PXSL Pharmaxis Limited - Sponsored Adr (Australia) (MM)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

( Mark One)

o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2008

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

OR

o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

Commission file number 000-51505

Pharmaxis Ltd

(Exact name of Registrant as specified in its charter)

(Translation of Registrant’s name into English)

Australia
(Jurisdiction of incorporation or organization)

Unit 2, 10 Rodborough Road, Frenchs Forest, NSW 2086, Australia
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of each class		Name of each exchange on which registered
Ordinary Shares in the form of American Depositary
Shares, evidenced by American Depositary Receipts		Nasdaq Global Market

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

     As of June 30, 2008 the number of outstanding shares of each of the issuer’s classes of capital or common stock was as follows: 194,514,762 fully paid Ordinary Shares.

     Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act

o Yes þ No

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o Yes þ No

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes o No

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

o  Large accelerated filer þ  Accelerated filer  o  Non-accelerated filer 

     Indicate by check mark which absis of accounting the registrant has used to prepare the financial statements included in this filing:

o U.S. GAAP     þ International Financial Reporting Standards as issued by the     o Other
International Accounting Standards Board

     If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

o Item 17 þ Item 18

     If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes þ No

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

     Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of the securities under a plan confirmed by a court.

o Yes o No

 

 

Cross-Referenced Index

Form 20-F Cross-Reference Index (for the purpose of filing with the United States Securities and Exchange Commission)

20-F Item Number and Description				Statutory Annual Report Reference
Part I
Item 1.		Identity of Directors, Senior Management and Advisers		Not Applicable
Item 2.		Offer Statistics and Expected Timetable		Not Applicable
Item 3.		Key Information
		A. Selected Financial Data		Section 2.1 and section 4.2.10
		B. Capitalization and Indebtedness		Not Applicable
		C. Reasons for the Offer and Use of Proceeds		Not Applicable
		D. Risk Factors		Section 2.4
Item 4.		Information on Pharmaxis
		A. History and Development of Pharmaxis		Section 1.2.1, 2.2.5 and 4.4
		B. Business Overview		Section 1.2.2
		C. Organizational Structure		Section 1.2.3
		D. Property, Plant and Equipment		Section 1.2.4
Item 4A.		Unresolved staff comments		None
Item 5.		Operating and Financial Review and Prospects
		A. Operating Results		Sections 2.2.1 to 2.2.4 inclusive
		B. Liquidity and Capital Resources		Sections 2.2.4 to 2.2.8 inclusive
		C. Research and Development, Patents, Licenses etc.		See section 2.2.1 Operating Results — Research and Development
		D. Trend Information		See section 2.2.1 and 2.2.5
		E. Off-Balance Sheet Arrangements		Section 2.2.9
		F. Tabular disclosure of contractual obligations		Section 2.2.10
		G. Safe Harbor		See section 1.1 Important Information
Item 6.		Directors, Senior Management and Employees
		A. Directors and Senior Management		Sections 1.4.1 and sections 1.6.1 — 1.6.4
		B. Compensation		Section 1.5 and section 1.6.4
		C. Board Practices		Sections 1.3.2, 1.4.1 and sections 1.6.1 — 1.6.4 and
				Section 4.2.1 — Constitution, Board of Directors, and section 1.5.1 and section 1.5.3
		D. Employees		Section 1.6.2
		E. Share Ownership		Sections 1.5.4, 1.5.5 and 4.1.2
Item 7.		Major Shareholders and Related Party Transactions
		A. Major Shareholders		Section 4.1.2 and section 4.2.3
		B. Related Party Transactions		Section 4.1.4
		C. Interests of Experts and Counsel		Not Applicable
Item 8.		Financial information
		A. Consolidated Statements and Other Financial Information		Section 1.4.8 and section 3 and section 1.2.2 (xiii)
		B. Significant Changes		Section 3
Item 9.		The Offer and Listing
		A. Offer and Listing Details		Section 4.1.3
		B. Plan of Distribution		Not Applicable
		C. Markets		Section 4.1.3
		D. Selling Shareholders		Not Applicable
		E. Dilution		Not Applicable
		F. Expenses of the Issue		Not Applicable
Item 10.		Additional information
		A. Share Capital		Not Applicable
		B. Constitution		Sections 4.2.1 to 4.2.4 inclusive and section 4.4
		C. Material Contracts		Section 4.2.5
		D. Exchange Controls		Section 4.2.6
		E. Taxation		Section 4.2.7
		F. Dividends and Paying Agents		Not Applicable
		G. Statements by Experts		Not Applicable
		H. Documents on Display		Section 4.2.8
		I. Subsidiary Information		Not Applicable
Item 11.		Quantitative and Qualitative Disclosures about Market Risk		Section 2.2.6
Item 12.		Description of Securities Other than Equity Securities		Not Applicable

20-F Item Number and Description				Statutory Annual Report Reference
Part II
Item 13.		Defaults, Dividend Arrearages and Delinquencies		Not Applicable
Item 14.		Material Modifications to the Rights of Security Holders and Use of Proceeds		Not Applicable
Item 15T.		Controls and Procedures
		(a) Disclosure Controls and Procedures		Section 2.3.1
		(b) Management’s Annual Report on Internal Control Over Financial Reporting		Section 2.3.2
		(c) Changes in Internal Control Over Financial Reporting		Section 2.3.3
Item 16A.		Audit Committee Financial Expert		Section 2.3.4
Item 16B.		Code of Ethics		Section 2.3.5
Item 16C.		Principal Accountant Fees and Services		Section 2.3.6
Item 16D.		Exemptions from the Listing Standards for Audit Committees		Not Applicable
Item 16E.		Purchases of Equity Securities by the Issuer and Affiliated Purchasers		Not Applicable
Part III
Item 17.		Financial Statements		Not Applicable
Item 18.		Financial Statements		Section 3
Item 19.		Exhibits		Exhibits

Contents

Section 1

1.1 Important Information									4
1.2 Information on Pharmaxis									4
1.2.1		History and Development of Pharmaxis							4
1.2.2		Business Overview							5
			i.			Introduction			5
		ii.				Lung Disease Overview			6
		iii.				Bronchitol Development			10
		iv.				Aridol			14
			v.			Drug Development			16
		vi.				Our Strategy			17
		vii.				Sales and Marketing			18
		viii.				Manufacturing			18
		ix.				Competition			18
			x.			Intellectual Property			19
		xi.				Government Regulation and Product Approval			24
		xii.				Employees			27
		xiii.				Legal Proceedings			27
		xiv.				Research Grant Funding			27
1.2.3		Organisational Structure							28
1.2.4		Property, Plant and Equipment							28
1.3 Corporate Governance									28
1.3.1		Introduction							28
1.3.2		ASX Disclosures							28
1.3.3		Corporate Governance Requirements Arising from Our U.S. Listing — the Sarbanes-Oxley Act of 2002, SEC Rules and the Nasdaq Global Market Marketplace Rules							34
1.4 Directors’ Report									35
1.4.1		Information on Directors							35
1.4.2		Meetings of Directors							36
1.4.3		Indemnification and Insurance of Directors							36
1.4.4		Company Secretary							37
1.4.5		Principal Activities							37
1.4.6		Review and Results of Operations							37
1.4.7		Remuneration Report							37
1.4.8		Dividends							37
1.4.9		Significant Changes in the State of Affairs							37
1.4.10		Matters Subsequent to the End of the Financial Year							38
1.4.11		Likely Developments and Expected Results of Operations							38
1.4.12		Environmental Regulation							38
1.4.13		Rounding							38
1.4.14		Non Audit Services							38
1.4.15		Auditor’s Independence Declaration							39
1.4.16		Auditor							39
1.4.17		Resolution of the Board							39
1.5 Remuneration Report									40
1.5.1		Principles Used to Determine the Nature and Amount of Remuneration Paid to Directors and Senior Executive Officers							40
1.5.2		Details of Remuneration Paid to Directors and Senior Executive Officers							42
1.5.3		Service Agreements with Senior Executive Officers							45
1.5.4		Share-Based Compensation Paid to Directors and Senior Executive Officers							46
1.5.5		Additional Information on Compensation Paid to Directors and Senior Executive Officers							53
1.5.6		Pharmaxis Ltd Employee Option Plan							55
1.6 Senior Management, Employees and Scientific Advisory Board									57
1.6.1		Executive Director and Senior Executive Officers							57
1.6.2		Employees							59
1.6.3		Scientific Advisory Board							60
1.6.4		Retirement Benefits							60

Section 2

2.1 Four Year Summary Financial Information					62
2.2 Operating and Financial Review and Prospects					64
2.2.1		Operating Results			64
2.2.2		Critical Accounting Policies and Estimates			66
2.2.3		Review of 2008 Operations			66
2.2.4		Results of Operations			67
2.2.5		Liquidity and Capital Resources			70
2.2.6		Qualitative and Quantitative Disclosures about Market Risk			71
2.2.7		Income Taxes			71
2.2.8		Recently Issued Accounting Announcements			71
2.2.9		Off-Balance Sheet Arrangements			71
2.2.10		Contractual Obligations and Commitments			72
2.3 Controls and Procedures					72
2.3.1		Disclosure Controls and Procedures Required as a Result of Our U.S. Listing			72
2.3.2		Management’s Annual Report on Internal Control over Financial Reporting			73
2.3.3		Changes in Internal Controls over Financial Reporting			73
2.3.4		Audit Committee Financial Expert			73
2.3.5		Code of Ethics			73
2.3.6		Principal Accountant Fees and Services			73
2.4 Risk Factors					74

Section 3

3.1		Annual Financial Report							96
		Income Statements							97
		Balance Sheets							98
		Statements of Changes in Equity							99
		Cash Flow Statements							100
		Notes to the Financial Statements							101
		Note 1				Summary of significant accounting policies			101
		Note 2				Revenue			108
		Note 3				Other income			108
		Note 4				Expenses			109
		Note 5				Income tax expense			110
		Note 6				Current assets — Cash and cash equivalents			111
		Note 7				Current assets — Trade and other receivables			111
		Note 8				Current assets — Inventories			112
		Note 9				Non-current assets — Receivables			112
		Note 10				Non-current assets — Other financial assets			113
		Note 11				Non-current assets — Plant and equipment			113
		Note 12				Non-current assets — Intangible assets			114
		Note 13				Current liabilities — Trade and other payables			115
		Note 14				Current liabilities — Other liabilities			115
		Note 15				Non-current liabilities — Provisions			115
		Note 16				Contributed equity			115
		Note 17				Reserves and accumulated losses			117
		Note 18				Key management personnel disclosures			118
		Note 19				Remuneration of auditors			121
		Note 20				Contingent liabilities			122
		Note 21				Commitments			122
		Note 22				Related party transactions			123
		Note 23				Subsidiaries			124
		Note 24				Events occurring after the balance sheet date			124
		Note 25				Financial reporting by segments			124
		Note 26				Reconciliation of loss after income tax to net cash outflows from operating activities			124
		Note 27				Earnings per share			125
		Note 28				Financial risk management			125
		Note 29				Share-based payments			128
3.2		Directors’ Declaration							133
3.3		Independent Auditor’s Report							134
3.4		Adoption of IFRS for Inclusion in U.S. Filings (Form 20-F)							136
			3.4.1			Exemptions from Retrospective Application of IFRS			136
			3.4.2			Significant Differences between IFRS and U.S. GAAP			136
			3.4.3			Tabular Reconciliation of U.S. GAAP to IFRS			136

Section 4

4.1 Shareholder Information and Related Party Transactions									138
			4.1.1			ASX Shareholder Disclosures			139
			4.1.2			U.S. Shareholder Disclosures			139
			4.1.3			Price History			142
			4.1.4			Related Party Transactions			143
4.2 Additional Information									144
			4.2.1			Constitution			144
			4.2.2			Limitations on Rights to Own Shares and ADSs			148
			4.2.3			Change of Control			149
			4.2.4			Disclosure of Interests			151
			4.2.5			Material Contracts			151
			4.2.6			Exchange Controls			154
			4.2.7			Taxation Summary Applicable to U.S. Holders			154
			4.2.8			Documents on Display			158
			4.2.9			Enforceability of Civil Liabilities by U.S. Shareholders			158
			4.2.10			Exchange Rate Information			159
4.3 Glossary									160
4.4 Corporate Directory									164

1.1

Important Information

Forward Looking Statements

This Statutory Annual Report contains statements that constitute ‘forward-looking statements’ within the meaning of section 21E of the United States Securities Exchange Act of 1934, as amended (‘Securities Exchange Act’). The United States Private Securities Litigation Reform Act of 1995 provides a ‘safe harbour’ for forward-looking information to encourage companies to provide prospective information about themselves without fear of litigation so long as the information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the information.

Forward-looking statements appear in a number of places in this Statutory Annual Report. In some cases, you can identify forward-looking statements by terminology such as ‘may,’ ‘will,’ ‘should,’ ‘expects,’ ‘plans,’ ‘anticipates,’ ‘believes,’ ‘estimates,’ ‘predicts,’ ‘potential,’ or ‘continue,’ or the negative of these terms or other comparable terminology. These statements are only current predictions and are subject to known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we are under no duty to update or revise any of our forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Statutory Annual Report.

Currency of Presentation

We publish our consolidated financial statements in Australian dollars. In this Statutory Annual Report, unless otherwise stated or the context otherwise requires, references to ‘dollar amounts’, ‘$’, ‘AUD’ or ‘A$’ are to Australian dollars. References to ‘US$’, ‘USD’ or ‘US dollars’ are to United States dollars.

Certain Australian dollar amounts have been translated into US dollars at specified rates. The amounts have been translated into U.S. dollars from Australian dollars based upon the noon buying rates in New York City as determined by the Federal Reserve Bank of New York on 30 June 2008, which was A$1.00 to US$0.9562. These translations are merely for the convenience of the reader and should not be construed as representations that the Australian dollar amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated.

Exchange Rate information is presented in Section 4.2.10 of this report.

1.2

Information on Pharmaxis

1.2.1		History and Development of Pharmaxis
		Pharmaxis Ltd is a public company limited by shares which is domiciled in Australia and operates under, and is subject to, Australian law. Our Australian Company Number is 082 811 630 and our Australian Business Number is 75 082 811 630.
		We were incorporated under Australian law on 29 May, 1998 under the name ‘Praxis Pharmaceuticals Australia Pty Ltd.’ On 6 June, 2002, we changed our name to ‘Pharmaxis Pty Ltd.’ On 5 September, 2003, we changed our name to ‘Pharmaxis Ltd’ to reflect the change of company type from a proprietary company limited by shares to a public company limited by shares undertaken at that time. Our ordinary shares are quoted on the Australian Securities Exchange (‘ASX’) and our American Depositary Shares (‘ADS’) are quoted on the Nasdaq Global Market. Each ADS represents 15 ordinary shares.
		In November 2003 we completed an initial public offering in Australia of 50 million of our ordinary shares and received A$22.9 million after payment of underwriting fees and offering expenses. In November 2005 we completed a public offering in the U.S. of 1.3 million ADSs and a simultaneous placement in Australia of 19.9 million ordinary shares and received A$79.4 million after payment of underwriting fees and offering expenses. We have completed other share (and ADS) issues which are described in Section 2.2.5 — Liquidity and Capital Resources.

4 Pharmaxis 2008 Statutory Annual Report

Section 1

		Our principal place of business is Unit 2, 10 Rodborough Road, Frenchs Forest, NSW 2086, Australia, and our primary telephone number is +61 2 9454 7200.
1.2.2		Business Overview

	(i)		Introduction
			We are a specialty pharmaceutical company focused on the development of new products for the diagnosis and treatment of chronic respiratory and immune disorders.
			Bronchitol
			We are developing Bronchitol, our proprietary inhaled dry powder mannitol formulation, for the treatment of cystic fibrosis, or CF; for the treatment of chronic obstructive pulmonary disease, or COPD, an umbrella term for diseases such as bronchiectasis and chronic bronchitis; and for the treatment of other acute and chronic pulmonary conditions.
			Bronchitol for Cystic fibrosis

	•		In August 2008 we completed enrolment for a Phase III clinical trial of Bronchitol in patients with CF in Europe and Australia being conducted according to a clinical trial protocol agreed with the European Medicines Agency, or EMEA. The efficacy component of the clinical trial is scheduled to report in the first half of 2009.
	•		In 2005 we completed a Phase II clinical trial of Bronchitol in patients with CF and demonstrated a statistically significant improvement in lung function relative to placebo over a two week treatment period.
	•		In April 2008 we reported initial results from a Phase II clinical trial of Bronchitol in children with CF and demonstrated an improvement in lung function over a three month treatment period.
	•		In August 2008 we commenced a further Phase III clinical trial of Bronchitol for the treatment of CF to be conducted according to a clinical trial protocol agreed with the U.S. Food and Drug Administration, or the FDA, under its Special Protocol Assessment (SPA) procedure.
	•		In August 2008 we reported a Phase II dose ranging clinical trial of Bronchitol in patients with CF which demonstrated a dose dependent improvement in lung function.
	•		The FDA has granted Orphan Drug designation to Bronchitol for the treatment of bronchiectasis and for CF patients at risk of developing bronchiectasis. The EMEA has granted Orphan Drug designation to Bronchitol for the treatment of CF.

