Faron Pharmaceuticals Oy

(“Faron” or the “Company”)

Financial statement release January 1 to December 31, 2019

Financial statement release, Turku, 20 March 2019 at 9.00 AM (EET)

Inside information

TURKU, FINLAND – Faron Pharmaceuticals Oy (AIM: FARN, First North: FARON), the clinical stage biopharmaceutical company, today reports its financial statements for the year ended 31 December 2019 and H2 2019.

HIGHLIGHTS

Operational (including post period):

Clevegen^® – Regulator of major inhibitory immune checkpoints and wholly-owned novel cancer immunotherapy in development

•      Part I of the open label phase I/II MATINS trial, initiated across multiple sites through Europe and primarily intended to investigate safety and tolerability, was completed with dose escalation reaching its planned maximum level of 10mg/kg. Clevegen demonstrated good tolerability at all dosing levels (0.1 to 10 mg/kg) without dose limiting toxicity.

•      Clevegen promoted immune activation in all dosed patients, measured following treatment with Clevegen and observed as increased circulating CD8+ T cells and CD8+/CD4+ ratio, decreased regulatory T-cells (T-regs) or a substantial increase in mobile natural killer (NK) cells in the blood.

•      Partial responses were observed in two patients. The first, a colorectal cancer (CRC) patient, showed a continuation of lung and lymph node metastasis shrinkage and their tumour load biochemical marker, carcinoembryonic antigen (CEA), also normalised. The second, a heavily pre-treated melanoma patient, showed a reduction in the size of the target lesion tumour (a lung metastasis) by 44 percent and other non-target lesions stabilized. Their biochemical tumour load marker also declined and clearance of pleura fluid was observed.

•      Data showing Clevegen’s potential early efficacy and good tolerability were presented at the European Society of Medical Oncology (ESMO) 2019 Congress in Barcelona, Spain. At the Society’s subsequent Immuno-Oncology Congress 2019 in Geneva, Switzerland, more detailed cell surface biomarker data were presented for the first time showing Clevegen’s potential to downregulate a range of inhibitory immune checkpoints commonly targeted by current immuno-oncology (IO) therapies.

•      The US Food and Drug Administration (FDA) approved Faron’s Investigational New Drug (IND) application for Clevegen, enabling expansion of the MATINS trial into the US.

•      CRC and ovarian cancer were selected by the MATINS data monitoring committee as the first and second expansion cohorts in part II of the study. Both cancer types are known to host a significant number of Clever-1 positive tumour-associated macrophages (TAM) which correlates with increased mortality rates.

•      New experimental data supporting the immunotherapeutic blockade of Clever-1 as an alternative to, or in combination with PD-1 checkpoint inhibition to reactivate immunity against immunosuppressive tumours were published in Clinical Cancer Research, a journal of the American Association for Cancer Research.

•      Several new patent filings were carried out during the period to further strengthen the existing IP around Clevegen use in conditions where harmful immune suppression causes serious diseases.

•      bexmarilimab is under consideration by the World Health Organization as the Proposed International Nonproprietary Name.

•      Manufacturing was established to supply drug product for cohort expansions in part II of the MATINS study.

•      Partnering discussions continued with the aim of supporting expansion of clinical development and exploring the potential of Clevegen in combination with existing immunotherapies and other cancer therapies.

Traumakine^® – in development for the treatment of organ failures

•        Faron remains focused on developing Traumakine as a treatment for acute respiratory distress syndrome (ARDS) taking into account the high levels of concomitant corticosteroids used as a standard of care for ARDS and some ruptured abdominal aorta aneurysm (RAAA) patients.

•        Following feedback from the FDA regarding trial design, Faron submitted an amended protocol to the FDA, reflecting the FDA’s feedback that further studies with interferon-beta (IFN-beta) should exclude the use of overlapping corticosteroids since they are likely to block the desired therapeutic effect of Traumakine and may have a potentially deleterious impact on patient outcomes.

•        The FDA accepted Faron’s proposed study protocol for the new Traumakine trial, which excludes the use of concomitant corticosteroids and which will be split in two steps. The first step will commence with INTEGRITY, a pilot randomised and placebo controlled study, which will serve as final adjustment for adequate statistical powering and sample size justification for the pivotal second step, CALIBER.

•        The Company envisages that further Traumakine trials are likely to be funded through a third party.

•        Top-line data from the phase III ARDS trial with Japanese partner Maruishi Pharmaceutical Co., Ltd were, as expected, consistent with the INTEREST study results, showing that treatment with Traumakine did not result in reduced mortality or an increased number of ventilator-free survival days when compared to placebo. In the study, very high concomitant corticosteroids use (77%) was observed.

•        A phase I study in healthy volunteers (pharmacokinetic/dynamic YODA study), examining the administration and concomitant use of corticosteroids with Traumakine, confirmed observations previously seen in the INTEREST study. Traumakine produced the expected levels of bioactivity, suggesting drug formulation was not a factor in the outcome of that trial and that concomitant corticosteroids use interferes in the desired IFN-beta effect on CD73.

•        Interim results from the phase II INFORAAA study examining the effect of Traumakine on mortality (predominantly for multi-organ failure, MOF) and on pharmacodynamic biomarkers in surgically operated RAAA patients, showed biomarker (MxA and CD73) responses indicating a good IFN-beta response from Traumakine. A trend towards reduction of mortality was seen in patients increasing their CD73 plasma levels.

•        Based on the advice from the INFORAAA independent data monitoring committee and investigators, the Company decided to close the INFORAAA trial, as unexpected high use of concomitant corticosteroids prevent the scientific implementation of the INFORAAA protocol.

•        Faron filed a request for arbitration with the Arbitration Institute of the Stockholm Chamber of Commerce seeking damages from Rentschler Biopharma SE for terminating the API manufacturing process for Traumakine.

•        It is the understanding of the Company that the current API manufacturing process used to manufacture Traumakine requires significant upgrading to secure MAA/BLA approval. Various options for manufacturing are currently being explored.

AOC3 Antagonist Platform Technology

•        In March 2020, Faron acquired rights for the potential new use of AOC3 inhibitors. Faron will be responsible for the future development of the AOC3 protein inhibitor and for the management, prosecution, maintenance and filing of patent applications.

Corporate

•        Yrjö Wichmann took up the new position of Vice President, Financing and Investor Relations and Toni Hänninen was appointed as Faron’s new Chief Financial Officer.

•        Faron’s shares were listed on Nasdaq First North Growth Market Helsinki as of 3 December 2019.

Financial

•        On 31 December 2019, the Company held cash balances of €7.1 million (2018: €4.1 million).

•        Loss for the period for the financial year ended 31 December 2019 was €13.3 million (2018: €20.1 million loss).

•        Net assets on 31 December 2019 were €1.6 million (2018: €0.4 million).

•        During the period, in November, August, May and March 2019, the Company successfully raised a total of €15.6 million gross (€14.5 million net) from new and existing shareholders, employees and Company Directors through issuance of a total of 12,262,853 new ordinary shares. The majority of these proceeds are being used to advance Clevegen through the MATINS trial, further Traumakine development through the design and preparation of the next clinical trials and advance partnering discussions in respect of both Traumakine and Clevegen.

FINANCIAL

Consolidated key figures, IFRS

€’000	Unaudited 7-12/2019 6 months	Unaudited 7-12/2018 6 months	1-12/2019 12 months	1-12/2018 12 months
Revenue	0	(1)	0	19
Research and Development expenses	(5,255)	(4,762)	(10,237)	(16,463)
General and Administrative expenses	(1,688)	(1,378)	(3,049)	(3,750)
Loss for the period	(6,850)	(6,026)	(13,262)	(20,086)

	Unaudited 7-12/2019 6 months	Unaudited 7-12/2018 6 months	1-12/2019 12 months	1-12/2018 12 months
Loss per share EUR	(0.16)	(0.19)	(0.31)	(0.65)
Number of shares at end of period	43,290,747	31,027,894	43,290,747	31,027,894
Average number of shares	35,533,179	30,749,648	35,533,179	30,749,648

€’000	Unaudited 30 Jun 2019	Unaudited 30 Jun 2018	31 Dec 2019	31 Dec 2018
Cash and cash equivalents	2,892	11,168	7,059	4,067
Equity	(1,761)	6,722	1,610	369
Balance sheet total	5,103	16,716	10,209	8,002

Commenting on the results, Dr Markku Jalkanen, CEO of Faron, said: “Our priority in 2019 was to rapidly accelerate our immunotherapy candidate, Clevegen, through the clinic. With the continued progression of the phase I/II MATINS trial, we are very encouraged by its results so far. Clevegen is clearly exhibiting exciting properties as a potential immunotherapy capable of down regulating a range of major inhibitory immune checkpoints (PD-1, PD-L1, CTLA-4) across several cancers. With our two cohort expansions in colorectal and ovarian cancer, we will continue to rapidly progress the development of Clevegen in patients with limited effective treatment options.   

“We are also pleased that, following feedback from the FDA, we have agreed the trial design for the continued clinical development of Traumakine, which we continue to believe holds great potential as a future treatment for ARDS, regardless of the underlying condition.

“We are very pleased to also have secured a further EUR 8 million through our series of fundraises in late 2019, further supporting the progress of our pipeline. I would like to thank our new and existing shareholders, and the entire team at Faron, for their continued support.”

Board of Directors’ Proposal on the Dividend

The Group’s loss for the accounting period was 13,261,911.93 euro (2018: 20,086,402.60 euro).

The Board of Directors does not recommend the payment of a dividend (2018: nil).

March 19, 2020

Faron Pharmaceuticals

Board of Directors

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 (“MAR”).

Conference call information

Faron will host a conference call for analysts to provide an update on the results followed by a Q&A session at 09:30 GMT / 11:30 EET. A presentation to accompany the call will be available on the Faron website (https://www.faron.com/investors/results) at 09:00 GMT / 11:00 EET

Dial-in details are:

International: +44 (0) 20 7192 8000

Finland: (09) 4245 0806
Conference ID: 7377079

For more information please contact:

Faron Pharmaceuticals Oy

Dr Markku Jalkanen, Chief Executive Officer

investor.relations@faron.com

Panmure Gordon (UK) Limited, Nomad and Broker

Emma Earl, Freddy Crossley (Corporate Finance)

James Stearns (Corporate Broking)

Phone: +44 207 886 2500

Sisu Partners Oy, Certified Adviser on Nasdaq First North

Juha Karttunen, Jussi Majamaa

Phone: +358 (0)40 555 4727

Consilium Strategic Communications

Mary-Jane Elliott, David Daley, Lindsey Neville

Phone: +44 (0)20 3709 5700

E-mail: faron@consilium-comms.com 

Publication of financial information during year 2020

The half-year financial report for the period 1 January to 30 June 2020 is scheduled to be published on 24 September 2020. Faron’s financial statements for full year 2019 will be published on 25 March and will also be available on the Company’s website at https://www.faron.com/investors/results.

The Annual General Meeting is planned for 15 April 2020. A separate stock exchange notice will be issued by Faron’s Board of Directors to convene the meeting.

About Faron Pharmaceuticals Ltd

Faron (AIM:FARN, First North: FARON) is a clinical stage biopharmaceutical company developing novel treatments for medical conditions with significant unmet needs. The Company currently has a pipeline based on the receptors involved in regulation of immune response in oncology and organ damage. Clevegen, its precision immunotherapy, is a novel anti-Clever-1 antibody with the ability to switch immune suppression to immune activation in various conditions, with potential across oncology, infectious disease and vaccine development. Currently in phase I/II clinical development as a novel macrophage checkpoint immunotherapy for patients with untreatable solid tumours, Clevegen has potential as a single-agent therapy or in combination with other immune checkpoint molecules or standard of care therapies. Traumakine, the Company’s pipeline candidate to prevent vascular leakage and organ failures, has completed a phase III clinical trial in Acute Respiratory Distress Syndrome (ARDS). Plans for its future development are being finalised to avoid interfering steroid use together with Traumakine. Faron is based in Turku, Finland. Further information is available at www.faron.com

Caution regarding forward looking statements

Certain statements in this announcement, are, or may be deemed to be, forward looking statements. Forward looking statements are identified by their use of terms and phrases such as ”believe”, ”could”, “should”, “expect”, “hope”, “seek”, ”envisage”, ”estimate”, ”intend”, ”may”, ”plan”, ”potentially”, ”will” or the negative of those, variations or comparable expressions, including references to assumptions. These forward-looking statements are not based on historical facts but rather on the Directors’ current expectations and assumptions regarding the Company’s future growth, results of operations, performance, future capital and other expenditures (including the amount, nature and sources of funding thereof), competitive advantages, business prospects and opportunities. Such forward looking statements reflect the Directors’ current beliefs and assumptions and are based on information currently available to the Directors.

A number of factors could cause actual results to differ materially from the results and expectations discussed in the forward-looking statements, many of which are beyond the control of the Company. In particular, the early data from initial patients in the MATINS trial may not be replicated in larger patient numbers and the outcome of clinical trials may not be favourable or clinical trials over and above those currently planned may be required before the Company is able to apply for marketing approval for a product.  In addition,  other factors which could cause actual results to differ materially include the ability of the Company to successfully licence its programmes within the anticipated timeframe or at all, risks associated with vulnerability to general economic and business conditions, competition, environmental and other regulatory changes, actions by governmental authorities, the availability of capital markets or other sources of funding, reliance on key personnel, uninsured and underinsured losses and other factors.  Although any forward-looking statements contained in this announcement are based upon what the Directors believe to be reasonable assumptions, the Company cannot assure investors that actual results will be consistent with such forward looking statements. Accordingly, readers are cautioned not to place undue reliance on forward looking statements. Subject to any continuing obligations under applicable law or any relevant AIM Rule requirements, in providing this information the Company does not undertake any obligation to publicly update or revise any of the forward-looking statements or to advise of any change in events, conditions or circumstances on which any such statement is based.

Chairman’s statement

2019 was a significant year for Faron. The highly experienced management team made significant progress executing the Company’s strategy and maintaining momentum in the delivery of its novel pipeline.

The development programme for Faron’s wholly-owned novel precision cancer immunotherapy candidate, Clevegen, has accelerated rapidly. Promising early clinical data continued to give us confidence in the potential of Clevegen as a next-generation immuno-oncology therapy and one that could potentially be used in combination therapy. The strength of the early clinical data generated in 2019 enabled the Clevegen team to quickly identify a group of patients thought most likely to respond to treatment. Selection of the first expansion cohort in colorectal cancer was a significant achievement and is testament to the focus Faron has placed on Clevegen’s development this year. The US Food and Drug Administration (FDA) approval of the Company’s Investigational New Drug (IND) application for Clevegen was a major development milestone enabling expansion of Clevegen’s clinical development in the US.

Harnessing the immune system to fight cancer has transformed the way patients are treated and scientists continue to make new discoveries in the field of immune-oncology every day. It is exciting to see the Clevegen programme generating such interest in this field, from the scientific community and commercial organisations. The wealth of data generated in 2019 strengthens Faron’s confidence in the programme’s future.

Alongside Clevegen’s development progress in 2019, the Company continued to build on its understanding of the results from Traumakine’s INTEREST trial. Data from a late-stage trial undertaken by our Japanese partner Maruishi were consistent with our study results a year earlier and supported our observation that corticosteroid use interferes with Traumakine efficacy. This observation has since been confirmed by the FDA who, following discussions about the future development path for Traumakine, advised that further studies should exclude the concomitant use of steroids. The body of evidence generated during Traumakine’s development programme is clearly a matter of interest for opinion leaders involved in the treatment of acute respiratory distress syndrome (ARDS) patients and the debate around whether corticosteroids have any beneficial role in ARDS patients continues.

Recent guidance from the World Health Organization (WHO) on the clinical management of severe acute respiratory infection related to the novel coronavirus that emerged in China at the end of 2019 advises against the routine use of corticosteroids. The emergence of this novel virus, and the risk of ARDS among infected patients, is a reminder of the need for new treatments to tackle this potentially fatal condition.

During the year our fundraising activities and our listing on the Nasdaq First North Growth Market in Finland received strong shareholder support enabling us to build a more secure financial position for the Company and give the pipeline its greatest chances of success. It was also encouraging to see the Company’s share price performance in 2019, its growth reflecting the progress of the business and the strength of Faron’s pipeline potential.

On behalf of the Board, I would like to thank all those who have played a part in Faron’s progress in 2019 – the management team, staff and Board for their hard work and commitment, our partners and steering committee members for their support and expertise, and the investigators and patients involved in our clinical trials. I would also like to pay particular thanks to our CEO, Markku Jalkanen who, while guiding Faron through difficult circumstances, has successfully led its transition to becoming a leading immunotherapy company.

We look forward to continued progress with our pipeline products Clevegen and Traumakine in 2020.

Dr Frank Armstrong

Chairman

March 19, 2020

Chief Executive Officer’s Review 

Overview

Faron is focused on immuno-oncology, organ trauma and vascular damage. Our goal is to save lives by developing unique scientific discoveries into ground-breaking new treatments for hard-to-treat and rare diseases. Our work is rooted in two scientific principles. First, a deep knowledge of the pharmacology of our drug candidates. And second, understanding the science of the targeted conditions at the molecular level, to most effectively influence their underlying causes.

Our focus for 2019 has been to continue to progress our wholly-owned novel precision cancer immunotherapy candidate, Clevegen, through the first-in-human clinical study, MATINS, in selected metastatic or inoperable solid tumours. We have also been working closely with the regulatory authorities to determine the future development pathway for Traumakine in ARDS and organ failures.

Clevegen Development

We have made significant, and exciting, clinical progress with Clevegen during 2019. Clevegen is our wholly-owned novel precision cancer immunotherapy candidate, which causes conversion of the immune environment around a tumour from immune-suppressive to immune-stimulating by reducing the number and function of tumour-associated macrophages (TAMs). Clevegen is differentiated from other immunotherapies through its specific targeting of M2 TAMs which facilitate tumour growth. Through myeloid cell plasticity, Clevegen can convert these M2 TAMs to M1s, leaving existing M1 TAMs intact and allowing both to support immune activation against tumours. We believe it has the potential to function as a novel macrophage checkpoint immunotherapy both as a monotherapy and in combination with other immuno-oncology therapies or standard of care treatments.

