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16186_01_arpida_e_06:arpida_geschäftsbericht

Annual Report 2006 Major pipeline progress: • Positive results from • Intravenous iclaprim with intravenous achieves primary end- iclaprim in special point in its first Phase • Concentration of re- • AR-709 in clinical search operations in Reinach, Switzerland Cash and financial invest-ments of CHF 72.8 millionat 31 December 2006 Further pipeline progress Several key appointments Headquarters moved to new • Completion of second Arpida is a biopharma- premises in Reinach Phase III trial with intra- ceutical company that focuses on the discoveryand development of novel • New Drug Application pharmaceutical products for intravenous iclaprim for the treatment of micro- in its first indication in bial infections.
• AR-709 to move ahead Arpida's mission is to Continued careful control discover and develop in - novative drugs and providecaregivers with novel ther -apies to overcome the "antibiotic crisis".
Arpida aims to become aworld-leading biopharma-ceutical company in thearea of antibacterial drugs.
The longer-term goals are to complement the integrat-ed research and develop-ment capabilities with ahospital-focused sales andmarketing infrastructureand to co-promote, co- develop or enter into stra -tegic partnerships with major pharmaceutical orbiopharmaceutical compa-nies, provided satisfactoryterms and conditions canbe achieved.

Table of Contents Letter to Our Shareholders Arpida's Stock and Financial Review The Antibiotics Market: Crisis and Opportunity Research and Development Corporate Governance This annual report contains certainforward-looking statements. These forward-looking statements may beidentified by words such as "believes", "expects", "anticipates", "projects","should", "seeks", "estimates", "future" or similar expressions or bydiscussion of, among other things,strategy, goals, plans or intentions.
Various factors may cause actual results to differ materially from thosereflected in the forward-looking statements contained in this annualreport.
This annual report is available in English only. A German summary is available on request. Contact datacan be found on the back cover.
Der vorliegende Geschäftsbericht istnur auf Englisch erhältlich. Einedeutsche Zusammenfassung wird aufVerlangen zur Verfügung gestellt.
Daten zu Kontaktpersonen finden sichauf der Rückseite des Berichts.

Clear Lines of Progress Annual report 2006 Dr André Lamotte, Chairman of the Board of Directors Dr André Lamotte President and CEO Chairman of the Board of Directors Letter to Our Shareholders Annual report 2006 Letter to Our Shareholders The key event in 2006 was surely the publication of the As expected, the cash burn increased relative to 2005, as positive results of our first pivotal Phase III study with the Phase III trials in cSSSI were running on full steam. As intravenous iclaprim in complicated Skin and Skin Structure at year-end 2006, cash and financial investments amounted Infections (cSSSI). On 30 November, we announced to CHF 72.8 million, down from CHF 122.4 million at the these top-line data for the 497 patients enrolled in the trial (ASSIST-1). The primary efficacy endpoint of statistical non-inferiority to Zyvox® was achieved. Iclaprim's cure rate After the excellent clinical progress achieved in 2006, compares very favourably to those of other MRSA drugs, Arpida has come significantly closer to its aim: to become either approved or in clinical development. Moreover, a leading biopharmaceutical company in the area of anti- iclaprim showed an excellent safety profile in ASSIST-1, bacterial drugs. Iclaprim has made tremendous progress confirming the results of earlier studies. With these data, and remains on track towards filing and launch and AR-709 iclaprim has now been compared successfully with both has moved into the clinic. vancomycin (Phase II) and Zyvox® (Phase III).
In February of 2007 we announced positive results from Another important milestone that is worthy of mention is a Phase I study with intravenous iclaprim in volunteers the progress of AR-709 into human studies. In the second with varying degrees of renal and hepatic impairment and half of 2006, the regulatory agency in the UK granted obesity. This study adds important information for a New authorisation to start "first-in-man" studies with AR-709, Drug Application. The results suggest that patient monitor- making it Arpida's second compound to move into the ing may not be required. Also, in February 2007, we an- clinic. AR-709 originates from our own research efforts nounced an important focusing of our research organisa- based on a rational drug design approach. This success not tion, concentrating operations at the headquarters in only broadens our pipeline, but also confirms the quality of Reinach, Switzerland. This strategic re-alignment should our research engine. We expect this study to yield important bring about an integration and concentration of research pharmacological information for the further development of efforts, enabling an acceleration of the progress of the most advanced research compounds towards development.
In addition, in 2006, we started operations in the USA. We Arpida continues to be committed to finding new products have attracted a highly qualified team at Arpida, Inc., as aimed at areas with high medical need. During 2006, the well as several high-calibre Board members. Among them urgency of the need for new speciality antibacterial prod- are Professor John G. Bartlett, an iconic figure in the field ucts was again emphasised in a number of publications, of infectious diseases, and Daniel A. Mica, a former both scientific and general. In these, leading experts make member of the US House of Representatives.
alarming statements such as: "Drug-resistant infections kill The US company currently has a headcount of nine and is more Americans than AIDS and breast cancer combined", active in preclinical research and in facilitating our clinical or "More and more bugs are becoming dangerously close to trials in the USA. This is our first step into the strategically important North American market.
Undoubtedly, 2007 will pose new challenges, but we are In the summer of 2006, we were able to announce another convinced we have the product, the team and the financial key addition to Arpida's ranks as Dr Jürgen Raths joined the resources to continue to deliver on our promises. Board of Directors of Arpida Ltd. Dr Raths has more than 15years of experience in sales and marketing in the pharma- The Board of Directors wishes to thank all those who ceutical industry. We feel he will make a valuable contribu- contributed to Arpida's progress in 2006, including tion to the company's development, particularly as iclaprim employees, shareholders and business partners. Your is approaching the final stages of its development path.
dedication to Arpida is essential for its success.
In the final weeks of 2006, the company successfully completed a major logistical operation, moving the head-quarters from Münchenstein to Reinach. The new premisesprovide state-of-the-art laboratory and office space and offer room for further growth.
We are also very pleased with the excellent performance Dr André Lamotte of the Arpida share in its second year on the SWX Swiss President and CEO Exchange, rising by 93% to CHF 29.55 at year-end. Arpida's Board of Directors market capitalisation at year-end 2006 amounted to CHF507.8 million.
Reinach, 9 March 2007 Development of share price and trading volumes in 2006 Arpida (LH scale) Swiss Biotech rebased (LH scale) Average daily volume (RH scale) Arpida's Stock and Financial Review On 4 May 2005, Arpida issued 5.4 million new shares and Trading in the shares was increasingly lively during 2006.
listed all its shares through an Initial Public Offering (IPO) On average, some 90,000 Arpida shares were traded per on the SWX Swiss Exchange. Concurrently, the shares of the day in 2006, compared with 40,000 in 2005.
pre-IPO investors, in total representing 67% of the capital atthe time, were subject to a twelve-month lock-up. After a As far as Arpida is aware, the following shareholders had successful block trade and after the expiration of the lock- holdings of over 5% as at 31 December 2006.
up obligation in May 2006, the free-float increased to 100%and has remained at that level since then.
% of share capital The stock is included in the Swiss Performance Index as well as in the sub-indices for Life Science and Biotech/Medtech companies. The stock ended the year at CHF 29.55, yielding * The Arpida shares are held by several units within the Group.
a performance of 93% for the year under review. As per year-end 2006, there were 17,183,232 shares out- Arpida has only registered common shares outstanding.
standing, giving Arpida a market capitalisation of CHF 507.8 Some 88% of the identified shares are held by institutional million on an undiluted basis.
investors, with the remainder being held by private share- Annual report 2006 Arpida's Stock and Financial Review holders. In total, some 1,300 shareholders are entered Management and general expenses rose to CHF 9.2 million in the share register. The geographical split at year-end in 2006 (CHF 7.3 million in 2005). The increase is due to 2006 was as follows: the fact that additional administrative and corporate func-tions were filled in the course of 2006.
Expenses related to stock option grants are included in research, in development and in management and general Overall, the operating loss for the year 2006 amounts to CHF 73.6 million (2005: CHF 36.5 million). Taking into consideration the positive effect of the financial result of CHF 1.1 million and the income tax expense of CHF 0.1 million, the net loss for 2006 amounts to CHF 72.5 million The major changes in the geographical mix of the share- (2005: CHF 35.1 million).
holder structure during 2006 mainly reflect a shift in owner-ship from former pre-IPO investors towards UK- and Swiss- Balance sheet and cash flow based investment funds. None of the pre-IPO shareholders As at year-end 2006, cash and financial investments stood held stakes over 5% as at year-end 2006, compared with at CHF 72.8 million as compared with CHF 122.4 million as three at year-end 2005.
of 31 December 2005. These funds are invested in moneymarket accounts with first-rate banks.
As of year-end 2006, the Arpida share was covered by eightequity research analysts from domestic and international Arpida has no third-party interest-bearing debt outstanding.
investment banks, up from five at year-end 2005. During2006, two Swiss banks terminated coverage, due to dis - The cessation of research activities at Arpida A/S in Copen- continuation of the relevant operations. On the other hand, hagen has led to an impairment of tangible and intangible five banks initiated equity research coverage. assets of approximately CHF 1.2 million and CHF 6.1 mil-lion, respectively. These non-cash charges have been in-cluded in the 2006 accounts.
For the full year 2006, cash used in operating activities increased to CHF 52.6 million (CHF 33.4 million in 2005).
Key financial indicators Investing activities required CHF 4.3 million in 2006 (2005:CHF 1.7 million). The increase mainly reflects spending on equipment in the company's new premises in Reinach and Research and development expenses long-term financial investments made.
Management and general expenses Total operating expenses During 2006, the payment of the strike price from exercis- ing employee stock options resulted in a cash inflow from Cash and financial investments financing activities of CHF 4.5 million. The large cash inflow in 2005 was the result of the cash raised in the Initial Pub- Equity at year-end lic Offering at the SWX Swiss Exchange. In 2006, the two ASSIST trials with intravenous iclaprim In 2006 Arpida generated CHF 0.3 million of revenues, weighed heavily on the cash position. In 2007, the amount related to contract research for third parties. In 2005, there spent on the ASSIST programmes will decrease substan- were no revenues.
tially. On the other hand, costs related to the filing of a NewDrug Application and pre-launch activities for iclaprim will Research and development expenses increased to CHF be substantial. Moreover, spending on the development of 64.7 million in 2006. Excluding the non-cash impairment AR-709 and oral iclaprim will increase.
charges related to the cessation of research activities atArpida A/S in Copenhagen (CHF 7.3 million), research anddevelopment expenses amounted to CHF 57.4 million(2005: CHF 29.2 million). This increase primarily stemsfrom the Phase III clinical trials with iclaprim in complicatedSkin and Skin Structure Infections the costs of which are borne solely by Arpida. Furthermore, the set-up andconduct of US operations contributed to the increase in operating expenses.
Robert Moellering, infectious disease specialist at Harvard Medical School, in Forbes, June 2006 Forbes, June 2006 Pandemic bug returns as community MRSA strain.
Dr M. C. Enright, University of Bath, in New Scientist, April 2005 Infectious Diseases Do Not Respect Boundaries Annual report 2006 Theodor C. Eickhoff, MD, in Infectious Disease News, September 2006 Investigation Johns Hopkins Hospital, September 2006 Newsweek, December 2006 The Antibiotics Market: Crisis and Opportunity Annual report 2006 The Antibiotics Market The antibiotic crisis Global antibacterial market Data published by the European Antimicrobial Resistance Based on analysts' expectations, overall growth in the Surveillance System (EARSS) show that bacterial resistance global antibacterial market is modest. However, within to methicillin (oxacillin) has been rapidly increasing in the market, different parts show very different dynamics.
Europe, as it has been in the USA. On average, MRSA rates On the one hand, blockbusters such as Zithromax® in intensive care units in the five largest European countries (azithromycin) are facing patent expiry, leading to signifi- has increased to 42% in 2005, with the UK showing the cantly lower revenues. On the other hand, emerging health- highest rates of the five, at around 65%. According to the care threats, such as MRSA, require novel drugs, leading to EARSS report, no less than twelve countries reported a double-digit growth in this part of the market. The MRSA significant increase in the proportion of MRSA within the part of the market is growing so rapidly that market re- last seven years. search bureau Datamonitor recently signalled that it can nolonger be considered a "niche" market. MRSA rates in intensive care units in 2005 As at the end of 2006, five antibiotics (including generics)made up the bulk of the "MRSA-market", up from three in 2002. Based on analysts' research and company state- ments, total revenues in this market are estimated to have reached USD 1.5 billion in 2006, up from USD 570 million in 2002, implying annual growth rates of close to 25% for the years 2003–2006.
This high growth rate is mainly driven by three factors.
First, the increasing age of the population, requiring more EUR Big 5 Rest EUR surgery and leading to more hospital stays, in turn raisingthe chances of acquiring hospital infections. A second Source: European Antimicrobial Resistance Surveillance System (EARSS) annual important trend concerns the rising bacterial resistance to report 2005; US CDC National Nosocomial Infections Surveillance (NNIS) System older drugs. These first two factors lead to an increase of Report 2004.
the market in volume terms. A third factor is the gradual re-placement of older generic drugs by more expensive new Apart from hospital-acquired MRSA, the threat of Commu- branded drugs. This boosts the average price of the drugs nity-Acquired MRSA is increasing in urgency. In the USA, used, lifting the size of the market in monetary terms.
many outbreaks of Community-Acquired MRSA have alreadybeen documented. They occur in various populations, The growth recorded in the years 2003–2006 was driven including children attending child care, prison inmates, almost exclusively by recently introduced MRSA drugs and among players of competitive sports. The US Centers (Zyvox®, Cubicin® and Tygacil®). This clearly demonstrates for Disease Control and Prevention (CDC) has alerted the urgent need for novel anti-MRSA drugs and the willing- physicians to be aware of the potential for MRSA infections ness of the market to accept new drugs.
in sports participants when evaluating patients and makingtreatment decisions.
