for a healthier future

Phytopharm plc Annual Report and Accounts 2012

Who we are

Developing novel treatments targeting diseases with high levels of unmet need.

Phytopharm (LSE:PYM) is a development-stage pharmaceutical company. Our lead series of compounds has the potential to be a new class of therapy for neurodegenerative diseases.

Our lead programme is in clinical trials for Parkinson's disease, a \$3 billion market with a significant unmet need.

We operate with a low headcount and minimal infrastructure. This lean operational structure confers substantial cost and technical benefits.

We have cash resources to fund the Group's ongoing activities until at least the end of Q1 2014.

Read more about our strategy on page 2 Read more about our product development on pages 6 to 10

Business highlights

Operational

• Recruitment into CONFIDENT-PD Phase II clinical trial of Cogane™ in untreated patients with early-stage Parkinson's disease was completed in April 2012 and the last patient completed the trial in early December 2012. Results from the trial remain on track to be available in February 2013.
• Cogane™ demonstrated efficacy in the "gold standard" preclinical model of amyotrophic lateral sclerosis ("ALS"), the most common form of motor neurone disease. Positive data have now been obtained in four models of ALS, providing a strong rationale for Cogane™ as a potential treatment for this devastating condition.
• Preparation for a Phase I clinical trial to evaluate Cogane™ solid dose oral formulations for up to 28 days has been initiated.
• A study of Myogane™ in a preclinical model of glaucoma was inconclusive due to an unexpectedly low neuronal cell loss in the control group which prevented evaluation of a neuroprotective effect of Myogane™.

Corporate

• Dr Ian Tulloch was appointed as a non-executive Board director in February 2012. As planned, Mr Sandy Morrison stepped down from the Board following the Company's Annual General Meeting in March 2012.

Financial

• Loss after tax of £7.77 million in line with expectations reflects ongoing focus on the development of our pharmaceutical programmes (2011: £7.66 million).
• Cash and money market investments of £8.89 million (2011: £17.57 million). Based on our current expectations Phytopharm is financed until at least the end of Q1 2014.

Business Overview

IFC Who we are
01 Business highlights
02 Strategy

Business Review

04 Chairman's review
05 Chief Executive's review
06 Business review
11 Financial review

Corporate Governance

14 Principal risks and uncertainties
16 Board of Directors
17 Directors' report
22 Remuneration report
28 Corporate governance report
36 Statement of Directors' responsibilities

Financial Statements

37 Independent auditors' report
39 Consolidated statement of comprehensive income
40 Consolidated and Company balance sheets
41 Consolidated statement of changes in equity
42 Company statement of changes in equity
43 Consolidated and Company cash flow statements
44 Notes to the financial statements

Shareholder information can be found on pages 63, 64 and IBC.

Strategy

Targeting diseases with high levels of unmet need.

Phytopharm is a development-stage pharmaceutical company developing novel treatments targeting diseases with high levels of unmet need.

Our commercially focused development programmes have the potential to produce significant treatment advances in our target areas of neurodegeneration and inflammatory disease. Our products are single chemical entities with novel mechanisms of action protected by strong patent families. Our pipeline has been sourced from our own research activities and from licensing activities, particularly from leading research institutions in China with which the Company has long‑standing relationships.

CoganeTM and MyoganeTM are orally bioavailable neurotrophic factor modulators that readily cross the blood-brain barrier. Neurotrophic factors are naturally occurring proteins in the brain that have been shown to be effective in re-growing damaged nerves.

What we're working on

Many neurodegenerative diseases, including Parkinson's disease, ALS, glaucoma and Alzheimer's disease, occur as a result of neurodegenerative processes that exhibit many similarities suggesting that these diseases are related on a sub-cellular level. Because of the similarities in neurodegeneration across this range of diseases, there is hope that therapeutic advances, such as Phytopharm's lead pharmaceutical programmes Cogane™ and Myogane™, could be beneficial in more than one of these diseases.

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Dopaminergic neurones 2
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Chairman's review

"Phytopharm is very much on track to deliver on the objective outlined as part of the November 2009 equity financing."

Mr Alistair Taylor Non-executive Chairman

During the year the Group once again made good progress against its stated objectives. I am pleased to be able to report that Phytopharm is very much on track to deliver on the objectives outlined as part of the November 2009 equity financing: principally, to finance the development of lead product, Cogane™, through Phase I and II

clinical studies in Parkinson's disease; and to retain a one year cash runway at the conclusion of these studies. Having completed patient recruitment into the CONFIDENT-PD clinical trial in early-stage Parkinson's disease patients earlier this year, we are looking forward to receiving the results from the trial in February 2013. Once received, the Board will work with the Group's management team to determine the best way forward to maximise value for shareholders.

The past year saw some changes to our Board. After giving over five years of valuable service to the Group Sandy Morrison stepped down as a non-executive director in March this year. The Board would like to acknowledge the valuable contribution Sandy made to the Group, particularly in stepping in as interim Chief Executive Officer during a period of transition in 2009/2010. Sandy has been succeeded on the Board by Dr Ian Tulloch. Ian has recently retired from his position as Global Head of Marketing, Neuroscience and Ophthalmology at Novartis and his experience will be of great value as we develop the commercial strategy for our pharmaceutical pipeline.

The coming year will be of great importance to Phytopharm and we will continue to keep you apprised of our progress and plans. Until then I would like to thank the management team and staff for the excellent job they have performed in the past year and shareholders for their continued support.

Mr A Taylor Non-executive Chairman

Chief Executive's review

"Over the last year the Group has continued to focus on the development of its pharmaceutical programmes whilst maintaining tight financial control. Operationally, good progress has been made in the development of our lead programme Cogane™."

Mr Tim Sharpington Chief Executive Officer

Over the last year the Group has continued to focus on the development of its pharmaceutical programmes whilst maintaining tight financial control. Operationally, good progress has been made in the development of our lead programme Cogane™ in Parkinson's disease and amyotrophic lateral sclerosis ("ALS") and on the development of our preclinical anti-inflammatory project, P61, though our development of Myogane™ in glaucoma did suffer a setback with an inconclusive study.

Phytopharm continues to operate a cost-effective, virtual model, with just 13 staff, enabling us to focus our expenditure on our research and development programmes. Our experienced staff are complemented by a network of leading scientists and clinicians who provide guidance on the design and implementation of our projects.

Cogane™ and Myogane™ are first-in-class development stage medicines with the potential to be important new treatments for a wide range of neurodegenerative diseases. These diseases, including Parkinson's disease, ALS and glaucoma, are characterised by ongoing neuronal degeneration with devastating consequences for those affected. There is a large medical and commercial unmet need for new treatments which can slow or halt the progression of these diseases.

Cogane™ and Myogane™ have been shown to be both neuroprotective (protecting neurones from degeneration) and neurorestorative (restoring functionality to damaged and dormant neurones) in a wide range of industry-standard preclinical models conducted in independent laboratories around the world. The next crucial step is to determine whether this preclinical promise translates into real clinical benefit to patients and it is this question which our ongoing clinical trial in Parkinson's disease has been designed to answer.

Leading movement disorder centres in North America and Europe have treated more than 400 patients with either Cogane™ or placebo for 28 weeks and are assessing signs of efficacy, safety and tolerability. Patients will have completed the study in December 2012 and we will receive data in February 2013. The results of this study represent a major milestone for Phytopharm and are eagerly awaited.

Whilst conducting the study we have also been planning for next steps. If successful, Cogane™ will need to undergo Phase III registration studies in Parkinson's disease before receiving marketing authorisation. Detailed plans for these next studies have been put in place.

In addition, the Group has had very positive responses in initial discussions with larger pharmaceutical companies who represent potential licensing partners for Cogane™. The best way forward for Cogane™ in Parkinson's disease will be determined once data are received.

Cogane™ has also demonstrated good potential in ALS, the most common form of motor neurone disease. ALS is a rapidly progressing, devastating condition with very limited treatment options. During the past year the preclinical programme for ALS has been completed. Positive data has been generated in four preclinical models of ALS, providing strong support for progressing into clinical trials. The latest of these studies, the results of which were announced earlier this year, was supported by a grant from the Motor Neurone Disease Association and we are grateful for their support. Cogane™ has been granted orphan drug designation in both the US and Europe which offers the potential for an expedited development programme and additional value from the programme.

As we approach key development milestones in the coming year, which will have a significant impact on the Group's prospects, plans are being put in place to respond to results in a way which maximises value for our shareholders. Finally, I would like to thank our Board members and staff for their contribution during the year and our shareholders for their continued support.

Mr T Sharpington Chief Executive Officer

Business review

"Our lead series of compounds, the sapogenins (including Cogane™ and Myogane™), has the potential to be a new class of therapy for neurodegenerative diseases."

Strategy

Phytopharm plc ("Phytopharm") is a development-stage pharmaceutical Group developing novel treatments targeting diseases with high levels of unmet need. Our lead series of compounds, the sapogenins (including Cogane™ and Myogane™), has the potential to be a new class of therapy for neurodegenerative diseases including Parkinson's disease, amyotrophic lateral sclerosis ("ALS") and glaucoma.

Phytopharm operates as a virtual Group ensuring the majority of our financial resources are focused on our pharmaceutical pipeline. We utilise a network of external scientific and clinical experts to help guide our development programmes with our experienced pharmaceutical managers overseeing operations.

Our commercially focused development programmes have the potential to produce significant treatment advances in our target areas of neurodegeneration and inflammatory disease. Our products are single-chemical entities with novel mechanisms of action protected by strong patent families. Our pipeline has been sourced from our own research activities and from licensing activities, particularly from leading research institutions in China with which the Group has long-standing relationships.

Our objective is to develop products aimed at major markets with high unmet medical need to key value inflection points before seeking late-stage development and/or commercial partners as appropriate.

Overview

We continue to progress our strategy of focusing on our pharmaceutical programmes, specifically on the development of Cogane™ for Parkinson's disease, and results from the CONFIDENT-PD clinical trial are expected in February 2013.

	Programme	2012 Key highlights
Cogane™	Parkinson's disease	CONFIDENT-PD: April 2012 – completion of recruitment	CONFIDENT-PD: Early December 2012 – last patient completed the trial
		Preparation for a Phase I bioavailability clinical trial of new solid dose oral formulations initiated
	ALS	Positive data from preclinical evaluation supporting the role of Cogane™ in ALS
Myogane™	Glaucoma	Inconclusive results in a preclinical model which prevented evaluation of a neuroprotective action
P61	Inflammatory diseases	Characterisation of lead compound ongoing

Pharmaceutical programmes

Neurodegeneration

Neurodegeneration is the umbrella term for the progressive death or loss of structure and function of neurones. Many neurodegenerative diseases, e.g. Parkinson's disease, ALS, glaucoma and Alzheimer's disease, occur as a result of neurodegenerative processes that exhibit many similarities suggesting that these diseases are related on a sub-cellular level. Because of the similarities in neurodegeneration across this range of diseases, there is hope that therapeutic advances, such as Phytopharm's lead pharmaceutical programmes Cogane™ and Myogane™, could be beneficial in more than one of these diseases.

Parkinson's disease

Parkinson's disease is a movement disorder characterised by muscle rigidity, tremor and 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, responsible for the control of movement. This is caused by degeneration of dopaminergic neurones that project from the substantia nigra to the striatum, 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.

Motor neurone disease/ALS

ALS, also known as Lou Gehrig's disease, is the most prevalent form of motor neurone disease which generally occurs in people between 40 and 60 years of age. It is characterised by 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 with only 50% of patients surviving 18 months from diagnosis and only 20% surviving beyond five years from diagnosis(7). There is an urgent need for the development of new approaches to treat this devastating condition. (7) ALS-TDI 2012.

Glaucoma

Current pharmacological treatments for glaucoma are predominantly focused on reducing the elevated intra ocular pressure ("IOP") in the eye, which is often associated with glaucoma. However, a significant number of patients with glaucoma do not exhibit raised IOP and, in addition, a significant number of patients whose IOP is successfully reduced still experience ongoing neurodegeneration resulting in deterioration of sight. It is therefore believed that there is a major unmet need and a commercial opportunity for products which could successfully treat the underlying neurodegenerative process in glaucoma.

Indication	Opportunity
Parkinson's disease	Second most common neurodegenerative disease(1)
	Estimated to affect more than 4 million people globally(1)
	Estimated to affect 8.3 to 9.3 million people by 2030(2) across the world's most populous countries(a)
	\$3.0 billion market in 2011(1)
Motor neurone disease/ALS	Estimated to affect more than 400,000 people globally(4)
	Approximately 120,00 new cases diagnosed annually(5)
	Designated orphan disease
	Estimated market \$211 million in 2012(6). Potential market size forecast of \$2 billion(4) for effective treatment
Glaucoma	Currently the second leading cause of blindness worldwide(6)
	Estimated to affect 70 million people globally(6)
	Estimated market \$3 billion in 2010(6)

(Sources: (1) Business Insights 2010; (2) European Parkinson's Disease Association 2012; (3) ASD Reports 2012; (4) ALS-TDI 2012; (5) International Alliances of ALS/MND Associations 2012; (6) Global Data 2011.)

(a) Bangladesh, Brazil, China, France, Germany, India, Indonesia, Italy, Japan, Nigeria, Russia, Spain, UK and USA.

Business review (continued)

"Recruitment into the CONFIDENT-PD clinical trial completed in April 2012 and the last patient completed the trial in early December 2012. It is anticipated that data from the trial will be available in February 2013."

The sapogenins

Cogane™ and Myogane™ are structurally related, small molecule, chemical entities and members of the sapogenin class of compounds.

Mode of action

Cogane™ and Myogane™ are therapies which are administered orally. Once absorbed by the body they readily cross the blood-brain barrier and concentrate in the central nervous system ("CNS"). Once delivered to the brain and CNS it is hypothesised that they exert their beneficial actions by modulating the production of neurotrophic factors. Glial cell-derived neurotrophic factor ("GDNF") and brain derived neurotrophic factor ("BDNF") are naturally occurring proteins in the brain that have been shown to be effective in re-growing damaged nerves. As neurotrophic factors are proteins, they cannot themselves be given orally (in tablet or liquid form) because they are degraded in the stomach and intestine and also do not readily cross the blood-brain barrier.

Direct infusion of GDNF into the area of the brain involved in Parkinson's disease has shown evidence of being clinically effective in restoring the control of movement but requires highly complex and difficult surgical procedures.

Cogane™ therefore has the potential to overcome many of the difficulties associated with GDNF administration, whilst retaining its therapeutic promise. In preclinical models, Cogane™ modulated the release of GDNF and BDNF in the brain and increased neurite outgrowth. When administered orally in several different preclinical models of Parkinson's disease, Cogane™ modulated neurotrophic factor production and reversed the loss of dopaminergic neurones in the substantia nigra, the area of the brain most affected in Parkinson's disease.

Cogane™	Myogane™
	Orally bioavailable neurotrophic factor modulators that readily cross the blood-brain barrier
	Demonstrated neuroprotective effects in a range of preclinical models
	Induce and modulate the production of neurotrophic factors
	Completed long-term toxicology studies
	Formulated as once daily, orally administered therapies with good bioavailability and safety profiles
Currently being evaluated in a Phase II trial of untreated patients with early-stage Parkinson's disease (CONFIDENT-PD)	Evaluated in a preclinical model of glaucoma. Data from this study will be further evaluated
Evaluated for safety and tolerability in patients with Alzheimer's disease
Positive results in preclinical models of ALS which provides strong support for the utility of Cogane™ in the treatment of this condition

Cogane™ in Parkinson's disease – progress to date

The preclinical neuroprotective profile of Cogane™ suggests that it will have benefit on both motor and non-motor symptoms of Parkinson's disease. In addition its effect on restoring damaged neurones to a functioning state implies that it might result in a delay in the progression of disease in recently diagnosed patients.

Cogane™ is currently being evaluated in a multi-national Phase II, randomised, double blind, placebo controlled, dose ranging trial (CONFIDENT-PD). The trial is comparing the safety, tolerability and efficacy of three doses of Cogane™ and placebo when administered for 28 weeks to untreated patients with early-stage Parkinson's disease. The trial will assess the efficacy of Cogane™ in the treatment of both motor and non-motor symptoms of Parkinson's disease. Recruitment into the trial completed in April 2012 and the last patient completed the trial in December 2012. It is anticipated that data from the trial will be available in February 2013.

Data from preclinical models also indicates that in addition to its effectiveness as a monotherapy, Cogane™ administered in conjunction with L-DOPA, a commonly used symptomatic treatment of Parkinson's disease, shows additional benefit over L-DOPA alone. Other data suggests that Cogane™ co-administration reduces the side effects associated with L-DOPA. If these effects of improved efficacy and reduced side effects

of L-DOPA by co-administration of Cogane™ are also observed in patients, this will have significant benefit in the management of patients with more severe, later stage disease.