MATINS Trial

The MATINS (Macrophage Antibody To INhibit immune Suppression) study is a first-in-human open label phase I/II clinical trial with an adaptive design to investigate the safety and efficacy of Clevegen in selected metastatic or inoperable solid tumours. The selected tumours under investigation are cutaneous melanoma, hepatobiliary/hepatocellular, pancreatic, ovarian and colorectal cancer, all known to host a significant number of Clever-1 positive TAMs. Together these five target groups consist of approximately 2 million annual cases worldwide. Cancer patients with high Clever-1 expression are identified with a simple blood myeloid cell staining with Clevegen (“liquid biopsy”).

Part I of the MATINS study was conducted to establish tolerability, safety and dose escalation to optimize dosing. Subjects in Part I of the study received doses of 0.1 mg/ kg, 0.3 mg/kg, 1.0 mg/kg, 3.0 mg/kg and 10 mg/kg. All dose levels tested showed good tolerability with no dose limiting toxicity signals and all subjects dosed in the study experienced a switch in their immune cell profiles following treatment with Clevegen towards increased immune activation, observed as increased circulating CD8+ T cells and CD8+/CD4+ ratio, decreased regulatory T-cells (T-regs) or a substantial increase in mobile natural killer (NK) cells in the blood.

Based on results from the initial part of the MATINS trial, Faron announced in April 2019 that late-stage colorectal cancer (CRC) had been chosen for the first expansion cohort for the second part of the trial. Following the successful conclusion of the dose escalation in Part I, and with approval from the MATINS trial’s data monitoring committee (DMC), Faron initiated this first expansion cohort, Part II, in January 2020. A total of 10 late-stage CRC patients are expected to be dosed at the approved initial dose level of 0.3 mg/kg cohort, including two patients who had previously received this dose in the earlier Part I of the study. Furthermore, in January 2020, we announced that ovarian cancer has been selected as the second expansion cohort in the trial. Both these tumour types are known to host a significant number of Clever-1 positive TAMs which correlates with increased mortality rates among these patients.

In November 2019, the FDA approved the Company’s Investigational New Drug (IND) application for Clevegen (FP-1305), enabling expansion of the MATINS trial into the US. We anticipate opening the first site in mid-2020. In due course, we also plan to file applications for Breakthrough Therapy status in the US and PRIME status in Europe, further facilitating regulatory interactions during the development of Clevegen.

Clevegen’s ability to down regulate a range of major inhibitory checkpoints reaffirms our belief in its potential as a master regulator of immunity and a highly effective immunotherapy. It indicates that Clevegen treatment could potentially allow increased efficacy of other immuno-oncology therapies through the biomarker analysis of patient’s blood cells post Clevegen induced immune activation, finally offering a biological rationale to guide combination therapies. Due to high interest in the potential for new combination therapies in the immuno-oncology field, we are currently engaged in partnering discussions with several parties and hope for a positive outcome from these negotiations during 2020.

Traumakine Development

With no currently approved pharmacological treatments available, acute respiratory distress syndrome (ARDS) remains a significant problem for patients and healthcare systems. During 2019, the Company has continued to further understand the correlation between the combined use of corticosteroids and IFN-beta and has been working closely with the regulatory authorities in order to determine the next steps in Traumakine’s future development pathway.

In April 2019, Faron announced top-line data from the Phase III trial with Japanese partner Maruishi Pharmaceutical Co., Ltd. Results from this trial were in line with the Company’s expectations, and previously announced results observed in the INTEREST trial, showing that treatment with Traumakine did not result in reduced mortality or an increased number of ventilator free survival days when compared to placebo. In order to further examine the effects of concomitant steroid use and Traumakine, as seen in both the INTEREST trial and the Japanese study, Faron conducted the pharmacokinetic/dynamic YODA study in healthy volunteers. Results from this study, announced in June 2019, were consistent with the INTEREST data, supporting the conclusion that coadministration of steroids with Traumakine in patients inhibits IFN-beta action.

Also, in June 2019, Faron announced interim results from the Phase II INFORAAA study, which examined the effect of Traumakine on mortality (predominantly for multi-organ failure, MOF) and pharmacodynamic biomarkers of surgically operated ruptured abdominal aorta aneurysm (RAAA) patients. Based on the advice from the INFORAAA independent data monitoring committee and investigators, the Company decided to close the INFORAAA trial, as unexpected high use of concomitant corticosteroids was preventing the scientific implementation of the INFORAAA protocol.

Interestingly, in January 2020, the World Health Organization (WHO) published a recommendation recognising the risk of using corticosteroids on patients with coronavirus. This recommendation aligns with our findings from the post-hoc analysis of the INTEREST study and strengthens our belief that the whole medical community should be more diligent with regard to the combined use of corticosteroids and type I interferons. Faron’s scientific network has also confirmed this interaction at a molecular level in lung endothelial cells.

The Company remains committed to progressing Traumakine for the treatment of ARDS and, following the Company’s revised protocol submission in February 2020, the FDA have now accepted the protocol design for the next Traumkine study. The study design reflects the feedback and conclusions from the FDA that further studies with IFN beta should exclude the use of concomitant glucocorticoids since they are likely to block the desired therapeutic effect of Traumakine and may have a potentially deleterious impact on patient survival. We are planning to split the clinical development of Traumakine in ARDS into two steps, commencing with INTEGRITY, a pilot randomised and placebo controlled study with approximately 60 patients. The INTEGRITY data will then serve as final adjustment for adequate statistical powering and sample size justification for the pivotal CALIBER study, subjected for FDA review. We expect that the sample size of the CALIBER study will not exceed 200 patients based on the post hoc analysis of the INTEREST trial data. We envisage that future Traumakine trials (including INTEGRITY and CALIBER) are likely to be funded through a third party or parties.

AOC3 Antagonist Platform Technology

In March 2020, Faron announced it had acquired rights for the potential new use of AOC3 inhibitors covered by a recently filed patent application. The AOC3 enzymatic domain, a semicarbazide-sensitive amine oxidase, is known to produce hydrogen peroxide, a potent inflammatory mediator. Being expressed by many inflamed vascular endothelial cells, the AOC3 overexpression has been connected with many vascular diseases.

Faron will be responsible for future development of the invention and for the management, prosecution and maintenance of any patent applications as well as for the filing of new patent applications for the AOC3 protein inhibitor. Pre-clinical studies with humanized AOC3 mice and with ex vivo human cells in relation to the Invention are currently ongoing and further information will be provided later in the year.

Corporate

On 3 December 2019, Faron started trading on Nasdaq First North Growth Market (“Nasdaq First North”), a multilateral trading facility operated by Nasdaq Helsinki Ltd. The ISIN code of Faron’s ordinary shares is FI4000153309 and the trading code on Nasdaq First North is FARON. This is in addition to Faron’s listing, since November 2015, on AIM.

In October 2019, Faron received a letter from Rentschler Biopharma SE (“Rentschler”) in which Rentschler stated that it was terminating the agreement concerning the API manufacturing for Traumakine. Following a detailed investigation by Faron into the circumstances around manufacturing arrangements, the Company has since concluded that, in its view, Rentschler was in breach of the underlying agreement between the parties. Faron has filed a request for arbitration, funded by a third party on a non-recourse basis, with the Arbitration Institute of the Stockholm Chamber of Commerce seeking damages.

In May 2019, Yrjö Wichmann left his role as the Company’s Chief Financial Officer to take up the new position of Vice President, Financing and Investor Relations. Mr Wichmann remains a member of the senior management team but stepped down from the Board with effect from 28 May 2019. We were delighted to welcome Mr Toni Hänninen as Faron’s new CFO, effective from 1 June 2019, being responsible for both internal and external reporting.

The Annual General Meeting held on 28 May 2019 resolved the number of members of the Board as six. Frank Armstrong, Markku Jalkanen, Matti Manner, Leopoldo Zambeletti, Gregory Brown and John Poulos were re-elected to the Board for a term that ends at the end of the next AGM.

Financial

During the period, the Company successfully raised approximately EUR 15.6 million (gross), EUR 14.5 million (net) from new and existing shareholders, employees and Company Directors. The majority of these proceeds are being used to advance Clevegen through the MATINS trial, further Traumakine development through the design and preparation of the next clinical trials and advance partnering discussions in respect of both Traumakine and Clevegen.

Outlook

Our focus for 2020 will be to continue to expedite Clevegen’s clinical development through part II and part III of the MATINS trial and to report these data to regulatory authorities. We will also continue to work in close collaboration with the regulatory authorities in order to progress the INTEGRITY and CALIBER clinical trials and secure Traumakine’s future development pathway. We are continuing to make progress with potential partners regarding both Clevegen and Traumakine, whilst also exploring funding opportunities to ensure we can continue to progress both products. I would like to thank our shareholders for their continued belief in the Company and the management team for their hard-work and dedication and look forward to updating the market on our progress throughout the course of the year.

The Board anticipates the following pipeline progress and catalysts during 2020:

Clevegen:

•        Completion of all biomarker analyses from MATINS Part I patients to guide Clevegen dosing

•        Initiation of the second expansion cohort, ovarian cancer, during H1-2020

•        Initial data from the first expansion cohort (CRC) expected in Q2-2020

•        Expansion of the MATINS trial to leading cancer centres in France and Spain in Q2-2020

•        Opening of US study sites to facilitate rapid expansion of the MATINS trial in Q2-2020

•        Partnering update during 2020

Traumakine:

•        Further updates in relation to INTEGRITY and CALIBER during 2020

•        Continuation plans to be announced in H2-2020

AOC3 Antagonist Platform Technology:

•        Additional information from pre-clinical studies with humanized AOC3 mice and with ex vivo human cells during 2020

Dr Markku Jalkanen

Chief Executive Officer

March 19, 2020

Financial review

Key Performance Indicator

As a clinical stage drug development company, Faron’s primary interconnected KPIs are cash burn and cash position. The Company conducted several successful fundraises during 2019. The Company’s net cash flow showed €3.0 million positive due to a reduction in expenses and said fundraises. The Board will consider the appropriateness of monitoring additional KPIs as the Company’s operations advance.

Revenue and Other Operating Income

The Company’s revenue was €0.0 million for the year ended 31 December 2019 (2018: €nil).

The Company recorded €0.2 million (2018: €0.2 million) of other operating income. This consisted of the reimbursement of already occurred legal expenses by the third-party recovery services provider as announced by the Company on 30 December 2019.

Research and development costs

The R&D costs decreased by €6.3 million from €16.5 million in 2018 to €10.2 million in 2019. The costs of outsourced clinical trial services were reduced by €3.4 million from €5.3 to €1.9 million. The cost of materials and services used in the R&D was reduced by €1.7 million from €7.3 to €5.6 million.

General and administration costs

Administrative expenses decreased by €0.8 million from €3.8 million in 2018 to €3.0 million in 2019. The decrease was mainly due to the €1.4 million decrease in external costs related to the development of internal financial and reporting processes during 2018, but this was partially offset by an increase of €0.7 million in the other administrative expenses.

Taxation

The Company’s tax credit for the fiscal year 2019 can be recorded only after the Finnish tax authorities have approved the tax report and confirmed the amount of tax-deductible. The total amount of cumulative tax losses carried forward approved by tax authorities on 31 December 2019 was €16.1 million (2018: €11.2 million). The Company estimates that it can utilise most of these during the years 2020 to 2028 by offsetting them against future profits. In addition, Faron has €58.6 million of R&D costs incurred in the financial years 2010 – 2019 that have not yet been deducted in its taxation. This amount can be deducted over an indefinite period at the Company’s discretion.

Losses

Loss before income tax was €13.3 million (2018: €20.1 million). Net loss for the year was €13.3 million (2018: €20.1 million), representing a loss of €0.31 per share (2018: €0.65 per share) (adjusted for the changes in number of issued shares).

Cash Flows

Net cash flow was €3.0 million positive for the year ended 31 December 2019 (2018: €5.3 million negative). Cash used for operating activities decreased by €9.0 million to €11.5 million for the year, compared to €20.5 million for the year ended 31 December 2018. This decrease was mostly driven by a decrease in R&D investments.

Net cash inflow from financing activities was €14.5 million (2018: €15.5 million) due to the successful equity placings completed in during 2019.

Fundraising

During the period, 1 January to 31 December 2019, the Company successfully raised a total of €15.6 million gross (€14.5 million net) across several fundraises from new and existing shareholders, employees and Company Directors. The majority of these proceeds are being used to advance Clevegen through the MATINS trial, further Traumakine development through the design and preparation of the next clinical trials and advance partnering discussions in respect of both Traumakine and Clevegen.

•        In March 2019, €3.1 million gross (€2.9 net) through issuance of new ordinary shares.

•        In May 2019, €1.3 million gross (€1.3 net) through issuance of new ordinary shares.

•        In August 2019, €2.5 gross (€2.2 net) million through issuance of new ordinary shares.

•        In November 2019, €8.7 million gross (€8.0 net) through issuance of new ordinary shares.

Financial Position 

As at 31 December 2019, total cash and cash equivalents held were €7.1 million (2018: €4.1 million). The Company continues to exercise tight cost control to keep the cash burn as low as possible for preservation of existing resources.

Going Concern

As part of their going concern review, the Directors have followed the Finnish Limited Liability Companies Act, the Finnish Accounting Act and the guidelines published by the Financial Reporting Council entitled “Guidance on the Going Concern Basis of Accounting and Reporting on Solvency and Liquidity Risks – Guidance for directors of companies that do not apply the UK Corporate Governance Code”. The Company and its subsidiaries (the “Group”) are subject to a number of risks similar to those of other development stage pharmaceutical companies. These risks include, amongst others, generation of revenues in due course from the development portfolio and risks associated with research, development, testing and obtaining related regulatory approvals of its pipeline products. Ultimately, the attainment of profitable operations is dependent on future uncertain events which include obtaining adequate financing to fulfil the Group’s commercial and development activities and generating a level of revenue adequate to support the Group’s cost structure.

The Group made a net loss of €13.3 million during the year ended 31 December 2019. It had total equity of €1.6 million including an accumulated deficit of €80.0 million. As at that date, the Group had cash and cash equivalents of €7.1 million.

The Directors have prepared detailed financial forecasts and cash flows looking beyond 12 months from the date of the approval of these financial statements. In developing these forecasts, the Directors have made assumptions based upon their view of the current and future economic conditions that are expected to prevail over the forecast period. The Directors estimate that the cash held by the Group together with known receivables will be sufficient to support the current level of activities into the fourth quarter of 2020. The Directors are continuing to explore sources of finance available to the Group and they believe they have a reasonable expectation that they will be able to secure sufficient cash inflows for the Group to continue its activities for not less than 12 months from the date of approval of these financial statements; they have therefore prepared the financial statements on a going concern basis.

Because the additional finance is not committed at the date of issuance of these financial statements, these circumstances represent a material uncertainty that may cast significant doubt on the Company’s ability to continue as going concern. Should the Group be unable to obtain further finance such that the going concern basis of preparation were no longer appropriate, adjustments would be required, including to reduce balance sheet values of assets to their recoverable amounts, to provide for further liabilities that might arise.

Headcount

Average headcount of the Company for the year was 24 (2018: 25).

Shares and Share Capital

During the period 1 January to 31 December 2019, the Company, using the share authorities granted at the Annual General Meetings held on 31 May 2018 and on 28 May 2019, as well as at an Extraordinary General Meeting held on 25 October 2019, issued a total of 12,262,853 new ordinary shares.

•    On 28 March 2019, 4,448,625 shares at an issuance price of € 0.7020 (£0.60) per share.

•    On 13 May 2019, 1,757,375 shares at an issuance price of € 0.7598 (£0.65) per share.

•    On 5 August 2019, 941,840 shares at an issuance price of € 1.1900 (£1.06) per share.

•    On 27 August 2019, 1,179,513 shares at an issuance price of € 1.1900 (£1.06) per share.

•    On 12 November 2019, 3,935,500 shares at an issuance price of €2.1980 (£1.90) per share.

The subscription price net of costs was credited in full to the Company’s reserve for invested unrestricted equity, and the share capital of the Company was not increased.

The Company has no shares in treasury; therefore at the end of 2019 the total number of voting rights was 43,290,747.

Legal proceedings

As announced by the Company on 2 October 2019 and 30 December 2019, the Company has received a letter from Rentschler Biopharma SE in which Rentschler stated that it terminates the agreement concerning the Traumakine API manufacturing. The Company considers that this statement is without merit and has filed a request for arbitration to seek damages. To fund the proceedings, the Company has entered into a litigation funding agreement with a third-party recovery services provider which, in the event of success, would receive a typical portion of any damages awarded.

Toni Hänninen

Chief Financial Officer

March 19, 2020

 

Consolidated Income Statement, IFRS

€’000	Unaudited 7-12/2019 6 months	Unaudited 7-12/2018 6 months	1-12/2019 12 months	1-12/2018 12 months
Revenue	0	(1)	0	19
Other operating income	185	191	185	205
Research and development expenses	(5,255)	(4,762)	(10,237)	(16,463)
General and administrative expenses	(1,688)	(1,378)	(3,049)	(3,750)
Operating loss	(6,758)	(5,951)	(13,101)	(19,989)
Financial expense	(151)	(70)	(224)	(397)
Financial income	69	(3)	74	302
Loss before tax	(6,840)	(6,024)	(13,251)	(20,084)
Tax expense	(10)	(2)	(11)	(2)
Loss for the period	(6,850)	(6,026)	(13,262)	(20,086)
Other comprehensive income	–	–	–	–
Total comprehensive loss for the period	(6,850)	(6,026)	(13,262)	(20,086)
Loss per ordinary share
Basic and diluted loss per share, EUR	(0.16)	(0.19)	(0.31)	(0.65)

Faron Pharmaceuticals Ltd

(“Faron” or the “Company”)

Interim results for the six months ended 30 June 2019

TURKU – FINLAND, 23 September 2019 – Faron (AIM: FARN), the clinical stage biopharmaceutical company, today announces its unaudited interim results for the six months ended 30 June 2019 (the “Period”).

