23rd Jun 2006 07:30
SR Pharma plc Preliminary Financial Results for the year ended 31 December 200523 June 2006, London - SR Pharma plc (London LSE: SPA) today announces itspreliminary financial results for the year ended 31 December 2005.HIGHLIGHTS ¢â‚¬¦¢â‚¬¦¢â‚¬¦¢â‚¬¦ * In July 2005 SR Pharma plc acquired Atugen AG for ‚£7.5m. * In July 2005 SR Pharma plc raised ‚£10m of new investment from blue-chip institutions, including a $3m equity investment by Introgen Therapeutics Inc, a leading US biotech company. * In September 2005 SR Pharma plc appointed Fulcrum plc to advise upon and co-ordinate its pipeline development programme. * In October 2005 SR Pharma plc selected a lead target for pancreatic and liver cancer which will enter the clinic in the first half of 2007. * In November 2005 SR Pharma plc appointed Eden BioDesign to develop a robust manufacturing process for M.vaccae based products. * Following the acquisition of Atugen and the adoption of International Financial Reporting Standards, pre-tax losses amounted to ‚£3.6m (2004: ‚£ 3.0m) in line with management expectations * Cash of ‚£9.1m at the end of the year (2004: ‚£3.1m) * Post year end, in March 2006 SR Pharma plc granted a licence to Merck Inc. which will allow Merck to elucidate fully the therapeutic potential of a target gene owned by Atugen. * In April 2006 SR Pharma plc announced two key scientific publications in Gene Therapy on the development and systemic applications of Atugen's siRNA-lipoplex (AtuPLEX) technology for enabling in vivo its therapeutic application in oncology. * In June 2006 SR Pharma plc announced a key technical breakthrough with its lyophilized (dry powder) liposomal-based siRNA formulation * In the same month key collaborations with Genzyme, BioSpring and OctoPlus were signed in respect of the manufacturing and formulation of GMP material required to progress the pre-clinical development of SR's siRNA (AtuRNAi) therapeutic molecules. CHAIRMAN'S STATEMENTA PERIOD OF POSITIVE CHANGEThe last 18 months has seen a complete re-shaping of SR Pharma's business focusand strategy. The Company has made a strategic move into the fast moving RNAitechnology sector which is set to revolutionise the identification anddevelopment of novel therapeutics for previously unmet medical needs and isvery committed to growing critical mass in this sector. During the second halfof the year ended 31 December 2005, the Company made excellent progress indeveloping its business in line with the plans set out in July 2005 when AtugenAG, a leader in siRNA therapeutics, was acquired for ‚£7.5m and ‚£10m of newfunding was raised.As a result of these transactions SR Pharma plc has now established itself as awell funded European biopharmaceutical company with two operating subsidiaries;Atugen AG in Berlin, Germany and Stanford Rook Ltd in London, UK. We arecommitted to making further strategic moves to strengthen our position bothscientifically and financially and we anticipate further significanttransactions during 2006/2007.Notwithstanding the unsettled market conditions in mid 2006, SR Pharma has seena significant and disappointing decline in the Company share price. This isfrustrating for our shareholders and the frustration is shared by the Board andManagement who continue to take the view that their priority must be to createhigh quality product development programmes which in turn will lead to thecreation of a significant and sustainable increase in shareholder value in themedium term.In addition, the Company continues to pursue active discussions at the highestlevel of the pharmaceutical industry, with significant interest in ourproprietary technology base. The Company is also proactively exploring M&Adiscussions with like-minded and complementary businesses as part of its valuebuilding strategy.A STRONG AND COMMITTED SHAREHOLDER BASE ¢â‚¬¦¢â‚¬¦¢â‚¬¦¢â‚¬¦..Following the move in late 2004 from the main market of the London StockExchange to AIM, the acquisition of Atugen AG and the subsequent ‚£10m financingthe Company's shareholder base has been considerably strengthened and nowcomprises a number of blue chip investors including Insight, Fidelity, Artemis,Gartmore, Apax, MPM Capital and Novartis Venture Fund. In addition to theseinstitutional shareholders, Introgen Therapeutics Inc., a US biotechnologycompany, holds a 9% stake in SR Pharma plc.FINANCIAL STABILITY¢â‚¬¦¢â‚¬¦¢â‚¬¦¢â‚¬¦¢â‚¬¦As of 31 December 2005 the Group had ‚£9.1m in cash, which coupled with theforecasted mid-term revenue stream and in the absence of any further M&Atransactions, means there is sufficient funding to support the Company'sdevelopment plans for the next 2 years. During the year we have reduced thepersonnel and facility costs in Atugen by 20% and 15% respectively and cut backoperations in the UK to a core team. It is anticipated that any future M&Aactivity will be completed in conjunction with a further fundraising tosupport, as necessary, the enlarged entity. It is your Board's aim to ensurethat until profitability there is always a minimum of a two-year cash `runway'.A SMART M&A STRATEGY¢â‚¬¦¢â‚¬¦¢â‚¬¦¢â‚¬¦Through the acquisition of Atugen AG the Company now has a stake at the cuttingedge of medical science. SR Pharma is now a leading company in the RNAi sectorand as a result the business focus has inevitably moved towards the US marketwhere RNAi technology companies are highly valued. As a consequence in 2006/2007 your Board will look to increase significantly our presence in the USmarket through continued M&A activity and in addition announce a number of USbased collaborations with pharmaceutical and biotech companies to validate,underpin and co-fund our product development programmes. In line with thisstrategy, in March 2006 the Company announced it had granted a licence to MerckInc and as a result of increased interest and other strategic moves bypharmaceutical companies in the RNAi sector we anticipate further significantdeals being announced in 2006/2007. Within our sector, it is normal andexpected that big pharma collaborations can take a considerable time tocomplete and only when we have our own products in the clinic might we see atrue acceleration in third party activity.VALUE CREATING ASSETS¢â‚¬¦¢â‚¬¦¢â‚¬¦¢â‚¬¦Atugen AG has 30 employees, owns novel, chemically modified proprietary siRNAmolecules ("AtuRNAi") and a proprietary in vivo delivery system ("AtuPLEX").Clinical development of AtuRNAi therapeutic molecules for systemic applicationsin Atugen's oncology programs are targeted to start in 2007. Other AtuRNAitherapeutic programs with third party collaborators are scheduled to enter theclinic in the second half of 2006. We have several lead siRNA molecules inpre-clinical development and at the research stage for other