Hospital MRSA antibiotics Moreover, for the first time in England, a case of nosoco-mial transmission of a strain of Community-Acquired MRSA occurred. This outbreak heralds the first report of known deaths due to this strain in the United Kingdom. This change in the epidemiology of MRSA demands increased vigilance among healthcare personnel. Not only is the threat of growing bacterial resistance clear to the medical and scientific community, increasingly it is also becoming an important issue in the general media. In
Old drugs
New drugs June 2006, there were headline articles on "the superbug" Source: Analyst estimates, January 2007 MRSA in journals ranging from The Lancet to Time maga-zine and Forbes. And CBS News in the US listed MRSA asone of its Top 10 health stories of 2006.
Looking ahead to the years 2007–2009, analysts expectthat the number of anti-MRSA drugs could potentially rise tonine. Based on analysts' expectations, total revenues in theMRSA market will continue to grow strongly, implying thatnovel drugs with competitive properties should be able tofind their niche in this market, despite the expected increase in the number of approved drugs.
Innovative Products Terradaily/UPI, September 2006 Dennis Stevens, MD, PhD, Professor of Medicine at the University of Washington and Chief of the Infectious Disease Section at the Veterans Administration Medical Center Boise, Idaho (USA) Annual report 2006 Research and Development Clinical Phase II Clinical Phase III Iclaprim i. v. cSSSI Iclaprim oral AR-709 Topical programmeGastrointestinal programmeEarly-stage programmes Status at year-end 2006 Annual report 2006 Research and Development Arpida's lead development compound is currently known An independent Data and Safety Monitoring Board (DSMB) by its compound name iclaprim. It is a potent antibiotic has been established to oversee the trial. that is active against many multidrug-resistant bacteria, including MRSA. Arpida obtained exclusive unencumbered On 21 March 2006, Arpida announced that the DSMB had ownership rights of iclaprim from Roche in 2001 in ex- reviewed data on approximately 40% of the total number of change for a one-time payment and additional future royalty patients to be enrolled in ASSIST-1. The DSMB concluded payments which are fixed as a single-digit percentage of that there were no safety concerns and recommended the net sales. The intellectual property status is strong. Two trial to continue as planned.
development programmes are underway: one for an intra-venous and one for an oral formulation.
On 15 August, the announcement followed that the DSMBhad reiterated this recommendation after reviewing data on Iclaprim is a member of the diaminopyrimidines class of a total of 80% of the total number of patients to be enrolled.
antibiotics. Iclaprim targets dihydrofolate reductase (DHFR),an enzyme in the bacterium fulfilling an essential step in The completion of enrolment in ASSIST-1 was reported on bacterial DNA synthesis. DHFR is a well-studied, but com- 5 September, by which date a total of 497 patients had mercially underexploited target.
been enrolled and treated. Based on the results of tests conducted so far, iclaprim is The top-line results of ASSIST-1 were published on 30 No- expected to have several important characteristics, which vember. The results clearly showed that the study's primary should enable it to secure a good position upon market endpoint had been reached: statistical non-inferiority to line- entry. These include: zolid. Iclaprim's cure rates were high and confirmed theearlier Phase II results. Moreover, iclaprim showed an excel- • broad spectrum of activity lent safety profile.
• potent activity against Gram-positive pathogens, Of the total of 497 patients (250 in the iclaprim arm and • rapidly bactericidal, "killing" action on bacteria 247 in the linezolid arm), the vast majority had extensive • low propensity for development of resistance cellulitis, abscesses, ulcers, burns or wounds. Staphylo - • good distribution in tissues and organs coccus aureus was the most common baseline pathogen • safe and well tolerated (about 70%) and up to 25% of the isolates were methicillin- • ease of administration: resistant strains (MRSA). For the microbiologically evaluable • possibility to switch from intravenous to oral patients, the cure rates were 94.7% and 98.8% for iclaprim and linezolid, respectively.
The overall clinical cure rates for the Intent-To-Treat (ITT)population of 497 patients were 85.5% and 91.9% for Intravenous iclaprim in cSSSI – ASSIST-1 iclaprim and linezolid, respectively. For the clinically reaches primary endpoint evaluable patients, the cure rates were 93.8% and 99.1% After successful completion of Phase II clinical trials, Arpida for iclaprim and linezolid, respectively. received authorisation in March 2005 from the FDA to include US centres in the Phase III clinical trials for intra-venous iclaprim for its first indication: complicated Skin Clinical cure rates ASSIST-1 and Skin Structure Infections (cSSSI).
The Phase III programme consists of two trials of identical design, albeit with differences in geographical mix of enrol- ment: ASSIST-1 and ASSIST-2 (Arpida's Skin and Skin Structure Infection STudies). Both trials are international, multicentre, randomised, investigator-blind, comparative studies, designed to assess the efficacy and safety of iclaprim in treating hospitalised adult patients with compli- cated Skin and Skin Structure Infections, including those infected with MRSA. In Phase III, the comparator is linezolid, marketed by Pfizer as Zyvox®, the current market leader in terms of revenues.
Patients are randomised (1:1) to receive intravenous iclaprim (0.8 mg/kg) or intravenous linezolid (600 mg) for 10 to 14 days and are evaluated during treatment. The Test-of-Cure visit is performed 7–14 days after the end oftreatment.
Iclaprim showed an excellent safety profile which compared Intravenous iclaprim – additional indications very favourably with that of linezolid. In this study there Additional indications such as Hospital-Acquired Pneumonia were no serious adverse events resulting from treatment.
(HAP), Community-Acquired Pneumonia (CAP) and Commu- Overall, the proportion of patients in the iclaprim arm, nity-Acquired MRSA (CA-MRSA) are being evaluated with the reporting adverse events that were judged by the investi- intention to initiate the appropriate clinical trials in due gator to be possibly/probably related to treatment, was course, eg. Phase II, Phase II/III or Phase III. lower than in the linezolid arm (18.0% of the ITT populationfor iclaprim versus 25.1% for linezolid). No adverse event exceeded 5% of the ITT population.
Arpida believes that the availability of an oral formulationcould potentially fulfil an important clinical medical need for The most frequent adverse events possibly/probably related the treatment of serious bacterial infections, particularly to treatment were nausea (2.4% for iclaprim versus 4.5% for those caused by MRSA. Iclaprim could be offered not only linezolid), headaches (2.8% for iclaprim versus 0.4% for as an intravenous formulation for hospital use in acute linezolid), pruritus (1.6% for iclaprim versus 2.4% for linezol- situations, but also as an oral formulation, allowing early id), diarrhoea (2.0% for iclaprim versus 0.4% for linezolid) patient discharge and outpatient treatment. This switch and pyrexia (1.6% for iclaprim versus 1.2% for linezolid).
should be a valuable instrument in reducing healthcarecosts and enhancing patient comfort.
Formal ECG Phase I studies suggested a potential for QTc In July 2005, the US FDA approved an Investigational New prolongation with iclaprim and consequently ECG monitor- Drug application (IND), allowing Arpida to file clinical ing was performed in all patients enrolled. In the ASSIST-1 studies of oral iclaprim with the FDA. In 2005, clinical trials study, initially patients with a pre-treatment QTc interval ex- were initiated in Europe.
ceeding 470 ms were excluded. This exclusion criterion wasremoved in March 2006, following the review of the clinical Early in 2006, Arpida announced results of several trials data on the first 200 patients by the Data and Safety Moni- within this Phase I programme, which showed that oral toring Board. In ASSIST-1, the mean maximal prolongation administration (solution and capsule) of iclaprim can of the QTc interval from pre-treatment values with iclaprim achieve blood levels comparable with those of therapeutic was approximately 6.3 ms versus 1.2 ms with linezolid.
doses of intravenous iclaprim. Three patients showed a QTc interval exceeding 500 ms (one in the iclaprim arm and two in the linezolid arm). In Two additional Phase I trials are currently ongoing. After five patients, a QTc increase relative to pre-treatment of completion of these trials, efficacy trials could be under - more than 60 ms was observed (two cases in iclaprim arm and three cases in linezolid arm). No cardiac events wereattributable to QTc prolongation.
Early in 2007, Arpida reported positive results of a Phase Itrial with intravenous iclaprim in volunteers with varying degrees of renal and hepatic impairment and obesity. Thepredictable pharmacokinetics observed in these populationswould suggest that monitoring may not be required. Thestudy adds important information for a New Drug Applica-tion (NDA) as it could provide useful guidance for cliniciansfor treating patients with underlying dysfunctional conditions. At year-end 2006, ASSIST-2, the second trial of the PhaseIII programme was ongoing. After completion of this study,the data from the two trials will be pooled and a filing is expected to take place in 2007. Given the fact that iclaprimhas been granted a fast-track product designation by theFDA, a launch in 2008 would be feasible.
Annual report 2006 Research and Development AR-709 originates directly from Arpida's own drug discovery Arpida's research efforts are focused on finding new efforts. It is a bactericidal antibiotic that is active against chemical entities to address current and future needs. To pathogens that cause infections of the upper and lower res- this end Arpida employs an integrated, multidisciplinary piratory tract. In particular it shows potent activity against discovery platform. In 2006, Arpida has strengthened this multidrug-resistant Streptococcus pneumoniae which is be- platform by adding expertise in the field of biostructural coming a real threat to the community. sciences which will help to accelerate hit-to-lead as well as Unlike iclaprim which primarily targets infections acquired lead optimisation.
during hospitalisation, AR-709 is aimed at community- acquired infections. In this market, several drugs have An important area of emerging medical need concerns reached blockbuster status.
topical antibiotics used in preventive medicine. In recentyears, these have seen a large increase in resistance.
An international patent on the structure, synthesis and use Similarly, recent reports have raised serious concerns on was filed in July 2001. In 2003, a patent on the specific gastrointestinal infections, particularly those caused by synthesis, composition of matter and use of the compound Clostridium difficile. The main programmes, aimed at these needs, are the following.
In preclinical tests, AR-709 effectively sterilised the lung Topical programme tissue. Moreover, preclinical testing has shown that the The lead compound of this programme is a new chemical compound could have characteristics that would make it a entity showing promising activity against a large number of valuable addition to the armamentarium for the treatment multidrug-resistant bacterial strains. The compound origin- of streptococcal infections. They include: ates directly from Arpida's own drug discovery efforts. In • potent activity against multidrug-resistant pathogens addition, several well-differentiated back-up molecules are • bactericidal action being investigated. These show very promising in vitro and • low propensity for development of resistance in vivo characteristics and therefore could be developed • significant post-antibiotic effect as a topical therapy for different indications, including the • potential for once-daily dosage prevention of the transmission of MRSA in the healthcaresetting.
During 2006, significant progress was made along AR-709'sdevelopment path. In May, results of extensive in vitro microbiological studies were reported. The studies com- During 2006, work on different series possessing very good prised a total of 451 Streptococcus pneumoniae clinical iso- in vitro activity against Clostridium difficile progressed well.
lates from the USA and Europe. Including these 451, The molecules of these series could have potential in the AR-709 has now been tested against 611 pneumococcal treatment and prevention of serious gastrointestinal clinical isolates from Europe, USA and Asia and exhibited infections including those caused by the emerging and potent activity against all of them, irrespective of the type difficult-to-treat multidrug-resistant Clostridium difficile.
and pattern of resistance to currently used drugs.
Proof of concept studies in models of Clostridium difficile-associated diarrhoea (CDAD) will be initiated shortly.
In August, the UK Medicines and Healthcare products Regulatory Authority granted authorisation to start "first-in- Early-stage research programmes man" studies with AR-709. These studies got underway in Moreover, Arpida has a number of programmes at earlier the second half of 2006 and are expected to yield a wealth research stages. Efforts are focused on a number of of additional pharmacological information.
selected targets. Crystallisation and co-crystallisation ofthese target proteins and inhibitory molecules could open At the 46th annual Interscience Conference on Antimicro- up new avenues for rational drug design.
bial Agents and Chemotherapy (ICAAC), which took place inSeptember in San Francisco, Arpida delivered one invitedoral presentation and eight posters on AR-709 describingchemistry, mode of action and antibacterial activity. ICAACis a major scientific conference where thousands of scien-tists and clinicians from all over the world gather to discussthe latest developments in the field of infectious diseases.
AR-709 was considered to be one of the highlights of theconference in the field of new antibacterial compounds.
Steady and Successful Growth Through Teamwork Annual report 2006 Annual report 2006 The Arpida Team Clinical development General and administrative The average age of Arpida's employees is 37 at year-end Moreover, at the Third International Symposium on Resist- 2006, with some 70% of all staff being younger than 41. De- ant Gram-Positive Infections in Canada in October 2006, spite the relatively low average age of Arpida's employees, seven posters on iclaprim were presented.
the company boasts a wealth of experience from academia, In addition, Arpida staff members made presentations at large pharmaceutical companies as well as biotechnology. the 11th International Antibacterial Drug Discovery and Development Summit, at the International Symposium on In total, 15 nationalities are represented, ranging from Italy Structural Biology and The XIV Protein Structure Determin- to India and from the Netherlands to America. The cultural ation in Industry meeting.
mix of the staff forms a stimulating part of Arpida's corpor-ate identity. Another indication of the external recognition for Arpida'sstaff is the fact that representatives of the company have At the end of 2006, Arpida employed 39 PhDs, 42% of the been elected at important positions in industry bodies.
total headcount.
