Report and Accounts 2009 - Pa

RNS Number : 5083D

Phytopharm PLC

03 December 2009

 



Phytopharm plc

Report and Accounts 2009

A pharmaceutical development company

Contents

Joint Chairman and Chief Executive's review	1
Business highlights	2
Business strategy	3
Programme pipeline	4
Business review - pharmaceutical programmes	5 - 8
Business review - functional food programmes	9
Financial review	10 - 11
Corporate and social responsibility review	12 - 13
Board of Directors	14
Directors' report	15 - 19
Remuneration report of the Board of Directors	20 - 26
Corporate governance	27 - 32
Statement of Directors' responsibilities	33
Independent auditors report to the members of Phytopharm plc	34 - 35
Consolidated income statement	36
Consolidated and Company balance sheets	37
Statement of changes in shareholders' equity	38
Consolidated and Company cash flow statements	39
Notes to the financial statements	40 - 62
Shareholder information	63

Page 1

Joint Chairman and Chief Executive's review

As reported last year, we entered 2009 with an interim management team of Alexander (Sandy) Morrison, one of the Phytopharm plc Non-Executive Directors, as Acting Chief Executive Officer and Keith Thomson, contracted in as Interim Chief Operating Officer. The management team rapidly completed a thorough business strategy review and made a number of specific recommendations to the Board on a significant cost saving programme. This involved a reduction in headcount from 40 to 21 and the need to focus on our valuable neurodegenerative research and development programmes with Cogane™, our lead product, firmly targeted on Parkinson's disease. There is a need to minimise our expenditure on the residual functional foods programmes, especially the Hoodia extract project, until all of the output from the remaining activities with Unilever can be finalised and published and new partnering arrangements are pursued.

We are pleased to report that the restructuring was implemented effectively. Unfortunately we had to lose a number of staff members but we successfully helped them with outplacement advice. We have an expert, dedicated and motivated smaller team who are focused largely on the neurodegenerative disease programmes. We also managed the cost savings programme and maintained tight cost control throughout 2009.

The focus on our lead product Cogane™ in Parkinson's disease has been greatly helped by both the financial assistance and strategic support from the Michael J. Fox Foundation and The Cure Parkinson's Trust. We thank them for their continued commitment especially in respect of the planned Phase II study design with international specialists in Parkinson's disease. This gave us considerable confidence and motivation to progress the detailed study design ahead of the pre-clinical trial results during 2009.

We have also maintained our dialogue with other disease specific charities, notably the Motor Neurone Disease Association and the CHDI Foundation, Inc. for Amyotrophic Lateral Sclerosis ("ALS") and Huntington's disease. In addition, an EU grant submission (for an orphan disease project on Myogane™) has been delayed for a number of reasons and has been submitted in November 2009, as will a new application to the Michael J. Fox Foundation to specifically support the progression into further clinical trials. We do not expect news on these submissions until Q1/Q2, 2010. 

In the meantime we are taking actions to manage the residual functional foods projects to establish if a new licensee or cooperative arrangement to progress Hoodia can be achieved and also to stabilise the sale of Phytopica^®, sales of which have suffered primarily due to the merger of Schering-Plough Animal Health (SPAH) with Intervet. During 2009 we have managed these programmes with limited resources.

In contrast to 2008, we have ended 2009 with the business in a much more stable position focused on creating shareholder value by progressing our exciting and valuable novel therapeutic programmes for neurodegenerative disease treatment. We have reported positive headline results from our Phase Ib safety, tolerability and pharmacokinetics study with both healthy volunteers and Parkinson's disease patients with no serious adverse events supporting the progression of Cogane™ into a Phase II clinical study in 2010. In addition, a nonclinical efficacy study of Cogane™ in the gold-standard, nonclinical model of Parkinson's disease funded by the Michael J Fox Foundation reported that oral administration of Cogane™ over 18 weeks produced a 43% statistically significant symptomatic improvement in Parkinsonian animals using a modified UPDRS assessment tool of motor and behavioural performance.

These data, together with the results of the Phase Ib safety, tolerability and pharmacokinetics study, strongly support our view that Cogane™ is a highly encouraging novel potential treatment for Parkinson's disease and vindicates the strategy to rapidly progress a Phase II proof of concept and dose range finding clinical study. The Board is therefore at this time urgently addressing ways to take this next step and determine whether Cogane™ will prove to be an effective and safe novel treatment that will address the large unmet medical needs of Parkinson's disease patients.

The interim management team appointed in late 2008 has driven forward the implementation of our business review and is currently focused on securing the resources to take forward our strategy. Once these resources are in place we intend to strengthen our Executive Team with the recruitment of a permanent CEO and a Research and Development Director. 

As in previous years, but more so this year, we would like to express our gratitude to all who have helped us throughout 2009, but especially to our loyal and dedicated core team at Godmanchester.

Alistair Taylor	A D (Sandy) Morrison
Non-Executive Chairman	Acting Chief Executive

Page 2

Business highlights

This year has seen a focus on the development of our pharmaceutical programmes, with significant progress on our lead programme, Cogane™ in Parkinson's disease. We retain our residual functional food programmes whilst we continue to pursue partnering arrangements to continue their development.

As a virtual organisation, the Group's business model is centred on a lean cash burn with all laboratory, manufacturing and clinical work out-sourced to specialists, while core competencies such as clinical/nonclinical management, strategy development, project management and intellectual property generation are maintained in-house. Close collaboration with charitable organisations enhances the Company's interaction with scientists and clinicians, who lead and develop expert opinion. Cash grants from these organisations accelerate the Group's development programmes, thereby increasing their value.

Pharmaceutical programmes

Parkinson's disease

• Positive headline results from two key studies:
  
• • A non-clinical efficacy study of Cogane™ in the gold-standard, non-clinical model of Parkinson's disease
    
  • A Phase Ib safety, tolerability and comparative pharmacokinetic clinical study in healthy volunteers and patients with mild-moderate Parkinson's disease
    
• International Scientific Advisory Panel jointly hosted by Phytopharm and The Cure Parkinson's Trust held in May 2009 

Huntington's disease

• CHDI Foundation, Inc. are funding the evaluation of the efficacy of Cogane™ in a preclinical model of Huntington's disease

Page 3

Business strategy

Phytopharm - we develop products in areas of high unmet health needs, to relieve suffering to promote longer healthier lives

Medicinal plants with a history of use

• Prior history of human use
  
• Reduced development risk

Virtual operation

• Internal expertise with outsourced development activities
  
• Reduces costs/maximises efficiency
  
• Enhances collaboration with key scientific advisors and specialist contractors worldwide
  
• Enhances innovative partnering

Balanced portfolio

• High value programmes
  
• Low cost, rapid development using "orphan drug" status where appropriate

Partner with disease specific charities

• Reduces development cost
  
• Enhances collaboration with key international scientists
  
• Validates novel treatments for diseases with high unmet medical need and enhances value
  