HIGHLIGHTS  

Operational (including post Period-end):

Clevegen^®  – wholly-owned novel cancer immunotherapy in clinical development

• Dose escalation reached its planned maximum level of 10mg/kg in the open label phase I/II MATINS study and data from 11 subjects, dosed across three sites in Finland and the UK, indicated Clevegen’s potential early efficacy and good tolerability.
• All subjects showed a switch in their immune cell profiles towards increased immune activation, demonstrating the biological effect of Clevegen.
• The first partial responder observed among colorectal cancer (CRC) patients showed a continuation of lung and lymph node metastasis shrinkage. The subject’s tumour load biochemical marker, carcinoembryonic antigen (CEA), also normalised.
• CRC was selected as a first expansion cohort for part II of the trial. Simon’s two-stage statistical design will be utilised during parts II and III to predict cohort sizes for efficacy and regulatory acceptance.
• A pre-IND package was filed with the FDA, to be followed by the IND submission and to enable new trial site openings in the US. Planning commenced to include top clinical cancer research centres in France and Spain as the next European countries to join the trial.
• New experimental data supporting the immunotherapeutic blockade of Clever-1 as an alternative to, or in combination with PD-1 checkpoint inhibition to reactivate immunity against immunosuppressive tumours was published in Clinical Cancer Research, a journal of the American Association for Cancer Research.
• Data from the MATINS study was selected for a poster discussion presentation at the European Society of Medical Oncology (ESMO) 2019 Congress, taking place in Barcelona between 27 September and 1 October 2019.
• Several new patent filings have been carried out during the period to further strengthen the existing IP around Clevegen use in conditions where harmful immune suppression causes serious diseases.
• Manufacturing has been established to supply drug product for cohort expansions in part II of the MATINS study.
• Partnering discussions continue with the aim of supporting expansion of clinical development and exploring the potential of Clevegen in combination with existing immunotherapies.

Traumakine^® – in development for the treatment of ARDS and organ failures without interfering corticosteoids

• Top-line data from the phase III ARDS trial with Japanese partner Maruishi Pharmaceutical Co., Ltd were, as expected, consistent with the INTEREST study results, showing that treatment with Traumakine did not result in reduced mortality or an increased number of ventilator-free survival days when compared to placebo. In the study very high concomitant glucocorticoid use (77%) was observed.
• A phase I study in healthy volunteers (pharmacokinetic/dynamic YODA study), examining the administration and concomitant use of corticosteroids with Traumakine, confirmed observations previously seen in the INTEREST study. Traumakine produced the expected levels of bioactivity, suggesting drug formulation was not a factor in the outcome of that trial and that concomitant corticosteroid use interferes in the desired interferon-beta effect on CD73.
• Interim results from the phase II INFORAAA study examining the effect of Traumakine on mortality (predominantly for Multi-Organ Failure, MOF) and on pharmacodynamic biomarkers in surgically operated Ruptured Abdominal Aorta Aneurysm (RAAA) patients, showed biomarker (MxA and CD73) responses indicating a good interferon-beta response from Traumakine. A trend toward reduction of mortality was seen in patients increasing their CD73 plasma levels.
• Based on the advice from the INFORAAA Independent Data Monitoring Committee and investigators, the Company has decided to close the INFORAAA trial, as unexpected high use of concomitant corticosteroids prevent the scientific implementation of the INFORAAA protocol.
• Faron remains focused on designing a new global phase III trial for Traumakine treatment (CALIBER) for the treatment of ARDS taking into account the high levels of concomitant steroids used as a standard of care for ARDS and some RAAA patients, and is in the process of seeking scientific advice from regulatory authorities on the proposed new trial structure.
• It is the understanding of the Company that the current API manufacturing process used to manufacture Traumakine requires significant upgrading to secure MAA/BLA approval. Various options are currently explored.
• The Company envisages that further Traumakine trials are likely to be funded through a third party.

Group financial

• Raised EUR 4.5 million (net EUR 4.2 million) in aggregate through a placing and subscription in March and May 2019 at an issue price of Eur 0.76 (£0.65) per share.
• Cash balances of EUR 2.9 million at 30 June 2019 (2018: EUR 11.2 million).
• Operating loss of EUR 6.3 million for the six months ended 30 June 2019 (2018: EUR 14.0 million).
• Net assets of EUR −1.8 million (2018: EUR 6.7 million) as at 30 June 2019.
• Post the Period-end raised approximately EUR 2.5 million (before expenses) through an issue of equity consisting of subscriptions and an open offer at an issue price of EUR 1.19 (GBP 1.06) per share.
• The net proceeds of the post-Period fundraise are expected to provide the Company with working capital into Q1 2020. 

Commenting on the results, Dr Markku Jalkanen, CEO of Faron, said: “We have focused on two important matters during H1-2019, MATINS study progress and the re-design of Traumakine’s development pathway. I am delighted to report that both of these have advanced significantly. Our novel precision cancer immunotherapy, Clevegen, has been well tolerated in cancer patients with advanced solid tumours, all showing an immune switch that we predicted based on the preclinical data and expected mode of action of Clevegen. We have also observed a first partial responder showing a constant decline of tumour burden in tumour imaging and biochemical markers. The response in this patient, who suffers from colorectal cancer (MSI low type) and has failed on all previous treatments, is a promising indicator of Clevegen’s potential.

“It has become clear that Traumakine’s development requires a study design which would avoid concomitant corticosteroid use. Faron’s solution is a design which would allow corticosteroid use within the standard of care arm but never in combination with Traumakine. As soon as the Company receives feedback for this new design, we will finalise plans to allow us to progress third party funding discussions. The unmet medical need among these patients is significant and the widespread use of corticosteroids for ARDS and multi-organ failures requires serious re-consideration.

“I am pleased that, through the recent fundraise, the Company is in a more secure financial position while we explore partnering activities for Clevegen and funding opportunities for Traumakine. I would like to thank shareholders, both new and existing, for their support of Faron.”

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 (MAR).

For more information please contact:

Faron Pharmaceuticals Ltd

Dr Markku Jalkanen, Chief Executive Officer

investor.relations@faron.com 

Consilium Strategic Communications

Mary-Jane Elliott, David Daley, Lindsey Neville

Phone: +44 (0)20 3709 5700

E-mail: faron@consilium-comms.com

Westwicke Partners, IR (US)

Chris Brinzey

Phone: 01 339 970 2843

E-mail: chris.brinzey@westwicke.com

Panmure Gordon (UK) Limited, Nomad and Broker

Emma Earl, Freddy Crossley (Corporate Finance)

James Stearns (Corporate Broking) 

Phone: +44 207 886 2500

About Faron Pharmaceuticals Ltd

Faron (AIM:FARN) is a clinical stage biopharmaceutical company developing novel treatments for medical conditions with significant unmet needs. The Company currently has a pipeline based on the endothelial receptors involved in regulation of immune response, in oncology and organ damage. Clevegen, its precision immunotherapy, is a novel anti-Clever-1 antibody with the ability to switch immune suppression to immune activation in various conditions, with potential across oncology, infectious disease and vaccine development. Currently in phase I/II clinical development as a novel macrophage checkpoint immunotherapy for patients with untreatable solid tumours, Clevegen has potential as a single-agent therapy or in combination with other immune checkpoint molecules. Traumakine, the Company’s pipeline candidate to prevent vascular leakage and organ failures, has completed a phase III clinical trial in Acute Respiratory Distress Syndrome (ARDS).Plans for its future development are being finalised to avoid interfering steroid use together with Traumakine. Faron is based in Turku, Finland. Further information is available at www.faron.com.

Chairman’s and Chief Executive Officer’s Review

Introduction

Faron’s two projects Clevegen and Traumakine are based on long term research findings made by the Company’s scientific network. This network has shown again its vital role through our work to understand the unexpected results from the INTEREST study – the  interfering role of corticosteroids on exogenous and endogenous action of interferon-beta. This analysis has penetrated to molecular signalling pathways and could have a significant impact on the wide use of corticosteroids in emergency conditions. Similarly, Clevegen’s mode of action has advanced the detailed understanding of how Clever-1 blockade results in an immune switch needed by cancer patients who are immune suppressed by their disease progress. Therefore, the Company believes that both projects are today on solid grounds to move forward and in this report we provide further information on their progress.

Clevegen – encouraging phase I/II MATINS data show potential of novel cancer immunotherapy

In the first half of 2019, the Company’s focus has been on progressing the MATINS study, the first-in-human open label phase I/II clinical trial with an adaptive design to investigate the safety and efficacy of Clevegen in selected metastatic or inoperable solid tumours. The selected tumours under investigation are cutaneous melanoma, hepatobiliary/hepatocellular, pancreatic, ovarian and colorectal cancer, all known to host a significant number of Clever-1 positive tumour associated macrophages (TAM). Together these five target groups consist of approximately 2 million annual cases worldwide. Cancer patients with high Clever-1 expression are identified with a simple blood myeloid cell staining with Clevegen (“liquid biopsy”).

Clevegen dosing reached its planned maximum of 10mg/kg in mid-June, which has continued to be well tolerated. No dose limiting toxicity (DLT) nor maximally tolerated dose (MTD) has been observed so far. The trial includes an option to administer a 20mg/kg dose.

Of the 11 subjects dosed so far in the trial, across three clinical trial sites in Finland and the UK, two subjects have shown clinical anti-cancer responses. The first patient, a partial responder with colorectal cancer (CRC) whose initial treatment progress was announced on 11 April 2019, showed a continuation of lung metastasis shrinkage according to the latest tumour imaging report at the end of May. In July, we announced that the subject’s tumour load marker CEA (carcinogenic embryonal antigen), which measures tumour mass of CRC, had also normalised and that a second subject with CRC had shown an initial decrease in CEA (−40%) and tumour stabilization.

All study subjects dosed in the trial have experienced a switch in their immune cell profiles following treatment with Clevegen towards increased immune activation. Typically this has been observed by one or more of the following: increased CD8+ cells, an increase in the CD8+/CD4+ ratio, a decrease in regulatory T-cells (T-regs) and a substantial increase in mobile natural killer (NK) cells in the blood. These changes were measurable immediately post-dosing, indicating a dynamic response in the immunological switch to immune-activation after the immunotherapeutic blockade of Clever-1. Data indicate that dose escalation results in prolonged Clever-1 occupancy of the blood monocytes during the first two weeks of the three-week dosing cycle before a decrease to baseline levels prior to the next dosing cycle. Key data will be presented in a poster discussion session at the European Society of Medical Oncology (ESMO) meeting in Barcelona September 27 – October 1.

The majority of patients in the trial have received 5-7 different treatment lines prior to entering the MATINS study. Faron is investigating why the observed immune activation has not turned into anti-tumour activity in all study subjects but only in part. The Company believes the patient’s immune system receiving Clevegen as a last line of therapy could have been adversely affected by the underlying therapies they have received prior to taking part in the MATINS study, as previous chemotherapies can inactivate bone marrow, preventing revitalization of the immune system. It is also important to note that the partial responder patient with CRC (MSI low type) is resistant to PD-1 treatments, increasing the significance of this response.

The planned distinct cohort expansions during part II of the study will focus on identification of patients who show an increased number of Clever-1 positive circulating monocytes and the safety and efficacy of the treatment. The Company has announced that CRC has been selected as the first expansion cohort in part II and that initiation of this expansion is expected in Q4 2019. Faron also intends, subject to regulatory approval, to amend the MATINS trial to allow inclusion of hormone receptor-positive breast cancer, gastric cancer and uveal melanoma, based on striking translational data on Clever-1 positive cancer types and current poor survival rates and associated with high Clever-1 expression. Additionally, Faron has filed a pre-IND package to the FDA and intends to file a final IND package in early Q4-2019. If accepted, Faron plans to open new sites in the US and facilitate expansion of the CRC cohort as fast as possible. Similarly, Faron is planning to include top cancer centres in France and Spain as the next European countries to join the MATINS trial.

Traumakine – determining a path for future development

Following the detailed analyses undertaken by the Company and its scientific network during 2018 to understand the INTEREST trial results, in 2019 Faron has continued to further explore the potential causes and to determine a way forward for Traumakine’s continued development.

The final part of the pharmacokinetic/dynamic YODA study, examining the administration of concomitant steroids and Traumakine in healthy volunteers, confirmed earlier observations from parts I and II of the study that the INTEREST study drug produced the expected levels of bioactivity, suggesting drug formulation was not a factor in the outcome of the INTEREST trial. Results from YODA also showed that concomitant use of interferon-beta and the corticosteroid prednisolone reduced interferon-beta action, compared to subjects who did not receive steroids. This was evident through both clinical signs of the subjects and reduction of cluster of differentiation 73 (CD73) activity responses measured from blood samples of these subjects.

Results from the Japanese Traumakine phase III trial for ARDS, which included high levels of concomitant corticosteroid use, were in line with results from the INTEREST trial with the effect of corticosteroids showing similar trends to those observed from the INTEREST study.

Interim results of the Company’s phase II study examining the effect of Traumakine on mortality (predominantly MOF) and pharmacodynamic biomarkers of surgically operated RAAA patients (INFORAAA trial) also indicated corticosteroid interference with Traumakine action. Whilst biomarker (MxA and CD73) responses indicated a good interferon-beta response from Traumakine, unexpectedly, concomitant corticosterone was recorded both in the active and placebo treatment arms. The removal of corticosteroid-treated patients from statistical analysis reduced group sizes and made statistical interim mortality analysis meaningless; however, a trend toward reduction of mortality was seen in the Traumakine-treated patients who did not receive corticosteroids.

The Company has conducted a full review of all the Traumakine data with key opinion leaders in order to make decisions on Traumakine’s future development. This review has led to the decision to close the INFORAAA trial given unexpected levels of concomitant corticosteroid use seen in the trial to date which would prevent the scientific implementation of the INFORAAA protocol. The Company is designing a new global phase III trial for Traumakine treatment (CALIBER) for the treatment of ARDS taking into account the high levels of concomitant steroids used as a standard of care for ARDS and some RAAA patients, and is in the process of seeking regulatory feedback on the proposed trial. The Company envisages that further Traumakine trials are likely to be funded through a third party.

Financial review

During the Period, in March and May 2019, the Company successfully raised approximately EUR 4.5 million from new and existing shareholders, employees and Company Directors.  The majority of these proceeds are being used to advance Clevegen through the MATINS trial, further Traumakine development through the design and preparation of the global phase III CALIBER clinical trial and advance partnering discussions in respect of both Traumakine and Clevegen.

Statement of comprehensive income

The loss from operations for the six months ended 30 June 2019 was EUR 6.3 million (six months ended 30 June 2018: loss of EUR 14.0 million). No revenue was generated during the the period or prior revenue. Research and development expenditure decreased by EUR 6.7 million to EUR 5.0 million (2018: EUR 11.7 million). Administrative expenses decreased by EUR 1.0 million to EUR 1.4 million (2018: EUR 2.4 million). Both the research and development and the administrative expenses include the IFRS charge resulting from the options allocated by the Board to the personnel. This had no impact on the cash flow or the Company’s equity.

The loss after tax for the Period was EUR 6.4 million (2018: loss of EUR 14.1 million) and the basic loss per share was 0.17 (2018: loss per share of 0.45).

Statement of financial position and cash flows

At 30 June 2019, net assets amounted to EUR −1.8 million (30 June 2018: EUR 6.7 million). The net cash flow for the first six months in 2019 was EUR −1.1 million (2018:  EUR 1.8 million positive). As at 30 June 2019, total cash and cash equivalents held were EUR 2.9 million (2018: EUR 11.2 million).

Events after the Period

In August 2019, the Company successfully raised approximatey EUR 2.5 million (before expenses) from existing Shareholders. The net proceeds are expected to provide the Company with working capital into early Q1 2020 to further the clinical development of Clevegen. 

Corporate

Yrjö Wichmann left his role as the Company’s Chief Financial Officer to take up the new position of Vice President, Financing and Investor Relations. Mr. Wichmann remains a member of the senior management team but stepped down from the Board with effect from 28 May 2019.

Toni Hänninen was appointed as Faron’s new CFO from 1 June 2019, being responsible for both internal and external reporting.

The annual general meeting held on 28 May 2019 resolved the number of members of the Board as six. Frank Armstrong, Markku Jalkanen, Matti Manner, Leopoldo Zambeletti, Gregory Brown and John Poulos were re-elected to the Board for a term that ends at the end of the next AGM.

Summary & outlook

The successful financing undertaken in H1 2019 will allow us to further progress the clinical programme for Clevegen which, we continue to believe, offers significant potential as a novel immunotherapy for patients in need of new treatment options. Successful completion of part I of the MATINS study and initiation of the cohort expansion phase in colorectal cancer in Q4 2019 will provide important data to support our ongoing negotiations as we seek to enter a licensing agreement for Clevegen. We will also fund the commercialisation preparation of Traumakine by seeking scientific advice and regulatory approval for the CALIBER study in H2 2019.

On behalf of the Board, we would like to thank our new and existing shareholders for their continued support and belief in Faron. While work continues apace to progress development of our two clinical assets we will also continue to preserve cash in order to drive value for shareholders. We look forward to updating shareholders on the pathways for Clevegen and Traumakine over the coming months. 

Caution regarding forward looking statements

Certain statements in this announcement are, or may be deemed to be, forward-looking statements. Forward-looking statements are identified by their use of terms and phrases such as “believe”, “could”, “should”, “expect”, “hope”, “seek”, “envisage”, “estimate”, “intend”, “may”, “plan”, “potentially”, “will” or the negative of those, variations or comparable expressions, including references to assumptions. These forward-looking statements are not based on historical facts but rather on the Directors’ current expectations and assumptions regarding the Company’s future growth, results of operations, performance, future capital and other expenditures (including the amount, nature and sources of funding thereof), competitive advantages, business prospects and opportunities. Such forward-looking statements reflect the Directors’ current beliefs and assumptions and are based on information currently available to the Directors.

