D IA M Y D M E D ICAL

Transcription

1 ANNUAL REPORT 09/10

2 TABLE OF CONTENTS The year in brief... 2 Diamyd in brief... 3 CEO comments... 4 Diamyd s business model... 6 The Diamyd story Business area Diabetes Business area Pain Scientific and medical advisory board Administration report Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Parent Company s income statement Parent Company s balance sheet Change in shareholders equity parent Consolidated statement of cash flow Accounting policies Notes Audit report Corporate governance report The board Key executives Organization, employees and sustainable development Diamyd on the stock exchange Key ratios, definitions Annual general meeting of shareholders Sources cited... inside of the back cover

3 vision Diamyd Medical s vision is to be able to prevent and cure the autoimmune form of diabetes and its complications. annual report 09/10 1

4 Q1 Q2 Q3 Q4 THE YEAR IN BRIEF 4-year follow-up of type 1 diabetes patients included in a Phase II study with the drug candidate Diamyd showed a clear positive trend. Diamyd Medical received compensation from Apoteket AB after the execution of a settlement agreement regarding a clinical study in LADA patients, which was invalidated in An oversubscribed preferential rights issue brought in just over MSEK 219 before issue expenses to Diamyd Medical. The US Department of Veterans Affairs (VA) awarded a grant of USD 1.84 million to support the development of Diamyd Medical s Nerve Targeting Drug Delivery System (NTDDS) for Diabetic Neuropathic Pain. The last patient was included in the European Phase III study of the Diamyd drug candidate. The Diamyd treatment was approved for studies in children down to three years of age in the US. A 2:1 division of shares (a split) was executed. Diamyd granted Orphan Drug Designation in the US. Diamyd Medical signed an agreement with Ortho-McNeil-Janssen Pharmaceuticals, Inc., a Johnson & Johnson company, to develop and commercialize Diamyd. Diamyd Medical received an upfront payment of USD 45 million year followup showed positive trend 1.84 million grant awarded in support of the NTDDS project 2:1 division of shares Agreement with OMJPI regarding the Diamyd diabetes therapy 100 Compensation from Apoteket AB Preferential rights issue oversubscribed Diamyd treatment approved for children down to three years of age European Phase III study fully recruited Diamyd granted Orphan Drug Designation in the US Upfront payment of USD 45 million from OMJPI sep okt nov dec jan feb mar apr maj jun jul aug The Diamyd share and significant events during the fiscal year 2009/2010 2

5 DIAMYD IN BRIEF DIAMYD IN BRIEF Diamyd Medical is a Swedish pharmaceutical company that focuses on the development of pharmaceuticals for the treatment of autoimmune diabetes and pain. Diamyd was founded in 1996 and has its head office in Stockholm in Sweden and operations in Pittsburgh, Pennsylvania in the US. The stock is listed on the small cap segment at the Nasdaq OMX Stockholm (ticker DIAM B) and on the OTCQX in the US (ticker DMYDY). BUSINESS CONCEPT AND STRATEGY Diamyd s business concept is to license candidate products in the preclinical and clinical phases, and to refine them through development. The products are then to be commercialized, either independently or with a partner. Diamyd aims to build a small pharmaceutical company with its own development operations and sales and marketing organization in the Nordic countries: a Nordic small pharma company. BUSINESS AREAS From fiscal year 2010/2011, Diamyd Medical s operations will be divided into two business areas, Diabetes and Pain. The Diabetes business area consists of the antigen-based Diamyd drug candidate for the treatment and prevention of autoimmune diabetes. The Pain business area consists of development projects that use the Company s patented NTDDS platform (Nerve Targeting Drug Delivery System) for the administration of drugs directly to the nervous system for the treatment of chronic pain and comprise the drug candidates NP2 Enkephalin, NG2 GAD and NE2 Endomorphin. CLINICAL STUDIES A major Phase III program is ongoing in the US and Europe with the drug candidate Diamyd. The trials comprise 640 children and adolescents with newly diagnosed type 1 diabetes. The first study results are planned to be reported during spring In addition to the Company s own clinical trials, a number of external trials, so called investigator initiated studies, are beeing conducted with Diamyd by independent researchers and research organizations. The drug candidate NP2 Enkephalin has been evaluated in a Phase I clinical trial for the treatment of chronic cancer pain. Based on the results from the Phase I trial with NP2 Enkephalin, the Company has decided to start a Phase II trial in the US. annual report 09/10 3

