PAION AG — Interim / Quarterly Report 2014

Aug 7, 2014

PAION Q2#2014

Consolidated Financial Interim Report for the First Half-Year 2014

Contents

Interim Group Management Report for the First Half-Year 2014	3
The First Six Months at a Glance	3
Capital Market Environment and PAION Share Performance	8
Overview of Research and Development Activities	9
Net Assets, Financial Position, and Results of Operations	17
Personnel Development	19
Changes to the Supervisory Board	19
Risks and Opportunities	19
Significant Events Occurring After the Balance Sheet Date	20
Report on expected developments	20
Condensed Consolidated Interim Financial Statements	22
Consolidated Balance Sheet	22
Consolidated Statement of Comprehensive Income	24
Consolidated Cash Flow Statement	25
Consolidated Statement of Changes in Equity	26
Selected Explanatory Notes to the Consolidated Interim Financial
Statements as of 30 June 2014	27
Review Report	34
Information on PAION Shares	35
Corporate Calendar	35

01.01. 30.06. 2014

About PAION AG

PAION AG is a publicly-listed Specialty Pharma Company headquartered in Aachen, Germany with a second site in Cambridge, UK. The company has a track record in developing hospital-based treatments for which there is substantial unmet medical need. PAION's strategy is to extend its business model from a pure development company to a specialty pharmaceutical company with a focus on anaesthesia products. Remimazolam is intended to be the basis for its future marketing activities.

Key Figures

(all figures in KEUR unless otherwise noted)	Q2 2014	Q2 2013	H1 2014	H1 2013
Revenues	1,517	5	1,521	1,222
Research and development expenses	-2,696	-1,130	-4,298	-2,028
General administrative and selling expenses	-1,003	-880	-1,882	-1,823
Result for the period	-1,629	-1,537	-3,836	-2,190
Earnings per share in EUR for the period (basic)	-0.05	-0.06	-0.13	-0.09
Earnings per share in EUR for the period (diluted)	-0.05	-0.06	-0.13	-0.09

	H1 2014	H1 2013
Cash flows from operating activities	-5,300	-875
Cash flows from investing activities	-15	0
Cash flows from financing activities	10,696	-7,163
Change in cash and cash equivalents	5,412	-8,174
Average number of group employees	14	13

	30-06-2014	31-12-2013
Intangible assets	3,499	3,494
Cash and cash equivalents	18,704	13,292
Equity	20,561	13,329
Non-current liabilities	22	28
Current liabilities	4,056	4,659
Balance sheet total	24,639	18,016

Interim Group Management Report for the First Half-Year 2014

The First Six Months at a Glance

January

Successful completion of a capital increase with subscription rights and gross proceeds of EUR 5 million

Successful completion of a private placement with gross proceeds of EUR 3 million

February

Successful completion of a private placement with gross proceeds of EUR 3.17 million

Successful completion of the recruitment of the Phase II clinical trial with the short-acting anaesthetic/sedative Remimazolam in the indication "anaesthesia" in patients undergoing cardiac surgery at the heart center Leipzig, Germany

May

At the General Meeting on 21 May 2014, the resolutions proposed by the Management Board and the Supervisory Board were accepted with large majorities. This also included the resolution regarding the increase of the Company's share capital by cash contributions through the issue of up to 18,505,305 new shares. Furthermore, Mr. John Dawson was elected to the Company's Supervisory Board as successor of Mr. Alan Goodman.

Announcement of positive data from the Phase II clinical trial with the short-acting anaesthetic/sedative Remimazolam in the indication "anaesthesia" in patients undergoing cardiac surgery at the heart center Leipzig

June

Signing of an exclusivity agreement with Pendopharm concerning a license agreement for the development and commercialization of Remimazolam in the territory of Canada

Extension of the license agreement with R-Pharm for the development and commercialization rights of Remimazolam to include the MENA-region (Middle East and North Africa)

July

Successful completion of a subscription offer with a placement of 18,505,305 new shares and gross proceeds of EUR 46.26 million

Completion of a license agreement with Pendopharm concerning an exclusive license for the development and commercialization of Remimazolam in the territory of Canada

Successful completion of a private placement with gross proceeds of EUR 4 million

Development and Commercial Activities

In the first half-year of 2014 PAION focussed on the development and partnering of Remimazolam. In February 2014, only 5 months after the start, the completion of recruitment of the Phase II clinical trial with the short-acting anaesthetic/sedative Remimazolam in the indication "General Anaesthesia" in patients undergoing cardiac surgery at the heart center Leipzig was announced. The Phase II study was a randomized, propofol and sevoflurane (standard treatment) controlled Phase II study to evaluate the efficacy, tolerability and pharmacokinetics of Remimazolam during general anaesthesia in patients undergoing cardiac surgery using a heart-lung machine. After surgery a follow up sedation in the recovery room or in the intensive care unit (ICU) for up to 24 h took place. A total of 90 patients were treated. The primary endpoint of effectiveness as a general anaesthetic was achieved in 98% of patients in the two Remimazolam dose groups and 96% in the Propofol/Sevofluarane group. This demonstrated an excellent efficacy rate across all treatment groups. The safety profile was generally very good in all treatment groups. One of the key targets of this trial was to assess the cardiostability during cardiac surgery with Remimazolam when compared to Propofol/Sevoflurane, both of which are known to cause cardiac depression. During cardiac surgery Norepinephrine is routinely used to maintain blood pressure in the normal range and counteract pronounced blood pressure decreases. In the trial, the use of Norepinephrine was 36.7% lower in Remimazolam treated patients when compared to the Propofol/Sevoflurane group which can be regarded as a clinically meaningful differentiation.

In June 2014, PAION and R-Pharm, Russia, have extended their licence agreement concerning the exclusive rights of development and commercialization of Remimazolam to include the MENA-region (Middle East and North Africa). Based on this extension, PAION has received an upfront payment in the amount of EUR 1.5 million and will receive potential regulatory and commercial milestone payments of up to EUR 5.5 million and low double digit royalties on net sales in the territory.

After the completion of an exclusivity agreement with Pendopharm's European affiliate, Pharmascience International Ltd., in June 2014, the definitive license agreement for the development and commercialization of Remimazolam in the territory of Canada was signed in the beginning of July 2014. Based on this license agreement, PAION will receive potential regulatory and commercial milestone payments of up to CAD 5.7 million (approximately EUR 3.9 million) and significant double digit tired royalties on net sales in Canada starting at 15%. Through the option agreement announced on 13 June 2014, Pendopharm's European affiliate, Pharmascience International Limited, had committed to invest up to EUR 4 million in shares not subscribed by PAION's shareholders at the end of the meanwhile completed rights offering at a 10% premium to the theoretical ex-rights price of PAION's share price. Because at the end of the rights offering, no new shares were available to permit the investment of the EUR 4 million, PAION had the right to require Pharmascience International Limited to invest the EUR 4 million in shares of PAION in a separate private placement at a 10% premium to the then current market price. The private placement was completed on 17 July 2014 at a subscription price of EUR 3.1463 which was 25.9% above the subscription price in the rights offering.

Closing date	Type of capital measure	Issued shares	Issue price	Gross proceeds
13 January 2014	Rights offering	2,777,777	EUR 1.80	EUR 5 million
22 January 2014	Private placement	1,245,899	EUR 2.4079	EUR 3 million
17 February 2014	Private placement	1,290,178	EUR 2.4553	EUR 3.17 million
9 July 2014	Rights offering	18,505,305	EUR 2.50	EUR 46.26 million
22 July 2014	Private placement	1,271,334	EUR 3.1463	EUR 4 million
		25,090,493		EUR 61.43 million

Capital increases

On 17 December 2013, the Management Board decided with the approval of the Supervisory Board and based on the authorisation by the General Meeting to issue 2,777,777 new, no-par value bearer shares at a subscription price of EUR 1.80, granting pre-emptive rights to existing shareholders. The existing shareholders were able to subscribe the new shares at a subscription ratio of 19:2 in the subscription period from 23 December 2013 to 9 January 2014. The U.S. institutional investor Capital Ventures International had undertaken to purchase all new shares that were not subscribed by existing shareholders or other investors in the rights offering at the subscription price. Upon completion of the capital increase, the company's share capital increased from EUR 25,379,906.00 by EUR 2,777,777.00 to EUR 28,157,683.00 through the issuing of 2,777,777 new shares. The capital increase was recorded in the commercial register on 13 January 2014 and led to gross proceeds of EUR 5 million.

