Annual Report 2008

Highlights

• Lialda™successfullylaunchedinCanadaon29January2008

• HighlypositiveresultsfromtheLMWHeparinMMX®phaseIIbtrialfor

UlcerativeColitisannouncedon21April2008

• CosmoawardedUSpatentforuseofitsMMX®technologyon4August2008

• CompletionofthefirstphaseIclinicaltrialofCB-03-01forthetreatmentof

skindisorderson2September2008

• RifamycinSVMMX®licensingagreementforEUsignedwithDr.FalkPharma

on24November2008

• StrategiccollaborationwithSantarusforUSrightstoBudesonideMMX®

andRifamycinSVMMX®signedon15December2008

Pipeline development 2007–2008

Product Drug type Preclinical Phase I Phase II Phase III MA Launch

Lialda™/ Mezavant ®

MildtomoderateUlcerativeColitis

5-ASA

Budesonide MMX®

MildtomoderateUlcerativeColitis

Corticosteroid

Rifamycin SV MMX®

Travellers’Diarrhoea

Antibiotic

LMW Heparin MMX®

MildtomoderateUlcerativeColitis

Biologic

Zacol NMX®

IntestinalDisorders(nutraceutical)

Dietarysupplement

Rifamycin SV MMX®

CDAD

Antibiotic

CB-03-01 (NCE)

Acne,malepatternbaldnessandHirsutism

Steroidester,

androgenantagonist

CB-01-12

IBD

Anti-TNFα

CB-01-09

IBD

Immunosuppressant

CB-01-13

ColorectalCancerprevention

CB-01-14

Crohn’sDisease

CB-01-16

Opioid-inducedconstipation

Cox-2inhibitor

Antibiotic

Opioidantagonist

2007 2008

PKStudy/POCSteadyStatePKSensitivityStudy

Cosmo at a glance

CosmoPharmaceuticalsS.p.A.isaspecialtypharmaceuticalcompany

headquarteredinLainate,Milan,Italy,andislistedontheSIXSwissExchange

(SIX:COPN).

Cosmo’sobjectiveistobecomeagloballeaderinthemarketofoptimized

therapiesforselectedGastrointestinalDisorders.TheCompany’sclinicaldevelop-

mentpipelinespecificallyaddressesinnovativetreatmentsforInflammatory

BowelDiseases(IBD),suchasUlcerativeColitisandCrohn’sDisease,aswellasfor

ColonInfections.Inaddition,theCompanyisdevelopinganewchemicalentity

forthetreatmentofAcne,AlopeciaandHirsutism.

Cosmo’sproprietarymultimatrixtechnology,MMX®,isanexcellentbasefor

developingnew,patentable,yetlow-riskproducts,manufacturedattheCompany’s

ownGMP-approvedplant.CurrentlyCosmohastwoproductsonthemarket,five

inclinicaltrialsandafurtherfiveinpreclinicaldevelopment.

Key figures

EUR1,000 2008 2007

Income statements

Revenues 34,173 21,900

Costofsales (13,203) (13,162)

R&Dcosts (4,287) (4,772)

SG&Acosts (5,546) (4,730)

Operatingresult 11,184 (248)

Profitbeforetaxes 11,613 153

Profitfortheperiod 9,401 116

Balance sheet

Non-currentassets 24,072 13,562

Cashandcashequivalents 22,166 25,505

Othercurrentassets 11,527 8,161

Liabilities 14,529 12,081

Shareholders’equity 43,236 35,147

Equityratio(in%) 75% 74%

Shares

Weightedaveragenumberofshares 13,871,249 13,348,507

Earningspershare(inEUR) 0.678 0.009

CosmoPharmaceuticalsAnnualReport2008 3

TheMMX®technologyallowsthedeliveryofactivepharmaceuticalingredientsintothelumenofthecolonthroughtabletsinadelayedandcontrolledmechanismwiththeeffectthattheactivepharma-ceuticalingredientscanbeappliedtothefulllengthofthecolon.

CosmoPharmaceuticalsAnnualReport2008 5

Cosmo in 2008 6

Letter to Shareholders 9

Business performance against strategic objectives 14

Company information

InflammatoryBowelDisease 15

Keyvaluedrivers 19

Businessstrategy 21

ScientificAdvisoryBoard 32

Operatingprinciplesandactivities 34

Corporate governance

Groupstructureandshareholders 41

Capitalstructure 43

BoardofDirectors 45

ExecutiveManagement 52

Compensation,shareholdingsandloans 57

Shareholders’rights 61

IndependentAuditors 63

Changeofcontrolanddefencesmeasures 63

Informationpolicy 63

Episode 1: Agent MMX® strikes back 65

Financial review 75

Consolidated financial statements

Consolidatedfinancialstatementsasof31December2008 81

Explanatorynotestotheconsolidatedfinancialstatements

asof31December2008 86

Auditors’report 134

Selectedfinancialinformation 136

Informationforinvestors 138

Glossary 140

Contactsandaddresses

Tableofcontents

6 CosmoPharmaceuticalsAnnualReport2008–Cosmoin2008

2008 key facts and figures

• Totalrevenueincreasedby56%toEUR34.2million

• RevenuefromownproductsincreasedfromEUR7.3milliontoEUR21million,

contributing62%oftotalrevenue

• Manufacturingofgenericproductsandspecialtydrugsrevenuedecreasedby

8.7%toEUR12.4million

• NetprofitofEUR9.4millionafterasmallnetprofitofEUR0.1millionin2007

• CashandcashequivalentsdecreasedslightlytoEUR22.2million

Revenue breakdown

Revenue split by own products and third-party products

Cosmoin2008

2007 2008

2007

2008

Ownproducts

Third-partyproducts

Manufacturing of

generic products

and specialty drugs

Total revenue EUR 21.9 million Total revenue EUR 34.2 million

EUR

Manufacturing of

MMX® products

Related services Licence fees and

milestones

Royalties

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

62%

38%

33%

67%

Employees by function

131personsemployed(6newjobs;+5%)

Share price

Cosmoin2008–CosmoPharmaceuticalsAnnualReport2008 7

Research&Development

Production&Logistics

Administration&Finance

CosmoPharmaceuticals

SPIBiopharma

SPIS&MCAP

2008 CHF

27.0

22.5

24.7

20.0

18.0

13.5

15.7

11.2

03

.01

.20

08

14

.02

.20

08

31

.03

.20

08

14

.05

.20

08

25

.06

.20

08

07

.08

.20

08

18

.09

.20

08

30

.10

.20

08

11

.12

.20

08

30

.12

.20

08

13%18%

69%

TabletsmanufacturedwithMMX®technologyarecoatedwithpH-resistantacryliccopolymerswhichdelaythereleaseoftheactiveingredientuntilthetabletreachestheindicatedintestinallocationwheretheprogrammeddissolutionbegins.

LettertoShareholders–CosmoPharmaceuticalsAnnualReport2008 9

In2008,weweresuccessfulinachievingallofthemainobjectiveswesetourselves

atthebeginningoftheyear.Thecataclysmiceventsinthefinancialmarketsdid

notaffectouroperationsorthedevelopmentofclinicalprogrammesnegatively.

Lialda™/Mezavant®increaseditsmarketpenetrationbyslightlymorethanexpect-

ationsandtheserevenues,togetherwiththesteadyrevenuesfromourcontract

manufacturing,allowedustocontinuetoadvanceourclinicalprogrammeswithout

diminishingourfinancialresources.Theclinicaldevelopmentofourmainproducts

andprojectscontinuedasplanned.Importantly,afterdiscussionswiththeregula-

toryagenciesintheEUandintheUSA,weinitiatedphaseIIIclinicaltrialsinEurope

andNorthAmericaforBudesonideMMX®andarealsoundertakingthefinalprepar-

ationsaheadoftheupcomingphaseIIIclinicaltrialsforRifamycinSVMMX®in

theEUandUSA.Thesetwoproductsrepresentournextgenerationofproductsand

arescheduledformarketentryinlate2011.Additionally,wesuccessfullyconcluded

twokeyclinicaltrialsforLMWHeparinMMX®andforCB-03-01,thusstrengthening

theregenerationofourdevelopmentpipeline.

Towardstheendoftheyear,wemadesignificantstepsinenteringtheimportant

USmarket.Followingextensiveinvestigationandanalysis,weenteredintoan

exclusivelicensingandequityparticipationagreementforBudesonideMMX®and

RifamycinSVMMX®intheUSAwithSantarus(NASDAQ:SNTS).Santarushasa

strongfocusandcommitmenttotheGastrointestinalDisorders(GI)fieldandis

wellalignedwithCosmotoadvancethedevelopmentofboththeseproductsand

tobringthemtomarket.Shortlybeforethis,wesignedanagreementtooutli-

censeRifamycinSVMMX®intheEUtoDr.FalkPharma,oneofEurope’sleading

GIspecialists.ThuswehavecontinuedonourpathtowardspositioningCosmo

asoneofthepremiercompaniesintheInflammatoryBowelDiseases(IBD)arena.

Our US distribution strategy

OurManagementTeamhasbeenkeenlyawarethatitcouldcreatesubstantial

valueforshareholdersifwewereabletosuccessfullybuildupourownmarketing

anddistributioncompanyintheUSA.Consequentlywecarriedoutextensive

analysesontherequirementsofsuchanorganization,thefinancialimplications

ofsettingthisupandtherisksofdoingsounsuccessfully.Thisrisk-rewardprofile

wasthencontrastedwiththeopportunitycoststhatwewouldincurbyentering

intoalicensingagreement.ThroughouttheyearanumberofUScompanies

showedaninterestinlicensingeitherBudesonideMMX®,RifamycinSVMMX®or

both,fortheUSmarket.Themanagementteam,supportedbytheBoard,carefully

DearShareholder

Wehavecontinuedonourpath

towardspositioningCosmo

asoneofthepremiercompanies

intheInflammatoryBowel

Diseases(IBD)arena.

10 CosmoPharmaceuticalsAnnualReport2008–LettertoShareholders

assessedtheoptions.Itwasevidentsupportwasneededinrunningtheclinical

trialsintheUSAthathadjustbegunorwereabouttobelaunched.Furthermore,

wefeltthat,giventhestateofthefinancialmarkets,itwouldbeprudenttohave

partiesthatsharethedevelopmentcostsofourprojectswithus.

Inconclusion,wedecidedtopursuetheoutlicensingofournexttwoproducts,

BudesonideMMX®andRifamycinSVMMX®,whicharebothreformulationsof

well-knownexistingchemicalentities.Thesetwoproductsareintheirmostexpen-

siveclinicaltrialphase.Theyhavehigherprobabilitiesofgainingregulatory

approvalthannewchemicalentitiesbuttheyalsohavelowermarketpotentials.

Thus,theirstrategicvalueislowerthanthestrategicvalueofLMWHeparinMMX®

andCB-03-01.Wealsowantedtoaddastrategicdimensiontothelicensingagree-

mentsoweselectedSantarus,acompanythathasahighlevelofexpertiseandan

establishedGIsalesforce.ForSantarus,withaneedtobuilditsproductportfolio,

developingBudesonideMMX®andRifamycinSVMMX®successfullywillbecrucial

andsothefullcommitmentofbothcompaniesgivesusthegreatestconfidencein

thiscollaboration.Santarusalsopresentedanimportantopportunityforustofur-

thershareinthepotentialupsideofsuccessfuldevelopmentofourproductsby

undertakinganimportantequityparticipation.

Ourtwodevelopment-stageproductsofhighestpotentialintermsofrevenue,

LMWHeparinMMX®andCB-03-01,areun-partnered,leavingusmaximumflexibil-

ityforfuturecommercializationoptions.TheManagementTeam,supportedbythe

Board,feelsthatbyenteringintothetransactionwithSantaruswehaveselecteda

rationalstrategicoptionforCosmothatbalancestheoptimizationofvalueagainst

implementationrisks,especiallyinthecurrentuncertainfinancialenvironment.

Promising clinical results on new products

In2008,wemademajorprogressinthedevelopmentofourtwomainnewproducts:

LMWHeparinMMX®andCB-03-01.Bothsuccessfullymettheclinicalendpoints

wedeterminedattheoutsetofthetrials.LMWHeparinMMX®isabiologicdrug

thathasnothadanymeasurableadversesideeffectsinthetrialswehavecon-

ductedsofar.InclinicaltrialswetestedLMWHeparinMMX®againstmesalamine,

thecurrentindustrystandard,andthestatisticalreportsreleasedinAugust2008

demonstratedresultsthatwerefarbetterthanwehadanticipated.Theresults

broadenedthepossibilitiesofthedevelopmentofLMWHeparinMMX®asastand-

alonedrugorasanadjuvantformildtomoderateIBDandalsopotentiallyfor

thetreatmentofmoderatetosevereIBD.Wearenowcarefullyreviewingwhat

nextstepsshouldbetakenandthedecisionwillbemadeduringthecourseof2009.

WiththeSantarustransaction

wehaveselectedarational

strategicoptionforCosmothat

balancestheoptimizationof

valueagainstimplementation

risks,especiallyinthecurrent

uncertainfinancialenvironment.

LettertoShareholders–CosmoPharmaceuticalsAnnualReport2008 11

InSeptember2008,weannouncedthesuccessfulcompletionofthefirstPKstudy

ofthephaseIclinicaltrialinmenforCB-03-01,anewchemicalentity.CB-03-01

isananti-androgenwhichisindicatedforthetopicaltreatmentofskindisorders

includingAcne,androgen-inducedbaldnessinmenandHirsutism(facialandbody

hairgrowthinwomen).Theresultsshowedthatthedrugwaswelltoleratedboth

locallyandsystemicallyandwasdevoidofmeasurableadversesideeffectsinall

dosestested.InDecember2008,weproceededwithaproofofconceptphaseIItrial

totesttheefficacyofthedruginmenwithAcne.Weplantoreporttheresultsof

thesetrialsduringthecourseof2009.Thisisthefirstofourproductsthatdoesnot

makeuseoftheMMX®technology.

Launching our first phase III clinical trials

In2007weenteredintoalicensingagreementwithFerringforBudesonideMMX®

intheEU,LatinAmericaandAsia.FerringassistedusinthedesignofthephaseIII

clinicaltrialsintheEUandinthenegotiationswithvariousEuropeanregulatory

agencies.Inordertominimizecosts,itwasourobjectivetorunaconcurrentphase

IIIclinicaltrialintheUSAinsuchamannerthatthedatafromtheUStrialswould

beacceptablefortheEUregulatorsandviceversa.TheFDA,however,suggested

thatwetreatthefirst150patientsthatenterremissionaftereightweeksof

treatmentwithBudesonideMMX®forupto12furthermonths(oruntilthenext

attackoccurs)atareduceddose.Theclinicaltrialswereconsequentlyredesigned

andpatienttreatmentshavestartedbothinEuropeandNorthAmerica.Clinical

trialsintheUSAwillberunbySantarusandCosmo,andinEuropebyFerringand

Cosmo.

ThedesignofthephaseIIIclinicaltrialofRifamycinSVMMX®beganimmedi-

atelyaftertheagreementswithDr.FalkPharmaandSantarusweresigned.

AswithBudesonideMMX®,itisourobjectivetoruncloselyrelatedtrialswith

thedatageneratedintheUSAalsoqualifyingfortheEUapprovalandviceversa.

Dr.FalkPharmawillpayfortheEUtrials,SantarusfortheUStrialsbuteachwill

benefitfromthedatageneratedbytheotherparty.Recruitmentofpatientsfor

bothtrialsislikelytostartinthesecondquarterof2009.

Stable revenue base takes the substantial risk out of our development

Wehavelonghadacontractdrugmanufacturingrevenuebasethathasbeen

generatingrevenuesofapproximatelyEUR12millionperannum.Thisrevenue

basehasbeenincreasinglysupplementedbytherevenuegeneratedthrough

themanufacturingofLialda™/Mezavant®.In2008,wedelivered84.2million

In2008,wemademajor

progressinthedevelopmentof

ourtwomainnewproducts:

LMWHeparinMMX®and

CB-03-01.Bothsuccessfullymet

theclinicalendpointswe

determinedattheoutsetofthe

trials.

12 CosmoPharmaceuticalsAnnualReport2008–LettertoShareholders

Lialda™tablets(+162%)and6millionMezavant®tablets(+154%)forShireand

royaltiesincreasedby206.6%toEUR3.5million.Thusweachievedstableongoing

revenuesinexcessofEUR23millionin2008.Theserevenuescoveredallofour

operatingexpenses(includingtheR&Dexpenses)ofEUR23millionin2008andthus

substantiallycontributetowardssecuringourpositionasasuccessfuldrugdevel-

opmentcompany.

ByenteringintothenewagreementswithSantarusandDr.FalkPharmawe

notonlyassuredourselvesofpartnersthathaveadditionalexpertiseinhelpingus

tosuccessfullydevelopourproductsbutalsofinanceaconsiderablepartofthe

developmentcosts.ThiswillallowustodrivethedevelopmentofCosmoforward

withoutunduefinancingrisk.

Key priorities and strategies for 2009

In2009wewillbefocusingontheexecutionofthephaseIIIclinicaltrialsfor

BudesonideMMX®andRifamycinSVMMX®.Webelievethatwearestrongly

positionedtoexecutetheseclinicaltrialsinatimelyandcost-efficientmanner.

Weremainfocussedondeterminingthebeststrategyforthedevelopment

ofLMWHeparinMMX®bymid-2009andwillassesshowbesttoexecutethis

strategyintermsofpotentialpartnering.

ItisakeyprioritytodevelopCB-03-01,ouranti-androgenproject,tothepoint

wherewecanfirmlyrecognizethepotentialofthedruganddesignthenext

clinicaltrialsaccordingly.Weexpecttohavedataontheproofofconcepttrial

beforeyearend2009.

WiththeBudesonideMMX®,RifamycinSVMMX®,LMWHeparinMMX®and

CB-03-01projectsunderwaywewilllooktowardsthedevelopmentofnewpreclin-

icalMMX®projects.

Nomajorinvestmentsareplannedinmanufacturingequipment.Fromaper-

sonnelperspective,however,wewillneedtogearupourmanufacturingbaseto

prepareforaneventualsecondshiftforthemanufacturingofLialda™/Mezavant®

byhiringuptofournewpersons.Wewillalsostrengthenourproductdevelopment

organizationtofacilitatetheexpandingMMX®developmentprojectsbyhiringan

additionalthreepersons.

Outlook

Wedonotanticipatethattheeconomicdownturnwillhaveamajoreffectonus.

Contractmanufacturingrevenueshouldremainstableandweexpectrevenues

fromLialda™/Mezavant®tocontinueincreasing.NowthatSantaruswillbebearing

Byenteringintothenew

agreementswithSantarusand

Dr.FalkPharmawenotonly

assuredourselvesofpartners

thathaveadditionalexpertise

inhelpingustosuccessfully

developourproductsbutalso

financeaconsiderablepartof

thedevelopmentcosts.

thecostoftheclinicaltrialsintheUSA,wenolongerhaveanaturalhedgeagainsta

devaluationoftheUSdollarandshallconsequentlyimplementahedgingstrategy.

Wearegratefultoourshareholders,whohavemaintainedtheirconfidencein

ourCompanyandManagement,andtoouremployees,whostrivetohelpusdeliver

onourpromises.Astheresultsin2008demonstrate,weremainontherighttrack.

Wehavethedrivetosucceedandtomake2009anotherexcellentyearforCosmo.

Lainate,20March2009

MauroS.Ajani RolfStahel

ChiefExecutiveOfficer ChairmanoftheBoard

LettertoShareholders–CosmoPharmaceuticalsAnnualReport2008 13

WiththeBudesonideMMX®,

RifamycinSVMMX®,LMW

HeparinMMX®andCB-03-01

projectsunderwaywewilllook

towardsthedevelopmentof

newpreclinicalMMX®projects.

14 CosmoPharmaceuticalsAnnualReport2008–Businessperformanceagainststrategicobjectives

Businessperformanceagainststrategicobjectives

Strategic priority Metrics Performance Comments

Progress clinical

pipeline

Startoftrial

Endoftrial

Availabilityof

datareport

BudesonideMMX®

trialenddelayedfrom

targetQ4/09toQ1/10

StartofRifamycin

SVMMX®phaseIII

expectedinQ3/09

(previouslyQ4/08)

Additionalrequire-

mentsofFDAregarding

extensionstudy

Delayinlicensing

agreementinEurope.

Delayinstartoftrial

becauseofrequired

climaticwindow

Move preclinical

projects to the

clinic

Numberofnew

projectsinphaseI

OnephaseIstartedfor

CB-03-01

Twoprojectspending

approvalofpotential

partner

Improve utilization

of manufacturing

capacity

Increaseinmanu-

facturingrevenueby

capitalinvestments

Totalrevenuein-

creasedfromEUR21.9

milliontoEUR34.2

millionwhilecapital

investmentswere

madeforEUR1.4

millionin2008

Strongincreasefrom

Lialda™manufactur-

ingandlow,primarily

maintenance,invest-

mentsinplant

Optimize

US strategy

Riskreturnprofileof

variousalternatives

Licensingandequity

participationdealwith

Santarus

Reductionoffinancial

riskandreduction

ofimplementationrisk

atslightlyreduced

returns

Best partner

European

distribution

Topthreepartnerfor

RifamycinSVMMX®

inEU

Licensingdealwith

Dr.FalkPharma

Best-in-classpartner

InflammatoryBowelDisease–CosmoPharmaceuticalsAnnualReport2008 15

InflammatoryBowelDisease(IBD)isachronicinflammatoryconditionthat

affectsthegastrointestinaltractcausinganumberofdistressingsymptomssuch

asbleeding,diarrhoeaandabdominalpain.Thediseasehastwoforms,Crohn’s

DiseaseandUlcerativeColitis,andbothcansignificantlyimpactthequalityof

lifeofanindividual.ThegoaloftreatmentofIBDistoinduceandmaintainremis-

sionofsymptomsandmucosalinflammationinordertoprovideanimproved

qualityoflife.Thereareanumberoftreatmentoptionsavailablethatrangefrom

non-pharmacologicaltreatments,suchasdietary,topharmacologicaltreatments

andsurgery.Noprecisecauseofthediseasehasbeenfoundbutscientistsand

gastroenterologistscommonlybelievethatIBDresultsfromacombinationofgenetic

andenvironmentalfactors.

Persons affected

Approximately0.24%oftheUSpopulationsufferfromUlcerativeColitisand0.2%

haveCrohn’sDisease,withthespreadofIBDplateauingintheUSA.InEurope

prevalenceisabouthalfashighasintheUSA,butgrowthisstillincreasing.Aside

fromJapan,therestoftheworldiscurrentlyconsideredtobestatisticallyinsignifi-

cantinwhatpertainstodiseaseprevalenceanddiseaseincidenceandmarketsize.

Cosmobelievesthatthisviewoftheemergingmarketsisseriouslyflawed.Univer-

sally,gastroentrologistshavebeenraisingtheawarenessofIBDsincetheystrongly

believethatenvironmentalfactorsplayanincreasinglyimportantroleinIBD.Thus,

asthe“Westernwayoflife”spreadsaroundtheworlditisexpectedthattheglobal

populationofpeoplewithUlcerativeColitisandCrohn’sDiseasewillsteadily

increase.Researchhasshown(Datamonitor:StakeholderInsight.Inflammatory

BowelDisease.Page73–75.12/2007;BMJJournals:IncidenceandPrevalenceof

UCinPunjab,NorthIndia.Authors:DrAStood,VMidha,NSood,ASBhatiaandG

Avasthi–Gut2003;52:1587–15990.)thatovertimeitisentirelypossiblethatthe

developingeconomieswillhaveheavilyincreasingpatientpopulationswhowill

needtobeadequatelytreated.

Characterization of disease

UlcerativeColitisischaracterizedbyadiffusemucosalinflammationwhichis

limitedtothecolon.Thediseasecanaffectvariouspartsofthecolonandmost

patientsareaffectedinseveralregionsofthecolon.92%ofpatientshavethe

diseaseintherectum,predominatelytreatedwithuncomfortableenemasor

suppositories.

InflammatoryBowelDisease

IBDhastwoforms,Crohn’s

DiseaseandUlcerativeColitis,

andbothcansignificantly

impactthequalityoflifeofan

individual.Thegoaloftreatment

ofIBDistoinduceandmaintain

remissionofsymptomsand

mucosalinflammationinorder

toprovideanimprovedquality

oflife.

16 CosmoPharmaceuticalsAnnualReport2008–InflammatoryBowelDisease

Crohn’sDiseaseisapatchy,transmuralinflammationthatcanaffectanypart

ofthegastrointestinaltractfromthemouthtotheanus.Itisthusmuchmore

disparatelydistributedthanUlcerativeColitis.

ThesymptomsofCrohn’sDiseaseandUlcerativeColitisvaryfrompatientto

patientdependingonthelevelofdiseaseseverityandmaychangeovertime

becauseofthechronic,relapsingnatureofthediseases;mostpatientsexperience

periodsofdiseaseactivityandremission.AsIBDisachronicdisease,mostpatients

arerequiredtotakemedicationoverthecourseofalifetimemakingconsistent

compliancewithdrugregimensanimportantfactor.

Intermsofseverity,gastroenterologiststendtosplitthepatientpopulation

intothreedifferentcategories;mild,moderateandsevere,andprescribemedica-

tionaccordingly.Itiscommonlybelievedthat45–55%ofpatientshaveamildform

ofthedisease,30–35%amoderateformandtheremaining10–15%sufferasevere

formofthedisease.

Disease treatment

Giventhechronicnatureofthediseaseandthedesiretominimizesideeffects,the

classictreatmentstrategyhasbeenforthegastroenterologisttostarttreatment

usingthemildestformofmedication.Ifapharmaceuticalproductthenprovesto

beineffective,astepuptoamoreeffectivebutusuallymoretoxicproductismade.

Morerecentlytherehasbeenamovebysomegastroenterologiststowardsadopt-

ingatop-downapproachmeaningthattheuseofaggressivetherapiessuchas

anti-TNFαtherapiesisstartedearlyon.This,however,makesthetherapyconsider-

ablymoreexpensiveperpatientandcouldexposethepatienttohigher,unnecessary

adversesideeffects.

Cosmobelievesthatthereisgrowingconsensusinthemedicalcommunity

thatinfectionsplayanimportantroleinIBD.Whiletherearecurrentlynoepidemi-

ologicalstudiesonthis,theCompanybelievesthatmorethan30%ofallIBD

patientscouldbebettertreatediftheyreceivedanti-infectivesconcurrentlywith

theirIBDmedication.GiventhatIBDisachronicdisease,itisaconsiderable

challengeforthepharmaceuticalindustrytodevelopanti-infectivesthatcanbe

appliedfrequentlywithoutincurringproblemsassociatedwithresistance.

Approximately0.24%oftheUS

populationsufferfromUlcerative

Colitisand0.2%haveCrohn’s

Disease,withthespreadofIBD

plateauingintheUSA.InEurope

prevalenceisabouthalfashigh

asintheUSA,butgrowthisstill

increasing.

InflammatoryBowelDisease–CosmoPharmaceuticalsAnnualReport2008 17

Treatmentwith5-ASAsforthemildtomoderateformofthediseaseincludeoral

dosageforms(primarilytablets),enemasandsuppositories.Corticosteroidsare

deliveredintabletsandenemasandtreatmentwithimmunosuppressantsis

primarilywithtabletswithselectiveinjectedapplications.Biologicshave,todate,

allrequiredintravenousorsubcutaneousinjections.Thismeansthattheactive

pharmaceuticalingredientactsindifferentforms.Tablets,enemasandsupposi-

toriesdeveloptheireffectprimarilytopically(onlyasmallpartoftheactivepharma-

ceuticalisabsorbedandgetsintotheblood)buttheyhavethedisadvantage

thattheydonotconsistentlyreachthesiteofinflammation,whileinjectionsonly

actsystemicallyandthusalsoreachmanypartsofthebodythatdonotrequire

treatment.

Fromapuremarketvalueperspective,thevalueoftheIBDmarketintheseven

majormarkets(USA,Japan,UK,Germany,France,Italy,Spain)rosefromUSD1.7billion

in2004toUSD2.7billionin2007.Thisgrowthof16.7%perannumwasprimarily

duetotheintroductionofhigh-costanti-TNFαtreatments.Thesenowaccountfor

48%ofthetotalvalueofthemarketeventhoughtheyonlytreatasmallfragment

ofthepatientpopulation.Inthefuture,Datamonitor(ReportCommercialInsight:

InflammatoryBowelDisease.Page48.9/2008)expectsoverallmarketgrowthto

leveloffto4.6%perannumintheperiodof2008to2017.Interestingly,Datamonitor

forecaststheanti-TNFαgroupofdrugstogrowbyonly3%perannum,theanti-

inflammatorygroupofdrugstogrowby3.2%perannum(withthehighestgrowth

1)Statusofdiseaseseverity

Severe 1)

Surgery

Diet(andProbiotics)

Aminosalicylates(5-ASA)

Corticosteroids

Immuno-suppressants

Antibiotics

Biologics

Mild 1)

GiventhatIBDisachronic

disease,itisaconsiderable

challengeforthepharmaceut-

icalindustrytodevelopanti-

infectivesthatcanbeapplied

frequentlywithoutincurring

problemsassociatedwith

resistance.

comingfromCosmo’sLialda™),andthehighestgrowthtocomefromthecortico-

steroidgroupofdrugswith9.9%growthperannum(withthehighestgrowth

projectedforCosmo’sBudesonideMMX®).

AccordingtoDatamonitor,therestoftheworldmarketsgrewby22.9%per

annumfrom2004to2007andreachedUSD362millionor15%ofthesevenmajor

marketsin2007(Datamonitor.Page130.9/2008).Datamonitorhasnotmade

anymarketprojectionsfortheperiodupto2017forthesemarketsbutananalysis

madebyIMS(IMS2009GlobalPharmaceuticalMarketandTherapyforecast)has

identifiedsevenemergingmarkets(China,Brazil,India,SouthKorea,Mexico,Turkey

andRussia)anddeterminedthatthesewillgrowby14–15%in2009andreach

USD105–115billionandthatthesesevenemergingmarketswillsoonbelargerthan

themarketsofthetopfiveEuropeancountries.

18 CosmoPharmaceuticalsAnnualReport2008–InflammatoryBowelDisease

Keyvaluedrivers–CosmoPharmaceuticalsAnnualReport2008 19

Cosmo’smostimportantvaluedriveristhedecidedlyentrepreneurialapproach

toopportunitiesandrisks.Carefulcashmanagementhasbeenalongstanding

principleoftheCompanyandthishasenabledustobuildupCosmo’scashgener-

ationcapacityandimplementstrategiesthatcanbeexecutedwithintheCompany’s

ownfinancialresources.Cosmocarefullyconsiderstheeconomicrationaleofeach

newopportunityandinitiativepresentedtoittoensuretheCompanyisnot

overcommittedwithfinancialburden.

CosmodevelopeditsMMX®technologybasedonaclearmarketneed.Tothis

endhigh-leveltechnicalcompetencewasrequiredandCosmocontinuesbuilding

onthistoensureasustainabledevelopmentpipelineandproductportfoliointothe

future.AfterdevelopingtheMMX®technology,theCompanydiscoveredthatthe

majorityofdrugsthatwerebeingprescribedanddevelopedforcolondiseaseshad

complianceorsafetyissuesandsoCosmosetouttoidentifysuchdrugs.Thisability

tolooklaterallysetstheCompanyapartfromapureresearch-drivenorganization.

Indevelopingtheseapplications,theCompanyhasestablishedabroadknowledge

ofthecolon’sphysiologyandtheabsorptionofpharmaceuticalproductsinthe

gastrointestinaltract.Thisgivesrisetonewopportunities.TheCompanybelieves

thattheblendofitsknowledgeofthecolonandtheuniquecharacteristics

oftheMMX®technologygiveitastrongcompetitiveedgeindevelopingnewmedi-

cationsforthecolonwithoutbecomingoverexposedtotheexpensiveandhigh-

riskpureresearchprocessfornewchemicalentities.Cosmoprimarilyworkswith

moleculesthatareonthemarket.TheCompanyseekstoimprovetheirsafety

profile,theirefficacyortomakethemmorepatient-friendly.Whilstmanyofthe

Company’sproductsprimarilyrepresentimprovementsovertheirpredecessors,

theseproductsaremuchmorelikelytogainregulatoryapprovalthanentirelynew

chemicalentities.

ThethirdkeyvaluedriverliesintheCompany’sattentiontoitspartnerships.

Asasmallcompanyitiscrucialtodeterminewhatriskscanbetakeninbuildingup

adistributionorganizationandwhatpartnersshouldbesoughtifpartnerships

makemoresense.Cosmo’sfirstthreeproducts,Lialda™,BudesonideMMX®and

RifamycinSVMMX®,allhavethepotentialofattainingpeaksalesofseveralhundred

millionUSDeach;buttheyareprimarilygradualimprovementsandnotlikelyto

beblockbusters.Peaksalescanonlybeachievedwithdedicatedeffortssoitis

importanttofindpartnersthathavethewillandskillstodothis.TheCompany

believesthatithastheidealpartnerinShireforLialda™,inFerringandDr.Falk

PharmafortheEuropeaneffortsinBudesonideMMX®andinRifamycinSVMMX®,

andinSantarusfortheUSeffortsforBudesonideMMX®andRifamycinSVMMX®.

Keyvaluedrivers

Cosmo’skeyvaluedriversare

theentrepreneurialapproachto

opportunitiesandrisks,the

uniqueMMX®technologyand

successfulstrategicpartnering.

MMX®technologyprotectstheactivesubstancesfromadversepHconditionsandenzymaticpresenceintheupperdigestivetracts.

Businessstrategy–CosmoPharmaceuticalsAnnualReport2008 21

Businessstrategy

LMWHeparinMMX®

Lialda™/Mezavant®

CB-01-12CB-01-09

BudesonideMMX®

RifamycinSVMMX®

ZacolNMX®

1)Statusofdiseaseseverity

Severe 1)

Surgery

Diet(andProbiotics)

Aminosalicylates(5-ASA)

Corticosteroids

Immuno-suppressants

Antibiotics

Biologics

Mild 1)

InitiallyCosmofocussedondevelopinga5-ASA/mesalamineapplicationthat

wouldreducethehighnumberoftabletsthatpatientsneededtotakeinmultiple

dailydosesandeliminatetheneedforcertainpatientstoalsotakeenemas.This

ledtothedevelopmentoftheMMX®technology.ItthenbecameclearthattheMMX®

technology’scharacteristics,givenitsabilitytoprotecttheactiveingredientinits

passagethroughthestomachandsmallintestineanditsabilitytoevenlyand

topicallydeliveractiveingredientthroughoutthecolon,madeitidealforapplica-

tionsformanymoreopportunities.

ThustheCompany’sstrategyhasevolvedaccordingly.Cosmonowhasasepar-

ateproductportfoliostrategy,adistributionstrategyandamanufacturingstrategy.

Product portfolio strategy

Cosmo’sproductportfoliostrategyisfocussedondiseasesofthecolon,primarily

onInflammatoryBowelDiseases.Todate,themajorityofgastroenterologiststreat-

ingIBDhavefollowedastep-upstrategy,firstprescribing5-ASA-baseddrugsto

theirpatients,thenmovingontocorticosteroids,thenontoimmunosuppressants

andfinallytobiologicproducts.Soafterdevelopingthe5-ASAproduct,theCom-

panysetabouttoidentifycorticosteriods,immunosuppressantsandbiologics

whoseefficacyorsafetyprofilecouldbeimprovedbytheMMX®technology.This

ledtotheCompany’spipeline:Cosmonowhasproductsonthemarketorin

developmentforpatientsofalllevelsofseverity.

Afterdevelopingthe5-ASA

product,theCompanysetabout

toidentifycorticosteriods,

immunosuppressantsand

biologicswhoseefficacyor

safetyprofilecouldbeimproved

bytheMMX®technology.

22 CosmoPharmaceuticalsAnnualReport2008–Businessstrategy

Marketed products

Zacol NMX®

ZacolNMX®isanutraceuticalproductwhichusesanamendedformoftheMMX®

technologyinordertodeliverbutyricacidandinulindirectlytothecolon.Butyric

acidaccountsforpowerfulmetabolicactivitieswhicharethebasicsupportforthe

integrityandreconstitutionofthegutmucosaandinulinpromotesthegrowth

ofthesaprophyticflora,whichinturnproducesadditionalshort-chainfattyacids

(SCFAs)thusreinforcingcolonicdefencesagainstinfections.Todate,therehas

notbeenanyproductthatwasabletosuccessfullydeliverbutyricacidtothecolon.

ZacolNMX®,togetherwithanappropriatediet,couldrepresentthefirststepsfor

thetreatmentofcolondisorders.

TheCompanyhasbeenworkingonestablishingthebestdistributionstrategy

forthisnon-prescriptionproductandisalsolookingintothepossibilityofhaving

ZacolNMX®distributedoverthecounter.Inlate2008,theCompanychangedits

distributorintheItaliantestmarket.FurthermoretheCompanyisworkingon

developingadditionalNMX®applicationstobutyricacidtogetherwithoutside

partners.

Lialda™/Mezavant®

Lialda™(astheproductiscalledintheUSA)/Mezavant®(Europe)isthefirst

proprietaryproductCosmodeveloped,amesalamineMMX®.Itistheentrylevel

productforallpersonssufferingfrommildtomoderateUlcerativeColitis.Itwas

introducedintheUSmarketbyShire,whichhastheworldwidelicence(excluding

ItalyandotherselectedrestoftheworldmarketswhicharelicensedtoGiuliani),

inMarch2007forthetreatmentofacutemildtomoderateUlcerativeColitis.Its

principleadvantageisthatapatientrequiring4.8gofmesalaminetotreatthe

inflammationcantaketherequiredamountoftabletsatonceinsteadofhavingto

taketabletsthreetofourtimesaday.ThisisduetothefactthattheMMX®tech-

nologyassuresahighconcentrationinsidethecolonandlittleabsorptionintothe

mainbloodsystem.Atyearend2008,Lialda™hadalreadyachievedanoverall

marketshareof14%ofall5-ASAsintheUSA.Shireisalsoseekingapprovalforthe

useofLialda™inthetreatmentofmaintenanceofremission,i.e.asatreatment

betweentheacuteattacks.Itisexpectedthatthisapprovalwillbeobtainedin2011.

