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Annual Report 2009

Plain-text annual report

ANNUAL REPORT 2009 Neuren Pharmaceuticals Limited ARBN 111 496 130 Neuren Pharmaceuticals Limited Contents Corporate Directory Chief Executive’s Report Directors’ Report Corporate Governance Statement Financial Statements Statements of Comprehensive Income Statements of Financial Position Statements of Changes in Equity Statements of Cash Flows Notes to the Financial Statements Auditors’ Report Additional Information 1 3 6 9 10 11 12 13 14 28 29 The Board of Directors is pleased to present the Annual Report of Neuren Pharmaceuticals Limited for the year ended 31 December 2009, authorised by it on 25 March 2010. For, and on behalf of, the Board Dr Robin Congreve Chairman Dr Trevor Scott Director 25 March 2010 Company Neuren Pharmaceuticals Limited ARBN 111 496 130 Corporate Head Office Level 2, 57 Wellington Street, Freemans Bay, Auckland, New Zealand Tel: +64 9 529 3940 Australian Registered Office Level 13, 122 Arthur Street, North Sydney, NSW 2060, Australia Tel: +61 2 9956 8500 Directors Dr Robin Congreve Dr John Holaday Dr Graeme Howie Dr Trevor Scott Dr Douglas Wilson Company Secretary Mr Robert Waring Auditors PricewaterhouseCoopers 188 Quay Street Private Bag 92162 Auckland, New Zealand Share Registry Link Market Services Limited Level 9, 333 Collins Street Melbourne, Victoria 3000 Australia Tel: +61 3 9615 9800 Fax: +61 3 9615 9900 Stock Exchange Listing ASX Limited ASX Code: NEU Website www.neurenpharma.com Neuren Pharmaceuticals Limited Chief Executive’s Report 2009 proved to be a watershed year for the Company. Putting the termination of the Glypromate® program at the end of 2008 behind us and weathering an almost unprecedented economic recession that took a major toll on the global biopharmaceutical industry, Neuren has emerged as a stronger, more secure company with a clear path forward and the resources necessary to achieve major milestones with the potential to significantly enhance shareholder value. Major accomplishments during 2009 included: • Approval of an Investigational New Drug (IND) application for a Phase II trial of NNZ-2566 in traumatic brain injury (TBI) by the US Food and Drug Administration (FDA) • Obtaining Fast Track designation for NNZ-2566 in TBI from the FDA • • Receiving a US$14 million grant award from the US Army for clinical development of NNZ-2566 Creating a subsidiary (Perseis Therapeutics) to advance our cancer portfolio in a partnership with, and with funding from, the New Zealand Breast Cancer Research Trust Strengthening the board of directors with the addition of Dr John Holaday, a seasoned US biotech executive, banker and entrepreneur with significant operating experience in the Australian biotech sector as CEO of QRxPharma Establishing a strategic relationship with Cato Research, a US-based global contract research organisation, to manage the Company’s clinical development and source additional product pipeline opportunities Securing new funding of up to A$7.6 million through private placement and a convertible debt facility which, in combination with the funding from the US Army, is expected to cover all corporate and product development expenses through to the end of 2011. • • • As we enter 2010, Neuren is one of the few small biopharmaceutical companies in Australia, New Zealand or elsewhere with two active, Phase II clinical development programmes and the financial, human and technical resources already in hand to complete them. This will enable Neuren to focus on execution of the programmes as well as strengthen our position with respect to partnering, which remains a key objective for the Company. NNZ-2566 Clinical Development Programme Neuren has been working collaboratively with the US Army to develop NNZ-2566 as a treatment for Traumatic Brain Injury (TBI) since 2004. TBI is an injury to the head caused by an external trauma that can lead to brain cell death, inflammation, oedema, haemorrhage and severe disruption of normal brain function. The medical need for a drug to treat TBI is well recognised. Annually in the US alone, approximately 1.5 million people experience TBI resulting in 700,000 emergency department visits, 300,000 hospital admissions and 52,000 deaths. Direct and indirect costs of TBI have been estimated to exceed US$50 billion per year. TBI is also a major cause of mortality and disability among military personnel. There presently are no drugs approved to treat TBI. NNZ-2566 is a novel molecule developed by Neuren that has been shown in preclinical studies to prevent the brain cell death that results from a wide variety of injuries and to improve functional and cognitive outcome after injury as a consequence. The efficacy of NNZ-2566 is thought to result from the wide-reaching effects the drug has, including suppression of the inflammatory response to injury, as well as beneficial effects on seizure activity and apoptosis or ”programmed cell death”. During 2009, Neuren and Army scientists published four peer-reviewed papers reporting on the performance of NNZ-2566 in experimental models of brain injury. In 2008, the US Army awarded US$4 million in funding to the NNZ-2566 Phase II clinical trial programme through a grant to the Geneva Foundation. A proposal for further funding for the trial was approved in 2009 resulting in a direct grant of US$14.2 million which is intended to cover most of the costs of the Phase II trial as well as further safety testing and chemistry-related studies that would enable progression into a pivotal registration trial if the results of the Phase II are sufficiently positive. Phase Ia and Ib safety trials were completed in 2007 and manufacturing scale up was successfully completed in 2008. At a pre-IND meeting held with the FDA in mid 2008, the FDA indicated that, with completion of successful Phase II trials with compelling proof of efficacy, only one pivotal trial would be required prior to registration if that trial shows comparable efficacy. The objective of the Phase II trial is to evaluate the safety and efficacy of NNZ-2566 in patients with moderate to severe brain injury and also to evaluate a number of endpoints in order to determine which will be used in a subsequent pivotal trial. These include neuropsychological function and global outcomes. Psychological problems such as depression, short term memory loss and attention deficit are frequent consequences of TBI and can cause significant disability. In addition, the trial will incorporate biochemical and electroencephalographic (EEG) markers. In preclinical studies conducted by the US Army, NNZ-2566 showed significant effects in attenuating so-called non-convulsive seizures that can occur following TBI and that have been associated with worse clinical outcomes. These seizures are a major focus of the Army’s TBI research program. The Phase II trial is a complex study, seeking to enroll 260 patients and incorporating a large number of endpoints and measurements. The Company has already recruited 12 Level I and II trauma centres across the US to participate in the trial and is presently qualifying an additional 4 sites as backup in the event that enrolment is slower than anticipated. Contracts have been signed and provisional Institutional Review Board (IRB, the US equivalent of an Ethics Committee) approval obtained from most sites and from the US Army. Initiation of patient enrolment was delayed somewhat by the need to develop, test and manufacture a buffer system to avoid irritation at the site of injection and the risk that that could unblind the study. This has now been completed and both the drug product and buffer are available for shipment to the clinical sites. All other technical capabilities necessary to implement the trial — electronic data capture and data 1 Neuren Pharmaceuticals Limited management, site monitoring, EEG recording and centralised interpretation, randomisation and drug supply, and central laboratory support for determination of pharmacokinetic and biomarker levels — have been put in place. Patient enrolment is now expected to begin in April 2010. Neuren also is pursuing indications for NNZ-2566 beyond TBI. The Company has entered into a Material Transfer Agreement with the Rett Syndrome Research Trust to test NNZ-2566 in a mouse model of Rett Syndrome, one of the most severe of the autism spectrum disorders. Researchers at the Massachusetts Institute of Technology have found that IGF-1(1-3), the naturally occurring parent molecule of NNZ-2566, is effective in reducing symptoms of Rett Syndrome in a mouse model. The Company is also seeking potential partners concerning development of NNZ-2566 for conditions associated with pre-term birth and perinatal asphyxia, neurological damage associated with cancer chemotherapy and other indications. Motiva™ Motiva™ is being developed to treat neuropsychiatric consequences of stroke and other chronic CNS conditions. The drug is an analogue of the natural neurotransmitter γ-aminobutyric acid, of the 2-oxo-pyrrolidine class of compounds, a class of compound with proven efficacy in neuropsychiatric conditions. Motiva™ has been shown in preclinical studies to improve outcome in models of motivation and depression. In a Phase II trial conducted by Daiichi in the US and Canada, Motiva™ was shown to have a significant effect on apathy in post-stroke patients with depression. Apathy Syndrome occurs in a wide range of neurological conditions such as stroke, TBI, schizophrenia, depression, Parkinson’s disease and Alzheimer’s disease and is a major contributor to disability and therapeutic failure. Professor Sergio Starkstein from the University of Western Australia, one of the investigators on the completed Phase II trial and an international expert on psychiatric complications of neurological disease, submitted a grant application to the National Health and Medical Research Council for a study of Motiva™ in post-stroke patients. As announced, that application has been funded and will cover virtually all the costs of the 122-patient study. Patient enrolment is expected to begin in April 2010. Preclinical Research Programme In the preclinical pipeline, the Company has obtained proof of concept in a range of in vivo models of peripheral neuropathy, Parkinson’s disease and certain cancers. These conditions reflect significant unmet medical need and market opportunity and represent important targets for many larger pharmaceutical and biotechnology companies. Neuren’s primary objective for the preclinical portfolio remains leveraging non-dilutive capital and outlicensing or partnering these compounds to extract value without in any way impacting the progress of or resources available to the clinical programmes. Within the preclinical portfolio, priority is being given to the cancer projects and NNZ-2591. Neuren has assigned its rights to the cancer technologies to a subsidiary, Perseis Therapeutics, which is funded and partly owned by the New Zealand Breast Cancer Research Trust (BCRT). Sufficient capital has been invested by the BCRT to validate the approach, after which Perseis will determine whether to continue development internally or seek a partner for further development and commercialisation. NNZ-2591 is a novel neuroprotective molecule that has been shown in preclinical studies to improve outcome in models of chronic neurological disorders, including Parkinson's disease and peripheral neuropathy. The drug’s oral bioavailability and safety profile suggests that NNZ-2591 is a preclinical development candidate with an excellent likelihood of successful development and a strong asset for partnering. Financial Review Grant income increased from $1,660,000 in 2008 to $6,123,000 in 2009 due to the commencement of start-up activities on the NNZ-2566 Phase II trial, with a resulting flow of advance grant funding from the US Army to cover direct costs associated with the trial. In addition, a one-off R&D tax credit of $288,000 was recorded in grant income in the year. Partially offsetting this increase were reductions in contract revenue and out-licensing revenue, both of which were one- off items in 2008. The level of interest