6 CEO COMMENTS WE ARE NOW DEVELOPING DIAMYD INTO A NEW SWEDISH PHARMACEUTICAL COMPANY The past year has been one of the most important years in Diamyd Medical s history. The single most important event took place in June, when we signed a partnership agreement with the US pharmaceutical company Ortho-McNeil-Janssen Pharmaceuticals, Inc. (OMJPI), for the global development and marketing rights for our drug candidate Diamyd. We are very satisfied with both the choice of partner and the terms. The agreement includes an upfront payment of USD 45 million which was paid when the agreement was signed future milestone payments of up to USD 580 million and royalties on future sales. In addition to the financial security the upfront payment has provided Diamyd as a company, we also see the agreement as a validation of the entire diabetes platform. This has strengthened my belief that we have an extremely promising drug candidate that may one day change the lives of many future diabetics throughout the world. Next development step ongoing The Diamyd drug candidate constitutes the foundation of our development operations in diabetes and during the year, we announced that the European part of the global Phase III program has been fully enrolled and just recently, we also recruited enough patients for the US trial. Furthermore, Diamyd has obtained orphan drug status in the US, a significant and long-awaited decision that highlights the major medical need for a new treatment for type 1 diabetes that, in the long-term, can speed up the process of making the product available to children and adolescents newly diagnosed with diabetes. The next stage of development, which is already well underway, is to see whether we can also use Diamyd to treat individuals at high risk of developing type 1 diabetes, and potentially prevent the disease. Diamyd s portfolio of pain-relieving drug candidates contains NP2 Enkephalin, NG2 GAD and NE2 Endomorphin. These development projects comprise a broad portfolio with a wide range of applications. Pain management is a therapeutic area with significant medical needs. We are convinced that the pain portfolio, with drug candidates that act locally in the nervous system, has major potential for many diseases where existing pain treatment is inadequate. We recently presented promising results from our first clinical trial with NP2 Enkephalin, our furthest advanced drug candidate in the pain portfolio, and we have well-developed plans for the coming year to further increase development resources in the pain therapy area, where the first step is the start-up of a Phase II trial with NP2 Enkephalin. Two business areas Because Diamyd now consists of two separate portfolios with promising development projects, we have decided to divide the operations into two business areas: Diabetes and Pain, from the new fiscal year 2010/2011. This division will above all create greater opportunities to present and highlight the drug candidates in our pain portfolio, which all have promising future prospects but have not received the attention they deserve in the past. In line with our plans, we are now starting to prepare for our very first product launch. In our agreement with OMJPI we have secured exclusive marketing rights for the Nordic countries, and we intend to build our own market and sales organization for selling Diamyd in the Nordic market. As Diamyd develops as a company, we will take new steps toward new projects. With the partnership agreement in place and a healthy bank balance, both interest and opportunities to find new and attractive development projects will grow, through either licensing or acquisitions. In the coming year we hope to be able to expand the portfolio with projects in the early phase of development, and with already approved substances in the field of endocrine diseases in children, in order to steadily increase and strengthen our position in this specialized therapeutic area and to allow us to use our future sales more effectively. Although Diamyd has grown a lot over the past years, and we have clear plans to continue growing, our aim to maintain a flexible and cost-efficient organization remains. 4

7 CEO COMMENTS Ambition to change the corporate landscape Our ambition for the future is that Diamyd will be able to change the corporate landscape and show that building a profitable development company in Sweden is possible. Sweden is mainly characterized today by either small research-intensive biotech companies, or large pharmaceutical companies with head offices outside of Sweden. Mediumsized pharmaceutical companies with both development and sales are clearly underrepresented. The classic biotech model, where a small research-intensive company has a drug development pipeline with projects that are successively refined and out-licensed somewhere between the preclinical phase and clinical Phase II, is slowly disappearing. A new product generally takes ten to fifteen years to develop, and a large pipeline with continuous transactions is needed to finance the operations until the proceeds from large milestone payments and royalties on sales arrive, a timeframe that is usually too long for small companies. Biotech companies must be able to drive the development of their products further and retain parts of the market themselves. The key is strong owners with the desire and means to make financial investments in long-term development projects. Diamyd s owners have a long-term focus, which is enormously gratifying as we now draw closer to the results of our first Phase III trial with Diamyd for the treatment of type 1 diabetes. The journey has been long, but our owners have always supported us in good times and bad. I would like to thank our loyal band of shareholders, and I hope you will continue to follow us on our journey to build a new pharmaceutical company in Sweden. Stockholm November 24, 2010 Elisabeth Lindner CEO and President of Diamyd Medical annual report 09/10 5

