Medivir — Annual Report 2008

Mar 24, 2009

Contents

• Medivir in brief, Focus in 2008
• CEO's statement
• Major advances
• Skilled and committed staff
• Patents and patent filings
• Managing risk and creating value
• The analyst's view of value creation
• The Medivir share
• Operations
• Project portfolio
• Corporate Governance Report 2008
• Board of Directors and Auditors Management
• Six-Year Summary
• Key Figures
• Definitions
• Glossary
• Report of the directors
• Income statement
• Balance sheet
• Change in shareholders´equity
• Cash flow statement
• Accounting principles
• Notes
• Report of the auditors

The art of managing risk and creating opportunities. CFO Rein Piir reports on operational and financial risks.

2005 2006 2007 2008 2009

In 2008, the Medivir share performed far better than the all-share and sector index. 11

B-Aktien OMX Stockholm OMX Bioteknik Omsatt antal aktier 1000-tal

JAN FEB MAR APR MAJ JUN JUL AUG SEP OKT NOV DEC JAN FEB Markets, product portfolio and priority indications 16

Medivir in brief

Medivir develops pharmaceuticals against major, widespread diseases, with its biggest commitment currently in the hepatitis C segment. The company engages in a number of partnerships with established pharmaceutical companies and smaller biotechnology enterprises on clinical and preclinical projects.

Medivir's objective is to become a profitable pharmaceutical company with in-house sales resources on the Nordic market.

The project portfolio includes the pharmaceutical Lipsovir®, whose NDA (new drug application) for Europe and the US was filed in October 2008. Medivir has four projects in phase II and two in phase I. Medivir also runs several preclinical projects.

Net sales in 2008 were sek 97.2 m and as of 31 December, the group had 103 employees. The group consists of parent company Medivir AB (publ) and the subsidiaries Medivir HIV Franchise AB, Medivir Personal AB and Medivir (UK) Ltd.

Medivir has been listed on Nasdaq OMX Stockholm since 1996.

Focus in 2008

Medivir successfully focused on four segments in the year:

• Bringing its proprietary pharmaceutical Lipsovir® closer to market registration.
• Running its innovative projects in the hepatitis C segment vigorously with its partner, Tibotec.
• Concentrating major preclinical research resources on identifying a CD (candidate drug) against Alzheimer's disease, with the protease BACE as target enzyme.
• Setting up in-house marketing resources to sell pharmaceuticals.

CEO's statement

Medivir is attracting positive attention from investors for its hepatitis C projects. Despite the stock market falling by nearly 50% over the past year, Medivir's share has performed well – 2008 was an interesting and productive year for Medivir.

The financial crisis that arose in the year is very severe and has had a negative impact on industry funding for early projects. We will have to live in this environment for some time ahead, which creates the need for strategic focus and staying power.

The project portfolio we have accumulated in recent years has high potential business value for the long term, and includes a proprietary product in its registration phase.

The year started with us extending our HIV protease collaboration with Tibotec Pharmaceuticals for another year. Any new anti-HIV protease inhibitor faces challenges because there are already many of them available on the market. We're working to an entirely new and commercially attractive specification. As a result of the successes this research partnership has achieved, Tibotec can now take this project onwards in-house towards designating a CD in 2009.

Partnerships and agreements

We are open to long-term, broad-based agreements, where we can receive predetermined remuneration for our input on collaborative projects. We have been using the model of early partnerships for several years now. We first collaborate in preclinical research, then let our partner take the reins once a CD has

been designated. This means that we can exploit our specialist skills optimally in preclinical research into protease inhibitors. Using early partnerships and outlicensing, we can use greater resources in our skills segment to produce new protease inhibitors, while other companies develop projects further. Milestone payments and future royalties apply to early collaboration partnerships in the usual manner. The latest example of this type of deal is a preclinical hepatitis project (hepatitis C polymerase) that we have been running in conjunction with Tibotec since the spring. This work quickly resulted in the designation of compounds for onward development and triggered a milestone payment.

NDA filing

In 2008, we were able to present the results of our phase III trial on Lipsovir®. Just as we had hoped, this pharmaceutical can prevent the incidence of cold sores. We satisfied all but one clinical objective specified by the FDA. However, the conclusion is clear: Lipsovir® is the first preparation that prevents cold sores with early treatment onset. For a regulatory authority, evaluating whether a pharmaceutical is better than others on the market is important. In the

Business highlights in 2008

7 JANUARY Partnership with Tibotec on HIV protease inhibitors extended, Medivir receives continued research supportfor 2008.

13 FEBRUARY Release of the Financial Statement for 2007.

19 MARCH Phase III trial on Lipsovir® presented at a press conference. The trial shows that the preparation is the first to prevent the incidence of cold sores with early treatment onset. Treatment with

Lipsovir® prevented the development of cold sores in 42% of patients. Patients that still experienced an outbreak of cold sores saw their severity reduced and healing times significantly shortened.

7 APRIL Publication of Medivir's Annual Report for 2007.

15 APRIL Collaboration entered with GlaxoSmithKline (GSK) giving Medivir the rights to market products from GSK's

autumn, we filed an NDA with the European and US regulators, and the earliest their decisions can be expected is autumn 2009.

Medivir – a pharmaceutical company

Plans to develop Medivir into a pharmaceutical company, and to build a sales force in-house based on inlicensed products in anticipation of our own products reaching the market were reviewed in last year's CEO's statement. In the spring, we signed a collaboration agreement with GlaxoSmithKline, allowing us to take on marketing responsibility for a portfolio of products in dermatology, anti-infective products and a smoking cessation product. This type of deal covers the costs of our sales resources for these products in 2009.

We are continuously monitoring opportunities to tie in other products so that we can fill our portfolio with more pharmaceuticals. In the year, our sales and marketing unit worked on contacting and informing pharmaceutical committees and opinion-leaders about these products, which also means that work on building our brand has begun.

Hepatitis C (HCV), an exciting drug target Our hepatitis C projects attracted major interest in the year. Phase I data from TMC435 (HCV protease inhibitor) showed that virus levels were very potently suppressed when the pharmaceutical was

pharmaceutical portfolio in the dermatological, anti-infective and smoking cessation segments. This agreement is a momentous step in the development of in-house sales and marketing resources, and in creating a pharmaceutical company on the Nordic market.

23 APRIL Medivir holds its Annual General Meeting (AGM) and presents its First-quarter Interim Report for 2008, attracting additional attention for the results from its phase III trial on Lipsovir® and new partnership with GSK.

24 APRIL Press release stating the results from the research collaboration with Tibotec Pharmaceuticals on protease inhibitor TMC435, demonstrating antiviral effect when dosed in patients with chronic hepatitis C infections that had not previously responded to treatment.

15 MAY Hepatitis C collaboration with Tibotec extended with a new agreement on HCV polymerases. The objective of this partnership is to design and develop orally active inhibitors of the HCV polymerase NS5B. Medivir and Tibotec will jointly run the project through the preclinical phase with the aim of designating one or more candidate drugs (CDs).

20 MAY Medivir participates at the Acumen BioFin Rodman&Renshaw 5thAnnualHealthcare Conference in Monaco, presenting its current projects and new agreement on hepatitis C polymerase inhibitors.

9 JULY Release of Half-year Interim Report for 2008.

administered only once daily. Based on the first very positive results from a phase IIa trial, our partner Tibotec took a decision in late autumn to start preparations for forthcoming phase IIb trials involving far more patients than the previous trials. These trials are scheduled to start in spring 2009. In the hepatitis C segment, the race is on with two competitors ahead, and one in a parallel development phase, but so far, it would appear that our compound has benefits over the others in terms of dosing and efficacy.

In May 2008, we signed our best agreement yet, a preclinical collaboration with Tibotec Pharmaceuticals in the hepatitis C segment, but with another approach than previously – to design compounds that inhibit the viral polymerase enzyme. We're very satisfied with Tibotec's commitment and rapid advances on the HCV protease inhibitor side. It's particularly pleasing to be able to sign another agreement in the same exciting segment, and with the same skilled partner, but based on another technology. We were able to designate a CD on this project before year-end.

Attracting interest from the world around us

Positive and credible effects from combining a protease inhibitor and a polymerase inhibitor in treatment is a topic of discussion in hepatitis C research. The fact that we have projects in both compound classes is a major asset. Medivir has received huge interest from international researchers and investors for its hepatitis C projects. Our hepatitis C research has a bright future, and we have high hopes of onward progress. But at the same time, we know that producing new pharmaceuticals is always associated with substantial risks, and a lot can happen on the way.

As for myself, I'm now moving onto new challenges after six years with Medivir. It's been an enjoyable and exciting time, when we have succeeded in accumulating a strong project portfolio, creating valuable partnerships, while also taking our first step towards having our own Nordic sales resources.

Lars Adlersson Chief Executive Officer

Huddinge, Sweden, January 2009

For 2009, we anticipate that the first CD on the HCV polymerase project will advance towards clinical phase I trials. A phase IIb trial will be started on TMC435, and on Lipsovir®, our dialogue with the authorities regarding registration will continue. We'll be making it easy for the public to get accessto Lipsovir®, and hope that it will be an OTC product on as many markets as possible. We are concentrating a sizeable share of our research resources on the Alzheimer's project BACE, a protease project in optimization. This segment is attracting major interest from large pharmaceutical corporations, and we're receptive to entering a new, early research partnership. With the challenging business climate that will feature in 2009, in February, we embarked on a processto reduce our cost base. Our ambition isto cut coststo an annual level ofsome sek 50 m. This will involve staff downsizing, reduced external costs and reprioritizing some projects. We expect to see the full savings effect in early-2010.Wewill continue to take the greatest care in prioritizing new business opportunities for our projects and managing our existing partnerships.

Huddinge, March 2009

Ron Long Chief Executive Officer

24 SEPTEMBER Press release reporting that phase IIa data from hepatitis C patients treated with TMC435 would be presented at the 59th Annual Meeting of the American Association for Study of Liver Diseases (AASLD) in San Francisco, held from 31 October to 4 November.

1 OCTOBER in accordance with the previously reported schedule, an NDA (new drug application) for Lipsovir® was filed with the US regulatory authority, the FDA. "Medivir has taken a major and momentous step in filing its first NDA," comments CEO Lars Adlersson.

20 OCTOBER Medivir releases its Interim Report for the first three quarters of 2008, highlighting the important clinical results from TMC435 against hepatitis C.

23 OCTOBER NDA for Lipsovir® now also filed with European regulatory authorities. "We have reached the substantial and important milestone on Lipsovir®, of filing an NDA for the US and Europe," says Börje Darpö, Vice President of Medivir's Clinical Development function.

4 NOVEMBER Phase IIa data from hepatitis C patients treated with TMC435 presented alongside collaboration partner Tibotec at the AASLD liver disease conference. The results are the subject of major interest among US investors.

Major advances

Several projects made major advances in 2008, the biggest successes being in hepatitis C, and Lipsovir® against labial herpes. In the hepatitis C segment, Medivir is conducting two projects with differing approaches to the disease in conjunction with its partner, Tibotec. Documentation supporting the NDA for Lipsovir®.

Protease inhibitor TMC435 against hepatitis C

Clinical data on the protease inhibitor TMC435, conducted in partnership with Tibotec Pharmaceuticals Ltd., were presented in the year. Results from phase Ib and the first results from phase IIa showed that virus levels in HCV patients were very effectively and potently suppressed when the pharmaceutical was administered once daily. This is highly competitive, because other pharmaceuticals in development must be taken more times per day, and at higher doses. Based on the results of the two lowest dose groups in the phase IIa trial, planning began for the next clinical phase, IIb, scheduled to start in the first quarter of 2009. The project has attracted widespread attention, notably on the US market, where Medivir presented its results in a range of contexts through the year.

Polymerase inhibitor as a CD against hepatitis C

Future hepatitis C therapy is likely to consist of combinations of a protease inhibitor and a polymerase inhibitor, creating a treatment where the virus is eradicated more quickly, with less risk of resistance development, and with far less side-effects than current treatment, interferon and ribavirin. Medivir is working successfully with both protease and polymerase inhibitors, and in the autumn,

was also able to designate a new CD based on polymerase inhibition. Producing a combined polymerase/protease inhibitor against hepatitis C will take several more years. But if this concept prevails, it would mark an improvement in treatment compared to current standard of care (SoC) and far more patients would then opt for treatment.

Lipsovir® against labial herpes

In autumn 2008, Medivir filed NDAs in the US and EU for Lipsovir®, a pharmaceutical it has developed in-house against labial herpes.

The final phase III trial concluded in December 2007, and its results were communicated in late-March 2008. NDAs were filed with the US regulatory authority (FDA) and its European counterparts in October. The earliest that decisions from the regulatory authorities could be expected is autumn 2009.

The phase III trial demonstrated that it was possible to completely prevent the incidence of cold sores if treatment with Lipsovir® starts at the early symptoms. This makes Lipsovir® more effective than treatments currently available, and means that patients with recurrent cold sores could get access to better treatment.

More information on these projects is available in the sections on Medivir's operations on pages 16–22.

13 NOVEMBER The company participates at the Rodman & Renshaw Annual Global Investment Conference in New York, US, presenting its research portfolio, successes with Lipsovir® and Medivir's emphasis on the hepatitis C segment. The presentation is monitored with unprecedented closeness by US investors.

8 DECEMBER US (FDA) and European regulatory authorities validate Lipsovir's® NDA, so their review and evaluation process can begin on the data Medivir has filed.

9 DECEMBER Research collaboration on hepatitis C with Tibotec Pharmaceuticals in the polymerase segment triggers a milestone payment of EUR 2.6 m to Medivir.

10 DECEMBER Medivir is one of the companies presented at Financial Hearings, Avanza Bank's corporate event at Operaterassen in Stockholm, Sweden.

15 DECEMBER Medivir announces that its CEO Lars Adlersson would be leaving on 31 January 2009.

Skilled and committed staff

Since its creation, Medivir has grown from being a small, privately owned research enterprise into a public, listed research and pharmaceutical company with major multinational partners. This is a result of having long-term institutional shareholders, partnerships, adapting projects to market conditions and skilled and committed staff.

Qualifications

Other 14% PhDs 50%

Graduates 36%

Division between sexes

Number 25	Women Men
20
15
10
5
0	-30 31-40 41-50 51-60 61-

Medivir's human resources policy states our values on equality and health, which are brought into practice in our daily operations. Our staff should feel good at work and their workloads should be tailored to allow work and family life to combine.

Medivir's ethnic diversity is, as it has always been, substantial. We have people from some ten different nations, which has major benefits in contexts including the company's cross-border collaborations.

Organization and skills

Medivir AB and its subsidiaries Medivir HIV Franchise AB, Medivir Personal AB and Medivir UK Ltd. employed 103 (97) staff in 2008. The skill levels of our employees is high, with 50% (51%) holding Ph.D.s, and three of them being professors. Most staff are researchers. The company possesses the

skills to conduct research from early discovery phases in preclinical research through managing clinical trials to registering – and now also marketing – pharmaceuticals.

A broad skills base and short decisionpaths through the company help high flexibility, which means that Medivir can quickly realign and change direction on projects where necessary.

Health and working environment

Employees are encouraged to maintain good health. One of several health-related activities where Medivir participated in 2008 was tappa.se, a project where staff used pedometers to measure themselves walking a distance as long as Malmö to Berlin.

Working environment issues, safety consciousness and environmental matters are high priorities, and a constant feature of daily work. Medivir's environmental policy encourages increased recycling and reduced waste volumes. Safety routines to protect employees and the working environment in research activities are very stringent. Medivir holds regular internal training programs on safety, ergonomics and environmental matters.

Patents and patent filings

Broad patent protection is the foundation of all new pharmaceuticals and their commercial prospects. Patent activities are a fundamental and integrated part of Medivir's early preclinical activities. At the close of 2008, Medivir had 89 patent families, including those filed by collaboration partners and that may generate royalties for Medivir. A patent family is the collection of national or regional patents and patent applications that cover a single invention or group of related inventions. In 20 of 89 of these families, the official examination process has progressed to the point that at least one US or EU patent

has been granted. Including these approved US/EU patents, Medivir had 374 granted patents in force at yearend. Of the patent families that are in the early stages of the official examination process, 40 patent families are in the international stage, which applies in more than 130 countries worldwide; 15 of these "PCT" applications were filed in the year. The 26 patent families, for which priority applications were filed in 2008, i.e. the official global documentation that first presents a unique aspect of an innovation, are even earlier in the patent process.

Projekt	Patent number	Normal expiry	AU	BR	CA	CN	EU	IL	IN	KR	JP	MX	MY	RU	TH	TW	US	ZA	Additional families (expiry)
Lipsovir®	WO96/24355	2/2016	G		G	G	19	G	G	G	G		G		P	G	G	G	2019
TMC435	WO07/014926	7/2026	P	P	P	P	all	P	P	P	P	P	P	P	P	P	P	P	2028
HCV polymerase	WO08/043704	10/2027	P	P	P	P	all	P	P	P	P	P	P	P	P	P	P	P	2029
BACE Alzheimers	Unpublished	10/2029	P	P	P	P	all	P	P	P	P	P	P	P	P	P	P	P
MIV-701	WO05/66180	1/2025	P	P	P	A	all	P	P	P	P	P	P		P	P	P		2028
HIV-PI	W006/084688	2/2026	P	P	P	P	all	P	P	P	P	P	P	P	P	P	P	P	2029
MMP12	W007/068474	11/2026	P	P	P	P	all		P		P	P				P	P
Cathepsin S	Unpublished	12/2029	P	P	P	P	all	P	P	P	P	P	P	P	P	P	P	P
Renin	WO08/107365	2/2028	P	P	P	P	all	P	P	P	P	P	P	P			P	P	2029
RAPiD	WO97/40065	4/2017	G		P		9				A						G		2018
Cancer	Unpublished	1/2029	P	P	P	P	P	P	P	P	P	P	P	P	P	P	P	P
MIV-606	WO97/30051	2/2017	G	G	G	G	25	G		G	A	G	G	G	P	G	G	G	2026
MIV-210	WO99/09031	8/2018	G		G	G	20	P	G	G	G	G	G	G	P	G	G	G
MIV-150	WO99/36406	1/2019	G	P	P	G	23	G	G	G	P	G	G	G	P	G	G	G
MIV-160	WO02/70516	3/2022	G	P	P	G	19	P	P	P	P	G	P	G	P	G	G
MIV-170	WO05/66131	12/2024	P	P	P	P	all	P	P	P	P	P		G			P	A
MIV-410	W007/006707	7/2026	P	P	P	P	A		P	P	P	P	P	P			P	P
MIV-310	US 6358934	3/2019															G		2027

• Patent granted
• Patent allowed by patent examiner, but grant formalities not completed
• Patent pending: awaiting examination at patent office

Normal expiry

• • Since 1995, almost all countries specify a patent life of 20 years from the international application date.
• • Older US patents have a life of 17 years from grant, which could lead to substantially different lives in different countries. An example is MIV-310, which has an exceptionally long patent life in the world's biggest pharmaceutical market, the US.
• • Europe additionally allows up to five year's extension of pharmaceutical patents, where the European marketing authorization was granted more than 5 years from the patent application date. The projects where European extension is relevant (extended expiry in brackets) are: MIV-606 (2/2022), Lipsovir® (2/2021), MIV-210 (8/2023), MIV-150 (1/2024) and MIV-160 (3/2027).
• • Many countries have an additional form of market exclusivity for pharmaceuticals, called "data exclusivity". This prevents generic pharmaceutical applications "ANDA" being approved based on an original product for a defined number of years, namely 10 years in Europe, 2.5 - 5 years in the US and 6 years in China. This exclusivity is independent of patents and as it is based on the launch date, the exclusivity may extend longer than the patent life. For example in Europe, MIV-310 will gain 10 years protection from generic pharmaceutical applications regardless of whether the European patent has expired.

Country codes

• • AU Australia, BR Brazil, CA Canada, CN China/Hong Kong, IL Israel, IN India, KR South Korea, JP Japan, MX Mexico, MY Malaysia, RU Russia, TH Thailand, TW Taiwan, US USA, ZA South Africa. WO is an international (PCT) patent application.
• EU At present, a European patent can cover all countries in the EU and a number of other European countries such as Switzerland, Iceland, Croatia, Turkey, and soon, Norway. Medivir always validates granted European patents, at least in the key pharmaceutical markets of Germany, the UK, France, Italy, Spain, Switzerland and Sweden. The figure in this column is the total number of European countries where the patent is pending or has been validated.

Additional patent families

• • With the exception of MIV-310 and some cancer projects, all Medivir's patent families have product claims (also known as "composition of matter") and therapeutic method claims. Product claims are preferred in pharmaceutical contexts as they give control over product pricing, notwithstanding that further uses for a product may be discovered in the future.
• Medivir practices patent portfolio management and files successive generations of patents to in-house and CRO developments such as formulations, synthesis methods and synergistic combinations. Although such patent families can seldom totally prevent generic competition after the basic product patent has expired, they do serve a role in ensuring continued royalty income from Medivir's partners even after the introduction of generic competition. This extended royalty period is indicated in this column.

Managing risk and creating value

"We have two types of risk to manage – the financial and the operational."

Consistent and systematic management of operational risks is an important link in the chain to success, and thus, value creation. In recent years, Medivir has adopted a goal-oriented, strategic approach to create the best possible prospects of running its projects quickly and with balanced risks.

Diversifying risk

"We've got two types of risk to manage: operational, i.e. project specific, and financial. Despite us working continually on this, there are still factors we can't control. New information is generated with each new development phase as the results from various trials are compiled. We need to be prepared for different outcomes in our project portfolio, so we can act quickly to ensure stable progress and value creation over time. Our ability to attract partners is decisive to our risk management and the supply of resources to projects," comments Rein Piir.

Investor issues

There is substantial interest in Medivir from domestic and international investors, the main explanation being the company's successes in hepatitis C. However, project values do not become visible until clinical development because project/product profiles are determined from clinical data.

Investors focusing on development companies like Medivir know that its business model features high risk and that most projects never reach market registration. The risk appetite of Nordic investors has changed in the last ten years. At present, the focus is on companies with clinical projects that are close to positive cash flow. US investors have also shifted their investment focus to companies with projects in late clinical development. Risk diversification, mature project portfolios and liquid stocks are some of the decisive factors for attracting investors.

"Medivir is working diligently to explain how we work on projects and how they compare to competitors. We also need to be clear about what the company is doing to reduce the various risks associated with our business and highlight the opportunities inherent in our projects," continues Medivir's Chief Financial Officer Rein Piir, "we do this in regular meetings with potential and existing shareholders. We also take a dedicated approach to meeting Nordic and international investment banks that show an interest in our work."

Partnerships

In the last three to four years, Medivir has deliberately entered into partnerships when projects are in preclinical research. This enables projects to gain the human and financial resources necessary to reach clinical development quickly, while Medivir receives research support for the staff on projects, which also strengthens Medivir financially.

"Our partners bear all the costs of projects," continues Mr. Piir, "and Medivir receives milestone payments as the project progresses towards the market. These revenues help us fund other parts of our business."

Sector model

Most companies need to integrate forward to reveal the values of their business. For Swedish-based development companies, running large, high-quality clinical programs is extremely costly. Partnerships are an alternative to reduce operational risk financially while still enabling the portfolio to advance. Partnerships to sell already established products or straight cash flow acquisitions are now more common. Combining this with launches of products developed in-house would further enhance Medivir's prospects of success.