• Provides non-dilutive funding

Page 4

Programme pipeline

			Development status
Programme	Product	Description	Preclinical	Phase I	Phase II	Phase III	Marketed
Pharmaceutical programmes
Alzheimer's disease	Cogane™	Orally active, neurotrophic factor inducer	X	X	X
Parkinson's disease	Cogane™	Orally active, neurotrophic factor inducer	X	X
ALS	Myogane™	Orally active, neurotrophic factor inducer	X	X
Huntington's disease	Cogane™	Orally active, neurotrophic factor inducer	X
Asthma & COPD	PYM60001 series	TRPV1-modulator. Anti-inflammatory and airway relaxant and prevents airways remodelling	X
Vascular dementia (China)	PYM60086	Improves cerebral blood flow and memory	X
Functional Food programmes
Canine skin health	Phytopica®	Natural, three plant product for canine skin health	X	X	X	X	X
Weight management	Hoodia gordonii extract	Reduces calorific intake	X	X	X

Page 5

Business Review

Pharmaceutical programmes

Overview

Phytopharm is currently conducting development of novel pharmaceutical products developing a broad, balanced portfolio targeted at specific disease areas with diversified risk and substantial potential value. The Group is currently focusing on the development of its sapogenin family of compounds of which Cogane™ is in preparation for a Phase II proof of concept and dose range finding clinical study. In addition Phytopharm has preclinical programmes in development for asthma, chronic obstructive pulmonary disease (COPD) and vascular dementia

Pharmaceutical programmes - Clinical

Parkinson's disease

Parkinson's disease is a movement disorder characterised by muscle rigidity, tremor, a slowing of physical movement (bradykinesia) and, in extreme cases, a loss of physical movement (akinesia). The primary symptoms are the result of altered signalling in an area of the brain, the striatum, which is responsible for the control of movement. This is caused by degeneration of dopaminergic neurones between the striatum and the substantia nigra part of the brain, leading to insufficient formation and action of dopamine. Parkinson's disease is therefore termed a neurodegenerative disease. The disease is slow in onset and the appearance of symptoms reflects the gradual loss of dopaminergic neurones.

The prevalence of Parkinson's disease globally is expected to increase to approximately 9 million people by 2030 (Source: Neurology Journal). In the US alone, there are estimated to be 1.5 million patients diagnosed with Parkinson's disease (Source: American Parkinson's Disease Association), with associated healthcare costs of $25 billion (Source: Northwest Parkinson's Foundation submission to US Congress).

Neurotrophic factors are essential for the survival and maintenance of healthy nerve cells and provide protection against toxic insults, however, as proteins, their utility as pharmacological treatments is limited. A protein cannot be given orally (in pill or liquid form) because it is degraded in the stomach and intestine and does not readily cross the blood-brain barrier (Source: Michael J. Fox Foundation). At present, there is no cure for Parkinson's disease, but a variety of medications provide temporary relief from the symptoms, usually by dopamine replacement therapy.

Direct infusion of Glial Derived Neurotrophic Factor (GDNF) into the area of the brain involved in Parkinson's disease has shown substantial beneficial effects in small-scale clinical studies but requires highly skilled neurosurgeons to carry out the complex and difficult surgical procedures which limits the number of patients that can be treated. A more effective route of administration is therefore needed in order to realise the full potential benefits of GDNF therapy. Cogane™, which can be taken orally, readily crosses the blood-brain barrier and stimulates the release of GDNF in the brain in animals and therefore has the potential to overcome many of the difficulties associated with GDNF administration.

Alzheimer's disease

Alzheimer's disease is a neurodegenerative disorder that mainly affects the elderly and is characterised by a progressive loss of learning ability and memory. Alzheimer's disease is thought to affect 5.3 million people in the US. The direct and indirect costs of Alzheimer's and other dementias to US healthcare and businesses are approximately $148 billion. These costs are expected to continue to rise each year as the number of people with Alzheimer's is anticipated to rise due to an ageing population (Source: Alzheimer's Association).

Page 6

Motor neurone disease

Amyotrophic Lateral Sclerosis (ALS) is the most prevalent form of motor neurone disease which generally strikes people between 40 and 60 years of age. It is characterised by the progressive loss of both lower (spinal cord and brain stem) and upper (cerebral cortex) motor neurones, which leads to severe muscle weakness and wasting, followed by paralysis and death, generally caused by respiratory failure. Prognosis is generally death within two to three years.

ALS is considered an orphan disease. Approximately 120,000 cases are diagnosed worldwide each year. Most people with ALS die from respiratory failure, usually within two to three years from the onset of symptoms. The financial cost to families of patients is exceedingly high, and it is estimated that care can cost an average of $200,000 per patient per year in the USA (Source: International Alliance of ALS Associations).

The precise causes of motor neurone degeneration in ALS patients remain unknown. Approximately five to ten per cent. of cases appear to be of familial origin and possible mechanisms include loss of neurotrophic factors coupled with oxidative and glutamate mediated damage of nerve cells. Neurotrophic factors are essential for the survival and maintenance of nerve cells and provide protection against toxic insults, however, as proteins, their utility as pharmacological treatments are limited. Riluzole (Rilutek™) is the only drug currently licensed for the treatment of ALS by the US Food and Drug Administration ("FDA") and the European Medicines Agency ("EMEA"), and is believed to reduce damage to motor neurones by decreasing the release of glutamate. Clinical trials with ALS patients showed that riluzole only prolongs survival by several months, mainly in those with difficulty in swallowing. There is an urgent need for the development of improved treatments for this devastating condition and non-protein orally bioavailable neurotrophic factor inducers that readily cross the blood-brain barrier may represent an important therapeutic approach. 

Progress to date

Cogane™ is a novel small molecule, orally bioavailable neurotrophic factor inducer that readily crosses the blood-brain barrier. In preclinical studies, Cogane™ stimulates the release of neurotrophic factors and increases neurite outgrowth. Importantly, Cogane™ also reverses the decrease of neurotrophic factors and reverses dopaminergic neuronal degeneration observed in vitro. When administered orally in several different preclinical models of Parkinson's disease, Cogane™ reverses the loss of dopaminergic neurones and elevates GDNF.

The Group conducted a Phase IIa clinical study of Cogane™ in patients with mild and moderate Alzheimer's disease in 2005. The more severely affected patients in this study appeared to demonstrate a decline in cognition in the placebo group, with an encouraging trend for slower disease progression in the Cogane™ treated group. Patients with only mild symptoms of the disease showed no decline in cognitive function and therefore, there was no overall effect detectable on treatment with Cogane™. The benefits to patients with moderate Alzheimer's disease, coupled with Cogane™'s good safety and tolerability profile, provides positive data to suggest longer term studies for efficacy determination in both Parkinson's disease and Alzheimer's disease may be appropriate.

Phytopharm has made significant progress demonstrating that in preclinical models of Parkinson's disease, Cogane™ reverses the damage to dopamine-containing neurones and elevates GDNF in the area of the brain involved in Parkinson's disease. In a recently completed efficacy study, oral administration of Cogane™ over eighteen weeks significantly reduced parkinsonian disability by 43 per cent. in the macaque model of MPTP-induced Parkinson's disease (the gold standard for preclinical Parkinson's disease research), which will be clinically highly relevant if repeated in Parkinson's disease patients. Encouragingly, in the macaque study a statistically significant reduction in parkinsonian symptoms was reached after nine weeks of administration with Cogane™. The magnitude of the effect increased over the subsequent nine weeks of administration and was still increasing at the end of the study (week eighteen). These data strongly support the continued development of Cogane™ as an exciting, new and potentially disease-modifying therapy for Parkinson's disease. This study was funded from the $1.16 million grant from the Michael J. Fox Foundation.