Dr Stephen Hawser, Arpida's Head of Microbiology, was Arpida's staff regularly interact with universities and leading elected to join the Quality Control working group of the scientists, supplying valuable input for the company's activ- subcommittee on antimicrobial susceptibility testing within ities in research and development.
the Clinical and Laboratory Standards Institute (CLSI). CLSIis a global, non-profit, standards-developing organisation In February 2007, Arpida announced a re-alignment of oper- that promotes the development and use of voluntary ations, leading to the cessation of the Danish research ac- consensus standards and guidelines within the healthcare tivities. This will result in a reduction of the headcount in community. The major goal of the working group is to Research by up to 18. In future, Arpida's main research op- standardise all aspects of quality control related to the erations, including rational drug design and chemistry, will antimicrobial susceptibility testing of new antibiotics in be concentrated at its corporate headquarters in Reinach, clinical development and in current clinical use. Dr Khalid Islam, President and Chief Executive Officer of Scientific forums Arpida, is a member of the International Advisory Board of The know-how of Arpida's people is not only recognised the Network of Excellence in EuroPathoGenomics. More- within the company but also in scientific forums.
over, he is member of the working group on AntimicrobialResistance of EASAC – the European Academies Science In 2006, the company was represented at several external Advisory Council. This is a body formed by the national sci- scientific conferences, the most important being the Inter- ence academies of the EU member states to enable them to science Conference on Antimicrobial Agents and Chemo- collaborate with each other in providing advice to European therapy (ICAAC) in San Francisco. At this conference, Arpida delivered one invited oral presentation and eightposters on AR-709 describing chemistry, mode of actionand antibacterial activity.
Corporate Governance Annual report 2006 Table of Contents Group structure and shareholders Capital structure Board of Directors Senior Executive Officers Compensation, shareholdings and loans Shareholders' participation Changes of control and defence measures Information policy Group Structure and Shareholders On 20 February, Standard Capital Partners N.V. of Arpida ("the Company") is a corporation established under Willemstad, Netherlands Antilles, disclosed that they owned the laws of Switzerland with registered office in Reinach 1,050,000 options on Arpida shares, representing a (Canton of Basel-Landschaft, Switzerland). The Arpida potential stake of 6.41% (SHAB 28 February 2006). On Group consists of parent company Arpida Ltd. and three 28 July, the investor reported that their stake had been re- wholly owned, non-listed subsidiaries: duced to 600,000 options and 205,000 shares, therebyfalling below the 5% threshold (SHAB 16 August 2006). Issued share capital Arpida, Inc., Delaware On 2 March, Deutsche Bank AG of Frankfurt am Main, Arpida UK Ltd., London Germany, reported that three units within Deutsche Bank Arpida A/S (formerly AG owned a total of 838,657 Arpida shares, representing 5.123% of Arpida's share capital (SHAB 8 March 2006). On22 August, the shareholder reported that their stake had in- Arpida's business purpose is to engage in the research, de- creased to 951,749 shares, or a stake of 5.81%. The stake velopment and marketing of medical drugs as well as in all was spread across two (previously three) units within the activities connected therewith. The business operations are bank (SHAB 29 August 2006). On 14 November, Deutsche organised along the lines of the main activities: research Bank AG reported that their stake had increased to (biology and chemistry) and development. As yet, there are 1,119,956 shares, or 6.84% of Arpida's share capital. The no marketing operations. stake was concentrated in one unit of the bank, down fromtwo previously (SHAB 28 November 2006). On 6 December Arpida has four Senior Executive Officers: the President, 2006, the bank announced that their stake had increased one Senior Vice President, the Head of Research and the to 1,452,737 (8.873% stake), spread across three units, ver- Head of Development.
sus one previously (SHAB 19 December 2006). On 14 De-cember, Deutsche Bank AG reported that their stake had in- Significant shareholders creased to 1,648,670 shares (10.07%), spread across three The Arpida shares have been listed on the Main Segment of units of the group: DWS Investment GmbH, Frankfurt, Ger- the SWX Swiss Exchange since 4 May 2005, under the sym- many, Deutsche Bank AG London Branch and Deutsche bol ARPN. As far as Arpida is aware, the following share- Bank AG Zürich Branch (SHAB 28 December 2006).
holders had holdings of over 5% as at 31 December 2006.
On 31 March, 3i of London, UK, announced that their stake % of share capital in Arpida had been reduced to 522,950 shares, hence falling below the 5% disclosure threshold (SHAB 10 April * The Arpida shares are held by several units within the Group.
On 11 May, HBM BioVentures (Cayman) reported that theirholding in Arpida shares had fallen below the 5% disclosure During the year 2006, there were significant movements in threshold (SHAB 17 May 2006).
the shareholder structure. The following changes were sub-ject to the SWX disclosure rules.
On 25 July, Fidelity International Limited of Bermuda reported that they owned a total of 1,029,737 Arpidashares, giving a stake of 6.29% of Arpida's share capital.
(SHAB 7 August 2006). On 23 August, Fidelity reported thattheir stake had increased to 1,742,815 shares, or 10.65% ofArpida's share capital (SHAB 31 August 2006). On 13 December, HealthCap disclosed that the stake of their shareholders' group had fallen below the 5% disclo-sure threshold. The shareholders' group consisted ofHealthCap 1999 KB of Stockholm, Sweden, HealthCap1999 GbR/GmbH, Berlin, Germany, HealthCap III SidefundKB, Stockholm, Sweden, and Odlander, Frederikson & Co.
AB, Stockholm, Sweden (SHAB 20 December 2006).
Cross-shareholdingsAs of 31 December 2006, no cross-shareholdings existed.
Annual report 2006 Corporate Governance Capital Structure Changes in capital As of 31 December 2006, 17,183,232 registered common At the start of 2005, the Company's share capital amount- shares were issued and outstanding, with a nominal value ed to CHF 2,194,391.80, divided into 577,600 common of CHF 0.20 each. At the balance sheet date, the share shares and 10,394,359 preference shares of CHF 0.20 par capital amounted to CHF 3,436,646.40. All shares are fully value each. On 3 May 2005, the Company converted all paid up. As of 31 December 2006, Arpida does not hold preference shares one for one into common shares and is- any shares in treasury. sued 5,400,000 common shares in the Initial Public Offer-ing at the SWX Swiss Exchange. This brought the number of At the Extraordinary General Meeting of shareholders of common shares outstanding at year-end 2005 to 19 July 2006, the shareholders approved the creation of authorised capital of CHF 340,000. The authorisation expires 19 July 2008. In the course of 2006, 811,273 shares were issued due to The Board of Directors is authorised to suspend the the exercise of staff options, lifting the total number of com- preferential subscription rights of the shareholders wholly or mon shares outstanding by 5% to 17,183,232 at year-end in part (1) in the event of the issuance of shares for the par- ticipation of strategic partners; or (2) for the takeover ofcompanies, parts of companies, participations or intellec- For changes in capital that took place prior to 2005, tual property rights or for the financing and refinancing of reference is made to the 2005 annual report.
such transactions; or (3) for granting an over-allotment option ("greenshoe") of up to 20% to the lead managers in Description of the shares connection with a placement of shares at market price; or As of 31 December 2006, only registered common shares (4) for raising capital in a fast and flexible manner, which were outstanding. No bearer shares or participation would hardly be achieved without the exclusion of the statu- certificates have been issued. All registered shares have a tory pre-emptive rights of the existing shareholders; or (5) nominal value of CHF 0.20. Each share carries one vote at for other valid grounds in the sense of Art. 652b para. 2 the shareholders' meetings of the Company – subject to Swiss Code of Obligations. The placement of the shares can limitations as described below. The shareholders' meeting take place through one or several banks who may subscribe may at any time convert registered shares into bearer to the capital increase in a fiduciary capacity. If preferential shares and bearer shares into registered shares through an rights were granted, but not exercised, the Board of Direc- amendment of the Articles of Association.
tors may use the respective shares in the interest of theCompany. Limitations on transferability and nominee registrationA transfer of shares is effected by a corresponding entry in At the same meeting, the shareholders approved the in- the books of a bank or depository institution following an crease of the conditional capital from CHF 387,000 to CHF assignment in writing by the selling shareholder and 487,000 for the potential issuance of 2,435,000 registered notification of such assignment to Arpida by the bank or the common shares of CHF 0.20 each under the stock option depository institution. A transfer of shares further requires plan for employees, Board members and persons in com- that a shareholder file a share registration form in order to parable positions. The priority right of subscription and the be registered in the share register of the Company with pre-emptive rights of the shareholders shall be excluded.
voting rights. Failing such registration, a shareholder may The conditions of the grant of the options, as the amount of not vote at or participate in a shareholders' meeting. A the issue of the shares, the time of the entitlement to divi- purchaser of shares will be recorded in the Company's dends as well as the kind of contribution, shall be deter- share register as a shareholder with voting rights if the mined by the Board of Directors in the form of special rules purchaser discloses its name, citizenship or registered (stock option plans). During 2006, 811,273 registered com- office and address and gives a declaration that it has mon shares were issued due to option exercise. Hence, at acquired the shares in its own name and for its own year-end 2006, conditional capital for the issuance of 1,623,727 shares remains.
For further information about the stock option plans, reference is made to the Notes to Consolidated FinancialStatements on pages 53 to 55. The Articles of Association provide that a person or entitynot explicitly stating in its registration request that it willhold the shares for its own account ("Nominee") may be entered as a shareholder in the share register with votingrights for shares up to a maximum of 5% of the outstandingnominal share capital. Shares held by a Nominee that exceed this limit are only registered in the share registerwith voting rights if such Nominee declares in writing to disclose name, address and shareholding of any person orlegal entity for whose account it is holding 1% or more ofthe outstanding nominal share capital. The limit of 5% shallapply correspondingly to Nominees who are related to oneanother through capital ownership or voting rights or have acommon management or are otherwise interrelated. A share being indivisible, the Company will only recogniseone representative for each share. Furthermore, shares mayonly be pledged to the bank that administers the bank entries of such shares for the account of the pledging share-holders; in such case, the Company must be notified.
Convertible bonds and warrantsAs of 31 December 2006, the Company did not have anyconvertible bonds or warrants outstanding. Stock option plansConditional share capital: Shareholders have approved aconditional share capital for the potential issuance of2,435,000 registered common shares of CHF 0.20 each(share capital of CHF 487,000) under the stock option plansfor employees, Board members and persons in comparablepositions. During 2006, 811,273 registered common shareswere issued due to option exercise. Hence, at year-end2006, conditional capital for the issuance of 1,623,727shares remains.
Stock option plans and plan administration: Arpida has established several stock option plans to provide incentivesto directors, executives, employees and consultants. Underthe plans, such persons have an opportunity to receive non-transferable options to acquire shares of the Company. Forfurther information about these option plans, reference ismade to the Notes to Consolidated Financial Statements. Annual report 2006 Corporate Governance Board of Directors as well as the financial planning and • appoint, recall and ultimately supervise the persons entrusted with the management and representation of Responsibilities and organisation the Company.
According to the Articles of Association, the Board of Dir- • The duties also comprise the responsibility for the ectors of the Company (the "Board of Directors") shall con- preparation of the annual report and the shareholders' sist of five to eleven members and shall be elected by the meeting, carrying out of shareholders' resolutions and general shareholders' meeting for a term of three years, re- the notification of the judge in case of over-indebted- election being allowed. Each year one third of the Board is ness of the Company.
up for re-election. The Board of Directors is entrusted withthe ultimate direction of the Company and the supervision According to Arpida's organisational regulations, the adop- of management. The Board of Directors' duties include the tion of resolutions and elections by the Board of Directors require a majority of the votes cast. To validly pass a resolu- • ultimately manage the Company and issue the tion, more than half of the members of the Board of Direct- necessary directives; ors must be present at the meeting.
• determine the organisational structure of the Company;• organise the accounting system, the financial controls Members of the Board of Directors sation Audit Nomination period Committee Committee Committee Dr André Lamotte Dr Hans Fünfschilling Prof Dr Nam-Hai Chua Prof Dr Axel Kleemann Dr Matthias Staehelin, MAES In accordance with the Articles of Association and the Furthermore, there are no interests of any shareholder or current organisational by-laws (Organisationsreglement) members of the Board of Directors or the management in enacted by the Board of Directors, the Board of Directors transactions effected by the Company which are or were has delegated the operational management of the Company unusual in their nature or conditions.
to the Senior Executive Officers of the Company. In addi-tion, the Board of Directors has established a Compensa-tion Committee, a Finance & Audit Committee and a Nomi-nation Committee.
Dr Islam is the only executive member of the Board, theother members are non-executives. None of the non- executive Board members were in Arpida's management inthe preceding three years, nor do they have any significantbusiness connections with Arpida or its subsidiaries, withthe following exception:In the year 2006, the law firm Vischer, in which Dr MatthiasStaehelin is a partner, charged fees in the amount of CHF 101,558.75 for its legal and notary services.