8 DIAMYD S BUSINESS MODEL Diamyd Medical s vision is to be able to prevent and cure the autoimmune form of diabetes and its complications. In order to achieve this vision, Diamyd employs a dynamic business model that can be adapted to different scenarios concerning current and future trial programs, commercialization of Diamyd s drug candidates, financing of its business and partnerships and acquisitions. BUSINESS CONCEPT Diamyd s business concept is to license candidate products in the preclinical and clinical phases, and to refine them through development. The products are then to be commercialized, either independently or with a partner. VISION AND OBJECTIVES Diamyd s vision is to be able to prevent and cure the autoimmune form of diabetes and its complications. The objective for the Company s development in the field of autoimmune diabetes is, at the first stage, to preserve the natural ability of newly diagnosed type 1 diabetes patients to produce insulin by treatment with the drug candidate Diamyd. The next stage is to prevent the development of type 1 diabetes through preventive treatment of people at high risk of developing the disease. STRATEGY Diamyd s aims to build a small pharmaceutical company with its own development operations and sales and marketing organization in the Nordic countries: a Nordic small pharmaceutical company. The Company s research and development concentrates on generating pharmaceuticals for the treatment of autoimmune diabetes, diabetes-related complications and chronic pain. The main focus lies on completing the ongoing global Phase III program with the drug candidate Diamyd and preparing an application for market approval. The planned Phase II trial with the drug candidate NP2 Enkephalin for the treatment of chronic cancer pain is also prioritized. To ensure that the established goals are achieved, and that Diamyd moves continuously towards its vision of curing autoimmune diabetes, Diamyd follows a strategic plan with the following areas: development and commercialization, financing, partnerships and acquisitions. The plan is a dynamic tool and the strategy is continually evaluated in pace with changing internal conditions and external factors. OUTSOURCING MODEL Diamyd is managed according to an outsourcing model, where some of its operations have been outsourced to qualified partners with expert knowledge. A small group of employees manage, lead and implement projects in areas such as clinical and preclinical development, regulatory affairs and production. Diamyd does not perform basic research internally. This model generates lower operating expenses because expert services and new development projects are sought externally. This enables the Company to develop in a cost-efficient and flexible manner while maintaining its focus on results and quality. Diamyd s outsourcing model Clinical research and development Regulatory Klinisk forskning affairs DIAMYD Pre-clinical research Preklinisk forskning and development Production Marknadsföring Marketing and sales 6

9 DIAMYD S BUSINESS MODEL Drug Candidate Indication Preclinic Phase I Phase II Phase III BUSINESS AREA Diabetes Pain Diamyd Diamyd Diamyd NP2 Enkephalin NG2 GAD Type 1 diabetes LADA Prevention Cancer pain Diabetes pain NE2 Endomorphin Chronic pain Diamyd Medical s operations are divided into two business areas, Diabetes and Pain. The Diabetes business area consists of the Diamyd drug candidate for the treatment and prevention of autoimmune diabetes. Diamyd is the Company s furthest advanced development project with ongoing Phase III trials in Europe and the US. The Pain business area consists of three drug candidates in clinical and preclinical phases that use the Company s patented NTDDS platform (Nerve Targeting Drug Delivery System) for the administration of drugs directly to the nervous system for the treatment of pain. DEVELOPMENT AND COMMERCIALIZATION The completion of ongoing and pending trials, applications for market approval and finally, market launches of Diamyd s drug candidates can take place in partnership with other pharmaceutical companies, or partly independently. The method chosen is mainly dependent upon the resources that are required to drive the development and market launch, the terms that can be achieved in a potential license agreement and the prevailing capital requirements. The out-licensing of development projects can provide a means for financing and securing resources for the completion of trial programs or pending market launches. In general, the further a product has been developed, the better the terms that can be achieved in a license agreement. The optimal development phase and structure for a licensing agreement are dependent upon several factors. For Diamyd and its shareholders, a major future potential lies in retaining control of certain markets. This will enable Diamyd to become a market-oriented pharmaceutical company in its own right. A summary of strategies for the commercialization of Diamyd s drug candidates that are currently under development follows. Diabetes business area In June 2010, Diamyd signed an agreement with Ortho-McNeil- Janssen Pharmaceuticals, Inc. (OMJPI) concerning the antigen-based drug candidate Diamyd. The agreement concerns the development and global commercialization of Diamyd for the treatment and prevention of type 1 diabetes and associated diseases. In line with the company strategy, Diamyd has secured exclusive rights in the Nordic countries. If market approval is obtained, the Company intends to drive the marketing and sales of Diamyd in the Nordic region independently. This is considered a reasonable undertaking because type 1 diabetes patients are treated by a small group of specialized doctors who are mainly based at diabetes clinics and university hospitals. The limited number of relevant doctors and hospitals entails that a small sales organization is sufficient for launching Diamyd for the treatment of newly diagnosed type 1 diabetes in the Nordic market. The market strategy for other potential indications and applications depends primarily on the intended target group. The market for products prescribed by general practitioners is much broader, and subsequently more resource-intensive from a marketing perspective. annual report 09/10 7