income in 2009 was consistent with lower average cash balances across the year compared with 2008. Neuren had $4,232,000 in cash deposits as at 31 December 2009. In addition to the increased grant funding, expenditure was significantly reduced throughout the year while the Company sought additional capital to progress its drug portfolio. Research and development costs declined from $10,341,000 in 2008 to $3,969,000 as a result of the Glypromate® trial being undertaken throughout 2008 compared to only start-up activities occurring through 2009 in relation to the NNZ-2566 Phase II trial. An intangibles impairment charge of $7,052,000 was also taken in 2008 following the outcome of the Glypromate® trial compared to only $192,000 in 2009 after rationalisation of the patent portfolio. As a result the Group recorded a small income after tax and minority interest in 2009 of $123,000 compared to an after tax loss of $18,434,000 in 2008. Mr Larry Glass Chief Executive Officer 2 Neuren Pharmaceuticals Limited Directors’ Report Principal Activities Neuren Pharmaceuticals Limited (Neuren or the Company, and its subsidiaries, or the Group) is a publicly listed biopharmaceutical company focusing on the development of drugs for neurological disorders, metabolism and cancer. The drugs target acute indications of brain injury such as cognitive impairment resulting from traumatic brain injury, psychiatric symptoms of stroke, as well as chronic conditions such as Parkinson’s and Alzheimer’s diseases. Neuren has three lead candidates; Motiva™ and NNZ-2566 presently in clinical development to treat four different neurological conditions, and NNZ-2591 in preclinical development for Parkinson’s disease dementia and other chronic neurodegenerative conditions. The Group has operations in New Zealand and the United States. Performance Overview During 2009, Neuren obtained FDA approval to proceed with its Phase II trial of NNZ-2566 in traumatic brain injury, and a further US$14 million award from the US Army towards the direct costs of the trial. The focus of the year was on start-up activities related to the NNZ-2566 trial and also securing funding for the Company for working capital to support the trial. In this regard, Neuren secured a convertible loan facility for up to A$6.7 million, and in November 2009 drew down the first note of A$550,000. This facility is available until December 2011 and provides minimum monthly funding commencing with A$400,000 in January 2010, followed by ten tranches of A$100,000, and subsequent tranches of A$60,000. Start-up activities for the NNZ-2566 trial are almost complete and patient recruitment is expected to commence in April 2010. Neuren’s operations for 2009 are described further in the Chief Executive’s Report on pages 1 and 2. All amounts are shown in New Zealand dollars unless otherwise stated. The Group’s net loss for the year ended 31 December 2009 was $33,000 (2008: $18,434,000). The detailed financial statements are presented on pages 10 to 27. The net deficit per share for 2009 was nil (2008: $0.08) based on 271,275,942 weighted average number of shares outstanding (2008: 223,265,642). No ordinary share dividends were paid in the year and the Directors recommend none for the year. Directors Dr Robin Congreve, LLM, PhD (Chairman) Dr Congreve was for many years a partner in Russell McVeagh McKenzie Bartleet & Co specialising in taxation and business law. He was subsequently on the Boards of or chaired a number of public and private companies including NZ Railways Corporation, BNZ, Comalco NZ Limited, Lion Nathan Limited and TruTest Limited. He is a principal of Oceania & Eastern Group, a New Zealand private equity group which has provided private equity funding to both Neuren's predecessor companies, NeuronZ and EndocrinZ. Dr Congreve was founding Chairman of the Auckland Medical School Foundation which led to the formation of NeuronZ within the University of Auckland and subsequently to the introduction of private equity into that company and EndocrinZ. Dr Trevor Scott, MNZM, LLD (Hon), BCom, FCA, FNZIM, DF Inst D (Non-Executive Director) Dr Scott is founder of T.D. Scott and Co., an accountancy and consulting firm, which he formed in 1988. He is an experienced advisor to companies across a variety of industries. Dr Scott serves on numerous corporate boards and is chairman of several, including Mercy Hospital Dunedin Limited and Arthur Barnett Limited. He is also a director of ING Property Trust Limited which is listed on the New Zealand Stock Exchange. Dr Douglas Wilson, MB, ChB, PhD (Director and Chief Medical Officer) Dr Wilson was originally a medical academic with postgraduate experience in Auckland, London, Oxford and Walter and Eliza Hall Institute, Melbourne. He then spent many years in the international pharmaceutical industry, firstly as Senior Vice-President for Boehringer Ingelheim USA. Dr Wilson was responsible for all drugs and clinical development and all interactions with the FDA. He then carried these responsibilities worldwide at Boehringer Ingelheim Head Office in Germany. He has overseen multiple drugs at all phases of development including bringing many drugs successfully to the market in the USA. Dr Wilson is now a consultant to the biotechnology sector. Dr Graeme Howie, BSc (Hons), PhD (Non-Executive Director) Dr Howie has over 27 years of management experience in the international pharmaceutical industry with a strong and diverse background in research and development, product development, manufacturing and commercial fields. His most recent experience is in recombinant biotech product development and was until December 2004 a senior executive at Pfizer Inc., based in New York. Dr Howie has extensive international experience in technical and commercial due diligence activities, including in-licensing. He also led and was responsible for new delivery route feasibility studies on human growth hormone and has been responsible for the development and registration of various products throughout the USA, Europe, Australia and Asia. Dr John Holaday, PhD (Non-Executive Director) Dr Holaday joined the Neuren Board in November 2009. Dr Holaday, a veteran life-science entrepreneur, has built five public and private biopharmaceutical companies over the past 21 years and raised more than US$450 million in capital. Dr Holaday founded EntreMed in 1992 and served as its Chairman, President and CEO until his retirement in 2003 and was the co-founder, director, Scientific Director and SVP of Medicis Pharmaceutical Corporation. He was the founder and Chief of the Neuropharmacology Branch at the Walter Reed Army Institute of Research for 21 years. Dr Holaday has 3 Neuren Pharmaceuticals Limited received numerous honours and awards, including induction into Ernst and Young’s Entrepreneur of the Year 2006 Hall of Fame. He holds over 60 U.S. and foreign patents, has published more than 200 scientific articles and reviews, and edited five books. He is currently CEO of QRxPharma, a listed specialty pharmaceutical company specialising in pain and CNS diseases. Interests Register The Company is required to maintain an interests register in which particulars of certain transactions and matters involving Directors must be recorded. Details of the entries in this register for each of the Directors are as follows: Dr R L Congreve Dr Congreve is a director of Oceania & Eastern Biotech Limited, EndocrinZ Founders Limited, and Hazardous Investments Limited, all shareholders of the Company. Dr Congreve does not have any other interests considered to cause any potential conflict of interests. Dr T D Scott Dr Scott is a director of Centralo Limited, a shareholder of the Company, and Essex Castle Limited, a nominee company. Dr Scott is also the chairman of Mercy Hospital Dunedin Limited which also operates in the biotechnology/pharmaceutical industry. Dr Scott does not have any other interests considered to cause any potential conflict of interests. Dr J D Wilson Dr Wilson was appointed a director of Phylogica Limited, a Perth, Australia, based biopharmaceutical drug discovery company, in March 2008. Dr Wilson does not have any other disclosed interests considered to cause any potential conflict of interests. Dr G B Howie Dr Howie does not have any interests considered to cause any potential conflict of interests. Dr J Holaday Dr Holaday is CEO of QRxPharma, a listed specialty pharmaceutical company specialising in pain and CNS diseases. Dr Holaday does not have any other interests considered to cause any potential conflict of interests. Mr T R Amos Mr Amos resigned as a director on 27 March 2009. He was a representative of the Macquarie Technology Funds 1A and 1B, both shareholders of the Company until 13 January 2009. Mr Amos did not have any other interests considered to cause any potential conflict of interests. The details of each Director’s relevant interests in securities of the Company are disclosed in the “Other Information” section of this Annual Report. Information used by Directors During the year the Board received no notices from Directors of the Company requesting to use Company information received in their capacity as Directors, which would not otherwise have been available to them. Indemnification and Insurance of Directors and Officers Neuren has arranged Directors and Officers Liability Insurance that provides that generally Directors and Officers will incur no monetary loss as a result of actions undertaken by them as Directors and Officers. The insurance does not cover liabilities arising from criminal activities or deliberate or reckless acts or omissions. Remuneration of Directors Directors’ Fees Dr Robin Congreve (Chairman) 1 Mr Tom Amos 1 3 Dr John Holaday 1 2 Dr Graeme Howie 1 Dr Trevor Scott 1 2009 $’000 60 9 3 35 40 Dr Doug Wilson 1 Fees and other remuneration were accrued but unpaid at 31 December 2009 2 Appointed as a director 25 November 2009 3 Resigned as a director 27 March 2009 - Other Remuneration 2009 $’000 40 - - - 20 100 Directors’ Fees 2008 $’000 60 35 - 19 40 - Other Remuneration 2008 $’000 - 5 - - 5 172 4 Neuren Pharmaceuticals Limited Executive Remuneration The number of employees, not being directors of the Company, who received remuneration and benefits above $100,000 per annum, is as follows: 2009 $’000 2008 $’000 $100,000 - $109,999 $110,000 - $119,999 $120,000 - $129,999 $140,000 - $149,999 $150,000 - $159,999 $170,000 - $179,999 $190,000 - $199,999 $290,000 - $299,999 $360,000 - $369,999 $400,000 - $409,999 1 - 2 1 - 1 - - 1 - 3 2 - 1 1 - 1 1 - 1 Donations The Company made no donations during the year (2008: nil). Auditors PricewaterhouseCoopers are the auditors of the Company. Audit fees in relation to the annual and interim financial statements were $44,000 (2008: $45,500). During 2008 PricewaterhouseCoopers also received $500 (2009: $nil) in relation to other financial advice. 