therapeuticindications. For the benefit of those readers unfamiliar with the RNAi sectorwe have included a brief overview in the annual report.Also, I am pleased to report that Stanford Rook Ltd (SRL) has continued tooperate as a separate subsidiary with its own proprietary Mycobacteriumvaccae-based technology and related products for immunotherapy. In late 2005Eden Biodesign Ltd, the operator of the National Biomanufacturing Centre, basedin Liverpool, was appointed to assist SRL with the development of a robustmanufacturing process for M.vaccae based products and discussions havecommenced with third parties regarding the future commercial exploitation ofthis technology. In addition SRL has filed patent applications relating to anovel synthetic molecule which, from initial pre-clinical screening studies,demonstrates activity in allergic conditions. Also licensing discussions areunderway in respect of the Inositol Phosphoglycans product portfolio andfurther announcements are expected in 2006/2007.AN EMERGING R&D PIPELINE ¢â‚¬¦¢â‚¬¦¢â‚¬¦¢â‚¬¦¢â‚¬¦.Since the acquisition of Atugen, SR Pharma has accomplished several key R&Dmilestones. We have established a pipeline of lead siRNA candidates for siRNAtherapeutic applications in advanced cancers (in particular hepatocellularcarcinoma and pancreatic carcinoma) and several lead siRNA molecules andrespective formulations have already been tested in vivo for efficacy in animalmodels predictive of human diseases.We have appointed a number of third party contractors including Fulcrum plc toassist and oversee the development of our siRNA therapeutics programme,OctoPlus to assist with the development of GMP grade formulations of ourAtuPLEX lipid technology for systemic delivery and also we have appointedinternationally respected consultants to assist with the regulatory andpre-clinical and clinical development issues. In addition in-house we haveestablished fully functional lipid chemistry laboratories to synthesise andcharacterise lipid components and formulations and manufacturing agreementshave been signed with Genzyme Pharmaceuticals and BioSpring to ensure thesupply of GMP grade production for all components.I am pleased to report that our lipid chemists have accomplished a keytechnical breakthrough by manufacturing a lyphilized (dry-powder)liposomal-based siRNA formulation. The dry powder formulation extends theshelf-life and simplifies the distribution chain, with a one-stepreconstitution process enhancing ease of administration.We remain on track to commence in early 2007 clinical trials of our proprietarysiRNA molecules in patients with advanced cancers at the Charitƒ¨ Hospital inBerlin. Professor Wiedenmann, Director of the Medical Clinic for Hepatology andGastroenterology & Interdisciplinary Centre of Metabolism at the Charitƒ©,Berlin has agreed to oversee the clinical trials.In addition we have further strengthened our IP portfolio by filing new patentapplications covering the lipid components, the formulations used and specificsiRNA sequences. As anticipated we have continued to file oppositions in theRNAi sector as appropriate.We have continued the collaboration with our partner Quark Biotech, Inc. (QBI)in terms of the development of an AtuRNAi candidate indicated for Age-relatedMacular Degeneration (AMD). According to QBI this product is due to enter theclinic in 2006. QBI has started pre-clinical development with a second AtuRNAicandidate for the indication of Acute Renal Failure.THIRD PARTY SUPPORT AND ENDORSEMENT WILL BE ESSENTIAL¢â‚¬¦¢â‚¬¦¢â‚¬¦¢â‚¬¦¢â‚¬¦¢â‚¬¦¢â‚¬¦During the year we strengthened the business development function within Atugenby appointing an internationally experienced Director of Business Developmentand as a result all major biotech and pharmaceutical companies with an interestin RNAi have been contacted and many visited. Accordingly a number ofinteresting discussions are ongoing whereby we are looking to set up a numberof collaborations in the RNAi sector. Also we have achieved an extension of ahigh-profile public grant (RiNA grant) financed by Germany's Federal Ministryof Education and Research; the State of Berlin and funds from the EuropeanUnion for an additional 9 months worth approximately ¢â€š¬600,000.In conclusion, whilst 2005 was the year in which we made a dramatic move intoRNAi, the true value of these strategic investments lie in the future and Ibelieve that, by remaining patient and making the right moves in the future, wewill be able to further consolidate our position over the next 12-18 months.Your Board believes that enhanced shareholder value will be built on the basisof creating a pipeline of proprietary RNAi products validated by meaningfulthird party collaborations and remains committed to achieving this goal.Finally I would like to thank the Board, the management and the staff for theirsupport, hard work and tenacity over the last year and I look forward to seeingthe benefits in the near future.Iain G RossExecutive ChairmanFINANCIAL REVIEWThe financial statements have been affected by three major factors this year: * The acquisition of Atugen AG in July 2005 * The subsequent fundraising for the enlarged Group completed in July 2005, and * The adoption of International Financial Reporting Standards (IFRS) for the presentation of the Group Financial Statements For a number of years the Group has been looking for suitable opportunities toexpand and diversify its operations and the acquisition of Atugen presented theGroup with a strategic position in an exciting area of novel therapeuticinterest. The Group issued 22,905,318 ordinary shares and 3,125,926 warrantsfor ordinary shares in respect of the acquisition of Atugen, at a time when theshares of SR Pharma plc were trading at 27p. Further financial details of theacquisition are given in the notes to the financial statements. Thistransaction increases the assets held by the Group by approximately ‚£7.5million, reflecting this in both increased Share Capital and Share PremiumAccount. Direct costs of the transaction have been reflected in the acquisitioncosts.Subsequent to the acquisition, the Group accessed further working capital byway of a fundraising with institutional investors. The Group raised ‚£8.3million via a placing with a number of institutions and at the same timesecured a US$3 million equity investment as part of a strategic collaborationwith Introgen Therapeutics Inc. of Austin, Texas, USA. In order to obtain thisfunding, the Group issued 43,513,044 new ordinary shares in total at 23p pershare. Net of costs directly related to the fundraising paid by the Group, thisproduced additional cash of ‚£9.45 million.Due in part to the acquisition of Atugen and thus the expansion of the Groupoutside the United Kingdom, the Board decided that it would be