Bronchitol for Bronchiectasis

	•		In 2007 we reported a Phase III clinical trial of Bronchitol for bronchiectasis conducted in Europe and Australia. The study demonstrated a significant improvement in quality of life after 13 weeks of treatment with Bronchitol as assessed by the St George Respiratory Questionnaire, a significant improvement in quality of life compared to placebo and a significant change in mucus clearance on patients receiving Bronchitol versus those patients receiving placebo.
	•		In August 2008, we reported the results from an open label 12 month safety trial in subjects with bronchiectasis. This trial was an extension of the trial described above. The trial demonstrated that Bronchitol was safe and well tolerated when administered twice per day for 12 months without any serious adverse events attributed to treatment. Based on this study we are preparing to apply for marketing approval of Bronchitol for the treatment of bronchiectasis in Australia during the third quarter of 2008.
	•		In June 2008 we reached agreement with the FDA on the clinical trial design for a Phase III registration clinical trial of Bronchitol for the treatment of bronchiectasis, having previously agreed on the clinical trial design with the EMEA.
	•		In 2004 we completed a Phase II clinical trial of Bronchitol in bronchiectasis patients and demonstrated a clinically meaningful increase in patients’ quality of life relative to placebo following two weeks of treatment.

Bronchitol for Other Pulmonary Indications

•

Bronchitol has potential application to other pulmonary conditions such as chronic bronchitis and patients within hospital intensive care units.

Pharmaxis 2008 Statutory Annual Report 5

1.2.2

Business Overview (Continued)

			Aridol
			We have developed Aridol, as a novel tool for the detection of airway hyperresponsiveness and to assist in the diagnosis and management of asthma and chronic obstructive pulmonary disease, or COPD. The Aridol test mimics the bronchoconstriction that can occur in inflamed airways from time to time in people with asthma. Airway hyperresponsiveness is one of the hallmarks of untreated or poorly controlled asthma. Aridol may also be used to determine the minimum effective doses of inhaled corticosteroid required for optimum control of asthma.

	•		We received marketing approval in Australia in March 2006 and commenced commercial supply of Aridol in Australia in June 2006.
	•		In June 2007 we successfully completed the E.U. mutual recognition procedure which permitted marketing approvals of Aridol by Germany, France, the United Kingdom, Italy, the Netherlands, Belgium, Denmark, Greece, Finland, Ireland, Norway, Sweden and Portugal. Individual country marketing certificates were issued from June 2007 to June 2008 at which time Italy, Spain, France and Belgium were still being processed.
	•		We received marketing approval in Korea in January 2008.
	•		In August 2006 we completed a pivotal U.S. Phase III clinical trial to determine the selectivity and specificity of Aridol as a test for the detection of airway hyperresponsiveness in patients diagnosed with exercise induced asthma. Based on this study and an earlier Phase III clinical trial that was the basis of marketing approval in Australia and Europe, we have met with the FDA, and are preparing to apply for marketing approval of Aridol in the U.S.
	•		In 2007 we reported the commencement of an independent investigator led asthma management study being conducted by the U.S. Asthma Clinical Research Network.
	•		We have previously reported independent investigator clinical trials assessing the role of Aridol in determining those patients with COPD who will respond to treatment with inhaled corticosteroids.

			Preclinical Pipeline
			Our preclinical pipeline is focused on novel treatments for inflammatory and immune disorders, including asthma and other pulmonary conditions. During the next twelve months PXS25 is scheduled to commence Phase I clinical trials and PXS4159 is scheduled to complete preclinical studies. PXS25 is an inhibitor of the mannose 6 phosphate receptor and PXS4159 is an inhibitor of semicarbazide sensitive amine oxidase/vascular adhesion protein-1.
	(ii)		Lung Disease Overview
			Our lead product and product candidates are for the diagnosis or treatment of chronic respiratory diseases, including asthma, cystic fibrosis and COPD, including bronchiectasis and chronic bronchitis and other chronic and acute pulmonary conditions. Several of these diseases share similar biology and pathology, such as the airway inflammation in both asthma and chronic bronchitis, as well as difficulty with normal clearance of lung mucus in patients with cystic fibrosis and bronchiectasis.
			Lung Congestion
			The inside lining of the airways is covered by millions of fine hair-like structures called cilia, which are in turn covered by a surface liquid and a thin layer of mucus, secreted by the lungs to defend against germs, dust particles and other extraneous matter. The cilia move continuously and propel the mucus up towards the throat. This constant process, which is unnoticeable in healthy people, cleans the airways, permits clean air to pass freely through the lungs and removes bacteria, thereby limiting infectious episodes.
			Patients with COPD or with CF are generally affected by a breakdown in natural mechanisms of creating, hydrating, and clearing this mucus. These patients face the ongoing challenge of clearing excessive and thickened secretions from their congested lungs, usually by constant coughing. A key therapeutic goal for clinicians treating these patients is to assist the natural process of keeping the mucus hydrated and clearing it from the lungs.

6 Pharmaxis 2008 Statutory Annual Report

Section 1

			Cystic Fibrosis
			CF is an inherited, progressive and fatal disease that affects epithelial surfaces including the airways, pancreas, sweat ducts, reproductive system and intestinal tract. The lungs of CF patients produce copious amounts of thick, tenacious secretions which are not cleared effectively by the lungs. Such changes are known to be present from birth and inevitably result in airway obstruction and bacterial infection. This generally leads to progressive lung deterioration, and eventually respiratory failure, the primary cause of death in adult CF patients.
			According to the U.S. Cystic Fibrosis Foundation, there are about 30,000 diagnosed CF patients in the U.S. and 70,000 worldwide. While this patient population is relatively small, the problem of sputum clearance is common to all sufferers and is a chronic lifelong problem. According to the literature, annual direct healthcare cost associated with the disease in the United States amount to over U.S.$0.5 billion.
			There is no cure for CF. Maintaining a reasonable quality of life for these patients is a significant challenge. Problems include breathing difficulties, respiratory infections, poor sleep, general discomfort, lifestyle limitations and gradual deterioration of lung function over time. Although the life expectancy of CF sufferers has increased dramatically over the past few decades due to better management of the disease, according to the U.S. Cystic Fibrosis Foundation, the predicted median age of survival in 2006 was 37 years of age.
			Physicians seek to improve lung function and reduce the number and severity of secondary lung infections by hydrating and breaking down the excessive, sticky mucus secretions, allowing it to be cleared from the lungs. Management of CF includes exercise, daily physiotherapy, postural drainage and chest percussion and can take several hours of at-home treatment every day. Medications to treat CF are limited, and few are very effective or convenient. Nebulised medications, delivered by aerosol or a facemask, are used to make the mucus less thick and sticky and open up the airways. Antibiotics may also be required to treat secondary infections, and are also often used to prevent infection.
			Dornase alfa, marketed by Genentech in the U.S., is the most widely used therapeutic for chronic use in CF to aid sputum clearance. According to Genetech, U.S. sales of dornase alfa were approximately U.S.$266 million in 2007. We estimate that dornase alfa has a market penetration in developed countries and the seven major pharmaceutical markets of the U.S., Germany, France, United Kingdom, Italy, Spain and Japan of about 30%. Although dornase alfa demonstrates lung function improvement in CF patients, similar benefit was not shown in other respiratory conditions, including bronchiectasis. Further, in previous clinical trials, dornase alfa provided no increase in sputum clearance. Dornase alfa is unstable and is delivered by a nebulizer. Solutions have to be prepared by the patient before administration, the treatment periods are long and all equipment has to be sterilized after use.
			Chronic Obstructive Pulmonary Disease
			Chronic Obstructive Pulmonary Disease, or COPD, encompasses a number of serious conditions affecting the lungs, including emphysema, chronic bronchitis and bronchiectasis and other chronic and acute pulmonary conditions. According to the World Health Organization, or WHO, 80 million people suffer from moderate to severe COPD and 3 million died due to it in 2005. The WHO predicts that by 2030, it will be the third largest cause of mortality worldwide.
			Since COPD is not diagnosed until it becomes clinically apparent, prevalence and mortality data greatly underestimate the socioeconomic burden of COPD.
			According to Datamonitor, there are 16 million people diagnosed with COPD in the U.S., and more than 30 million people are affected with COPD in the seven major pharmaceutical markets. In 2005 there were more than 10 million physician office visits and two million hospitalizations per year. The disease was estimated to cost the U.S. healthcare system U.S.$30 billion in 2000. According to a report by Datamonitor, worldwide sales in 2004 of the top seven respiratory therapeutics indicated for COPD were U.S.$4.8 billion.

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Business Overview (Continued)

			Management of COPD generally involves bronchodilators and steroids. However, only an estimated 20%-25% of patients respond positively to steroids and it is currently not practical to determine in advance which patients will respond to steroids. We believe that only half of moderate and severe COPD patients achieve an adequate treatment outcome. Therefore, as with asthma, we believe there is room to improve both the diagnosis and management of COPD.
			Bronchiectasis
			In this condition the bronchial tubes become enlarged and distended, and the cilia do not function normally. Many patients with cystic fibrosis and asthma may also have bronchiectasis. For other patients, bronchiectasis is a result of infections such as pneumonia, or the chronic inhalation of noxious substances although in over half the case, the underlying cause is never identified. The condition results in poor clearing of mucus and predisposes the lung to more infections. The body repairs damaged lung tissue by forming tough, fibrous material, which leads to reduced lung function, lower lung efficiency, changes of the organization of blood vessels and increased blood flow through the lungs. These changes impair normal lung function and can ultimately lead to heart failure. Recurrent lung infections commonly reduce patients’ quality of life and progressive respiratory insufficiency is the most common cause of death from this disease. Based on research carried out for us by Datamonitor and Frost & Sullivan, we estimate that there are about 600,000 people worldwide seeking treatment for bronchiectasis. A report in Clinical Pulmonary Medicine published in 2005 (Volume 12, Number 4, page 205) indicates that over 110,000 people in the U.S. may be receiving treatment for bronchiectasis, resulting in an annual additional medical-care expenditure of $630 million.
			Bronchiectasis treatment is aimed at controlling infections, increasing secretions, reducing airway obstructions and minimizing complications. Daily drainage to remove bronchial secretions is a routine part of treatment. Physicians often prescribe medications similar to those for chronic bronchitis, including inhaled bronchodilators to dilate the airways. Although antibiotics can be used to some effect to clear infections, no currently approved products effectively clear excess mucus secretions and improve the quality of life of these patients. Furthermore, because of the serious damage to lung tissue present in these patients, medications generally do not provide substantial improvement in lung function.
			Chronic Bronchitis
			Patients with chronic bronchitis experience persistent airway inflammation and airflow obstruction, with symptoms including a chronic mucus-producing cough and shortness of breath. Due to the difficulties they have in clearing mucus from their lungs, sufferers are prone to periodic bacterial infections where their cough worsens, mucus production increases and breathing becomes more difficult. These episodes damage and scar the bronchial lining and contribute to continued chronic inflammation and immune-mediated cell damage as the body struggles to fight the infections. This cycle of infection and internal scarring causes a progressive decline in lung function, reducing quality of life and ultimately causing death.
			Many of the deaths associated with chronic bronchitis are included in the COPD figure that now accounts for over 100,000 deaths a year in the U.S. The disease is predominately caused by inhaling some form of lung irritant repeatedly for many years, usually cigarette smoke. Chronic bronchitis is slow to develop and is often not diagnosed until the sufferer is in their 40s or 50s.
			Management of chronic bronchitis includes various general supportive measures such as giving up smoking, limiting exposure to dust and chemicals, avoiding sudden temperature changes, undertaking chest physiotherapy and deep-breathing exercises, and increasing fluid intake to keep the bronchial secretions thin. While there are a number of medications that dilate the airway and reduce airway inflammation, for chronic bronchitis sufferers, there are few therapeutic products available to effectively clear excess mucus secretions. This presents a major medical challenge, as ineffective mucus clearance is a major cause of infection and progression of the disease.
			Treatments for chronic bronchitis include anti-cholinergic agents, steroids, antibiotics and oxygen. Anticholinergic agents, also known as antimuscarinics, are bronchodilators used for the relief of acute symptoms in both asthma

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Section 1

			and COPD, but tend to be more effective in COPD. Inhaled corticosteroids are less likely to cause systemic side effects than oral corticosteroids, and have been shown to be effective in asthmatics. However, the role of these agents in the management of COPD remains unclear. According to a recent scientific report (Chest, 2004, 126, 1815) there are no indications that early treatment with inhaled corticosteroids modifies a rapid decline in lung function or respiratory symptoms and quality of life.
			Asthma
			Asthma is a chronic inflammatory disease of the lungs where the airways narrow in response to a variety of stimuli. Published estimates indicate that this disease affects over 20 million people in the U.S. and approximately 51 million people in the seven major pharmaceutical markets of the U.S., Germany, France, United Kingdom, Italy, Spain and Japan. Based on published studies, we estimate that each year in the U.S., 4.7 out of every 1,000 people under the age of 16 are newly diagnosed with asthma and two out of every 1,000 people aged 16 to 44 are newly diagnosed with the disease.
			Many patients with asthma are not currently diagnosed with the disease. Sufferers and even physicians often attribute common asthma symptoms, such as cough and breathlessness, to smoking, lack of fitness or old age. Moreover, according to a recent publication, 34% of individuals diagnosed as asthmatic by their primary care physician do not have the disease. Even when accurately diagnosed, many patients do not receive the most appropriate therapy according to published guidelines. Physicians can underestimate the severity of the disease, and prescribe only bronchodilators, whereas the addition of an inhaled corticosteroid is the recommended course of action according to the Global Initiative for Asthma, or GINA, guidelines. We estimate that only about 30% of asthma patients in the U.S. receive inhaled corticosteroids despite evidence that uncontrolled asthma is common. Poorly controlled asthma can lead to irreversible damage to the airways. Therefore, the goal of treatment is to provide sufficient anti-inflammatory medication to control inflammation and airway remodeling. However, using high doses of medication can lead to unwanted side effects. Hence, selecting the right dose for individual patients remains a clinical problem.
			To diagnose asthma and to evaluate patient response to treatment, pulmonary specialists may, for example, introduce an aerosolized substance directly into the lungs, and subsequently test lung function. The tests fall into two categories. The first category, known as ‘direct’ challenge tests, use either histamine or methacholine to directly cause airway narrowing. These substances act on receptors on bronchial smooth muscle to cause contraction. The second category, known as ‘indirect’ challenge tests, involve stimuli such as exercise, rapid breathing of dry air, or inhalation of salt solutions or adenosine monophosphate. This more closely mimics an asthmatic process, and can cause the release of chemicals from inflammatory cells within the lungs, resulting in airway contraction and narrowing.
			The only FDA-approved direct test is Provocholine ® (methacholine), marketed by Methapharm Inc. We believe that the disadvantage of direct tests are that the airway narrowing caused by histamine or methacholine is not dependent on the presence of inflammatory cells. Moreover, a positive response is not specific for identifying asthma and can occur in healthy people with no symptoms, smokers, and those with other diseases of the lung. Despite these limitations, we believe that over 200,000 direct tests are performed each year in the U.S., based on information reported by Solucient LLC in 2003. However, this represents only a small fraction of the potential market.
			We believe that the indirect tests have a much lower false positive rate for asthma and increased sensitivity. However, each of them suffers from limitations. For example, tests involving exercise and rapid breathing of dry air require a lengthy period of time to complete and they require complicated equipment. Furthermore, these tests are limited to identifying exercise induced asthma and are not useful for determining the severity of airway inflammation. Hypertonic saline, which is delivered by a nebuliser during administration of the test, is uncomfortable for the patient, determination of the administered dose is difficult and this procedure is unsuitable for managing anti-inflammatory drug treatment. Adenosine monophosphate is unstable, also delivered by a nebuliser and its use is restricted to specialist research laboratories.