Atyearend2008,Lialda™had

alreadyachievedamarketshare

of14%ofall5-ASAsintheUSA.

Businessstrategy–CosmoPharmaceuticalsAnnualReport2008 23

ThetablebelowshowsthedevelopmentoftheLialda™tabletsandMezavant®

packssoldtoShire.

Products in clinical development

Budesonide MMX®

Corticosteroidsareknowntobemoreeffectivethan5-ASAsinthetreatmentofIBD

buttheyarealsoknowntohaveseveresideeffects.Asaresult,nocorticosteroid

iscurrentlyapprovedforusebymildtomoderateUlcerativeColitispatientsinthe

USA.CosmobelievesthatbyapplyingtheMMX®technologytobudesonide,

anoff-patentcorticosteroidthathasbeenpredominatelyusedforpulmonary

applications,atreatmentcanbecreatedthatismoreeffectivethanexisting5-ASA

applicationsandlesstoxicthanclassicalcorticosteroidapplicationsandthatthis

productmightgainFDAapprovalforinductionofremissioninpatientswithmild

tomoderateUlcerativeColitis.

TothisendCosmoispresentlyconductingtwophaseIIIclinicaltrials,one

intheUSAandoneintheEU.TheUStrialistestingefficacyandsafetyofneworal

BudesonideMMX®9mgand6mgextended-releasetabletformulations

(CB-01-02)inpatientswithmildormoderate,activeUlcerativeColitis.Thetrial

isamulticentre,randomized,double-blind,double-dummycomparativestudy

versusplacebo,withanadditionalreferencearmevaluatingAsacol®2400mg.

Atotalof440patientsarescheduledtocompletethetrialincentresintheUSA,

Canada,MexicoandPuertoRico.TheEUtrialisalsotestingefficacyandsafety

oftheneworalBudesonideMMX®9mgand6mgextended-releasetablet(CB-01-02)

inpatientswithmildormoderate,activeUlcerativeColitis–amulticentre,ran-

domized,double-blind,double-dummycomparativestudyversusplacebo,withan

additionalreferencearmevaluatingEntocort®ECcapsules.440patientsare

scheduledtocompletethestudywithpatientsenrollinginAustralia,Belgium,

Estonia,France,Israel,Italy,Latvia,Lithuania,Poland,Serbia,Slovakia,Sweden,

theUK,Romania,UkraineandRussia.

MMX® products 2008 2007

No. EUR 1,000 No. EUR 1,000

Lialda™(tablets) 84,161,484 6,472 32,092,010 2,409

Mezavant®(packs) 96,310 675 39,474 261

Totalrevenue 7,147 2,670

Wefeelconfidentthat

BudesonideMMX®canbe

submittedforregulatory

filingintheUSAandEU

concurrently.

24 CosmoPharmaceuticalsAnnualReport2008–Businessstrategy

Asof2March2009,72patientshavebeenrandomizedintheUSAand157patients

havebeenrandomizedintothetrialinEurope.TheFDAhasrequestedthatthe

first150patientsthatenterremissionshouldbetreatedforupto12additional

months(oruntilthenextacutephaseoccurs,whicheverisearliest)atalowerdose

of6mg.Thisadditionalrequirementhasmadeprojectingtheendoftheclinical

trialsdifficulttopredictbutwefeelconfidentthattheproductcanbesubmitted

forregulatoryfilingintheUSAandEUconcurrently.

Rifamycin SV MMX®

During2008,theCompanyconductedadose-rangingstudyinTurkeyandMexico

andaseriesofadditionalpreclinicaltestsinordertobestdesigntheupcoming

phaseIIIclinicaltrialsforTravellers’Diarrhoea.Aftersigninglicensingagreements

withDr.FalkPharmaandSantarus,theprotocolsfortheclinicaltrialsarecurrently

beingwrittenanddiscussedwiththeEMEAandtheFDAandthetrialsarelikelyto

startinthesecondquarterof2009.TheCompanybelievesthatRifamycinSVMMX®

couldbeindicatedforaseriesofdiseasesbeyondTravellers’Diarrhoeasuchas

Diverticulitis,HepaticEncephalopathy,ClostridiumDifficileandIBDconcomitant

infections.

ThemostcommoncoloninfectionisknownasTravellers’Diarrhoea.Itafflicts

between20%and50%ofallinternationaltravellers.Travellers’Diarrhoeaisprimar-

ilycausedbytheingestionoffoodorwatertaintedbybacteria.

Diverticulitisistheinflammationofdiverticulaofthecolonthatstrikesmainly

elderlypeople.Withincreasingage,muscularelasticitydecreasesincolonmuscles.

Thisallowstheformationofextrusionsofthewallofthecoloncalleddiverticula.

60%ofallpersonsover60havediverticula.Whenfaecalmattergetstrappedinthe

diverticulatheybecomeinfectedandinflamed.

HepaticEncephalopathyisaneurologicaldisorderrelatedtotheliverimpair-

ment.Whenthereisliverdysfunction,theammoniaproducedintheintestine

bybacteriaisnotneutralizedbytheliver,sothatitreachesthebraincausingtoxic

effects.Antibioticsarenecessarytoreducethebacterialproductionofammonia.

Itaffectsaround20%ofallpeoplewithCirrhosisoftheLiver.

ClostridiumDifficileAssociatedDiarrhoea(CDAD)isprimarilyahospital-

acquiredinfectionofthecolonthatmainlyaffectselderlypersons.Thisdisease

affectsaround500,000personsayearintheUSAanditcanhaveepidemic

dimensionsthatfrequentlyleadtofatalities.

Finally,althoughnoclinicalresearchhasbeenconducted,gastroenterologists

commonlybelievethatbetween20%and40%ofallpatientssufferingfromIBD

CosmobelievesthatRifamycin

SVMMX®couldbeindicated

foraseriesofdiseasesbeyond

Travellers’Diarrhoeasuchas

Diverticulitis,HepaticEncepha-

lopathy,ClostridiumDifficile

andIBDconcomitantinfections.

Businessstrategy–CosmoPharmaceuticalsAnnualReport2008 25

haveconcomitantinfections.TheCompanybelievesthatRifamycinSVMMX®

couldbeappliedforthetreatmentoftheseconcomitantinfections.

LMW Heparin MMX®

Heparinisapolysaccharidicdrugthathasbeenlongandsuccessfullyappliedas

aninjectableanticoagulantandanti-blood-clottingagent,especiallyaftermajor

surgery.Inthe1990sitwasobservedthatmajorsurgerypatientstreatedwith

heparinalsowitnessedastrongreductionofIBDs.ThisobservationledCosmoto

formulatethehypothesisthatatabletizedformoftherightheparin,broughttothe

colonandtopicallyapplied,couldretaintheanti-inflammatorypropertieswhilst

avoidinganyanticoagulationeffects.

Heparinisalargemolecule,soCosmosetouttoidentifyasmaller,lowermo-

lecularweightheparinsuitedtotheobjectives.Afterintenselaboratorytesting,a

low-molecular-weightheparin(CB-01-05)wasidentifiedandthecorresponding

tabletwasdevelopedusingtheMMX®technology.In2007,Cosmoconducteda

phaseIIrandomized,double-blindclinicaltrialwithactiveleft-sidedmildtomod-

erateUlcerativeColitis.In24sitesinfivedifferentcountries,157patientswere

screened,141randomizedand132completedthetrial.TheCompanyreceivedthe

finaldatareportinAugust2008.TheresultsfromthetrialshowthatLMWHeparin

MMX®metitsprimaryandsecondaryendpointsbyinducingsuperiorclinical

remissioninpatientswithactivemildtomoderateUlcerativeColitisandwaswell

toleratedatoncedailydosing.Efficacyandtolerabilityweremeasuredbycom-

paringtheefficacyofLMWHeparinMMX®asanadd-ontomesalazinetoaplacebo

add-ontomesalazine.Theprimaryendpointwasthenumberofpatientsachiev-

ingclinicalremission(clinicalactivityindex[CAI]<4)aftereightweekstreatment;

thesecondaryendpointwasclinicalimprovement(byatleasttwopointsreduc-

tionoftheCAI,theendoscopicindex[EI]andthehistologicscore)aftereightweeks

treatment.Astatisticallysignificanthigherpopulationofpatientsachievedclinical

remissionintheLMWHeparinMMX®plusmesalazinegroupcomparedtothe

placeboplusmesalazinegroup.TheCAI,EIandhistologicalscoresimprovementin

theLMWHeparinMMX®groupwasalsostatisticallysignificantlyhigherthanin

theothergroup.

Atthesametime,theCompany’sresearchteamcontinuedtoinvestigatethe

mechanismofactionofLMWHeparinMMX®.Theyfoundthatitinhibitspro-

inflammatorycytokines(TNFα,IFNγ,IL-2)andhasawideractivityprofilethan

monoclonalantibodies.LMWheparinisalsoanendogenoussubstance,meaning

thatthebodydoesnotproduceresistancenorneutralizingantibodiestoit.This

Theresultsoftheclinicaltrials

broadenedthepossibilities

ofthedevelopmentofLMW

HeparinMMX®andCosmo

isnowreviewingwhatnext

stepsshouldbetaken.

26 CosmoPharmaceuticalsAnnualReport2008–Businessstrategy

stronglydifferentiatesLMWHeparinMMX®fromotherbiologicdrugscurrently

onthemarket.

TheCompanyispresentlyconductingaseriesofanalysesthatwillassistitin

determiningwhichstrategyitshouldpursueregardingpatientbase(mildtomod-

erateormoderatetosevere),whetherthisshouldbeattemptedasastand-alone

drugorasanadjuvantand,ifasanadjuvant,whichdrugshouldbeusedtogether

withLMWHeparinMMX®.

CB-03-01

CB-03-01isthefirstnewchemicalentitythatCosmoisdeveloping.Itisanovel

anti-androgendrug,acortexolone17α-proprionate(CB-03-01)1%creamtargeted

atAcne,AlopeciaandHirsutism.AphaseItrialwasdesignedasarandomized,

double-blind,placebo-controlled,singleascendingdosestrialandwasaimedto

assessdrugsafety,tolerabilityandpharmacokineticsaftersingledoseadministra-

tion.ThetrialwascarriedoutattheDepartmentofClinicalPharmacologyofthe

MedicalUniversityHospitalofVienna,underthesupervisionofthemaininvestiga-

torProf.MarkusMuller.Inthestudy,threedosesofcortexolone17α-proprionate

wereadministeredto24healthymalevolunteersdividedinthreecohorts.Each

cohortincludedtwosubjectsreceivingonlyplacebocreamonbothforearmsand

sixsubjectsreceivingCB-03-011%creamononeforearmandplacebocreamon

theotherforearm.Safetyandtolerabilityassessment,aswellasPKevaluations,

wereperformedupto36hoursfollowingdrugapplication.

Thetrialresultsconcludedthatthedrugiswelltoleratedbothlocallyandsys-

temicallyanddevoidofmeasurablesideeffectsforallthedosestested.CB-03-01

wasshowntopermeatetheskinandtobequantifiableintheplasmaofabout40%

ofthetreatedsubjects:themaximumrecordedconcentrationoftheunchanged

compoundinplasmawasbelow10mg/ml.InallsubjectsCB-03-01wasundetect-

able24–36hoursafterdosing.Thesedataindicateaverylowbioavailability,even

thoughitwasimpossibletocalculatetheCB-03-01actualabsorption,duetothe

lackofareferencei.v.plasmaprofile.

FollowingthisPKstudyofthephaseItrial,theCompanydecidedtoimmedi-

atelymovetoaproof-of-concepttrialwiththedosesusedinthePKstudy.Onlyifthis

phaseIItrialissuccessfulwilltheCompanyproceedwithalengthierandmore

expensivepreclinicalreproductiontrialinanimals,thephaseIsteadystatePKplus

thesensitivitytrialwhichwouldbegininparallelinthesecondhalfof2009.

CB-03-01ispatentedbyCosmoasananti-androgenicdrugindicatedforthe

topicaltreatmentofandrogen-dependentskindisorders.Itsmechanismofaction

InDecember2008,wepro-

ceededwithaproof-of-concept

phaseIItrialtotesttheefficacy

ofCB-03-01inmenwithacne.

Businessstrategy–CosmoPharmaceuticalsAnnualReport2008 27

isthecompetitionbetweentestosteroneandDHTatthehumanandrogen-receptor

level.CB-03-01isdevoidofsystemicanti-androgenicactivity,itdoesnotinhibit

gonadotropinshypersecretion,anditpossessesamoderateanti-inflammatory

activity.Inpreclinicaltestsitwaswelltoleratedandrapidlymetabolizedtothe

parentcortexolonewhichisinactiveinhumanplasmaandskin.

Acneaffectsabout45millionpeopleintheUSA,i.e.around16%ofthepopula-

tion.TheworldwidemarketforAcneisvaluedatoverUSD2.8billion.Roche’s

Roaccutane™generatedsalesexceedingUSD253millionin2004butthese

decreasedfollowinganFDAwarningofsideeffects.

Alopecia(androgen-inducedhairlossinmales)affectsabout12%ofallmen

over20yearsofage.Propecia™,asystemicallyapplieddrug,generatedsalesof

USD405millionin2007.

Hirsutism(androgen-inducedgrowthoffacialand/orbodyhairinwomen)

affectsabout10%ofthefemalepopulation.Theworldwidemarketremainslargely

undeveloped.

Preclinical projects

CB-01-16

CB-01-16isaprojectthatfocusesonpreventingopioid-inducedconstipation.

Practicallyallpatientsthatneedheavydosagesofopioidsasapaintreatment

sufferfromseriousconstipationbecausetheopioidsinhibittheperistalticmove-

mentsinthecolon.Cosmohasbeenexperimentingwithoff-patentanti-opioids

withtheobjectiveofusingtheMMX®technologytotransportthesetothecolon

wheretheywouldselectivelyinhibitopioidattachmenttotheMUreceptorsthus

makingpossibletheperistalticmovementsagain.Thegalenicdevelopmentof

thesetabletsisscheduledtobecompletedinQ12009andaphaseItrialisplanned

tostartinQ22009.

CB-01-12

CB-01-12istheapplicationofCosmo’sMMX®technologytoananti-TNFα.Anti-

TNFαsaretraditionallygivenbyinjection,thushaveunwantedsideeffectsand

patientstendtobuildupresistancetothemovertime.TheCompanybelievesthat

byapplyingitsMMX®technologyitcantransformanti-TNFαintoananti-TNFα

MMX®tabletthatactstopicallyinthecolon,retainingitsefficacybutwithstrongly

reducedsideeffects.Cosmohascarriedoutearlypreclinicaltestsandisnowin

activecontactwithanti-TNFαcompaniesaboutdevelopingthisdrugtogether

TheCompanybelievesthatby

applyingitsMMX®technologyit

cantransformanti-TNFαinto

ananti-TNFαMMX®tabletthat

actstopicallyinthecolon,

retainingitsefficacybutwith

stronglyreducedsideeffects.

28 CosmoPharmaceuticalsAnnualReport2008–Businessstrategy

withthemandalsodevelopingadditionalpeptideorproteinMMX®application

forthecolon.

CB-01-09

CB-01-09wasinitiatedasaprojectwhenCosmostartedworkonawell-known

immunosuppressantthatisnowoff-patent.Alargemultinationalpharmaceutical

companysubsequentlyapproachedCosmoandrecommendedthatitdelaysthe

projectandalternativelydevelopsaMMX®-basedimmunosuppressantbasedon

anewchemicalentitytogetherwiththem.Thisprojectiscurrentlyunderconsid-

eration.

CB-01-13

CB-01-13isaprojectthatfocusesonColonCancerprevention.ColonCanceraffects

morepersonsonaworldwidebasisthananyothercancer;accordingtoDatamoni-

tor,incidenceinthesevenmajormarketsreached470,204personsperannum.

CurrentlythereisanecdotalevidencethatthedailyuseofCox-2inhibitorsinhibits

thedevelopmentoflesionsthatleadtoColonCancer.Cox-2inhibitorshave

recentlycomeunderattackfromregulatorsbecausetheyarepresumedtohave

aseriesofpotentiallyfatalsideeffects,predominatelyheartattacks.Consequently

wehavesoughttoidentifyaCox-2inhibitorthatisoff-patentandwhoseside

effectstheCompanybelievescanbestronglyreducedbyapplyingtheMMX®

technology.TheCompanyhasbeennegotiatinganagreementwithawell-estab-

lishedpharmaceuticalcompanythathasextensiveexperienceinCox-2inhibitors.

TheCompanybelievesthattheCox-2inhibitorthatwasdevelopedbyitsprospect-

ivepartnerisnotabsorbedinthecolonandthatitcouldthusbesafelyusedona

long-termbasisifitisdeliveredwiththeMMX®technology.Theprojectishowever

currentlyonholdsincetheCox-2moleculeisunderincreasedregulatoryscrutiny

anditsownerpresentlydoesnotplaceahighpriorityonparticipatinginthe

developmentofnewapplicationsofit.

Cosmo’s pipeline

ThechartonthenextpagesummarizesCosmo’sclinicalandpreclinicalprojects.

ItisareflectionoftheCompany’sconvictionthatawell-stockedpipelineshould

allowittoregularlybringnewproprietaryproductstothemarket,beginninginlate

2010.Wearefurthermoreconvincedthatwewillbeabletoaddonetotwonew

projectstothepipelineeachyearfortheforeseeablefuture.

Cosmo’spipelineisareflection

oftheCompany’sconviction

thatawell-stockedpipeline

shouldallowittoregularlybring

newproprietaryproductsto

themarket,beginninginlate

2010.

Businessstrategy–CosmoPharmaceuticalsAnnualReport2008 29

Distribution strategy

In2008,wecontinuedimplementingourstrategyofenteringintolicensing

agreementswithrenownedEuropeanIBDcompanies.Inadditiontoouragreement

withFerring,whowillmarketanddistributeBudesonideMMX®inEurope,we

negotiatedalicensingagreementwithDr.FalkPharmaforRifamycinSVMMX®in

2008.Dr.FalkPharmaisaprivatelyheldGermanresearch-drivenspecialtypharma-

ceuticalcompanyactiveinglobalmarkets.Thecompanyidentifies,developsand

marketsinnovativeproductsintheareasofhepatologyandgastroenterology.Itis

theownerofaseriesofwell-knowndrugsinIBDandiswidelyconsideredtobe

oneofthemostknowledgeableandrespectedIBDfirms.Ithasaffiliatesinseveral

EuropeancountriesandanextensivenetworkofpartnersintheremainingEuro-

peancountries.ThecompanyoutlicensesitsproductsforsaleoutsideoftheEU.

IntermsoftheUSA,Cosmohasbeendrivenbythehypothesisthatasuccessful

distributorwillgenerateapproximatelyasmuchprofitfromsalesasthepartythat

Product Drug typePre- clinical Phase I Phase II Phase III MA Launch Partner

Lialda™/ Mezavant®

MildtomoderateUlcerativeColitis

5-ASA

1Q10

03/07USA/10/07UK

12/05ITA

3Q10

4Q10

4Q09

2Q10PKStudy/POCSteadyStatePKSensitivityStudy

Shire

Ferring–Worldwide

(excludingJapan&USA)

Santarus–USA

Dr.FalkPharma–Europe&

Australia(excludingItaly)

Santarus–USA

Budesonide MMX®

MildtomoderateUlcerativeColitis

Corticosteroid

Rifamycin SV MMX®

Travellers’Diarrhoea

Antibiotic

LMW Heparin MMX®

MildtomoderateUlcerativeColitis

Biologic

Zacol NMX®

IntestinalDisorders(nutraceutical)

Dietary

supplement

Rifamycin SV MMX®

CDAD

Antibiotic

CB-03-01 (NCE)

Acne,malepatternbaldnessandHirsutism

Steroidester,

androgen

antagonist

CB-01-12

IBD

Anti-TNFα

CB-01-09

IBD

Immuno-

suppressant

CB-01-13

ColorectalCancerprevention

CB-01-14

Crohn’sDisease

CB-01-16

Opioid-inducedconstipation

Cox-2

inhibitor

Antibiotic

Opioid

antagonist

developedthedrug.Generallycolondiseasesaretreatedbygastroenterologists

andnotbygeneralpractitionersandsocolonapplicationsmustbemarketed

directlytothepopulationofgastroenterologists.Itiscommonlyassumedthatthe

approximately8,000gastroenterologistsintheUSAcanbemarketedbyasales

forceofaround150salespersonsfocussingonthosethatwritethemostprescrip-

tions.Cosmocarefullyconsideredtheoptionofestablishingitsownsalesforce

intheUSAbutgiventhelargenumberofproductentry,regulatoryandreimburse-

mentissuestobeconsideredwhichrequireahighly-developedknowledgeoflocal

practices,theCompanysignedamajorlicensingagreementwithSantarus.Santa-

rusisaspecialtypharmaceuticalcompanyfocussedonacquiring,developing

andcommercializingproprietaryproductsthataddresstheneedsofpatientstreated

bygastroenterologistsorprimarycarephysicians.Thecompany’scurrentmarketing

effortsareprimarilyfocussedonZegerid®(omeprazole/sodiumbicarbonate)

capsulesandpowderfororalsuspension,whichareindicatedforthetreatment

ofcertainupperGIdiseasesanddisorders,andonGlumetza®(metforminhydro-

chlorideextendedreleasetablets),whichisindicatedasanadjuncttodietand

exercisetoimproveglycemiccontrolinadultswithtype2diabetes.Santarushas

approximately300salesandmarketingpersonnelincludingsome100salespersons

fromacontractsalesorganization.In2008,Zegerid®salesreachedUSD101.2million.

CosmohasnotyetmadeanydecisiononthedistributionstrategyforLMW

HeparinMMX®.WithreferencetoCB-03-01itislikelythattheCompanywillbe

seekingaworldwidelicensingagreementoragreements.

Manufacturing strategy

TheexperiencegainedbyyearsofmanufacturingasaunitofParkeDavisand

WarnerLambertwasthebasisfortheestablishmentoftheMMX®technology.

Cosmoseekstoretainandcontinuouslyexpandthisexpertiseandstrivesto

manufactureasmuchofitsownproductsaspossible.Since2006anincreasing

proportionoftheproductionhasbeenforCosmo’sownproducts.Ingeneral,

classicallow-volatilitycontractdrugmanufacturingoflongestablishedproducts

istheleastprofitable,themanufacturingofgenericswheretheCompanyprovides

servicesthatgobeyondthesolemanufacturingoftheproductareconsiderably

morelucrativeandthehighestprofitscanbeachievedinthemanufacturingof

ownproducts.ItistheCompany’sstrategytoincreasemanufacturingprofitability

andtocontinuouslyexpanditsexcellenceinthemanufacturingfield.

Cosmoseekstoretainand

continuouslyexpanditsmanu-

facturingexpertiseandstrives

tomanufactureasmuchofits

ownproductsaspossible.

30 CosmoPharmaceuticalsAnnualReport2008–Businessstrategy

Thecontrolledreleaseoverthelengthofthecolonnotonlysimplifiestheapplicationforthepatientsbutallowsforthetopicalapplicationoftheactivepharmaceuticalingredientstothewholebowelsurfacethatisaffectedbyinflammations.

InordertosupportthedevelopmentofCosmoPharmaceuticalsbyproviding

adviceonscientificandclinicaldevelopmentandproductapplication,the

CompanyestablishedaScientificAdvisoryBoard.Itmeetsperiodicallyandadvises

theManagementinallmattersofscientificrelevance.TheScientificAdvisoryBoard

comprisesthefollowingmembers:

Prof. Jean-Frédéric Colombel, MD

Professorofgastroenterologyanddirectorofthedepartmentofhepatogastroen-

terologyintheHôpitalHuriez,Lille,France.HeispresidentoftheEuropeanCrohn’s

andColitisOrganizationandscientificsecretaryoftheInternationalOrganization

ofIBD(IOIBD).

Prof. Geert D’Haens, MD

Directorofgastroenterology,ImeldaGIResearchCentre,Bonheiden,Belgium,and

consultantgastroenterologistforIBD,sectionofgastroenterologyandendoscopy,

UniversityHospitalGasthuisberg,Leuven,Belgium.Heisthesecretaryofthe

EuropeanCrohn’sandColitisOrganization.

Prof. Brian Gordon Feagan, MD

Professorinthedepartmentofepidemiology&biostatisticsattheUniversityof

WesternOntario,London,Ontario,Canada,andprofessoratRobartsResearch

Institute,London,Ontario,Canada.HeisamemberoftheCanadianAssociationof

GastroenterologistsandoftheCrohn’sandColitisFoundationofCanada.

Prof. Claudio Fiocchi, MD

DirectorofIBDandvice-chairmanofresearchdepartmentofgastroenterologyand

hepatologyattheClevelandClinicFoundation,Cleveland,Ohio,USA,andprofessor

ofpathologyattheInstituteofPathology,CaseWesternReserveUniversity,School

ofMedicine,Cleveland,Ohio,USA.

Prof. Michael Kamm, MD

ProfessorofgastroenterologyatStVincent’sHospitalandtheUniversityof

Melbourne,Melbourne,Australia,andatImperialCollege,London,UK.Hesitson

theeditorialboardofseveralinternationalgastroenterologicaljournals.

ScientificAdvisoryBoard

32 CosmoPharmaceuticalsAnnualReport2008–ScientificAdvisoryBoard

Prof. Robert Löfberg, MD

Professorofgastroenterology,KarolinskaInstitutet,Stockholm,Sweden,andhead

oftheIBDunit,Sophiahemmet,Stockholm,andchairmanoftheSwedishorganiza-

tionforthestudyofIBD.

Prof. William Sandborn, MD

ProfessorofmedicineatthedivisionofgastroenterologyandhepatologyofMayo

Clinic,Rochester,Minnesota,USA.HeisamemberoftheAmericanCollegeof

Gastroenterology,theCrohn’sandColitisFoundationofAmericaandchairmanof

theIOIBD(InternationalOrganizationofIBD).

Prof. Maurizio Vecchi, MD

Directorofthegastroenterologyandgastrointestinalendoscopyunitatthe

PoliclinicoSanDonatoMilanese,Italy,andtheItalianrepresentativeinthe

EuropeanCrohn’sandColitisOrganization.

ScientificAdvisoryBoard–CosmoPharmaceuticalsAnnualReport2008 33

34 CosmoPharmaceuticalsAnnualReport2008–Operatingprinciplesandactivities

Research & Development

WhiletheCompanydoeshaveonenewchemicalentityunderdevelopmentit

doesnothaveapureresearchgroupinhouseanditsactivitiesareentirelyoppor-

tunitydriven.Researchisprimarilyfocussedonassessingifandhowdifferent

substancescanbebroughttothecolon.Consequentlyresearchanddevelopment

expendituresareprimarilyclinicaltrialcostsandwillconsequentlyvaryenor-

mouslyfromyeartoyear.

In2008developmentfocussedondrivingforwardthephaseIIIclinicaltrials

ofBudesonideMMX®,thephaseItrialofCB-03-01,thepreparationsforthephaseIII

clinicaltrialsofRifamycinSVMMX®andtheanalysisofthedataofthephaseIIb

clinicaltrialsofLMWHeparinMMX®.Oneproject,CB-03-01movedintophaseI

clinicaldevelopment.Nonewprojectswereinitiated.

Procurement

FortheCompany’scontractmanufacturingactivitiesactiveingredientsareeither

suppliedbytheclientorpurchasedinthemarketfromexternalItalianorinterna-

tionalsuppliers.Allofthematerialspurchasedarestandardmaterialsprovidedby

alargenumberofsellers.

WithreferencetotheCompany’sproprietaryproducts,allactiveingredients

arefromexternalsuppliers.Allactiveingredientsrequiredaremanufacturedby

morethanonesupplier.GenerallytheCompanynegotiateswiththesesuppliers

inordertodetermineonepreferredsupplieratattractivepricesandthenholds

certaininventorytopreventsupplybottlenecks.

Production

TheCompanyhastheabilitytomanufacturetablets,ointments,andliquids.Allof

Cosmo’sownproductsaremanufacturedinhouse,amongstother,atthenew

FDA-approvedplantwhichisadjacenttotheplantoriginallysetupbyParkeDavis.

InordertomonitortheproductionprocessestheCompanyhasitsownanalytics

departments.TheCompanydoesnotmanufactureunfinishedproducts.Allproducts

areeitherpackagedinbulkorfinalformattheCompany’spackagingline.Itisthe

Company’sintentiontomanufactureallofitsownproductsinhouse.

Environmental protection

Cosmoisfamiliarandawareoftheimportanceofprotectingtheenvironmentand

conductsitsoperationsinamannerdesignedtoprotectthelocalenvironment.

Cosmocontinuouslymonitorscompliancewithapplicableenvironmentalhealth

Operatingprinciplesandactivities

Operatingprinciplesandactivities–CosmoPharmaceuticalsAnnualReport2008 35

andsafetylawsandregulationsandtherequirementsofitspermitsandlicenses

andmaintainprogrammeswhichensurethatit:

• monitorsthequalityoftheambientairandtheprotectionofthewater

resources;

• evaluatesthesiteprogrammesfortheprotectionoftheenvironmentandthe

healthandsafetyofemployeesandneighbours;

• managesthewastedisposalinconformitywiththelocalregulations;

• designs,constructs,maintainsandmanagesitsplantandsystemsinaccord-

ancewiththebestpractices;

• communicateswiththelocalcommunityonsafetyandenvironmentalmatters

inatimelyandeffectivemanner.

Cosmoiscommittedtoaprogrammeofcontinualimprovementinenvironmen-

tal,healthandsafetyperformancebymakingitanintegralpartofallitsoperations.

Asapharmaceuticalcompany,CosmoisnotdirectlyobligedunderREACH

(Registration,Evaluation,AuthorisationandRestrictionofChemicalsubstances),

anewEuropeanCommunityRegulationonchemicalsandtheirsafeuse

(EC1907/2006),butconstantlymonitorsitssuppliers(i.elabelsandpackaging

materials)toassesstheircompliancetothatregulation.

Quality management

Cosmo’saimistoguaranteethedevelopmentandthemanufacturingofdrug

productsofhighqualityandtosatisfytheexpectationsofallourinternational

customers.TheQualitySystemimplementedatCosmomeetstherequirements

andtheexpectationsoftheEuropeanandAmericanHealthAuthorities(EMEAand

FDA)forthemanufacturingofdrugproducts.Pharmacopoeias,pharmaceutical

directivesandguidelines(i.e.thoseissuedbyICH)helptomaintaintheQuality

Systematahighstandardlevel.TheQualitySystemisfullyincompliancewiththe

currentgoodmanufacturingpractice(GMP)andallowstheproductionofdrug

productsofdefinedquality.

TheQualitySystematCosmo’splantisalsocertifiedaccordingtoISO9000

standard.Thiscertification,evenifnotrequiredforthedrugproductmanufactur-

ing,showstheattentionoftheCompanytothequalityandingeneraltotheservice

offeredtoourcustomers.

Cosmoiscommittedtoapro-

grammeofcontinualimprove-

mentinenvironmental,health

andsafetyperformanceby

makingitanintegralpartofall

itsoperations.

36 CosmoPharmaceuticalsAnnualReport2008–Operatingprinciplesandactivities

Internal control system and risk management

TheBoardhasapprovedacomprehensiveinternalcontrolsystem(ICS)inorder

toguaranteethattheinternalprocessesareadequate,thefinancialreportingis

reliable,theassetsofthecompanyareprotectedandalllawsandinternalregula-

tionsarecompliedwith.Thefollowingriskmatrixwasestablished:

Risksareclassifiedascashrisks,whereeventshaveimmediatecashcostsbyeither

lossofrevenueorunplannedexpenditures,orvaluerisks,whereeventscausethe

valueoftheCompanytofallbecausefuturerevenuewillnotbecomingorfuture

costswillbehigher.

Riskparametersweredefinedasexistentialrisksthat,shouldtheyoccur,could

putthebeingoftheCompanyinjeopardyorbusinessplanrisksthatcouldimpede

thefulfilmentofplannedstrategicobjectives.

Allriskswerethenbundledundereitherscientificrisks,developmentrisks,

manufacturingrisks,marketrisks,liquidityandfinancialrisksorlegalrisks.The

monitoringofeachoftheseriskgroupsisassignedtoaseparateperson.Foreach

oftheserisksthethreatsaredefined,probabilitiesassignedandnegativecash

andvalueimpactscalculated.Theserisksandtheparametersrespectivelyassigned

tothemareregularlyreassessed.

Theserisksarethenclassifiedintorisksthatcanbemanagedbyappropriate

inhouseactionorrisksthatcannotbemanagedbyinternalaction.Alltherisks

thatcannotbemetbyinternalactionarethensplitintorisksthatcanbeinsured

andthosethatcannotbereasonablyinsuredandmustbeborneasbusinessrisks.

TheBoardhasapproveda

comprehensiveinternalcontrol

system(ICS)inordertoguarantee

thattheinternalprocessesare

adequate,thefinancialreporting

isreliable,theassetsofthe

companyareprotectedandall

lawsandinternalregulations

arecompliedwith.

Development risk

Pers

onn

el

Equ

ipm

ent a

nd

syst

ems

Info

rmat

ionScientific risk

Products

Clients

Know-how

Manufacturing risk

Market risk

Liquidity and financial risk

Legal risk

Operatingprinciplesandactivities–CosmoPharmaceuticalsAnnualReport2008 37

Job safety

Cosmoconstantlymonitorsitsproceduresandprocessestoensurethatthehealth

andsafetyofallpersonnelworkingonsiteisprotectedandriskfromaccidents

orincidentsarisingfromsiteactivitiesisminimizedbothonandoffsite.

Fromajobcategoryperspective,employmentatCosmocaneitherbegrouped

intoofficeactivities,researchandanalysisactivitiesormanufacturingactivities.

Aninitialmedicaltestonhiringandanannualbloodandurinetestisperformedfor

allmanagers,employeesandworkersandallmalesabove40yearsoldaretested

forPSA(ProstateSpecificAntigen)too.Formanagersandemployeesworkingwith

aPC,eyeandeyesighttestaremadeeverytwoyearsandworkstationsarepro-

tectedwithblindsandproperlypositioned,whenexposedtonaturallight.With

respecttoresearchandanalysisactivities,strictpolicieswereestablishedtogether

withtheItalianMinistryofHealthspecificallywithreferencetothehandlingof

dangeroussubstances.Withreferencetomanufacturingactivitiesprimarilyinthe

manufacturing,packagingandhandlingofpharmaceuticals,therearestrictinternal

workflowprocessesintendedtoinsurethataccidentsareminimized.Thereisan

insurancecoveragepaidbytheCompanyforaccidentsoccurredoffsite.

In2008therewasoneaccidentand14workdayslosttoaccidentsinthegroup

ofofficeactivities(afall),noaccidentsandnoworkdayslostinthegroupof

researchandanalysisactivitiesandfouraccidentsand28workdayslostinthegroup

ofmanufacturingactivities(conjunctivitis:fiveworkdayslost;caraccidenton

thewayhome:tenworkdayslost;fall:tenworkdayslost;traumaticlipwound:

threeworkdayslost).

Performance management

Startingfrom2008,astaffincentiveplanisinplaceforCosmo’semployees,based

onpredeterminedgoalsachievedintheperiod1January–31Decemberofeach

year(theperformanceperiod).

Theplanhasbeenconceivedtoprovideanincentiveprogrammetoachieve

overallcorporateobjectivesandtoenhanceshareholdervalue,torewardstaff

attheachievementofcorporategoals,toencourageincreasedteamworkamong

alldisciplineswithintheGroupandtohelpattractandretainkeypeople.

Forthepurposeoftheplan,theCompany’sstaffhasbeendividedinthree

macroareasofactivity:

• Production&Logistics(Area1);

• Research&Development(Area2);

• Administration&Finance,Others(Area3).

Cosmoconstantlymonitorsits

proceduresandprocessesto

ensurethatthehealthand

safetyofallpersonnelworking

onsiteisprotectedandriskfrom

accidentsorincidentsarising

fromsiteactivitiesisminimized

bothonandoffsite.

38 CosmoPharmaceuticalsAnnualReport2008–Operatingprinciplesandactivities

Corporategoalsareeconomicandnon-economic,theyaremostlybasedonthe

figuresoftheconsolidatedbudgetapprovedbytheBoardandcanvarybymacro-

areaofactivityorbepresentinmorethanonemacroarea,butwithdifferent

incidence.

Theawardisbudgetedat6%oftheemployees’annualfixedcompensation

andisreducedindividuallyifgoalsareonlypartiallyachieved.

TheachievementofcorporategoalsisverifiedandapprovedbyCosmo’s

CompensationCommitteeandcommunicatedtotheCompany’sunions.

Information technology

Cosmohasthehard-andsoftwarewhichtheManagementconsidersasadequate

forrunningitsbusiness.Cosmohasafirewall-protectednetworkinfrastructure

linkingfourserversofwhichthreeareHPXeonservers.Theaccountingsoftwareis

KingbyNuovaMigra,theERPisGMAbyNuovaMigraandthequalitycontrol

softwareusedareQualityandFormula,bothbyDataCheck.Thehardware,except

forcopiers,isgenerallyowned.TheGrouphasconcludedmaintenanceandservice

agreementswhichtheManagementbelievesaresufficienttokeeptheGroup’s

hard-andsoftwarefunctional.

In2008Cosmoimproveditsdatarecoverysystembyincreasingitssecond

backupcapacity,atanoutsourcedlocation,to1.6terabyte.