appropriate tobring forward the adoption of IFRS to take effect in the current year. This hasan impact not only on the figures as presented for 2005, but also thecomparative figures for 2004 which have been amended to conform with IFRS.Apart from certain re-descriptions of items within the financial statements,the major impact of adopting IFRS is the inclusion of a charge in respect ofthe options and warrants issued by the Group. This has given rise to anincrease of ‚£113,572 in the 2004 costs and an increase of ‚£490,471 in the 2005costs. Furthermore, the calculation of the cost of investment in Atugen and thecost of the fundraising charged against the Share Premium Account both includea sum in respect of the calculated fair value of the warrants issued as part ofeach transaction. The Company has set up a Share-based payment reserve as partof Capital Reserves to complete the picture.With the impact of the above, and offset by the loss for the year, Total Equityrose from ‚£2.34 million at 31 December 2004 to ‚£15.69 million at 31 December2005. With the much larger number of shares in issue at the end of the year,this is equivalent to an increase in net assets per shares from 9.8p per shareat 31 December 2004 to 17.4p per share at 31 December 2005. The group was alsoholding bank balances of over ‚£9 million at the year end (2004: ‚£2.6 million),providing adequate financial resources for the immediate future.The loss for the year before taxation rose from ‚£3.3 million to ‚£3.6 million.These results include 6 months of operations of Atugen since its acquisition,which contributed ‚£1.25 million to the loss. Thus, setting aside the impact ofAtugen, the group would have shown a loss for the year of ‚£2.4 million, downfrom a loss of ‚£3.3 million for 2004. The results reflect the fact that priorto the acquisition both the SR Pharma group and Atugen had continued to cutback on their research activities and switch resources into corporate activityin order to secure a suitable partner and adequate long-term financing for thecontinuation of the research and development programmes. The enforced change inemphasis due to financial constraints, and the impact of adopting IFRS 2Share-based payments is reflected in the holding back of Research andDevelopment costs whilst Administrative expenses rose by 50%. Of the increasein Administration expenses, approximately ‚£700,000 relates to Atugen's costspost acquisition, a further ‚£300,000 relates to legal and corporate financeadvice and almost ‚£500,000 relates to the adoption of IFRSs. Without these, thecore costs for the former SR Pharma Group had fallen in the year.The Group continues to invest in its two main areas of technology, RNAi andImmunotherapy. As highlighted in the Chairman's Statement, the Group hasappointed independent consultants to assist in the development processes andfollowing a period of planning and consolidation, the group has increased itsrate of investment in its Research and Development programmes in order tomaximise the benefit of these technologies. The Group will continue to seekopportunities to expand and strengthen its technology as well as theopportunity to diversify into other potentially profitable areas. At the sametime, continued efforts are being devoted to restricting other areas ofAdministrative expenses to enable the Group's resources to be channelled intomore valuable and productive areas.Melvyn DaviesFinance DirectorSR PHARMA PLCCONSOLIDATED INCOME STATEMENTYEAR ENDED 31ST DECEMBER 2005 2005 2004 ‚£ ‚£ Revenue 508,721 159,211 Research and development direct costs (1,659,494) (1,697,509) Gross loss (1,150,773) (1,538,298) Administrative expenses (2,747,531) (1,830,188) Operating loss (3,898,304) (3,368,486) Finance income 264,034 133,513 Finance costs (498) (71,445) Loss for the year before taxation (3,634,768) (3,306,418) Taxation credit for the year 50,000 350,255 Loss for the year after taxation transferred from (3,584,768) (2,956,163)reserves Loss per share (basic and diluted) 5.89p 12.38p SR PHARMA PLCCONSOLIDATED BALANCE SHEETAT 31 DECEMBER 2005 2005 2004 ‚£ ‚£ Non-current assets Property, plant and equipment 246,970 39,950 Goodwill 6,380,166 - Other Intangible assets 876,860 - 7,503,996 39,950 Current assets Inventories 81,852 - Trade and other receivables 445,352 242,195 Tax recoverable 50,371 276,175 Cash and cash equivalents 9,091,201 2,632,002 9,668,776 3,150,372 Liabilities Trade and other payables 1,153,701 324,231 Provisions - current 189,680 189,680 Provisions - non current 142,260 331,940 1,485,641 845,851 Net Assets 15,687,131 2,344,471 Equity Share capital 903,116 238,857 Capital Reserves 36,405,031 20,284,665 Translation reserve 142,803 - Retained loss (21,763,819) (18,179,051) Total Equity 15,687,131 2,344,471 SR PHARMA PLCCONSOLIDATED STATEMENT OF CHANGES IN EQUITYAT 31 DECEMBER 2005 Share Capital Translation Retained capital reserves reserve Loss Total ‚£ ‚£ ‚£ ‚£ ‚£ Balances at 1 January 238,607 20,166,593 - (15,222,888) 5,182,312 2004 (as restated) Loss for the year ended 31 December 2004 - - - (2,956,163) (2,956,163) Recognition of - 113,572 - - 113,572 share-based payments Shares issued in the 250 4,500 - - 4,750 year At 31 December 238,857 20,284,665 - (18,179,051) 2,344,471 2004 (restated) Loss for the year ended 31 December 2005 - - - (3,584,768) (3,584,768) Recognition of - 1,954,514 - - 1,954,514 share-based payments Shares issued in the 664,259 14,165,852 - - 14,830,111 year Exchange differences arising on consolidation of foreign operations - - 142,803 - 142,803 At 31 December 2005 903,116 36,405,031 142,803 (21,763,819) 15,687,131 SR PHARMA PLCCONSOLIDATED CASH FLOW STATEMENTFOR THE YEAR ENDED 31ST DECEMBER 2005 2005 2004 Cash Flow from Operating Activities ‚£ ‚£ Loss before taxation (3,634,768) (3,306,418) Adjustments for: Depreciation charges 111,253 37,623 Amortisation charges 104,265 - (Profit)/Loss on sale of property, plant and equipment (161) 556 Loss on write off of intangible assets 7,658 - Charge for the year in respect of Share-based payments 490,471 113,572 Foreign exchange gain (13,143) - Provision against loan 100,000 - Investment income (200,401) (133,513) Interest expense 498 - (3,034,328) (3,288,180) Decrease/(increase) in trade and other 117,277 943,886 receivables (Increase) in inventories (13,451) - (Decrease)/increase in trade and other (127,192) (373,824) payables Cash (absorbed)/generated by operations (3,057,694) (2,718,118) Interest paid (498) - Taxation received 275,804 237,375 Net cash outflow from operating activities (2,782,388) (2,480,743) Cash Flows from Investing activities Acquisition of and investment in Subsidiary net of cash acquired (see Note below) (330,067) - Loans to Subsidiaries - - Loans made in the year - (100,000) Interest received 200,401 