On 15 January 2014, the Management Board decided with the approval of the Supervisory Board and based on the authorisation of the General Meeting to issue 1,245,899 new bearer shares to the U.S. institutional investor Capital Ventures International in a private placement excluding existing shareholders' pre-emptive rights. The new shares were issued at a share price of EUR 2.4079 and led to gross proceeds of EUR 3 million. As a result, the company's share capital increased from EUR 28,157,683.00 by EUR 1,245,899.00 to EUR 29,403,582.00 through the issuing of 1,245,899 new shares. The capital increase was recorded in the commercial register on 22 January 2014.

On 12 February 2014, the Management Board decided with the approval of the Supervisory Board and based on the authorisation of the General Meeting to issue 1,290,178 new bearer shares to the U.S. institutional investor Capital Ventures International in a private placement excluding existing shareholders' pre-emptive rights. The new shares were issued at a share price of EUR 2.4553 and led to gross proceeds of EUR 3.17 million. As a result, the company's share capital increased from EUR 29,403,582.00 by EUR 1,290,178.00 to EUR 30,693,760.00 through the issuing of 1,290,178 new shares. The capital increase was recorded in the commercial register on 17 February 2014.

The Authorised Capital 2011 correspondingly decreased to EUR 7,366,534.00. By virtue of a resolution adopted by the Annual General Meeting on 21 May 2014, the Management Board was authorised to increase the share capital on or prior to 20 May 2019, with the consent of the Supervisory Board, on one or more occasions, by up to an aggregate of EUR 15,408,631.00 by issuing up to 15,408,631 new no-par value bearer shares in return for cash contributions or contributions in kind (Authorised Capital 2014). Furthermore the Management Board was authorised to use up to EUR 3,084,217 out of the Authorised Capital 2014 to issue new shares for cash by excluding pre-emptive rights. The remaining Authorised Capital 2011 in the amount of EUR 7,366,534.00 was revoked.

On 18 June 2014, the Management Board decided with the approval of the Supervisory Board and based on the authorisation by the General Meeting to issue 18,505,305 new, no-par value bearer shares at a subscription price of EUR 2.50, granting pre-emptive rights to existing shareholders. The existing shareholders were able to subscribe the new shares at a subscription ratio of 5:3 in the subscription period from 20 June to 4 July 2014. At the end of the subscription period 18,074,183 new shares were subscribed, corresponding to a final subscription rate of 97.67%. 431,122 new shares not subscribed for were placed with institutional investors by way of an accelerated bookbuilt offering. The capital increase led to gross proceeds of EUR 46.26 million. Upon completion of the capital increase, the company's share capital increased from EUR 30,842,178.00 by EUR 18,505,305.00 to EUR 49,347,483.00 through the issuing of 18,505,305 new shares. The capital increase was recorded in the commercial register on 9 July 2014. The net proceeds of approx. EUR 43.5 million from the offering shall be used primarily for the further development of Remimazolam in the US and the EU. For the completion of the Phase III programs PAION currently anticipates, subject to further consultations with the regulatory authorities, costs in the amount of approximately EUR 20-25 million for the US and approximately EUR 15-20 million for the EU. Remaining proceeds from the capital increase will be invested in premarketing activities.

On 17 July 2014, the Management Board decided with the approval of the Supervisory Board and based on the authorisation of the General Meeting to issue 1,271,334 new bearer shares to Pendopharm´s European affiliate Pharmascience International Limited in a private placement excluding existing shareholders' pre-emptive rights. The new shares were issued at a share price of EUR 3.1463 which was a 10% premium to the volume weighted average share price at five trading days before the private placement and which was 25.9% above the subscription price in the rights offering. The capital increase led to gross proceeds of EUR 4 million. The company's share capital increased from EUR 49,347,483.00 by EUR 1,271,334.00 to EUR 50,618,817.00 through the issuing of 1,271,334 new shares. The capital increase was recorded in the commercial register on 22 July 2014. The Authorised Capital 2014 correspondingly decreased to EUR 14,137,297.00.

Financial Overview

In the first half-year 2014, revenues amounted to EUR 1.5 million and thus were EUR 0.3 million higher than in the corresponding prior years' period. The revenues mainly relate to the upfront payment from TR-Pharm in connection with the extension of the license agreement to include the territory Middle East and North Africa. In the prior-year period, the revenues resulted from a milestone payment from Yichang after completion of technology transfer. Research and development expenses increased compared to the prior-year period due to increased development activities with Remimazolam. General administrative and selling expenses slightly increased compared to the prior-year period. In total a net loss of EUR 3.8

million has been incurred in the first half-year 2014 compared to a net loss of EUR 2.2 million in the prior-year period.

Cash and cash equivalents increased by EUR 5.4 million in the first half-year 2014 mainly due to the capital increases conducted in the first quarter 2014. As of 30 June 2014 PAION's cash and cash equivalents amounted to EUR 18.7 million. With the cash and cash equivalents and the proceeds received from the capital increase completed in the beginning of July 2014 PAION has sufficient funds to conduct the planned Phase III programmes with Remimazolam in the EU and the U.S., including the filing process, and to initiate premarketing and market access activities.

Capital Market Environment and PAION Share Performance

The development of the German capital market was impacted by the uncertainties of the political crises in Ukraine and Middle East as well as by the slower growth in the emerging markets in the first half-year 2014. Based on good economic fundamentals in Germany and the Eurozone, the DAX increased slightly by 2.9% at the end of the first half-year in comparison to the closing level of 2013. The NASDAQ Biotechnology Index and the AMEX Biotechnology Index could continue the trend of previous years and reported gains of 13% and 19% in the first half-year 2014 despite an incipient phase of correction in March. The DAX Subsector biotechnology showed a solid growth of 7.5% in the first half-year 2014, after all.

The PAION share price started the year 2014 at a price of EUR 2.40 (Xetra). The peak price on 5 March 2014 was EUR 4.70 (Xetra). On 3 January 2014 the lowest price in the first half-year 2014 was marked at EURO 2.27 (Xetra). The closing price on 30 June 2014 was EUR 2.90 (Xetra). This corresponds to an increase of 19% compared to the closing price of 2013 on 30 December (EUR 2.43; Xetra)

The average daily trading volume (Xetra and Frankfurt Stock Exchange) amounted to 485,105 shares during the first half-year 2014 (in the year 2013: 223,632 shares). Thereby 60.2 million shares (119% of the current share capital) were traded during the first half-year of 2014 (in the year 2013: 56.6 million shares and 112% of current share capital, respectively).

Development of the PAION Share Price and Volume (Xetra) in the First Half-Year 2014

Overview of Research and Development Activities

At the end of the first half-year 2014, PAION's portfolio comprised four candidates in the pipeline which are described in the following. PAION has rights to further substances which are partly out-licensed and may lead to additional performance-related income and expenses. At present, the likelihood is still assessed to be low, since these substances are not a major part of PAION's or its partners' strategy.

Remimazolam

Remimazolam is an ultra short-acting general anaesthetic/sedative that was initially developed by PAION for use in minor medical interventions (procedural sedation), primarily targeting the U.S. market. Sedatives are used, for example, in endoscopic procedures such as colonoscopies. After intravenous administration to over 900 volunteers/patients in the course of clinical trials in all indications, Remimazolam has clearly shown a controllable sedative and anaesthetic effect with rapid onset and offset. This means that the patient can be selectively sedated for the duration of the intervention and rapidly regains full consciousness after the procedure. The rapid offset of the substance's effect is due to its metabolism by tissue esterase enzymes that are widely distributed throughout the body.

Remimazolam is being developed by PAION's partner Ono Pharmaceutical (hereafter: Ono) for the Japanese market in the indication of general anaesthesia. Furthermore, Remimazolam is also being developed by Ono as a sedative during sedation in an Intensive Care Unit (ICU).

In November 2013, PAION reported the headline data of ONO's phase II/III trial. Remimazolam met the primary endpoint and showed good safety data.

Based on the fact that general anaesthesia is the more attractive business case for the EU, PAION decided to develop Remimazolam for general anaesthesia as the lead indication for Europe. In February 2013, PAION held a formal scientific advice meeting with the German regulatory authority BfArM on the European clinical development programme for Remimazolam in the general anaesthesia indication. After granting approval to start the clinical study by the BfArM, the European Phase II trial with Remimazolam in general anaesthesia in cardiovascular surgery was started in September 2013. A total of 90 patients were treated and on 11 February 2014 the completion of recruitment was announced PAION reported about the positive study data on 28 May 2014. PAION currently assumes that one Phase II and one Phase III trial in general anaesthesia in addition to the Japanese development programme will be sufficient for EU approval. In preparation for the European Phase III trial, PAION will have further scientific advice meetings with European regulatory authorities.