The Group has also recently completed a Phase Ib safety, tolerability and pharmacokinetic clinical study with Cogane™, which was shown to be safe and generally well tolerated in both healthy volunteers and Parkinson's disease patients over the twenty eight day study period. Importantly, at day twenty eight, plasma levels in Parkinson's disease patients taking Cogane™ at a dose of 150 mg/day reached levels associated with efficacy in the non-human primate study and other preclinical disease models of Parkinson's disease.

Page 7

Myogane™ is a novel small molecule, orally bioavailable neurotrophic factor inducer that readily crosses the blood-brain barrier. In preclinical studies, Myogane™ stimulates the release of neurotrophic factors, increases neurite outgrowth, and increases functional synapse formation. Myogane™ also reverses the decrease of neurotrophic factors, reverses oxidative and glutamate damage and reverses neuronal degeneration observed in motor neurones in vitro. In particular, one of these factors known as brain derived neurotrophic factors (BDNF) has been particularly effective in re-growing damaged motor neurones. When administered orally to preclinical models of ALS, Myogane™ delays the loss of muscle strength and extends survival time.

Phytopharm has successfully completed a Phase Ia clinical study conducted under an Investigational New Drug application filed with the FDA and confirmed that Myogane™ was well absorbed with a good safety profile. The FDA has also granted Orphan Drug and Fast Track designation to Myogane™ for the treatment of ALS and Orphan designation has also been granted by the EMEA. In July 2007, the Group successfully progressed through a Phase Ib healthy volunteers clinical trial with a new liquid formulation suitable for ALS patients conducted under a clinical trial authorisation (CTA) filed with the Medicines and Healthcare Products Regulation Agency (UK). The Group's data have generated considerable interest from charitable organisations including the Motor Neurone Disease Association which has informed the Group that it is in principle prepared to commit funding for the programme once the Group has identified the remaining funding required to complete the proof of concept clinical study. A potential source of EU funding has been identified and the Group has submitted an application in November 2009.

The neuroprotective and neurotrophic actions of Cogane™ and Myogane™ suggest potential beneficial effects in other neurodegenerative diseases.

Page 8

Pharmaceutical programmes - Preclinical

Huntington's disease

Huntington's disease results from genetically programmed degeneration of neurons which causes uncontrolled movements, loss of intellectual faculties and emotional disturbance. Specifically affected are the cells of the basal ganglia, structures deep within the brain that have many important functions, including movement. Within the basal ganglia, Huntington's disease especially targets the neurones of the striatum. Huntington's disease is a familial disease, passed from parent to child through a mutation in the normal gene. Each child of a Huntington's disease parent has a 50-50 chance of inheriting the Huntington's disease gene. It occurs in approximately 1 in 10,000 people in most western countries (Source: Huntington's Disease Association).

Asthma and Chronic Obstructive Pulmonary Disease

Asthma is a chronic inflammatory disorder of the airways that causes recurrent episodes of wheezing, breathlessness, chest tightness and coughing. In addition, asthma is usually associated with widespread but variable airflow obstruction. Inhibition of inflammation and opening of the airways are therefore key components of asthma and chronic obstructive pulmonary disease treatment.

Vascular dementia

Vascular dementia is caused by cerebrovascular disease that occurs almost entirely in the elderly. People with vascular dementia generally experience a decline in thought processes (cognitive function) that follows specific steps. This decline is often punctuated by small strokes-ruptures of tiny blood vessels in the brain. People experiencing vascular dementia often have problems with memory, abstract thinking, object identification or recognition, speech creation, speech comprehension, and motor activities. 

Progress to date

In July 2009, CHDI Foundation, Inc. in the USA entered into an agreement with the Group to evaluate the efficacy of Cogane™ in a preclinical model of Huntington's disease. CHDI Foundation, Inc. is funding the testing of Cogane™ (in its network of industrial contract research organisations) employing its standardised criteria for the rigorous evaluation of novel therapeutic approaches for Huntington's disease treatment.

In July 2007, the Group licensed novel candidates for memory and concentration, including vascular dementia, from the Beijing Institute. Under the terms of the Collaboration and Licence Agreement, Phytopharm and the Beijing Institute will collaborate to progress PYM60086. The Group intends to continue to develop this lead product through further preclinical testing.

The Collaboration and Licence Agreement also extends to certain other patented compounds, which may be utilised in other disease areas including vascular disorders and stroke. The Group has been granted an exclusive licence from the Beijing Institute to develop and commercialise these products globally in return for royalty and milestone payments to the Beijing Institute upon the achievement of certain pre-defined goals. The Beijing Institute's scientists bring significant knowledge on Traditional Chinese Medicine and the Group is working with them to advance the lead product through clinical development.

Steady progress has been made in identifying novel synthetic molecules from the PYM60001 series that can be developed as a pharmaceutical medicine for the treatment of asthma and COPD. Preclinical comparative proof of concept studies with marketed products have demonstrated encouraging results showing improved beneficial effects in several models of asthma. The Group's lead candidates are TRPV1-modulators, anti-inflammatory and airway relaxants and prevent airways remodelling.

Page 9

Functional food programmes

Overview

Functional foods are foodstuffs that provide health or physiological benefits above their nutritional value and have a health claim on the packaging. Despite recent setbacks with the Hoodia programme, the Group intends to progress these assets where possible, subject to funding from a partner or licensee.

Hoodia extract

In December 2008, a satisfactory Mutual Termination Agreement was concluded with Unilever. Under this agreement the original rights have been restored to the Group and access to those patents filed by Unilever has been secured. The Group is currently maintaining a limited supply chain until a satisfactory business proposition is secured. Expenditure on this programme will remain limited whilst opportunities with potential partners or licensees are being explored. Co-operation with a number of other parties, commercially interested in the Hoodia programme, in both South Africa and in Europe, is being discussed.

The Group's weight management functional food product is based on a highly concentrated extract of the succulent plant Hoodia gordonii, which contains novel satiety stimulators that reduces calorie intake in overweight subjects, as demonstrated in the Group's double-blind, placebo-controlled clinical study.

Earlier clinical studies funded by Pfizer using a solid product formulation had been encouraging in demonstrating a statistically significant reduction in the average daily calorific intake in the Hoodia extract group. The kinetic data confirms that the systematic exposure to biologically active constituents of Hoodia was consistent with the observed clinical effects.

Further clinical evaluation was undertaken in conjunction with Unilever utilising a different Hoodia extract product formulation.

The Group conducted a number of clinical studies under the joint development agreement with Unilever; this was undertaken using different extracts and formulations from those previously studied. Under the terms of the Mutual Termination Agreement Phytopharm and Unilever are currently evaluating the data arising from one of these studies and the final report is expected to be available from the CRO in Q1 2010. Data from this clinical study using Hoodia extract in a drink-based product led Unilever to conclude that it was unsuitable to be taken forward by Unilever.