Cogane™ is administered in a liquid formulation in the current CONFIDENT-PD clinical trial. In parallel to this trial the Group has been developing solid dose oral formulations which it believes will be a more commercially attractive proposition to take forward into Phase III registration trials and onto the market. Preparation for a Phase I bioavailability clinical trial has been initiated to assess the bioavailability of these solid dose oral formulations of Cogane™ in healthy volunteers for a period of up to 28 days. The results of the trial are expected in early 2013.

Cogane™ in motor neurone disease/ALS – progress to date

A study of Cogane™ in the genetic "gold standard" preclinical model of ALS was completed during the period. The model has a mutation in the SOD1 gene (SOD1G93A); mutation of the SOD1 gene is a known cause of ALS in humans. In this study, Cogane™ was administered orally for 50 days, commencing after ALS-type symptoms had manifested. This is therefore considered to be a model of severe, late-stage ALS. The main findings from the study are:

• administration of Cogane™ resulted in a 30–50% improvement in muscle strength in one muscle type compared to both the untreated control group and a group treated with riluzole (the only currently approved treatment of ALS);

• treatment with Cogane™ also resulted in an increase in the number of motor units (a measure of functional motor neurones) compared with both the untreated and riluzole treated groups;
• treatment effects were less clear in a second muscle type which was more severely damaged in the model, though the group treated with Cogane™ again showed an improvement in strength compared to the riluzole treated group; and
• histopathology data shows that administration of Cogane™ reduced the loss of spinal cord motor neurones by 39% compared with the number damaged in the untreated group (a statistically significant difference; p=0.008). Treatment with riluzole resulted in a 29% but not statistically significant reduction. Additionally, microscopic examination showed that Cogane™ protected muscle composition, supporting the results on muscle strength.

This study was performed by Professor Linda Greensmith's group at University College London with the financial support of the Motor Neurone Disease Association, a UK-based charitable organisation which provided a grant to cover the costs of the study.

These results support those reported previously by Phytopharm in which Cogane™ showed benefit in an environmental (toxin-induced) model of ALS, in a progressive motor neuropathy model and in a nerve crush model.

Business review (continued)

Cogane™ in motor neurone disease/ALS – progress to date (continued)

Collectively the results from these four different models of motor neurone damage provide strong support for the utility of Cogane™ in the treatment of this condition.

As Cogane™ is already in clinical trials for Parkinson's disease, rapid progression into efficacy indicating trials would be possible, subject to funding.

Cogane™ has been granted Orphan Drug status by both the European Commission and by the US Food and Drug Administration for development in ALS and this will allow significant access to the regulatory authorities for advice and expedited clinical progression as well as providing financial advantages.

Myogane™ in glaucoma – progress to date

Myogane™ has demonstrated neuroprotective effects in a range of preclinical models of neurodegenerative diseases. Specifically, Myogane™ has been shown to modulate the production of neurotrophic factors in a number of cell types and to have beneficial neuroprotective and neurorestorative effects on retinal ganglion cells, the cells which degenerate in glaucoma.

The Group has completed a study with Myogane™ in an animal model of glaucoma that was inconclusive. The study did not yield a valid result because of an unexpectedly low level of neuronal cell death in the control group which prevented evaluation of the neuroprotective effect of Myogane™.

The study was designed to evaluate the neuroprotective effects of treatment with Myogane™ in an established model of glaucoma. In this model intraocular pressure is elevated in order to induce neuronal cell loss in the retina.

The endpoint was a comparative measurement of neuronal cell loss. However, the extent of induced neuronal cell loss was much less than anticipated (from literature precedent) in the control group. While there were some indications of a neuroprotective effect following Myogane™ treatment, it was not possible to draw definitive conclusions because of the limited neurodegeneration in the control group.

Pharmacokinetic evaluation indicated that levels of Myogane™ in the plasma were broadly in line with that expected from previous studies and that Myogane™ was present in the retina. This study was performed with the financial support of the UK Technology Strategy Board. Further tests will be conducted in glaucoma when resources permit.

P61 programme – progress to date

The P61 programme was established to investigate the known pharmacological properties of curcumin and gingerol. P61 is a series of novel new chemical entities ("NCEs") which exhibit anti-inflammatory, anti-remodelling, anti-spasmodic and TRPV1 modulating activities. This range of activity within single molecules could provide attractive therapeutic options for a number of inflammatory diseases. A lead compound has been identified and is being characterised to better understand its pharmaceutical potential.

Legacy products Hoodia

The Council for Scientific and Industrial Research, South Africa, is continuing its evaluation of Hoodia gordonii as an appetite suppressant.

Phytopica®

During the year we signed a global licence agreement for Phytopica®, a natural product for canine skin health, with a Chinese company, Hebei Meiwei Chinese Medicinal Herbs Co. Limited ("Hebei Meiwei"). We have retained a commercial interest in the project and will receive a proportion of any future commercial milestones and royalties from the project following a period of further development by Hebei Meiwei.

Financial review

"We operate with a low headcount and minimal infrastructure. This lean operational structure confers substantial cost and technical benefits."

Cash resources to fund the Group's ongoing activities until at least the end of Q1 2014.

The financial performance for the year ended 30 September 2012 reflects the Group's ongoing pharmaceutical development activities, particularly the progress of our pharmaceutical development programmes in neurodegenerative diseases.

During the year we have continued to progress our pharmaceutical programmes as planned whilst maintaining our lean operating structure. Alongside the development work on Cogane™ in Parkinson's disease and ALS, we have continued discussions with potential partners. We have also benefited from changes in the research and development corporation tax credit system which were confirmed during the year. Based on our current expectations, we have sufficient cash resources until at least the end of Q1 2014.

Income statement Revenue

Revenue from continuing operations for the year of £0.02 million (2011: £0.07 million) was principally generated from activities on the Group's legacy programmes.

Other income of £0.08 million (2011: £nil) has been received in respect of a grant towards the preclinical development programme for Myogane™ in glaucoma.

Research and development expenses

Our research and development expenses are inline with our expectations at £8.29 million, an increase from £7.46 million in 2011. The increase in our research and development expenses over the last two financial years reflects the investment in our development programmes, in particular the ongoing CONFIDENT-PD clinical study.

Administrative expenses

Our virtual business model allows us to operate with a low cost base which is reflected in our administrative expenses of £1.10 million (2011: £1.15 million).

Finance income

Finance income decreased to £0.21 million for the year (2011: £0.38 million) and represents interest received and receivable from our cash balances. The reduction reflects the utilisation of cash resources on our research and development programmes.

Taxation

During the year a number of changes to the research and development corporation tax credit system were confirmed. These changes included the removal of the cap on the level of refund payable at the level of PAYE and NIC paid in each year. This change has resulted in a substantial increase in the corporation tax refund for the year to £1.32 million (2011: £0.51 million). This refund is expected to be received in 2013.

Financial review (continued)

Our CONFIDENT-PD

clinical study is expected to generate clinical data in February 2013, which, if positive, will allow us to maximise shareholder value by seeking late-stage development and/or commercial partners as appropriate.

Balance sheet Non-current assets

Non-current assets representing property, plant and equipment amounted to £0.06 million at 30 September 2012 (2011: £0.08 million).

Current assets

Current assets at 30 September 2012 amounted to £10.53 million compared to £18.51 million at the same time last year. The movement during the year principally comprised the increased research and development tax credit receivable for the year of £1.32 million (2011: £0.48 million) offset by a reduction in our cash balances representing the investment in our pharmaceutical programmes.

Cash balances of £8.89 million (2011: £17.57 million) comprise money market investments and cash and cash equivalents. Money market investments represent fixed-rate, short-term deposits placed with a range of financial institutions at fixed terms with a maturity date of more than three months. Cash and cash equivalents are invested with a similar range of financial institutions for a period of 90 days or less.

Current liabilities

Our current liabilities principally comprise trade and other payables of £2.22 million at 30 September 2012, a slight decrease from £2.63 million last year.

Equity

Share capital and share premium amounted to £3.47 million and £77.29 million respectively at the year end and have increased slightly during the year due to the exercise of share options under which the Group issued 99,777 new ordinary shares for cash.

Cash flow

We continue to utilise our cash to fund the development of our pharmaceutical programmes and the net cash used in operating activities was £9.00 million (2011: £6.42 million). We expect to continue utilising our cash resources to fund our ongoing programmes as planned.

We expect our cash outflow to continue as we continue the progression of our pharmaceutical programmes, primarily Cogane™ in the CONFIDENT-PD clinical trial which we expect will provide us with data in February 2013.

Outlook

Our CONFIDENT-PD clinical study is expected to generate clinical data in February 2013, which, if positive, will allow us to maximise shareholder value by seeking late-stage development and/or commercial partners as appropriate. We are also evaluating opportunities following the successful completion of our investigations into the effects of Cogane™ in ALS which may, funding dependent, allow us to investigate further efficacy-indicating clinical trials in this indication. We will continue to evaluate funding opportunities as they arise. We also expect to complete the current phase of the P61 programme.

In line with our virtual operational structure, we will continue to outsource the majority of our operations to specialist external organisations enabling us to operate with a low headcount and minimal infrastructure. This lean operational structure confers substantial cost and technical benefits. Efficiency and cost control continue to be a key focus. Our lean operational structure continues to provide substantial cost and technical benefits as the nature and range

We are also evaluating opportunities following the successful completion of our investigations into the effects of Cogane™ in ALS which may, funding dependent, allow us to investigate further efficacy-indicating clinical trials in this indication.

of our activities evolve in tandem with our programmes' progress through the various stages of development.

At 30 September 2012, the Group had cash resources (being cash and cash equivalents and money market investments) of £8,887,220 (2011: £17,574,476). These cash resources are sufficient for the Group to complete the CONFIDENT-PD trial and any other ongoing research and development studies and to fund, entirely from its own existing resources, the Group's ongoing activities until at least the end of Q1 2014. Thus, after making enquiries and taking into account management's estimate of future expenditure, the directors have a reasonable expectation that the Group will have adequate financial resources to continue in operation for the foreseeable future.

Forward-looking statements

Certain information included in these statements is forward-looking and involves risk and uncertainties that could cause results to differ materially from those expressed or implied by the forward-looking statements.

Forward-looking statements include, without limitation, projections relating to results of operations and financial conditions, market estimates, the Group's plans and objectives for future operations, including future revenues, financial plans and expected expenditures and divestments. All forward-looking statements in this report are based on information known to the Group on the date of this release.

The Group undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

It is not reasonably possible to itemise all of the many factors and specific events that could cause the Group's forward-looking statements to be incorrect or that could otherwise have a material adverse effect on the future operations or results of the Group.

Principal risks and uncertainties

The nature of pharmaceutical development is such that there are significant inherent risks due to the long and complex development process.

Below are those principal risks and uncertainties that the Board considers could have a material impact on the Group's operational results, financial condition and prospects. These risks are not in any particular order of priority and there may be other risks that are either currently unknown or not considered material which could have a similar impact on the Group's business in the future.

The Board reviews each area of the business at least annually to identify material risks and the controls in place to manage these risks where possible. This comprehensive review is undertaken as part of the review of internal controls as set out on pages 32 and 33.

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 success of the Group's programmes depends upon the quality of the design and the implementation of each programme. The Group utilises a range of external scientific and clinical experts to help guide its development programmes.

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 or operations may be adversely impacted. The Group also may derive revenue or financial support from collaborators and from partnering with certain charitable organisations. If these relationships are adversely affected, or if the products

Clinical and regulatory risk

Successful commercialisation of the Group's products is likely to depend on successful progress through clinical studies and registration. 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 conclusions of the Group's research and may require

involved fail to continue to make satisfactory progress, the Group's results or operations may be adversely impacted. Where appropriate the Group will assess third party organisations to establish that such organisations have the required capability, expertise and financial stability to perform relevant services for the Group.

The progress of the development programmes therefore represents the best indicator of the Group's performance. A full review of the programmes is given in the Business Review on pages 6 to 10.

further testing or withhold approval altogether. The Group manages its clinical and regulatory risk by working closely with its expert regulatory advisors and, where appropriate, seeking advice from regulatory authorities on the design of key development plans for its preclinical and clinical programmes.

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 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 and overall cost effectiveness of the product. The Group works closely with its legal advisors and obtains, where necessary, opinions on the intellectual property landscape relevant to the Group's product development programmes.

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. The Group invests in maintaining and protecting this intellectual property to reduce risks over the enforceability and validity of the Group's patents. The Group works closely with its legal advisors and obtains where necessary opinions on the intellectual property landscape relevant to the Group's programmes and activities.

Financial risk

Cash flow

The Group has a history of operating losses which are anticipated to continue until the Group is able to generate sufficient revenues from its development programmes. However, the Group may need to seek further capital through equity or debt financings in the future and if this is not successful, the financial condition of the Group may be adversely affected. As at 30 September 2012, the Group had cash resources of £8,887,220 which the Group considers sufficient to finance its operational activities until at least the end of Q1 2014.

Return on investment

The drug development process is inherently risky and is conducted over several years and consequently is extremely costly. Many drug candidates fail in development due to the clinical and regulatory risks, and even in those circumstances where drugs are approved, sales levels can be disappointing due to competition, healthcare regulation and/or intellectual property challenges. As a result the returns achieved may be insufficient to cover the costs incurred. The Group looks to mitigate the development and commercial risk of its development programmes' by partnering drug candidates for late-stage development and commercialisation. By partnering in this way, part of the programmes' value can be realised whilst retaining a potential upside through future milestones and royalty payments from commercial sales.

Foreign exchange risk

The Group records its transactions and prepares its financial statements in sterling. Where possible the Group maintains natural hedges by matching foreign currency income with foreign currency expenditure. The Group incurs expenditure in foreign currency relating principally to clinical trials which may exceed any revenues in foreign currencies. To the extent that income and expenditure in foreign currencies are not matched, fluctuations in exchange rates between sterling and foreign currencies, principally US dollar and euro, may result in realised or unrealised foreign exchange gains and losses. Where there is certainty

Counterparty credit risk

The Group is exposed to credit-related losses on cash deposits in the event of non-performance by counterparties.

With the current economic uncertainty, counterparty risk is a key consideration when placing cash funds on deposit. The Group's policy is to minimise the risks associated with cash deposits by placing them of the amount and timing of expenditure of foreign currencies, the Group may purchase financial instruments to minimise any foreign exchange gains or losses. Where the timing and/or the amount to be received is uncertain, risk management is more difficult and the Group will use financial instruments wherever possible. To the extent that financial instruments are not utilised, any fluctuations in foreign exchange movements may have a material adverse impact on the results from operating activities.

with institutions with a recognised high rating (typically A or above assigned by international credit-rating agencies) or with one of the major clearing banks. If any counterparty were to experience financial difficulties, this may impact on the Group's liquidity in the future.

Board of Directors

Mr Alistair Taylor Non‑executive Chairman

Mr Taylor is formerly executive Chairman of UK listed Lombard Medical Technologies plc and has 50 years' experience in the healthcare industry: twelve years in pharmaceuticals and over 38 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 position of Financial Controller, Pfizer Hospital Products Inc. New York. He is also executive Chairman of ORProductivity plc and Arterius Limited, as well as being non-executive Chairman of Intelligent Orthopaedics Limited, Anaxsys Limited and Nightingale-EOS Limited. He is a chartered accountant.

Mr Tim Sharpington Chief Executive

Mr Sharpington has more than 20 years' experience in the life sciences sector with various pharmaceutical, biotechnology and pharmaceutical service companies in Europe and the US. He has broad experience across drug development, in-licensing, mergers and acquisitions as well as fundraisings. After a period of time at Pfizer, Mr Sharpington led product development at US-based Sequus Inc. in the late 1990's. In 2002, Mr Sharpington was appointed as Development Director at Arakis Ltd, a UK-based VC-backed biotechnology company sold to Sosei in 2005 for £107 million. After leaving Arakis Mr Sharpington founded and became Chief Executive Officer of Serentis Limited in 2006. He joined Phytopharm as Chief Executive Officer in 2010.