Dr André Lamotte Dr Hans Fünfschilling Prof Dr Nam-Hai Chua The Board of Directors includes the following individuals: Dr André Lamotte, Chairman of Arpida's Board of Directors, Mr. Søren Carlsen is managing partner of Novo Ventures, a initiated the Company's foundation in 1997 and was joined venture capital fund managed by the Danish Novo Group.
by co-founders Dr Dieter Gillessen, Dr Rolf Studer and Before moving to his current position in 2000, Mr. Søren Carlsen was in the executive management of Novo Dr Lamotte is an entrepreneur, who founded, co-founded, or Nordisk's Enzyme Business as Corporate Vice President seed financed 13 pharmaceutical and biotech companies and Chief Science Officer. He holds an M.S. in chemical (Acambis-Oravax, Axovan, BAGTech, Creagen-Neurex, de engineering from the Danish Technical University and Code genetics, Diatide, ICAgen, Inspire Pharmaceuticals, in brewing technology from the Skandinavian Brewing Insti- Paion, Vernalis), medtech companies (Cryocath) and tute. Next to Arpida, he serves on the board of 7TM Pharma medical service companies (Laser Vision, Worldcare). He A/S (Denmark), Santaris Pharma A/S (Denmark) and PTC was partner of NMT/HBM and the Harvard Medical School Therapeutics, Inc. (USA). Mr. Carlsen is chairman of Dan- Venture Fund, general manager of Pasteur Merieux US ishBiotech – the Association of Biotechnology Industries in operations and marketing manager at Sandoz. He has a Denmark. He is a Danish national. PhD in chemical engineering from MIT, an MBA from Har-vard, and is a graduate from Ecole Centrale Paris. Dr Lam- Professor Dr Nam-Hai Chua is currently the Andrew W. Mel- otte is member of the Board of Directors of the following lon Professor and Head of Laboratory of Plant Molecular firms: ICAgen, URRMA and Spine Vision. Dr Lamotte is a Biology at the Rockefeller University, USA. He received a B.S. in botany and biochemistry from the University of Sin-gapore and a PhD in biology from Harvard University. He Dr Hans Fünfschilling, Vice Chairman of Arpida's Board of was elected to The Royal Society (UK) and the Academia Directors, is the sole representative of the Canton of Basel- Sinica (Taiwan, ROC) in 1988 and as a Foreign Academician land in the Swiss Council of States (Ständerat). Prior to his to the Chinese Academy of Science in 2006. He serves on political career, he worked for almost 21 years in senior ex- editorial boards of many scientific journals, such as Current ecutive positions at Roche. Dr Fünfschilling graduated from Opinion in Biotechnology and The Journal of Cell Science.
the University of Basel and holds a PhD in astronomy. In addition to being a member of the Board of Directors of Dr Fünfschilling serves on the Board of Directors of the can- the Delta and Pine Land Company (listed in New York), Pro- tonal insurance company (Basellandschaftliche Gebäudever- fessor Chua is also a corporate advisor to Temasek Hold- sicherung), the association of the Swiss cantonal re-insur- ings, Inc. (Singapore). Professor Chua is a citizen of Singa- ance companies (Interkantonaler Rückversicherungsverband IRV) and of the Endress + Hauser Group, Switzerland. Dr Fünfschilling is a Swiss national.
Annual report 2006 Corporate Governance Prof Dr Axel Kleemann Dr Matthias Staehelin Dr Khalid Islam is President and Chief Executive Officer of Dr Jürgen Raths studied medicine and dentistry at the Uni- Arpida. He obtained a Ph D in biochemistry from Imperial versities of Heidelberg, Bonn and Cologne. He obtained his College, University of London. After an academic career, he MD title at the University of Bonn. Since 1990 he has been worked for Marion Merrell Dow and Hoechst Marion Roussel active in several positions within the global pharmaceutical (Aventis). In 1999 he joined Arpida. He is a member of the group Eli Lilly and Company, both in Europe and in the US.
editorial board of Current Drug Discovery Technologies, the While at Lilly, he was involved in developing and analysing International Advisory Board of the Network of Excellence in product portfolio strategies, product launches and in the EuroPathoGenomics and president of the art foundation build-up of sales organisations. In August 1999, Dr Raths Casaperlarte – foundation Paolo Minoli. Dr Islam acts as an moved to his current position: Head Critical Care Europe, advisor to several international journals. He holds several the European hospital-focused business of Eli Lilly and patents and has published over 75 articles in leading jour- Company. In this function, Dr Raths manages the European nals. He is Chairman of the Boards of Directors of Arpida sales, medical and marketing organisation of approximately A/S and Arpida, Inc. Dr Islam has dual British and Italian 200 people and is also responsible for the unit's finance and human resources. Dr Raths is a German citizen, domiciled in Switzerland.
Professor Dr Axel Kleemann was member of the Manage-ment Board of ASTA Medica AG from 1987 until 2000 with Dr Matthias Staehelin is a partner in the law firm Vischer responsibility for Research & Development, Production, En- with offices in Basel and Zürich. He is the lead partner of gineering and Drug Safety. He obtained his PhD in chem- the firm's life sciences group. He studied law at University istry at the Johann Wolfgang Goethe University in Frankfurt of Basel where he obtained his PhD and at the College of am Main. Since 1987, he is an honorary professor of hhem- Europe, Bruges/Belgium, where he obtained a Master of istry at the same institution. Furthermore, Professor Klee- Advanced European Studies (MAES) and a Diplôme des mann is co-author of the standard reference book Pharma- Hautes Etudes Européennes (DHEE). He is admitted to the ceutical Substances. He is co-founder of Act.On GmbH bar in Basel/Switzerland and is qualified as public notary in Pharma Consultants in Germany, chairman of the Board of the Cantons Basel-Stadt and Baselland. He serves on the Directors of Protagen AG, Germany, and member of the Board of Directors of Swiss subsidiaries of publicly traded Board of Directors of several other non-listed biotech and companies and privately held companies incl. Hesperion AG fine chemicals companies. Professor Kleemann is German.
and MEV Schweiz AG. Dr Matthias Staehelin is a Swiss national.
Announced changes The Compensation Committee currently consists of the fol- The terms of Mr. Søren Carlsen and Dr Khalid Islam expire lowing members: André Lamotte, Søren Carlsen and Nam- in the Annual General Meeting of shareholders of 8 May 2007, neither will stand for re-election. The Compensation Committee assists the Board of Direc-tors in compensation-related matters. It provides the Board of Directors with recommendations on the compensation of In 2003 the Board of Directors established a Finance & the members of the Board of Directors and the Senior Ex- Audit Committee and a Compensation Committee and, in ecutive Officers, the policies for the compensation of the 2005, a Nomination Committee. Senior Executive Officers and the basic principles for the establishment, amendment and implementation of the The Finance & Audit Committee currently consists of André Company's stock option plans. The committee convened Lamotte, Hans Fünfschilling and Axel Kleemann.
once in 2006, discussing the remuneration system as well The Committee assists the Board of Directors in fulfilling its as the remuneration levels for the Board of Directors and duties of supervision of the management. It is responsible Senior Executive Officers.
for the guidelines for the Company's risk management andinternal control system, the review of the compliance sys- The Nomination Committee currently consists of André tem, the review of the auditors' audit plans, the review of Lamotte, Nam-Hai Chua and Matthias Staehelin. annual and interim financial statements, the monitoring of The Nomination Committee enacts guidelines for selecting the performance and independence of external auditors (in- candidates for election or re-election to the Board of Direc- cluding the authorising of non-audit services by the auditors tors and for appointment of senior management and makes and their compliance with applicable rules), the review of arrangements to select such candidates. The Nomination the audit results and the monitoring of the implementation Committee supplied important input in 2006 in the selec- of the findings by management. After examination by the tion of candidates for key functions and convened once to Finance & Audit Committee, the (interim) accounts are discuss an addition to the Board of Directors.
approved and recommended for approval by the Board ofDirectors. The committee convened twice in 2006, the CFO Information and control instruments and the external auditors were present at both meetings. Arpida employs an extensive reporting framework in order In one meeting the 2005 accounts were discussed and ap- to secure management information and risk assessment.
proved. In the other meeting the accounts for the first half Risk management is largely embedded in the teams working of 2006 and the audit plan for 2007 were the main agenda on research and development projects. The teams report to the Senior Executive Officers on a weekly basis, discussingproject progress, (potential) bottlenecks and timelines.
Management information is secured on the one hand viathe weekly update on project progress (activity reports) andon the other hand via frequent financial liquidity reports.
Deviations from budgets are analysed by Arpida's financialstaff and, if necessary, adjustments are made.
External auditors review Arpida's risk management and financial reporting systems on a regular basis and recom-mend changes if required. In 2006, the external auditorswere present in both meetings of the Finance & Audit Com-mittee.
In general, the Board of Directors meets four to six timesper year. In 2006, the Board met six times and had threeconference calls. The agenda for the meetings is preparedby the Chairman of the Board in close consultation with theCEO. In general, the main agenda items are the progress ofthe research and development pipeline, the financial situa-tion, the risks and the Company's strategic opportunities.
The Board is supplied with an extensive reporting set aheadof each meeting consisting of activity reports and financialreports. The CFO is present at every Board meeting. TheBoard can ask for additional information and can consultexternal experts if deemed necessary. The performance ofthe auditors is monitored in close consultation with theCFO. If necessary, external experts can be consulted.
Annual report 2006 Corporate Governance from left: Dr Sergio Lociuro; Dr Khalid Islam; Harry Welten, MBA; Dr Paul Hadvary Senior Executive Officers MembersArpida has four Senior Executive Officers (the President, Harry Welten, MBA, has more than 19 years of international one Senior Vice President, the Head of Research and the experience in finance. He joined Arpida in August 2001 as Head of Development, collectively, the Senior Executive Offi- Chief Financial Officer. He also serves as a member of the cers). The Senior Executive Officers, under the responsibili- Board of Directors of Arpida A/S. Prior to joining Arpida, ty of the Chief Executive Officer and the control of the Board he was a director at UBS Warburg in New York following of Directors, conduct the operational management of the various senior positions within the UBS Group. Before join- Company pursuant to the Company's organisational by-laws ing UBS, he was with ABB and DaimlerChrysler. Mr. Welten and report to the Board of Directors on a regular basis.
holds a degree in banking and finance, a degree in eco- During 2006, Arpida had no management contracts with ex- nomics and business administration and an MBA (Hons.) ternal persons or companies.
from Columbia University, New York. Mr. Welten is a Swissnational.
The following table sets forth the names, dates of appoint-ment and positions of the current Senior Executive Officers Dr Paul Hadvary is Head of Development. He was previous- (for Dr Islam who is also a member of the Board of Direc- ly Chief Science Officer of Basilea Ltd. and was instrumen- tors, reference is made to the corresponding description in tal in the foundation of this spin-off company of Roche as its "Board of Directors"): first CEO. Dr Hadvary has over 30 years of pharmaceuticalindustry experience. He worked in several therapeutic areas of Roche's research organisation including as Head of Anti- infectives Research. He holds 20 issued patents and is Harry Welten, MBA Senior Vice Presi- author of over 40 articles in leading scientific journals. Dr Hadvary received his PhD in biochemistry from the ETH Financial Officer Zurich. He is a Swiss national.
Head of Development Dr Sergio Lociuro has held several senior management pos- Dr Sergio Lociuro itions in major pharmaceutical companies such as MarionMerrell Dow and GlaxoSmithKline. Dr Lociuro received hislaurea in chemistry at the University of Rome. He obtainedhis PhD in chemistry from the University of New Bruns-wick(Canada). Dr Lociuro is author of numerous publicationsand holds several patents in the field of pharmaceuticals.
He is an Italian national.
Compensation, Shareholdings 2. Board of Directors In 2006, the seven non-executive members of the Board of Directors (2005: seven members) received compen-sation in an aggregate amount of CHF 312,664 (2005: Remuneration system CHF 217,009). The remuneration package of the member Arpida's remuneration system is governed by the Board of of the Board of Directors who is also a Senior Executive Directors, upon recommendation of the Compensation Officer is included in the senior executive figures.
3. Former members of governing bodies The compensation package for Arpida employees consists In 2006, no payments were made. In 2005, a former of a base salary plus potentially a variable bonus and/or member of the Board of Directors received a payment of The base salary is based on general labour market normsfor personnel in comparable positions. The framework is Shares and options reviewed regularly by the Compensation Committee and, In the year under review, no shares were allotted. For a de- if necessary, changes are recommended to the Board of tailed description of the option plans, reference is made to the notes on pages 53 to 55.
The variable part is determined by the Board of Directorsupon recommendation by the employees' supervisor. As Highest total compensation Arpida is a development-stage company, financial yardsticks The member of the Board of Directors with the highest com- such as revenues or margins are not yet meaningful as a pensation received a total amount of CHF 820,505 and basis for the calculation of variable income. Instead, per- 220,000 options in 2006 (2005: CHF 682,077 and 88,086 formance is measured in terms of achieving predefined goals such as development milestones, projects completed,cost control and similar criteria. Options are a tool for incentivising and retaining people. Op- As at year-end 2006, non-executive directors owned a total tion allotment is not limited to Senior Executive Officers but of 12,735 Arpida shares (2005: 15,900). Senior Executive is within reach of the majority of Arpida's staff. Usually, op- Officers owned a total of 69,184 Arpida shares (2005: tions vest over a period of up to four years.
The framework of variable compensation and option allot-ment is established by the Board of Directors upon recom- Loans and additional items mendation of the Compensation Committee.
In the year under review, the Company did not issue or as-sume any guarantees for any shareholder or member of the The compensation of the four Senior Executive Officers con- Board of Directors or the management. No shareholder and sists of a fixed monetary amount plus potentially a variable no member of the Board of Directors or the management cash bonus and number of options. Variable compensation have received any loans from the Company.
can add up to 25% to base salary and is paid in cash. Thepercentage is based on predefined goals, including develop- In 2006, no fees were paid to members of the Board of ment milestones, projects completed and cost control. In Directors or senior management for consultancy or other 2006, the average level of the variable part of compensa- services delivered to Arpida, except for the fees paid to tion of the four Senior Executive Officers was 25% of their the law firm Vischer, in which Dr Matthias Staehelin is a base salary. The Compensation Committee makes recom- partner (see page 27).
mendations to the Board of Directors concerning the yearlyawarding of variable remuneration and options.