Phytopica®

Canine dermatological disorders are well recognised by veterinarians to be a major problem, with an estimated 15 per cent. of the UK dog population (around 900,000 dogs) affected by skin conditions (Source: Pet Food Manufacturers Association). Maintenance of a healthy skin and coat and alleviation of itching are of major importance to canine general health and quality of life.

Phytopica® is a natural, three plant product for canine skin health that provides a novel three in one approach to help maintain a normal healthy immune system, support normal white cell function and provide antioxidant benefits. The beneficial effects and good safety profile of Phytopica® have been proven in clinical trials and the product has been found to be suitable for all dogs studied to date regardless of size or breed.

In January 2006, Phytopharm entered into an exclusive global agreement with Schering-Plough for Phytopica®. Under the terms of the agreement, Phytopharm is responsible for manufacturing Phytopica® whilst Schering-Plough is responsible for the global sales, marketing and distribution.

The Directors believe that the decline in sales has been largely due to the Schering-Plough focus on integrating the Intervet product line following their recent merger. A review of the strategic options for this product has been initiated by the Group with Schering-Plough.

Page 10

Financial review

The financial performance for the year ended 30 September 2009 reflects the Group's ongoing pharmaceutical development and residual functional food activities.

Cash flow

The net cash used in operating activities for the year ended 30 September 2009 was £3.40 million, an increase from £2.58 million in the prior year reflecting the Group's focus on the development of its lead programmes Cogane™ in Parkinson's disease during the year. This has been partly offset by the cost savings achieved following the Group's restructuring programme in early 2009. Our focus is on building shareholder value by effective progress of our innovative pharmaceutical programmes which we intend to move forward, subject to available resources. Phytopharm expects its net cash outflow to increase in 2010 should sufficient resources be available to progress its lead programmes. We intend to continue to pursue sources of non-dilutive funding, in particular from disease specific charities, building on the learnings from valuable relationships already in place. See Note 1 attached to the financial statements in this regard. 

Income statement

The revenue of £0.87 million for the year (2008: £2.62 million) was principally generated from the agreements with Unilever in respect of the development of Hoodia extract, Intervet/Schering-Plough Animal Health ("Schering-Plough") in respect of sales of our veterinary product Phytopica® and from the sale of certain raw materials from inventory. 

Revenue from Unilever represents reimbursement to the Group of development expenditure relating to the Hoodia extract programmes, together with funding certain Phytopharm staff. During the year, the Group signed a Mutual Termination Agreement with Unilever resulting in a reduction in the level of revenue to £0.57 million (2008: £2.33 million) 

Revenue from Schering-Plough comprises the sale of Phytopica® by Phytopharm to Schering-Plough for onward distribution and eventual sale to end users. Phytopica® sales during the year amounted to £0.14 million compared to £0.17 million for the year ended 30 September 2008.  

Other miscellaneous revenue of £0.16 million for the year ended 30 September 2009 primarily comprises the sale of certain inventories. Other miscellaneous revenue for the year ended 30 September 2008 amounted to £0.12 million.

Other income of £0.25 million (2008: £0.34 million) represents payments from Michael J. Fox Foundation in respect of nonclinical development work on Cogane™ completed during the period.

Cost of goods sold for the year ended 30 September 2009 amounted to £0.19 million (2008: £0.17 million) and comprised the costs of the manufacture and sale of Phytopica® and the costs of the raw materials sold during the period.

Development costs for the year decreased to £3.91 million (2008: £4.25 million) reflecting the reduced expenditure on the Hoodia extract programmes following the termination arrangements with Unilever, offset by the increase in expenditure incurred on our lead programme Cogane™ to complete a Phase Ib safety, tolerability and PK study and a substantial non-clinical study.

Expenditure on administrative expenses increased from £1.29 million for the year ended 30 September 2008 to £1.39 million for the year ended 30 September 2009. During the year the Group incurred certain exceptional costs following the resignation of the Chief Executive and the Chief Financial Officer and the restructuring programme costs following the Group's business strategy review. Administrative expenses, before exceptional items, decreased during the year ended 30 September 2009 to £1.12 million (2008: £1.29 million).

The overall loss on ordinary activities before tax increased to £4.21 million (2008: £2.48 million). The loss after tax increased to £3.91 million (2008: £2.28 million). The increased losses are mainly due to the increased development expenditure on unfunded activities, primarily in relation to the progression of the Cogane™ programme.

Page 11

Balance Sheet

As at 30 September 2009, non-current assets amounted to £0.20 million (2008: £0.30 million). Intangible assets of £0.10 million represent patent and know-how licences acquired externally that have been recognised as an asset at cost (2008: £0.10 million). At each balance sheet date the Group reviews the carrying amount of its intangible assets to determine whether there is any indication that these assets have suffered an impairment loss.

Current assets decreased to £4.68 million compared to £8.19 million at 30 September 2008. Current assets includes inventories of £0.25 million (30 September 2008: £0.40 million), amounts receivable of £0.52 million (30 September 2008: £0.68 million) of which £0.30 million related to research and development tax credits (30 September 2008: £0.20 million). Cash and cash equivalents (comprising money market investments and cash and cash equivalents) decreased to £3.91 million (30 September 2008: £7.11 million).

Inventories decreased during the year ended 30 September 2009 as the Group utilised stocks for the sale of Phytopica® and certain raw materials. 

Amounts receivable (excluding research and development tax credits) decreased to £0.23 million at 30 September 2009 due to a decrease in amounts outstanding for the reimbursement of activities under collaboration agreements (30 September 2008: £0.48 million). The increase in amounts receivable in respect of research and development tax credits to £0.30 million (2008: £0.20 million) reflects the Groups increased expenditure on unfunded qualifying development activities.

Cash resources described as cash and cash equivalents are invested for a period of ninety days or less. Money market investments represent fixed-rate short-term deposits placed with a range of banks at fixed terms with a maturity date of more than three months. The Group's policy is to minimise the risks associated with cash and short-term investments by placing these deposits with institutions with a recognised high rating, or with one of the major clearing banks. Cash and cash equivalents amounted to £3.91 million at 30 September 2009 reflecting the cash outflows on the Group's operating activities. Collectively, cash and cash equivalents and money market investments amounted to £7.11 million at 30 September 2008.

Current liabilities increased to £1.75 million at 30 September 2009 (30 September 2008: £1.33 million) reflecting an increase in accruals for expenditure on the Group's development activities.

The increase in share premium at 30 September 2009 to £55.71 million (30 September 2008: £55.67 million) reflects the recovery of VAT on certain share issue costs.

Page 12

Corporate social responsibility

To our employees

Phytopharm places considerable value on its employees and seeks to keep them informed on the Group's business strategy and objectives to assist them in working towards these goals. This is achieved through formal and informal meetings where employees have the opportunity to ask questions as well as receive information.

Employee training and development requirements are assessed as part of the performance appraisal process. Additional training is undertaken as required to provide staff with continuous professional development.