The next step

Last year, Medivir started to plan and prepare for building an organization to address marketing and sales, and thus establish Medivir as a pharmaceutical company. This unit took shape in 2008, starting on a small scale by entering a collaboration with GlaxoSmithKline for Sweden.

Establishing a partnership with a large pharmaceutical company allowing us to sell their products is an opportunity for us to diversify risks. We're not tied to developing all the pharmaceuticals we sell ourselves, but can also target specialist products from other companies. We are endeavoring to build a specialist pharmaceuticals portfolio that is marketable and saleable to specialists and decision-making bodies in the healthcare system. The segments we're addressing are our own research segments and areas of interest, mainly dermatology and infection. But we might consider other segments in the future.

For large pharmaceuticals corporations, marketing and sales collaborations offer an opportunity to retain, and potentially increase, sales of 'mature' and relatively small-scale products.

"If another company can help boost sales of such products on the Nordic market, large pharmaceutical corporations might think it is worth forgoing a portion of the revenues. But for us, these revenues may be highly significant; in our context, the Nordic region is an attractive market. We have started this operation with a collaboration with GSK, and our ambition is to create more partnerships.

By starting its sales and marketing work now, Medivir is also preparing for the launch of its own potential products."

If and when Lipsovir® is approved, we're hoping that it will be an OTC product in as many markets as possible. For several reasons, we want to market Lipsovir® in-house in the Nordic region. Partly, Lipsovir® would be the first product Medivir has developed completely itself, giving it a special showcase value in launching it in our own name. Additionally, the Nordic market for treating labial herpes is financially attractive.

But Medivir's plans extend beyond selling products it has developed itself or those in partnerships with other pharmaceutical companies. The third option would be to inlicense or purchase specialist products from other companies. Medivir evaluates products appropriate for the Nordic market continuously.

The analyst's view of value creation

Medivir's progress and projects are actively monitored by most Nordic investment banks every day. An increasing newsflow around Medivir's hepatitisC projects also sparked interest among international investors in 2008, primarily in the US. Financial analysts regard newsflow as an important factor for valuing companies like Medivir.

Is there any difference in investors' views of the sector yesterday, today and tomorrow?

Access to capital, in this case the stock market, determines the biotechnology investment climate. Interest in biotech has fallen over the past year as risk appetites have reduced with a worsening economy, for reasons including the prevailing financial crisis.

Despite the end-market for the product – all the people that need pharmaceuticals – being independent of the economy or financial markets, established pharmaceutical and research companies are also affected by an altered perception of risk. Looking ahead, a realization that pharmaceutical companies are not as cyclical as other businesses may improve their investment climate.

What creates the most shareholder value?

What determines the value of a company is the market, and it is important to communicate advances to enable a fair valuation of the company. Medivir's successes in hepatitis C research has demonstrated this clearly. It is only now that Medivir has started communicating the results from its hepatitis C projects that its observers understand that value has been created in the company that is not visible in its share valuation.

Companies that make genuine progress in value creation are those that have some products to market and sell themselves. Smaller companies need to choose a product on a niche market so that sales can be managed by a small group of staff.

Once a product has got to the market through a sales force, the opportunity to sell other company's products also arises, an example here are 'quids', or products swapped from large pharmaceutical companies. While such partnerships may be of marginal significance to the large company, for a small player, getting the rights to the Nordic region can have a big impact. Supplementary products from smaller enterprises are another option, which can contribute to payroll overheads and ease the company's vulnerability.

The biotech sector is undergoing a transformation from the classic model of research and outlicensing products to a type of hybrid where more companies want to own pharmaceuticals and move more towards speciality pharma. This is positive from a value-creation perspective but it also implies other risks. The innovation height of developed products might be lower without the resources to buy in, develop and sell the most attractive products.

What determines the current valuation of companies like Medivir?

The most important issues to focus on are liquidity and newsflow. Liquidity can be low in small companies, which is a drawback. Generally, investing in pharmaceuticals research is high risk. If there is a risk of a company consuming its cash in the short term, then risk is high. However, if the company has a good chance of gaining future milestone payments, there is an opportunity to secure funds, implying a stronger cash position and lower risk. Because newsflow determines the share price in the short perspective, for investors, it's important to understand the company's operations and long-term strategy.

The Medivir share

• 1. Lipsovir® prevents cold sores. Phase III clinical trial results first to show prevention by early treatment.
• 2. First data on TMC435350 in patients with hepatitis C who have failed previous treatment shows antiviral activity.
• 3. Medivir AB broadens its hepatitis C collaboration with Tibotec, entering a partnership in the field of HCV polymerase.

• 4. Phase IIa data on TMC435350 in patients with hepatitis C to be presented at AASLD.

• 5. New Drug Application (NDA) for Lipsovir® submitted to US FDA.

• 6. Marketing Authorization Application for Lipsovir® submitted to European regulatory authorities.
• 7. Phase IIa data on TMC435350 in patients with hepatitis C now presented at the ongoing AASLD.
• 8. Medivir receives milestone payment from research collaboration with Tibotec in the field of hepatitis C polymerase.

The Medivir share

Medivir's class B share was floated on the Nasdaq OMX Stockholm Stock Exchange on 14 November 1996; the high-vote class A share is not listed.

Share structure

Medivir has 20,843,547 shares divided between 660,000 class A and 20,183,547 class B shares. All shares confer equal rights to participation in Medivir's assets and profits. Class A shares have ten votes and class B shares one vote. The share capital is SEK 104,217,735.

Share structure, 30 December 2008

Share class	No. of shares	No. of votes	% of capital	% of votes	Shares after full exercise of options
A10votes	660,000	6,600,000	3.0	25.0	660,000
B 1 vote		20,183,547 20,183,547	97.0	75.0	21,285,847
Total	20,843,547 26,783,547		100.0 100.0		21,945,847

Share price performance and turnover in 2008

Medivir's share price fell 6%, from sek 50 to sek 46,9, in 2008. In the same period, the Stockholm Small Cap Index (OMX-SSCPI) fell 46.2% and the biotechnology index fell 16.2%. At year-end 2008, Medivir's market capitalization was sek 980 m, based on the closing price for the year of sek 46,9. There were 4 865 087 Medivir shares turned over on Nasdaq OMX Stockholm Exchange in 2008, equivalent to a turnover rate of 24% against 152% for Nasdaq OMX Stockholm Exchange as a whole. As of 28 February 2009, the share price was sek 46,1, equivalent to a market capitalization of sek 961 m.

Beta value

As of 30 December 2008, Medivir's class B share had a beta value of 1.08. This value is based on historical closing prices on the last trading day of each of the preceding 24 months. The same measure is applied on the Stockholm All-share Index, and provides an indication of the extent to which a share price fluctuates against an index. If a share has the same price variation as the index, its beta value is 1.0; if it has been more volatile, its value is greater than 1.0, and vice versa.

Dividend policy

A proposal on dividends will not be raised until longterm profitability can be expected through new product launches on the market.

Outstanding option plans, 30 December 2008

Type	Duration	Number	Rights to no. shares	Exercise price sek	Outstanding shares today and at conv.
					20,843,547
Stock opt	2004–2009	210,000	266,700	99.30	21,110,247
Stock opt	2005–2010	280,000	355,600	68.60	21,465,847
Stock opt	2007–2012	480,000	480,000	66.64	21,945,847
Total			970,000 1,102,300

Medivir's 15 largest shareholders, 30 December 2008*

Descending order of vote	Class A shares	Class B shares	% of votes	% of capital
Bo Öberg	284,000	333,280	11.9	3.0
Nils-Gunnar Johansson	284,000	248,800	11.5	2.6
Staffan Rasjö		3,028,482	11.3	14.5
DNB Nor Bank AB		1,507,888	5.6	7.2
Skandia		1,218,098	4.6	5.8
Länsförsäkringar		1,041,080	3.9	5.0
Christer Sahlberg	92,000	32,456	3.6	0.6
Awake Swedish Equity Fund		825,000	3.1	4.0
Tredje AP-fonden		781,506	2.9	3.8
Handelsbanken		761,200	2.8	3.6
Nordea Bank Finland		708,415	2.6	3.4
Unionen		563,360	2.1	2.7
SIX SIS AG		546,310	2.0	2.6
Bear Sterns & Co		500,400	1.9	2.4
Reabourne Melin Life Science		358,500	1.3	1.7
Others		8,388,772	28.9	37.1
Total		660,000 20,843,547	100.0	100.0

* Source: VPC Analys, register of shareholders. The table may include composites from multiple entries in VPC's statistics. These composite entries are intended to indicate an institution or private individual's total holdings in Medivir. Such composite entries are not utilized in other tables relating to the Medivir share.

Shareholder categories, 30 December 2008*

	% of Votes	% of Capital	No. of shareholders
Swedish institutions	26.1	33.5	290
Foreign institutions	21.2	27.2	178
Swedish private individuals	52.4	38.9	4,339
Foreign private individuals	0.3	0.4	61
Total	100.0	100.0	4,868

Shareholder statistics as of 30 December 2008, by size of holding*

Size of holdings	No. of shareholders	No. of shares	% of capital	% of votes
1-100	1,424	62,251	0.3	0.2
101-1000	2,588	1,040,848	5.0	4.0
1001-5000	640	1,510,122	7.2	5.6
5001-20000	132	1,327,233	6.4	4.9
20001-100000	56	2,496,331	12.0	9.3
100001-	28	14,406,762	69.1	76.0
Total		4,868 20,843,547	100.0	100.0

* Source: VPC Analys

Year	Transaction	Nominal amount, sek	Change in share capital, sek	Total share capital, sek	Total no. of class A shares	Total no. of class B shares	Total no. of shares
1988/89	Incorporation	10		50,000	5,000		5,000
	New share issue 1:1	10	50,000	100,000	10,000		10,000
	New share issue 3:1	10	300,000	400,000	10,000	30,000	40,000
1991/92	Bonus issue 1:1	10	400,000	800,000	20,000	60,000	80,000
	New share issue 1:8	10	100,000	900,000	22,500	67,500	90,000
1992/93	Bonus issue 4:1	10	3,600,000	4,500,000	112,500	337,500	450,000
1994/95	Non-cash issue 1:7	10	2,250,000	6,750,000	112,500	562,500	675,000
1996	Bonus issue 3:1	10	20,250,000	27,000,000	450,000	2,250,000	2,700,000
	Split 2:1	5		27,000,000	900,000	4,500,000	5,400,000
	Reclassification to class B shares	5		27,000,000	740,000	4,660,000	5,400,000
	New share issue 598:2700 at a subscription price of sek 125	5	5,980,000	32,980,000	740,000	5,856,000	6,596,000
1997	Reclassification to class B shares	5		32,980,000	740,000	5,856,000	6,596,000
1999	Non-cash issue	5	295,110	33,275,110	660,000	5,995,022	6,655,022
2000	Private placement	5	7,025,000	40,300,110	660,000	7,400,022	8,060,022
	Non-cash issue	5	475,000	40,775,110	660,000	7,495,022	8,155,022
	Options conversion, 1996–2001	5	665,000	41,440,110	660,000	7,628,022	8,288,022
2001	Options conversion, 1996-2001	5	500	41,440,610	660,000	7,628,122	8,288,122
2002	Private placement	5	1,507,390	42,948,000	660,000	7,929,600	8,589,600
2004	New share issue 2:1	5	21,498,410	64,446,410	660,000	12,229,282	12,889,282
	Options conversion, 2002–2007	5	66,645	64,513,055	660,000	12,242,611	12,902,611
2007	New share issue 5:3	5	38,707,830	51,610,441	660,000	19,984,177	20,644,177
	Options conversion, 2002-2007	5	996,850	52,607,291	660,000	20,183,547	20,843,547

Warrants and stock options

Medivir had three outstanding stock option plans at year-end (see table on page 12). At 1 January, there were 676,995 outstanding options, with 142,408 options converted to class B shares in the year, 44,587 options expiring and 480,000 options added through the new stock option plan designated 2007-2012. At year-end there were 970,000 stock options, corresponding to 1,102,300 class B shares. The number of outstanding options could increase shareholders' equity by sek 82.9 m, and upon full conversion, the total number of shares would be 21,945,847.

As a result of the new issue completed at the beginning of 2007, the stock option plans launched in 2004 and 2006 have been restated, whereupon the stock options confer rights to the conversion of 1.27 shares per option and the exercise price has been restated, see the table on page 12.

The 2004 – 2009 plan

The Annual General Meeting on 22 April 2004 resolved to raise a subordinated debenture of sek 1,000 through the issuance of debt instruments with 210,000 detachable warrants. The debenture was subject to 5% interest and has been repaid. Of the 210,000 options, 156,000 were granted to staff, with the remainder held by Medivir Personal AB to cover social security costs. Medivir's hedge for its various staff stock option plans do not mean that Medivir is utilizing what is termed hedge accounting according to IAS 39. For a review of Medivir's hedge, please refer to the section on accounting policies under 'staff stock option plans' on page 49, and the section 'rights to acquire shares' on page 14.

The stock options are only to be utilized to the extent that total profit upon conversion does not exceed an amount corresponding to the product of the number of stock options and 500% of the stock options' exercise price. Subscription for class B shares is possible from 1 May 2005–30 June 2009 inclusive, at a price of sek 126.

The subsidiary Medivir Personal AB controls these detachable warrants in order to fulfill undertakings relating to stock options issued within the framework of the stock option plan 2004–2009. Each stock option is exercisable to acquire one share in Medivir AB through the agency of the subsidiary, against the payment of a redemption fee equivalent to at least 130% of the closing price of the Medivir class B share quoted on Nasdaq OMX Stockholm Exchange's Small Cap-list at the grant date (albeit subject to a minimum of sek 126) for each share. These stock options have been issued to staff of the Medivir group, free of charge. The theoretical market value according to the Black & Scholes equation was sek 19.90 per option at the grant date, and sek 0 as of year-end 30 December 2008.

Upon full conversion of the detachable warrants, Medivir's liquid assets and shareholders' equity would increase by approximately sek 26.5 m, whereupon the company's share capital would increase by sek 1.33 m. The number of class B shares would increase by 266,700.

As a result of the new issue completed in 2007, the plan has been restated, whereupon one option confers the right to conversion to 1.27 shares at an exercise price of sek 99.30.

The 2005 – 2010 plan

The Annual General Meeting of 21 April 2005 resolved to raise a subordinated debenture of sek 1,000 through the issuance of debt instruments with 280,000 detachable warrants. The debenture was subject to 5% interest and has been repaid. Of the 280,000 options, 183,600 were granted to staff, with the remainder held by Medivir Personal AB to cover social security costs. Subscription for class B shares is possible from 1 July 2005 to 31 December 2010, at a price of sek 87.

The subsidiary Medivir Personal AB controls these detachable warrants in order to fulfill undertakings relating to stock options issued within the framework of the stock option plan 2005–2010. Each stock option is exercisable to acquire one Medivir AB share through the agency of the subsidiary, against the payment of a redemption fee equivalent to at least 130% of the closing price of the Medivir class B share quoted on Nasdaq OMX Stockholm Exchange's Small Cap-list at the grant date (albeit subject to a minimum of sek 87.00). These stock options have been issued to staff of the Medivir group, free of charge. The theoretical market value according to the Black & Scholes equation was sek 11.60 per option at the grant date, and sek 2.63 as of year-end 30 December 2008.

Upon full conversion of the detachable warrants, Medivir's liquid assets and shareholders' equity would increase by approximately sek 24.4 m, whereupon the company's share capital would increase by sek 1.78 m. The number of class B shares would increase by 355,600.

As a result of the new issue completed in 2007, the plan has been restated whereupon one option confers the right to conversion to 1.27 shares at an exercise price of sek 68.60.

The 2007–2012 plan

The Annual General Meeting of 24 April 2007 resolved to raise a subordinated debenture of sek 1,000 through the issuance of debt instruments with 480,000 detachable warrants. The debenture was subject to 5% interest and has been repaid. Of the 480,000 options, 360,000 were granted to staff, with the remainder held by Medivir Personal AB to cover social security costs. Subscription for class B shares is possible from 18 June 2007 to 30 April 2012, at a price of sek 66.64.

The subsidiary Medivir Personal AB controls these detachable warrants in order to fulfill undertakings relating to stock options issued within the framework of the stock option plan 2007–2012. Each stock option is exercisable to acquire 1.0 Medivir AB share through the agency of the subsidiary, against the payment of a redemption fee equivalent to at least 115% of the closing price of the Medivir class B share quoted on Nasdaq OMX Stockholm Exchange's Small Cap-list at the grant date (albeit subject to a minimum of sek 64.64) for each share. These stock options have been issued to staff of the Medivir group, free of charge.

The theoretical market value according to the Black & Scholes equation was sek 11.90 per option at the grant date, and sek 6.41 as of year-end 30 December 2008.

Upon full conversion of the detachable warrants, Medivir's liquid assets and shareholders' equity would increase by approximately sek 32.0 m, whereupon the company's share capital would increase by sek 2.4 m. The number of class B shares would increase by 480,000.

Rights to acquire shares

For the stock options issued in 2004, each holder possesses the right to exercise one third of the total number of granted stock options from a date one year after granting onwards, with another one third on the corresponding date in each of the ensuing two years, providing the stock option holder remains an employee of the Medivir group.

The plan issued in 2005 is subject to the above terms, apart from the first one third not being exercisable until two years have passed, with a further one third in the subsequent two years.

The plan issued in 2007 confers the right to acquire new shares at 30% of the whole number of granted options from the date occurring one year after granting onwards, another 30% on the second anniversary and 40% on the third anniversary.

Upon exercise, a taxable benefit arises, and to cover future social security costs, the subsidiary controls a number of options for subscription for new Medivir AB stock (as a hedge). The hedge functions by those options assigned to the hedge held by Medivir Personal AB being converted to shares, which are sold on the market to generate a commensurate cash flow for the group to cover the payment of social security costs. However, the personnel costs arising in the Income Statement are not offset by a cost reduction (revenue), but rather the effect arises in cash flow terms exclusively. This is because the income from such share sales from a group perspective is considered as an issue from shareholders' equity. More information under Accounting principles, Social security costs on stock options, on page 49.

Cash settlement

In November 2008, the Board of Directors introduced a cash settlement facility for all stock option plans, with the aim of making subscription for shares easier.

Outstanding options

Upon full subscription, the total number of outstanding detachable warrants as of 31 December 2007, 970,000, confer rights to 1,102,300 new class B shares, corresponding to some 5.3% of the share capital and 4.1% of the vote upon full exercise. 142,408 (0) stock options were exercised in the year, converted to 199,370 (0) new class B shares. As of 1 January, the total number of outstanding detachable warrants was 676,995, and 970,000 at 31 December. The difference comprises the 480,000 newly issued options, 142,408 new subscriptions and 44,587 expired options relating to the 2002-2007 plan.

The Income Statement includes a provision of some sek 0.8 (0.2) m for accrued social security costs that would arise on the taxable benefit coincident with exercise of the stock options.

The value of the outstanding options for the purposes of calculation of accruals is in accordance with URA 46, IFRS 2 and social security costs, which were initiated in 2005. Information on accounting principles is available in the Stock option plans section on page 49.

Valuation of staff benefits via stock option plans

Medivir utilizes the Black & Scholes model for calculating the theoretical value of the stock options its employees receive. This model is used both at the grant date and at each quarterly financial statement. Medivir utilizes this value, determined by the Black & Scholes model at the grant date, to account a personnel cost pursuant to IFRS 2, which is allocated over the accrual period. For a review of accounting pursuant to IFRS 2, please refer to Stock option plans in the Accounting principles section on page 49. The market value of the option is also calculated quarterly, and utilized to determine the provision for social security costs to be accounted pursuant to URA 46.

Calculations consider share price, exercise price, the option term, expected volatility, risk-free interest and expected dividends. During the financial year, expected volatility of 30% has been applied in accordance with previous analysis conducted by Carnegie Investment Bank AB.

Shareholder agreement and pre-emption

An agreement exists between holders of class A shares in Medivir, stipulating that the parties will behave in accordance with decisions reached on relevant issues by the parties prior to shareholders' meetings. If, during their preparatory deliberation, the parties are unable to agree on a particular issue, the resulting decision is that opinion represented by the majority of class A share votes represented during the deliberation process. Furthermore, the agreement implies that if holders of class A shares wish to transfer their class A shares in the company to another holder of class A shares or a third party, the shares will be converted into class B shares. The same applies if a party acquires class A shares in the company in any other way. If a majority of the holders of class A shares so decide, the class A shares will have the facility for transfer to a new owner without conversion, at which point the new owner will become party to the current shareholders' agreement for holders of class A shares. For class A shares, pre-emptive rights apply pursuant to the Articles of Association.

Operations

Medivir develops pharmaceuticals with the aim of becoming a profitable pharmaceutical company with proprietary sales resources on the Nordic market. Projects are mainly developed in collaboration with large established pharmaceutical companies, but also with smaller biotech enterprises

In 2008, Medivir signed its biggest agreement in value terms so far, a new partnering agreement with Tibotec (Johnson & Johnson group) to develop hepatitis C pharmaceuticals. This is the third currently active partnering agreement with Tibotec and the second in the hepatitis C indication. Medivir is developing hepatitis C pharmaceuticals through two differing approaches, protease and polymerase inhibition, and is thus in the front line globally in this segment. In the year, Medivir also entered its first collaboration agreement with an established pharmaceutical company, GlaxoSmithKline in Sweden, to sell selected GSK products. Its ambition is to enter more of these agreements.

Medivir in December 2008

At year-end 2008, Medivir had 103 employees, 74 of them in its preclinical organization and 7 in clinical development and sales. The remainder work in business development, IT, administration and management.

In the year, work in the Clinical Development function focused on the phase III program and NDA of the labial herpes project Lipsovir® and clinical trials on TMC435 in collaboration with Tibotec.

Some 30–35% of human resources in the preclinical organization worked on projects funded by Tibotec. The remaining resources worked on the cathepsin K project in the first half-year, where resources were downscaled in the second half-year in favor of an Alzheimer's project (BACE). By the end of 2008, BACE was Medivir's largest preclinical project in terms of resources. Less than 20% of resources have been assigned to other projects for specifically delineated efforts in COPD, renin and cathepsin S.

Risk management

Developing pharmaceuticals is time-consuming and resource intensive, and the further a project goes through its development, the more resources are needed. To achieve the greatest possible success, Medivir works in partnership with pharmaceutical companies in different phases of the development process depending on Medivir's and the project's needs.

Business focus

Medivir previously worked actively developing CDs against two drug targets: polymerases and proteases. Developing pharmaceuticals based on polymerase inhibition is mainly suitable for the HIV, hepatitis C and cancer indications. Accordingly, a few years ago, Medivir decided to shelve its active work in HIV and outlicensed these projects through Medivir HIV Franchise AB. Apart from MIV-606 (against shingles inter alia), these projects are suited to various types of niche strategy and are currently being run by several partners.

Hepatitis C is the only therapy area in polymerase inhibition that Medivir is now addressing actively, and Chiron, Roche and now Tibotec have all been partners in the segment. However, its knowledge of polymerases has generated an extensive library of nucleoside analogues for Medivir, which are relevant to a number of potential cancer treatments.

Today

Medivir's research and development projects are today focused on protease inhibitors. Proteases are a type of enzyme involved in many diseases. Some of the indications where Medivir has knowledge of protease inhibition are hepatitis C, HIV, osteoporosis, osteoarthritis, skeletal metastases, Alzheimer's disease, COPD and hypertension.