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Business Overview (Continued)

	(iii)		Bronchitol Development
			We are developing Bronchitol, our proprietary inhaled mannitol formulation, for the treatment of chronic respiratory diseases, including cystic fibrosis and COPD, including bronchiectasis and chronic bronchitis and other chronic and acute pulmonary conditions. Mannitol is accepted as a food additive in the U.S. and is included in the FDA Inactive Excipients Guide for drug products. We manufacture mannitol into a dry respirable powder and incorporate it into a capsule. The compound is delivered to a patient’s lungs via a pocket-sized inhaler.
			In a 12 week Phase III clinical trial involving 362 bronchiectasis patients sponsored by us, Bronchitol demonstrated a significant improvement in quality of life and a highly significant improvement in mucus clearance relative to placebo. In a 12 month extension to this study, Bronchitol was proven to be safe with no serious adverse events attributed to treatment. In a Phase II clinical trial sponsored by us and involving 60 patients with bronchiectasis, Bronchitol provided a statistically-significant increase in patients’ quality of life relative to placebo and a highly statistically significant reduction in the symptoms of the disease following two weeks treatment.
			In a 2 week Phase II trial involving 39 cystic fibrosis patients sponsored by us, Bronchitol provided a statistically significant reduction in airway obstruction and a statistically significant improvement in lung function measurement of 7% as determined by the change in Forced Expiratory Volume in 1 second, known as FEV 1 .
			In a small second Phase II trial in children with cystic fibrosis supported by us, Bronchitol improved lung function by 7% as determined by FEV 1 measurement following a 3 month treatment period.
			In a Phase II trial sponsored by us and comparing four different doses of Bronchitol in 49 cystic fibrosis patients a clear dose related effect in improving lung function was recorded with the top dose of 400 mg improving lung function by a statistically significant 139mls or 8.6%.
			We have an exclusive, worldwide license from Sydney South West Area Health Service to certain key intellectual property and patents relating to the use and formulation of Bronchitol.
			Mechanism and Early Data
			Bronchitol increases mucociliary clearance in asthmatic and healthy subjects. We have shown that a single inhalation of Bronchitol increases the clearance of mucus both acutely and over a 24 hour period in patients with bronchiectasis, and acutely in patients with cystic fibrosis.
			In an investigator-sponsored 19 patient, single-dose Phase II clinical trial of Bronchitol in patients diagnosed with bronchiectasis, an increase in whole lung mucus clearance was observed over a 75 minute period beginning at the onset of intervention and this increase was statistically significant (p<0.005). There was an almost doubling of mucus clearance after Bronchitol treatment and most of this was in the central and intermediate regions of the lung. Over a 24 hour period after Bronchitol intervention the increase in mucus clearance was approximately 30% over control and this was statistically significant (p<0.0001).
			Bronchitol for CF
			In August 2005, we announced results from a Company sponsored Phase II clinical trial involving 39 patients with cystic fibrosis. The placebo-controlled trial was conducted at eight sites in Australia and New Zealand. Patients were treated for two weeks with either Bronchitol or placebo. After a two week washout period where patients received neither drug nor placebo, patients who previously received Bronchitol were treated with placebo, and vice versa. This crossover trial design allows each patient to act as their own control. The primary endpoint was change in Forced Expiratory Volume in 1 second, known as FEV 1 . This is a quantitative measure of the volume of air a patient can exhale in one second, and is the most frequently used measure of the degree of airway obstruction. The secondary endpoints included quality of life, sputum microbiology, the physical properties of the sputum, safety and additional lung function measurements. At the end of the treatment period, patients receiving Bronchitol had significantly better lung function compared to placebo as measured by FEV 1 and for the maximum mid-expiratory flow, or MMEF, another measure of airway function. Approximately half the subjects were using dornase alfa during the trial.

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			In this trial, Bronchitol had a positive impact on lung function. Patients who received Bronchitol had a 7% improvement in FEV 1 as compared to placebo (p=0.008). An improvement of 7% in this indication is considered to be clinically relevant. MMEF increased by 15% while on Bronchitol treatment and this increase was significant compared to control (p<0.01). The MMEF reflects function in small airways and is an early abnormality in cystic fibrosis. Respiratory symptoms determined from a Likert scale self-assessment after Bronchitol treatment were significantly improved as compared to placebo (p<0.02).
			In August 2005, the FDA granted Orphan Drug designation to Bronchitol for the treatment of cystic fibrosis. In November 2005, the European Medicines Agency, or EMEA, granted Orphan Drug designation to Bronchitol for the treatment of cystic fibrosis. In November 2006, Bronchitol was awarded ‘Fast Track’ designation by the FDA for cystic fibrosis, making Bronchitol eligible to apply for accelerated approval.
			In April 2008, we reported the results of a Company supported investigator-led Phase II clinical trial comparing the effect on lung function of Bronchitol as compared to dornase alfa in children. Both Bronchitol and dornase alfa improved lung function by 7% although the patient numbers were too small to draw a statistically definitive conclusion.
			In August 2008 we also reported results from a Company sponsored Phase II dose-ranging clinical trial to determine optimal dosing. The trial was an open, randomized comparison of 400mg, 240mg, 120mg and 40 mg of Bronchitol involving 48 patients with cystic fibrosis conducted at 12 centres across Canada and Argentina. Bronchitol was administered twice a day for 14 days. The primary end point was a dose dependent change in FEV 1 and Forced Vital Capacity, known as FVC. The secondary endpoints included other spirometry and quality of life measures. The trial demonstrated a dose dependent improvement in lung function as measured by FVC and FEV 1 .

Change in FEV 1		Change in FVC
400 mg treatment group			8.6	%*			7.9	%*
240 mg treatment group			4.6	%			3.9	%
120 mg treatment group			1.9	%			1.5	%
40 mg treatment group			(1.6	%)			(0.6	%)

			Secondary measures showed a positive effect for 400 mg Bronchitol on MMEF and the respiratory domain of the cystic fibrosis quality of life questionnaire. Additionally, no serious adverse events emerged during treatment periods and the adverse event profile was similar across all doses.
			In August 2008 we completed enrolment in a pivotal Phase III clinical trial in the E.U. and Australia, to provide the basis for applications for marketing authorization in the E.U. and other countries outside of the U.S.. The protocol for the clinical trial was designed with scientific advice from the EMEA. The clinical trial is being conducted in 325 subjects with cystic fibrosis over a 6 month treatment period. The primary endpoint was change in Forced Expiratory Volume in 1 second, known as FEV1. Additional endpoints of the trial included a reduction in exacerbation frequency and other lung function measurements. The data from this trial will not be available until the first half of 2009.
			We have agreed a clinical trial protocol with the U.S. FDA under its Special Protocol Assessment procedure for a Phase III trial with Bronchitol in cystic fibrosis. This trial will be the second of two required by the FDA before a New Drug Application (NDA) can be submitted for Bronchitol to treat cystic fibrosis. The clinical trial will be conducted in 250 subjects with cystic fibrosis over a 6 month treatment period and will study a similar patient population to the first Phase III trial. The primary endpoint is to be change in Forced Expiratory Volume in 1 second, known as FEV 1 . Additional endpoints of the trial included a reduction in exacerbation frequency, quality of life and other lung function measurements. The trial is due to commence recruitment during the third quarter of 2008 and data from this trial will not be available until 2010.
			We believe that the addressable annual market for Bronchitol in CF is the 70,000 diagnosed CF patients in the major pharmaceutical markets.

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Business Overview (Continued)

			Bronchitol for Bronchiectasis
			In 2004 we completed a proof of concept Phase II clinical trial of Bronchitol in 60 bronchiectasis subjects. We began this comparator-controlled, crossover design trial at a single centre in Sydney and later expanded it to include four centres in Australia and New Zealand. This trial was designed to explore the safety and efficacy of Bronchitol in bronchiectasis patients. Patients received 400 mg of Bronchitol or comparator, twice a day for 14 days. In this trial, the comparator was a mannitol formulation with a larger (non-respirable) particle size, which we anticipated to be most similar in patient experience to active Bronchitol, yet was intended not to enter the lungs to any significant degree. Endpoints of the study were to evaluate the effect of Bronchitol treatment on patient qualify of life using a self-assessment known as the Likert scale, the St. Georges Hospital Respiratory Questionnaire, or SGRQ, which is another self assessed measure of quality of life, sleep quality as measured by the self assessed Epworth scale, exercise tolerance as measured by the 6 minute walk test, lung function as measured by two tests known as spirometry and flow oscillometry, sputum microbiology, the physical properties of sputum, the volume of sputum production over 24 hours and the safety profile of Bronchitol. The SGRQ includes changes in three components, symptom, activity and impact, as well as an overall score. Improvement in quality of life measures is indicated by a reduction in score.
			Versus baseline, treatment with Bronchitol led to a significant reduction in the Likert scale score of 6.1 (p=0.03). Versus baseline and comparator, there was a statistically significant improvement in the Epworth sleep score (p<0.02 versus comparator). For patients receiving Bronchitol, 38% went from an unclear chest to a clear chest as compared to 17% on comparator (p<0.05). There were no statistically significant changes on lung function as measured by standard spirometry. Flow oscillometry showed a significant effect of Bronchitol compared to comparator (p<0.05). Flow oscillometry is considered to reflect changes in small airways.
			However, the effect of Bronchitol was most pronounced in the 75% of patients who entered the study with an unclear chest, which indicates the most serious problems with normal clearance of lung mucus. There was a mean decrease of 10.2 in Likert scale score during Bronchitol treatment, compared to a mean decrease of 3.6 for placebo (p<0.005 versus placebo). Treatment with Bronchitol led to a significant improvement in the impact component of the SGRQ compared to comparator in those patients with an unclear chest. The improvement was clinically significant at 6.9 points. There was also a trend for an effect on the total score versus comparator but this did not reach significance (p=0.15). Compared to baseline, the overall score showed a strong trend with a clinically significant reduction of 5.6 (p=0.055).
			In August 2007 we completed a Phase III clinical trial of Bronchitol in 362 bronchiectasis subjects. This comparator-controlled double blinded trial was conducted over 22 sites in the United Kingdom, Australia and New Zealand. The trial was designed to evaluate the safety of Bronchitol and its impact on quality of life and mucus clearance. In this trial, the comparator was a mannitol formulation with non respirable particle size, which we anticipated to be most similar in patient experience to active Bronchitol, yet was intended not to enter the lungs to any significant degree. Primary efficacy endpoints of the study were to evaluate the effect of Bronchitol treatment on patient qualify of life using a self-assessed questionnaire, known as the St. Georges Hospital Respiratory Questionnaire, or SGRQ, which is a patient reported outcome tool for measuring health-related quality of life, and 24 hour mucus clearance. The SGRQ includes changes in three components, symptom, activity and impact, as well as an overall score. Improvement in quality of life measures is indicated by a reduction in score. Additional endpoints included exercise tolerance, antibiotic use, exacerbation rate, cough frequency and lung function as determined by spirometry readings.
			Subjects were administered drug or comparator over a twelve week period and the randomization was 2:1 in favor of the treatment arm. Following conclusion of the formal efficacy component, a proportion of the trial subjects were recruited to an open label extension of the trial for a total treatment period of twelve months.

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Section 1

			Treatment with Bronchitol led to an overall improvement in quality of life versus baseline (p<0.001) and an overall improvement in quality of life versus the comparator (p<0.05). The change in quality of life was clinically significant at 4.1 units at the mid-point of the study and 3.9 units at the end of the study. Additionally, there was a difference in sputum volume between the two groups of subjects, with the Bronchitol treated group producing 30% more mucus over the 24 hour collection periods and this difference was statistically significant (p<0.001).
			In addition to the primary efficacy analysis, clinical trial subjects that had been assigned to the drug treatment arm used less antibiotics over the first six week period than their counterparts on the comparator arm and this difference was significant (p<0.05).
			There were no serious adverse events attributable to treatment and there was no statistical difference in the number or nature of adverse events in the two treatment groups.
			No therapies to enhance mucus clearance in bronchiectasis patients have been approved in over 20 years in the U.S. In June 2008, we reached agreement with the FDA under its Special Protocol Assessment procedure and with the EMEA on the protocol for a Phase III trial with Bronchitol in bronchiectasis to provide the basis for application for marketing authorization in the U.S. and the E.U.
			In February 2005, the FDA granted Orphan Drug designation to Bronchitol for the treatment of bronchiectasis. We are currently supplying Bronchitol in Australia on an individual, named patient basis under a TGA-administered compassionate use program known as the Special Access Scheme. This program allows patients access to unapproved drugs where there are limited treatment options. In June 2008 we announced the extension of this named patient basis program to qualifying patients in other parts of the world.
			We believe that an effective daily treatment for the estimated 600,000 people worldwide affected by bronchiectasis represents a significant market opportunity.
			Bronchitol for Other Pulmonary Indications
			Most asthmatics with mucus hypersecretion have difficulty in clearing their secretions such that mucus plugs and airway obstruction are commonly present and this can present clinical challenges. A recent study (Respirology, 2007, 12, 683) indicates that Bronchitol may be beneficial in enhancing clearance of mucus in asthmatics. The expected long term effect would be a reduction in mucus plug formation and an improvement in lung function in asthmatics with mucociliary dysfunction.
			Pilot data in patients with chronic bronchitis have shown that Bronchitol may also be beneficial in improving mucociliary and cough clearance in these patients. We indirectly supported a small, investigator-sponsored Phase II clinical trial to determine the effects of Bronchitol on mucus clearance over a two hour period, and the effects on rate of clearance of a radiolabelled tracer over a 24 hour period. The trial was not powered nor suitably controlled for statistical analysis, but provided encouraging data.
			We plan to conduct additional Phase II clinical trials in patients with chronic bronchitis. The objective of these trials will be to determine if Bronchitol assists in clearing mucus after an exacerbation requiring hospitalization and whether Bronchitol has the ability to lengthen the time to and, reduce the frequency of, subsequent exacerbations requiring hospitalisation.
			We also plan to conduct additional clinical trials to determine the effects of Bronchitol on mucus clearance in patients admitted to hospital intensive care units.

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Business Overview (Continued)

	(iv)		Aridol
			We have initially developed Aridol as a more accurate and precise proprietary tool for physicians to use in the diagnosis and management of asthma and COPD. Physicians do not currently have rapid, accurate, safe and inexpensive tests to evaluate the presence or severity of these diseases. Aridol is a proprietary dry powder formulation of mannitol, delivered to the lungs through an inhaler. Mannitol is an osmotic agent which causes the release of certain mediators from inflammatory cells, which in turn cause a bronchoconstriction. This process mimics the changes that often occur in the airways of people with asthma. Asthma patients who are not receiving adequate doses of anti-inflammatory medicine, such as an inhaled corticosteroid, experience airway narrowing and a drop in lung capacity when given the Aridol test. In contrast, healthy people or well-controlled asthma patients do not experience this narrowing and reduction in lung capacity. In 2004 we completed a 646 subject,12 centre, Phase III clinical trial of Aridol. Based on the Phase III data, we have received marketing approval in Australia. In June 2007 we successfully completed the E.U. mutual recognition procedure which permitted marketing approvals of Aridol by Germany, France, the United Kingdom, Italy, the Netherlands, Belgium, Denmark, Greece, Spain, Finland, Ireland, Norway, Sweden and Portugal. Individual country marketing certificates were issued from June 2007 to June 2008 at which time Italy, France, Spain and Belgium were still being processed.
			We received marketing approval in Korea in January 2008. In October 2006 we completed a 500 participant, 30 centre, Phase III clinical trial designed to allow approval in the U.S. Based on this study and the earlier Phase III clinical trial that was the basis of marketing approval in Australia and Europe, we intend to file a New Drug Application (NDA) with the FDA in the third quarter of 2008.
			Aridol is the subject of 48 peer-reviewed publications in international journals. We believe that Aridol is superior to direct tests such as methacholine because Aridol is an indirect challenge test that relies on mediators released by inflammatory cells to cause a bronchoconstriction, thereby making Aridol a more accurate predictor of airway inflammation. We believe that Aridol’s high degree of sensitivity and specificity for airway inflammation, combined with its ease of use, will make it possible for physicians to:

	•		diagnose asthma more accurately and objectively, and measure disease severity, with a high correlation to in-depth patient assessment by a pulmonary specialist physician;
	•		monitor the effectiveness of treatment, with a negative Aridol test indicating good control of asthma and a positive test indicating active airway inflammation and the need for more or different medication;
	•		determine the minimum required dose of steroids to achieve adequate disease control in a given patient, and predict the risk of exacerbation when reducing the steroid dose.