Patents and licences

Cosmohasbeenpursuingadoublecoverselectivecountrypatentstrategy.Aglobal

MMXpatentprotectingtheplatformtechnologyhasbeenfiledandgrantedin

practicallyallmajorcountriesandderivingproductpatentshavebeenfieldand

receivedinmostofthecountries.InselectivecasestheCompanysubsequently

filesprocessandusepatents.

In2008theCosmopatentportfoliowasfurtherstrengthenedworldwidebythe

issueofthefollowingpatents:

• MMXtechnology–USA;

• RifamycinSV–28Europeancountries;

• LMWHeparin–25Europeancountries;

• CB-03-01–India.

TheCompanyhasbeenpursuingthepolicyofhavingsufficientfundstofinance

theclinicaltrialsforallitsproductsthroughfiling.Selectively,wheredeemed

Startingfrom2008,astaffincen-

tiveplanisinplaceforCosmo’s

employees,basedonpredeter-

minedgoalsachievedinthe

period1January–31December

ofeachyear.

Operatingprinciplesandactivities–CosmoPharmaceuticalsAnnualReport2008 39

advantageous,theCompanyhasenteredintolicensingagreementsafterproofof

conceptandifitfeltthatitneededsupportintheregulatoryprocessandforall

countrieswhereitfeltthatsettingupanowndistributionorganizationisunlikely.

On24November2008,theCompanyannouncedalicenceagreementwith

Dr.FalkPharmaforRifamycinSVMMX®forallofEurope(withoutItaly)andAus-

tralia.Dr.FalkPharmapaidasigningfee,willpaythephaseIIIclinicaltrialsin

Europe,afeeuponregistrationoftheproductforInfectiousColitisandroyalties

increasingwithsales.Dr.FalkPharmawillalsopurchaseallRifamycinSVMMX®

tabletsfromtheCompanyexclusively.

On15December2008,theCompanyannouncedalicenceandequityparticipa-

tionagreementwithSantarusforBudesonideMMX®andRifamycinSVMMX®

fortheUSA.SantaruspaidUSD2.5millionandsixmillionSantarussharesasasigning

feeupfrontandmayalsopayCosmouptoatotalofUSD9millioninclinicaland

regulatorymilestonesfortheinitialclinicalindications,uptoUSD6millioninclin-

icalandregulatorymilestonesforasecondindicationforRifamycinSVMMX®,

anduptoUSD57.5millionincommercialmilestones.Ifandwhenearned,themile-

stoneswillbepayableatCosmo’soptionineitherSantaruscommonstockorin

cash,subjecttocertainlimitations.SantarusreimbursedCosmoapproximately

USD2.8millionby31January2009whichrepresentsSantarus’50%shareofthe

phaseIIIclinicaltrialcostsforBudesonideMMX®incurredbyCosmothroughmid-

November2008.Infuture,Santaruswillberesponsiblefor50%ofthecosts

associatedwiththeongoingUSregistrationandEuropeanBudesonideMMX®

phaseIIIclinicaltrialsandallcostsforthefuturephaseIIIUSregistrationclinical

trialforRifamycinSVMMX®.Assumingregulatoryapprovalandcommercial

launch,SantaruswillpaytoCosmotieredroyaltiesonnetsalesofeachproduct

rangingfrom12%to14%,subjecttoreductioninlimitedcircumstances.Cosmo

oritsaffiliatewillberesponsibleforthemanufactureandsupplyoftheproducts

underasupplyagreementtobenegotiatedatalaterdate.

AglobalMMXpatentprotec-

tingtheplatformtechnologyhas

beenfiledandgrantedin

practicallyallmajorcountries.

40 CosmoPharmaceuticalsAnnualReport2008–Corporategovernance

MMX®technologycanbeusedasaplatformforapplicationsoutsidethecolonwhereacontrolledreleaseisofimportance.

Corporategovernance–CosmoPharmaceuticalsAnnualReport2008 41

Group structure and shareholders

TheCompanyisastockcorporation“SocietàperAzioni”/S.p.A.organizedunderthe

lawsofItalyandlistedontheSIXSwissExchange.Cosmowasoriginallyincorp-

oratedwithasharecapitalofEUR10,000.Itssharecapitalhasbeensubsequently

raisedtoEUR2,185,000on2August2006,throughthecontributioninkindof

CosmoHolding’s100%shareholdinginCosmoS.p.A.andCosmoTechnologiesLtd.

TheGrouphasnoequityinterestinunconsolidatedcompaniesthatcontribute

10%ormoreoftheconsolidatedequityoroftheconsolidatedprofitoftheGroup.

TheGroupisorganizedaccordingtoamatrixorganizationprinciple.Theline

organizationconsistsoffourlegalentities;CosmoPharmaceuticalsS.p.A.and

its100%subsidiaries,CosmoS.p.A.,CosmoTechnologiesLtd.,Ireland,andCosmo

Research&DevelopmentS.r.l.

ThesefourentitieshavetheirownBoardsofDirectorsandinternalmanage-

mentstructure.ThefunctionaltasksoftheGrouphavebeenallocatedtothediffer-

ententities.

CosmoPharmaceuticalsS.p.A.isresponsibleforoverallmanagementofthe

Group,administrationandpersonnel,andfinanceandinvestorsrelations.Cosmo

S.p.A.isresponsibleforproduction.CosmoTechnologiesLtd.isresponsiblefor

internationalbusinessdevelopmentandinternationalresearchanddevelopment

andCosmoResearch&DevelopmentS.r.l.executestheresearchanddevelopment

activitiesinItaly.

Businessdevelopmentisresponsibleforthenegotiationofcontractswith

licensing,productionandmarketingpartners,fortheidentificationofthird-party

productswhoseefficiencycouldbeimprovedbytheMMX®technology,for

theidentificationofproductsthatcouldfittheGroup’sportfoliowellandforthe

identificationofproductsthatareabouttolosetheirpatentprotectionand

couldbeproducedinhouse.

Research&Developmentisresponsiblefortheidentificationofnewchemical

andbiologicalsubstancesthatcouldbepurchasedbytheGrouporthatcouldbe

refinedbytheapplicationoftheGroup’sMMX®technology,forthecorrectdesign

andtimelyexecutionofallclinicaltrials,forthedefinitionofclinicalendpoints

ofclinicaltrials,fortheselectionandthemanagementofclinicalresearchorgan-

izations,forthepatentstrategydefinitionanditsexecution.

Productionisresponsibleforthequalityofproduction,forproductionplan-

ning,fortheidentificationofunusedcapacityanditsoptimaluse,forthemarket-

ingofcontractdrugmanufacturingclientsandforthemarketingoftemporarily

unusedcontractdrugmanufacturingcapacity.

Corporategovernance

42 CosmoPharmaceuticalsAnnualReport2008–Corporategovernance

Administrationisresponsibleforallpersonnel,infrastructureandsystems,insur-

anceandsecurity.

FinanceandinvestorrelationsarecentralizedintheCompanywhichprovides

financialservicesforsubsidiaries.

Asof31December2008,theGroup’sstructurewasthefollowing:

Major shareholders

CosmoHoldingS.p.A.isanItaliancompanywithitsregisteredofficeatLainate,

andhasasharecapitalofEUR2,800,000consistingof2,800,000shareswithapar

valueofEUR1each.CosmoHoldingS.p.A.iscontrolledbyitsmajorityshareholder,

CassiopeaS.A.,aLuxemburgcompany,holding81%ofthesharecapitalinCosmo

HoldingS.p.A.,whichinturniscontrolledbyMauroS.Ajani,theCEOandExecutive

DirectoroftheCompany,whoholdsa60%ofCassiopeaS.AFurthermore,MauroS.

Ajani’sdaughter,BenedettaAjani,andhiswife,GisellaDeSena,eachhold20%of

thesharesofCassiopeaS.A.RobertoVilla,LuigiMoro,GiuseppeCiprianoand

MassimoPedrani,membersoftheManagementoftheCompany,hold,inaggregate,

10.3%ofthesharesofCosmoHoldingS.p.A.dieviniHoppBioTechHoldingGmbH&

Co.KG,theinvestmentcompanyofDietmarHoppandhisfamily,owns10.6%ofthe

shares.

Cassiopea S.A. 1)

81%

63%

100% 100% 100%

37%

19%

Cosmo Research & Development S.r.l., Italy

Cosmo S.p.A., Italy Cosmo Technologies Ltd.,Ireland

Cosmo Holding S.p.A., Italy

Cosmo Pharmaceuticals S.p.A., Italy (Listing entity)

Other Investorsincluding Management 2)

Financial Investors

Source: Company information 1) Controlled by the Ajani family 2) Management holds 10%

63%

26.4%

10.6%

CosmoHoldingS.p.A.

dieviniHoppBioTechHoldingGmbH&Co.KG

Othershareholders

Corporategovernance–CosmoPharmaceuticalsAnnualReport2008 43

Capital structure

Share capital

Asper1January2009,thesharecapitaliscomposedof13,875,000shares,eachwith

anominalvalueofEUR0.25.Thesharecapitalisfullypaidup.Thesharesareissued

inbookentryformaccordingtoItalianlaw.Nosharecertificateshavebeenissued

andsharecertificateswillnotbeavailableforphysicaldelivery.Sharesarecentral-

izedinthecentralsecuritydepositorysystemmanagedbyMonteTitoli.Forthe

purposeoftheexerciseoftherelevantrights(suchasthevotingrightpursuantto

section2,370oftheItaliancivilcodeandtherighttoreceivepaymentofdividends),

shareholdersmustrelyontheproceduresofMonteTitoli,BancaIntesaS.p.A.,or

SISandontheintermediariesorparticipantsthathaveaccountswithMonteTitoli,

BancaIntesaS.p.A.,orSIS.Thefinancialintermediary,BancaIntesaS.p.A.,isin

chargeofliaisingbetweenMonteTitoliandSIS.Shareholdersareentitledtoreceive

writtenconfirmationregardingthenumberofsharesheldthroughtheintermedi-

aryorthedepositarybankatwhichtheyhavetheaccount.

Stock option plan

Theextraordinaryshareholders’meetingof14December2006authorizedthe

increaseofthesharecapitalbyamaximumofnominalEUR378,000withtheissue

of1,513,200newsharesattheserviceofanemployeestockownershipplan(ESOP),to

beimplementedwithinthefollowingfiveyears.Attheshareholders’meetingthe

BoardofDirectorswasformallyauthorizedtoexecutesuchplan.On18December

2007theBoardofDirectorsgrantedatotalof1,013,568options;theyvestafterthree

yearsandtheycanbeexercisedatapriceofCHF22pershareuntil14December

2011.In2008noadditionaloptionsweregranted.Italianlawdoesnotforeseethe

creationoftheconditionalcapitalforstockoptionplans.Thesharecapitalwillthus

notbeincreaseduntilsuchtimewhentheoptionholdersexecutetheiroptions.

Authorization to purchase own shares

Attheshareholders’meetingon28March2008theshareholdersapproved

theBoardofDirectors’proposaltohaveapositionofupto1.3millionshares.

AtyearendtheCompanyheld45,992sharesatanaveragepriceof

CHF13.09pershare.

Transfer of shares and disclosure of principal shareholders

Thetransferofsharesisaffectedbycorrespondingentryinsecuritiesaccounts

whichrecordthetransferoffinancialinstrumentsopenedwithauthorized

44 CosmoPharmaceuticalsAnnualReport2008–Corporategovernance

financialintermediariesandinaccordancewiththeapplicablelaw.Uponregistra-

tionofthetransferanduponrequestoftheshareholder,thefinancialintermedi-

ariesshallinformtheCompanyofthetransferofshares,andtheCompanyshall

updatetheshareholders’register(“LibroSoci”)inaccordancewithItalianlaw.

Ashareholdermayaskforhisregistrationatanytime.

TheCompanyhasbeenadvisedthat,sinceitisanItaliancompanylistedin

Switzerland,itanditsshareholdersmaynothavetheprotectionofeitherItalian

orSwisslawsandregulationsgoverningdisclosureofsignificantshareholdings.

However,eachshareholder(asdefinedintheArticlesofAssociation)who

directly,indirectlyorbeneficiallyhasvotingorinvestmentpowerintheCompany

isrequiredbytheArticlesofAssociation,tocomplywiththelaws,rulesandregula-

tions.

Corporategovernance–CosmoPharmaceuticalsAnnualReport2008 45

ChrisTanner(57)

ExecutiveDirector;

CFO

2006 Boardmember/BeiratofJoimaxGmbH

BoardmemberofCosmoBioscienceS.p.A.

BoardmemberofPrivateEquityHoldingAG

GianluigiBertolli(57)

Non-ExecutiveDirector

2006 GeneralsecretaryofItalianNational

AssociationofCharteredAccountants

Presidentofstatutoryauditorsofanumberof

majorItalianandinternationalcompanies

Founderandseniorpartnerof

StudioBertollieAssociati

Board of Directors

In2008,theBoardofDirectorsofCosmoPharmaceuticalsS.p.A.consistedoffive

non-ExecutivemembersandtwoExecutiveDirectors.Themanagementofthe

GroupisintheresponsibilityoftheBoardofDirectors.AllMemberswereelected

bytheshareholdersattheannualshareholders’meetingforatermofthreefiscal

yearsandareeligibletosuccessivetermsfollowingItaliancivilcoderules.

Name/current position Member since

Relevant external positions

RolfStahel(64)

Non-ExecutiveDirector;

Chairman

2006 ExecutivechairmanofChesylPharmaLtd.

Non-executivechairmanfor:

NewronPharmaceuticalsS.p.A.

EUSAPharmaInc.

MauroS.Ajani(54)

ExecutiveDirector;

CEO

2006 Chairmanandmemberoftheboardof

CosmoBioscienceS.p.A.

46 CosmoPharmaceuticalsAnnualReport2008–Corporategovernance

Name/current position Member since

Relevant external positions

FriedrichvonBohlenund

Halbach(46)

Non-ExecutiveDirector

2006 Chairmanoftheboard(Beirat)of

ApogenixGmbH,andofCureVacGmbH

ChairmanoftheboardofLifeBiosystemsAG

andofSygnisPharmaAG

MemberoftheboardofCosmoBioscience

S.p.A.,CuracyteAG,HeidelbergPharmaAGand

WilexAG

Memberoftheboard(Beirat)of

CytonetGmbH&Co.KG

DieterA.Enkelmann(49)

Non-ExecutiveDirector

2006 Chieffinancialofficerandmemberofthe

executivemanagementboardofJuliusBaer

HoldingAG

BoardmemberofiNNutriGELAG

AlessandroDellaChà(45)

Non-ExecutiveDirector

2006 SeniorpartneratStudioLegaleEdoardoRicci

eAssociati

Corporategovernance–CosmoPharmaceuticalsAnnualReport2008 47

Rolf Stahel

Swiss(born1944),hasbeenChairmanoftheBoardofDirectorsofCosmoPharma-

ceuticalsS.p.A.since2006.From2005to2007hewastheDeputyChairmanofthe

BoardofCosmoHoldingS.p.A.

RolfStahelhasadegreeinbusinessstudiesfromKSLLucerne,Switzerland,and

heattendedtheadvancedmanagementprogrammeatHarvardBusinessSchool.

FromMarch1994toMarch2003,hewaschiefexecutiveofficerofShirePharma-

ceuticalsGroupplc(nowShireplc).Hewasalsoamainboarddirectorandchair-

manoftheexecutivecommitteeofShirePharmaceuticals.From1967to1994,he

workedforWellcomeplcinSwitzerland,Italy,Thailand,SingaporeandtheUnited

Kingdom.From1990to1994,hewasWellcome’sdirectorofgroupmarketing,based

inLondonandBeckenham,withresponsibilityforgroupstrategy,R&Dportfolio

evaluation,marketingofexistingandnewproductsandbusinessdevelopment.In

thisposition,hereporteddirectlytothechiefexecutiveofficerofWellcomeplc.

From1979to1990,hewasaregionaldirectorofWellcomeplc,basedinSingapore,

withresponsibilityfor18PacificRimcountries.

ChesylPharmaLtd.,theadvisorycompanycontrolledbyRolfStahel,hadbusi-

nessdevelopmentcontractswiththeCompanyrespectivelyCosmoHoldingS.p.A.

TheagreementwithChesylPharmaLtd.wasterminatedpriortotheIPO.

RolfStahelisamemberoftheadvisoryboardoftheBusinessSchoolofImper-

ialCollegeLondon.In2009hereceivedthelifetimeachievementawardfromthe

UKBioindustryAssociation.

Mauro S. Ajani

Italian(born1955),residentinMilan,Italy,founderand,throughhisholdingsin

CassiopeaS.A.,mainshareholderofCosmoHoldingS.p.A.andCosmoBioscience

S.p.A.aswellasindirectlyofCosmoPharmaceuticalsS.p.A.

SoleDirectorofCosmoS.p.A.from1998toFebruary2001.

From1994to1996,hewasthegeneralmanageroftheRussiancompanyItal-

centerandtookpartinajointventureofItalianandRussianentrepreneursfor

thecreationofapharmaceuticalproductdistributioncompany.Hewasaconsult-

antofPharmhispaniafrom1991to1993,anItalian-Spanishjointventureforthe

import/exportanddistributionofpharmaceuticalproductsbetweenSpainand

Italy.Intheperiodfrom1983to1993,hewasthemarketingmanagerofPharmajani

S.r.l.,acompanyengagedinthecommercialdistributionandlogisticsofpharma-

ceuticalproducts.From1980to1983,hewasNielsen’sareamanagerforover-the-

counterproductsoftheSeronoOTCcompanywhileintheperiodfrom1978to1980

48 CosmoPharmaceuticalsAnnualReport2008–Corporategovernance

heworkedasasalesmanfortheLepetitcompanyandfortheGazzonicompany

intheOTCsector.

MauroS.AjaniischairmanandmemberoftheboardofCosmoBioscience

S.p.A.,Lainate,Milan,acompanywhich,throughitsCosmoBioscienceInc.,LaJolla,

USA,subsidiaryisdedicatedtothedevelopmentofcancervaccinesformelanoma.

In2008,CosmoBioscienceInc.,whichiscontrolledbyCosmoBioscienceS.p.A.,

whosemajorshareholderisMauroS.Ajaniandhisfamily,providedanalytical

servicesinthedeterminationofmechanismofactionofLMWHeparinfor

approximatelyUSD300thousand.

Chris Tanner

Swiss(born1951),hasbeenaBoardMemberofCosmoPharmaceuticalsS.p.A.since

2006andfrom2005to2007ofCosmoHoldingS.p.A.Since2006hehasbeenChief

FinancialOfficerofCosmoPharmaceuticalsS.p.A.

DrTannerhasadiplomaasaneconomistandaPhDineconomicsfromthe

UniversityofSt.Gallen.HejoinedUBSin1977andfollowingamanagement

traineeprogrammeworkedinvariousforeignassignments.In1985,hebecamea

memberoftheglobalcreditcommitteeandfrom1987to1992wastheheadof

corporatebankinginAsia,AustraliaandAfricaaswellasSouthernEurope.In1992

hebecameheadofcorporatefinanceandcapitalmarketsatUBSinZurich.In

1998,oneyearafterUBS’smergerwithSBC,helefttobecomeapartnerofDrErnst

Müller-Möhl,co-foundedthe“20Minuten”groupofnewspapersandfounded

A&AActiveInvestor,alistedinvestmentcompany.Since2002hehasbeenacor-

poratefinanceadviserandparticipatedinnumerousfundraisingsamongstother

fortheprivateplacementofCosmoHoldingS.p.A.Heisontheadvisoryboardof

MilleniumAssociates,afinancialadvisertothefinancialservicesindustryasse-

nioradviser.

HeisaBeiratrespectivelyboardmemberofJoimaxGmbH,CosmoBioscience,

Inc.andPrivateEquityHoldingAGwhichislistedontheSIXSwissExchange.

NoneofthecompaniesthatDrTannerisamajorshareholderofhasanybusi-

nessactivitieswiththeCompany.

Friedrich von Bohlen und Halbach

German(born1962),hasbeenaBoardMemberofCosmoPharmaceuticalsS.p.A.

since2006andwasaMemberoftheBoardofCosmoHoldingS.p.A.from2005

to2007.DrvonBohlenundHalbachhasadiplomainbiochemistryfromthe

UniversityofZurichandaPhDinneurobiologyfromtheSwissFederalInstitute

Corporategovernance–CosmoPharmaceuticalsAnnualReport2008 49

ofTechnology(ETH)inZurich.In2008,hewasappointedprofessorforinformation

sciencesattheUniversityofAppliedSciences(FH)inHeidelberg,Germany.

HeisfoundingmemberandshareholderofdieviniHoppBioTechHolding

GmbH&Co.KGwhichmanagesthelifesciencesinvestmentsoftheHoppfamily.

Hehas15yearsofentrepreneurialexperienceandwasawardednumerousprizes,

amongstotherstheMcKinseyStartUp-PrizeinGermanyin1998andtheGerman

EntrepreneuroftheYearPrizein1999byManagerMagazin,Ernst&YoungandSAP.

DrvonBohlenundHalbachismanagingpartnerofdieviniHoppBioTech

HoldingGmbH&Co.KG.Heisamemberofthefollowingboards:chairmanofthe

board(Beirat)ofApogenixGmbH,Heidelberg,memberoftheboardofCosmo

BioscienceS.p.A.,Lainate,Milan,memberoftheboardofCuracyteAG,Munich,

chairmanoftheBoard(Beirat)ofCureVacGmbH,Tübingen,memberoftheboard

(Beirat)ofCytonetGmbH&Co.KG,Weinheim,memberoftheboardofHeidelberg

PharmaAG,Heidelberg,chairmanoftheboardofLifeBiosystemsAG,Basel,chair-

manoftheboardofSygnisPharmaAG,Heidelberg,andmemberoftheboardof

WilexAG,Munich.

NoneoftheunrelatedcompaniesthatDrvonBohlenundHalbachisamajor

shareholderoforisontheboardofhadanybusinessactivitieswiththeCompany.

Gianluigi Bertolli

Italian(born1951),DrBertollihasbeenaBoardMemberofCosmoPharmaceuticals

S.p.A.since2006andwasaBoardMemberofCosmoHoldingS.p.A.from2005to

2007.

DrBertollihasadiplomaasbusinessandtaxconsultant,adiplomaaschar-

teredaccountantandaPhDfromtheBocconiUniversityinMilan.Heisthegeneral

secretaryofItalianNationalAssociationofCharteredAccountantsandpresident

ofstatutoryauditorsofanumberofmajorItalianandinternationalcompanies.

HeistheownerandheadofStudioBertolli,afirmthatspecializesinM&A,

accountingandtaxadvice.

DrBertolli,andrespectivelycompaniesthatheowns,carryoutaseriesoftax

andaccountingservicesfortheCompany.

Alessandro Della Chà

Italian(born1963),hasbeenaBoardMemberofCosmoPharmaceuticalsS.p.A.

since2006.

AlessandroDellaChàhasadegreeinlawfromtheUniversityofMilan,Italy,

andanLL.M.fromtheUniversityofLeicester,UnitedKingdom,inEuropeanUnion

50 CosmoPharmaceuticalsAnnualReport2008–Corporategovernance

CommercialLaw.Heisalecturerinconferencesandseminarsheldbyuniversities

andinstitutionsoncommercialandcompanylawissues.

HeisalsoseniorpartneratStudioLegaleEdoardoRiccieAssociati,Milan,

wherehespecializesincompanylaw,mergersandacquisitions.Hejoinedthefirm

in1988.From1987to1988hewasassistantofthecentraldirectorforcorporate

mattersatFininvestGroup.From1994to1998hewasdirectorofII.PP.A.B.Milan

(formerlyECA),acharitableinstitutionowninghospitalsandspecializedinelderly

care.

StudioLegaleEdoardoRiccieAssociatiprovidesaseriesoflegaladvisoryser-

vicestotheCompany.

Dieter A. Enkelmann

Swiss(born1959),hasbeenaBoardMemberoftheCompanysince2006.

HegraduatedfromtheUniversityofZurich,whereheobtainedadegreeinlaw.

DieterA.Enkelmannischieffinancialofficerandmemberoftheexecutiveman-

agementboardofJuliusBaerHoldingAG,oneofSwitzerland’slargestprivatebanks,

listedontheSIXSwissExchange.From2003to2006hewaschieffinancialofficer

ofBarryCallebautAG,theworld’sleadingmanufacturerofhigh-qualitycocoa,

chocolateandconfectionaryproductswhichislistedontheSIXSwissExchange.

From1997to2003hewasatSwissReasheadoffinanceofthebusinessunit

financialservicesandasheadofcorporatefinanceandinvestorrelations,treasury.

From1985to1997heheldseveralpositionsatCreditSuisse,bothinZurich

andLondon.DieterA.EnkelmannisaboardmemberofiNNutriGELAG,Schlieren,

Switzerland.JuliusBaerbankprovidesnoservicesfortheCompany.

Operating principles of the Board of Directors

ThegeneralpoliciesandthemanagementoftheCompanyaretheresponsibility

oftheBoardofDirectors,whichestablishesthestrategic,accounting,organiza-

tionalandfinancingpoliciesandappoints,recallsandsupervisesthemembersof

theManagement.Furthermore,theBoardofDirectorsisresponsibleforthe

organizationandpreparationofshareholders’meetingsandcarryingoutshare-

holders’resolutions.TheBoardofDirectorsmaydelegateitsauthoritytothe

ExecutiveCommitteeand/ortotheChiefExecutiveOfficer(CEO)anddetermines

thedurationofthetermandthepoweroftheCEO.

BoardofDirectors’meetingsarecalledbytheChairmanorbytheCEObywritten

notice,highlightingthematterstobediscussedandsentatleastthreedays(incase

ofurgencyatleastoneday)beforethedateofthemeeting.

SixmeetingsoftheBoardofDirectorstookplacein2008.

Corporategovernance–CosmoPharmaceuticalsAnnualReport2008 51

Board Committees

Compensation Committee

TheCompensationCommitteeassiststheBoardofDirectorsincompensation-

relatedmatters,includingmattersrelatedtotheCompany’sstockoptionplan.

TheCompensationCommitteeprovidesrecommendationsonandpolicesfor

thecompensationoftheMembersoftheBoardofDirectors,theManagement

andotheremployees.Itiscomposedsolelyofnon-ExecutiveMembersofthe

BoardandheadedbyRolfStahel.AdditionalMembersareFriedrichvonBohlen

undHalbachandDieterA.Enkelmann

OnemeetingoftheCompensationCommitteetookplacein2008.

Nomination Committee

TheBoardofDirectorshasestablishedaNominationCommittee,whichenacts

guidelinesforselectingcandidatesfortheelectiontotheBoardofDirectorsin

theeventoneormoreDirectorsisreplacedpursuanttosection2386oftheItalian

civilcode.ItalsoenactsguidelinesfortheappointmentofSeniorManagement

andmakesarrangementstoselectsuchcandidates.TheNominationCommittee

iscomposedsolelyofnon-ExecutiveMembersoftheBoardandisheadedby

RolfStahel.FriedrichvonBohlenundHalbachandDieterA.Enkelmannarethe

AdditionalMembers.

Audit Committee

TheBoardofDirectorshasestablishedanAuditCommittee.TheAuditCommittee

surveystheeffectivenessoftheexternalauditandtheinternalcontrolandrisk

managementprocesses.Italsoevaluatesthestateofcompliancewithnorms

withintheCompany.

Additionally,theAuditCommitteereviews–togetherwiththeChiefFinancial

Officer,and,separately,asthecasemaybe,withtheheadoftheexternalaudit–the

individualandconsolidatedfinancialstatementsaswellastheinterimstatements

intendedforpublication.Itdecideswhethertheindividualandconsolidatedfinancial

statementscanberecommendedtotheBoardofDirectorsforpresentationtothe

generalshareholders’meeting.TheAuditCommitteeassessestheperformanceand

thefeeschargedbytheexternalauditorsandascertainstheirindependence.It

examinescompatibilityoftheauditingresponsibilitieswithanyconsultingman-

dates.TheAuditCommitteeiscomposedsolelybynon-ExecutiveBoardMembers

andisheadedbyDieterA.Enkelmann.GianluigiBertolliandRolfStahelarethe

AdditionalMembers.

FourmeetingsoftheAuditCommitteetookplacein2008.

52 CosmoPharmaceuticalsAnnualReport2008–Corporategovernance

Executive Management

TheManagementisresponsiblefortheoperationalmanagementofCosmo

PharmaceuticalsS.p.A.inlinewiththeinstructionsissuedbytheBoardofDirectors.

Cosmohasgrownbasedonastrong,focussedManagementTeamencompassing

skillsacrossthespectrumofdisciplinesrequiredforanemergingfullyintegrated

specialtypharmaceuticalcompany.TheCompanyhasaninternationallyexperi-

encedandentrepreneurialManagementTeamofpharmaceuticalindustryexecu-

tivesandrecognizedexpertsintheirfieldwithdiversebackgroundsandcomple-

mentaryskillsinresearch,development,regulation,manufacturing,sales,

marketingandfinance.

M. S. AjaniFounder and

Chief Executive Officer

G. CiprianoChief Operating Officer

R. VillaChief Manufacturing Officer

M. LecchiDeputy Chief Financial Officer

G. CelascoChief Medical Officer

R. BozzellaR&D

RegulatoryAffairs

Manager

R. JonesClinical

Operations Manager

M. SuraceMedical

Manager

F. RasettiRegulatory

Manager

A. LovatiQuality

AssuranceManager

M. AlbasiniTechnicalDirector

C. TannerChief Financial Officer

L. MoroChief Scientific Officer

M. PedraniHead of Business

Development Generics

G. Naccari Head of IBD Business

Development

Totalemployeesasat31December2008:131• Production&Logistics:90• Administration&Finance:17• Research&Development:24

Corporategovernance–CosmoPharmaceuticalsAnnualReport2008 53

Members of the Management

Mauro S. Ajani

Italian(born1955),ChiefExecutiveOfficerofCosmoPharmaceuticalsS.p.A.and

MemberoftheBoardofDirectors.

Marco Albasini

Italian(born1969),TechnicalDirectorofCosmoS.p.A.since2006.From2004to

2005hewasqualitymanagerofGentiumS.p.A,Como,Italy.From2001to2003he

wasthequalitycontrolmanagerofthefinechemicalbusinessunitofZambon

GroupSpa,Vicenza,Italy,companiesinthefieldofAPIsandrelatedservices.From

1995to2001hewasqualitycontrolmanagerofTecresSpa,acompanyinthefield

ofsterilemedicaldevices.Heholdstwodegrees:chemistry&pharmaceutical

technologiesandpharmacy.

Roberta Bozzella

Italian(born1974),R&DRegulatoryAffairsManagerofCosmoResearch&Devel-

opmentS.r.l.Sheholdsauniversitydegreeinpharmaceuticalchemistryfrom

theUniversityofMilan.ShejoinedtheGroupin2002,comingfromSPA,anItalian

pharmaceuticalcompanywhereshewasthequalityassurancemanager.At

Cosmosheisresponsiblefortheregulatorydesignofthepipelinedevelopment

projects.From1999to2002sheworkedasqualityassurancemanageratasmall

Italianpharmaceuticalcompany(SocietàProdottiAntibioticiS.p.A.).

Giuseppe Celasco

Italian(born1941),ChiefMedicalOfficerofCosmoResearch&DevelopmentS.r.l.

HegraduatedinmedicineandsurgeryattheUniversityofGenova,Italy(1967).

Hebeganhiscareerasaresearcherinthefieldoftoxicologyandendocrinologyin

theWarner-VisterInstituteforResearchonSteroidsin1969,andwassubsequently

appointedresponsibleforthedepartmentofpharmacologyandtoxicologywithin

thesameresearchinstitute(1972–1985).Hetaughtexperimentalendocrinology

attheUniversityofPavia(1972),andgeneralpathologyandocularpathologyatthe

AdvancedInstituteofOptometricSciencesofMilan(1973–1975).From1985to1995

hewasseniormedicaladvisorofParkeDavisS.p.A.,and,from1995to2000,director

ofscientificaffairsandregulatoryaffairsmanagerwithinthesamecompany.Heis

authorof59scientificcontributions.HejoinedtheGroupin2001.

54 CosmoPharmaceuticalsAnnualReport2008–Corporategovernance

Giuseppe Cipriano

Italian(born1957),ChiefOperatingOfficerofCosmoS.p.A.since2001.From1996to

2001hewasmanagingdirectorofGianFrancoFerrèS.p.A.andGianFrancoFerrè

USAHolding,thewell-knownfashiongroup.From1990to1996hewasthemanag-

ingdirectorofCordaraS.p.A.andEcorImpiantiS.r.l.,companiesinthefieldof

commercializationofoilproductsandrelatedservices.From1982to1990hewas

avice-president(vicedirettore)inthePublicAdministrationInlandRevenue

DepartmentinMilan.

Richard Jones

British(born1969),ClinicalOperationsManagerofCosmoTechnologiesLtd.,which

istheinterfaceoftheGroupwithCROsinchargeofconductingtheclinicaltrials.

HejoinedtheGroupinFebruary2006.From1996to1999,RichardJonesworkedas

aclinicalscientistfortheNationalHealthService,UniversityHospitalBirmingham,

UK.From1999to2005,heworkedwithICONClinicalResearch,firstasadrugsafety

associate,thereafterasaprojectmanagerandfinallyasaseniorprojectmanager.

BeforehejoinedtheGroup,heheldapositionwithNabiBiopharmaceuticals

Europeasaclinicalprojectmanager.HeholdsaPhDinclinicalbiochemistryfrom

TrinityCollege,Dublin.

Marco Lecchi

Italian(born1964),DeputyChiefFinancialOfficerofCosmoPharmaceuticalsS.p.A.

HejoinedtheGroupin2001;from1999to2001heworkedasdirectorofadminis-

trationofGianfrancoFerrèS.p.A.anditssubsidiaryGFManufacturingSrlandfrom

1992to1999heworkedataninternationalauditfirm.In1999hegainedadmit-

tancetotheOfficialRegisterofPublicAuditor.MarcoLecchiobtainedhisdegreein

economicsandbusinessadministration,specializinginfinancialadministration,

fromtheBocconiUniversityinMilan.

Andrea Lovati

Italian(born1967),QualityAssuranceManagerofCosmoS.p.A.since1999.From

1997to1999hewasresponsibleforqualitycontroloflabsinCosmoS.p.A.From

1996to1997hewasresponsibleofthequalitycontrolchemicallabinParkeDavis

S.p.A.HebeganhiscareerasanalystinFormentiS.p.A.(1995).Heholdsadegree

inpharmaceuticalchemistryandtechnologyfromtheUniversityofMilan,Italy.

Corporategovernance–CosmoPharmaceuticalsAnnualReport2008 55

Luigi Moro

Italian(born1951),ChiefScientificOfficerofCosmoResearch&DevelopmentS.r.l.

HegraduatedinchemistryandpharmacologyattheUniversityofMilan.Hebegan

hiscareerin1976withFarmitalia–CarloErba,workingondiscovery/preclinical

phasetechnologicalprojectsandthedevelopmentofnewdrugadministration

systems,withparticularconcentrationonanti-cancerdrugs.

From1985to1988,withRecordatiIndustriaChimicaeFarmaceuticaS.p.A.,he

collaboratedonthedirectionoftechnologicalprojectsoftheparentcompanyand

inthedefinitionofdrugdeliverysystemsdevelopedbythesubsidiarycompany

Pharmetrix,aCaliforniancompanyspecializingintheapplicationofpolymermem-

branesandcontrolsystemsforproblemsrelatingtothecontrolledadministration

ofdrugs.Hewasappointedmanagerofthepharmaceuticaltechnologylaboratories

ofPoliIndustriaChimicaS.p.A.in1988andfrom1990to1995,hecoordinatedthe

company’sresearchactivitiesandindustrialapplicationsinthepharmaceutical,

synthesisandfermentationsector.In1996,hebecamemanagerofindustrialdevel-

opment,responsiblefortheidentificationofthetechnicalresourcesandfacilities

fortheindustrialimplementationofdevelopmentprojects.Heistheauthorof

numerousscientificpublicationsandpapersandinventorofnumerousinternational

technologypatents.HejoinedtheGroupin1999.

Gian Carlo Naccari

Italian(born1941),HeadofIBDBusinessDevelopmentofCosmoTechnologiesLtd.,

hasbeeninthepharmaceuticalbusinessfor40yearsandisconsideredoneofthe

leadingIBDexpertsinthefield.From1998to2006hewastheheadofprescription

drugsandheadofbusinessdevelopmentatGiulianiS.p.A.andwasassuchthe

interfacewithCosmoformanyyears.From1994to1997hewasmanagingdirector

forEuropeofOsteotechInc,aleadingbonereplacementandmedicaldevice

company,andfrom1989to1992hewasmanagingdirectorofCentocorItaly.Prior

tothathewasatGiulianiS.p.A.,GistBrocades,ItalfarmacoandPfizer.

Massimo Pedrani

Italian(bornin1954),HeadofBusinessDevelopmentGenericsofCosmoS.p.A.,

beganhiscareerasaresearcherinthegalenicallaboratoryofMidyS.p.A.(Sanofi

Group)in1981andthenworkedasresponsibleforpharmaceuticaldevelopment

departmentinPierrelS.p.A.from1983to1987.HethenjoinedFarmitalia–Carlo

Erba(ErbamontGroup)assupervisorofexternalresearchinstitutesandhead

oftheindustrialgalenicslaboratoriesuntil1992.During1992to1996,hewasthe

managingdirectoroftheItaliansubsidiaryofAppliedAnalyticalIndustriesInc.,

56 CosmoPharmaceuticalsAnnualReport2008–Corporategovernance

aUScompanyoperatinginthepharmaceuticalresearchandservicessector.Since

1997,hehasworkedasapharmaceuticalbusinessdevelopmentandregulatory

affairsconsultantthroughhisowncompany,EmmepiPharmaSAS.HejoinedCosmo

asanExternalConsultantinJuly2001.Hegraduatedinchemistryandpharmaceut-

icalTechnologyfromUniversityofPavia.