5 Neuren Pharmaceuticals Limited Corporate Governance Statement The Directors have adopted practices and procedures for the good corporate governance of the Company. These practices and procedures establish the framework of how the Directors carry out their duties and discharge their obligations. The Company has adopted appropriate policies and practices as provided by the ASX Listing Rules and the Corporate Governance Principles and Recommendations issued by the ASX Corporate Governance Council (“Council”) in March 2003 and revised in August 2007 (2nd edition) which are as follows: Principle 1. Principle 2. Principle 3. Principle 4. Principle 5. Principle 6. Principle 7. Principle 8. Lay solid foundations for management and oversight Structure the Board to add value Promote ethical and responsible decision-making Safeguard integrity in financial reporting Make timely and balanced disclosure Respect the rights of shareholders Recognise and manage risk Remunerate fairly and responsibly Neuren’s corporate governance practices were fully compliant with the Council’s August 2007 best practice recommendations apart from the following recommendations: Recommendation 2.2: The chair should be an independent director Dr Congreve is the Chairman of the Board, and was elected as such by the shareholders of the Company. As noted below, Dr Congreve is not “independent” however in accordance with Council’s recommendations, Dr Scott, Chairman of the Remuneration and Audit Committee, acts as lead independent director. Recommendation 2.4: The Board should establish a nomination committee The Board has previously considered establishing a Nomination Committee, however due to the small number of Directors the Board considers it more efficient for the selection and appointment of Directors to be considered by the Board itself. It is the Board’s policy to determine the terms and conditions relating to the appointment and retirement of non-executive Directors on a case by case basis and in conformity with the requirements of the Listing Rules. The Board may also engage an external consultant where appropriate to identify and assess suitable candidates who meet the Board’s specifications. Role of the Board The Board is responsible for the overall corporate governance of the Company. The Board acts on behalf of and is accountable to the shareholders. The Board seeks to identify the expectations of shareholders as well as other regulatory and ethical expectations and obligations. The Board is responsible for identifying areas of significant business risk and ensuring mechanisms are in place to manage those risks adequately. In addition, the Board sets the overall strategic goals and objectives, and monitors achievement of goals. The Board appoints the Chief Executive Officer and the responsibility for the operation and administration of the Company has been delegated to the Chief Executive Officer and senior management. The Board ensures this team is appropriately qualified to discharge their responsibilities and reviews the performance of the Chief Executive Officer annually against agreed objectives. This performance review was conducted in 2009 and early 2010. The Chief Executive Officer is responsible for reviewing annually the performance of senior management. The Board ensures management’s objectives and activities are aligned with the expectations and risks identified by the Board through a number of mechanisms including the following: • • establishment of the overall strategic direction and leadership of the Company; approving and monitoring the implementation by management of the Company’s strategic plan to achieve those objectives; reviewing performance against its stated objectives, by receiving regular management reports on business situation, opportunities and risks; • • monitoring and review of the Company’s controls and systems including those concerned with regulatory matters to ensure statutory compliance and the highest ethical standards; and review and adoption of the annual budget and monitoring the results against stated targets. • The Board reviews its corporate strategy and financial targets in terms of shareholder expectations, performance and potential in the interests of creating long-term value for shareholders. The Board considers corporate governance to be an important element of its responsibilities. It meets regularly throughout the year. 6 Neuren Pharmaceuticals Limited Board Composition The Company must have between 3 and 9 Directors. The independence and tenure of each Director at the date of this report is as follows: Director Position Independence Term in Office Dr Robin Congreve Mr Tom Amos (until 27 March 2009) Dr John Holaday (from 25 November 2009) Dr Graeme Howie Dr Trevor Scott Dr Doug Wilson Chairman – Non-executive director Non-executive director Non-executive director Non-executive director Non-executive director Chief Medical Officer – Executive director Non-independent Non-independent Independent Independent Independent Independent 8 4 - 5 7 6 The composition of the Board, its performance, and the independence of Directors are regularly reviewed by the Chairman and lead independent director, Dr Scott, to ensure that the Board has the appropriate mix of independence, expertise and experience. Dr Holaday, Dr Howie and Dr Scott are independent Directors. The Board has previously considered establishing a Nomination Committee, however due to the small number of Directors the Board considers it more efficient for the selection and appointment of Directors to be considered by the Board itself. It is the Board’s policy to determine the terms and conditions relating to the appointment and retirement of non-executive Directors on a case by case basis and in conformity with the requirements of the Listing Rules. The Board may also engage an external consultant where appropriate to identify and assess suitable candidates who meet the Board’s specifications. The relevant skills, experience and expertise of each Board member are set out in the Directors’ Report. For the purposes of the proper performance of their duties, Directors are entitled to seek independent professional advice at the Company’s expense on prior approval of the Chairman. Board Committees It is the Board’s policy that the various Committees it has established should: • be entitled to obtain such resources and information from the Company including direct access to employees of and advisers to the Company as it may require; and operate in accordance with the terms of reference established by the Board. • Remuneration and Audit Committee The Remuneration and Audit Committee must have a minimum of 2 non-executive directors. Currently the Committee members are Dr Scott (Chair) and Dr Congreve. The Board is considering the structure of the Remuneration and Audit Committee following the resignation of Mr Amos on 27 March 2009. The Committee operates under terms of reference approved by the Board. It is responsible for undertaking a broad review of, ensuring compliance with, and making recommendations in respect of, the Company’s internal financial controls, legal compliance obligations and remuneration policies. It is also responsible for: • review of audit assessment of the adequacy and effectiveness of internal controls over the Company’s accounting and financial reporting systems, including controls over computerised systems; review of the audit plans and recommendations of the external auditors; evaluating the extent to which the planned scope of the audit can be relied upon to detect weaknesses in internal control, fraud and other illegal acts; review of the results of audits, any changes in accounting practices or policies and subsequent effects on the financial statements and make recommendations to management where necessary and appropriate; review of the performance and fees of the external auditor; audit of legal compliance including trade practices, corporations law, occupational health and safety and environmental statutory compliance , and compliance with the Listing Rules of the ASX; supervision of special investigations when requested by the Board; setting and reviewing compensation policies and practices of the Company; setting and reviewing remuneration of the Directors, Chief Executive Officer and members of the executive team; and setting and reviewing the Company’s equity plans for employees and/or Directors. • • • • • • • • • All members of the Committee meet at least twice during the year. In undertaking these tasks the Remuneration and Audit Committee meets separately with management and external auditors where required. The Committee also seeks assurances from the Chief Executive Officer and Chief Financial Officer in respect of the accuracy and compliance of the Company’s annual and half-year financial statements and effectiveness of the Company’s management of its material business risks. 7 Neuren Pharmaceuticals Limited Ethical Standards and Share Trading The Company recognises the need for Directors and employees to observe the highest standards of behaviour and business ethics when engaging in corporate activity or share trading. The Constitution permits Directors to acquire shares in the Company. The Company’s share trading policy prohibits Directors, executives and employees from acquiring or disposing of securities unless this occurs during a 42 day period commencing 24 hours after the announcement to the ASX of the quarterly, half-yearly and annual results and/or after the conclusion of the Company’s Annual General Meeting and provided that the person is not in possession of price sensitive information and the trading is not for short-term or speculative gain. Other trading may only occur with Board approval. Continuous Disclosure As a listed company, Neuren is required to comply with the continuous disclosure requirements as set out in the ASX Listing Rules. The Company discloses to the ASX any information concerning the Company which a reasonable person would expect to have a material effect on the price or value of securities of the Company, unless certain exemptions from the obligation to disclose apply. relevant All www.neurenpharma.com, in compliance with the continuous disclosure requirements of the Listing Rules. is also posted onto information provided the ASX the Company’s corporate website to Rights of Shareholders The Board strives to communicate regularly and clearly with shareholders, the principal methods being through the Company’s annual and half-year reports, and Company announcements posted on the Company’s website. Shareholders are encouraged to attend and participate at general meetings, which the Auditors are also invited to attend. Identification and Management of Significant Business Risk The Board has identified the significant areas of potential business and legal risk for the Company. The identification, monitoring and, where appropriate, the reduction of significant risk to the Company are monitored by the Board. The Board reviews and monitors the parameters under which such risks will be managed. The Board has identified the Company’s activities in conducting clinical trials on humans as a significant area of risk. The Board has established the Clinical Development and Ethics Committee to assist the Board in discharging its responsibilities regarding this specific area of risk including ensuring: • • • • risk management strategies are in place (such as insurance) and that variances in such strategies are reported; staff involved in this area are sufficiently experienced and skilled; appropriate procedures are in place for the selection and remuneration of external contractors; compliance with regulatory obligations including manufacturing, testing, analysis and FDA/Med Safe and Ethics. Similar risk management procedures are adopted for other areas of identified risk. The Remuneration and Audit Committee also assists the Board in its monitoring of financial and operational risk. Both Committees ensure adequate and timely reporting of their findings and activities to the Board. Remuneration Neuren believes having highly skilled and motivated people will allow the organisation to best pursue its mission and achieve its goals for the benefit of shareholders and stakeholders more broadly. The ability to attract and retain the best people is critical to the Company’s future success. The Board believes remuneration policies are a key part of ensuring this success. The Remuneration and Audit Committee of the Board is responsible for determining and reviewing compensation arrangements for the Directors, Chief Executive Officers and members of the executive team. The Committee assesses the appropriateness of the nature and amount of emoluments on a periodic basis by reference to relevant employment market conditions, with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality Board and executive team. To assist in achieving these objectives, the Remuneration and Audit Committee links the nature and amount of executive Directors’ and Officers’ emoluments to the Company’s performance. Remuneration of Executives comprises base salary and an “at-risk” (bonus) component, the payment of which is dependent upon individual, team and Company performance relative to specific targets. Executive performance and remuneration is reviewed formally each year. Long-term incentive arrangements have been provided by participation in a share option plan to ensure key employees maintain a long-term interest in the growth and value of the Company. Non-executive Director fees are determined by the Board within the aggregate limit for Directors’ fees approved by shareholders. The current remuneration level for the Chair is $60,000 and for non-executive Directors is $25,000 per year with an additional $10,000 for committee membership and $5,000 for committee Chairs. Executive Directors do not receive Directors fees. Directors and Executives receive no retirement allowances. New Zealand Companies Act disclosures with regard to Directors’ Fees and Executives’ remuneration are set out in the Directors’ Report. 