Siren Gold Limited
Annual Report 2012

Plain-text annual report

S y n a i r g e n l p c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 2 i m o c . n g s e d c d b w w w . d e t i m L i y n a p m o C n g s e D i t n i r p e u B e h T l y b d e c u d o r p d n a d e n g s e D i Synairgen plc, Mailpoint 810, Level F, South Block, Southampton General Hospital, Tremona Road, Southampton, SO16 6YD United Kingdom © Synairgen plc Annual Report and Accounts 2012 Targeting the causes of respiratory disease When I get a cold… GEoRGE, AGED 74 who hAS CoPD G A i L , A G E D 3 9 w h o h A S A S T h m A “It wears me down and drains my energy” “I have to take days off work” PoLLy, AGED 16 who hAS ASThmA “I have to have time off school” Stock symbol: LSE:SNG www.synairgen.com Synairgen is a respiratory drug discovery and development company with a focus on viral defence of the lungs. It is developing inhaled interferon beta (‘IFN-β’) in two programmes: • To prevent asthma and COPD patients suffering severe exacerbations as a result of cold or flu infections • To treat other patients who have been hospitalised with severe viral lung infections Patents protecting the use of inhaled iFN-β to treat exacerbations of asthma and CoPD induced by rhinovirus (the common cold) have been granted in the USA, the EU and Japan. in 2012 Synairgen announced positive data from its Phase ii proof of concept trial of inhaled iFN-β in asthma and is aiming to secure the right partnership arrangement to enable commencement of follow-on clinical trial activity during the 2013-14 virus season. Exacerbations (acute deteriorations of symptoms) represent the greatest unmet clinical need in asthma and CoPD. The common cold plays a major role in exacerbations, causing up to 80% of asthma exacerbations. For CoPD patients 50% of colds result in exacerbations. The annual direct healthcare cost of treating asthma and CoPD is very significant. in the USA it amounts to $54 billion1, of which $16 billion is for hospitalisations and Emergency Room visits. Viruses are parasites which take over cells and use the cells’ ‘machinery’ to replicate. The normal host cell response to viral infection is to trigger iFN-β production, which in turn orchestrates an anti-viral response (see page 10). Deficiencies in iFN-β production following infection explain why some patient groups (such as those with asthma and CoPD) are more susceptible to infection. many pathogenic respiratory viruses, such as influenza and SARS, can suppress iFN-β production, allowing infections to spread to the lungs and cause severe illness. By delivering iFN-β to the lungs, Synairgen aims to overcome the iFN-β deficiency and restore/boost the lungs’ anti-viral defence mechanism. Reference 1. National Heart, Lung, and Blood Institute. Morbidity & Mortality: 2012 Chart Book on Cardiovascular, Lung, and Blood Diseases. www.synairgen.com Contents Introduction Overview of interferon beta programmes Operational and financial highlights Business Review Chairman’s and Chief Executive Officer’s Report Financial Review Scientific Review Governance Directors Synairgen’s Founders and Scientific Advisors Directors’ Report Corporate Governance Directors’ Remuneration Report Financials Statement of Directors’ responsibilities in respect of the Annual Report and the Finanicial Statements Independent Auditor’s Report Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity 16 18 20 23 24 25 25 1 2 3 8 9 13 15 Consolidated Statement of Financial Position Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Parent Company Balance Sheet Notes to the Parent Company Financial Statements Other Corporate Directory Glossary 26 27 28 39 40 43 43 1 | Synairgen plc annual report and accounts 2012 | www.synairgen.com | LSE:SNG LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 46 I have suffered with asthma since I was 10 years old. I lead a very normal life (swim 3 times a week and run regularly) until I get a cold. When I get a cold it goes straight to my chest and I get very wheezy and have to take my inhaler about 20 times a day. I usually end up on oral steroids and/or antibiotics when I have a cold and have to have days off work. My colds seem to last a lot longer than any of my friends, and I often feel as though the entire winter is spent with a bad chest and not leading a normal life. Asthma is a chronic condition but it doesn’t affect my life until I get a cold. Gail aged 39 Highlights for the year ended 31 December 2012 Operational highlights ● Positive data announced in April 2012 from the Phase II proof of concept trial of inhaled interferon beta (SNG001) being developed for the treatment or prevention of virus-induced asthma exacerbations, which showed: ● We are continuing to map out the different regulatory and clinical paths required to progress SNG001 to market in asthma and COPD. This is being progressed in parallel with our business development discussions ● British Thoracic Society Step 4/5 patients (estimated to represent between 10% and 20% of adult asthma sufferers, who are the greatest healthcare burden) suffer most due to cold viruses ● Significant benefit across multiple endpoints in the Step 4/5 population ● Inhaled interferon beta is well tolerated ● The positive Phase II clinical trial data triggered comprehensive business development activity. Multiple parties are conducting detailed technical and commercial evaluations of SNG001. We aim to finalise arrangements with a primary partner to enable commencement of follow-on clinical trial activity during the 2013 – 2014 virus season ● Biomarker analysis of Phase II study samples commenced ● We have commenced engagement with the US government to investigate the potential of SNG001 as a broad spectrum anti-viral treatment ● Expansion of patent portfolio, including grant of US patent for compounds that induce interferon beta to treat or prevent rhinovirus (common cold)-induced exacerbations in asthma or COPD Financial highlights ● Balance sheet strengthened with fundraising of £2.5 million (gross) completed in July 2012 ● Research and development expenditure for the year: £1.5 million (six months ended 31 December 2011: £1.8 million) ● Post-tax loss for the year: £2.3 million (six months ended 31 December 2011: £2.0 million) ● Cash at 31 December 2012: £3.1 million (31 December 2011: £3.4 million) LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 2 LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 2 LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 2 Chairman’s and Chief Executive Offi cer’s Report This has been a pivotal year for Synairgen, as its primary programme, SNG001 (inhaled interferon beta) to treat or prevent exacerbations of asthma and COPD, has produced positive Phase II clinical trial data. We also raised further funds to strengthen the balance sheet whilst we explore partnering opportunities. Exacerbations cause loss of lung function even whilst on ‘gold standard’ inhaled corticosteroid therapy – ) ) i n m / L ( F E P ( n o i t c n u F g n u L 800 700 600 500 400 300 200 100 0 Uncontrolled asthma with very variable and reduced lung function Controlled asthma as a result of inhaled corticosteroid Lung function restored and previous variability removed Virus exacerbation In spite of taking corticosteroid, patient’s lung function is significantly reduced by exacerbation 0 4 8 12 16 20 24 28 32 Adapted from Reddel et al. Lancet 1999; 353: 364–69 Reproduced with permission Weeks of inhaled corticosteroid use (budesonide) Synairgen’s inhaled SNG001 is being developed as a broad spectrum anti-viral therapy to be taken by asthmatic and COPD patients at the onset of cold (or infl uenza) symptoms. It is designed to treat and/or attenuate a deterioration of asthma or COPD symptoms and prevent severe exacerbations that require intensive treatment with oral therapies such as steroids or antibiotics. It has long been established that common viruses are a major cause of exacerbations and hospitalisations in these diseases. The rationale for developing inhaled SNG001 came from the observation that cells from asthmatic patients and COPD patients’ lungs respond poorly to viruses, and do not produce enough of the key anti-viral protein interferon beta. Adding interferon beta to the cells restores and boosts the anti-viral defences. 3 | Synairgen plc annual report and accounts 2012 | www.synairgen.com | LSE:SNG When I get a cold it lasts a couple of days and then goes, then a few days later it hits me again and that’s when my chest is really bad. I cough a lot more than usual and have a lot of mucus. It is much worse when I get up. I can't do a great deal, especially in the morning, and then it gets better as the day goes on. I have to take my inhalers more regularly. I don't like going to the doctors and it takes me a long time to get an appointment. They often give me steroids and antibiotics. I just feel drained and it takes me a long time to get back to normal again. I haven't really been back to normal since Christmas. It wears me down and drains my energy. George aged 74 LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 4 LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 4 Chairman’s and Chief Executive Offi cer’s Report (continued) Phase II trial structure Screening Pre-Treatment Baseline (Day 1) Treatment 14 Days Follow-Up 5 Weeks Pool of screened asthma patients (approx. 300) wait to get a respiratory virus infection Onset of cold/flu symptoms • Dosed within 24 hours of reporting cold/flu symptoms • 147 patients were treated, of whom 134 developed a confirmed cold, thereby meeting the mITT criteria Objectives/Endpoints • Asthma symptoms • Lung function • Exacerbations • Virus load • Safety Results of Phase II trial In April we announced preliminary results from the trial. Since then we have continued to review the mass of data generated by this study alongside key opinion leaders in the fi eld. The results were presented by Prof. Ratko Djukanovic at the European Respiratory Society in September 2012 and were well received. The results have also recently been submitted for publication. In the trial, 147 patients with a wide range of asthma severity were treated with either SNG001 or placebo at the early signs of a cold infection. Of the 147, 134 went on to develop a full cold (the other 13 patients either did not provide data to be able to confi rm a cold, or the cold symptoms did not materialise). Various endpoints were assessed to establish whether SNG001 was providing benefi t to these asthmatic patients during respiratory virus infections. The primary endpoint was a measure of change in asthma symptoms during the fi rst week of treatment using the shortened Asthma Control Questionnaire (sACQ). In the treated population who got colds, there appeared to be minimal benefi t. Essentially the cold infection was not impacting on patients’ asthma as seriously as expected, thus there was little opportunity for an intervention to demonstrate effi cacy and there was no statistically signifi cant difference. However for lung function (morning peak expiratory fl ow, a secondary/exploratory endpoint) there was a statistically signifi cant benefi t for patients receiving SNG001. This in itself is very encouraging. A review of patients whose asthma deteriorated to the point where they were prescribed oral steroids (or antibiotics) to treat their exacerbation showed that fi ve patients receiving placebo and one patient receiving SNG001 required this more serious level of intervention to treat their asthma exacerbation. One of the patients on placebo was hospitalised for fi ve days for their asthma. Of particular interest to us was that all fi ve of the placebo patients who received oral corticosteroids or antibiotics to treat their exacerbation were in the British Thoracic Society (BTS) Step 4 classifi cation. The BTS Step classifi cation system ranges from 1 to 5, with Step 1 patients being least intensively treated to Step 5 being the most intensively treated. BTS Step 4 patients, who are recognised as ‘diffi cult to treat’, receive close to maximal routine inhaled therapies (i.e. higher doses of inhaled corticosteroids - an anti-infl ammatory - and a long acting beta agonist (bronchodilator) as a minimum). None of the Step 4 or Step 5 SNG001-treated patients required this higher level of intervention (i.e. oral steroids or antibiotics). This led us to investigate the possibility that this population may be the patient group who not only suffer most during respiratory virus infections, but also respond best to SNG001 treatment. 5 | Synairgen plc annual report and accounts 2012 | www.synairgen.com | LSE:SNG Change in sACQ from Pre-Treatment Baseline to Day 8 in BTS Step 4/5 Group (mITT) difference 0.63, p = 0.004 Clinically relevant worsening of asthma symptoms Baseline R F E P g n n r o M n i i e g n a h C i * ) n m / L ( * 2 y a D m o r f 80 60 40 20 0 -20 -40 Change in Home Morning Peak Expiratory Flow Rate from Day 2 in BTS Step 4/5 Group (mITT) No change Placebo (n = 30) SNG001 (n = 24) * LS Mean±SEM 32 54 76 98 Study day 10 11 12 13 14 Placebo SNG001 * LS Mean±SEM 1.0 0.5 0.0 -0.5 m o r f Q C A s n i e g n a h C * e n i l e s a B t n e m t a e r T - e r P Analysis of sub populations according to BTS Step group The first observation was that there were disproportionately more (approaching half) Step 4 and Step 5 patients in the trial than one would find in the general asthma population, where 10% to 20% would be expected. We believe the trial radio advert recruitment wording, “Does your asthma get worse when you get a cold?”, created a positive bias that resulted in the selection of patients whose asthma deteriorates most when they get a cold. An assessment of asthma control using the sACQ (as used for the primary endpoint) showed that in the first week of the cold there was a marked worsening in patients on placebo, whereas patients on SNG001 showed a movement returning towards their screening (uninfected) level of control. The difference on the sACQ scale of 0.63 in favour of SNG001 exceeded the threshold considered to be clinically relevant (> 0.5) and was statistically significant (p=0.004). A similar subgroup analysis of the lung function (morning peak expiratory flow) changes, which were significantly better for the overall population in the trial (as referred to above), showed that the positive effects of SNG001 were minimal for the ‘milder’ Step 2 patients (difference of 6 litres/min), approaching clinical relevance (17 litres/min) for the Step 3 patients, and exceeding the clinically relevant difference of 20 litres/min in the Step 4 patients (31 litres/min). This trial has been successful on three counts: • Firstly, we have identified the patient group which appears to suffer most due to cold viruses; this is the Step 4 and Step 5 patients. Patients at lower Steps have other therapeutic options: they have greater scope to increase the doses of their existing routine daily medication, and it is also quite possible that compliance to medication may increase at times of infection. It appears that Step 4 patients are more likely to use more potent drugs, such as oral corticosteroids. • Secondly, in these Step 4/5 patients, treatment with SNG001 was beneficial in terms of the number of patients requiring oral therapies, improvement in asthma control, and accelerating the recovery in lung function. • Thirdly, SNG001 appears to be well tolerated, and there was no evidence of systemic absorption. LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 6 Chairman’s and Chief Executive Officer’s Report (continued) Business Development The positive data from the Phase II clinical trial has triggered comprehensive business development activity. This process has identified multiple parties with established commercial respiratory franchises who are interested in this therapeutic area. During the period, we have devoted significant time and resource to enable potential partners to conduct technical and commercial evaluations of SNG001. Given the novelty of this potential treatment we have worked up a number of options regarding clinical and regulatory development pathways for SNG001. We aim to secure the right partnership arrangement to enable commencement of follow-on clinical trial activity during the 2013 – 2014 virus season and we are confident that this process can achieve that goal. Biomarker analysis of Phase II samples We are also progressing well with the analysis of samples from our Phase II study in asthma. A panel of possible gene and protein biomarkers have been identified and are the subject of further investigations. We shall provide updates on this activity which is designed to underpin the clinical observations, and also identify potential prognostic biomarkers. Intellectual