Working on such differing indications is possible despite the company's limited size and resources. Medivir's strength lies in its knowledge of different proteases, their links to diseases, and thus the design of inhibitors that can impact the course of diseases. When developing CDs based on protease inhibition, the strategy is to work on several approaches in parallel, as on the hepatitis C polymerase project. Medivir's breadth means it can address several different structural classes and potential compounds for future designation of CDs. So far, this approach has been highly successful enabling preclinical partnerships with Tibotec in hepatitis C and HIV.

Broad-based activities

Working on a broad basis in several structural classes means that partners can select from alternative compounds with differing characteristics for developing pharmaceuticals. The underlying drivers of this conscious strategy have been to initiate partnerships and finance Medivir's work on projects, thus simultaneously diversifying risks. At present, all three partnerships with Tibotec have been highly successful – Medivir currently can earn some sek 2,500 m of milestone payments in these three partnerships. Thereafter, Medivir would receive royalties on global sales excluding the Nordic market where Medivir kept the marketing rights.

Medivir has consciously chosen to increase the likelihood of reaching clinical development programs with the aid of partners. The size of Medivir's current preclinical organization means it can simultaneously assign resources to two to three projects optimally. By entering early partnerships the portfolio risk is reduced.

Prioritized projects

Explorative phase	Optimization	Preclini	cal dev.* Phase I Phase II	Phase III	NDA	Indication(s)	Partners/Date of agreement	Terms	Medivir's markets
	Lipsovir® (ME-609)					Labial herpes	In-house
	TMC435 (HCV-PI)					Hepatitis C	Tibotec/2004	eur 80.5 m + royalties and FTE funding	Nordic region
	MIV-701 (Cath K)					Osteoporosis, osteoarthritis, bone metastases	In-house
HCV POL						Hepatitis C	Tibotec/2008	eur 142-272 m + royalties and FTE funding	Nordic region
Cathepsin K						Osteoporosis, osteoarthritis, bone metastases	In-house
HIV PI						HIV	Tibotec/2006	eur 64 m+ royalties and FTE funding	Nordic region
BACE						Alzheimer´s	In-house
Cath. S						Rheumatoid arthritis, multiple sclerosis	In-house
COPD PI						COPD	In-house		World
Renin						Hypertension	In-house

Polymerase inhibitor projects

Explorative phase	Optimization	Preclini	cal dev.* Phase I Phase II	Phase III	NDA	Indication(s)	Partners/Date of agreement	Terms	Medivir's markets
	Valomaciclovir (MIV-606) Valomaciclovir (MIV-606)					Shingles, herpes virus	Epiphany Biosciences / 2006	usd 24.5 m + royalties. Epiphany shares	Nordic region
	Alovudine (MIV-310)					HIV	Mefuvir/2007	Royalties	World excl. Asia
	Lagociclovir (MIV-210)					Hepatitis B, HIV	Hainan Noken/2007	usd 7 m + royalties	World excl. China, Taiwan and Macao
MIV-150						HIV	Population Council / 2003		Option on 50% of Western world
MIV-160						HIV	Mefuvir/2007	Mefuvir shares and royalties	World excl. China, Taiwan and Macao
MIV-410						HIV, CMV	Presidio / 2006	usd 52.25 m + royalties. Presidio shares	Nordic region and UK. Option on Europe

•Polymerase inhibition/hydrocortisone •Protease inhibitor •Polymerase inhibitor * The regulated preclinical development phase.

Preclinical research phases

Clinical development phases

Phase I – trials of the CD on healthy volunteers, usually involving 20 to 50 individuals. Phase I is divided into two parts. In phase Ia, a single dose of increasing strength, then repeat doses, are administered to healthy volunteers. Sometimes, phase Ib studies are conducted, on a small group of patients for a short period.

Phase II – the first trials on patients suffering from the target disorder. Studies usually encompass 100 to 500 patients, with efficacy and safety assessed. Phase II is also divided into two parts. Phase IIa is intended to demonstrate that the course of the disease can genuinely be influenced. Phase IIb demonstrates the efficacy of various doses on the course of the disease.

Phase III – comparative trials on a large sample of patients to measure efficacy in relation to other treatments, if any exist, as well as safety.

NDA – New Drug Application, which often requires Phase III trials as documentation.

Explorative phase – identifying active hit compounds.

Lead identification – identifying feasible compounds with drugable potential.

Optimization phase – this stage is focused on producing the optimal compound/compound class possessing pharmaceutical potential. Towards the end of this phase, CDs (candidate drugs) are designated.

IND – late preclinical development – the final working phase before designated CDs enter clinical studies. This phase is authority regulated and includes extensive safety studies, pharmacokinetics, metabolism studies and is when the first kilogram-scale amounts of the active compound are produced. Applications for regulatory approval for clinical trials of designated CDs are also filed.

Project portfolio

Medivir's project portfolio consists of 16 projects, one of which is heading towards market registration and six are in clinical development phases. Four projects are in the regulated preclinical development phase and five are in early preclinical phases. At present, nine of Medivir's projects are being run in collaboration with partners. For more information, see the previous page.

The disease areas where Medivir is now actively running projects, either in-house or via partners, are reviewed below.

Hepatitis C

An estimated 3% of the global population, or 170–200 million people, are infected with the hepatitis C virus (HCV).

HCV mutates quickly, which means it can develop resistance rapidly. At present, Standard of Care treatment (SoC) consists of interferon and ribavirin, which both have severe side-effects. The treatment is long term – it is not unusual for patients to receive drugs for 48 weeks at a time. There is a significant risk of discontinuing treatment due to unpleasant and severe sideeffects. Moreover, SoC only cures about 40% of cases.

New trend likely

Interferon and ribavirin were not specifically produced as anti-HCV pharmaceuticals, but there are several compounds with new points of attack in development. These new compounds are direct antivirals, mainly targeting their effect against HCV protease and polymerase. By combining SoC with a protease inhibitor, these compounds have been demonstrated to help markedly improve therapeutic effect by eradicating the virus faster and more effectively.

The next step would be to develop medication completely free of interferon and ribavirin. The industry has high hopes of the possibility of combining protease inhibitors and polymerase inhibitors, thus eradicating the virus and preventing resistance development, currently a major problem. However, the development of these combinations has only just begun.

With more effective pharmaceuticals, the value of the market for hepatitis C pharmaceuticals is forecasted to increase radically. Last year, global pharmaceutical sales were USD 3.9 bn. New therapies are expected to more than double this within the next five years. New, more effective treatments with fewer side-effects would also get more patients to start treatment.

HIV

The WHO estimates that some 33 million people worldwide are living with HIV. Approximately 1.7 million people were infected with HIV in 2007, half the level of the previous year. HIV attacks the immune system. Protease inhibitors play a major role in increasingly effective anti-HIV medication. Many pharmaceutical companies are involved in enhancing and improving the characteristics of protease inhibitors. This applies primarily to resistance development and attempts to alleviate side-effects.

Alzheimer's disease

Alzheimer's disease attacks and kills brain cells. Estimates indicate that some 25 million people around the world are sufferers of Alzheimer's disease, which affects more women than men. Memory problems, orientation and difficulties in self-expression are characteristic of Alzheimer's. Patient care is exceptionally costly for society (it is arguably the most costly disease) and any possibility of blocking the development of the disease would imply a massive improvement for patients, reduce care costs and generate major socioeconomic benefits. One leading current principle in Alzheimer's research is attempting to prevent the incidence of what are termed Alzheimer's plaques in the brain. BACE is a protease generally believed to be a contributor to the formation of these plaques, and developing an inhibitor of BACE is now a leading principle in developing new pharmaceuticals against Alzheimer's disease.

Bone disorders

Osteoporosis occurs when an imbalance arises between natural bone degradation and bone formation in the body. A total of some 100 million people are estimated to suffer from osteoporosis on the world's seven largest markets, and the pharmaceutical market amounted

to some USD 11 bn in 2008. Pharmaceuticals in the bisphosphonate group are the most common current therapy, prescribed to strengthen the skeleton and reduce the incidence of fractures. This treatment is cheap and effective but has shortcomings, such as partial irreversibility. This means that bisphosphonates remain stored in the skeleton, even if medication ceases, which is a disadvantage because while strengthening bone tissue, they also stop normal skeletal turnover in the body.

Cathepsin K has several targets in bone disorders such as osteoporosis, osteoarthritis and skeletal metastases, i.e. tumors that have spread from other cancers to the skeleton. By inhibiting the enzyme cathepsin K in the body, the rate of bone degradation can be markedly reduced, while normal bone formation remains unaffected. Cancers become less receptive to the formation of skeletal metastases.

Shingles

Shingles is a viral disease caused by the Varicella-zoster virus (VZV) affecting people that have had chickenpox earlier in life. After a chickenpox episode, the virus can remain dormant in the nerve roots for many years. The immune defense deteriorates with the passing years, enabling the virus to re-activate in the form of shingles. Shingles expresses as redness and vesicles, with sufferers often experiencing severe pain coincident with rashes. The pain can remain for an extended period after the vesicles and rash have cleared up and become a chronic condition called post-herpetic neuralgia (PHN). Current therapy does not affect PHN but does shorten episodes of vesicles. Treatment is with tablets taken several times daily.

Projects in each disease area

Lipsovir®

Indication: Labial herpes (cold sores) caused by the herpes simplex virus. The primary mode of infection of the herpes virus is by direct contact during a cold sore episode. The virus remains dormant in the body and the illness can recur every year. Colds, stress and sunlight are some of the factors that can trigger herpes outbreaks.

Medivir's compound/pharmaceutical: Lipsovir® is a patented combination of hydrocortisone (anti-inflammatory) and acyclovir (antiviral).

Progress in the year: Results from the phase III program were presented in 2008, and for the first time, it was demonstrated that the incidence of cold sores can be prevented through treatment. Trials also showed that Lipsovir® reduced healing times for the subjects that developed cold sores by one and a half days compared to placebo. Overall, this is a clinically significant improvement. In a meeting before the trial started, the US regulatory authority, the FDA, stipulated that Lipsovir® should be better than current pharmaceuticals or placebos in three respects. Lipsovir® achieved two of them, preventing cold sores significantly better than placebo (p<0.0001). Despite an unexpected positive effect of acyclovir in Medivir's cream base, the preventative effect of Lipsovir® was also significantly better than acyclovir (p=0.014). In 42 % of subjects that started treatment with Lipsovir® at early signs or symptoms, the cold sore was prevented.

After summarizing the preclinical and clinical trials, in October, Medivir filed an NDA (new drug application) with the US and European regulatory authorities. During the year, work in-house also continued on preparing publication of the trials and ensuring that sufficient volumes of the product are ready for sale once Lipsovir® is approved.

The objective is to have several partners, for future global marketing.

Competitors: There are a number of established products whose availability varies depending on the market. In Europe, these are mainly OTC pharmaceuticals like Anti, Vectavir and Zovirax. Famvir and Valtrex require prescriptions in many EU countries like Sweden and Denmark, while in the US, pharmaceuticals against labial herpes require prescriptions. No currently registered pharmaceutical prevents the incidence of cold sores, so with its treatment profile, Lipsovir® has a unique competitive edge.

TMC435 – hepatitis C

Indication: Hepatitis C

Medivir's compound/pharmaceutical: TMC435 is a protease inhibitor in clinical phase II administered as an adjuvant to existing SoC with interferon and ribavirin. SoC alone cures some 40% of patients, and by adding a protease inhibitor, the share of cured patients is expected to increase.

Progress in the year: Phase I and phase IIa data shows that the protease inhibitor in combination with SoC reduces virus levels very sharply even if administered as a single daily tablet dose. Based on activity data from the two first and lowest dose groups in the phase IIa trial, Medivir's partner Tibotec decided to start preparations for phase IIb trials in late autumn. These phase IIb trials will involve more patients and different dose groups in longer-term trials. The trials are scheduled to start during spring 2009.

Competitors: TMC435 is just behind two other compounds and in a parallel development phase with another. One significant feature of Medivir's compound is that it is more potent than competitors, enabling a single daily dose, which is a major benefit for patients. The interferons Pegasys and Pegintron are the two biggest currently available hepatitis C pharmaceuticals on the market. The third product is an immunomodulator, Rebetol.

Candidate drug HCV POL

Indication: Hepatitis C

Medivir's compound/pharmaceutical: HCV POL is a polymerase inhibitor, and a CD (candidate drug) was designated in late-2008, which, will undergo preclinical safety trials in 2009 ahead of clinical trials.

Progress in the year: Medivir signed a research agreement with Tibotec on polymerase inhibitors against hepatitis C in May 2008. This agreement involves screening Medivir's compound library to identify new CDs. The agreement is the largest of its kind, worth eur 137 m in future milestone payments plus research support for Medivir. Medivir received a one-off eur 5 m upfront payment on signing. In December, Medivir and Tibotec designated a CD on this project, triggering a eur 2.6 m milestone payment.

Performed by licensing partners contract laboratories

¹ Source: DiMasi, Hansen, Grabowski, and Lasagna (Tufts Center for the Study of Drug Development), "Research and Development Costs for New Drugs by Therapeutic Category, "Pharmaco-Economics (published by Adis International,Inc.), January 1995.

Tibotec is now responsible for continued clinical development and potential marketing on all markets apart from the Nordic region, where Medivir is retaining the rights. Medivir will also receive royalties on Tibotec's global sales.

Competitors: At present there are three nucleoside analogues in clinical trials, one in phase II and two in phase I. An experimental clinical phase I trial on a combination of a protease inhibitor and polymerase inhibitor is underway in a research partnership between Roche, InterMune and Pharmasset, and is the first trial of its kind.

MIV-701 and cathepsin K – follow-up compound

Indication: Bone disorders

Medivir's compound/pharmaceutical: MIV-701: phase I trials concluded in late-2007.

Progress in the year: The results of phase I trials achieved proof of principle in the cathepsin K segment. Thus the thesis that bone degradation rates can be reduced by inhibiting cathepsin K is proven. A broad base of scientific data indicates that inhibition of cathepsin K may improve the situation in several therapy areas. Medivir designated in February 2009 a clinical follow-up compound (MIV-710), and the objective is to secure a research collaboration for the whole cathepsin K program.

Competitors: One compound is in a phase III trial (Merck) and another is in phase II (Ono).

HIV-PI

Indication: HIV

Medivir's compound/pharmaceutical: HIV-PI is a protease inhibitor in late optimization phase that has demonstrated potent antiviral effect against wild-type and multiresistant virus.

Progress in the year: In early 2008, Tibotec extended its collaboration agreement with Medivir for another year. HIV-PI has a commercially attractive specification that has been hard to satisfy so far. The project has identified compounds that are highly potent and active against those mutants that are resistant to current pharmaceuticals. The collaboration ran until December 2008, when Tibotec took over the project to run it in-house with the aim of designating a CD in 2009.

Competitors: there are several protease inhibitors against HIV on the market, and competition in the segment is intense.

BACE

Indication: Alzheimer's disease

Medivir's compound/pharmaceutical: BACE is a protease inhibitor in optimization that inhibits beta-secretase, an enzyme involved in the formation of plaques in the brain, a cause of Alzheimer's disease. Research results have demonstrated that plaque formation can be prevented by blocking BACE. This research segment is highly complicated, and most large pharmaceutical companies are active in the area.

Progress in the year: BACE is a project in optimization where Medivir's research made significant advances in 2008. Medivir's objective is to secure, in 2009, a research collaboration on BACE while the project remains in its research phase.

Competitors: Many large corporations are working in this segment and have projects in the research phase. BACE has a possibility of becoming the first treatment alternative to block the development of Alzheimer's disease.

Valomaciclovir – MIV-606

Indication: Shingles and glandular fever. Medivir's compound/pharmaceutical: Valomaciclovir – MIV-606 is a polymerase inhibitor in clinical phase IIb against shingles caused by VZV and in phase IIa against glandular fever caused by Epstein-Barr virus (EBV). These projects are being run by the US company Epiphany.

Progress in the year: Phase II trials are progressing. Data from the phase IIb trial is scheduled to be complete and reported in summer 2009.

Competitors: The compound enables treatment once daily compared to three times daily for its closest competitor, Valtrex. This implies a distinct dosage improvement that may make treatment far easier and probably reduce PHN.

Corporate Governance Report

Medivir AB (publ) was founded in 1988 and has been quoted on Nasdaq OMX Stockholm since 1996. Medivir adopted the revised Swedish Code of Corporate Governance ("the Code") on 1 July 2008, as part of Nasdaq OMX Stockholm's regulatory structure. Medivir did not deviate from the Code in 2008. Pursuant to the Swedish Corporate Governance Board's adoption guidelines, this Corporate Governance Report includes a separate section on how internal controls of financial reporting are organized. The Report is not part of the formal Annual Report documentation, and has not been reviewed by the company's auditor.

The figure to the right illustrates Medivir's corporate governance model, and the operations of its central bodies.

Internal regulatory structures and policies that affect corporate governance

• • Articles of Association
• • Board of Directors' Rules of Procedure and CEO's Instructions
• • Remuneration Guidelines for Senior Executives
• • Rules of Procedure for Board Committees
• • Finance Policy
• • IT Policy
• • Accounting Handbook
• • HR Handbook

External regulatory structures that affect corporate governance

• • Swedish Companies Act
• • The Swedish Book-keeping Act
• • Swedish Annual Accounts Act
• • Nasdaq OMX Stockholm's Listing Agreement
• • Swedish Code of Corporate Governance

Shareholders

Medivir's class B share was floated on Nasdaq OMX Stockholm in 1996. The high-vote class A share is not listed. All shares possess equal rights to participation in Medivir's assets and profits. Class A shares confer ten votes and class B shares confer one vote. Medivir's share capital was sek 104,2 (104,2) m at year-end, divided between 20 843 547 (20 843 547) shares. The closing price on 30 December 2008 was sek 46.90 per share, equating to market capitalization of some sek 980 m.

As of 31 December 2008, there were 4,868 shareholders, of which 4,012 had holdings of 1,000 shares or less.

Bo Öberg was the largest shareholder in terms of voting rights, followed by Nils-Gunnar Johansson and Staffan Rasjö. 5,5% of shareholders held 1,000 shares or less and the ten largest shareholders held 48,5% of the total number of shares and 61,2% of the voting rights. The share of foreign shareholders was 27.6% of total equity.

For more information on ownership structure, see The Medivir share on page 12.

Annual General Meeting

Shareholders exercise control over the company at the Annual General Meeting (AGM). The AGM is held within six months of the end of the financial year. At the AGM, shareholders resolve issues including election of the Board of Directors, and where appropriate auditors, how to appoint the Election Committee and discharging the Board of Directors and CEO from liability for the past year. The AGM also considers adoption of the Income Statement and Balance Sheet, fees to the Board of Directors and Auditors and remuneration guidelines for the CEO and other senior executives. The minutes from the AGM 2008 are available at www.medivir.se.

The AGM 2009 will be held on 23 April 2009. Minutes from the AGM will be uploaded to Medivir's website, www.medivir.se.

Medivir's corporate governance model

Election Committee

The procedures of the Election Committee adopted at the AGM 2008 require the Chairman of the Board to contact at least three of the largest shareholders as of the end of the third quarter of the year. These shareholders are each requested to appoint a representative to the Election Committee, which should also include the Chairman of the Board. If any of these shareholders waives their right to appoint a representative, this right transfers to that shareholder with the largest shareholding after the aforementioned shareholders. The Election Committee appoints a Chairman to lead its work internally.

The Election Committee prepares proposals for electing and remunerating the Board of Directors, Chairman, and where appropriate, Auditors, and the method for appointing the Election Committee and its Chairman to be submitted to the AGM for resolution.

The Election Committee's proposals will be published at the latest coincident with the notice convening the AGM. Shareholders were able to submit proposals to the Election Committee by 31 December 2008 by means including e-mail at; valberedning@medivir.se. The name of the shareholders representatives on the Election Committee should be published as soon as they are appointed.

The Election Committee for the AGM 2009 consists of Eva Gottfridsdotter-Nilsson (representing Länsförsäkringar Fonder, 3,9% of votes*), Frank Larsson (representing Handelsbanken Fonder, 2,8% of votes*), Bo Öberg (representing class A shareholders, 27% of votes*) and

* Record date 30 December 2008.

Name	Function	Board meetings	R&D Committee	Remuneration Committee	Audit Committee
Anders Vedin	Chairman	100%	100%	100%
Björn C Andersson	Member	88%			100%
Lars-Göran Andrén	Member	100%		100%
Anna Malm Bernsten	Member	90%			100%
Magnus Falk	Member	100%			100%
Donna Janson	Member	100%	67%	100%
Ingemar Kihlström	Member	100%	100%
Ron Long	Member	100%	67%		75%
Göran Pettersson	Member	88%		100%
Bo Öberg	Member	100%

Board members' attendance in 2008*

*If a member was unable to attend a Board meeting, he/she had the opportunity of submitting views to the Chairman before the meeting.

Composition of the Board of Directors, from 2008 onwards

Name	Remuneration Committee	Audit Committee	R&D Committee	Affiliation to the company's management and major shareholders
Anders Vedin	Member		Member	No
Björn C Andersson		Member		No
Lars-Göran Andrén	Chairman			No
Anna Malm Bernsten		Member		No
Magnus Falk		Chairman		No
Donna Janson	Member		Chairman	No
Ingemar Kihlström			Member	No
Ron Long**		Member	Member	No
Göran Pettersson	Member			No
Bo Öberg				Yes*

* Bo Öberg is employed by the company and holds 284,000 class A shares and 333,280 class B shares with 11.8% of the voting rights in total.

** Ron Long became CEO of Medivir AB on 1 February 2009 and is thus no longer independent of the company's management. He is also no longer a member of the Audit Committee.

Namn	Function	Directors' fee	Committee fees	Total
Anders Vedin	Chairman	435 000	100 000	535 000
Björn C Andersson	Member	185 000	65 000	250 000
Lars-Göran Andrén	Member	185 000	65 000	250 000
Anna Malm Bernsten	Member	185 000	65 000	250 000
Magnus Falk	Member	185 000	80 000	265 000
Donna Janson	Member	185 000	115 000	300 000
Ingemar Kihlström	Member	185 000	50 000	235 000
Ron Long**	Member	185 000	115 000	300 000
Göran Pettersson	Member	185 000	50 000	235 000
Bo Öberg	Member	0	0	0
Total		1 915 000	705 000	2 620 000

Directors' fees for the period May 2008 - April 2009 (sek)*

* Consulting fees were not paid to Board members.

** Ron Long was appointed as CEO of Medivir AB on 1 February 2009 and his remuneration will be adjusted accordingly.

Anders Vedin, Chairman of Medivir's Board, as published in the prescribed manner. The mandate term runs until the composition of the next Election Committee has been published.

Since its appointment in autumn 2008, the Election Committee has met on one occasion where all members attended. The Chairman of the Board reported to the Election Committee on the annual appraisal process for the Board of Directors, Board members and CEO to the Election Committee, and also informed them of the outcome of this appraisal. The Election Committee also met the company's new (2009) CEO.

The Nomination Committee is proposing at the Annual General Meeting 2009 that a new Board of Directors is appointed through the re-election of five members, namely Göran Pettersson (new Chairman of the Board), Björn C. Andersson, Anna Malm Bernsten, Ingemar Kihlström and Ron Long (CEO). Former members Lars-Göran Andrén, Magnus Falk, Donna Janson, Anders Vedin and Bo Öberg are not standing for re-election.