133,513 Additions to property, plant and equipment (50,837) (18,769) Additions to intangible assets (32,824) - Proceeds of sale of property, plant and 1,529 500 equipment Net cash (used in)/generated from (211,798) 15,244 investing activities Cash Flows from Financing Activities Proceeds from issue of share capital and 9,453,385 4,750 options Increase/(Decrease) in cash & cash 6,459,199 (2,460,749)equivalents Cash and cash equivalents at start of year 2,632,002 5,092,751 Net increase/(decrease) in the year 6,459,199 (2,460,749) Cash and cash equivalents at end of year 9,091,201 2,632,002 Notes to the Cash Flow StatementAcquisition of SubsidiaryDuring the year the Group acquired the whole of the issued share capital ofAtugen AG. The fair value of the assets acquired and liabilities assumed wereas follows: ‚£ Property, plant and equipment 263,601 Intangible assets 937,033 Goodwill acquired 6,248,349 Inventories 68,401 Trade and other receivables 420,434 Cash 345,605 Trade and other payables (766,982) Total purchase price 7,516,441 Less: Consideration settled by issue of shares and (6,840,769)warrants 675,672 Less: Cash of Atugen AG (345,605) Cash outflow on acquisition 330,067 The accompanying accounting policies and notes form an integral part of thesefinancial statements.SR PHARMA PLCNOTES1. The above financial information does not constitute statutory accountswithin the meaning of Section 240, Companies Act 1985. The information for bothyears has been extracted from the statutory accounts of the Group for the yearended 31 December 2005 which have been audited by the Group's auditors GrantThornton UK LLP and whose report thereon is unqualified.The accounts are being put to the members for approval at the forthcoming AGM(see below) and have not yet been delivered to Companies House.2 Adoption of International Financial Reporting Standards2.1 Transition to International Financial Reporting StandardsThe consolidated financial statements of the Group have been prepared inaccordance with International Financial Reporting Standards (IFRS) as adoptedby the EU and as issued by the International Accounting Standards Board (IASB).The Group has adopted IFRS for the first time in its consolidated financialstatements for the year ended 31 December 2005. Previously the Group hadreported under United Kingdom Generally Accepted Accounting Principles ("UKGAAP").The transition from UK GAAP to IFRS has been made in accordance with IFRS 1:First-time Adoption of International Financial Reporting Standards. Thistransition has resulted in a number of changes to the Group's accountingpolicies in the following areas that have affected the amounts reported for thecurrent or prior years: * IFRS 2: Share-based payments * IFRS 3: Business combinations , and * Excess of acquirer's interest in the net fair value of acquiree's identifiable assets, liabilities and contingent liabilities over cost of acquisition (IFRS 3) The impact of these changes is discussed in detail later in this note. Theimpact on earnings per share is disclosed in note 4.2.2 Revised structure of balance sheet and income statementThe Group has modified its former balance sheet and income statement structureon transition to IFRS to amend the classification and disclosure of its Capitaland Revenue Reserves, the impact of which is shown in the Statement of Changesin Equity above and can be summarised as: Equity Capital Retained Capital Reserves Loss As at 1 January 2004 As previously reported 238,607 20,162,719 (15,219,014) Adjustment re IFRS 2: Share-based - 3,874 (3,874) payments As at 1 January 2004 as restated 238,607 20,166,593 (15,222,888)under IFRS 2.3 Share-based paymentsIFRS 2: Share-based payments requires recognition of equity-settled share-basedpayments at fair value at the date of grant and the recognition of liabilitiesfor cash-settled share-based payments at the current fair value at each balancesheet date. Prior to the adoption of IFRS 2 the Group did not recognise thefinancial effect of share-based payments until such payments were settled,unless required to do so under UITF 17.In accordance with the transitional provisions of IFRS 2, the Standard has beenapplied retrospectively to all grants of equity instruments after 7 November2002 that were unvested as of 1 January 2005 and to liabilities for share-basedtransactions existing at1 January 2005.The opening balance sheet as at 1 January 2004 has been adjusted to reflect theimpact of options granted prior to that date. These have resulted in priorperiod losses being increased by ‚£3,874 and the opening balance sheet has beenadjusted to reflect the increased loss and the creation of a related reserve.For 2004, the change in accounting policy has resulted in a net increase inloss for that year of ‚£113,572. The balance sheet at 31 December 2004 has beenadjusted to reflect the recognition of that loss and the creation of therelated reserve.For 2005, the impact of the grant of options has been to increase losses by ‚£490,471.During the year the Group also issued warrants in connection with itsacquisition of Atugen AG and in relation to the subsequent fundraising carriedout. The impact of implementing the requirements of IFRS 2 to these warrants isto increase the cost of acquiring Atugen by ‚£656,333 and to increase the costsof the fundraising by ‚£807,710. Consequently, the balance sheet at 31 December2005 reflects the recognition of the cumulative liability in respect of all ofthese share-based payments amounting to ‚£2,071,960 as a Share-based paymentsreserve.2.4 Restatement of Balance SheetsThe impact of the adoption of IFRS on the balance sheets of the Group and theCompany at 31 December 2003 and 31 December 2004 is as follows:Group Balance Sheet at 31 December 2003 as previously as restated reported adjustment under IFRS ‚£ ‚£ ‚£ Non-current assets Property, plant and equipment 59,860 - 59,860 Current assets Trade and other receivables 1,336,081 - 1,336,081 Cash and cash equivalents 5,092,751 - 5,092,751 6,428,832 - 6,428,832 Liabilities Trade and other payables 1,306,380 - 1,306,380 Net Assets 5,182,312 - 5,182,312 Equity Share capital 238,607 - 238,607 Share premium account 19,978,803 - 19,978,803 Merger reserve 183,916 - 183,916 Share-based payment reserve - 3,874 3,874 Retained loss (15,219,014) (3,874) (15,222,888) Total Equity 5,182,312 - 5,182,312 Group Balance Sheet at 31 December 2004 as previously adjustment as restated reported under IFRS ‚£ ‚£ ‚£ Non-current assets Property, plant and equipment 39,950 - 39,950 Current assets Trade and other receivables 518,370 - 518,370 Cash and cash equivalents 2,632,002 - 2,632,002 3,150,372 - 3,150,372 Liabilities Trade and other payables 513,911 (189,680) 324,231 Provisions - current - 189,680 189,680 Provisions - non current - 