property During the year, a US patent was granted for compounds that induce interferon beta to treat or prevent rhinovirus (common cold)-induced exacerbations in asthma or COPD. This is important intellectual property for the Company, as it prevents inducers of interferon beta, such as toll-like receptor agonists, being developed to do the same role as SNG001. Severe viral lung infections We submitted an application to the US National Institutes of Health to support activity that will progress inhaled SNG001 towards the non-asthma, non-COPD market, which is to treat patients hospitalised with severe viral lung infections. We expect to hear whether we have been successful during this summer. In summary In 2012 our interferon beta programme achieved a significant milestone, generating persuasive efficacy data within the group of asthma patients that we are seeking to treat. We are now planning the further development of this exciting therapy and are focussed on securing the right partnership to help us deliver it. Clinical development plan We are making very good progress with regard to preparation of materials (e.g. protocols) for follow-on studies in asthma and COPD. These are being progressed in parallel with our business development discussions. Each potential partner has a slightly different view on how this should be progressed, but all are still valid approaches for this innovative programme. Simon Shaw Chairman Richard Marsden Chief Executive Officer 12 February 2013 7 | Synairgen plc annual report and accounts 2012 | www.synairgen.com | LSE:SNG Financial Review The Financial Review should be read in conjunction with the consolidated financial statements of the Company and Synairgen Research Limited (together the ‘Group’) and the notes thereto on pages 25 to 38. The consolidated financial statements are presented under International Financial Reporting Standards as adopted by the European Union. The financial statements of the Company continue to be prepared in accordance with UK Generally Accepted Accounting Practice and are set out on pages 39 to 42. During the previous accounting period, the Group brought forward its financial year-end from 30 June to 31 December and as a result comparative financial information in this annual report is for the six months ended 31 December 2011. Statement of Comprehensive Income The loss from operations for the year ended 31 December 2012 was £2.49 million (six months ended 31 December 2011: £2.24 million). Research and development expenditure for the year amounted to £1.51 million (six months ended 31 December 2011: £1.82 million). The proportionate reduction in research and development expenditure was due to the completion early in the year of both the asthma Phase II study (SG005) and the pre-clinical study in viral pneumonia. The most significant item of continuing research and development during the year has been the analysis of data and samples collected from SG005. Other administrative costs for the year amounted to £0.98 million (six months ended 31 December 2011: £0.42 million). The research and development tax credit for the year, in line with the reduction in expenditure, was £0.21 million (six months ended 31 December 2011: £0.25 million). The loss after tax for the year was £2.25 million (six months ended 31 December 2011: £1.97 million) and the loss per share was 3.12p (six months ended 31 December 2011: loss of 2.83p). Treasury policy and financial risk management Credit risk The Group follows a risk-averse policy of treasury management. Sterling deposits are held with one or more approved UK-based financial institutions. The Group’s primary treasury objective is to minimise exposure to potential capital losses whilst at the same time securing prevailing market rates. Interest rate risk The Group’s cash held in current bank accounts is subject to the risk of fluctuating base rates. A substantial element of the Group’s financial assets is placed on fixed-term interest deposits. The interest rate profile of financial assets is illustrated in note 16 to the financial statements. Currency risk During the year under review, the Group was exposed to Euro and Australian dollar exposure as a small element of its research and development expenditure is denominated in these currencies. The Group does not routinely hedge against this exposure. Capital structure and funding The Group is funded by equity capital, reflecting the early stage nature of its discovery and development programmes. The Group considers its capital to be its total equity, which at 31 December 2012 amounted to £3.42 million (31 December 2011: £3.12 million). The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns to equity holders of the Company and benefits to other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. The Group manages this objective through tight control of its cash resources and, upon reaching significant drug development programme milestones (to decrease investment risk), by raising additional equity from shareholders to meet its forecast future cash requirements. Fundraising In July 2012, the Company raised £2.50 million (gross) through the issue of 5.56 million shares at a price of 45p per share. Costs of the issue amounted to £0.15 million (6.0%). Net funds held by the Group at 31 December 2012 amounted to £3.09 million and comprised cash and cash equivalents, short-term deposits (with original maturities of greater than three months and less than one year) as shown below: Statement of Financial Position and cash flows At 31 December 2012, net assets amounted to £3.42 million (31 December 2011: £3.12 million), including net funds, as detailed below in Capital structure and funding, of £3.09 million (31 December 2011: £3.35 million). The principal elements of the £0.26 million decrease over the year ended 31 December 2012 (six months ended 31 December 2011: £1.54 million decrease) in net funds were: • Cash used in operations of £2.75 million (six months ended 31 December 2011: £1.93 million outflow); • Research and development tax credits received of £0.25 million (six months ended 31 December 2011: £0.40 million); • Investment into intangible assets (patents and licences) £0.14 million (six months ended 31 December 2011: £0.02 million); and • Share issue proceeds (net of costs) £2.35 million (six months ended 31 December 2011: £nil). Short-term deposits Cash and cash equivalents Net funds 31 Dec 2011 £m 2.45 0.90 3.35 2012 £m 1.43 1.66 3.09 2011 £m 3.40 1.49 4.89 30 June 2009 £m 1.98 5.96 7.94 2010 £m 3.68 1.33 5.01 The Group did not have any bank borrowings as at 31 December 2012 (31 December 2011: £nil). There have been five significant issues of shares with the following amounts (net of costs) raised: £0.62 million (August 2003); £8.98 million (from IPO on AIM in October 2004); £6.20 million (June 2009); £2.50 million (June 2011); and £2.35 million (July 2012). The other major sources of funding received by the Group from the formation of the business until 31 December 2012 have been: research and development tax credits of £2.22 million, bank interest of £1.60 million, and revenues from collaborative work of £0.60 million. John Ward Finance Director 12 February 2013 LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 8 Scientific Review – The key role of interferons in defending the body against infection Interferons (‘IFNs’) are proteins made and released by cells as part of the body’s immune response to infection and cancer. Historically IFNs were named because of their ability to ‘interfere’ with viral replication within cells1. There are three types of IFN, each type activates different receptors on the surface of cells resulting in different biological responses. Type I IFNs (IFN-α and IFN-β) are essential for immunity against most viruses. The more recently identified Type III IFNs (IFN-λ 1, IFN-λ2 and IFN-λ3) also play a role in anti-viral defence, although their relative importance to Type I IFNs is still to be fully understood. IFN-γ is the only Type II IFN and it is important for immunity against bacteria, fungi, and parasites. Defects in the production of, or response to, IFNs are associated with an increased susceptibility to infection. For example, mice lacking the Type I IFN are highly susceptible to infection with a range of viruses despite an otherwise intact immune system2. Similarly, people with genetic defects in IFN pathways are prone to serious life-threatening infections3. Anti-viral activities of Type I IFNs Viruses are microscopic organisms consisting of genetic material (RNA or DNA) surrounded by a protein coat. They are not capable of replicating on their own (unlike bacteria) and so have to invade cells and ‘hijack’ their replication machinery. After latching onto a cell, a virus will insert its genetic material into the cell and direct it to make copies of the viral genetic material, structural components and the enzymes needed to produce and assemble new virus particles (virions). Having made many thousands of new virions, the cell finally dies, releasing the new viral particles, which can then infect surrounding cells. Synairgen is developing an inhaled form of IFN-β. IFN-β plays an indispensable role in limiting viral infection within the body. Production and release of IFN-β is triggered when viral genetic material is detected by receptors inside cells. IFN-β can then bind to and activate Type I IFN receptors on the surface of nearby cells, resulting in the ‘switching on’ of hundreds of Interferon Stimulated Genes (‘ISG’), including Type I IFN genes, which orchestrate the anti-viral response within cells and the wider immune response to infection (Figure 1). Prof. Stephen Holgate Non-executive Director Dr Phillip Monk Chief Scientific Officer 9 | Synairgen plc annual report and accounts 2012 | www.synairgen.com | LSE:SNG Figure 1. Anti-viral activities of IFN-β IFN-(cid:31) Cell cannot limit viral replication Infection has not taken hold Infected cells Uninfected cells Immune cells B cells T cells NK cells Macrophages DC cells Controlled cell death Removal of virus-infected cells Anti-viral state Inhibition of viral replication ➊ ➋ ➌ Immune response Elimination of virus-infected cells CD4/8 CD4/8 mDC CD4/8 NK NK Production of antibodies against the virus B B ➊ In cells which cannot limit viral replication IFN-β causes controlled cell death or ‘cell suicide’ in a process known as apoptosis. By dying, the cell can no longer support viral replication, thus limiting the spread of the infection. Cells which die by apoptosis can be cleared by immune cells (macrophages) without causing further infl ammation. ➋ In uninfected cells and infected cells in which the infection has not yet taken hold, IFN-β switches the cell into an ‘Anti-viral State’ by driving the expression of numerous Interferon Stimulated Genes (ISG) products that act together to limit replication of many different virus types. By switching on anti-viral defences in surrounding uninfected cells IFN-β prevents the spread of the infection. ➌ IFN-β and ISG products also have additional benefi cial effects on the wider immune response including promoting the recruitment of immune cells (NK cells and CD8+ T-cells) to the site of infection to eliminate virus infected cells and mechanisms leading to the production of antibodies against virus (by B-cells) which prevent the virus binding to and infecting cells. Antibodies not only limit the ongoing infection but can also provide long lasting immunity against the virus. LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 10 Scientific Review – The key role of interferons in defending the body against infection (continued) Type I IFNs as anti-viral treatments Recognising the potential of Type I IFNs to modify the body’s immune response, a number of man-made mimics have been successfully developed as drugs. These include a number of injectable IFN-α related products (such as Intron-A®, Roferon®, Infergen®, Pegasys® and Pegintron®) that have been developed as anti-virals for the treatment of hepatitis and/or treatments for cancers. Injectable IFN-β related products have been developed as treatments for the nervous system disease multiple sclerosis (‘MS’), these include Rebif®, Avonex®, Betaferon®/Betaseron® and Extavia®. MS is a disease in which the nerves of the brain and spinal cord are mistakenly targeted by the immune system. The way IFN-β works in MS in not fully understood but it is believed to involve modulation of the immune response resulting in reduced inflammation and damage4. Inhaled IFN-β as a treatment for virus induced exacerbations of respiratory disease Respiratory virus infections such as the common cold and influenza are strongly associated with exacerbations of respiratory diseases such as asthma, chronic obstructive pulmonary disease (COPD) and cystic fibrosis. There is growing evidence that this association can be explained by a local increase in susceptibility to viral infection in the lungs of these patients, caused by a deficiency to produce IFN-β in response to a viral infection5-10. In the laboratory it has been observed that the addition of small amounts of human IFN-β to lung cell cultures from patients with chronic respiratory disease can restore their anti-viral responses and protect cells from respiratory viruses associated with asthma exacerbations (especially rhinoviruses but also others such as respiratory syncytial virus and influenza). These findings have been translated to clinical application by Synairgen to see if IFN-β can be used as a potential treatment for virus-induced exacerbations of chronic lung disease. In our recent clinical trial we found that when compared to placebo, the administration of inhaled IFN-β could prevent worsening asthma symptoms and exacerbations, and improve lung function in “more difficult to treat” asthmatics suffering from an upper respiratory tract infection (such as the common cold). Thus, by administering IFN-β directly to the lungs of asthmatics we could correct the deficiency and restore anti-viral defences thus preventing the spread of the infection and worsening lung inflammation. Further clinical studies are planned to confirm the result of this study in asthma and explore the potential of adopting a similar approach in COPD. Professor Stephen Holgate CBE Founder and Non-executive Director Dr Phillip Monk Chief Scientific Officer 12 February 2013 References 1. Isaacs, A. and Lindenmann, J. (1957) Virus interference. I. The interferon. Proc R Soc Lond B Biol Sci., 147(927):258-67. 2. Müller, U. et al. (1994) Functional role of type I and type II interferons in anti-viral defense. Science, 264(5167):1918-21. 3. Dupuis, S. et al. (2003) Impaired response to interferon-alpha/beta and lethal viral disease in human STAT1 deficiency. Nat Genet., 33(3):388-91. 4. Dhib-Jalbut, S. and Marks, S. (2010) Interferon-beta mechanisms of action in multiple sclerosis. Neurology, 74 Suppl 1:S17-24. 5. Wark, P. et al. (2005) Asthmatic bronchial epithelial cells have a deficient innate immune response to infection with rhinovirus. J Exp Med., 201(6): 937-47. 6. Sykes, A. et al. (2012) Rhinovirus 16-induced IFN-α and IFN-β are deficient in bronchoalveolar lavage cells in asthmatic patients. J Allergy Clin Immunol., 129(6):1506-1514. 11 | Synairgen plc annual report and accounts 2012 | www.synairgen.com | LSE:SNG 7. Xiao, C. et al. (2012) Duration of protective anti-viral effect of exogenous interferon-β against rhinovirus infection in primary bronchial epithelial cells from patients with COPD. Am J Respir Crit Care Med., 185:A3295 8. Mallia, P. et al. (2011) Experimental rhinovirus infection as a human model of chronic obstructive pulmonary disease exacerbation. Am J Respir Crit Care Med.,183(6):734-42. 9. Edwards, M. et al. (2012) Impaired innate interferon induction in severe therapy resistant atopic asthmatic children. Mucosal Immunol., Epub ahead of print. 