A number of factors could cause actual results to differ materially from the results and expectations discussed in the forward-looking statements, many of which are beyond the control of the Company. In particular, the early data from initial patients in the MATINS trial may not be replicated in larger patient numbers and the outcome of clinical trials may not be favourable or clinical trials over and above those currently planned may be required before the Company is able to apply for marketing approval for a product.  In addition, other factors which could cause actual results to differ materially include the ability of the Company to successfully license its programmes within the anticipated timeframe or at all, risks associated with vulnerability to general economic and business conditions, competition, environmental and other regulatory changes, actions by governmental authorities, the availability of capital markets or other sources of funding, reliance on key personnel, uninsured and underinsured losses and other factors.  Although any forward-looking statements contained in this announcement are based upon what the Directors believe to be reasonable assumptions, the Company cannot assure investors that actual results will be consistent with such forward-looking statements. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements. Subject to any continuing obligations under applicable law or any relevant AIM Rule requirements, in providing this information the Company does not undertake any obligation to publicly update or revise any of the forward-looking statements or to advise of any change in events, conditions or circumstances on which any such statement is based.
 

Statement of comprehensive income
	Group			Parent
EUR ‘000	Unaudited six months ended 30 Jun 2019	Unaudited six months ended 30 Jun 2018	For the year ended 31 Dec 2018	Unaudited six months ended 30 Jun 2019	Unaudited six months ended 30 Jun 2018	For the year ended 31 Dec 2018
Revenue	–	20	19	–	20	19
Other operating income	–	14	205	–	14	205
Research and development expenses	(4,982)	(11,701)	(16,463)	(4,982)	(11,701)	(16,463)
General and administrative expenses	(1,361)	(2,372)	(3,750)	(1,334)	(2,368)	(3,740)
Operating loss	(6,343)	(14,038)	(19,989)	(6,316)	(14,034)	(19,979)
Financial expense	(73)	(327)	(397)	(73)	(327)	(397)
Financial income	5	305	302	5	305	302
Loss before tax	(6,411)	(14,060)	(20,084)	(6,384)	(14,055)	(20,074)
Tax expense	(0)	–	(2)	(0)	–	(2)
Loss for the period	(6,412)	(14,060)	(20,086)	(6,384)	(14,055)	(20,076)
Comprehensive loss for the period attributable to the equity holders of the Company	(6,412)	(14,060)	(20,086)	(6,384)	(14,055)	(20,076)
Loss per ordinary share
Basic and diluted loss per share, EUR	(0,17)	(0,45)	(0,65)	(0,17)	(0,45)	(0,65)

Faron Pharmaceuticals Ltd

(“Faron” or the “Company”)

Final Results for the year ended 31 December 2017

TURKU – FINLAND, 8 May 2018 Faron Pharmaceuticals Ltd (“Faron”) (AIM: FARN), the clinical stage biopharmaceutical company, today reports its full year audited results for the year ended 31 December 2017. Today, the Company also separately announced top line data from the Phase III INTEREST trial.

HIGHLIGHTS (including post period end)

OPERATIONAL:

Traumakine^® 

·       INTEREST study did not meet the Day 28 primary composite endpoint with both Traumakine and placebo reporting similar all cause mortality rates. Further investigations are currently underway to provide additional information on the outcome of the current analysis.

·       Japanese partner Maruishi continued to progress their pivotal Phase III ARDS trial in Japan and has received two IDMC recommendations to continue the trial as planned. Maruishi anticipates completion of recruitment of this 120-patient study in mid 2018.

·       Faron received the first recommendation from the Independent Data Monitoring Committee (IDMC) in the Traumakine Phase II INFORAAA study for the treatment of Multi-Organ Failure (MOF) and mortality prevention of surgically operated Ruptured Abdominal Aorta Aneurysm (RAAA), to continue the trial as planned. Study currently on pause until INTEREST study analysis completes and Japanese Phase III ARDS trial is reported.

·       US Food and Drug Administration (FDA) proposed that Faron proceed directly to BLA submission for Traumakine in the US upon successful completion of the European and Japanese Phase III trials.  FDA Fast Track Designation was granted in January. Initiation of a collaboration with Syneos Health for Traumakine – a global biopharmaceutical solutions organization with end-to-end clinical development and commercialization capabilities.

·       Second independent manufacturing facility established for Traumakine.

·       Patent estate for Traumakine strengthened with a formulation patent granted in Finland and filed in the US and PCT for Faron’s IV dose form of interferon-beta, in addition to allowed patents in Europe and Japan for the use of certain biomarkers to measure the severity and treatment efficacy of patients with ARDS.

Clevegen^®

·       Preclinical toxicity studies completed with no sign of serious adverse events indicated.

·       Successful production of technical batches of Clevegen by manufacturing partner Abzena.

·       Agreement signed with the University of Birmingham Medical School, UK, to initiate a liver cancer clinical trial program, focused on the protocol design for a Phase I/II trial, MATINS. Clinical trial application expected to be filed in H2 2018.

·        Filed advice package to the UK Regulatory Agency MHRA on the adaptive protocol design for the MATINS trial to include dose escalation and efficacy measures in four solid tumour cancers (liver, melanoma, pancreas and ovarian).

·       Patent granted by the European Patent Office for the use of Clever-1 antibodies, the mechanism behind Clevegen, for the treatment of cancer.

FINANCIAL

·       Raised £5.0 million (net €5.4 million) in March 2017 to fund preclinical and early clinical development of Clevegen. Raised £10 million (net €10.4 million) in October 2017 to support the Traumakine pre-launch activities.

·       In addition to the above the Company raised €0.4 million through the subscription of shares with warrants and options in April – May 2017.

·       Drew down €0.5 million of a €1.5 million R&D loan granted by Tekes in June 2017 to progress the Clevegen programme.

·       On 31 December 2017, the Company held cash balances of €9.3 million (2016: €11.5 million).  The cash position at end March 2018 was €18.7 million.

·       Operating loss for the financial year ended 31 December 2017 was €21.1 million (2016: €10.1 million loss).

·       Net assets on 31 December 2017 were €4.7 million (2016: €8.4 million)

·       Post accounting period raised £15.0 million (net €15.9 million) in February 2018 intended to support preparations for the commercialisation of Traumakine and to advance the clinical development of Clevegen in several indications.

·       The board will be focussing on reducing cash burn and preservation of existing resources until the full data analysis is complete and it is agreed how best to deliver value to shareholders.

CORPORATE

·       Dr Juhana Heinonen was appointed Chief Commercial Officer and Dr Juho Jalkanen was appointed Vice President of Business Development within the period.

·       Board strengthened by the appointments of Dr Gregory Brown and Mr John Poulos as Non-Executive Directors in May 2017.

·      During the first of quarter 2018, Faron Pharmaceuticals has registered subsidiaries in the United States of America and in Switzerland.

Commenting on the results, Dr Markku Jalkanen, CEO of Faron, said: “Although throughout 2017 we have made significant progress across all areas of the business, we are extremely disappointed with the Traumakine data announced today. We will now take some time to better understand the data and plan the next steps for Traumakine in ARDS, whilst remaining focused on rapidly progressing Clevegen. We remain focused on the development of drugs for life threatening conditions, and we have strong foundations in place, and I am really proud of the strong commitment and resilience of our staff and collaborators at this challenging time.”

The 2017 Annual Report and Accounts will be made available shortly, in digital form and on the Company’s website together with the invitation to the Annual General Meeting (AGM).

This announcement contains inside information for the purposes of Article 7 of EU Regulation 596/2014 (MAR).

For more information please contact:

Faron Pharmaceuticals Ltd

Dr Markku Jalkanen, Chief Executive Officer

investor.relations@faron.com 

Consilium Strategic Communications

Mary-Jane Elliott, Philippa Gardner, Matthew Neal, Lindsey Neville

Phone: +44 (0)20 3709 5700

E-mail: faron@consilium-comms.com

Westwicke Partners, IR (US)

Chris Brinzey

Phone: 01 339 970 2843

E-Mail: chris.brinzey@westwicke.com

Panmure Gordon (UK) Limited, Nomad and Broker

Freddy Crossley, Emma Earl, Ryan McCarthy

Phone: +44 207 886 2500

About Faron Pharmaceuticals Ltd

Faron (AIM:FARN) is a clinical stage biopharmaceutical company developing novel treatments for medical conditions with significant unmet needs. The Company currently has a pipeline focusing on acute organ traumas, vascular damage and cancer immunotherapy. The Company’s lead candidate Traumakine, to prevent vascular leakage and organ failures, has completed a Phase III clinical trial in Acute Respiratory Distress Syndrome (“ARDS”). An additional European Phase II Traumakine trial is underway for the Rupture of Abdominal Aorta Aneurysm (“RAAA”). Faron’s second candidate Clevegen is a ground breaking preclinical anti-Clever-1 antibody. Clevegen has the ability to switch immune suppression to immune activation in various conditions, with potential across oncology, infectious disease and vaccine development. This novel macrophage-directed immuno-oncology switch called Tumour Immunity Enabling Technology (“TIET”) may be used alone or in combination with other immune checkpoint molecules for the treatment of cancer patients. Faron is based in Turku, Finland. Further information is available at www.faron.com

Chairman’s Statement

During 2017 Faron continued to make progress across all areas of the business, with the highly experienced management team consistently delivering against all strategic objectives for the year. Progress was made with both Traumakine and Clevegen and the Company built out the underlying capabilities within the organisation.

Faron’s lead drug candidate, Traumakine, completed patient recruitment into the pivotal, pan-European Phase III INTEREST trial in ARDS according to schedule. We are incredibly disappointed to report that the trial has not met the primary endpoint, and we will now carefully review the data in order to plan the next steps for Traumakine in ARDS.

The Company continues to believe that Traumakine could have applications across other serious indications and in early 2017, recruited the first patient in a Phase II trial (INFORAAA) assessing Traumakine for the prevention of Multi Organ Failure (MOF) and patient mortality after surgical repair of the acute rupture of abdominal aorta (RAAA). RAAA is a medical emergency with no known treatment and an overall mortality of 30 to 50% for post-operative reperfusion injury for RAAA patients. The study is currently on pause until the INTEREST study analysis completes and the Japanese Phase III ARDS trial is reported.

Faron’s second product, Clevegen, is an immunotherapy candidate that causes conversion of the immune environment around a tumour from immune suppressive to immune stimulating by reducing the number of tumour-associated macrophages (TAMs). We continue to believe that Clevegen is well differentiated from other immunotherapies and following encouraging preclinical toxicity studies, we look forward to moving Clevegen into first clinical trials in H2 2018 to study its potential in multiple solid tumours through our partnership with the University of Birmingham Medical School, UK.

The Company remains well funded, having raised £15m gross proceeds during 2017, and a further £15m gross proceeds in February 2018 which provides us with a solid financial foundation.

During the course of the year we further strengthened the Board with the appointment of Dr Gregory Brown and Mr John Poulos in May 2017. Greg and John bring a wealth of global experience in the life sciences and investment community, particularly from a US and commercial angle and I was delighted to welcome them.

The Board’s key priority is to now assess the next steps for Traumakine in ARDS, once the data are fully analysed, and to progress our novel and unique immunotherapy agent Clevegen into first human trials. The board will be focussing on reducing cash burn and preservation of existing resources until the full data analysis is complete and it is agreed how best to deliver value to shareholders.

The Board would like to thank the management team, staff and key partners for continued delivery during 2017. The Board is also extremely grateful to the investigators and patients who are part of our clinical trials. We look forward to updating you on our plans in due course.

Dr Frank M Armstrong – Chairman

May 5, 2018

Chief Executive Officer’s Review

Overview

Faron is highly focused on developing novel treatments for life-threatening medical conditions with significant unmet need for both individuals and society. Whilst 2017 was a busy year for Faron in anticipation of Traumakine data, we have today reported that the trial did not meet the primary endpoint. We will now seek to analyse and understand, as quickly as possible, the implications and next steps for Traumakine in ARDS.

Traumakine Development

INTEREST trial

We have today reported in a separate announcement that the Traumakine INTEREST trial did not meet the primary endpoint in ARDS. This is despite many years of research suggesting a potential benefit in these very sick patients. We are conducting further investigations in order to provide additional information on the outcome of the current analysis.

Our partner Maruishi continues to progress its pivotal Phase III trial in Japan and two IDMC recommendations to continue the trial as planned have been received. Maruishi expects to complete recruitment in the second quarter of 2018.

Phase II INFORAAA

We continue to believe that Traumakine has the potential for application in additional disease areas. In February 2017, the first patient was enrolled in the Traumakine Phase II INFORAAA trial for the treatment of Multi-Organ Failure (MOF) and mortality prevention of surgically operated Ruptured Abdominal Aorta Aneurysm (RAAA).

RAAA is a surgical emergency with an overall mortality of 70 to 80% and requires immediate surgery and aortic repair. The main cause of death for these patients is multiple organ failure following a post-operative reperfusion injury of ischemic organs including kidneys, liver, brain and intestines. We believe that Traumakine has the potential to offer significantly improved outcomes for patients following surgery for RAAA. We also believe that the clinical data from the INFORAAA trial could provide us with valuable information on the recovery of ischemic single organ injuries and are planning further trials to treat these injuries.  The study is currently on pause until the INTEREST study analysis completes and the Japanese Phase III ARDS trial is reported.

The study currently has six open sites in Finland, two in Lithuania and one in Estonia. The INFORAAA study aims to treat a total of 160 post-operative RAAA patients. The study is currently on pause until the INTEREST study analysis completes and the Japanese Phase III ARDS trial is reported.

Clevegen Development

Faron’s second product, its preclinical immunotherapy candidate, Clevegen, causes conversion of the immune environment around a tumour from immune suppressive to immune stimulating by reducing the number and function of tumour-associated macrophages (TAMs). Recent developments in the exciting field of cancer immunotherapy have been well documented with a number of important indications of clinical success. We believe that Clevegen is differentiated from other immunotherapies through its specific targeting of M2 TAMs which facilitate tumour growth, while leaving intact the M1 TAMs that support immune activation against tumours.

Preclinical toxicity studies of Clevegen commenced as planned in 2017, following successful production of technical batches by our manufacturing partner Abzena and initial data indicate no signs of serious adverse events. In April 2017, the Company signed an agreement with the University of Birmingham Medical School, UK, to initiate a liver cancer clinical trial program, focused on the protocol design for a Phase I/II trial MATINS (Macrophage Antibody To INhibit immune Suppression), which was also reviewed by the UK regulatory authority (MHRA) and discussed at the January 2018 meeting. Based on the MHRA positive feedback the Company anticipates filing the clinical trial application (CTA) in H2 2018.

Faron also continues a close collaboration with the MediCity unit of Turku University Medical School, where Faron has sponsored a set of Clevegen related preclinical experiments. Data reported at the international Juselius Symposium (June 2017, Helsinki, Finland) demonstrated how genetic depletion of macrophage Clever-1 resulted in tumour growth resistance and prevented the spread of Lewis lung cancer in preclinical models. Furthermore, signs of strong immune activation were observed, as evidenced by CD8 positive T-cells at the tumour site, in line with the expected effect of Clevegen. Additional data were also outlined during Faron’s second R&D day in February 2018.

Corporate

In December 2017, Faron announced the appointment of Dr Juhana Heinonen as Chief Commercial Officer. Dr Heinonen joined Faron from AstraZeneca where he served as the Global Marketing Director for AstraZeneca/Medimmune’s Fasenra (benralizumab) for the treatment of asthma, the first biologic launched from the AstraZeneca respiratory unit. Dr Heinonen led the global market shaping and the patient and healthcare professional support strategy development for the new monoclonal antibody, which met the primary endpoints in two Phase III clinical trials in 2016. Prior to this, he held a variety of positions in sales and marketing at Roche between 2008 and 2015, successfully leading the launch and development of a global marketing strategy for the blockbuster treatment for rheumatoid arthritis, RoACTEMRA (tocilizumab).

Dr Juho Jalkanen was appointed as Vice President of Business Development in April 2017 and stepped down from the Board in May 2017, of which he had been a member since 2013. Dr Jalkanen has a Master’s degree in Economics and Business Administration from the Turku School of Economics, a Medical Doctor’s degree from the University of Turku and was a fully licensed General Practitioner and specialist in Vascular Surgery with expertise in organ protection during major cardiovascular surgery. I extend my gratitude to Juho for his contribution to the Board over the past four years and am pleased he will continue his input to the Company as a management team member.

Financial

The Company has adopted new and amended accounting standards and corrected certain prior period errors in accounting. The 2016 financial statements, as initially reported, have therefore been amended and restated.

Strengthened Board

Dr. Gregory B. Brown and Mr John Poulos were appointed as Non-Executive Directors to the Board in May 2017. Both bring a wealth of global experience in the life sciences and investment community to strengthen our Board, particularly from a US and commercial angle.

Dr. Gregory B. Brown has more than 35 years of experience in healthcare and investment. Most recently, Greg founded HealthCare Royalty Partners, a healthcare-focused private asset management firm investing in biopharmaceutical and medical products, where he currently serves as Vice Chairman. In addition, Greg is currently a director of Caladrius Biosciences Inc (NASDAQ) and Nuron Biotech Inc and previously acted as a director of Invuity Inc (NASDAQ) between October 2014 and December 2015. Prior to this, he was a General Partner at Paul Capital Partners in New York, Co-Head of Investment Banking at Adams, Harkness & Hill, and VP of Corporate Finance at Vector Securities International.

Mr John Poulos has a wealth of expertise in global corporate life sciences, having spent 38 years working for AbbVie and Abbott. Most recently, John served as Vice President, Head of Licensing and Acquisitions for AbbVie, and Group Vice President, Head of Pharmaceutical Licensing and Acquisitions for Abbott Pharmaceuticals. During his career, John was instrumental in the negotiation of numerous acquisitions, including Knoll/BASF Pharma in 2001 for $6.9 billion and Solvay in 2010 for $6.2 billion.

Outlook

Our immediate focus in 2018 will be on determining the next steps for Traumakine in ARDS once we have completed a comprehensive review of the INTEREST Phase III data to understand why Traumakine did not have any effect over placebo in the trial. We also plan to continue to progress our immuno-oncology candidate, Clevegen, into the clinic in H2 2018.