331,940 331,940 513,911 331,940 845,851 Creditors due after more than one year 331,940 (331,940) - Net Assets 2,344,471 - 2,344,471 Equity Share capital 238,857 - 238,857 Share premium account 19,983,303 - 19,983,303 Merger reserve 183,916 - 183,916 Share-based payment reserve 117,446 117,446 - Retained loss (18,061,605) (117,446) (18,179,051) Total Equity 2,344,471 - 2,344,471 3. Principal accounting policiesThe financial statements have been prepared in accordance with InternationalFinancial Reporting Standards as adopted by the EU and on the historical costbasis.The principal accounting policies adopted are set out below.3.1 Basis of consolidationThe group financial statements consolidate those of the Company and itscontrolled subsidiary undertakings drawn up to 31 December 2005. Control isachieved where the Company has the power to govern the financial and operatingpolicies of the entity so as to obtain benefits from its activities.Acquisitions of subsidiaries are dealt with by the purchase method ofaccounting.The results of subsidiaries acquired or disposed of during the year areincluded in the consolidated income statement from the effective date ofacquisition or up to the effective date of disposal.Where necessary, adjustments are made to the financial statements ofsubsidiaries to bring accounting policies into line with those used forreporting the operations of the Group. All intra-group transactions, balances,income and expenses are eliminated on consolidation.3.2 Business combinationsThe acquisition of subsidiaries is accounted for using the purchase method. Thecost of the acquisition is measured at the aggregate of the fair values, at thedate of exchange, of assets given, liabilities incurred or assumed, and equityinstruments issued by the Group in exchange for control of the acquiree, plusany costs directly attributable to the business combination. The acquiree'sidentifiable assets, liabilities and contingent liabilities that meet theconditions for recognition under IFRS 3 are recognised at their fair values atthe acquisition date.Goodwill arising on acquisition is recognised as an asset and initiallymeasured at cost, being the excess of the cost of the business combination overthe Group's interest in the net fair value of the identifiable assets,liabilities and contingent liabilities recognised. If, after reassessment, theGroup's interest in the net fair value of the acquiree's identifiable assets,liabilities and contingent liabilities exceeds the cost of the businesscombination, the excess is recognised immediately in profit or loss.In arriving at the cost of acquisition, the fair value of the shares issued bythe Company is taken to be the mid-market price of those shares at the date ofissue. Where this figure exceeds the nominal value of the shares, the excessamount is treated as an addition to reserves. The Group has credited the excessamount to the Merger reserve since, under Section 131 of the Companies Act,such excess amount arising where the Company acquires more than a 90% interestin another entity is not treated as an addition to Share premium account.3.3 GoodwillGoodwill arising on the acquisition of a subsidiary represents the excess ofthe cost of acquisition over the Group's interest in the net fair value of theidentifiable assets, liabilities and contingent liabilities of the subsidiaryat the date of acquisition. Goodwill is initially recognised as an asset atcost and is subsequently measured at cost less any accumulated impairmentlosses.For the purpose of impairment testing, goodwill is allocated to each of theGroup's cash-generating units expected to benefit from the synergies of thecombination. Cash-generating units to which goodwill has been allocated aretested for impairment annually, or more frequently when there is an indicationthat the unit may be impaired. If the recoverable amount of the cash-generatingunit is less than the carrying amount of the unit, the impairment loss isallocated first to reduce the carrying amount of any goodwill allocated to theunit and then to the other assets of the unit pro-rata on the basis of thecarrying amount of each asset in the unit. An impairment loss recognised forgoodwill is not reversed in a subsequent period.On disposal of a subsidiary, the attributable amount of goodwill is included inthe determination of the profit or loss on disposal.3.4 Revenue recognitionThe Group's income consists of licence fees, milestone and option payments,fees earned from target validation work, grant income and research anddevelopment collaborations.Licence fees, option and milestone payments for which the Group has no furthercontractual duty to perform any future services are recognised on the date thatthey are contractually receivable.Where such fees or receipts require future performance or financial commitmentson behalf of the Group, the revenue is recognised pro rata to the services orcommitments being performed.Revenues from target validation work or other research and testing carried outfor third parties are recognised when the work to which they relate has beenperformed.Government grants are dealt with as per note 3.5 below.All other technology access fees, annual licence fees or other time-relatedreceipts are recognised as revenue on a straight line basis over the period ofthe underlying contract.3.5 Government GrantsGovernment grants towards the cost of staff employed in research anddevelopment activities are recognised as income over the periods necessary tomatch them with the related costs.Government grants towards the cost of plant and equipment are treated as areduction in the cost of the asset to which they relate.3.6 Foreign currency translationSR Pharma's consolidated financial statements are presented in Sterling (‚£),which is also the functional currency of the parent company. The individualfinancial statements of each group entity are presented in the currency of theprimary economic environment in which the entity operates (its functionalcurrency).In preparing the financial statements of the individual entities, transactionsin currencies other than the entity's functional currency (foreign currencies)are recorded at the rates of exchange prevailing on the dates of thetransactions. At each balance sheet date, monetary items denominated in foreigncurrencies are retranslated at the rates prevailing on the balance sheet date.Non-monetary items carried at fair value that are denominated in foreigncurrencies are retranslated at the rates prevailing on the date when the fairvalue was determined. Non-monetary items that are measured in terms ofhistorical cost in a foreign currency are not retranslated.Exchange differences arising on the settlement of monetary items, and on theretranslation of monetary items, are included in