10. Vareille, M. et al. (2012) Impaired type I and type III interferon induction and rhinovirus control in human cystic fibrosis airway epithelial cells. Thorax, 67(6):517-25. My name is Polly and I have suffered with asthma for 12 years. When I get a cold I get bad asthma and sometimes a chest infection. I tend to start with cold symptoms (sore throat and runny nose) and then within a day it has gone to my chest. I get very wheezy and produce a lot of mucus. I often have to take oral steroids and antibiotics and use my inhalers more frequently. I have to stop playing sport and have time off school. It takes a little while before I can start playing sport again and get back to normal. Polly aged 16 LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 12 Directors Simon Shaw Non-executive Chairman Simon Shaw joined Synairgen as executive Chairman on its inception in June 2003 and became non-executive Chairman in October of that year. He is Group Chief Financial Officer of Savills plc. He was Chief Financial Officer of Gyrus Group PLC from 2003 until its sale to Olympus Corporation in 2008, having previously been Chief Operating Officer of Profile Therapeutics plc between 1998 and 2003. Between 1991 and 1997 he was a corporate financier, latterly at Hambros Bank Limited. He is a chartered accountant. Richard Marsden Chief Executive Officer Richard Marsden joined Synairgen in a consulting role as General Manager in November 2003, was appointed to the Board as Managing Director in June 2004 and appointed Chief Executive Officer in September 2009. Richard is a non-executive Director of Southampton Asset Management Limited. Between 1998 and 2003 he worked as Projects Manager and Cystic Fibrosis Business Development Manager at Profile Therapeutics plc, where he managed the Cystic Fibrosis business and played a major role in the development of its proprietary pharmaceutical unit, Profile Pharma Limited. Prior to this, he worked for Zimmer Limited, Genentech (UK) Limited and Roche Products Limited. Dr Phillip Monk Chief Scientific Officer John Ward Finance Director Phillip Monk joined Synairgen in October 2006 as Head of Bioscience Development and was appointed to the Board as Chief Scientific Officer in September 2009. Phillip was previously Director of the Respiratory and Inflammation Biology group at Cambridge Antibody Technology (‘CAT’) and led the scientific development of CAT-354, an anti-IL-13 antibody being developed for the treatment of severe asthma. Prior to joining CAT, he worked at Bayer AG within the respiratory disease therapeutic area, focusing on the development of novel therapies for asthma, COPD and cystic fibrosis. John Ward joined Synairgen in October 2004 as Finance Director. From December 1999 to July 2004 he was Chief Financial Officer and Company Secretary of Profile Therapeutics plc and was appointed to the Profile Therapeutics board in March 2003. From 1996 to 1999 he was Finance Director of Rapid Deployment Group Limited, the UK holding company for the healthcare operations of Ventiv Health, Inc. Prior to joining Rapid Deployment he was a Director of Corporate Finance at Price Waterhouse. He is a chartered accountant. 13 | Synairgen plc annual report and accounts 2012 | www.synairgen.com | LSE:SNG Iain Buchanan Non-executive Director Dr Bruce Campbell Non-executive Director Iain Buchanan was appointed as a non-executive Director in June 2010 and is currently Chief Executive Officer of NOXXON Pharma AG based in Berlin. Previously he was Chief Executive Officer of Novexel SA (‘Novexel’), a specialty pharmaceutical company focused on novel anti-infectives, from its formation in 2004 until 2010, when it was sold to AstraZeneca. He has some 35 years’ commercial experience in the pharmaceutical and biotech industries. He joined Novexel from Vertex Pharmaceuticals (Europe) Limited, where he was Managing Director. Prior to Vertex, Iain was the Regional Licensing Director of Cilag A.G. International, a division of Johnson & Johnson based in Switzerland, where he managed Cilag’s international licensee business from 1987 to 1994. Bruce Campbell joined Synairgen as a non-executive Director in April 2006. He has 40 years of drug development experience and has developed many drugs in a wide range of indications which are now on the market. He is currently a scientific advisor to IP Group plc and acts as a consultant to various companies including Proximagen Limited. Formerly he was Senior VP of International Development at Neurocrine Biosciences, Inc. (‘Neurocrine’). Prior to joining Neurocrine he worked for 27 years at Servier (United Kingdom), latterly as Scientific Director. In addition, he has also been a Director and European Chairman of the Drug Information Association and a member of the European ICH Safety Working Party. He is a visiting Professor in Pharmacology at King’s College, London. Paul Clegg Non-executive Director Paul Clegg was appointed as a non-executive Director in September 2009. He is Chief Executive Officer of Accsys Technologies PLC, Chairman of Tricoya Technologies Ltd and a non-executive Director of Peel Hunt LLP. Paul was previously Managing Director and Chief Executive Officer of Cowen International Limited and Director of Cowen Asset Management Limited until June 2008. Paul has over twenty years’ senior investment banking experience. Prof. Stephen Holgate CBE Non-executive Director Stephen Holgate is a co-founder of Synairgen and was appointed a non- executive Director in June 2003. After qualifying in Medicine at Charing Cross Hospital Medical School, London he has pursued an academic career leading to his appointment in 1987 to his current position as Medical Research Council Clinical Professor of Immunopharmacology at the University of Southampton. His research interests have been largely focused on the cellular and molecular mechanisms of asthma that has involved use of both epidemiological and genetic approaches. He has published over 900 papers in peer-reviewed literature. He is currently Member of the newly formed Science Europe Medical Committee; Chairman of the European Respiratory Society Scientific Committee; Treasurer of the World Allergy Organisation; Chairman of Defra’s Hazardous Substances Advisory Committee; Member of the Department of Health Committee on the Medical Effects of Air Pollution; and a scientific board member or advisor to eleven companies, including Amgen, Boehringer Ingelheim, Merck, and Novartis. In 2010, he was appointed by the Higher Education Funding Council for England to be the Chair of the Research Excellence Framework (REF) Main Panel A covering Medicine, Health and Life Sciences. LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 14 Synairgen’s Founders and Scientifi c Advisors Synairgen’s Founders Prof. Stephen Holgate CBE is MRC Clinical Professor of Immunopharmacology at the University of Southampton Prof. Donna Davies is Professor of Respiratory Cell and Molecular Biology at the University of Southampton Prof. Ratko Djukanovic is Professor of Medicine at the University of Southampton and Director of the Southampton NIHR Respiratory Biomedical Research Unit Scientific Advisors Prof. James Gern is Professor in the Department of Pediatrics at the University of Wisconsin and his research focusses on the role of viral infections in the initiation and disease activity of asthma Prof. Sebastian Johnston is Professor of Respiratory Medicine & Allergy at the National Heart and Lung Institute, Imperial College, London Prof. Wisia Wedziche is Professor of Respiratory Medicine at UCL Medical School and her work is centered on the causes and mechanisms of COPD exacerbations 15 | Synairgen plc annual report and accounts 2012 | www.synairgen.com | LSE:SNG Directors’ Report The Directors present their report and the audited fi nancial statements for Synairgen plc (the ‘Company’) and its subsidiary (together the ‘Group’) for the year ended 31 December 2012. Principal activities Synairgen plc is the holding company for Synairgen Research Limited, a respiratory drug discovery and development company with a particular focus on viral defence. Review of the business and future developments A review of the business and anticipated future developments is included in the Chairman’s and Chief Executive Offi cer’s Report and the Financial Review set out on pages 3 to 8. Research and development During the year ended 31 December 2012, the Group has invested £1,508,000 (six months ended 31 December 2011: £1,815,000) in research and development activities and a review of this expenditure is included in the Financial Review. Principal risks and uncertainties The Board considers that the principal risks and uncertainties facing the Group may be summarised as follows: • Reliance on the interferon beta programmes All of the Group’s resources are focused on the three interferon beta programmes. Whilst these are three separate indications (asthma, COPD and severe viral lung infections), there is a risk that failure in one indication may have a negative impact upon the others. • Failure to generate innovative discoveries There can be no guarantee that the Group will successfully develop new pharmaceutical products. • Clinical development and regulatory risk The development of pharmaceutical drugs requires the necessary safety and effi cacy to be demonstrated in clinical programmes in order to meet the requirements of the appropriate regulatory bodies. There can be no guarantee that the necessary safety or effi cacy will be demonstrated or that the clinical trials will not be delayed or extended. There can be no guarantee that any of the Group’s therapies will be able to obtain or maintain the necessary regulatory approvals. The Group seeks to reduce this risk by closely monitoring the progress of recruitment on its clinical trials, drawing on the experience of its Founders, seeking advice from regulatory advisers, and holding consultations with the appropriate regulatory bodies. • Intellectual property risk The commercial success of the Group depends on its ability to obtain patent protection for its pharmaceutical discoveries in the US, Europe and other countries and to preserve the confi dentiality of its know- how. There is no guarantee that patent applications will succeed or be broad enough to provide protection for the Group’s intellectual property rights and exclude competitors with similar pharmaceutical products. The success of the Group is also dependent on non- infringement of patents, or other intellectual property rights, held by third parties. Competitors and third parties may hold intellectual property rights which the Group may not be able to license upon favourable terms, potentially inhibiting the Group’s ability to develop and exploit its own business. Litigation may be necessary to protect the Group’s intellectual property which may result in substantial costs. The Group seeks to reduce this risk by seeking patent attorney advice that patent protection will be available prior to investing in a project, by seeking patent protection where appropriate and by minimising disclosure to third parties. • Commercial risk There can be no guarantee that the Group will succeed in securing and maintaining the necessary contractual relationships with licensing partners for its programmes under development. Even if the programmes are successfully out-licensed and pharmaceutical products are brought to market by a partner, there is no guarantee that such products will succeed in the marketplace. The Group seeks to reduce this risk by structuring its development programmes to meet the needs and requirements of its potential partners and by engaging with partners who have the appropriate experience, resource and interest to bring such pharmaceutical products to the global marketplace. • Competition risk The Group’s current and potential competitors include pharmaceutical and biotechnology companies and academic institutions, many of whom have signifi cantly greater fi nancial resources than the Group. There can be no assurance that competitors will not succeed in developing products that are more eff ective or economic than any developed by the Group, or which would render the Group’s products non-competitive or obsolete. • Funding risk The Group continues to consume cash resources. Until the Group generates positive net cash infl ows from successful out-licensing transactions and commercialisation of its products, it remains dependent upon securing additional funding through the injection of capital from share issues. The Group may not be able to generate positive net cash fl ows in the future or attract such additional funding required at all, or on suitable terms. In such circumstances, the Group’s discovery and development programmes may be delayed or cancelled and the business operations curtailed. The Group seeks to reduce this risk through tight fi nancial control, prioritising programmes which will generate the best returns and keeping shareholders informed on progress. • Dependence on Founders, senior management and key staff The Founders and certain members of staff are highly skilled scientists and clinicians. The Group has deliberately pursued a lean headcount policy to conserve fi nancial resources. Failure to continue to attract and retain such individuals could adversely aff ect operational results. The Group seeks to reduce this risk by appropriate incentivisation of staff through participation in long term equity incentive schemes. Key performance indicators (‘KPIs’) The Board considers that the most important KPIs are non-fi nancial and relate to the progress of the scientifi c programmes which are discussed in the Chairman’s and Chief Executive Offi cer’s Report. The most important fi nancial KPIs are the cash position and the operating loss of the Group. At 31 December 2012 cash and deposit balances amounted to £3.09 million and were above budgeted levels. The operating loss of £2.49 million was also favourable to the budgeted loss for the year. LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 16 Directors’ Report (continued) Results and dividends The Group’s loss after taxation for the year ended 31 December 2012 amounted to £2,250,000 (six months ended 31 December 2011: loss of £1,967,000). A Financial Review is set out on page 8. The Directors do not propose the payment of a dividend. Financial instruments The Group’s use of financial instruments is discussed in the Financial Review on page 8 and in note 16 to the financial statements. Substantial shareholdings As at 12 February 2013, the Company had been advised of the following shareholders with interests of 3% or more in its ordinary share capital: Name of shareholder Number of ordinary shares % of share capital Lansdowne Partners Limited IP Group plc F&C Asset Management plc IP Venture Fund LP Mr MR Underwood Southampton Asset Management Limited 15,023,111 8,135,921 6,480,512 5,564,020 3,970,588 3,600,000 20.0% 10.8% 8.6% 7.4% 5.3% 4.8% Directors The Directors of the Company during the year ended 31 December 2012 were: Executive Directors: Richard Marsden Dr Phillip Monk John Ward Non-executive Directors: Simon Shaw Iain Buchanan Dr Bruce Campbell Paul Clegg Prof. Stephen Holgate Directors’ interests in ordinary shares The Directors, who held office at 31 December 2012, had the following interests in the ordinary shares of the Company: 31 December 2012 Number of shares 1 January 2012 Number of shares Directors’ remuneration and share options Details of Directors’ remuneration and share options are given in the Directors’ Remuneration Report on pages 20 to 22. Directors’ and officers’ liability insurance Qualifying indemnity insurance cover has been arranged in respect of the personal liabilities which may be incurred by Directors and officers of the Group during the course of their service with the Group. This insurance has been in place during the year and on the date of this report. Payment of creditors It is the policy of the Group and the Company that payments to suppliers are made in accordance with those terms and conditions agreed between the Group and its suppliers, provided that all trading terms and conditions have been complied with. At 31 December 2012 the Group had an average of 26 days’ purchases outstanding in trade creditors (31 December 2011: 22 days’ purchases). Post balance sheet events There are no events occurring post 31 December 2012 requiring disclosure. Charitable and political donations During the year ended 31 December 2012, the Group made no charitable donations (six months ended 31 December 2011: £nil) and no political donations (six months ended 31 December 2011: £nil). Disabled employees The Group gives every consideration to applications for employment from disabled persons where the requirements of the job may be adequately covered by a handicapped or disabled person. Should any employee become disabled, every practical effort is made to provide continued employment. Auditors All of the current Directors have taken all the steps that they ought to have taken to make themselves aware of any information needed by the Company's auditors for the purposes of their audit and to establish that the auditors are aware of that information. The Directors are not aware of any relevant audit information of which the auditors are unaware. Richard Marsden Dr Phillip Monk John Ward Simon Shaw (i) Iain Buchanan Dr Bruce Campbell Paul Clegg (ii) Prof. Stephen Holgate (iii) 110,972 28,592 243,912 1,408,879 112,741 294,259 204,244 858,360 By order of the Board John Ward Company Secretary 12 February 2013 95,860 18,518 228,788 1,368,580 92,592 253,960 184,095 852,316 (i) Simon Shaw’s shareholding includes 40,299 shares held in his pension plan. (ii) Paul Clegg’s shareholding includes 200,299 shares held in his pension plan. (iii) Prof. Stephen Holgate’s shareholding includes 1,923 shares owned by his wife, Elizabeth Holgate. Between 31 December 2012 and the date of this report there has been no change in the interests of Directors in shares or share options as disclosed in this report. 