Mr Roger Hickling

Research and Development Director

Mr Hickling has a BSc in Chemistry from Kings College, University of London and over 30 years' experience in pharmaceutical research and development. This includes management of development portfolios and projects from preclinical through to Phase IV covering a range of disease areas. In addition, Mr Hickling has extensive experience in international regulatory affairs, including clinical trials and marketing applications. Between 1976 and 1998 Mr Hickling worked at SmithKline Beecham where he oversaw both in-house and partnered early-stage neuroscience development projects. Mr Hickling held a variety of positions at several pharmaceutical companies between 1998 and 2009 including Alizyme Therapeutics plc. He was appointed to the Board of Alizyme Therapeutics as Research and Development Director in 2006 with responsibility for research and development strategy development, all research and development operations and staff.

Dr Peter Blower Non‑executive director

Dr Blower has over 40 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 70 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).

Dr Ian Tulloch

Non‑executive director

Dr Tulloch has over 30 years' experience in the pharmaceutical industry, encompassing a broad range of senior roles in both research and development and commercial functions. He has a strong background in neuroscience, including both neurological and psychiatric disorders, and has been closely involved in the commercialisation of innovative products for the treatment of Parkinson's disease, depression, epilepsy, multiple sclerosis and pain. From 2002 to 2010 he was Global Marketing Director in the Neuroscience & Ophthalmics Business Franchise at Novartis AG, based in Basel, Switzerland, where he supported both in-line products and Phase II/III development candidates and also worked closely with Business Development & Licensing on in-licensing opportunities. Prior to this he held global medical marketing positions at GlaxoSmithKline/ SmithKline Beecham, from 1990–2002, and was Drug Discovery Program Director at Reckitt Benckiser from 1978 to 1990. Dr Tulloch has a BSc (Hons) in Pharmacology and a PhD in Neuropharmacology, both from the University of Edinburgh. He has authored over 100 scientific publications in the neuroscience field.

Directors' report

for the year ended 30 September 2012

The directors of Phytopharm plc (registered in England and Wales: 03131723) present their report together with the audited consolidated and Company financial statements for the year ended 30 September 2012.

The Remuneration Report can be found on pages 22 to 27 and the Corporate Governance Report, including the corporate social responsibility statement, can be found on pages 28 to 35.

Principal activities

The principal activity of the Group undertaken during the year was the ongoing research and development of novel treatments targeting diseases with high levels of unmet need. The Group's lead series of compounds, the sapogenins (including Cogane™ and Myogane™), has the potential to be a new class of therapy for neurodegenerative diseases including Parkinson's disease ("PD"), amyotrophic lateral sclerosis ("ALS") and glaucoma. Phytopharm plc manages these activities which are carried out by its subsidiary, Phytotech Limited.

Research and development

Details of the Group's research and development activities can be found in the Business Review on pages 6 to 10.

Business review

A review of the development and performance of the Group including important events, progress during the year, the financial performance during the year and likely future developments can be found in the Chairman and Chief Executive Officer's Review, the Business Review and the Financial Review on pages 11 to 13 all of which are incorporated in this Directors' Report by reference. The principal risks and uncertainties facing the Group can be found on pages 14 and 15.

The directors are satisfied with the progress made across the Group's programmes and with the year-end position.

Key performance indicators

The principal key performance indicators ("KPIs") of the Group are the progress of the Group's development programmes through preclinical and clinical development, in particular its lead programme Cogane™ in Parkinson's disease, whilst tightly controlling its cost base. The Group focuses its financial resources on its research and development activities whilst operating as a virtual Group keeping administrative costs to a minimum and ensuring cash resources are sufficient to fulfil its current strategy. While these KPIs demonstrate relevant factors by reference to which the development, performance and position of the Group can be measured effectively, due to the nature of Phytopharm's business and the pharmaceutical industry in general these KPIs are not readily or meaningfully comparable on a year-on-year basis. The Group's expenditure on its research and development programmes and on administrative expenses was in line with management's expectations. Details of financial performance are given in the Financial Review on pages 11 to 13.

Key events

Key events during the past year include the following:

Operational

• Recruitment into CONFIDENT-PD Phase II clinical trial of Cogane™ in untreated patients with early-stage Parkinson's disease was completed in April 2012 and the last patient completed the trial in early December 2012. Results from the trial remain on track to be available in February 2013.
• Cogane™ demonstrated efficacy in the "gold standard" preclinical model of amyotrophic lateral sclerosis ("ALS"), the most common form of motor neurone disease. Positive data have now been obtained in four models of ALS, providing a strong rationale for Cogane™ as a potential treatment for this devastating condition.
• Preparation for a Phase I clinical trial to evaluate Cogane™ solid dose oral formulations for up to 28 days has been initiated.
• A study of Myogane™ in a preclinical model of glaucoma was inconclusive due to an unexpectedly low neuronal cell loss in the control group which prevented evaluation of a neuroprotective effect of Myogane™.

Corporate

Directors' report (continued)

for the year ended 30 September 2012

Key events (continued)

Important events since the year end See note 22 to the financial statements.

Results and dividends

The Group's results for the year ended 30 September 2012 are presented on page 39. The Group's net loss after taxation was £7,766,309 (2011: £7,658,330). The Group is not yet in a position to pay a dividend and the loss for the year has been added to the accumulated losses in equity.

Significant agreements

The Company is not a party to any significant agreement which takes effect, alters or terminates upon a change of control of the Company other than the directors' service contracts, details of which are set out in the Remuneration Report.

Directors

The directors of the Company who served during the year and up to the date of this report, unless otherwise indicated, are as follows:

	Capacity
Mr T Sharpington	Chief Executive Officer
Mr R I Hickling	Research and Development Director
Mr A H Taylor	Non-executive Chairman
Dr P R Blower	Senior independent director
Dr I F Tulloch	Non-executive director	Appointed 2 February 2012
Mr A D Morrison	Non-executive director	Resigned 27 March 2012

Biographical details of the directors are shown on page 16.

Re-election of directors

At the 2013 Annual General Meeting ("AGM"), in accordance with the Company's Articles of Association and the provisions of the UK Corporate Governance Code ("the Code"), Mr T Sharpington and Mr A H Taylor will retire. Being eligible, and with the Board's recommendation, they will offer themselves for re-election.

Mr A H Taylor, Dr P R Blower and Dr I F Tulloch, as non-executive directors, have letters of appointment which provide for three months' notice from either party.

The service contracts of the executive directors and the letters of appointment for the non-executive directors are available for inspection at the registered office of the Company and will be available at the 2013 AGM as specified in the notice of meeting.

In accordance with Section 992 of the Companies Act 2006, the directors disclose that the rules regarding the appointment and replacement of directors are contained in the Company's Articles of Association, which may be amended with shareholder approval in accordance with relevant legislation. The powers of the directors are contained in the Company's Articles of Association or in accordance with the provisions of the Companies Act 2006. The Companies Act 2006 provides that directors may issue and buy back the Company's shares on behalf of the Company, subject to authority being given to the directors by shareholders in general meeting. No authority to buy back the Company's ordinary shares of 1 pence has been sought. Purchases in shares of Phytopharm relate to the Phytopharm Share Incentive Plan whereby the Company issued one "Matching Share" for every one "Partnership Share" purchased by the employee. All shares are held by the scheme Trustees until the shares vest unconditionally with the employee.

Directors' interests

Details of the directors' interests in the ordinary share capital of the Company, as required to be disclosed in accordance with the Disclosure and Transparency Rules, are given in the Remuneration Report on page 26. During the financial year under review no directors purchased ordinary shares.

Directors' indemnities

The Group has in place for the whole of the year, and at the date of signing the financial statements, qualifying third party indemnity insurance for all directors and officers.

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 2012, 346,901,749 shares were allotted and fully paid. See note 16 to the financial statements for details of movements in the Company's share capital during the year.

Holders of ordinary shares are entitled to receive all shareholder documents, to attend, speak and exercise voting rights, either in person or by proxy, on resolutions proposed at general meetings and participate in any distribution of income or capital. There are no restrictions on the transfer of shares in the Company or in respect of voting rights attached to the shares. None of the shares carry any special rights with regard to the control of the Company.

Details of employee share option schemes are set out in note 17 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.

Authority to issue shares

At the last AGM held on 27 March 2012, shareholders authorised the directors to allot relevant securities up to an aggregate nominal value of £1,156,007, representing one-third of the issued share capital, and to further allot equity securities up to an additional aggregate nominal value of £346,902 in connection with a fully pre-emptive rights issue, in accordance with ABI guidance, and to allot for cash equity securities having a nominal value not exceeding in aggregate £346,902 (being 10% of the issued share capital). The authority expires at the conclusion of the 2013 AGM or, if earlier, the close of business on 27 March 2013. At the 2013 AGM similar authorities will be sought from shareholders.

Substantial shareholdings

At 30 November 2012, the Company had received notification from the following financial institutions of their and their clients' interest in the following disclosable holdings, which represent 3% or more of the voting rights of the issued share capital of the Company, and are disclosed in accordance with the Disclosure and Transparency Rules of the Financial Services Authority.

Shareholder having a major interest	Number of shares held	% of issued shares
Invesco Asset Management Limited	195,527,147	56.36
Henderson Global Investors Limited	41,697,242	12.02
Mr Klaus Hebben	15,082,454	4.35

The shares held by Invesco Asset Management Limited ("Invesco") are held in Invesco's capacity as an institutional investor and an investment channel for others and not on its own behalf. A significant number of the shares are held by open-ended investment companies together with other shares held in investment portfolios managed by Invesco as nominee/bare Trustee.

Directors' report (continued)

for the year ended 30 September 2012

Substantial shareholdings (continued)

On 3 December 2009, Invesco and the Company entered into a relationship agreement under which Invesco has undertaken to ensure that whilst it holds an interest in the shares of the Company in excess of 30% it will exercise its voting rights insofar as it is able to do so that:

(a) the Company is capable of carrying on its business independently of Invesco;
(b) all transactions, agreements and arrangements with any member of the Group and Invesco are conducted on an arm's length basis; and
(c) any dealing or dispute between Invesco and any member of the Group is dealt with by a committee comprising only of independent directors.

Purchase of own shares

Purchases in shares of Phytopharm relate to the Phytopharm Share Incentive Plan whereby the Company issued one "Matching Share" for every one "Partnership Share" purchased by the employee. All shares are held by the scheme Trustees until the shares vest unconditionally with the employee.

During the year ended 30 September 2012, the Group purchased 55,251 ordinary shares of 1 pence (2011: 5,171) at a total cost of £4,172 (2011: £373).

Payment of creditors

The Company does not have a specific payment policy but pays its suppliers in accordance with the specific terms agreed with each supplier. Trade payables of the Company and the Group at 30 September 2012 were equivalent to 0.05 (2011: 47.01) and 23.95 (2011: 33.46) days' purchases respectively based on the average daily amount invoiced by suppliers during the year.

Financial risk management

The financial risk management and objectives of the Group and the exposure of the Group to capital, liquidity, credit and interest rate risks are set out in note 21 to the financial statements.

Annual General Meeting

The notice convening and giving details of the 2013 AGM of the Company will be mailed to shareholders.

Corporate governance

The Company's statement on corporate governance can be found in the Corporate Governance Report on pages 28 to 35 of these financial statements. The Corporate Governance Report forms part of this Directors' Report and is incorporated into it by cross-reference.

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 Section 418 of the Companies Act 2006.

Going concern

Having completed patient recruitment into the CONFIDENT-PD clinical trial in patients with early-stage Parkinson's disease during the financial year, the Group expects to receive the results from the trial in February 2013. Once the trial has been completed, the Group's research and development expenditure is expected to fall substantially while the Group evaluates the results of this important milestone. Initial discussions have been held with potential partners and plans put in place for the next steps in the development of our pipeline assets, be that alone or in partnership with other companies, to ensure that the Group is well positioned to extract maximum value from its programmes.

Independent auditors

A resolution to re-appoint PricewaterhouseCoopers LLP as auditors to the Company and authorising the directors to set their remuneration will be proposed at the next AGM.

Mr T Sharpington Chief Executive Officer

30 November 2012

Remuneration report

This report covers the year ended 30 September 2012 with comparative figures provided for the year ended 30 September 2011. It has been prepared in compliance with the UK Corporate Governance Code 2010, the Listing Rules of the FSA and the Companies Act 2006. It sets out the Group's remuneration policy and details of directors' remuneration. In accordance with the Companies Act 2006, a resolution to approve this report will be proposed to shareholders at the AGM in 2013. The vote will be advisory and will be considered carefully by the Remuneration Committee in the formulation and approval of the Group's future remuneration policies.

The auditors are required 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 2006 (as amended by the Regulations). The report has therefore been divided into separate sections for audited and unaudited information.

The information below is unaudited unless specified otherwise.

Remuneration Committee

The Remuneration Committee ("the Committee") is comprised exclusively of independent non-executive directors. The directors who have served on the Remuneration Committee are set out on page 30.

The Remuneration 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 pay and benefits for the executive directors, the setting of pay and benefit 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 aims to reward all individuals fairly based on their role, their performance and salary levels in the wider market.

The executive directors are invited to attend the Remuneration Committee meetings to make recommendations on compensation levels for employees.

Remuneration policy

The Committee aims to provide remuneration packages that are competitive and designed to attract, retain and motivate individuals including:

• having regard to experience and the nature and complexity of the individuals' work, and regard to individuals' remuneration in comparable companies, in order to pay a competitive salary, including a performance related cash bonus that attracts and retains individuals of the highest quality;
• linking individual remuneration packages to the Group's long-term performance through the award of share options; and
• providing post-retirement benefits through the Group's pension schemes.

To achieve these objectives the Committee takes account of information from various sources on compensation packages primarily to ensure that remuneration generally at all levels is broadly aligned to comparable companies in the UK.

Remuneration package

The principal components of remuneration packages are base salary, short and long-term incentives and pension benefits. This report sets out the policy and details of:

• basic pay and benefits;
• performance related bonuses;
• share option incentive schemes;
• total shareholder return;
• directors' remuneration;
• executive directors' contracts;
• non-executive directors' remuneration and letters of appointment;
• directors' interests in shares; and
• directors' interests in share options.

Basic pay and benefits

The Committee sets the annual salaries for executive directors, having regard to personal performance and responsibilities of each executive director and their expected future contribution. The Committee also reviews the basic pay structure for all other employees.

All directors and employees are invited to participate in a money purchase group personal pension plan which has no defined benefits. During the period, the Group contributed to the scheme a maximum of 12.5% of base salary in relation to the executive directors, a maximum amount of 8% of base salary in relation to managers and senior managers and a maximum amount of 5% of base salary in relation to all other employees.

Performance related bonuses

The Group may make bonus payments depending on the overall performance of the Group against objectives agreed with the Committee at the beginning of each year. These objectives relate to the development and progression of the Group's product portfolio together with operational and corporate effectiveness. The level of any bonus payments is based on the Group's overall performance against these objectives together with the individual's performance and contribution towards achieving overall objectives. Objectives typically include development of the Group's programmes, licensing activities, corporate activities and are weighted towards objectives with the highest corporate significance. Bonus payments are not pensionable.

Share option incentive schemes

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% of the issued ordinary share capital of the Company immediately prior to that day.

Share option plan

Share options are granted under the Phytopharm Share Option Plan 2007 which is 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 limit of 400% of an individual's salary 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. The vesting of a share option under the scheme will depend on total shareholder return ("TSR") performance conditions being met. 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 Company's TSR will be compared to that of the companies making up the FTSE Small Cap Index measured over a period of three years. Awards vest in accordance with the following table:

	Level of
	award
	released
Level of comparative performance during the performance period	%
Below median	Nil
At or above median	100

Remuneration report (continued)

Long-term incentive plan

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 limit of 400% of an individual's salary 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.

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 vesting of a share award under the above scheme will depend on TSR performance conditions being met. The Company's TSR will be compared to that of the companies making up the FTSE Small Cap Index measured over a period of three years. Awards vest in accordance with the following table:

	Level of
	award
	released
Level of comparative performance during the performance period	%
Below median	Nil
Between median and upper quartile (pro rata)	25 to 100
Upper quartile and above	100

Directors' reward plan

The 2010 Directors' Reward Plan enabled the Group to recognise the input of the non-executive directors to the success of the Group in 2009. The one-off grant of options in 2010 under the plan will vest at the end of three years and no performance conditions will apply. As a condition of exercise, the non-executive directors will be required to enter into an agreement under which they agree not to dispose of any shares acquired on exercise for a period of at least one year from the date of exercise. No further options have been granted under this scheme.

Share Incentive Plan

The Phytopharm Share Incentive Plan 2007 ("SIP") is open to all employees, including executive directors, for the purpose of encouraging employees to become shareholders of the Group and to retain their shares over the medium to long term. Employees 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. The SIP is an HMRC approved scheme through which benefits are provided in a tax efficient manner.