In the U.S., procedural sedation remains the lead indication. Insurance companies in the U.S. pay in excess of 1.8 billion for colonoscopies with Propofol and the necessary presence of anaesthesiologists. Under sedation with Midazolam, however, an anaesthesiologist does not need to be present, as Midazolam is a very safe agent for providing induction of conscious sedation.

The disadvantages of Midazolam are longer and variable initiation and recovery times for the patient. Compared to Propofol this results in reduced numbers of procedures that can be performed. Gastroenterologists therefore often use Propofol to almost double the number of patients that can be screened in a day. The high number of procedures in a doctor's surgery/clinic is not only necessary to manage the facility's business but also to fulfil the social mission to screen as many patients as possible, as colonoscopies are the only proven method for early detection and prevention of colon cancer. Remimazolam is expected to be as safe as Midazolam. This assumption is based on the fact that Remimazolam belongs to the class of benzodiazepines (such as Midazolam) and the previously generated data indicate a very good safety profile.

The development programme required until market approval (Phase III studies, associated development activities, production development) will be prepared based on a positive End-of-Phase II Meeting with the FDA held in October 2013. The objective of the development programme is to show that Remimazolam is as quick as Propofol with respect to its efficacy (high throughput by rapid onset and offset of sedation) and at the same time is equivalent to Midazolam in terms of its safety profile. If this can be shown, it is possible that the FDA will grant a label that does not require the presence of an anaesthetist for the performance of procedural sedation. The FDA will be able to make this decision only after the complete data set is available (i.e. after Phase III). This development is positively supported by the presence of a reversal agent (Flumazenil is an antagonist for all benzodiazepines such as Midazolam and Remimazolam) which can quickly terminate the effect of the drug in the event of an overdose or adverse reaction, for example. Propofol does not have such an antagonist, which, among other things is the reason why the presence of an anaesthetist for the application of Propofol is required.

Remimazolam could offer savings of USD 1 billion per year to the U.S. healthcare system for procedures such as colonoscopies. This is why PAION sees a very attractive business case for conscious sedation in the U.S. market.

Clinical Development

Procedural sedation

The clinical studies performed with Remimazolam comprise two Phase I and two Phase II studies with single or multiple dosing without an intervention or during endoscopy of the upper gastrointestinal tract or the colon.

The generated data indicate a good tolerability of Remimazolam. A rapid onset and offset of the sedative effect was observed during the procedures. It was also shown that it is possible to achieve the same (safety) or better (efficacy) results with single or multiple dosing of Remimazolam as compared to single or multiple dosing of the current standard Midazolam. The effect of Remimazolam can be reversed by the benzodiazepine antagonist Flumazenil.

In November 2013 PAION announced a positive End-of-Phase II Meeting with the FDA for Remimazolam in procedural sedation. At that meeting, the FDA laid out its expectations for the remaining development programme up to NDA filing and offered a dialogue to finalise the necessary study designs together with PAION. Plans are to start a pivotal Phase III programme evaluating the safety and efficacy of Remimazolam in the second half of 2014. Subject to successful results from future clinical trials, filing for approval with the FDA is expected in the course of 2015/2016.

General Anaesthesia

PAION's partner Ono Pharmaceutical has completed the Phase III programme of Remimazolam in anaesthesia as the lead indication for the Japanese market.

As part of the Phase III programme, a Phase II/III study was conducted in Japan as a multi-centre randomised parallel-group study with Propofol as a control in surgery patients undergoing general anaesthesia in combination with analgesics. Remimazolam and Propofol were intravenously administered to 375 patients (2 Remimazolam groups with induction doses of 6 mg/kg/h or 12 mg/kg/h and a dose of 1 mg/kg/h for maintenance, 150 subjects per group) and 75 patients received a standard dose of Propofol, respectively, to compare the success rates of induction and maintenance of general anaesthesia and the safety profiles.

All 375 patients achieved loss of consciousness and underwent successful intubation. As expected the primary endpoint (efficacy) as a general anaesthetic was achieved by 100% of patients in all groups.

No adverse events of concern were observed. The incidence rates of decrease in blood pressure were 35.3%, 34.7% and 60.0% in the 6 mg/kg/h and 12 mg/kg/h Remimazolam and Propofol groups, respectively. In this study Remimazolam showed a clinically meaningful advantage regarding cardiodepressive/hypotensive effects compared to Propofol. The incidence rate of cardiodepressive/hypotensive effects was significantly lower in each Remimazolam group as compared to the Propofol group (p=0.0004 and p=0.0003 for the 6 and 12 mg/kg/h doses vs. Propofol).

The recruitment of the second study in the Phase III programme in more severely sick patients (American Society of Anesthesiologists classification III or higher) and the hepatic impairment study were completed. No unexpected adverse reactions were reported. The clinical development programme for the indication of induction and maintenance of general anaesthesia is completed. The pharmacokinetic and pharmacodynamic modelling is still ongoing to support filing for marketing approval, which is expected in the second half of 2014.

In Europe PAION has completed recruitment of a Phase II study, which was a randomised, Propofol and Sevoflurane (standard treatment) controlled Phase II study to evaluate the efficacy, safety and pharmacokinetics of Remimazolam during general anaesthesia in patients undergoing major cardiac surgery. After surgery, follow-up sedation in the recovery room or the intensive care unit (ICU) for up to 24 h took place. A total of 90 patients were treated.

The primary efficacy endpoint of effectiveness as a general anaesthetic (defined as successful anaesthesia not requiring rescue therapy) was achieved in 98% of patients in the two Remimazolam dose groups and 96% in the Propofol/Sevoflurane group concluding that an excellent efficacy rate across all treatment groups was shown. As expected, the onset and offset of action profile was comparable between all treatment groups, showing that Remimazolam indeed shares the fast-acting sedative profile of Propofol. The safety profile was generally very good in all treatment groups. One of the key targets of this trial was to assess the cardiostability during cardiac surgery with Remimazolam when compared to Propofol/Sevoflurane, both of which are known to cause cardiac depression. The study evaluated a substantial number of parameters to analyse these effects. Remimazolam already had shown excellent cardiostability in the ONO Phase III study. During cardiac surgery norepinephrine is routinely used to maintain blood pressure in the normal range and counteract pronounced blood pressure decreases. Norepinephrine and other adrenergic substances however are known to impair the microcirculation in vital organs and thus have a negative effect on short, mid and long-term outcomes. Therefore lowering the norepinephrine dose is of high medical relevance. The amount of norepinephrine required to counteract the cardio-depressive effects (e.g., drop in blood pressure) is a direct measure of the cardiodepressive effects in each group: a higher amount of norepinephrine would be used to counteract higher cardiodepressive effects. The use of norepinephrine was 36.7% lower in Remimazolam treated patients when compared to the Propofol/Sevoflurane group which can be regarded as a clinically meaningful differentiation.

The study was designed such that the data can be compared with the anaesthesia study conducted by Ono in Japan.

Results of the scientific advice meetings with the European regulatory authority EMA to define the European Phase III program are expected in the fourth quarter 2014 and determine the study start either end of 2014 or first half of 2015. Filing for approval in general anesthesia in the EU is expected in the course of 2015/2016, subject to successful results from future clinical trials.

ICU sedation

In parallel to the initiation of the programme in anaesthesia, Ono initiated a Phase II study in the indication "ICU Sedation". Ono investigated the efficacy and safety of Remimazolam for sedation during mechanical ventilation in the intensive care unit in a multi-centre, randomised, parallel-group study in postoperative patients. The target sample size in this study was 90 patients.

Due to unclear pharmacokinetic data in long-term administration in this explorative study (in a few patients higher than expected Remimazolam plasma levels were observed), ONO decided to discontinue the study in August 2013. Overall all patients were sedated successfully and no significant adverse events were reported. The planned preclinical experiments and additional PK modelling based on the plasma samples is underway. The results will be the basis for a dose adjustment, if necessary, for new studies.

Cooperation Agreements

In 2007 Ono was granted the rights to develop and market Remimazolam for the Japanese market in return for undertaking to make development milestone payments and pay royalties. Ono is developing Remimazolam for interventions that require continuous infusion. In this cooperation, data and information are continually shared so that all parties, including the other Remimazolam partners, may benefit from each other's development progress.

This substantial data package generated by Ono supports and accelerates the development of Remimazolam for the indications anaesthesia and ICU sedation in the PAION territories and reduces the development costs for PAION. In addition, the FDA considers the data to be an important part of the safety data on Remimazolam.