17 | Synairgen plc annual report and accounts 2012 | www.synairgen.com | LSE:SNG Corporate Governance The Board is accountable to the Company’s shareholders for good corporate governance and it is the objective of the Board to attain a high standard of corporate governance. As an AIM-quoted company, full compliance with The UK Corporate Governance Code (the ‘Code’) is not a formal obligation. The Company has not sought to comply with the full provisions of the Code, however it has sought to adopt the provisions that are appropriate to its size and organisation and establish frameworks for the achievement of this objective. This statement sets out the corporate governance procedures that are in place. Board of Directors On 31 December 2012 the Board of Directors (the ‘Board’) consisted of a non-executive Chairman (Simon Shaw), three executive Directors (Richard Marsden, Dr Phillip Monk and John Ward), and four non-executive Directors (Iain Buchanan, Dr Bruce Campbell, Paul Clegg and Prof. Stephen Holgate). Brief details about the Directors are given on pages 13 and 14. The responsibilities of the non-executive Chairman and the Chief Executive Officer are clearly divided. The non-executive Directors bring relevant experience from different backgrounds and receive a fixed fee for their services and reimbursement of reasonable expenses incurred in attending meetings. The Board retains full and effective control of the Group. This includes responsibility for determining the Group’s strategy and for approving budgets and business plans to fulfil this strategy. The full Board ordinarily meets bi-monthly. It also meets on any other occasions it considers necessary. During the year ended 31 December 2012, the Board met ten times, with each member attending as follows: Director Simon Shaw Richard Marsden Dr Phillip Monk John Ward Iain Buchanan Dr Bruce Campbell Paul Clegg Prof. Stephen Holgate Number of meetings held whilst a Board member Number of meetings attended 10 10 10 10 10 10 10 10 10 10 8 10 9 7 8 3 It is the duty of the Chairman to ensure that all Directors are properly briefed on issues arising at Board meetings. Prior to each Board meeting, Directors are sent an agenda and Board papers for each agenda item to be discussed. Additional information is provided when requested by the Board or individual Directors. The Company Secretary is responsible to the Board for ensuring that Board procedures are followed and that the applicable rules and regulations are complied with. All Directors have access to the advice and services of the Company Secretary, and independent professional advice, if required, at the Company’s expense. Removal of the Company Secretary would be a matter for the Board. As appropriate, the Board has delegated certain responsibilities to Board committees. Audit Committee The Audit Committee currently comprises Simon Shaw (Chairman) and Dr Bruce Campbell. Whilst it is not normal in larger companies for the chairman of the Company to chair the Audit Committee, the Company considers it appropriate for Simon Shaw to be Chairman as he is considered to have the most significant, recent and relevant financial experience of the non-executive Directors. The committee has primary responsibility for ensuring that the financial performance of the Group is properly measured and reported on and it reviews the interim financial information and annual financial statements before they are submitted to the Board. The committee reviews accounting policies and material accounting judgements. The committee also reviews, and reports on, reports from the Group’s auditors relating to the Group’s accounting controls. It makes recommendations to the Board on the appointment of auditors and the audit fee. The committee monitors the scope, results and cost-effectiveness of the audit. It has unrestricted access to the Group’s auditors. In certain circumstances it is permitted by the Board for the auditors to supply non-audit services (in the provision of tax advice, or on specific projects where they can add value). The committee has approved and monitored the application of this policy in order to safeguard auditor objectivity and independence. The overall fees paid to the auditors are not deemed to be of such significance to them as to impair their independence. The Group does not have an internal audit function, but the Board considers that this is appropriate, given the size of the Group. The committee keeps this matter under review annually. During the year ended 31 December 2012, the committee met four times and all meetings were attended by Simon Shaw and Dr Bruce Campbell. Remuneration and Nomination Committee The Remuneration and Nomination Committee currently comprises Paul Clegg (Chairman), Dr Bruce Campbell and Simon Shaw. The committee is responsible for making recommendations to the Board on remuneration policy for executive Directors and the terms of their service contracts, with the aim of ensuring that their remuneration, including any share options and other awards, is based on their own performance and that of the Group generally. The committee administers the Long-Term Incentive Plan, the staff share option scheme and the Qualifying Non-Employee Option Scheme and approves grants under all three schemes. It also advises on the remuneration policy for the Group’s employees. The committee is responsible for all senior appointments that are made within the Group. During the year ended 31 December 2012, the committee met four times, with each member attending as follows: Director Paul Clegg Dr Bruce Campbell Simon Shaw Number of meetings held whilst a Committee member Number of meetings attended 4 4 4 4 3 4 LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 18 Corporate Governance (continued) Investor relations The Directors seek to build a mutual understanding of objectives between the Company and its shareholders by meetings with major institutional investors and analysts after the Company’s preliminary announcement of its year-end results and its interim results. The Company also maintains investor relations pages on its website (www. synairgen.com) to increase the amount of information available to investors. During the year, with the assistance of its retained financial public relations adviser (Newgate Threadneedle), the Directors have also had meetings with a number of private client stockbrokers around the UK to raise awareness of the Company. There is an opportunity at the Annual General Meeting for individual shareholders to question the Chairman, the Chairmen of the Audit and Remuneration and Nomination committees, and the executive Directors. Notice of the meeting is sent to shareholders at least 21 clear days before the meeting. Shareholders are given the opportunity to vote on each separate issue. The Company counts all proxy votes and will indicate the level of proxies lodged on each resolution, after it has been dealt with by a show of hands. Details of the resolutions and explanations thereto are included with the notice. Internal control The Directors are responsible for establishing and maintaining the Group’s system of internal control and reviewing its effectiveness. The system of internal control is designed to manage, rather than eliminate, the risk of failure to achieve business objectives and can only provide reasonable but not absolute assurance against material misstatement or loss. The main features of the internal control system are as follows: • a control environment exists through the close management of the business by the executive Directors. The Group has a defined organisational structure with delineated approval limits. Controls are implemented and monitored by personnel with the necessary qualifications and experience; • a list of matters reserved for Board approval; • monthly management reporting and analysis of variances; • financial risks for each major transaction are identified and evaluated by the Board; and • standard financial controls operate to ensure that the assets of the Group are safeguarded and that proper accounting records are maintained. By order of the Board John Ward Company Secretary 12 February 2013 19 | Synairgen plc annual report and accounts 2012 | www.synairgen.com | LSE:SNG Directors’ Remuneration Report This report is non-mandatory for AIM-quoted companies and has been produced on a voluntary basis. It includes and complies with the disclosure obligations of the AIM Rules and with the principal disclosure requirements of Schedule 5 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008. Remuneration Committee The Company’s remuneration policy is the responsibility of the Remuneration and Nomination Committee (the ‘Committee’), which was established in October 2004. The terms of reference of the Committee are outlined in the Corporate Governance Statement on page 18. The members of the Committee are Paul Clegg (Chairman), Simon Shaw and Dr Bruce Campbell. The Committee, which is required to meet at least twice a year, met four times during the year ended 31 December 2012. The Chief Executive Officer and certain executives may be invited to attend meetings of the Committee to assist it with its deliberations, but no executive is present when his or her own remuneration is discussed. During the year, the Committee has been advised on Director remuneration by its retained independent remuneration adviser, FIT Remuneration Consultants LLP. No other advice has been provided to the Group by this firm during the year. Remuneration policy (i) Executive remuneration The Committee has a duty to establish a remuneration policy which will enable it to attract and retain individuals of the highest calibre to run the Group. Its policy is to ensure that the executive remuneration packages of Executive Directors and the fee of the Chairman are appropriate given performance, scale of responsibility, experience, and consideration of the remuneration packages for similar executive positions in companies it considers are comparable. Packages are structured to motivate executives to achieve the highest level of performance in line with the best interests of shareholders. A significant element of the total remuneration package, in the form of bonus and LTIP awards, is performance driven. Executive remuneration currently comprises a base salary, an annual performance-related bonus, a pension contribution to the executive Director’s individual money purchase scheme (at 9% of base salary), family private health cover, permanent health and life assurance. Salaries and benefits are reviewed annually in July, taking into account Group and individual performance, external benchmark information and internal relativities, but it is the intention of the Company to align this with the financial year-end of the Company with effect from 1 January 2014. The Company operates a discretionary bonus scheme for executive Directors for delivery of exceptional performance against personal and corporate objectives, with the maximum bonus payable remaining at 200% of base salary. Bonuses payable to executive Directors in respect of the year ended 31 December 2012 were 34% of base salary, amounting to £44,000 for Richard Marsden, £33,000 for Dr Phillip Monk and £40,000 for John Ward. Pay rises awarded to executive Directors with effect from 1 July 2012 amounted to 3%, which was broadly consistent with the increase awarded to staff generally. Executive Directors are also rewarded for improvements in the performance of the Group sustained over a period of years in the form of Long-Term Incentive Plan share awards granted on a discretionary basis by the Committee. Directors’ remuneration for the year ended 31 December 2012 is set out on page 22 of this document. (ii) Chairman and non-executive Director remuneration The Chairman, Mr Buchanan and Mr Clegg receive a fixed fee of £25,000 per annum. Dr Campbell and Professor Holgate receive a fixed fee of £15,000 per annum. The fixed fee covers preparation for and attendance at meetings of the full Board and committees thereof. A fee of £5,000 per annum is also paid for chairing each of the audit and remuneration committees. The Chairman and the executive Directors are responsible for setting the level of non-executive remuneration. These fees remain unchanged from 1 September 2009. The non-executive Directors are also reimbursed for all reasonable expenses incurred in attending meetings. (iii) Equity-based incentive schemes The Committee strongly believes that equity-based incentive schemes increase the focus of employees in improving Group performance, whilst at the same time providing a strong incentive for retaining and attracting individuals of a high calibre. Long-Term Incentive Plan (‘LTIP’) The Synairgen Long-Term Incentive Plan, comprising conditional (performance-related) share awards (technically structured as nominal cost options pursuant to which participants must pay 1p per share on the exercise of their awards), was introduced in 2005 as the primary long-term incentive vehicle for executive Directors. Senior executives and other employees may be granted an award which will normally vest if demanding performance conditions are achieved over a three-year period and if the grantee remains an employee of the Group. Grants under the LTIP in any financial year are capped at a maximum of 100% of base salary. Historically, grants have been made in September following the publication of the final results for the year to June. The last grants were made in September 2011. Following, the change in year-end to 31 December, it was not considered appropriate to accelerate the date of grants so no grants were made during 2012. Instead, it is anticipated that grants will continue to be made following the publication of the final results in or around February each year with the next such grant following the results in February 2013. Executive Directors are expected to retain no fewer than 50% of shares acquired upon vesting of awards under the LTIP, net of taxes, until such time as, in combination with any other shares the executives may have acquired, they hold shares with a value equivalent to 100% of base salary. All awards will lapse at the end of the applicable performance period to the extent that the applicable performance criteria conditions have not been satisfied with no opportunity for retesting. In the event of a good leaver event or a change of control of the Company, the LTIP awards may vest early, but only to the extent that, in the opinion of the Committee, the performance conditions have been satisfied at that time. The awards will generally also be subject to a time pro-rated reduction to reflect the reduced period of time between the grant of the awards and the time of vesting although this reduction may not be applied in certain cases. LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 20 Directors’ Remuneration Report (continued) Performance conditions for the 2009, 2010 and 2011 LTIP awards The performance conditions for all three awards were the same. The awards are subject to two conditions. Firstly, awards will only vest to the extent that the percentage increase in the total shareholder return (‘TSR’, being the return earned by a shareholder over the performance period in terms of change in the share price and assuming re- investment of any dividends in more shares at the prevailing price on the relevant ex-dividend date) of the Company over the three year performance period is equal or greater than the percentage increase in the techMARK mediscience™ index over the same period as follows: TSR growth over the performance period less percentage increase in the techMARK mediscience™ index over the same period Vesting percentage of total number of shares subject to award Less than 0% 0% 10% 20% Performance between the steps 0% 25% 50% 100% Pro-rata on a straight-line basis Secondly, no award will vest unless the average annual growth in the TSR of the Company over the performance period is equal to or greater than RPI plus 2% or, for more than 75% of an award to vest, annual average TSR must exceed RPI by at least 5% rather than 2%. Vesting of 2009 LTIP awards In September 2012, the awards granted in 2009 vested in full. The TSR growth over the three year performance period amounted to 110% and the percentage increase in the techMARK mediscience™ index over the same period was 34%, resulting