			We have an exclusive, worldwide license from Sydney South West Area Health Service to certain key intellectual property and patents relating to the use and formulation of Aridol.
			Aridol for Asthma
			In our Phase II and Phase III clinical trials, patients used a dry powder inhaler to take progressively higher doses of Aridol (from 5 mg to 635 mg, nine steps in all). After each inhalation the patient’s lung capacity is determined by a spirometer, an instrument to measure airflow and lung capacity. The Aridol test is stopped when a patient has a 15% fall in lung capacity, indicating the presence of active airway inflammation. Only those patients with active airway inflammation will experience a drop in lung capacity. On average, the procedure takes 17 minutes for a positive test and 26 minutes for a negative test. The only equipment required is a standard spirometer to record lung capacity.
			A large number of investigator-sponsored, open-label Phase I and Phase II clinical trials have been conducted with Aridol. The results show that use of Aridol can identify subjects with asthma who are also responsive to inhaled salt solutions, inhaling dry air and exercise. Aridol also identifies both adults and children with currently active asthma who are responsive to methacholine, as well as others who are not responsive to methacholine. The Aridol test demonstrates good repeatability in both adults and children, and responses are rapidly reversible using a standard dose of bronchodilator. Furthermore, Aridol can provide an assessment of the effectiveness of inhaled steroids in controlling the disease. Finally, Aridol response correlates with the symptoms and signs of exercise induced asthma, indicating that a negative response to Aridol may be a useful end point signifying adequate asthma control.

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Section 1

In 2004 we completed a 12 centre, 646 subject, Phase III clinical trial of Aridol to identify airway hyperresponsiveness in asthmatic patients, and to support filing for marketing authorization in Australia and the European Union. Airway hyperresponsiveness is a hallmark of untreated or poorly controlled asthma, and over time can lead to long-term changes in the lungs. This trial included asthmatic patients who were currently treating their disease, patients with symptoms suggestive of asthma but without a clinical diagnosis, and healthy volunteers, including both children and adults. The goals of this trial were to:

	•		compare Aridol to hypertonic saline in identifying airway hyper-responsiveness in asthmatic subjects and non-asthmatic subjects;
	•		compare Aridol to standard clinical assessment in diagnosing asthma;
	•		compare asthma severity as determined by our Aridol test to the Severity of Asthma (Asthma Management Handbook 2002);
	•		evaluate the advantages of Aridol versus hypertonic saline with respect to simplicity, safety and patient and health care convenience; and
	•		further evaluate the safety profile of Aridol.

			The primary endpoint was a comparison of the sensitivity and specificity of Aridol to that for an unapproved test, hypertonic saline, which is widely used in Australia. A secondary endpoint was a comparison of the sensitivity and specificity of Aridol to that of physician diagnosis. Sensitivity is a measure of the percentage of people correctly identified as having airway hyperresponsiveness by the test. Specificity is a measure of the percentage of people correctly identified as lacking airway hyperresponsiveness.
			In this trial, sensitivity of Aridol against hypertonic saline was 81%, and specificity was 87%. This means that 81% of patients identified as having airway hyper-responsiveness by the hypertonic saline test were also identified as positive by the Aridol test and 87% of patients classified as lacking airway hyper-responsiveness were also identified as negative by Aridol. Conversely, the sensitivity of hypertonic saline against Aridol was 88%, and specificity was 79%. These numbers indicate good agreement between the two tests (p<0.01).
			In comparison to physician diagnosis, Aridol had a sensitivity of 58%, and specificity was 94%. Significantly, of the 42% of patients identified as asthmatic by physician diagnosis, but lacking airway hyper-responsiveness as determined by Aridol, 85% were using inhaled corticosteroids at the time of the clinical trial. When the subjects who were Aridol negative and were using inhaled corticosteroids were removed from the analysis versus physician diagnosis, sensitivity was 89% and specificity was 95%. The increase in sensitivity underscores the utility of Aridol in managing patients on inhaled corticosteroid medication.
			As a result of this trial, we have received marketing approval in Australia, Korea, Germany, the United Kingdom, the Netherlands, Denmark, Greece, Finland, Ireland, Norway, Portugal and Sweden. We have filed for the issue of marketing authorizations in France, Italy, Spain and Belgium subsequent to our successful completion of the E.U. mutual recognition procedure. We have also filed for marketing approval in Switzerland and several smaller Asian markets.
			We have established a sales force based in Australia and have completed our first two years of sales of Aridol in Australia. We have appointed independent marketing partners in Scandinavia, Switzerland, Italy, Greece, Spain, Portugal, the Netherlands and Korea and established an office in the United Kingdom to manage these partners and to manage European sales and marketing in the UK, Ireland and France. We have appointed an independent marketing partner in Korea and established an office in China to manage Asian sales and marketing partners. We intend to establish additional marketing partnerships in select E.U. and Asian territories and other jurisdictions for this product. We are supporting a number of investigator-sponsored trials to provide the basis for a rapid uptake of Aridol in the marketplace.
			In the U.S., unlike Australia and Europe, a product, methacholine, is approved by the FDA to identify airway hyper-responsiveness in asthmatic patients. Based on discussions with the FDA, we undertook a 500 subject Phase III clinical trial comparing Aridol with methacholine and exercise challenge in patients with suspected asthma. The primary endpoint was to compare the sensitivity and specificity of Aridol to identify exercise-induced bronchoconstriction. We completed this trial in October 2006. In this group with predominantly very mild symptoms, Aridol was able to identify patients with exercise induced bronchoconstriction in 58% of cases

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Business Overview (Continued)

			(sensitivity). In comparison methacholine, an approved lung function test in the U.S., identified 54% of cases. The difference between the two tests was not statistically significant. Aridol also had similar specificity to methacholine, (66% versus 70% respectively) in subjects without exercise induced bronchoconstriction. In addition Aridol was proven to have an acceptable safety profile and to cause less bronchoconstriction than methacholine (p<0.05). Based on this study and the earlier Phase III clinical trial that was the basis of marketing approval in Australia and Europe, we intend to file a New Drug Application (NDA) with the FDA. We have established an office in the U.S.A. to manage sales and marketing of Aridol in North America.
			Our initial target market for Aridol are the lung function testing laboratories and specialist physicians that manage those asthamatic patients that have poor control of their disease. Because current use of objective lung function testing is low, we plan to focus initial Aridol marketing efforts on physician education regarding asthma diagnosis and disease control. We believe physicians who commonly diagnose asthma based only on patient history of asthma symptoms leads to sub-optimal control of this disease, falling far short of the goals of current clinical guidelines. We are also planning development and marketing efforts in new areas where challenge testing could be useful given the availability of an accurate, valid and easy to use test like Aridol. These include monitoring asthma therapy and assessing asthma prevalence in the community.
			Aridol for COPD
			We are also exploring the use of Aridol in the management of COPD. Treatment of COPD is difficult but approximately 20%-25% of patients with COPD can have a positive clinical outcome with the administration of inhaled steroids. A long standing problem is that there is no effective test to identify those people that will respond clinically to inhaled steroids. A publication by Jörg Leuppi and colleagues has shown that in an investigator-sponsored, Phase II clinical trial, those patients with COPD that have a positive response to an Aridol challenge test are likely to benefit from inhaled corticosteroids treatment. In this trial, all patients had a positive response to inhaled histamine (a lung challenge test) whereas only 23% had a response to inhaled Aridol. After three months treatment with steroids, only those patients who recorded a positive Aridol challenge test had an improvement in their lung capacity. The difference in response to treatment between the two groups was highly statistically significant (p=0.001). In March 2007 we reported the results of a Phase II clinical trial to determine if Aridol is a practical test to guide treatment of inhaled corticosteroids in COPD patients in the primary care setting. In subjects with a positive Aridol challenge test, treatment with inhaled corticosteroids led to a statistically significant improvement in airway hyper-responsiveness as judged by a subsequent Aridol challenge test.
	(v)		Drug Development
			We currently conduct a number of different research programs including PXS25 and PXS4159.
			PXS25
			PXS25 is an inhibitor of the cation-independent mannose-6-phosphate/insulin-like growth factor-II receptor (CI-M6P/IGF2R). According to the type of ligand, CIM6PR/IGF2R may modulate a large panel of biological pathways, such as cell migration, wound healing, angiogenesis and cell growth inhibition,
			PXS25 has been developed as a selective and stable antagonist of CIM6PR/IGF2R and has been studied in a variety of models of human disease. Our preclinical studies indicate that PXS25 is able to inhibit inflammatory cell ingress to selected organs including the lungs and may be useful in addressing clinical conditions such as COPD or fibrotic disorders of the lung.
			In our animal studies, PXS25 demonstrated significant activity when administered by injection. However, the oral bioavailability of PXS25 is low in several species of animals. Therefore, we have developed PXS64, an orally available prodrug of PXS25 which is metabolized to active PXS25 once absorbed by the body.
			The preclinical safety assessment of PXS25 as an intravenous formulation have been completed and initial Phase I clinical trials to determine the safety and pharmacokinetic properties of PXS25 are in preparation.
			Additional preclinical research studies are in progress to determine the most appropriate clinical indication for PXS25 and the most appropriate route of delivery. Additional preclinical safety studies will be required if PXS25 is delivered to the lungs to treat fibrotic disorders of the lung and additional preclinical safety studies will be required if PXS25 is to be delivered orally via its prodrug PXS64.

16 Pharmaxis 2008 Statutory Annual Report

Section 1

			PSX4159
			PXS4159 is a potent and selective inhibitor of semicarbazide sensitive amine oxidase (SSAO) which is also known as vascular adhesion protein-1 (VAP1). SSAO/VAP-1 plays a key role in inflammation.
			The soluble products form SSAO/VAP-1 are highly reactive and include hydrogen peroxide and reactive aldehyde. The concentration of SSAO/VAP-1 circulating in the blood is increased in several inflammatory diseases, including congestive heart failure, inflammatory liver disease, and diabetes. The soluble products which form when SSAO/VAP-1 reacts with substrates are highly reactive and include hydrogen peroxide and reactive aldehyde.
			SSAO/VAP-1 plays a role in the transmigration of leukocytes out of the blood stream into sites of inflammation. It has been reported in the scientific and patent literature that inhibition of the amine oxidase enzymatic activity of SSAO/VAP-1 in animal models of inflammatory diseases leads to amelioration of disease symptoms. Rheumatoid arthritis, lung inflammation, multiple sclerosis, liver inflammation and ocular inflammation disease models have been studied in this manner.
			In a series of preclinical studies, PXS4159 has been shown to effectively inhibit the oxidas activity of SSAO/VAP-1 when administered to animals and to suppress inflammation in an animal model of lung disease, is effectively absorbed following oral administration and is well tolerated. On this basis, we have selected PXS4159 as our preferred development candidate and have commenced the scale up manufacture and pre-clinical safety studies necessary to evaluate the compound in humans.
	(vi)		Our Strategy
			Our objective is to build a specialty pharmaceutical company focused on respiratory and inflammatory/autoimmune indications. Key aspects of our strategy include:

	•		Focus on attractive product opportunities in our core therapeutic areas. We are developing products that address severe, chronic and acute respiratory and inflammatory diseases where there are limitations to current treatment and the patient population is treated by a relatively concentrated physician audience.
	•		Successfully complete the clinical development of Bronchitol in two initial indications. In the use of Bronchitol for cystic fibrosis we have recently successfully completed our Phase II clinical trial program, completed recruitment of our first Phase III clinical trial (in Europe and Australia) and initiated our second Phase III clinical trial (in the U.S.). In the use of Bronchitol for bronchiectasis we have successfully completed our first Phase III clinical trial, have agreed the protocol for a second Phase III clinical trial with the FDA and EMEA, and we are preparing to file a marketing application with the Australian TGA.
	•		Increase manufacturing capacity. We have a TGA approved manufacturing plant sufficient for the current commercial requirements of Aridol. A purpose built manufacturing, research and office facility is currently being constructed for us which we will equip with manufacturing capacity sufficient for our launch of Bronchitol into global markets.
	•		Complete the international approval and commercial launch of Aridol. We have received marketing authorization of Aridol in Europe, Australia and Korea. Based on our pre-IND meeting with the FDA, the completed U.S. clinical trial of Aridol and the earlier Phase III clinical trial that was the basis of marketing approval in Korea, Australia and Europe, we intend to file a New Drug Application (NDA) with the FDA. The commercial launch of Aridol continues throughout Europe and Asia as country specific marketing and pricing approvals are obtained.
	•		Develop sales and marketing capabilities in select markets. We intend to retain commercial rights to our products in indications and territories where we believe we can effectively market them with a small specialized sales force. For all other indications and territories, we intend to pursue strategic collaborations.
	•		Continue to expand and progress our R&D pipeline. We have a number of current research and development programs and will continue to build and strengthen our product pipeline and commercial capabilities, and we may acquire complementary technology and drug development candidates from research institutes, universities and private and public companies. These acquisitions may take the form of collaborations, licensing arrangements or outright purchase of intellectual property, research groups or corporate entities.

Pharmaxis 2008 Statutory Annual Report 17

1.2.2

Business Overview (Continued)

	(vii)		Sales and Marketing
			We have a sales and marketing group in Australia and have appointed marketing and distribution partners for certain European and Asian territories with respect to the marketing and sale of Aridol. We have established offices in the United Kingdom, the U.S. and China to manage local marketing and distribution partners and/or undertake direct marketing to pulmonary specialists and third parties. In order to commercialize any of our other respiratory product candidates, we must further develop these capabilities internally or through collaborations with third parties. We intend to retain commercial rights to market our products to pulmonary specialists in the U.S. and Europe and may enter into sales, marketing and distribution agreements for other parts of the world. Because the U.S. and European pulmonary specialist market is relatively concentrated, we believe we can effectively target it with a small specialized sales force. We may pursue strategic collaborations to commercialize our products in other territories and on a worldwide basis for indications treated by large physician populations, such as asthma or chronic bronchitis.
	(viii)		Manufacturing
			We manufacture both Aridol and Bronchitol in our production facility located in Sydney, Australia, under conditions of current Good Manufacturing Practice, known as cGMP. Our manufacturing facility consists of a warehouse, adjoining office space, a cGMP laboratory for quality control and quality assurance, and clean rooms. Final packing of both Aridol and Bronchitol in foil packs is performed by a third party. The inhaler used in conjunction with both Aridol and Bronchitol is manufactured by a third party in Italy and is supplied to us on a non-exclusive basis through a standard supply agreement.
			We believe that our manufacturing facility has ample operating capacity to produce adequate Aridol and Bronchitol to undertake the full clinical trial program through submission of an NDA in the U.S. for those product candidates and to support the commercial demand of Aridol two years after international launch. We have entered into an agreement concerning the lease of a purpose built manufacturing, warehousing and office facility. Construction of the new facility is underway and is expected to complete in the first quarter of 2009. We have entered an agreement for the construction of a spray dryer, being the key piece of production equipment to be housed in the new facility and are continuing to enter into agreements for other pieces of equipment which will be required to increase capacity.
			Our cGMP facilities have been inspected and licensed by the Therapeutic Goods Administration. Our facilities and those of any third-party manufacturers will be subject to periodic inspections confirming compliance with applicable law of jurisdictions in which we have approved product. Our new facility must be cGMP certified before we can manufacture our drugs for commercial sale. Failure to comply with these requirements could result in the shutdown of our existing facilities or the assessment of fines or other penalties or an inability to supply product from our new facility.
			Mannitol is the key raw material required for the manufacture of both Aridol and Bronchitol. cGMP grade mannitol is available from a number of suppliers. Inhalers are also available from a number of suppliers.
			We have outsourced the manufacturing of cGMP grade PXS25 for preclinical and clinical trials as our manufacturing facilities are not suitable for the production of PXS25. Our contract manufacturers have the capacity to produce adequate PXS25 for clinical trials.
			We have outsourced the manufacturing of cGMP grade PXS4159 for preclinical trials as our manufacturing facilities are not suitable for the production of PXS4159. Our contract manufacturers have the capacity to produce adequate PXS4159 for clinical trials.
	(ix)		Competition
			We operate in highly competitive segments of the biotechnology and pharmaceutical markets. We face competition from many different sources, including commercial pharmaceutical and biotechnology enterprises, academic institutions, government agencies, and private and public research institutions. Many of our competitors have significantly greater financial, product development, manufacturing and marketing resources than do we. Large pharmaceutical companies have extensive experience in clinical testing and obtaining regulatory approval for drugs. These companies also have significantly greater research capabilities than do we. In addition, many