8 Neuren Pharmaceuticals Limited Financial Statements for the year ended 31 December 2009 9 Neuren Pharmaceuticals Limited Statements of Comprehensive Income for the year ended 31 December 2009 Consolidated Parent Notes NZ$’000 2009 2008 NZ$’000 2009 NZ$’000 2008 NZ$’000 Revenue - interest income - contract revenue - out-licensing revenue Other income - grants Total revenue and other income Depreciation and amortisation expense Intangible asset impairment expense Research and development costs Patent costs Share option compensation expense Foreign exchange gain Interest expense 24 - 58 82 6,123 6,205 (625) (192) (3,969) (515) (7) 203 (3) 155 323 736 1,214 1,660 2,874 (1,341) (7,052) (10,341) (741) (111) 424 (31) Corporate and administrative costs (1,130) (2,042) 15 - 58 73 388 461 (164) (192) (990) (306) (7) 204 (3) (978) 153 323 736 1,212 1,660 2,872 (936) (7,052) (10,325) (615) (111) 424 (31) (2,070) Loss before income tax Income tax expense Loss after income tax 4 5 (33) - (33) (18,361) (73) (18,434) (1,975) - (1,975) (17,844) (73) (17,917) Other comprehensive income (expense), net of tax Exchange differences on translation of foreign operations (1,321) 1,661 - - Total comprehensive loss $ (1,354) $ (16,773) $ (1,975) $ (17,917) Profit (loss) after income tax attributable to: Equity holders of the company Minority interest Total comprehensive loss attributable to: Equity holders of the company Minority interest 123 (156) (18,434) - (1,975) - (17,917) - $ (33) $ (18,434) $ (1,975) $ (17,917) (1,198) (156) (16,773) - (1,975) - (17,917) - $ (1,354) $ (16,773) $ (1,975) $ (17,917) Basic and diluted loss per share 6 $ 0.00 $ (0.08) The notes on pages 14 to 27 form part of these financial statements 10 Neuren Pharmaceuticals Limited Statements of Financial Position as at 31 December 2009 ASSETS Current assets: Cash and cash equivalents Trade and other receivables Income taxes receivable Total current assets Non-current assets: Property, plant and equipment Intangible assets Investments in subsidiaries Total non-current assets TOTAL ASSETS LIABILITIES AND EQUITY Current liabilities: Trade and other payables Equipment finance – short term Lease incentive – short term Total current liabilities Non-current liabilities: Equipment finance – long term Convertible note Lease incentive – long term Total liabilities EQUITY Share capital Other reserves Accumulated deficit Total equity attributable to equity holders Minority interest in equity Total equity Consolidated Parent Notes 2009 NZ$’000 2008 NZ$’000 2009 NZ$’000 2008 NZ$’000 7 8 9 10 15 11 12 12 12 13 4,232 2,270 - 6,502 51 6,153 - 6,204 1,619 195 6 1,820 94 8,301 - 8,395 1,695 1,871 - 3,566 47 933 4,257 5,237 1,529 963 6 2,498 94 1,303 4,201 5,598 $ 12,706 $ 10,215 $ 8,803 $ 8,096 3,093 11 12 3,116 - 490 22 3,481 15 12 3,508 11 - 34 2,700 11 12 2,723 - 490 22 3,434 15 12 3,461 11 - 34 3,628 3,553 3,235 3,506 69,344 3,601 (63,692) 9,253 (175) 9,078 68,768 2,545 (64,651) 6,662 - 6,662 69,344 3,351 (67,127) 5,568 - 5,568 68,768 974 (65,152) 4,590 - 4,590 TOTAL LIABILITIES AND EQUITY $ 12,706 $ 10,215 $ 8,803 $ 8,096 The notes on pages 14 to 27 form part of these financial statements For and on behalf of the Board of Directors who authorised the issue of these financial statements on 25 March 2010. Dr Robin Congreve Chairman Dr Trevor Scott Director 11 Neuren Pharmaceuticals Limited Statements of Changes in Equity for the year ended 31 December 2009 Consolidated Share Option Reserve NZ$’000 Foreign Currency Translation Reserve NZ$’000 Accumulated Deficit NZ$’000 Total Attributable to Equity Holders NZ$’000 Share Capital NZ$’000 Minority Interest NZ$’000 Total Equity NZ$’000 Equity as at 1 January 2008 $ 54,023 $ 857 $ (90) $ (46,217) $ 8,573 $ - $ 8,573 Shares issued in rights issue Shares issued on conversion of notes Shares issued in private placement Shares issued in Share Purchase Plan Share issue costs expensed 8,065 3,866 1,190 2,426 (802) Share option grants for services 117 8,065 3,866 1,190 2,426 (802) 117 8,065 3,866 1,190 2,426 (802) 117 Comprehensive loss for the year 1,661 (18,434) (16,773) (16,773) Equity as at 31 December 2008 $ 68,768 $ 974 $ 1,571 $ (64,651) $ 6,662 $ - $ 6,662 Shares issued in Share Purchase Plan Shares issued on conversion of notes Shares issued in private placement Share issue costs expensed 1,003 190 1,903 (150) Share option grants for services (2,370) 2,377 Minority interest issued in subsidiary Gain on issue of minority interest Comprehensive loss for the year (1,321) 836 123 1,003 190 1,903 (150) 7 - 836 (1,198) 1,003 190 1,903 (150) 7 817 - (1,354) 817 (836) (156) Equity as at 31 December 2009 $ 69,344 $ 3,351 $ 250 $ (63,692) $ 9,253 $ (175) $ 9,078 Parent Share Option Reserve NZ$’000 Foreign Currency Translation Reserve NZ$’000 Accumulated Deficit NZ$’000 Total Attributable to Equity Holders NZ$’000 Share Capital NZ$’000 Equity as at 1 January 2008 $ 54,023 $ 857 $ - $ (47,235) $ 7,645 Shares issued in rights issue Shares issued on conversion of notes Shares issued in private placement Shares issued in Share Purchase Plan Share issue costs expensed 8,065 3,866 1,190 2,426 (802) Share option grants for services 117 8,065 3,866 1,190 2,426 (802) 117 Comprehensive loss for the year (17,917) (17,917) Equity as at 31 December 2008 $ 68,768 $ 974 $ - $ (65,152) $ 4,590 Shares issued in Share Purchase Plan Shares issued on conversion of notes Shares issued in private placement Share issue costs expensed 1,003 190 1,903 (150) Share option grants for services (2,370) 2,377 1,003 190 1,903 (150) 7 Comprehensive loss for the year (1,975) (1,975) Equity as at 31 December 2009 $ 69,344 $ 3,351 $ - $ (67,127) $ 5,568 The notes on pages 14 to 27 form part of these financial statements 12 Neuren Pharmaceuticals Limited Statements of Cash Flows for the year ended 31 December 2009 Cash flows from operating activities: Receipts from grants Receipts from licensing Interest received GST refunded Interest paid Payments to employees Payments to other suppliers Consolidated Parent 2009 NZ$’000 2008 NZ$’000 2009 NZ$’000 2008 NZ$’000 5,835 1,666 107 24 111 (3) (976) (6,688) 611 155 222 (5) (2,023) (11,434) 100 107 15 94 (3) (851) (1,908) 1,666 611 153 222 (5) (2,023) (11,221) Net cash used in operating activities (1,590) (10,808) (2,446) (10,597) Cash flows from investing activities: Sale of property, plant and equipment Purchase of property, plant and equipment Advance to subsidiaries Net cash used in investing activities Cash flows from financing activities: Proceeds from the issue of shares Proceeds from the issue of convertible notes Proceeds from minority interest Repayment of equipment financing Payment of share issue expenses 5 (6) - (1) 54 (27) - 27 2,906 11,682 680 817 (15) (149) - - (16) (831) Net cash provided from financing activities 4,239 10,835 Net (decrease) increase in cash Effect of exchange rate changes on cash balances Cash at the beginning of the year 2,648 (35) 1,619 54 274 1,291 5 - (867) (862) 2,906 680 - (15) (149) 3,422 114 52 1,529 54 (27) (37) (10) 11,682 - - (16) (831) 10,835 228 237 1,064 Cash at the end of the year $ 4,232 $ 1,619 $ 1,695 $ 1,529 Reconciliation with loss after income tax: Loss after income tax $ (33) $ (18,434) $ (1,975) $ (17,917) Non-cash items requiring adjustment: Depreciation of property, plant and equipment Loss (gain) on disposal of property, plant and equipment Amortisation of intangible assets Intangible asset impairment Share option compensation expense Foreign exchange gain Lease incentive amortisation Interest on convertible notes Changes in working capital: Trade and other receivables Trade and other payables 43 (1) 582 192 7 (203) (12) - (1,852) (313) 88 132 1,253 7,052 111 (424) (29) 26 (41) (542) 43 (1) 121 192 7 (204) (12) - 104 (721) 88 132 848 7,052 111 (424) (29) 26 (41) (443) Net cash used in operating activities $ (1,590) $ (10,808) $ (2,446) $ (10,597) The notes on pages 14 to 27 form part of these financial statements 13 Neuren Pharmaceuticals Limited Notes to the Financial Statements for the year ended 31 December 2009 1. Nature of business Neuren Pharmaceuticals Limited (Neuren or the Company, and its subsidiaries, or the Group) is a publicly listed biopharmaceutical company focusing on the development of drugs for neurological disorders, metabolism and cancer. The drugs target acute indications of brain injury such as cognitive impairment resulting from cardiac surgery and traumatic brain injury, psychiatric symptoms of stroke, as well as chronic conditions such as Parkinson’s and Alzheimer’s diseases. Neuren has three lead candidates; Motiva™ and NNZ-2566 presently in clinical development to treat a range of acute and chronic neurological conditions, and NNZ-2591 in preclinical development for Parkinson’s disease dementia and other chronic neurodegenerative conditions. The Group has operations in New Zealand and the United States. The Company is a limited liability company incorporated and domiciled in New Zealand. The address of its registered office in New Zealand is level 2, 57 Wellington Street, Auckland, and in Australia Level 13, 122 Arthur Street, North Sydney. Neuren has its primary listing on the Australian Securities Exchange (ASX code: NEU). These consolidated financial statements have been approved for issue by the Board of Directors on 25 March 2010. Inherent Uncertainties • There are inherent uncertainties associated with assessing the carrying value of the acquired intellectual property. The ultimate realisation of the carrying values of intellectual property totalling $6,153,000 (after amortisation) is dependent on the Company and Group successfully developing its products, on licensing the products, or divesting the intellectual property so that it generates future economic benefits to the Company. • The Group’s research and development activities involve inherent risks. These risks include, among others: dependence on, and the Group’s ability to retain key personnel; the Group’s ability to protect its intellectual property and prevent other companies from using the technology; the Group’s business is based on novel and unproven technology; the Group’s ability to sufficiently complete the clinical trials process; and technological developments by the Group’s competitors may render its products obsolete. • The Company has a business plan which will require a high level of expenditure until product revenue streams are established and therefore expects to continue to incur additional net losses until then. In the future, the Company will need to raise further financing through other public or private equity financings, collaborations or other arrangements with corporate sources, or other sources of financing to fund operations. There can be no assurance that such additional financing, if available, can be obtained on terms reasonable to the Company. In the event the Company is unable to raise additional capital, future operations will need to be curtailed or discontinued. 