in an outperformance by 76%, thus meeting in full the first performance condition. Similarly, this significantly exceeded the RPI underpin. Qualifying Non-Employee Option Scheme (‘QNEOS’) On 12 June 2009 shareholders in General Meeting approved the adoption of the QNEOS. This plan is a discretionary share scheme which enables the Committee to grant market value share options to consultants and non-executive Directors who, in the opinion of the Committee, make, or, in the case of new appointments, will make, a significant contribution to the Group and where the Committee considers it to be in the interests of shareholders to make such grants. During the year under review no options were granted under the QNEOS. Vesting of 2009 QNEOS awards In September and October 2012 the awards made in September and October 2009 vested in full. In September 2009, an award of options was made to a non-executive Director of the Company (Mr Clegg) which was subject to a performance condition whereby if TSR during the three year period exceeded 30% then the award would vest if full. The actual TSR achieved was 110% and therefore the award vested in full. In October 2009, an award of options was made to a consultant to the Company with non-market performance conditions. These conditions were achieved in full and therefore this award has also vested in full. (iv) Service contracts and letters of appointment The executive Directors have entered into service agreements which can be terminated on six months’ notice by either party. During the year, Richard Marsden continued to act as a non-executive Director of Southampton Asset Management Limited but did not receive any fees with regards to this appointment. None of the other executive Directors held non-executive directorships with other companies. The Chairman and non-executive Directors have entered into letters of appointment for an initial fixed period of twelve months, which renew automatically for a further twelve month period on the anniversary of commencement. The appointment can be terminated on three months’ notice by either party. Directors’ interests in share options The interests of Directors in share options over ordinary shares during the year were as follows: Synairgen Long-Term Incentive Plan Date of grant At 1 January and 31 December 2012 Exercise price Earliest exercise date Expiry date Richard Marsden 7 September 2009 8 September 2010 21 September 2011 Dr Phillip Monk 7 September 2009 8 September 2010 21 September 2011 John Ward 7 September 2009 8 September 2010 21 September 2011 605,000 498,969 538,063 414,625 371,134 400,212 550,000 453,608 489,148 1p 1p 1p 1p 1p 1p 1p 1p 1p 7 Sept 2012 8 Sept 2013 21 Sept 2014 6 Sept 2019 7 Sept 2020 20 Sept 2021 7 Sept 2012 6 Sept 2019 8 Sept 2013 7 Sept 2020 21 Sept 2014 20 Sept 2021 7 Sept 2012 8 Sept 2013 21 Sept 2014 6 Sept 2019 7 Sept 2020 20 Sept 2021 The options awarded in September 2010 and 2011 under the LTIP will only vest if the performance conditions outlined above are met. The exercise of the options awarded in September 2009 (which vested in 2012) is generally subject to the relevant option holder continuing to be an employee or Director of a company in the same Group as the Company at the relevant time. Other options granted on or before the IPO or under the Synairgen plc Staff Option Scheme Date of grant Richard Marsden 11 October 2004 11 October 2004 26 October 2004 26 October 2004 Dr Phillip Monk 2 October 2006 John Ward 26 October 2004 26 October 2004 At 1 January and 31 December 2012 Exercise price Earliest exercise date Expiry date 280,000 140,000 140,000 140,000 10p 10p 130p 130p 11 Oct 2004 30 June 2005 30 June 2006 30 June 2007 10 Oct 2014 10 Oct 2014 25 Oct 2014 25 Oct 2014 50,000 85.5p 2 Oct 2009 1 Oct 2016 140,000 140,000 130p 130p 30 June 2005 30 June 2006 25 Oct 2014 25 Oct 2014 The vesting and exercise of these other options is generally subject to the relevant option holder continuing to be an employee or Director of a company in the same Group as the Company at the relevant time. There are no further performance criteria. 21 | Synairgen plc annual report and accounts 2012 | www.synairgen.com | LSE:SNG Synairgen Qualifying Non-Employee Option Scheme Date of grant Iain Buchanan 28 June 2010 Paul Clegg 7 September 2009 At 1 January and 31 December 2012 Exercise price Earliest exercise date Expiry date 212,765 23.5p 28 Jun 2013 27 Jun 2020 250,000 20p 7 Sept 2012 6 Sept 2019 The options awarded in June 2010 will only vest to the extent that the percentage increase in the total shareholder return (‘TSR’) of the Company over the three year performance period is at least 5% pa (when 25% will vest) increasingly, on a straight-line basis, to 100% of vesting for 10% p.a. growth. There were no other options granted to Directors or which were exercised or lapsed during the year. The mid-market price of the Company’s shares at 31 December 2012 was 45.5p. During the year then ended, the mid-market price ranged from 28.5p to 53.5p. On 12 February 2013 the closing price was 41.25p. Audited information The following section (Directors’ remuneration) contains the disclosures required by Schedule 5 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, forms part of the financial statements for the year ended 31 December 2012 and has been audited by the Company’s auditor, BDO LLP. Directors’ remuneration The aggregate remuneration received by Directors who served during the year ended 31 December 2012 and the six months ended 31 December 2011 was as follows: £’000 Note Salary/fee Benefits Bonus Year ended 31 December 2012 Total (incl. pension) Pension Total (excl. pension) 6 months ended 31 December 2011 Total (incl. pension) Total (excl. pension) Pension Executive Directors Richard Marsden Dr Phillip Monk John Ward Non-executive Directors Simon Shaw Iain Buchanan Dr Bruce Campbell Paul Clegg Prof. Stephen Holgate Total (i) (ii) (iii) (iv) 128 95 117 30 25 15 30 15 455 2 - 2 - - - - - 4 44 11 40 - - - - - 174 106 159 30 25 15 30 15 12 31 11 - - - - - 186 137 170 30 25 15 30 15 63 47 58 15 13 8 15 8 6 4 5 - - - - - 69 51 63 15 13 8 15 8 95 554 54 608 227 15 242 (i) Richard Marsden was the highest paid Director during the year ended 31 December 2012 and the six months ended 31 December 2011 and he did not exercise any share options during either period. (ii) Dr Phillip Monk requested that £22,500 of his bonus entitlement for the year ended 31 December 2012 be paid in the form of an additional employer pension contribution. (iii) £15,000 was paid to IP2IPO Limited for the services of Dr Bruce Campbell. (iv) In addition to this fee for his services as a Director, Prof. Holgate received consultancy fees amounting to £11,000 (six months ended 31 December 2011: £5,000) as disclosed in note 19 to the financial statements. (v) The total amount paid to third parties amounted to £15,000 (six months ended 31 December 2011: £8,000). In addition to the amounts shown above, the share-based payment charge for the period was: Richard Marsden Dr Phillip Monk John Ward Iain Buchanan Paul Clegg Year ended 6 months ended 31 Dec 2012 31 Dec 2011 £000 £000 54 40 49 4 2 25 18 23 2 2 Total share-based payment in respect of key management personnel amounted to £143,000 for the year ended 31 December 2012 (six months ended 31 December 2011: £66,000). By order of the Board Paul Clegg Chairman of the Remuneration and Nomination Committee 12 February 2013 LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 22 Statement of Directors’ responsibilities in respect of the Annual Report and the Financial Statements Website publication The Directors are responsible for ensuring the annual report and financial statements are made available on a website. Financial statements are published on the Group's website in accordance with AIM rules for companies and legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Group's website is the responsibility of the Directors. The Directors' responsibility also extends to the ongoing integrity of the financial statements contained therein. Going concern The Directors have prepared and reviewed financial forecasts. After due consideration of these forecasts and current cash resources, the Directors consider that the Company and the Group have adequate financial resources to continue in operational existence for the foreseeable future (being a period of at least twelve months from the date of this report), and for this reason the financial statements have been prepared on a going concern basis. By order of the Board John Ward Company Secretary 12 February 2013 The Directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial period. Under that law the Directors have elected to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and the Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the Group for that period. The Directors are also required to prepare financial statements in accordance with the rules of the London Stock Exchange for companies trading securities on the Alternative Investment Market. In preparing these financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • state whether they have been prepared in accordance with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the requirements of the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. 23 | Synairgen plc annual report and accounts 2012 | www.synairgen.com | LSE:SNG Independent Auditor’s Report to the members of Synairgen plc We have audited the financial statements of Synairgen plc for the year ended 31 December 2012 which comprise the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Financial Position, the Consolidated Statement of Cash Flows, the Parent Company Balance Sheet and the related notes. The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditors As explained more fully in the statement of Directors’ responsibilities, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/scope/private.cfm. Opinion on financial statements In our opinion: • the financial statements give a true and fair view of the state of the group’s and the parent company’s affairs as at 31 December 2012 and of the group’s loss for the year then ended; • the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; • the parent company’s financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matters prescribed by the Companies Act 2006 In our opinion the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Paul Anthony (senior statutory auditor) For and on behalf of BDO LLP, statutory auditor Southampton United Kingdom 12 February 2013 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127) LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 24 Consolidated Statement of Comprehensive Income for the year ended 31 December 2012 Research and development expenditure Other administrative expenses Total administrative expenses Loss from operations Finance income Loss before tax Tax Loss and total comprehensive income for the period attributable to equity holders of the parent Loss per ordinary share Basic and diluted loss per share (pence) Year ended 31 December 2012 £000 6 months ended 31 December 2011 £000 Notes (1,508) (982) (2,490) (2,490) 27 (2,463) 213 (2,250) (1,815) (423) (2,238) (2,238) 20 (2,218) 251 (1,967) (3.12)p (2.83)p 4 6 7 8 Consolidated Statement of Changes in Equity for the year ended 31 December 2012 Notes At 1 July 2011 Recognition of share-based payments Total comprehensive income for the period At 31 December 2011 Issuance of ordinary shares Transaction costs in respect of share issues Recognition of share-based payments Total comprehensive income for the year Share capital £000 18a 696 - - 696 56 - - - Share premium £000 18b 17,128 - - 17,128 2,445 (151) - - Merger reserve £000 18c 483 - - 483 - - - - At 31 December 2012 752 19,422 483 Retained deficit £000 18d (13,313) 96 (1,967) (15,184) - - 193 (2,250) (17,241) Total £000 4,994 96 (1,967) 3,123 2,501 (151) 193 (2,250) 3,416 25 | Synairgen plc annual report and accounts 2012 | www.synairgen.com | LSE:SNG Consolidated Statement of Financial Position as at 31 December 2012 Assets Non-current assets Intangible assets Property, plant and equipment Current assets Inventories Current tax receivable Trade and other receivables Other financial assets – bank deposits Cash and cash equivalents Total assets Liabilities Current liabilities Trade and other payables Total liabilities Total net assets Equity Capital and reserves attributable to equity holders of the parent Share capital Share premium Merger reserve Retained deficit Total equity Notes 31 December 2012 £000 31 December 2011 £000 9 10 11 12 13 14 15 17 17 332 27 359 72 210 79 1,431 1,656 3,448 3,807 (391) (391) 3,416 752 19,422 483 (17,241) 3,416 239 48 287 85 250 113 2,455 896 3,799 4,086 (963) (963) 3,123 696 17,128 483 (15,184) 3,123 The financial statements on pages 25 to 38 were approved and authorised for issue by the Board of Directors on 12 February 2013 and signed on its behalf by: Richard Marsden Chief Executive Officer John Ward Finance Director LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 26 Consolidated Statement of Cash Flows for the year ended 31 December 2012 Year ended 31 December 2012 £000 6 months ended 31 December 2011 £000 (2,463) (2,218) (27) 30 46 5 193 (2,216) 13 30 (572) (2,745) 254 (2,491) 30 (9) (144) 1,024 901 2,501 (151) 2,350 760 896 1,656 (20) 15 17 - 96 (2,110) 131 4 41 (1,934) 396 (1,538) 15 (3) (16) 946 942 - - - (596) 1,492 896 Cash flows from operating activities Loss before tax Adjustments for: Finance income Depreciation Amortisation Loss on derecognised intangible asset Share-based payment charge Cash flows from operations before changes in working capital Decrease in inventories Decrease in trade and other receivables (Decrease)/Increase in trade and other payables Cash used in operations Tax credit received Net cash used in operating activities Cash flows from investing activities Interest received Purchase of property, plant and equipment Purchase of intangible assets Decrease in other financial assets Net cash generated from investing activities Cash flows from financing activities Proceeds from issuance of ordinary shares Transaction costs in respect of share issues Net cash generated from financing activities Increase/(Decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the period Cash and cash equivalents at end of the period 27 | Synairgen plc annual report and accounts 2012 | www.synairgen.com | LSE:SNG Notes to the Consolidated Financial Statements for the year ended 31 December 2012 1. Accounting policies Basis of preparation The Group financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (Adopted IFRSs) and with those parts of the Companies Act 2006 applicable to companies preparing their financial statements under IFRSs. The following new standards, amendments to standards and interpretations that have been issued by the International Accounting Standards Board and the International Financial Reporting Interpretations Committee are to be applied to financial statements with periods commencing on or after the following dates: International Accounting and Financial Reporting Standards (IAS/IFRS) IAS 1 IAS 19 IAS 27 IAS 28 IFRS 10 IFRS 11 IFRS 12 IFRS 13 IFRS 9* Presentation of Items of Other Comprehensive Income (Amendment) Employee Benefits Separate Financial Statements Investments in Associates and Joint Ventures (Amendment) Annual Improvements to IFRSs (2009-2011 Cycle) Consolidated Financial Statements Joint Arrangements Disclosure of Interests in Other Entities Fair Value Measurement Financial Instruments Effective date 1 July 2012 1 January 2013 1 January 2013 1 January 2013 1 January 2013 1 January 2013 1 January 2013 1 January 2013 1 January 2013 1 January 2015 * Not endorsed by the European Union as at the date of approval of these financial statements. The Directors anticipate that the adoption of these standards and interpretations in future periods will have no material impact on the financial statements of the Group. The Group financial statements are presented in Sterling. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company made up to the reporting date. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Business combinations that took place prior to 1 July 2006, the date of transition to IFRS, have not been restated as permitted by IFRS 1 “First-time Adoption of International Financial Reporting”. The consolidated financial statements have been prepared using the merger method of accounting. Change of Accounting Reference Date in prior accounting period During the prior accounting period the Group brought forward its financial year-end from 30 June to 31 December for administrative reasons to expedite the production of its annual report and accounts. As a result these financial statements cover the year ended 31 December 2012 with comparative financial information being given for the six months ended 31 December 2011, and therefore the amounts presented in the financial statements are not entirely comparable. Research and development All ongoing research expenditure is currently expensed in the period in which it is incurred. Due to the regulatory and other uncertainties inherent in the development of the Group’s products, the criteria for development costs to be recognised as an asset, as set out in IAS 38 “Intangible Assets”, are not met until a product has been submitted for regulatory approval and it is probable that future economic benefit will flow to the Group. The Group currently has no such qualifying expenditure. LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 28 Notes to the Consolidated Financial Statements for the year ended 31 December 2012 (continued) 1. Accounting policies (continued) Employee benefits All employee benefit costs, notably salaries, holiday pay, bonuses and contributions to Group stakeholder or personal defined contribution pension schemes are charged to the consolidated statement of comprehensive income on an accruals basis. Share-based payments Option awards and awards made under the Group’s Long-Term Incentive Plan (‘LTIP’) granted after 7 November 2002 which had not vested by 1 July 2006 are fair valued and charged to the consolidated statement of comprehensive income over the period from grant to vesting. The Group has fair-valued option and LTIP awards using appropriate share valuation models. Options granted to non-employees are measured at the fair value of the goods or services received, except where the fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instrument granted. At each reporting date, the Group revises its estimate of the number of options that are expected to become exercisable. The credit for any charge is taken to equity. Intangible assets Intangible assets are stated at cost less any accumulated amortisation and any accumulated impairment losses. Patent and licence costs are amortised over ten years on a straight-line basis and the amortisation cost is charged to research and development expenditure in the consolidated statement of comprehensive income. Property, plant and equipment Property, plant and equipment are stated at cost less any accumulated depreciation and any accumulated impairment losses. Depreciation is provided on a straight-line basis at rates calculated to write off the cost of property, plant and equipment, less their estimated residual value over their expected useful lives, which are as follows: Computer equipment: Laboratory and clinical equipment: 3 years 5 years The carrying values of property, plant and equipment are reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable. Inventories Inventories are stated at the lower of cost and net realisable value. Financial instruments Financial assets and financial liabilities are recognised on the Group’s consolidated statement of financial position when the Group becomes a party to the contractual provisions of the instrument. Financial assets The Group classifies its financial assets as loans and receivables. These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment. Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the Group will be unable to collect all of the amounts due under the terms receivable; the amount of such a provision being the difference between the net carrying amount and the present value of the future expected cash flows associated with the impaired receivable. The Group’s loans and receivables comprise trade and other receivables, other financial assets and cash and cash equivalents in the consolidated statement of financial position. Other financial assets comprise short-term deposits not meeting the IAS 7 definition of a cash equivalent. Cash and cash equivalents includes cash in hand, deposits held at call with banks and other short-term bank deposits with a maturity period of three months or less from the date of initial deposit. Financial liabilities The Group classifies its financial liabilities as financial liabilities held at amortised cost. Trade payables are initially recognised at fair value and subsequently carried at amortised cost using the effective interest rate method. Leased assets Where substantially all of the risks and rewards incidental to ownership are not transferred to the Group (an ‘operating lease’), the total rentals payable under the lease are charged to the consolidated statement of comprehensive income on a straight-line basis over the lease term. 29 | Synairgen plc annual report and accounts 2012 | www.synairgen.com | LSE:SNG Notes to the Consolidated Financial Statements for the year ended 31 December 2012 (continued) 1. Accounting policies (continued) Taxation Income tax is recognised or provided at amounts expected to be recovered or to be paid using the tax rates and tax laws that have been enacted or substantively enacted at the reporting date. Research and development tax credits are included as an income tax credit under current assets. Deferred tax balances are recognised in respect of all temporary differences that have originated but not reversed by the reporting date except for differences arising on: • investments in subsidiaries where the Group is able to control the timing of the reversal of the difference and it is probable that the difference could not reverse in the foreseeable future; and • the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting or taxable profit. The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the reporting date and are expected to apply when the deferred tax liabilities/(assets) are settled/(recovered). Recognition of deferred tax assets is restricted to those instances where it is probable that a taxable profit will be available against which the temporary difference can be utilised. Deferred tax balances are not discounted. Foreign currencies Transactions entered into by Group entities in a currency other than the currency of the primary economic environment in which they operate (their "functional currency") are recorded at the rates ruling when the transactions occur. Foreign currency monetary assets and liabilities are translated at the rates ruling at the reporting date. Exchange differences arising on the retranslation of unsettled monetary assets and liabilities are recognised immediately in the consolidated statement of comprehensive income. The functional currency of all entities in the Group is Sterling. 2. Critical accounting estimates and judgements Critical accounting estimates, assumptions and judgements are continually evaluated by management based on available information and experience. As the use of estimates is inherent in financial reporting, actual results could differ from these estimates. Inventory The Group’s raw material inventory shown in note 11 comprises the Group’s biobank of human tissue, which is valued net of a provision for items which management consider will be excess to the Group’s future research and development requirements. Inventories have been written down by £9,000 during the year. Share-based payment The critical accounting estimates, assumptions and judgements underpinning the valuation of the option and LTIP awards are disclosed in note 17. 3. Segmental analysis The Group operates in one area of activity, namely drug discovery and development. All assets of the Group are located within the United Kingdom and all losses were generated in that territory. LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 30 Notes to the Consolidated Financial Statements for the year ended 31 December 2012 (continued) 4. Loss from operations The loss from operations has been arrived at after charging: Depreciation of property, plant and equipment Amortisation of intangible assets Loss on derecognised intangible asset Research and development expenditure Operating lease rentals payable Land and buildings Other operating lease rentals The fees of the Group’s auditor, BDO LLP, for services provided are analysed below: Fees payable to the Company’s auditor for the audit of the Company’s financial statements Fees payable to the Company’s auditor for other services: The audit of the Company’s subsidiary, pursuant to legislation Audit-related assurance services Tax compliance services Tax advisory services Total fees 5. Employee benefit expense The average monthly number of employees (including executive Directors) was: Research Administration Their aggregate remuneration comprised: Wages and salaries Social security costs Pension costs – defined contribution plans Total cash-settled remuneration Accrued holiday pay Share-based payment Total remuneration Year ended 31 Dec 2012 £000 6 months ended 31 Dec 2011 £000 30 46 5 1,508 79 93 15 17 - 1,815 39 47 Year ended 31 Dec 2012 £000 6 months ended 31 Dec 2011 £000 10 10 5 5 3 33 10 10 - 5 2 27 Year ended 31 Dec 2012 6 months ended 31 Dec 2011 15 3 18 24 3 27 Year ended 31 Dec 2012 £000 6 months ended 31 Dec 2011 £000 874 104 72 1,050 (2) 182 1,230 493 58 29 580 (20) 90 650 For the purpose of presentation in the Consolidated Statement of Comprehensive Income, remuneration costs of £705,000 (six months ended 31 December 2011: £453,000) are included in research and development expenditure and £525,000 (six months ended 31 December 2011: £197,000) are included in other administrative expenses. 31 | Synairgen plc annual report and accounts 2012 | www.synairgen.com | LSE:SNG Notes to the Consolidated Financial Statements for the year ended 31 December 2012 (continued) 5. Employee benefit expense (continued) Key management compensation The Directors represent the key management personnel and details of their remuneration are given in the Directors’ Remuneration Report. In respect of Directors’ remuneration, the disclosures required by Schedule 5 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 are included in the detailed disclosures in the audited section of the Remuneration Report on page 22, which are ascribed as forming part of these financial statements. 6. Finance income For the year ended 31 December 2012 and the six months ended 31 December 2011, Finance income represents bank interest receivable. 7. Taxation Current tax UK corporation tax credit on loss for the period Adjustment in respect of prior periods Total income tax credit Year ended 31 Dec 2012 £000 6 months ended 31 Dec 2011 £000 (210) (3) (213) (250) (1) (251) The tax assessed on the loss on ordinary activities for the period is different to the standard rate of corporation tax in the UK of 24.5% (six months ended 31 December 2011: 26%). The differences are reconciled below: Loss on ordinary activities before tax Loss on ordinary activities before tax multiplied by the standard rate of corporation tax in the UK Effects of: Expenses not deductible for tax purposes Enhanced research & development relief Variable rates on tax losses surrendered for research & development tax credit Movement in unrecognised losses and temporary differences Overprovision in respect of previous periods Total tax credit for the current period Year ended 31 Dec 2012 £000 6 months ended 31 Dec 2011 £000 (2,463) (603) (2,218) (577) 48 (231) 238 338 (3) (213) 25 (321) 270 353 (1) (251) Deferred taxation Changes in tax rates and factors affecting the future tax charge Finance Act 2012 includes provision for the main rate of corporation tax to reduce from 26% to 24% on 1 April 2012, and to 23% on 1 April 2013. It has also been announced that there will be a further 1% reduction to bring the main rate to 22% from 1 April 2014. This will reduce the Company’s future tax charge accordingly. The rate of 24% was substantially enacted on the 26 March 2012 and the rate of 23% was substantially enacted on 6 July 2012. Accordingly, deferred tax balances have been recognised at 23%, the rate of corporation tax enacted in Finance Act 2012 to apply from 1 April 2013. Recognised deferred taxation Accelerated capital allowances Other temporary differences Losses Charge for the period Year ended 31 Dec 2012 £000 6 months ended 31 Dec 2011 £000 4 (4) - - 9 (6) (3) - LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 32 Notes to the Consolidated Financial Statements for the year ended 31 December 2012 (continued) 7. Taxation (continued) Unrecognised deferred taxation At 31 December 2012 the Group has trading losses carried forward which are available for offset against future profits of the Group amounting to £9,624,000 (31 December 2011: £8,424,000) and non-trading losses of £861,000 (31 December 2011: £635,000). At 31 December 2012 the Group has an unrecognised deferred tax asset in respect of these losses of £2,412,000 (31 December 2011: £2,265,000). The full utilisation of these losses in the foreseeable future is uncertain and no deferred tax asset has therefore been recognised. The movement on the unrecognised deferred tax asset comprises the following: Unrecognised deferred tax asset at the start of the period Effect of tax rate change Movement in period Unrecognised deferred tax asset at the period-end 8. Loss per ordinary share Loss attributable to equity holders of the Company (£000) Weighted average number of ordinary shares in issue Year ended 31 Dec 2012 £000 6 months ended 31 Dec 2011 £000 (2,265) 181 (328) (2,412) (1,990) 90 (365) (2,265) Year ended 31 Dec 2012 6 months ended 31 Dec 2011 (2,250) (1,967) 72,036,917 69,560,064 The loss attributable to ordinary shareholders and weighted average number of ordinary shares for the purpose of calculating the diluted earnings per ordinary share are identical to those used for basic earnings per share. This is because the exercise of share options would have the effect of reducing the loss per ordinary share and is therefore not dilutive under the terms of IAS 33. At 31 December 2012, there were 7,511,635 options outstanding (31 December 2011: 7,911,787 options outstanding) as detailed in note 17. 9. Intangible assets Cost At 1 July 2011 Additions At 31 December 2011 Additions Derecognised assets At 31 December 2012 Amortisation At 1 July 2011 Charge for the period At 31 December 2011 Derecognised assets Charge for the year At 31 December 2012 Net book amount At 31 December 2012 At 31 December 2011 At 1 July 2011 Patent and licence costs £000 329 16 345 144 (5) 484 89 17 106 - 46 152 332 239 240 At 31 December 2012 £332,000 (31 December 2011: £229,000) of the net book amount relates to interferon beta and lambda patent and licence costs, which has a remaining average amortisation period of 7 years (31 December 2011: 7 years). 33 | Synairgen plc annual report and accounts 2012 | www.synairgen.com | LSE:SNG Notes to the Consolidated Financial Statements for the year ended 31 December 2012 (continued) 10. Property, plant and equipment Computer equipment £000 Laboratory and clinical equipment £000 Cost At 1 July 2011 Additions At 31 December 2011 Additions Derecognised assets At 31 December 2012 Depreciation At 1 July 2011 Charge for the period At 31 December 2011 Derecognised assets Charge for the year At 31 December 2012 Net book value At 31 December 2012 At 31 December 2011 At 1 July 2011 At 31 December 2012 the Group had no capital commitments (31 December 2011: nil). 11. Inventories Raw materials Raw materials comprises the Group’s biobank. 12. Trade and other receivables Amounts receivable within one year: Other tax and social security Prepayments and accrued income 13. Other financial assets – bank deposits 81 2 83 9 (50) 42 71 3 74 (50) 6 30 12 9 10 172 1 173 - (41) 132 122 12 134 (41) 24 117 15 39 50 31 Dec 2012 £000 72 31 Dec 2012 £000 22 57 79 31 Dec 2012 £000 Total £000 253 3 256 9 (91) 174 193 15 208 (91) 30 147 27 48 60 31 Dec 2011 £000 85 31 Dec 2011 £000 42 71 113 31 Dec 2011 £000 Amounts receivable within one year: Sterling fixed rate deposits of greater than three months’ maturity at inception 1,431 2,455 LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 34 Notes to the Consolidated Financial Statements for the year ended 31 December 2012 (continued) 14. Cash and cash equivalents Cash available on demand Sterling fixed rate deposits of up to three months’ maturity at inception 15. Trade and other payables Trade payables Social security and other taxes Accrued expenses 16. Financial instruments 31 Dec 2012 £000 1,656 - 1,656 31 Dec 2012 £000 97 30 264 391 31 Dec 2011 £000 746 150 896 31 Dec 2011 £000 199 35 729 963 An explanation of the Group’s objectives, policies and strategies for financial instruments and analysis of the capital structure and capital funding of the Group can be found on page 8 in the Financial Review. Financial assets Loans and receivables Trade and other receivables Other financial assets (less than one year) Cash and cash equivalents (less than one year) Total Financial liabilities Other financial liabilities Notes (i) Book value £000 31 Dec 2012 Fair value £000 Book value £000 31 Dec 2011 Fair value £000 29 1,431 1,656 3,116 29 1,431 1,656 3,116 51 2,455 896 3,402 51 2,455 896 3,402 Trade and other payables (less than one year) (ii) 361 361 928 928 (i) Trade and other receivables shown above excludes prepayments, which are not a contractual obligation to receive cash, amounting to £50,000 (31 December 2011: £62,000). (ii) Trade and other payables shown above excludes amounts due in respect of social security and other taxes, which are not a contractual obligation to pay cash, amounting to £30,000 (31 December 2011: £35,000). 