The Board anticipates the following pipeline progress and catalysts during 2018:

Traumakine:

·      Full data analysis from the Phase III INTEREST trial

·      Determine next steps for Traumakine in ARDS

·      The Company currently expects to announce top-line data from the Japanese Phase III pivotal study for the treatment of ARDS with Traumakine, run by its Japanese licensing partner Maruishi Pharmaceutical Co., in 2018.

Clevegen:

·      Faron expects preclinical toxicological studies for Clevegen to be completed in Q2 2018 

·      The Company expects to file the first CTA with the UK regulatory authorities (MHRA) in H2 2018 based on the preclinical safety data. The first, and primarily safety focused clinical trial is expected to be conducted with liver cancer patients at the Birmingham University Liver Cancer Centre and is expected to continue into a Phase II study via an adapted trial design for HCC patients to recognise early efficacy signals.

·      The second set of clinical cancer trials will be conducted in parallel with the HCC trial in Scandinavia with melanoma, pancreas and ovarian cancer patients.

·      Faron intends to expedite the expansion of its planned Clevegen clinical development program, the MATINS trial, in several solid tumours (liver, pancreas, ovarian and melanoma) in order to obtain accelerated safety and clinical data read-outs.

Dr Markku Jalkanen  – Chief Executive Officer

May 5, 2018

Financial Review

Restatement of previously issued financial statements

Subsequent to the original issuance of the Company’s financial statements for the year ended 31 December 2016, the Company has adopted new and amended accounting standards and corrected certain prior period errors in its accounting. The 2016 financial statements, as initially reported, have therefore been amended and restated. The total impact of the restatements on the pre-tax income for periods prior to 31 December 2016 was negative EUR 2.5 million. In total the restatements reduced the 31 December 2016 equity with negative EUR 2.5 million.

Further details of the restatement are set out in Note 1 to the accounts.

Key Performance Indicator

As a clinical stage drug development company, Faron’s primary interconnected KPI’s are cash burn and cash position. During 2017, the Company’s net cash flow decreased by only €1.7 million despite a significant increase in R&D spending. This was mainly due to two successful fundraisings during the year. The Board will consider the appropriateness of monitoring additional KPIs as the Company’s operations advance.

Revenue and Other Operating Income

The Company’s revenue was €0.0 million for the year ended 31 December 2017 (2016: €1.0 million). The revenue in 2016 included the €0.7 million licence agreement cash signing fee from Korean license partner PharmBio. The Company also recorded €1.5 million (2016: €1.0 million) of other operational income. This comprised of income recognised from the European Commission FP7 grant in support of the Traumakine programme as well as a grant component from public loans.

Research and development costs

The R&D costs more than doubled by €9.9 million (107%) from €9.2 million to €19.1 million. This was a result of very strong investment in the finalisation of INTEREST trial. The trial completed recruitment in early December 2017 with results reported today. The increased activity of Clevegen development also contributed to the increase in R&D investment. In September 2017, the Company received a positive recommendation from the FDA regarding the possibility to proceed directly to BLA filing in the US upon successful completion of the European and Japanese Phase III trials without the need to conduct clinical trials for Traumakine in the US. In view of this recommendation and in anticipation of a positive INTEREST trial the Company, the Company accelerated the preparatory work for eventual Traumakine launch, including increasing production of active pharmaceutical ingredient (API), with the majority of this work to be completed 2018.

Share-based Compensation

During the year, options over 500,000 ordinary shares (2016: 400,000) were awarded to Directors and key personnel. This had no cash impact on the results for the year, however, accounting standards require this share based compensation to be recognised in the Consolidated Statement of Comprehensive Income, resulting in a charge of €1.2 million (2016: €0.9 million).

Taxation

The Company’s tax credit for the fiscal year 2017 can be recorded only after the Finnish tax authorities have approved the tax report and confirmed the amount of tax-deductible losses for 2017. The total amount of cumulative tax losses carried forward approved by tax authorities on 31 December 2017 was €23.5 million (2016: €14.2 million). The Company estimates that it can utilise €23.3 million of these during the years 2019 to 2026 by offsetting them against future profits. In addition, Faron has €2.8 million of research and development costs incurred in the financial years 2010 and 2011 that have not yet been deducted in its taxation. This amount can be deducted over an indefinite period at the Company’s discretion.

Losses

Loss before income tax was €21.1 million (2016: €10.1 million). Net loss for the year was €21.1 million (2016: €10.1 million), representing a loss of €0.76 per share (2016: €0.42 per share) (adjusted for the changes in number of issued shares).

Cash Flows

Despite doubling its R&D expenses net cash outflow was only €2.2 million negative for the year ended 31 December 2017, compared to a positive net cash inflow of €0.4 million for the previous year. Cash used for operating activities increased by €9.0 million to €18.4 million for the year, compared to €9.4 million for the year ended 31 December 2016. This increase was mostly driven by a €9.9 million (107%) increase in R&D investment together with a €0.6 million (24%) increase in administrative costs.

Net cash inflow from financing activities was €16.6 million (2016: €9.3 million) due to the two successful equity placings completed during the year.

Fundraising

Faron raised £5million (net €5.4 million) via an oversubscribed financing round in February/March 2017 by issuing 1,422,340 new ordinary shares at a price of 350 pence per share. The proceeds are being used to fund preclinical and early clinical development of Clevegen. The Company also raised £10 million (net €10.4 million) via an oversubscribed financing round in October 2017 by issuing 1,250,000 new ordinary shares at a price of 800 pence per share. The proceeds are being used to support the pre-launch activities for Traumakine and to expedite Clevegen clinical program. Post the period end, Faron also raised £15.0 million (net €15.9 million) in February 2018 via an oversubscribed financing round by issuing 1,863,350 new ordinary shares at a price of 805 pence per share to support preparations for the commercialisation of Traumakine and to advance the clinical development of Clevegen in several indications. After this round, at the end of February 2018, the total number of outstanding shares was 31,027,894.

Financial Position

As at 31 December 2017, total cash and cash equivalents held were €9.3 million (2016: €11.5 million). This excludes the funds raised in the financing round announced on 21 February 2018.  The cash at end of March 2018 was €18.7 million. The board will be focussing on reducing cash burn and preservation of existing resources until the full data analysis is complete and it is agreed how best to deliver value to shareholders.

Headcount

Average headcount of the Company for the year was 17 (2016: 10). The increase in headcount is attributable to the expansion of the Traumakine and Clevegen programs, in addition to preparation for the commercialisation of Traumakine.

Shares and Share Capital

Using the share authorities granted at the Annual General Meetings held on 26 May 2016 and on 16 May 2017, in February 2017 the Company issued 1,422,340 new ordinary shares at a subscription price of £3.50 pursuant to a fundraising and in October 2017 issued 1,250,000 new ordinary shares at a price of £8.00 per share pursuant to a further fundraise. The subscription price was credited in full to the Company’s reserve for invested unrestricted equity, and the share capital of the Company was not increased.

Additionally during 2017, warrants over 109,800 ordinary shares in the Company were exercised at a price of €1.55 per share and further warrants over 41,600 ordinary shares in the Company were exercised at a price of €2.01 per share.

In May 2017 options over 15,000 ordinary shares in the Company were exercised at a price of €3.71 per share and options over a further 14,100 ordinary shares in the Company were exercised at a price of €2.90 per share.

The Company has no shares in treasury; therefore at the end of 2017 the total number of voting rights was 29,164,544.

Money Raised to Date

To date, the Company has been funded with a total of approximately €61 million, made up of a combination of equity, debt and grant funding, which has been used to develop the Company’s products and intellectual property. The Company has also generated cash revenues of €4.5 million to date through the receipt of milestone payments pursuant to certain of its licensing arrangements and the sale of surplus raw materials.

Yrjö E K Wichmann   – Chief Financial Officer

May 5, 2017

Statement of comprehensive income		For the year ended 31 December
		2017		2016
€’000				(Restated)
Revenue		–		952
Other operating income		1,495		1,025
Research and development expenses		(19,100)		(9,223)
General and administrative expenses		(3,054)		(2,457)
Operating loss		(20,659)		(9,703)
Financial expense		(408)		(360)
Financial income		7		–
Loss before tax		(21,060)		(10,063)
Tax expense		(1)		(75)
Loss for the period		(21,061)		(10,138)
Comprehensive loss for the period attributable to the equity holders of the Company		(21,061)		(10,138)
Loss per ordinary share
Basic and diluted loss per share, EUR		(0.76)		(0.42)

Balance sheet		As at 31 December				As at 1 January
		2017		2016		2016
€’000				(Restated)		(Restated)
Assets
Non-current assets
Machinery and equipment		22		21		28
Intangible assets		325		304		283
Prepayments and other receivables		1,310		1,475		1,885
Total non-current assets		1,657		1,800		2,196
Current assets
Prepayments and other receivables		3,920		2,469		489
Cash and cash equivalents		9,310		11,478		11,068
Total current assets		13,230		13,947		11,557
Total assets		14,887		15,747		13,753
Equity and liabilities
Capital and reserves attributable to the equity holders of the Company
Share capital		2,691		2,691		2,691
Reserve for invested unrestricted equity		48,576		32,362		23,843
Accumulated deficit		(46,524)		(26,652)		(17,450)
Total equity		4,743		8,401		9,084
Non-current liabilities
Borrowings		2,088		2,083		1,446
Other liabilities		–		614		241
Total non-current liabilities		2,088		2,697		1,687
Current liabilities
Borrowings		338		93		245
Trade payables		3,196		2,021		620
Other current liabilities		4,522		2,535		2,117
Total current liabilities		8,056		4,649		2,982
Total liabilities		10,144		7,346		4,669
Total equity and liabilities		14,887		15,747		13,753

Statement of changes in equity €’000				Share capital		Reserve for invested unrestricted equity	Accumulated deficit		Total equity
Balance as at 1 January 2016				2,691		24,533	(16,046)		11,178
Impact of restatements (net of tax)1.1. 2016					(690)		(1,404)	(2,094)
Balance as at 1 January 2016, restated				2,691		23,843	(17,450)		9,084
Comprehensive loss for the period							(10,138)		(10,138)
Transactions with equity holders of the Company
Issue of ordinary shares, net of transaction cost EUR 811 thousand				–		8,519	–		8,519
Share-based compensation				–		–	936		936
				–		8,519	936		9,455
Balance as at 31 December 2016				2,691		32,362	(26,652)		8,401
Comprehensive loss for the period				–		–	(21,061)		(21,061)
Transactions with equity holders of the Company
Issue of ordinary shares, net of transaction costs EUR 1,149 thousand				–		15,863	–		15,863
Share options exercised				–		97	–		97
Warrants exercised				–		254	–		254
Share-based compensation				–		–	1,189		1,189
				–		16,214	1,189		17,403
Balance as at 31 December 2017				2,691		48,576	(46,524)		4,743

Statement of cash flows		For the year ended 31 December
		2017		2016
€’000				(Restated)
Cash flow from operating activities
Loss before tax		(21,060)		(10,063)
Adjustments for:
Depreciation and amortisation		76		78
Interest expense		75		24
Unrealised foreign exchange loss (gain), net		290		(627)
Share-based compensation		1,189		936
Adjusted loss from operations before changes in working capital		(19,430)		(9,652)
Change in net working capital:
Prepayments and other receivables		(1,286)		(1,570)
Trade payables		1,175		1,402
Other liabilities		1,189		480
Cash used in operations		(18,352)		(9,340)
Taxes paid		(1)		(75)
Interest paid		(10)		(4)
Net cash used in operating activities		(18,363)		(9,419)
Cash flow from investing activities
Payments for intangible assets		(90)		(92)
Payments for equipment		(8)		–
Net cash used in investing activities		(98)		(92)
Cash flow from financing activities
Proceeds from issue of shares		17,362		9,330
Share issue transaction cost		(1,148)		(811)
Proceeds from borrowings		453		775
Repayment of borrowings		(84)		–
Net cash from financing activities		16,583		9,294
Net increase (+) / decrease (-) in cash and cash equivalents		(1,878)		(217)
Effect of exchange rate changes on cash and cash equivalents		(290)		627
Cash and cash equivalents at 1 January		11,478		11,068
Cash and cash equivalents at 31 December		9,310		11,478

Note 1            Basis of preparation

The financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) of the International Accounting Standards Board (IASB) and the interpretations of the International Financial Reporting Standards Interpretations Committee (IFRS IC). The financial statements have been prepared on a historical cost basis, unless otherwise stated.

The financial statements have been prepared on the basis of a full retrospective application of IFRS 15, Revenue from Contracts with Customers, with the adoption date as of 1 January 2017.

The principal accounting policies applied in the preparation of these financial statements are set out below. The Company has consistently applied these policies to all the periods presented, unless otherwise stated.

All amounts are presented in thousands of euros, unless otherwise indicated, rounded to the nearest euro thousand.

Restatements of previously issued financial statements

Subsequent to the original issuance of the Company’s financial statements for the year ended 31 December 2016, the Company has adopted new and amended accounting standards and corrected certain prior period errors in its accounting. The 2016 financial statements, as initially reported, have therefore been amended and restated as follows:

1)   In the process of adopting IFRS 15 Revenue from contracts with customers the Company identified errors in the application of IAS 18, which resulted in corrections to the previously issued 2016 financial statements.

2)   The Company has corrected amounts in its previous years’ accounting for government grants received in the form of direct funding from the European Commission and in the form of indirect government assistance through the below-market rate government loans.

3)   The Company has incorrectly capitalised in-process research and development expenditures which had not met the capitalisation criteria in IAS 38. 

4)   In the balance sheet, prepayments to a third party Contract Research Organisations and rental deposits have been reclassified from current prepayments and other receivables to non-current prepayments and receivables as at 1 January 2016 due to the long-term nature of the items.

5)   The Company has revised its previous balance sheet classification of inventories and re-classified the balances previously presented as inventory prepayments and finished goods to prepayments and other receivables as such goods are not held for sale in the Company’s ordinary course of business, but will be used in the Company’s research and development activities.

6)   The Company has corrected the effects of certain prior period cut-off errors related to charges by vendors and their sub-contractors in its restated financial statements. 

7)   The Company’s expense for the effects of the Option Plan 2015, accounted for as an equity-settled plan, has been misstated. The misstatements relate to the valuation to the Option Plan and to errors in accruing for the share-based compensation expense and determination of the grant and service inception date.

8)   The Company has corrected the proceeds from borrowings in the statement of cash flow for the financial year ended 31 December 2016 to reflect gross proceeds received. The cash flows for the withdrawal of the borrowings in the form of R&D loans were previously presented net of grant benefit. In addition, the Company has revised the presentation of the statement of cash flows for the financial year ended 31 December 2016 relating to unrealised foreign exchange gains, interest expense and the interest paid, previously presented on a combined basis as financial items.

The total impact of the restatements on the pre-tax income for periods prior to 31 December 2016 was negative EUR 2.5 million. In total the restatements reduced the 31 December 2016 equity with negative EUR 2.5 million.

Accordingly, these restated financial statements as of 31 December 2017 and for the year ended 31 December 2016 have been approved and authorized for issue by the Company’s Board of Directors on [5] May, 2018. The Company’s previously issued financial statements were approved and authorized for issue by the Board of Directors on 28 March 2017.

Going concern

The Company has incurred net losses since its inception and for the years ended 31 December 2017 and 2016, the Company reported losses of EUR 21,061 thousand and EUR 10,138 thousand, respectively.

The Company has primarily relied upon financing its development operations with funds that the Company has raised from share issues. In September 2016, the Company raised a total of EUR 8,519 thousand and during 2017, the Company had two separate issues raising a total of EUR 16,214 thousand. In addition to equity financing, the Company has obtained funding from license agreements and public R&D loans and grants.  

The financial information in these financial statements has been prepared on a going concern basis, which assumes that the Company will continue in operational existence for the foreseeable future.  After review of the future operating costs of the Company in conjunction with the cash held at 31 December 2017 and the net proceeds of approximately EUR 15,863 thousand received following the completion of a fundraising in February 2018, management believes the Company has sufficient funds to continue as a going concern for the foreseeable future. 

Critical accounting estimates and significant management judgements in applying accounting policies

Revenue recognition

The Company early adopted IFRS 15 on 1 January 2017 with full retrospective application. In determining the amounts to be recognised as revenue, the Company uses its judgement in the following main issues:

·      Identifying the performance obligations in the license agreements and determining whether the license provided is distinct – based on the Company’s analysis, the license is distinct as the licensee is able to benefit from the license on its own at its current stage and the licensee has the responsibility for the development in that territory. The management has determined that the provision of data and information generated by the Company in connection with its own development activities to facilitate the licensees’ territory-specific development efforts is immaterial (perfunctory) to the grant of the license to the IP and does not constitute a separate performance obligation.

·      Management has concluded that the license meets the criteria to be classified as a right to use, as the license granted provides at the outset of the contract all necessary documents and knowhow to utilize the license. The contract does not define activities that would significantly affect the intellectual property to which the licensee has rights after the date of granting.

Share-based compensation

The Company recognises expenses for share-based compensation. For share options and warrants management estimates certain factors used in the option pricing model, including volatility, vesting date of options and number of options and warrants likely to vest. If these estimates vary from actual occurrence, this will impact the value of the share-based compensation.

Clinical trial accruals

Quantification of the accruals related the clinical trials require significant management judgement. The services invoiced by Contract Research Organisations consist of contributions of various independent subcontractors and the actual tasks completed may be reported with significant delays. Also the clinical study sites, which are mainly public sector hospitals, may invoice their costs with long delays. These factors combined result in a complicated task of defining on which period the cost belongs to and requires management to make assumptions when defining the right timing of the delivered services. 

Foreign currency transactions and balance

Functional and presentation currency

The financial statements are presented in euro, which is the Company’s functional and presentation currency.

Transaction currency

Transactions in foreign currencies are translated at the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rates ruling at the reporting date. Foreign exchange differences arising on translation are recognised in the statement of comprehensive income, within financial income and expenses. Non-monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction.