2. Summary of significant accounting policies These general-purpose financial statements are for the year ended 31 December 2009 and have been prepared in accordance with and comply with generally accepted accounting practice in New Zealand, International Financial Reporting Standards, New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) and other applicable Financial Reporting Standards as appropriate for profit-oriented entities. (a) Basis of preparation Entities Reporting The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of the Group as at 31 December 2009 and the results of all subsidiaries for the year then ended. Neuren Pharmaceuticals Limited and its subsidiaries, which are designated as profit-oriented entities for financial reporting purposes, together are referred to in these financial statements as the Group. The financial statements of the ‘Parent’ are for the Company as a separate legal entity. Statutory Base Neuren is registered under the New Zealand Companies Act 1993 and is an issuer in terms of the New Zealand Securities Act 1978. Neuren is also registered as a foreign company under the Australian Corporations Act 2001. These financial statements have been prepared in accordance with the requirements of the Financial Reporting Act 1993 and the Companies Act 1993. Historical cost convention These financial statements have been prepared under the historical cost convention as modified by certain policies below. Critical accounting estimates The preparation of financial statements requires the use of certain critical accounting estimates. It also requires the Company to exercise its judgement in the process of applying the Company’s accounting policies such as in relation to impairment, if any, of intangible assets set out in note 10. Actual results may differ from those estimates. Changes in accounting policies The following new standards and amendments are mandatory for the first time in the period beginning 1 January 2009: 14 Neuren Pharmaceuticals Limited • NZ IAS 1 (Revised) Presentation of financial statements. The revised standard requires non-owner changes in equity to be presented separately from owner changes in equity within non-owner changes in equity shown on a performance statement. The financial statements have been prepared under the revised disclosure requirements and a Statement of Comprehensive Income is presented. • NZ IFRS 8 Operating Segments. The revised standard requires a “management approach” under which operating segment information is presented on the same basis as that used for internal reporting to the chief operating decision- maker, in the Company’s case, the Chief Executive Officer. This presentation is consistent with prior year reporting by the Company. (b) Principles of Consolidation Subsidiaries Subsidiaries are all those entities over which the Company has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Costs attributable to the acquisition are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the comprehensive income statement. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Company. (c) Segment Reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive Officer. (d) Foreign Currency Translation (i) Functional and Presentation Currency Items included in the financial statements of each of the Group’s operations are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that operation (”functional currency”). The consolidated and Parent financial statements are presented in New Zealand dollars, which is the Group’s presentation currency. (ii) Transactions and Balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the comprehensive income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. (iii) Foreign Operations The results and financial position of foreign entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position; • income and expenses for each comprehensive income statement are translated at average exchange rates; and • all resulting exchange differences are recognised as a separate component of equity. Exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders’ equity. Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate. (e) Revenue recognition Grants Grants received are recognised in the comprehensive income statement when the requirements under the grant agreement have been met. Any grants for which the requirements under the grant agreement have not been completed are carried as liabilities until all the conditions have been fulfilled. Out-licensing and royalty revenue Out-licensing and royalty revenue comprises income generated from technology out-licensing and research and development collaboration agreements. Where licensing agreements include non-refundable milestone income, revenue 15 Neuren Pharmaceuticals Limited is recognised on achieving the milestones. If any milestone income is creditable against royalty payments then it is deferred and released to the comprehensive income statement over the period in which the royalties would otherwise be receivable. Royalty income relating to the sale by a licensee of licensed product is recognised on an accruals basis in accordance with the substance of the relevant agreement and based on the receipt from the licensee of the relevant information to enable calculation of the royalty due. Contract research Where science projects are recognised on an individual project basis and span more than one year, the percentage completion method is used to determine the appropriate amount of revenue to recognise in a given year over the life of the project. Contract revenue is recognised when earned and non-refundable and when there are no future obligations pursuant to the revenue, in accordance with the contract terms. The full amount of an anticipated loss, including that relating to future work on the contract, is recognised as soon as it is foreseen. Interest income Interest income is recognised on a time-proportion basis using the effective interest method. (f) Research and development Research costs include direct and directly attributable overhead expenses for drug discovery, research and pre-clinical and clinical trials. Research costs are expensed as incurred. When a project reaches the stage where it is reasonably certain that future expenditure can be recovered through the process or products produced, development expenditure is recognised as a development asset when: • • • • a product or process is clearly defined and the costs attributable to the product or process can be identified separately and measured reliably; the technical feasibility of the product or process can be demonstrated; the existence of a market for the product or process can be demonstrated and the Company intends to produce and market the product or process; adequate resources exist, or their availability can be reasonably demonstrated to complete the project and market the product or process. In such cases the asset is amortised from the commencement of commercial production of the product to which it relates on a straight-line basis over the years of expected benefit. Research and development costs are otherwise expensed as incurred. Income tax (g) The income tax expense for the period is the tax payable on the period’s taxable income or loss using tax rates enacted at the balance sheet date and adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and to unused tax losses. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted at the balance sheet date. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences to measure the deferred tax asset or liability. An exception is made for certain temporary differences arising from the initial recognition of an asset or a liability. No deferred tax asset or liability is recognised in relation to these temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit or loss. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. (h) Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the comprehensive income statement on a straight-line basis over the period of the lease. Impairment of non-financial assets (i) Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The carrying amount of a long-lived asset is considered impaired when the recoverable amount from such asset is less than its carrying value. In that event, a loss is recognised in the comprehensive income statement based on the amount by which the carrying amount exceeds the fair market value less costs to sell of the long-lived asset. Fair market value is determined using the anticipated cash flows discounted at a rate commensurate with the risk involved. (j) Goods and services tax (GST) The financial statements have been prepared so that all components are presented exclusive of GST. All items in the statement of financial position are presented net of GST, with the exception of receivables and payables, which include GST invoiced. 16 Neuren Pharmaceuticals Limited Intellectual property (k) Costs in relation to protection and maintenance of intellectual property are expensed as incurred unless the project has yet to be recognised as commenced, in which case the expense is deferred and recognised as contract work in progress until the revenues and costs associated with the project are recognised. (l) Cash and cash equivalents Cash and cash equivalents comprises cash and demand deposits held with established financial institutions and highly liquid investments, which are readily convertible into cash and have maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. (m) Accounts receivable Trade receivables are recognised initially at fair value and subsequently measured at amortised cost, less provision for doubtful debts. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off. A provision for doubtful receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. (n) Property, plant and equipment Property, plant and equipment are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the comprehensive income statement during the financial period in which they are incurred. Depreciation is determined principally using the straight-line method to allocate their cost, net of their residual values, over their estimated useful lives, as follows: Scientific equipment Computer equipment Office furniture, fixtures & fittings Leasehold Improvements 4 years 2 years 4 years Term of lease Intangible assets (o) Intellectual property Acquired patents, trademarks and licences have finite useful lives and are carried at cost less accumulated amortisation and impairment losses. Amortisation is calculated using the straight line method to allocate the cost over the anticipated useful lives, which are aligned with the unexpired patent term or agreement over trademarks and licences. Acquired software Acquired software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives (two years). (p) Borrowing Costs Borrowing costs are expensed as incurred. (q) Employee benefits Wages and salaries and annual leave Liabilities for wages and salaries, bonuses and annual leave expected to be settled within 12 months of the reporting date are recognised in accrued liabilities in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for non-accumulating sick leave are recognised when the leave is taken and measured at the rates paid or payable. Share-based payments Neuren operates an equity-settled share option plan and awards certain employees and consultants share options, from time to time, on a discretionary basis. The fair value of the services received in exchange for the grant of the options is recognised as an expense with a corresponding increase in other reserve equity over the vesting period. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options at grant date. At each balance sheet date, the Company revises its estimates of the number of options that are expected to vest and become exercisable. It recognises the impact of the revision of original estimates, if any, in the comprehensive income statement, and a corresponding adjustment to equity over the remaining vesting period. The proceeds received net of any directly attributable transaction costs are credited to share capital when the options are exercised. (r) Share issue costs Costs associated with the issue of shares which are recognised in shareholders’ equity are treated as a reduction of the amount collected per share. (s) Financial instruments Financial instruments recognised in the statement of financial position include cash and cash equivalents, trade and other receivables and payables, equipment finance and convertible notes. The Company believes that the amounts reported for financial instruments approximate fair value. 