profit or loss for the period.Exchange differences arising on the retranslation of non-monetary items carriedat fair value are included in profit or loss for the period except fordifferences arising on the retranslation of non-monetary items in respect ofwhich gains and losses are recognised directly in equity. For such non-monetaryitems, any exchange component of that gain or loss is also recognised directlyin equity.For the purpose of presenting consolidated financial statements, the assets andliabilities of the Group's foreign operations (including comparatives) areexpressed in Sterling using exchange rates prevailing on the balance sheetdate. Income and expense items (including comparatives) are translated at theactual exchange rates. Exchange differences arising, if any, are recognised inEquity in the Group's Translation reserve. Cumulative translation differencesare recognised in profit or loss in the period in which the foreign operationis disposed of.Goodwill and fair value adjustments arising on the acquisition of a foreignoperation are treated as assets and liabilities of the foreign operation andtranslated at the closing rate.3.7 Defined contribution pension fundsThe group pays contributions related to salary to UK employees' individualpension schemes. The pension cost charged against profits represents the amountof the contributions payable to the schemes in respect of the accountingperiod. No separate provision is made in respect of non-UK employees.3.8 Property, plant and equipmentThe Group holds no property assets.All plant and equipment is stated in the accounts at its cost of acquisitionless a provision for depreciation.Depreciation is charged to write off the cost less estimated residual values ofplant and equipment on a straight line basis over their estimated useful lives.All plant and equipment is estimated to have useful lives of between 3 and 5years.3.9 Other intangible assets and research and development activitiesOther intangible assets include both acquired and internally developedintellectual property used in research and operations. These assets are statedat cost less amortisation.Acquired intellectual property rights are capitalised on the basis of the costsincurred to acquire the specific rights.Costs associated with research activities are treated as an expense in theperiod in which they are incurred.Costs that are directly attributable to the development phase of newintellectual property rights are recognised as intangible assets provided theymeet the following requirements: * an asset is created that can be separately identified, * it is probable that the asset created will generate future economic benefits either through internal use or sale, * sufficient technical, financial and other resources are available for completion of the asset, and * the expenditure attributable to the intangible asset during its development can be reliably measured. The costs of internally generated intellectual property are recognised asintangible assets and they are subject to the same subsequent measurementmethod as externally acquired intellectual property. However, until completionof the development project, the assets are subject to impairment testing onlyas described below. Amortisation commences upon completion of the asset.Amortisation is applied to write off the cost less residual value of theintangible assets on a straight line basis over their estimated useful life.The principal rate used is 10% per annum. Amortisation is included withinadministration expense.Careful judgement by SR Pharma's management is applied when deciding whetherrecognition requirements for development costs have been met. This is necessaryas the economic success of any product development is uncertain and may besubject to future technical problems at the time of recognition. Judgements arebased on the information available at each balance sheet date.3.10 Impairment testing of goodwill, other intangible assets and property,plant and equipmentAt each balance sheet date, the Group reviews the carrying amounts of itsproperty, plant and equipment and intangible assets to determine whether thereis any indication that those assets have suffered an impairment loss. If anysuch indication exists, the recoverable amount of the asset is estimated inorder to determine the extent of the impairment loss (if any). Where it is notpossible to estimate the recoverable amount of an individual asset, the Groupestimates the recoverable amount of the cash-generating unit to which the assetbelongs.For the purposes of assessing impairment, assets are grouped at the lowestlevels for which there are separately identifiable cash flows (cash-generatingunits). Goodwill is allocated to those cash-generating units that are expectedto benefit from synergies of the related business combination and represent thelowest level within the Group at which management controls the related cashflows.Individual assets or cash-generating units that include goodwill and otherintangible assets with an indefinite useful life, or those not yet availablefor use, are tested for impairment at least annually. All other individualassets or cash-generating units are tested for impairment whenever events orchanges in circumstances indicate that the carrying amount may not berecoverable.An impairment loss is recognised for the amount by which the assets orcash-generating unit's carrying amount exceeds its recoverable amount. Therecoverable amount is the higher of fair value, reflecting market conditionsless costs to sell, and value in use, based on an internal discounted cash flowevaluation. Impairment losses recognised for cash-generating units to whichgoodwill has been allocated are credited initially to the carrying amount ofgoodwill. Any remaining impairment loss is charged pro rata to the other assetsin the cash generating unit.3.11 Investments in subsidiariesInvestments in subsidiaries are included at cost less provisions forimpairment.3.12 Financial instrumentsFinancial assets and financial liabilities are recognised on the Group'sbalance sheet when the Group becomes a party to the contractual provisions ofthe instrument.Financial assets include cash and financial instruments. Financial assets,other than hedging instruments, can be divided into the following categories:loans and receivables, financial assets at fair value through profit or loss,available-for-sale financial assets and held-to-maturity investments. Financialassets are assigned to the different categories by management on initialrecognition, depending on the purpose for which the investments were acquired.The designation of financial assets is re-evaluated at every reporting date atwhich a choice of classification or accounting treatment is available.All financial assets are