In July 2012, Yichang Humanwell (Yichang) received an exclusive licence for the development, manufacture and commercialisation in the territory of People's Republic of China in return for undertaking to make development milestone payments and pay royalties. By entering into the licence agreement, PAION has received upfront payments totalling EUR 3 million. In addition, milestone payments and royalties of 10% have been agreed. The amount of future milestone payments will depend on the eventual development strategy for Remimazolam selected by Yichang in China and has a volume of up to EUR 4 million. Yichang and PAION have completed the technology transfer in 2013 to enable Yichang to produce

Remimazolam in the territory. The data generated in China are also available for PAION and its licence partners.

In October 2013, PAION signed an exclusive licence agreement with Hana Pharm for Remimazolam in South Korea against an upfront payment of EUR 1 million. In addition, potential milestone payments of up to EUR 2 million and 10% royalties on sales in the South Korean market have been agreed. Hana Pharm will manage and finance the development and marketing approval process in South Korea. The data generated in South Korea are also available for PAION and its licence partners.

Also in October 2013 an exclusive licence agreement with R-Pharm for Remimazolam in Russia and other CIS countries was signed. PAION has received an upfront payment in the amount of EUR 1 million and will receive potential milestone payments of up to EUR 3 million and low double digit royalties on net sales in the CIS. R-Pharm will manage the development and marketing approval process in the CIS. R-Pharm intends to market Remimazolam in all indications with the lead indication anaesthesia and plans to start a bridging study in anaesthesia as soon as possible. The data generated in the CIS are also available for PAION and its licence partners.

In November 2013, it was announced that PAION and R-Pharm have extended their licence agreement for Remimazolam to include Turkey. TR-Pharm, an affiliate of R-Pharm based in Istanbul, will manage the development and marketing approval process in Turkey. PAION has received an upfront payment in the amount of EUR 1.0 million and will receive potential regulatory and commercial milestone payments of up to EUR 3.0 million and low double digit royalties on net sales in the territory. TR-Pharm intends to market Remimazolam in all indications with the lead indication anaesthesia. The data generated in Turkey are also available for PAION and its licence partners.

In June 2014, PAION and R-Pharm, Russia, have extended their licence agreement concerning the exclusive rights of development and commercialization of Remimazolam to include the MENA-region (Middle East and North Africa). TR-Pharm, an affiliate of R-Pharm based in Istanbul, will manage the development and marketing approval process in the MENAregion. Based on this extension, PAION has received an upfront payment in the amount of EUR 1.5 million and will receive potential regulatory and commercial milestone payments of up to EUR 5.5 million and low double digit royalties on net sales in the territory. TR-Pharm intends to market Remimazolam in all indications with the lead indication anaesthesia and expects an earliest launch of Remimazolam in 2016. The data generated in the MENA-region are also available for PAION and its licence partners.

After the completion of an exclusivity agreement with Pendopharm in June 2014, the final license agreement for the development and commercialization of Remimazolam in the territory of Canada was closed in the beginning of July 2014. Based on this license agreement, PAION will receive potential regulatory and commercial milestone payments of up to CAD 5.7 million (approximately EUR 3.9 million) and significant double digit tired royalties on net sales in Canada starting at 15%. Through the option agreement announced on 13 June 2014, Pendopharm's European affiliate, Pharmascience International Limited, had committed to invest up to EUR 4 million in shares not subscribed by PAION's shareholders at the end of the meanwhile completed rights offering at a 10% premium to the theoretical ex-rights price of PAION's share price. Because at the end of the rights offering, no new shares were available to permit the investment of the EUR 4 million, PAION had the right to require Pharmascience International Limited to invest the EUR 4 million in shares of PAION in a separate private

placement at a 10% premium to the then current market price. The private placement was successfully completed on 17 July 2014 at a subscription price of EUR 3.1463 which was 25.9% above the subscription price in the rights offering.

PAION's goal is to add further regional cooperation agreements.

	Total received	Total outstanding	Royalty rate
Ono, Japan (2007)	USD 8 m	not disclosed	not disclosed
Yichang, China (2012)	EUR 3 m	Up to EUR 4 m	10%
Hana Pharm, S. Korea (2013)	EUR 1 m	EUR 2 m	10%
R-Pharm, CIS (2013)	EUR 1 m	EUR 3 m	Low double digit
(T)R-Pharm, Turkey (2013)	EUR 1 m	EUR 3 m	Low double digit
(T)R-Pharm, MENA (2014)	EUR 1.5 m	EUR 5.5 m	Low double digit
Pendopharm, Canada (2014)		Approx. EUR 3.9 m	double digit tiered (starting at 15%)
Total	~EUR 13.4 m

The following table is a summary of the licensing deals to this date:

Solulin

Solulin is an improved variant of the human protein thrombomodulin, an important natural regulator of the clotting system. One of the functions of thrombomodulin is to stabilise the initial fibrin clot to stop bleeding. Other than native thrombomodulin, which is anchored in the wall of blood vessels, Solulin can enter the blood stream to reach its potential site of action. In low concentrations, Solulin is able to stabilise blood clots and to support coagulation. Haemophilia patients could benefit from this property.

According to the WHO, about 400,000 people worldwide are currently affected by the hereditary disease haemophilia, including 10,000 in Germany. Therefore, the definition of an "orphan disease" is fulfilled. Solulin has the potential to significantly improve the existing treatment options for the patients.

Solulin could possibly represent an improved therapeutic approach in the treatment of haemophilia and various acute diseases associated with hyperfibrinolysis (excessive dissolution of blood clots).

Hyperfibrinolysis is a coagulation deficit that leads to unstable clots and their premature dissolution. In patients with haemophilia this is the cause of recurrent or - after initial coagulation - delayed bleedings (as the major complication). In the absence of haemophilia, the same disorder can result in blood losses and a need for blood transfusions, i.e. when patients are treated in the ICU after surgery or severe trauma. Solulin and its mutants correct hyperfibrinolysis via the so-called "Thrombin Activatable Fibrinolysis Inhibitor" (TAFI) pathway. The novelty of the approach lies in the anticipated specific TAFI activation to mitigate or prevent coagulation failure.

Due to the focus of the available resources on anaesthesia and due to the restructuring in 2011, the Phase Ib study had to be stopped in October 2012 as the enrolment lagged far behind the study objectives. Nevertheless, the available data showed that Solulin has the expected effect in haemophilia patients. PAION considers the potential for Solulin and PN 13 (see below) in the indications mentioned to be very attractive. As PAION focuses all resources on Remimazolam, the project can only be continued with third party funding.

PN 13

In July 2012, PAION announced that the Federal Ministry for Education and Research (BMBF) will be subsidising the production and preclinical development of novel PAION thrombomodulin – mutants (PN 13) with a maximum of EUR 0.7 million until end of 2014 under the funding initiative "KMU-INNOVATIV: Biotechnologie – BioChance". The lead candidate could possibly represent an improved therapeutic approach in the treatment of haemophilia and various acute diseases associated with hyperfibrinolysis (excessive dissolution of blood clots).

The project is in a very early stage of development. The funding was used to produce several Solulin mutants as a first step. The resulting Solulin mutants could not be tested using the standard methods. Therefore, further research will require a higher financial expenditure than expected, which was not covered by the granted funding. As PAION focuses all resources on Remimazolam, PAION has asked for a discontinuation of the grant from BMBF and the project was terminated. The project can only be continued with third party funding.

GGF2

GGF2 (Glial Growth Factor 2) is known to stimulate the growth and differentiation of a variety of cells including glial cells, the support cells of the nervous system. These glial cells form the myelin sheath that insulates nerve cells and is essential for their survival and proper functioning. In demyelinating diseases such as multiple sclerosis, the myelin sheath is damaged, leading to the degeneration of nerve cells.

In preclinical studies PAION's licence partner Acorda Therapeutics, Inc. (Acorda) demonstrated that GGF2 can stimulate the cell growth necessary to protect and regenerate a damaged myelin sheath. GGF2 is the lead neuregulin in Acorda's portfolio. Neuregulins have also shown the ability to restore cardiac function in preclinical models of heart failure caused by myocardial infarction, heart rhythm disorders and myocardial dysfunctions.

At the beginning of March 2013, Acorda announced positive results of the Phase I trial with GGF2. The study identified a maximum tolerated dose of GGF2 and the preliminary efficacy measures showed that GGF2 improves heart function. Acorda has discussed the findings from the study with the FDA and has reached agreement on the next clinical study of GGF2 in heart failure. This Phase Ib study involves primarily the continued investigation of the safety profile but also the efficacy of GGF2 across a range of doses; the start of the study was announced by Acorda on 8 October 2013 and subsequently paused enrolment in the trial to review additional preclinical data. On April 22, 2014, Acorda announced that it has completed its review of these data and has agreed with the FDA that the Phase Ib clinical trial of GGF2 will resume recruitment. The Company expects that the trial will be completed in 2015. The FDA has granted Fast Track designation for GGF2 for the treatment of heart failure.