17 Neuren Pharmaceuticals Limited Although it is exposed to interest rate and foreign currency risks, the Company does not utilise derivative financial instruments. Financial assets: Loans and receivables Loans and receivables 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 balance sheet date. These are classified as non-current assets. The Group’s loans and receivables comprise ‘trade and other receivables’ and cash and cash equivalents in the statement of financial position. Loans and receivables are measured at amortised cost using the effective interest method less impairment. Borrowings Borrowings, which include convertible notes and equipment financing, are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost unless part of an effective hedging relationship. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the comprehensive income statement over the period of the borrowings using the effective interest method. Borrowings 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 balance sheet date. (t) Earnings per share Basic and diluted earnings per share are calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares outstanding during the period. (u) Standards, interpretations and amendments to published standards that are not yet effective Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for later periods and which the Group has not early adopted. The key item applicable to the Group is: NZ IFRS 3, Business Combinations (Revised) and NZ IAS 27, Consolidated and Separate Financial Statements (Revised) (mandatory for periods beginning on or after 1 July 2009). Transaction costs associated with any future acquisition are expensed when incurred and no longer included in the cost of acquisition. In addition, any contingent consideration is required to be recognised at fair value at the acquisition date with any subsequent changes taken to the comprehensive income statement. Where less than a 100% interest is acquired, the acquirer can recognise either the entire goodwill or the goodwill proportionate to the interest acquired. This has no impact on the Group’s acquisitions to date. There are no other standards, amendments or interpretations to existing standards which have been issued, but are not yet effective, which are expected to impact the Company or Group. 3. Segment information (a) Description of Segments The chief operating decision maker has been identified as the CEO, who reviews the business largely on a geographic basis and assesses results from New Zealand and the USA separately. The information reviewed is prepared in the same format as included in the financial statements. (b) Geographic Segments Consolidated Segment revenue Segment result before minority interest Segment assets Segment liabilities Acquisitions of property, plant and equipment, intangibles and other non-current segment assets Depreciation and amortisation expense Intangible asset impairment Loss (gain) on disposal of property, plant and equipment Consolidated Segment revenue Segment result before minority interest Segment assets Segment liabilities Acquisitions of property, plant and equipment, intangibles and other non-current segment assets Depreciation and amortisation expense Intangible asset impairment Loss (gain) on disposal of property, plant and equipment 18 2009 2009 2009 2009 New Zealand United States Consolidation Total Group NZ$’000 NZ$’000 NZ$’000 NZ$’000 Adjustments 467 (2,535) 9,156 3,275 - 167 192 (1) 5,738 2,502 9,283 1,829 6 458 - - - - (5,733) (1,476) - - - - 6,205 (33) 12,706 3,628 6 625 192 (1) 2008 2008 2008 2008 New Zealand United States Consolidation Total Group NZ$’000 2,872 (17,917) 8,096 3,506 27 936 7,052 132 Adjustments NZ$’000 NZ$’000 NZ$’000 2 (517) 7,088 815 - 405 - - - - (4,969) (768) - - - - 2,874 (18,434) 10,215 3,553 27 1,341 7,052 132 Neuren Pharmaceuticals Limited 4. Expenses Loss before income tax includes the following specific expenses: Depreciation – property, plant and equipment Scientific equipment Computer equipment Fixtures and fittings Leasehold improvements Total depreciation Amortisation – intangible assets Intellectual property Software Total amortisation Remuneration of auditors Audit fees Taxation advisory fees Total remuneration of auditors Employee benefits expense Salaries and wages Share option compensation Total employee benefits expense Directors’ fees Lease expense 5. Income tax Income tax expense Current tax Deferred tax Income tax expense Numerical reconciliation of income tax expense to prima facie tax payable (receivable): Loss before income tax Tax at rates applicable in the respective countries Tax effect of amounts not deductible (taxable) in calculating taxable income: Share option compensation Grant income Other expenses not deductible for tax purposes Foreign jurisdiction withholding tax Under (over) provision in prior years Deferred tax assets not recognised Income tax expense Consolidated Parent 2009 NZ$’000 2008 NZ$’000 2009 NZ$’000 2008 NZ$’000 24 5 11 3 43 581 1 582 44 - 44 964 7 971 147 176 37 21 13 17 88 1,239 14 1,253 46 1 47 1,792 27 1,819 154 266 24 5 11 3 43 120 1 121 44 - 44 836 7 843 147 176 37 21 13 17 88 834 14 848 46 1 47 1,792 27 1,819 154 266 Consolidated Parent 2009 NZ$’000 2008 2009 NZ$’000 NZ$’000 2008 NZ$’000 - - - (33) 277 2 (2,422) - (2,143) - 62 2,081 - 73 - 73 - - - 73 - 73 (18,361) (1,975) (17,844) (5,568) (593) (5,353) 33 - 30 (5,505) 73 3 5,502 73 2 (86) - (677) - 2 675 - 33 - 30 (5,290) 73 3 5,287 73 The weighted average applicable tax rate for New Zealand segments is 30% and for United States segments 41% (2008: 30% and 41% respectively). 19 Neuren Pharmaceuticals Limited 6. Earnings (loss) per share Basic loss per share is based upon the weighted average number of outstanding ordinary shares. For the years ended 31 December 2008 and 2009, the Company’s potentially dilutive ordinary share equivalents (being the options over ordinary shares set out in note 13) have an anti-dilutive effect on loss per share and, therefore, have not been included in determining the total weighted average number of ordinary shares outstanding for the purpose of calculating diluted loss per share. In the year ended 31 December 2009, the convertible notes set out in note 12 were potentially dilutive ordinary share equivalents for the purposes of the Group earnings per share. Consolidated 2009 NZ$’000 2008 NZ$’000 Profit (loss) after income tax attributable to equity holders 123 (18,434) Weighted average shares outstanding (basic) Weighted average shares outstanding (diluted) 271,275,942 223,265,642 272,220,539 223,265,642 Basic and diluted loss per share $0.00 ($0.08) 7. Cash and cash equivalents Cash Demand and short-term deposits 8. Trade and other receivables Trade receivables Prepayments Sundry receivables and accruals Due from subsidiaries 9. Property, plant and equipment Consolidated Parent 2009 NZ$’000 2008 NZ$’000 2009 NZ$’000 2008 NZ$’000 308 3,924 4,232 81 1,538 1,619 134 1,561 1,695 81 1,448 1,529 Consolidated Parent 2009 NZ$’000 2008 NZ$’000 2009 NZ$’000 2008 NZ$’000 347 1,923 - - 62 84 49 - 2,270 195 330 49 - 1,492 1,871 62 84 49 768 963 Scientific Equipment Computer Equipment NZ$’000 NZ$’000 Fixtures & Fittings NZ$’000 Leasehold Total Improvements NZ$’000 NZ$’000 - 161 (39) 122 122 (37) (30) 55 109 (54) 55 55 - (24) (4) 27 100 (73) 27 80 (59) 21 21 6 (21) - 6 68 (62) 6 6 - (5) - 1 68 (67) 1 108 (68) 40 40 11 (13) (14) 24 43 (19) 24 24 - (11) - 13 43 (30) 13 196 (38) 158 158 10 (17) (142) 9 10 (1) 9 9 - (3) - 6 10 (4) 6 545 (204) 341 341 27 (88) (186) 94 230 (136) 94 94 - (43) (4) 47 221 (174) 47 Parent As at 1 January 2008 Cost Accumulated depreciation Net book value Movements in the year ended 31 December 2008 Opening net book value Additions Depreciation Disposals Closing net book value As at 31 December 2008 Cost Accumulated depreciation Net book value Movements in the year ended 31 December 2009 Opening net book value Additions Depreciation Disposals Closing net book value As at 31 December 2009 Cost Accumulated depreciation Net book value 20 Neuren Pharmaceuticals Limited In addition to the Parent’s property, plant and equipment noted above, the only property, plant and equipment within the Group was computer equipment with a cost of US$4,000 purchased by the US based subsidiary for use in the upcoming Phase II trial of NNZ-2566. As the trial had not commenced at 31 December 2009 and the computer equipment was not in use, no depreciation was charged in the year ended 31 December 2009 for this equipment. During the year ended 31 December 2008 the Company moved premises and at that time fully depreciated assets and leasehold improvements related to the previous tenancy that were not sold were written off. 10. Intangible assets Consolidated As at 1 January 2008 Cost Accumulated amortisation Net book value Movements in the year ended 31 December 2008 Opening net book value Amortisation Impairment expense Exchange differences Closing net book value As at 31 December 2008 Cost Accumulated amortisation Net book value Movements in the year ended 31 December 2009 Opening net book value Amortisation Impairment expense Exchange differences Closing net book value As at 31 December 2009 Cost Accumulated amortisation Net book value Parent As at 1 January 2008 Cost Accumulated amortisation Net book value Movements in the year ended 31 December 2008 Opening net book value Amortisation Impairment expense Closing net book value As at 31 December 2008 Cost Accumulated amortisation Net book value Movements in the year ended 31 December 2009 Opening net book value Assigned to subsidiary Amortisation Impairment expense Closing net book value As at 31 December 2009 Cost Accumulated amortisation Net book value Intellectual Property NZ$’000 Acquired Software Total NZ$’000 NZ$’000 18,137 (3,386) 14,751 14,751 (1,239) (7,052) 1,840 8,300 9,522 (1,222) 8,300 8,300 (581) (192) (1,374) 6,153 7,660 (1,507) 6,153 35 (20) 15 15 (14) - - 1 35 (34) 1 1 (1) - - - 35 (35) - 18,172 (3,406) 14,766 14,766 (1,253) (7,052) 1,840 8,301 9,557 (1,256) 8,301 8,301 (582) (192) (1,374) 6,153 7,695 (1,542) 6,153 Intellectual Property NZ$’000 Acquired Software Total NZ$’000 NZ$’000 12,511 (3,323) 9,188 9,188 (834) (7,052) 1,302 1,932 (630) 1,302 1,302 (57) (120) (192) 933 1,556 (623) 933 35 (20) 15 15 (14) - 1 35 (34) 1 1 - (1) - 35 (35) - 12,546 (3,343) 9,203 9,203 (848) (7,052) 1,303 1,967 (664) 1,303 1,303 (57) (121) (192) 933 1,591 (658) 933 The results from the Glypromate® Phase 3 trial were released at the end of 2008, which showed that Glypromate® had no observable effect in a cardiac surgery population and this program was terminated. Accordingly, an impairment charge of $7,052,000 representing the carrying value of intellectual property related to Glypromate® was recorded at 31 December 2008. An intangibles impairment charge of $192,000 was recorded in 2009 following rationalisation of the patent portfolio. 21 Neuren Pharmaceuticals Limited 11. Trade and other payables Trade payables Accruals Employee benefits 12. Borrowings Consolidated and Parent Interest bearing Equipment finance - short term - long term Total interest bearing debt Non-interest bearing Convertible note - long term Consolidated Parent 2009 NZ$’000 2008 NZ$’000 2009 NZ$’000 2008 NZ$’000 2,443 464 186 3,093 2,267 1,016 198 3,481 2,052 464 184 2,700 2,258 978 198 3,434 2009 NZ$’000 2008 NZ$’000 11 - 11 490 15 11 26 - The New Zealand dollar denominated equipment finance is unsecured, has a fixed interest rate of 12.25% and matures in 2010. The convertible note with a principal amount of A$550,000 was issued on 18 November 2009, and A$150,000 of this was converted at the election of the noteholder to 4,629,630 ordinary shares on 4 December 2009. The principal terms of the note are: (a) The Note is unsecured and does not bear interest; (b) The Note, or part thereof, shall convert to new ordinary shares in the Company determined by dividing the Principal Amount, or part thereof to be converted, by the lesser of: (i) 130% of the average of the Volume Weighted Average Prices per share of the Company’s ordinary shares quoted on the ASX (“VWAPs”) for the twenty (20) business days immediately prior to 18 November 2009; and (ii) 90% of the lowest of the VWAPs during the twenty (20) business days immediately prior to the date the Investor elects to have the Note, or part thereof, repaid; (c) The ordinary shares issued upon conversion of the Note will rank equally in all respects with the then existing ordinary shares on issue; (d) The noteholder may convert the Note or any part thereof at any time or times prior to 18 November 2011; (e) The Note does not carry any voting rights at meetings of shareholders of Neuren, and have no rights of participation in any rights issue undertaken by Neuren prior to conversion of the Notes. The convertible loan agreement under which the above convertible note was issued provides for convertible note funding of up to A$6.7 million. This facility is available until December 2011 and provides further minimum monthly funding commencing with A$400,000 in January 2010, followed by ten tranches of A$100,000, and subsequent tranches of A$60,000 on the principal terms noted above except that each monthly convertible note shall have a term of approximately one month. Pursuant to the convertible loan agreement, the Company issued for no value 13,000,000 ordinary shares as collateral for funding under the agreement. On expiry or termination of the convertible loan agreement these collateral shares shall be returned to the Company to be cancelled or held as treasury shares, or by mutual agreement of the parties purchased by the convertible loan funding provider. 