MemberoftheboardoftheItalianPharmaceuticalAssociation,sinceFebruary

1992,andoftheControlledReleaseSocietyItalianChapter,sinceJune1998.

Francesca Rasetti

Italian(born1966),RegulatoryManagerofCosmoS.p.A.since1999.Shegraduated

inpharmacyfromtheUniversityofMilanin1990.Sheholdsaspecializationin

pharmacologyandaPhDinpharmacognosyfromtheUniversityofMilan.From

1996to1997sheworkedinParkeDavisS.p.A.assenioranalystinlaboratoryand

wasresponsibleoftheanalyticalvalidationstudies.ShebeganhercareerinCosmo

in1997asaLaboratorySeniorAnalyst.Sheisresponsibleforthesupervisionofthe

manufacturingprocessvalidationandforthecleaningvalidation.

Matteo Surace

Italian(born1972),MedicalManagerofCosmoResearch&DevelopmentS.r.l.He

graduatedatUniversityofMilan.Afterthepost-graduatecourseingynaecology

andobstetricsattheMilanUniversityofSanRaffaeleHospital,heworkedas

gynaecologistbetween2003and2005.BeforejoiningCosmo,heservedasmedical

directorandscientificdirectorofSOFARS.p.A.Duringthisperiodhisactivitywas

mostlyconcernedwithgastroenterology(inparticularfocusingonInflammatory

BowelDisease)butalsowithgynaecology,dermatologyandurology.Hetook

careandsupervisedclinicaltrials,mainlypostmarketing,andscientifictraining

ofthefieldforce;healsocollaboratedwithmarketingmanagementandregulatory

affairsmanagementforthedevelopmentoftheproducts.Heistheauthorofa

numberofscientificpublications.HejoinedCosmoin2008.

Chris Tanner

Swiss(born1951),ChiefFinancialOfficerofCosmoPharmaceuticalsS.p.A.,Member

oftheBoardofDirectors.

Roberto Villa

Italian(born1943),ChiefManufacturingOfficer,joinedCosmoS.p.A.whenitwas

established.Hehassignificantexperienceinmultinationalpharmaceutical

Corporategovernance–CosmoPharmaceuticalsAnnualReport2008 57

companies.Hebeganhiscareerasalaboratoryanalyst,andwaspromotedover

theyearstoproductionmanager,headofdevelopmentlaboratories,andfinally,to

theheadofqualitycontrolandqualityassurancelaboratories.Giventheexperi-

enceacquiredinvariouspharmaceuticalsectors,hewasappointedasChief

ManufacturingOfficerofCosmoS.p.A.andisresponsibleforthesupervisionofall

industrial,logisticandqualityaspectsofitsproductionfacilities.

Board of Statutory Auditors

TheBoardofStatutoryAuditorsiscomposedofthreePermanentAuditors,plustwo

DeputyAuditors,withprioritygiventotheeldest,whowouldautomaticallyreplace

aStatutoryAuditorwhoresignsorisotherwiseunabletoserveasaStatutory

Auditor.AtleastonepermanentMemberandonedeputyMemberoftheBoardof

StatutoryAuditorsmustberegisteredwiththenationalregisterofauditors

(RegistrodeiRevisoriContabili).

TheBoardofStatutoryAuditorsoverseestheCompany’scompliancewiththe

lawandwiththeArticlesofAssociation,verifiestheCompany’sadherencetogood

principlesofadministration,andassessestheadequacyoftheCompany’sinternal

controlsandaccountingreportingsystems,aswellastheeffectivenessoftheprovi-

sionsconcerningthesupplyofinformationtoandfromtheCompany’ssubsidiar-

ies.ThereviewperformedbytheBoardofStatutoryAuditorsdoesnotconstitute

anauditinaccordancewithItalianauditingstandards.

Members of the Board of Statutory Auditors

• FabrizioGardi(60),Auditor(Chairmanoftheapprovalofthe2008financial

statementsBoardofStatutoryAuditors)

• AndreaRighetti(54),Auditorapprovalofthe2008financialstatements

• MariaCristinaChioda(42),Auditorapprovalofthe2008financialstatements

Compensation, shareholdings and loans

Compensation of Board of Directors and Board of Statutory Auditors

AccordingtoItalianlawthetotalcompensationoftheBoardofDirectorsissetby

theordinaryshareholders’meetingandtheallocationismadebytheBoardof

Directors.Compensationforthethree-yearperiodstarting2007hasbeensetby

CosmoPharmaceuticalsS.p.A.’sordinaryshareholders’meetingon14December

2006,atEUR400,000peryearforthewholeBoard.Additionalcompensationof

certainMembersoftheBoardofDirectorswhoareappointedtocertainspecific

functionsisdeterminedbytheBoardofDirectors.ChrisTanner’sremunerationis

58 CosmoPharmaceuticalsAnnualReport2008–Corporategovernance

includedintheManagementcompensationfiguresandexcludedinthecorrespond-

ingfiguresfortheBoardofDirectors.

ThecompensationoftheMembersoftheBoardofStatutoryAuditorsisin

accordancewiththeprofessionalfeessetbytheNationalAssociationofPublic

Auditors.ThetotalremunerationfortheMembersoftheBoardofStatutoryAuditors

ofCosmoPharmaceuticalsS.p.A.amountedtoEUR19.6thousandin2008andhas

beensetbythe2006ordinaryshareholders’meetingtoEUR19.6thousandforthe

followingyears.

EUR

Board of Directors

Function Base compensa-tion

Additional compensa-tion

Cash bonus Fringe benefits

Stock options **

Total compensa-tion

RolfStahel non-

Executive

Chairman

80,000 – – – 74,352 154,352

MauroS.

Ajani

Deputy

Chairman

CEO

200,000 – – – – 200,000

Gianluigi

Bertolli

Member,

non-

Executive

30,000 – – – 25,367 55,367

Alessandro

DellaChà

Member,

non-

Executive

30,000 – – – 25,367 55,367

DieterA.

Enkelmann

Member,

non-

Executive

30,000 10,000 – – 25,367 65,367

ChrisTanner Member,

Executive

CFO

177,000 * – 20,000 * – 156,580 * 353,580 *

Friedrichvon

Bohlenund

Halbach

Member,

non-

Executive

30,000 – – – 25,367 55,367

Total 577,000 10,000 20,000 – 332,400 939,400

Compensation of Board of Directors and Board of Statutory Auditors

*CompensationasCFO

**CosttotheCompanyofstockoptionsallocatedin2007

Corporategovernance–CosmoPharmaceuticalsAnnualReport2008 59

Additional fees and remuneration

StudioBertolli,throughitsmanagingpartnerDrGianluigiBertolli,whoisthe

Company’sTaxAdvisoronthemajorityofItaliantaxissues:EUR29thousand.

StudioLegaleEdoardoRiccieAssociati,Milan,throughtheintermediationof

Avv.AlessandroDellaChà,whoistheCompany’sLegalAdvisoronallItalianand

manyinternationalcorporatematters:EUR226.9thousand.

Stock option plan

TheCompensationCommitteedidnotallocateanyoptionsin2008.

In2007theoptionswereallocatedasfollows:

Allocationtonon-ExecutiveMembersoftheBoard

AllocationtoExecutiveMembersoftheBoardandMembersofManagementif

allocationexceeds100,000shares

EUR

Executive Management No. of members

Base compensa-tion

Cash bonus Fringe benefits

Stock options

Total compensa-tion

ExecutiveManagement 13members 1,126,457 123,960 22,013 306,600 1,579,030

Highestpaidof13member 155,000 15,000 – 83,100 253,100

Compensation for Management

RolfStahel Chairman 117,936

GianluigiBertolli Member 40,236

FriedrichvonBohlen

undHalbach

Member 40,236

AlessandroDellaChà Member 40,236

DieterA.Enkelmann Member 40,236

ChrisTanner MemberoftheBoard

andCFO

248,364

GiuseppeCipriano COO 131,812

LuigiMoro CSO 131,812

Othermembersof

Management

222,700

Unallocatedshares 373,944

60 CosmoPharmaceuticalsAnnualReport2008–Corporategovernance

On18December2007theBoardofDirectorsgrantedatotalof1,013,568options;

theyvestafterthreeyearsandtheycanbeexercisedatapriceofCHF22pershare

until14December2011.In2008noadditionaloptionsweregranted.Italianlaw

doesnotforeseethecreationoftheconditionalcapitalforstockoptionplans.The

sharecapitalwillthusnotbeincreaseduntilsuchtimewhentheoptionholders

executetheiroptions.

Thefairvalueofoptionsgranted,determinedusingtheblack-scholesvaluation

model,resultedinavalueofCHF3.14peroption.Theoptionsgrantedarerecognized

ascostsoverthevestingperiodfrom18December2007to18December2010.

Management transactions

PursuanttotheSIXSwissExchangeDirectiveontheDisclosureofManagement

Transactions,effectiveasof1July2005,membersoftheboardofdirectorsandof

themanagementofacompanylistedontheSIXSwissExchangearerequiredto

reporttransactionstheycarriedoutdirectlyorindirectlyinshares,call-and-put

optionsandconversionandsimilarrightswithrespecttosharesoftheissuer

withintwostockexchangetradingdays.Transactionsmustalsobereportedifthey

arecarriedoutbyorontheaccountofathirdparty,butthedecisionwasmade

byorsignificantlyinfluencedbyamemberoftheboardofdirectorsormanagement.

Dependingonthevolumeofsuchtransactions,theissuerisrequiredtoinformthe

SIXSwissExchangeofsuchtransactionswithintwostockexchangetradingdaysor

attheendofeachcalendarmonth.TheSIXSwissExchangewillpublishsuch

transactions,indicatingthepositionofthereportingpersons(butnottheirnames).

ThisdirectiveisalsobindingfortheCompany.

Intheyear2008thefollowingshareswereboughtbyMembersoftheBoardof

Directors,theBoardofStatutoryAuditorsandExecutiveManagement:

NosharesweresoldbyMembersoftheBoardofDirectors,theBoardofStatutory

AuditorsandExecutiveManagement.

Shares purchased in 2008 Purchased

MauroS.Ajani 15,600

GisellaDeSena(MauroS.Ajani’swife) 13,900

DieterA.Enkelmann 1,800

AlessandroDellaChà 14,100

SuzanneTanner(ChrisTanner’ssister) 2,900

Corporategovernance–CosmoPharmaceuticalsAnnualReport2008 61

Share purchases by the Company

TheCompanyenteredintoamarket-makingagreementwithawell-knownbank

on5October2007.TheCompanyselectivelybuysandsellssharestosupportthese

activities.AtyearendtheCompanyhad45,992sharesonitsbookspurchased

atanaveragepriceofCHF13.09.

Loans granted by the Group to Members of Board of Directors or

Management

NocompanyoftheGrouphasgrantedanyloansorguaranteestoanyMember

oftheBoardsofDirectors,theBoardofStatutoryAuditorsorMembersofthe

Management.

Shareholders’ rights

Eachsharecarriesonevote.Holdersofthesharesareentitledtoattendandvoteat

shareholders’meetingsonthebasisofonevoteforeachshareheld,although

sharesheldinbreachofcertainprovisionsofapplicablelawand/ortheCompany’s

ArticlesofAssociationmaynotbevoted.

Aninvestorwhoacquires33.33%ormoreoftheCompany’svotingsharecapital

hastolaunchapublicofferforallsharesasrequiredSwisstenderofferrules

apply.TheBoardofDirectorshastheauthorityundertheArticlesofAssociationto

takeanyandallactionitdeemsnecessary,initssolediscretion,inordertocause

ashareholdertocomplywiththisobligation,andtodisallowanyshareholderwho

doesnotcomplywithitsobligationtolaunchapublicoffertovoteattheshare-

holders’meeting.

TheArticlesofAssociationalsorequireinvestorsinthesharestonotifythe

Companyofcertainacquisitionsanddispositionsofshares.

Toattendameeting,theownersofsharesarerequiredtoinstructanyrelevant

authorizedintermediarywithwhichtheiraccountsareheldtoprovidetothe

Companyadmissioncertificatesornoticepursuanttosection2,370oftheItalian

civilcodeatleasttwoworkingdayspriortothefirstdatesetforthemeeting.

TheCompany’sshareholdersmayappointproxiesinwriting.Proxiesarevalid

onlyforsinglemeetings(including,however,thefirst,secondandsubsequent

calls).Generalproxiescanbereleasedonlybycompanies,associations,foundations

orotherlegalentitiesorinstitutions,andonlytotheirownemployees.

Directors,StatutoryAuditors,IndependentAuditorsandemployeesofthe

Companyorofitssubsidiaries,orasubsidiaryitself,maynotactasproxiesfor

shareholders.Ashareholdermayalsoappointanothershareholdertorepresent

itatshareholders’meetings.

62 CosmoPharmaceuticalsAnnualReport2008–Corporategovernance

Dividends, allocation of annual net profits and other financial rights

Asamatterofpractice,annualdividendsareproposedbytheBoardofDirectors

andaresubjecttoapprovalbytheshareholders,usuallyattheannualshareholders’

meeting,whichmustbeconvenedwithinsixmonthsaftertheendofthefiscalyear

towhichthedividendrelates.Dividendsarepayableonthedatespecifiedbythe

shareholders’resolutionattheannualmeetingontheaccountofeachshareholder

throughtherelevantintermediaries.

Pre-emptive rights

Newissuesofshares,whethersharesorotherclassesofsharecapital,areauthor-

izedbyaresolutionoftheshareholderspassedatanextraordinarymeeting.

PursuanttoItalianlaw,holdersofordinarysharesareentitledtosubscribefornew

issueofshares,debtinstrumentsconvertibleintosharesandanyotherwarrants,

rightsoroptionsentitlingtheholdertoacquireshares,ineachcaseinproportion

totheirrespectiveshareholdings.

Minority shareholders’ rights

MinorityshareholdershavetherighttoappointoneDirectorandoneStatutory

AuditoroftheCompany,eachshareholdermaybringtotheattentionoftheBoard

ofStatutoryAuditorsfactsoractsthatsuchshareholderbelievestobewrongful.

Ifshareholders,representingatleast2.0%ofthesharecapitaloftheCompany,

submitacomplainttotheBoardofStatutoryAuditors,theBoardmustinvestigate

withoutdelayandmustreportitsfindingsandrecommendationstotheshare-

holders’meeting.

Shareholdersrepresentingatleast5.0%ofthesharecapitaloftheCompany

havetherighttoreportmajorirregularitiesintheManagementoftheCompanyto

thecourtwheretheCompanyhasitsdomicile.

Forcompanieswhosesharesarelistedonrecognizedstockexchanges,aquali-

fiedminorityofshareholdersrepresenting2.5%oftheoutstandingsharecapital

canbringanactionagainsttheBoardofDirectorsforthebenefitoftheCompanyas

awhole.ThisactioncanbesettledbytheCompanyonlyifthereisnottheoppos-

itionofshareholdersrepresenting5%oftheoutstandingsharecapital.Thesame

actioncanbebroughtagainsttheStatutoryAuditors,astheyarejointlyandsever-

allyliablewiththeDirectors,forwhatevernegligenceormisconductofthelatter.

Independent Auditors

Duration of the mandate and term of office of the Independent Auditors

CosmohasappointedtheauditingcompanyMazars&GuerardS.p.A.,Milan,asits

IndependentAuditorson14December2006.TheyhavenotservedasAuditorsof

theCompanybefore.Mazars&GuerardS.p.A.hasauditedthecombinedfinancial

statements(balancesheet,incomestatement,statementofcashflowandstate-

mentofchangesinequityandthenotestheretoofCosmoS.p.A.andCosmo

TechnologiesLtd.)forthethree-yearperiod2004/2005/2006,andpreparedthe

2006stand-alonefinancialstatements(balancesheet,incomestatementandthe

notesthereto)oftheCompanyfortheIPO.Mazars&GuerardS.p.A.hasbeenalso

appointedfortheauditofthe2007and2008consolidatedfinancialstatements

andstand-alonefinancialstatements(balancesheet,incomestatementandthe

notesthereto)oftheCompany.

Suchappointmentshallexpirewiththeapprovalofthe2008financialstate-

ments.CarloConsonniisthePartnerinchargeforthereportoftheIndependent

Auditors.

Auditing honorarium

Mazars&GuerardS.p.A.’shonorariumsfor2008amountedtoEUR53thousand.

Additional honorariums

NootherhonorariumshavebeenpaidtotheIndependentAuditors.

Change of control and defences measures

Information and control instruments vis-à-vis the Board of Directors

ItalianlawprescribesthenominationofanexternalBoardofStatutoryAuditors

whichhasextensiverightstoreportitsfindingstotheBoardofDirectors.The

BoardofDirectorsiscurrentlyscheduledtomeetatleastfourtimesayearplusa

budgetmeetingplusameetingtodiscussandapprovethefinancialstatements.

Furthermeetingswillbecalledasneeded.TheBoardofDirectorshassetaseriesof

benchmarksandparameterstotrackthefinancial,scientific,product,andproduc-

tiondevelopmentoftheCompany.Thesebenchmarksandparametersareregularly

reviewed.

Information policy

CosmoPharmaceuticalsS.p.A.iscommittedtoaclear,transparent,consistentand

non-selectivedisclosureofmaterialinformation.InaccordancewiththeItalian

Corporategovernance–CosmoPharmaceuticalsAnnualReport2008 63

64 CosmoPharmaceuticalsAnnualReport2008–Corporategovernance64 CosmoPharmaceuticalsAnnualReport2008–Corporategovernance

andtheSIXSwissExchangerules,CosmoPharmaceuticalsS.p.A.providescomplete

anddetailedinformationonannualandhalf-yearreports.TheCompanypublishes

additionalinformationonimportantevents.

TheCompanyhasformulatedacorporatecommitmenttokeepitsinvestors

fullyapprisedofCompany’sdevelopments.TheCEO,CFOandHeadofInvestor

Relationsareresponsibleforcommunicationwiththefinancialcommunity.The

CompanyadheresstrictlytotheadhocpublicityrulesoftheSIXSwissExchange

andhasissuedallpressreleasestoawiderangeofinternationalagenciesinthe

immediateperiodbeforethestockmarketopeningafterhavingnotifiedtheSIX

SwissExchange.Inselectivecasessuchasthepresentationofthesemi-annual

report,theCompanyhasalsoinvitedshareholdersandthefinancialpressto

conferencecallsandselectivenewsevents.

PursuanttotheArticlesofAssociation,noticesaremadebypublicationinan

Italiannewspaperchosenamong“IlCorrieredellaSera”,“LaRepubblica”,“IlSole

24Ore”,intheEnglishnewspaper“TheFinancialTimes”andintheSwissnewspaper

“NeueZürcherZeitung”.

IntheeventthepublicationinadailyItaliannewspaperisnotpossible,under

applicableItalianlaw,theCompanypublishesnoticesandotherannouncements

intheItalian“GazzettaUfficiale”.Noticesarealsotobepublishedasrequiredby

thelistingrulesoftheSIXSwissExchange.

66 CosmoPharmaceuticalsAnnualReport2008

Ulcerative colitis (Uc) has attacked aroUnd 0.24% of the Us popUlation. in eUrope, this horde is wreaking similar havoc.

at the observation centre:

"oh dear, instead of fighting the Uc, these pills fire too early jUst caUsing strong, adverse side effects."

"this is too horrible to watch: now they explode. withoUt even crossing the small intestine!"

CosmoPharmaceuticalsAnnualReport2008 67

"the Uc is terrible! bUt chasing him away doesn’t need to mean hUrting the whole body as the other pills did. me and my team have a better tactic ...”

"agent mmx team watch carefUlly: that's him. the gUy that grabs hold of the colon, attacks and leaves a bloody trail of destrUction. it comes back to haUnt Us time after time."

"those pills are no good. i need to send in the agent mmx team. they have extraordinary powers, they can do it!"

–

68 CosmoPharmaceuticalsAnnualReport2008

“i need a 24-hoUr permanent combat in all areas. no limitations. yoU know what to do – no collateral damage and no wastage. i’m going to send all of yoU on yoUr mission at the same time. it’s easier and qUicker.”

"beware Uc! i'm getting ready to find yoU. there's no escape!"

CosmoPharmaceuticalsAnnualReport2008 69

“observation centre to agent mmx: hold yoUr fire, yoU aren’t there yet!”

“this is it. now i’m entering the colon battle zone.”

"so, this is where the other pills fired – i can see the holes. no wonder they had no ammUnition later. what amateUrs ..."

70 CosmoPharmaceuticalsAnnualReport2008

"this looks dreadfUl. the Uc has been here!"

"and this is where the other pills exploded – i have to be carefUl. bUt my UniqUe composition and matrices seqUence coating protects me."

CosmoPharmaceuticalsAnnualReport2008 71

"now it's action time: by Using hydrophilic matrices the medicine grafts to the wall's mUcosal layer where the attacker is."

“i have got to beat him down and contain the damage."

72 CosmoPharmaceuticalsAnnualReport2008

"cUrsed agent mmx! yoUr colleagUes already nerved me. and now yoU! yoU've made me lazy and tired – i better rest for a while now. bUt remember, this isn't over yet!"

“Uc – this shoUld keep yoU Under control . yoU better give Up now.”

CosmoPharmaceuticalsAnnualReport2008 73

"he may be back tomorrow – bUt so will we! i promise: there's light at the end of the tUnnel for all who sUffer from Uc."

"my colleagUes - yoU did a great job! the Uc is contained!"

Financialreview–CosmoPharmaceuticalsAnnualReport2008 75

In2008,Cosmo’srevenuegrewby56.0%toEUR34,173

thousand.Thisenabledittomovefromanetprofit

aftertaxesofEUR116thousandtoanetprofitafter

taxesofEUR9,401thousand.

TheagreementsignedwithSantaruson10Decem-

ber2008hadamaterialimpactonthe2008resultsof

theCompany.SantaruspaidCosmoUSD2.5millionin

cashatsigningandissuedtoCosmosixmillionshares

ofSantaruscommonstock.Furthermore,Santarus

agreedtoreimbursetotheCompanyalloftheaccrued

2008costsfortheUStrialsandtobearallthefuture

costsoftheUSclinicaltrials.

Revenue

Overall,therevenuerelatedtoownproducts(which

includesmanufacturingofMMX®products,licence

fees,upfrontfeesandmilestonesandroyalties)

increasedfromEUR7,326thousandtoEUR21,073

thousandor187.6%.Thisisanindicationofthe

transformationprocesstheCompanyisgoingthrough.

In2008,CosmoPharmaceuticalshadastrongyear:

Thedecreaseinrevenuefrommanufacturingof

genericproductsandspecialtydrugsforthirdparties,

Financialreview

EUR1,000 Year ended 31 December 2008 Year ended 31 December 2007

% of revenue % of revenue

Manufacturingonbehalfofthirdparties:

Manufacturingofgenericproductsandspecialtydrugs 12,375 36.2 13,558 61.9

ManufacturingofMMX®products 7,147 20.9 2,670 12.2

Relatedservices 564 1.7 703 3.2

Otherrevenuesfromsales 161 0.5 313 1.4

Licencefees,upfrontfeesandmilestones 10,388 30.4 3,502 16.0

Royalties 3,538 10.4 1,154 5.3

Totalrevenue 34,173 100.0 21,900 100.0

EUR1,000 Year ended 31 December 2008 Year ended 31 December 2007

% of revenue % of revenue

Ownproducts 21,073 61.7 7,326 33.5

Third-partyproducts 13,100 38.3 14,574 66.5

Totalrevenue 34,173 100.0 21,900 100.0

76 CosmoPharmaceuticalsAnnualReport2008–Financialreview

duetoadecreaseintheproductionofgenericprod-

uctsasaconsequenceoflowerordersfromcustomers

in2008,wasoffsetbythestrongincreaseinthemanu-

facturingofMMX®productsbyEUR4,423thousand

or167.7%toEUR7,147thousand.Strongestgrowth

wasseeninlicencefees,upfrontfeesandmilestones

(mainlyEUR7,737thousandforBudesonideMMX®

andEUR2,486thousandforRifamycinSVMMX®),which

jumpedby196.6%toEUR10,388thousand,andin

royaltiesforLialda™/Mezavant®,whichincreased

by206.6%toEUR3,538thousand.

Net operating expenses

Researchanddevelopmentcostexpensedintheprofit

andlossdecreasedbyEUR485thousand.However,

in2008theGroupcapitalizeddevelopmentcostsfor

anamountof3,779thousandincludingoutsourced

clinicaltrialcosts(morethan90percentoftheamount

capitalized),material(API,excipient)fortheprep-

arationofclinicalbatchesandpersonnelexpenses

directlyrelatedtoBudesonideMMX®project.

EUR1,000 Year ended 31 December 2008 Year ended 31 December 2007

% of revenue % of revenue

Otherincome 47 0.1 516 2.4

Costofsales (13,203) (38.6) (13,162) (60.1)

Researchanddevelopmentcosts (4,287) (12.5) (4,772) (21.8)

Selling,generalandadministrativecosts (5,546) (16.2) (4,730) (21.6)

Totalnetoperatingexpenses (22,989) (67.3) (22,148) (101.1)

EUR1,000 Year ended 31 December 2008 Year ended 31 December 2007

% of revenue % of revenue

Otherincome 47 0.1 516 2.4

Changesininventoriesoffinishedgoodsandworkinprogress 148 0.4 380 1.7

Rawmaterialsandconsumablesused (5,791) (16.9) (6,642) (30.3)

Personnelexpenses (7,028) (20.6) (6,629) (30.3)

Outsourcedpreclinicalandclinicaltrialcosts (1,928) (5.6) (2,640) (12.1)

Otheroperatingexpenses (6,836) (20.0) (5,673) (25.9)

Depreciationandamortization (1,601) (4.7) (1,460) (6.7)

Totalnetoperatingexpenses (22,989) (67.3) (22,148) (101.1)

Operating expenses as per nature

Other income

Theitemin2008includesincomeforleaseof

officesarisingfromthesubleaseofsomeoffices

toothercompaniesandotherminorincome.

Changes in inventories of finished goods

and work in progress

Theamountin2008principallyreferstotheincrease

infinishedgoodsandisduetothehigherstockof

Lialda™tablets(59batchesasat31December2008

comparedto46batchesasat31December2007),

requiredtosatisfytheordersfromcustomers.

Raw materials and consumables used

Thedecreaseofcostforrawmaterialsandpackaging

in2008comparedto2007isduetothedifferent

mixofproductsmanufactured–highervolumesof

Lialda™/Mezavant®andlowerordersforgenerics.

Personnel expenses

PersonnelcostincreasedbyEUR399thousandor

6.02%toEUR7,028thousand.Theincreasewas

primarilyduetotheadditionalcostsofsixnew

personshired,increasingtotalpersonnelto131

persons,totheexpensesforstockoptionsandto

theannualbonus;in2007personnelexpenses

includedaonce-onlyloyaltypaymentpaidouttoall

employeestotheamountofEUR1,021thousand.

Growthinpersonnelprimarilycameatfactorylevel

andwasnecessarytostafftheincreasedproduction

runsforLialda™.

Inthetablebelow,weshowthenumberofemploy-

eesbyfunctionasat31December2008.

Staffinproductionandlogisticsinclude16persons

workinginanalytical,chemicalandbiologicallabora-

toriessupportingtheactivityofcontractmanufactur-

ingandrelatedservices.

Outsourced preclinical and clinical trial costs

Preclinicalandclinicaltrialscostsoutsourcedto

subcontractorsandexpensedintheprofitand

lossdecreasedfromEUR2,640thousandtoEUR1,928

thousand;startingfrom2008,asBudesonideMMX®

enteredphaseIII,outsourcedclinicaltrialcosts

relatingtotheEuropeantrialswerecapitalizedand

expensesfortheUSportionoftheBudesonideMMX®

phaseIIIclinicaltrialswerereimbursedbySantarus,

followingthestrategiccollaborationagreement

signedinDecember2008.

Employees as at 31 December 2008 by function

Research&Development 24

Production&Logistics 90

Administration&Finance 17

Total 131

Financialreview–CosmoPharmaceuticalsAnnualReport2008 77

78 CosmoPharmaceuticalsAnnualReport2008–Financialreview

EUR1,000 Year ended 31 December 2008 Year ended 31 December 2007

% of revenue % of revenue

Financialincome 1,369 4.0 870 4.0

Financialexpenses (940) (2.8) (469) (2.1)

Totalfinancialincome 429 1.3 401 1.8

Other operating expenses

OtheroperatingexpensesincreasedbyEUR1,163

thousandor20.5%toEUR6,836thousand.This

increasewasprimarilyduetoheavierexpensefor

investorrelationsactivities,consultancyservices,the

expensefornon-ExecutiveDirectors’stockoptions

grantedon18December2007andtheincreaseofthe

utilitiesandenergycosts.

Depreciation and amortization

Depreciationandamortizationofpropertyandplant

hasremainedlargelyunchangedatEUR1,601thousand.

Financial income and expenses

Financialincomeispositivelyinfluencedbythe

interestreceivedoncashandcashequivalentswhich

wereplacedintimedepositswithbanks;financial

expensesincludetheforeignexchangedifferenceof

EUR519thousandarisingfromthemeasurementat

fairvalueasat31December2008ofSantarusshares

includedinthefinancialassetsavailableforsale.

Income tax expenses

GiventheCompany’sincreaseinprofit,incometaxes

increasedfromEUR37thousandin2007toEUR2,212

thousandin2008.Currentincometaxincludescost

forIRESandothercorporationtaxesandIRAP(which

representsanItalianregionaltaxleviedonoperating

incomepluspersonnelcostsandfinancialcharges

whicharenotconsideredtax-deductible);deferredtax

benefitprimarilyreferstotheutilizedlossescarried

forwardanddeferredtaxexpensesprimarilyrelating

totemporarydifferencesonthedevelopmentcosts

capitalizedinthelocalstatutoryfinancialstatements.

EUR1,000 As at 31 December

Non-current assets 2008 2007

Property,plantandequipment 6,986 6,891

Goodwill 109 109

Otherintangibleassets 6,856 3,175

Financialassets 6,769 –

Deferredtaxassets 1,208 1,434

Othernon-currentreceivables 2,144 1,953

Totalnon-currentassets 24,072 13,562

Assets

Non-current assets

Property,plantandequipmentprimarilyconsists

oftheequipmentintheplantthatisusedfor

themanufacturingoftheMMX®tablets.Nocapacity

additionsweremadebutselectedequipment

wasreplaced.

Intangibleassetsconsistofcostsforfilingand

extensionofpatentsandofdevelopmentcosts

ontheBudesonideMMX®projectcapitalizedstarting

from2008,andamountedtoEUR3,779thousand.

Financialassetsavailableforsalereferstothe

investmentinSantarusshares:accordingtothe

strategiccollaborationagreementwithSantarus,

grantingSantarusexclusiverightstodevelopand

commercializeBudesonideMMX®andRifamycinSV

MMX®fortheUSmarket,Cosmoreceived,inaddition

tocashofUSD2.5million,sixmillionofnewlyissued

sharesofSantaruscommonstock,thataresubjectto

aninitial15-monthrestrictionontheirsaleortransfer.

Thereductionindeferredtaxassetsisdueto

theutilizationoflossescarriedforwardandispartially

compensatedbythedeferredtaxassetsonchange

inthefairvaluearisingfromthemeasurementatfair

valueoftheinvestmentinSantarusshares.

EUR1,000 As at 31 December

Current assets 2008 2007

Inventories 1,507 1,549

Tradereceivables 3,549 3,400

Currenttaxassets 578 273

Otherreceivablesand

otherassets

5,893

2,939

Cashandcashequivalents 22,166 25,505

Totalcurrentassets 33,693 33,666

EUR1,000 As at 31 December

Equity 2008 2007

Sharecapital 3,469 3,469

Sharepremium 29,372 29,372

Treasuryshares (394) –

Otherreserves 2,162 2,162

Fairvaluereserves (1,557) –

Stockoptionplanreserve 667 28

Retainedearnings 116 –

Profitfortheperiod 9,401 116

Totalshareholders’equity 43,236 35,147

Financialreview–CosmoPharmaceuticalsAnnualReport2008 79

Current assets

Otherreceivablesandotherassetsincreasedby

EUR2,954thousandtoEUR5,893thousandprimarily

becauseofanamountduebySantarus.According

tothestrategiccollaborationagreement,Santaruswas

topayby31January2009thecostsfortheUSphaseIII

clinicaltrialsofBudesonideMMX®thattheCompany

hadalreadyincurredduring2008.

Equity and liabilities

Equity

Asat31December2008and2007,CosmoPharma-

ceuticalshad13,875,000sharesissued,fullysubscribed

andpaidup,eachsharewithanominalvalueof

EUR0.25,foratotalsharecapitalofEUR3,469thousand.

Non-current liabilities

Non-currentliabilitiesdecreasedfromEUR5,503

thousandtoEUR5,145thousand,duetothereclassifi-

cationoftheshort-termportionofinterest-bearing

loansandborrowingsascurrentliabilities,inaccord-

ancewiththecontractuallyforeseenrepayment

schedulesoftheloanandfinancialleaseliabilities,

partiallycompensatedbytheincreaseindeferred

taxliabilitiesrelatingtotemporarydifferences

onthedevelopmentcostscapitalizedinthelocal

statutoryfinancialstatements.

Current liabilities

Short-terminterest-bearingloans,borrowingsand

bankoverdraftsdecreasedfromEUR1,540thousand

toEUR1,391thousand,duetotherepaymentofloans

andborrowingsinaccordancewiththecontractually

foreseenrepaymentschedules.

EUR1,000 As at 31 December

Current liabilities 2008 2007

Interest-bearingloans,bor-

rowingsandbankoverdraft

1,391

1,540

Tradepayables 4,228 4,162

Deferredincome 1,996 –

Currenttaxliabilities 562 171

Othercurrentliabilities 1,207 705

Totalcurrentliabilities 9,384 6,578

80 CosmoPharmaceuticalsAnnualReport2008–Financialreview

Deferredincomerelatestotheupfrontpayment

receivedfromSantarusandDr.FalkPharmafor

RifamycinSVMMX®thatwillbereversedduring

thenextyearbasedontheadditionalactivities,

whichhavetobeperformedinaccordancetothe

contractualobligations.

CurrenttaxliabilitiesincreasedfromEUR171

thousandtoEUR562thousandprimarilydueto

theincreasein2008incometaxes(IRESandIRAP).