The Group operates an equal opportunities policy. Full consideration is given to all job applicants, irrespective of gender, age, marital status, disability, sexuality, race, colour, religion, political belief, ethnic or national origin or any other conditions not relevant to the performance of the job, who can demonstrate that they have the necessary skills and abilities.

Phytopharm is committed to health and safety and has well developed health and safety policies and procedures to safeguard all of its employees, partners, contractors and visitors. The Board is aware of its legal and moral obligations for Health and Safety at work and is committed to preventing accidents and minimising occupational ill health.

To ethical business practices

As a semi-virtual Group, Phytopharm has adopted the key principles of SA8000, Social Accountability International's standard that provides a comprehensive and flexible system for managing ethical workplace conditions throughout global supply chains. In adopting these principles Phytopharm addresses the issue of fair treatment to all its employees who are required to follow the Group's Code of Conduct that includes social awareness. Phytopharm also promotes SA8000 standards amongst its partners, suppliers and contractors worldwide. Assessment of compliance with these principles and other applicable regulatory or legal requirements is assessed through audit and subject to continuous improvement.

Action plans are agreed and implemented to raise the level of compliance where appropriate. By starting with a plant extract that has a history of clinical use, Phytopharm's unique approach may reduce the need for lengthy pre-clinical animal testing. Nevertheless, regulatory authorities worldwide require that all new medicines must be subjected to rigorous safety testing in animals and in human clinical studies before they are approved for use in order to protect people from potentially toxic effects.

The use of tests on animals to develop medicines is the subject of enormous ethical sensitivity that rightly commands a high level of public interest. Phytopharm is committed to implementing the three R's - Reducing the number of animals used for research, Replacement by non-animal methods whenever possible and Refinement of the techniques used to eliminate or reduce suffering and improve animal welfare. Phytopharm has no animal testing facilities itself but uses regulated and licensed Contract Research Organisations and other licensed institutions that comply with government requirements. Phytopharm implements robust review processes to ensure the highest quality animal welfare standards are maintained.

To the environment

Phytopharm recognises that protecting the environment is a primary corporate responsibility and that environmental matters are not just the responsibility of the Board of Directors, but also an area in which each employee, corporate partner and third party contractor has a contribution to make.

Phytopharm therefore encourages all employees, partners and contractors to operate in an environmentally responsible manner. Where appropriate these requirements have been incorporated into the Group's standard operating procedures and the environmental performance of contractors is reviewed as part of the audit process. It is Phytopharm's policy to undertake reasonable measures to assess the environmental impact of its operations, processes and products. The Group aims to continuously improve environmental performance and compliance within these areas.

Page 13

Biodiversity Treaty

Phytopharm's policy is to embrace the principles of the International Convention on Biodiversity and address the challenging issues it presents.

The Group endeavours to enter into commercial arrangements with organisations and companies in third world countries that bring financial and technology transfer rewards to the originating country or inventor. These financial rewards may take the form of milestone payments or royalty shares in successful products. Examples of technology transfer include training of farmers to cultivate botanical raw materials in accordance with the principles of Good Agricultural Practice (GAP) and the installation of Good Manufacturing Practice (GMP) compliant facilities and training of staff responsible for its correct operation and maintenance.

Quality Assurance

As a responsible organisation, Phytopharm's products are developed in accordance with recognised quality guidelines and appropriate national and international legislation to ensure the efficacy of the product and the safety of the consumer. In order to achieve this, the Group has adopted the following guidelines:

Good Agricultural Practice (GAP)

The principles of GAP are applied to the cultivation and post-harvest processing of botanical raw materials. The Group's GAP manual and associated technical documentation have been developed with reference to recognised codes of practice.

The manual provides a framework for cultivation protocols that are implemented by working with local farmers, agronomists and horticulturalists in the countries where crops are grown. The cultivation protocols are developed to combine local practice with the principles of GAP to ensure a synergy between developing agricultural systems and western agricultural practices. Compliance to the protocols is assessed by the review of crop record sheets and monitoring visits to the growing sites.

Good Laboratory Practice (GLP)

The Group requires that contractors involved in the conduct of key non-clinical studies and the analysis of such studies apply the appropriate level of GLP to their facilities and the conduct of studies therein. These requirements are detailed in the GLP regulations Statutory Instrument 199 No. 3106 and they have been incorporated into the Group's quality system. Compliance is reviewed by routine monitoring visits and/or audit and training may be provided to ensure the level of compliance is acceptable.

Good Manufacturing Practice (GMP)

The Group requires that all contractors directly managed by Phytopharm and involved in the operational aspects of manufacture, analysis, packing, labelling, release, storage and distribution of its materials and products apply the appropriate level of GMP to their facilities, as defined in GMP regulation and guideline documents.

These practices are mandatory requirements for products designated for use in clinical trials conducted in accordance with competent authorities' regulatory requirements. Guidelines are detailed in UK, European, US and ICH publications and have been incorporated into the Group's quality system. Compliance is reviewed by routine monitoring visits and/or audit and training may be provided to ensure the level of compliance is acceptable.

Good Clinical Practice (GCP)

GCP is an international ethical and scientific quality standard for designing, conducting, recording and reporting studies that involve the participation of human subjects. Studies conducted in Europe and North America must have ethical and regulatory approval prior to initiation and compliance with the stated protocol is independently monitored and further assessed by audit. These actions help to provide assurance that the rights, safety and wellbeing of study subjects are protected, consistent with the principles that have their origin in the Declaration of Helsinki, and that the clinical trial data are credible. These requirements have been incorporated into the Group's standard operating procedures and working documentation.

Page 14

Board of Directors

Mr Alistair Taylor

Non-Executive Chairman

Mr Taylor is formerly Executive Chairman of UK listed Lombard Medical Technologies plc and has 45 years experience in the healthcare industry, ten years in pharmaceuticals and 35 years in medical devices. He was Chief Executive Officer of Biocompatibles International plc from 1994 to 1998 and during this period the company progressed from a technology-based start up company, through flotation to a FTSE 250 company. Prior to this, Mr Taylor was Chief Executive Officer of Schneider Inc, a Swiss interventional cardiology/radiology device company and during this time the company's turnover grew to $100 million. Schneider was subsequently sold by Pfizer Inc., its parent, for over $2 billion. Mr Taylor's early career included the Chief Accountant role at Beecham Pharmaceuticals. He is also Chairman of Starbridge Systems Limited and Nightingale-EOS Limited

Mr Alexander Morrison

Acting Chief Executive

Mr Morrison has a BSc (Hons) in applied chemistry (Strathclyde) and has over 20 years experience in general and international management, global supply chain management and R&D. He was Chief Executive Officer of Lipton Ltd, the global tea sourcing organization for Unilever with operations in six countries from 2000 to 2006. During Mr Morrison's period as CEO, substantial operational and financial improvements were made to the Unilever global tea supply chain and he also played a significant part in addressing issues in the international tea trade. In the immediate years prior to 2000, Mr Morrison had senior international food and beverage roles for Unilever outside the UK, in the supply chain and in R&D, both at the Rotterdam head office and in the Unilever food and beverage subsidiary in Australia.