Board of Directors

The over-arching task of the Board of Directors is to manage the company's affairs on behalf of the shareholders in the best way possible. The Board of Directors possesses substantial skills and experience in pharmaceuticals research, finance and strategy.

The Board of Directors evaluates the group's financial situation and appraises its executive management on an ongoing basis. The Board considers matters including the group's strategic orientation and organization, and decides on significant investments and commitments.

The Board adopts Rules of Procedure including the CEO's Instructions annually, which formalize matters including the division of responsibilities between the Board of Directors and Chief Executive Officer. The Rules of Procedure also formalize how Board activities are divided between Board members, how often the Board should meet and how work should be delegated to Board committees.

At each Board meeting, Board members receive a written agenda and comprehensive supporting documentation. Current business conditions, consolidated profits and financial position and the outlook for the remainder of the year are reviewed at each scheduled Board meeting. The Chairman of the Board leads the Board's work, represents the company on ownership issues and is responsible for appraising the Board's activities. The Chairman is also responsible for maintaining ongoing contacts with the group management, and for the Board performing its duties. Board members are presented on page 30.

Board activities in 2008

The Board of Directors elected its officers on 23 April 2008, held 11 meetings where minutes were taken in 2008 and was quorate on all occasions. Medivir's General Counsel, who is not a Board member, is Board Secretary. Other Medivir employees also participated at Board meetings, to submit reports. In the year, the Board of Directors mainly considered issues regarding strategy, research and development, outlicensing, collaboration, significant investments, financing, quarterly reports, the Financial Statement and Annual Report.

Directors' fees 2008

The AGM on 23 April 2008 resolved on total Directors' fees of sek 2,620,000 payable for the period until the next AGM, divided as follows. Directors' fees of sek 435,000 payable to the Chairman of the Board and sek 185,000 to each of those Board members entitled to fees. For work on the Audit Committee, a fee of sek 80,000 payable to the Chairman of the Committee, and sek 65,000 to the Committee's three members. For work on the Remuneration Committee, a fee of sek 65,000 payable to the Chairman of the Committee and sek 50,000 to each of the Committee's three members. For work on the R&D Committee, a fee of sek 65,000 payable to the Chairman of the Committee and sek 50,000 to each of the Committee's three members.

Board Committees

There are three consultative committees within the Board: the Remuneration Committee, the Audit Committee and the R&D Committee.

Remuneration Committee

The Remuneration Committee is appointed by the Board of Directors and has a maximum of four members, who are Lars-Göran Andrén (Chairman), Donna Janson, Göran Pettersson and Anders Vedin. The Committee is advisory and does not have the right to take decisions. This Committee submits proposals to the Board regarding:

(i) the Chief Executive Officer's salary and other employment terms,

(ii) salaries and employment terms for other senior executives, and

(iii) evaluation and proposals regarding incentive schemes.

In 2008, the Remuneration Committee held four meetings where minutes were taken, where all members attended. In addition, the Committee held a number of consultations via telephone and e-mail. At the AGM, the Board presents proposed guidelines for determining salary and other remuneration for the CEO and other members of the company's management, for the approval of the shareholders.

Audit Committee

The Audit Committee is appointed by the Board and has a maximum of four members, who are Björn C Andersson, Anna Malm Bernsten, Magnus Falk (Chairman) and Ron Long. The Committee is advisory and does not have the right to take decisions.

The primary task of the Committee is to support the Board in its work on the company's risk management, control and internal controls, and to quality-assure financial reporting. The Committee considers significant accounting issues affecting the group, and meets the company's auditors on an ongoing basis. The Committee evaluates audit work, supports the Election Committee in considering proposed auditors and their remuneration, and approves the supplementary services the company may purchase from external auditors. The Chairman of the Audit Committee is responsible for the whole Board being kept informed regarding audit work, and where necessary, submits matters for decision to the Board.

In 2008, the Audit Committee considered the company's risk analysis, finance policy and significant audit matters. The Committee also received and discussed the risk analysis and audit plan the auditors prepared as a basis for the statutory audit process. All of the Committee's members are independent of the company's major shareholders. In 2008, the Audit Committee held four meetings where minutes were taken, where all members attended. The Auditors, Chief Financial Officer and CEO also attended all meetings.

R&D Committee

The R&D Committee is appointed by the Board and has a maximum of four members, who are Donna Janson (Chairman), Ingemar Kihlström, Ron Long and Anders Vedin. The Committee is advisory and does not have the right to take decisions. This Committee's main tasks are to: (i) participate in preparing the principles for managing and prioritizing, and systems for monitoring, R&D activities,

(ii) review and provide the Board with decision-support data regarding the strategic focus of R&D operations and

(iii) periodically screen the research portfolio and participate in structuring proposals for overall priorities ahead of budget decisions and major updates. In 2008, the R&D Committee held three meetings where minutes were taken.

Management

The Chief Executive Officer leads the company's operations pursuant to instructions adopted by the Board of Directors. The CEO is responsible for keeping the Chairman and other Board members continuously informed on the company's progress, both financially and operationally, and for the required information being available to Board members.

Medivir's management has eight members including the CEO. The management has a broad composition of individuals with in-depth, thorough experience of the research and development, marketing and sale of pharmaceuticals. The management also possesses the necessary skills in accounting and finance, legal issues and corporate communications.

Remuneration to senior executives

The AGM 2008 determined that the compensation package offered by Medivir will follow market norms that enables skilled senior executives to be hired and retained. Remuneration to senior executives will consist of basic pay, potential performance-related pay, stock options pursuant to the 2007/2012 stock option plan resolved by the AGM, pension and other benefits. Fixed salaries relate to individual responsibilities and experience.

Performance-related pay – which at present, and where appropriate, is payable as a discretionary individual bonus – is a maximum of 50% of fixed salary. The CEO's pension scheme will conform to the ITP (supplementary pensions for salaried employees) scheme, and approximately 15% of basic pay excluding bonus and benefits. The pension plans of other senior executives will conform to the ITP scheme, and the relevant individual plan in the UK corresponds to legislated contributions, plus 6% of basic pay excluding bonus and benefits. The Board of Directors is entitled to diverge from the above guidelines if the Board considers that there are special circumstances in an individual case that justify this. For more detail on remuneration, see Note 3 on pages 52-54.

Auditing

Auditing firm PricewaterhouseCoopers AB, which has been Medivir's auditor since 1988, was elected at the AGM 2008 for a mandate term of four years. PricewaterhouseCoopers then appointed Authorized Public Accountant Claes Dahlén as Senior Auditor. PricewaterhouseCoopers audits all group companies.

On assignment from the Board, the Auditor conducts a summary review of all interim financial statements pursuant to the applicable standard for limited reviews (SÖG) 2410 "Limited review of interim financial information conducted by the company's appointed auditor". Other statutory audits of the Annual Report, Consolidated Financial Statements and accounting records and the Board of Directors' and Chief Executive Officer's management is conducted pursuant to applicable Swedish RS Auditing Standards. Audits of management, internal processes and control systems are conducted in the fourth quarter. The conclusions of this audit are reported to the

Audit Committee, and for the fourth quarter, also directly to the Board of Directors. During the year, the Auditors attended four meetings with the Audit Committee and one meeting with the Board of Directors.

Apart from auditing, Medivir also consulted PricewaterhouseCoopers on tax issues and a range of accounting matters. PricewaterhouseCoopers is accountable for verifying its independence ahead of decisions to also offer independent advisory services to Medivir apart from its auditing assignment. Information on audit fees is stated in Note 2 on page 52.

Internal Audit

The company has a simple legal and operational structure and formulated controlling and internal control systems. The Board of Directors and Audit Committee monitors the company's evaluation of internal controls through means including contacts with the company's Auditors. Against the above background, the Board of Directors has chosen not to conduct a dedicated internal audit process.

Board of Directors' report for the financial year 2008 on the organization of internal control of financial reporting

Pursuant to the Swedish Annual Accounts Act and the Swedish Code of Corporate Governance Medivir's Board of Directors is responsible for internal controls. This section has been prepared pursuant to section 3.7.2 of the Swedish Code of Corporate Governance, with supplementary instructions from the Swedish Corporate Governance Board. This report has not been reviewed by the company's auditors.

The over-arching purpose of internal controls is to provide reasonable assurance that the company's operational strategies and goals are monitored and that shareholders' investments are protected. Additionally, internal controls should provide reasonable assurance that external financial reporting is reliable and prepared in accordance with generally accepted accounting practice, that applicable laws and ordinances are observed, and that the requirements of listed companies are observed.

The internal control environment at Medivir conforms to the international Internal Control – Integrated Framework structure, "COSO", having the following five main elements: control environment, risk assessment, control activities, information and communication and monitoring.

Control environment

Primarily, the control environment is the culture the Board of Directors and management communicate and operate from. The Board has overall responsibility for internal controls of financial reporting. The Board has adopted written Rules of Procedure that clarify the Board's responsibilities and formalize the internal division of responsibilities of its Committees. Additionally, the Board of Directors has appointed an Audit Committee whose primary task is to safeguard financial reporting and internal controls, and maintain expedient relations with the company's Auditors. Medivir's internal control activities are intended to ensure that the group realizes the objectives of financial reporting.

Medivir's financial reporting conforms to applicable laws and ordinances for companies listed on the Stockholm Stock Exchange. Apart from external laws and ordinances, financial reporting is also subject to fundamental policies and guidelines including a finance policy, certification and authorization instructions as well as purchasing and investment policies.

Financial reports are prepared monthly and quarterly for the group, parent company, subsidiaries and for functions and projects. Forecasts, extensive analysis and comment, with purposes including quality-assuring financial reporting are prepared coincident with reporting. Medivir has prepared an accounting handbook comprising internal instructions and directions. There are also checklists for significant routines and processes. Internal instructions and routines are subject to continuous enhancement.

Risk assessment

Effective risk assessment integrates Medivir's business opportunities and results with the requirements of shareholders and other stakeholders for stable, long-term value growth and control. Developing a new pharmaceutical to approved registration and launch is a highly capital intensive and risky process. The likelihood of reaching the market increases as the project moves through the development chain, which also affects costs, which rise steeply in later clinical phases.

Medivir is exposed to a range of risks, both operational and financial, including risks of misstatements in financial reporting. The company has an established risk management process for operational and financial risks. The company has identified, mapped and documented all significant operational risks and classified them systematically in terms of the likelihood and consequences of these risks for operations. The risk assessment and classification has been presented to, and is endorsed by, the Audit Committee and Board of Directors. Based on the outcome of internal and external risk assessment, the Committee continually discusses the focus and scope of the audit with the company's Auditors.

Financial risks such as liquidity risk, currency risk, interest risk and credit risk have been identified. They are mainly managed by the accounting and finance function pursuant to the group's finance policy. For a detailed review, see Note 8 on pages 55-58.

Control activities

The primary purpose of control activities is to prevent, discover and rectify misstatements in financial reporting. Routines and activities have been structured to manage and address significant risks related to financial reporting.

These activities include analytical updates and comparisons of the progress of profits or items, reconciling accounts and balances, and approval of all business transactions and collaboration agreements, powers of attorney and certification instructions, as well as accounting and valuation policies. Access to ERP systems is limited by authority, responsibility and role.

There is an established controller function that conducts control activities at all levels of the company. This function analyses and monitors budget variances, prepares forecasts, investigates significant fluctuations over time and also reports within the company, which minimizes the risk of misstatements in financial reporting.

Information and communication

Medivir has information and communication pathways intended to promote the completeness and accuracy of financial reporting. The Board of Directors approves the group's annual report and financial statement, and assigns the CEO to issue quarterly reports pursuant to the Board's Rules of Procedure. All financial reports are transmitted to Nasdaq OMX Stockholm first. They are also distributed to all shareholders that have not declined the opportunity of receiving this information. External information is also communicated continuously via Medivir's website (www.medivir.se), where quarterly reports, financial statements, annual reports, press releases and news are uploaded in chronological order. Information from press and analysts' conferences is also uploaded to the website.

The Board receives regular financial reports regarding the group's position and progress of profits. Meetings are held within the company at management level, and at the level individual function managers and project managers consider appropriate. The intranet is a prime internal communication channel, where policies, guidelines and information is uploaded and informative meetings for all staff are held on an ongoing basis.

Monitoring

The Board of Directors considers all the group's quarterly reports, financial statements and annual reports before publication. The Board receives regular financial reports on the group's position and profits, and the group's financial situation is considered at every Board meeting.

The Board's monitoring of internal control of financial reporting is mainly conducted through the Audit Committee. Medivir's Auditor conducts its audit process pursuant to the audit plan and monitors parts of internal controls within the auspices of the statutory audit annually. After the audit is completed, observations are reported continuously back to the Audit Committee. The auditors also attend one Board meeting each year, where they report their observations on the audit for the year and operational routines. The practice on this occasion is to reserve time for special discussions where the CEO or other employees are not present.

The company has a simple legal and operational structure and formulated controlling and internal control systems. Against the above background, the Board of Directors has chosen not to operate a dedicated internal audit process. The Board and Audit Committee evaluate and monitor the issue of the potential creation of an internal audit function on a continuous basis.

Board of Directors

ANDERS VEDIN, born in 1942. Chairman of the Board. Board member since 2001 and a member of Medivir's Remuneration, R&D and Nomination Committees. Anders is an MD and adviser to the biotechnology and pharmaceutical industries. He is a Professor of the Management of Medical Technologies from Chalmers University of Technology, previously held senior executive positions in the Astra group and is a Board member of the Royal Swedish Academy of Engineering Sciences. Anders holds several directorships in other companies and is Chairman of Cellartis AB, Emilion AB and Recepticon A/S (Denmark), as well as a Board member of Cewatech AB and Santosolve A/S (Norway). Medivir shareholding: 1,600 class B.

Björn C Andersson, born in 1946. Board member since 2008 and a member of Medivir's Audit Committee. He is a Licentiate of Economics and former employee of Handelsbanken, where he was COO and Head of Handelsbanken Markets, then Head of Handelsbanken Asset Management. Björn is Chairman of Euroben Life & Pension, Nordben Life, NAXS Nordic Access Buyout Fund AB and a Board member of Bliwa Livförsäkring. Medivir shareholding: 0.

Lars-Göran Andrén, born in 1943, is also Chairman of Medivir's Remuneration Committee. He has been a member of Medivir's Board since 1998 and holds a B.Sc. (Chem. Eng.) from Chalmers University of Technology. Lars-Göran was President, CEO and Executive Chairman of Biacore International AB (publ.) in 1992–2002. He was also a Board member of Biacore International AB until September 2006.

Medivir shareholding: 1,200 class B.

Anna Malm Bernsten is also a member of Medivir's Audit Committee. She was born in 1961, and has been a member of Medivir's Board since 2006. Anna holds a B. Sc. (Eng.) and is Chief Marketing Officer of GE Healthcare Life Sciences, possessing broad experience of life sciences. She was previously employed by Medivir, and has been a self-employed leadership and business development consultant. Apart from senior executive experience at Pharmacia, Assa Abloy, Medivir and Baxter Medical, she was also CEO and President of Carmeda AB. Anna is a Board member of Fagerhult AB, DiaGenic ASA and Artimplant AB. Medivir shareholding: 0.

Magnus Falk is also Chairman of Medivir's Audit Committee. He was born in 1942 and elected to Medivir's Board in 2002. Magnus holds a B.Sc. (Econ.) and has a background with Nordbanken/Nordea, most recently as CEO of Nordea Bank Sverige AB. His previous Board positions include Chairmanship of Postgirot AB. Magnus is currently a Board member of Koncentra AB. Medivir shareholding: 3,400 class B.

Donna Janson is also Chairman of Medivir's R&D Committee and a member of the Remuneration Committee. Donna was born in 1954 and was elected to the Board in 2007. She possesses many years' experience of the US biotech industry, and is CEO and President of Novalar Pharmaceuticals Inc. of San Diego, US. Donna was previously CEO and President of Biora AB. Apart from being a Board member of Medivir, she is also a Board member of Axenic Dental Inc. Medivir shareholding: 0.

Ingemar Kihlström, born in 1952, has been a Board member since 2008 and is also a member of Medivir's R&D committee. Ingemar is an Associate Professor at the University of Uppsala, and is a self-employed consultant in the life sciences sector. He possesses broad experience of pharmaceuticals and business development, from the pharmaceutical industry and financial sector. Ingemar previously held senior positions with Pharmacia, Aros Securities and ABG Sundal Collier. He has several directorships in Scandinavia, including chairmanships of Acromed AB, Artimplant AB, Innate Pharmaceuticals AB, Prolight Diagnostics AB and RecoPharma AB and is Deputy Chairman of Diagenic ASA.

Medivir shareholding: 2,180 class B.

Ron Long was born in 1947 and was elected to Medivir's Board, its R&D and Audit Committees in 2007. Ron is Chairman of Procognia Israel, Executive Deputy Chairman of Sky Medical Technologies Ltd, Non-Executive Director of DxS Ltd. and Managing Director and owner of Scicona Ltd. He was formally CEO of Amersham Pharmacia AB, Deputy Chairman of Amersham Plc, Chairman of Kudos Pharmaceuticals Ltd., Deputy Chairman of The Automation Partnership Plc, Senior Independent Director of Asterand Plc and Non Executive Director of Gyros AB and Biacore AB. He also held a number of Divisional Director appointments in his earlier career with The Wellcome Foundation Ltd. Medivir shareholding: 0.

Göran Pettersson is also a member of Medivir's Remuneration Committee. He was born in 1945 and elected to Medivir's Board in 2008. Göran is a pharmacist and market economist (IHM) and possesses long-term experience of the pharmaceutical industry in Sweden and foreign countries. He has been a self-employed life sciences consultant since 2000, and previously held senior positions with the Astra group, KabiVitrum, Pharmacia/ PharmaciaUpJohn and Meda. Göran holds several directorships in other companies and is Chairman of Ipsat Therapies Oy, Lund University Bioscience AB, OxyPharma AB, Spectracure AB and Vivoxid Oy and a Board member of Pfizer Sweden's pension fund, Recipharm AB and Swedish Orphan International AB. Medivir shareholding: 0.

Bo Öberg, born in 1939, is one of Medivir's co-founders and has been a Board member since 1988. He is currently CEO of Medivir HIV Franchise AB and a member of Medivir's Nomination Committee. Bo holds a Ph.D., is a Professor and holds several directorships including Chairman of the Advisory Board Rapid Centre and a Board member of Microbial Antagonism against Fungi, a Member of the Advisory Board Centre for Infectious Medicine and a Board member of the Royal Society of Sciences in Uppsala. Medivir shareholding (family): 284,000 class A, 358,880 class B.

Auditors

PricewaterhouseCoopers AB

for 2008 to 2012. The Senior Auditor is Authorized Public Accountant CLAES DAHLÉN.

Board members of Medivir UK Ltd. BERTIL SAMUELSSON and BO ÖBERG.

Board members of Medivir HIV Franchise AB

LARS ADLERSSON and REIN PIIR.

Board members of Medivir Personal AB BO ÖBERG, CHRISTINA KASSBERG and REIN PIIR.

BÖRJE DARPÖ

BERTIL SAMUELSSON

PAUL WALLACE

REIN PIIR

LARS ADLERSSON

STEFAN MÅRTENSSON

TOM SCHLOSSMAN

CHRISTINA KASSBERG

Management

LARS ADLERSSON, born in 1964. CEO and President. Medivir employee since 2003. Lars holds a B.Sc. (Econ.) and was previously Marketing VP, Marketing Director and CEO of GlaxoWellcome (Sweden) and CEO of GSK (Austria).

Medivir shareholding: 3,200 class B. Stock options*: 2004–2009: 9,000, 2005–2010: 15,000, 2007–2012: 46,000

Börje Darpö, Vice President of Clinical Development, has held this position since 2007. He was born in 1952 and has a background as a cardiologist and internal medicine specialist. Börje possesses experience of executive positions within Clinical Pharmacology Pharmacia/Pfizer, Quintiles and Daiichi Medical Research, UK/USA. Medivir shareholding: 8,900 class B.

Christina Kassberg, born in 1968. Vice President of Business Control and Administration. Medivir employee since 2000. She is an economics graduate, and was previously Controller of Medivir AB, Accounting Manager at Skandia Link Multifond and an Auditor at Öhrlings PricewaterhouseCoopers. Medivir shareholding (family): 8,406 class B. Stock options*: 2004–2009: 2,000, 2005–2010: 2,000, 2007–2012: 20,000

Stefan Mårtensson, born in 1959. Marketing Director. Joined Medivir in 2007. Stefan holds a B.Sc. (Econ.), and his previous positions include Sales & Marketing Director of GlaxoWellcome/GSK and Nordic Business Area Manager and Marketing VP for Novartis. Medivir shareholding: 0.

Rein Piir, born in 1958. Chief Financial Officer and Vice President of Investor Relations. Medivir employee since 2000. Rein holds a B.Sc. (Econ.) and previously held senior positions in Healthcare & Research at D.Carnegie AB and Research & Strategy at SPP. Medivir shareholding: 0. Stock options*: 2004–2009: 4,800, 2005–2010: 7,000, 2007–2012: 20,000

Bertil Samuelsson, born in 1950. Vice President of Discovery Research. Medivir employee since 1999. He is a Ph.D. and Professor, and was previously Head of Medicinal Chemistry at AstraZeneca, Mölndal, Sweden. Medivir shareholding (family): 50,460 class B. Stock options*: 2004–2009: 4,800,

2005–2010: 7,500, 2007–2012: 22,000

Tom Schlossman, born in 1964. General Counsel. Tom has been a Medivir employee since 2004, was previously legal counsel and company lawyer at Astra and had assignments for several venture capital companies including HealthCap. Medivir shareholding: 2,200 class B. Stock options*: 2004–2009: 6,800, 2005–2010: 7,000, 2007–2012: 20,000

Paul Wallace, born in 1962. Vice President of Business Development. Paul holds a Ph.D. from the University of Cambridge. Paul has been a Medivir employee since 2000 and was previously Business Development Manager at Peptide Therapeutics plc and Director of Research at Eclagen, both in the UK. Medivir shareholding: 0. Stock options*: 2004–2009: 4,800, 2005–2010: 7,500, 2007–2012: 22,000

* For the terms governing the rights to acquire shares, see 'The Medivir Share' on page 14.