The compensation of the non-executive members of the Board of Directors consists of a monetary amount and afixed number of options per annum. Amounts for the year under review In principle, each share carries one vote. The only limitationto this rule is the one described under "Limitations on 1. Senior Executive Officers transferability and nominee registration". Each shareholder At year-end there were four Senior Executive Officers.
may authorise in writing another shareholder, a Company During 2006, two Senior Executive Officers stepped down.
representative, a specially designated independent share- The total remuneration for the six persons who were Senior holder representative or a depositary representative to rep- Executive Officers during 2006 (five persons in 2005) resent him or her at the shareholders' meeting. A share- amounted to CHF 3,181,849 in 2006 (CHF 1,965,668 in holder wanting to vote at a shareholders' meeting has to be entered in the register no later than seven days before themeeting takes place.
Annual report 2006 Corporate Governance offer to acquire all listed shares. Swiss law allows a corpora- The Articles of Association do not prescribe a quorum for tion to deviate from this rule in its Articles of Association.
shareholders' meetings. Unless the law requires otherwise, Arpida has opted not to use this possibility.
the general meeting of shareholders passes resolutions andelections with a simple majority of the votes represented at Clauses on changes of control the shareholders' meeting. Swiss law requires a two-thirds Arpida has no special arrangements taking effect in the majority of the votes represented for resolutions concerning: event of a change of control, other than the customary • changes to the Company's business purpose; clauses concerning the exercise of stock options. • the creation of shares with privileged voting rights;• restrictions on the transferability of registered shares;• an authorised or conditional increase in the share • an increase in the share capital by way of capitalisation of reserves, against contribution in kind for the acquisition of assets or involving the grant of special The monitoring of the performance and independence of ex- ternal auditors (including the authorising of non-audit ser- • the restriction or elimination of pre-emptive rights of vices by the auditors and their compliance with applicable rules) is the responsibility of the Finance & Audit Committee.
• a relocation of the registered office; or This committee reviews the external auditor's audit plan and • the dissolution of the Company other than by liquidation oversees its execution. The external auditor was present in (for example, by way of merger).
both meetings of the Finance & Audit Committee in 2006.
The introduction or abolition of any provision in the Articles PricewaterhouseCoopers AG (PwC), Basel, Switzerland, is introducing a majority greater than that required by law group auditor and statutory auditor since 1997. The lead au- must be resolved in accordance with such greater majority.
ditor for Arpida is Mr. Th. Brüderlin, since 2001. In the yearunder review PwC charged Arpida CHF 102,075 in audit fees and CHF 137,912 for additional services.
Under Swiss law, an annual ordinary shareholders' meetingmust be held within six months after the end of the Com-pany's financial year. Shareholders' meetings may be con-vened by the Board of Directors or, if necessary, by the Information Policy Company's statutory auditors. The Board of Directors is fur-ther required to convene an extraordinary shareholders'meeting if so resolved by a shareholders' meeting or if so Arpida puts much weight on keeping its stakeholders in- requested by holders of shares holding in aggregate at least formed. Without proper communication, our achievements 10% of the nominal share capital.
in research and development will not be fairly reflected in A shareholders' meeting is convened by publishing a notice the public perception or in the share price. Many different in the Swiss Official Gazette of Commerce (Schweizerisches channels are used, including the twice-yearly financial re- Handelsamtsblatt) at least 20 days prior to such meeting. In sults releases, ad hoc statements, the annual report, the addition, holders of registered shares may be informed by a website, shareholders' meetings, roadshows, conferences, letter sent to the address indicated in the share register.
and press contacts. The website (www.arpida.com) offersinterested parties the possibility to subscribe to the com- pany's news releases. The Corporate Communications Shareholders holding shares representing the lower of 10% department is at the stakeholders' service to respond to of the share capital or a nominal value of CHF 1 million have questions or requests.
the right to request that a specific proposal be discussedand voted upon at the next shareholders' meeting, settingforth the item and proposal. According to the Articles of Association, the request to put an item on the agenda has tobe made at least 45 days prior to the meeting.
Arpida Corporate CommunicationsPaul VerbraekenHead of Corporate CommunicationsDuggingerstrasse 23 Changes of Control and SwitzerlandPhone +41 61 417 96 [email protected] Duty to make an offerA shareholder that, either directly, indirectly or acting inconcert with third parties, controls 331⁄3% of the votingrights (whether exercisable or not), is obliged to make an Annual report 2006 Table of Contents Consolidated financial statements Consolidated balance sheets Consolidated statements of operations Consolidated statements of cash flow Consolidated statements of equity Notes to consolidated financial statements Report of the Group auditors Statutory financial statements Swiss statutory balance sheets Swiss statutory statements of operations Notes to the Swiss statutory financial statements of Arpida Ltd. Report of the statutory auditors Consolidated Balance Sheets Intangible assets Financial investments (rent deposit) Plant and equipment Total non-current assets Other receivables Cash and cash equivalents Total current assets Equity and liabilities EquityShare capital Other reserves (share-based compensation) Cumulative translation differences Current liabilitiesTrade accounts payables Accrued and other current liabilities Short-term portion of lease liabilities Total current liabilities Non-current liabilitiesDeferred tax liabilities Pension liabilities Long-term lease liabilities Total non-current liabilities Total equity and liabilities The accompanying notes form an integral part of these consolidated financial statements.
Annual report 2006 Consolidated Financial Statements Consolidated Statements of Operations 1 January 2006 to 1 January 2005 to Income from services Research and development expenses Management and general expenses Total operating expenses Financial expenses Net loss before tax Income tax expenses Net loss for the period Basic and diluted loss per share The accompanying notes form an integral part of these consolidated financial statements.
Consolidated Statements of Cash Flow 1 January 2006 to 1 January 2005 to Operating activitiesNet loss Adjustments to reconcile net loss to net cash– Changes in deferred taxes – Depreciation on tangible assets – Amortisation on intangible assets – Impairment of goodwill – Impairment of tangible assets – Interest income – Share-based compensation charges – Changes in the composition of working capital – Change in inventories – Change in other current and long-term receivables – Change in prepayments – Change in accounts payables and accrued liabilities – Change in provisions – Change in prepaid pension – Interest payments received Net cash used in operating activities Investing activitiesPlant and equipment purchases Financial investments Proceeds from the sale of intangible assets Net cash used in investing activities Financing activitiesFinance lease payments Issuance of common shares Capital increase costs Total cash provided by financing activities Net change in cash position Net increase/(decrease) in cash and cash equivalents Exchange gains on cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period The accompanying notes form an integral part of these consolidated financial statements.
Annual report 2006 Consolidated Financial Statements Consolidated Statements of Equity At 31 December 2004 Translation differences Net income/(expense) recognised directly in equity Loss for the period Total recognised income and expense for 2005 Conversion preferred shares Capital increase IPO Equity funding costs Effect of IFRS 2 share-based compensation At 31 December 2005 Translation differences Net income/(expense) recognised directly in equity Loss of the period Total recognised income and expense for 2006 Compensation of accumulated loss with share premium in the general reserves Exercise of stock options Effect of IFRS 2 share-based compensation Compensation of other reserves with share premium for exercised options At 31 December 2006 At 31 December 2004 Translation differences Net income/(expense) recognised directly in equity Loss for the period Total recognised income and expense for 2005 Conversion preferred shares Capital increase IPO Equity funding costs Effect of IFRS 2 share-based compensation At 31 December 2005 Translation differences Net income/(expense) recognised directly in equity Loss of the period Total recognised income and expense for 2006 Compensation of accumulated loss with share premium in the general reserves Exercise of stock options Effect of IFRS 2 share-based compensation Compensation of other reserves with share premium for exercised options At 31 December 2006 The accompanying notes form an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements Based on the current cash position, management antici-pates Arpida to continue as going concern. Managementcontinually monitors the Company's cash position and the Arpida Ltd. (the "Company") together with its subsidiaries level of spending.
(collectively "Arpida") is a therapeutically focused bio- The Company was registered in the register of commerce pharmaceutical company focusing on the discovery and on 18 August 1997, and has its domicile and registered development of new, safer and more efficacious anti- office at Duggingerstrasse 23, CH-4153 Reinach, microbial drugs for the treatment of infectious diseases. To Switzerland. Since 4 May 2005, the Company is a public date, Arpida has financed its cash requirements primarily company whose shares are traded at the SWX Swiss from share issuances and debt financings. Arpida is a de- velopment-stage enterprise as of 31 December 2006 and isexposed to all the risks inherent in establishing a business:Inherent in Arpida's business are various risks and uncer-tainties, including the substantial uncertainty that current 2. Summary of Significant projects will succeed. Arpida's success may depend in part Accounting Policies upon its ability to (i) establish and maintain a strong patentposition and protection, (ii) enter into collaborations withpartners in the pharmaceutical industry, (iii) attract and Basis of accounting retain key personnel, and (iv) acquire additional capital to The financial statements of Arpida are prepared in accord- support its operations. ance with the historical cost convention except for the Annual report 2006 Notes to Consolidated Financial Statements revaluation to market value of certain financial assets and in. Transactions in other currencies are initially reported us- liabilities and comply with the International Financial ing the exchange rate at the date of the transaction. Gains Reporting Standards (IFRS) formulated by the International and losses from such transactions as well as gains and loss- Accounting Standards Board (IASB) as well as with the es on translation of monetary assets and liabilities denom- following significant accounting policies.
inated in other currencies are included in income. Upon con-solidation, assets and liabilities of Group companies using Critical accounting estimates functional currencies other than Swiss francs (foreign en- The preparation of the financial statement requires manage- tities) are translated into Swiss francs using year-end rates of ment to use certain critical accounting estimates. It also re- exchange. Revenues, expenses, net income and cash flows quires management to exercise its judgment in the process are translated at the average rates of exchange for the year.
of applying the Company's accounting policies. Such esti- Translation differences due to the changes in exchange rates mates and assumptions effect the reported amounts of as- between the beginning and the end of the year and the differ- sets and liabilities and disclosure of contingent assets and ence between net loss translated at the average and year-end liabilities at the date of the financial statements and the exchange rates are taken directly to equity.
reported amounts of expenses during the reporting period.
Actual outcomes could differ from those estimates. Revenue recognitionRevenue from rendering of services is based on the stage of Based on the current cash position, management antici- completion determined by reference to services performed pates Arpida to continue as a going concern.
to date as a percentage of total services to be performed.
Dividends are recognised when the right to receive payment In 2005, Arpida adopted IFRS 2 related to accounting for is established.
stock-based compensation. As a result, stock options aremeasured based on the grant-date fair value of the award.
Cash and cash equivalents The accounting for stock-based compensation is partly Cash and cash equivalents comprise cash on hand, de- based on management's estimates, especially related to the posits held at call with banks and other short-term highly expected term of the stock options and expected volatility. liquid investments which are readily convertible to knownamounts of cash (and which are subject to insignificant risk Arpida is subject to income taxes in numerous jurisdictions.
of changes in value) and have a maturity of three months or Judgment is required in determining the current and de- less from the date of acquisition. This definition is also used ferred assets and liabilities for income taxes. The assess- for the cash flow statement.
ment as to whether deferred tax assets relating to tax losscarry-forwards and temporary differences have to be recog- Financial instruments nised requires significant judgement.
Financial instruments carried on the balance sheet includeother receivables, financial investments, trade accounts Principles of consolidation payable, accrued and other current liabilities.
Subsidiaries in which the Company has a controlling inter-est, directly or indirectly, are consolidated. Control is de- Other receivables, financial investments, trade accounts fined as the power to govern the financial and operating payable, accrued and other current liabilities are financial policies of an enterprise so as to obtain benefits from its ac- assets and financial liabilities, respectively, with fixed or de- tivities. Control is normally evidenced when the Company terminable payments that are not quoted in an active mar- owns, either directly or indirectly, more than 50% of the vot- ket. They arise when the Company provides or receives ing rights or potential voting rights of a company's share money, goods or services directly to a debtor and from a capital that are currently exercisable. creditor, respectively, with no intention of trading the receiv- The consolidation commences from the date on which con- able or payable. They are included in current assets and cur- trol is transferred to the Company and subsidiaries are no rent liabilities, except for maturities longer than twelve longer consolidated from the date that control ceases. Inter- months after the balance sheet date. These are classified as company balances and transactions between Group compa- non-current assets and non-current liabilities and are shown nies are eliminated. Intercompany transactions solely result separately in the balance sheet. These are measured at from providing services to other Group companies. amortised cost. Amortised cost is the amount at which the The consolidated financial statements include the accounts financial asset and liability s measured at initial recognition of Arpida Ltd. and its wholly owned subsidiaries Arpida UK minus principal repayments, plus or minus the cumulative Ltd., a company located in the UK, Arpida A/S, a company amortisation using the effective interest method of any dif- located in Denmark, and Arpida, Inc., a company located in ference between that initial amount and the maturity the USA. Arpida UK Ltd. was founded in 2003. Combio A/S was acquired in October 2004 and renamed Arpida A/S on1 March 2005. Arpida, Inc., was founded by Arpida Ltd. in The Company assesses at each period end whether there is objective evidence those financial assets are impaired. Im-pairment losses are recognised in the income statement. Foreign currency translationGroup companies use their local currency as their functionalcurrency reflecting the economic environment they operate Business combinations and goodwill All supplies acquired by Arpida are related to its research Business combinations are accounted for using the pur- and development activities. Generally these supplies are not chase method in accordance with IFRS 3. The cost of a busi- considered inventoriable costs, as such they were recorded ness combination is the aggregate of the fair values at the as a research and development expense when acquired.
date of exchange of any assets given and equity instruments However, auxiliary materials and semi-finished goods ac- issued by the acquirer, given in exchange for control over the quired in business combinations are recorded as inventories net assets of the acquired company. The cost of acquisition and expensed subsequently based on the consumption.
also includes directly attributable incidental costs. Arpida allocates the cost of a business combination by recognising Plant and equipment the acquiree's identifiable assets, liabilities, incurred or as- Plant and equipment are recorded at cost and are stated at sumed, and contingent liabilities that satisfy the recognition historical cost less accumulated depreciation. Depreciation criterion at their fair value. In-process research development expense is recorded utilising the straight-line method over projects of the acquiree are recognised by Arpida as an in- the estimated useful life of the assets. Assets are written tangible asset separately from goodwill if at the acquisition down to their estimated residual value which usually is deter- date the project meets the definition of an intangible asset mined as zero. The useful lives are summarised as follows: and its fair value can be measured reliable. Goodwill isrecognised as an asset from the acquisition date and is Useful life (years) measured as the excess of the cost of the business acquisi- Leasehold improvements tion over Arpida's interest in the net fair value of the identifi- Laboratory furniture and equipment able net assets acquired. Office furniture and fixtures Office installations Impairment of goodwill An impairment test of goodwill is carried out annually.