Cooperation Agreements

The rights relating to the recombinant GGF2, rh GGF2, were licensed to Acorda in 2002 by PAION UK. In total, further milestone payments of USD 2.5 million prior to market approval and an additional milestone payment of USD 5 million are due upon market authorisation; after that PAION will receive royalties depending on net sales.

Net Assets, Financial Position, and Results of Operations

Q2 2014 KEUR	Q2 2013 KEUR	H1 2014 KEUR	H1 2013 KEUR
1,517	5	1,521	1,222
1,517	5	1,521	1,222
-2,696	-1,130	-4,298	-2,028
-1,003	-880	-1,882	-1,823
18	355	33	355
-3,681	-1,655	-6,147	-3,496
-2,165	-1,650	-4,626	-2,273
12	-19	24	-156
524	132	766	239
-1,629	-1,537	-3,836	-2,190

Results of Operations

Revenues in the first half-year 2014 amounted to EUR 1.5 million and thus were EUR 0.3 million higher than in the corresponding prior years' period. The revenues mainly relate to the upfront payment from TR-Pharm in connection with the extension of the license agreement to include the territory Middle East and North Africa. In the prior-year period, the revenues resulted from a milestone payment from Yichang after completion of technology transfer.

Research and development expenses amounted to KEUR 4,298 in the first half-year 2014 and relate mainly to Remimazolam. This means an increase of KEUR 2,270 compared to the prior-year period. The increase is due to increased development activities, in particular the production development of Remimazolam, the Phase II study with Remimazolam and the preparation of the Phase III programmes with Remimazolam.

General administrative and selling expenses in the first half-year 2014 increased slightly by KEUR 59 to KEUR 1,882.

The financial result for the first half-year 2014 amounted to KEUR 24 and improved by KEUR 180 compared to the prior-year period. The improvement results primarily from the fact that based on the repayment of the subordinated loan in April 2013 no further interest incurred on the loan.

The income taxes relate mainly to tax claims for reimbursement of parts of the research and development costs from the British tax authorities. The change compared to the prior-year period mainly relates to the increase of the research and development expenses in the reporting period.

The net loss for the first half-year 2014 amounted to KEUR 3,836. In the prior-year period a net loss of KEUR 2,190 has been reported. The change is mainly based on higher research and development expenses in the current reporting period.

Net Assets

	30-06-2014 KEUR	31-12-2013 KEUR	Change KEUR
Non-current assets	3,583	3,583	0
Current assets	21,056	14,433	6,623
Total Assets	24,639	18,016	6,623
Equity	20,561	13,329	7,232
Non-current liabilities	22	28	-6
Current liabilities	4,056	4,659	-603
Total Equity and liabilities	24,639	18,016	6,623

The non-current assets mainly comprise the development project Remimazolam (KEUR 3,474).

The KEUR 6,623 increase in current assets is mainly attributable to the increase in cash and cash equivalents (KEUR 5,412) and accrued costs (KEUR 1,277) of the capital increase carried out at the beginning of July 2014. The accrued cost will be recorded as reduction of the capital reserve in the third quarter 2014.

The equity increased mainly due to the capital increases carried out in the first quarter 2014 by KEUR 7,232 compared to 31 December 2013. The increase was reduced by the net loss of the first half-year 2014 amounting to KEUR 3,836. As of 30 June 2014 the equity ratio was 83.5% (31 December 2013: 74.0%).

The decrease in current liabilities by KEUR 603 relates mainly to tax payments (KEUR 2,162) relating to the sale of Desmoteplase to Lundbeck which took place in 2012. This effect was partially offset by the increase of the trade liabilities.

Financial Position

Compared to 31 December 2013 cash and cash equivalents increased by KEUR 5,412 to KEUR 18,704 at the end of the current reporting period. The change in cash and cash equivalents stems from the following areas:

	H1 2014 KEUR	H1 2013 KEUR
Cash flows from operating activities	-5,300	-875
Cash flows from investing activities	-15	0
Cash flows from financing activities	10,696	-7,163
Effects of exchange rate changes	31	-136
Change in cash and cash equivalents	5,412	-8,174

The cash flows from operating activities in the first half-year 2014 were KEUR -5,300, mainly due to the net loss of the period (KEUR -3,836) and tax payments and refunds amounting to KEUR -1,440 (net). The tax payments relate to the sale of Desmoteplase to Lundbeck which took place in 2012.

The cash flows from financing activities in the first half-year 2014 in the amount of KEUR 10,696 mainly results from the capital increases carried out in the first quarter of 2014.

Personnel Development

On average, PAION employed 14 employees in the first six months of 2014 (fiscal year 2013: 14 employees). As of 30 June 2014 the headcount was 15.

Changes to the Supervisory Board

The Annual General Meeting on 21 May 2014 elected Mr. John Dawson to the Company's Supervisory Board as successor of Mr. Alan Goodman.

Risks and Opportunities

Material risks and opportunities relating to future development are presented in detail in the group management report for fiscal year 2013 and have not changed significantly in the first half-year of 2014.

Significant Events Occurring After the Balance Sheet Date

In the beginning of July 2014, a capital increase with issuing 18,505,305 new shares has been successfully completed. Regarding the details of this capital measure reference is made to the explanations in section "Capital Increases" in this interim group management report and in section "Equity" in the selected explanatory notes to the consolidated interim financial statements.

After the completion of an exclusivity agreement with Pendopharm in June 2014, the final license agreement for the development and commercialization of Remimazolam in the territory of Canada was signed in July 2014. Regarding the details of this license agreement reference is made to explanations in sections "Development and Commercial Activities" and "Overview of Research and Development Activities" in this interim group management report.

On 17 July 2014 PAION announced, that the Company issued 1,271,334 new shares for EUR 3.1463 per share with a total value of EUR 4 million in a private placement to Pendopharm under exclusion of the shareholders' subscription rights. The capital increase was recorded in the commercial register on 22 July 2014.

There were no further significant events in the period between the reporting date, 30 June 2014, and the preparation of this report.

Report on expected developments

Development and Commercialisation Activities

PAION's major goals for the rest of 2014 are the completion of the preparation of the Phase III programmes with Remimazolam in the U.S./Europe. This includes the intensive continuation of the ongoing discussions with the authorities to define the approval requirements. In addition, the focus of activities and spending is on the production development for Remimazolam in particular the production of the test medication and the validation of the production in market scale.

PAION expects the development activities of its cooperation partners Ono, Yichang, Hana Pharm, R-Pharm and Pendopharm (all Remimazolam) and Acorda (GGF2) to continue.

Since PAION is evolving into a specialty pharmaceutical company with a focus on anaesthesia products, it is planned to start premarketing and market access activities. This includes active participation in international congresses to position Remimazolam in the respective fields and to involve important key opinion leaders.

PAION wants to evolve into a specialty pharmaceutical company with a focus on anaesthesia products. In this context, PAION seeks to retain certain marketing rights for Remimazolam for the European market in order to market Remimazolam in Europe itself or together with a partner. In case of a successful out-licensing by way of a development cooperation, PAION would expect to receive substantial payments as upfront payments or through sharing of development costs, development milestone payments, a partial or complete assumption of future development costs until market approval and royalties from market approval onwards. In case of a pure marketing cooperation after registration, PAION would expect to receive a comparably higher upfront payment and higher royalties.

Cooperation partner Ono finalised a Phase II/III study with Remimazolam in anaesthesia in Japan in November 2013. The submission of the marketing authorisation application is expected in the second half of 2014. PAION benefits from the progress of development by Ono and the other cooperation partners in the form of additional development data and financially in the form of milestone payments and royalties from launch onwards.

Financial Forecast

In 2014 PAION could, in addition to the milestone payment already received from R-Pharm, receive further milestone payments from the existing cooperation agreements of up to EUR 1 million.

Because of the investment in the development of Remimazolam the research and development expenses will be higher than in the previous year and will amount in a high single-digit million range. Costs for selling and general administration will be slightly higher than in the previous year.

The budgeted expenses will lead to a significant high single-digit to low double-digit million loss in 2014.

As of 30 June 2014, the PAION Group had cash and cash equivalents of EUR 18.7 million. With the cash and cash equivalents and the proceeds received from the capital increase completed in the beginning of July 2014 PAION has sufficient funds to conduct the planned Phase III programmes with Remimazolam in the EU and the U.S., including the filing process, and to initiate premarketing and market access activities. Furthermore, PAION expects to receive further milestone payments from the existing cooperation agreements in case of successful development of Remimazolam or the filing for and receipt of market approval for Remimazolam in Japan and other regions. These milestone payments as well as future upfront payments, milestone payments or cost reimbursements would strengthen the cash position but could also be completely or partly used to fund the development of the company.