35 | Synairgen plc annual report and accounts 2012 | www.synairgen.com | LSE:SNG Notes to the Consolidated Financial Statements for the year ended 31 December 2012 (continued) 16. Financial instruments (continued) The objective of holding financial instruments is to have access to finance for the Group’s operations and to manage related risks. The main risks arising from holding these instruments are interest rate risk, liquidity risk, and credit risk. Interest rate risk Interest rate risk profile of financial assets, excluding short-term debtors: Australian Dollar Euro Sterling Total 31 Dec 2012 Floating rate financial assets £000 31 Dec 2011 Floating rate financial assets £000 - 83 3,004 3,087 66 - 3,285 3,351 Floating-rate financial assets comprise cash on deposit and cash at bank. There is no difference between the carrying amount and the fair value of the financial assets. Short-term deposits are placed with banks for periods of up to twelve months and are categorised as floating-rate financial assets. Contracts in place at 31 December 2012 had a weighted average period to maturity of 48 days and a weighted average annualised rate of interest of 1.09% (31 December 2011: 83 days, 1.31%). Sensitivity analysis It is estimated that a decrease of half of one percentage point in interest rates would have increased the Group’s loss before taxation by approximately £16,000 (six months ended 31 December 2011: £11,000). Liquidity risk The Group’s policy is to maintain adequate cash resources to meet liabilities as they fall due. All Group payable balances as at 31 December 2012 and 31 December 2011 fall due for payment within one year. Cash balances are placed on deposit for varying periods with reputable banking institutions to ensure there is limited risk of capital loss. The Group does not maintain an overdraft facility. Credit risk The Group’s credit risk is attributable to its banking deposits. The Group places its deposits with reputable financial institutions to minimise credit risk. 17. Share capital and premium At 1 July 2011 and 31 December 2011 Issuance of ordinary shares Costs of issuance of shares At 31 December 2012 Note Number of shares 69,560,064 (i) (ii) 5,624,272 - 75,184,336 Ordinary shares of 1p each £000 696 56 - 752 Share premium £000 17,128 2,445 (151) 19,422 Total £000 17,824 2,501 (151) 20,174 (i) 5,555,556 ordinary shares of 1p were issued on 23 July 2012 at a premium of 44p per share to finance the Company’s ongoing interferon beta programme and to provide working capital for the Company. Funds raised net of expenses amounted to £2,349,000. (ii) 68,716 ordinary shares of 1p were issued on 28 September 2012 at par following the exercise of share options under the Company’s Long Term Incentive Plan (LTIP). The total authorised number of ordinary shares is 125 million shares (31 December 2011: 125 million shares) with a par value of 1p per share (31 December 2011: 1p per share). All issued shares are fully paid. LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 36 Notes to the Consolidated Financial Statements for the year ended 31 December 2012 (continued) 17. Share capital and premium (continued) Options At 31 December 2012 there were options outstanding over 7,511,635 un-issued ordinary shares, equivalent to 10.0% of the issued share capital, as follows: Date of grant Number of shares Exercise price Earliest exercise date Latest exercise date Approved EMI scheme 26 October 2004 26 October 2004 26 October 2004 12 May 2005 2 October 2006 29 October 2007 Unapproved schemes 11 October 2004 11 October 2004 26 October 2004 26 October 2004 26 October 2004 7 September 2009 (LTIP) 7 September 2009 (QNEOS) 16 October 2009 (QNEOS) 28 June 2010 (QNEOS) 8 September 2010 (LTIP) 21 September 2011 (LTIP) 64,515 64,515 42,000 14,000 119,159 29,848 280,000 140,000 75,485 215,485 140,000 1,855,431 250,000 250,000 212,765 1,815,250 1,943,182 7,511,635 130p 130p 130p 136.5p 85.5p 61.5p 10p 10p 130p 130p 130p 1p 20p 20p 23.5p 1p 1p 30 June 2005 30 June 2006 26 October 2007 12 May 2008 2 October 2009 29 October 2010 11 October 2004 30 June 2005 30 June 2005 30 June 2006 30 June 2007 25 October 2014 25 October 2014 25 October 2014 11 May 2015 1 October 2016 28 October 2017 10 October 2014 10 October 2014 25 October 2014 25 October 2014 25 October 2014 7 September 2012 6 September 2019 7 September 2012 6 September 2019 16 October 2012 15 October 2019 28 June 2013 27 June 2020 8 September 2013 7 September 2020 21 September 2014 20 September 2021 The Group has no legal or constructive obligation to repurchase or settle the options in cash. The movement in the number of share options is set out below: Outstanding at start of period Granted during the period Exercised during the period Lapsed during the period Number of outstanding options at period-end Year ended 31 Dec 2012 Weighted average exercise price 15.2p 1.0p 9.6p 15.6p Number 7,911,787 - (68,716) (331,436) 7,511,635 6 months ended 31 Dec 2011 Weighted average exercise price 18.9p 1.0p 1.0p 15.2p Number 6,283,487 2,126,469 - (498,169) 7,911,787 At 31 December 2012, 3,540,438 share options were capable of being exercised (31 December 2011: 1,214,576) and had an average exercise price of 30.6p (31 December 2011: 81.7p). The options outstanding at 31 December 2012 had a weighted average remaining contractual life of 6.7 years (31 December 2011: 7.8 years). 37 | Synairgen plc annual report and accounts 2012 | www.synairgen.com | LSE:SNG Notes to the Consolidated Financial Statements for the year ended 31 December 2012 (continued) 17. Share capital and premium (continued) The Group uses a number of share-based incentive schemes as detailed above. The fair value per award granted and the assumptions used in the calculations for the 6,671,635 options which had not vested at 30 June 2006 (being the date after which IFRS 2 has been applied) are as follows: Date of grant Type of award Number of shares Exercise price (p) Share price at date of grant (p) Fair value per option (p) Award life (years) Risk free rate 26 Oct 2004 Unapproved 140,000 26 Oct 2004 12 May 2005 2 Oct 2006 29 Oct 2007 7 Sept 2009 7 Sept 2009 16 Oct 2009 28 Jun 2010 8 Sept 2010 21 Sept 2011 EMI EMI EMI EMI 42,000 14,000 119,159 29,848 LTIP 1,855,431 QNEOS QNEOS QNEOS LTIP LTIP 250,000 250,000 212,765 1,815,250 1,943,182 6,671,635 130p 130p 155p 155p 136.5p 135.5p 85.5p 61.5p 1p 20p 20p 23.5p 1p 1p 85.5p 61.5p 18.5p 18.5p 20p 23.5p 24.25p 22.5p 57.7p 57.7p 36.9p 24.4p 17.8p 7.1p 4.0p 6.3p 5.6p 12.1p 13.4p 5 5 5 5 5 3 5 5 5 3 3 4.59% 4.59% 4.35% 4.75% 4.95% 2.09% 2.67% 2.65% 2.09% 0.92% 0.79% Expected volatility rate Performance conditions 20% 20% 20% 20% 20% 30% 30% None None None None None Market Market 30% Non-market 30% 40% 56% Market Market Market In accordance with IFRS 2, the Company has applied IFRS 2 to all share-based payments granted after 7 November 2002 which had not vested by 1 July 2006. The following comments apply to those options which have been fair valued in accordance with IFRS 2. (i) Stochastic valuation methodology was used for the LTIP awards and the QNEOS awards with market performance conditions and Black-Scholes methodology for the other awards. (ii) Expected dividend yield is nil, consistent with the Directors’ view that the Group’s model is to generate value through capital growth rather than payment of dividends. (iii) The risk free rate is equal to the prevailing UK Gilts rate at grant date that most closely matches the expected term of the grant. (iv) The fair value charge is spread evenly over the expected vesting period. (v) The charge for the year ended 31 December 2012 for share-based payment amounted to £193,000 (six months ended 31 December 2011: £96,000). 18. Capital and reserves 18a Share capital Share capital represents the nominal value of shares issued. 18b Share premium Share premium represents amounts subscribed for share capital in excess of nominal value less the related costs of share issues. 18c Merger reserve The merger reserve represents the reserve arising on the acquisition of Synairgen Research Limited on 11 October 2004 via a share for share exchange accounted for as a Group reconstruction using merger accounting under UK GAAP. 18d Retained deficit The retained deficit represents cumulative net gains and losses recognised in the consolidated statement of comprehensive income, adjusted for cumulative recognised share-based payments. 19. Related party transactions and balances During the year ended 31 December 2012, the Group incurred consultancy fees with Prof. Stephen Holgate, a Director of the Company, amounting to £11,000 (six months ended 31 December 2011: £5,000) in addition to his Director’s remuneration disclosed on page 22. At the reporting date, the amount unpaid in respect of these charges was £11,000 (31 December 2011: £1,000). During the year ended 31 December 2012, the Group incurred consultancy fees with Ms Emma Toman, partner of Richard Marsden, a Director of the Company, amounting to £1,000 in connection with risk assessments (six months ended 31 December 2011: £nil). At the reporting date, there was no amount unpaid in respect of these charges (31 December 2011: £nil). Details of key management personnel and their compensation are given in note 5 and on page 22 of the Directors’ Remuneration Report. LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 38 Parent Company Balance Sheet as at 31 December 2012 Company number: 5233429 Fixed assets Investments Current assets Debtors Investments: short-term deposits Cash at bank and in hand Creditors: amounts falling due within one year Net current assets Total assets less current liabilities Capital and reserves Called up share capital Share premium account Profit and loss account Shareholders’ funds Notes 31 December 2012 £000 31 December 2011 £000 5 6 7 8 8 9 9 17,761 15,405 9 1,431 1,632 3,072 (36) 3,036 20,797 752 19,422 623 20,797 20 2,455 647 3,122 (48) 3,074 18,479 696 17,128 655 18,479 The financial statements on pages 39 to 42 were approved and authorised for issue by the Board of Directors on 12 February 2013 and signed on its behalf by: Richard Marsden Chief Executive Officer John Ward Finance Director 39 | Synairgen plc annual report and accounts 2012 | www.synairgen.com | LSE:SNG Notes to the Parent Company Financial Statements for the year ended 31 December 2012 1. Basis of preparation Synairgen plc’s Parent Company balance sheet has been prepared under the historical cost convention and in accordance with UK Generally Accepted Accounting Practice (‘UK GAAP’). As permitted by FRS 1 “Cash Flow Statements”, no cash flow statement for the Company has been included on the grounds that the Group includes the Company in its own published consolidated financial statements. The Company has taken advantage of the exemption in FRS 8 “Related Party Disclosures” not to disclose related party transactions with wholly-owned subsidiaries. 2. Accounting policies The following accounting policies have been applied consistently in dealing with items which are considered material to the Company’s financial statements. Investment in subsidiary undertakings Investments in subsidiary undertakings where the Company has control are stated at cost less any provision for impairment. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. Short-term deposits Short-term deposits comprise deposits with UK banks for periods of up to twelve months. Short-term deposits are measured initially at cost and subsequently at cost or recoverable amount if lower. Interest is accrued evenly on an accruals basis. Share-based payments In accordance with FRS 20, when the Company grants options over equity instruments directly to the employees of a subsidiary undertaking, the effect of the share-based payment is capitalised as part of the investment in the subsidiary as a capital contribution, with a corresponding increase in equity. Taxation The charge for taxation is based on the loss for the period and takes into account taxation deferred. Current tax is measured at amounts expected to be paid using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax balances are recognised in respect of all timing differences that have originated but not reversed by the balance sheet date, except that the recognition of deferred tax assets is limited to the extent that the company anticipates making sufficient taxable profits in the future to absorb the reversal of the underlying timing differences. Deferred tax balances are not discounted. 3. Loss attributable to member of the Parent Company As permitted by Section 408 of the Companies Act 2006, the Company’s profit and loss account has not been included in these financial statements. The loss dealt with in the financial statements of the Parent Company for the year ended 31 December 2012 was £225,000 (six months ended 31 December 2011: loss of £113,000). 4. Directors’ remuneration The only employees of the Company are the executive Directors and all their costs are borne by its subsidiary undertaking. In respect of Directors’ remuneration, the disclosures required by Schedule 5 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 are included in the detailed disclosures in the audited section of the Directors’ Remuneration Report on page 22, which are ascribed as forming part of these financial statements. LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 40 Notes to the Parent Company Financial Statements for the year ended 31 December 2012 (continued) 5. Investments At 1 January 2012 Additions At 31 December 2012 Investment in subsidiary undertaking £000 140 - 140 Loan to subsidiary undertaking £000 14,543 2,163 16,706 Capital contribution £000 722 193 915 Total £000 15,405 2,356 17,761 At 31 December 2012, the Company has an investment in the following subsidiary undertaking: Name of company Synairgen Research Limited Country of incorporation England Proportion of voting rights and ordinary share capital held Nature of business 100% Drug discovery and development 6. Debtors Other tax and social security Prepayments and accrued income All amounts fall due for payment within one year. 7. Creditors: amounts falling due within one year Trade creditors Accruals and deferred income 8. Share capital and share premium At 1 July 2011 and 31 December 2011 Issuance of ordinary shares Costs of issuance of shares At 31 December 2012 Note (i) (ii) Number of shares 69,560,064 5,624,272 - 75,184,336 Ordinary shares of 1p each £000 696 56 - 752 31 Dec 2012 £000 31 Dec 2011 £000 2 7 9 3 17 20 31 Dec 2012 £000 31 Dec 2011 £000 5 31 36 Share premium £000 17,128 2,445 (151) 19,422 24 24 48 Total £000 17,824 2,501 (151) 17,824 (i) 5,555,556 ordinary shares of 1p were issued on 23 July 2012 at a premium of 44p per share to finance the Company’s ongoing interferon beta programme and to provide working capital for the Company. Funds raised net of expenses amounted to £2,349,000. (ii) 68,716 ordinary shares of 1p were issued on 28 September 2012 at par following the exercise of share options under the Company’s long term incentive plan (LTIP). Details of the Company’s share option schemes and long term incentive plan can be found in note 17 to the Group accounts on pages 37 and 38. 