Data processing equipment and software Goodwill is allocated to cash-generating units. When the re-coverable amount of the cash-generating unit, being the The costs of repairs and maintenance are capitalised only if higher of its fair value less costs to sell or its value in use, they improve the related asset or extend its useful life.
is less than its carrying amount, then an impairment in thecarrying amount is recorded. The methodology used in the Subsequent costs are included in the assets' carrying impairment testing for cash-generating units is further de- amount or recognised as a separate asset, as appropriate, scribed in note 10.
only when it is probable that future economic benefits asso-ciated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount Leases where a significant portion of the risks and rewards of the replaced part is derecognised. All other repairs and of ownership are retained by the lessor are classified as op- maintenance are charged to the income statement during erating leases. Payments made under operating leases the financial period in which they are incurred.
(net of any incentives received from the lessor) are chargedto the income statement on a straight-line basis over the Intangible assets period of the lease. Intangible assets (other than goodwill) are initially valued at Leases of tangible fixed assets where Arpida has substantially cost and, if within the context of a business combination, all the risks and rewards of ownership are classified as fi- they are recorded at fair value. Generally, intangible assets nance lease. Finance leases are capitalised at the lease com- are amortised over their useful lives on a straight-line basis.
mencement at the lower of the fair value of the leased assetand the present value of minimum lease payments. Each Impairment of long-lived tangible assets lease payment is allocated between the liability and finance Plant and equipment and intangible assets (other than charges so as to achieve a constant rate on the finance bal- goodwill) are reviewed for impairment whenever events or ance outstanding. The corresponding rental obligations, net changes in circumstance indicate that the balance sheet of finance charges, are included in other short-term and other carrying amount of the asset may not be recoverable. When long-term payables. The interest element of the finance cost the recoverable amount of the long-lived asset, being the is charged to the income statement over the lease period so higher of its fair value less costs to sell or its value in use, as to produce a constant periodic rate of interest on the re- is less than its carrying amount, then an impairment in the maining balance of the liability for each period. The asset ac- carrying amount is recorded. Arpida estimates its value in quired under finance lease is depreciated over the shorter of use based on the future cash flows expected to result from the useful life of the asset and the lease term.
the use of the asset. For purposes of assessing impairment,assets are grouped at the lowest level for which there are separately identifiable cash flows.
Arpida recognises provisions when it has a present legal orconstructive obligation to transfer economic benefits as aresult of past events and a reasonable estimate of the obli-gation can be made. Employee entitlements to annual leaveare recognised when they accrue to employees. An accrualis made for annual leave as a result of services rendered byemployees up to the balance sheet date.
Annual report 2006 Notes to Consolidated Financial Statements Share-based compensation Deferred income taxes Non-executive members of the Board of Directors and cer- Deferred taxes are provided for, using the liability method, tain employees of Arpida participate in stock option plans.
for all temporary differences between the tax bases of as- The fair value of these equity-settled compensation awards sets and liabilities and their carrying values for financial re- granted to employees is estimated at the grant date and porting purposes, except for those temporary differences re- recorded as an expense over the vesting period. The ex- lated to investments in entities where the timing of their pense is charged to the appropriate income statement reversal can be controlled and it is probable that the differ- heading within the operating expenses and a corresponding ence will not reverse in the foreseeable future. Deferred tax increase is recorded in equity. At each reporting date, the assets relating to the carry-forward of unused tax losses Company revises its estimates of the number of options and deductible temporary differences are recognised to the that are expected to become exercisable. It recognises the extent that future taxable profit is expected to be available.
impact of the revision of original estimates, if any, in the in- The realisation of the deferred tax asset is assessed on an come statement and a corresponding adjustment to equity.
annual basis. The recognition of such a deferred tax asset is Any subsequent cash flows from exercises of vested awards based on this assessment. Deferred taxes are based on tax are recorded as an increase in equity.
rates currently enacted or substantially enacted and are ex-pected to apply when the related deferred tax asset is rea- Employee benefits lised or the deferred tax liability is settled.
For the defined contribution plan, the Company pays a con-tribution to a privately administrated pension plan on a con- Earnings/(Loss) per share tractual basis. Contributions are recognised as an employee Basic earning/(loss) per share is calculated by dividing the net benefit expense when they are due.
profit/(loss) attributable to the shareholders by the weightedaverage number of shares outstanding during the period. Di- For the defined benefit plan, the liability is calculated regu- luted earning/(loss) per share is calculated by dividing the net larly by an independent actuary using the projected unit profit/(loss) attributable to the shareholders by the weighted credit method. The defined benefit obligation is measured average number of shares outstanding during the period ad- at the present value of the estimated future cash flows us- justed for the conversion of all dilutive potential shares.
ing a discount rate based on the interest rate of high-qualitycorporate bonds. The charge for such pension plans, rep- Dividends payable resenting the net periodic cost, is included in the staff costs.
The Company may declare dividends upon the recommen- Plan assets are recorded at their fair values. Significant dation of the Board of Directors and the approval of share- gains or losses arising from adjustment posted, changes in holders at their annual general meeting. Under Swiss cor- actuarial assumptions, and amendments to pension plans, porate law, the Company's right to pay dividends may be are recognised over the average remaining service lives of limited in certain circumstances. At this point, the Company the related employees, where these differences exceed 10 % has not paid any dividends since its inception and does not of the higher amount of the discounted value of the obliga- anticipate paying dividends in the foreseeable future.
tion and the fair value of assets at the beginning of the year.
Changes in accounting policies Research and development IAS 19 (Amendment), Employee Benefits, is mandatory for Research and development costs consist primarily of com- the Company effective from 1 January 2006. As the Com- pensation and other expenses related to research and devel- pany has not changed its accounting policy adopted for opment personnel; costs associated with preclinical testing recognition of actuarial gains and losses, the adoption of and clinical trials of Arpida's product candidates, including this amendment only impacts the format and extent of dis- the costs of manufacturing the product candidates; expens- closures presented in the accounts.
es for research and services under collaboration agree-ments as well as outsourced research and development at Standards, interpretations, amendments effective from 1 January 2006, but not relevant for Arpida's consolidated Research and development expenses are fully charged to the financial statements, are IFRS 6, Exploration for and Evalua- income statement as incurred. Arpida considers that regula- tion of Mineral Resources, IAS 39, Financial Instruments: tory and other uncertainties inherent in the development of Recognition and Measurement Regarding the Fair Value Op- its key new products preclude it from capitalising develop- tion, the Cash Flow Hedging of Forecast Intragroup Transac- ment costs under IFRS. Research and development projects tion and the Transition and Initial Recognition of Financial As- which have achieved technical feasibility, usually signified by sets and Financial Liabilities, IAS 39 and IFRS 4, Insurance US Food and Drug Administration or comparable regulatory Contracts regarding Financial Guarantee Contracts, and IAS body approval, would be capitalised because it is probable 21, The Effects of Changes in Foreign Exchange Rates regard- that the costs will give rise to future economic benefits. La- ing Net Investment in a Foreign Operation, IFRS 1 (Amend- boratory buildings and equipment included in plant and ment), First-Time Adoption of International Financial Report- equipment are depreciated over their estimated useful lives.
ing Standards, IFRIC 6, Liabilities Arising from Participatingin a Specific Market – Waste, Electrical and Electronic Equip-ment IFRIC 4, Determining whether an Arrangement Containsa Lease, IFRIC 5, Rights to Interests Arising from Decommis-sioning, Restoration and Environmental Rehabilitation Funds.
New accounting pronouncements foreign currency movements affecting its net loss and finan- Arpida is currently assessing the potential impacts of the cial position, as expressed in Swiss francs. Arpida monitors new and revised standards that will be effective from its currency exposures.
1 January 2007. Those will potentially expand financialstatement disclosure in certain areas, such as IFRS 7, Interest rate risk: Interest rate risk arises from movements Financial Instruments: Disclosures. IFRS 8, Operating Seg- in interest rates, which could have adverse effects on ments was published in November 2006, and will be effec- Arpida's net loss or financial position. Changes in interest tive from 1 January 2009. IFRS 8 replaces IAS 14, Segment rates cause variations in interest income and expenses on Reporting. IFRS 8 requires entities to define operating seg- interest-bearing assets and liabilities. In addition, they can ments and segment performance in the financial state- affect the market value of certain financial assets, liabilities ments based on information used by the chief operating de- and instruments. Arpida does not have significant exposure cision-maker. This new requirement could have an impact to interest rate risks.
on the segments presented, the items reported and their re-spective measurement. The Company has not undergone a Liquidity risk: To date, Arpida has financed its cash require- detailed analysis and therefore no final assessment of the ments primarily from share issuances and debt financings.
impact can presently be made.
Therefore, Arpida is potentially exposed to liquidity risks.
The following interpretations to existing standards have Credit risk: Credit risk stems from a counterparty's failure been published: IFRIC 8, Scope of IFRS 2 (effective for an- to meet its obligation. Cash and cash equivalents are held nual periods beginning on or after 1 May 2006), IFRIC 10, with first-rate financial institutions.
Interim Financial Reporting and Impairment (effective forannual periods beginning on or after 1 November 2006),IFRIC 11 and IFRS 2, Group and Treasury Share Transac-tions (effective for annual periods beginning on or after 1 3. Changes in the Scope March 2007), IFRIC 7, Applying the Restatement Approach under IAS 29, Financial Reporting in HyperinflationaryEconomies (effective from 1 March 2006), IFRIC 9, Re-assessment of embedded derivatives (effective for annual In 2006, the Company incorporated Arpida, Inc., in order to periods beginning on or after 1 June 2006) and IFRIC 12, establish a presence in the USA. The results of Arpida, Inc., Service Concession Arrangements (effective for annual peri- are included in the consolidated financial statements since ods beginning on or after 1 January 2008). Arpida is cur- incorporation on 11 May 2006.
rently assessing the impact and, if applicable, will adopt theinterpretations in 2007 or later.
In 2005, there were no changes to the Group scope.
Financial risk managementFinancial risk management is governed by policies andguidelines approved by senior management. These policies 4. Information by cover foreign exchange risk, interest rate risk, liquidity risk Geographical Area and credit risk.
Foreign exchange risk: Arpida sources supplies as well as The Group has only one business segment, namely the dis- research and development, consulting and other services in covery and development of new, safer and more efficacious several countries and operates a foreign subsidiary perform- antimicrobial drugs for the treatment of infectious diseases. ing research and development activities and is exposed to The geographical analysis of assets is as follows: Outside Switzerland The geographical analysis of capital expenditure is as follows: Outside Switzerland Total capital expenditure Annual report 2006 Notes to Consolidated Financial Statements The geographical analysis of operating expenses is as follows: Outside Switzerland Total research and development Outside Switzerland Total management and general expenses Total operating expenses The geographical analysis of income from services is as follows: Outside Switzerland Total income from services Wages and salaries Share-based compensation Social-security costs Pension costs – employer contribution Other staff-related costs Total staff-related costs 6. Financial Result Charges related to bank accounts Interest finance lease Foreign exchange loss, net Total financial expenses Interest income from bank deposits Foreign exchange gains, net Total financial income Net financial result Income tax expenses comprise: Current income tax expenses Deferred income tax expenses Total income tax expenses Arpida had net operating loss carry-forwards for tax purposes, which are available to offset future taxable income. The loss carry-forwards with their expiry dates are as follows: Later than one year and not later than five years More than five years The deferred tax assets and liabilities as per 31 December comprise: Tax loss carry-forwards Capitalised research and development costs in tax books Investments (1,377,237) Intangible assets Plant and equipment Accrued expenses and other current liabilities Net deferred tax assets Unrecognised deferred tax assets Deferred tax liabilities recognised Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred income taxes relate to the same tax jurisdiction. Arpida does not recognise a deferred tax asset relating to tax loss carry-forwards and temporary differences since the criteria for recognition are not met. The main elements contributing to the difference between the Company's overall expected tax rate (as a weighted average of the tax rates in the tax jurisdictions in which Arpida operates) and the effective income tax expense are: Loss before income tax Expected income tax rate Expected tax benefit Effect of changes in unrecognised deferred taxes Income tax expenses 8. Loss per Share Basic and diluted loss per share are calculated by dividing the net loss attributable to shareholders by the weighted average number of shares outstanding during the year.
Net loss attributable to shareholders (CHF) Weighted average number of shares outstanding Basic and diluted loss per share (CHF) For the years ended 31 December 2006 and 2005, loss per basic and diluted shares is based on weighted average of shares outstanding and excludes diluted shares relating to employee stock options, as they would be antidilutive.
Annual report 2006 Notes to Consolidated Financial Statements 9. Plant and Equipment Historical cost1 January 2005 Consolidation changes Translation effects Accumulated depreciation1 January 2005 Consolidation changes Depreciation for the year Translation effects Net book value at 31 December 2005 Historical cost1 January 2006 Consolidation changes Translation effects Accumulated depreciation1 January 2006 Consolidation changes Depreciation for the year Translation effects Net book value at 31 December 2006 Please refer to note 14 for finance lease obligation information. Please refer to note 10 for impairment charge information.