Six-year summary

Medivir Group 1), sek (000)	2008	2007	2006	2005	2004	2003
INCOME STATEMENT
Net sales 2)	97,175	249,623	126,048	102,646	82,602	149,033
Change in work in progress and finished goods	0	0	0	0	0	2,330
Other turnover	4,800	3,840	3,287	2,211	2,505	1,252
Operating costs	-215,708	-290,783	-330,931	-220,996	-211,442	-264,913
Operating profit	-113,733	-37,320	-201,596	-116,139	-126,335	-112,298
Profit from financial investments 3)	13,711	8,489	1,140	8,335	12,330	69,575
Profit after financial items 3)	-100,023	-28,832	-200,455	-107,805	-114,005	-42,723
Full tax	820	-487	4,876	3,229	2,490	2,409
Profit after full tax	-99,203	-29,318	-195,580	-104,576	-111,515	-40,314
BALANCE SHEET	31 Dec. '08	31 Dec. '07	31 Dec. '06	31 Dec. '05	31 Dec. '04	31 Dec. '03
Intangible fixed assets	482	936	1,390	9,052	10,927	10,712
Tangible fixed assets	35,764	35,878	33,361	81,708	80,732	40,154
Financial fixed assets	18,793	18,793	0	47	47	3,130
Inventories and current receivables	31,990	73,928	56,942	63,304	24,323	14,518
Liquid assets and short-term investments 4)	284,486	329,330	195,066	301,875	440,569	239,174
Shareholders' equity	287,606	383,979	186,306	377,964	475,694	277,847
Deferred tax liability/provisions	0	0	0	2,039	2,519	0
Long-term liabilities, interest bearing	0	0	0	11,194	21,200	3,352
Current liabilities	83,908	74,887	100,452	66,827	59,702	26,489
Total assets	371,515	458,866	286,758	455,985	556,597	307,688
Capital employed	287,606	383,979	193,181	398,325	506,061	281,199

1) International Financial Reporting Standards (IFRS) apply for the financial years 2004–2008. Amounts for 2003 are presented pursuant to the accounting principles Medivir applied for the financial year 2004. For a review of the accounting principles applied for the years 2002–2003, refer to the Annual Report 2004. 2) Net sales in 2007 mainly comprised three milestone payments totaling sek 182.3 m for HCV protease inhibitors from Tibotec Pharmaceuticals Ltd.

3) Gains from the divestment of the CCS group were included in financial investments in 2003.

4) The increase in liquid assets in 2007 and 2004 are due to factors including the new share issue effected by Medivir AB in the first quarter of 2007 and the second quarter of 2004.

Key figures

Medivir group1)	2008	2007	2006	2005	2004	2003
Operating margin, %	-117.0	-15.0	-159.9	-113.1	-152.9	-75.4
Profit margin, %	-102.9	-11.6	-159.0	-105.0	-138.0	-28.7
Debt gearing, multiple	0.0	0.00	0.04	0.05	0.06	0.0
Return on:
equity, %	-29.5	-10.3	-69.3	-24.5	-29.7	-13.5
capital employed, %	-29.6	-9.9	-66.6	-23.7	-28.9	-13.9
total capital, %	-23.9	-7.6	-52.8	-21.0	-26.2	-12.4
Equity ratio, %	77.4	83.7	65.0	82.9	85.5	90.3
Average number of shares, thousand	20,844	16,873	12,903	12,903	10,746	8,590
Number of shares, closing balance, thousand	20,844	20,844	12,903	12,903	12,903	8,590
Earnings per share, before and after dilution, sek 2)	-4.76	-1.74	-15.16	-8.10	-10.38	-4.69
Shareholders' equity per share,
before and after dilution, sek 2)	13.80	18.42	14.44	29.29	36.87	32.35
Net worth per share, before and after dilution, sek 2)	13.80	18.42	14.44	29.29	36.87	32.96
Cash flow per share after investments, sek	-2.14	-4.91	-7.39	-2.17	-22.12	11.20
Cash flow per share after financing activity, sek	-2.14	7.95	-8.28	-10.75	18.74	11.10
Dividend per share, sek	0	0	0	0	0	0
Number of outstanding warrants	970,000	970,000	676,995	886,995	646,895	449,900

Earnings per share, forecast for 2009, please refer to the Future progress section of the Director's Report on page 41.

1) International Financial Reporting Standards (IFRS) apply for the financial years 2004–2008. Amounts for 2003 are presented pursuant to the accounting principles Medivir applied for the financial year 2004. For a review of the accounting principles applied for the year 2002–2003, refer to the Annual Report 2004.

2) Pursuant to IAS 33, potential ordinary shares do not give rise to any dilution effects when their conversion to ordinary shares implies an improvement to earnings per share, as would apply coincident with the conversion of Medivir's outstanding options.

Definitions

Average number of shares

The unweighted average number of shares during the year.

Capital employed

Total assets less non interestbearing liabilities including deferred tax liabilities.

Cash flow per share

Cash flow divided by the average number of shares.

Debt gearing

Interest-bearing liabilities divided by shareholders' equity.

Earnings per share

Profit after financial items less full tax divided by the average number of shares.

Equity ratio

Shareholders' equity in relation to total assets.

Full tax

Tax on profit after financial items and deferred tax on change in untaxed reserves.

Net worth per share

Shareholders' equity plus, until 31 Dec 2004, hidden assets in listed equities less deferred tax, i.e. assets not included in ordinary operations, divided by the number of shares at the end of the period. Net worth does not include the value of research projects, patents, real estate, CCS' operations (divested 30 June 2003), etc.

Operating margin

Operating profit as a percentage of net sales.

Profit margin

Profit after financial items as a percentage of net sales.

Return on equity

Profit after financial items less full tax as a percentage of average shareholders' equity.

Return on capital employed

Profit after financial items plus financial costs as a percentage of average capital employed.

Return on total capital

Profit net of financial items plus financial costs as a percentage of average total assets.

Shareholders' equity

Taxed shareholders' equity plus 72% of untaxed reserves.

Shareholders' equity per share

Shareholders' equity divided by the number of shares at the end of the period.

Glossary

Alzheimer's disease

A form of dementia named after the German neuropathologist and psychiatrist Alois Alzheimer.

Antiviral

Inhibition of virus growth.

Bisphosphonate

A class of drugs that are used in the treatment of osteoporosis. Bisphosphonates inhibit bone removal (resorption) by osteoclasts.

CD (candidate drug)

Compound designated to proceed into clinical studies. Medivir uses the same criteria as the big pharmaceutical companies.

Clinical studies

Studies of experimental drug on humans.

CMV-Cytomegalovirus

A herpesvirus giving severe infections in persons with deficient immune defence.

Compound library

A collection of chemical compounds which can be screened for inhibition of different enzymes.

COPD

Chronic obstructive pulmonary disease.

CRO (Clinical Research Organization)

A company that conducts clinical studies on a contract basis.

Enzyme

A protein molecule, typically a very large one, that catalyses chemical reactions in living cells. These reactions occur rapidly and with great precision without the enzyme itself being consumed. Polymerases and proteases are enzymes.

Follow-on compound

A drug substance having improved therapeutic properties compared to it's predecessor.

Hepatitis B

Jaundice caused by human Hepatitis B virus (HBV).

Hepatitis C

Jaundice caused by human Hepatitis C virus (HCV).

HIV (Human immunodeficiency virus)

Causes deficiencies in the immune system and gives rise to AIDS.

IAS (International

Accounting Standards) See 'IFRS'.

IFRS (International Financial Reporting Standards)

New accounting rules adopted by the EU. Intended to facilitate comparisons between Annual Reports in different European countries. Listed companies must comply with IFRS since 1 January 2005.

Interferon

Human protein with antiviral effect.

Labial herpes/cold sores

Caused by herpes simplex virus type 1 (HSV-1) and transmitted via saliva/oral contact. There are two types of herpes simplex virus, type 1 and 2 (HSV-2). HSV-2 is normally sexually transmitted, but it can also cause labial herpes. The infection becomes latent and the virus can be reactivated.

Milestone payments

Payments upon attaining contracted achievements.

Mononucleosis

A human disease caused by Epstein-Barr virus, from the family of herpes virus. The disease is transmitted via saliva, sexually and via blood transfusions.

MS (Multiple Sclerosis)

Disease of the central nervous system.

Nucleoside analogue

A structural modification of the nucleosides used as building blocks for genes.

Option

Right to buy shares at some time in the future.

Osteoarthritis

Chronic degenerative arthritic disease.

Osteoporosis

Brittle bones.

Pharmacokinetics

The study of a drug's metabolism in the human body (absorption, distribution, conversion and secretion).

Phase I, II and III clinical trials

For a detailed description of the various phases, please refer to page 18.

PHN

See 'post-herpetic neuralgia'.

Polymerase

A type of enzyme that replicates genes, for example, of a virus.

Post-herpetic neuralgia

Pain coincident with shingles that continues after lesions have healed. Due to virally induced damage to the nerves.

Preclinical research

Research into a pharmaceutical compound prior to studies on humans (clinical studies).

Pre-emption

If a holder of class A shares wishes to sell these shares, they must be offered to other holders of class A shares first.

Proof-of-principle

Preclinical or early stage clinical drug development studies on a compound to examine it's potential to modulate a physiologically relevant mechanism and to detect and monitor a signal or biomarker for it's pharmacodynamic effect.

Protease

An enzyme able to break proteins down into smaller units.

Rheumatoid arthritis

Chronic, painful and disabling collagen disease affecting joints.

Resistance

Reduced efficacy of a compound that normally suppresses a virus or other microorganism.

Ribavirin

A nucleoside analogue which inhibits virus replication through cellular interaction.

Royalty

Payment, often calculated as a percentage of product (drug) sales.

Share issue

Provision of new shares to raise capital.

Shingles

Painful disease with vesicles on the skin caused by a herpes virus, the varicella- zoster virus (VZV). This virus remains latent within the body after chickenpox infection, and may re-activate many years later, causing shingles.

Wild-type virus

A virus which has not developed resistance to any drug.

Report of the Directors 38
Income Statement 43
Balance Sheet 44
Change in Shareholders' Equity 46
Cash Flow Statement	47
Accounting principles 48
Notes	52
Report of the Auditors 64

Report of the Directors

The Board of Directors and Chief Executive Officer of Medivir AB (publ), corporate identity number 556238-4361, with registered office in Huddinge, Sweden, hereby submit the Annual Report for the operations of the Group and Parent Company for the financial year 2008. The Group comprises Parent Company Medivir AB (publ) and wholly owned subsidiaries Medivir UK Ltd., Medivir HIV Franchise AB and Medivir Personal AB. Medivir has been quoted on Nasdaq OMX Stockholm since 1996. For more information, go to www.medivir.se.

Operations

Medivir develops pharmaceuticals against major, widespread diseases, with its biggest commitment currently in the hepatitis C segment. The company manages a number of partnerships with established pharmaceuticals companies and smaller biotechnology enterprises on clinical and preclinical projects. Medivir's objective is to become a profitable pharmaceutical company with in-house sales resources on the Nordic market.

Significant events in 2008

In 2008, Medivir signed its biggest agreement in value terms so far, a new partnering agreement with Tibotec (Johnson & Johnson Group) to develop hepatitis C pharmaceuticals. This is the third currently active partnering agreement with Tibotec and the second in the hepatitis C indication. Medivir is developing hepatitis C pharmaceuticals through two differing approaches, protease and polymerase inhibitors, and is thus in the front line globally in this segment.

In autumn 2008, Medivir filed NDAs in the US and EU for Lipsovir®, a pharmaceutical it has developed in-house against labial herpes. Decisions from the regulatory authorities could be expected is autumn 2009.

In the year, Medivir also entered its first collaboration agreement with an established pharmaceutical company, GlaxoSmithKline in Sweden, to sell selected GSK products. Its ambition is to enter further, similar agreements.

Medivir upscaled resources on an Alzheimer's disease project (BACE) in the year, due to advances on this project. Medivir will be seeking an early collaboration with a large pharmaceutical company for onward development.

Project portfolio

Medivir's project portfolio consists of 16 projects, of which Lipsovir® is heading towards market registration and six projects are in clinical development phases – four in phase II and two in phase I. Four projects are in the regulated preclinical development phase and five are in early preclinical phases. Nine of Medivir's projects are being run in collaboration with partners.

Medivir's research and development projects are today focused on protease inhibitors. Proteases are a type of enzyme involved in many diseases. Some of the indications where Medivir has knowledge of protease inhibition are hepatitis C, HIV, osteoporosis, osteoarthritis, skeletal metastases, Alzheimer's disease, COPD (chronic obstructive pulmonary disease) and hypertension.

Medivir previously worked actively developing CDs against two drug targets: polymerases and proteases. Developing pharmaceuticals based on polymerase inhibition is mainly suitable for the HIV, hepatitis C and cancer indications. A few years ago, Medivir decided to shelve its active work in HIV and outlicensed these projects through Medivir HIV Franchise AB. Apart from MIV-606 (against shingles et al.), these projects are suited to various types of niche strategy and are currently being run by several partners.

Hepatitis C is the only therapy area in polymerase inhibitor development that Medivir is still addressing actively, and Chiron, Roche, and now Tibotec, have all been partners in the segment. However, its knowledge of polymerases has generated an extensive library of nucleoside analogues for Medivir, which are relevant to various potential new cancer treatments.

Patents and patent filings

Broad patent protection is the foundation of all new pharmaceuticals and their commercial prospects. Patent activities are a fundamental and integrated part of Medivir's early preclinical activities. At the close of 2008, Medivir had 89 patent families, including those filed by collaboration partners and that may generate royalties for Medivir. A patent family is the collection of national or regional patents and patent applications that cover a single invention or group of related inventions. In 20 of 89 of these families, the official examination process has progressed to the point that at least one US or EU patent has been granted. Including these approved US/EU patents, Medivir had 374 granted patents in force at year-end.

Summarized progress by project

The projects that Medivir is now actively running, either in-house or via partners, are reviewed below. The projects Medivir is concentrating on in-house are mainly protease-based projects managed and administered by Medivir AB. For more information, see the project portfolio section on page 19.

Lipsovir® is a project against labial herpes that Medivir is running in-house. Results from the phase III program were presented in 2008, which demonstrated for the first time that the incidence of cold sores can be prevented through early treatment onset. The trials also showed that Lipsovir® reduced healing times for the subjects that developed cold sores by one and a half days compared to placebo. Overall, this is a clinically significant improvement. After summarizing the preclinical and clinical trials, in October, Medivir filed an NDA with the US and European regulatory authorities. During the year, work in-house also continued on preparing publication of the trials and ensuring that sufficient volumes of the product are ready for sale once Lipsovir® is approved. The objective is to have several partners to conduct future global sales.

TMC435 – hepatitis C – is a protease inhibitor in clinical phase II administered as an adjuvant to existing SoC with interferon and ribavirin. SoC alone cures some 40% of patients, and by adding a protease inhibitor, the share of cured patients is expected to increase.

Phase I and phase IIa data show that the protease inhibitor in com bination with SoC reduces virus levels very potently despite a single daily tablet dose. Based on activity data from the two first and lowest dose groups in the phase IIa trial, Medivir's partner Tibotec decided to start preparations for phase IIb trials in the late-autumn. These phase IIb trials will involve more patients and different dose groups in longer-term trials. The trials are scheduled to start in spring 2009.

HCV POL – polymerase inhibitor against hepatitis C. Medivir signed a research agreement with Tibotec in May 2008, which involves screening Medivir's compound library to identify new CDs. The agreement is the largest of its kind, worth eur 137 m in potential milestone payments plus research support for Medivir. Medivir received a one-off eur 5 m upfront payment on signing. In December, Medivir and Tibotec designated a CD on this project, triggering a eur 2.6 m milestone payment. Tibotec will now be responsible for clinical development and potential marketing on all markets apart from the Nordic region, where Medivir is retaining the rights. Medivir will also receive royalties on Tibotec's future sales.

MIV-701 and cathepsin K, follow-up compound – protease inhibitor for treating bone degradation diseases. Results from phase I trials achieved proof of principle in the cathepsin K segment. Thus the thesis that bone degradation rates can be reduced by inhibiting cathepsin K is proven. A broad base of scientific data indicates that inhibition of cathepsin K may improve the situation in several therapy areas. Medivir designated a clinical follow-up compound in February 2009 (MIV-710), and its objective is then to secure a research collaboration for the whole cathepsin K program.

HIV-PI – protease inhibitor in late optimization phase that has demonstrated potent antiviral effect against wild-type and multiresistant virus. In early 2008, Tibotec extended its collaboration agreement with Medivir for another year. HIV-PI has a commercially attractive specification of requirements that has been hard to satisfy so far. The project has identified compounds that are highly potent and active against those mutants that are resistant to current pharmaceuticals. The collaboration ran until December 2008, when Tibotec took over the project to run it in-house with the aim of designating a CD.

BACE – protease inhibitor in optimization that inhibits beta-secretase, an enzyme involved in the formation of plaques in the brain, a cause of Alzheimer's disease. Research results have demonstrated that plaque formation can be prevented by blocking BACE. This research segment is highly complex, and most large pharmaceuticals corporations are active there. BACE is a project in optimization where Medivir's research made significant advances in late-2008. Medivir's objective is to secure a research collaboration on BACE while the project remains in its preclinical research phase, during 2009.

Valomaciclovir (MIV-606) – a polymerase inhibitor in clinical phase IIb against shingles caused by varicella zostervirus (VZV) and in phase IIa against glandular fever caused by Epstein-Barr virus (EBV). These projects are being run by US company Epiphany, which is currently conducting phase II trials. Data from the phase IIb trial is scheduled to be complete and reported in summer 2009.

Turnover and costs

Group

Net sales were sek 97.2 (249.6) m for the year. In May, Medivir signed an agreement with Tibotec Pharmaceuticals Ltd. regarding hepatitis C in the polymerase segment, triggering a one-off payment of sek 46.2 m (eur 5 m). This payment was allocated over the assessed agreement term, and sek 30.8 m of revenue was recognized. In December, the research collaboration on hepatitis C triggered a milestone payment of sek 32.0 m (EU 2.6 m). Turnover in the year also included remuneration of sek 29.3 m for research collaboration on HIV protease inhibitors and hepatitis C from Tibotec Pharmaceuticals Ltd.

In the previous year, net sales was sek 249.6 m, largely comprising three milestone payments of sek 182.3 m (eur 19.5 m) for the protease inhibitor TMC435 against hepatitis C from Tibotec Pharmaceuticals Ltd. Turnover also included sek 34.1 m of remuneration for research collaboration on hepatitis C and HIV protease inhibitors from Tibotec Pharmaceuticals Ltd. and an allocated one-off payment of sek 9.2 m on HIV protease inhibitors. Turnover also included remuneration of sek 17.7 m on the MIV-606 shingles project from Epiphany Biosciences.

Operating costs were sek -215.7 (-290.8) m, comprising external costs of sek -101.6 (-168.1) m, personnel costs of sek -103.8 (-99.0) m, depreciation and amortization of sek -10.3 (-10.8) m and impairment losses of sek -0.0 (-12.9) m. The reduced operating costs mainly related to lower costs for the Lipsovir® and MIV-701 projects, because clinical trials were conducted in the previous year. Impairment losses in the previous year were on the balance sheet item 'non-current assets held for sale' of Medivir UK.

The operating loss was sek -113.7 (-37.3) m. The profit reduction is mainly a consequence of lower operating income. Profit from financial investments was sek 13.7 (8.5) m. The increase in profits from financial investments is due mainly to rising interest rates. The net loss for the year was sek -99.2 (-29.3) m.

Shareholders' equity, share data and stock options

The share capital at year-end was sek 104.2 (104.2) m and shareholders' equity was sek 287.6 (384.0) m. The number of shares was 20,843,547 (20,843,547), of which 660,000 (660,000) were class A and 20,183,547 (20,183,547) class B shares with a quotient value of sek 5. There were 970,000 outstanding options at the end of the year, corresponding to 1,102,300 class B shares. No options were converted or expired in the year. The number of outstanding options could increase shareholders' equity by sek 82.9 m and upon full conversion, the total number of shares could amount to 21,945,847.

The equity ratio was 77.4 (83.7)%. Earnings per share, based on a weighted average number of outstanding shares, was sek -4.76 (-1.74) and shareholders' equity per share was sek 13.80 (18.42).

For a review of the Medivir share, and warrant and stock option plans, more information is provided under "the Medivir share" on page 11. For a review of Medivir's financial risks and the principles applied for financial risk control, more information is provided in Note 8 "financial risks", on pages 55–58. For a review of the progress of operations in the past six years, more information is provided in Medivir's six-year summary on page 34.

Cash flow

Cash flow from operating activities was sek -34.9 (-70.5) m, a change of sek 35.6 m. In year-on-year terms, cash flow from operating activities was positively affected by changes in working capital, mainly from reduced current receivables.

Cash flow from financing activity was sek 0.0 (217.3) m. In the first quarter of 2007, a new share issue raised sek 215.0 m net of issue costs. The consolidated equity ratio at year-end was 77.4 (83.7)%. Liquid assets including short-term investments with a maximum maturity of three months were sek 284.5 (329.3) m at year-end.

Investments, depreciation, amortization and impairment losses

Gross investments in tangible fixed assets were sek 9.9 (12.9) m in the year, in research equipment and existing research premises. Sales of fixed assets were sek 0.4 (0.1) m. Depreciation and amortization in the year reduced profit by sek -10.3 (-10.8) m and impairment losses reduced it by sek 0.0 (-12.9) m. In the previous year, impairment losses related to the 'non-current assets held for sale' balance sheet item of Medivir UK.

Medivir AB

The Group's operations are mainly conducted in the Parent Company, and consist of research operations and administrative functions. Parent company net sales for the year were sek 104.0 (254.3) m. Operating costs were sek -214.5 (-273.8) m, divided between external costs of sek -100.4 (-168.4) m, personnel costs of sek -103.8 (-94.7) m and depreciation and amortization of sek -10.3 (-10.8) m. The operating loss was sek -107.7 (-17.1) m and the loss after financial items was sek -98.8 (-27.2) m. The loss after financial items included a cost for covering the deficits of Medivir UK Ltd. of sek -4.8 (-18.9) m. The net loss for the year was sek -98.8 (-18.9) m. Purchases from Medivir UK Ltd. were sek 0.0 (9.1) m. Sales to Medivir (UK) Ltd. amounted to sek 4.7 (2.4) m. Purchases from Medivir HIV Franchise AB were sek 2.1 (2.6) m. Sales to Medivir HIV Franchise AB amounted to sek 2.1 (2.6) m.

Gross investments in tangible fixed assets were sek 9.9 (16.9) m. Liquid assets including short-term investments with a maximum maturity of three months amounted to sek 283.2 (326.0) m. For comments on the deficit from operations, please refer to the section on consolidated turnover and costs.

Human resources

Medivir's staff possess broad-based knowledge and experience of conducting projects from really early discovery phases in preclinical research, through extensive clinical development and right the way through a registration process. The knowledge base represented by Medivir's employees is highly competitive. Over 50% of its researchers hold PhDs, and three of them are professors. Medivir employees have average professional experience in the pharmaceutical sector of approximately 14 years. Medivir's ethnic diversity is, as it has always been, substantial. Medivir's staff come from some ten different nations, which has major benefits in contexts including the company's cross-border collaborations. Equality initiatives are a natural part of day-to-day business. The company offers keep-fit activities, and funds regular health-checks. For more information on Medivir's employees, refer to "Medivir's professionals" on page 6.

The number of employees of the Group as of 31 December 2008 was 103 (97) and the average number of employees in the year was 100 (97). More information on the average number of employees, salary, other benefits and social security costs, and the latest adopted guidelines governing remuneration to the CEO and senior executives is in Note 3 on pages 52–54.

Environment

Medivir conducts systematic working environment activities in order to continually improve safety and the working environment. Safety procedures are in place and Medivir's staff are subject to ongoing training on safety issues. The biggest health risks arise when handling chemicals. Conducting risk assessments before laboratory experimentation and handling all chemicals correctly minimizes the health risks. Protective equipment and clothing are used. All work with chemicals is conducted in ventilated space. All fume cupboards and clean benches are equipped with alarms and are regularly checked. No incidents were reported in 2008.