Revenue recognition

The Company’s revenue for the periods presented in these financial statements consists mainly of upfront payments from a license agreement with Pharmbio. The Company adopted IFRS 15 Revenue from Contracts with Customers effective 1 January 2017 and has applied the single, principles based five-step model to all contracts with customers provided by IFRS 15 as follows: 

1.   Identify the contract with a customer

2.   Identify the performance obligations in the contract

3.   Determine the transaction price

4.   Allocate the transaction price to the performance obligations in the contract

5.   Recognise revenue when (or as) the entity satisfies a performance obligation (over time or at a point in time).

Revenue from licensing agreements

According to IFRS 15, performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services. Goods and services that are not distinct are bundled with other goods or services in the contract until a bundle of goods or services that is distinct is created. A good or service promised to a customer is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.

The Company’s existing license agreements with Maruishi in Japan, with A&B in Greater China and with Pharmbio in Republic of Korea each include only one performance obligation, which is the grant of the license to use of its intellectual property (“IP”). After the Company has granted the license, it does not have an obligation to participate or provide additional services to its customers. The transaction price for the grant of the license to use the Company’s IP comprises of fixed and variable payment streams and the grant of the license is considered to be a right to use IP. Upfront fees earned, are recognised as revenue at a point in time, upon transfer of control over the license to the licensee. Revenue from variable consideration, which are contingent on achievements of future milestones or future sales of the products by the licensees, are recognised as revenue when it is highly probable the revenue will not reverse, that is when the underlying contingencies have been resolved. For future royalty payments, the Company applies exception for sales-based royalties and recognises the revenue only when the subsequent sale occurs.

In addition, there is a potential performance obligation regarding future manufacturing. The Company has tentatively agreed on supply and manufacture of the drug product to its licensees. The terms including quantities and commercial terms for the future supply will be subject to separate negotiations.

Recognition of government grants

The direct government grants are recognised as other operating income at the same time as the underlying expenditure is incurred, provided that there is reasonable assurance that the Company will receive the grant and complies with the conditions of such grant. Direct grant payments received in advance of the incurrence of the expenditure that the grant is intended to compensate are deferred at the reporting date and presented under advances received on the balance sheet.

The indirect government assistance in the form of below-market interest government loans is recognised as grant income and recorded as other operating income in the same period in which the company recognises the expenses for which the benefit is intended to compensate. Grant income is measured as the difference between the initial carrying value of the loan and the proceeds received.

Note 2            Other operating income

		Year ended 31 December
		2017	2016
€’000			(Restated)
Grants from the European Union		1,063	873
Grant component of government loans		432	148
Other income		–	4
Total operating income		1,495	1,025

Grants from the European Union comprise of direct funding from the European Commission under the Seventh Framework Programme for Research and Technological Development to support the Traumakine clinical program. The grant component of government loans comprises of indirect financial benefit from the below-market interest of a loan from the Finnish Funding Agency for Technology and Innovation (“Tekes”, currently “Business Finland”), which has been granted to finance the Clevegen clinical development program.

Note 3            Research and development expenses

Research and development costs are expensed as incurred and presented under research and development expenses in the statement of comprehensive income. Research and development expenses include costs for outsourced clinical trial services, materials and services, employee benefits and other expenditure directly attributable to the Company’s research and development activities. The Company’s research and development expenses are directly related to the Company’s development projects and may therefore fluctuate strongly from year to year.

Capitalization of expenditure on the development of the Company’s products commences from the point at which technical and commercial feasibility of the product can be demonstrated and it is probable that future economic benefits will result from the product once completed. As at 31 December 2017, considering the development stage of the Company’s drug candidates, no internally developed assets related to Company’s development activities had met these criteria and had therefore not been recognised. 

		Year ended 31 December
€’000		2017	2016 (Restated)
Outsourced clinical trials services		(9,392)	(5,218)
Materials and services		(4,727)	(1,594)
Employee benefits		(2,704)	(1,475)
Other R&D costs		(1,315)	(865)
Inventory write-down		(893)	–
Depreciation and amortization		(69)	(71)
Total research and development expenses		(19,100)	(9,223)

Note 4            Share-based compensation

The options and warrants granted under share-based incentive programs are measured at fair value at earlier of the grant date or the service commencement date, using the Black-Scholes valuation model. The options, for which the option exercise price is determined later, right before the vesting, an estimate is used to determine the fair value at service commencement date and the estimate is subsequently revised until the options become granted.

The share-based compensation expense is recognised on a straight-line basis over the vesting period together with a corresponding increase in equity, based on the Company’s estimate of equity instruments that will eventually vest. At each reporting date, the Company revises its estimate of the number of equity instruments that are expected to vest and its estimate of the grant date fair value for the options with earlier service commencement date. The exercise price paid by the option or warrant holder to subscribe the Company’s shares is recognised in the reserve for invested unrestricted equity.

Option Plan 2015

The Option Plan 2015 was approved at the Company’s extraordinary shareholders’ meeting on 15 September 2015 as part of the Company’s incentive scheme determined by the Board of Directors. The share options are granted to the members of the Board of Directors and the management team and other management and employees for no consideration. The annual general meeting on 10 May 2017 resolved to amend, due to the increase in the number of employees in the Company and the increase in the number of members of the Board of Directors, the Option Plan so that a maximum total of 500,000 C options and a maximum total of 500,000 D options may be offered under initial Option Plan terms and conditions. The share options have a service condition and are forfeited in case the employee leaves the Company before the share options vest, unless the Board of Directors approves otherwise. After the beginning of the share subscription period, the vested options may be freely transferred or exercised. The fair value of the options was determined at the grant date or estimated at earlier service commencement date by using the Black & Scholes option valuation model and expensed over the vesting period. Grant dates for the share options may vary depending on the date when the Company and the employees agree to the key terms and conditions of the Option Plan. The maximum number of share options that can be awarded under the Option Plan is 1.800.000 in four different tranches designated as A options, B options, C options and D options. Each share option entitles the holder of the option to subscribe for one ordinary share in the Company.

The exercise price for ordinary shares based on A options is euro equivalent of the Company’s share subscription price in the Company’s initial public offering on the AIM market place of the London Stock Exchange on 17 November 2015. The exercise price for ordinary shares based on B options, C options and D options is euro equivalent of the exercise price determined based on the Company’s average share price on the AIM market place during 1 July – 30 September 2016, 2017 and 2018, respectively.

Key characteristics and terms of the option plan are listed in the table below.

2015 Option Plan	A options	B options	C options	D options
Maximum number of share options	400,000	400,000	500,000	500,000
Exercise price, EUR	3.71	2.90	8.39	(*)
Dividend adjustment	No	No	No	No
Beginning of subscription period	2 November 2015	8 October 2016	8 October 2017	8 October 2018
End of subscription period	20 September 2021	20 September 2021	20 September 2021	20 September 2021
Vesting conditions	Service until the beginning of the subscription period

(*) Exercise price will be determined based on euro equivalent of the Company’s average share price on the AIM market place during 1 July – 30 September 2018.

		For the year ended 31 December 2017				For the year ended 31 December 2016
		2015 Option Plan				2015 Option Plan
Number of share options	A		B	C	D	A	B	C	D
Outstanding at 1 January	400,000		400,000	250,000	250,000	250,000	250,000	250,000	250,000
Granted				250,000	20,000	150,000	150,000	–	–
Forfeited	–		–	–	–	–	–	–	–
Exercised	(15,000)		(14,100)	–	–	–	–	–	–
Outstanding at 31 December	385,000		385,900	500,000	270,000	400,000	400,000	250,000	250,000
Exercisable at 31 December	385,000		385,900	500,000	–	400,000	400,000	–	–
The weighted average fair value of the share options granted, EUR	–		–	3.23	0.53	1.27	1.43	–	–
The weighted average share price at the date of exercise, EUR	8.83		8.83	–	–	–	–	–	–

	2017			2016
	2015 Option Plan			2015 Option Plan
Determination of the fair value for the share options granted	C	D	A		B
Share price at grant date, EUR	4.51-9.39	9.21	2.69-3.38		2.96-4.10
Subscription price, EUR	4.51-8.39	9.21	3.71		2.90-4.10
Volatility, % (*)	42.59-52.57	42.59	50.03-52.57		50.03-52.57
Interest free rate, %	0.01	0.01	0.01		0.01
Expected dividends yield, %	0	0	0		0
Option fair value, EUR	1.42-4.01	2.87	1.00-1.54		1.32-1.57
Effect on earnings 2016, EUR thousand (**)	43	–	191		188
Effect on earnings 2017, EUR thousand (**)	758	25	–		–

(*) Expected volatility was determined as the average volatility of a peer group consisting of ten comparable biotechnology companies listed on London Stock Exchange AIM list.

(**) Effect of share options granted on earnings is calculated based on earlier of the grant date or the service commencement date.

The share-based compensation expense for the Option Plan 2015, was EUR 1,189 thousand in 2017 (EUR 936 thousand in 2016).

Warrants

Based on authorization given by the Company’s extraordinary shareholders’ meeting on September 15, 2015, the Board of Directors approved on 16 September 2015, the issuance of 151,400 warrants that entitled the holder to subscribe for a maximum number of 151,400 ordinary shares in the Company. The warrants were issued in exchange for services received from a Company’s external advisor. The warrants were granted in two tranches designated as Warrants A and Warrants B and each warrant entitles the holder of the warrant to subscribe for one ordinary share in the Company. After the beginning of the share subscription period, the vested warrants may be freely transferred or exercised. The fair value of the warrants was determined at the grant date or by using the Black & Scholes valuation model and expensed over the vesting period during 2015.

Tranche	Number of warrants	Share subscription period	Exercise price, EUR
Warrants A	109,800	2 November 2015 – 7 May 2018	1.55
Warrants B	41,600	2 November 2015 – 28 February 2018	2.01

	2017		2016
Number of warrants	Warrants A	Warrants B	Warrants A	Warrants B
Outstanding at 1 January	109,800	41,600	109,800	41,600
Granted	0	0	0	0
Forfeited	0	0	0	0
Exercised	(109,800)	(41,600)	0	0
Outstanding at 31 December	0	0	109,800	41,600
Exercisable at 31 December	0	0	109,800	41,600
The weighted average share price at the date of exercise, EUR	8.72	8.72	–	–

All of the warrants the Company had issued in 2015, were exercised during 2017.

Note 5            Financial income and expenses

	Year ended 31 December
€’000	2017	2016
Financial income
Interest income	–	0
Gains from foreign exchange	7	0
Total financial income	7	0
Financial expenses
Interest expenses	(75)	(24)
Losses from foreign exchange	(332)	(333)
Other financial expenses	(1)	(3)
Total financial expenses	(408)	(360)
Total financial income and expenses, net	(401)	(360)

Interest expenses consist of paid and accrued interest expenses. The accrued interest expense relates mainly to the government loans.

The foreign exchange losses relate to euro value changes of cash balances nominated in Pound Sterling.

Unrealised foreign exchange loss is EUR 290 thousand and gain is EUR 627 thousand for the years ended 31 December 2017 and 2016, respectively.

Note 6            Tax expense

Income tax expense for the period consists of current and deferred taxes. Tax is recognised in the statement of comprehensive income, except for the income tax effects of items recognised in other comprehensive income or directly in equity, which is similarly recognised in other comprehensive income or equity.

Deferred taxes are recognised using the liability method on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred taxes are determined using tax rates enacted or substantively enacted by the balance sheet date in the respective countries and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.

Deferred income tax assets are recognised only to the extent that it is probable that future taxable income will be available against which the temporary differences can be utilized.

	Year ended 31 December
€’000	2017	2016
Tax expense	(1)	(75)
Total tax expense	(1)	(75)

During the financial year ended 31 December 2016, income tax consists of foreign withholding tax on upfront fee received.

The difference between income taxes at the statutory tax rate in Finland (20%) and income taxes recognised in the statement of comprehensive income is reconciled as follows:

	Year ended 31 December
	2017	2016
€’000		(Restated)
Loss before tax	(21,060)	(10,063)
Income tax calculated at Finnish tax rate 20%	4,212	2,013
Tax losses and temporary differences for which no deferred tax asset is recognised	(3,974)	(1,937)
Non-deductible expenses and tax exempt income	(238)	(1)
Non-credited foreign withholding taxes	(1)	(75)
Taxes in the statement of comprehensive income	(1)	(75)

Tax losses and deductible temporary differences for which no deferred assets have been recognised, are as follows:

	Year ended 31 December
	2017	2016
€’000		(Restated)
R&D expenses not yet deducted in taxation (1)	16,893	47
Tax losses carried forward (2)	25,862	23,527
Deferred tax depreciation on fixed assets	1,628	1,012
Total	44,383	24,586

1) The Company has incurred research and development costs, mostly during the year ended 31 December 2017, that have not yet been deducted in its taxation. The amount deferred for tax purposes can be deducted over an indefinite period.

2) Tax losses carried forward expire over the period of 10 years. The tax losses will expire as follows:

€’000	2017	2016
Expiry within five years	3,164	1,565
Expiry within 6-10 years	22,698	21,962
Total	25,862	23,527

The related deferred tax assets have not been recognised in the balance sheet due to the uncertainty as to whether they can be utilized. The Company has a loss history, which is considered a significant factor in the consideration of not recognising deferred tax assets. The total tax value of unrecognised deferred tax assets is EUR 8,877 thousand (2016: EUR 4,917 thousand).

The Company does not have any other deductible or taxable temporary differences. Therefore, no deferred tax assets or liabilities have been recognised in the balance sheet and thus the itemisation of deferred taxes is not provided.

Note 7            Loss per share

Basic loss per share is calculated by dividing the loss for the period with the weighted average number of ordinary shares during the year.

	Year ended 31 December
	2017	2016
Loss for the period	(21,061)	(10,138)
Weighted average number of ordinary shares in issue	27,887,901	23,979,650
Basic and dilutive loss per share (in €)	(0.76)	(0.42)

As of 31 December 2016, the Company had two potentially dilutive instruments comprising of share options and warrants.

As of 31 December 2017, the Company had only share options outstanding as the warrants were exercised during the period. Number of potentially dilutive instruments currently outstanding totalled 1,540,900 as of 31 December 2017 (31 December 2016: 1,451,500). Since the Company has reported a net loss, the share options and warrants would have an anti-dilutive effect and are therefore not taken into account in diluted loss per share -calculation. As such, there is no difference between basic and diluted loss per share.

Note 8            Intangible assets and machinery and equipment

The Company’s intangible assets comprise of capitalized patent costs arising in connection with the preparation, filing and obtaining of patents. Patent cost are amortised on a straight-line basis over the useful lives of the patents of ten years.

The Company’s machinery and equipment comprise of office furniture and equipment, which is stated at historical cost less depreciation and any impairment losses. The historical cost includes expenditure that is directly attributable to the acquisition of the machinery and equipment.

Depreciation is calculated using the straight-line method over the asset’s estimated useful life of four years. Depreciation is recorded to the costs of the asset function

€’000		Intangible assets	Machinery and equipment
Book value 1 January 2016 (restated)
Acquisition cost (restated)		348	32
Accumulated depreciation/amortisation		(65)	(4)
Book value 1 January 2016 (restated)		283	28
Additions		92	0
Depreciation/amortisation (restated)		(71)	(7)
Book value 31 December 2016 (restated)		304	21
As at 31 December 2016 (restated)
Acquisition cost		440	28
Accumulated depreciation/amortisation		(136)	(7)
Book value 31 December 2016 (restated)		304	21
Book value on 1 January 2017		304	21
Additions		90	8
Depreciation/amortisation		(69)	(7)
Book value 31 December 2017		325	22
As at 31 December 2017
Acquisition cost		530	36
Accumulated depreciation/amortisation		(205)	(14)
Book value 31 December 2017		325	22

Note 9            Non-current prepayments and other receivables

	As at 31 December
€’000	2017	2016 (Restated)
Prepayments for API	1,192	1,451
Production supplies	86	–
Other receivables	32	24
Total non-current prepayments and other receivables	1,310	1,475

Prepayments for API consist of payments remitted to manufacturer for API to be consumed in the Company’s development activities. Other receivables consist of restricted cash in the form of security deposits for rental agreements.

Note 10          Inventories

Inventories are stated at the lower of cost and net realizable value. The cost includes all costs of direct materials and external services associated with the process of manufacturing of the goods sellable upon obtaining the regulatory marketing approval. The cost of inventories is fully written down, with a corresponding charge recognised in research and development expenses until such approval has been obtained. When marketing approval from the relevant regulatory authority is received, the write-down is reversed to net realisable value, which may not exceed the original cost.

	As at 31 December
	2017	2016
€’000		(Restated)
Work in process	893	–
Write-down of inventory	(893)	–
Total inventories	–	–

Inventories purchased prior to regulatory marketing approval are recognised as inventory but are subject to full write-down. Write-downs of inventories to net realisable value amounted to EUR 893 thousand (2016 nil). These were recognised as research and development expenses. The Company has not reversed any previous inventory write-downs.

Note 11          Current prepayments and other receivables

		As at 31 December
€’000		2017	2016 (Restated)
Prepayments		1,594	1,200
Grant receivable		1,063	160
Receivable for production defects		434	–
VAT receivable		404	342
Receivable for joint purchase agreement		–	474
Other receivables		425	293
Total current prepayments and other receivables		3,920	2,469

The majority of prepayments consist of the Clinical Service Agreements with Contract Research Organisations, which are or were current service providers in different clinical trials. Grant receivable consist of the grant income from the European Union for which the grant payment has not been received.

Note 12          Shareholders’ equity

Movements in number of shares, share capital and reserve for invested unrestricted equity were as follows.