The Company recorded depreciation expenses in 2006 of CHF 1,337,002 (2005: CHF 1,023,310) as part of research and development expenses and CHF 334,250 (2005: CHF 255,827) as part of management and general expenses in the statement of operations.
10. Intangible Assets Historical costs1 January 2005 Consolidation changes Translation effects Accumulated amortisation1 January 2005 Consolidation changes Amortisation of the year Translation effects Net book value at 31 December 2005 Historical costs1 January 2006 Consolidation changes Translation effects Accumulated amortisation1 January 2006 Consolidation changes Amortisation of the year Translation effects Net book value at 31 December 2006 Annual report 2006 Notes to Consolidated Financial Statements Goodwill is tested for possible impairment annually on a The Company has decided to discontinue a substantial part cash-generating unit (CGU) level. For this purpose, Arpida of Arpida A/S, the operations in Denmark. The staff will be Group was determined to be the cash-generating unit unless substantially reduced and the research activity will be evidence of impairment exists at a lower level such as with- ceased. As a result, the goodwill of CHF 6,056,705 arisen in an operation contained within the CGU. The recoverable in connection with the acquisition of Arpida A/S was written amount of Arpida Group is based on fair value, which is de- off as of 31 December 2006, since the research capabil- termined with reference to the publicly quoted share price ities acquired and workforce acquired are not transferred to of Arpida Ltd., less costs to sell.
Switzerland. In addition, the equipment located at ArpidaA/S was written down by CHF 1,173,374. 11. Cash and Cash Equivalents Cash at bank and in hand Short-term bank deposits Total cash and cash equivalents The effective interest rate on cash and cash equivalents amounts to 1.43% in 2006 and 1.02% in 2005.
12. Share Capital On 31 December 2004, the issued share capital amounted to On 31 December 2005, the conditional share capital CHF 2,194,392 consisting of 577,600 common shares with a was 1,935,000 registered common shares of CHF nominal value of CHF 0.20 each, and 10,394,359 preferred 0.20 each (CHF 387,000).
A, B and C shares with a nominal value of CHF 0.20 each.
On 19 July 2006, the shareholders approved the in- On 3 May 2005, the Company converted all preferred A, B crease of the conditional capital from CHF 387,000 and C shares one for one into common shares and issued to CHF 487,000 for the potential issuance of 5,400,000 common shares in the Initial Public Offering at 2,435,000 registered common shares of CHF 0.20 the SWX Swiss Exchange excluding the pre-emptive right each under the stock option plan for employees, ("Bezugsrecht") of the shareholders. The first day of trading Board members and persons in comparable posi- was 4 May 2005, and the total number of registered common tions. During 2006, 811,273 registered common shares issued amounted to 16,371,959 with a nominal value shares were issued due to option exercise. Hence, of CHF 0.20 each, bringing the nominal share capital to at year-end 2006, conditional capital for the is- CHF 3,274,391.80. suance of 1,623,727 shares remains.
In the course of 2006, 811,273 shares were issued due to theexercise of staff options, lifting the total number of commonshares outstanding to 17,183,232 per 31 December 2006 witha nominal value of CHF 0.20 each, bringing the nominal valueto CHF 3,436,646.40.
The Extraordinary General Meeting of shareholders of 19 July2006 approved the creation of authorised capital of CHF340,000. The authorisation expires on 19 July 2008. 13. Accrued and Other Current Liabilities Accrued salaries and social security Accrued finance costs Accruals for capital expenditures Accrued research and development costs 14. Finance Lease In October 2005, the Company entered into a rental contract for office and laboratory spacein the "TechCenter Reinach" in Reinach, Switzerland, starting 1 December 2006. Certain elements of the contract qualify as a finance lease.
As of 31 December 2006, the capitalised cost of the property under finance lease was CHF 5,500,000 (2005: CHF 0) and the net book value of this asset was CHF 5,469,444(2005: CHF 0).
Present value of future Future minimum lease payments minimum lease payments Between one and five years More than five years Annual report 2006 Notes to Consolidated Financial Statements 15. Employee Benefits Arpida maintains retirement plans covering all of its employ- pay retirement contributions, which are defined as a per- ees including its executive officers. The plan for the Danish centage of the employees' covered salaries, to a collective Arpida A/S is considered to be a defined contribution plan pension fund operated by an insurance company. Interest is and therefore no actuarial calculations as required under credited to the employees' accounts at the minimum rate IAS 19 have been taken into consideration. Charges of provided in the plan, payment of which is guaranteed by the CHF 373,875 and CHF 373,038 were recognised in 2006 insurance contract. Additionally the plans provide benefits and 2005, respectively, for the Danish plan.
on the death or long-term disability of its employees.
The Swiss plans are considered as defined benefit plans in For accounting purposes this insurance contract represents accordance with IAS 19. These plans are structured accord- the sole asset of the plans. Fair value of plan assets is the ing to the principles of the Swiss Occupational Benefits Law estimated cash surrender value at the respective balance (BVG) and are substantially identical to the BVG programme except that the Company plan also covers salaries abovethe salary limit of the BVG. The Company and its employees The amounts recognised in the balance sheet for the Swiss plans are determined as follows: Change in benefit obligation Benefit obligation at 1 January Current service costs Employee contribution Actuarial (gains)/losses Benefit obligation at 31 December Change in plan assets Fair value at 1 January Expected return on plan assets Actuarial gains/(losses) Employer contributions Employee contributions Fair value at 31 December Fair value of plan assets Defined benefit obligation Over-/(under) funding Unrecognised actuarial (gains)/losses Net recognised asset/(liability) The net periodic costs recognised in the statements of operations Expected return on plan assets Actuarial (gains)/losses outside corridor, recognised Net periodic cost Of the total charge CHF 503,148 (2005: CHF 242,466) and CHF 195,670 (2005: CHF 68,389) were included in research and development and management and general expenses, respectively. The actual return on plan assets was CHF 118,502 (2005: CHF 133,723).
Future contributionsIn 2007, the Group expects to contribute approximately CHF 608,000 to the plan.
Overview and experience adjustments Defined benefit obligation Over-/(under) funding Experience adjustments – Fair value of plan assets – Defined benefit obligation The principal actuarial assumptions used for the Swiss plans were as follows: Expected return on plan assets Future salary increases Future pension increases Assumptions regarding the mortality experience are based on published statistics.
Annual report 2006 Notes to Consolidated Financial Statements 16. Stock Option Plans The Board of Directors administers the stock option plans.
The granting to employees and members of the Board of In 2005, the stock option plan D was issued. Options under Directors is, according to the stock option plan regulation, this equity-settled plan were granted for the first time on under the discretion of the Plan Administrator, who is elect- 31 December 2005. The options vest 25% each year over ed by the Board of Directors of the Company. No compen- four years. The first exercise date is four years after the sation expense has been recognised for options granted grant date (first day after a lock-up period of four years), under plan A and plan B except to the extent that the social and the options expire after eleven years after the grant security cost related to the issuance of options has been date. In case of cessation of service, the vested options re- main exercisable the later of (i) six months after terminationor (ii) six months after the end of the lock-up period. In case of death, the vested options are exercisable within one year. Options under the equity-settled stock option plan A weregranted for the first time on 1 July 2001. According to this plan 20% of the options vested after two full years of em- In 2006, the stock option plan E was issued. Options under ployment and an additional 10% vested after the third year this equity-settled plan were granted for the first time on of employment. Finally, all remaining options had vested on 31 December 2006. The options vest 25% each year over 1 July 2003, provided the option holder was at that time four years. The first exercise date is four years after the still employed by the Company. In case of death or disability grant date (first day after a lock-up period of four years), (but not retirement), all options vest immediately. All op- and the options expire after eleven years after the grant tions would have expired by 31 March 2004. In 2002, the date. In case of cessation of service, the vested options re- plan was amended whereby all options became vested. Fur- main exercisable the later of (i) six months after termination thermore, the first exercise date was amended to 1 October or (ii) six months after the end of the lock-up period. In case 2004 (first day after a lock-up period of two years), and the of death, the vested options are exercisable within one year.
options expiration date was set for 1 October 2006. All out-standing options had been exercised prior to the expirationdate.
Plan BIn 2002, the stock option plan B was issued. Options underthis equity-settled plan were granted for the first time on 1 October 2002. 20% of the options vested after two fullyears of employment, an additional 30% vested after thethird year of employment and the remaining 50% vest afterfour years of employment. During the applicable post- service exercise period, no additional options vest. In caseof death or disability (but not retirement), all options vestimmediately. The first exercise date is 1 October 2004 (firstday after a lock-up period of two years), and the options expire by 1 October 2007.
Plan CIn 2004, the stock option plan C was issued. Options underthis equity-settled plan were granted for the first time on 1 May 2004. The options can be exercised between 1 May2006 and 30 April 2007, after a lock-up period of two years.
Economically, the options vest over three years as the Com-pany has a repurchase right of the shares: Within the firstyear after the grant date, the Company is entitled to repur-chase all the shares. Within the second year after the grantdate, the Company is entitled to repurchase two thirds ofthe shares. Within the third year after the grant date, theCompany is entitled to repurchase one third of the shares.
The entitlement to repurchase shares ceases after threeyears.
Options outstanding under the plans as of 31 December 2006 are as follows: years of remaining exercise price (CHF) options outstanding Options outstanding under the plans as of 31 December 2005 are as follows: Weighted average years of remaining exercise price (CHF) options outstanding A summary of the options granted, exercised, cancelled and outstanding for the above plan is as follows: Weighted average exercise price (CHF) exercise price (CHF) Outstanding at 1 January Outstanding at 31 December of which exercisable The fair values of the 2004, 2005 and 2006 grants were assessed by using a binomial option value assessment model. The resulting expenses are recognised on a straight-line basis over the vesting period. In 2006 and 2005, the following IFRS 2 expenses were recorded in the Company's statements of operations: Research and development expenses Management and general expenses Annual report 2006 Notes to Consolidated Financial Statements The significant inputs into the value assessment model were as follows: 31 December 2005 – 1 May 2006 31 December 2016 – 30 April 2017 Expected dividend yield Risk-free interest rate The exercise price is set by the Board of Directors. The volatility is based on comparable companies' volatility or on the Company's volatility where available. The risk-free interest rate is based on the CHF swap rate for the expected life of the option.
17. Related Parties Senior executive and Board compensation At year-end 2006 there were four Senior Executive Officers. During 2006, two Senior Executive Officers stepped down. The total remuneration for the six persons who were Senior Executive Officers during 2006 (five persons in 2005) and the eight members of the Board of Directors (2005: 9 members) was as follows: Compensation (CHF) Board of Directors Senior executives Short-term employee benefits Post-employment benefits Share-based compensation One member of the Board of Directors is also a senior executive. His compensation and options are included in the senior executive figures. Short-term employee benefits comprise salaries, bonus payments, social security and expense allowance. IFRS 2 rules were used for accounting for share-based compensation.
Senior executives Board of Directors The total number of options held by senior executives amounts to 1,027,642 (1,062,912 as per year-end 2005). The total number of options held by non-executive members of the Board of Directors amounts to 96,080 (64,501 as per year-end 2005). 18. Commitments and Contingencies Operating lease commitmentsThe future minimum lease payments under non-cancellable operating leases that are not accounted for in the balance sheet were as of year-end: Later than one year and not later than five years Later than five years As of 1 January 2003, a rental contract was applicable for the buildingDammstrasse 36, 4142 Münchenstein, in Switzerland. This contract hasbeen terminated with effect as per 31 December 2006. In October 2005, the Company entered into a rental contract for officeand laboratory space in the "TechCenter Reinach" in Reinach, Switzer-land, starting 1 December 2006. The rental period is 15 years unless it isterminated earlier or extended. The elements not qualifying for financelease are incorporated in the table above. The Company has the option toextend the rental term for an additional period of five years unless Arpidaterminates the contract.
Annual report 2006 Notes to Consolidated Financial Statements Research and development commitments 19. Contingent Assets Arpida has entered into long-term research agreements withvarious supply institutions including potential milestone andother contingent payments amounting to CHF 4,707,950 The Company is involved in a VAT discussion regarding a in total. The following two contracts represent the most im- possible VAT receivable on incurred expenses for the period portant collaborations: 1998–2003. In 2004, the Company received a reimburse-ment of CHF 511,767. With respect to the remaining VAT According to one of the collaboration contracts, total mile- amount, which is approximately CHF 160,000, it is unclear stone payments amount to CHF 4,050,000 and will be ap- whether it will be reimbursed. Therefore, no receivable has plied for a first compound developed under the agreement.
been recognised for this as of year-end 2006 and 2005.
If a further compound will be developed under this agree-ment, 75% of above-disclosed milestone payments shall bedue by Arpida. In case of a third and any other compound,50% of the mentioned milestone payments shall be due.
20. Legal Proceedings The latter two payments are not included in the amountmentioned. The timing of such milestone payments cannotreliably be estimated due to the uncertainty involved in such No legal actions are pending at the time of this report but the Company expects to be involved in up to two lawsuitsarising in the ordinary course of its business. The Company According to another collaboration contract Arpida entered believes that adequate provisions were made to cover the into, a milestone payment of USD 500,000 (CHF 657,950) risks associated with these threatened lawsuits.
is due immediately after the identification of a lead com-pound by the joint research committee.