Total shareholder return ("TSR") over the last five years

The chart below shows the Company's TSR performance over the period 30 September 2007 to 30 September 2012 alongside the performance of the FTSE Small Cap Index and meets the requirements of Section 420 of the Companies Act 2006. TSR looks at the value at 30 September 2012 of £100 invested in the Company on 30 September 2007 compared with the value of £100 invested in the FTSE Small Cap 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 TSR of the Company should be measured.

Executive directors' service contracts

The Group's policy in entering into service contracts with executive directors is to enable the recruitment of high-quality executives and to obtain protection from their sudden departure to competitor companies. In addition, service contracts are an important element in maintaining maximum protection for the Group's intellectual property rights and other commercially sensitive information. It is the Group's policy that executive directors have contracts with an indefinite term but which provide for a maximum period of six months' notice to be served by the Company or by the director. However, if an executive director is guilty of serious misconduct, is in serious breach of contract or persistently fails to carry his out duties, then the Group (after due warning) is entitled to summarily terminate his service contract without notice or any compensation in respect of that termination.

Non-executive directors' remuneration and letters of appointment

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 information regarding the level of fees within the sector, 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.

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 2012	3 months
Dr P R Blower	31 July 2012	3 months
Dr I F Tulloch	2 February 2012	3 months

Directors' remuneration (audited)

	2011
	Performance	Total		Total
					Pension contributions
£	£	£	£	£	£

					22,469
137,764	14,962	152,726	16,208	150,341	15,327
341,208	52,405	393,613	40,208		37,796

					—
					—
					—
21,167	—	21,167	—	—	—
112,092	—	112,092	—	102,895	—
453,300	52,405	505,705	40,208	458,923	37,796
	Salary and fees 203,444 43,125 15,810 31,990	2012 related bonus 37,443 — — —	excluding pensions 240,887 43,125 15,810 31,990	Pension contributions 24,000 — — —	excluding pensions 205,687 356,028 41,344 30,793 30,758

(i) To 27 March 2012.

(ii) From 2 February 2012.

No directors waived emoluments in the financial year ended 30 September 2012 (2011: £nil).

Remuneration report (continued)

Directors' interests in shares

The table below sets out the interests of directors and their connected persons in the Company's shares:

2012(i)	2011
	120,000
	120,000
	330,043
	193,682
	—
246,544	246,544
	Ordinary shares of 1 pence 120,000 120,000 330,043 193,682 —

(i) Or as at date of resignation if earlier.

All directors' interests are beneficially held.

Apart from the interests disclosed above, and those set out in the share option table below, 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.

Directors' options (audited)

Details of options over shares of the Company held by directors, all of which have been granted at no cost to the Directors, are set out below:

	Number of options
	At 1 October 2011	Granted during the year	At 30 September 2012(i)	Note*	Exercise price	Date from which exercisable	Expiry date
Mr T Sharpington	1,566,186	—	1,566,186	1	£0.07630	21 July 2013	20 July 2020
	750,791	—	750,791	1	£0.07350	17 December 2013	16 December 2020
	1,900,588	—	1,900,588	2	£0.07630	21 July 2013	20 July 2020
	—	886,976	886,976	2	£0.06525	24 November 2014	23 November 2021
	4,217,565	886,976	5,104,541
Mr R I Hickling	1,566,186	—	1,566,186	1	£0.07630	21 July 2013	20 July 2020
	512,305	—	512,305	1	£0.07350	17 December 2013	16 December 2020
	167,201	—	167,201	2	£0.07630	21 July 2013	20 July 2020
	—	613,026	613,026	2	£0.06525	24 November 2014	23 November 2021
	2,245,692	613,026	2,858,718
Mr A H Taylor	350,000	—	350,000	3	£0.11250	31 March 2013	30 March 2018
Dr P R Blower	256,667	—	256,667	3	£0.11250	31 March 2013	30 March 2018
Mr A D Morrison	256,667	—	256,667	3	£0.11250	31 March 2013	30 March 2018
Total	7,326,591	1,500,002	8,826,593

(i) Or as at date of resignation if earlier.

* Further details of the terms of the share option schemes are contained in note 17 to the financial statements under the note referenced in the above table.

Directors' options (audited) (continued)

No price was paid for the grant of options, nor were any share options exercised by directors during the year (2011: none).

The market price of the Company's shares on 28 September 2012, the last working day of the financial year, was 12.25 pence (30 September 2011: 7.5 pence).

During the year, the daily closing market price of the Company's shares ranged from 12.75 pence (20 September 2012) to 5.88 pence (19 June 2012) (2011: 9.75 pence to 6.88 pence).

Approved by the Board of directors

Dr I F Tulloch Chairman of the Remuneration Committee 30 November 2012

Corporate governance report

The Board is committed to practising good corporate governance and recognises that it is accountable to shareholders for the Group's standard of governance.

The principles set out in the Code cover five main areas: leadership, effectiveness, accountability, remuneration and relations with shareholders. With the exception of directors' remuneration (which is dealt with separately in the Remuneration Report) the following section states how the Board has performed in relation to the remaining four areas of the Code.

Board

The Board comprises five directors, three of whom are non-executive. The biographies of all members of the Board are set out on page 16.

The Board is chaired by Mr A H Taylor who, together with the other non-executive directors, is considered to be independent of the executive directors and free from any relationship which could materially affect the exercise of their independent judgement.

The Board typically has six scheduled meetings during the year. In addition, further meetings are held when circumstances and urgent business dictate. All directors receive an agenda and Board papers in advance of the Board meetings to facilitate an effective contribution at the meetings. The executive directors maintain regular informal contact between the Board meetings with non-executive directors.

The Board is responsible for the overall direction and strategy of the Group and for securing the optimum performance from Group assets. At each meeting, the Board reviews strategy and progress of the Group towards its objectives, particularly in respect of research and development projects, and monitors financial progress against budget.

While the Board retains overall responsibility for, and control of, the Group, day-to-day management of the business is conducted by the executive directors.

The Board has agreed a schedule of items that are specifically reserved for its consideration, which is reviewed on an annual basis. This schedule includes:

• strategy and management;
• structure and capital;
• financial reporting and controls;
• internal controls;
• approval of significant contracts;
• approval of shareholder communications;
• board composition;
• corporate governance; and
• health and safety policy.

The role of non-executive directors is to ensure that independent judgement is brought to Board deliberations and decisions. Dr P R Blower is the senior independent director. During 2010, shareholders approved the 2010 Directors' Reward Plan to enable the Group to recognise the input of the non-executive directors to the success of the Group in the previous twelve months and the non-executive directors were awarded a one-off grant of share options. The Group does not intend to make any further grants of share options under this scheme. There are no performance conditions attached to the share options and given the level of the award, the Board considers the non-executive directors to be independent.

All directors are required to retire and submit themselves for re-election at the first AGM after appointment and, thereafter, at least every three years. Subject to their re-election and Companies Act 2006 provisions, the non-executive directors are appointed for specified terms. See page 25.

Board (continued)

There is clear separation of the roles of Chairman and Chief Executive Officer on terms which have been agreed and set out in writing by the Board and which are reviewed on an annual basis. The Chairman is responsible for overseeing the running of the Board, encouraging all directors to participate fully in discussions with the aim of reaching a consensus and ensuring that the non-executive directors are properly briefed on matters. The Chief Executive Officer has responsibility for implementing the Board's strategy and managing day-to-day business activities of the Group with the executive directors and senior managers. The Company Secretary, through the Chairman, is responsible for advising the Board on all governance matters.

If directors believe that they require independent professional advice in the furtherance of their duties, the Board has agreed procedures for them to follow which allow the directors to take such advice at the Group's expense. In addition, the directors have direct access to the advice and services of the Company Secretary who is accountable to the Board through the Chairman for governance matters. It is the responsibility of the Company Secretary to ensure that the Board follows its procedures and complies with all rules and regulations.

Under the direction of the Chairman, the Company Secretary's responsibilities include facilitating induction and professional development of the directors and ensuring the smooth flow of information within the Board and its Committees and between non-executive directors and senior management.

New directors receive a comprehensive, formal and tailored induction to the Group's operations and have the opportunity to meet major shareholders. Appropriate training is provided to new directors and is also available to other directors as required. The Group maintains directors' and officers' liability insurance.

Board diversity

Phytopharm recognises the importance of ensuring that its composition reflects the broad range of skills, expertise and experience required to enable it to meet its responsibilities and satisfy the demands of its stakeholders. The Board is committed to making Board appointments based on merit in the context of the skills and experience the Board as a whole requires to be effective.

The Board and the Nomination Committee will ensure that should any vacancies arise on the Board, the Nomination Committee will consider candidates on merit and overall suitability against objective criteria and with due regard for the benefits of diversity in the context of the size of the Group.

Board performance and appraisal

The Board has established a formal and rigorous process to annually evaluate its own performance and that of the Audit and Remuneration Committees, individual directors and Chairman. In line with the practice of previous years all directors have conducted a self-assessment of the performance of the Board during the year using a questionnaire circulated by the Company Secretary which included the following areas:

• setting and understanding of the Group's strategy;
• composition, management and conduct of Board meetings;
• roles of the Chairman, Chief Executive Officer and non-executive directors;
• risk management and control; and
• corporate governance practices.

The results were collated by the Company Secretary and reported to the Board. Any items for improvement were considered by the Board.

Corporate governance report (continued)

Board committees

The Board has established Audit, Remuneration and Nomination Committees, each with written terms of reference stating their authorities and duties. The full terms of reference of all the committees are reviewed annually and are published on the Group's website www.phytopharm.com.

Committee membership and attendance at Board and committee meetings during the year under review was as follows:

		Board Total meetings: 6		Audit Committee Total meetings: 2		Remuneration Committee Total meetings: 6		Nomination Committee Total meetings: 3
Director's name	Independent	Position	Meetings attended	Position	Meetings attended	Position	Meetings attended	Position	Meetings attended
Mr T Sharpington	No	Chief Executive Officer	6/6	—	—	—	—	—	—
Mr R I Hickling	No	Research and Development Director	6/6	—	—	—	—	—	—
Mr A H Taylor	Yes	Non-executive Chairman	6/6	Member	2/2	Member	6/6	Member	3/3
Dr P R Blower	Yes	Non-executive	6/6	Chairman	2/2	Member	6/6	Chairman	3/3
Dr I F Tulloch(i)	Yes	Non-executive	4/4	Member	1/1	Chairman	3/3	Member	—
Mr A D Morrison(ii)	Yes	Non-executive	2/2	Member	1/1	Chairman	3/3	Member	3/3

(i) Dr I F Tulloch was appointed on 2 February 2012 and became Chairman of the Remuneration Committee at the next meeting held on 27 March 2012. (ii) Mr A D Morrison stepped down from the Board on 27 March 2012.

Audit Committee

The Audit Committee members are all the independent non-executive directors and the Committee is chaired by Dr P R Blower. The Board considers that Mr A H Taylor has recent and relevant financial experience. The qualifications and experience of the members of the Audit Committee are disclosed on page 16.

The terms of reference of the Audit Committee include the following responsibilities:

• to monitor the integrity of the Group's financial statements and make recommendations to the Board;
• to review annually the need for an internal audit function;
• to review the effectiveness of the Group's internal control and risk management systems; and
• to consider and make recommendations to the Board regarding the appointment of the Group's external auditors.

Financial reporting procedures and external audit

The Audit Committee assists the Board in ensuring that the Group's published financial statements give a true and fair view and in securing reliable internal financial information for decision making. The Audit Committee reviews the findings of the external auditors and reviews key accounting policies and judgements. The Audit Committee is also responsible for monitoring the effectiveness of the external audit process and the independence of the external auditors, recommending audit fee proposals to the Board and considering the scale and nature of non-audit work. Non-audit services provided by the external auditors are discussed to ensure the Audit Committee is satisfied regarding the objectivity and independence of the external audit, including any relevant safeguards. Any material non-audit fees are approved by the Audit Committee before being committed.

The Group's tax compliance work is carried out by the auditors only in cases where they are best suited to perform the work in a cost efficient manner, given their familiarity with the Group's business. A breakdown of fees paid to the auditors can be found in note 5 to the financial statements.

The Audit Committee assesses annually the qualifications, expertise and resources and independence of the external auditors and the effectiveness of the audit process. The assessment covers all aspects of the audit service provided by the audit firm. The Audit Committee considers that the relationship with the Group's auditors is working well and it remains satisfied with their effectiveness. Accordingly, it has not been necessary to perform a tender. There are no contractual obligations restricting the Company's choice of external auditors.

Board committees (continued)

Audit Committee (continued)

Protected disclosure

The Audit Committee reviews the Group's protected disclosure ("whistleblowing") policy and procedures on an annual basis to ensure that adequate arrangements are in place by which members of staff may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other areas. The Audit Committee considers that appropriate arrangements are in place for the proportionate and independent investigation of such matters and for appropriate follow-up action.

Internal audit

Due to its size and structure, the Group does not have an internal audit function although the Audit Committee keeps this under annual review.

Audit Committee performance and appraisal

The Audit Committee conducted a self-assessment of its performance during the year by reference to an evaluation checklist provided by the Group's external auditors. The results were compiled and analysed by the Company Secretary. Areas for improvement identified by the assessment will be addressed accordingly.

Remuneration Committee

The Remuneration Committee members are all the independent non-executive directors, and has been chaired by Dr I F Tulloch since 27 March 2012. Prior to this date the Remuneration Committee was chaired by Mr A D Morrison.

The Remuneration Committee is responsible for making recommendations to the Board on remuneration policy for all members of staff and executive directors. The policy recommendations include setting salary scales and approving the format and range of incentive payments and share option grants to all staff. Remuneration of non-executive directors is under the control of the Chairman and the executive members of the Board.

The terms of reference of the Remuneration Committee include the following responsibilities:

• to determine and agree with the Board the framework and policy for the remuneration of the executive directors and other members of the executive team;
• to determine targets for any performance related pay scheme;
• to approve overall remuneration structure; and
• to review employee benefit structures.

Remuneration Committee performance and appraisal

The Remuneration Committee conducted a self-assessment of its performance during the year by reference to an evaluation checklist provided by the Group's external auditors. The results were compiled and analysed by the Company Secretary. Areas for improvement identified by the assessment will be addressed accordingly.

Nomination Committee

The Nomination Committee comprises the independent non-executive directors and is chaired by Dr P R Blower.

The Nomination Committee is responsible to the Board for determining the qualities and experience required of the Company's executive and non-executive directors and for identifying suitable candidates. In appropriate cases, recruitment consultants assist in the process. The Nomination Committee is also responsible for succession planning.

The terms of reference of the Nomination Committee include the following responsibilities:

• to identify and nominate candidates to fill Board positions as they arise;
• to prepare a description of the role and capabilities required for a particular appointment; and
• to give full consideration to succession planning.

Corporate governance report (continued)

Internal controls and risk management

The Board acknowledges that it is ultimately responsible for the Group's system of internal control and reviews its effectiveness at least annually and the Board confirms that this process has been in place up to the date of the approval of the financial statements. However, the Board acknowledges that such a system can only provide reasonable and not absolute assurance against material misstatement or loss, as it is designed to manage rather than eliminate the risk of failure to achieve business objectives.

The key procedures that the Board has established are designed to provide effective internal controls within the Group and comply with the Internal Control Guidance for Directors on the UK Corporate Governance Code (Turnbull Guidance 2005) issued by the Financial Reporting Council. There is an ongoing process for identifying, evaluating and managing significant risks faced by the Group and the effectiveness of all the Group's internal controls in effect during the year has been reviewed by the Board. This process has been in place throughout the year under review and up to the date of signing the financial statements. The Board confirms that the necessary steps have been taken to rectify any significant failings or weaknesses identified through this process.

The Group has a quality assurance function but it does not have a formal internal audit function, which is considered appropriate by the Audit Committee given the size of the Group's operations at this time. The executive directors' active involvement in the activities of the Group allows the Board to continually monitor and assess significant business, operational, financial, compliance and other risks and to review the effectiveness of internal control. The executive directors provide regular management reports covering, inter alia, research and development activities, shareholder relations, financial management and commercial activities.

Following the implementation of the Bribery Act 2010, the Group reviewed, and where appropriate updated, its existing policies and procedures in this area. It will continue to monitor and review its policies and procedures to ensure compliance and effectiveness, both internally and externally.

The Group's key internal control procedures include the following:

Control environment

The Group's control environment is the responsibility of the Group's directors and managers at all levels. The Group's organisational structure has clear lines of reporting and responsibility. Regular research and development programme reviews are held to review progress against plans for each programme. The information from these meetings is reported on a regular basis to a management group comprising the executive directors and key senior managers to compare progress against plans for the business as a whole. Overall control of the business rests with the Board.