Aachen, Germany, 6 August 2014 PAION AG

Dr Wolfgang Söhngen Dr Mariola Söhngen

Condensed Consolidated Interim Financial Statements

Consolidated Balance Sheet

ASSETS	30 June 2014 EUR	31 Dec. 2013 EUR
Non-current assets
Intangible assets	3,499,211.94	3,493,863.66
Equipment	83,951.19	88,705.47
Other assets	14.20	14.10
	3,583,177.33	3,582,583.23
Current assets
Prepaid expenses and other assets	2,351,292.48	1,140,908.90
Cash and cash equivalents	18,704,077.03	13,292,294.63
	21,055,369.51	14,433,203.53
Total assets	24,638,546.84	18,015,786.76

EQUITY AND LIABILITIES	30 June 2014 EUR	31 Dec. 2013 EUR
Equity
Share capital	30,842,178.00	25,379,906.00
Capital reserve	96,052,018.24	90,573,880.43
Translation reserve	-910,449.44	-1,037,402.54
Loss carryforward	-101,587,224.18	-99,375,250.28
Consolidated Loss for the period	-3,835,816.88	-2,211,973.90
	20,560,705.74	13,329,159.71
Non-current liabilities
Deferred income	22,222.16	27,777.72
	22,222.16	27,777.72
Current liabilities
Trade payables	3,491,883.77	1,914,349.67
Provisions	315,154.64	2,508,496.58
Other current liabilities	237,469.41	224,891.96
Current portion of deferred income	11,111.12	11,111.12
	4,055,618.94	4,658,849.33
Total equity and liabilities	24,638,546.84	18,015,786.76

		Consolidated Statement of Comprehensive Income
--	--	------------------------------------------------	--

EUR	1. April – 30 June 2014	1. April – 30 June 2013	1 January – 30 June 2014	1 January – 30 June 2013
Revenues	1,517,328.66	4,918.29	1,521,018.92	1,222,273.88
Gross profit	1,517,328.66	4,918.29	1,521,018.92	1,222,273.88
Research and development expenses	-2,695,775.86	-1,130,059.24	-4,298,205.36	-2,028,403.01
General administrative and selling expenses	-1,003,490.22	-879,806.56	-1,882,391.43	-1,822,567.02
Other income (expenses), net	17,908.34	355,360.72	33,821.99	355,271.48
Operating expenses	-3,681,357.74	-1,654,505.08	-6,146,774.80	-3,495,698.55
Operating result	-2,164,029.08	-1,649,586.79	-4,625,755.88	-2,273,424.67
Financial income	11,589.41	12,368.28	24,061.70	32,709.34
Financial expenses	0.00	-32,072.08	0.00	-188,770.99
Financial result	11,589.41	-19,703.80	24,061.70	-156,061.65
Result for the period before taxes	-2,152,439.67	-1,669,290.59	-4,601,694.18	-2,429,486.32
Income taxes	524,042.09	132,391.46	765,877.30	239,327.88
Consolidated Loss for the period	-1,628,397.58	-1,536,899.13	-3,835,816.88	-2,190,158.44
of which attributable to other shareholders	0.00	0.00	0.00	0.00
of which attributable to shareholders of PAION	-1,628,397.58	-1,536,899.13	-3,835,816.88	-2,190,158.44
Foreign currency translation	101,839.68	-29,305.77	126,953.10	-160,879.15
Total income and expense recognized directly in
equity that will be reclassified to profit or loss
when specific conditions are met	101,839.68	-29,305.77	126,953.10	-160,879.15
Other comprehensive income	101,839.68	-29,305.77	126,953.10	-160,879.15
Total comprehensive income	-1,526,557.90	-1,566,204.90	-3,708,863.78	-2,351,037.59
of which attributable to other shareholders of which attributable to shareholders of PAION	0.00 -1,526,557.90	0.00 -1,566,204.90	0.00 -3,708,863.78	0.00 -2,351,037.59
Earnings per share (basic)	-0.05	-0.06	-0.13	-0.09
Earnings per share (diluted)	-0.05	-0.06	-0.13	-0.09

Consolidated Cash Flow Statement

EUR	1 January – 30 June 2014	1 January – 30 June 2013
Cash flows from operating activities:
Consolidated Loss for the period	-3,835,816.88	-2,190,158.44
Reconciliation of net result for the period to cash flows
from operating activities:
Amortization/depreciation and non-cash exchange rate
changes of fixed assets	14,282.41	325,752.27
Profit/Loss from the disposal of non-current assets	197.99	0.00
Interest expenses and interest income	-24,061.70	156,061.66
Release of deferred income	-5,555.56	-5,555.56
Expenses from stock option plans	244,891.95	0.00
Change in assets and liabilities which are not attributable to
investing or financing activities:
Trade receivables	0.00	1,499,627.50
Prepaid expenses and other assets	-1,776,441.68	-75,236.44
Trade payables	1,577,534.10	-343,465.42
Provisions	-185,434.54	-208,956.01
Other current liabilities	12,577.45	-46,268.94
Non-cash exchange losses/gains	96,419.61	-21,338.40
	-3,881,406.39	-909,537.78
Paid income taxes	-2,162,246.58	0.00
Tax payments received	722,694.34	0.00
Interest received	20,792.95	34,940.84
Cash flows from operating activities	-5,300,166.14	-874,596.94
Cash flows from investing activities:
Cash paid for investments in intangible assets and equipment	-15,074.50	0.00
Cash flows from investing activities	-15,074.50	0.00
Cash flows from financing activities:
Capital increase	5,462,272.00	0.00
Contributions to the capital reserve	5,936,590.07	0.00
Payments in connection with raising capital	-703,344.21	0.00
Repayment of financial liabilities	0.00	-7,000,000.00
Interest paid	0.00	-163,346.05
Cash flows from financing activities	10,695,517.86	-7,163,346.05
Change in cash and cash equivalents	5,380,277.22	-8,037,942.98
Effect of exchange rate changes on cash	31,505.18	-135,666.25
Cash and cash equivalents at beginning of the period	13,292,294.63	22,336,122.91
Cash and cash equivalents at end of the period	18,704,077.03	14,162,513.68
Composition of cash and cash equivalents at the end of the period:
Cash and cash equivalents	18,704,077.03	14,162,513.68

Consolidated Statement of Changes in Equity

			Translation
EUR	Share capital	Capital reserve	reserve	Loss carryforward	Equity
31 December 2012	25,379,906.00	90,573,880.43	-1,006,405.04	-99,375,250.28	15,572,131.11
Total comprehensive income	0.00	0.00	-160,879.15	-2,190,158.44	-2,351,037.59
30 June 2013	25,379.906.00	90,573,880.43	-1,167,284.19	-101,565,408.72	13,221,093.52
Total comprehensive income	0.00	0.00	129,881.65	-21,815.46	108,066.19
31 December 2013	25,379,906.00	90,573,880.43	-1,037,402.54	-101,587,224.18	13,329,159.71
Total comprehensive income	0.00	0.00	126,953.10	-3,835,816.88	-3,708,863.78
Issue of shares	5,462,272.00	0.00	0.00	0.00	5,462,272.00
Contribution to the capital
reserve	0.00	5,936,590.07	0.00	0.00	5,936,590.07
Cost of raising capital	0.00	-703,344.21	0.00	0.00	-703,344.21
Additional contribution to the
capital reserve due to the issue
of options	0.00	244,891.95	0.00	0.00	244,891.95
30 June 2014	30,842,178.00	96,052,018.24	-910,449.44	-105,423,041.06	20,560,705.74

Selected Explanatory Notes to the Consolidated Interim Financial Statements as of 30 June 2014

General

The half-year financial report of PAION AG includes interim consolidated financial statements and an interim group management report in accordance with the provisions of Sec. 37w (2) WpHG

["Wertpapierhandelsgesetz": German Securities Trading Act] in conjunction with Sec. 37y WpHG as well as a statement of the management board according to Secs. 264 (2) sentence 3 and 289 (1) sentence 5 HGB ["Handelsgesetzbuch": German Commercial Code]. The consolidated financial statements were prepared in accordance with the provisions of the International Financial Reporting Standards (IFRSs) for interim financial reporting. The interim group management report was prepared in accordance with the relevant provisions of the German Securities Trading Act.