10 Pain business area The strategy for Diamyd s candidate drugs in the pain business area is to independently develop NTDDS-based products and therapies for the treatment of chronic pain, such as cancer and diabetes pain, and to out-license, wholly or partly, to external partners before Phase III. Cancer and diabetes patients constitute such broad target groups that the Company, in the medium term, does not see any possibility for handling the marketing and sales independently. Other development projects Candidate drugs with therapeutic indications outside the diabetes and pain area are planned for out-licensing to external partners, either wholly or partly, at an early stage. The NTDDS technology could be applied in a variety of therapeutic areas besides pain. FINANCING Diamyd has several options for financing its operations, such as outlicensing entire or parts of development projects in selected markets, or through various forms of share issues. The development from preclinical to clinical Phase III trials, which is where Diamyd is today, has been carried out at a very low cost compared with industry standards. Since the foundation of the Company, new share issues have generated SEK 702 million. PARTNERSHIPS AND ACQUISITIONS Partnerships with other pharmaceutical companies are included in the strategy - to find markets for the Company s projects, and to identify new development projects. In 2010, Diamyd Medical signed an agreement with Ortho-McNeil-Janssen Pharmaceuticals, Inc., concerning the development and commercialization of the GAD65-based drug candidate Diamyd for the treatment and prevention of autoimmune diabetes. Diamyd received an upfront payment of USD 45 million when the agreement became effective and according to the agreement, Diamyd may be eligible for up to USD 580 million in development and sales milestone payments, as well as tiered royalties on future sales. The agreement also stipulates that the parties will equally share costs for the development until results from the ongoing European Phase III trial, which are expected in the first half of OMJPI has the right to fully assume responsibility for the development program upon reviewing the results. Diamyd retains the rights to therapeutic use of the GAD65 gene, and to derivatives, fragments and variants of the GAD65 protein. The rights to the application of the GAD65 gene in the treatment of Parkinson s disease were previously out-licensed on a non-exclusive basis to the American company Neurologix, Inc. Interest in the NTDDS technology has also been shown by other companies that have drug substances that they want to deliver effectively to nerve cells. Diamyd has also been involved in a collaboration with Sangamo BioSciences for several years during which their proprietary zinc finger protein technology has been delivered via a NTDDS vector. Development projects in early and late phases, and companies with promising products under development, are continuously evaluated for their out-licensing or acquisition potential. Drug development Drug development is a very long and costly process. It is said that in general it costs one billion USD to take a drug from discovery to market. A candidate drug must get through a number of stages before it can obtain a market approval. These stages can be separated into discovery, preclinical phase and clinical phase. After discovery, the drug undergoes preclinical testing in disease models. The drug is then tested in the clinical phase by carrying out clinical trials in human subjects. Clinical trials consist of four stages of which the first three Phases I, II and III take place prior to market launch. The following is a short description of each of the phases of drug development. Discovery phase The drug candidate is identified and protected by patents. The identification phase may rely on an understanding of the mechanism of a pathological process or on pharmacological knowledge about a particular substance. The identification phase may take several years. Preclinical phase In the preclinical phase, the candidate drug is tested in experimental systems and disease models to establish safety and efficacy. These studies are essential for obtaining the approval of the regulatory authorities to begin human trials. Phase I After successfully completing the preclinical phase, the drug can then be tested on a limited number of human volunteers in order to confirm the results of the preclinical studies, i.e. to confirm the safety of the drug, and to provide indications of any possible adverse effects. Phase II Phase II trials are carried out on a small number of patients with the actual disease that is to be treated, prevented or alleviated. The aim is to establish the optimal dosage of the drug, prove that it is efficacious, find out how it is distributed in the body, discover how the body affects to the drug and establish its safety profile. Phase III The candidate drug is now tested in a larger group of patients in order to prove statistically that it is safe and efficacious. The effects on the disease are studied, and any possible side effects recorded. If the results in Phase III achieve the stated objectives, the sponsor can apply to the regulatory authorities for marketing approval. Phase IV Phase IV studies are also carried out, after the drug has been introduced onto the market. The aim is to study the drug in everyday clinical use over an extended period of time, and to record any rare adverse effects that may later emerge. New patient groups may also be evaluated during Phase IV. 8