EUR1,000 As at 31 December

Non-current liabilities 2008 2007

Interest-bearingloans

andborrowings

2,903

3,658

Employeebenefits 511 630

Deferredtaxliabilities 1,731 1,213

Othernon-currentliabilities – 2

Totalnon-currentliabilities 5,145 5,503

Consolidatedfinancialstatements–CosmoPharmaceuticalsAnnualReport2008 81

Consolidated income statements

Consolidatedfinancialstatements

EUR1,000 Year ended 31 December

Notes 2008 2007

Revenue 5 34,173 21,900

Otherincome 47 516

Costofsales (13,203) (13,162)

Researchanddevelopmentcosts (4,287) (4,772)

Selling,generalandadministrativecosts (5,546) (4,730)

Netoperatingexpenses 6 (22,989) (22,148)

Operatingresult 11,184 (248)

Financialincome 7 1,369 870

Financialexpenses 7 (940) (469)

Profitbeforetaxes 11,613 153

Incometaxexpenses 8 (2,212) (37)

Profitfortheyear 9,401 116

Earnings per share EUR

Basic 9 0.67773 0.00869

Diluted 9 0.67773 0.00866

82 CosmoPharmaceuticalsAnnualReport2008–Consolidatedfinancialstatements

EUR1,000 As at 31 December

Notes 2008 2007

Assets

Non-currentassets

Property,plantandequipment 10 6,986 6,891

Goodwill 11 109 109

Otherintangibleassets 12 6,856 3,175

Financialassets 13 6,769 –

Deferredtaxassets 14 1,208 1,434

Othernon-currentreceivables 15 2,144 1,953

Totalnon-currentassets 24,072 13,562

Currentassets

Inventories 16 1,507 1,549

Tradereceivables 17 3,549 3,400

Currenttaxassets 18 578 273

Otherreceivablesandotherassets 19 5,893 2,939

Cashandcashequivalents 20 22,166 25,505

Totalcurrentassets 33,693 33,666

Totalassets 57,765 47,228

Consolidated balance sheets

EUR1,000 As at 31 December

Notes 2008 2007

Equity

Sharecapital 3,469 3,469

Sharepremium 29,372 29,372

Treasuryshares (394) –

Otherreserves 2,162 2,162

Fairvaluereserve (1,557) –

Stockoptionplanreserve 667 28

Retainedearnings 116 –

Profitfortheperiod 9,401 116

Totalequity 21 43,236 35,147

Liabilities

Non-currentliabilities

Interest-bearingloansandborrowings 22 2,903 3,658

Employeebenefits 23 511 630

Deferredtaxliabilities 24 1,731 1,213

Othernon-currentliabilities 25 – 2

Totalnon-currentliabilities 5,145 5,503

Currentliabilities

Interest-bearingloans,borrowingsandbankoverdraft 26 1,391 1,540

Tradepayables 27 4,228 4,162

Deferredincome 28 1,996 –

Currenttaxliabilities 29 562 171

Othercurrentliabilities 30 1,207 705

Totalcurrentliabilities 9,384 6,578

Totalliabilities 14,529 12,081

Totalequityandliabilities 57,765 47,228

Consolidatedfinancialstatements–CosmoPharmaceuticalsAnnualReport2008 83

84 CosmoPharmaceuticalsAnnualReport2008–Consolidatedfinancialstatements

Consolidated statements of changes in

shareholders’ equity

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31December2006

8,740,000

2,185

–

370

357

1,850

299

–

(344)

4,717

Issueofshares(Jan.2007) 2,460,000 615 (370) 245

Allocationofpreviousyear

profit/(loss)

(45)

(299)

344

–

Issueofshares,IPO(Mar.2007) 2,675,000 669 32,495 33,164

Sharecapitalissuecosts (3,123) (3,123)

Personnelcostforstockoptions 28 28

Profit/(Loss)fortheyear 116 116

Netequityasat

31December2007

13,875,000

3,469

29,372

–

–

357

1,805

–

–

28

–

116

35,147

Allocationofpreviousyear

profit/(loss)

116

(116)

–

Personnelcostforstockoptions 639 639

Transactionswithtreasury

shares

(394)

(394)

Fairvaluemeasurementof

available-for-salefinancial

assets

(1,996)

(1,996)

Deferredtaxationonfair

valuemeasurement

439

439

Profit/(Loss)fortheperiod 9,401 9,401

Netequityasat

31December2008

13,875,000

3,469

29,372

(394)

–

357

1,805

–

(1,557)

667

116

9,401

43,236

Consolidated cash flow statements

*Reclassifiedfrom“cashflowfrominvestingactivities”

EUR1,000 As at 31 December

Notes 2008 2007

Profitbeforetaxes 11,613 153

Incometaxespaid (1,026) (399)

Foreignexchangeonavailable-for-salefinancialassets 13 519 –

Financialincomeatfairvalueonsubsidizedloans 7 (363) –

Financialexpensesonsubsidizedloansatamortizedcost 7 67 –

Share-payment-basedexpenses 31 639 28*

Depreciationandamortization 10, 12 1,601 1,460

Accrualtoemployeebenefits 23 257 145

13,307 1,387

Changeininventories 42 (583)

Changeintradereceivables (149) (232)

Changeintradepayables 66 (786)

Changeinotherreceivablesandotherassets (2,954) 65

Changeindeferredincome 1,996 –

Changeinothercurrentliabilities 502 (2,112)

Changeincurrenttaxliabilities 83 38

Paymentofemployeebenefits 23 (376) (270)

Cashflowsfromoperatingactivities (12,517) (2,493)

Investments/disposalsin

Investmentsinproperty,plantandequipment 10 (1,370) (949)

Investmentsinotherintangibles 12 (4,019) (113)

Disposalsofproperty,plantandequipment 10 12 1,987

Investmentsinfinancialassetsavailableforsale 5, 13 (9,284) –

Cashflowsfrominvestingactivities (14,661) 925

Changeininterest-bearingloansandborrowings (608) (3,652)

Changeinothernon-currentreceivables (191) (47)

Changeinothernon-currentliabilities (2) (8)

Sharecapitalincrease – 30,286

Purchaseofownshares 21 (394)

Cashflowsfromfinancingactivities (1,195) 26,579

Netincrease/(decrease)incashandcashequivalents (3,339) 25,011

Cashandcashequivalentsatthebeginningoftheyear 25,505 494

Cashandcashequivalentsattheendoftheyear 20 22,166 25,505

Cashathand 5 10

Bankaccounts 22,161 25,495

Totalcashandcashequivalentsattheendoftheyear 20 22,166 25,505

Consolidatedfinancialstatements–CosmoPharmaceuticalsAnnualReport2008 85

86 CosmoPharmaceuticalsAnnualReport2008–Explanatorynotes

Explanatorynotes

1 General information

CosmoPharmaceuticalsS.p.A.withitssubsidiaries

CosmoS.p.A.,CosmoTechnologiesLtd.andCosmo

Research&DevelopmentS.r.l.(“CosmoPharmaceut-

icals”or“Company”or“Group”)isaspecialtypharma-

ceuticalcompany:theCompany’sobjectiveisto

becomeagloballeaderinthemarketofoptimized

therapiesforselectedGastrointestinalDisorders.

TheCompany’sclinicaldevelopmentpipelinespecif-

icallyaddressesinnovativetreatmentsforInflamma-

toryBowelDiseases(IBD),suchasUlcerativeColitis

andCrohn’sDisease,aswellasforColonInfections.

Inaddition,theCompanyisdevelopinganewchem-

icalentityforthetreatmentofAcne,Alopeciaand

Hirsutism.

Since12March2007,CosmoPharmaceuticals’

sharesarepubliclylistedattheSwissStockExchange

(SIX:COPN).TheCompany’sstockmarketcapitaliza-

tionasat31December2008wasequalto

CHF223,387,500.

Headquartersandregisteredaddressareatvia

CristoforoColombo,1–20020Lainate(Milan),Italy.

ThestructureoftheCompanyasof31December

2008isthefollowing:

2 Basis of preparation

The2008consolidatedfinancialstatementshave

beenpreparedinaccordancewiththeInternational

FinancialReportingStandards(the“IFRS”)issued

bytheInternationalAccountingStandardsBoard

(“IASB”).

Thedesignation“IFRS”alsoincludesallvalid

InternationalAccountingStandards(“IAS”),aswellas

allinterpretationsoftheInternationalFinancial

ReportingInterpretationsCommittee(“IFRIC”),

formerlytheStandingInterpretationsCommittee

(“SIC”).

IntheprecedingyearstheCompanyadoptedthe

IFRSandrelatedinterpretationspublishedbyIASB

andendorsedbytheEuropeanUnionwithRegulation

no.1725/2003,butitisnotedthat,withrespecttothe

Company’sfinancialstatements,theywereincompli-

ancewiththeonesadoptedin2008.

Thefinancialstatementsarepreparedusingthe

historicalcostconvention,modifiedasrequired

forthevaluationofcertainfinancialassets,aswellas

onthegoingconcernassumption.Inthisrespect,

despiteoperatinginadifficulteconomicandfinancial

environment,theGroup’sassessmentis

thatnomaterialuncertainties(asdefinedinpara-

graph25ofIAS1)existaboutitsabilitytocontinue

asagoingconcern.

Inordertoprovidethewidestandclearestpossi-

bleinformationonthebusinessoftheCompany,

startingfromthisyear,theManagementhasdecided

toreviewtheformatofpresentationoftheincome

statementusingaclassificationbasedonthefunction

ofexpenses(otherwiseknownasthe“costofsales”

method),ratherthanbasedontheirnature,asthisis

believedtoprovideinformationthatismorerelevant.

Theformatselectedisthatusedformanagingthe

businessandformanagementreportingpurposes

andisconsistentwithinternationalpracticeinthe

phamaceuticalsector.Consequently,theincome

statement2007hasbeenpresentedconsistently

withthesameanalysis.

Theconsolidatedfinancialstatementsare

expressedinthousandsofeurosunlessstatedother-

wise,roundingtheamountstothenearestthousand.

100%Cosmo

Research &Development S.r.l.

100%Cosmo S.p.A.

Cosmo Pharmaceuticals S.p.A.

100%Cosmo

Technologies Ltd.

Explanatorynotes–CosmoPharmaceuticalsAnnualReport2008 87

3 New accounting standards and

IFRIC interpretations

Standards, amendments and interpretations

effective in 2008

Thefollowingstandards,amendmentsandinterpre-

tationstopublishedstandardsaremandatoryfor

accountingperiodsbeginningonorafter1January

2008buttheyarenotrelevanttotheGroup’soperations:

• IFRIC14,IAS19–“Thelimitonadefinedbenefit

asset,minimumfundingrequirementsandtheir

interaction”

• IFRIC11,IFRS2–“Groupandtreasuryshare

transactions”

• IFRIC13,“Customerloyaltyprogrammes”

(effectiveforannualperiodsbeginningonor

after1July2008)

• IFRIC12,“Serviceconcessionarrangements”

Standards, amendments and interpretations to

existing standards that are not yet effective and

have not been adopted early by the Group

Thefollowingamendmentsandinterpretationsto

existingstandardshavebeenpublishedandare

mandatoryfortheGroup’saccountingperiodsbegin-

ningonorafter1January2009orlaterperiods.The

Groupiscurrentlyassessinganyeffectthatthe

adoptionofthesenewstandards,amendmentsand

interpretationstoexistingstandardsmayhaveon

thefinancialstatementsiftheyarerelevantforthe

Groupoperations.

• IAS23(Amendment),“Borrowingcosts”(effective

from1January2009)

• IFRS3(Revised),“Businesscombination”(effective

from1July2009)

• IAS27(Revised),“Consolidatedandseparate

financialstatements”(effectivefrom1July2009)

• IFRS8,“Operatingsegments”(effectivefrom

1January2009)

• IAS1(Revised),“Presentationoffinancial

statements”(effectivefrom1January2009)

• IFRS2(Amendment),“Share-basedpayment”

(effectivefrom1January2009)

• IAS32(Amendment),“Financialinstruments:

presentation”,andIAS1(Amendment),

“Presentationoffinancialstatements”(effective

from1January2009)

• IFRS5(Amendment),“Non-currentassetsheld-

for-saleanddiscontinuedoperations”(and

consequentialamendmenttoIFRS1,“First-time

adoption”)(effectivefrom1July2009)

• IAS28(Amendment),“Investmentsinassociates”

(andconsequentialamendmentstoIAS32,

“Financialinstruments:presentations”,andIFRS7,

“Financialinstruments:disclosure”)(effective

from1January2009)

• IAS36(Amendment),“Impairmentofassets”

(effectivefrom1January2009)

• IAS19(Amendment),“Employeebenefits”

(effectivefrom1January2009)

• IAS39(Amendment),“Financialinstruments:

recognitionandmeasurement”(effectivefrom

1January2009)

• IAS1(Amendment),“Presentationoffinancial

statements”(effectivefrom1January2009)

• IAS38(Amendment),“Intangibleassets”

(effectivefrom1January2009)

• IFRIC16,“Hedgesofanetinvestmentinaforeign

operation”(effectiveforannualperiodsbeginning

onorafter1October2008)

• IAS27(Amendment),“Consolidatedandseparate

financialstatements”(effectivefrom1January2009)

• IAS20(Amendment),“Accountingforgovernment

grantsanddisclosureofgovernmentassistance”

(effectivefrom1January2009)

• IFRIC17,“Distributionofnon-cashassetsto

owners”(effectivefrom1July2009)

• IFRIC18,“Transferofassetsfromcustomers”

(effectivefrom1July2009)

• IAS16(Amendment),“Property,plantand

equipment”(andconsequentialamendmentto

IAS7,“Statementofcashflows”)(effectivefrom

1January2009)

• IAS28(Amendment),“Investmentsinassociates”

(andconsequentialamendmentstoIAS32,

“Financialinstruments:presentation”andIFRS7,

“Financialinstruments:disclosures”)(effective

from1January2009)

• IAS29(Amendment),“Financialreportingin

hyperinflationaryeconomies”(effectivefrom

1January2009)

• IAS31(Amendment),“Interestsinjointventures”

(andconsequentialamendmentstoIAS32and

IFRS7)(effectivefrom1January2009)

• IAS40(Amendment),“Investmentproperty”(and

consequentialamendmentstoIAS16)(effective

from1January2009)

• IAS41(Amendment),“Agriculture”(effectivefrom

1January2009)

• IFRS1(Amendment)“First-timeadoptionofIFRS”,

andIAS27“Consolidatedandseparatefinancial

statements”(effectivefrom1January2009)

• IFRIC15,“Agreementsforconstructionofreal

estate”(effectivefrom1January2009)

4 Accounting policies

Themajoraccountingpoliciesadoptedaredetailed

below.

Basis of consolidation

Theconsolidatedfinancialstatementsincludethe

financialstatementsofCosmoPharmaceuticalsS.p.A.

anditssubsidiariesCosmoS.p.A.,CosmoTechnologies

Ltd.andCosmoResearch&DevelopmentS.r.l.

SubsidiariesareallentitiesoverwhichtheGroup

hasthepowertogovernthefinancialandoperating

policiesgenerallyaccompanyingashareholdingof

morethanhalfofthevotingrights.

Accountingpoliciesofsubsidiarieshavebeen

changedwherenecessarytoensureconsistencywith

thepoliciesadoptedbytheGroup.

Intercompanytransactions,balancesandunrealized

gainsontransactionsbetweenGroupcompanieshave

beeneliminatedinconsolidation.

Property, plant and equipment

Property,plantandequipmentarestatedatcost

includingrelatedexpenses,lessaccumulated

depreciation(seebelow)andimpairmentlosses.

Thecostofself-constructedassetsincludesthe

costofmaterials,directlabour,theinitialestimate,

whererelevant,ofthecostsofdismantlingand

removingtheitemsandrestoringthesiteonwhich

theyarelocated,andanappropriateproportion

ofproductionoverheads.

Subsequentexpendituresarecapitalizedonlyif

theyincreasethefutureeconomicbenefitsembodied

intherelateditemofproperty,plantandequipment.

Allotherexpendituresareexpensedasincurred.

Property,plantandequipmentthatarebeing

constructedordevelopedforfutureuseareclassified

as“assetsunderconstruction”andstatedatcost

untilconstructioniscomplete,atwhichtimethey

arereclassifiedasproperty,plantandequipment.

Wherepartsofanitemofproperty,plantand

equipmenthavedifferentusefullives,theyare

separatelyidentifiedanddepreciatedonthebasisof

theirestimatedusefullives(“componentapproach”).

Thecostofreplacingpartofanitemisrecognized

inthecarryingamountofanitemofproperty,plant

andequipmentwhenthatcostisincurredifitis

probablethatthefutureeconomicbenefitsembodied

intheitemwillflowtotheGroupandthecostofthe

itemcanbemeasuredreliably.Theresidualcarrying

amountofthereplacedcomponentisrecognized

intheincomestatementasanexpense.Allothercosts

arerecognizedintheincomestatementasanexpense

asincurred.Financialexpensesrelatedtothepur-

chaseofsuchassetsarerecognizedintheincome

statement.

Depreciationisrecognizedstartingfromthemonth

inwhichtheassetisavailableforuseorpotentially

88 CosmoPharmaceuticalsAnnualReport2008–Explanatorynotes

abletoprovidetheeconomicbenefitsassociated

therewithonasystematicbasis,wherebytheassets

aredepreciatedovertheirusefullivesor,intheevent

ofdisposal,untiltheirfinalmonthofuse.

Forassetsdisposedofduringtheyear,depreciation

iscalculatedfortheperiodinwhichtheassetwas

availableforuse,excludingassetspurchasedduring

theyear.

Residualamounts,usefullivesandthedepreciation

methodsarereviewedattheendofeveryaccounting

period.Thedepreciationratesappliedtotheitemsof

property,plantandequipmentarethefollowing:

Appurtenancelandrelatedtoownbuildingsor

purchasedthroughfinanceleasesisstatedseparately

andisnotdepreciated.

Improvementstothird-partyassetsareclassified

underproperty,plantandequipmentdependingon

thenatureoftheassettowhichitrefers.Thedeprecia-

tionperiodisbasedontheloweroftheasset’sremain-

ingusefullifeandtheresidualdurationoftheleaseof

theprincipalasset.

Ifspecificeventsindicatethatimpairmentofanitem

ofproperty,plantandequipmentmayhavetaken

place,theitem’srecoverabilityisassessedbycompar-

ingitscarryingamountwithitsrecoverableamount,

representedbythehigherofthefairvaluenet

ofdisposalcostsandvalueinuse,asdefinedinthe

paragraph“Impairmentofproperty,plantand

equipmentandintangibleassets”.

Assetsheldunderfinanceleases,whichprovide

theGroupwithsubstantiallyalltherisksandrewards

ofownership,arerecognizedasassetsoftheGroup

attheirfairvalueor,iflower,atthepresentvalueof

theminimumleasepayments.Thecorresponding

liabilitytothelessorisincludedinthefinancialstate-

mentsasfinancialliabilities.Leaseswherethelessor

retainssubstantiallyalltherisksandrewardsofown-

ershipoftheassetsareclassifiedasoperatingleases.

Operatingleaseexpendituresareexpensedona

straight-linebasisovertheleaseterms.

Goodwill

Allbusinesscombinationsareaccountedforby

applyingthepurchasemethod.Goodwillrepresents

amountsarisingupontheacquisitionofsubsidiaries,

associatesandjointventures.Inrespectofbusiness

acquisitionsthathaveoccurredsince1January2004,

goodwillrepresentsthedifferencebetweenthe

acquisitioncostandthefairvalueofthenetidentifi-

ableassetsandliabilitiesacquired,inproportionto

theinterestacquired.

Inrespectofacquisitionspriortothisdate,good-

willhasbeenretainedatthepreviousItalianGAAP

amount,subjecttobeingtestedforimpairmentatthat

date.Theclassificationandaccountingtreatmentof

businesscombinationsthatoccurredpriorto1January

2004hasnotbeenreconsideredinpreparingthe

Group’sopeningIFRSbalancesheetat1January2004.

Goodwillarisingonbusinesscombinationsisno

longeramortized,butistestedannuallyforimpair-

ment,asdescribedintheparagraph“Impairmentof

property,plantandequipmentandintangibleassets”.

Buildings–ownedbuildings 33years

Buildings–leaseholdimprovements Atthelower

oftheuseful

lifeofthe

improve-

mentandthe

residualterm

ofthelease

Plantandmachinery–general 10years

Plantandmachinery–specific 8years

Industrialandcommercialequipments 3years

Othertangibleassets–officeequipments–

electronic

5years

Othertangibleassets–officeequipments–

furniture

8years

Othertangibleassets–meansofinternal

transportation

5years

Explanatorynotes–CosmoPharmaceuticalsAnnualReport2008 89

Other intangible assets

Otherintangibleassetsarerecognizedasassetswhere

itisprobablethattheuseoftheassetwillgenerate

futureeconomicbenefitsandwherethecostsofthe

assetcanbedeterminedreliably.Otherintangible

assetsthatareacquiredbytheGrouparestatedat

costlessaccumulatedamortization(seebelow)and

impairmentlosses,ifany.

Subsequentexpendituresoncapitalizedintan-

gibleassetsarecapitalizedonlywhentheyincrease

thefutureeconomicbenefitsembodiedinthespecific

assetstowhichtheyrelate.Allotherexpenditureis

expensedasincurred.

Otherintangibleassetswithdefiniteusefullives

areamortizedonastraight-linebasisovertheiruseful

lives,beingtheestimatedperiodoverwhichtheGroup

willusetheassets.Otherintangibleassetsareamor-

tizedfromthedatetheyareavailableforuse.

Residualamounts,usefullivesandtheamortiza-

tionmethodsarereviewedattheendofevery

accountingperiod.Theestimatedusefullivesare

asfollows:

• Patentsandrightsareamortizedovertheir

usefullives.

• Trademarksandlicences:trademarksareamort-

izedover10years.Licencesareamortizedoverthe

durationofthecontracttowhichtheyrelate.

Expendituresonresearchactivities,undertakenwith

theprospectofgainingnewtechnicalknowledgeand

understanding,arerecognizedintheincomestate-

mentsasanexpenseasincurred.

Developmentcostsarecapitalizedasanintan-

gibleassetifallofthefollowingcriteriaareintangible:

• thetechnicalfeasibilityofcompletingtheintangi-

bleassetsothatitwillbeavailableforuseorsale;

• theintentiontocompletetheintangibleassetand

useorsellit;

• theabilitytouseorselltheintangibleasset;

• theassetwillgenerateprobablefutureeconomic

benefitsanddemonstratetheexistenceofamar-

ketortheusefulnessoftheintangibleassetifit

istobeusedinternally;

• theavailabilityofadequatetechnical,financial

andotherresourcestocompletethedevelopment

andtouseorsellit;and

• theabilitytomeasurereliablytheexpenditure

attributabletotheintangibleassetduringits

development.

Followinginitialrecognitionofthedevelopment

expenditureasanintangibleasset,thecostmodel

isappliedrequiringtheintangibleassettobe

carriedatcost,lessanyaccumulatedamortization

andaccumulatedimpairmentlosses.Theintangible

assetisamortizedonastraight-linebasisoverthe

periodofitsexpectedbenefit,startingfromthedate

offullcommercialuseoftheproduct.Duringthe

periodofdevelopment,theassetistestedforimpair-

mentannually.

Ifspecificeventsindicatethatimpairmentofan

itemofintangibleassetmayhavetakenplace,the

item’srecoverabilityisassessedbycomparingitscar-

ryingamountwithitsrecoverableamount.Therecov-

erableamountisthehigherbetweenthefairvalue

netofdisposalcostsandthevalueinuse,asdefinedin

theparagraph“Impairmentofproperty,plantand

equipmentandintangibleassets”.

Impairment of property, plant and equipment

and intangible assets

ThecarryingamountsoftheGroup’stangibleand

intangibleassetsarereviewedateachbalancesheet

datetodeterminewhetherthereisanyindicationof

impairment.Ifanysuchindicationexists,theasset’s

recoverableamountisestimated.

Forgoodwillassetsthathaveanindefiniteuseful

lifeandintangibleassetsthatarenotyetavailablefor

use,therecoverableamountisestimatedateachbal-

ancesheetdate.

90 CosmoPharmaceuticalsAnnualReport2008–Explanatorynotes

Animpairmentlossisrecognizedwheneverthe

carryingamountofanassetoritscash-generatingunit

exceedsitsrecoverableamount.Impairmentlosses

arerecognizedintheincomestatements.

Therecoverableamountisthehigherofanasset’s

fairvaluelesscoststosell,ifthereisanactivemarket,

anditsvalueinuse.Ifthereisnobindingsalesagree-

ment,thefairvalueisestimatedattheamount

expressedbyanactivemarket,byrecenttransactions

oronthebasisofthebestavailableinformation

indicatingtheamountthattheCompanywould

obtainfromtheasset’ssale.

Valueinuseisthepresentvalueoftheestimated

futurecashflowsexpectedtoarisefromthecontinu-

inguseofanassetorcash-generatingunitandfrom

itsdisposalattheendofitsusefullife.Thecashflows

aredeterminedonthebasisofreasonableanddocu-

mentedassumptionsrepresentingthebestestimate

ofthefutureeconomicconditionsthatwilltakeplace

overtheresidualusefullifeoftheasset,givinggreat-

estweighttoexternalindicators.Thediscountingrate

(pretax)takesintoaccounttheriskimplicitinthebusi-

nesssectorandthefinancialcomponentbasedon

thetiming.Withtheexceptionoflossesongoodwill,

impairmentsinvaluearereversedwhenthereisan

indicationthattheimpairmentlossmaynolonger

existandtherehasbeenachangeintheestimates

usedtodeterminetherecoverableamount.Animpair-

mentlossisreversedonlytotheextentthatthe

asset’scarryingamountdoesnotexceedthecarrying

amountthatwouldhavebeendetermined,netof

depreciationoramortization,ifnoimpairmentloss

hadbeenrecognized.

Financial assets

FinancialassetswithinthescopeofIAS39areclassi-

fiedasfinancialassetsatfairvaluethroughprofitor

loss,loansandreceivables,held-to-maturityinvest-

ments,oravailable-for-salefinancialassets,as

appropriate.Whenfinancialassetsarerecognized

initially,theyaremeasuredatfairvalue,plus,inthe

caseofinvestmentsnotatfairvaluethroughprofitor

loss,directlyattributabletransactioncosts.TheGroup

determinestheclassificationofitsfinancialassetson

initialrecognitionand,whereallowedandappropri-

ate,re-evaluatesthisdesignationattheendofeach

financialyear.All“regularway”purchasesandsales

offinancialassetsarerecognizedonthetradedate,

whichisthedatethattheGroupcommitstopurchase

theasset.

Regularwaypurchasesorsalesarepurchasesor

salesoffinancialassetsthatrequiredeliveryofassets

withintheperiodgenerallyestablishedbyregulation

orconventioninthemarketplace.

Available-for-salefinancialassetsarethose

non-derivativefinancialassetsthataredesignatedas

availableforsaleorarenotclassifiedinanyofthe

threeprecedingcategories.Afterinitialmeasurement,

available-for-salefinancialassetsaremeasuredat

fairvalue,atthecloseofbusinessonthebalancesheet

date,withunrealizedgainsorlossesrecognized

directlyinequityuntiltheinvestmentisderecognized

ordeterminedtobeimpaired,atwhichtimethe

cumulativegainorlosspreviouslyrecordedinequity

isrecognizedinprofitorloss.

Thefairvaluesoflistedinvestmentsarebased

oncurrentmarketprices.Ifthemarketforafinancial

assetisnotactiveandforunlistedsecurities,the

Groupestablishesfairvaluesbyusingvaluationtech-

niques.Theseincludetheuseofrecentarm’s-length

transactions,referencetootherinstrumentsthatare

substantiallythesame,discountedcashflowanalysis,

andoptionpricingmodelsrefinedtoreflecttheCom-

pany’sspecificcircumstances.

Ateachbalancesheetdate,theGroupassesses

whetherafinancialassetorgroupoffinancialassets

isimpaired.

Ifanavailable-for-salefinancialassetisimpaired,

anamountcomprisingthedifferencebetweenits

cost(netofanyprincipalpaymentandamortization)

Explanatorynotes–CosmoPharmaceuticalsAnnualReport2008 91

anditscurrentfairvalue,lessanyimpairmentloss

previouslyrecognizedinprofitorloss,istransferred

fromequitytoprofitorloss.

Inventories

Inventoriesarestatedatthelowerofacquisitionor

productioncostandnetrealizablevalue.Netrealiz-

ablevalueistheestimatedsellingpriceintheordinary

courseofbusiness,lesstheestimatedcostsofcomple-

tionandsellingexpenses.

Thecostofinventoriesisdeterminedinaccord-

ancewiththefirst-infirst-out(FIFO)principleand

includesexpenditureincurredinacquiringtheinven-

toriesandbringingthemtotheirexistinglocationand

condition.Inthecaseofmanufacturedinventories

andworkinprogress,thecostincludesanappropriate

shareofoverheadcoststhatmayreasonablybeattrib-

utabletotheperformanceofmanufacturingactivities

innormaloperatingconditions.

Aprovisionforinventoriesiscalculatedtotakeinto

accountobsoleteandslow-movingitems,considering

theirpossiblefutureuseandrealizablevalue.Esti-

matedrealizablevaluerepresentstheestimatedsales

priceinnormalbusiness,netofestimatedcoststosell.

Foreign currency transactions and translation of

financial statements of the foreign controlled

companies

Transactionsinforeigncurrencyaretranslatedinto

eurosusingtheexchangeraterulingonthetransac-

tiondate.Monetaryassetsandliabilitiesdenomin-

atedinforeigncurrenciesatthebalancesheetdate

aretranslatedintoeurosattheforeignexchangerate

rulingatthatdate.Foreignexchangedifferences

arisingontranslationarerecognizedintheincome

statement.Non-monetaryassetsandliabilitiesthat

aremeasuredintermsofhistoricalcostinaforeign

currencyaretranslatedusingtheexchangerateatthe

dateofthetransaction.Non-monetaryassetsand

liabilitiesdenominatedinforeigncurrenciesthat

arestatedatfairvaluearetranslatedintoeuros

atforeignexchangeratesrulingatthedatesthefair

valuewasdetermined.

Trade and other receivables and payables

Tradeandotherreceivablesarestatedatamortized

costnetofimpairmentlosses.Theimpairmentloss

iscalculatedonthebasisofrecoveryassessments

byanalyzingeachreceivableconsideredunlikelyto

becollectedandtheoverallriskofnon-recovery

ofthereceivables.Whenthepaymentofthesumdue

ispostponedbeyondnormalcredittermsofferedto

customers,itisnecessarytodiscountthereceivable.

Tradeandotherpayablesaremeasuredat

amortizedcostwhichreflectstheeffectiveinterest

rateintheincomestatementandrepresentsthe

rateusedtodiscounttheexpectedfuturecashflows

tothecarryingvalueoftheassetstowhichthey

relate.

Theyareincludedincurrentassetsorliabilities,

exceptformaturitiesgreaterthan12monthsafter

thebalancesheetdate.

Cash and cash equivalents

Cashandcashequivalentscomprisecashbalances

andcalldeposits.Advancesoninvoicesandbank

overdraftsthatarerepayableondemandandforman

integralpartoftheGroup’scashmanagementare

includedasacomponentofcashandcashequivalents

forthepurposeofthestatementofcashflows.

Interest-bearing loans and borrowings

Interest-bearingloansandborrowingsareinitially

recognizedatfairvaluelessattributabletransaction

costs.Subsequenttoinitialrecognition,interest-

bearingloansandborrowingsarestatedatamortized

costwithanydifferencebetweencostandredemption

valuebeingrecognizedintheincomestatement

92 CosmoPharmaceuticalsAnnualReport2008–Explanatorynotes

overtheperiodoftheborrowingsonaneffective

interestbasis.

Theyareincludedincurrentliabilities,exceptfor

maturitiesgreaterthan12monthsafterthebalance

sheetdate.

Employee benefits

Obligationsforcontributionstodefined-contribution

pensionplansarerecognizedasanexpenseinthe

incomestatementasincurred.

Employee termination benefits

Theemployeeterminationbenefitisconsideredas

adefined-benefitplanunderIAS19.Thebenefits

guaranteedtoemployees,intheformoftheemployee

terminationbenefitpaidoutuponleavingthe

Company,arerecognizedintheperiodinwhichthe

rightmatures.Therelatingliabilityiscalculatedon

thebasisofactuarialassumptionsandthebenefit

vestedandnotyetpaidoutatthebalancesheetdate,

applyingthecriteriarequiredbytheItalianlaw.

Thediscountingprocessisbasedondemographic

andfinancialassumptions,usingthe“Projected

UnitCreditMethod”(vestedbenefitmethod)applied

byprofessionalactuaries.

Thismethodinvolvescalculatingtheaverage

presentvalueofthevestedpensionbenefitonthe

basisoftheemployee’sservicerenderedtothemeas-

urementdate,basedonaprojectionoftheemployee’s

remuneration.

Actuarialgainsandlossesaretakentoincome

statementsonanaccrualbasisinlinewiththeperiod

ofservicenecessarytoearnthebenefits.TheGroup

hasdecidednottousetheso-called“corridormethod”,

whichwouldallowitnottorecordthecostcomponent

calculatedinaccordancewiththemethoddescribed

representedbyactuarialprofitsorlosses,whereit

doesnotexceedtenpercent.

Notapplyingthe“corridormethod”,theactuarial

gainsandlossesaretakentotheincomestatement

duringtheyear.

Forms of remuneration involving participation

in stock capital (stock option plans)

TheGroupgrantsadditionalbenefitstotheBoardand

SeniorManagementandkeyemployeesthrough

stockoptionplans.PursuanttoIFRS2,“Share-based

payment”–theseplansrepresentaformofremu-

nerationforthebeneficiaries.Thecostisequaltothe

fairvalueascalculatedonthedatetheoptionrights

aregrantedandisrecordedintheincomestatement

onastraight-linebasisoverthevestingperiod,i.e.

thedatebetweenthedatethestockoptionplanwas

grantedandthedatetherightsmatured.Thecorres-

pondingentryismadedirectlytoshareholders’

equity.Changesinfairvalueafterthegrantdatedo

nothaveaneffectontheinitialvaluation.Ateach

balancesheetdate,theGrouprevisesitsestimateof

thenumberofoptionsthatareexpectedtobecome

exercisable.Itrecognizestheimpactoftherevision

tooriginalestimates,ifany,intheincomestatements,

withacorrespondingadjustmenttoequity.The

proceedsreceivednetofanydirectlyattributable

transactioncostsarecreditedtosharecapital

(nominalvalue)andsharepremiumwhentheoptions

areexercised.

Provisions

Provisionsarerecordedwhen:

• theGrouphasanobligation,legalorconstructive,

tothirdparties;

• itisprobablethatresourceswillbeexpensedin

ordertomeettheobligation;

• areliableestimateoftheamountsoftheobliga-

tioncanbemade.

Explanatorynotes–CosmoPharmaceuticalsAnnualReport2008 93

Animpliedobligationisdefinedasanobligation

arisingwhentheGrouphasmadeotherpartiesaware,

bywayofroutineprocedure,publiccompanypolicy

orasufficientlyspecificannouncement,thatitaccepts

theobligationinawaythat,asaconsequence,itleads

thethirdpartytobelievethattheGroupwillhonour

itsobligation.

Provisionsforrisksandchargesarerecognizedat

anamountwhichrepresentsthebestestimateofthe

amounttheGroupwillhavetopayinordertosettle

theobligation,orotherwisetransferittothirdparties

attheendoftheyear.

Whentheeffectofthetimevalueofmoneyis

materialandthepaymentdatesfortheobligations

maybeestimatedreliably,theprovisioniscalculated

bydiscountingtheestimatedfuturefinancialcash

flowsusingapretaxdiscountrateinordertoreflect

thecurrentmarketassessmentsofthecurrentvalue

ofmoneyandthespecificrisksconnectedtotheliabil-

ities.Followingdiscounting,theincreaseintheprovi-

sionisrecognizedintheincomestatementcaption

“financialexpenses”.

Theprovisionsareupdatedregularlytoreflect

changesincostestimates,settlementtimesandthe

discountrate.Reviewsoftheestimateoftheprovi-

sionsarerecognizedunderthesameincomestate-

mentcaptionwheretheprovisionwaspreviously

recognized.

Revenue and cost recognition

Revenue,income,costsandchargesarerecordednet

ofdiscountsandallowances.

Revenuefromthesaleofgoodsisrecognizedin

theincomestatementwhenthesignificantrisksand

rewardsofownershiphavebeentransferredtothe

buyer.Revenuefromservicesrenderedisrecognized

intheincomestatementinproportiontothestageof

completionofthetransactionatthebalancesheet

date.Thestageofcompletionisassessedbyreference

tosurveysofworkperformed.Norevenueisrecog-

nizediftherearesignificantuncertaintiesregarding

recoveryoftheconsiderationdue,associatedcosts

orthepossiblereturnofgoodscannotbeestimated

reliablyandthereisnocontinuingmanagement

involvementwiththegoods.

Revenuesfromlicensingcontractsfornon-refund-

ableupfrontfees,insituationswherenofurther

performanceobligationexists,arerecognizedonthe

earlierofwhenpaymentsarereceivedorcollection

isassured.Upfrontfeesrelatedtofutureperformance

obligationsareeitherspreadoverthedurationofsuch

obligationsorpartoftherevenueisprovisionedthere-

fore.Wherecontinuingsignificantinvolvementis

requiredintheformofsupport,revenuesarerecog-

nizedovertherelevantperiod.

Revenuesfromlicensingcontractsformilestones

arerecognizedintheperiodtheoutcomecanbeesti-

matedreliablywhichisingeneralwhenthemilestone

issuccessfullyachieved,whichisdeterminedwhen

thefundingpartyagreesthattherequiredresults

stipulatedintheagreementhavebeenmet.

Incomefromroyaltiesisrecognizedonanaccrual

basisandrepresentsincomeearnedasapercentage

ofproductsales,inaccordancewiththetermsofthe

relevantagreement.

Researchgovernmentgrantsarerecognizedat

theirfairvalueatthemomentinwhichtheGroup

issuingthegranthasconfirmeditsapprovalandthe

proceedsaredefinite;theyarerecognizedinthe

incomestatementovertheperiodnecessarytomatch

themwiththecoststhattheyareintendedtocom-

pensate.

Rentalincomefrominvestmentpropertyisrecog-

nizedintheincomestatementonastraight-linebasis

overthetermofthelease.

Interestincomeisaccountedforbasedonthe

effectiverateofreturnonanaccrualbasis.

94 CosmoPharmaceuticalsAnnualReport2008–Explanatorynotes

Paymentsmadeunderoperatingleasesarerecog-

nizedinincomestatementsonastraight-linebasis

overthetermofthelease.

Minimumleasepaymentsmadeunderfinance

leasesareapportionedbetweenthefinanceexpense

andthereductionoftheoutstandingliability.

Income tax

Incometaxontheprofitorlossfortheyearcomprises

currentanddeferredtax.Incometaxisrecognizedin

theincomestatementexcepttotheextentthatit

relatestoitemsrecognizeddirectlyinequity,inwhich

caseitisrecognizedinequity.

Currenttaxistheexpectedtaxpayableonthe

taxableincomefortheyear,usingtaxratesenacted

orsubstantiallyenactedatthebalancesheetdate,

andanyadjustmenttotaxpayableinrespectof

previousyears.

Deferredtaxisprovidedusingthebalancesheet

liabilitymethod,providingfortemporarydifferences

betweenthecarryingamountsofassetsandliabilities

forfinancialreportingpurposesandtheamountsused

fortaxationpurposes.Thefollowingtemporarydiffer-

encesarenotprovidedfor:goodwillnotdeductiblefor

taxpurposes,theinitialrecognitionofassetsorliabil-

itiesthataffectneitheraccountingnortaxableprofit,

anddifferencesrelatingtoinvestmentsinsubsidiaries

totheextentthattheywillprobablynotreverseinthe

foreseeablefuture.Theamountofdeferredtaxpro-

videdisbasedontheexpectedmannerofrealization

orsettlementofthecarryingamountofassetsand

liabilities,usingtaxratesenactedorsubstantively

enactedatthebalancesheetdate.

Adeferredtaxassetisrecognizedonlytothe

extentthatitisprobablethatfuturetaxableprofits

willbeavailableagainstwhichtheassetcanbe

utilized.Deferredtaxassetsarereducedtotheextent

thatitisnolongerprobablethattherelatedtaxbene-

fitwillberealized.

Additionalincometaxesthatarisefromthedistribu-

tionofdividendsarerecognizedatthesametimeas

theliabilitytopaytherelateddividend.

Treasury shares

Treasurysharesarepresentedasadeductionfrom

equity.Thepurchasecostoftreasurysharesandthe

salesproceedsofanysubsequentsalearepresented

asmovementsinequity.

Dividends

Dividendspayablearereportedasamovementin

equityintheperiodinwhichtheyareapprovedby

shareholders.