Medivir has reported its usage of class II biological substances to the Swedish Work Environment Authority inspectorate and holds permits from the Swedish Work Environment Authority to use class III and III* (normally not airborne infection) biological substances (reference AFS 1997:12). Additionally, Medivir has permits from the Municipality of Huddinge to process inflammable solvents and research approval from the Swedish Ministry of Agriculture. The Swedish Work Environment Authority previously inspected the operation and laboratories. Medivir pursues a far-reaching program for sorting waste at source and for the processing and destruction of hazardous waste. Medivir constantly strives to minimize the usage of environmentally hazardous materials and is not party to any environmental disputes.

IT security

IT security is a high priority for Medivir because it is important to safeguard the company's internal information. Medivir's IT security policy includes guidelines for its resources, responsibilities and authorization, the administration of rights, virus protection, traceability, classifying information, plus operational and communications security.

All data is replicated and processed pursuant to well-defined security and back-up routines. External communication is safeguarded with encrypted data traffic. PCs and software are secured by applying local hardware encryption. Medivir also endeavors to enhance staff security-consciousness when handling hardware and software continually.

The focus in the year was on activities including updating Medivir's IT policy and disaster plan to attain a still-higher security level.

Remuneration to senior executives

For 2009, the Board of Directors is proposing the following guidelines for remuneration to senior executives. Senior executives mean the CEO and other members of the management team. Medivir will offer overall compensation on market terms that enables skilled senior executives to be hired and retained. Remuneration to senior executives will consist of basic pay, potential performance-related pay, stock options pursuant to the 2007/2012 stock option plan resolved by the AGM, pension and other benefits. Basic pay will consider individual areas of responsibility and experience. Performancerelated pay will be a maximum of 50% of basic pay. The CEO's pension scheme will conform to the ITP (supplementary pensions for salaried employees) scheme, and approximately 15% of basic pay excluding bonus and benefits. The pension plans of other senior executives will conform to the ITP scheme, and the relevant individual plan in the UK corresponds to legislated contributions, plus 6% of basic pay excluding bonus and benefits. The CEO will be subject to a mutual notice period of six months, and coincident with termination initiated by the company, in addition to dismissal pay, the CEO is entitled to severance pay of 18 months' salary paid monthly with a liability for deduction against other income. Other senior executives will be subject to a mutual notice period of six months. In addition to what is stated above, initially, severance pay or similar remuneration will not be payable, but subject to a maximum of 100% of basic pay, may be subject to agreement in instances of changes to ownership

structure. The Board of Directors is entitled to diverge from the above guidelines if the Board considers that there are special circumstances in an individual case that justify this. For more detail on remuneration, see Note 3 on pages 52–54.

Events after the end of the financial year

New CEO and President of Medivir

In January 2009, Medivir's Board of Directors appointed Ron Long as CEO and President of Medivir AB, effective 1 February 2009. Mr. Long was born in 1947 and was elected to Medivir's Board of Directors, R&D and Audit Committees in 2007. He has extensive and long-term experience of the pharmaceuticals and life science industries. Mr. Long is employed on a consultancy basis. His consulting agreement stipulates a mutual notice period of three months until 1 July 2009, followed by a mutual notice period of one month, a shorter notice period than pursuant to the remuneration guidelines resolved by the AGM 2008. Neither severance pay nor pension provisions are payable pursuant to this agreement.

Medivir designates MIV-710 as a CD against osteoporosis and osteoarthritis

Selective inhibitors of Cathepsin K for treating osteoporosis and osteoarthritis are being developed in Medivir's research project. MIV-710, a highly active and selective low-molecular inhibitor, was designated as a CD in February 2009.

Medivir sharpens strategic focus and improves financial staying power

Medivir's employees have been informed that the company will be implementing cost savings in 2009, which may lead to staff downsizing. Consultations with the relevant unions will begin in March 2009.

Future progress

The ability to develop new candidate drugs, enter into partnerships for its projects and to bring its development projects successfully to market launch and sale are crucial to Medivir's future. The progress of existing partnerships, and the addition of new partnerships, will exert a significant influence on Medivir's revenue and cash balance. However, it is not possible to specify the exact timing of revenue flows. With the challenging business climate that will feature in 2009, in February, we embarked on a process to reduce our cost base. Our ambition is to cut costs to an annual level of some sek 150 m. This will involve staff downsizing, reduced external costs and reprioritizing some projects. We expect to see the full savings effect in early-2010. We will continue to take the greatest care in prioritizing new business opportunities for our projects and managing our existing partnerships.

In spring 2008, Medivir signed its first collaboration agreement with GlaxoSmithKline, involving Medivir taking on marketing responsibility for a portfolio of GSK products. Medivir is continuously examining the possibility of tying in other products so that it can fill its portfolio with more pharmaceuticals.

For 2009, Medivir anticipates that the designated CD in the HCV polymerase project may proceed towards phase I trials. Medivir considers that on TMC 435, a phase IIb trial will start in spring 2009, and on Lipsovir®, Medivir's dialogue with the authorities regarding registration will conclude. Medivir wants to make it easy for the public to get access to Lipsovir®, and hopes that it will be an OTC product on as many markets as possible. On the cathepsin K project, including MIV-710 and MIV-701, which could become a new therapy principle in bone disorders, Medivir's objective is to secure a collaboration agreement for the complete program. Medivir will be concentrating a sizeable share of its research resources on the Alzheimer's project BACE, a protease project in preclinical optimization. This segment is attracting major interest from large pharmaceutical corporations, and the company is receptive to entering a new, early research partnership.

Risks and uncertainty factors

Developing a new pharmaceutical to approved registration and launch is a risky and capital intensive process. Medivir's business model is characterized by high risk and the majority of projects never reach market registration. Recent progress of the global economy has generally increased uncertainty, which in the longer term, may affect Medivir's access to funding.

There are two types of risk to manage in operations, operational, i.e. project specific, and financial. In recent years, Medivir has taken a goal-oriented and strategic approach to create the best possible prospects of running projects quickly and with balanced risks, but despite continued work on this, there are still factors the company cannot influence. The demand for Medivir's project portfolio is subject to factors such as competitive conditions in the surrounding world.

Medivir has a number of projects in or near clinical phases; one of the company's strengths is rather than focusing on specific therapy areas, the company has chosen to concentrate on a single approach to a variety of diseases. Medivir's knowledge and capacity in preclinical research and clinical development means it can conduct several projects simultaneously in different development phases in several indications. This enables Medivir to diversify and reduce risks, both operational and financial.

Medivir has several partnership agreements with established pharmaceutical companies and smaller biotechnology enterprises. By entering partnerships when projects are in preclinical research, projects gain the human and financial resources necessary to reach clinical development quickly, while Medivir receives research support for the staff on projects, which also strengthens Medivir financially.

For a detailed review of financial risks such as currency risk, interest risk, credit risk and liquidity risk, please refer to Note 8 on pages 55–58. A detailed review of operational risks is provided under 'managing risks and creating value' on pages 8–9.

Board activities

The Board of Directors' overall task is to manage the company's affairs as well as possible on behalf of the shareholders. The Board possesses substantial skills in pharmaceutical research, finance and strategy.

The Board judges the Group's financial position on an ongoing basis and appraises its executive management. The Board decides on matters including the Group's strategic orientation and organizational resources, and on significant investments and commitments. The Board of Directors has three internal preparatory committees: the Remuneration Committee, the Audit Committee and the R&D Committee. For a more detailed review of the Board's and Committees' work, please refer to the Corporate Governance Report on page 23. Remuneration to the Board of Directors is reviewed in Note 3 on pages 52–54.

Proposed appropriation of losses

The Board and the Chief Executive Officer propose that the accumulated deficit, sek -644,617,170 be carried forward.

Dividends

The Board of Directors proposes that no dividends are paid for 2008.

Income Statement

			Medivir Group		Medivir AB
sek 000	Note	2008	2007	2008	2007
Turnover, etc.
Net sales		97,175	249,623	103,952	254,319
Other turnover		4,800	3,840	2,838	2,422
Total	1	101,975	253,463	106,790	256,742
Operating costs
Other external costs	1,2,20	-101,594	-168,112	-100,408	-168,375
Personnel costs	3	-103,791	-98,995	-103,796	-94,710
Depreciation and amortization	4	-10,323	-10,753	-10,323	-10,753
Write-downs	5	–	-12,923	–	–
Total operating costs	6	-215,708	-290,783	-214,528	-273,838
Operating profit/loss		-113,733	-37,320	-107,738	-17,096
Profit/loss from financial investments
Profit/loss from participations in group companies	7	–	–	-4,800	-18,840
Other interest income, etc.	8,9	14,327	10,325	14,291	10,194
Interest costs, etc.	8,10	-616	-1,836	-586	-1,828
Total profit/loss from financial		13,711	8,489	8,905	-10,114
Profit/loss after financial items		-100,023	-28,832	-98,834	-27,210
Tax on profit/loss for the year	11	820	-487	–	–
Net profit/loss		-99,203	-29,318	-98,834	-27,210
Earnings per share before and after dilution	12	-4,76	-1,74
Average number of shares at year-end, 000		20,844	16,873
Number of shares at year-end, 000		20,844	20,844
Proposed dividend per share, sek		0	0

– = not applicable

Balance Sheet

2008 2007 2008 2007 sek 000 Note 31 Dec. 31 Dec. 31 Dec. 31 Dec. ASSETS Fixed Assets Intangible fixed assets Other intangible assets 13 482 936 482 936 Total intangible fixed assets 482 936 482 936 Tangible fixed assets Buildings and land 14 2,349 2,561 2,349 2,561 Equipment, tools, fixtures and fittings 14 33,415 33,317 33,415 33,317 Total tangible fixed assets 35,764 35,878 35,764 35,878 Financial fixed assets Participations in group companies 15 – – 200 200 Receivables, group companies – – 2 10 Financial assets held for sale 16 18,793 18,793 18,793 18,793 Total financial fixed assets 18,793 18,793 18,995 19,003 Total fixed assets 55,038 55,607 55,240 55,817 Current receivables Current receivables Customer receivables 11,877 64,685 9,897 61,922 Other receivables 11,167 1,052 11,167 1,052 Prepaid costs and accrued income 17 8,946 8,191 7,590 6,589 Total current receivables 31,990 73,928 28,653 69,563 Short-term investments Other short-term investments 18 227,842 311,501 227,842 311,501 Cash and bank balances 18 56,644 17,829 55,429 14,463 Total current assets 316,476 403,259 311,924 395,527 TOTAL ASSETS 371,515 458,866 367,165 451,344 – = not applicable		Medivir Group	Medivir AB

	Medivir Group		Medivir AB
sek 000 Note	2008 31 Dec.	2007 31 Dec.	2008 31 Dec.	2007 31 Dec.
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' equity, Medivir group
Share capital	104,218	104,218	–	–
Other paid-up capital	847,030	844,810	–	–
Exchange rate differences	4,335	3,724	–	–
Accumulated deficit	-667,976	-568,773	–	–
Total shareholders' equity, Medivir group	287,606	383,979
Shareholders' equity, Medivir AB
Restricted equity
Share capital	–	–	104,218	104,218
Statutory reserve	–	–	827,971	827,971
Total restricted equity			932,189	932,189
Accumulated deficit
Share premium reserve	–	–	189,939	187,717
Accumulated deficit	–	–	-735,722	-708,512
Net profit/loss	–	–	-98,834	-27,210
Accumulated deficit			-644,617	-548,005
Total shareholders' equity, Medivir AB			287,572	384,184
Long-term liabilities
Liabilities to group companies	–	–	1,696	621
Total long-term liabilities			1,696	621
Current liabilities
Accounts payable	10,588	11,254	10,588	11,254
Other liabilities	2,406	2,757	2,341	2,743
Accrued costs and deferred income 19	70,914	60,876	64,967	52,542
Total current liabilities	83,908	74,887	77,897	66,539
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	371,515	458,866	367,165	451,344
Assets pledged	–	–	–	–

– = not applicable

Change in Shareholders' Equity

	Share	Other paid-up	Exchange rate diffe	Deficit brought	Total share holders'	No.
Group, sek 000	capital	capital	rences	forward	equity	of shares
Opening balance, 1 January 2007	64,513	658,181	3,065	-539,455	186,306	12,902,6111)
Exchange rate differences for the period			659		659
Total revenues and costs posted directly
to shareholders' equity	0	0	659	0	659	0
Net profit/loss 2007				-29,318	-29,318
Total revenues and costs	0	0	659	-29,318	-28,659	0
New issue	38,708	176,227			214,935	7,741,566
Option conversion	997	8,254			9,251	199,370
Stock option plans: value of staff service		2,148			2,148
Closing balance, 31 Dec. 2007	104,218	844,810	3,724	-568,773		383,979 20,843,5472)
Opening balance, 1 January 2008	104,218	844,810	3,724	-568,773		383,979 20,843,5473)
Exchange rate differences for the period			611		611
Total revenues and costs posted directly
to shareholders' equity	0	0	611	0	611	0
Net profit/loss 2008				-99,203	-99,203
Total revenues and costs	0	0	611	-99,203	-98,592	0
Stock option plans: value of staff service		2,221			2,221
Closing balance, 31 Dec. 2008	104,218	847,030	4,335	-667,976		287,606 20,843,5473)

1) Opening number of shares in 2007: 660,000 class A shares and 12,242,611 class B shares, quotient value: sek 5

2) Closing number of shares in 2007: 660,000 class A shares and 20,183,547 class B shares, quotient value: sek 5

3) Number of shares, opening and closing balance 2008: 660,000 class A shares and 20,183,547 class B shares with a quotient value of sek 5.

Quotient value is calculated as share capital divided by total number of shares.

Proposed dividend for 2008: sek 0 per share.

							Total share
	Share	Statutory	Premium	Accumul	Net profit/	Net	holders'
Parent company, sek 000	capital	reserve	reserve	ated deficit	loss	profit/loss	equity
Opening balance, 1 Jan. 2007	64,513	827,971	1,088	-489,489	-219,023		185,060 12,902,6111)
Appropriation of profit/loss, AGM 2006:				-219,023	219,023	0
Previous year's profit/loss brought forward					-27,210	-27,210
Net profit/loss 2007	0	0	0	-219,023	191,813	-27,210	0
New issue	38,708		176,227			214,935	7,741,566
Option conversion	997		8,254			9,251	199,370
Stock option plans: value of staff service,
Medivir AB			2,148			2,148
Closing balance, 31 Dec. 2007	104,218	827,971	187,717	-708,512	-27,210		384,185 20,843,5472)
Opening balance, 1 Jan. 2008	104,218	827,971	187,717	-708,512	-27,210		384,185 20,843,5473)
Appropriation of profit/loss, AGM 2007:				-27,210	27,210	0
Previous year's profit/loss brought forward					-98,834	-98,834
Total revenues and costs	0	0	0	-27,210	-71,624	-98,834	0
Stock option plans: value of staff service, Medivir AB			2,221			2,221
Closing balance, 31 Dec. 2008	104,218	827,971	189,938	-735,722	-98,834		287,572 20,843,5473)

1) Opening number of shares in 2007: 660,000 class A shares and 12,242,611 class B shares, quotient value: sek 5

2) Closing number of shares in 2007: 660,000 class A shares and 20,183,547 class B shares, quotient value: sek 5

3) Opening and closing balance of the number of shares 2008: 660,000 class A shares and 20,183,547 class B shares with a quotient value of sek 5.

Quotient value is calculated as total share capital divided by total number of shares.

Proposed dividend for 2008: sek 0 per share.

Cash flow statement

	Medivir Group		Medivir AB
sek 000	2008	2007	2008	2007
Operating activities
Operating profit/loss	-113,733	-37,320	-107,738	-17,096
Reversal of non-cash items
Depreciation, amortization and write-downs	10,323	23,676	10,323	10,753
Other reversals 1)	7,331	-15,825	6,478	-16,313
	-96,079	-29,469	-90,937	-22,656
Interest received	8,630	5,030	8,593	4,899
Dividend received	902	3,332	902	3,332
Interest paid	-83	-177	-79	-169
Tax received/paid	820	4,895	0	0
Cash flow from operating activities before change in working capital	-85,810	-16,389	-81,521	-14,594
Increase(-) / decrease (+) in current receivables	41,948	-35,389	40,910	-35,966
Increase (+) / decrease (-) in current liabilities	9,011	-18,691	11,358	342
Cash flow from operating activities	-34,851	-70,469	-29,253	-50,218
Investment activity
Acquisitions of tangible fixed assets	-9,915	-12,914	-9,915	-16,907
Sales of tangible fixed assets	199	491	199	251
Cash flow from investment activity	-9,716	-12,423	-9,716	-16,656
Financing activity
Conversion of warrants	0	9,251	0	9,251
New issue	0	214,935	0	214,935
Amortization	0	-6,875	0	-6,875
Financial inter-company transactions	0	0	-3,725	-18,880
Cash flow from financing activity	0	217,311	-3,725	198,431
Cash flow for the year
Liquid assets, opening balance	329,330	195,066	325,964	194,409
Change in liquid assets	-44,567	134,418	-42,694	131,554
Exchange rate difference, liquid assets	-277	-154	0	0
Liquid assets, closing balance	284,486	329,330	283,271	325,964

1) Reversals mainly consist of the valuation of financial instruments and net sales in the form of shares.

Accounting principles

Group

Medivir has prepared its Consolidated Financial Statements pursuant to IFRS, International Financial Reporting Standards, as endorsed by the EU. The same principles were applied to the Annual Report for 2007. In addition to IFRS, the group also observes RFR's (Rådet för finansiell rapportering, the Swedish Financial Reporting Board) recommendation RFR 1.2 (Supplementary Accounting Rules for Groups) and applicable statements from the Swedish Financial Reporting Board.

The Medivir group presents its Income Statement by cost class, implying that operating costs are divided between other external costs, personnel costs as well as depreciation, amortization and impairment losses.

The essential significance of IFRS is stated in the following headings, where the principles of the Annual Report are reviewed in more detail.

Parent company

Medivir AB continues to apply those accounting principles relevant to legal entities that prepare Consolidated Financial Statements and are listed on a stock exchange. Medivir AB observes RFR 2.2, Accounting rules for legal entities.

Pursuant to RFR 2.2, the parent company will structure its reports pursuant to all applicable IFRS unless the standards allow an exception from their application. Accordingly the parent company's principles are consistent with the group's unless otherwise stated below.

Basis for valuation

The group uses historical costs for balance sheet items unless otherwise stated.

Consolidated Financial Statements

The Consolidated Financial Statements have been prepared using acquisition accounting, implying that subsidiary shareholders' equity at the time of acquisition is eliminated. Subsidiaries are all companies where Medivir is entitled to formulate financial and operational strategies in a manner usually following from a shareholding amounting to more than half of the voting rights. Subsidiaries are consolidated from the day when the controlling influence is transferred to the group onwards. They are deconsolidated from the date the controlling influences ceases onwards. Moreover, the preparation of Medivir's Consolidated Financial Statements conforms to the stipulations of IAS 27 and IFRS 3 such as elimination of intra-group receivables and liabilities as well as intra-group income and costs, implying that the Consolidated Income Statement and Consolidated Balance Sheet are reported without intra-group transactions.

Translation of foreign currency

Functional currency and reporting currency

Medivir has a foreign subsidiary, Medivir UK Ltd. Items stated in the financial reports for this entity within the group are valued in GBP, as this is the subsidiary's functional currency. Swedish krona, the parent company's functional currency and reporting currency, is utilized in the Consolidated Financial Statements.

Transactions and balance sheet items

Foreign currency transactions are translated to the functional currency at the rates of exchange ruling on the transaction date. The exchange rate gains and losses arising when paying such transactions, and upon translating foreign currency monetary assets and liabilities at the rate of exchange ruling on the balance sheet date, are reported in the Income Statement. Profits and losses on trading receivables and liabilities are reported net under other operating income or other operating costs.

Group companies

Profits and the financial position of all group companies with a functional currency that differs from the reporting currency, are translated to the group's reporting currency as follows: (i) assets and liabilities for each balance sheet are translated at the rate of exchange ruling on the balance sheet date; (ii) income and costs for each of the Income Statements are translated at average rates of exchange. If average rates of exchange are not a reasonable estimate of total exchange rate effects for the year from each transaction date, income and costs are translated instead at the transaction date, and (iii) all exchange rate differences arising are reported as a separate portion of shareholders' equity.

Financial instruments, reporting, disclosure and classification

For information on financial risks and investments, see Note 8, financial risks.

Financial assets reported at actual value in the Income Statement Medivir's short-term investments are managed as a group of financial assets and the result is evaluated based on actual value, in accordance with the documented risk management and investment strategy. Accordingly, Medivir has chosen to report the changes in fair value of its short-term investments in the Income Statement.

Financial assets held for sale

Holdings of shares in Medivir's licensing partners Epiphany Biosciences and Presidio Pharmaceuticals Inc. have been classified as financial assets held for sale.

Because none of these shares are listed, and are not registered on a recognized marketplace, no ongoing value changes of the balance sheet item will be recognized unless a reliable measurement of the changed fair value through an official valuation conducted gives reason to recognize a value change.

Accounts receivable and other receivables

Accounts receivable are non-derivative financial assets, with measured or measurable payments that are not listed on an active market. Their distinguishing feature is that they arise when the group provides funds, goods or services direct to a customer without any intention to trade in the arising receivable. They are included in current assets, apart from items with maturities more than 12 months from the balance sheet date, which are classified as fixed assets. Initially, accounts receivable are reported at actual value, and subsequently, at accrued historical cost, by applying the effective interest method, less potential provisioning for impairment. Other receivables, and where applicable interim receivables, are reported according to the same principles.

Provisioning for the impairment of accounts receivable is effected when there is objective evidence that the group will not be able to receive all the amounts due according to the original terms of such receivables. The provisioning amount is the difference between asset carrying amounts and the present value of estimated future cash flows, discounted by effective interest. The provision amount is reported in the Income Statement. Other receivables are reported in the same manner.

Purchases and sales of financial instruments

Purchases and sales of financial instruments are reported on the transaction date – the date Medivir undertakes to buy or sell the asset. Financial instruments are removed from the Balance Sheet when the right to receive cash flows from the instrument has expired or been transferred and the group has transferred basically all risks and benefits associated with rights of ownership.

Accounts payable

Accounts payable are initially reported at fair value, and subsequently at amortized cost by applying the effective interest method.

Stock option plans

As of the balance sheet date, Medivir has three outstanding stock option plans. Upon conversion/exercise, liquid assets would increase by the exercise/conversion price and the share capital by a nominal sek 5 per share, with the remaining deposited amount increasing shareholders' equity.

For more details on the various effects of each plan and the number of outstanding stock options, please refer to page 12, warrants and stock options'.

Medivir reports its stock option plans in accordance with IFRS 2 and IFRIC 11. Medivir values current plans at the grant date at actual value and then allocates the value over the vesting period as a personnel cost. This remuneration to personnel implies that Medivir issues equity instruments (warrants that personnel are entitled to in the plans' agreements) and thus, for the cost associated with each period, achieves the corresponding increase in other contributed capital (share premium reserve in the parent company). The stock options that are attributable to personnel in the subsidiary Medivir UK Ltd., are reported in accordance with IFRIC 11. Here, Medivir's issue of equity instruments is defined as a shareholder contribution to the subsidiary from the parent company, implying that it is reported as investment in a subsidiary. Like other contributions, the investment is then tested for impairment. If there is value impairment in a subsidiary, the effect is that a financial cost is reported in Medivir AB's Income Statement.