Risk identification and evaluation

Regular assessments of ongoing risks facing the business are undertaken as part of the operational reviews and regular management group meetings are held in key areas such as management of working capital, compliance, legal and operational issues.

Operational controls

Quality

Investigational medicinal products are manufactured on behalf of Phytopharm and are produced in accordance with Good Manufacturing Practice ("GMP") to ensure that the products are manufactured consistently to the appropriate quality standards.

Non-clinical studies

Key non-clinical studies to determine the safety and efficacy of new products are conducted in accordance with Good Laboratory Practice ("GLP") by contractors who operate under those regulations. Each contractor is audited to assess compliance with GLP prior to initiation of studies.

Clinical studies

All clinical studies carried out by the Group are in accordance with Good Clinical Practice ("GCP"). This ensures that the health and well-being of the subjects is carefully monitored during the study and that the data gathered are complete and reliable. All studies are audited for compliance under the management of Phytopharm's quality assurance group.

Financial controls

Financial reporting and consolidation

Budgets and long-term forecasts are normally prepared twice a year to allow management to monitor the key business and financial risks. Further, more frequent forecasts are prepared if circumstances require. The budgets are reviewed and approved by the Board prior to adoption by the Group. Consolidated management accounts are prepared on a monthly basis and performance against budget is analysed in detail and reported on a monthly basis and reviewed regularly by the Board.

The integrity of the Group's public financial reporting process is supported by a number of processes and steps to provide assurance over the completeness and accuracy of the content, including:

• review by executive directors;
• review and recommendation by the Audit Committee; and
• review and approval by the Board.

Control procedures

The Group has established detailed policies and accounting and administrative procedures are in place covering all significant areas and key systems. These include formal authorisation procedures for the transfer of funds, capital expenditure and recruitment. Any commitment of expenditure requires documentary approval which is subject to prescribed limits of authority. Any major expenditure or commitment including the appointment of senior members of staff requires Board approval.

Employees

Equal opportunities

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

Disabled employees

With regard to existing employees and those who may become disabled, the Group's policy is to examine ways and means to provide continuing employment under its existing terms and conditions and to provide training and career development, including promotion, wherever possible.

Employee involvement

The Group believes that it is important that employees are aware of the Group's business strategy and objectives and to assist them to work towards these goals. Regular meetings are held with all employees and managers, both to raise issues and provide a flow of information.

Share option schemes

The directors remain committed to the principle that all employees should be able to participate in the Group's progress through share ownership schemes. Details of the Group's share option schemes are given on pages 23 and 24.

Relationships with shareholders

The Group is committed to maintaining good relations with its institutional and private shareholders and reports formally to shareholders four times a year through the provision of interim results (around May) and annual results (around November) and, as required under the Disclosure and Transparency Rules, releases interim management statements around February and August. In addition, the Group keeps shareholders informed of significant events for the Group during the year by issuing press releases which are immediately made available on the Group's website (www.phytopharm.com). The Group's website also provides an overview of the business, including its strategy, products and objectives.

All major announcements are approved by the Board prior to issue. The Group also has internal procedures to guard against unauthorised release of information.

The Group also maintains communication by making presentations during the year to institutional shareholders on request and to all shareholders through the Group's website. This contains information on all of the Group's products and all financial reports and regulatory announcements issued by the Group. Details of the current share price and historic share price performance are also included.

Corporate governance report (continued)

Relationships with shareholders (continued)

The Chairman and senior independent director, Mr A H Taylor and Dr P R Blower, are each available, as appropriate, as a contact for shareholders.

The Board is kept up to date at its regular meetings with the views of shareholders and analysts by the Chairman and Chief Executive Officer.

The principal forum for discussion with both institutional and private shareholders is the AGM and their participation is encouraged. The Group endeavours to provide formal notification together with an explanation of each proposed resolution and to send these to shareholders at least 20 working days in advance of the meeting. The Chairs of the Audit, Remuneration and Nomination Committees attend to answer questions.

In accordance with the Code recommendations, the Company counts all proxy votes. On each resolution which is voted on a show of hands, the Company indicates the level of proxies lodged, the number of proxy votes for and against each resolution and the number of abstentions. If applicable, after the AGM, the Company's registrar will count and verify any poll votes. The results will be announced to the London Stock Exchange and will be published on the Company's website.

The disclosure requirements of the Takeover Directive relating to the Company's share capital are included in the Directors' Report on pages 17 to 21.

Compliance statement

The directors are satisfied that the Group has complied throughout the year with the best practice provisions set out in the Code in effect for the financial year to 30 September 2012. This report, together with the Remuneration Report, sets out the manner in which the Group has applied the main principles contained in the Code. A copy of the Code is available at the FRC's website: www.frc.org.

Corporate social responsibility

The Board recognises the importance of social, ethical and environmental matters and it endeavours to take into account the interests of the Group's stakeholders, including its investors, employees and suppliers, when operating the business.

Social

The health, welfare and development of the Group's employees are a priority. With the intent of attracting, recruiting, developing and retaining key employees, the Group has produced a number of employee handbooks which are made available to all employees and are reviewed on a regular basis. These handbooks include the Group's policies and procedures on:

• health and safety;
• code of business conduct and ethics;
• equal opportunities;
• stress; and
• whistleblowing.

The Group places considerable value on keeping employees 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 continual professional development.

The Group is committed to health and safety 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.

Ethical

The Group operates within a strict regulatory environment in the pharmaceutical industry and conducts its clinical development activities in accordance with internationally recognised regulatory and quality standards. A code of business conduct and ethics is in place to promote fair, honest and ethical conduct by all employees in their relationships with stakeholders. The Group has also implemented an anti-bribery and corruption policy following the introduction of the Bribery Act 2010.

The Group endeavours to appoint employees with appropriate skills, experience and knowledge for the roles they undertake. The Group has a range of polices which are aimed at retaining and incentivising key staff. Employees have clear objectives based on the Group's business objectives which have been set by the Remuneration Committee.

Environment

The Group 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, sub-contractor and supplier has a contribution to make.

The Group 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 the Group's policy to undertake reasonable measures to assess the environmental impact of its operations, processes and products. Waste is minimised with paper and packaging recycled and confidential waste is shredded and recycled. Where possible other materials, including glass and plastics, are recycled. The Group aims to continually improve environmental performance and compliance within these areas.

Compliance

The Group has established policies and standard operating procedures ("SOPs") together with Company handbooks that provide instruction on all aspects of the operation of the business. These SOPs and handbooks are designed to ensure compliance with the quality management requirements of the Group and external regulations where appropriate. All SOPs and company handbooks are reviewed on a regular basis and updated where necessary.

Insurance

The Group has reviewed its portfolio of insurance policies with its insurance broker to ensure that the policies are appropriate to the Group's activities.

Announcements

All major announcements, including those relating to the Group's research and development activities, are approved by the Board and, where appropriate, by senior management prior to issue. The Group also has internal and external checks to guard against unauthorised release of information.

On behalf of the Board

Mr A H Taylor Non-executive Chairman 30 November 2012

Statement of Directors' responsibilities

The directors are responsible for preparing the Annual Report, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the Group and parent company financial statements in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU"). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In preparing these financial statements, the directors are required to:

• select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent; and
• state whether applicable IFRS as adopted by the EU have been followed, subject to any material departures disclosed and explained in the financial statements.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the directors, whose names and functions are listed in the Board of directors on page 16, confirm that, to the best of their knowledge:

• the Group financial statements, which have been prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and loss of the Group; and
• the information contained in the Business Highlights, Chairman's Review, Chief Executive's Review, Business Review, Financial Review, Principal Risks and Uncertainties and Directors' Report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.

By order of the Board

Mrs Z McGowan Company Secretary 30 November 2012

Independent auditors' report

to the members of Phytopharm plc

We have audited the financial statements of Phytopharm plc for the year ended 30 September 2012 which comprise the consolidated statement of comprehensive income, the consolidated and company balance sheets, the consolidated and company statements of changes in equity, the consolidated and company cash flow statements and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards ("IFRS") as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

Respective responsibilities of directors and auditors

As explained more fully in the Statement of Directors' Responsibilities set out on page 36, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

This report, including the opinions, has been prepared for and only for the Company's members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group's and the parent company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report and Accounts to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Opinion on financial statements

In our opinion:

• the financial statements give a true and fair view of the state of the Group's and of the parent company's affairs as at 30 September 2012 and of the Group's loss and Group's and parent company's cash flows for the year then ended;
• the Group financial statements have been properly prepared in accordance with IFRS as adopted by the European Union;
• the parent company financial statements have been properly prepared in accordance with IFRS as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the lAS Regulation.

Independent auditors' report (continued)

to the members of Phytopharm plc

Opinion on other matters prescribed by the Companies Act 2006

In our opinion:

• the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
• the information given in the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to report by exception

We have nothing to report in respect of the following:

Under the Companies Act 2006 we are required to report to you if, in our opinion:

• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or
• the parent company financial statements and the part of the Directors' Remuneration Report to be audited are not in agreement with the accounting records and returns; or
• certain disclosures of directors' remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.

Under the Listing Rules we are required to review:

• the directors' statement, set out on page 21, in relation to going concern;
• the parts of the Corporate Governance Statement relating to the Company's compliance with the nine provisions of the UK Corporate Governance Code specified for our review; and
• certain elements of the report to shareholders by the Board on Directors' remuneration.

Simon Ormiston (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Cambridge 30 November 2012

Consolidated statement of comprehensive income

for the year ended 30 September 2012

		2012	2011
	Note	£	£
Revenue	2	18,717	66,659
Cost of sales		—	—
Gross profit		18,717	66,659
Other income	2	77,400	—
Operating expenses	3	(9,392,016)	(8,613,800)
Operating loss		(9,295,899)	(8,547,141)
Finance income	4	211,481	375,685
Loss before taxation	5	(9,084,418)	(8,171,456)
Taxation	6	1,318,109	513,126
Loss and total comprehensive losses for the year		(7,766,309)	(7,658,330)
Basic and diluted loss per ordinary share (pence)	7	(2.2)	(2.2)

The notes on pages 44 to 62 form part of these financial statements.

All of the loss is attributable to the owners of the parent.

Consolidated and Company balance sheets

at 30 September 2012

		Group		Company
	Note	2012 £	2011 £	2012 £	2011 £
Assets
Property, plant and equipment	8	62,284	83,646	—	—
Investments	9	—	—	1,815,219	1,639,136
Amounts due from subsidiary undertaking	10	—	—	29,935,991	21,870,207
Non-current assets		62,284	83,646	31,751,210	23,509,343
Trade and other receivables	11	321,562	459,954	77,983	198,675
Current tax receivable	6	1,318,109	479,229	—	—
Money market investments	12	8,600,507	14,500,000	8,500,000	14,500,000
Cash and cash equivalents	13	286,713	3,074,476	127,668	2,677,736
Current assets		10,526,891	18,513,659	8,705,651	17,376,411
Total assets		10,589,175	18,597,305	40,456,861	40,885,754
Liabilities and equity
Trade and other payables	14	2,215,453	2,633,307	49,498	87,034
Total current liabilities		2,215,453	2,633,307	49,498	87,034
Equity attributable to owners of the parent
Ordinary shares	16	3,469,017	3,468,019	3,469,017	3,468,019
Share premium	16	77,286,854	77,283,731	76,791,447	76,788,324
Merger reserve		(204,211)	(204,211)	—	—
Accumulated losses		(72,177,938)	(64,583,541)	(39,853,101)	(39,457,623)
Total equity		8,373,722	15,963,998	40,407,363	40,798,720
Total liabilities and equity		10,589,175	18,597,305	40,456,861	40,885,754

The notes on pages 44 to 62 form part of these financial statements.

The financial statements, comprising the consolidated statement of comprehensive income, the consolidated and Company balance sheets, the consolidated and Company statements of changes in equity, the consolidated and Company cash flow statements and the related notes, were approved by the Board and were signed on its behalf by:

Mr T Sharpington Chief Executive Officer

30 November 2012

Phytopharm plc Registered number: 3131723

Consolidated statement of changes in equity

for the year ended 30 September 2012

		Ordinary	Share	Merger	Accumulated
Group	Note	shares £	premium £	reserve £	losses £	Total £
Balance at 1 October 2010		3,466,774	77,278,113	(204,211)	(57,062,371)	23,478,305
Comprehensive income
Loss attributable to owners of the parent		—	—	—	(7,658,330)	(7,658,330)
		—	—	—	(7,658,330)	(7,658,330)
Transactions with owners:
Issue of ordinary shares	16	1,245	5,618	—	—	6,863
Purchase of shares in Phytopharm plc	16	—	—	—	(373)	(373)
Credit in respect of share options		—	—	—	137,533	137,533
Transactions with owners:		1,245	5,618	—	137,160	144,023
Balance at 30 September 2011 and 1 October 2011		3,468,019	77,283,731	(204,211)	(64,583,541)	15,963,998
Comprehensive income
Loss attributable to owners of the parent		—	—	—	(7,766,309)	(7,766,309)
		—	—	—	(7,766,309)	(7,766,309)
Transactions with owners:
Issue of ordinary shares	16	998	3,123	—	—	4,121
Purchase of shares in Phytopharm plc	16	—	—	—	(4,171)	(4,171)
Credit in respect of share options		—	—	—	176,083	176,083
Transactions with owners		998	3,123	—	171,912	176,033
Balance at 30 September 2012		3,469,017	77,286,854	(204,211)	(72,177,938)	8,373,722

The notes on pages 44 to 62 form part of these financial statements.

Company statement of changes in equity

for the year ended 30 September 2012

Company	Note	Ordinary shares £	Share premium £	Accumulated losses £	Total £
Balance at 1 October 2010		3,466,774	76,782,706	(39,159,249)	41,090,231
Comprehensive income
Loss for the year and total comprehensive losses		—	—	(435,907)	(435,907)
		—	—	(435,907)	(435,907)
Transactions with owners:
Issue of ordinary shares	16	1,245	5,618	—	6,863
Credit in respect of share options		—	—	137,533	137,533
Transactions with owners		1,245	5,618	137,533	144,396
Balance at 30 September 2011 and 1 October 2011		3,468,019	76,788,324	(39,457,623)	40,798,720
Comprehensive income
Loss for the year and total comprehensive losses		—	—	(571,561)	(571,561)
		—	—	(571,561)	(571,561)
Transactions with owners:
Issue of ordinary shares	16	998	3,123	—	4,121
Credit in respect of share options		—	—	176,083	176,083
Transactions with owners		998	3,123	176,083	180,204
Balance at 30 September 2012		3,469,017	76,791,447	(39,853,101)	40,407,363

The notes on pages 44 to 62 form part of these financial statements.

Consolidated and Company cash flow statements

for the year ended 30 September 2012

	Group			Company
	Note	2012 £	2011 £	2012 £	2011 £
Cash flows from operating activities
Loss for the year		(7,766,309)	(7,658,330)	(571,561)	(435,907)
Finance income	4	(211,481)	(375,685)	(210,355)	(373,891)
Taxation		(1,318,109)	(513,126)	—	—
Depreciation		26,905	49,804	—	—
Loss/(gain) on disposal of property, plant and equipment		383	(24,743)	—	—
Share option charge		176,083	137,533	—	—
		(9,092,528)	(8,384,547)	(781,916)	(809,798)
Changes in working capital
Decrease in trade and other receivables		35,778	17,052	18,345	6,632
(Decrease)/increase in trade and other payables		(417,854)	1,498,392	(37,536)	10,073
Cash used in operations		(9,474,604)	(6,869,103)	(801,107)	(793,093)
Taxation received		479,229	445,068	—	—
Net cash used in operating activities		(8,995,375)	(6,424,035)	(801,107)	(793,093)
Cash flows from investing activities
Purchase of property, plant and equipment	8	(5,926)	(20,800)	—	—
Sale of property, plant and equipment		—	24,997	—	—
Interest received		314,095	379,653	312,702	378,378
Loan to subsidiary undertaking	10	—	—	(8,065,784)	(5,398,881)
Net cash generated from/(used in) investing activities		308,169	383,850	(7,753,082)	(5,020,503)
Cash flows from financing activities
Issue of shares	16	4,121	6,863	4,121	6,863
Investment in shares of Phytopharm plc		(4,171)	(373)	—	—
Movement in money market investments	16	5,899,493	8,000,000	6,000,000	8,000,000
Net cash generated from financing activities		5,899,443	8,006,490	6,004,121	8,006,863
Movements in cash and cash equivalents in the year		(2,787,763)	1,966,305	(2,550,068)	2,193,267
Cash and cash equivalents at the beginning of the year		3,074,476	1,108,171	2,677,736	484,469
Cash and cash equivalents at the end of the year		286,713	3,074,476	127,668	2,677,736
Money market investments at the end of the year		8,600,507	14,500,000	8,500,000	14,500,000
Total cash, cash equivalents and money market investments		8,887,220	17,574,476	8,627,668	17,177,736

The notes on pages 44 to 62 form part of these financial statements.