13. Share capital Consolidated and Parent Issued share capital 2009 Shares 2008 Shares 2009 2008 NZ$’000 NZ$’000 Ordinary shares on issue at beginning of year 257,464,313 144,739,253 68,768 54,023 Shares issued in Rights Issue Shares issued on conversion of notes Shares issued for cash in private placements Shares issued for cash under Share Purchase Plan Shares issued as collateral and in lieu for capital raising fees Share issue expenses - 4,629,630 40,306,174 27,176,665 22,670,669 - 50,700,000 24,525,060 11,875,000 25,625,000 - - - 190 1,903 1,003 - (2,520) 8,065 3,866 1,190 2,426 - (802) 352,247,451 257,464,313 69,344 68,768 22 Neuren Pharmaceuticals Limited (a) Ordinary Shares The ordinary shares have no par value and all ordinary shares are fully paid-up and rank equally as to dividends and liquidation, with one vote attached to each fully paid ordinary share. (b) Share Options On 23 December 2009 the Company granted 40,306,174 options (“December 2009 Placement Options”) in conjunction with a private placement on that date. The options are exercisable into ordinary shares on a one-for-one basis with an exercise price of A$0.0457 per share. The options expire on 23 December 2013. On 4 December 2009 the Company granted 4,629,630 options (“December 2009 Conversion Options”) in conjunction with partial conversion of a convertible note. The options are exercisable into ordinary shares on a one-for-one basis with an exercise price of A$0.0389 per share. The options expire on 4 December 2013. On 18 November 2009 the Company granted 20,000,000 options (“November 2009 Options”) in conjunction with obtaining a convertible loan facility. The options are exercisable into ordinary shares on a one-for-one basis with an exercise price of A$0.0445 per share. The options expire on 18 November 2013. On 30 September 2008 the Company granted 750,000 options (“September 2008 Options”) for underwriting services. The options are exercisable into ordinary shares on a one-for-one basis with an exercise price of A$0.15 per share. The options expire on 30 September 2010. On 26 February 2008 the Company granted 3,000,000 options (“January 2008 Options”) for future consulting services related to capital raising and financing activities. The options are exercisable into ordinary shares on a one-for-one basis with an exercise price of A$0.25 per share. The options expire on 7 February 2011. On 17 January 2007 the Company granted 1,800,000 options (“January 2007 Options”) for future consulting services related to capital raising and financing activities, exercisable on a one-for-one basis at an exercise price of A$0.60 per share. The options expired on 1 December 2008. Oceania & Eastern Biotech Limited is an investment company associated with interests of Dr Robin Congreve and held 1,528,892 options (the “O&E Options”). The O&E Options’ exercise price was a fixed sum of NZ$600,000, exercisable into 1,528,892 ordinary shares (equivalent to NZ$0.392 per share). The options expired on 31 March 2009. Auckland UniServices Limited (“UniServices”) is the commercial research and knowledge transfer company for the University of Auckland and held 1,872,892 options (“UniServices Options”). The UniServices Options’ exercise price was a fixed sum of NZ$735,000, exercisable into 1,872,892 ordinary shares (equivalent to NZ$0.392 per share). The UniServices Options expired on 31 March 2009. The above options were otherwise issued on terms and conditions not materially different to those of the Share Option Plan described below. The Company has established a Share Option Plan to assist in the retention and motivation of senior employees of, and certain consultants to, the Company (“Participants”). Under the Share Option Plan, options may be offered to Participants by the Remuneration and Audit Committee. The maximum number of options to be issued and outstanding under the Share Option Plan is 15% of the issued ordinary shares of the Company at any time. No payment is required for the grant of options under the Share Option Plan. Each option is an option to subscribe in cash for one ordinary share, but does not carry any right to vote. Upon the exercise of an option by a Participant, each ordinary share issued will rank equally with other ordinary shares of the Company. Options granted under the Share Option Plan generally vest over three years service by the Participant and lapse five years after grant date. Movements in the number of share options are as follows: Consolidated and Parent Outstanding at 1 January 2008 Granted Expired Outstanding at 31 December 2008 Granted Expired Weighted Average Exercise Price (NZ$) $ $ $ $ $ $ 0.419 0.263 0.674 0.373 0.056 0.392 Options 20,637,627 3,750,000 (1,800,000) 22,587,627 64,935,804 (17,517,627) Weighted Average Exercise Price (NZ$) Exercisable 20,090,961 $ 0.417 22,387,627 $ 0.373 Outstanding at 31 December 2009 70,005,804 $ 0.074 70,005,804 $ 0.074 23 Neuren Pharmaceuticals Limited The weighted average remaining contractual life of outstanding share options is as follows: Consolidated and Parent Options 2009 Weighted Average Remaining Contract Life (years) 2008 Weighted Average Remaining Contract Life (years) Options Exercise price range NZ$0.392 – NZ$0.472 A$0.15 – A$0.25 A$0. 0389 – A$0.0457 1,320,000 3,750,000 64,935,804 70,005,804 0.3 1.1 3.9 3.7 18,837,627 3,750,000 - 0.3 1.9 - 22,587,627 0.6 The weighted average assessed fair value of options granted during the year determined using the Black-Scholes valuation model was NZ$0.036 per option (2008: NZ$0.02). The significant weighted average inputs into the model were a grant date share price of NZ$0.046 (2008: NZ$0.13), volatility of 146% (2008: 69%), dividend yield of 0% (2008: 0%), an expected option life of three years (2008: two years), and an annual risk-free interest rate of 4.23% (2008: 7.07%). The expected price volatility was derived by analysing the historic volatility of the Company’s shares since listing on the ASX. 14. Deferred tax Deferred tax asset (liability) Amounts recognised in profit or loss Provisions and accruals Property, plant and equipment Intangible assets Tax losses Unrecognised deferred tax assets Deferred tax asset (liability) Movements Deferred tax asset (liability) at the beginning of the year Credited (charged) to the income statement (note 5) Impact of loss of shareholder continuity Effects of change in tax rate Exchange differences Change in unrecognised deferred tax assets Deferred tax asset (liability) at the end of the year Consolidated Parent 2009 NZ$’000 2008 NZ$’000 2009 NZ$’000 2008 NZ$’000 13 10 (1,762) 21,580 19,841 (19,841) - - 2,081 (568) (612) (901) - 43 11 (1,907) 20,793 18,940 (18,940) - - 5,502 - - 734 (6,236) - 13 10 (5) 43 11 564 16,130 15,423 16,148 (16,148) 16,041 (16,041) - - 675 (568) - (107) - - - 5,287 - - - (5,287) - Unrecognised tax losses of $7.7 million, $10.4 million, $14.0 million, $17.5 million, and $4.3 million expire in 2013, 2014, 2015, 2016 and 2017 respectively. 15. Subsidiaries Investment in subsidiaries (a) The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 2(b). Name of entity Date of incorporation Principal activities Interest held Domicile Amount due to (from) Parent 2009 NZ$’000 2008 NZ$’000 AgVentures Limited 7 October 2003 Dormant NeuroendocrinZ Limited 10 July 2002 Dormant 100% 100% NZ NZ Neuren Pharmaceuticals Inc. 20 August 2002 US Based Office 100% USA Hamilton Pharmaceuticals Inc. 2 April 2004 Clinical research 100% USA Neuren Pharmaceuticals (Australia) Pty Ltd Perseis Therapeutics Limited 9 November 2006 25 March 2009 Dormant 100% Australia Preclinical research 72.2% NZ - - 852 624 - 16 - - - 768 - - All subsidiaries have a balance date of 31 December, except Perseis Therapeutics which has a 31 March year end. 24 Neuren Pharmaceuticals Limited 16. Commitments and contingencies (a) Operating leases The following aggregate future non-cancellable minimum lease payments for premises have been committed to by the Company, but not recognised in the financial statements. The Company moved premises in June 2008 and the new premises commitment is for a four year and four month lease commencing June 2008, with two two year rights of renewal, followed by two five year rights of renewal, and three yearly rental reviews throughout. Consolidated and Parent Not later than one year Later than one year and not later than five years Later than five years 2009 NZ$’000 148 259 - 407 2008 NZ$’000 148 407 - 555 (b) Finance leases The following aggregate future non-cancellable minimum lease payments for scientific equipment have been committed to by the Company: Consolidated and Parent Not later than one year Later than one year and not later than five years Later than five years Future finance charges Total equipment finance (refer note 12) 2009 NZ$’000 2008 NZ$’000 12 - 12 (1) 11 18 11 - 29 (3) 26 (c) Legal claims The Company has not entered into any collaborative arrangements and has no other significant legal contingencies as at 31 December 2009. During 2008 a claim by a former employee for a share of any proceeds received on commercialisation of a portion of the Neural Regeneration Peptides (NRP) intellectual property was lodged against the Company. The Company disclaimed liability and the claim was withdrawn during 2009. (d) Capital commitments The Company is not committed to the purchase of any property, plant or equipment as at 31 December 2009 (2008: nil). 17. Related party transactions (a) Key management and personnel The key management personnel include the directors of the Company, the CEO, and direct reports to the CEO Compensation for this group was as follows: Consolidated and Parent Directors’ fees and other short term benefits CEO and management - short-term benefits CEO and management - share-based payments 2009 NZ$’000 307 1,245 7 1,252 2008 NZ$’000 341 1,107 27 1,475 In December 2009, in conjunction with a shareholder approved private placement Dr Trevor Scott subscribed for and was allotted 10,604,991 ordinary shares at A$0.0381 per share and 10,604,991 options over ordinary shares with an exercise price of A$0.0457 per option. (b) Subsidiaries Interests in and amounts due from subsidiaries are set out in note 15. The Parent funds the activities of the subsidiaries throughout the year through the intercompany accounts as needed. All amounts due between entities in the Group are payable on demand and bear no interest. During the year ended 31 December 2009 the Parent charged Perseis Therapeutics $42,000 for monthly management and administrative services. 18. Events after balance date As at the date of these financial statements there were no events arising since 31 December 2009 which require disclosure. 