recognised on their settlement date. All financialassets that are not classified as at fair value through profit or loss areinitially recognised at fair value plus transaction costs.Derecognition of financial instruments occurs when the rights to receive cashflows from investments expire or are transferred and substantially all of therisks and rewards of ownership have been transferred. An assessment forimpairment is undertaken at least at each balance sheet date whether or notthere is objective evidence that a financial asset or a group of financialassets is impaired.Non-compounding interest and other cash flows resulting from holding financialassets are recognised in profit or loss when received, regardless of how therelated carrying amount of financial assets is measured.Trade receivablesTrade receivables are measured at initial recognition at fair value and aresubsequently measured at fair value less impairment losses. Appropriateallowances for estimated irrecoverable amounts are recognised in profit or losswhen there is objective evidence that the asset is impaired. The allowancerecognised is measured as the difference between the asset's carrying amountand the present value of estimated future cash flows discounted at an effectiveinterest rate computed at initial recognition.Loans receivableLoans receivable are non-derivative financial assets with fixed or determinablepayments that are not quoted in an active market. They arise when the Groupprovides money directly to a debtor with no intention of trading thereceivables. Loans receivable are subsequently measured at amortised cost usingthe effective interest method, less provision for impairment. Any change intheir value is recognised in profit or loss.Cash and cash equivalentsCash and cash equivalents comprise cash on hand and demand deposits that arereadily convertible to a known amount of cash and are subject to aninsignificant risk of change in value.Financial liabilities and equityFinancial liabilities and equity instruments issued by the Group are classifiedaccording to the substance of the contractual arrangements entered into and thedefinitions of a financial liability and an equity instrument. An equityinstrument is any contract that evidences a residual interest in the assets ofthe Group after deducting all of its liabilities. The accounting policiesadopted for specific financial liabilities and equity instruments are set outbelow.Equity instrumentsEquity instruments issued by the Group, other than equity-settled share-basedpayments which are described below, are recorded at the proceeds received netof direct issue costs.Credit riskThe Group's principal financial assets are cash and cash equivalents and tradeand other receivables. The credit risk on cash and cash equivalents is limitedsince the counterparties are banks with high credit ratings. The amountspresented in the balance sheet for trade and other receivables is stated afterallowance is made for any impairment loss.3.13 Operating LeasesAll leases are regarded as operating leases and the payments made under themare charged to the profit and loss account on a straight line basis over thelease term.3.14 InventoriesInventories comprise raw materials, supplies and purchased goods. At thebalance sheet date, inventories are stated at the lower of cost and netrealisable value. Net realisable value is the estimated selling price in theordinary course of business less any applicable selling expense.3.15 ProvisionsProvisions are recognised when the Group has a present obligation as a resultof a past event, and it is probable that the Group will be required to settlethat obligation. Provisions are measured at the directors' best estimate of theexpenditure required to settle the obligation at the balance sheet date, andare discounted to present value where the effect is material.3.16 Share-based paymentsThe Group issues equity-settled share-based payments to certain employees andadvisers. Equity-settled share-based payments are measured at fair value(excluding the effect of non market-based vesting conditions) at the date ofgrant. The fair value so determined is expensed on a straight-line basis overthe vesting period, based on the Group's estimate of the number of shares thatwill eventually vest and adjusted for the effect of non market-based vestingconditions.Fair value is measured using a Binomial pricing model. The key assumptions usedin the model have been adjusted, based on management's best estimate, for theeffects of non-transferrability, exercise restrictions and behaviouralconsiderations.3.17 EquityShare capital is determined using the nominal value of shares that have beenissued.The Share premium account includes any premiums received on the initial issuingof the share capital. Any transaction costs associated with the issuing ofshares are deducted from the Share premium account, net of any related incometax benefits.The Merger reserve represents the difference between the nominal value and themarket value at the date of issue of shares issued in connection with theacquisition by the group of an interest in over 90% of the share capital ofanother company.Equity-settled share-based payments are credited to a Share-based paymentreserve as a component of equity until related options or warrants areexercised.Foreign currency translation differences are included in the Translationreserve.Retained loss includes all current and prior period results as disclosed in theincome statement.3.18 TaxationThe tax expense recognised in the Income Statement represents the sum of thetax currently payable or receivable and deferred tax.The tax currently payable is based on taxable profit for the year. Taxableprofit differs from profit as reported in the income statement because itexcludes items of income or expense that are taxable or deductible in otheryears and it further excludes items that are never taxable or deductible. TheGroup's liability for current tax is calculated using tax rates that have beenenacted or substantively enacted by the balance sheet date.Tax receivable arises from the UK legislation regarding the treatment ofcertain qualifying research and development costs, allowing for the surrenderof tax losses attributable to such costs in return for a tax rebate.Deferred tax is recognised on differences between the carrying amounts ofassets and liabilities in the financial statements and the corresponding taxbases used in the computation of taxable profit, and is accounted for using thebalance sheet liability method. Deferred tax liabilities are generallyrecognised for all taxable temporary differences and deferred tax assets arerecognised to the extent that it is probable that taxable profits will beavailable against which deductible temporary differences can be