11 DIAMYD S BUSINESS MODEL OUT-LICENSING OF DIAMYD HOW WE DID IT In the summer, Diamyd Medical signed one of Swedish biotech s largest ever out-licensing agreements for the drug candidate Diamyd. The process from actively seeking a partner to signing the agreement took one and a half years, and required an enormous amount of effort from Diamyd, our advisers and the companies that we negotiated with. Why does a transaction like this require so much time and effort? Out-licensing in the pharmaceutical industry entails transfer of patent and market rights for candidate drugs that will hopefully become successful drugs approved for sale sometime in the future. Out-licensing is one of the most important forms of financing for biotech companies that develop new drugs. Furthermore, licensing has become a key source for promising development projects for large pharmaceutical companies that need to replenish their product portfolios. Change of strategy Previously, Diamyd would contact potential partners individually in a sequential process because we lacked the resources for carrying out discussions in a parallel manner. At the beginning of 2009, we decided to change our strategy and engage the American consulting firm Destum Partners to help us act on a broad front and handle several stakeholders simultaneously. Destum Partners distributed our information material and followed up with approximately one hundred different pharmaceutical companies to attract several bidders in an auction process. We visited the companies that showed genuine interest in the project and gave a personal presentation. If they were still interested, the companies gained access to a virtual data room where they could begin a due diligence process. Finally, three large pharmaceutical companies came to Stockholm to conduct full due diligence on site. Each company sent a team of experts who reviewed the more than 150 binders with material that we had prepared. The due diligence comprised all preclinical and clinical studies, the production process, the communication with regulatory authorities, patent rights, the development budget and, of course, the future market potential. Each person from Diamyd represented several subject areas and answered all kinds of questions. We also received invaluable assistance from our own external experts on the Scientific Advisory Board and the lead investigators in our clinical trials. Close collaboration Agreement negotiations took place alongside the due diligence with a number of parties. Licensing agreements in general come in endless variations where the total value of the transaction is distributed between upfront payment, milestone payments and royalties. Even sections that are unrelated to money must be formulated with care because the parties embark on a collaborative effort that often must function smoothly for many years. We engaged experienced US lawyers to help us with the negotiations and formulating the actual agreement text. We finally reached an agreement with Ortho-McNeil-Janssen Pharmaceuticals, Inc. We are extremely happy to have them as a partner and with our agreement, which will generate value for Diamyd for many years to come. The next challenge will be to find new projects and products to complement the portfolio for our planned Nordic sales force, in the short term and the long term. Peter Zerhouni Director of Business Development, Diamyd Medical annual report 09/10 9

12 THE DIAMYD STORY Diamyd Medical s research and development concentrates on the development of drugs for treating autoimmune diabetes and its complications. Since Diamyd was founded and obtained the rights for GAD65 - the active substance in the drug candidate Diamyd - in the mid-1990s, several preclinical and four clinical trials have been conducted with Diamyd. In these studies the treatment has been able to slow or halt the progress of autoimmune diabetes without causing any serious adverse effects. Today s focus lies on completing the ongoing global Phase III program and preparing an application for market approval Researchers find antibodies to beta cells in people with newly diagnosed type 1 diabetes The 64K protein is identified as GAD Researchers report that antibodies against 64K are an early warning sign of type 1 diabetes in humans Diamyd Medical obtains the license for GAD65, the active substance in the drug candidate Diamyd, from UCLA in Los Angeles Researchers find antibodies to a 64K beta cell protein in children with type 1 diabetes Two scientific articles that are published simultaneously in Nature report that GAD can be used to prevent the onset of type 1 diabetes in NOD mice Preclinical trials with Diamyd. Researchers confirm that transmitting GAD-reactive T-cells also transmits diabetes, and that the induction of regulatory T-cells slows autoimmune diabetes. DIAMYD WILL PLAY A KEY ROLE IN THE EFFORTS TO CURE AUTOIMMUNE DIABETES Two decades have now passed since four research groups, at four different US universities, simultaneously submitted their respective patent applications for the prevention of autoimmune type 1 diabetes with the GAD65 molecule. Shortly before, experts in the field had reported that a specific auto-antigen, a kind of target molecule, plays a major role when the immune system attacks its own blood sugar-controlling beta cells in autoimmune diabetes. The molecule was also present in the body s nervous tissue and was identified as the human enzyme Glutamic Acid Decarboxylase (GAD). The task then became to try to use GAD to stop the autoimmune process that leads to the destruction of beta cells. Several groups quickly succeeded with this and sought to patent their methods. Diamyd Medical (then Synectics Biotechnology) heard about the research and decided to try and license the discovery in order to develop a drug from GAD. Several major pharmaceutical companies were also interested but deterred by the complex patent situation with so many universities involved. Diamyd saw an opportunity and signed parallel license agreements with several of the universities for their patent applications for rights to the GAD molecule. A conflict arose between the University of Washington and UCLA concerning who was the rightful inventor, but because Diamyd had secured exclusive rights from both universities, the Company could calmly wait for a conclusion. UCLA finally obtained a patent after an interference process. The outdrawn patent dispute benefitted Diamyd because it probably prolonged the patent protection in the US substantially. Logical step Research into GAD, which is now being conducted in the ongoing Phase III trials with the Diamyd drug candidate, may be very close to a breakthrough when it comes to treating people with newly diagnosed type 1 diabetes. Continuing to 10