Dr Peter Blower

Non-Executive Director

Dr Blower has over forty years experience in medicinal research and development with a strong background in the field of neuroscience. He joined Beecham Research Laboratories in 1969 and rose to the position of Director of New Neuroscience products at SmithKline Beecham in 1996 before leaving in 2000 to form his own consultancy company. He has been elected to Fellowship of the Royal Society of Medicine and the Institute of Biology and has authored over seventy scientific publications. He has a M.I.Biol from the Institute of Biology (1972), a PhD in Pharmacology from the University of Aston (1977) and a DSc from the University of East London (1997).

Board changes

On 12 November 2008 CEO Daryl Rees and CFO Piers Morgan resigned as Directors and employees of the Group. Mr A D (Sandy) Morrison was appointed acting CEO.

Page 15

Directors' report

for the year ended 30 September 2009

The Directors of Phytopharm plc (registered in England & Wales: 03131723) present their report together with the financial statements and auditors' report for the year ended 30 September 2009.

The Corporate Governance statement (on pages 27 to 32) forms part of the Directors' report.

Principal activities

Phytopharm is a pharmaceutical development Group with a residual portfolio of functional food programmes whose products are primarily generated from medicinal plants.

Review of the business and future developments

The Group is required to set out in this Directors' report a fair review of the business of the Group and a description of the principal risks and uncertainties facing the Group (known as a "Business Review"). The Business review is required to set out a balanced and comprehensive analysis of the development and performance of the Group's business during the year ended 30 September 2009 and of the position of the Group at the end of that financial period. The information that fulfils the requirements of the Business Review can, in addition to that set out below, be found on pages 5 to 9.

The Directors are satisfied with the progress made across the product portfolio and with the period end position.

Key performance indicators

The principal key performance indicators ("KPI's") of the Group are the progress of the Group's development programmes through preclinical and clinical development, in particular its lead programme Cogane™, whilst tightly controlling its cost base. While these KPI's demonstrate relevant factors by reference to which the development, performance and position of the Group can be measured effectively, it is the nature of Phytopharm's business and the biopharmaceutical industry in general, that these KPI's are not readily or meaningfully comparable on a year-on-year basis.

Principal risks and uncertainties

Industry risk

In common with other research and development stage businesses, Phytopharm's business risks relate principally to the success of its development programmes and to the need to fund its operations through these. The progress of the development programmes therefore represents the best indicator of the Group's performance and a full review of the programmes is given in the business review on pages 5 to 9.  

Financial risk

The Group has one product, Phytopica®, on the market. However, the revenues currently being generated by this programme are not yet sufficient to offset the Group's research and development expenditure, and the Group expects to continue to make losses until it is able to increase its revenues sufficiently. Additional funds such as charitable income, collaboration deals and / or further financing may be required to allow further scope for product development. The availability and timing of such additional external funds represents a material uncertainty.

Clinical and regulatory risk

Successful commercialisation of the Group's products is likely to depend on successful progress through clinical and consumer studies, and registration as applicable. Development of product candidates involves a lengthy and complex process, and products may not meet the necessary requirements in terms of toxicity, efficacy or safety, or the relevant regulators may not agree with the results of the Group's research and may require further testing or withhold approval altogether.

Page 16

Competition risk

The Group's success depends on acceptance of the Group's products by the markets, including physicians and third party payers, and consequently the Group's progress may be adversely affected if it is unable to achieve market acceptance of its products. Factors which may affect the rate and level of market acceptance of any of the Group's products will include the existence or entry on to the market of superior competing products or therapies and the price of the Group's products compared to competing products.

Intellectual property risk

The Group's success depends in part on its ability to obtain and maintain protection for its intellectual and proprietary information, so that it can stop others from making, using or selling its inventions or proprietary rights. The Group's patent applications may not be granted and its existing patent rights may be successfully challenged and revoked.

Economic risk

As a consequence of the international nature of its business, the Group is exposed to risks associated with changes in foreign currency rates. The Group is headquartered in the United Kingdom, and substantially all its cash resources are in pounds sterling. An adverse change in exchange rates may lead to either an increase in certain of the Group's costs or a decrease in the pounds sterling value of its revenues, and hence a significant impact on the Group's reported results of operations, financial position and cash flow.

Counterparty risk

The Group relies on third party organisations to conduct its clinical trials and to manufacture its products. If the relationship with, or performance of, any of these partners is adversely affected, the Group's results of operations may be adversely impacted.

The Group also derives revenue or financial support from its collaborators and expects to derive additional support from partnering with certain charitable organisations. If these relationships are adversely affected, or if the products involved fail to continue to make satisfactory progress, the Group's results of operations may be adversely impacted.

Post balance sheet events

• In October 2009, the Group announced positive headline data from two key Cogane™ studies.
  
• In December 2009, the Group approved a £24.1 million (net of expenses) underwritten fundraising. The Placing and Open Offer will be voted on by shareholders at the General meeting on 29 December 2009.

Results and Dividends

The Group's results for the year ended 30 September 2009 are presented on page 36. The Group's net loss after taxation was £3,910,688 (2008: £2,274,702). The Group is not yet in a position to pay a dividend and the loss for both periods has been added to the accumulated deficit on reserves.

Page 17

Group research and development activities

The Group continues to develop pharmaceutical products and functional foods from product leads generated from medicinal plants.

Directors

The Directors of the Company, all of whom have been Directors for the whole of the year except as noted below, are as follows:

Executive Directors

Mr A D Morrison - Acting Chief Executive Officer

Dr D D Rees (resigned 12 November 2008)

Mr P J Morgan (resigned 12 November 2008)

Non-Executive Directors

Mr A H Taylor - Non-Executive Chairman 

Mr A D Morrison - (appointed Acting Chief Executive Officer 14 November 2008)

Dr P R Blower - Senior Independent Director

Biographical details of the Directors are shown on page 14.

There were no contracts of significance with the Company or any of its subsidiaries existing during or at the end of the financial period in which a Director of the Company was materially interested.

The interests of Directors in the shares and share options of the Company at 30 September 2009 are disclosed in the Remuneration report of the Board of Directors on pages 20 to 26.

Re-election

At the 2010 AGM, in accordance with the Company's Articles of Association and the provisions of the Combined Code, Mr A D Morrison and Dr P R Blower will retire. Being eligible, and with the Board's recommendation, they will offer themselves for re-election.

Mr A D Morrison and Dr P R Blower, as Non-Executive Directors, have letters of appointment which provides for three months notice from either party. 

Directors and officers liability insurance

The Group has in place qualifying third party indemnity insurance for all Directors.

Structure of the Company's capital

The Company's share capital traded on the London Stock Exchange comprises a single class of ordinary shares of 1 pence each, each carrying one voting right and all ranking equally with each other. At 30 September 2009, the authorised share capital was £1,500,000 and 94,548,391 shares were allotted and fully paid. There were no movements in the Company's share capital during the year.

Details of employee share option schemes are set out in note 25 to the financial statements. Participants in employee share option schemes have no voting or other rights in respect of the shares subject to their awards until the options are exercised, at which time the shares rank pari passu in all respects with shares already in issue.

There are no restrictions on the transfer of securities in the Group.