Notes to the financial statements

for the year ended 30 September 2012

1. Accounting policies and basis of preparation

Phytopharm plc is a public limited company incorporated in England and Wales and domiciled in the UK with a listing on the London Stock Exchange under the symbol PYM. The address of its registered office is Lakeview House, 2 Lakeview Court, Ermine Business Park, Huntingdon, Cambridgeshire, England PE29 6UA.

The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to both years presented, unless otherwise stated.

Basis of preparation

These financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the EU, IFRIC interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared on a historical cost basis.

Going concern

Basis of consolidation

The consolidated financial statements include the financial statements of Phytopharm plc (the "Company") and all its subsidiary undertakings (together the "Group"), made up to 30 September 2012.

Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one-half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

Inter-company transactions, balances, income and expenses on transactions between Group companies are eliminated. Profits and losses resulting from inter-company transactions that are recognised in assets are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

Accounting developments Current financial year

There are no IFRS or IFRIC interpretations that are effective for the first time for the financial year beginning on or after 1 October 2011 that would be expected to have a material impact on the Group.

1. Accounting policies and basis of preparation (continued) Accounting developments (continued)

Future financial years

A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after 1 October 2011, and have not been applied in preparing these consolidated financial statements. None of these is expected to have a significant effect on the consolidated financial statements of the Group. The following amendments to standards and new standards may impact the Group in the future:

• Amendment to IAS 1, 'Financial statement presentation' regarding other comprehensive income. The main change resulting from these amendments is a requirement for entities to group items presented in "other comprehensive income" ("OCI") on the basis of whether they are potentially reclassifiable to profit or loss subsequently (reclassification adjustments). The amendments do not address which items are presented in OCI. The Group is yet to assess the full impact of the amendment to IAS 1 and intends to adopt this no later than the accounting period beginning on or after 1 October 2013.
• IFRS 9, 'Financial instruments', addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 was issued in November 2009 and October 2010. It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortised cost. The determination is made at initial recognition. The classification depends on the entity's business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity's own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. The Group is yet to assess IFRS 9's full impact and intends to adopt IFRS 9 no later than the accounting period beginning on or after 1 October 2015, subject to endorsement by the EU. The Group will also consider the impact of the remaining phases of IFRS 9 when issued.
• IFRS 13, 'Fair value measurement', aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRS. The requirements, which are largely aligned between IFRS and US GAAP, do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRS or US GAAP. The Group is yet to assess IFRS 13's full impact and intends to adopt IFRS 13 no later than the accounting period beginning on or after 1 October 2013.

There are no other IFRS or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group.

Critical accounting judgements

The preparation of the financial statements requires the directors to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The main accounting judgements relate to the determination of the carrying value of investments in, and loans to, subsidiaries, the period over which research and development costs are recognised and the share option charge and the underlying assumptions.

The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate is revised if the revision affects only that year, or in the year of revision and future years if the revision affects both current and future years.

The carrying value of investments in and loans to subsidiaries are reviewed at each balance date. In considering the value of these investments and loans, the Directors assess whether there is objective evidence that an investment or loan is impaired.

Research and development costs relating to clinical trials are recognised over the period of the clinical trial based on information provided by clinical research organisations. All other expenditure on research and development is recognised as the work is completed.

The estimation of share-based payment costs requires the selection of an appropriate valuation model, consideration as to the inputs necessary for the valuation model chosen and the estimation of the number of awards that will ultimately vest, inputs for which arise from judgements relating to the probability of meeting non-market conditions and the continuing participation of employees.

Notes to the financial statements (continued)

for the year ended 30 September 2012

1. Accounting policies and basis of preparation (continued)

Revenue

Revenue, which excludes value added tax, represents the invoiced value of services supplied.

Amounts received or receivable in respect of research and development contracts, collaborative research agreements, licence fees or milestone payments are recognised as revenue when the licence rights are granted or the specific conditions stipulated in the agreements have been satisfied and provided that there are no future obligations. These amounts are shown gross of any withholding tax.

Other income

Other income, which excludes value added tax, represents amounts received or receivable from charitable organisations as grant income.

Operating expenses

Operating expenses represent selling, general and administrative expenses and research and development expenses.

Research and development expenditure

All research and development costs, whether funded by third parties under licence and development agreements or not, are included within operating expenses and classified as research and development costs. Research and development costs relating to clinical trials are recognised over the period of the clinical trial based on information provided by clinical research organisations. All other expenditure on research and development is recognised as the work is completed.

All ongoing development expenditure is currently expensed in the year in which it is incurred. Due to the regulatory and other uncertainties inherent in the development of the Group's programmes, the criteria for development costs to be recognised as an asset, as prescribed by IAS 38, 'Intangible assets', are not met until the product has been submitted for regulatory approval, such approval has been received and it is probable that future economic benefits will flow to the Group. The Group does not currently have any such internal development costs that qualify for capitalisation as intangible assets.

Share-based payments

The Group makes equity-settled share-based payments to its employees and Directors. Equity-settled share-based payments are measured at fair value at the date of grant and are expensed on a straight line basis over the vesting period of the award. At each balance sheet date, the Group revises its estimate of the number of options that are expected to become exercisable. The share-based payment charge is allocated to research and development expenses and administrative expenses on the basis of staff numbers, with a corresponding adjustment to equity.

The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions. Non-market vesting conditions are included in the assumptions about the number of options that are expected to vest.

The grant by the Company of options over its equity instruments to the employees of subsidiary undertakings in the Group is treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period as an increase to investment in subsidiary undertakings with a corresponding credit to equity.

Employee benefits

All employee benefit costs, notably holiday pay and contributions to Group or personal defined contribution plans, are charged to the statement of comprehensive income on an accruals basis. The Group operates a defined contribution pension scheme. The assets of this scheme are held separately from those of the Group in independently administered funds. The Group does not offer any other post-retirement benefits.

Operating leases

Costs in respect of operating leases are charged to the statement of comprehensive income on a straight line basis over the lease term.

1. Accounting policies and basis of preparation (continued) Property, plant and equipment

Property, plant and equipment are stated at historic purchase cost less accumulated depreciation. The cost of property, plant and equipment is its purchase cost, together with any incidental expenses of acquisition. Depreciation is calculated so as to write off the cost of property, plant and equipment, less its estimated residual value, on a straight line basis over the expected useful economic lives of the assets concerned.

The principal rates used for this purpose are:

Plant and machinery	20%
Computer equipment	33%
Fixtures and fittings	20%
Motor vehicles	25%

Leasehold improvements are depreciated over the shorter of the lease term and the asset's useful economic life.

The assets' residual values and useful lives are reviewed, and adjusted if necessary, at each balance sheet date.

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within the statement of comprehensive income.

Impairment of assets

Non-current assets are reviewed for impairment both annually and when there is an indication that an asset may be impaired (when events or changes in circumstances indicate that carrying value may not be recoverable). An impairment loss is recognised in the statement of comprehensive income for the amount by which the asset's carrying value exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less cost to sell and value in use. Non-financial assets, other than goodwill, which have suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.

Investments in subsidiary

Investments in subsidiary undertakings are carried at cost less any impairment provision. Such investments are subject to an annual impairment review and any impairment is charged to the statement of comprehensive income.

Trade and other receivables

Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired.

The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the statement of comprehensive income within "administrative expenses". When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against "administrative expenses" in the statement of comprehensive income.

Current tax

Current tax represents UK tax recoverable and is provided at amounts expected to be recovered using the tax rates and laws that have been enacted at the balance sheet date.

Notes to the financial statements (continued)

for the year ended 30 September 2012

1. Accounting policies and basis of preparation (continued)

Money market investments

Money market investments have fixed maturities that the Company's management intend to hold to maturity or a notice period exceeding three months. These investments include short-term investments with an original maturity date of more than three months.

Cash and cash equivalents

Cash and cash equivalents include cash in hand, bank deposits repayable on demand and other short-term highly liquid investments with original maturities at inception of 90 days or less.

Foreign currency translation

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in sterling (£), which is the Company's functional and presentation currency.

Transactions denominated in foreign currencies are translated into sterling at actual rates of exchange ruling at the date of transaction. Monetary assets and liabilities expressed in foreign currencies are translated into sterling at rates of exchange ruling at the end of the financial year. All foreign currency exchange differences are taken to the statement of comprehensive income in the year in which they arise.

Trade and other payables

Trade payables are non-interest bearing and are initially stated at their fair value and subsequently held at amortised cost.

Ordinary shares and share premium

Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs.

Employee share trust

The Company recognises the assets and liabilities of the trust in its own accounts and shares held by the trust are recorded at cost as a deduction at arriving at total equity until such time as the shares vest unconditionally to employees. The trust is a separately administered trust, funded by contributions from employees and Phytotech Limited, whose assets comprise shares in the Company.

Segmental information

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker.

Deferred taxation

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements in accordance with IAS 12, 'Income taxes'. Deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither the accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. A deferred tax asset is recognised only to the extent that it is probable that sufficient taxable profit will be available in future years to utilise the temporary difference.

Company statement of comprehensive income

In accordance with the provisions of Section 408 of the Companies Act 2006, no separate statement of comprehensive income has been presented for the Company. The results for the Company are also prepared under IFRS.

The loss attributable to shareholders which is dealt with in the financial statements of the Company was £571,561 (2011: £435,907).

2. Segmental information

The Group's development and other functions operating across all the Group's research programmes are managed centrally and are reported internally as a single business. This also applies to the Group's marketed products. The chief operating decision maker has been identified as the executive directors of Phytopharm plc. The executive directors review the Group's internal reporting in order to assess performance and allocate resources. Management has determined the operating segment based on these reports. Accordingly, the Directors consider that there is only one reporting segment, being the research and development of pharmaceutical products.

The Group is domiciled in the UK. The revenue and other income from external customers in the UK is £77,400 (2011: £4,761) and the total revenue and other income from external customers in other countries is £18,717 (2011: £61,898). All non-current assets are located in the United Kingdom.

Revenue analysis

The revenue analysis in the table below is based on the country of registration of the fee paying party:

	2012	2011
	£	£
Revenue
Europe	17,474	4,761
Asia	1,243	—
South Africa	—	61,898
	18,717	66,659
Other income
United Kingdom(i)	77,400	—
	96,117	66,659

(i) Represents grant income recognised.

An analysis of revenue and other income by customer is set out in the table below:

	2012	2011
	£	£
Customer A	77,400	—
Customer B	17,474	4,761
Customer C	1,243	—
Customer D	—	61,898
	96,117	66,659

3. Operating expenses

	2012	2011
	£	£
Research and development	8,290,976	7,461,246
Administrative expenses	1,101,040	1,152,554
	9,392,016	8,613,800

4. Finance income

	2012	2011
	£	£
Interest on cash and cash equivalents	11,196	59,262
Interest on money market deposits	200,285	316,423
	211,481	375,685

Notes to the financial statements (continued)

for the year ended 30 September 2012

5. Operating loss

Operating loss is the result for the Group before interest and taxation and is stated after charging/(crediting):

	2012	2011
	£	£
Depreciation charge for the year	26,905	49,804
Loss/(gain) on disposal of property, plant and equipment	383	(24,743)
Fees payable to the Company's auditor for the audit of the Company's annual financial statements	25,340	24,255
Audit of the Company's subsidiaries	10,860	10,395
Audit-related assurance services	10,995	10,640
Tax compliance services	6,600	14,350
Non-audit services	—	6,400
Foreign exchange (gain)/loss	(84,609)	19,186
Operating lease charges	81,224	83,318
6. Taxation
	2012 £	2011 £
Current tax:
UK corporation tax
Current UK corporation tax credit on loss for the year	1,318,109	479,229
Adjustment in respect of prior year	—	33,897
Current UK corporation tax credit on loss for the year	1,318,109	513,126

No liability to UK corporation tax arose during the year due to the loss incurred (2011: £nil). At 30 September 2012, there were tax losses available for carry forward in excess of £55,024,000 (2011: £51,476,000) subject to approval by HM Revenue and Customs.

The Company has taken advantage of the research and development corporation tax credits introduced in the Finance Act 2000 whereby a company may surrender corporation tax losses incurred on research and development expenditure for a corporation tax refund at the rate of 12.5% to 31 March 2012 and 11% from 1 April 2012. See note 15 for factors affecting current and future tax.

The tax credit for the year is higher (2011: lower) than the standard rate for research and development tax credits and the differences are reconciled below:

	2012	2011
	£	£
Loss before taxation	(9,084,418)	(8,171,456)
Loss before taxation multiplied by the standard rate for research and development tax credits at 11.75% (2011: 13.25%)	(1,067,419)	(1,082,718)
Effect of:
Difference between depreciation and capital allowances	2,510	(1,524)
Expenses not deductible for tax purposes	725	407
Effect of share option charge	19,738	18,223
Enhanced research and development expenditure	(687,994)	(511,373)
Adjustment in respect of prior year	—	(33,897)
Carried forward losses	414,331	1,097,756
Tax credit for the year	(1,318,109)	(513,126)

7. Loss per ordinary share

	2012	2011
Attributable loss (£)	(7,766,309)	(7,658,330)
Weighted average number of shares in issue	346,654,352	346,619,213
Basic and diluted loss per ordinary share (pence)	(2.2)	(2.2)

The loss per share is based on the weighted average number of shares in issue during the period. IAS 33, 'Earnings per share', requires presentation of diluted earnings per share when a company could be called upon to issue shares that would decrease net profit or increase net loss per share. No adjustment has been made to the basic loss per share, as the exercise of share options would have the effect of reducing the loss per ordinary share, and therefore is not dilutive.

8. Property, plant and equipment

	Leasehold	Computer	Motor	Plant and	Fixtures
	improvements	equipment	vehicles	machinery	and fittings	Total
Group	£	£	£	£	£	£
Cost
At 1 October 2011	37,072	234,212	—	12,780	84,666	368,730
Additions	—	5,543	—	383	—	5,926
Disposals	—	(3,904)	—	(871)	—	(4,775)
At 30 September 2012	37,072	235,851	—	12,292	84,666	369,881
Accumulated depreciation
At 1 October 2011	9,129	207,817	—	7,847	60,291	285,084
Charge for year	7,414	10,570	—	1,233	7,688	26,905
Disposals	—	(3,777)	—	(615)	—	(4,392)
At 30 September 2012	16,543	214,610	—	8,465	67,979	307,597
Net book value
At 30 September 2012	20,529	21,241	—	3,827	16,687	62,284
At 30 September 2011	27,943	26,395	—	4,933	24,375	83,646
	Leasehold	Computer	Motor	Plant and	Fixtures
	improvements	equipment	vehicles	machinery	and fittings	Total
Group	£	£	£	£	£	£
Cost
At 1 October 2010	32,637	233,257	61,304	19,049	130,054	476,301
Additions	4,435	11,309	—	4,443	613	20,800
Disposals	—	(10,354)	(61,304)	(10,712)	(46,001)	(128,371)
At 30 September 2011	37,072	234,212	—	12,780	84,666	368,730
Accumulated depreciation
At 1 October 2010	2,011	187,644	60,111	17,281	96,350	363,397
Charge for year	7,118	30,465	1,193	1,086	9,942	49,084
Disposals	—	(10,292)	(61,304)	(10,520)	(46,001)	(128,117)
At 30 September 2011	9,129	207,817	—	7,847	60,291	285,084
Net book value
At 30 September 2011	27,943	26,395	—	4,933	24,375	83,646
At 30 September 2010	30,626	45,613	1,193	1,768	33,704	112,904

Company

The Company has no property, plant and equipment (2011: none).

Notes to the financial statements (continued)

for the year ended 30 September 2012

9. Investments

	Group		Company
	2012	2011	2012	2011
Investment in Group undertakings	£	£	£	£
At 1 September	—	—	1,639,136	1,501,603
Increase in capital contribution relating to share option charge	—	—	176,083	137,533
At 30 September	—	—	1,815,219	1,639,136

The capital contribution relating to share-based payments relates to share options granted by the Company to employees of subsidiary undertakings in the Group. Refer to note 17 for further details on the Group's share option schemes.