€’000	Total registered shares (pcs)	Share capital	Reserve for unrestricted equity
1 January 2016	23,111,704	2,691	23,843
Issue of new shares, net of transaction costs	3,200,000	–	8,519
31 December 2016	26,311,704	2,691	32,362
1 January 2017	26,311,704	2,691	32,362
Issue of new shares, net of transaction costs	2,672,340	–	15,863
Exercise of warrants	151,400	–	254
Exercise of options	29,100	–	97
31 December 2017	29,164,544	2,691	48,576

On 23 September 2016, the number of shares was increased to 26,311,704 following the issue of 3,200,000 new shares. On 1 March 2017, the number of shares was increased to 27,734,044 following the issue of 1,422,340 new shares. On 27 April 2017, the number of shares was increased to 27,787,034 following the issue of 52,990 new shares due to exercise of warrants. On 31 May 2017, the number of shares was increased to 27,914,544 following the issue of 127,510 new shares due to exercise of warrants and options and on 11 October 2017, the number of shares was increased to 29,164,544 following the issue of 1,250,000 new shares.

The Company has one class of ordinary shares. The shares have no par value. Each share entitles the holder to one vote at the Annual General Meeting and equal dividend. All shares are fully paid.

The subscription price for the shares is recorded to the share capital, unless the Board has made a resolution to record the subscription price in the reserve for invested unrestricted equity. Reserve of invested unrestricted equity includes, under the Finnish Limited Liability Companies Act, the exercise value of shareholders’ investment comprising share subscription prices and exercise prices of share options and warrants.

Note 13          Financial assets and liabilities

The Company’s financial assets comprise of other receivables and cash and cash equivalents, which are all classified to the category “loans and receivables”. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the reporting date, which are classified as non-current assets.

Other receivables consist mainly of the deferred grant income from the European Union for which the grant payment has not been received, carried at the amount expected to be received according to the terms and conditions of the grant.

Cash and cash equivalents comprise cash on hand and at banks.

The Company’s financial liabilities comprise of interest bearing borrowings, trade payables, other non-current and current liabilities.

Borrowings are initially recognised at fair value, less any directly attributable transaction costs. Subsequently borrowings are carried at amortised cost using the effective interest method. Borrowings are presented as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period. Borrowings are not derecognised until the liability has ceased to exist, that is, when the obligation identified in a contract has been fulfilled or cancelled or is no longer effective.

Borrowings comprise of three government loans with a below-market rate of interest from The Finnish Funding Agency for Technology and Innovation (“Tekes”, currently “Business Finland”), of which two have been fully drawn down before the Company’s date to transition to IFRS. Accordingly, the Company has utilized the IFRS 1 exemption and not accounted for the below-market grant separately for these two loans, which are carried at amortised cost.

The government loan originated after the date of transition to IFRS was initially recognised and measured at fair value and subsequently at amortised cost over the loan period by using the effective interest method. The grant component of the loan, which is the benefit of the below-market interest rate, is measured as the difference between the initial fair value of the loan and the proceeds received.

Trade payables and other liabilities are classified as current liabilities, unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period, in which case they are classified as non-current liabilities. The carrying amount of trade payables and other current liabilities are considered to be the same as their fair values, due to their short-term nature. Non-current liabilities are initially measured at fair value and subsequently at amortised cost.

		As at 31 December
		2017	2016
€’000			(Restated)
Loans and receivables
Other receivables (*)		1,497	634
Cash and cash equivalents		9,310	11,478
Total loans and receivables		10,807	12,112
Financial liabilities measured at amortised cost
Trade payables		3,196	2,021
Borrowings in form of Tekes R&D loans		2,426	2,176
Total financial liabilities measured at amortised cost		5,622	4,197

*Prepayments are excluded as they are not considered to be financial instruments.

Due to the short-term nature of the other receivables, their carrying amount is considered to equal their fair values.

Borrowings in the form of Tekes R&D loans

Fair value for the Tekes R&D loans is calculated by discounting estimated future cash flows for the loans using appropriate interest rates at the reporting date. The discount rate considers the risk-free interest rate and estimated margin for the Company’s own credit risk. Discounted future cash flows are derived from the terms containing the repayment amounts and repayment dates for the principal and the cash payments for interest. Given that some of the inputs to the valuation technique rely on unobservable market data, loan fair values are classified in Level 3.

The fair value of all the Tekes loans was EUR 2,139 thousand (2016 EUR 2,035 thousand).

Tekes R&D loans are granted to a defined product development project and cover a contractually defined portion of the underlying development projects’ R&D expenses. The below-market interest rate for these loans is the base rate set by the Ministry of Finance minus three (3) percentage points, subject to a minimum rate of 1%. Repayment of these loans shall be initiated after 5 years, thereafter loan principals shall be paid back in equal instalments over a 5-year period, unless otherwise agreed with Tekes. The accrued interest on Tekes R&D loans amounted to EUR 65 thousand (2016 EUR 20 thousand). Grant payments received in advance of the incurrence of the costs the grant is intended to compensate are deferred at the reporting date and presented under advances received on the balance sheet.

Analysis of net debt and the movements in net debt (calculated as cash and cash equivalents less borrowings) for each of the periods presented.

		As at 31 December
	2017		2016
€’000			(Restated)
Net debt
Cash and cash equivalents	9,310		11,478
Tekes R&D loans- repayable within one year	(338)		(93)
Tekes R&D loans- repayable after one year	(2,088)		(2,083)
Net debt	6,884		9,302
€’000	Cash and cash equivalents	Borrowings		Total
Net debt as at 1 January 2016	11,068	(1,691)		9,377
Cash flows	(217)	(775)		(992)
Foreign exchange adjustments	627	–		627
Other non-cash movements		290		290
Net debt as at 31 December 2016	11,478	(2,176)		9,302
Cash flows	(1,878)	(369)		(2,247)
Foreign exchange adjustments	(290)	–		(290)
Other non-cash movements		119		119
Net debt as at 31 December 2017	9,310	(2,426)		6,884

Note 14          Trade payables and other current liabilities

	As at 31 December
	2017	2016
€’000		(Restated)
Trade payables	3,196	2,021
Clinical trial hospital fees	1,241	245
Advances received	976	1,021
Accrued payroll	969	599
Accrued milestone payment	600	600
Accrued research costs	350	–
Other accruals	84	5
Other liabilities	301	65
Total	7,718	4,556

Advances received comprise mainly received grant payments from European Union for which the related grant income has not yet been recognised or which have not been forwarded to the other participants of the grant consortium.

Accrued expenses comprise mainly accrued clinical trial fees EUR 1,241 thousand (31 December 2016: EUR 245 thousand), salary accruals EUR 969 thousand (31 December 2016: EUR 599 thousand) and milestone payment EUR 600 thousand (31 December 2016: EUR 600 thousand).

Note 15          Contingencies and commitments

Operating lease – Faron as a lessee

The future aggregate minimum lease payments under non-cancellable operating leases are as follows

	Year ended 31 December
€’000	2017	2016
No later than 1 year	172	144
Later than 1 year and no later than 5 years	231	261
Later than 5 years	–	–

The Company’s operating lease commitments comprise of rent commitments for leasehold properties and lease commitments for cars, machines and equipment with leases of 3 to 4 years. The Company’s operating leases are non-cancellable and they do not include redemption or extension options.

Contractual contingencies

In addition to the accrued milestone payment to a subcontractor of Traumakine of EUR 600 thousand, the Company has contingent milestone payments of EUR 1,400 thousand to the same party that will become payable only upon the Company achieving certain milestones it its clinical development and obtaining the regulatory approval for Traumakine.

The Company has a contingent contractual liability to a development party for pre-clinical product candidate Clevegen to pay milestone payments. First milestone payment of EUR 427 thousand is contingent to production system reaching certain material yield threshold and the remaining ones upon the Company achieving subsequent regulatory filings and approvals for Clevegen. The milestone payments related to subsequent regulatory filings and approvals for Clevegen are considered to be remote. At the date of these financial statements there is no certainty that the yield threshold will be reached

Note 16          Related party transactions

The Company identifies the following related parties:

•      A&B (HK) Company Limited, an investment company existing under the laws of Hong Kong having significant influence in Faron Pharmaceuticals Oy, given its shareholding of 11.69% and membership on the Board of Directors.

•      Members of the Board of Director, and their close family members; and

•      Company’s Key Management team and their close family members

Faron has not had interests in other entities as at and for the years ended December 31, 2016 and 2017.

Key management personnel

The Company’s key management personnel consist of the following:

•      Members of the Board of Directors

•      Management team, including CEO

	Year ended 31 December
€’000	2017	2016
Compensation of key management personnel*
Salaries and other short-term employee benefits	1,668	832
Post-employment benefits	220	159
Share-based payments	883	785
Total	2,551	1,617

The Management team was awarded 249,850 share options during 2017 (2016: 303,600 share options). At the end of the 2017, the number of outstanding options and share granted to the Management team amounted to 663,450 share options (at the end of 2016: 413,600 share options).

Non-executive Directors were awarded 40,000 share options during 2017 (2016: 0 share options). At the end of 2017, the number of outstanding options and share options granted to the non-executive directors amounted to 600,000 share options (at the end of 2016: 560,000 share options).

Management and Board shareholding

Management* shareholding, 31 December 2017
Number of shares (pcs)	4,047,740
Shareholding, percentage	13.9 %
Board** shareholding, 31 December 2017
(excluding the shareholding of CEO and CFO)
Number of shares (pcs)	626,169
Shareholding, percentage	2.1 %
Total number of shares outstanding at 31 December 2017 (pcs)	29,164,544

*Presented information for the Management Includes the executive directors of the Board

**Presented information for the Board includes only non-executive directors.

Transactions with related parties

There are no additional related party transactions during 2017 and 2016 than already disclosed.

Faron Pharmaceuticals Ltd

(“Faron” or the “Company”)

Interim Results for the six months ended 30 June 2017

–       INTEREST Phase III Traumakine^® trial patient recruitment to complete in Q4 2017 and FDA advice received regarding advancement to BLA

–       Traumakine clinical development broadened to include organ protection opportunities

–       Clevegen^® advancing towards clinic

TURKU – FINLAND, 6 September 2017 – Faron Pharmaceuticals Ltd (“Faron”) (LON: FARN), the clinical stage biopharmaceutical company, today announces its unaudited Interim Results for the six months ended 30 June 2017 (the “Period”).

HIGHLIGHTS

Operational (including post period-end)

·      Pipeline progress with portfolio of products focused on acute organ traumas, vascular damage and cancer immunotherapy

·      Traumakine – lead product in late Phase III with opportunity to become world’s only approved ARDS treatment

o  Pivotal, pan-European, Phase III INTEREST trial with Faron’s lead product Traumakine for the treatment of Acute Respiratory Distress Syndrome (“ARDS”) continues as planned and is expected to complete recruitment of the targeted 300 patients during the fourth quarter of 2017.

o  Faron announced plans to initiate a program for compassionate use of Traumakine treatment once the trial is closed to new patients.

o  FDA proposal to proceed directly to BLA submission for Traumakine® upon completion of European and Japanese Phase III studies following successful discussions with the Agency as announced 4 September 2017.

o  Collaboration was initiated with INC Research/inVentiv Health – a global biopharmaceutical solutions organization with end-to-end clinical development and commercialization capabilities – to develop the pre-launch commercialization strategy for Traumakine. 

o  Japanese partner Maruishi continues to progress their pivotal Phase III ARDS trial in Japan and has received two IDMC recommendations to continue the trial as planned. Maruishi anticipates completion of recruitment in this 120 patient study during H1 2018.

o  Formulation patent granted in Finland and filed in the US and PCT for Faron’s IV dose form of interferon-beta.

o  First patient enrolled in February in the Phase II INFORAAA clinical trial of Traumakine for the treatment of Multi-Organ Failure (MOF) and mortality prevention of surgically operated Ruptured Abdominal Aorta Aneurysm (RAAA).

o  INFORAAA program open at five sites in Finland with three to four more planned in Estonia and Lithuania in the near future; filing in progress to open three to four sites in the UK.

·      Clevegen – wholly-owned novel cancer immunotherapy in development

o  Preclinical toxicity studies commenced as planned following successful production of technical batches of Clevegen by manufacturing partner Abzena.

o  Agreement signed with the University of Birmingham Medical School, UK, to initiate a liver cancer clinical trial program, focused on the protocol design for a Phase I/II trial.

o  Initiated protocol design to treat melanoma, pancreas and ovarian cancer with Clevegen and to be submitted to the Finnish regulatory authority, FIMEA, later this year.

Financial

·      Raised approximately £5.0 million before expenses through a placing of 1,422,340 Ordinary Shares at an issue price of 350 pence per share in March 2017.

·      Cash balances of €10.3 million (2016: €8.9 million) at 30 June 2017 aided by prudent cost control.

·      Operating loss of €7.2 million (2016: €3.0 million) for the six months ended 30 June 2017.

·      Net assets of €9.5 million (2016: €7.7 million) on 30 June 2017.

Corporate

·      Dr Juho Jalkanen was appointed as Vice President of Business Development in April and stepped down from the Board in May.

·      Two new Board members, Dr Gregory Brown and Mr John Poulos, with significant global networks, were appointed as Non-Executive Directors in May.

Commenting on the results, Dr Markku Jalkanen, CEO of Faron, said: “Our aim is to build Faron into a global business dedicated to addressing areas of significant unmet need, utilising the opportunities contained within our wholly owned pipeline of novel drug candidates. The Truamakine Phase III INTEREST study for ARDS completed two further independent safety reviews and is approaching completion of recruitment in Q4 2017. We are looking forward to the data readout, which if favourable, will pave the way for our first commercial launch of Traumakine. We were further encouraged by the FDA’s recent proposal to allow Traumakine to proceed directly to BLA submission upon completion of the European and Japanese trials and which will likely result in a faster and cheaper route to market in the US in the event of positive data. 

“Beyond ARDS, we believe that Traumakine has excellent potential for application in other areas of organ protection. Impairment of endothelial barrier can be a reason for many organ dysfunctions. We are currently exploring its efficacy in addressing Multi-Organ Failure and mortality in patients with surgically operated Ruptured Abdominal Aorta Aneurysm (RAAA) through a Phase II trial.

“We are also pleased to have made substantial progress with our novel cancer immunotherapy candidate Clevegen, which works to remove immune suppression around tumours caused by tumour associated type-2 macrophages (TAM). Following the development of our new TIET platform and the commencement of preclinical toxicity studies we are now preparing to embark upon an extensive clinical program to investigate this promising candidate. In addition to its potential application in oncology, we are excited by Clevegen’s potential application in a broader range of indications including chronic infections and vaccination enhancement.”

For more information please contact:

Faron Pharmaceuticals Ltd

Dr Markku Jalkanen, Chief Executive Officer

investor.relations@faron.com 

Consilium Strategic Communications

Mary-Jane Elliott, Chris Welsh, Philippa Gardner, Lindsey Neville

Phone: +44 (0)20 3709 5700

E-mail: faron@consilium-comms.com

Westwicke Partners, IR (US)

Chris Brinzey

Phone: 01 339 970 2843

E-Mail: chris.brinzey@westwicke.com

Cairn Financial Advisers LLP, Nominated Adviser

Emma Earl, Tony Rawlinson

Phone: +44 207 213 0880

Panmure Gordon (UK) Limited, Joint Broker

Freddy Crossley, Duncan Monteith (Corporate Finance)

Tom Salvesen (Corporate Broking)

Phone: +44 207 886 2500

Whitman Howard Limited, Nominated Broker

Ranald McGregor-Smith, Francis North

Phone: +44 207 659 1234

About Faron Pharmaceuticals Ltd

Faron (AIM:FARN) is a clinical stage biopharmaceutical company developing novel treatments for medical conditions with significant unmet needs. The Company currently has a pipeline focusing on acute organ traumas, vascular damage and cancer immunotherapy. The Company’s lead candidate Traumakine, to prevent vascular leakage and organ failures, is currently the only treatment for Acute Respiratory Distress Syndrome (ARDS) undergoing Phase III clinical trials.  There is currently no approved pharmaceutical treatment for ARDS. An additional European Phase II Traumakine trial is underway for the Rupture of Abdominal Aorta Aneurysm (“RAAA”). Faron’s second candidate Clevegen is a ground breaking pre-clinical anti-Clever-1 antibody. Clevegen has the ability to switch immune suppression to immune activation in various conditions, with potential across oncology, infectious disease and vaccine development. This novel macrophage-directed immuno-oncology switch called Tumour Immunity Enabling Technology (“TIET”) may be used alone or in combination with other immune checkpoint molecules for the treatment of cancer patients. Faron is based in Turku, Finland. Further information is available at  www.faron.com

 

Chairman’s and Chief Executive Officer’s Review

Introduction

We are pleased to report on the progress of Faron Pharmaceuticals during the six months ended 30 June 2017, a period which has seen the Company make significant progress in the development of its most advanced drug candidates Traumakine and Clevegen. We believe that the Company is now well placed to move into its next stage of development as a commercial entity as we anticipate the outcome of data from the INTEREST trial. As such, during the period we established a collaboration with a biopharmaceutical solutions organization to prepare a commercialization strategy for Traumakine for execution in the event of a positive INTEREST trial outcome. In addition, we believe that in time Faron could become the world’s leading company around organ protection in cardiovascular surgery, transplantation, and other ischemic-reperfusion injuries of vital central organs.

Traumakine – progressing towards completion of Phase III recruitment in Q4 2017

Faron’s lead candidate Traumakine continues to progress through the clinic and we anticipate that INTEREST, the pivotal, pan-European, Phase III trial for the treatment of Acute Respiratory Distress Syndrome (“ARDS”) will complete recruitment of the targeted 300 patients during the fourth quarter of 2017. In August, Faron announced plans to initiate an early access program for compassionate use of Traumakine once the trial is closed to new patients following the fifth meeting of the trial’s Independent Data Monitoring Committee (IDMC) which recommended continuation of the study as planned. The early access programme will allow compassionate use of Traumakine in eligible named patients at European ICU hospitals, who may benefit from Traumakine treatment ahead of the product’s potential regulatory approval.

Following successful pre-IND discussions, we are pleased to report that the FDA has proposed that Faron can proceed directly to Biologics License Application (BLA) submission pending positive results from the two on-going Phase III trials in Europe and Japan. In the letter received on 1 September 2017, the FDA proposed that, subject to the FDA being satisfied with data from the trials, the BLA application for Traumakine can be filed purely with data obtained from the ongoing trials outside of the US. In the event of positive outcomes of the ongoing trials this FDA feedback is therefore expected to shorten the time for approval of Traumakine in US. 