Page 18

Substantial shareholdings

At 19 November 2009 the Directors are aware of the following holdings representing 3%, or more, of the voting rights of the issued share capital of the Company in accordance with the Disclosure and Transparency rules of the Financial Services Authority:

Name of shareholder having a material interest  Invesco Asset Management Limited  Mr Klaus Hebben  Dr Richard Dixey  AXA S.A.  TD Waterhouse  HSDL Stockbrokers  Gartmore Investment Limited

% holding 29.61 10.42 5.17 4.54 4.07 3.12 3.04

Authority to issue and buy back shares

At the Company's Annual General Meeting held on 11 March 2009, shareholders approved authority, for the purposes of Section 166 of the Companies Act 1985 (the 'Act'), to make market purchases (within the meaning of Section 163(3) of the Act) of any of its ordinary shares of 1p each in the capital of the Company on such terms and in such manner as the Directors may from time to time determine, and where such shares are held as treasury shares, the Company may use them for the purposes of its employee share scheme provided that:

• the maximum number of ordinary shares which may be purchased is 9,454,197, representing approximately 10% of the ordinary share capital issued at the date of the meeting;
  
• the minimum price which may be paid for each ordinary share is 1p which shall be exclusive of all expenses, if any;
  
• the maximum price which may be paid for each ordinary share is an amount equal to 105% of the average middle market quotations for the ordinary shares of the Company as derived from the Official List of the London Stock Exchange plc for the five business days immediately preceding the day on which such share is contracted to be purchased;
  
• unless previously renewed, revoked or varied this authority shall expire at the conclusion of the annual general meeting in 2010; and
  
• under this authority the Company may make a contract to purchase ordinary shares which would or might be executed wholly or partly after the expiry of this authority, and may make purchases of ordinary shares pursuant to it as if this authority had not expired.

As at 30 September 2009 the Company had not utilised the authorities above.

Significant agreements

The Group is not party to any significant agreement which would take effect, alter or terminate upon a change of control of the Company. The Group has licences granted to it from Shanghai Jiao Tong University (formerly Shanghai Second Medical University), the Beijing Institute of Radiation Medicine and the Council for Scientific and Industrial Research in South Africa (CSIR). In addition, the Group has entered into a collaboration agreement with Schering-Plough Animal Health.

Creditor payment policy

The Group's current policy concerning the payment of the majority of its trade creditors is to follow the CBI's Prompt Payers Code (copies are available from the CBI, Centre Point, 103 New Oxford Street, London WC1A 1DU). For other suppliers, the Group's policy is to:

• agree the terms of payment with those suppliers when negotiating the terms of each transaction;
  
• ensure that those suppliers are made aware of the terms of payment by inclusion of the relevant terms in contracts; and
  
• pay in accordance with its contractual and other legal obligations.

Page 19

The payment policy applies to all payments to creditors for revenue and capital supplies of goods and services without exception. The average credit period (expressed as creditor days) taken during the year was 25 days (2008: 35 days) for the Group and nil days for the Company in both periods. The average credit period is calculated using purchases for the year and the closing trade payables figure.

Employees

The Board of Directors is committed to continuing communication and involvement with all the Group's employees. Further details of the Groups policies towards its employees are given in the Corporate Social Responsibility review on pages 12 to 13.

Health and safety

The Directors are committed to ensuring the highest standards of health and safety. Further details of the Group's policies towards its employees are given in the Corporate Social Responsibility review on pages 12 to 13.

Financial instruments

The Group's policies in relation to financial risk management in respect of financial instruments are detailed in note 1 "Accounting Policies" and note 22 "Financial Instruments".  

Annual General Meeting

The notice convening and giving details of the 2010 AGM of the Company will be mailed to Shareholders.

Audit information

In the case of each of the persons who are Directors of the Company at the date when this report is approved:

• so far as each of the Directors is aware, there is no relevant audit information (as defined in the Companies Act 2006) of which the Company's auditors are unaware; and
  
• each of the Directors has taken all steps that he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Company's auditors are aware of that information.

This confirmation is given and should be interpreted in accordance with the provisions of S418 of the Companies Act 2006.

Going concern

At 30 September 2009, the Group had cash resources of £3.91 million (30 September 2008: £7.11 million). On 2 December 2009, the Group approved its intention to raise approximately £24.1 million, net of expenses, by way of binding commitments and an underwritten Placing and Open Offer of, in aggregate, 252,129,042 new ordinary shares at 10 pence per ordinary share capital, conditional, inter alia, upon the passing by shareholders of the resolutions at a General Meeting on 29 December 2009.

After making enquiries and taking into account (i) management's estimate of future expenditure, (ii) management's expectation, based on the underwriting undertaking received, that the Group will secure sufficient equity funding in the proposed Placing and Open Offer and (iii) management's expectation that shareholder support for the relevant shareholder resolutions will be forthcoming at the General Meeting, the Directors have a reasonable expectation that the Group will have adequate financial resources to continue in operation for the foreseeable future.

Auditors

A resolution to reappoint PricewaterhouseCoopers LLP as auditors to the Company will be proposed at the next Annual General Meeting.

Mr A D Morrison

Acting Chief Executive

2 December 2009

Page 20

Remuneration report of the Board of Directors

This report complies with the Combined Code on Corporate Governance published in June 2008 (the "Combined Code") and sets out the Group's remuneration policy and details of Directors' remuneration. A resolution to approve this report will be proposed to shareholders at the Annual General Meeting in 2010.

The regulations require the auditors to report to the Company's members on certain parts of the Directors' remuneration report and to state whether in their opinion those parts of the report have been properly prepared in accordance with the Companies Act (as amended by the Regulations). The report has therefore been divided into separate sections for audited and unaudited information.

Unaudited information

Remuneration Committee

The Remuneration Committee ("the Committee") is comprised exclusively of independent Non-Executive Directors. The Directors who have served on the Committee during the year are as follows:

Dr P R Blower (Chairman) 

Mr A H Taylor 

Mr A D Morrison has temporarily stepped down as a member of the Remuneration Committee whilst Acting Chief Executive Officer.

The Committee decides the remuneration policy that applies to Executive Directors and all of the Group's employees including other senior management. This comprises the setting of salaries for the Executive Directors, the setting of salary scales for other employees, approving the format and range of all performance-related arrangements (both annual and long term equity incentive arrangements) and determining the extent to which the elements of variable pay vest. In determining remuneration, consideration will be given to reward levels throughout the organisation as well as in the external employment market. The Remuneration Committee aim to reward all employees fairly based on their role, their performance and salary levels in the wider market.

To assist the Committee in establishing its policy, the Group has retained the services of Hewitson New Bridge Street Consultants, to advise on remuneration in the biotech industry. The Chief Executive is invited to attend the Committee meetings to make recommendations on compensation levels for employees. Hewitson New Bridge Street did not provide any other services to the Group.

During the period ended 30 September 2009, the Committee met six times and there was full attendance at each meeting.  

Remuneration of Non-Executive Directors

The Non-Executive Directors each receive a fee for their services, which is agreed by the Board following recommendation by the Committee in respect of the Chairman and by the Chairman in respect of the other Non-Executive Directors with the assistance of independent advice, where necessary, concerning comparable organisations and appointments.