Earnings per share

Basicearningspershareiscalculateddividingthe

netprofit(loss)attributabletotheownersofordinary

sharesintheCompany(thenumerator)bythe

weightedaveragenumberofordinarysharesinissue

(thedenominator)duringtheyear.

Dilutedearningspershareiscalculatedbyadjust-

ingthenetprofit(loss)attributabletoownersofor-

dinarysharesandtheweightedaveragenumberof

ordinarysharesduringtheyeartotakeaccountofall

potentialordinaryshareswithadilutingeffect.A

potentialordinaryshareisafinancialinstrumentor

othercontractthatcouldgiveitsownertherightto

obtainordinaryshares.

Segment reporting

TheManagementhasidentifiedonlyonebusiness

segment,whichisthepharmaceuticalsegment.

Indeed,theManagementdidnotidentifyother

segmentstowhichspecificanddifferentrisksand

benefitscanberelatedto.Moreover,theManagement

didnotbelievethatcostsofinvestmentscouldbe

reasonablyallocatedunlessthroughanarbitrary

allocationwhichwouldnotprovideabetterdisclosure

Explanatorynotes–CosmoPharmaceuticalsAnnualReport2008 95

thanthatprovidedbythepharmaceuticalsector

consideredasawhole.Inparticular,undertheGroup’s

currentorganizationalstructure,mostoftheinvest-

mentsmadeandcostsincurredbytheGroupwhile

performingitsproductionactivitiescannotbe

allocatedtoaspecificgeographicalareaoraspecific

customersegment,ortheproductionofspecific

products.ThereforetheManagementbelievesthat,

todate,segmentreportingbyeithergeographical

areaorproductsorcustomerswouldnotimprovethe

understandingoftheGroupresultsorthepresenta-

tionofrisksandprofitability.

Critical accounting estimates, assumptions

and judgments

Thepreparationoftheconsolidatedfinancialstate-

mentsandtherelatednotesrequirestheuseof

estimatesandassumptionsthataffecttheapplication

ofaccountingpoliciesandthereportedamountof

assets,liabilities,incomeandexpenses.However,as

theyareestimates,actualfutureresultscoulddiffer

fromthoseincludedintheconsolidatedfinancial

statements.Suchestimatesandassumptionsare

basedonaccumulatedexperienceandonother

factorsdeemedtobeappropriateinthecalculation

ofthecarryingamountsofassetsandliabilitiesthat

cannotbemeasuredonthebasisofothersources.

Revisionstoaccountingestimatesarerecognizedin

theperiodinwhichtheestimateisrevisedandany

futureperiodaffected.

Accountingestimatesthatrequirethemoresub-

jectivejudgmentofmanagementinmakingassump-

tionsorestimatesregardingtheeffectsofmatters

thatareinherentlyuncertain,andforwhichchanges

inconditionsmaysignificantlyaffecttheresults

reportedintheconsolidatedfinancialstatements,

arereportedbelow.

Impairment of property, plant and equipment,

goodwill, other intangible assets and financial

assets

TheManagementreviewedthecarryingamount

ofproperty,plantandequipment,goodwill,other

intangibleassetsandfinancialassetsatbalance

sheetdatetodeterminewhethertherewasany

indicationofimpairmentanddeterminedthatsuch

anindicationdidnotexist.

ForfinancialassetsavailableforsaletheManage-

mentconcludesthatanavailable-for-salefinancial

assetisimpairedifitsfairvaluefallseithersignifi-

cantlyorforaprolongedperiodbelowitscost,less

anyimpairmentlosspreviouslyrecognizedinprofit

orloss.

TheManagementtakesthevolatilityandthemar-

ketenvironment(ifapplicable)ofthespecificasset

intoaccountwhenassessingthesignificanceofthe

asset’sreductioninfairvalue.

Financialassetsavailableforsaleforwhichthe

reductioninfairvalueismorethan30%oftheinitial

measurementandthereductionisobservedforacon-

tinuousperiodoftwelveormoreconsecutivemonths

areusuallytestedforimpairment.

Deferred tax assets

TheGrouphasaconsiderableamountoftaxlosses

carriedforwardandtemporarydifferencesbetween

carryingamountofassetsandliabilitiesforfinancial

reportingpurposesandfortaxationpurposesthat

allowfortherecognitionofdeferredtaxassets.

Deferredtaxassetsarerecognizedonlytotheextent

thatitisprobablethatfuturetaxableprofitswill

beavailableagainstwhichtheassetcanbeutilized,

determinedonthebasisoffutureresultsforecasts.

Share-based compensation expenses

TheGrouphasgrantedstockoptionstosomeofits

employeesandDirectors.Sincethereisnomarketfor

tradingstockoptions,theManagementmustusea

96 CosmoPharmaceuticalsAnnualReport2008–Explanatorynotes

fairvaluemethodtovaluethestockoptions.Fair

valuemethodsrequiretheManagementtomake

severalassumptions,themostsignificantofwhichare

theselectionofafairvaluemodel,stockpricevolatility

andtheaveragelifeofanoption.Thefairvalueofthe

stockoptionsisdeterminedseparatelybyanexternal

appraiser.EstimateshavebeenbasedonCompany

historyormarketdatawhereappropriate.Thereisno

certaintythattheresultsofafairvaluemethodwould

bethevalueatwhichthestockoptionswouldbe

tradedforcash.Shoulddifferentassumptionsbeused,

theexpenditurerecognizedcouldbedifferent.Add-

itionalinformationisreportedin“Accountingpolicies –

Employeebenefits–Formsofremunerationinvolving

participationinstockcapital(stockoptionplans)”.

Development costs

Developmentcostsarecapitalizedinaccordance

withtheaccountingpolicydetailedin“Otherintan-

gibleassets”.

Basedonthefactsandcircumstancesofthe

projectBudesonideMMX®,theManagementbelieves

thatcapitalizationcriteriaaremetstartingfrom

phaseIIIclinicaltrial.Theproducthassuccessfully

completedphaseIIandenteredphaseIIIin2008.

Atthisstagethereisastatisticalprobabilityofsuccess

of66%to75%fornewchemicalentities.However,

BudesonideMMX®isnotanewchemicalentity,

havingbeenusedinthemarketformanyyears,

althoughindifferenttherapeuticareas.TheGroup

willbearphaseIIIcostsoftheEuropeanclinical

trialsuntilproductregistration.

5 Revenue

Revenuecanbesplitasfollows:

Thedecreaseinrevenuefrom“manufacturing

ofgenericproductsandspecialtydrugs”in2008

comparedto2007ismainlyduetoadecreasein

theproductionofgenericproductsasaconsequence

oflowerordersfromcustomersin2008.

Theitem“manufacturingofMMX®products”relates

tomanufacturingofShire’sLialda™/Mezavant®,

thefirstproductinthemarket,basedontheMMX®

technologywhosemanufacturinganddeliveries

startedinJuly2006.

Revenuefrom“licencefees,upfrontfeesandmile-

stones”in2008comprisesi)EUR7,737thousand

asupfrontfeeontheBudesonideMMX®licence

agreementsignedwithSantarusfortheUSmarket,ii)

EUR2,486thousandasupfrontfeeonthetwo

RifamycinSVMMX®licenceagreementssignedwith

Dr.FalkPharmaandSantarusfortheEuropean

andtheUSmarketrespectively,iii)EUR165thousand

forthedevelopmentofagenericproduct.

Accordingtothestrategiccollaborationagree-

mentsignedon10December2008withSantarus,

grantingSantarusexclusiverightstodevelopand

commercializeBudesonideMMX®andRifamycinSV

EUR1,000 Year ended 31 December

2008 2007

Manufacturingonbehalfof

thirdparties:

Manufacturingofgeneric

productsandspecialtydrugs

12,375

13,558

ManufacturingofMMX®

products

7,147

2,670

Relatedservices 564 703

Otherrevenuesfromsales 161 313

Licencefees,upfrontfees

andmilestones

10,388

3,502

Royalties 3,538 1,154

Totalrevenue 34,173 21,900

Explanatorynotes–CosmoPharmaceuticalsAnnualReport2008 97

MMX®fortheUSmarket,SantaruspaidCosmoan

upfrontcashfeeofUSD2.5million(EUR1,935thou-

sand)forRifamycinSVMMX®andissuedtoCosmo

sixmillionsharesofSantaruscommonstock(onemil-

lionforRifamycinSVMMX®andfivemillionfor

BudesonideMMX®).Atthedateoftheagreement,the

fairvalueofoneshareofSantarus,publiclytraded

onNASDAQ(tickersymbol:SNTS),wasUSD2.00fora

totalofUSD12.0million(EUR9,284thousand).These

sharesaresubjecttoaninitial15-monthrestrictionon

theirsaleortransfer.

Upontheagreementsignedon24November2008,

Dr.FalkPharmapaidanupfrontfeeofEUR1,000

thousandforthelicensingofRifamycinSVMMX®

(CB-01-11)inEurope(excludingItaly)andAustralia.

RifamycinSVMMX®wasout-licensedin4Q2008

toDr.FalkPharmaandSantarusjustbeforethestart

ofphaseIIIclinicalstudies,whichwillbeconductedby

thetwolicenseesattheirownexpense.However,in

January2009,theFDArequestedthatsomeadditional

preclinicalandphaseIclinicalstudieshadtobeper-

formedbeforetheproductregistrationbyDr.Falkand

Santarus;soin2009theCompany,inaccordanceto

itscontractualobligations,willbearadditionalcosts

forthosepreclinicalandphaseIactivities.Asaconse-

quence,theupfrontfeesforRifamycinSVMMX®

werepartiallydeferredforanamountofEUR1,996

thousandbasedontheproportionofcostsincurred

todateinrelationtotheestimatedtotalcosts.

Revenuefrom“royalties”in2008includes

EUR3,516thousandrelatingtotheroyaltieson

Lialda™sales(theitemamountedtoEUR1,131

thousandin2006);italsoincludesEUR22thousand

forroyaltiesonthegenericproductcontaining

simethicone,aproductinternallydevelopedand

launchedin2003byanItaliancustomer(theitem

amountedtoEUR23thousandin2007).

6 Net operating expenses

Netoperatingexpensespresentedintheincome

stalementsbyfunctionaredetailedandcommented

bynaturebelow:

Other income

Theterm“otherincome”comprisesthefollowing:

Theitemin2008includesincomefor“leaseofoffices”

arisingfromsubleaseofsomeofficestoothercompa-

niesandotherminorincome.

Theitem“governmentgrant”in2007referstothe

grantfiledwiththeItalianMinistryofUniversityand

Research(MIUR)forthepreclinicalactivityonthe

anti-androgenproductCB-03-01.Thegrantfiledwith

MIURforthepreclinicalactivityontheanti-androgen

productCB-03-01totalledEUR1,936thousand,of

whichEUR929thousandascontributionsafonds

EUR1,000 Year ended 31 December

2008 2007

Leaseofoffices 13 41

Maintenanceservices – 161

Governmentgrant – 169

Other 34 145

Totalotherincome 47 516

EUR1,000 Year ended 31 December

2008 2006

Otherincome 47 516

Changesininventoriesof

finishedgoodsandworkin

progress

148

380

Rawmaterialsandconsum-

ablesused

(5,791)

(6,642)

Personnelexpenses (7,028) (6,629)

Outsourcedpreclinicaland

clinicaltrialcosts

(1,928)

(2,640)

Otheroperatingexpenses (6,836) (5,673)

Depreciationandamortization (1,601) (1,460)

Total net operating expenses (22,989) (22,148)

98 CosmoPharmaceuticalsAnnualReport2008–Explanatorynotes

perdutocovertheresearchanddevelopment

expensesincurredbytheGroupandtheremaining

EUR1,007thousandintheformofasubsidizedloan.

ThegrantwasfiledinJuly2003andtheactivities

startedinJanuary2004;inJanuary2006,theresearch

projectwasofficiallyapprovedbytherelevantbodies

andpublishedintheItalian“GazzettaUfficiale”,and

inSeptember2007,theprojectwascompleted.

In2007,theitem“otherincome”includedincome

for“leaseofoffices”arisingfromsubleaseofsome

officestoothercompaniesandfor“maintenance

services”andotherfacilitiesprovidedtotenants.

Changes in inventories of finished goods

and work in progress

Theitemcomprisesthefollowing:

EUR1,000 Year ended 31 December

2008 2007

Changesininventoriesof

finishedgoods

141

356

Changesininventoriesof

workinprogress(wip)

7

24

Totalchangesininventories

offinishedgoodsandwip

148

380

EUR1,000 Year ended 31 December

2008 2007

Purchaseofrawmaterials

andpackaging

4,928

6,244

Purchaseofconsumables 224 216

Purchaseoflaboratory

suppliesandmaterialsfor

clinicaltrial

241

198

Purchaseofmaintenance

materials

123

108

Purchaseofsafetymaterials 52 44

Purchaseofwrappingand

crate

33

35

Totalpurchases 5,601 6,845

Changesinrawmaterials

inventories

190

(203)

Totalrawmaterialsand

consumablesused

5,791

6,642

Raw materials and consumables used

Theitem“rawmaterialsandconsumablesused”

comprisesthefollowing:

Rawmaterialsinthepharmaceuticalindustryare

mainlyreferredtoastheactivepharmaceutical

ingredient(API)oftheproduct,whichisthemost

significantcostitemofmaterialconsumption,

mainlywhentheproductionisrelatedtogeneric

products,whilefortheproductionofbranded

specialtydrugsitisgenerallyprovidedbythecommis-

sioningcompanyinaccountformanufactureaspart

oftheworkingcontract;otherrawmaterialsarethe

excipientsandthepackagingmaterials.

Thedecreaseofcostforrawmaterialsandpack-

agingin2008comparedto2007isduetothedifferent

mixofproductsmanufactured–highervolumes

ofLialda™/Mezavant®andlowerordersforgenerics.

Laboratorysuppliesaremainlyrelatedtothe

researchanddevelopmentactivitiescarriedoutinthe

laboratoriesoftheGroup.

Explanatorynotes–CosmoPharmaceuticalsAnnualReport2008 99

Despiteanincreaseinrevenuefromcontractmanu-

facturing,rawmaterialsandconsumablesusedwill

decrease.

Personnel expenses

Theitem,whichincludesthecostoftheentirestaff,

comprisesthefollowing:

Theincreaseinpersonnelexpensesin2008isdueto

thehiringofsixnewpersons,totheexpenseforthe

valueofemployees’andDirectors’servicesexchanged

forstockoptionsandtotheannualbonus;in2007

personnelexpensesincludedaone-timepaymentof

EUR1,021thousandtoallemployees.

Theaveragenumbersoftheentirestaffforthe

yearsended31December2008and2007arethefol-

lowing:

Thenumbersbycategoryoftheentirestaffasat

31December2008and2007arethefollowing:

Outsourced preclinical and clinical trial costs

Outsourcedpreclinicalandclinicaltrialcostscanbe

brokendownasfollows:

Preclinicalandclinicaltrialscostsoutsourcedto

subcontractorsandexpensedintheprofitandloss

decreasedfromEUR2,640thousandtoEUR1,928

thousand;in2008BudesonideMMX®entered

phaseIIIdevelopmentandforthisreasonthe

outsourcedclinicaltrialcostsrelatingtothisproject

fortheEUwerecapitalized(seenote12,“Other

intangibleassets”).

Followingthestrategiccollaborationagreement

signedinDecember2008,Santarusisreimbursing

theCompanycompletelyallcostsforphaseIIIclinical

studiesonBudesonideMMX®thathadalready

beenincurredintheUSA(in2008,theseamountedto

EUR2,951thousand).

No.ofpeople Year ended 31 December

2008 2007

Managers 13.0 11.0

Juniormanagers 6.5 8.0

Employees 54.0 54.0

Workers 54.5 48.0

Totalaveragenumber 128.0 121.0

No.ofpeople Year ended 31 December

2008 2007

Managers 15 11

Juniormanagers 5 8

Employees 54 54

Workers 57 52

Totalaveragenumber 131 125

EUR1,000 Year ended 31 December

2008 2007

BudesonideMMX® – 435

LMWHeparinMMX® 861 1,002

RifamycinSVMMX® 424 421

Anti-androgens 509 740

Others 134 42

Outsourcedpreclinicaland

clinicaltrials

1,928

2,640

100 CosmoPharmaceuticalsAnnualReport2008–Explanatorynotes

EUR1,000 Year ended 31 December

2008 2007

Salariesandwages 5,029 5,265

Socialsecuritycontributions 1,216 1,156

Employeebenefits 257 145

Stockoptions 463 20

Othercosts 63 43

Totalpersonnelexpenses 7,028 6,629

Other operating expenses

Theitem“otheroperatingexpenses”comprises

thefollowing:

Theitem“servicecosts”mainlycomprisescostsfor

professionalandconsultancyservices(i.e.scientific,

commercialandadministrativeservices),utilities

(gas,electricity,water)andmaintenanceservices

andthird-partymanufacturing,whicharedetailed

asfollows:

EUR1,000 Year ended 31 December

2008 2007

Servicecosts 4,601 3,678

Operatingleaseexpenses 1,796 1,611

Otheroperatingcosts 439 384

Totalotheroperatingexpenses 6,836 5,673

EUR1,000 Year ended 31 December

2008 2007

Externalconsultancyservices 817 572

Patentcosts 85 51

Maintenance 525 430

InvestorrelationsandWeb

sitemaintenance

224

93

Technicalassistance 36 28

Utilities,electricalpower 565 513

Utilities,gasandheating 225 193

Utilities,water 44 35

Wastedisposal 84 65

Premisescleaning 75 73

Receptionistandsecurity

services

140

148

Utilities,telephone,Internet 100 115

Insurance 139 116

Non-ExecutiveDirectors 218 238

Stockoptionsnon-Executive

Directors

176

8

BoardofStatutoryAuditors 47 51

Auditing 66 67

Advertisingand

marketingcosts

199

204

Freightandcustoms 58 50

Travelexpenses 184 94

Subcontractingandother

servicesinrelationtothe

manufacturing

355

334

Othercosts 239 200

Totalservicecosts 4,601 3,678

Explanatorynotes–CosmoPharmaceuticalsAnnualReport2008 101

“Servicecosts”increasedparticularlyduetoaheavier

expenseforinvestorrelationsactivities,consultancy

services,theexpensefornon-ExecutiveDirectors’

stockoptionsgrantedon18December2007andthe

increaseoftheutilitiesandenergycosts.

Theitem“operatingleaseexpenses”isdetailedas

follows:

“Rent”increasedin2008comparedto2007,asthe

Companystartingfrom1June2008rentedsome

additionalspacefromCristoforoColomboRealEstate

S.r.l.,namelya3-floorofficebuildingintheLainate

complex;in2008thetotalcostfortherentofthe

LainatecomplexisEUR1,324thousand(seenote33,

“Relatedpartiestransactions–Leaseagreementfor

Lainate”).

“Rent”alsoincludesEUR37thousandandEUR13

thousandrespectivelyfortheannualrentofthe

Dublinofficeandtherentofalaboratoryforpreclin-

icalactivitiesinCatania,Italy.

“Otherrentals”in2008and2007includethe

amountofEUR308thousand,fortherentofthe

equipmentofthenewplant,suchasHVAC,electrical

andmechanical,purifiedwaterequipment,etc.(see

note33,“Relatedpartiestransactions–Leaseagree-

mentforLainate”).Italsoincludestherentofphoto-

copymachinesandcars.

Theitems“otheroperatingcosts”isdetailed

asfollows:

Depreciation and amortization

Theitemcomprisesthefollowing:

EUR1,000 Year ended 31 December

2008 2007

Representationexpenses 204 141

Stationery 50 49

Newspapersandmagazines 17 13

Fuelandoil 32 28

Tax,otherthanincometax 31 32

Clubmemberships 17 17

Postalcosts 75 85

Othercosts 13 19

Totalotheroperatingcosts 439 384

EUR1,000 Year ended 31 December

2008 2007

Depreciationofproperty,

plantandequipment

1,263

1,138

Amortizationofother

intangibleassets

338

322

Totaldepreciationand

amortization

1,601

1,460

102 CosmoPharmaceuticalsAnnualReport2008–Explanatorynotes

EUR1,000 Year ended 31 December

2008 2007

Rent 1,374 1,201

Otherrentals 422 410

Totaloperatingleaseexpenses 1,796 1,611

7 Financial income/expenses

Theitemcomprisesthefollowing:

Financialincomein2008mainlyincludesEUR942

thousandduetotheinterestreceivedoncashandcash

equivalents,whichwereplacedintimedepositswith

banks;italsoincludesEUR363thousandarisingfrom

themeasurementatfairvalueofthesubsidizedloans.

Interestsonmedium-andlong-termbankloans

includealsoEUR67thousandarisingfromtheappli-

cationoftheamortizedcoststothesubsidizedloans.

Otherfinancialexpensesincludetheforeign

exchangedifferenceofEUR519thousandarisingfrom

thefairvaluemeasurementasat31December2008

ofSantarussharesincludedinthefinancialassets

availableforsale.

8 Income tax expenses

Theitemcomprisesthefollowing:

CurrentincometaxincludesIRAP,whichrepresents

anItalianregionaltaxappliedatarateequalto3.9%

(4.25%in2007)andleviedonprofit(loss)beforetax,

pluspersonnelcostsandnetfinancialchargeswhich

arenotconsideredtax-deductible,aswellasIRES,

whichrepresentstheItaliancorporateincometax

appliedatarateequalto27.5%(33%in2007),andthe

Irishcorporationtaxappliedatarateequalto12.5%

tothetaxableincomeofCosmoTechnologiesLtd.

Forexplanationofdeferredtaxbenefitanddeferred

taxexpenseseenote14andnote24.

Thereconciliationbetweentheoreticalincome

taxesdeterminedonthebasisofthetaxrates

applicableinItalyandtheincometaxes(currentand

deferred)reportedintheconsolidatedfinancial

statementsfortheyearended31December2008and

2007isasfollows:

EUR1,000 Year ended 31 December

2008 2007

IncometaxIRESand

othercorporationtaxes

765

5

IncometaxIRAP 264 190

Currentincometax 1,029 195

Deferredtaxbenefit 665 (211)

Deferredtaxexpense 518 53

Totalincomeexpenses 2,212 37

EUR1,000 Year ended 31 December

2008 2007

Financial income

Other 1,369 870

Totalfinancialincome 1,369 870

Financial expenses

Interestsonbankoverdraft/

advanceoninvoices

–

30

Interestsonmedium-and

long-termbankloans

184

150

Interestsonfinanciallease

payables

101

126

Other 655 163

Totalfinancialexpenses 940 469

Explanatorynotes–CosmoPharmaceuticalsAnnualReport2008 103

Asat31December2008and2007,thetotalincome

taxwasEUR2,212thousandandEUR37thousand

respectively(fordetailsseealsonotes14and24).

Theoreticalincometaxesarecalculatedbyapply-

ingtheIREStaxrate(27.5%in2008and33%in2007)

totheresultbeforetax,andtheIRAP(anItalian

regionaltax)taxrate(3.90%in2008and4.25%in

2007)totheoperatingincomepluspersonnelcost

fortheItaliancompanies.

9 Basic and diluted earnings per share

Basicearningspersharearecalculatedbydividing

thenetprofit(loss)fortheyearattributableto

ordinaryshareholdersbytheweightedaverage

numberofordinarysharesoutstandingduring

theyear.Basicearningspershareareasfollows:

Dilutedearningspersharearecalculatedbydividing

thenetprofitfortheyearattributabletoordinary

shareholdersbytheweightedaveragenumberof

ordinarysharesoutstandingduringtheyear,plusthe

weightedaveragenumberofsharesthatwouldbe

issuedontheconversionofallthedilutivepotential

optionintoordinaryshares.Regardingthestock

optionplansetupinDecember2007,theexercise

priceasat31December2008washigherthanthe

weightedaveragemarketprice,thereforetheoptions

wouldnothavebeenexercised.

Year ended 31 December

2008 2007

Netprofitattributable

toshareholders

(inEUR1,000)

9,401

116

Weightedaveragenumberof

ordinaryshares

13,871,249

13,348,507

Basic earnings per share

(in EUR)

0.67773

0.00869

104 CosmoPharmaceuticalsAnnualReport2008–Explanatorynotes

EUR1,000 Year ended 31 December

2008 2007

Profitbeforetaxes 11,613 153

IREStaxrate 27.5% 33%

IRES theoretical income taxes 3,194 50

OperatingincomeforIRAP

taxbasis(a)

928

(2,659)

Personnelcostsnotdeduct-

ibleforIRAP(a)

5,361

4,871

IRAPtaxbasis 6,289 2,212

IRAPtaxrate 3.90% 4.25%

IRAP theoretical income taxes 245 94

Total theoretical income taxes 3,439 144

Taxeffectofpermanent

differences(b)

(35)

60

Adjustment in 2007 on de-

ferred taxes due to IRES and

IRAP tax rate reduction (c)

–

21

Effectofdifferentcorporatetax

ratesintheIrishsubsidiary(d)

(1,378)

(267)

Unrecognizedtheoreticaltax

benefitforlosscarry-forward(e)

182

301

Unrecognized deferred tax on

temporary differences (IPO

and stock option costs) (e)

4

(222)

Current and deferred income

tax recognized in the consoli-

dated financial statements

2,212

37

(a)OperatingincomeandpersonnelcostsoftheItalian

companiesrelevantforIRAP

(b)Itmainlyincludesnon-deductiblecostsforentertainment

expensesandcompanycarsanddeductiblepersonnelcostsfor

IRAP

(c)NewItalianlegislationforeseesIRESrateas27.5%andIRAP

ratesas3.9%:deferredtaxesconsequentlyhavebeenrecalculated

(d)Applicabletaxrateof12.5%inIrelandforthesubsidiary

CosmoTechnologiesLtd.

(e)Duetouncertaintyaboutthetaxableprofitintheforeseea-

blefuture,nodeferredtaxassetcalculatedonlossofCosmo

PharmaceuticalsS.p.A.andontemporarydifferencesonthe

amortizationofIPOcostsandthecostofstockoptioncosts

10 Property, plant and equipment

Thecompositionandvariationof “property,plant

andequipment”areshowninthefollowingtables:

Year ended 31 December

2008 2007

Netprofitattributable

toshareholders

(inEUR1,000)

9,401

116

Weightedaveragenumberof

ordinaryshares

13,871,249

13,387,384

Diluted earnings per share

(in EUR)

0.67773

0.00866

Euro1,000 Plant and machinery

Industrial and commercial equipment

Other fixed assets

Assets under construc-tion and payments on account

Total

Cost

Balanceat1January2008 8,707 1,272 1,027 13 11,019

Additions 699 79 164 428 1,370

Constructioncompleted 182 – 252 (434) –

Disposals (14) – (4) – (18)

Balanceat31December2008 9,574 1,351 1,439 7 12,371

Accumulated depreciation

Balanceat1January2008 2,466 1,121 541 – 4,128

Depreciationcharge

fortheyear

1,003

116

144

–

1,263

Disposals (5) – (1) – (6)

Balanceat31December2008 3,464 1,237 684 – 5,385

Netbookvalueasat

31December2008

6,110

114

755

7

6,986

Explanatorynotes–CosmoPharmaceuticalsAnnualReport2008 105

Euro1,000 Plant and machinery

Industrial and commercial equipment

Other fixed assets

Assets under construc-tion and payments on account

Total

Cost

Balanceat1January2007 8,018 1,149 936 – 10,103

Additions 708 123 105 13 949

Othermovements – – (14) – (14)

Disposals (19) – – – (19)

Balanceat31December2007 8,707 1,272 1,027 13 11,019

Accumulated depreciation

Balanceat1January2007 1,545 1,021 441 – 3,007

Depreciationchargefor

theyear

924

100

114

–

1,138

Othermovements – – (14) – (14)

Disposals (3) – – – (3)

Balanceat31December2007 2,466 1,121 541 – 4,128

Netbookvalueasat

31December2007

6,241

151

486

13

6,891

“Plantandmachinery”mainlyrelatestothecostof

acquisitionofmachineryandproductionfacilitiesfor

themanufacturingbusinessofpharmaceutical

products;theincreasein2008and2007mainlyrefers

totheacquisitionfortherenewalofproduction

machinery.ThetotalhistoricalcostincludesEUR4,176

thousandasplantandmachineryacquiredthrough

financeleaseagreements.

“Industrialandcommercialequipment”relates

totheinvestmentinthemodernizationoflaboratory

equipmentwhichoccurredthroughouttheyears.

Ofthelaboratoryequipmenthistoricalcosts,approxi-

matelyEUR341thousandwereacquiredbywayof

financeleaseagreements.

“Otherfixedassets”increasedin2008and2007,in

relationtotheinvestments(i)infittingsandfurniture

forthenewlaboratories,(ii)incomputersandservers

and(iii)inliftandpallettrucksforplantandware-

house.ApproximatelyEUR64thousandrefertoother

fixedassetsacquiredbywayoffinancelease

agreements.

11 Goodwill

Theitem“goodwill”isdetailedasfollows:

“Goodwill”relatestotheacquisitionin1997from

ParkeDavisofthemanufacturingbusinessofpharma-

ceuticalproducts.

Thegoodwillhasbeentestedforimpairment.The

recoverableamountisdeterminedbasedonvalue-in-

usecalculations.Thesecalculationsusecashflowpro-

EUR1,000 As at 31 December

2008 2007

Openingcarryingamount 109 109

Additions/disposalsfortheyear – –

Write-downs/revaluations

fortheyear

–

–

Closingcarryingamount 109 109

106 CosmoPharmaceuticalsAnnualReport2008–Explanatorynotes

12 Other intangible assets

Thecompositionandvariationof“Otherintangible

assets”areshowninthefollowingtable:

jectionsbasedonfinancialplansapprovedbythe

Managementcoveringa3-yearperiod.Cashflows

beyondthe3-yearperiodareextrapolatedusingthe

estimatedgrowthratesstatedbelow.

Keyassumptionsforthegoodwillpositions

include:

1)Usedforcalculatingtheterminalvalue

2)Pre-taxdiscountrateappliedtothecashflowprojections

TheManagementdeterminedplannedgrossmargin

basedonpastperformanceanditsexpectationsfor

marketdevelopment.

Thegrowthratesusedareconsistentwiththe

forecastsandtheleveredWACCusedispre-tax.

Basedontheimpairmenttestconducted,no

impairmentswererecognizedin2008.

Terminalgrowthrate¹ 7.4%

Weightedaveragecostofcapital(WACC)² 9.1%

Euro1,000 Patents and rights

Trademarks and licences

Develop-ment costs

Total

Cost

Balanceat1January2008 4,367 20 – 4,387

Additions 240 – 3,779 4,019

Othermovements – – – –

Disposals – – – –

Balanceat31December2008 4,607 20 3,779 8,406

Accumulated amortization

Balanceat1January2008 1,198 14 – 1,212

Amortizationchargefortheyear 337 1 – 338

Othermovements – – – –

Disposals – – – –

Balanceat31December2008 1,535 15 – 1,550

Netbookvalueasat31December2008 3,072 5 3,779 6,856

Explanatorynotes–CosmoPharmaceuticalsAnnualReport2008 107

“Patentsandrights”referstothecostsforfilingand

extensionofpatentsownedbytheGroup.

“Developmentcosts”referstotheBudesonide

MMX®project:atthebeginningof2008theproduct

hassuccessfullycompletedphaseIIandentered

phaseIII.Atthisstagestatisticallythereisa66%to

75%probabilityofsuccess,andfurthermoreBudeso-

nideMMX®isnotanewchemicalentity.TheGroup

willbearphaseIIIcostsoftheEuropeanclinicaltrials

untilproductregistration.

Thecapitalizedcostsincludeoutsourcedclinical

trialcosts(morethan90percentoftheamount

capitalized),material(API,excipient)fortheprepar-

ationofclinicalbatchesandpersonnelexpenses

directlyrelatedtotheBudesonideMMX®project.

Theassetisnotamortizedastheamortization

willstartfromthedateoffullcommercialuseof

theproductonastraight-linebasisovertheperiod

ofitsexpectedbenefit.

13 Financial assets

Theitemisdetailedasfollows:

“Financialassetsavailableforsale”referstothe

investmentinsharesofSantarus:accordingtothe

strategiccollaborationagreementwithSantarus

whichgrantedSantarusexclusiverightstodevelop

andcommercializeBudesonideMMX®andRifamycin

SVMMX®fortheUSmarket,Cosmoreceived,in

additiontocashofUSD2.5million,sixmillionofnewly

issuedsharesofSantaruscommonstock(onemillion

forRifamycinSVMMX®andfivemillionforBudeso-

nideMMX®).Theseshares(10.4%ofthecommon

sharesofSantarusoutstandingon31December2008)

aresubjecttoaninitial15-monthrestrictionontheir

saleortransfer.

Thefairvalueofeachshareatthedateofthe

agreement(10December2008)wasUSD2.00amount-

EUR1,000 Year ended 31 December

2008 2007

Financialassetsavailable

forsale

6,769

–

Financial assets 6,769 –

108 CosmoPharmaceuticalsAnnualReport2008–Explanatorynotes

Euro1,000 Patents and rights

Trademarks and licences

Develop-ment costs

Total

Cost

Balanceat1January2007 4,260 20 – 4,280

Additions 113 – – 113

Othermovements (6) – – (6)

Disposals – – – –

Balanceat31December2007 4,367 20 4,387

Accumulated amortization

Balanceat1January2007 884 12 – 896

Amortizationchargefortheyear 320 2 – 322

Othermovements (6) – – (6)

Disposals – – – –

Balanceat31December2007 1,198 14 – 1,212

Netbookvalueasat31December2007 3,169 6 – 3,175

ingtoatotalofUSD12.0million(EUR9,284thousand).

Asat31December2008thefairvalue(marketprice

NASDAQ)ofthesharewasequaltoUSD1.57foratotal

ofUSD9.42million(EUR6,769thousandatyear-end

foreignexchangeUSD/EUR):thelossofEUR2,515thou-

sandwasrecognizedforEUR1,996thousandnetofthe

taxeffectofEUR439thousanddirectlyinequityand

forEUR519thousand(lossontheforeignexchange

USD/EUR)intheprofitandloss.

Fortheseassetsattheendof2008,thecondition

fortheimpairmentasdescribedin“Criticalaccount-

ingestimates,assumptionsandjudgments”havenot

beenfulfilled.FurthermoretheCompanyenteredinto

thisinvestmentinrelationwithalong-termcommer-

cialagreementwithSantarus,which,itfeelswillcre-

ateconsiderablevalueforbothcompanies.Presently

thereisnoindicationthatSantarusissufferingfroma

materialdeteriorationofitsbusinessenvironmentnor

performance.

14 Deferred tax assets

Thecaptionchangedasfollows:

EUR1,000 As at 1 January

Changes duringthe year

As at

31 De-

cember

Changes duringthe year

As at

31 De-

cember

2007

Increase

Decrease

2007

Increase

Decrease

Directly in equity

2008

Goodwilldepreciation – 3 – 3 2 – – 5

Entertainingexpenses 22 12 (11) 23 1 (9) – 15

Directors’feenotpaid – 8 – 8 – (8) – –

Lossescarriedforward 662 322 (101) 883 – (811) – 72

Patents 531 – (38) 493 – (38) – 455

Othercosts 4 – (2) 2 – (2) – –

Gainonassignmentof

enterprise

–

15

_

15

–

(4)

11

Developmentcosts – – – – 93 – – 93

Fairvaluefinancialinvest-

mentsavailableforsale

–

–

–

–

114

–

439

553

Formationandstart-up

expenses

4

4

(1)

7

–

(3)

–

4

Total deferred tax assets 1,223 364 (153) 1,434 210 (875) 439 1,208

Explanatorynotes–CosmoPharmaceuticalsAnnualReport2008 109

Thefollowingtablesetsoutthenatureoftemporary

differencesdeterminingthecaptiondeferredtaxassets.

Deferredtaxassetsonlossescarriedforwarddecrease

toEUR72duetothetaxlossesutilizedagainstcurrent-

yearprofitofCosmoS.p.A.andCosmoTechnologiesLtd.

Deferredtaxassetsonpatentsrelatetotheelim-

inationofthegainonassignmentofpatentsfrom

CosmoS.p.A.toCosmoTechnologiesLtd.which

occurredin2004,netofthedeductionfortheperiod.

Deferredtaxassetsondevelopmentcostsrelates

tothedifferenceontheamountofdevelopmentcosts

capitalizedintheconsolidatedaccountscompared

totheamountcapitalizedinthelocalstatutoryfinan-

cialstatements.

Deferredtaxassetsonchangeinthefairvalue

arisefromthemeasurementatfairvalueofthe

investmentinSantarusshares.

Thedeferredtaxassetsincludedintheconsoli-

datedfinancialstatementsasat31December2007

aredeemedrecoverableonthebasisoffutureeco-

nomicforecastsassetoutinthebusinessplanto2015,

approvedbytheBoardofDirectors.

Intheanalysisoftherecoverabilityofthisitem,

analyses,basedonthenormalestimationprocessthat

theManagementcarriesoutinthepreparationof

theconsolidatedfinancialstatements,alongwithand

consistentwiththeimpairmenttestingofgoodwill

aswellastheassumptionsregardinggrowththatform

thebasisoffutureresultsforecasts,havebeensub-

jectedtosensitivityanalysis.Atthebalancesheet

date,theseanalyseshavenothighlightedanycritical

areasthatwouldrequireadjustmentstothedeferred

taxassetvalues.