18 Pharmaxis 2008 Statutory Annual Report

Section 1

			universities and private and public research institutes are active in respiratory and autoimmune disease research, some in direct competition with us. We also compete with these organizations to recruit scientists and clinical development personnel. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.
			We are aware of many of our competitors in each of the markets we target. These products include approved and marketed products as well as products in development. We expect Aridol, to compete with direct bronchial provocation tests such as methacholine (Provocholine ® ) and histamine. We expect Bronchitol for CF to compete with or to be used in conjunction with Pulmozyme and other mucolytic agents and bronchodilators. Although it has little market penetration, Mucomyst ® , marketed by AstraZeneca, is used by some physicians to treat bronchiectasis, other forms of COPD and CF. Numerous other potential competing therapeutic products are in clinical treatment and preclinical development, including new antibiotic preparations and new agents to restore salt balance. In each of our development programs addressing indications for which there are therapies available, we intend to complete clinical trials designed to evaluate the potential advantages of our drug candidates as compared to, or in conjunction with, the current standard of care. Key differentiating elements affecting the success of all of our drug candidates are likely to be their efficacy, convenience and side-effect profile compared to commonly used therapies.
	(x)		Intellectual Property
			We patent the technology, inventions and improvements that we consider important to the development of our business. As of 31 July 2008, we owned or had exclusive rights to 20 issued U.S. and foreign patents and 14 pending U.S. and foreign patent applications. Of these, 11 issued patents and three pending applications relate to Aridol and Bronchitol. The last of these issued patents are due to expire in 2021. One pending application relates to PXS25 and PXS64 and has now entered the national phase and one provisional application relates to PXS4159. The remaining patents and applications relate to other aspects of our technology or other drug discovery programs that have not yet entered a full development program. If available to us, we intend to seek patent term extension for our eligible patents, including under the Hatch-Waxman Act, which provides up to five years of patent extension.
			We have the exclusive worldwide rights from Sydney South West Area Health Service for certain key intellectual property and patents relating to the use of respirable dry powders for the assessment of bronchial hyper-responsiveness, a condition consistent with active asthma, for monitoring steroid use in asthma patients, and enhancing mucus clearance in diseases such as cystic fibrosis, bronchiectasis and chronic bronchitis. These exclusive rights, which form the basis for patent protection of both Aridol and Bronchitol, derive from one issued U.S. and eight issued foreign patents. The U.S. and most of the foreign patents covering Aridol and Bronchitol are due to expire in 2015. The latest expiring in any territory is 2021. The U.S. and European patents may be eligible for extension by up to an additional five years, however, we cannot guarantee that any such extension would be granted.
			We also have an exclusive worldwide license from ANU Enterprises Pty Ltd. (formerly Anutech Pty Ltd.) to develop and commercialize intellectual property relating to the treatment of inflammatory or immune-mediated conditions in patients by administering a phosphosugar. These exclusive rights derive from two issued U.S. and four issued foreign patents covering the E.U. member states and Australia, as well as other major territories. The last of these patents are due to expire in 2017. The U.S. patents may be eligible for extension by up to an additional five years however we cannot guarantee that any such extension would be granted.
			Our ability to build and maintain our proprietary position for our technology and drug candidates will depend on our success in obtaining effective claims and enforcing those claims once granted. The patent positions of biopharmaceutical companies like ours are generally uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. Some countries in which we may sell our product candidates or license our intellectual property may fail to protect our intellectual property rights to the same extent as the protection that may be afforded in the U.S. or Australia. Some legal principles remain unresolved and there has not been a consistent policy regarding the breadth or interpretation of claims allowed in patents in the United States, the European Union, Australia or elsewhere. In addition, the specific content of patents and patent applications that are necessary to support and interpret patent claims is highly uncertain due to the complex

Pharmaxis 2008 Statutory Annual Report 19

Section 1

Country		Patent/Application No.				Status		Expires
Australia				682756		Granted — 5 Feb 1998		23 Feb 2015
Canada				2183471		Granted		23 Feb 2015
Europe (EPO)				95910331.8		Under examination		23 Feb 2015
Japan				3979660		Granted		23-Feb-2015
				2006-317693		Under examination
				2009-317692		Under examination
Malaysia				PI9603590		Granted		23 Feb 2015
New Zealand				281522		Granted		23 Feb 2015
P.R. China				95191808.7		Granted		25 Feb 2015
Republic of Korea				96-704666		Granted		23 Feb 2015
Singapore				34525		Granted		19 Dec 2015
The Philippines				I-54034		Granted		17 Mar 2024
USA				5,817,028		Granted		06 Oct 2015
Vietnam				SC0131/96		Granted		23 Feb 2015

This series of patents and patent applications are held in the name of Sydney South West Area Health Service and stem from an initial Australian provisional patent application PM4114 filed 25 February 1994. Subsequently, complete applications were filed via a PCT application (PCT/AU/95/00086) filed on 23 Feb 1995.

Patent Family 2 — Phosphosugar-Based Anti-Inflammatory and/or Immunosuppressive Drugs

The invention covered by this family of patents and patent applications generally relates to a method for treating inflammatory or immune-mediated conditions in patients by administering a phosphosugar (mainly mannose-6-phosphate and fructose-6-phosphate) as well as oligo- and poly-saccharides that contain such phosphosugars. These agents act as antagonists at mannose phosphate receptors by competitive inhibition of the binding of the natural ligand for these receptors. This treatment targets ‘delayed hypersensitivity’ types of immune reactions and their attendant inflammatory processes, and the patent is directed specifically to the treatment of arthritis, inflammatory diseases of the central nervous system, and the rejection of organ transplants.

Country		Patent/Application No.				Status		Expires
Australia				627500		Granted — 21 Dec 1992		18 Aug 2009
Europe						Granted — 30 June 1996		17/18 Aug 2009
Japan				509079/89		Granted — 03 Dec 1999		18 Aug 2009
USA				5,506,210		Issued — 09 Apr 1996		09 Apr 2013

This family of patents is owned by The Australian National University (‘ANU’) and claims priority to Australian Provisional application P19942/88 filed on 19 August 1988. Subsequently, complete applications were based on a PCT application (PCT/AU89/00350) filed on 18 August 1989.

Pharmaxis 2008 Statutory Annual Report 21

1.2.2

Business Overview (Continued)

			Patent Family 3 — Novel Phosphosugars and Phosphosugar-Containing Compounds Having Anti-Inflammatory Activity
			These patents are for substituted D-mannoside-6-phosphate compounds that have anti-inflammatory activity and their use in treating inflammatory diseases, particularly cell-mediated inflammatory diseases. The patent discloses use of these compounds to suppress experimental auto-immune encephalomyelitis in the rat (a model of multiple sclerosis) and two different types of delayed-type hypersensitivity responses in mice. Issued claims in the U.S. patent cover some of these novel phosphosugar compositions and methods of treating cell-mediated inflammation in a human or non-human mammalian patient by administering these compositions.

Country

Patent/Application No.

Status

Expires

Australia

728393

Granted 26 Apr 2001

17 Oct 2017

USA

6,294,521

Issued 25 Sep 2001

18 Oct 2017

The above family of patents are held in the name of the ANU and stem from a priority Australian provisional patent application (PO 3098/96) filed on 18 October 1996.

Patent Family 4 — Novel Compounds and Methods

This family of patent applications relates generally to novel phosphotetrahydropyran (mannose-6-phosphate derivatives) compounds and their use in treating diseases that are dependent upon T lymphocyte migration. These compounds were shown to inhibit (a) T lymphocyte migration across rat brain endothelial cell layers in vitro; (b) lymphocyte migration into lymphatic and extralymphatic tissues in vivo; and (c) delayed hypersensitivity-type immune responses and development of T cell-mediated autoimmune disease in vivo in animal models. In particular, the present invention relates to the use of the above compounds in the treatment of T lymphocyte mediated inflammatory diseases in animals and man, such as rheumatoid arthritis, multiple sclerosis, etc.

Country		Patent/Application No.				Status		Expires
Australia				2001270356		Granted		11 Jul 2021
Canada				2415214		Pending		11 Jul 2021
Europe				01949109.1		Pending		11 Jul 2021
New Zealand				523565		Granted		11 Jul 2021
Japan				2002-509335		Lodged		11 Jul 2021
USA				6878690		Granted		11 Jul 2021

These applications stem from Australian Provisional Patent Application No. PQ8723/00 filed on 11 July 2000. Complete applications were based on a PCT application (PCT/AU01/00831) filed on 11 July 2001.

Patent Family 5 — Novel Phosphotetrahydropyrans and Methods

The present invention relates generally to novel phosphotetrahydropyran compounds, primarily derivatives of mannose-6-phosphate, and their use in treating diseases or disorders that are mediated at least in part by T lymphocyte emigration from blood to tissues. These compounds are said to be improved inhibitors as compared to the compounds in Patent Family 4. Pharmaceutical compositions containing these compounds are used in methods to treat T lymphocyte mediated inflammatory and autoimmune diseases in animals and man, including rheumatoid arthritis, multiple sclerosis, acute disseminated encephalomyelitis, psoriasis, Crohn’s disease, T cell-mediated dermatitis, stromal keratitis, uveitis, thyroiditis, sialitis or type I diabetes.

22 Pharmaxis 2008 Statutory Annual Report

Section 1

Country		Application No.				Status		Expires
USA				60/761,754		Under examination		20 years from filing date
Canada				2525328		Request examination by 20 May, 2009		20 years from filing date
New Zealand				544085		Under examination		20 years from filing date
Australia				2004240938		Request examination by 20 May, 2009		20 years from filing date
Europe				04752819.5		Under examination		20 years from filing date
Singapore				200507071-9		Under examination		20 years from filing date

These applications stem from U.S. Provisional Patent Application No. 60/471,716 filed on 20 May 2003. Complete applications were based on a PCT application (PCT/US2004/015876) filed on 19 May 2004.

Patent Family 7 — Novel Anti-inflammatory Agents and Uses Thereof

This patent relates to a series of compounds and pharmaceutical compositions comprising novel inhibitors of tumor necrosis factor (TNF). The compounds are useful for the treatment of treat inflammatory conditions, immune disorders and cell proliferative disorders, as well as in pain management, either alone or in combination with known agents for these conditions.

Country		Application No.		Status		Expires
USA		Serial No. 60/761,754		Provisional Application		20 years from filing date

The U.S. provisional application was filed in the name of Pharmaxis Pty Limited on 28 January 2008 and the non-provisional and/or the international application must be filed by no later than 28 January 2009 in order to claim priority from this provisional application.

			Patent Family 8 — Novel Inhibitors of SSAO/VAP-1
			This patent relates to a series of compounds and pharmaceutical compositions comprising novel inhibitors of SSAO/VAP-1. The compounds are useful for the treatment of inflammatory conditions, immune disorders and cell proliferative disorders, either alone or in combination with known agents for these conditions.

Country		Application No.		Status		Expires
USA		Serial No. 60/689,634		Provisional Application		20 years from filing date

The U.S. provisional application was filed in the name of Pharmaxis Ltd on 21 November 2007 and the non-provisional and/or the international application must be filed by no later than 21 November 2008 in order to claim priority from this provisional application.

Pharmaxis 2008 Statutory Annual Report 23

1.2.2

Business Overview (Continued)

(xi)

Government Regulation and Product Approval

Regulation by governmental authorities is a significant factor in the development, manufacture and marketing of pharmaceuticals. All of our products will require regulatory approval by regulatory authorities prior to commercialization and will be subject to a variety of regulations governing clinical trials and commercial sales and distribution of our product throughout the world. In particular, pharmaceutical drugs are subject to rigorous preclinical testing and clinical trials and other premarketing approval requirements by regulatory authorities. Regulatory authorities often also govern or impact upon the manufacturing, safety, labeling, storage, record-keeping and marketing of pharmaceutical products. The lengthy process of seeking required approvals and the continuing need for compliance with applicable statutes and regulations require the expenditure of substantial resources. Regulatory approval, when and if obtained for any of our product candidates, may be limited in scope which may significantly limit the indicated uses for which our product candidates may be marketed. Further, approved drugs and manufacturers are subject to ongoing review and discovery of previously unknown problems that may result in restrictions on their manufacture, sale or use or in their withdrawal from the market.

The approval process varies from country to country, and the time may be longer or shorter than that required in other countries. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country. The following describes the typical regulatory framework applicable in North American, European and Australian jurisdictions.

Preclinical Studies

Before testing any compounds with potential therapeutic value in human subjects, stringent government requirements for preclinical data must be satisfied. Preclinical testing includes both in vitro and in vivo laboratory evaluation and characterization of the safety and efficacy of a drug and its formulation. Preclinical testing results obtained from studies in several animal species, as well as from in vitro studies, are typically submitted to the regulatory authority and reviewed by the regulatory authority prior to the commencement of human clinical trials. These preclinical data must provide an adequate basis for evaluating both the safety and the scientific rationale for the initial trials in human volunteers.

Clinical Trials

If a company wants to test a new drug in humans, it must typically first apply to and receive approval from the relevant local regulatory authority. In addition, an institutional review board typically comprised in part of physicians at the hospital or clinic where the proposed trials will be conducted must review and approve the trial protocol and monitor the trial on an ongoing basis. The local regulatory authority typically retains the ability to impose a clinical hold on proposed or ongoing clinical trials. which can result in substantial delay and expense.

Clinical Trial Phases

Clinical trials typically are conducted in three sequential phases, phases I, II and III, with phase IV trials potentially conducted after marketing approval. These phases may be compressed, may overlap or may be omitted in some circumstances.

	•		Phase I clinical trials. After receiving approval from the relevant local regulatory authority phase I human clinical trials can begin. These trials evaluate a drug’s safety profile, and the range of safe dosages that can be administered to healthy volunteers and/or patients, including the maximum tolerated dose that can be given to a trial subject with the target disease or condition. Phase I trials also determine how a drug is absorbed, distributed, metabolized and excreted by the body, and duration of its action.
	•		Phase II clinical trials. Phase II clinical trials typically are designed to evaluate the potential effectiveness of the drug in patients and to further ascertain the safety of the drug at the dosage given in a larger patient population.
	•		Phase III clinical trials. In phase III clinical trials, the drug is usually tested in a controlled, randomized trial comparing the investigational new drug to an approved form of therapy in an expanded and well defined patient population and at multiple clinical sites. The goal of these trials is to obtain definitive statistical evidence of safety and effectiveness of the investigational new drug regime as compared to an approved standard therapy in defined patient populations with a given disease and stage of illness.

24 Pharmaxis 2008 Statutory Annual Report

Section 1

All clinical trials for our products have been conducted in accordance with the ICH (International Conference on Harmonization) guidance so that we can apply for marketing authorization in multiple jurisdictions.

New Drug Application/Marketing Authorisation Application

After completion of clinical trials, if there is substantial evidence that the drug is safe and effective, a new drug application (NDA) or marketing authorization application (MAA), is prepared and submitted for the relevant local regulatory authority to review. The NDA/MAA must contain all of the essential information on the drug gathered to that date, including data from preclinical and clinical trials, and the content and format of an NDA/MAA must conform with all regulatory authority regulations and guidelines. Accordingly, the preparation and submission of an NDA/MAA is a major undertaking for a company.

In some countries the regulatory authority will review NDAs/MAAs submitted before accepting them for filing and may request additional information from the sponsor rather than accepting an NDA/MAA for filing. Once the submission is accepted for filing, the regulatory authority begins an in-depth review of the NDA/MAA. The time to review and respond to the NDA/MAA varies by country and may involve referring of the application to an appropriate advisory committee, typically a panel of clinicians, for review, evaluation and a recommendation as to whether the application should be approved.

Other Regulatory Requirements

Any products we manufacture or distribute are subject to pervasive and continuing regulation by regulatory agencies including record-keeping requirements and reporting of adverse experiences with the products. Drug manufacturers and their subcontractors are typically subject to periodic unannounced inspections by the regulatory authorities for compliance with current GMP regulations which impose procedural and documentation requirements upon us and any third party manufacturers we utilize.