The interim consolidated financial statements comprise PAION AG as the parent company, registered at Martinstrasse 10-12, 52062 Aachen, Germany, and the wholly-owned subsidiaries, which are fully consolidated:

• PAION Deutschland GmbH, Aachen/Germany
• PAION Holdings UK Ltd, Cambridge/UK
• PAION UK Ltd, Cambridge/UK
• CeNeS Drug Delivery Ltd, Cambridge/UK
• TheraSci Limited, Cambridge/UK
• CeNeS Pharmaceuticals Inc., Norwood/USA

Basis of Accounting

The interim consolidated financial statements have been prepared in accordance with Sec. 315a HGB ["Handelsgesetzbuch": German Commercial Code] and IFRSs, as adopted by the EU, and the interpretations of the International Financial Reporting Interpretations Committee (IFRIC). The consolidation principles and accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual consolidated financial statements for the year ended 31 December 2013, except for the adoption of the following new or revised standards effective as of 1 January 2014:

• IAS 32: In December 2011, the IASB published amendments to IAS 32 "Financial Instruments: Presentation". The amendments shall clarify the requirements for the offsetting of financial instruments and correct inconsistencies in current practice of offsetting financial assets and financial liabilities.
• IAS 36: In May 2013, the IASB published amendments to IAS 36 "Impairment of Assets". When developing IFRS 13 "Fair Value Measurement", the IASB decided to amend IAS 36 to require disclosures about the recoverable amount of impaired assets. The amendments published clarify the IASB's original intention: that the scope of those disclosures is limited to the recoverable amount of impaired assets that is based on fair value less costs of disposal.
• IAS 39: In June 2013, the IASB issued "Novation of Derivatives and Continuation of Hedge Accounting," an amendment to IAS 39 (Financial Instruments: Recognition and Measurement). The amendment introduces new rules for continuing an existing hedge accounting relationship using a novated derivative. A novation occurs when the original parties to a derivative agree that one or more clearing counterparties replace their original counterparty to become the new counterparty to each of the parties. The new rules enable a derivative to remain a hedging instrument in a continuing hedge accounting relationship despite its novation if certain criteria are met.
• IFRS 10: In May 2011, the IASB published IFRS 10 "Consolidated Financial Statements". IFRS 10 provides a consistent definition of control and therefore a consistent basis for the existence of control and the determination of the entities that should be included in the consolidated financial statements of the parent company. The new standard replaces the

guidance in IAS 27 and SIC-12 that was previously applicable in this respect.

• IFRS 12: In May 2011, the IASB published IFRS 12 "Disclosure of Interests in Other Entities". IFRS 12 provides guidance on disclosure requirements for all forms of interests in other entities in consolidated financial statements.
• In October 2012, under the title "Investment Entities," the IASB issued amendments to IFRS 10, IFRS 12 and IAS 27 for investment entities. Such entities are to be exempted from the requirement to consolidate certain subsidiaries according to IFRS 10. Instead, they must recognize them at fair value through profit or loss. IFRS 12 introduces additional disclosure requirements for investment entities.

The amendments did not have any effects on the Group´s net assets, financial position and results of operations.

The following standards which have been issued by the IASB during the reporting period will be applied as soon as they become effective, provided they are adopted by the European Commission:

• IAS 16 and IAS 38: In May 2014, the IASB has published amendments to IAS 16 "Property, Plant and Equipment" and to IAS 38 "Intangible Assets". The amendments include guidelines concerning the applicable methods of depreciation of property, plant and equipment and of intangible assets. The amendments are effective for fiscal years beginning on or after 1 January 2016. The adoption by the EU is still pending.
• IFRS 9: In July 2014 the IASB has published the final version of IFRS 9 "Financial Instruments" regarding the accounting for financial instruments. The new standard includes new guidelines for the classification and measurement of financial assets including impairment requirements. The standard amends the new guidelines regarding hedge accounting that were published in 2013. The new guidelines are effective for fiscal years beginning on or after 1 January 2018. The adoption by the EU is still pending.

• IFRS 11: In May 2014, the IASB has published amendments to IFRS 11 "Joint Arrangements". The amendments include additional guidelines regarding the accounting for acquisitions of an interest in a joint operation. The amendments are effective for fiscal years beginning on or after 1 January 2016. The adoption by the EU is still pending.

• IFRS 15: In May 2014, the IASB has published IFRS 15 "Revenue from contracts with customers". IFRS 15 establishes a standard set of rules for all aspects of revenue recognition from contracts with customers. This standard replaces the previous standards and interpretations relating to revenue recognition (IAS 11, IAS 18, IFRIC 13, IFRIC 15 und IFRIC 18). The amendments are effective for fiscal years beginning on or after 1 January 2017. The adoption by the EU is still pending.

The application of these new and/or revised standards may, in some cases, result in additional disclosure obligations in future consolidated financial statements. The new standard and the amendments will presumably not have any effects on the Group´s net assets, financial position and results of operations.

The provisions of IAS 34, "Interim Financial Reporting", have been applied. The interim financial statements as of 30 June 2014 should be read in conjunction with the consolidated financial statements as of 31 December 2013.

The preparation of interim consolidated financial statements in accordance with IFRSs requires management to make estimates and assumptions which have an effect on the amount of recognised assets and liabilities, income and expenses and contingent liabilities. Actual amounts may differ from these estimates.

The interim consolidated financial statements do not contain any segment information as no material reportable segments could be identified.

Foreign Currency Translation

The consolidated financial statements are shown in Euro, which is the functional currency of PAION AG and the reporting currency of the Group. Each company within the Group defines its own functional currency. This is the Euro in the case of the German companies, whereas the UK-based companies use Pound Sterling as their functional currency. All items on the respective financial statements of each company are initially converted to the functional currency at the exchange rate applicable on the transaction date. Monetary assets and liabilities denominated in a foreign currency are translated into the functional currency on the reporting date at the exchange rate applicable on that date. All ensuing currency

differences are recognised in profit or loss with the exception of exchange rate gains and losses from intra-Group loans classified in accordance with IAS 21 as net investments in foreign business operations; these are recognised in equity.

The assets and liabilities of the foreign companies are translated into Euro on the balance sheet reporting date at the exchange rate applicable on that date. These include any goodwill in connection with the acquisition of a foreign company and any fair value adjustments to the carrying amounts of the foreign company's assets and liabilities. Equity components are translated into Euro at historical rates at the time of initial consolidation. Expenses and income are translated into Euro at average monthly exchange rates. The resulting currency differences are accounted for separately within equity.

Equity

On 17 December 2013, the Management Board decided with the approval of the Supervisory Board and based on the authorisation by the General Meeting to issue 2,777,777 new, no-par value bearer shares at a subscription price of EUR 1.80, granting pre-emptive rights to existing shareholders. The existing shareholders were able to subscribe the new shares at a subscription ratio of 19:2 in the subscription period from 23 December 2013 to 9 January 2014. The U.S. institutional investor Capital Ventures International had undertaken to purchase all new shares that are not subscribed by existing shareholders or other investors in the rights offering at the subscription price. Upon completion of the capital increase, the company's share capital increased from EUR 25,379,906.00 by EUR 2,777,777.00 to EUR 28,157,683.00 through the issuing of 2,777,777 new shares. The capital increase was recorded in the commercial register on 13 January 2014 and led to gross proceeds of EUR 5 million. The Authorised Capital 2011 correspondingly decreased to EUR 9,902,611.00.

On 15 January 2014, the Management Board decided with the approval of the Supervisory Board and based on the authorisation of the General Meeting to issue 1,245,899 new bearer shares to the U.S. institutional investor Capital Ventures International in a private placement excluding existing shareholders' pre-emptive

rights. The new shares were issued at a share price of EUR 2.4079 and led to gross proceeds of EUR 3 million. As a result, the company's share capital increased from EUR 28,157,683.00 by EUR 1,245,899.00 to EUR 29,403,582.00 through the issuing of 1,245,899 new shares. The capital increase was recorded in the commercial register on 22 January 2014. The Authorised Capital 2011 correspondingly decreased to EUR 8,656,712.00.

On 12 February 2014, the Management Board decided with the approval of the Supervisory Board and based on the authorisation of the General Meeting to issue 1,290,178 new bearer shares to the U.S. institutional investor Capital Ventures International in a private placement excluding existing shareholders' pre-emptive rights. The new shares were issued at a share price of EUR 2.4553 and led to gross proceeds of EUR 3.17 million. As a result, the company's share capital increased from EUR 29,403,582.00 by EUR 1,290,178.00 to EUR 30,693,760.00 through the issuing of 1,290,178 new shares. The capital increase was recorded in the commercial register on 17 February 2014. The Authorised Capital 2011 correspondingly decreased to EUR 7,366,534.00. By virtue of a resolution adopted by the Annual General Meeting on 21 May 2014, the Management Board was authorised to increase the share capital on or prior to 20 May 2019, with the consent of the Supervisory Board, on one or more occasions, by up to an aggregate of EUR 15,408,631.00 by issuing up to 15,408,631 new no-par value bearer shares in return for cash contributions or contributions in kind (Authorised Capital 2014). Furthermore the Management Board was authorised to use up to EUR 3,084,217 out of the Authorised Capital 2014 to issue new shares for cash by excluding pre-emptive rights. The remaining Authorised Capital 2011 in the amount of EUR 7,366,534.00 was revoked.