Faron has decided to discuss this new important feedback with its US experts, who have been involved in planning the development of Traumakine in the US. Based on the outcome of these discussions the Company will refine its strategy to build its US presence based on the recent FDA feedback.

In preparation, we are in the process of recruiting a clinical/regulatory head for our Boston office to coordinate US Traumakine development. The US will be a key market for Faron, as demonstrated by the FDA’s Office of Orphan Products Development (OOPD), which has estimated that US annual diagnoses for ALI/ARDS totals 300,000 cases, based on information in the national inpatient sample (NIS) and national hospital discharge survey (NHDS) databases. This is a larger market than previously estimated, which makes Traumakine ineligible for Orphan Drug Designation in the US.

Our partner Maruishi continues to progress its pivotal Phase III trial in Japan and two IDMC recommendations to continue the trial as planned have been received. Maruishi expects to complete recruitment in the first half of 2018. The Company believes that in Korea and Greater China, where commercial partnerships have already been established, further clinical studies may not be needed to secure approval in the event of a positive outcome from the INTEREST trial.

While the Company’s primary focus is on gaining approval for Traumakine in the treatment of ARDS, we also believe that the product has the potential for application in additional disease areas. In February, the first patient was enrolled in the Phase II INFORAAA clinical trial of Traumakine, for the treatment of Multi-Organ Failure (MOF) and mortality prevention of surgically operated Ruptured Abdominal Aorta Aneurysm (RAAA).

Ruptured Abdominal Aortic Aneurysm (RAAA) is a surgical emergency with an overall mortality of 70 to 80% and requires immediate surgery and aortic repair. The main cause of death for these patients is multiple organ failure following a post-operative reperfusion injury of ischemic organs including kidneys, liver, brain and intestines. We believe that Traumakine has the potential to offer significantly improved outcomes for patients following surgery for RAAA. Furthermore, there is the possibility that a positive INFORAAA outcome could be supported by data from the INTEREST trial towards regulatory filings. We also believe that the clinical data from the INFORAAA trial could also provide us with valuable information on the recovery of ischemic single organ injuries and are planning further trials to treat these injuries. The INFORAAA program now has six sites open in Finland with three to four more expected to open in Estonia and Lithuania in the near future. Applications to open three to four sites in the UK are also in progress.

Clevegen – novel cancer immunotherapy approaching start of first Phase I/II trials

Faron’s second product, its pre-clinical immunotherapy candidate, Clevegen, causes conversion of the immune environment around a tumour from immune suppressive to immune stimulating by reducing the number and function of tumour-associated macrophages (TAMs). Recent developments in the exciting field of cancer immunotherapy have been well documented with a number of important indications of clinical success. We believe that Clevegen is differentiated from other immunotherapies through its specific targeting of M2 TAMs which facilitate tumour growth, while leaving intact the M1 TAMs that support immune activation against tumours.

Preclinical toxicity studies of Clevegen have commenced as planned, following successful production of technical batches by our manufacturing partner Abzena. In April the Company signed an agreement with the University of Birmingham Medical School, UK, to initiate a liver cancer clinical trial program, focused on the protocol design for a Phase I/II trial, TIETALC, (Tumour Immunity Enabling Technology Against Liver Cancer). We expect to receive regulatory feedback for the Phase I/II liver cancer protocol from the UK regulatory authority (MHRA) during the second half of 2017. In addition, feedback on the protocol for other solid tumours (melanoma, ovarian and pancreas cancers) from the Finnish regulatory authority (FIMEA) is also expected during the second half of 2017.

Faron also continues a close collaboration with the MediCity unit of Turku University Medical School, where Faron has sponsored a set of Clevegen related preclinical experiments. Data reported at the international Juselius Symposium (June 2017, Helsinki, Finland) demonstrated how genetic depletion of macrophage Clever-1 resulted in tumour growth resistance and prevented the spread of Lewis lung cancer in preclinical models. Furthermore, signs of strong immune activation were observed, as evidenced by CD8 positive T-cells at the tumour site, in line with the expected effect of Clevegen.

Financial Review

During the period, Faron continued to maintain its focused and cost-conscious financial strategy, without compromising the intensity of the development work. The Company raised approximately £5.0 million before expenses through the Placing of 1,422,340 Ordinary Shares at a premium to the Company’s share price, which indicates the level of confidence our investors, both new and established, have in our products, our strategy and the ability of our management team to deliver. The R&D expenses increased significantly but less than anticipated resulting to an operating loss of €7.2 million. The loss combined with the placing during the period, resulted in a fairly modest cash outflow. Thus the cash balances at the end of the period stood at €10.3 million and were stronger than anticipated. No operating income from the EU FP7 grant was recorded during the period as the report for the period ended in May 2017 has not yet been approved by EU. After the EU FP7 grant has been fully utilised, the Company will continue its proven active and successful strategy to utilise various forms of public funding – both grants and loans.

Summary & Outlook

Faron is on track to complete recruitment in the pivotal Phase III INTEREST trial in the fourth quarter of 2017. If the data are favourable this will represent a significant milestone for the Company and will pave the way for the launch of our first commercial product Traumakine, for the treatment ARDS, an area of genuine unmet medical need with poor patient prognosis. We are preparing for potential commercialisation in Europe and plan to make Traumakine available to patients on a compassionate use basis ahead of potential approval. We continue to explore additional opportunities for Traumakine to protect organs beyond the lung in order to maximise the opportunity for our lead asset. We also look forward to making significant progress with our exciting immuno-oncology candidate, Clevegen, now in primate toxicological studies. The Board is confident that both Traumakine and Clevegen position Faron well for the future and looks forward to the coming period with great confidence. 

Caution regarding forward looking statements

Certain statements in this announcement, are, or may be deemed to be, forward looking statements. Forward looking statements are identified by their use of terms and phrases such as ”believe”, ”could”, “should”, “expect”, ”envisage”, ”estimate”, ”intend”, ”may”, ”plan”, ”potentially”, ”will” or the negative of those, variations or comparable expressions, including references to assumptions. These forward looking statements are not based on historical facts but rather on the Directors’ current expectations and assumptions regarding the Company’s future growth, results of operations, performance, future capital and other expenditures (including the amount, nature and sources of funding thereof), competitive advantages, business prospects and opportunities. Such forward looking statements reflect the Directors’ current beliefs and assumptions and are based on information currently available to the Directors.

A number of factors could cause actual results to differ materially from the results and expectations discussed in the forward looking statements, many of which are beyond the control of the Company. In particular, the outcome of clinical trials (including, but not limited to the Company’s INTEREST trial) may not be favourable or clinical trials over and above those currently planned may be required before the Company is able to apply for marketing approval for a product.  In addition,  other factors which could cause actual results to differ materially include risks associated with vulnerability to general economic and business conditions, competition, environmental and other regulatory changes, actions by governmental authorities, the availability of capital markets, reliance on key personnel, uninsured and underinsured losses and other factors.  Although any forward looking statements contained in this announcement are based upon what the Directors believe to be reasonable assumptions, the Company cannot assure investors that actual results will be consistent with such forward looking statements. Accordingly, readers are cautioned not to place undue reliance on forward looking statements. Subject to any continuing obligations under applicable law or any relevant AIM Rule requirements, in providing this information the Company does not undertake any obligation to publicly update or revise any of the forward looking statements or to advise of any change in events, conditions or circumstances on which any such statement is based.

 

Statement of comprehensive income                        (Stated in 1,000 euros)		Note	Unaudited six months ended 30 Jun 2017		Unaudited six months ended 30 Jun 2016 (1)	Year ended 31 Dec 2016
Revenue		2	7		419	1 153
Cost of sales			–		–	–
Gross profit			7		419	1 153
Other operating income		3, 4	103		968	1 742
Administrative expenses			(1 320)		(974)	(2 161)
Research and development expenses			(5 709)		(3 795)	(9 592)
Operating result			(6 919)		(3 382)	(8 858)
Financial income			6		0
Financial expenses			(299)		(305)	(361)
Net financial costs			(293)		(305)	(361)
Loss before income taxes			(7 212)		(3 686)	(9 219)
Income tax expense			(1)		–	(75)
Total comprehensive income for the period			(7 213)		(3 686)	(9 294)
Total comprehensive income, attributable to:
Equity holders of the Company			(7 213)		(3 686)	(9 294)
Loss per share attributable to equity holders of the Company
Basic and diluted loss per share, euro		5	(0,26)		(0,16)	(0,39)
		Unaudited		Unaudited
Balance sheet                                                          (Stated in 1,000 euros)	Note	30 Jun 2017		30 Jun 2016  (1)		31 Dec 2016
Assets
Non-current assets
Propertly, plant and equipment		18		24		21
Intangible assets		897		926		933
		915		950		954
Current assets
Inventories		1503		1 021		1 451
Trade and other receivables		3 333		3 161		3 404
Cash and cash equivalents		10 333		8 862		11 478
		15 169		13 044		16 333
Total assets		16 084		13 994		17 287
Equity and liabilities
Capital and reserves attributable to equity holders of the Company
Share capital		2 691		2 691		2 691
Reserve for invested non-restricted equity		39 815		25 244		34 006
Retained earnings		(33 027)		(20 206)		(25 814)
Total equity		9 480		7 729		10 884
Non-current liabilities
Interest-bearing financial liabilities	4	2 434		2 057		2 033
		2 434		2 057		2 033
Current liabilities
Interest-bearing financial liabilities		65		93		93
Non-interest-bearing financial liabilities		2 011		1 009		1 874
Other current liabilities		2 094		3 105		2 403
		4 170		4 207		4 371
Total liabilities		6 604		6 265		6 404
Total equity and liabilities		16 084		13 994		17 287
(1) Restated to reflect that €0.75m of revenue (relating to the signing fee paid by PharmBio) was reclassified from revenue to a current liability in the balance sheet in the year ended 31 December 2016. Accordingly, to provide comparability with the prior period, the same reclassification has been applied for the 6 months ended 30 June 2016 above. The impact of this on associated taxes has also been restated.

Statement of changes in equity (Stated in 1,000 euros)	Share capital	Reserve for invested non-restricted equity	Retained earnings	Total equity
Balance at 31 December 2015	2 691	24 533	(16 046)	11 178
Total comprehensive income for the first six months 2016			(2 580)	(2 580)
				–
Transactions with equity holders of the Company				–
Share base payment			237	237
Increase of share capital		–	–	–
Transaction costs on share capital issued				–
Conversion of convertible notes			–	–
	–	–	(2 342)	(2 342)
Balance at 30 June 2016	2 691	24 533	(18 389)	8 836
Total comprehensive income for the last six months 2016			(6 714)	(6 714)
				–
Transactions with equity holders of the Company				–
Share base payment			243	243
Increase of share capital		9 330	–	9 330
Transaction costs on share capital issued		(811)		(811)
Conversion of convertible notes			–	–
	–	8 519	(6 471)	2 048
Balance at 31 December 2016	2 691	33 052	(24 860)	10 884
Total comprehensive income for the first six months 2017			(7 213)	(7 213)
Transactions with equity holders of the Company				–
Share base payment				–
Increase of share capital		6 197	–	6 197
Transaction costs on share capital issued		(388)		(388)
Conversion of convertible notes			–	–
	–	5 809	(7 213)	(1 404)
Balance at 30 June 2017	2 691	38 861	(32 073)	9 480

Statements of cash flows                                     (Stated in 1,000 euros)	Unaudited 1 Jan – 30 Jun 2017	Unaudited 1 Jan – 30 Jun 2016	1 Jan – 31 Dec 2016
Cash flow from operating activities
Loss(-) / profit(+) attributable to equity holders of the Company	(7 213)	(3 686)	(9 294)
Adjustments for
Depreciation and amortization	80	79	168
Financial items	293	305	361
Income taxes	1	–	75
Expensed R&D	–	–	–
Non-cash items (options granted)	–	237	480
Change in net working capital:
Trade and other receivables	71	(1 086)	(1 330)
Inventories	(52)	(728)	(802)
	(173)	2 162	2 325
Interest and other financial costs paid	(299)	(305)	(361)
Interest and other financial income received	6	0	0
Income taxes paid	(1)	–	(75)
Net cash used in / from operating activities  (A)	(7 287)	(2 666)	(8 452)
Cash flow from investment activities
Investments in machinery and equipment and intangible assets	(41)	–	(92)
Net cash from/used in investing activities (B)	(41)	–	(92)
Cash flow from financing activities		–
Proceeds from issue of share capital issue, net	5 809	–	8 519
Proceeds from issue of convertible notes	–	–
Proceeds from current borrowings	–	–	(151)
Proceeds from non-current borrowings	401	611	587
Repayment of current borrowings	(28)	(151)	–
Net cash used in financing activities (C)	6 182	460	8 955
Net increase(+) / decrease (-) in cash and cash equivalents (A+B+C)	(1 145)	(2 206)	410
Cash and cash equivalents at 1 January	11 478	11 068	11 068
Cash and cash equivalents at end of period	10 333	8 862	11 478

 

Note 1  Basis of Preparation

Corporate information

Faron Pharmaceuticals Ltd. (hereafter “Faron” or “Company”) is a Finnish private limited liability company organized under the laws of Finland and domiciled in Turku, Finland. The Company’s registered address is Joukahaisenkatu 6 B, 20520 Turku, Finland. Faron Pharmaceuticals Ltd. is a clinical stage drug discovery and development company. Currently Faron has three major drug development projects focusing on: acute trauma, inflammatory diseases; and cancer growth and spread.

Basis of accounting

The unaudited interim financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (and as published by the International Accounting Standards Board (IASB) and in force as at 30 June 2017. In the EU IFRS are standards and their interpretations adopted in accordance with the procedure laid down in regulation (EC) No 1606/2002 of the European Parliament and of the Council. These policies are consistent with those used in the financial statements for the year ended 31 December 2016 and with those that the Company expects to apply in its financial statements for the year ending 31 December 2017.

The interim financial statements do not include all of the information required for full annual financial statements and do not comply with all the disclosures in IAS 34 “Interim Financial Reporting”. Additionally though the interim financial statements have been prepared in accordance with IFRS, they are not in full compliance with IFRS.

Going Concern

The Company has prepared forecasts to estimate the Company’s cash requirements over the next twelve months. In order to make these forecasts the Company has made a number of assumptions regarding the quantity and timing of future expenditure and income as well as other key factors. Though these estimates have been made with caution and care, they continue to contain a significant amount of uncertainty. Based on the forecast the Company believes that it has adequate financial resources to continue its operations for the foreseeable future (at least twelve months from the date of this report) and therefore these interim financial statements have been prepared on a going concern basis. 

In its meeting on 5 September 2017 the Board of Directors of Faron Pharmaceuticals Ltd. approved the publishing of interim financial statements.

Note 2  Revenue

The revenue for the first six months in 2017 EUR 7,463 euro. This consisted of payment of INF-beta production.

Note 3  Other operating income

Other operating income of EUR 103 097 consists of the grant component of government subsidized loan. In accordance with IFRS 39 below-market level government loans must be divided into Fair-value -component and Grant component. Thus, the Tekes -loan drawn down during 2016 and 2017 have been decomposed and the grant component is recorded in Other operating income.

Note 4  Tekes loans

During H1 2017 Faron drew down a fourth instalment of EUR 452,908 of the Tekes loan for the Clevegen development work, bringing the total amount of the third Tekes loan to EUR 1,228,080 and the total amount of all Tekes loans drawn down to EUR 2,890,660. The third loan has also a maturity of 10 years from the first instalment, of which the first five years are free of repayment. The interest rate for all Tekes loans is currently one per cent. Loans are unsecured and if the projects fall short of their goals and results cannot be commercialised, part of the loans may be converted into a grant.

Note 5  Loss per share	H1 2017	H1 2016	2016
	€ ‘000	€ ‘000	€ ‘000
Basic
Basic loss per share is calculated by dividing the loss attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year.
Loss attributable to equity holders of the Company (EUR 1,000)	(7 213)	(3 686)	(9 294)
Weighted average number of ordinary shares in issue	27 290 736	23 111 704	23 979 650
Basic (and dilutive) loss per share, EUR	(0,26)	(0,16)	(0,39)
Issued ordinary shares at 1 January	23 111 704	23 111 704	23 111 704
Effect of shares issued	4 179 032	–	867 946
Weighted-average number of ordinary shares at end of period	27 290 736	23 111 704	23 979 650
Diluted
Diluted loss per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares.
Loss attributable to equity holders of the Company (EUR 1,000)	(7 213)	(3 686)	(9 294)
Interest adjustment		–
Diluted weighted average number of ordinary shares in issue	27 593 783	23 164 610	23 979 650
Basic loss per share, EUR	(0,26)	(0,16)	(0,39)
Weighted-average number of ordinary shares
Issued ordinary shares at 1 January	23 111 704	23 111 704	23 111 704
Effect of shares issued	4 179 032	0	867 946
Weighted-average number of ordinary shares at end of period	27 290 736	23 111 704	23 979 650
Dilution effect of convertible loans			–
Dilution effect of outstanding options	303 047	52 906	–
Diluted weighted-average number of ord. shares at end of period	27 593 783	23 164 610	23 979 650

FURTHER INFORMATION TO SHAREHOLDERS

AIM:                                                           FARN

Company number:                 (ISIN) FI4000153309

Investor website:                    http://www.faron.com/investor-relations

Registered office:                   Joukahaisenkatu 6, 20900 Turku, FINLAND

Directors:                              Frank Armstrong (Non-Executive Chairman)

                                            Matti Manner (Non-Executive Vice-Chairman)

                                            Gregory B. Brown (Non-Executive Director)

                                            Markku Jalkanen (CEO)

                                            Jonathan Knowles (Non-Executive Director)

                                            Huaizheng Peng (Non-Executive Director)

                                            John Poulos (Non-Executive Director)

                                            Leopoldo Zambeletti (Non-Executive Director)

 Yrjö Wichmann (CFO)