Regulatory authorities closely regulate the marketing and promotion of drugs. A company can make only those claims relating to safety and efficacy that are approved by the relevant regulatory agency. Failure to comply with these requirements can result in adverse publicity, warning letters, corrective advertising and potential civil and criminal penalties. Physicians may prescribe legally available drugs for uses that are not described in the product’s labeling and that differ from those tested by us and approved by regulatory authorities. Such off-label uses are common across medical specialties. Physicians may believe that such off-label uses are the best treatment for many patients in varied circumstances. Regulatory authorities do not regulate the behavior of physicians in their choice of treatments. Regulatory authorities do, however, restrict manufacturer’s communications on the subject of off-label use.

Regulatory authority policies may change and additional government regulations may be enacted which could prevent or delay regulatory approval of our product candidates or approval of new indications for our existing products. We cannot predict the likelihood, nature or extent of adverse governmental regulations that might arise from future legislative or administrative action.

Regulation in the U.S.

Preclinical Studies

Before testing any compounds with potential therapeutic value in human subjects, in the United States, stringent government requirements for preclinical data must be satisfied. Preclinical testing includes both in vitro and in vivo laboratory evaluation and characterization of the safety and efficacy of a drug and its formulation. Preclinical testing results obtained from studies in several animal species, as well as from in vitro studies, are submitted to the FDA as part of an investigational new drug application, or IND, and are reviewed by the FDA prior to the commencement of human clinical trials. These preclinical data must provide an adequate basis for evaluating both the safety and the scientific rationale for the initial trials in human volunteers.

Pharmaxis 2008 Statutory Annual Report 25

1.2.2

Business Overview (Continued)

New Drug Application

After completion of clinical trials, if there is substantial evidence that the drug is safe and effective, a new drug application, or NDA, is prepared and submitted for the FDA to review. The NDA must contain all of the essential information on the drug gathered to that date, including data from preclinical and clinical trials, and the content and format of an NDA must conform with all FDA regulations and guidelines. Accordingly, the preparation and submission of an NDA is a major undertaking for a company.

The FDA reviews all NDAs submitted before it accepts them for filing and may request additional information from the sponsor rather than accepting an NDA for filing. In such an event, the NDA must be submitted with the additional information and, again, is subject to review before filing. Once the submission is accepted for filing, the FDA begins an in-depth review of the NDA. Typically, the FDA takes ten months to review and respond to the NDA. The FDA may refer the application to an appropriate advisory committee, typically a panel of clinicians, for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation, but gives great weight to it. If the FDA evaluations of both the NDA and the manufacturing facilities are favorable, the FDA may issue either an approval letter or an approvable letter, which usually contains a number of conditions that must be satisfied in order to secure final approval. If the FDA’s evaluation of the NDA submission or manufacturing facility is not favorable, the FDA may refuse to approve the NDA or issue a not approvable letter.

The FDA’s policies may change and additional government regulations may be enacted which could prevent or delay regulatory approval of our product candidates or approval of new indications for our existing products. We cannot predict the likelihood, nature or extent of adverse governmental regulations that might arise from future legislative or administrative action, either in the United States or abroad.

We received orphan drug designation for Bronchitol from the FDA in August 2005 for the treatment of CF for patients at risk for developing bronchiectasis in the U.S. Bronchiectasis is a major risk for CF patients. Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the U.S. Orphan drug designation must be requested before submitting an NDA. After the FDA grants orphan drug designation, the identity of the applicant, the therapeutic agent and the designated orphan use are disclosed publicly by the FDA. The European Medicines Agency in November 2006 has likewise granted orphan drug designation for Bronchitol in the treatment of CF in Europe.

Orphan drug designation does not convey any advantage in or shorten the duration of the regulatory review and approval process. If a product that has orphan drug designation is the first such product to receive FDA approval for the disease for which it has such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications to market the same drug for the same disease, except in limited circumstances, for seven years. The FDA may permit additional companies to market a drug for the designated condition if such companies can demonstrate clinical superiority. More than one product may also be approved by the FDA for the same orphan indication or disease as long as the products are different drugs. As a result, even if Bronchitol is approved to treat CF and receives orphan drug status, the FDA can still approve other drugs for use in treating the same indication or disease covered by Bronchitol, which could create a more competitive market for us. Moreover, if a competitor obtains approval of the same drug for the same indication or disease before us, we would be blocked from obtaining approval for our product for seven years, unless our product can be shown to be clinically superior.

Regulation in the E.U.

Under E.U. regulatory systems, marketing authorizations may be submitted either under a centralized procedure, a mutual recognition procedure or a decentralized procedure. The centralized procedure provides for the grant of a single marketing authorization that is valid for all European Union member states. The decentralized procedure provides for a joint assessment of safety and efficacy by a number of E.U. member states. The mutual recognition procedure provides for mutual recognition of national approval decisions. Under this procedure, the member state

26 Pharmaxis 2008 Statutory Annual Report

Section 1

approving the first marketing authorization within the E.U. submits an application for recognition to other E.U. member states. Within 90 days of receipt of the application and the first member state’s report of the assessment of the drug, the other member states are supposed to recognize the marketing authorization of the first member state or refer the application to the Committee for Human Medicinal Products, or CHMP, for arbitration, if one or more member states believe there is a potential serious risk to public health, and the member states cannot reach agreement on the approval of the product. The CHMP is a scientific expert committee of the European Medicines Agency, or EMEA. The EMEA is responsible for the protection of public health in the E.U. through the coordination and evaluation and supervision of medicinal products, including administering the centralized procedure and performing a more limited role in the mutual recognition procedures. After member states agree to mutual recognition of the first marketing authorization, national marketing authorizations must still be issued in each member state which recognized it, including approval of translations, labeling and the like.

Regulation in Australia

In Australia, the relevant regulatory body responsible for the pharmaceutical industry is the Therapeutics Goods Administration, or TGA. The TGA maintains the Australian system of controls, safety, efficacy and availability of therapeutic goods used in Australia or exported from Australia.

Any products we manufacture in Australia or distribute in, or export from, Australia are subject to pervasive and continuing regulation by the TGA. Our products are subject to pre-market evaluation and approval by the TGA and must be entered on the Australian Register of Therapeutic Goods prior to commercial manufacture or sale. Our manufacturing facilities must be licensed by the TGA and our products must be manufactured in accordance with international standards of Good Manufacturing Practice. The TGA carries out a range of ongoing assessment and monitoring activities, including sampling, adverse event reporting, surveillance activities, and response to public inquiries and undertakes assessments of products for export. The TGA also regulates the advertising, labeling, product appearance and guidelines of our products.

The TGA’s policies may change and additional governmental regulations may be enacted which could prevent or delay the regulatory approval of our product candidates or approval of new indications of our existing products. We cannot predict the likelihood, nature and extent or adverse governmental regulations that might arise from future legislative or administrative action.

In addition to regulations in Europe, Australia and the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial distribution of our products.

(xii)

Employees

As of 30 June 2008, we had 86 full time equivalent employees and full time contractors. A total of 35 of our employees and full time contractors are engaged in research and development, 35 are engaged in manufacturing which has a significant research component, with the remainder involved in administrative and marketing functions. We believe relations with our employees are generally good. None of our employees are covered by a collective bargaining agreement. For further details, see Section 1.6.2 of the Statutory Annual Report.

(xiii)

Legal Proceedings

We are not involved in any legal, arbitration or governmental proceedings which may have, or have had in the recent past, significant effects on our financial position or profitability. We are also not aware of any pending legal, arbitration or governmental proceedings against us which may have significant effects on our financial position or profitability.

(xiv)

Research Grant Funding

We have a research grant with the Commonwealth of Australia that assisted us in funding certain of our research programs.

Under our AusIndustry P3 Pharmaceuticals Partnerships Program funding deed with the Commonwealth of Australia, subject to certain conditions, the Commonwealth of Australia agreed to pay us a total amount of $6.1 million between the July 2004 and June 2008 for eligible pharmaceutical research and development activities undertaken by us in relation to the development of new treatments for autoimmune diseases and the development of new treatments for chronic respiratory diseases. The grant concluded at 30 June, 2008 and no further funding is available thereunder. For details regarding this research grant, see Section 4.2.5 of this Statutory Annual Report.

Pharmaxis 2008 Statutory Annual Report 27

1.2.3

Organisational Structure

We have two wholly owned subsidiaries:

	(i)		Pharmaxis Pharmaceuticals Limited, incorporated under the laws of England and Wales.
	(ii)		Pharmaxis, Inc., incorporated under the laws of the State of Delaware, U.S.

1.2.4

Property, Plant and Equipment

As of 30 June, 2008 we leased approximately 19,000 square feet of manufacturing, warehouse and office space at 10 Rodborough Road, Frenchs Forest, NSW 2086, Sydney, Australia. Our lease was renewed in June 2006 for a further five years, with an option to renew for a further five years thereafter. From 1 July 2002 to 30 June, 2008, we spent approximately A$5 million related to the establishment of this manufacturing facility.

As of 30 June, 2008 we license approximately 2,000 square feet of research laboratory and office space at Building 34, 1 Rivett Road, Riverside Corporate Park, North Ryde, Sydney, Australia. Our lease is terminable at one month’s notice by either party. Our research staff based at this site will relocate to our new facility at Frenchs Forest once it is completed in early 2009.

We will require additional space and facilities as our business expands. In particular, we will require additional manufacturing capabilities. We have therefore entered into an agreement concerning the lease of a custom designed manufacturing, warehousing and office facility of approximately 75,000 square feet. The facility is being constructed to our specifications. Once the lease commences, the lease will have a term of 15 years, with two options to renew of a further five years each and the option to break the lease at ten years but with financial penalties attached. We anticipate spending approximately A$20 million to fitout this facility and acquire additional and expanded production equipment.

1.3		Corporate Governance
1.3.1		Introduction

We have adopted a Corporate Governance Framework. In preparing the framework, we have been mindful of the revised Corporate Governance Principles and Recommendations (second edition) issued by ASX Limited’s Corporate Governance Council in August 2007 (‘ASX Governance Principles’). Compliance with the recommendations set out in the ASX Governance Principles are not mandatory however departures from the recommendations are required to be disclosed in our Statutory Annual Report. ASX Listing Rule 12.7 requires that we must comply with the recommendation in relation to the composition, operation and responsibility of our audit set out in Principle 4 of the ASX Governance Principles. We have also adopted certain corporate governance requirements arising as a result of our ADS’s being quoted on the Nasdaq Global Market.

The Board reviews and updates our Corporate Governance Framework as required and at least annually.

This statement reflects our corporate governance framework, policies and procedures as at 12 August 2008. The documents referred to in this section, are available for viewing in the corporate governance section of our website (unless otherwise stated) at www.pharmaxis.com.au

1.3.2

ASX Disclosures

A description of our Corporate Governance Framework and supporting policies are available on our website. The disclosures required by the ASX Governance Principles are set out below. For ease of reference, this section is structured within the context of the ASX Governance Principles.

Principle 1: Lay Solid Foundations for Management and Oversight

Companies should establish and disclose the respective roles and responsibilities of board and management.

Recommendation 1.1

Companies should establish the functions reserved to the board and those delegated to senior executives and disclose those functions.

This is disclosed on our website.

28 Pharmaxis 2008 Statutory Annual Report

Section 1

Recommendation 1.2 & 1.3

Companies should disclose the process for evaluating the performance of senior executives and provide the information required in the guide to Principle 1.

The performance of our Chief Executive Officer and Senior Executive Officers was evaluated in the current year in accordance with the process described below.

The Remuneration and Nomination Committee is specifically responsible for reviewing the ongoing performance of the Chief Executive Officer (‘CEO’) and ensuring there is an appropriate process to review the performance of Senior Executive Officers and for setting and approving performance objectives of Senior Executive Officers in relation to bonus payments and options. In June of each year the Remuneration and Nomination Committee:

	•		approves individual milestone objectives for the CEO and Senior Executive Officers for the coming financial year, the milestones being based on our business plan approved by the Board;
	•		evaluates the performance of the CEO compared to milestone objectives set at the beginning of the year and approves the payment of any bonus and/or the grant and vesting of any options related to the CEO’s performance;
	•		in relation to Senior Executive Officers, reviews recommendations, considers and approves the payment of any bonus and/or the grant and vesting of any options based on performance of milestone objectives for the current financial year.

Principle 2: Structure the Board to Add Value

Companies should have a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties.

Recommendation 2.1

A majority of the board should be independent directors.

Our Board of Directors currently consists of six directors, including five non-executive directors, one of whom is the non-executive chairman. Details of the skills, experience and expertise of each of our directors are set out in the Section 1.4.1 of this Statutory Annual Report.

Under our constitution, the number of Directors will not, unless otherwise determined by an ordinary resolution of our shareholders, be less than three or more than nine. A Director need not be a shareholder of us. Only a person over the age of 18 may be appointed as a director.

We regard our five non-executive Directors, Messrs. McComas, Farrell, Villiger, Delaat and Hanley as independent for the purposes of the ASX Governance Principles. The Board regularly assesses director independence having regard to the criteria outlined in the ASX Governance Principles. The threshold for materiality is set at $250,000 in any one year in relation to financial/contractual dealings with the Company, and ten years in relation to years of service. In relation to Directors serving on the Audit Committee, the Director and/or their associates may not receive any fees from the Company other than those related to Director or Committee fees.

We do not regard Dr. Robertson as an independent Director as he is an executive officer.

The Board has an agreed procedure for Directors and Board Committees to obtain independent professional advice at the Company’s expense.

Recommendation 2.2

The chair should be an independent director.

The Chairman of our Board is an independent director. Our Corporate Governance Framework requires the Chairman to be independent.

Recommendation 2.3

The roles of the chair and the chief executive officer should not be exercised by the same individual.

The role of Chairman and Chief Executive Officer are exercised by different individuals. Our Corporate Governance Framework requires the Chairman to be a different individual to the Chief Executive Officer.

Pharmaxis 2008 Statutory Annual Report 29

1.3.2

ASX Disclosures (continued)

Recommendation 2.4

The board should establish a nomination committee.

We have a Remuneration and Nomination Committee. The combined role is considered appropriate for a company of our size. A copy of the Remuneration and Nomination Committee Charter is available on our website. The purpose of our Remuneration and Nomination Committee is:

	•		monitor the ongoing development of the Board consistent with our growth and development;
	•		make recommendations for the appointment and removal of Directors to the Board;
	•		assist the Board evaluate the performance and contribution of individual directors, the Board and Board Committees; and
	•		assist the Board in establishing remuneration policies and practices that enable us to attract, retain and motivate executives and Directors who will pursue our long-term growth and success.

The Remuneration and Nomination Committee consisted entirely of independent directors during the financial year ended 30 June 2008. The chairman of the Remuneration and Nomination Committee is an independent Director.

The names of the members of the Remuneration and Nomination Committee, the number of meetings held in the financial year ended 30 June 2008 and the number of meetings attended by each member is detailed in Section 1.4.2 of this Statutory Annual Report.

Recommendation 2.5

Companies should disclose the process for evaluating the performance of the board, its committees and individual directors.

Our Remuneration and Nomination Committee is responsible for overseeing the process for evaluating the performance of the Board, Board Committees and individual Directors. Evaluations were conducted in the current year in accordance with the process described below.

Our Remuneration and Nomination Committee conducts an annual survey of Directors.

A Board performance survey is used to:

	•		review our current corporate governance practices and identify any requirements that required to be changed;
	•		review the respective roles of the Board and management;
	•		review the mix of experience and skills required by the Board;
	•		assess the performance of the Board as a whole over the previous 12 months;
	•		assess the effectiveness of Board processes; and
	•		examine ways of assisting the Board in performing its duties more effectively and efficiently.

The Board performance surveys are collated by the Company Secretary and discussed at a subsequent Board meeting where the implementation of recommendations is agreed.

Board committee performance is assessed using the Board performance survey, separately completed by committee members in relation to their respective committee. Individual committees are then asked to:

	•		review recommendations and comments arising from the survey and implement changes considered appropriate; and
	•		review their committee charter annually, and recommend changes to the Board.

An individual director performance survey is used to assess the performance of individual directors. Each Director completes a survey in relation to every member of the Board including themselves and the Chief Financial Officer/Company Secretary. The results of the surveys are collated by the Company Secretary and provided to the Director concerned and the Chairman as a basis for separate discussions as considered necessary by either.