On 18 June 2014, the Management Board decided with the approval of the Supervisory Board and based on the authorisation by the General Meeting to issue 18,505,305 new, no-par value bearer shares at a subscription price of EUR 2.50, granting pre-emptive rights to existing shareholders. The existing shareholders were able to subscribe the new shares at a subscription ratio of 5:3 in the subscription period from 20 June to 4 July 2014. At the end of the subscription period 18,074,183 new shares were subscribed, corresponding

to a final subscription rate of 97.67%. 431,122 new shares not subscribed for were placed with institutional investors by way of an accelerated bookbuilt offering. The capital increase led to gross proceeds of EUR 46.26 million. Upon completion of the capital increase, the company's share capital increased from EUR 30,842,178.00 by EUR 18,505,305.00 to EUR 49,347,483.00 through the issuing of 18,505,305 new shares. The capital increase was recorded in the commercial register on 9 July 2014. Since the capital increase was carried out after the balance sheet date of the half-year financial statements, the capital increase will be recorded in the financial statements of the third quarter 2014.

On 17 July 2014, the Management Board decided with the approval of the Supervisory Board and based on the authorisation of the General Meeting to issue 1,271,334 new bearer shares to Pendopharm´s European affiliate Pharmascience International Limited in a private placement excluding existing shareholders' pre-emptive rights. The new shares were issued at a share price of EUR 3.1463 which is 10% premium to the volume weighted average share price at five trading days before the private placement and which is 25.9% above the subscription price in the rights offering. The capital increase led to gross proceeds of EUR 4 million. The company's share capital increased from EUR 49,347,483.00 by EUR 1,271,334.00 to EUR 50,618,817.00 through the issuing of 1,271,334 new shares. The capital increase was recorded in the commercial register on 22 July 2014. The Authorised Capital 2014 correspondingly decreased to EUR 14,137,297.00. Since the capital increase was carried out after the balance sheet date of the half-year financial statements, the capital increase will be recorded in the financial statements of the third quarter 2014.

Stock options

On 18 December 2013, the Management Board members and the Supervisory Board decided to issue 720,000 stock options from the stock option plan 2010. The stock options were granted on 18 January 2014.

The stock options are accounted for in accordance with the provisions of IFRS 2 "Share-Based Payment". The fair value of the stock options was EUR 1.67 per stock option at the granting date and was

calculated using the Black/Scholes option pricing model and is recognised in profit or loss as a personnel expense over the waiting period of two years. The calculations were based on a risk-free interest rate of 0.70% according to the four year waiting period. The expected volatility of 73.75% was calculated based on the historical volatility of the last four years prior to the date of issue. This is based on the assumption that the historical volatility is the best estimate for the expected volatility. Dividends were not considered in the calculation. Furthermore an annual staff fluctuation of 10% was assumed. In connection with the granted stock options from the stock option plan 2010 personnel expenses in the amount of KEUR 245 were recognised in first half-year 2014.

In the first half-year 2014 148,418 stock options were exercised from the stock option plan 2008. This led to cash inflows of KEUR 231.

Tax Effects on Other Comprehensive Income

In the reporting period the Other Comprehensive Income (foreign currency translation of foreign subsidiaries) did not have any tax effects.

Fair value of financial assets and liabilities

As of 30 June 2014 the fair value of financial assets and

liabilities is identical to the book value. As of

31 December 2013 the fair value of financial assets and

liabilities was also identical to the book value.

		Book value		Fair Value
in KEUR		30 June 2014	31 Dec. 2013	30 June 2014	31 Dec. 2013
Financial assets
Cash and cash equivalents	(1)	18,704	13,292	18,704	13,292
Other assets	(1)	4	2	4	2
Financial liabilities
Provisions	(2),(3)	315	2,508	315	2,508
Trade payable	(2)	3,492	1,914	3,492	1,914
Other liabilities	(2)	208	102	208	102

Measurement category according to IAS 39:

• (1) Loans and receivables
• (2) Liabilities recognised at amortised cost
• (3) Lead to cash outflows

The determination of the fair values of these financial instruments was based on unobservable input factors (Level 3 inputs according to IFRS 13).

Related Parties

The relationships with related parties have not changed in comparison to those applied in the consolidated financial statements as of 31 December 2013 except for the change in the Supervisory Board.

Declaration of the Management Board pursuant Secs. 264 para. 2 sentence 3 and 289 para.1 sentence 5 HGB [German Commercial Code]

"To the best of our knowledge and in accordance with the applicable reporting principles for interim financial reporting, the consolidated interim financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the group, and the interim management report of the group includes a fair review of the development and performance of the business and the position of the group, together with a description of the principal opportunities and risks associated with the expected development of the group for the remaining months of the financial year."

Aachen, Germany, 6 August 2014 PAION AG

Dr Wolfgang Söhngen Dr Mariola Söhngen

Review Report

To PAION AG, Aachen:

We have reviewed the condensed consolidated interim financial statements -comprising the condensed statement of financial position, the condensed statement of comprehensive income, the condensed statement of cash flows, the condensed statement of changes in equity and selected explanatory notes - together with the interim group management report of PAION AG, Aachen, for the period from January 1 to June 30, 2014, part of the six monthly financial report pursuant to § (Article) 37w WpHG ("Wertpapierhandelsgesetz": German Securities Trading Act). The preparation of the condensed consolidated interim financial statements in accordance with the IFRS applicable to interim financial reporting as adopted by the EU and of the interim group management report in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports is the responsibility of the parent Company's Board of Managing Directors. Our responsibility is to issue a review report on the condensed consolidated interim financial statements and on the interim group management report based on our review.

We conducted our review of the condensed consolidated interim financial statements and the interim group management report in accordance with German generally accepted standards for the review of financial statements promulgated by the Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany) (IDW) and additionally in accordance with the International Standard on Review Engagements "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" (ISRE 2410). Those standard require that we plan and perform the review so that we can preclude through critical evaluation, with moderate assurance, that the condensed consolidated interim financial statements have not been prepared, in all material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU and that the interim group management report has not been prepared, in all material respects, in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports. A review is limited primarily to inquiries of company personnel and analytical procedures and thus provides less assurance than an audit. Since, in accordance with our engagement, we have not performed a financial statement audit, we cannot express an audit opinion.

Based on our review, no matters have come to our attention that cause us to presume that the condensed consolidated interim financial statements have not been prepared, in all material respects, in accordance with the IFRS applicable to interim financial reporting as adopted by the EU nor that the interim group management report has not been prepared, in all material respects, in accordance with the provisions of the German Securities Trading Act applicable to interim group management reports.

Cologne, Germany, 6 August 2014 Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft

(s) Ueberschär (s) Galden Wirtschaftsprüfer Wirtschaftsprüfer [German Public Auditor] [German Public Auditor]

Information on PAION Shares

Market segment	Regulated market – Prime Standard Frankfurt Stock Exchange
Ticker symbol	PA8
Reuters symbol	PA8G.DE (Xetra)
Bloomberg	PA8 GY (Xetra)
ISIN	DE000A0B65S3
First day of trading	11 February 2005
Designated sponsor	Close Brothers Seydler

Key figures	H1 2014	2013
Numbers of shares at the end of the period	30,842,178	25,379,906
Average daily trading volume (Xetra, FSE)	485,105	223,632
Year high (Xetra closing price)	EUR 4.70 (5 March 2014)	EUR 2.87 (9 Dec. 2013)
Year low (Xetra closing price)	EUR 2.27 (3 Jan. 2014)	EUR 0.60 (21 June 2013)
Share price at the end of the period	EUR 2.90	EUR 2.43
Market capitalisation at the end of the period (Xetra)	EUR 89.4m	EUR 61.7m

Corporate Calendar

12 March 2014	Publication of the financial results 2013
7 May 2014	Publication of the financial results of the first quarter 2014
21 May 2014	Annual General Meeting, Aachen
6 August 2014	Publication of the financial results of the second quarter and the first half-year 2014
5 November 2014	Publication of the financial results of the third quarter and the first nine months of 2014

PAION AG Martinstrasse 10-12 52062 Aachen Germany Phone +49 241 4453-0 Fax +49 241 4453-100 info@paion.com www.paion.com