25 Neuren Pharmaceuticals Limited 19. Financial instruments and risk management (a) Categories of financial instruments Financial assets Cash and cash equivalents Trade receivables Total financial assets (loans and receivables classification) Financial liabilities Amortised cost: Trade and other payables Equipment finance Convertible notes Total financial liabilities Consolidated Parent 2009 NZ$’000 2008 NZ$’000 2009 NZ$’000 2008 NZ$’000 4,232 347 4,579 3,093 11 490 3,594 1,619 111 1,730 3,481 26 - 3,507 1,695 330 2,025 2,700 11 490 3,201 1,529 111 1,640 3,434 26 - 3,460 (b) Risk management The Company and its subsidiaries are subject to a number of financial risks which arise as a result of its activities. Currency risk During the normal course of business the Company and its subsidiaries enter into contracts with overseas customers or suppliers or consultants that are denominated in foreign currency. As a result of these transactions there is exposure to fluctuations in foreign exchange rates. The Company also has a net investment in a foreign operation, whose net assets are exposed to foreign currency translation risk. The Group does not utilise derivative financial instruments. It operates a policy of holding cash and cash equivalents in the currency of estimated future supplier payments, however it does not designate formal hedges and as such remains unhedged against foreign currency fluctuations. A foreign exchange gain of $203,000 is included in results for the year ended 31 December 2009 (2008: $424,000 gain). The carrying amounts of foreign currency denominated assets and liabilities are as follows: Assets US dollars Australian dollars UK pounds Euro Liabilities US dollars Australian dollars UK pounds Euro Consolidated Parent 2009 NZ$’000 2008 NZ$’000 2009 NZ$’000 2008 NZ$’000 9,297 622 17 - 1,345 993 153 - 7,291 822 25 49 1,582 788 270 - 1,495 622 17 - 958 990 153 - 960 822 25 49 1,535 788 270 - The following table details the Group's sensitivity to a 10% increase and decrease in each of the currencies noted against the New Zealand dollar as at the reporting date. Decrease (increase) in loss after income tax 10% strengthening of NZ dollar against: US dollar Australian dollar UK pound Euro 10% weakening of NZ dollar against: US dollar Australian dollar UK pound Euro Consolidated Parent 2009 NZ$’000 2008 NZ$’000 2009 NZ$’000 2008 NZ$’000 (139) 31 12 - 170 (44) (15) - 168 (3) 22 (4) (206) 4 (27) 5 (49) 31 12 - 60 (44) (15) - 52 (3) 22 (4) (64) 4 (27) 5 Foreign currency denominated transactions occur consistently throughout the year. In management's opinion, the sensitivity analysis set out above is unrepresentative of the inherent foreign exchange risk as the year end exposure does not reflect the exposure during the year. Interest rate risk The Company and the Group are exposed to interest rate risk as entities in the Group hold cash and cash equivalents and borrow interest bearing funds. 26 Neuren Pharmaceuticals Limited The effective interest rates on financial assets are as follows: Financial assets Cash and cash equivalents New Zealand dollar cash deposits New Zealand dollar interest rate US dollar cash deposits US dollar interest rate Australian dollar cash deposits Australian dollar interest rate Consolidated Parent 2009 NZ$’000 2008 NZ$’000 2009 NZ$’000 2008 NZ$’000 1,265 3.4% 2,079 1.1% 580 3.1% 468 5.0% 280 0.0% 790 3.2% 981 3.4% - - 580 3.1% 468 5.0% 190 0.0% 790 3.2% The Company and Group’s effective interest rates on financial liabilities are set out in note 12. Trade and other receivables and payables do not bear interest and are not interest rate sensitive. The Company and Group’s interest bearing financial assets bear interest at overnight deposit rates and accordingly any change in interest rates would have an immaterial effect on reported loss after tax. Similarly, the Company and Group’s financial liabilities are at fixed or no interest rates, and accordingly a change in market interest rates would have no effect on reported loss after tax. Credit risk The Company and its subsidiaries incur credit risk from transactions with trade receivables and financial institutions in the normal course of its business. The credit risk on financial assets of the Group, which have been recognised in the statement of financial position, is the carrying amount, net of any allowance for doubtful debts. The Company and its subsidiaries do not require any collateral or security to support transactions with financial institutions. The counterparties used for banking and finance activities are financial institutions with high credit ratings. Liquidity risk The maturities for the Company and Group’s interest bearing financial liabilities are set out in note 12. The Company and Group’s other financial liabilities, comprising trade and other payables, are generally repayable within 1 – 2 months, and are managed together with capital risk as noted below. Capital risk The Company manages its capital to ensure that constituent entities are able to continue as a going concern. The capital structure of the group consists of cash and cash equivalents, convertible notes and equity of the parent, comprising issued capital, reserves and accumulated deficit. 27 PricewaterhouseCoopers 188 Quay Street Private Bag 92162 Auckland New Zealand Telephone +64 (09) 355 8000 Facsimile +64 (09) 355 8001 Auditors’ Report to the Shareholders of Neuren Pharmaceuticals Limited We have audited the financial statements on pages 10 to 27. The financial statements provide information about the past financial performance and cash flows of the Company and Group for the year ended 31 December 2009 and their financial position as at that date. This information is stated in accordance with the accounting policies set out on pages 14 to 18. This report is made solely to the Company’s shareholders, as a body, in accordance with Section 205(1) of the Companies Act 1993. Our audit work has been undertaken so that we might state to the Company’s shareholders those matters which we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s shareholders as a body, for our audit work, for this report, or for the opinions we have formed. Directors’ Responsibilities The Company’s Directors are responsible for the preparation and presentation of the financial statements which give a true and fair view of the financial position of the Company and Group as at 31 December 2009 and their financial performance and cash flows for the year ended on that date. Auditors’ Responsibilities We are responsible for expressing an independent opinion on the financial statements presented by the Directors and reporting our opinion to you. Basis of Opinion An audit includes examining, on a test basis, evidence relevant to the amounts and disclosures in the financial statements. It also includes assessing: (a) (b) the significant estimates and judgements made by the Directors in the preparation of the financial statements; and whether the accounting policies are appropriate to the circumstances of the Company and Group, consistently applied and adequately disclosed. We conducted our audit in accordance with generally accepted auditing standards in New Zealand. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatements, whether caused by fraud or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We have no relationship with or interests in the Company or any of its subsidiaries other than in our capacity as auditors and taxation advisors. Unqualified Opinion We have obtained all the information and explanations we have required. In our opinion: (a) (b) proper accounting records have been kept by the Company as far as appears from our examination of those records; and the financial statements on pages 10 to 27: (i) (ii) (ii) comply with generally accepted accounting practice in New Zealand; comply with International Financial Reporting Standards; and give a true and fair view of the financial position of the Company and Group as at 31 December 2009 and their financial performance and cash flows for the year ended on that date. Our audit was completed on 30 March 2010 and our unqualified opinion is expressed as at that date. Chartered Accountants, Auckland 28 Additional Information Equity Securities Held by Directors as at 15 March 2010 Director R L Congreve T D Scott J D Wilson G B Howie J Holaday Shareholding Interests in Ordinary Shares Interests in Options Direct Indirect Direct Indirect - - - 50,000 - 22,386,224 16,694,126 135,000 55,000 - - - - - - - 10,604,991 - - - Each ordinary share is entitled to one vote when a poll is called; otherwise on a show of hands at a general meeting every member present in person or by proxy has one vote. The number of ordinary shareholdings held in less than marketable parcels at 15 March 2010 was 899, holding 5,620,586 ordinary shares. The following information is presented based on share registry information processed up to and including 15 March 2010. Distribution of Shareholders Analysis of numbers of ordinary shares by size of holding: Number of Shareholders Number of Ordinary Shares 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over 136 331 296 835 343 1,941 29,553 1,247,487 2,507,942 34,911,910 327,785,435 366,482,327 Distribution of Optionholders Analysis of numbers of options by size of holding: Number of Optionholders Number of Options 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Substantial Security Holders who have notified the Company as at 15 March 2010 are: CNF Investments LLC and associates K One W One Limited There are no securities subject to escrow. - 4 - - 8 12 - 20,000 - - 84,220,680 84,240,680 Number of Ordinary Shares 23,188,005 19,305,865 29 Neuren Pharmaceuticals Limited Twenty Largest Holders of ordinary shares: Number of Ordinary Shares % Holding HSBC Custody Nominees (Australia) Limited Essex Castle Limited ANZ Nominees Limited HSBC Custody Nominees (Australia) Limited K One W One Limited Merrill Lynch (Australia) Nominees Pty Limited Oceania & Eastern Biotech Limited Citicorp Nominees Pty Limited J P Morgan Nominees Australia Limited Pfizer Inc. National Nominees Limited Custodial Services Limited Centralo Limited TAC Murray & Quartet Equities Limited Hazardous Investments Limited Jarden Custodians Limited Mr Roger Scott Alter Mr Mladen Marusic Mr Robert Albert Boas Investment Custodial Services Limited 24,911,455 24,014,208 23,926,850 23,188,005 19,305,865 11,904,338 10,283,956 9,338,927 9,027,096 8,081,438 7,398,559 6,140,668 5,962,754 5,556,366 4,940,566 3,181,497 3,000,000 2,903,000 2,580,403 2,567,403 208,213,354 6.80 6.55 6.53 6.33 5.27 3.25 2.81 2.55 2.46 2.21 2.02 1.68 1.63 1.52 1.35 0.87 0.82 0.79 0.70 0.70 56.81 Australian Stock Exchange Disclosures Neuren Pharmaceuticals Limited is incorporated in New Zealand under the Companies Act 1993. The Company is not subject to Chapters 6, 6A, 6B and 6C of the Corporations Act, Australia, dealing with the acquisition of shares (such as substantial holdings and takeovers). Limitations on the acquisition of shares are imposed by the following New Zealand legislation: Companies Act 1993, Securities Act 1978, Securities Amendment Act 1988, Takeovers Act 1993, Overseas Investment Act 1973, Commerce Act 1986 and various regulations and codes promulgated under such Acts. Corporations Act, Australia - Directors’ declaration The Directors of Neuren Pharmaceuticals Limited (“Neuren”) declare that: 1. The financial statements on pages 10 to 27 of Neuren and its subsidiaries for the year ended 31 December 2009 and the notes to those financial statements: (a) comply with the accounting standards issued by the Institute of Chartered Accountants of New Zealand; and (b) give a true and fair view of the financial position as at 31 December 2009 and of the performance for the year ended on that date of Neuren and its subsidiaries. 2. In the Directors’ opinion there are reasonable grounds to believe that Neuren will be able to pay its debts as and when they become due and payable. This declaration is made in accordance with a resolution of the Board of Directors dated 25 March 2010. On behalf of the Board Dr Robin Congreve Chairman 30 ANNUAL REPORT 2009 Neuren Pharmaceuticals Limited ARBN 111 496 130 Level 2, 57 Wellington Street Freemans Bay, Auckland New Zealand Tel: +64 9 529 3940 Email: enquiries@neurenpharma.com www.neurenpharma.com 

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