30 Pharmaxis 2008 Statutory Annual Report

Section 1

Principle 3: Promote Ethical and Responsible Decision-making

Companies should actively promote ethical and responsible decision-making.

Recommendation 3.1

Companies should establish a code of conduct and disclose the code or a summary of the code as to:

	•		the practices necessary to maintain confidence in the company’s integrity
	•		the practices necessary to take into account their legal obligations and the reasonable expectations of their stakeholders
	•		the responsibility and accountability of individuals for reporting and investigating reporting and investigating reports of unethical practices.

A copy of our Code of Conduct is available on our website.

Recommendation 3.2

Companies should establish a policy concerning trading company securities by directors, senior executives and employees, and disclose the policy or a summary of that policy.

A copy of our Share Trading Policy is available on our website.

Principle 4: Safeguard Integrity in Financial Reporting

Companies should have a structure to independently verify and safeguard the integrity of their financial reporting.

Recommendation 4.1

The board should establish an audit committee.

We have an Audit Committee.

Recommendation 4.2

The audit committee should be structured so that it:

	•		consists only of non-executive directors;
	•		consists of a majority of independent directors;
	•		is chaired by an independent chair, who is not chair of the board; and
	•		has at least three members.

The structure of our Audit Committee complies with the above recommendation. Our Audit Committee is responsible for:

	•		the integrity of the financial reporting process and all other financial information published by the us;
	•		the integrity of the our financial reporting system, including the management of risk and systems of internal control;
	•		our internal and external audit process, including appointing the external auditor and overseeing the independence of the external auditor; and
	•		our process for monitoring compliance with laws and regulations and our own Code of Conduct.

The members of our Audit Committee are Messrs. McComas (chairman), Hanley and Delaat. Mr. Kiefel was a member of the Audit Committee until his retirement from the Board in December 2007. Dr. Villiger was a member of the Audit Committee following the retirement of Mr. Kiefel up until Mr. Delaat was appointed to the Board and the Audit Committee in June 2008.

The names of the members of the Audit Committee, their qualifications, the number of meetings held in the financial year ended 30 June 2008 and the number of meetings attended by each member is detailed in Section 1.4.2 of this Statutory Annual Report.

Pharmaxis 2008 Statutory Annual Report 31

1.3.2

ASX Disclosures (continued)

Recommendation 4.3

The audit committee should have a formal charter.

Our Audit Committee Charter is available on our website. The Audit Committee Charter provides information on procedures for the selection and appointment of our external auditor.

Principle 5: Make Timely and Balanced Disclosure

Companies should promote timely and balanced disclosure of all material matters concerning the company.

Recommendation 5.1

Companies should establish written policies designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior executive level for that compliance and disclose those policies or a summary of those policies.

We have a Continuous Disclosure and Shareholder Communications Policy, which is available on our website.

We have a Disclosure Committee to oversee the implementation of the policies and procedures in relation to communications with the market.

The Disclosure Committee consists of the:

	•		Chief Executive Officer;
	•		Chief Financial Officer/Company Secretary;
	•		Chairman of the Board;
	•		Medical Director; and
	•		Commercial Director.

Principle 6: Respect the Rights of Shareholders

Companies should respect the rights of shareholders and facilitate the effective exercise of those rights.

Recommendation 6.1

Companies should design a communications policy for promoting effective communication with shareholders and encouraging their participation at general meetings and disclose their policy or a summary of that policy.

Our Continuous Disclosure and Shareholder Communication Policy is available on our website. In addition to our continuous disclosure and statutory reporting requirements, we provide shareholders with quarterly updates of our progress across all areas of the business and utilize our website to disclose useful and relevant information about us.

Principle 7: Recognise and Manage Risk

Companies should establish a sound system of risk oversight and management and internal control.

Recommendation 7.1

Companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies.

The Audit Committee is responsible to the Board for oversight of material business risks and internal controls. Our Risk Management Statement is available on our website and provides an overview of our risk profile, management strategies and internal controls. Section 2.4 of this Statutory Annual Report also contains details of the material business risks relevant to us.

32 Pharmaxis 2008 Statutory Annual Report

Section 1

Recommendation 7.2

The board should require management to design and implement the risk management and internal control system to manage the company’s material business risks and report to it on whether those risks are being managed effectively. The board should disclose that management has reported to it as to the effectiveness of the company’s management of its material business risks.

The Audit Committee, as part of its oversight in this area, requires management to establish appropriate systems and procedures to manage our material business risks and to report on the effective management of those risks. Management has provided the Board in the current year with a report that attested to the effective management of our material business risks.

Recommendation 7.3

The board should disclose whether it has received assurance from the chief executive officer and the chief financial officer that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks.

This recommendation is a requirement of our Corporate Governance Framework as well as U.S. securities legislation. The Board has received such assurances in writing from the chief executive officer and chief financial officer.

Principle 8: Remunerate Fairly and Responsibly

Companies should ensure that the level and composition of remuneration is sufficient and reasonable and that its relationship to performance is clear.

Recommendation 8.1

The board should establish a remuneration committee.

We have a Remuneration and Nomination Committee. A copy of our Remuneration and Nomination Committee Charter is available on our website.

As noted above, our Remuneration and Nomination Committee consists of Mr. Hanley, Dr. Farrell and Dr. Villiger all of whom are independent directors. None of our executive officers serve as a member of the board of directors or compensation committee of any entity that has one or more executive officers who serve on our Board of Directors or Remuneration and Nomination Committee.

Recommendation 8.2

Companies should clearly distinguish the structure of non-executive directors’ remuneration from that of executive directors and senior executives.

As non-executive Directors assess individual and Company performance, their remuneration does not have any variable incentive component. Only the Executive Director and Senior Executive Officer remuneration includes a variable component such as the vesting of options or bonus payments linked to the achievement of performance targets.

Note that Directors, Senior Executive Officers and other persons designated by the Board are not permitted to trade in derivatives of our securities without the written consent of the Board. For further details in relation to our remuneration framework, refer to the Remuneration Report set out in Section 1.5 of this Statutory Annual Report.

Pharmaxis 2008 Statutory Annual Report 33

1.3.3

Corporate Governance Requirements Arising from Our U.S. Listing — the Sarbanes-Oxley Act of 2002, SEC Rules and the Nasdaq Global Market Marketplace Rules.

Our shares in the form of ADRs are quoted on the Nasdaq Global Market. The Sarbanes-Oxley Act of 2002, as well as related new rules subsequently implemented by the SEC, require companies which are considered to be foreign private issuers in the U.S, such as us, to comply with various corporate governance practices. In addition, Nasdaq has made certain changes to its corporate governance requirements for companies that are listed on the Nasdaq Global Market. These changes allow us to follow Australian ‘home country’ corporate governance practices in lieu of the otherwise applicable Nasdaq corporate governance standards, as long as we disclose each requirement of Rule 4350 that we do not follow and describe the home country practice we follow in lieu of the relevant Nasdaq corporate governance standards. We intend to take all actions necessary to maintain compliance with applicable corporate governance requirements of the Sarbanes-Oxley Act of 2002, rules adopted by the SEC and listing standards of Nasdaq. We follow Australian corporate governance practices in lieu of the corporate governance requirements of the Nasdaq Marketplace Rules in respect of:

	•		Nasdaq requirement under Rule 4350(f) that a quorum consist of holders of 33 1/3% of the outstanding ordinary shares — The ASX Listing Rules do not have an express requirement that each issuer listed on ASX have a quorum of any particular number of the outstanding ordinary shares, but instead allow a listed issuer to establish its own quorum requirements. Our quorum is currently five persons who are entitled to vote. We believe this quorum requirement is consistent with the requirements of the ASX and is appropriate and typical of generally accepted business practices in Australia.
	•		The Nasdaq requirements under Rules 4350(c)(1) and (2) relating to director independence, including the requirements that a majority of the board of directors must be comprised of independent directors and that independent directors must have regularly scheduled meetings at which only independent directors are present —The Nasdaq and ASX definitions of what constitute an independent director are not identical and the requirements relating to the roles and obligations of independent directors are not identical. The ASX, unlike Nasdaq, permits an issuer to establish its own materiality threshold for determining whether a transaction between a director and an issuer affects the director’s status as independent and it does not require that a majority of the issuer’s board of directors be independent, as long as the issuer publicly discloses this fact. In addition, the ASX does not require that the independent directors have regularly scheduled meeting at which only independent directors are present. We believe that our Board composition is consistent with the requirements of the ASX and that it is appropriate and typical of generally accepted business practices in Australia.
	•		The Nasdaq requirements under Rule 4350(d) (other than Rule 4350(d)(2)(A)(ii), which we will comply with) relating to the composition of the audit committee and the audit committee charter — The Nasdaq and ASX audit committee requirements are not identical. Moreover, differences in the requirements of Nasdaq and ASX also arise because of the differences in the definitions of who constitutes an independent director, as discussed above. Issuers listed in the top 300 of the S&P ASX All Ordinaries, such as us, are required to establish an audit committee consisting only of non-executive directors, a majority of independent directors, an independent chairman, and at least three members, and adopt a formal audit committee charter which sets out the roles and responsibilities, composition, structure and membership requirements of the audit committee. We have an audit committee and audit committee charter that are consistent with the requirements of the ASX Listing Rules and which we believe are appropriate and typical of generally accepted business practices in Australia. We also comply and will continue to comply with Nasdaq Rule 4350(d)(3) relating to audit committees responsibilities and authority required by SEC Rule 10A-3(b)(2)-(5).
	•		The Nasdaq requirements under Rules 4350(c)(3) and (4) that compensation of an issuer’s officers must be determined, or recommended to the Board for determination, either by a majority of the independent directors, or a compensation committee comprised solely of independent directors, and that director nominees must either be selected, or recommended for the Board’s selection, either by a majority of the independent directors, or a nominations committee comprised solely of independent directors. The Nasdaq compensation committee requirements are not identical to the Australian Securities Exchange remuneration and nomination committee requirements. Issuers listed on the ASX are recommended under applicable listing standards to establish a remuneration committee consisting of a majority of independent directors and an independent chairperson, or publicly disclose that it has not done so. We have a Remuneration and Nomination Committee that is consistent with the requirements of the ASX and which we believe is appropriate and typical of generally accepted business practices in Australia.

34 Pharmaxis 2008 Statutory Annual Report

Section 1

1.4

Directors Report

Your Directors present their report on the consolidated entity (referred to hereafter as the Group) consisting of Pharmaxis Ltd and the entities it controlled at the end of, or during, the year ended 30 June 2008.

1.4.1

Information on Directors

The following persons were Directors of Pharmaxis Ltd during the financial year and up to the date of this report:

Alan D. Robertson, Ph.D. (age 52), has been our Chief Executive Officer since December 1999 and a member of our Board of Directors since July 2000. Dr. Robertson has more than two decades of experience in drug discovery and product development with leading pharmaceutical companies, including spending 8 years with Wellcome plc in London and thereafter with two Australian companies, Faulding Ltd and Amrad Ltd. Dr. Robertson has been actively involved in the discovery, development and marketing of various compounds, including new treatments for migraine and cardiovascular disease. Dr. Robertson is the co-inventor of 18 patents and author of more than 35 scientific papers, and was the inventor of the migraine therapeutic Zomig that is marketed worldwide by AstraZeneca. Dr. Robertson holds a B.Sc. and a Ph.D. in Synthetic Organic Chemistry from the University of Glasgow.

Denis M. Hanley (age 61) has been the Chairman of our Board of Directors since October 2001. From 1983 to 1997, Mr. Hanley served as Chief Executive Officer of Memtec Limited, a leader in the design and manufacture of microfiltration membrane systems. From 1971 to 1982, Mr. Hanley held various positions within Baxter Healthcare, most recently as Australian Managing Director. Mr. Hanley has served on the Australian Industry Research and Development Board and various technology councils and roundtables. Mr. Hanley serves on the board of directors of Universal Biosensors, Inc., CathRx Ltd and PFM Cornerstone Limited, and was a member of the Australian Government’s Cooperative Research Centre Committee. Mr. Hanley holds an M.B.A. with high distinction from the Harvard Graduate School of Business Administration, where he was named a Baker Scholar. Mr Hanley is Chairman of the Remuneration and Nomination Committee and a member of the Audit Committee.

Peter C. Farrell, Ph.D. (age 66) has been a member of our Board of Directors since March 2006. Dr. Farrell has more than two decades of experience in developing and commercializing medical products in the U.S., Europe, Japan and Australia. Dr. Farrell began his commercial career with Baxter Healthcare, Inc. in Japan as Director and Vice President of Research and Development, then as Managing Director of the Baxter Center for Medical Research. He left Baxter in 1989 to establish ResMed, Inc., a company that develops treatments for sleep-disordered breathing and respiratory failure. Dr. Farrell is currently founding Chairman and Chief Executive Officer of ResMed Inc. Dr. Farrell serves on the Executive Councils of Harvard Medical School and the University of California at San Diego, and is visiting Professor at the University of Sydney. Dr. Farrell has written more than 150 papers covering topics from engineering applications in medicine to focusing technology to meet business objectives. Dr. Farrell holds bachelor and masters degrees in chemical engineering from the University of Sydney and the Massachusetts Institute of Technology, a Ph.D. in bioengineering from the University of Washington, Seattle and a Doctor of Science from the University of New South Wales for research related to dialysis and renal medicine. Dr Farrell is a member of our Remuneration and Nomination Committee.

Malcolm J. McComas (age 53) has been a member of our Board of Directors since July 2003. Mr. McComas is an experienced company director and has more than two decades of experience in investment banking, particularly in equity and debt finance, mergers and acquisitions, and privatizations. From 1999 to 2004, Mr. McComas was a director of Grant Samuel, the corporate advisor, property services and funds management group and currently serves as a consultant. During 1998, Mr. McComas served as a Managing Director at Salomon Smith Barney. From 1988 to 1998, Mr. McComas served as a Managing Director at County NatWest. Mr. McComas serves as a non-executive director of Falkiner Global Investors Limited and Ocean Capital Limited and as non-executive chairman of Sunshine Heart Inc. Mr. McComas holds a Bachelor of Economics and a Bachelor of Laws from Monash University. Mr McComas is chairman of our Audit Committee.

Pharmaxis 2008 Statutory Annual Report 35

1.4.1

Information on Directors (continued)

John Villiger, Ph.D. (age 54) has been a member of our Board of Directors since November 2006. Dr. Villiger co-founded The Medicines Company, a Nasdaq listed company in 1996. Dr. Villiger was Senior Vice President of Development until February 2006. The Medicines Company has a significant marketed product with two other products in late stage clinical development. From 1986 to 1996 Dr. Villiger held various positions in product development at Roche in both New Zealand and Switzerland, including International Project Director from 1991 to 1995 and Head of Global Project Management from 1995 to 1996. As Head of Global Project Management, he oversaw the development of Roche’s pharmaceutical portfolio, with programs in Switzerland, the UK, U.S. and Japan. Dr. Villiger holds has a Ph.D. in psychopharmacology from the University of Otago. Dr Villiger is a member of our Remuneration and Nomination Committee and served on our Audit Committee from December 2007 to June 2008.

William L. Delaat (age 57) was appointed a member of our Board of Directors on June 23, 2008. Mr Delaat has 35 years experience in the global pharmaceutical industry, most recently as the managing director of the Australian subsidiary of Merck & Co., a position he held from 1997 until his retirement in 2008. During his career Mr Delaat has held executive positions in both Europe and Australia for Merck and AstraZeneca. Mr Delaat is experienced in sales and marketing and has been responsible for international product launches and commercialisation of respiratory products. Mr Delaat is chairman of the Australian pharmaceutical industry’s peak body, Medicines Australia, and is chairman of the Pharmaceuticals Industry Council. Mr Delaat holds a Bachelor of Science, Physiology & Chemistry from the University of London. Mr Delaat is a member of our Audit Committee.

Charles Kiefel was a member of our Board of Directors from the beginning of the financial year until his resignation in December 2007.

There are no family relationships between any of our Senior Executive Officers or Directors.