Social security costs on stock option plans

For each outstanding plan, Medivir makes provisions for social security costs at the end of each accounting year. The provision for social security costs is calculated according to UFR 7 with the application of the same valuation model used when the options were written. The provision is revalued on each reporting date on the basis of a calculation of the charges that may be payable when exercise takes place.

Medivir uses the Black & Scholes model for valuation, which takes into account factors including the share price, remaining time until exercise, volatility and risk-free interest rate, see page 15.

Payments of social security expenses in connection with employees exercising options is offset against the provision made according to the above.

The social security cost on the taxable benefit (the difference between the redemption/exercise price and market value of shares) that arises when stock options are exercised can be covered in terms of cash flow in the group. This is achieved by Medivir exercising a portion of options the group retains to shares and selling them. However, the personnel cost arising in the Income Statement, which is provisioned on a continuous basis pursuant to UFR 7, will not be offset by a cost reduction (income), but the effect arises in cash flow terms only.

Intangible assets and research costs

Research and development

Research expenditure is expensed on an ongoing basis.

Proprietary patent rights, technology rights, brands and other similar assets are not given any value. Pursuant to IAS 38 Intangible assets, costs for developing pharmaceuticals should be capitalized when the following criteria are satisfied:

• • It is technically possible to complete the pharmaceutical;
• • The management intends to complete the pharmaceutical and the conditions for sale are in place;
• • The asset is expected to provide future economic benefits,
• • Medivir judges that the resources necessary to complete development of the asset are available,
• • expenditure for development can be measured reliably.

The research activities Medivir conducts are associated with sufficient uncertainty that IAS 38's capitalization criteria cannot be considered satisfied, primarily because of difficulties in judging whether it is technically possible to complete the pharmaceutical. Accordingly, all research and development costs are expensed as they arise at present. More information under 'significant estimates and forecasts'.

Other intangible fixed assets

Medivir implemented a new ERP (enterprise resource planning) system, reported at historical cost less planned depreciation. Its estimated useful life is five years, whereupon the reported asset will be depreciated over this term.

Revenues

According to Medivir's interpretation of IAS 18, the payment received in connection with an upfront payment, and where there is an outstanding undertaking to provide services from the licensor's side, is considered as an advance payment. Thus the licensor has not completed the earning of revenue until the estimated or appointed collaboration period expires. In cases where an agreement implies that Medivir has outstanding commitments and/or is to provide services for the counterparty, the remuneration received at the beginning of agreements is allocated over the estimated or determined collaboration period.

Down-payment revenue is recognized when the agreement is reached, providing there is no reservation or other impediment to receiving the remuneration and this is not related to future performance on Medivir's part.

Contracted milestone payments from a counterparty are reported when the remuneration criteria of the relevant outlicensing agreement have been satisfied and verified with the counterparty.

Medivir does not apply the percentage of completion method on those research projects that have potential future milestone payments from a collaboration partner. This is because:

• • It is impossible to measure the degree of completion with sufficient accuracy as IAS 18 stipulates as a requirement for the percentage of completion method;
• • It is impossible to measure the expenditure that will be due to secure the corresponding milestone revenue with sufficient accuracy, the number of researchers and other direct expenditure may vary over time;
• • No remuneration is due if the criteria contracted with the collaboration partner are not achieved.

Medivir AB and Medivir UK Ltd. have no products on the market yet, implying that only outlicensing, and milestone payments on, pharmaceutical projects are reported as revenue pursuant to the above.

Research services

Research services that Medivir renders pursuant to collaboration agreements and that generate remuneration from counterparties are recognized on an ongoing basis as Medivir provides such services.

Central government support (EU and other subsidies)

Central government support is reported pursuant to IAS 20 under other income. Support received is recognized as revenue when the company satisfies the conditions associated with the support, and it can be reliably determined that the support will be received. Support received is reported in the Balance Sheet under deferred income with revenue recognized as the terms for securing the funds are satisfied.

Segments

A segment is an identifiable part of the group in accounting terms, which through its business segment or location in a geographical region, is exposed to risks and opportunities that differ from other segments.

Medivir has a single business segment consisting of an integrated operation with similar risks and opportunities, and accordingly, operations are reported as a single segment.

Pension liability and pension cost

Medivir AB's ITP (supplementary pensions for salaried employees) scheme is insured with Alecta and should be considered as a definedbenefit pension scheme pursuant to statement UFR 3 from RFR.

Pursuant to UFR 3, the company should account its proportional share of defined-benefit commitments, plan assets and costs associated with the scheme. Because Alecta is unable to provide sufficient information, for the present, this scheme is reported as defined contribution.

Alecta's surplus can be distributed to policyholders and/or beneficiaries. At year-end 2008, Alecta's surplus in the form of its collective consolidation ratio was 112.0 (152.0)%. The group judges that current premiums should cover the current commitments.

The group's other pension schemes are defined contribution. The charges are reported as personnel costs when they become due for payment.

Remuneration on dismissal

Remuneration on dismissal is expensed when the obligation to pay remuneration arises.

Tangible fixed assets

Depreciation

Medivir applies the cost method with straight-line depreciation over estimated useful life.

Pursuant to IAS 16 for tangible fixed assets and IAS 38 for intangible fixed assets, planned depreciation and amortization is calculated on original historical costs with depreciation rates based on estimates of assets' economic useful lives.

The group applies the following depreciation terms: buildings, 20 years; equipment, tools, fixtures and fittings, 5–10 years and IT hardware, 3 years.

Impairment losses

Impairment tests of tangible and intangible fixed assets occur when internal or external indications of impairment arise pursuant to IAS 36. No indications of impairment were identified.

An unconditional shareholders' contribution was made to Medivir UK Ltd. in order to strengthen the subsidiary's shareholders' equity. This additional investment is reported as an increase in shares in subsidiaries. Investments in subsidiaries are subject to impairment tests at each year-end. The subsidiary's shareholders' equity forms a key criteria for this assessment, see Note 15.

Income tax

Pursuant to IAS 12, deferred tax assets should only be reported to the extent that it is likely that deductions will be utilized. Note 11 states items including the estimated deductible deficits accumulated in the group, and the explanation for no income taxes recoverable being reported for the group. The taxable deficits of Medivir AB and Medivir UK Ltd. have no expiry.

The treatment of potential deferred tax on temporary differences is reported and explained in Note 11. The various constituent items of consolidated total tax are also explained.

The positive tax amount relates to the tax credit for Medivir UK Ltd., as a result of UK legislated research support. The UK tax authority, HM Revenue & Customs, pays claims after a customary review. This amount is reported as revenue since HM Revenue & Customs' decision to waive the taxation is definitive. Loss carry-forwards in Medivir UK Ltd. are reduced because of the tax credit. More information is in Note 11, Tax on profit for the year.

Leases

Medivir's lease arrangements are operating leases pursuant to IAS 17, because Medivir does not assume any significant risks or benefit from any leased item in any lease arrangement. Payments made over the lease term are expensed in the Income Statement on a straight-line basis over the lease term, see Note 20.

Cash Flow Statement

The Cash Flow Statement has been reported by applying the indirect method.

Reported cash flow only encompasses those transactions involving payments made or received.

Cash and bank balances, plus short-term investments such as commercial paper, fixed-income and bond funds with maximum maturities of three months are reported as liquid assets in the Cash Flow Statement.

Significant estimates and forecasts

The accounting of income and research & development costs are two important parts of Medivir's accounting.

Medivir does not utilize the percentage of completion method for forthcoming potential milestone payments, because there is constant uncertainty regarding how far the project has progressed, and the likelihood of it achieving the next goal/milestone. Thus, the income side only states determined and non-repayable income that can be considered to have accrued.

Allocation to periods could demonstrate how Medivir progressively receives income from the counterparty's utilization of intellectual property. But if the percentage of completion method was applied, there would be a risk of income being reported as uncertain in terms of whether Medivir would ever receive any payment. In such circumstances, an announcement from a counterparty that a project was being discontinued, for example, would imply that Medivir had reported inaccurate profits/losses.

Development costs including registration costs should be capitalized when projects are likely to succeed. Each research project is unique and must be judged individually on its own conditions. The earliest assessed timing for capitalization is after phase III trials have been conducted, but even after the completion of phase III trials, the majority of uncertainty factors could remain so that the criteria for capitalization cannot be considered satisfied. In such cases, capitalization does not occur before the pharmaceutical is approved by the relevant regulatory authority.

Given premature capitalization, there is a risk that a project would fail and that the costs offset could not be justified, but would have to be expensed directly. In turn, this would imply that previous and current year profits/losses would be misleading because of an excessively optimistic assessment of the likelihood of success.

Introduction of new accounting principles

At the time of the preparation of the Consolidated Financial Statements as of 31 December 2008, a number of standards and interpretations have been published that have yet to take effect. A preliminary assessment of the impact the introduction of these standards and statements have had, and could have, on Medivir's financial reporting follows. Comments are only provided on those changes that could have an impact on Medivir's accounting:

IAS 1 (Amendment) Presentation of Financial Statements: This amendment comes into effect on 1 January 2009 and has stipulations on the presentation and content of financial statements to

ensure comparability between the company's previous reports, but also between the company and other companies. The standard has been amended to include more detailed information on items including changes in the company's shareholders' equity resulting from transactions with owners, in respect of owners, as opposed to all "non-owner changes" to shareholders' equity. This does not affect the scale of Medivir's reported profits and financial position but requires changes to the presentation of the company's financial reports.

IFRS 8 Operating segments:

This standard takes effect on 1 January 2009 and applies to financial years that begin from this date onwards. The standard relates to the breakdown of a company's operations into different segments. According to this standard, the company should proceed from the structure of internal reporting, and decide its reportable segments according to this structure. Pursuant to IAS 14, in 2008, Medivir is reporting a single segment. The introduction of IFRS 8 will not affect Medivir's accounts or the structure of its financial reports, because Medivir's operations also only consist of a single segment in terms of internal reporting.

IAS 23 (Amendment) Borrowing Costs:

This amendment comes into effect on 1 January 2009 and applies to financial years beginning from this date onwards. The amendment stipulates that borrowing costs directly attributable to the purchase, design or production of an asset, which necessarily take a significant time to complete for their intended use or sale should be included in the historical cost of the asset. This amendment to the standard does not affect Medivir's accounts because at present, the group has no such assets or liabilities.

IFRS 2 (Amendment) Share-based Payment:

This amendment applies to financial years beginning from 1 January 2009 or later. The Amendment clarifies the definition of vesting conditions, that only service conditions and performance conditions are vesting conditions. This amendment is not expected to affect the consolidated accounts.

IFRS 3 (Amendment) Business Combinations:

This amendment applies from financial years that begin after 1 July 2009. This Standard has not yet been endorsed by the EU. The amendment applies in advance to business combinations after the time it comes into effect. Application will imply changes to how future business combinations are reported in terms of factors including reporting transaction costs, potential conditional purchase prices and gradual acquisitions. The amendment will not have any effect on previous business combinations but will affect the reporting of potential future transactions.

Notes

• = Not applicable

Note 1 Intra-group transactions (sek 000)

Parent company

Purchases from Medivir UK Ltd. amounted to 0 (9,061). Sales to Medivir UK Ltd. amounted to 4,693 (2,379). Purchases from Medivir HIV Franchise AB amounted to 2,090 (2,620). Sales to Medivir HIV Franchise AB amounted to 2,084 (2,618).

Note 2 Costs for auditing and audit consulting (sek 000)

	Group			Parent company
	2008	2007	2008	2007
Audit costs 1)	454	343	260	297
Consulting cost, auditors 2)	440	827	205	266
Total	894	1 170	465	563

1) The group's auditing firm is PricewaterhouseCoopers.

2) The shareholders' equity balance sheet item also includes an amount of 287 for consulting services relating to the new share issue in February 2007.

Note 3 Average number of employees, salaries, other remuneration and social security costs (sek 000)

	Group1)		Parent company
	2008	2007	2008	2007
Average number of employees
Women	46	43	46	42
Men	54	54	54	52
Total	100	97	100	94

1) Of which 0 (3) in the UK.

Total sickness absence by group 2008 (2007)

Parent company	Women	Men	Age < 29	Age 30-49	Age >50	Total
Total sickness absence, %	1.8 (1.6)	3.3 (1.0)	12.9 (4.8)	1.8 (1.4)	1.0 (0.5)	2.6 (1.3)
%, of which > 60 days	0 (1.8)	23.6 (0)	35.1 (0)	0 (1.3)	0 (0)	15.9 (0.9)

		Group		Parent company
	2008	2007	2008	2007
Salaries and benefits
Lars Adlersson (Chief Executive Officer)	7,050	3,353	7,050	3,353
Anders Vedin (Chairman of the Board)	535	553	535	553
Alf Lindberg (Board member)	0	145	0	145
Lars-Göran Andrén (Board member)	250	238	250	238
Anna Malm Bernsten (Board member)	250	218	250	218
Magnus Falk (Board member)	265	283	265	283
Zsolt Lavotha (Board member)	0	55	0	55
Bo Öberg (Board member)	0	0	0	0
Donna Janson (Board member)	300	123	300	123
Ron Long (Board member)	300	123	300	123
Björn C Andersson (Board member)	167	0	167	0
Ingemar Kihlström (Board member)	157	0	157	0
Göran Pettersson (Board member)	157	0	157	0
Total, Board of Directors and Chief Executive Officer 1)	9,430	5,093	9,430	5,093
Senior executives 2)	11,112	10,539	11,112	8,877
Other employees 3)	47,244	50,536	47,244	48,464
Total	67,786	66,168	67,786	62,433
Statutory and contracted social security costs 4)	24,474	22,565	24,474	22,378
Pension costs 5)
of which for CEO of the group 706 (669) and parent company sek 706 (669)	8,844	9,063	8,844	8,876
Total salaries, remuneration, social security costs and pension costs 6)	101,104	97,796	101,104	93,688

1) of which UK 0 (0) 2) of which UK 0 (1,662) 3) of which UK 0 (2,072) 4) of which UK 0 (187) 5) of which UK total 0 (187) (1,805) 6) of which UK 0 (4,108)

Remuneration in the financial year

Board of Directors

Fees pursuant to resolution by the AGM are payable to the Chairman of the Board and Board members elected by the AGM. During the financial year, 2,270 (1,740) fees were paid to the Board of Directors of Medivir, 535 (553) of which to the Chairman of the Board. In addition, reimbursement of travel expenses to Board meetings, etc. was paid to Board members. No remuneration was paid for specific consulting assignments, and there is no pension scheme for board members.

Remuneration guidelines for senior executives

The AGM 2008 resolved that the company would offer total compensation on market terms that will enable the hiring and retention of skilled senior executives. Remuneration to senior executives will consist of basic salary, potential performance-related pay, stock options pursuant to the 2007/2012 stock option plan resolved by the AGM, pensions and other benefits. Basic salary will consider the individual areas of responsibility and experience. Performancerelated pay – which at present, and where applicable, is payable as a discretionary individual bonus – will be a maximum of 50% of basic salary. The Board of Directors is entitled to diverge from the above guidelines if the Board judges that there are special circumstances in individual cases justifying this.

CEO

Salary and remuneration of 2,394 (2,336) was paid to the CEO in the year, plus a bonus of 2,168 (734), other benefits of 123 (282) and remuneration for severance pay of 2,365 (0). Thus total remuneration was 7,050 (3,353). The CEO's pension plan is pursuant to the ITP (supplementary pensions for salaried employees) scheme, plus approximately 15% of basic salary excluding bonus and benefits. The CEO's pensionable age is 60. The pension provision for the year was 706 (669). The CEO is subject to a mutual notice period of six months. Coincident with termination initiated by the company, in addition to dismissal pay, the CEO is entitled to severance pay corresponding to 18 months' salary, paid monthly with a liability for deduction against other income. An amount corresponding to a maximum of 100% of basic salary may be agreed in instances of changes to ownership structure. Pursuant to a resolution by the AGM 2007, the CEO was granted 46,000 stock options from the 2007/2012 option plan. The theoretical market value of these options, calculated according to the Black & Scholes model, was sek 14.4 per option at the grant date, corresponding to a value of 662. For other option holdings, see page 33.

Other senior executives

Other senior executives means the 7 people apart from the CEO, who make up the management team with the CEO. Salary of 6,803 (6,769), bonuses of 3,965 (3,190) and other benefits of 344 (581) was paid to other senior executives, thus total remuneration was 11,112 (10,539). The management team includes one person employed on a consultancy basis. The pension plans of other senior executives conform to the ITP scheme, and the relevant individual plan in the UK corresponds to legislated contributions, plus 6% of basic pay excluding bonus and benefits. Pension provisions of 2,194 (1,939) were made in the year. Other senior executives are subject to a mutual notice period of six months. Severance pay or similar remuneration is not payable, but in instances of changes to ownership structure, may be agreed at a maximum amount of 100% of basic pay. Pursuant to a resolution by the AGM 2007, this group was granted 104,000 stock options from the 2007/2012 option plan. The theoretical market value of these options, calculated according to the Black & Scholes model, was sek 14.4 per option at the grant date, corresponding to a value of 1,498. For other option holdings, see page 33.

Divergence from the company's remuneration guidelines for senior executives

Guidelines and background

According to the remuneration guidelines for senior executives, the Board of Directors is entitled to award up to 50% of basic salary (the Fundamental Rule) and additional remuneration in individual cases in special circumstances. The CEO's employment contract entitles him to a bonus according to a bonus plan agreed for each year, which could have generated a bonus of between 20 and 40% of annual salary.

Special circumstances in 2008

In 2008, Medivir reached a particularly favorable collaboration agreement with a trade partner, which counted towards the CEO's bonus (Special Performance-related Bonus).

In tandem with this, Medivir was in far-reaching negotiations regarding a potential sale of all or substantial parts of operations, which the Board of Directors judged to be in the shareholders' best interests. Conditions for the transaction were partly that it was completed in 2008, and partly that the management team, particularly the CEO and Vice President of Discovery Research, remained employees of the company.

Meanwhile, opinions on other matters differed between various groupings within the Board of Directors and corporate management. Accordingly, it became necessary to ensure that the management team remained employed in 2008, by means of a bonus agreement entered in April/May 2008 (The Bonus Agreement). This loyalty bonus was conditional on members not resigning before year-end and consisted of eight months' salary for the CEO and Vice President of Discovery Research and six months' salary for other members. Additionally, it was considered justified to further ensure that the CEO did not leave the company on his own initiative in 2008. For this reason, on 5 May 2008, a supplementary agreement (The Supplementary Agreement) was reached with the CEO granting him the right to resign in January 2009 on the same terms as if he had been given notice by the company.

In September, it became clear that the transaction would not be consummated. In December, the Board of Directors agreed that it was best for the CEO to leave his position. The Board of Directors offered the CEO the option to resign his position subject to his regular employment contract. The CEO accepted, and thus an agreement to terminate his contract was signed on 15 December 2008 (The Agreement to Terminate the Contract). This meant that the CEO left the company on 31 January 2009, and that the related press release stated that the parties worked together to achieve a favorable solution for the company. Pursuant to The Agreement to Terminate the Contract, the CEO would receive remuneration and severance pay due pursuant to his employment contract and vested loyalty bonus pursuant to The Bonus Agreement. In the circumstances, the cessation of employment should be viewed as being a result of a termination initiated by the company, summarized in The Agreement to Terminate the Contract. The Supplementary Agreement was never applied.

Judgement

Six months' salary was paid to each member of the management team excluding the CEO and Vice President of Discovery Research, pursuant to the Fundamental Rule of the guidelines (The Bonus Agreement).

Pursuant to the company's guidelines, but over and above the Fundamental Rule, a Special Performance-related Bonus of three months' salary was paid to the CEO, and pursuant to The Bonus Agreement, another two months' salary each to the CEO and Vice President of Discovery Research. Additionally, in The Supplementary Agreement, the CEO was offered potential severance pay of up to 18 months' salary if he resigned in January 2009. In these decisions, there was either special performance or a significant shareholder interest in ensuring continued employment. Accordingly, the requirement regarding special circumstances for additional remuneration was judged as satisfied in all cases.

Other staff

Current stock option plans are reviewed on pages 13–15. Pursuant to a resolution by the AGM 2007, other staff were granted 21,000 stock options from the 2007/2012 option plan. The theoretical market value of these options, calculated according to the Black & Scholes model, was sek 14.4 per option at the grant date, corresponding to a value of 302. In addition, a small number of individuals received bonuses in accordance with a fixed bonus program. The group has defined-benefit pension schemes via Alecta and defined-contribution schemes through alternative solutions.

Closely related parties

Among other senior executives there are agreements with Medivir, as well as agreements between companies owned by senior executives and Medivir, which confer rights to royalties on products Medivir may develop based on patented inventions that Medivir has acquired from these senior executives before and during their time as researchers with Medivir. No such benefits became due in 2008. In 2007, a company owned by one senior executive received royalties pursuant to the contract Medivir signed in late November 2004 relating to the HCV PI project with Tibotec, of 1.95% of remuneration received of eur 19.5 m. Additionally, two companies belonging to other employees received royalties in 2007 totaling 1.3% of the received remuneration of eur 19.5 m.

Note 4 Depreciation and amortization (sek 000)

		Group		Parent company
	2008	2007	2008	2007
Amortization of intangible fixed assets	454	454	454	454
Depreciation of tangible fixed assets	9,869	10,299	9,869	10,299
Total	10,323	10,753	10,323	10,753

Note 5 Impairment losses (sek 000)

		Group		Parent company
	2008	2007	2008	2007
Impairment losses of tangible fixed assets	0	12,923	0	0
Total	0	12,923	0	0

Note 6 Research costs (msek)

Medivir conducted research operations exclusively in the financial year. The cost of research including depreciation according to plan but less administrative costs for the group, was approximately sek 190 (279.4) m. In 2007, research costs included a non-recurring cost due to the relocation of significant parts of the operations of Medivir UK

to Medivir AB totaling sek 8.6 m. Research costs in the parent company amounted to approximately sek 190.1 (260.7) m of which sek 0 (9.0) m related to purchases from Medivir UK Ltd. For the group, the operating profit/loss for the research segment was sek -83.4 (-37.3) m.

Note 7 Profit on participations in group companies (sek 000)

	Group			Parent company
	2008	2007	2008	2007
Impairment losses on shares in subsidiary Medivir UK Ltd.
(see also note 15, Participations in group companies)	–	–	-4,800	-18,880
Dividends from Medivir Personal AB	–	–	0	400
Total			-4,800	-18,480

Note 8 Financial risks ( sek 000)

The main financial risks that arise as a consequence of managing financial instruments consist of market risk (interest risk, currency risk and share price risk) credit risk, liquidity and cash flow risk. The financial risks are managed pursuant to a policy adopted by the Board. This policy means that investments in liquid assets will be conducted in such a manner that the invested assets generate secure and stable returns. The objective is to achieve the best possible return for the lowest possible risk level. The underlying instruments will be subject to low risk, and when investing liquid assets, the diversification of risk will be pursued. The company will invest its liquid assets with recognized bodies, such as banks.