41 | Synairgen plc annual report and accounts 2012 | www.synairgen.com | LSE:SNG Notes to the Parent Company Financial Statements for the year ended 31 December 2012 (continued) 9. Reconciliation of movements in reserves and shareholders’ funds At 1 July 2011 Loss for the period Share-based payment credit At 31 December 2011 Issuance of ordinary shares Transaction costs in respect of share issues Loss for the year Share-based payment credit At 31 December 2012 Share capital £000 696 - - 696 56 - - - Share premium account £000 Profit and loss account £000 Shareholders’ funds £000 17,128 - - 17,128 2,445 (151) - - 672 (113) 96 655 - - (225) 193 623 18,496 (113) 96 18,479 2,501 (151) (225) 193 20,797 752 19,422 LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 42 Corporate Directory Company number 5233429 Directors Executive: Richard Marsden, Dr Phillip Monk, John Ward Non-executive: Simon Shaw (Chairman), Iain Buchanan, Dr Bruce Campbell, Paul Clegg, Prof. Stephen Holgate Secretary John Ward Head office and Registered office Mailpoint 810, Level F, South Block, Southampton General Hospital, Tremona Road, Southampton SO16 6YD Telephone and fax: +44 (0) 2380 512 800 Website www.synairgen.com E-mail info@synairgen.com Advisers Independent auditor BDO LLP Arcadia House, Maritime Walk, Ocean Village, Southampton SO14 3TL Bankers HSBC Bank plc 165 High Street, Southampton SO14 2NZ Financial public relations Newgate Threadneedle 33 King William Street, London EC4R 9AS Nominated adviser and broker FinnCap Limited 60 New Broad Street, London EC2M 1JJ Registrars Capita Registrars Northern House, Woodsome Park, Fenay Bridge, Huddersfield HD8 0GA Solicitors Fasken Martineau LLP 17 Hanover Square, London W1S 1HU Glossary 2' - 5' OAS A protein produced within cells in response to IFN-β to prevent viral replication Adenovirus A virus that can cause respiratory disease (eg. the common cold), conjunctivitis and gastroenteritis Airways (or bronchial tubes) The tubes that carry air in and out of the lungs Antibiotic A drug that inhibits bacterial growth or kills bacteria Anti-viral Any substance that can either destroy viruses or suppress their growth Apoptosis A naturally occurring form of programmed cell death Assay A laboratory test to determine parameters such as the strength of a solution, the proportion of a compound in a mixture, the potency of a drug or the purity of a preparation Asthma A disorder in which the airways become episodically narrowed, leading to wheeze, shortness of breath, cough and chest tightness B cell A type of white blood cell that can produce antibodies Biobank A collection of samples from clinically- characterised volunteers comprising blood, induced sputum, bronchial biopsies and epithelial cells. These samples are used to develop the complex in vitro human disease models Biomarker A biomarker is a biochemical feature or facet that can be used to measure the progress of disease or the effects of treatment Bioterrorism Terrorism involving the intentional release or dissemination of biological agents British Thoracic Society (BTS) Step classification system A stepwise treatment regime (from steps 1 to 5, with 5 being the most severe) for treating asthma in Britain aiming to achieve optimum control without excessive medication Broad spectrum antibiotic An antibiotic that acts against a wide range of disease-causing bacteria Bronchodilators Medicines which relax the muscles around the airways, helping the airways to open up, so making it easier to breathe. There are several types of bronchodilators, of which short- acting beta-agonist drugs are the most commonly used CD8+ T cell A specialised type of white blood cell that can destroy virally-infected cells. The CD8 nomenclature refers to a particular type of receptor expressed on the cell surface Chronic bronchitis An inflammation of the airways accompanied by coughing and production of phlegm. The symptoms are present for at least three months in each of two consecutive years. See COPD Clinical Trial Authorisation or CTA An authorisation from the MHRA to conduct a clinical trial Compliance The level of adherence to a recommended course of treatment or prescribed regimen COPD Chronic obstructive pulmonary disease covers two conditions: chronic bronchitis and emphysema. COPD usually results from long-term exposure to irritants to the lungs, of which the most prevalent is tobacco smoke. Unlike asthma, where airflow obstruction varies, in COPD airflow obstruction is usually irreversible Coronavirus A virus that can cause respiratory disease such as the common cold or SARS (depending on the type of coronavirus) and gastroenteritis 43 | Synairgen plc annual report and accounts 2012 | www.synairgen.com | LSE:SNG DNA Nucleic acid that carries genetic information in the cell Emphysema A destructive process involving the air spaces (alveoli) of the lungs, which leads to over- inflation of the lung and, when sufficiently advanced, causes breathlessness and lack of oxygenation of blood. See COPD Epithelium In the lung, the epithelium is a thin layer of cells which lines the airway tubes in order to protect and regulate the tissue underneath Exacerbation A rapid deterioration of a chronic disease that makes the symptoms worse Gene A hereditary unit consisting of a sequence of DNA that determines a particular characteristic of a living organism H1N1 A subtype of influenza A and the most common cause of ‘flu’ in humans. The recent ‘swine flu’ is a H1N1 virus. The ‘H’ stands for haemagglutinin, which is a protein on the surface of influenza which allows the virus to enter the cell, thus causing infection. The ‘N’ stands for neuraminidase, a protein on the surface of influenza, which allows the newly-formed virus particles to be released from the cell H5N1 Also known as ‘bird flu’ or ‘avian influenza’ is a subtype of the influenza A virus which can cause serious illness in humans Hepatitis Inflammation of the liver that can occur as a result of a viral infection or exposure to harmful substances such as alcohol IFN-β Interferon beta is a natural protein found in the body which helps to regulate the immune system and fight off viruses. IFN-β is currently marketed by a number of companies as an injectable therapy for the treatment of multiple sclerosis Influenza-like illness Set of symptoms presenting similar to those for influenza of which influenza may or may not be the cause Influenza A contagious viral infection of the respiratory tract, leading to fever, headaches, sore throat, congestion of the nose and body aches Interferon stimulated genes (ISG) Genes up-regulated by interferon In vitro Carried out in the laboratory, e.g. in a test tube or culture plate In vitro model (complex) A research model which contains more than one cell type and allows the study of interactions between different cell types and ‘test’ agents relevant to the disease or a therapy IP-10 A protein released by cells in response to IFN-β which attracts other cell types involved in anti- viral defence of the lungs Long acting beta agonist An asthma drug that acts to relax (open) the airways for 12 or more hours Lower airway The airway tubes in the lung running from the throat down, ending in the air spaces (alveoli) where gas exchange occurs Macrophages Phagocytic (i.e. cells that can engulf other cells and cell components) white blood cells involved in cellular clearance and inflammation MHRA The Medicines and Healthcare products Regulatory Agency; a UK government body tasked with ensuring that medicines and medical devices work and are safe mITT population Modified intention to treat population. In SG005, mITT was defined as the population who were randomised with at least one dose of study medication and had a common cold as confirmed by the Jackson Cold Score Morbidity Incidence or prevalence of a disease Mucus A gelatinous substance normally produced by the airway cells to protect and hydrate the airway surface from harmful agents Multiple sclerosis (MS) A disease affecting nerves in the brain and spinal cord, causing problems with muscle movement, balance and vision MxA A protein produced within cells in response to IFN-β to prevent viral replication Natural Killer (NK) cell A specialised type of white blood cell that can respond to virus infection Neuraminidase inhibitor A class of drug used to treat influenza by interfering with virus release from the infected cell by blocking neuraminidase (a protein found on the virus cell surface), of which Tamiflu® and Relenza® are examples Neopterin An anti-viral biomarker Pandemic influenza An influenza pandemic occurs when a new influenza virus appears against which the human population has no immunity, resulting in epidemics worldwide with enormous numbers of deaths and illness (definition on world health organization website) Parainfluenza A virus that can cause the common cold. Parainfluenza is also responsible for 75% of croup cases in children Patent Cooperation Treaty or PCT A system by which a patent application can be filed in many different countries at once. A single international application is filed initially at a receiving office. After a search and publication, the application may be converted to a series of national applications in different countries Peak expiratory flow A lung function test that measures a person's ability to breathe out air Phase I Clinical Trial A study conducted in volunteers to determine the biological effects of a drug, especially safety and tolerability Phase II Clinical Trial A study in patients with the aim of making a preliminary determination of the efficacy of a drug to provide proof of concept and/or to study drug dose ranges Phase IIa Clinical Trial Used to describe a Phase II clinical trial evaluating efficacy, adverse effects and safety risks Phase IIb Clinical Trial Used to describe a subsequent Phase II clinical trial that also evaluates dosage tolerance and optimal dosage frequency in a larger number of patients than enrolled in a Phase IIa trial Phase III Clinical Trial A full scale clinical trial to determine drug efficacy and safety prior to seeking marketing approval Phlegm See Sputum Placebo An inactive substance or preparation used as a control/ comparator (in a clinical trial for example) to determine the effectiveness of a medicinal drug LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 44 Glossary (continued) Primary endpoint The most important measure (endpoint) assessed in a clinical trial Prognostic biomarker A biomarker that can predict the future course of a disease or response to a therapy Prophylaxis A measure taken for the prevention of a disease or condition Protein Large molecules made of smaller biological units known as ‘amino acids’. Proteins are responsible for the majority of the function and much of the structure of living things, including humans Pulmonary Relating to, functioning like, or associated with the lungs Rhinovirus Rhinoviruses are the most common viral infective agents in humans. The most well known disease caused by rhinoviruses is the common cold RNA Nucleic acid that is involved in protein synthesis and transmission of genetic information RSV Respiratory syncytial virus (RSV) can cause both mild respiratory illness (e.g. the common cold) and serious respiratory tract infections (such as bronchiolitis and pneumonia). More severe infections can occur in the very young, the very old and those with weakened immune systems Safety study See Phase I Clinical Trial SARS Severe Acute Respiratory Syndrome (SARS) is a type of coronavirus that can cause potentially fatal respiratory illness. SARS was first reported in Asia in 2002 Seasonal Influenza Seasonal flu is a yearly outbreak of flu infection, caused by a flu virus. The seasonal flu is somewhat different every year, as flu viruses are always changing Secondary/exploratory endpoint The second most important (or additional) measure (or endpoint) assessed in a clinical trial SG004 A double-blinded, placebo- controlled, single and multiple dose-escalating Phase I study to assess the safety and tolerability of inhaled IFN-β in controlled asthmatic male and female subjects SG005 A randomised, double-blinded, placebo-controlled Phase II study, comparing the efficacy and safety of inhaled IFN-β to placebo administered to asthmatic subjects after the onset of a respiratory viral infection for the prevention or attenuation of asthma symptoms caused by respiratory viruses Sputum The thick mucus which is coughed up by a person. Sputum contains cells and soluble substances secreted into the airways (bronchi), some of which can mediate disease if present in amounts different to normal. Sputum is also commonly called phlegm Steroids A group of chemicals that is produced naturally in the body by the adrenal gland. In asthma, steroids are given by inhalation or by mouth to reduce the inflammation of the airways Systemic absorption The fraction of drug that reaches the systemic circulation Upper airway The tubes in the nose and neck which conduct air into the lung Toll-like receptor agonists Novel anti-viral drugs that activate Toll-like receptors (TLRs). TLRs regulate the immune system in response to pathogens Type I IFNs A classification of interferon that includes IFN-β Virion A virus particle which has the ability to infect cells, consisting of an outer protein shell called a capsid and an inner core of nucleic acid Virus A virus is a non-living small particle that infects cells in biological organisms. Viruses can reproduce only by invading and controlling other cells as they lack the cellular machinery for self- reproduction Wheeze A whistling sound made by a person who has airflow obstruction when breathing 45 | Synairgen plc annual report and accounts 2012 | www.synairgen.com | LSE:SNG 15812_SY_AnnualReport_2012_full_v11.indd 44 02/04/2013 17:12 Synairgen is a respiratory drug discovery and development company with a focus on viral defence of the lungs. It is developing inhaled interferon beta (‘IFN-β’) in two programmes: • To prevent asthma and COPD patients suffering severe exacerbations as a result of cold or flu infections • To treat other patients who have been hospitalised with severe viral lung infections Patents protecting the use of inhaled iFN-β to treat exacerbations of asthma and CoPD induced by rhinovirus (the common cold) have been granted in the USA, the EU and Japan. in 2012 Synairgen announced positive data from its Phase ii proof of concept trial of inhaled iFN-β in asthma and is aiming to secure the right partnership arrangement to enable commencement of follow-on clinical trial activity during the 2013-14 virus season. Exacerbations (acute deteriorations of symptoms) represent the greatest unmet clinical need in asthma and CoPD. The common cold plays a major role in exacerbations, causing up to 80% of asthma exacerbations. For CoPD patients 50% of colds result in exacerbations. The annual direct healthcare cost of treating asthma and CoPD is very significant. in the USA it amounts to $54 billion1, of which $16 billion is for hospitalisations and Emergency Room visits. Viruses are parasites which take over cells and use the cells’ ‘machinery’ to replicate. The normal host cell response to viral infection is to trigger iFN-β production, which in turn orchestrates an anti-viral response (see page 10). Deficiencies in iFN-β production following infection explain why some patient groups (such as those with asthma and CoPD) are more susceptible to infection. many pathogenic respiratory viruses, such as influenza and SARS, can suppress iFN-β production, allowing infections to spread to the lungs and cause severe illness. By delivering iFN-β to the lungs, Synairgen aims to overcome the iFN-β deficiency and restore/boost the lungs’ anti-viral defence mechanism. Reference 1. National Heart, Lung, and Blood Institute. Morbidity & Mortality: 2012 Chart Book on Cardiovascular, Lung, and Blood Diseases. www.synairgen.com Contents Introduction Overview of interferon beta programmes Operational and financial highlights Business Review Chairman’s and Chief Executive Officer’s Report Financial Review Scientific Review Governance Directors Synairgen’s Founders and Scientific Advisors Directors’ Report Corporate Governance Directors’ Remuneration Report Financials Statement of Directors’ responsibilities in respect of the Annual Report and the Finanicial Statements Independent Auditor’s Report Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity 16 18 20 23 24 25 25 1 2 3 8 9 13 15 Consolidated Statement of Financial Position Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Parent Company Balance Sheet Notes to the Parent Company Financial Statements Other Corporate Directory Glossary 26 27 28 39 40 43 43 1 | Synairgen plc annual report and accounts 2012 | www.synairgen.com | LSE:SNG LSE:SNG | www.synairgen.com | Synairgen plc annual report and accounts 2012 | 46 S y n a i r g e n l p c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 2 i m o c . n g s e d c d b w w w . d e t i m L i y n a p m o C n g s e D i t n i r p e u B e h T l y b d e c u d o r p d n a d e n g s e D i Synairgen plc, Mailpoint 810, Level F, South Block, Southampton General Hospital, Tremona Road, Southampton, SO16 6YD United Kingdom © Synairgen plc Annual Report and Accounts 2012 Targeting the causes of respiratory disease When I get a cold… GEoRGE, AGED 74 who hAS CoPD G A i L , A G E D 3 9 w h o h A S A S T h m A “It wears me down and drains my energy” “I have to take days off work” PoLLy, AGED 16 who hAS ASThmA “I have to have time off school” Stock symbol: LSE:SNG www.synairgen.com 

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