Interests in Group undertakings

			Proportion of voting rights and nominal value of issued shares held by
Name of undertaking	Nature of business	Description of shares held	Group%	Company%
Phytotech Limited	Research and development	Ordinary 10 pence shares	100	100
Phytodevelopments Limited	Dormant	Ordinary £1 shares	100	—

Both the above companies have been consolidated in these financial statements and are incorporated in England and Wales.

10. Amounts due from subsidiary undertaking

	Group		Company
	2012	2011	2012		2011
	£	£	£	£
Amounts due from subsidiary undertaking	—	—	29,935,991	21,870,207

No provision was made against the amount due to the Company from its subsidiary undertaking during the year (2011: £nil).

There are no fixed terms in respect of amounts owed by subsidiary undertakings. These are non-interest bearing, unsecured and not payable on demand.

11. Trade and other receivables

The fair value of trade and other receivables are their current book values.

	Group		Company
	2012	2011	2012	2011
	£	£	£	£
Trade receivables	—	5,581	—	—
Other receivables	103,227	86,395	2,106	5,696
Prepayments and accrued income	218,335	367,978	75,877	192,979
	321,562	459,954	77,983	198,675

As of 30 September 2011, all trade receivables were fully performing and aged less than six months from their due date. These related to independent customers for whom there was no recent history of default.

The carrying amounts of the Group's trade receivables are denominated in sterling.

12. Money market investments

	Group		Company
	2012	2011	2012	2011
	£	£	£	£
Money market investments	8,600,507	14,500,000	8,500,000	14,500,000

These represent fixed-rate short-term deposits placed with a range of banks at fixed terms or with notice periods exceeding three months. The fair value of money market investments approximates their carrying value.

13. Cash and cash equivalents

	Group		Company
	2012	2011	2012	2011
	£	£	£	£
Cash and cash equivalents	286,713	3,074,476	127,668	2,677,736

The Company holds its excess cash and cash equivalents in a combination of fixed interest accounts and fixed-term money market deposits. At 30 September 2012 and 30 September 2011 these did not exceed three months in duration. The fair value of cash and cash equivalents approximates their carrying value.

14. Trade and other payables

The fair value of trade and other payables approximates their current book values.

	Group		Company
	2012	2011	2012	2011
	£	£	£	£
Trade payables	523,968	665,109	35	33,699
Other taxation and social security	38,921	37,945	—	—
Other payables	11,541	10,662	—	—
Accrued expenses	1,641,023	1,919,591	49,463	53,335
	2,215,453	2,633,307	49,498	87,034

15. Deferred taxation (unrecognised)

The Group and Company have the potential deferred tax assets shown below, which are not recognised due to uncertainty as to the timing of their utilisation.

		Group		Company
	2012	2011	2012 £	2011
	£	£		£
Tax effect of timing differences:
Depreciation in excess of tax allowances	260,697	302,472	6,731	7,317
Accumulated losses	12,394,711	12,655,313	1,057,616	1,115,669
	12,655,408	12,957,785	1,064,347	1,122,986

A number of changes to the UK corporation tax system were announced in the March 2012 Budget Statement. Certain of these tax changes were substantively enacted in the Finance Act 2012 in July 2012. The impact of this has been reflected in the unrecognised potential deferred tax asset.

Certain other changes are expected to be enacted in future Finance Acts, including a reduction in the main rate of corporation tax to 22% from 1 April 2014. As at 30 September 2012, there is an unrecognised deferred tax asset of £12,655,408. If these changes were applied to this, the impact would be to reduce the potential deferred tax asset by £551,000.

Company

The Company has a potential (unrecognised) deferred taxation asset of £1,064,347 at 30 September 2012 (30 September 2011: £1,122,986).

Notes to the financial statements (continued)

for the year ended 30 September 2012

16. Share capital and share premium

Company share premium
	Ordinary shares of 1 pence each	Share premium
	Number	£	£
At 1 October 2010	346,677,433	3,466,774	76,782,706
Issued under share option scheme	124,539	1,245	5,618
At 30 September 2011 and 1 October 2011	346,801,972	3,468,019	76,788,324
Issued under share option scheme	99,777	998	3,123
At 30 September 2012	346,901,749	3,469,017	76,791,447

Issue of shares

In the year ended 30 September 2012, the Company issued 99,777 new ordinary shares of 1 pence each for a total cash consideration of £4,121 following the exercise of share options. The nominal value of these shares was £998.

In the year ended 30 September 2011, the Company issued 124,539 new ordinary shares of 1 pence each for a total cash consideration of £6,863 following the exercise of share options. The nominal value of these shares was £1,245.

Phytopharm Share Incentive Plan 2007

Netted against the accumulated loss are purchases of shares in Phytopharm plc, which relate to the Phytopharm Share Incentive Plan 2007, under which the Company issued one "Matching Share" for every one "Partnership Share" purchased by the employee. All shares are held by the scheme Trustees until the shares vest unconditionally with the employee. During the year ended 30 September 2012, the Group purchased 55,251 (2011: 5,171) ordinary shares of 1 pence at a total cost of £4,171 (2011: £373). As at 30 September 2012, 176,851 (2011: 121,600) ordinary shares of 1 pence were held by the scheme Trustees.

Group share premium

	Ordinary shares of 1 pence each		Share premium
	Number	£	£
At 1 October 2010	346,677,433	3,466,774	77,278,113
Issued under share option scheme	124,539	1,245	5,618
At 30 September 2011 and 1 October 2011	346,801,972	3,468,019	77,283,731
Issued under share option scheme	99,777	998	3,123
At 30 September 2012	346,901,749	3,469,017	77,286,854

17. Share-based payments Potential issues of ordinary shares

At 30 September 2012, certain directors of the Company and certain employees across the Group held options to subscribe for shares in the Company under share option schemes approved by the shareholders and outlined in the Remuneration Report. The number of shares subject to options at 30 September 2012, the periods in which they were granted and the period in which they may be exercised are given below. All of the awards were granted for nil consideration.

				Currently	Currently		Number	Number
Date	Exercise	Exercisable	Exercisable	vested	exercisable		outstanding	outstanding
granted	price	from	to	2012	2012	Note	2012	2011
	Phytopharm Share Option Plan 2007
11/03/2009	£0.04130	11/03/2012	10/03/2019	115,982	115,982	1	115,982	235,189
20/01/2010	£0.11000	20/01/2013	19/01/2020	—	—	1	945,453	980,562
21/07/2010	£0.07630	21/07/2013	20/07/2020	—	—	1	3,132,372	3,132,372
17/12/2010	£0.07350	17/12/2013	16/12/2020	—	—	1	1,749,149	1,868,030
24/11/2011	£0.06525	24/11/2014	23/11/2021	—	—	1	3,599,152	—
17/12/2010	£0.07350	17/12/2013	16/12/2020	—	—	2	1,355,841	1,355,841
21/07/2010	£0.07630	21/07/2013	20/07/2020	—	—	2	2,067,789	2,067,789
24/11/2011	£0.06525	24/11/2014	23/11/2021	—	—	2	1,602,878	—
				115,982	115,982		14,568,616	9,639,783
	Phytopharm Directors' Reward Plan 2010
31/03/2010	£0.11250	31/03/2013	30/03/2018	—	—	3	863,334	863,334
				—	—		863,334	863,334

Note

1 These options vest on the third anniversary of the date of grant and have been granted under the Phytopharm Share Option Plan 2007: Enterprise Management Incentive Scheme. The number of options exercisable will be determined by the Company's TSR compared to the constituents of the FTSE Small Cap Index. The value of options (at date of grant) will be exercisable if the Company's TSR in the relevant ranking group is above the median.

2 These options vest on the third anniversary of the date of grant and have been granted under the Phytopharm Share Option Plan 2007: Unapproved Scheme. The number of options exercisable will be determined by the Company's TSR compared to the constituents of the FTSE Small Cap Index. The value of options (at date of grant) will be exercisable if the Company's TSR in the relevant ranking group is above the median.

3 These options vest on the third anniversary of the grant date and have been granted under the Phytopharm Directors' Reward Plan 2010. There are no performance conditions attached to the exercise of these options.

Exercise of an option

Exercise of an option is subject to continued employment or being a good leaver. Options were valued using a stochastic model (also known as a Monte Carlo model).

Option valuations

The fair value per option granted and the assumptions used in the calculation for options granted since 11 March 2009 are set out in the table below. Options were valued using a stochastic model (also known as a Monte Carlo model).

			Number of shares	Number of shares	Fair value
	Grant	Exercise	outstanding	outstanding	per option
Award	date	price	2012	2011	at grant date
Share Option Plan 2007	11/03/2009	£0.04130	115,982	235,189	£0.0223
Share Option Plan 2007	20/01/2010	£0.11000	945,453	980,562	£0.0574
Share Option Plan 2007	21/07/2010	£0.07630	3,132,372	3,132,372	£0.0404
Share Option Plan 2007	21/07/2010	£0.07630	2,067,789	2,067,789	£0.0404
Share Option Plan 2007	17/12/2010	£0.07350	1,749,149	1,868,030	£0.0402
Share Option Plan 2007	17/12/2010	£0.07350	1,355,841	1,355,841	£0.0402
Share Option Plan 2007	24/11/2011	£0.06525	5,202,030	—	£0.2990
Directors' Reward Plan 2010	31/03/2010	£0.11250	863,334	863,334	£0.0666
			15,431,950	10,503,117

Notes to the financial statements (continued)

for the year ended 30 September 2012

17. Share-based payments (continued)

Option valuations (continued)

The fair values of the share options granted but not vested as at 30 September 2012 were calculated using the following assumptions:

			Expected	Risk-free	Expected
		Expected	dividend yield	rate	volatility	Performance
	Grant	term	(note(b))	(note (c))	(note (d))	condition
Award	date	(note(a))	%	%	%	(note)
Share Option Plan 2007	11/03/2009	6.00 years	—	2.3	72.4	1
Share Option Plan 2007	20/01/2010	5.90 years	—	3.2	70.5	1
Share Option Plan 2007	21/07/2010	6.77 years	—	2.3	70.4	1
Share Option Plan 2007	17/12/2010	5.00 years	—	2.5	74.7	1
Share Option Plan 2007	24/11/2011	5.00 years	—	1.2	63.4	1
Share Option Plan 2007	21/07/2010	6.77 years	—	2.3	70.4	2
Share Option Plan 2007	17/12/2010	5.00 years	—	2.5	74.7	2
Share Option Plan 2007	24/11/2011	5.00 years	—	1.2	63.4	2
Directors' Reward Plan 2010	31/03/2010	5.91 years	—	2.7	73.7	3

Notes to assumptions

(a) Expected term

For options granted up to 21 July 2010

i) 40% of participants exercise after three years if a gain of 40% is available. If this gain is not available, these individuals hold on to their shares until such a gain can be made;
ii) 25% of the remainder exercise from the third anniversary onwards using a reducing balance methodology, providing that a gain of 20% is available. If this gain is not available, these individuals refrain from exercising until such a gain can be made;
iii) 15% of the total participants are "good leavers". A good leaver is an employee who ceases to be an employee due to redundancy or other circumstances outside their control;
iv) 5% of the participants exercise per annum on a reducing balance methodology, providing that the options are "in the money" (irrespective of the level of gain) to allow for leavers in these years;
v) any remaining options are exercised at maturity providing that they are "in the money" (i.e. the share option price is less than the market price). Any awards that are "underwater" (i.e. the share option price is greater than the market price) therefore lapse at maturity; and
vi) all exercises are dependent on the performance condition being met.

For options granted after 21 July 2010

A fixed term of five years (being almost halfway through the exercise window). The exercise profile has been simplified as calculations indicated that the difference in values is small and this alternative approach allows better modelling of the actual TSR performance condition and to use actual company data rather than assuming a hypothetical company performance.

(b) Expected dividend yield

The dividend yield of 0% reflects the absence of a history of paying dividends and a clear dividend policy statement at the relevant grant dates.

(c) Risk-free interest rate

UK Gilt rates prevalent on the date of grant with a period commensurate with the term of the award.

(d) Expected volatility

Expected volatility is the measurement of the amount by which a share price is expected to fluctuate during a period. The expected volatility has been calculated using the standard approach of calculating the standard deviation of the natural logarithm of historical share price movements. Certain periods where there has been inactivity followed by substantial increases in price and volume have been excluded from this calculation due to specific events creating a volatility that would not be representative of the potential future volatility.

17. Share-based payments (continued)

Notes to assumptions (continued)

A reconciliation of share option scheme movements for the years ended 30 September 2012 and 30 September 2011 is set out below:

	2012
		Weighted		Weighted
		average		average
	Number	exercise price	Number	exercise price
At 1 October	10,503,117	£0.06	8,339,476	£0.09
Granted	5,202,030	£0.07	3,466,774	£0.07
Exercised	(99,777)	£0.04	(124,539)	£0.06
Lapsed	(173,420)	£0.08	(1,178,594)	£0.13
At 30 September	15,431,950	£0.08	10,503,117	£0.06

The weighted average mid-market share price for options exercised during the year was £0.12 per share (2011: £0.08).

The following tables summarise the information about the range of exercise prices for share options outstanding at 30 September 2012 and 30 September 2011:

		2012			2011
	Weighted average exercise price	Number of shares	Weighted average remaining contractual years	Weighted average exercise price	Number of shares	Weighted average remaining contractual years
£0.04 to £0.08	£0.07	13,623,163	8.37	£0.07	8,659,221	8.97
£0.11 to £0.12	£0.11	1,808,787	5.61	£0.11	1,843,896	6.66

The total charge for the year relating to employee share-based payment plans for continuing operations is disclosed in note 18 (employees and directors), all of which related to the above equity-based transactions.

18. Employees and directors

The average monthly number of persons, including executive directors, employed by the Group during the year was:

	2012	2011
	Number	Number
Research and development	10	10
Administration	4	4
	14	14

As at 30 September 2012, the Group employed a total of 13 permanent staff (30 September 2011: 14) in continuing operations.

Staff costs in respect of these employees were:

	2012	2011
	£	£
Wages and salaries	1,020,210	1,022,420
Social security costs	127,789	117,542
Other pension costs	81,275	81,096
Share based payments	176,083	137,533
	1,405,357	1,358,591

The Group operates a defined contribution pension scheme for employees. The assets of the scheme are held separately from those of the Group in independently administered funds. The pension cost represents contributions paid and payable by the Group to the funds and amounted to £81,275 (2011: £81,096). The amounts outstanding in respect of pensions are £11,541 (2011: £10,662).

Notes to the financial statements (continued)

for the year ended 30 September 2012

18. Employees and directors (continued)

In respect of directors' remuneration, the Company has taken advantage of the permission in paragraph 6(2) of Schedule 5 part 2 of the Large and Medium Size Companies and Groups (Accounts and Reports) Regulations to omit aggregate information that is capable of being ascertained from the detailed disclosures in the Remuneration Report which forms part of these financial statements.

Key management compensation

	2012	2011
	£	£
Short-term employee benefits	846,869	769,840
Post-employment benefits	54,713	51,483
Share based payments	108,406	104,734
	1,009,988	926,057

The key management includes executive directors, non-executive directors and senior management who have the responsibility for planning, directing and controlling, directly or indirectly, the activities of the Group.

19. Financial commitments

At 30 September 2012 there were the following commitments under non-cancellable operating leases:

2012	2011
Land and	Land and
buildings	buildings
£	£
Within one year 82,107	81,224
Between two and five years inclusive 151,854	233,961
233,961	315,185

The Group has purchase obligations of £3,010,855 in respect of its sub-contracted research and development activities as at 30 September 2012 (2011: £8,290,230).

20. Related party transactions

Identity of related parties

The Group consists of a parent, Phytopharm plc, a wholly-owned trading subsidiary, Phytotech Limited, and a dormant subsidiary, Phytodevelopments Limited.

The parent company is responsible for financing and setting Group strategy. Phytotech Limited carries out the Group's research and development strategy, employs all the staff including the executive directors and manages the Group's intellectual property. The proceeds of the issue of shares by the parent are passed from Phytopharm plc to Phytotech Limited as a loan and Phytotech Limited manages the Group's funds and makes payments, including managing the payments of the parent company.

Group

Under IAS 24, 'Related Party Disclosures' the Group is not required to disclose intra-group transactions which are eliminated on consolidation.

Key management compensation is disclosed in note 18.

Company

The Company has been charged £529,771 (2011: £548,148) for corporate services provided by subsidiary undertakings. The Company provides financing to its subsidiary undertakings. Details of the inter-company balances can be found in note 10.

21. Financial risk management

The main risks arising from the Group's financial instruments are cash flow and liquidity, interest rate, foreign currency and credit risk.