Sales and purchase agreement 21. Events Subsequent to The Company obtained in 2001 from Hoffmann-La Roche the 31 December 2006 exclusive ownership rights to iclaprim, including its enan- Balance Sheet Date tiomers, in exchange for a one-time payment and additionalfuture payments which are fixed as a single-digit percentageof net sales. The one-time payment has been expensed as The Board of Directors approved the 2006 consolidated fi- acquired in-process research and development costs in nancial statements of the Company on 9 March 2007.
2001. In 2006 and 2005 no payments were made underthis agreement.
On 22 February 2007 Arpida announced the cessation of itsresearch activities in Denmark. Arpida A/S, the Danish sub- Other commitments sidiary of Arpida Ltd., has primarily focused on hit-to-lead The Company entered into various purchase commitments chemistry to support exploratory research. The cessation of for services and materials as part of the ordinary business.
these activities in Arpida A/S will result in a substantial re- These commitments are not in excess of current market duction of staff.
prices and reflect normal business operations.
Report of the Group Auditors Report of the Group Auditorsto the General Meeting ofArpida Ltd.
Reinach As Group Auditors, we have audited the consolidated finan- In our opinion, the consolidated financial statements give a cial statements (balance sheets, statements of operations, true and fair view of the financial position, the results of op- statements of cash flow, statements of equity and notes), erations and the cash flows in accordance with the Interna- pages 36 to 57, of the Arpida Group for the years ended tional Financial Reporting Standards (IFRS) and comply with 31 December 2006 and 2005.
These consolidated financial statements are the responsibil- We recommend that the consolidated financial statements ity of the Board of Directors. Our responsibility is to express submitted to you be approved.
an opinion on these consolidated financial statementsbased on our audit. We confirm that we meet the legal re- quirements concerning professional qualification and inde-pendence.
Our audit was conducted in accordance with Swiss AuditingStandards and with the International Standards on Auditing,which require that an audit be planned and performed to obtain reasonable assurance about whether the consolidat- Auditor in charge ed financial statements are free from material misstate-ment. We have examined on a test basis evidence support- Basel, 9 March 2007 ing the amounts and disclosures in the consolidatedfinancial statements. We have also assessed the accountingprinciples used, significant estimates made and the overallconsolidated financial statement presentation. We believethat our audit provides a reasonable basis for our opinion.
Annual report 2006 Swiss Statutory Balance Sheets Current assetsCash and cash equivalents Other receivables– Subsidiaries – Third parties Total current assets Non-current assetsPlant and equipment Financial investments (rent deposit) Intangible assets– Goodwill – Research and development costs Total non-current assets Liabilities and shareholders' equity Current liabilitiesTrade accounts payables– Subsidiaries – Third parties Accrued expenses and other current liabilities Short-term portion of lease liabilities Total current liabilities Long-term lease liabilities Total non-current liabilities Shareholders' equityShare capital Legal reserves– Agio – Loss carried forward – Net loss for the period Total shareholders' equity Total liabilities and shareholders' equity Swiss Statutory Statements of Operations 1 January 2006 to 1 January 2005 to Income from services – Third parties Total operating income Research and development costs Rent and maintenance expenses Administrative expenses Other operating expenses Depreciation plant and equipment Write-off capitalised research and development costs Goodwill amortisation Goodwill impairment Impairment subsidiaries Reimbursement to subsidiaries Total operating expenses Capitalisation of research and development costs Financial expenses Net loss for the period Proposed appropriation of accumulated losses The Board of Directors proposes to compensate the accumulated loss of CHF 31,079,128 with an equal amount of share premium in the general reserves.
Loss carried forward as of 1 January 2006 Net loss for the period Accumulated loss as of 31 December 2006 Compensation with share premium in the general reserves Loss to be carried forward Annual report 2006 Statutory Financial Statements Notes to the Swiss Statutory Financial Statements of Arpida Ltd.
Notes in accordance with article 663b of the Swiss Code of Obligations 1. Lease commitments not recorded in the balance sheet 2. Fire insurance value of plant and equipment 3. Conditional capital Authorised capital 4. Liabilities to pension fund Arpida UK Ltd. (inactive) Arpida, Inc.
6. Major shareholdersAccording to the information available to Arpida, the follow-ing shareholders held over 5% as at 31 December 2006: % of share capital * The Arpida shares are held by several units within the Group.
7. The position research and development costs (intangible These circumstances indicate the existence of a material assets) comprises capitalised research and development uncertainty regarding the valuation of the capitalised re- costs relating to various projects. Research and develop- search and development costs, because it is uncertain ment projects are capitalised to the extent that research whether these projects can be successfully finalised and and development projects are considered to represent sus- therefore these capitalised research and development tained and valuable prospective commercial opportunities costs can be realised through future revenues. In case the and the financing of the finalisation of the projects appears re-spective research and development projects are not suc- cessful, the amount of CHF 101,246,879 is fully or partially Exploratory research is expensed as occurred. For research impaired and needs to be charged to the income statement.
and development projects, where these requirements arenot met, any costs capitalised in previous periods as well ascost incurred in the current period are written off and fullycharged to the income statement. However, the remainingbook value of CHF 101,246,879 depends on management'sassumption that the results of the respective research anddevelopment projects are expected to be positive and theprojects can be successfully finalised.
Report of the Statutory Auditors Report of the Statutory Auditorsto the General Meeting ofArpida Ltd.
Reinach As Statutory Auditors, we have audited the accounting We recommend that the financial statements submitted to records and the financial statements (Swiss statutory bal- you be approved.
ance sheet, Swiss statutory statement of operations andnotes), pages 59 to 61, of Arpida Ltd. for the year ended Without qualifying our opinion we will draw the attention to 31 December 2006.
note 7 of the financial statements, whereas a material uncertainty regarding the valuation of the capitalised re- These financial statements are the responsibility of the search and development costs exists. This cannot be finally Board of Directors. Our responsibility is to express an opin- assessed at this date. The capitalised research and ion on these financial statements based on our audit. We development costs may be fully or partially impaired, if the confirm that we meet the legal requirements concerning research and development projects cannot be successfully professional qualification and independence.
finalised as currently assumed and therefore cannot be realised through future revenues. In this case, the Com- Our audit was conducted in accordance with Swiss Auditing pany's accumulated losses could exceed half of its capital Standards, which require that an audit be planned and per- and legal reserves as of 31 December 2006. The provisions formed to obtain reasonable assurance about whether the of article 725 of the Swiss Code of Obligation addressing financial statements are free from material misstatement.
the obligation of the Board of Directors in such cases would We have examined on a test basis evidence supporting the amounts and disclosures in the financial statements. Wehave also assessed the accounting principles used, signifi- cant estimates made and the overall financial statementpresentation. We believe that our audit provides a reason-able basis for our opinion.
In our opinion, the accounting records and financial state-ments and the proposed appropriation of accumulated loss- es comply with Swiss law and the Company's articles of in- Auditor in charge Basel, 9 March 2007 Annual report 2006 Activity The strength of a drug (e.g. an antibacterial agent) Efficacy Strength, effectiveness; the ability of a drug to to exert its action against its target (e.g. bacterium).
control or cure an illness.
Antibacterial Any agent that destroys or prevents the EMEA European Agency for the Evaluation of Medicinal growth of bacteria.
Antibiotic A class of natural and synthetic compounds Enzyme A protein capable of catalysing (facilitate and that inhibit the growth of or kill bacteria.
speed up) a set of specific cellular chemical reactions.
Anti-infective agent A compound able to stop the growthof or kill infectious agents (viruses, bacteria, fungi, proto-zoa, etc.).
Assay A test to determine the properties of a chemicalcompound by means of a biological response.
FDA The US Food and Drug Administration.
Bacterial resistance A change (mutation) occurring in a GMP Good Manufacturing Practice.
bacterium that enables it to tolerate an antibiotic.
Gram-negative bacteria Bacteria may be classified either Bactericidal Property of killing bacteria. A term often as Gram-positive or Gram-negative based on the differences used to describe certain antibiotics.
in the structure of their bacterial cell envelope. In Gram- Bacteriostatic Arresting the growth of bacteria. A term negative bacteria a thin cell wall is surrounded by a double often used to describe the property of antibiotics.
impermeable layer which constitutes an outer membrane.
Bacterium A bacterium (plural: bacteria) is a microscopic Gram-positive bacteria Bacteria may be classified either single-celled organism. Bacteria lack the nucleus and or- as Gram-positive or Gram-negative based on the differences ganelles of the more complex cells. They are the target of in the structure of their bacterial cell envelope (see Gram- drugs known as antibiotics.
negative bacteria). In Gram-positive bacteria the inner mem- Broad-spectrum Often used to describe an antibiotic that brane is simply protected by a well-structured thick cell is effective against a wide range of microorganisms.
CDC US Center for Disease Control and Prevention.
Hit A primary active compound, with specific binding Cell wall synthesis The bacterial cellular process of build- behaviour, exceeding a certain threshold value in a given ing cell wall.
Clinical development Process of conducting the neces- Hospital Antibiotics Market The market associated with sary studies to demonstrate safety and efficacy of a drug antibiotics that are solely/primarily prescribed for infections candidate in humans.
that must be treated in hospital settings or have been ac- Clinical trial A test in healthy volunteers or patients that quired during hospitalisation.
examines the safety and efficacy of a drug candidate.
HTS High-Throughput Screening. Screening (of a com- Community Antibiotics Market The market associated pound collection) to identify hits in an in vitro assay.
with antibiotics that are solely/primarily prescribed by gen-eral practitioners for infections that are acquired and treat-ed outside the hospital setting.
IND Investigational New Drugs – drug candidates under investigation by a regulatory authority such as the FDA.
Intravenous Into a vein.
DHFR/dihydrofolate reductase An essential enzyme of In vitro Biological or biochemical process or testing con- the folic acid pathway, inhibition of which leads to death or ducted in a test tube.
massive growth impairment of living organisms.
In vivo Biological or biochemical process or testing con-ducted in a living organism (often an animal).
Lead optimisation Stage of the drug development Parenteral Therapy that is not introduced orally through process indicating the synthesis and testing of tens/hun- the alimentary tract but delivered by injection such as sub- dreds of variations of a chemical compound or of the series cutaneous, intravenous or intramuscular routes.
it represents in order to improve its pharmacology, its acti- Pathogen Organism (bacterium, fungus, virus or similar) vity or its potential for side effects.
that can infect and cause disease.
Pharmacokinetic study The analysis of the time coursesof absorption, distribution and elimination of drugs in ani- mals and/or humans.
Phase I Phase of drug development involving clinical stud- Mechanism of action The way by which a drug exerts its ies in healthy volunteers primarily to determine the behav- activity on a target.
iour of the drug in the human body and to assess safety Microorganism/microbe A microorganism or microbe is and tolerance profile.
an organism that is so small that it is invisible to the naked Phase II Phase of drug development involving clinical eye. The term is synonymous by usage to single-celled or- studies in patients to test therapeutic activity and observe ganisms, such as bacteria and archaea.
safety and tolerance usually comparing a range of dosing MRSA Methicillin-resistant Staphylococcus aureus – bac- terial strain resistant to methicillin. Phase III Phase of drug development involving large-scale Multidrug-resistant Resistant to multiple antibiotics.
clinical studies in patients to confirm therapeutic activityand acceptable safety and tolerance of the selected dosingregimen.
Placebo Substance with no action administered as a con-trol to a group in the same quantity and concentration as New Emerging Pathogen A formerly harmless microbe the drug being tested.
turning into a disease threat by acquiring new capacities for Potency The power of a medicinal agent to elicit the de- initiating infections and disease or by altering the human sired response.
host's natural ability to mount an effective immune re- Preclinical Phase of activities where a new drug candi- date is tested in animal models and where other activities NIAID National Institute of Allergy and Infectious Diseases are performed to prepare for testing in humans.
Protein A molecule produced by cells that can have struc- Nosocomial infections Infections acquired in hospital.
tural or catalytic roles.
Novel class of drugs/pharmaceuticals/antibioticsDrugs/pharmaceuticals/antibiotics that all employ thesame novel mechanism of action.
Novel drug /novel pharmaceutical/novel antibiotic A drug/pharmaceutical/antibiotic that is patentable be- SAR Structure-Activity Relationship cause it is new in chemical structure and either acts on a Staph Staphylococcus aureus, often referred to simply as target which is not exploited by any other known drug or it "staph", are bacteria healthy people can carry on the skin has properties, which make it sufficiently different from any or the nose. Staphylococcus bacteria commonly cause skin other drug sharing the same target.
infections. In addition to skin infections, staphylococcus Novel mechanism of action The mechanism of action of bacteria can cause infections in the blood, in the bones and a drug that either acts differently from any other drug on a in the lungs (pneumonia).
known target or that acts on a novel target.
Strep Streptococcus pneumoniae, often referred to simply Novel target A target which is not exploited by any other as "strep", is the leading cause of bacterial pneumonia, meningitis and otitis media.
Superbug Bacteria that are resistant to a wide range ofcommonly used antibiotics.
Target (bacterial) A specific biological molecule (protein,enzyme or other) essential for bacterial survival and/or pro-liferation and/or host invasion that is addressed by a drug.
Annual report 2006 Arpida Ltd.
Duggingerstrasse 23CH-4153 Reinach Phone +41 61 417 96 60Fax + 41 61 417 96 [email protected] Arpida Corporate CommunicationsPaul VerbraekenHead of Corporate CommunicationsPhone +41 61 417 96 [email protected] 8 May Annual General Meeting EditorArpida Ltd.
Concept and designStier Communications AGWeiningen ZHwww.stier.ch PhotographyPeter Ruggle, St. Gallen PrintEffingerhof AG, Brugg 2007 Arpida Ltd.
Duggingerstrasse 23CH-4153 ReinachSwitzerland Phone +41 61 417 96 60 Duggingerstrasse 23 Fax +41 61 417 96 61

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