13 THE DIAMYD STORY 2005 Operations in the US company Nurel Therapeutics, Inc. are acquired. Nurel with its Nerve Targeting Drug Delivery System (NTDDS) becomes the foundation for Diamyd, Inc Ground-breaking Swedish prevention trial with Diamyd starts in healthy children at high risk of developing type 1 diabetes. Results from five-year follow-up study of the Phase IIa trial with Diamyd in LADA patients is published in Europe s leading scientific diabetes journal, Diabetologia. American TrialNet/NIDDK begins a trial with Diamyd at 15 leading diabetes centers in the US to closely study the treatment s mechanism of action. The last patient is enrolled in the European Phase III trial with Diamyd Positive results in a Phase IIa trial with Diamyd in LADA patients Phase I trial with Diamyd shows positive results Positive results in a Phase IIb trial with Diamyd in children with type 1 diabetes Phase III trials with Diamyd start in Europe and the US. The prestigious New England Journal of Medicine publishes the 30-month results from the completed Phase II trial with Diamyd Diamyd granted Orphan Drug Designation in the US. Contract is signed with Ortho-McNeil-Janssen Pharmaceuticals, Inc. to develop and commercialize Diamyd. Diamyd divides its operations into two separate business areas, Diabetes and Pain. Results from Phase I trial with NP2 Enkephalin in cancer patients with chronic pain show promising safety data and pain relief. develop toward other possible applications will then be a logical step, such as treating people who are at high risk of developing autoimmune diabetes. The most important work still remains, however. How can we one day achieve our vision to be able to prevent and cure the autoimmune form of diabetes and its complication? What is the fastest way to reach this goal? Believing that Diamyd can find a cure alone is presumptuous, but Diamyd is there to make a major contribution. We are doing what we can to achieve our vision, and have expert help along the way from some of the world s most prestigious diabetes researchers who make up our Scientific Advisory Board. It is gratifying to share and experience that creativity and knowledge, as well as experiencing the incredible enthusiasm and competence held by all of our employees at Diamyd. There is a long way to go, but I firmly believe that we are moving in the right direction and will play a key role in the efforts to achieve the goal. Anders Essen-Möller Chairman and founder of Diamyd Medical annual report 09/10 11

14 BUSINESS AREA DIABETES The Company s research in diabetes originates from the GAD65 molecule, which forms the basis for the drug candidate Diamyd for the treatment and prevention of autoimmune diabetes. Diamyd is the project in the Company that has advanced furthest in development, with Phase III trials in Europe and the US currently in progress. Drug Candidate Indication Preclinic Phase I Phase II Phase III BUSINESS AREA Diabetes Diamyd Diamyd Diamyd Type 1 diabetes LADA Prevention DIABETES A CHRONIC DISEASE Diabetes is a chronic disease characterized by elevated blood sugar levels. People with diabetes often develop serious complications resulting in great suffering and premature death. There are several types of diabetes. The three most common are type 2 diabetes, type 1 diabetes and LADA (Latent Autoimmune Diabetes in Adults). Type 1 diabetes, also known as juvenile diabetes, and LADA are similar in that they are both autoimmune forms of the disease. This means that the body s own immune system destroys the so-called beta cells, in the pancreas, that control the blood sugar level. Insulin is the hormone that regulates the level of sugar in the blood. As the disease progresses, the patient will inevitably need to self-inject with industrially manufactured insulin, since the patient s own beta cells will have been destroyed in the autoimmune attack. Type 2 diabetes, formerly known as adult-onset diabetes, is by far the most common form of diabetes and is rapidly increasing. In contrast to the autoimmune forms, type 2 diabetes is caused by impaired insulin sensitivity and is mainly related to age and lifestyle. In those people with type 2 diabetes, the body still produces insulin, but no longer responds to it. The result, in all types of diabetes, is that sugar remains in the bloodstream and is not made available to the cells, which has several damaging consequences. Both very high and very low blood sugar levels are extremely dangerous and can lead to rapid and potentially fatal loss of consciousness. Consistently raised and fluctuating blood sugar levels cause typical diabetes complications, including kidney and eye damage, impaired circulation and cardiovascular disease as well as nerve damage including diabetes pain. Treatment There is currently no product in the market addressing the autoimmune process that causes type 1 diabetes and LADA. Current treatment strategies involve lowering the blood sugar level in the bloodstream by adding external insulin, either by way of injections or an insulin pump. The aim is to reach as stable a blood sugar level as possible, neither too high nor too low, which is extremely difficult. Living with type 1 diabetes Type 1 diabetes is a lifelong disease that has a significant impact on the lives of those affected and their family members. It is usually a traumatic experience for the whole family when a child develops type 1 diabetes. Insulin must be injected and the blood sugar must be checked several times a day. The timing and composition of meals has to be regulated and balanced against the insulin dosage, which is especially difficult for small children. Diabetes patients must go for checks several times a year. It is extremely important to manage the condition carefully in order to avoid either high and low blood sugar levels. 12