15 Other non-current receivables

Theitem“othernon-currentreceivables”isdetailed

asfollows:

“Otherreceivables”relatetoguaranteedepositsfor

rentsoftheLainatecomplex:theincreasein2008of

EUR130thousandisduetothedepositpaidforthe

EUR1,000 As at 31 December

2008 2007

Otherreceivables 2,144 1,953

Totalothernon-current

receivables

2,144

1,953

110 CosmoPharmaceuticalsAnnualReport2008–Explanatorynotes

EUR1,000 Temporary differences as at 31 December

Tax effect as at 31 December

Temporary differences as at 31 December

Tax effect as at 31 December

2007 % 2007 2008 % 2008

Goodwilldepreciation 9 31.40 3 17 31.40 5

Entertainingexpenses 75 31.40 23 49 31.40 15

Directors’feenotpaid 29 27.50 8 – – –

Lossescarriedforward 4,232 20.87 883 261 27.50 72

Patents 3,947 12.50 493 3,644 12.50 455

Othercosts 6 31.40 2 – 31.40 –

Gainonassignmentofenterprise 48 31.40 15 36 31.40 11

Developmentcosts – 31.40 – 295 31.40 93

Fairvaluefinancialinvestments

availableforsale

–

–

–

2,515

22.00

553

Formationandstart-upexpenses 19 31.40 7 14 31.40 4

Deferredtaxassets 8,365 1,434 6,831 1,208

rentofa3-floorofficebuildingintheLainatecomplex

fromCristoforoColomboRealEstateS.r.l.,theresidual

increaserelatestothelegalinterestsaccruedfor2008

inrelationwiththerentofplant,laboratoriesand

relatedofficesandtherentofequipment.(Seenote33,

“Relatedpartiestransactions–Leaseagreementfor

Lainate”.)

16 Inventories

Theitem“inventories”comprisesthefollowing:

Theitem“rawmaterials,auxiliarymaterialsand

consumables”coverstherawmaterialsandpackaging

materialsusedbytheGroupinitsmanufacturing

activity;theitem“workinprogress”referstothe“bulk”

readytobepackaged.

Theincreaseinfinishedgoodsisduetothehigher

stockofLialda™tablets(59batchesasat31December

2008comparedto46batchesasat31December2007),

requiredtosatisfytheordersfromcustomers.

Thevalueofrawmaterialsin2008and2007

includesadepreciationfund,amountingtoEUR220

thousand,whichspecificallyreferstoaslowmoving

item.

17 Trade receivables

Theitem“tradereceivables”comprisesthefollowing:

Theitemcoversreceivablesfromclientsderivingfrom

manufacturingofpharmaceuticalproductsand

supplyofrelatedservices,netoftheprovisionforbad

debt,andfromtheroyaltieswithrespecttothelicence

agreementforLialda™/Mezavant®(Mesalazine

MMX®).

18 Current tax assets

Theitem“currenttaxassets”comprisesthefollowing:

Asat31December2008,“currenttaxassets”included

theresidualamountoftaxwithheldatthesource

frominterestreceivablesthatwillbeoffsetduring

thefirstquarterofthefiscalyear2009withthe

paymentofemployer’scontributionsandwithholding

taxforemployees;italsoincludestherefundable

taxwithheldonthepaymentfromDr.FalkPharmafor

thelicencecontractofRifamycinSVMMX®andon

theroyaltiespaymentsfromGiulianiInternationalLtd.

Asat31December2007,“currenttaxassets”

includedtheresidualamountoftheadvancepayments

EUR1,000 As at 31 December

2008 2007

Rawmaterials,auxiliary

materialsandconsumables

995

1,185

Workinprogress 194 187

Finishedgoods 538 397

Depreciationfund (220) (220)

Totalinventories 1,507 1,549

EUR1,000 As at 31 December

2008 2007

Domesticcustomers 2,182 1,834

EUcustomers 386 982

Non-EUcustomers 176 –

Domesticcustomers–

invoicestobeissued

48

2

EUcustomers–

invoicestobeissued

789

614

Baddebtprovision (32) (32)

Total trade receivables 3,549 3,400

EUR1,000 As at 31 December

2008 2007

Advancepaymentsof

incometaxes

578

273

Total current tax assets 578 273

Explanatorynotes–CosmoPharmaceuticalsAnnualReport2008 111

ofincometaxesexceedingtheamountdueforthe

yearandthetaxwithheldatsourcefrominterest

receivables.Theseamountswereoffsetduringthe

firstquarterofthefiscalyear2008withthepayment

ofemployer’scontributions,withholdingtaxfor

employeesandtheadvancepaymentofIRAPfor2008.

19 Other receivables and other assets

Theitem“otherreceivables”comprisesthefollowing:

For2008,theitem“governmentgrant”includesEUR

167thousandrelatedtothegrantfiledwiththeItalian

MinistryofUniversityandResearch(MIUR)forthe

preclinicalactivityontheanti-androgenproduct

CB-03-01:theresearchprojectwascompletedin

September2007,andinJanuary2008andJune2008

thefirsttwoinstalmentsamountingtoEUR762

thousandwerecollected;attheendof2008,

theMinistrymadethefinalcheck,andtheresidual

amountisexpectedtobecollectedin2009.

Thegovernmentgrantalsoincludestheamount

ofEUR78thousandrelatedtotheportionstilltobe

collectedforthegrantfiledwiththeMinistryofPro-

ductionActivities–“BandoTematicoLombardia”–

fortheresearchprojectonthemodifiedreleaseof

butyricacidcompletedin2006:attheendof2008

theMinistrymadethefinalcheck,andtheresidual

amountisexpectedtobecollectedin2009.

For2007,theitem“governmentgrant”includes

EUR929thousandrelatedtothegrantfiledwiththe

ItalianMinistryofUniversityandResearch(MIUR)

forthepreclinicalactivityontheanti-androgenprod-

uctCB-03-01andtheamountofEUR78thousand

relatedtotheportionstilltobecollectedforthegrant

filedwiththeMinistryofProductionActivities–

“BandoTematicoLombardia”–fortheresearchproject

onthemodifiedreleaseofbutyricacid.

“Receivablesfromothercompanies”attheendof

2008referstotheamountduebySantarusaccording

tothestrategiccollaborationagreementwithSanta-

rusthatforeseesthatstartingfromphaseIIIclinical

trials,thecostsfortheUSBudesonideMMX®clinical

trialarereimbursedbySantarustoCosmo.

“VATreceivables”asat31December2008refer

toCosmoS.p.A.,CosmoResearch&DevelopmentS.r.l.

andCosmoPharmaceuticalsS.p.A.andwerepartially

offsetatthebeginningof2009,bypayablesto

socialsecurityauthoritiesforcontributionsandto

taxauthoritiesforincometaxonsalaries.

“Prepaidexpenses”in2008mainlyincludes

advancepaymentstoCristoforoColomboRealEstate

S.r.l.for(i)therentofplant,laboratoriesandrelated

officesforEUR490thousand,(ii)therentofplant

equipmentforEUR1,271thousandand(iii)therent

ofthe3-floorofficebuildingforEUR104thousand.

(Seenote33,“Relatedpartiestransactions–Lease

agreementforLainate”.)

“Other”referstoadvancepaymentstosuppliers

ofservices.

20 Cash and cash equivalents

Theitem“cashandcashequivalents”comprises

thefollowing:

EUR1,000 As at 31 December

2008 2007

Cashathand 5 10

Bankaccounts 22,161 25,495

Total cash and

cash equivalents

22,166

25,505

112 CosmoPharmaceuticalsAnnualReport2008–Explanatorynotes

EUR1,000 As at 31 December

2008 2007

Governmentgrant 245 1,007

Receivablesfromother

companies

2,951

–

VATreceivables 717 357

Prepaidexpenses 1,923 1,387

Other 57 188

Total other receivables and

other assets

5,893

2,939

“Bankaccounts”includeavailabilityoncurrentbank

accountandshort-term“timedeposit”bankcon-

tracts.

21 Total shareholders’ equity

Theitem“totalshareholders’equity”comprises

thefollowing:

Share capital

Asat31December2008and2007,CosmoPharmaceut-

icalshad13,875,000sharesissued,fullysubscribed

andpaidup,eachsharewithanominalvalueof

EUR0.25,foratotalsharecapitalofEUR3,469thousand.

Treasury shares

Treasurysharesarevaluatedatweightedaveragecost

andhavebeendeductedfromequity.

Asat31December2008,thenumberoftreasury

sharesamountedto45,992;duringtheyear2008,

46,992treasuryshareswerepurchasedand1,000

treasurysharesweresold.

Thenumberofsharesoutstandingdeveloped

asfollows:

Share premium

“Sharepremium”referstothe2007IPO.Thefunds

raisedbyofferingnewsharesduringthe2007IPOwere

equaltoEUR33,164thousand,ofwhichEUR669

thousandaresharecapitalandEUR29,372thousand

(netofsharecapitalissuecostsamountingto

EUR3,123thousand)aresharepremium.

Other reserves

“Otherreserves”asat31December2008and2007

comprisesthe“contributionsreserve”ofEUR357

thousandandthe“capitalcontributionforloss

coverage”ofEUR1,805thousand.

Fair value reserve

Asat31December2008,“fairvaluereserve”isdueto

measurementatfairvalueofSantarusshareswhich

areincludedinthefinancialassetsavailableforsale

(seenote13,“Financialassets”).

Stock option plan reserve

In2008,theexpenseforthestockoptions,allallocated

in2007,amountedtoEUR639thousand,ofwhich

EUR463thousandforthepersonnelstaffandEUR176

thousandfornon-ExecutiveDirectors(in2007,the

totalwasEUR28thousand,ofwhichEUR20thousand

foremployeesandEUR8thousandfornon-Executive

Directors).

EUR1,000 As at 31 December

2008 2007

Sharecapital 3,469 3,469

Sharepremium 29,372 29,372

Treasuryshares (394)

Otherreserves 2,162 2,162

Fairvaluereserve (1,557) –

Stockoptionplanreserve 667 28

Retainedearnings 116

Profitfortheyear 9,401 116

Total shareholders’ equity 43,236 35,147

2008 2007

As at 1 January 13,875,000 8,740,000

Issuanceofnewshares

Issueofshares(January2007) – 2,460,000

IssueofsharesIPO

(March2007)

–

2,675,000

Treasuryshares

Purchased 46,992 –

Sold (1,000) –

As at 31 December 13,920,992 13,875,000

Explanatorynotes–CosmoPharmaceuticalsAnnualReport2008 113

22 Interest-bearing loans and

borrowings (non-current)

Theitem“interest-bearingloansandborrowings”

comprisesthefollowing:

Asat31December2008,“Bankloans”consistedof:

• asubsidizedloanofinitiallyEUR1,463thousand

atanominalinterestrateof2%p.a.,received

on17October2001fromSanPaoloIMIS.p.A.,pur-

suanttoagrantfiledwiththethennamed

MURST,nowMIUR(ItalianMinistryforUniversity

andResearch),duetoexpireon1January2011;

• aloanofinitiallyEUR1,320thousandatanominal

interestrateofEuriborrateplus0.80%,received

on22April2008fromBancaIntesaS.p.A.,dueto

expireon30April2011;

• asubsidizedloanofinitiallyEUR1.052thousand

atanominalinterestrateof0.816%p.a.,received

on8May2006fortheamountofEUR643thou-

sandandon2October2007fortheamountofEUR

409thousandfromCentrobancaS.p.A.,pursuant

toagrantfiledwiththeMinistryofProduction

Activities–“BandoTematicoLombardia”–for

theresearchprojectforthemodifiedreleaseof

butyricacid,duetoexpireon6October2018;

• asubsidizedloanofinitiallyEUR801thousand

atanominalinterestrateof0.500%p.a.,received

on16January2008fortheamountofEUR637

thousandandon12June2008fortheamountof

EUR164thousandfromBNLS.p.A-PariBas,pursu-

anttoagrantfiledwiththeMinistryofUniversity

andResearchforthepreclinicalactivitieson

theanti-androgenproductCB-03-01,dueto

expireon1July2015.

Duringtheyear2008theloanofinitiallyEUR2,200

thousandatanominalinterestrateofEuriborrate

plus1.50%,receivedon24November2004from

InterbancaS.p.A.,andduetoexpireon30November

2010,wasreimbursedinadvance.

Asummaryoftheabovedescriptionoflong-term

bankloansisshownbelow:

“Financialleaseliabilities”asat31December2008

and2007consistofthelong-termportionofleasing

payablesduetoIntesaLeasingS.p.A.andrelateto

plantandmachinery,industrialequipmentandother

fixedassets(seenote10).

23 Employee benefits

Theitem“employeebenefits”(“trattamentodifine

rapporto”/TFR)onlyreferstotheItaliancompanies

oftheGroupandhasbeendeterminedonanactuarial

calculationmethod,incompliancewithIAS19.It

consistsof:

EUR1,000 As at 31 December

2008 2007

SanPaoloIMI 192 388

Interbanca – 880

UnicreditBanca – 50

BancaIntesa 687 –

BNL-Paribas 513 –

Centrobanca 801 1,052

Bank loans 2,193 2,370

EUR1,000 As at 31 December

2008 2007

Managers 44 41

Juniormanagers 56 73

Employees 192 250

Workers 219 266

Employee benefits 511 630

114 CosmoPharmaceuticalsAnnualReport2008–Explanatorynotes

EUR1,000 As at 31 December

2008 2007

Bankloans 2,193 2,370

Totalbankloans 2,193 2,370

Financialleaseliabilities 710 1,288

Totalfinancialleaseliabilities 710 1,288

Total interest-bearing loans

and borrowings

2,903

3,658

Movementsintheperiodareasfollows:

Theprincipalassumptionsforthepurposeof

theactuarialvaluationwereasfollows:

Amountsrecognizedunderstaffcostsintheincome

statementsareasfollows:

*Ofwhich211and193respectivelyfor2008and2007,

amounttransferredtoexternalfund

EUR1,000 As at 1 January

Changes during the year

As at

31 December

Changes during the year

As at

31 December

2007

Accrued

Utilized

Curtailment (effect of the

reforms)

2007

Accrued Utilized 2008

Employee

benefits

755

216

(270)

(71)

630

257

(376)

511

Total

employee

benefits

755

216

(270)

(71)

630

257

(376)

511

% As at 31 December

2008 2007

Discountrate 4.25 4.72

Inflationrate 2.00 2.00

Futuresalaryincrease 4.00 4.00

Futurepensionincrease n/a n/a

Mortalityrate RGS 48 RGS 48

Averageannual

departurerate

7.59

7.48

EUR1,000 As at 31 December

2008 2007

Currentservicescost* 212 195

Interestexpenseson

obligation

26

27

Actuarialgains(/losses) 19 (6)

Costsintheincome

statements

257

216

Explanatorynotes–CosmoPharmaceuticalsAnnualReport2008 115

24 Deferred tax liabilities

Thecaptionchangedasfollows:

Thefollowingtablesetsoutthenatureoftemporary

differencesdeterminingthecaption“deferredtax

liabilities”.

EUR1,000 As at 1 January

Changes duringthe year

As at

31 December

Changes duringthe year

As at

31 December

2007 Increase Decrease 2007 Increase Decrease 2008

Tradereceivables (10) (6) 2 (14) _ _ (14)

Gainonsalesofinvestment

properties

(955)

–

351

(604)

–

201

(403)

Amortizationpatentand

software

(13)

(10)

5

(18)

0

14

(4)

Developmentcosts – – – _ (509) _ (509)

Amortizationpatentand

software

–

(271)

–

(271)

(21)

–

(292)

Goodwill (40) – 6 (34) – – (34)

Financialleaseonproperty,

plantandequipment

(134)

(153)

46

(241)

(132)

6

(367)

Fairvalueofloans – – – – (81) – (81)

Employeebenefits (8) (29) 6 (31) 0 4 (27)

Total deferred tax liabilities (1,160) (469) 416 (1,213) (743) 225 (1,731)

EUR1,000 Temporary differences as at 31 December

Tax effect as at 31 December

Temporary differences as at 31 December

Tax effect as at 31 December

2007 % 2007 2008 % 2008

Tradereceivables (54) 27.50 (14) (54) 27.50 (14)

Gainonsalesofinvestmentproperties (1,923) 31.40 (604) (1,282) 31.40 (403)

Amortizationpatentandsoftware (58) 31.40 (18) (14) 31.40 (4)

Developmentcosts – – – (4,074) 12.50 (509)

Amortizationpatentandsoftware (2,167) 12.50 (271) (2,333) 12.50 (292)

Goodwill (108) 31.40 (34) (108) 31.40 (34)

Financialleaseonproperty,plantandequip. (765) 31.40 (241) (1,166) 31.40 (367)

Fairvalueofloans – – – (296) 27.50 (81)

Employeebenefits (110) 27.50 (31) (97) 27.50 (27)

Deferred tax liabilities (5,185) – (1,213) (9,424) – (1,731)

116 CosmoPharmaceuticalsAnnualReport2008–Explanatorynotes

Asat31December2008,theitemmainlyincludesi)

EUR403thousandrelatingtodeferredtaxliabilities

onthegain,resultingfromthesalein2006ofthereal

estate“Investmentproperties”,andtaxableinfive

years(in2007,theamountwasequaltoEUR604

thousand),ii)EUR367thousandrelatingtotemporary

differencesderivingfromtheapplicationofIAS17in

relationtofinanceleasesonproperty,plantand

equipment(EUR241thousandin2007),iii)EUR296

thousand(EUR292thousandandEUR4thousand)

relatingtotemporarydifferencesderivingfrom

patentsandsoftware,iv)EUR509thousandrelating

totemporarydifferencesonthedevelopmentcosts

capitalizedinthelocalstatutoryfinancialstatements.

25 Other non-current liabilities

Theitem“othernon-currentliabilities”comprises

thefollowing:

“Otherpayables”asat31December2007refersto

theguaranteedepositandrelatedinterestspaidby

thetenantofthesubleaseofsomeofficespaces

withinthefacilityinLainate,Milan.Thesublease

endedin2008.

26 Interest-bearing loans, borrowings and

bank overdraft (current)

Theitem“interest-bearingloans,borrowings

andbankoverdraft”comprisesthefollowing:

Theitem“bankloans”referstotheshort-termportion

ofinterest-bearingloansandisdetailedasfollows:

Inadditiontotheloansdetailedinnote22,current

interest-bearingloansinclude:

• aloanofinitiallyEUR250thousandatanominal

interestofEuriborrateplus2%,receivedon

29March2004fromUnicreditBancaS.p.A.,dueto

expireon30September2009.

“Financialleaseliabilities”asat31December2008

and2007consistoftheshort-termportionofleasing

payablesduetoIntesaLeasingS.p.A.andrelatesto

plantandmachinery,industrialequipmentandother

fixedassets(seenote10).

EUR1,000 Year ended 31 December

2008 2007

Otherpayables – 2

Total other non-current

liabilities

–

2

EUR1,000 Year ended 31 December

2008 2007

Bankloans 813 884

Totalbankloans 813 884

Financialleaseliabilities 578 656

Totalfinancialleaseliabilities 578 656

Total interest-bearing loans

and borrowings and bank

overdraft

1,391

1,540

EUR1,000 Year ended 31 December

2008 2007

SanPaoloIMI 185 188

Interbanca – 440

UnicreditBanca – 117

UnicreditBanca 50 67

BancaIntesa – 72

BancaIntesa 428 –

BNL-Paribas 79 –

Centrobanca 71 –

Bank loans 813 884

Explanatorynotes–CosmoPharmaceuticalsAnnualReport2008 117

27 Trade payables

Theitem“tradepayables”includesthefollowing:

28 Deferred income

“Deferredincome”relatestotheupfrontpayment

receivedfromSantarusandDr.FalkPharmafor

RifamycinSVMMX®thatwillbecreditedtoprofit

andlossin2009,basedontheproportionofcosts

incurredtodateinrelationtotheestimatedtotalcosts.

29 Current tax liabilities

Theitem“currenttaxliabilities”includes:

Taxliabilitiescomprisestheamountsduetothetax

authoritiesinrelationtoincometaxwithheldfrom

salariesandthenetamountduebytheGroupfor

corporatetaxes(IRESandIRAPandothercorporation

taxes),netofadvancepaymentsmadeduringtheyear.

30 Other current liabilities

Theitem“othercurrentliabilities”includes

thefollowing:

“Socialsecuritypayables”comprisesboththecontri-

butionswithheldfromsalariesandthecontributions

dueinaccordancewithcurrentlawsandregulations.

“VATpayable”referstotheVATbalancepayableby

CosmoTechnologiesLtd.

“Otherliabilities”mainlyincludespayablesto

employeesrelatedtoaccrualsofdeferredpay

elements,calculatedonthebasisofthecollective

labouragreementcurrentlyinforceatCosmoS.p.A.

(ContrattoCollettivoNazionalediLavoro).

“Accruedexpensesanddeferredincome”refers

tointerestonthelong-termloansandincomeforrent,

tobedeferredincompliancewiththeaccrualbasis

rule.

31 Share-based payment

Theextraordinaryshareholders’meetingof

14December2006authorizedtheincreaseofthe

sharecapitalofamaximumofnominalEUR378,000

withtheissueof1,513,200newsharesattheservice

EUR1,000 Year ended 31 December

2008 2007

Domesticsuppliers 2,345 2,477

EUsuppliers 666 709

Non-EUsuppliers 143 349

Domesticsuppliers–

invoicestobereceived

678

646

EUsuppliers–

invoicestobereceived

398

1

Non-EUsuppliers–

invoicestobereceived

3

4

Domesticsuppliers–

creditnotestobereceived

(5)

(12)

EUsuppliers–credit

notestobereceived

–

(12)

Total trade payables 4,228 4,162

EUR1,000 Year ended 31 December

2008 2007

Deferredincomeonupfront

payment

1,996

–

Total deferred income 1,996 –

EUR1,000 Year ended 31 December

2008 2007

Withholdingtaxforemployees 221 135

Withholdingtaxfor

consultants

13

16

Taxpayables 328 20

Total current tax liabilities 562 171

EUR1,000 Year ended 31 December

2008 2007

Socialsecuritypayables 251 186

VATpayable 228 30

Otherliabilities 702 468

Advancesfromcustomers 12 12

Accruedexpensesand

deferredincome

14

9

Total other current liabilities 1,207 705

118 CosmoPharmaceuticalsAnnualReport2008–Explanatorynotes

ofanemployeestockownershipplan(ESOP),to

beimplementedwithinthefollowingfiveyears.

Attheshareholders’meetingtheBoardofDirectors

wasformallyauthorizedtoexecutesuchplan.

On18December2007,theBoardofDirectors

grantedatotalof1,013,568options;theyvestafter

threeyearsandtheycanbeexercisedatapriceof

CHF22pershareuntil14December2011.

Thefairvalueofoptionsgranted,determined

usingtheblack-scholesvaluationmodel,resulted

inavalueofCHF3.14peroption.

Theoptionsgrantedarerecognizedascostsover

thevestingperiod.In2008theexpenseforthevalue

ofemployees’andDirectors’servicesexchangedfor

stockoptionsamountedtoEUR639thousand,of

whichEUR463thousandforthepersonnelstaffand

EUR176thousandfornon-ExecutiveDirectors(in

2007,thetotalwasEUR28thousand,ofwhichEUR20

thousandforemployeesandEUR8thousandfornon-

ExecutiveDirectors).

In2008,noadditionaloptionsweregranted.

Option series Number Grant date Vestingdate

Expiry date Exercise price

Fair value of the option atthe grantdate

CHF CHF

1)Issued18December2007 1,013,568 18.12.2007 18.12.2010 14.12.2011 22 3.14

2008 2007

Number

Weighted average ex-ercise price

Number

Weighted average ex-ercise price

CHF CHF

Outstanding as at 1 January 1,013,568 22 – –

Grantedduringtheperiod – – 1,013,568 22

Forfeitedduringtheperiod – – – –

Exercisedduringtheperiod – – – –

Expiredduringtheperiod – – – –

Outstanding as at 31 December 1,013,568 22 1,013,568 22

Exercisableasat31December – – – –

Explanatorynotes–CosmoPharmaceuticalsAnnualReport2008 119

Theshareoptionsoutstandingattheendofthe

financialyearhadanexercisepriceofCHF22anda

weightedaverageremainingcontractuallifeof2.5years.

32 Contractual obligation, contingencies

and commitments

Thefollowingtablesetsforththecontractualcommit-

mentsandprincipalpaymentstheGroupwasobliged

tomakeasof31December2008and2007underdebt

instruments,financialleasesandotheragreements.

1)Notabalancesheetitem

Bankloansandfinancialleaseliabilitiesconsiderthe

residualdebtforprincipal.

Non-currentliabilitiesasat31December2008

includesEUR511thousandrelatedtorequiredindem-

nitiesforterminationofemployees(“Indennitàdifine

rapporto”/TFR)oftheItalianGroupcompanies.These

1) Issued 18 December 2007

Previousmonthlyaverageatgrant

dateshareprice

21.16

Exerciseprice 22

Expectedvolatility 19%

Optionlife 360 days

Discountrateduetothevestingperiod 7.12%

Risk-free interest rate 2.75%

EUR1,000 Total Less than 1 year

1–5 years More than 5 years

Bankloans 3,254 884 1,728 642

Financialleaseliabilities 1,944 656 1,288 –

Employeebenefits 630 – – 630

Operatingleaseexpenses1) 7,976 1,995 5,981 –

Totalcontractualobligationsasat31December2007 13,804 3,535 8,997 1,272

Bankloans 3,006 813 1,555 638

Financialleaseliabilities 1,288 578 710 –

Employeebenefits 511 – – 511

Operatingleaseexpenses1) 6,662 2,114 4,503 45

Totalcontractualobligationsasat31December2008 11,467 3,505 6,768 1,194

120 CosmoPharmaceuticalsAnnualReport2008–Explanatorynotes

obligationsarepayabletoemployeesupontheter-

minationofemploymentand,althoughinpracticea

partofthisliabilitymaycomewithin12months,this

portionisnotquantifiableandisconventionally

treatedaslong-term.

Operatingleaseexpensesmainlyreferstothe

leasefromCristoforoColomboRealEstateS.r.l.for

plantandofficesatLainate’sheadquarters.Thelease

hasadurationof6years(renewableforanequal

periodoftime)startingfrom1December2006atan

initialrentofEUR1,150thousandperyear,withannual

increaseuponcostoflife(ISTAT).Startingfromthe

samedateasthelease,theCompanyhasalsorented

fromtheCristoforoColomboRealEstateS.r.l.equip-

ment,suchasheating,vacuumandairconditioning

(HVAC),electricalandmechanical,purifiedwater

equipment,etc.ofthenewplant.Theannualrentfor

theequipmentamountstoEUR740thousandfora

durationof5years;forthefollowing7years,namely

untilthedateofexpirationoftheleaseforplantand

offices,theequipmentwillbegratuitouslyusedby

theCompanyintheformofacommodate.Starting

from1June2008,thecompanyrentedfromCristoforo

ColomboRealEstateS.r.l.thegroundfloorofanoffice

buildingintheLainatecomplexatanannualrentof

EUR90thousand(six-yearduration,renewableatthe

sametermsforanequalperiodoftime)andsecond

andthirdfloor,plusmeetingandconferenceroomsat

thebasement,atarentofEUR160thousand(one-year

duration,renewableatthesametermsforanequal

periodoftime).(Seenote33,“Relatedpartiestransac-

tions–LeaseagreementforLainate”).

Other guarantees

“Guarantees–given”referstobankguaranteesissued

byBancaIntesaS.p.A.andCreditoArtigianoS.p.A.

intheinterestoftheCompanyandinfavourofthe

suppliersofgasandelectricity.

“Guarantees–received”refersforEUR1,000

thousandtomoneypledgedbyCosmoHoldingS.p.A.,

theGroupcontrollingcompany,toIntesaLeasingS.p.A.

asaguaranteeonthefinanceleaseagreementsfor

theindustrialmachineryofthenewindustrialplant.

Contingencies

On26June2008,theIrishRevenueCommissioners

acceptedtheCompany’sclaimfortaxreliefonthe

transferofsharesmadein2006fromCosmoHolding

toCosmoPharmaceuticals,bystampingthestock

transferformas“exempt”.Nostampdutypayments

weremadebytheCompany,pendingrevenue’s

decision.

In2008,MaurizioZanettiinvokedthearbitration

clauseonalicenceagreementsignedwithCosmo

S.p.A.in2001fortheexclusiveuseofapatentinthe

biotechsector.MaurizioZanettiallegedthatacertain

sublicenceagreementforscientificpurposesonly,

signedsixyearsbeforebetweenCosmoandCosmo

Bioscience,Inc.,atthattimeanUSsubsidiary,had

tobeseenastheeventwhichmadeacontractual

milestonepaymentinhisagreementfallingdue.

On1December2008,thepartieswereconvened

beforethearbitrationpanelfortheirdepositions.

Afterthedepositions,thearbitratorsdeemedthatno

furtherdiscoverywasneededandsetthetermsfor

theparties’finalbrief.TheManagementestimates

thattheawardshallbeissuedwithinthenextthree

months.Afinalsummoninghearingshallbecalled

beforetheissuanceoftheaward.

TheCompany’scounselsdeemthatCosmohas

verygoodargumentstoresisttheclaim.

EUR1,000 Year ended 31 December

2008 2007

Guarantees–given 92 154

Guarantees–received 1,000 1,000

Total 1,092 1,154

Explanatorynotes–CosmoPharmaceuticalsAnnualReport2008 121

33 Related parties transactions

Relatedpartiestransactionsarecarriedoutonan

arm’s-lengthbasis.

TheBoardofDirectorsisnotifiedofanyproposed

relatedpartytransactionandtheDirectorsinvolved

mustabstainfromtherelateddiscussionandvoteon

decisionsrelatingtorelatedpartiestransactions.

Shouldthenature,valueorspecificcharacteristics

ofatransactionsorequire,theBoardofDirectorswill

drawontheassistanceofindependentexperts.

Lease agreement for Lainate

TheCompany’splantandofficesinLainateareowned

byCristoforoColomboRealEstateS.r.l.,arelatedparty

becauseitreferstothesamecontrollingshareholder,

whichleasesthemtotheCompanyasperthefollow-

ingagreements:

• aleaseagreementforplantandoffices,duration

sixyearsstartingfrom1December2006and

renewableforanequalperiodoftime.Theyearly

overallinitialrentwasequaltoEUR1,150thou-

sand,annuallyincreasedbyapplyingtheindex

measuringtheincreaseincostoflifeinItaly

(ISTAT);

• arentagreementfortheequipmentofthenew

plant,suchasHVAC,electricalandmechanical,

purifiedwaterequipment,etc.,durationfiveyears

startingfrom1December2006atanannualfixed

rentofEUR740thousand.Attheexpirationof

suchrentagreement,CristoforoColomboshall

provideCosmowiththegratuitoususeofthe

sameindustrialmachineryandequipmentforthe

followingsevenyears;

• aleaseagreementforthegroundfloorofanoffice

buildingintheLainatecomplexstartingfrom

1August2008atanannualrentofEUR90thou-

sand(six-yearduration,renewableatthesame

termsforanequalperiodoftime),annually

increasedbyapplyingtheindexmeasuringthe

increaseincostoflifeinItaly(ISTAT);

• aleaseagreementforthesecondandthirdfloor,

plusmeetingandconferenceroomsatthebase-

ment,startingfrom1August2008atarentofEUR

160thousand(one-yearduration,renewableat

thesametermsforanequalperiodoftime),annu-

allyincreasedbyapplyingtheindexmeasuring

theincreaseincostoflifeinItaly(ISTAT).

Cosmo Bioscience Inc. development activities

CosmoBioscienceInc.,acompanyalsocontrolledby

thesameultimateshareholdersasCosmoPharma-

ceuticalsS.p.A.,havingthreeDirectorsinbothboards,

andexpertinbiologicalanalysis,carriedoutsome

scientifictestsonthemechanismofactionofLMW

HeparinMMX®fortheCompanyin2008.TheBoardof

DirectorsoftheCompanyunanimouslyapprovedin

advancetheaboveactivities,whichin2008amounted

toUSD299,696(EUR235thousand).Additional

analyseswillbeperformedin2009.

122 CosmoPharmaceuticalsAnnualReport2008–Explanatorynotes

Key Management personnel compensation

KeyManagementpersonnelconsistoftheBoardof

DirectorsandtheExecutiveManagement;thetable

belowshowsthecompensationrecognizedinthe

profitandlossstatement2008.

* CompensationasCFO

**CosttotheCompanyofstockoptionsallocatedin2007

Explanatorynotes–CosmoPharmaceuticalsAnnualReport2008 123

EUR

Board of Directors

Function Base compensa-tion

Additional compensa-tion

Cash bonus Fringe benefits

Stock options **

Total compensa-tion

RolfStahel non-

Executive

Chairman

80,000 – – – 74,352 154,352

MauroS.

Ajani

Deputy

Chairman

CEO

200,000 – – – – 200,000

Gianluigi

Bertolli

Member,

non-

Executive

30,000 – – – 25,367 55,367

Alessandro

DellaChà

Member,

non-

Executive

30,000 – – – 25,367 55,367

DieterA.

Enkelmann

Member,

non-

Executive

30,000 10,000 – – 25,367 65,367

ChrisTanner Member,

Executive

CFO

177,000 * – 20,000 * – 156,580 * 353,580 *

Friedrichvon

Bohlenund

Halbach

Member,

non-

Executive

30,000 – – – 25,367 55,367

Total 577,000 10,000 20,000 – 332,400 939,400

EUR

Executive Management No. of members

Base compensa-tion

Cash bonus Fringe benefits

Stock options

Total compensa-tion

ExecutiveManagement 13members 1,126,457 123,960 22,013 306,600 1,579,030

Highestpaidof13member 155,000 15,000 – 83,100 253,100

34 Financial risk management objectives

and policies

Financial risk management

TheGroup’sprincipalfinancialliabilities,which

comprisebankloans,financialleasesandtrade

payables,aremainlycreatedtoraisefinancingfor

itsoperations.

TheGroup’sfinancialassets,suchascashand

cashequivalents,tradereceivablesandotherreceiva-

bles,aregeneratedbyitsoperationsandmanaged

bytheGroup’sTreasury.

ThemajorrisksarisingfromtheGroup’sfinancial

instrumentsarecreditrisk,liquidityrisk,marketrisk

(primarilyinterestrateriskandforeigncurrencyrisk).

TheGroup’sAuditCommitteeperiodicallyreviews

thepoliciesformanagingeachoftheabove-men-

tionedrisks.

Toillustratethecorrelationbetweenthefinancial

instrumentsandtherelatedriskexposure,adescrip-

tionofthepoliciesandthemeasuresadoptedbythe

Grouptomanageitsfinancialriskexposureispro-

videdherebelow.

Credit risk

CreditriskistheriskoffinanciallosstotheGroupifa

customeroracounterpartytoafinancialinstrument

failstomeetitscontractualobligations.Itarises

mainlyfromtheGroup’stradereceivablesandfrom

cashandcashequivalents.

TheGroup’sexposuretocreditriskisdrivenbythe

individualcharacteristicsofeachcustomer.TheGroup

hasaseriesoflong-standingcustomersandhasestab-

lishedconsiderableexperienceinassessingthese

customers’creditrisk.Forthesecustomers,theriskof

creditdeteriorationismonitored.Tothisendthe

Groupfollowsthedevelopmentofratings,andwhere

thecounterpartyisnotrated,itreliesonpro-active

marketinformation.Whentakingonanewclient,the

Group,wherecreditratingsarenotavailable,requests

bankreferencesandifthesefailtogeneratesufficient

comfort,maytransactonlyonaprepaymentbasis.

Inordertoreducethecreditriskconcentration,the

Group’spolicyistolimitdaysreceivablesallowed

toitsmajorcustomersandtoallocateitscashand

equivalentstoatleast4banks,whichasagroup,

maynotbeactiveinthesameareaofactivity.

Liquidity risk

LiquidityriskistheriskthattheGroupwillnotbeable

tomeetitsfinancialobligationsastheyfalldue.The

Group’sapproachtomanagingliquidityistoensure,

asfaraspossible,thatitwillalwayshavesufficient

liquiditytomeetitsliabilitieswhendue,underboth

normalandstressedconditions,withoutincurring

unacceptablelossesorriskingdamagestotheGroup’s

reputation.

TothisendtheGrouphasinvesteditscashinshort-

termdepositsorquicklyrealizablefinancialinvest-

mentsonly.Whereithasenteredintolong-termfinan-

cialobligations,thesearestructuredinsuchaway

thatmaturitiesareevenlyspreadout.Furthermore

theGroupstrivestohaveuncommittedlinesofcredit

availablefromatleasttwobanks.

TheGroupratesmanagingtheliquidityriskas

moreimportantthanoptimizinginvestmentincome.

Market risk

Marketriskistheriskthatchangesinmarketprices,

suchasforeignexchangerates,interestratesand

equityprices,willaffecttheGroup’sincomeorthe

valueofitsholdingsoffinancialinstruments.The

objectiveofmarketriskmanagementistomanage

andcontrolthemarketriskexposureswithinaccept-

ableparameters,whileoptimisingthereturnonrisk.

Interestraterisk

TheGroup’sexposuretotheriskofchangesinmarket

interestratesrelatesprimarilytotheGroup’scashin

bankdepositsandequivalentinvestments,loansand

financialleaseswithfloatinginterestrates.No

124 CosmoPharmaceuticalsAnnualReport2008–Explanatorynotes

materialhedgingactivities(suchasinterestrate

swaps)wereusedduringtheperiodunderreview.

TheGroup’spolicyistomaintainitsinvestments

invariablerateinstrumentsandtohaveallitsfinancial

obligationsinvariablerates,thuscreatinganatural

hedge.

Foreigncurrencyrisk

TheGroupisexposedtocurrencyriskonrevenues

andpurchasesthataredenominatedinacurrency

otherthanitsfunctionalcurrency(EUR).

TheGroupintendstoworkwithnaturalhedges

wherepossible,matchingforeigncurrencyinflows

withoutflows.Wherethisisnotpossible,foreign

exchangeriskwillbehedged.

Othermarketpricerisk

Equitypriceriskarisesfromavailable-for-saleequity

investments.TheGroupwillfromtimetotime

reassesswhetheritisopportunetohedgethese

investments.Generally,however,itwillonlyenterinto

equityinvestmentswhereitthinksthattheequity

valuewillappreciateandwillthusgenerallynot

hedgethemarketrisks.