The Group's financial instruments comprise primarily cash and liquid resources and various items such as trade receivables and trade payables, which arise directly from its operations.

21. Financial risk management (continued)

The Group's ongoing objectives in using financial instruments are to maximise the returns on funds held on deposit, while investing only with institutions with high credit ratings, to minimise exchange rate risk where appropriate, and to generate additional cash resources through the issue of shares when market conditions are appropriate. In addition, the Group has from time to time conserved cash resources by entering into financing arrangements for the acquisition of major capital assets.

The balance sheet positions at 30 September 2012 and 30 September 2011 are not representative of the positions throughout the years as cash and money market investments fluctuate considerably depending on the timing of cash loaned to subsidiaries to fund the Group's research and development programmes. Cash and cash equivalents are invested with a range of financial institutions for a period of 90 days or less. Money market investments represent fixed-rate, short-term deposits placed with similar institutions with a maturity date of more than three months.

Cash flow and liquidity risk

The Group is a research and development based pharmaceutical company which is not yet a sustainable business. It expects to incur further losses as current planned expenditure exceeds its anticipated receipts in the near term.

The Group still may need to seek further capital through equity or debt in the future and if this is not successful, the financial condition of the Group may be adversely affected.

The table below analyses the Group's financial assets and liabilities:

Notes to the financial statements (continued)

for the year ended 30 September 2012

21. Financial risk management (continued)

		Cash flow and liquidity risk (continued)
--	--	------------------------------------------	--

	2012	2011
	Financial	Financial
	liabilities at	liabilities at
	amortised cost £	amortised cost £
Company
Liabilities as per balance sheet
Trade and other payables excluding statutory liabilities	49,498	87,034
The table below analyses the Group's financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date
to the contractual maturity value. The amounts disclosed in the table are the contractual undiscounted total cash flows.
	Less than	Between
	3 months	3 and 6 months
As at 30 September 2012 Group	£	£
Liabilities as per balance sheet
Trade and other payables excluding statutory liabilities	2,176,531	—

	Less than 3 months	Between 3 and 6 months
As at 30 September 2012	£	£
Company
Liabilities as per balance sheet
Trade and other payables excluding statutory liabilities	49,498	—
	Less than	Between
	3 months	3 and 6 months
As at 30 September 2011	£	£
Group
Liabilities as per balance sheet
Trade and other payables excluding statutory liabilities	2,595,362	—
	Less than	Between
	3 months	3 and 6 months
As at 30 September 2011	£	£
Company Liabilities as per balance sheet
Trade and other payables excluding statutory liabilities	87,034	—

Interest rate risk

The Group holds all cash and cash equivalents in sterling, US dollar, euro, Canadian dollar, Hungarian forint, Czech koruna, Chinese yuan and Polish zloty accounts. Interest rates on current accounts are floating and are based on London Interbank Bid Rate ("LIBID"), while interest rates on term deposits are fixed for the duration of the deposit.

The Group monitors future potential cash outflows on a regular basis and where possible places cash resources in money market investments with fixed interest rates for the term of the deposit. The remaining cash resources are held in accounts with floating interest rates based on LIBID. Changes in interest rates for fixed and floating deposits may increase or decrease the Group's finance income. The Group does not have any committed borrowing facilities. Consequently, there is no material exposure to interest rate risk in respect of financial liabilities.

Interest rate sensitivity analysis

If interest rates had been 1% higher or lower in 2012 the increase/decrease in finance income arising from money market investments would have been £103,000 (2011: £168,000). A 1% increase or decrease represents management's assessment of the reasonably possible change in interest rates when evaluating interest rate risk.

21. Financial risk management (continued)

Interest rate sensitivity analysis (continued)

The interest rate profile of the Group's financial assets is:

	2012		2011
	Fixed	Floating	Fixed	Floating
Group	£	£	£	£
Sterling cash and cash equivalents	—	260,463	—	2,785,205
US dollar cash and cash equivalents	—	13,717	—	271,811
Euro cash and cash equivalents	—	12,303	—	17,416
Canadian dollar cash and cash equivalents	—	6	—	40
Hungarian forint cash and cash equivalents	—	—	—	4
Czech koruna cash and cash equivalents	—	3	—	—
Chinese yuan renminbi cash and cash equivalents	—	215	—	—
Polish zloty cash and cash equivalents	—	6	—	—
Sterling money market investments	8,600,507	—	14,500,000	—
	8,600,507	286,713	14,500,000	3,074,476

The weighted average interest rate of the Group's cash and cash equivalents at 30 September 2012 was 0.39% (2011: 1.09%).

The weighted average interest rate of the Group's money market investments at 30 September 2012 was 1.74% (2011: 2.06%).

	2012		2011
	Fixed	Floating	Fixed	Floating
Company	£	£	£	£
Sterling cash and cash equivalents	—	127,668	—	2,677,736
Sterling money market investments	8,500,000	—	14,500,000	—
	8,500,000	127,668	14,500,000	2,677,736

The weighted average interest rate of the Company's cash and cash equivalents at 30 September 2012 was 0.25% (2011: 1.27%).

The weighted average interest rate of the Company's money market investments at 30 September 2012 was 1.79% (2011: 1.81%).

Foreign currency risk

The Company's functional currency is sterling. Where possible the Group maintains natural hedges by matching foreign currency income with foreign currency expenditure. The Group incurs expenditure in foreign currency relating principally to clinical trials which may exceed any revenues in foreign currencies. To the extent that income and expenditure in foreign currencies are not matched, fluctuations in exchange rates between sterling and foreign currencies, principally euro and US dollar, may result in realised or unrealised foreign exchange gains and losses.

Where there is certainty of the amount and timing of expenditure of foreign currencies, the Group may purchase financial instruments to minimise any foreign exchange gains or losses. Where the timing and/or the amount to be received is uncertain, risk management is more difficult and the Group will use financial instruments wherever possible. To the extent that financial instruments are not utilised, any fluctuations in foreign exchange movements may have a material adverse impact on the results from operating activities.

Foreign currency sensitivity analysis

The Group had an exposure to the sterling/euro and sterling/US dollar exchange rates due to the need to fund expenditure denominated in euros and US dollars. Had sterling been 10% weaker in relation to the euro, the loss in 2012 would have been increased by £136,000 (2011: £79,000) and had sterling been 10% weaker in relation to the US dollar, the loss in 2012 would have increased by £52,000 (2011: £48,000). 10% represents management's assessment of a reasonably possible change in foreign exchange rates.

Fair value of financial assets and liabilities

There is no material difference between the fair value and the carrying values of the financial instruments referred to on pages 59 and 60 because of the short maturity period of these financial instruments or their intrinsic size and risk.

Notes to the financial statements (continued)

for the year ended 30 September 2012

21. Financial risk management (continued) Credit risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group does not believe it is exposed to major concentrations of credit risk on classes of financial instruments.

Trade and other receivables represent amounts due in respect of accrued interest on cash and cash equivalents and money market investments together with receivables relating to VAT. The Group is not exposed to risks relating to trade receivables arising from sales to customers as it is not currently generating significant revenues.

Other than trade and other receivables, the financial instruments that subject the Group to a potential credit risk comprise principally cash and cash equivalents and money market investments. The Group's policy is to minimise the risks associated with cash and cash equivalents by placing these deposits with institutions with a recognised high rating (typically A or above assigned by international credit-rating agencies) or with one of the major clearing banks.

The table below shows the rating of the financial institutions that the Group's cash and cash equivalents and money market investments are held with:

		2012	2011
Group	Rating	£	£
Institution A	A	4,664,626	8,241,585
Institution B	A	4,221,902	9,323,881
Institution C	A	—	8,410
		8,886,528	17,573,876
		2012	2011
Company	Rating	£	£
Institution A	A	4,561,094	8,083,089
Institution B	A	4,066,574	9,090,442
Institution C	A	—	4,205
		8,627,668	17,177,736

The Group disclosure above does not include cash in hand amounting to £692 (2011: £600).

Capital risk management

The Group consider capital to be "shareholders' equity" as shown in the consolidated balance sheet on page 40, as the Group is only funded by equity finance. The Group has no external debt and no material externally imposed capital requirements. The Group is not yet in a position to pay a dividend and the loss for the year has been added to the accumulated losses in equity.

The objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders. In order to maintain or adjust the capital structure, the Group may return capital to shareholders and issue new shares.

22. Post balance sheet events

Certain other changes are expected to be enacted in future Finance Acts, including a reduction in the main rate of corporation tax to 22% from 1 April 2014. As at 30 September 2012, there is an unrecognised deferred tax asset of £12,655,409. If these changes were applied to this, the impact would be to reduce the potential deferred tax asset by £551,000.

Additional shareholder information

Analysis of shareholdings at 30 September 2012

				Percentage
			Number of	of ordinary
	Number of	Percentage of total	ordinary	issued share
Shareholding range	shareholders	shareholders	shares	capital
1 – 1,000	1,379	54.5275%	584,512	0.1685%
1,001 – 5,000	639	25.2669%	1,536,956	0.4431%
5,001 – 10,000	181	7.1570%	1,327,951	0.3828%
10,001 – 500,000	285	11.2693%	18,141,779	5.2297%
500,001 – 1,000,000	15	0.5931%	11,392,483	3.2841%
1,000,000 and over	30	1.1862%	313,918,068	90.4919%
	2,529		346,901,749

Registrar

Administrative enquiries regarding shareholdings in Phytopharm on such matters as a lost share certificate should be made to Equiniti Registrars who can be contacted directly on 0871 384 2030* or you may wish to write to them at Equiniti, Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA. For security reasons, Equiniti cannot accept address changes over the telephone or by email.

Share dealing

If you wish to buy or sell shares in Phytopharm, this must be done through a stockbroker. The London Stock Exchange provides a "Guide to Investment Services" which gives a number of companies offering share dealing services.

Equiniti offers share dealing services by post, telephone and online. If you would like more details about the share dealing services available, please write to the address above, telephone 0871 384 2030* or visit Equiniti's website, www.equiniti.com.

Amalgamation of shareholdings

If a shareholder receives one or more copies of the report and accounts, it may indicate multiple accounts in the shareholder's name are appearing on the share register. Shareholders can write to Equiniti Registrars, or ADR holders should contact the Bank of New York Mellon, at the address on the next page stating the accounts concerned and giving instructions on how they should be amalgamated.

Share price information

Phytopharm is listed in the Official List of the Financial Services Authority and traded on the London Stock Exchange's ("LSE") main market for listed securities. The stock symbol for Phytopharm on the LSE is PYM.

American Depositary Receipts

Phytopharm's shares are represented in the US in the form of American Depositary Shares ("ADSs") represented by American Depositary Receipts ("ADRs"). The ADRs are issued by the Bank of New York Mellon. Each ADR is equivalent to two ordinary shares and trades on the over-the-counter ("OTC") market in the US under the symbol PHYOY, identified by the CUSIP number 41942W101.

* Calls to this number are charged at 8 pence per minute from a BT landline. Call charges may vary if using other telephone providers. Lines are open 8.30am to 5.30pm Monday to Friday.

Additional shareholder information (continued)

Unsolicited telephone calls – boiler room scams

Over the last year, some of our shareholders have received unsolicited telephone calls from organisations or persons claiming or implying that they have some connection with the Company and wishing to discuss investments.

These calls are typically from overseas "brokers" who target UK shareholders offering to buy their shares at a premium or sell them what often turn out to be worthless high risk shares in UK or overseas investments. The operations are commonly known as "boiler rooms". Shareholders should be very wary of any unsolicited advice, offers to buy/sell shares at a premium/discount or offers of free reports into the Company. If you receive any such unsolicited calls, you should:

• obtain the contact name of the person and organisation calling you;
• check that the organisation is on the Financial Services Authority ("FSA") Register and is authorised to give financial advice before getting involved by visiting www.fsa.gov.uk/pages/register;
• report the incident to the FSA Consumer Helpline (0845 606 1234) or complete the share fraud and boiler room scams reporting form at www.fsa.gov.uk/pages/doing/regulated/law/alerts/form.shtml; and
• if the calls persist, hang up.

If you deal with an unauthorised firm, you will not be able to use the financial ombudsman service or benefit from the financial services compensation scheme if you would otherwise be able to do so.

Addresses and advisors

Phytopharm plc

Registered office Lakeview House 2 Lakeview Court Ermine Business Park Huntingdon Cambridgeshire PE29 6UA

Tel: +44 (0)1480 437697 Fax: +44 (0)1480 417090

Registered number: 03131723 Domiciled in the United Kingdom Registered in England and Wales

Information about the Company may be found on the internet at www.phytopharm.com

Registrar

Equiniti Registrars Limited

Aspect House Spencer Road Lancing West Sussex BN99 6DA

Tel: +44 (0)871 384 2030

Calls to this number are charged at 8 pence per minute from a BT landline. Call charges may vary if using other telephone providers. Lines are open 8.30am to 5.30pm Monday to Friday.

ADR depositary bank

The depositary bank for the Phytopharm ADR programme is:

The Bank of New York Mellon PO Box 359516 Pittsburgh, PA 15252-8516 USA

Toll free number for domestic calls: (00)1-888-BNY-ADRS Number for international calls: +(00)1-201-680-6825 (There is no IVR on this number. Calls will go directly to CSRs.)

Email: [email protected]

Website: www.bnymellon.com/shareowners

Solicitors

White & Case

5 Old Broad Street London EC2N 1DW

Tel: + 44 (0)20 7532 1000 Fax: + 44 (0)20 7532 1001

Website: www.whitecase.com

Brokers

Peel Hunt LLP Moor House 120 London Wall London EC2Y 5ET

Tel: +44 (0)20 7418 8900 Fax: +44 (0)20 7418 8848

Website: www.peelhunt.com

Chartered Accountants and Statutory Auditors

PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Abacus House Castle Park Cambridge CB3 0AN

Tel: +44 (0) 1223 460 055 Fax: +44 (0) 1223 552 336

Website: www.pwc.co.uk

Financial public relations

FTI Consulting LLP Holborn Gate 26 Southampton Buildings London WC2A 1PB

Tel: +44 (0) 20 7269 7100

Website: www.fticonsulting.co.uk

Financial advisors

N M Rothschild & Sons Limited New Court St Swithins Lane London EC4N 8AL

Phytopharm plc

Lakeview House 2 Lakeview Court Ermine Business Park Huntingdon Cambridgeshire PE29 6UA United Kingdom

Tel: +44 (0)1480 437697 Fax: +44 (0)1480 417090 Email: [email protected]

AI assistant

IXICO PLC — Annual Report 2012

7723_10-k_2012-09-30_cff29e79-1fe8-4816-964b-3f96e1251e76.pdf

for a healthier future

Who we are

Developing novel treatments targeting diseases with high levels of unmet need.

Business highlights

Operational

Corporate

Financial

Contents

Business Overview

Business Review

Corporate Governance

Financial Statements

Strategy

Targeting diseases with high levels of unmet need.

What we're working on

Chairman's review

"Phytopharm is very much on track to deliver on the objective outlined as part of the November 2009 equity financing."

Chief Executive's review

Mr T Sharpington Chief Executive Officer

Business review

"Our lead series of compounds, the sapogenins (including Cogane™ and Myogane™), has the potential to be a new class of therapy for neurodegenerative diseases."

Strategy

Overview

Pharmaceutical programmes

Neurodegeneration

Parkinson's disease

Motor neurone disease/ALS

Glaucoma

Business review (continued)

The sapogenins

Mode of action

Cogane™ in Parkinson's disease – progress to date

Cogane™ in motor neurone disease/ALS – progress to date

Business review (continued)

Cogane™ in motor neurone disease/ALS – progress to date (continued)

Myogane™ in glaucoma – progress to date

P61 programme – progress to date

Legacy products Hoodia

Phytopica®

Financial review

Income statement Revenue

Research and development expenses

Administrative expenses

Finance income

Taxation

Financial review (continued)

Our CONFIDENT-PD

Balance sheet Non-current assets

Current assets

Current liabilities

Equity

Cash flow

Outlook

Forward-looking statements

Principal risks and uncertainties

The nature of pharmaceutical development is such that there are significant inherent risks due to the long and complex development process.

Industry risk

Clinical and regulatory risk

Competition risk

Intellectual property risk

Financial risk

Cash flow

Return on investment

Foreign exchange risk

Counterparty credit risk

Board of Directors

Mr Alistair Taylor Non‑executive Chairman

Mr Tim Sharpington Chief Executive

Mr Roger Hickling

Research and Development Director

Dr Peter Blower Non‑executive director

Dr Ian Tulloch

Directors' report

Principal activities

Research and development

Business review

Key performance indicators

IXICO PLC Annual Report 2012