15 BUSINESS AREA DIABETES Diabetes complications All types of diabetes can lead to associated diseases and complications. Diabetes has both acute and long-term complications, and they can affect several different organs. Acute complications mainly comprise hypoglycemia and ketoacidosis. In the case of hypoglycemia, the blood sugar level has dropped too low, which in severe cases can lead to the patient losing consciousness, and the body s functions come to a halt as the brain suffers an acute lack of nutrients. Markedly elevated blood sugar levels can lead to ketoacidosis, an extremely acute, life-threatening condition that requires intensive care. This condition arises when the body begins to break down its own cells to obtain nutrients, thereby releasing ketones and acids into the bloodstream. Long-term complications that can be caused by diabetes include cardiovascular diseases, nephropathy (kidney damage), neuropathy (nerve damage) and retinopathy (eye damage). Cardiovascular disease is the most common cause of death in diabetes, and people with diabetes run a much higher risk of developing heart disease, such as heart attack, as well as stroke and other forms of cerebrovascular disease 1). Impaired circulation in the legs and feet, i.e. peripheral vascular disease, can lead to leg ulcers and foot complications that may require amputation 2). Diabetic nephropathy is the main cause of kidney failure in the Western World, sometimes requiring dialysis or a kidney transplant 1). Diabetes affects the nervous system in several different ways. The most common are loss of sensation and severe pain characterized by a stabbing or burning sensation in the legs, feet and hands. The pain is caused by damage to the peripheral nervous system as a result of diabetes. Diabetes pain leads to disturbed sleep, reduced mobility and difficulty working and engaging in social activities. People with diabetes may develop damage to the blood vessels in the retina. This can lead to retinopathy, with impaired vision, and in some cases even blindness. People with diabetes may also develop cataracts resulting in impaired vision. Nearly everybody with long-standing type 1 diabetes will eventually develop retinal damage to some degree 3). Researchers have found that the risk of complications can be reduced by percent among type 1 diabetes patients who still have some remaining beta cell function of their own 4). This clearly demonstrates the importance of at least partially preserving the ability of patients with type 1 diabetes to control blood sugar levels. Since treatment with Diamyd aims to do just that, it could be of crucial importance for people with type 1 diabetes, in whom it could reduce the risk of developing complications. Eyes: Retinopathy Heart: Cardiovascular disease Kidney: Nephropathy Lower limbs: Peripheral vascular disease Brain: Cerebrovascular disease Peripheral nervous system: Neuropathy and diabetes pain Feet: Ulceration and amputation * ) A complete list of sources cited can be found on the inside of the back cover. annual report 09/10 13

16 Diabetes worldwide Diabetes is a common disease globally, today affecting an estimated total of 246 million people. This figure is expected to rise to 380 million by Type 2 diabetes is on the increase worldwide, accounting for percent of all cases 5). Several studies have shown that around 10 percent of all those diagnosed with type 2 diabetes actually have LADA, which translates into an estimated total of at least 20 million LADA sufferers worldwide 13). Type 1 diabetes is thought to account for about 5-10 percent of all cases of diabetes in the Western world 6). The prevalence of type 1 diabetes is highest in North America and the Nordic countries. Diamyd estimates that around 80,000 people develop type 1 diabetes annually in the US and Europe alone, which represent the primary market for the Diamyd drug candidate 7). In addition, new research shows that the number of children and adolescents that develop the disease in Europe is increasing by about 4 percent annually and that the age of onset of type 1 diabetes is falling 8). The reasons for this are unclear. Every year, 3.8 million people are estimated to die as a result of diabetes. Apart from individual suffering and lifelong medication, the disease has an enormous financial impact on health services and society, through loss of working hours. In 2007, annual global healthcare expenses for diabetes totaled USD 232 billion (including treatment of complications) 9). Percentage of the population with type 1 diabetes worldwide 10) < 0,10 % 0,10 0,20 % 0,20 0,30 % 0,30 0,40 % 0,40 0,50 % > 0,50 % Region Percentage of the population with type 1 diabetes Australia % Canada % Central Africa < 0.1 % China < 0.1 % Europe % India < 0.1 % Japan < 0.1 % North Africa % Russian Federation % Scandinavia > 0.5 % South Africa % South America % South-East Asia < 0.1 % The Middle East % USA % 14