utilised. Suchassets and liabilities are not recognised if the temporary difference arisesfrom goodwill or from the initial recognition (other than in a businesscombination) of other assets and liabilities in a transaction that affectsneither the taxable profit nor the accounting profit.Deferred tax liabilities are recognised for taxable temporary differencesarising on investments in subsidiaries and associates, and interests in jointventures, except where the Group is able to control the reversal of thetemporary difference and it is probable that the temporary difference will notreverse in the foreseeable future.The carrying amount of deferred tax assets is reviewed at each balance sheetdate and reduced to the extent that it is no longer probable that sufficienttaxable profits will be available to allow all or part of the asset to berecovered.Deferred tax is calculated at the tax rates that are expected to apply in theperiod when the liability is settled or the asset realised. Deferred tax ischarged or credited to profit or loss, except when it relates to items chargedor credited directly to equity, in which case the deferred tax is also dealtwith in equity.Deferred tax assets and liabilities are offset when there is a legallyenforceable right to set off current tax assets against current tax liabilitiesand when they relate to income taxes levied by the same taxation authority andthe Group intends to settle its current tax assets and liabilities on a netbasis.3.19 Critical accounting judgements and key sources of estimation uncertaintyIn the process of applying the entity's accounting policies, management makesestimates and assumptions that have an effect on the amounts recognised in thefinancial statements. Although these estimates are based on management's bestknowledge of current events and actions, actual results may ultimately differfrom those estimates.The key assumptions concerning the future, and other key sources of estimationuncertainty at the balance sheet date, that have a significant risk of causinga material adjustment to the carrying amounts of assets and liabilities withinthe next financial year, are those relating to the future recoverability ofintangible fixed assets and goodwill and the corresponding review forimpairment of those assets.4. LOSS PER SHAREThe calculation of the loss per share is based on the loss for the financialyear after taxation of ‚£3,584,768 (2004: loss ‚£2,956,163) and on the weightedaverage of 60,875,634 (2004: 23,872,872) ordinary shares in issue during theyear.The figures for 2004 above have been restated to reflect the impact of theadoption of IFRS. Changes in Group accounting policies are described in note 2above. To the extent that those changes have had an impact on the results for2005 and 2004 due to the adoption of IFRS 2: Share-based payments they have hadan impact on the amounts reported for loss per share. The implementation ofIFRS 2 has resulted in an increase in the reported loss per share of 0.47p in2004 and 0.81p in 2005.The options outstanding at 31 December 2004 and 31 December 2005 are consideredto be non-dilutive in that their conversion into ordinary shares would notincrease the net loss per share. Consequently, there is no diluted earnings pershare to report for either year.5. CASH & CASH EQUIVALENTS At 1 Cash At 31 January Flows December Cash at bank 2005 2005 Instant access 1,830,115 616,704 2,446,819 accounts Deposits 801,887 5,842,495 6,644,382 Total 2,632,002 6,459,199 9,091,201 Bank balances comprise cash held by the Group in current and short-term bankdeposits with an original maturity of three months or less. The carrying amountof these assets approximate to their fair value. The deposits held at bank aretreated as cash equivalents under the definitions of IAS 7: Cash FlowStatements. Although the sums are held on short term fixed rate deposit, theyare instantly available to the Group but only by breaking the terms of thedeposit which may incur minor penalties. During the year, the effective ratesof interest on fixed rate deposits ranged between 4.1% and 4.5% per annum.AVAILABILITY OF ACCOUNTSThe full Annual Report will be posted to shareholders shortly and will beavailable online at www.srpharma.com or from the Company's offices at Floor 26,Centre Point, 103 New Oxford Street, London, WC1A 1DD.NOTICE OF ANNUAL GENERAL MEETINGNotice is hereby given that the 2006 Annual General Meeting of SR Pharma plcwill be held at Farmers and Fletchers Hall, 3 Cloth Street, London EC1A 7LD at4.30 pm on Thursday 3 August 2006.BY ORDER OF THE BOARDJ M DAVIESSecretary23 June 2006SR Pharma (www.srpharma.com)SR Pharma plc is a European biopharmaceutical company, listed on AIM. TheCompany has two operating subsidiaries Atugen AG (www.atugen.com) based inBerlin, Germany and Stanford Rook Ltd based in London, UK.Atugen is a leader in RNAi therapeutics. This Company has developed novel,chemically modified proprietary siRNA molecules ("AtuRNAi") and a proprietarydelivery system ("AtuPLEX") both of which have advantages over conventionalsiRNA molecules and their delivery systems. Currently Atugen and itscollaboration partners have lead molecules in pre-clinical development for avariety of therapeutic indications. Clinical development of AtuRNAi therapeuticmolecules for systemic applications in Atugen's oncology programs are scheduledto start in 2007. Other AtuRNAi therapeutic programs of Atugen's collaboratorsare scheduled to commence in 2H 2006.Stanford Rook Ltd is an immunotherapy based company which owns a proprietaryMycobacterium vaccae-based technology and related products, which have beenevaluated in clinical trials for the treatment of asthma, cancer andtuberculosis. In addition it has a number of other proprietaryimmunotherapeutic compounds and related intellectual property. Currently theCompany is in discussions with third parties regarding the co-development andout-licensing of M. vaccae and related products.Forward-Looking StatementsThis press release includes forward-looking statements that are subject torisks, uncertainties and other factors. These risks and uncertainties couldcause actual results to differ materially from those referred to in theforward-looking statements. All forward-looking statements are based oninformation currently available to SR Pharma and SR Pharma assumes noobligation to update any such forward-looking statements.Enquiries:For further information, please contact the following:SR Pharma plc Atugen AG +44(0)20 7307 1620 +49(0)30 9489 2800 Iain Ross Executive Chairman Thomas Christƒ©ly, CEO Melvyn Davies Finance Director Dr. Klaus Giese, CSO Northbank Communications +44(0)20 7886 8150 Sue Charles Justine Lamond Rowan Minnion ENDSR PHARMA PLCRelated Shares:
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