1.4.2

Meetings of Directors

The number of meetings of the Company’s Board of Directors and of each Board committee held during the year ended 30 June 2008, and the number of meetings attended by each Director was:

										Meetings of Committees
		Board																Remuneration &
		Meetings								Audit								Nomination
		A				B				A				B				A				B
DM Hanley			9				9				3				3				4				4
AD Robertson			9				9
CPH Kiefel			6				6				2				1
MJ McComas			9				7				3				2
PC Farrell			9				7												4				3
J Villiger			9				9				1				1				4				4
WL Delaat			0				0				0				0

1.4.3

Indemnification and Insurance of Directors

Our Constitution provides that, except to the extent prohibited by the Corporations Act 2001, each of our officers shall be indemnified out of our funds against any liability incurred by such person in his or her capacity as an officer in defending any legal proceedings, whether civil or criminal, in which judgment is given in such person’s favor or where such officer is acquitted in connection with any application under the Corporations Act 2001 and relief is granted to such officer by a court.

36 Pharmaxis 2008 Statutory Annual Report

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We have entered into Deeds of Access to Documents and Indemnity agreements to indemnify our Directors and certain of our executive officers and to provide contractual indemnification in addition to the indemnification provided for in our Constitution. We believe that these provisions and agreements are necessary to attract and retain qualified directors and executive officers. Our Constitution also permits us, to the extent permitted by law, to secure insurance on behalf of any officer for any liability arising out of his or her actions.

At present, there is no pending litigation or proceeding involving any of our Directors, officers, employees or agents where indemnification by us will be required or permitted, and we are not aware of any threatened litigation or proceeding that may result in a claim for such indemnification.

We maintain directors’ and officers’ liability insurance providing for the indemnification of our Directors and officers against certain liabilities incurred as a director or officer, including costs and expenses associated in successfully defending legal proceedings. We intend to continue to maintain this insurance in the future. During the financial year, we paid a premium of $144,000 to insure the directors and officers of the Group for the policy year ended 26 September 2008. The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may be brought against the officers in their capacity as officers of the Group, and any other payments arising from liabilities incurred by the officers in connection with such proceedings. Policy exclusions include: liabilities that arise out of conduct involving a willful breach of duty by the officers or the improper use by the officers of their position or of information to gain advantage for themselves or someone else or to cause detriment to the Group; pollution that could reasonably be known to management; and, bodily injury and property damage. It is not possible to apportion the premium between amounts relating to the insurance against legal costs and those relating to other liabilities.

1.4.4

Company Secretary

The Company Secretary is Mr. David M McGarvey, CA, who was appointed to the position of Company Secretary in 2002. Before joining Pharmaxis Ltd he held similar positions with both listed and unlisted companies, including Memtec Limited, which was listed on the Australian Securities Exchange, NASDAQ and the New York Stock Exchange.

1.4.5

Principal Activities

During the year the principal continuing activities of the Group consisted of the research, development and commercialization of human healthcare products for the treatment and management of chronic respiratory and immune diseases.

1.4.6

Review and Results of Operations

A review of the operations of the Group for the financial year ended 30 June 2008 is set out in Section 2.2 of this Statutory Annual Report.

1.4.7

Remuneration Report

Refer to Section 1.5 of this Statutory Annual Report.

1.4.8

Dividends

No dividends were paid during the year and the Directors have not recommended the payment of a dividend.

We have never declared or paid any cash dividends on our ordinary shares and we do not anticipate paying any cash dividends in the foreseeable future. Dividends may only be paid out of our profits. Payment of cash dividends, if any, in the future will be at the discretion of our Board of Directors or, if our Directors do not exercise their power to issue dividends, our shareholders in a general meeting may exercise the powers.

1.4.9

Significant Changes in the State of Affairs

The Australian share placement and share purchase plan increased cash funds by A$59.2 million after deducting associated expenses. Together with pre-existing funds the Group ended the year with A$111.8 million in cash and bank accepted commercial bills. Capital expenditure for the 2008 financial year of A$5.1 million compares to A$1.3 million in 2007. Expenditure was predominantly related to the fit out of a new facility being constructed for us and additional manufacturing equipment to be housed in the new facility. Refer also to Section 2.2.5 of this Statutory Annual Report.

Pharmaxis 2008 Statutory Annual Report 37

1.4.10

Matters Subsequent to the End of the Financial Year

No matter or circumstance has arisen since 30 June 2008 that has significantly affected, or may significantly affect:

	(a)		the Group’s operations in future financial years, or
	(b)		the results of those operations in future financial years, or
	(c)		the Group’s state of affairs in future financial years.

1.4.11

Likely Developments and Expected Results of Operations

Likely developments in the operations of the Group that were not finalised at the date of this report are set out in Section 2.2 of this Statutory Annual Report.

Further information on likely developments in the operations of the Group and the expected results of operations have not been included in this report because the Directors believe it would be likely to result in unreasonable prejudice to the Group.

1.4.12

Environmental Regulation

The Group is subject to environmental regulation in respect of its manufacturing activities including the Clean Air Act 1961, Clean Waters Act 1970, Pollution Control Act 1970, Noise Control Act 1975 and Waste Minimisation & Management Act 1995.

However, the Group is not presently required to hold any licences for its current scale of manufacturing operations. The Group expects to apply for water discharge licences as it expands its manufacturing capacity. The Group holds a licence to manufacture goods for commercial sale.

1.4.13

Rounding

The Company is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to the ‘rounding off’ of amounts in the Directors’ Report. Amounts in the Directors’ Report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, to the nearest dollar.

1.4.14

Non Audit Services

The Company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditors’ expertise and experience with the Company are important.

Details of the amounts paid to the auditor (PricewaterhouseCoopers) for audit and non-audit services provided during the year are set out in note 19 to the Annual Financial Report included in Section 3 of this Statutory Annual Report.

The Board of Directors has considered the position and, in accordance with the advice received from the Audit Committee, is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001 . The Directors are satisfied that the provision of non-audit services by the auditor did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons:

	•		All non-audit services have been reviewed by the Audit Committee to ensure they do not impact the integrity and objectivity of the auditor
	•		None of the services undermine the general principles relating to auditor independence as set out in Professional Statement APES110, including reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Company, acting as advocate for the Company or jointly sharing economic risk and rewards.

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1.4.15

Auditors’ Independence Declaration

A copy of the auditors’ independence declaration as required under section 307C of the Corporations Act 2001 is below.

Auditor’s Independence Declaration

As lead auditor for the audit of Pharmaxis Ltd for the year ended 30 June 2008, I declare that to the best of my knowledge and belief, there have been:

	(a)		no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and
	(b)		no contraventions of any applicable code of professional conduct in relation to the audit.

This declaration is in respect of Pharmaxis Ltd and the entities it controlled during the period.

1.4.16

Auditor

PricewaterhouseCoopers continue in office in accordance with section 327 of the Corporations Act 2001 .

1.4.17

Resolution of the Board

This report is made in accordance with a resolution of directors.

Sydney
12 August 2008

Pharmaxis 2008 Statutory Annual Report 39

1.5         Remuneration Report

Remuneration Report

The remuneration report is set out under the following main headings:

1.5.1.		Principles used to determine the nature and amount of remuneration paid to Directors and Senior Executive Officers
1.5.2.		Details of remuneration paid to Directors and Senior Executive Officers
1.5.3.		Service agreements with Senior Executive Officers
1.5.4.		Share based compensation paid to Directors and Senior Executive Officers
1.5.5.		Additional information on compensation paid to Directors and Senior Executive Officers
1.5.6.		Employee option plan.

We make our remuneration disclosures to meet both Australian and applicable U.S. requirements. Wherever possible this report has been prepared to meet the requirements of both jurisdictions with a single disclosure. However in certain instances additional disclosures are required to address specific differing jurisdictional disclosures for format or content. Where additional disclosures are required to address U.S. requirements, we have sought to provide explanations of the basis of presentation.

1.5.1		Principles Used to Determine the Nature and Amount of Remuneration Paid to Directors and Senior Executive Officers
		As a company building a specialty pharmaceutical business, we require a board and senior management team that have both the technical capability and relevant experience to execute the Group’s business plan. The Directors consider options a key tool in attracting the required talented individuals to the Board and management team while staying within the fiscal constraints of a growing group.
		Director and Senior Executive Officer remuneration includes a mix of short and long-term components. Remuneration of Executive Directors and Senior Executive Officers include a meaningful proportion that varies with individual performance. Variable cash incentives and the vesting of options are subject to performance assessment by the Remuneration and Nomination Committee. Performance targets in the main relate to objectives and milestones assigned to individual executives from the Group’s annual business plan. At this stage of the Group’s development, shareholder wealth is enhanced by the achievement of milestones in the development of the Group’s products, within a framework of prudent financial management. The Group’s earnings have therefore not been a significant component of enhancing shareholder wealth during 2008 and therefore do not form a measure of executive performance. Individual performance targets are agreed by the Remuneration and Nomination Committee and the full Board each year. Annual performance of senior executives is reviewed by the Remuneration and Nomination Committee each year.
		As Non-Executive Directors assess individual and Group performance, their remuneration does not have a variable performance related component.
		Non-Executive Directors
		Fees and payments to Non-Executive Directors reflect the demands that are made on, and the responsibilities of, the Directors. Non-Executive Directors’ fees and payments are reviewed annually by the Remuneration and Nomination Committee of the Board. When last adjusted in 2006, the Group engaged an external consultant to assist in the determination of independent Non-Executive Directors’ fees appropriate to the Group’s stage of development. There are two components to the fees of independent Non-Executive Directors:

	•		a base fee, currently $110,000 for the chairman and $60,000 for other Non-Executive Directors;
	•		an flat annual fee for Non-Executive Directors serving on committees, currently $5,000 as a committee member and $10,000 as a committee chairman;
	•		Non-Executive Directors are allowed to package their remuneration to include superannuation and options in the Group, the latter being determined as the number of options granted during the year valued at award date using the same methodology as used to determine the amounts expensed in the financial statements. Options are

40 Pharmaxis 2008 Statutory Annual Report

Section 1

granted under our Employee Option Plan. As the options are granted in substitution for current year cash compensation they vest at the latter of award or shareholder approval. Options issued to Non-Executive Directors prior to August 2006 vest over a four year period.

		Independent Directors are issued options on becoming a Director of the Company, subject to shareholder approval, and vest over four years.
		Non-Executive Directors’ fees (including statutory superannuation) are determined within an aggregate directors’ fee pool limit, which is periodically recommended for approval by shareholders. The pool currently stands at a maximum of $600,000 per annum in total.
		Retirement Allowances for Directors
		Termination payments apply only to Executive Directors, as discussed below.
		Executive Directors and Senior Executive Officers:
		There are four components to the remuneration of Executive Directors and Senior Executive Officers:

	•		a base salary paid in cash or packaged at the executive’s discretion within Australian Fringe Benefit’s Tax, or FBT, guidelines as a total cost package;
	•		superannuation of 9 percent of base salary;
	•		a variable cash incentive component payable annually dependent upon achievement of performance targets set and approved by the Remuneration and Nomination Committee. Individual performance targets are set by reference to the components of the Group’s annual business plan for which the individual executive is responsible; and
	•		options under our Employee Option Plan. Options typically vest over a four-year time frame. For options granted after 1 January 2003, the number of an individual executive’s options vesting is subject to achievement of the performance targets set and approved by the Remuneration and Nomination Committee which may approve the vesting of all or only a portion of the relevant options. Founder options were granted in 2003 to the founding scientists — WB Cowden and B Charlton. These options vested at 30 June 2003. Sign-on options were granted to DM McGarvey in 2003, JF Crapper and GJ Phillips in 2004 and IA McDonald in 2005. Sign-on options vest completely on the first anniversary of the executive commencing employment with us.

		Base pay for the Chief Executive Officer and Senior Executive Officers is reviewed annually to ensure the executive’s pay is commensurate with the responsibilities and contribution of the executive. An executive’s pay is also reviewed on promotion.
		Termination payments
		Termination payments apply only to Executive Directors and Senior Executive Officers. The employment contracts for each of the Executive Directors and Senior Executive Officers can be terminated immediately by us for serious misconduct and with three months notice without cause. Unless otherwise required by law, no additional payments apply on termination.
		Pharmaxis Ltd Employee Option Plan
		Information on the Pharmaxis Ltd Employee Option Plan is set out in Note 29 to the Annual Financial Report included in Section 3 of this Statutory Annual Report and Section 1.5.6 of this Statutory Annual Report.

Pharmaxis 2008 Statutory Annual Report 41

1.5.2		Details of Remuneration Paid to Directors and Senior Executive Officers
		Details of the remuneration of the Directors and the Senior Executive Officers (‘key management personnel’ as defined in AASB 124 Related Party Disclosures) of Pharmaxis Ltd and the Group are set out in the following tables.
		The Senior Executive Officers and the Chief Executive Officer of the Group and the entity are:

Name		Position		Employer
Alan Duncan Robertson		Chief Executive Officer		Pharmaxis Ltd
Brett Charlton		Medical Director		Pharmaxis Ltd
John Francis Crapper		Chief Operations Officer		Pharmaxis Ltd
Ian Alexander McDonald		Chief Technical Officer		Pharmaxis Ltd
David Morris McGarvey		Chief Financial Officer and Company Secretary		Pharmaxis Ltd
Gary Jonathan Phillips		Commercial Director		Pharmaxis Ltd

		Included in the above are the five highest remunerated Group and entity executives.
		The payment of cash bonuses are dependent on the satisfaction of performance conditions as discussed in Section 1.5.1 of this Statutory Annual Report, and the options are not granted unless approved by the Remuneration and Nomination Committee. All other elements of remuneration are not directly related to performance.

42 Pharmaxis 2008 Statutory Annual Report

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														Post-				Long-				Share-
														employment				term				based
2008		Short-term benefits												benefits				benefits				payment
		Cash				Cash				Non-								Long
		salary or				bonus/				monetary				Super-				service				Options
		Directors’ fees				incentive				benefits				annuation				leave				value 1				Total
Name		A$				A$				A$				A$				A$				A$				A$
Non-Executive Directors
DM Hanley Chairman			106,558				—				—				9,590				—				10,082				126,230
WL Delaat 3			1,250				—				—				—				—				—				1,250
CPH Kiefel 2			19,878				—				—				1,789				—				5,041				26,708
MJ McComas			65,574				—				—				—				—				5,041				70,615
PC Farrell			60,251				—				—				—				—				88,164				148,415
J Villiger			67,917				—				—				—				—				212,790				280,707
Sub-total Non- Executive Directors			321,428				—				—				11,379				—				321,118				653,925
Executive Director
AD Robertson			353,476				90,750				—				31,813				17,247				340,187				833,473
Senior Executive Officers
B Charlton			263,681				37,500				—				23,731				13,163				275,470				613,545
JF Crapper			247,538				37,500				—				22,278				10,712				265,368				583,396
IA McDonald			202,000				45,000				—				18,180				5,929				263,863				534,972
DM McGarvey			277,944				45,000				—				25,015				12,948				265,368				626,275
GJ Phillips			269,063				45,000				—				24,216				10,447				266,281				615,007
Totals			1,935,130				300,750				—				156,613				70,445				1,997,655				4,460,593

Pharmaxis 2008 Statutory Annual Report 43

1.5.2

Details of Remuneration Paid to Directors and Senior Executive Officers (continued)

														Post-				Long-				Share-
														employment				term				based
2007		Short-term benefits												benefits				benefits				payment
		Cash				Cash				Non-								Long
		salary or				bonus/				monetary				Super-				service				Options
		Directors’ fees				incentive				benefits				annuation				leave				value 1				Total
Name		A$				A$				A$				A$				A$				A$				A$
Non-Executive Directors
DM Hanley Chairman			66,644				—				—				5,998				—				71,575				144,217
CPH Kiefel			6,987				—				—				629				—				75,944				83,560
MJ McComas			42,985				—				—				—				—				37,893				80,878
PC Farrell			40,688				—				—				—				—				157,141				197,829
BH Smith 2			10,174				—				—				—				—				—				10,174
J Villiger			35,000				—				—				—				—				—				35,000
Sub-total Non- Executive Directors			202,478				—				—				6,627				—				342,553				551,658
Executive Directors
AD Robertson			329,025				93,500				—				29,612				8,205				161,843				622,185
Senior Executive Officers
B Charlton			251,125				40,000				—				22,601				6,264				119,240				439,230
JF Crapper			235,750				40,000				—				21,218				4,554				105,568				407,090
IA McDonald			184,756				20,000				—				16,628				1,359				97,181				319,924
DM McGarvey			261,375				40,000				—				23,524				5,516				100,525				430,940
GJ Phillips			260,775				40,000				—				23,470				4,413				106,072				434,730
Totals			1,725,284				273,500				—				143,680				30,311				1,032,982				3,205,757