Capital management

Group’scapitalmanagementobjectivesarefocused

onsafeguardingtheGroup’scapacitytosafelyexecute

thebusinessplanoftheGroup.TothisendtheGroup

willnotrelyondebttofinanceanyofitslonger-term

capitalrequirementsandwillnotstrivetomaintain

anoptimalcapitalstructureuntilitsincomestreams

reachahighlevelofpredictability.

Fromtimetotime,theGrouppurchasesitsown

sharesonthemarketandthetimingofthesepur-

chasesdependsonmarketprices.Buyandselldeci-

sionsaremadebytheCFOafterpre-discussionwith

theCEO,whowasauthorizedbytheshareholders,

accordingtotheItalianCivilCode,tobuyinthemar-

ketuptomaximum1,387,500sharesoftheCompany

untilOctober2009.

NeithertheCompanynoranyofitssubsidiaries

aresubjecttocapitalrequirementsimposedbyany

regulatoryagencyorsimilarbody.

Withreferencetothesupplementaldisclosures

requiredbyIFRS7,thecommentsbelowsupplydetails

aboutthemeasuresandmechanismsimplemented

bytheGrouptomanageitsexposuretofinancialrisks.

Classes of financial instruments

Thetablebelowshowsthefinancialassetsand

liabilities,asrequiredbyIFRS7withintheframework

ofthedifferentcategoriescontemplatedbyIAS39,

resultingon31December2008and2007.

Separateinformationisprovidedoncurrentand

non-currentfinancialliabilities,asrequiredbyIFRS7

withintheframeworkofthedifferentcategoriescon-

templatedbyIAS39,resultingon31December2008

and31December2007.

* Onlyfinancialassets/liabilities

**Interestbearingguaranteedeposit

EUR1,000 Year ended 31 December

Carrying amount

2008 2007

Financialassetsavailable

forsale

6,769

–

Othernon-current

receivables**

2,144

1,953

Tradereceivables 3,549 3,400

Otherreceivablesand

otherassets*

3,196

1,007

Cashandcashequivalents 22,166 25,505

Financialleaseliabilities (1,288) (1,944)

Subsidizedloans (1,841) (1,628)

Unsecuredbankloans (1,165) (306)

Securedbankloans – (1,320)

Tradepayables (4,228) (4,162)

Othercurrentliabilities* (12) (12)

Othernon-current

liabilities**

–

(2)

Explanatorynotes–CosmoPharmaceuticalsAnnualReport2008 125

Information and financial risk analysis

Credit risk

Exposuretocreditrisk

Thefollowingtableshowsthetradereceivables

outstandingasof31December2008and2007,with

separateinformationonthecommercialreceivables

notyetdue(“Tocomedue”line)andthosealready

comedue,withanindicationoftheperiodforwhich

theyarepastdue(“0–90days”,“90–120days”and

“Morethan120days”lines).

Theexposuretocreditriskasoftheendof2008

and2007isoutlinedinthefollowingtable.

Asat31December2008and2007,theitem“other

receivables”doesnotincludeoverduepositions.

Receivablesandwrite-downs

Thechangesinthereserveforthewrite-downof

commercialandotherreceivablesareshownin

thefollowingtable.

Morethan78percentoftheGroup’scustomershave

beentransactingwiththeGroupforoverfouryears

andnolosseshaveoccurredsofar.Thebiggestclient

hadamaximumofEUR1,810thousandoutstanding

attheendofanyquarter,thesecondbiggestclient

hadamaximumofEUR579thousandoutstanding

attheendofanyquarterin2008.

Atpresent,therearenopendinglitigationswith

referencetoGroup’stradereceivables,norhasthere

beenanyrecordoflitigationsinthepast.Neverthe-

less,receivablesareconstantlymonitoredbytheMan-

agementwithinthecontextofariskmanagement

system,approvedbytheBoardofDirectors.

Basedonpastexperience,theGroupbelievesthat

theamountrecordedinthereservefordoubtfuldebt

issufficientinrespecttotheriskrelatedtotrade

receivablesthatarenotpastdue;alltradereceivables

relatetocustomersthathaveagoodtrackrecordin

thebusinessrelationswiththeGroup.

Liquidity risk

TheliquidityriskistheriskthattheGroupwill

encounterdifficultyinmeetingfutureobligationswith

respecttofinancialliabilities,afterconsideringthe

Company’scashandcashequivalents’availability.

Theriskanalysisisaimedatquantifying,onthebasis

EUR1,000 Year ended 31 December

Ageing of trade receivables 2008 2007

0–90 19 23

90–120 – –

120+days (2) 29

Total 17 52

(Allowanceforbaddebt) (32) (32)

Receivablestocomedue 3,564 3,380

Totaltradereceivables 3,549 3,400

EUR1,000 Year ended 31 December

Ageing of trade receivables 2008 2007

Movementinthereservefor

doubtfuldebts

32

32

Balanceatbeginningof

theyear

–

–

Impairmentlossesrecognized

onreceivables

–

–

Amountswrittenoffas

uncollectible

–

–

Amountsrecoveredduring

theyear

–

–

Impairmentlossesreversed – –

Balanceatendoftheyear 32 32

126 CosmoPharmaceuticalsAnnualReport2008–Explanatorynotes

ofcontractualmaturity,thecashflowinrelationto

thereimbursementoftheCompany’sfinancial

liabilitiesasof31December2007and2008asmuch

astheyareconsideredsignificantforthepurposeof

liquidityrisk.

TheCompany’sobjectiveistoachieveabalance

between(a)themaintenanceofbankcreditcapacity,

and(b)flexibilitythroughtheuseofmedium-term

financing.

TheGroupmonitorsitsliquidityriskusingarecur-

ringliquidityplanningtool.Thistoolconsidersthe

maturityofitsfinancialassets(e.g.cashandcash

equivalents,accountsreceivablesandotherfinancial

assets)aswellasprojectedcashflowsfromoper-

ations.

CorporateTreasurymaintainsflexibilityinfund-

ing,bymaintaininguncommittedcreditlinesand

monitorsrollingforecastsoftheGroup’sliquidity

reserve(whichcomprisesundrawnborrowingfacility

andcashandcashequivalentsonthebasisof

expectedcashflow).

Withreferencetothematuritiesofcashflowsrelated

totheCompany’sfinancialexposure,thereimburse-

mentplansforthemedium-termdebtaredeemed

importantforthepurposeofliquidityrisk,particularly

consideringthenatureoftheCompany’scashflow

cycle.

Herebelowthedebtrepaymentplansforannual

periodsarepresented,toquantifytheliquidityrisk

andthenecessarycashflows.

Inthisregarditisnotedthatthequantificationof

thecashflowpaymentsonnon-currentfinancialliabil-

itiesisrepresentedbythefutureflowsgeneratedby

thefinancialinstrument,takingintoaccountthecon-

tractualrepaymentplanandthefutureinterestrates

estimatedonthebasisoftheIRSinterestratesbyyear

asimpliedbytheEURIBORcurveon31December2008

and2007.

EUR1,000 Carrying amount

Total Less than 1 year

1–2 years 2–5 years More than 5 years

Bankloans 3,006 3,422 928 886 894 714

Financialleaseliabilities 1,288 1,408 614 557 237 –

Totalasat31December2008 4,294 4,830 1,542 1,443 1,131 714

Bankloans 3,254 3,484 990 847 987 660

Financialleaseliabilities 1,944 2,172 735 633 804 –

Totalasat31December2007 5,198 5,656 1,725 1,480 1,791 660

Explanatorynotes–CosmoPharmaceuticalsAnnualReport2008 127

Market risk

Theactualexposuretosuchsourcesofriskisillus-

tratedasof31December2008and2007,along

withthepossiblebalancesheetimpactoftherisk

factor’splausiblevariations.

Interestraterisk

TheGroupisexposedtointerestrateriskforits

floating-rate,medium-/long-termdebtobligations

andcashandcashequivalents,asidentifiedinthe

followingtables:

EUR1,000 31 December 2008

Currency Interest Interest rate Expiry Nominal value

Carrying amount

Fixed interest rate

subsidized loans

SanPaoloIMI EUR fixed rate 2.000% 01.01.11 1,463 377

BNL-Paribas EUR fixed rate 0.500% 01.07.15 802 592

Centrobanca EUR fixed rate 0.816% 06.10.18 1,052 872

Unsecured bank loans

UnicreditBanca EUR floating rate Euribor

+1.75%

31.12.08 350 –

UnicreditBanca EUR floating rate Euribor

+2.00%

30.09.09 250 50

BancaIntesa EUR floating rate Euribor

+1.55%

31.03.08 400 –

BancaIntesa EUR floating rate Euribor

+0.80%

30.04.11 1,320 1,115

Uncommited bank overdraft

Variousbanks(5) EUR floating rate Euribor

+various %

until

revocation

4,910 not utilized

Financial lease liabilities

Intesaleasing(various) EUR floating rate Euribor

+1.00%

from

01.11.08

3,942 1,288

to

01.06.11

128 CosmoPharmaceuticalsAnnualReport2008–Explanatorynotes

EUR1,000 31 December 2007

Currency Interest Interest rate Expiry Nominal value

Carrying amount

Fixed interest rate

subsidized loans

SanPaoloIMI EUR fixed rate 2.0% 01.01.11 1,463 576

Centrobanca EUR fixed rate 0.816% 06.10.18 1,052 1,052

Secured bank loans

Interbanca EUR floating rate Euribor

+1.50%

30.11.10 2,200 1,320

Unsecured bank loans

UnicreditBanca EUR floating rate Euribor

+1.75%

31.12.08 350 117

UnicreditBanca EUR floating rate Euribor

+2.00%

30.09.09 250 117

BancaIntesa EUR floating rate Euribor

+1.55%

31.03.08 400 72

Uncommited bank overdraft

Variousbanks(5) EUR floating rate Euribor

+various %

until

revocation

4,910 not utilized

Financial lease liabilities

IntesaLeasing(various) EUR floating rate Euribor

+1.00%

from

01.11.08

3,942 1,944

to

01.06.11

Explanatorynotes–CosmoPharmaceuticalsAnnualReport2008 129

Sensitivityanalysis–interestraterisk

Thetablebelowprovidesanindicationoftheimpact

ontheprofitbeforetaxofaparallel+/-50basis-point

shiftoftheratecurveestimatedasof31December

2008and2007.Theanalysiswascarriedoutbyassum-

ingthattheothervariablesremainedconstant,and

itwasalsocarriedoutfor2008and2007onthebasis

ofthesameassumptions.

Foreign currency risk

TheGroupisexposedtocurrencyriskonrevenues

andcoststhataredenominatedinacurrencyother

thanthefunctionalcurrencyoftheGroup(EUR).It

istheGroup’spolicyonlytoprimarilyinvestitscash

andcashequivalentsineuroandonlyholdshort-

termforeignexchangebalancesinanticipationof

short-termpaymentobligationsinforeigncurrency.

UntilDecember2008,theexchangeriskofthe

Groupwasmitigatedbyanaturalhedgesinceits

USdollarrelatedroyaltyincomewasoffsetbyits

USdollarrelatedResearchandDevelopmentcosts

locatedintheUSA.

Sensitivityanalysis–foreigncurrencyrisk

A10-percentstrengtheningoftheeuroagainstthe

USdollarasat31December2008wouldhaveresulted

inaprofitdecreaseofEUR609thousand(EUR240

thousandasat31December2007).

A10-percentweakeningoftheeuroagainstthe

USdollarasat31December2008wouldhavehadthe

oppositeeffect,fortheequalamountshownabove.

Theanalysisassumesthatallothervariables,in

particularinterestrates,remainconstant.

EUR1,000 Profit(/Loss)

31 December 2008 50bp 50bp

increase decrease

Variablerateinstruments (16) 16

Cashandcashequivalents 120 (120)

Cashflowsensitivity(net) 104 (104)

EUR1,000 Profit(/Loss)

31 December 2007 50bp 50bp

increase decrease

Variablerateinstruments (25) 25

Cashandcashequivalents 100 (100)

Cashflowsensitivity(net) 75 (75)

EUR1,000 31 December 2008

Currency Interest Interest rate Carrying amount

Cashathand Various n/a n/a 5

Bankaccounts,variousbanks(9) EUR floating rate Euribor

+various %

21,068

Bankaccounts,variousbanks(1) USD floating rate Euribor

+various %

1,093

EUR1,000 31 December 2007

Currency Interest Interest rate Carrying amount

Cashathand Various n/a n/a 10

Bankaccounts,variousbanks(7) EUR floating rate Euribor

+various %

24,669

Bankaccounts,variousbanks(2) USD floating rate Euribor

+various %

826

130 CosmoPharmaceuticalsAnnualReport2008–Explanatorynotes

TheManagementhaddecided,andtheBoardof

Directorshadapproved,thestrategyofthe“natural

hedge”,wherebyUSdollarbasedroyaltystreamsare

usedtopayUSDollarbasedcostsforclinicaltrials.

Theneteffectofsuchriskisminimizedaccordingly,

withgainandlosseffectsonthesetwocomponents.

Thisprovidesaneconomichedgeandnoderivatives

areenteredinto.

TheSantarusdealinDecember2008(seenote5

and6)hascalledforachangeinthenaturalhedge

strategybecauseitpracticallyeliminatedtheGroups

2008and2009USdollarR&Dcosts.Forthisreason

theManagementin2009decidedtohedgeforeign

exchangeriskbysellingforwardthe2009excesscash

flowsinUSdollar,whichessentiallywillderivefrom

theroyaltypaymentsonLialda™sales.

Other market price risk

AsaconsequenceoftheSantarusdeal,inDecem-

ber2008theGroupacquiredanequityinvestmentin

Santarus,whosesharesarelistedontheNewYork

StockExchange.Thisinvestmentrepresents10.4%of

thecommonsharesofSantarusandwasreceivedas

non-monetarydownpaymentinthelicenceagree-

mentsignedon10December2008.

ThisequityownershipinSantarusreflectsthe

Group’sconfidenceinthelong-termvalueofSantarus’

business.Thesharesaresubjecttoaninitial15

months’restrictionontheirsaleortransferandthe

investmentisactivelymonitoredandmanagedona

fairvaluebasis.

Forthisassetattheendof2008,theconditionfor

theimpairmentasdescribedin“Criticalaccounting

estimates,assumptionsandjudgments”havenot

beenfulfilled.FurthermoretheCompanyenteredinto

thisinvestmentinrelationwithalong-termcommer-

cialagreementwithSantarus,which,itfeelswillcre-

ateconsiderablevalueforbothcompanies.Presently

thereisnoindicationthatSantarusissufferingfroma

materialdeteriorationofitsbusinessenvironment

norperformance.

Sensitivityanalysis–othermarketrisk

Assumingthattheothervariablesremainedconstant,

a10-percentincreaseinthesharepriceatthereport-

ingdatewouldhaveincreasedequitybyEUR568

thousandaftertax;anequalchangeintheopposite

directionwouldhavedecreasedequitybyEUR568

thousandaftertax.

Share capital and share premium

Asat31December2008,theauthorizedshare

capitalcomprised13,875,000ordinaryshares(2007:

13,875,000).Allissuedsharesarefullypaid.

Theholdersofordinarysharesareentitledto

receivedividendsuponshareholders’resolution

andtheyareentitledtoonevotepershareatthe

shareholdersmeetings.

AccordingtotheItalianCivilCode,alltherights

forownsharesheldbytheGrouparesuspended.

EUR1,000 Year ended 31 December

2008 2007

Totalassets 57,765 47,228

Equity 43,236 35,147

Equityratio 75% 74%

Explanatorynotes–CosmoPharmaceuticalsAnnualReport2008 131

Fair values versus carrying amounts of financial

assets and liabilities

Thistableshowsthecomparisonoffairvaluesversus

carryingamountsoffinancialassetsandliabilities,as

requiredbyIFRS7.

Belowasummaryofthesignificantmethodsand

assumptionsusedinestimatingthefairvaluesof

financialinstrumentsinthetableabove.

Equityinvestments:

Thefairvalueoftheavailable-for-salefinancialassets

isdeterminedbyreferencetotheirquotedbidpriceat

thereportingdate.

Subsidizedloans:

Thefairvalueiscalculatedbasedonthepresentvalue

offutureprincipalandinterestcashflows,discounted

atinterestmarketrateatthereportingdate.

35 Subsequent events

Asatthedateofpresentationofthesefinancial

statementstherewerenomaterialeventsafterthe

balancesheetdate.Cosmoiscontinuingtodevelop

itsproductspipeline,inlinewithplansandpro-

grammedactivities.

EUR1,000 Year ended 31 December 2008 Year ended 31 December 2007

Carrying amount

Fair value

Carrying amount

Fair value

Financialassetsavailableforsale 6,769 6,769 – –

Othernon-currentreceivables** 2,144 2,144 1,953 1,953

Tradereceivables 3,549 3,549 3,400 3,400

Otherreceivablesandotherassets* 3,196 3,196 1,007 1,007

Cashandcashequivalents 22,166 22,166 25,505 25,505

Financialleaseliabilities (1,288) (1,288) (1,944) (1,944)

Subsidizedloans (1,841) (1,913) (1,628) (1,371)

Unsecuredbankloans (1,165) (1,165) (306) (306)

Securedbankloans – – (1,320) (1,320)

Bankoverdraft – – – –

Relatedpartiesloans – – – –

Tradepayables (4,228) (4,228) (4,162) (4,162)

Othercurrentliabilities* (12) (12) (12) (12)

Othernon-currentliabilities** – – (2) (2)

29,290 29,218 22,491 22,748

Unrecognized gain (/loss) (72) 257

* Onlyfinancialassets/liabilities

** Interestbearingguaranteedeposit

132 CosmoPharmaceuticalsAnnualReport2008–Explanatorynotes

134 CosmoPharmaceuticalsAnnualReport2008–Auditors’report

MAZARS & GUÉRARDCORSO DI PORTA VIGENTINA, 35 - 20122 MILANOTEL: +39 02 58 20 10 - FAX: +39 02 58 20 14 03 - www.mazars.it

SPA - CAPITALE SOCIALE DELIBERATO €3.000.000,00, SOTTOSCRITTO €2.703.000,00, VERSATO €2.587.500,00 - SEDE LEGALE: C.SO DI PORTA VIGENTINA, 35 - 20122 MILANO

REA N. 1059307 - COD. FISC. N. 01507630489 - P. IVA 05902570158 - AUTORIZZATA AI SENSI DI L. 1966/39 - REGISTRO DEI REVISORI CONTABILI GU 60/1997 ALBO SPECIALE DELLE SOCIETÀ DI REVISIONE CON DELIBERA CONSOB N° 10829 DEL 16/07/1997 UFFICI IN ITALIA: BOLOGNA - FIRENZE - MILANO - NAPOLI - PADOVA - PALERMO - ROMA – TORINO - UDINE

Auditors’ Report

To the Board of Directors of Cosmo Pharmaceuticals S.p.A.

Report on the Financial Statements

We have audited the accompanying consolidated financial statements of Cosmo Pharmaceuticals S.p.A. (“the Company”), which comprise the balance sheet as at December 31, 2008, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Auditors’report–CosmoPharmaceuticalsAnnualReport2008 135

Opinion

In our opinion, the consolidated financial statements give a true and fair view of the financial position of Cosmo Pharmaceuticals S.p.A. as of December 31, 2008, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

Milan, March 20, 2009

Mazars & Guérard S.p.A.

Carlo Consonni Partner

Selectedfinancialinformation

Income statements data

EUR1,000 Year ended 31 December 2008 Year ended 31 December 2007

% of revenue % of revenue

Revenue 34,173 100.0 21,900 100.0

Otherincome 47 0.1 516 2.4

Costofsales (13,203) (38.6) (13,162) (60.1)

Researchanddevelopmentcosts (4,287) (12.5) (4,772) (21.8)

Selling,generalandadministrativecosts (5,546) (16.2) (4,730) (21.6)

Depreciationandamortization 0 – 0 –

Netoperatingexpenses (22,989) (67.3) (22,148) (101.1)

Operatingresult 11,184 32.7 (248) (1.1)

Financialincome 1,369 4.0 870 4.0

Financialexpenses (940) (2.8) (469) (2.1)

Profitbeforetaxes 11,613 34.0 153 0.7

Incometaxexpenses (2,212) (6.5) (37) (0.2)

Profitfortheyear 9,401 27.5 116 0.5

136 CosmoPharmaceuticalsAnnualReport2008–Selectedfinancialinformation

Other dataBalance sheet data

Cash flow data

EUR1,000 As at 31 December

2008 2007

Non-currentassets 24,072 13,562

Cashandcashequivalents 22,166 25,505

Othercurrentassets 11,527 8,161

Totalassets 57,765 47,228

Medium-tolong-terminterest-

bearingloansandborrowings

2,903

3,658

Othernon-currentliabilities 2,242 1,845

Short-terminterest-bearing

loans,borrowingsandbank

overdraft

1,391

1,540

Othercurrentliabilities 7,993 5,038

Equity 43,236 35,147

Totalequityandliabilities 57,765 47,228

EUR1,000 As at 31 December

2008 2007

Cashflowsfromoperating

activities

12,517

(2,493)

Cashflowsfrominvesting

activities

(14,661)

925

Cashflowsfromfinancing

activities

(1,195)

26,579

Netincrease(/decrease)in

cashandcashequivalents

(3,339)

25,011

EUR1,000 As at 31 December

2008 2007

Networkingcapital1) 3,518 3,021

Netfinancialindebtedness2) (17,872) (20,307)

EBITDA3) 12,785 1,212

1)Networkingcapitalisdefinedasinventoriesplustraderecei-

vables,otherreceivablesandotherassetslesstradepayables,

deferredincomeandothercurrentliabilities.

2)Netfinancialindebtednessisdefinedascurrentinterest-

bearingloans,borrowingsandbankoverdraftplusnon-current

interest-bearingloansandborrowings,lesscashandcash

equivalents.

3)EBITDAiscalculatedasnetprofit/lossfortheyear,before

incometaxexpenses,financialincomeandexpenses,

depreciationandamortization.

Selectedfinancialinformation–CosmoPharmaceuticalsAnnualReport2008 137

138 CosmoPharmaceuticalsAnnualReport2008–Informationforinvestors

Capital structure

Share price data

Share earnings

Stock exchange information

Research coverage

Calendar

Key reporting dates

HalfYearReport–29July2009

AnnualReport–April2010

EUR1,000 31.12.2008

Equity 43,236

Sharecapital 3,469

Reserves 30,366

Profitfortheperiod 9,401

Numberforregisteredshares 13,875,000

Nominalvaluepershare(inEUR) 0.25

Major shareholders No. of shares % of share capital

CosmoHoldingS.p.A. 8,740,000 63.0%

dieviniHoppBioTechHolding

GmbH&Co.KG

1,476,876

10.6%

CHF Price Date

Firsttradingday 22.30 12.3.2007

2008lowest 11.00 12.12.2008

2008highest 25.30 25.2.2008

2008lasttradingday 16.10 30.12.2008

Marketcapitalization

(inCHFmillion)

223.3

30.12.2008

EUR 31.12.2008

Earnings 0.678

Listing SIXSwissExchange,

MainBoard

SecurityID COPN

ISIN IT0004167463

Swisssecuritynumber(Valor) 2862650

Numberofshares 13,875,000

Jefferies

International

Peter

Welford

Phone:+442070298668

Sal.

Oppenheim

Carri

Duncan

Phone:+41442142326

Vontobel AndrewC.

Weiss

Phone:+41582837152

Informationforinvestors

Informationforinvestors–CosmoPharmaceuticalsAnnualReport2008 139

Share price

Trading volumes

CosmoPharmaceuticals

SPIBiopharma

SPIS&MCAP

2008 CHF

27.0

22.5

24.7

20.0

18.0

13.5

15.7

11.2

03

.01

.20

08

14

.02

.20

08

31

.03

.20

08

14

.05

.20

08

25

.06

.20

08

07

.08

.20

08

18

.09

.20

08

30

.10

.20

08

11

.12

.20

08

30

.12

.20

08

40,000

60,000

20,000

0

03

.01

.20

08

14

.02

.20

08

31

.03

.20

08

14

.05

.20

08

25

.06

.20

08

07

.08

.20

08

18

.09

.20

08

30

.10

.20

08

11

.12

.20

08

30

.12

.20

08

140 CosmoPharmaceuticalsAnnualReport2008–Glossary

Acute

Acuteoftenmeansurgent.Anacutediseaseoccurs

suddenly.

5–aminosalicylic acid

Itisadrugderivedfromsalicylicacidusedtotreat

inflammationoftheintestine.

Acne

Skindisordercharacterizedbyinflammationasa

resultofover-activityofthesebaceousglands.

Alopecia (male pattern baldness)

Hairfolliclediseasewhichinvolvesindividuals

geneticallypredisposed.

Androgens

Malesexhormones.

Antibiotic

Drugthatkillsbacteriaorpreventsthemfrom

multiplying.

AUC (area under the curve)

TermusedinPKstudiesasmeasureofsystemic

absorption.

Autoimmune

Aconditioninwhichthebodyproducesantibodies

toitsowntissue.

Bacteria

Single-celledmicroorganismsthatcanexistindepend-

entlyordependentlyuponanotherorganism

forlife.Theycancauseinfectionandareusually

treatedwithantibiotics.

Butyric acid

Isashort-chainfattyacidproducedinthecolonbythe

fermentationofalimentaryfibres.Itisthemain

physiologicalfuelforthemucosacellsinthecolon.

C.P.O.

ContractPharmaceuticalOrganization,acompany

thatcarriesoutservicesinthepharmaceuticalsector

onbehalfofthirdparties.

C.R.O.

ContractResearchOrganization,acompanythat

carriesoutresearchand/ordevelopmentactivitiesin

thepharmaceuticalsectoronbehalfofthirdparties.

Clostridium Difficile Associated Diarrhoea (CDAD)

DiarroheaduetoClostridiumDifficileinfection.

Colon

Thecolonisthepartofthelargeintestinebetweenthe

cecumtotherectum.Itsprimarypurposeistoextract

waterfromfaeces.

Clinical need

Therapeuticneednotcoveredbydrugsthatare

currentlymarketed.

Clinical phase I

PhaseItrialsarethefirststageofdrugtestingon

humansubjects.

Clinical phase II

Oncetheinitialsafetyoftherapyhasbeenconfirmed

inphaseItrials,phaseIItrialsareperformedonlarger

groups(20–200)andaredesignedtoassessclinical

efficacyofthetherapy,aswellastocontinuephaseI

assessmentonalargergroupofvolunteersand/or

patients.

Glossary

Glossary–CosmoPharmaceuticalsAnnualReport2008 141

Clinical phase III

PhaseIIIstudiesarerandomizedcontrolledtrialson

largepatientgroups(≥200,dependingonthecondi-

tion)andareaimedatproducingadefinitiveassess-

mentoftheefficacyofthenewtherapy,sometimesin

comparisonwithcurrent“goldstandard”treatment.

Clinical trial

Ameticulouslycontrolledtestofadrugcandidateon

humans.

Cmax

Maximiumdrugconcentrationreachedinabody

fluid,usuallyplasmaorblood.

Compliance

Compliancewiththetherapeuticregimeimposedby

theprescribingdoctor.

Crohn’s Disease (CD)

ItisatypeofchronicInflammatoryBowelDisease

(IBD)whichcanaffectanypartofthegastrointestinal

tractfrommouthtoanus.

Chronic

Lastingalongtime.

Cytokines

Anyclassofsubstancesthataresecretedbycellsof

theimmunesystem.

Diarrhoea

Itisagenerallyunpleasantconditioninwhichthe

suffererhasfrequentwatery,loosebowelmovements.

Dose finding study

Aclinicalstudydesignedtodeterminetheefficacyand

safetyofdifferentdosestohelpintheidentificationof

themostefficaciousandwell-tolerateddose.

Double-blind study

Aclinicaltrialdesigninwhichneithertheparticipat-

ingindividualsnorthestudystaffknowwhichpartici-

pantsarereceivingtheexperimentaldrugandwhich

arereceivingplacebooranotheractiveingredient

(comparator).

Disease activity index (DAI)

AnindexofseverityofIBDincludingsubjectiveand

endoscopicevaluations.

Diverticulitis

Diverticulitisisadiseaseofthebowel,inparticular

thelargeintestine,characterizedbyinflammation

andinfectionofintestinaldiverticula.Diverticulaare

fingershapeddilatationsoftheintestinalwall.

Drug delivery system

Atechnologyormethodthatisabletocontrolthetime

andtheextentofthereleaseofadrug.

Efficacy

Theabilityofadrugtocontrolorcureanillness.

Endoscopic activity index (EAI)

AnindexevaluatingtheseverityofIBDbyendoscopic

examinations.

Endoscopy

Endoscopymeanslookinginsideandreferstolooking

insidethehumanbodyformedicalreasons.

Endogenous

Producedorsynthesizedwithintheorganism.

Enzyme

Amoleculethatincludestheconversionofone

chemicalsubstancetoanother.

142 CosmoPharmaceuticalsAnnualReport2008–Glossary

Epidemiologic

Causeanddevelopmentcharacteristicsofadiseasein

populations.

EMEA

EuropeanMedicineEvaluationAgency.

EPO

EuropeanPatentOffice.

Ethical drugs

Prescriptiondrugsusedfortreatmentofserious

diseases.

Excipient

Aninertsubstanceusedasadiluentorvehicleforadrug.

FDA

FoodandDrugAdministration,theUSgovernment

agencythatgovernstheentryandmonitoringof

productsonthemarket.

Galenic

Galenicformulationdealswiththeprinciplesof

preparingandcompoundingmedicinesinorderto

optimizetheirabsorption.

Generic drugs

Drugsequivalenttobranddrugs.

Hirsutism

Excessivegrowthinwomenofthickhair,withamale

pattern.

ICH

TheInternationalConferenceonHarmonisationof

TechnicalRequirementsforRegistrationofPharma-

ceuticalsforHumanUse.

Ileum

Theileumisthefinalportionofthesmallintestine.

Infection

Aconditionresultingfromthepresenceofbacteria

orothermicroorganismsinthebody.

Inflammation

Swelling,reddening,heatand/orpainproducedinthe

areaofthebodyasaresultofirritation,injuryor

infection.

Inflammatory Bowel Disease (IBD)

Agroupofinflammatoryconditionsofthebowel,

includingUlcerativeColitisandCrohn’sDisease.

Intestine

Theportionofthealimentarytractextendingfrom

thestomachtotheanus,consistingoftwosegments,

thesmallintestineandthelargeintestine(orcolon).

Inulin

Inulinsareagroupofnaturallyoccurringoligosacchar-

ideswhicharefermentedbyintestinalbacteria

leadingtotheproductionofshortchainfattyacid,

includingbutyricacid.

In vitro

Inanartificialenvironment,referringtoaprocessor

reactionoccurringtherein,asinatesttubeorculture

media.

Lesions

Alesionisanyabnormaltissuefoundonorinan

organism,usuallydamagedbydiseaseortrauma.

Lipophilic

Thepropertyofachemicalcompoundtodissolvein

fats,oils,lipids,andnon-polarsolvents.

Glossary–CosmoPharmaceuticalsAnnualReport2008 143

Lumen

Thelumenistheinteriorofavesselwithinthebody,

suchasthesmallcentralspaceinanarteryorvein,

oranyoftheirrelatingvesselsthroughwhichblood

flows.Onalargerscale,theinteriorofthegastrointes-

tinaltractmayalsobereferredtoasitslumen.

Mechanism of action

Themannerbywhichadrugexertsitsactivity.

Monoclonal antibodies

Identicalantibodiesproducedbyselectedand

restrictedBlymphocytes.

NCE

Newchemicalentity,chemicalstructurewhichisnot

partofexistingtechnicalknow-how.

NDA

TheNewDrugApplication,aprocedurethrough

whichdrugsponsorsformallyproposethattheFDA

approveanewpharmaceuticalforsaleandmarket-

ingintheUSA.

Nutraceuticals

Referstofoodsclaimedtohaveaeffectonhuman

health.Thetermincludesdietarysupplementsand

specialfood.

OTC drugs

Over-the-counterdrugsaremedicinesthatmaybe

soldwithouttheprescriptionofamedicalprofessional,

incontrasttoprescriptiondrugs.

Off-label

Theuseofadrugforamedicalconditionotherthan

forwhichitwasofficiallyapprovedandmarketed.

Orphan diseases

Diseasescharacterizedbyalimitedincidenceinthe

population,generallyfewerthan5casesper10,000,

andforwhichtherearecurrentlynovalidtherapies

available.

Orphan drug

Drugintendedtocureorphandiseases.

Onset of action

Thelengthoftimeittakesforamedicinetostarttowork.

Open-label study

Astudyinwhichallparties(patient,physicianand

studycoordinator)areinformedofthedruganddose

beingadministrated.

Pivotal study

UsuallyaphaseIIIstudywhichpresentsthedatathat

thegovernmentalagenciesresponsibleforapproving

themarketingofpharmaceuticalproducts(e.g.theUS

FDAandtheEMEA)usetodecidewhetherornotto

approveadrug.

Placebo

Drugwithnoactiveingredients.

Pharmaceutical manufacturing plant

Facilitiesforthemanufacturingofdrugs,subjectto

authorizationbyspecifichealthauthorities.

Pharmacokinetic

Theprocessbywhichadrugisabsorbed,distributed,

metabolizedandeliminatedbythebody.

Pharmacokinetic parameters

Measuresrelatedtodrugabsorptionandelimination

ratesthatareusefultoevaluatethebehaviourofthe

drugsafteradministrationtoalivingorganism(like

Cmax,tmax,AUCetc.).

144 CosmoPharmaceuticalsAnnualReport2008–Glossary

Peptides

Peptides(fromtheGreekπεπτος,“digestible”)arethefamilyofshortmoleculesformedfromthelinking,ina

definedorder,ofvariousα-aminoacids.

Probiotic bacteria

Microorganismsnormallypresentintheintestine,

producingbeneficialeffects.

Proof of concept study

PhaseIIaclinicaltrials,usuallyconductedwithinthe

targetpatientgroup,todeterminewhetherthe

considerableresourcesnecessarytocompletedrug

developmentshouldbeinvested.

Prophylaxis

Amethodtopreventadisease.

Randomized/Randomization

Theproceduresensuringthatthesubjectsareequally

andrandomlydistributedtotreatmentorcontrol

groups.

REACH

Registration,Evaluation,AuthorisationandRestric-

tionofChemicalsubstances.

Receptor

Aproteincomplexlocatedinsideoronthewallofthe

cellscharacterizedbyselectivebindingofaspecific

substance.

Rectum

Thelastpartofthelargeintestine.

Registration

Authorizationrequiredtomarketadrug.

Seborrhoea

Askindiseasecharacterizedbyincreaseofsebum

associatedornottoinflammation.

Technology platform

Technologyappliedtovariousmoleculesgenerating

certainproducts.

Tmax (Time to maximium concentration)

TermusedinPKstudiestoindicatethetimeafter

administrationwhenthemaximumconcentrationin

abodyfluidisobtained.

Ulcerative Colitis (UC)

UlcerativeColitisisaformofInflammatoryBowel

Disease(IBD).Thediseaseislocatedonlyinthecolon,

andischaracterizedbypresenceofmucosalulcer-

ations.Themainsymptomsofactivediseaseare

usuallyabdominalpainanddiarrhoeamixedwith

blood,ofgradualonset.

CosmoPharmaceuticalsAnnualReport2008 145

Concerning forward-looking statements

Thisreportcontainscertain“forward-lookingstate-

ments”,whichcanbeidentifiedbytheuseoftermin-

ologysuchas“could”,“might”,“propose”,

“addressable”,“outlook”,“attractive”orsimilar

wording.Suchforward-lookingstatementsreflect

thecurrentviewsofManagementandarenot

guaranteesoffutureperformanceandinvolverisks

anduncertainties,readersarecautionedthatactual

resultsmaydiffermateriallyfromthoseinthe

forward-lookingstatementsasaresultofvarious

factors.Cosmoisprovidingtheinformationinthis

reportasofthisdateanddoesnotundertakeany

obligationtoupdateanyforward-lookingstatements

containedinitasaresultofnewinformation,future

eventsorotherwise.

146 CosmoPharmaceuticalsAnnualReport2008

Imprint

© 2009 Cosmo Pharmaceuticals S.p.A.

Phone: +390293337614

Fax: +390293337663

Concept

IRFCommunicationsAG,Zurich

Graphic design, illustrations, production

and prepress

TGGHafenSennStieger,St.Gallen

Portraits

CarloBevilacqua

photographeranddirector

www.carlobevilaqua.com

Printing and lithography

NiedermannDruckAG,St.Gallen

Contacts and addresses

Cosmo Pharmaceuticals S.p.A.

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20020Lainate(Milan)

Italy

Phone: +390293337614

Fax: +390293337663

www.cosmopharmaceuticals.com

Cosmo S.p.A.

ViaCristoforoColombo,1

20020Lainate(Milan)

Italy

Phone: +390293337614

Fax: +390293337663

Cosmo

Research & Development S.r.l.

ViaCristoforoColombo,1

20020Lainate(Milan)

Italy

Phone: +390293337276

Fax: +390293337663

Cosmo Technologies Ltd.

1stfloor,ConnollyBuilding

42–43AmiensStreetDublin1

Ireland

Phone: +35318170370

Fax: +35318230718

Investor and public relations

ChrisTanner,CFOand

HeadofInvestorRelations

Phone: +390293337617

Fax: +390293337663

chris.tanner@cosmopharmaceuticals.com

Publications and further information

investor.relations@cosmopharmaceuticals.com

Cosmo Pharmaceuticals S.p.A.

ViaCristoforoColombo,1

20020Lainate(Milan)Italy

Phone: +390293337614

Fax: +390293337663

www.cosmopharmaceuticals.com