Neither the Chairman nor the other Non-Executive Directors receive any pension or other benefits from the Group.

Page 21

Remuneration policy for Executive Directors

The Group's remuneration policy for Executive Directors is to:

• have regard to the Directors' experience and the nature and complexity of their work, and regard to Directors' remuneration in comparable companies, in order to pay a competitive salary, including a performance related cash bonus that attracts and retains management of the highest quality; 
  
• link individual remuneration packages to the Group's long-term performance through the award of share options via the Phytopharm Share Option Plan 2007 and the Phytopharm Long Term Incentive Plan 2007; and
  
• provide post retirement benefits through the Group's pension schemes.

Consistent with the above policy, compensation awarded to Executive Directors comprises four main performance and non-performance related elements:

• basic salary and bonuses;
  
• benefits in kind;
  
• share options and performance share awards (awarded by reference to annual performance); and
  
• pension arrangements.

During the period under review Dr D D Rees and Mr P J Morgan resigned as Executive Directors. Mr A D Morrison was appointed Acting CEO and his remuneration during the period comprised a basic salary payable according to the number of days he has been acting in his capacity as Acting Chief Executive.

Basic salary

The Committee sets the annual salaries for Executive Directors, having regard to personal performance and responsibilities of each Director and their expected future contribution.  

Share schemes

The Group operates incentive schemes to assist in attracting and retaining high calibre employees and to focus the performance of senior Executives on creating long-term shareholder value. The awards to individuals are linked to the performance targets of the Group and the individual. The Group targets and those for Executive Directors are approved by the Board.

The total number of unissued Ordinary Shares in the capital of the Company which may be placed under option on any day under the Phytopharm share option schemes may not exceed, when added to the aggregate number of shares that have been or may be issued pursuant to rights granted for the past ten years, 10 per cent. of the issued ordinary share capital of the Company immediately prior to that day.

Share option schemes

Share options are granted under the Phytopharm Share Option Plan 2007 and the Phytopharm Sharesave Plan 2007, which are open to all employees. The Phytopharm Share Option Plan 2007 complies with the tax favoured Enterprise Management Incentive Legislation. Where possible the Company will grant tax advantaged options. The Remuneration Committee determines the level of awards. To provide maximum flexibility, the Committee has discretion to make awards up to an annual 400% of salary individual limit although the Committee would only envisage making an award at such a level in very exceptional circumstances. Performance share awards will normally vest three years after the date of grant subject to continued employment and the extent to which a performance target has been satisfied. There were no grants to Executive Directors during the year under review.

Page 22

The vesting of a share option will depend on total shareholder return ("TSR") performance conditions being met. The Company's TSR will be compared to that of the companies making up the FTSE Small Cap Index at or within three months of the vesting date. No option or award can be exercised for below median performance.

The Committee considers TSR to be the most appropriate method of measuring performance at this stage of the Group's development where income streams have not stabilised and the Group has not yet made a profit. The Committee seeks independent verification of the TSR conditions before confirming that a share option has vested.

The Phytopharm Sharesave Plan 2007 is an HMRC approved scheme and the first offer was made to employees and Executive Directors on 13 August 2007 and vests on 30 September 2010. Details of the Executive Directors' interests in this plan are specified in the table on page 26.

Long-term incentives

The Group operates the Phytopharm Long Term Incentive Plan 2007 under which performance share awards can be made to selected senior managers of the Group and its subsidiaries. The Committee determines the level of awards to provide maximum flexibility. The Committee has discretion to make awards up to an annual 400% of salary individual limit although the Committee would only envisage making an award at such a level in very exceptional circumstances. Performance share awards will normally vest three years after the date of grant subject to continued employment and the extent to which a performance target has been satisfied.  There were no grants to Executive Directors during the year under review.

The Committee's policy is that the same TSR performance condition as described above for share options will apply to the vesting of performance share awards. This is for the same reasons as given above. The relevant distinction is that the grant of share options depends on annual performance whereas it is envisaged that performance share awards will be granted each period in order to ensure that there is a continual and material long term incentive element to the Executives' remuneration packages.

Share purchase scheme

The Group also operates an HMRC approved Share Incentive Plan which is open to all employees who may purchase Partnership shares up to the value of £125 each month and are awarded one Matching share for each Partnership share purchased. The shares are held in trust for a minimum of three years and are not subject to performance criteria. Details of the Executive Directors' interests in this plan are specified in the table on page 26.

Pensions

The former Executive Directors had money purchase pension schemes to which the Group contributed 16% of basic salary.

Fees retained for Non-Executive Directorships in other companies

The Committee recognises that Executive Directors may be invited to take up Non-Executive Directorships and that these can broaden the experience and knowledge of the Director, from which the Group would benefit. Accordingly, subject to Board approval, they may accept Non-Executive appointments, as long as they are not likely to lead to a conflict of interest.  They are also allowed to retain any fees paid under such appointments. None of the Group's Executive Directors have taken up Non-Executive Directorships in other companies.

Page 23

Performance graph

The following shows the Company's performance, measured by total shareholder return compared with the performance of the FTSE SmallCap Index also measured by total shareholder return. Total shareholder return looks at the value at 30 September 2009 of £100 invested in the Company on 1 September 2004 compared with the value of £100 invested in the FTSE SmallCap Index over the same period. This index has been selected for this comparison because, in the opinion of the Directors, it is the most appropriate index against which the total shareholder return of the Company should be measured.

Embeded Graph, see Annual report on company website: www.phytopharm.co.uk

Executive Directors' contracts

It is the Group's policy that Executive Directors would normally have contracts with an indefinite term but which provide for a maximum period of notice to be served by the Company or by the Director. 

The appointment of Mr A D Morrison as Acting CEO was made on 14 November 2008. This appointment was made on a consultancy basis and provides for a maximum of one months notice to be served by the Company or by Mr A D Morrison. The Company will be considering the structure of the Board in the coming year and it is envisaged that Mr Morrison will return to his role as a Non-Executive Director. Whilst Mr Morrison has been Acting CEO, he has also continued to act as a Non-Executive Director for certain key strategic activities.

Page 24

Non-Executive Directors' letters of appointment

The terms of service for Non-Executive Directors are specified in letters of appointment. Currently appointments are for a period of twelve months, which may be renewed, and are summarised in the table below:

	Date of appointment	Notice  period
Mr A H Taylor	1 July 2009	3 months
Mr A D Morrison	1 June 2009	3 months
Dr P R Blower	31 July 2009	3 months

In addition, one third of all Directors are required under the Articles of Association to resign and offer themselves for re-election at each annual general meeting.

Directors' interests in shares 

The interests of the Directors in the shares of the Company at 30 September 2009 were:

	Ordinary shares of 1 pence
	30 September 2009	30 September 2008
Mr A H Taylor	180,043	30,043
Mr A D Morrison	96,544	29,794
Dr P R Blower	118,682	29,794

All Directors' interests are beneficially held.

Apart from the interests disclosed above, no Directors had any interest in the year in the share capital of the Company or other Group companies. There have been no changes in the Directors' interests in the share capital of the Group since the year end. 

 

END

 

 

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