Note 8 cont. Financial risks

The link between IAS 39 categories and Medivir's balance sheet items in the Balance Sheet

Group 31 Dec. 2007 (sek 000)	Financial assets recognized at fair value in the Income Statement	Accounts receivable	Borrowings and accounts payable	Financial assets held for sale	Total
Financial assets held for sale				18,793	18,793
Accounts receivable		64,685			64,685
Other short-term investments	311,501				311,501
Cash and bank balances	17,829				17,829
Accounts payable			-11,254		-11,254
Total	329,330	64,685	-11,254	18,793	401,554

Group 31 Dec. 2008 (sek 000)	Financial assets recognized at fair value in the Income Statement	Accounts receivable	Borrowings and accounts payable	Financial assets held for sale	Total
Financial assets held for sale				18,793	18,793
Accounts receivable		11,877			11,877
Other short-term investments	227,842				227,842
Cash and bank balances	56,644				56,644
Accounts payable			-10,588		-10,588
Total	284,486	11,877	-10,588	18,793	304,568

For information on leases, see Note 20.

The table illustrates the currency-exposed operating income and operating costs as net amounts per currency in sek 000

		Group			Parent company
2008	Income	Costs	Net	Income	Costs	Net
EUR	48,774	-12,309	36,465	48,774	-12,309	36,465
GBP	0	-11,298	-11,298	0	-11,298	-11,298
USD	78,291	-31,962	46,329	78,291	-31,962	46,329
Total	127,065	-55,569	71,496	127,065	-55,569	71,496

		Group			Parent company
2007	Income	Costs	Net	Income	Costs	Net
EUR	241,289	-20,386	220,921	241,243	-20,322	220,921
GBP	0	-20,727	-20,664	0	-20,664	-20,664
USD	0	-67,620	-67,410	0	-67,410	-67,410
Total	241,289	-108,460	132,847	241,243	-108,396	132,847

A 5% appreciation of the Swedish krona against the above currencies would have resulted in a 1,028 profit improvement for the group and parent company. The corresponding appreciation of the Swedish krona would have reduced profits by -1,028.

Market risks

Interest risk

Interest risk is the risk of a negative impact on cash flow or financial assets or liabilities resulting from changes in market rates of interest.

Medivir's investment policy implies that the company invests its liquid assets in instruments such as bank and corporate commercial paper, fixed-income and bond funds, fixed bank investments and special deposits. Thus changes in market rates of interest affect Medivir's profit/loss through reduced or increased returns on financial assets.

As of 31 December 2008, the group's liquid assets including short-term investments with maximum maturities of three months were 284,486 (329,330). 227,842 (177,090) of this total was invested in fixed-income funds with discretionary management, and 0 (134,411) was invested in certificates of deposit at fixed interest.

In 2008, Medivir received average interest on liquid assets of approximately 4.6%. Interest in the year varied between 3 and 5%. Based on an average of existing short-term investments in the year, and if yields had been 1 percentage point higher or lower, this would have had an annualized positive or negative profit impact of some 3,094. Falling interest rates in 2009 would result in reduced yields on the group's liquid assets. If yields fall by 3.5 percentage points compared to 2008, this would exert a profit/loss effect of sek -10,828 given unchanged holdings of liquid assets. At year-end 2008, the company had no interest-bearing liabilities, and accordingly, no other interest risks apply.

Currency risk

Currency risk is the risk of negative cash flow effects resulting from exchange rate changes.

• • Profit is affected when costs and revenues in foreign currencies are translated into Swedish kronor (transaction risk).
• • The Balance Sheet is affected when assets and liabilities in foreign currencies are translated into Swedish kronor (translation risk).

Medivir did not use currency hedging in 2008; future income and costs will be exposed to foreign currency fluctuations. The company's operating profit experienced a -549 (1,615) net influence in exchange rate gains in the financial year, with the net financial position influenced by -507 (-192) in exchange rate losses.

Sterling fluctuated between sek 11.25 and sek 12.09 in the year, with an average of sek 12.09 for the year. In the year, the dollar

exchange rate fluctuated between sek 5.84 and sek 8.38, with an average of sek 7.75. In the same period, the euro exchange rate fluctuated between sek 9.27 and sek 11.11 with an average rate of sek 9.61. All trading in foreign currency was conducted at the best rate of exchange attainable at the point of exchange. Many of Medivir's contracts involve payments in EUR and USD, implying that accounts payable and accounts receivable have exposure.

Share price risk

In 2007, Medivir received shares from a new issue conducted by Epiphany Biosciences, Medivir's licensing partner on the shingles project MIV-606 (EPB-348) and shares from a new issue conducted by Presidio Pharmaceuticals Inc., Medivir's licensing partner on the compound MIV-410 (PTI-801). The total value of the shares amounted to 18,793 (18,793). No net gains or net losses arose as a result of these investments in 2008. Medivir classifies the shares as financial assets held for sale pursuant to IAS 39, and the shares are reported in the Balance Sheet under the "financial fixed assets" item. Because there is no active market for these shares on US stock markets, no ongoing value changes of the balance sheet item are reported, unless a reliable estimate of the changed actual value through a valuation conducted gives reason to report a value change. Medivir does not have any investments in listed shares, hence there is no share price risk.

Credit risk (counterparty risk)

Credit risk is the risk that a counterparty is unable to fulfill its contracted obligations to Medivir, thus causing a financial loss for the company.

Medivir invests its liquid assets with Swedish fund managers with high credit ratings, P-1 from Moody's. In the year, these investments did not experience any value changes resulting from changes to asset managers' credit risk.

The most significant risks to Medivir relate to accounts receivable. As of the balance sheet date, Medivir has only one counterparty for accounts receivable, which is a risk per se, but this is a part of a large and well-recognized group, and accordingly the credit risk is considered limited. Historically, Medivir has never needed to write down accounts receivable. Medivir has several partnerships with established pharmaceutical companies and smaller biotechnology enterprises, which diversifies risks.

		Group	Parent company
sek 000	2008	2007	2008	2007
Accounts receivable
Not due	11,877	54,119	9,897	51,356
Due for payment 61-90 days	–	10,566	–	10,566
Total	11,877	64,686	9,897	61,922

Note 8 cont. Financial risks

Other account receivables amount to 11,157 (1,052) of which 0 (0) was due on the balance sheet date. The group's liquid assets are invested in liquid assets with low credit risk such as certificates of deposit, fixed income and bond funds subject to low risk levels (P-1, Moody's) through discretionary management. No credit risks are considered to apply to the above investments.

Liquidity and cash flow risk

Liquidity risk is the risk of future difficulties for Medivir to fulfill its obligations associated with financial liabilities. A financial liability is each liability in the form of a contracted obligation to pay cash or other financial assets to another company, or to exchange a financial asset or financial liability with another company subject to terms that may be disadvantageous for the company.

		Group	Parent company
sek 000	2008	2007	2008	2007
Accounts payable
Amounts due for payment within 1 year	10,588	11,254	10,588	11,254
Total	10,588	11,254	10,588	11,254

Other liabilities amounted to 2,406 (2,757) and become due for payment within 12 months.

The amounts due for payment within 12 months are consistent with book values, because the discounting effect is insignificant.

Capital

Consolidated shareholders' equity is 287,606 (383,979) and is the company's secure base for financing operating activities. A more detailed specification of shareholders' equity is on page 46. While Medivir does not have any independent long-term earnings capacity with sustainable profitability, the company will retain low debt gearing and a high equity ratio. Proposals regarding dividends will not be made until long-term profitability can be predicted through product launches on the market. Accordingly, no dividends will be considered for the forthcoming years.

Medivir's objective is to attain profitability by receiving income from licensing agreements with partners on its own research, receiving income on sales of specialist pharmaceuticals, and to bring proprietary compounds to market registration. Medivir's research partners are responsible for funding outlicensed projects, and Medivir receives income in the form of upfront and milestone payments as

projects progress towards the market. These revenues contribute to funding other parts of operations.

Liquidity risk is managed by Medivir investing liquid assets in fixed-income funds with low risk and a liquid market. Medivir's management and Board of Directors maintain continuous access to information on the company's shareholders' equity and liquid assets. Liquidity and cash flow forecasts, based on ongoing forecast cash flow, are prepared on an ongoing basis to monitor liquidity status.

The ability to develop new candidate drugs, enter into partnerships on projects and to bring development projects to market launch and sale, are crucial to Medivir's future. The progress of existing partnerships, and the addition of new partnerships, will exert a significant influence on Medivir's revenue and cash balance. Recent progress of the global economy has generally increased uncertainty, which in the longer term, may affect Medivir's access to funding. For more information on Medivir's strategy to strengthen its financial position see page 41 under 'future progress'.

Medivir's cash reserves and short-term investments totaling 284,486 (329,330) are estimated to cover all expected costs, liabilities and investment needs for the coming year.

Note 9 Other interest income and similar profit/loss items (sek 000) 1)

	Group			Parent company
	2008	2007	2008	2007
Interest income, bank	2,165	618	2,129	487
Interest income from fixed-income investments	6,464	4,413	6,464	4,413
Dividends from fixed-income fund	902	3,332	902	3,332
Fair value change on fixed-income fund, unrealized	4,796	1,963	4,796	1,963
Total	14,327	10,325	14,291	10,194

1) Other interest income and similar profit/loss items are an effect of short-term investments, cash and bank balances, which are recognized at fair value in the Income Statement.

Note 10 Interest costs and similar profit/loss items (sek 000)

	Group		Parent company
	2008	2007	2008	2007
Interest costs	-83	-177	-79	-169
Exchange rate differences, intra-group transactions	-263	-1,468	-236	-1,468
Exchange rate differences, other	-270	-192	-270	-192
Total	-616	-1,836	-586	-1,828

Note 11 Tax on net profit (sek 000)

		Group		Parent company
	2008	2007	2008	2007
Tax credit 1)	820	-487	0	0
Tax on net profit, according to Income Statement	820	-487	0	0
Applicable tax rates
Sweden	28%	28%	28%	28%
UK	30%	30%	–	–
Difference between consolidated tax cost reported in the Income Statement and tax cost based on applicable tax rate
Profit before tax	-100,023	-28,832	-98,834	-27,210
Tax at applicable tax rates	28,006	8,073	27,673	7,619
Tax effect of non-deductible impairment losses	0	-411	-1,344	-5,697
Tax effect of other non-deductible items	-163	-2,000	-163	-1,995
Tax effect of deductible costs reported against shareholders' equity	–	2,680	–	2,680
Tax effect of non-deductible revenue	1,343	2,058	1,343	2,058
Effect of foreign tax rates	119	410	–	–
Tax credit received, Medivir UK Ltd., for the previous year's deficit	820	-487	–	–
Tax effect of deficits for which income tax receivables are not considered	-29,305	-10,809	-27,509	-4,664
Tax on net profit	820	-487	0	0

1) The tax credits apply to Medivir UK Ltd., ensuing from UK legislated research support, implying the definitive relinquishment of income tax receivables on Medivir's part. The tax credit for the year relates to the tax credit for 2007. No new tax credits were provisioned in the year.

The group has estimated accumulated deductible deficits amounting to sek 890 m until 2008 inclusive. No related income tax receivables are reported because it is not considered likely that the group will account taxable income exceeding costs within the foreseeable future. The deductible deficits of Medivir AB and Medivir UK Ltd. have no expiry.

The temporary differences that arise from non-deductible impairment losses (due to impairment losses on Medivir UK Ltd.'s equities in 2008, 2007 and 2006 in Medivir AB and non-recurring impairment losses of fixed assets in the group) do not give rise to any deferred tax asset in the Balance Sheet because Medivir does not capitalize the total deductible deficits, as indicated above. The group also had a temporary difference in the form of the intangible asset acquired research and development, which amounted to sek 0 (0). There are no other temporary differences in the group. There are no temporary differences in the parent company.

The tax rate in Sweden has been reduced to 26.3% from 1 January 2009 onwards

Note 12 Earnings per share

	Group
	2008	2007
Earnings per share before and after dilution, sek 1)	-4,76	-1,74
Net profit/loss for the year	-99,203	-29,318
Average no. of shares, 000	20,844	16,873

The calculation of earnings per share is based on net profit/loss for the year divided by average number of shares for the year.

1) Pursuant to IAS 33, potential ordinary shares do not cause any dilution effect if their conversion to ordinary shares results in increased earnings per share. This would be the case upon the conversion of Medivir's outstanding options.

Note 13 Intangible fixed assets (sek 000)

		Group	Parent company
Other intangible assets 1)	2008	2007	2008	2007
Historical cost, opening balance	2,270	2,270	2,270	2,270
Purchases	0	0	0	0
Accumulated historical cost, closing balance	2,270	2,270	2,270	2,270
Amortization, opening balance	-1,334	-880	-1,334	-880
Amortization for the year	-454	-454	-454	-454
Accumulated amortization, closing balance	-1,788	-1,334	-1,788	-1,334
Book value at year-end	482	936	482	936

1) Other intangible assets relate to capitalized development costs for ERP systems. The useful life is estimated at 5 years, whereupon the reported asset is amortized in accordance with this estimate.

Note 14 Fixed assets (sek 000)

	Group		Parent company
Buildings and land 1)	2008	2007	2008	2007
Historical cost, opening balance	17,719	17,719	4,232	4,232
Purchases	0	0	0	0
Accumulated historical cost, closing balance	17,719	17,719	4,232	4,232
Depreciation, opening balance	-15,158	-14,946	-1,671	-1,458
Depreciation for the year	-212	-212	-212	-212
Accumulated depreciation, closing balance	-15,370	-15,158	-1,883	-1,671
Book value at year-end	2,349	2,561	2,349	2,561

1) The value of buildings in the group corresponds to incurred costs of improvement in rental properties.

	Group			Parent company
Equipment, tools, fixtures and fittings	2008	2007	2008	2007
Historical cost, opening balance	127,800	119,278	113,080	96,317
Purchases	9,915	12,914	9,915	16,907
Sales and disposals	-704	-4,520	-704	-144
Exchange rate differences	0	129	0	0
Accumulated historical cost, closing balance	137,011	127,800	122,291	113,080
Depreciation, opening balance	-94,483	-88,774	-79,763	-69,678
Depreciation for the year	-9,657	-10,085	-9,657	-10,085
Sales and disposals for the year	544	4,165	544	0
Exchange rate differences	0	211	0	0
Accumulated depreciation, closing balance	-103,596	-94,483	-88,876	-79,763
Book value at year-end	33,415	33,317	33,415	33,317

Note 15 Participations in group companies (sek 000)

	Group		Parent company
Other intangible assets 1)	2008	2007	2008	2007
Subsidiary:
Medivir UK Ltd.,
VAT reg. no. 3496162 registered office: Essex, UK.
2,000,007 shares with a nom. value of £1, participating interest: 100%	–	–	0	0
Shareholders' contribution paid to subsidiary	–	–	4,800	18,880
Impairment loss on shares in subsidiary	–	–	-4,800	-18,880
2,000,007 shares with a nom. value of £1, participating interest: 100%
Subsidiary:
Medivir Personal AB
Corp. ID no.: 556598-2823, reg. office: Huddinge, Sweden,	–	–	100	100
1,000 shares with a nom. value of sek 100, participating interest: 100%
Subsidiary:
Medivir HIV Franchise AB
Corp. ID no.: 556690-7118, reg. office: Huddinge, Sweden
1,000 shares with a nom. value of sek 100, participating interest: 100%	–	–	100	100
Total			200	200

Note 16 Financial assets held for sale (sek 000)

	Group		Parent company
	2008	2007	2008	2007
Epiphany Biosciences	14,165	14,165	14,165	14,165
Presidio Pharmaceuticals Inc.	4,628	4,628	4,628	4,628
Total	18,793	18,793	18,793	18,793

Note 17 Pre-paid costs and accrued income (sek 000)

	Group		Parent company
	2008	2007	2008	2007
Pre-paid rents	2,329	1,535	973	0
License fees	1,696	2,081	1,696	2,081
Connecting to external databases	3,473	2,830	3,473	2,830
Other items	1,448	1,745	1,448	1,677
Total	8,946	8,191	7,590	6,589

Note 18 Other short-term investments, cash and bank balances (sek 000)

	Group		Parent company
	2008	2007	2008	2007
Certificates of deposit and commercial paper	0	134,411	0	134,411
Fixed-income and bond funds 1)	227,842	177,090	227,842	177,090
Cash and bank balances	56,644	17,830	55,429	14,463
Total	284,486	329,330	283,271	325,964

1) Book value is equal to market value.

Note 19 Accrued costs and deferred income (sek 000)

	Group		Parent company
	2008	2007	2008	2007
Accrued holiday pay	12,209	10,914	12,209	10,914
Accrued bonuses	11,832	3,549	11,832	3,549
Accrued research costs	5,335	18,670	5,335	17,356
Accrued rent	3,952	4,818	0	0
Deferred income	23,043	10,087	21,320	10,087
Other items	14,543	12,839	14,271	10,636
Total	70,914	60,876	64,967	52,542

Note 20 Leasing contracts incl. property rent (sek 000)

	Group		Parent company
	2008	2007	2008	2007
Costs for the year 1)	10,859	8,950	5,098	4,783
The nominal value of future minimum lease payments on irrevocable leasing contracts including property rents
Within one year 2)	10,035	10,546	4,281	4,675
Between one and five years 3)	26,331	29,126	3,317	5,641
Total	36,365	48,623	7,598	15,098

1) Primarily, costs comprise rents on property in Medivir UK Ltd. and Medivir AB. The total consolidated rental cost amounts to 9,390 (7,633), of which rental costs in Medivir AB are 3,825 (3,505) and rental costs in Medivir UK Ltd. are 5,565 (4,128). Of rental costs for the year, 7,527 (3,795) has been recognized due to subletting of the research facility at Chesterford Park. Medivir AB's rental contracts mature between 2009 and 2011, Medivir UK Ltd.'s rental contract at Chesterford Park matures in 2025. Medivir UK Ltd. is subject to indexation every fifth year. The research facility at Chesterford Park has been sublet until 2015 inclusive. The contract may be extended, and as a result, no provisioning for the period beyond 2015 has been conducted, because the judgment is that Medivir UK Ltd. will not incur these costs.

2) Of which 7,500 will be recognized as revenue due to subletting of the research facility at Chesterford Park.

3) Of which 30,100 will be recognized as revenue due to subletting of the research facility at Chesterford Park.

Certification

The Board of Directors and Chief Executive Officer hereby certify that the Consolidated Financial Statements have been prepared pursuant to IFRS (International Financial Reporting Standards) as endorsed by the EU and giv a true and fair view of the group's financial position and profits. The Annual Report has been prepared pusuant to generally accepted accounting principles and gives a true and fair view of

the parent company's financial position and profits. The Director's Report of the group and parent company gives a true and fair view of the group's and parent company's operations, financial position and profits, and describes the significant risks and uncertainty factors facing the parent company and grpoup companies.

Lars-Göran Andrén Board member

Donna Janson Board member

Bo Öberg Board member

Huddinge, Sweden, 19 February 2009

Anders Vedin Chairman

Björn C. Andersson Board member

Anna Malm Bernsten Board member

Ingemar Kihlström Board member

Magnus Falk

Board member

Göran Pettersson Board member

Ron Long Board member/CEO

The Report of the Auditors was presented on 5 March 2009 PricewaterhouseCoopers AB

Claes Dahlén Authorized Public Accountant

Audit Report

To the Annual General Meeting of the shareholders of Medivir AB (publ) Corporate identity number 556238-4361

We have audited the annual accounts, the consolidated accounts, accounting records and the administration of the Board of Directors and the Chief Executive Officer of Medivir AB (publ) for the year 2007. The annual accounts and consolidated accounts of the company are included in this document on pages 38–63. These accounts and the administration of the company, and the application of the Swedish Annual Accounts Act when preparing the annual accounts, and the application of IFRS (International Financial Reporting Standards) as endorsed by the EU and the Swedish Annual Accounts Act when preparing the consolidated accounts, are the responsibility of the Board of Directors and the Chief Executive Officer. Our responsibility is to express an opinion on the annual accounts, the consolidated accounts and the administration based on our audit.

We conducted our audit in accordance with generally accepted accounting principles in Sweden. Those standards require that we plan and perform the audit to obtain reasonable assurance that the annual accounts and consolidated accounts are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the accounts. An audit also includes assessing the accounting principles used and their application by the Board of Directors and the Chief Executive Officer and significant estimates made by the Board of Directors and the Chief Executive Officer when preparing the annual accounts and consolidated accounts as well as evaluating the overall presentation of information in the annual accounts and consolidated accounts.

As a basis for our opinion concerning discharge from liability, we examined significant decisions, actions taken and circumstances of the company in order to be able to determine the liability, if any, to the company of any Board member or the Chief Executive Officer. We also examined whether any Board member or the Chief Executive Officer has, in any other way, acted in contravention of the Swedish Companies Act, the Swedish Annual Accounts Act or the Articles of Association. We believe that our audit provides a reasonable basis for our opinion set out below.

The annual accounts have been prepared in accordance with the Swedish Annual Accounts Act and give a true and fair view of the company's financial position and results of operations in accordance with generally accepted accounting principles in Sweden. The consolidated accounts have been prepared in accordance with IFRS as endorsed by the EU and the Swedish Annual Accounts Act and give a true and fair view of the group's financial position and results of operations. The statutory administration report is consistent with the other parts of the annual accounts and consolidated accounts.

We recommend to the Annual General Meeting that the Income Statement and Balance Sheet for the parent company and for the group be adopted, that the loss of the parent company be dealt with in accordance with the proposal in the statutory administration report and that the members of the Board of Directors and the Chief Executive Officer be discharged from liability for the financial year.

Stockholm, Sweden, 5 March 2009 PricewaterhouseCoopers AB

Claes Dahlén Authorized Public Accountant

Forthcoming reports

• • The Interim Report for the first three months will be published on 23 April 2009.
• The Interim Report for the first six months will be published on 9 July 2009.
• The Interim Report for the first nine months will be published on 21 October 2009.

These reports will be available at Medivir's website, www.medivir.se under the heading Investor/Media, as of these dates.

Medivir sends its reports to all shareholders, except those who declined all information when registering their VP account.

For more information, please contact Rein Piir, CFO and VP, Investor Relations.

Rein Piir Tel (direct): +46 (0)8 546 831 23 Switchboard: +46 (0)8 546 831 00 rein.piir@medivir.se

Annual General Meeting

PLEASE NOTE

Medivir's AGM will be held in Polstjärnan Conference Center, Sveavägen 77, Stockholm, Sweden on Tuesday 23 April 2009 at 3 p.m.

Shareholders intending to participate in the Annual General Meeting should

• • firstly, be recorded in the shareholders' register maintained by Euroclear Sweden AB by no later than 17 April 2009 and
• • secondly, notify the company of their name, address and telephone number by mail to Medivir AB, Box 1086, SE-141 22 Huddinge,Sweden or by telephone: +46 (0)8 546 831 00 or fax + 46 (0)8 546 831 95 or e-mail enter@medivir.se by no later than 18 April 2009 at 4 p.m.

Important notice for nominee-registered shareholders For entitlements to participate in the Annual General Meeting, shareholders with nominee-registered holdings should temporarily re-register their shares in their own name with Euroclear Sweden AB. Shareholders desiring such re-registration must inform their nominee thereof in good time before 17 April 2009.

production Medivir/Admarco editing Karina Sannefjordh photography Joakim Folke* translation Turner & Turner print Billes *except front cover

and page 37 Olivier Le Queinec

Medivir AB, Head office • PO BOX 1086, SE-141 22 Huddinge, Sweden • Visiting address: Lunastigen 7 Phone +46(0)8-546 831 00 • Fax +46(0)8-546 831 99 • E-mail: info@medivir.se • www.medivir.se United kingdom Chesterford Research Park • Little Chesterford • Essex CB10 1XL United Kingdom For more information, please contact Head Office.