17 BUSINESS AREA DIABETES DIAMYD TREATMENT AND PREVENTION OF AUTOIMMUNE DIABETES The Diamyd drug candidate for the treatment and prevention of autoimmune diabetes is the Company s furthest advanced project, with ongoing Phase III trials in Europe and the US. The purpose of Diamyd is to prevent, delay, or stop the autoimmune attack on beta cells in autoimmune diabetes, thereby preserving the body s capacity to regulate blood sugar. This is very important, since there is no such treatment available on the market today. Diamyd is currently under development for three principal indications: newly diagnosed type 1 diabetes, LADA (Latent Autoimmune Diabetes in Adults) and prevention of type 1 diabetes. In 2010, the Company entered into an agreement with Ortho-McNeil-Janssen Pharmaceuticals, Inc. (OMJPI) covering the development and commercialization of Diamyd. Mechanism of action Diamyd s platform for research into autoimmune diabetes originates from the GAD65 molecule and forms the basis for the Diamyd drug candidate. GAD65 (Glutamic acid decarboxylase isoform 65 kda) is the active substance in Diamyd. This is a human enzyme and an important autoantigen in autoimmune diabetes. GAD65 is found in the blood sugar-regulating beta cells of the pancreas, where its function is not yet fully understood. It is however clear that GAD65 is one of the most important targets when the immune system attacks the beta cells in autoimmune diabetes. The body s own GAD65 can be found in the beta cells of the pancreas as well as in nerve and brain tissue. In nerve cells, GAD catalyzes the transformation of the neurotransmitter glutamate to the neurotransmitter GABA. Accordingly, GAD65 is thought to have potential as a drug candidate in several neurological diseases, such as Parkinson s disease, as well as for chronic neuropathic pain. Treatment with Diamyd is thought to induce tolerance to GAD65, thereby intervening in the autoimmune attack and preserving the capacity to regulate the blood sugar in patients with autoimmune diabetes, namely type 1 diabetes and LADA. Diamyd works by immunomodulation and is antigen-specific, which means that it specifically aims to induce tolerance in the autoimmune T cells that attack GAD65 in the beta cells, without impairing the immune system either wholly or in part. This is in contrast to immunosuppression, which is a different treatment strategy that temporarily disables T cells, thus suppressing and weakening the immune system. Beta cell mass 100% 80% 60% 40% 20% 0% Beta cell mass 100% 80% 60% 40% 20% 0% Beta cell mass 100% 80% 60% 40% 20% 0% The autoimmune attack starts to destroy the beta cells Time Diagnosis of type 1 diabetes made The autoimmune attack destroys the insulin-producing beta cells. At the time of diagnosis only percent of the beta cells remain. The autoimmune attack starts to destroy the beta cells Time Diagnosis of type 1 diabetes made Treated with Diamyd Diamyd is given to stop the autoimmune attack, to preserve the remaining beta cells and the body s own insulin production. The earlier treatment can start, the greater the remaining own production of insulin. The autoimmune attack starts to destroy the beta cells Treated with Diamyd Time If Diamyd is given at an early stage, the autoimmune process may potentially be halted before the disease manifests. This means that if Diamyd can be given as a preventive measure, it may be possible to completely prevent type 1 diabetes. annual report 09/10 15

18 The purpose of Diamyd is to delay or stop the autoimmune process The autoimmune types of diabetes, type 1 diabetes and LADA, result from a deficiency of insulin caused by an autoimmune attack on the body s own blood sugar-regulating beta cells in the pancreas. The attack leads to the gradual destruction of the blood sugar-regulating beta cells over a period of time, which is thought to vary from a few months to several years. The destruction of beta cells begins even before symptoms appear. The symptoms of diabetes only become apparent when just 10 to 20 percent of beta cell function remains 14). By this time, the body does not have enough beta cells left to maintain blood sugar regulation. Typical symptoms include increased urine volume and excessive thirst, along with increasing fatigue, weakness, hunger and rapid weight loss. Children and adolescents with type 1 diabetes usually do not come into contact with the healthcare system until they become acutely ill. At this point, the patient s survival depends on immediately receiving insulin injections. Even after the disease has been diagnosed, the autoimmune attack continues on the remaining beta cells, which will ultimately be completely destroyed. By then, the body will have no blood sugar regulation left. All of its insulin needs will have to be met by insulin injections or an insulin pump. Treatment with Diamyd is intended to intervene in the autoimmune process and halt or slow the destruction process and to save any remaining beta cell function. In this manner, the blood sugarregulating ability of patients with autoimmune diabetes is preserved, which studies have shown to significantly reduce the risk of acute and long-term diabetes complications. This is very important, since there is no such treatment available in the market today. Earlier studies have shown that Diamyd is most effective when administered early in the course of the disease in patients with newly diagnosed type 1 diabetes. If these results can be confirmed by larger studies, the next logical step is to extend testing of the therapy to individuals who are at high risk of developing diabetes, thus preventing the disease before symptom appears, i.e. treat the autoimmunity before it has progressed to the extent that the patient become diabetic. DIAMYD INDICATIONS Diamyd is currently under development for the treatment of three principal indications: newly diagnosed type 1 diabetes (Phase III), LADA (Phase II) and prevention of type 1 diabetes (Phase II). Type 1 diabetes Type 1 diabetes is an autoimmune form of diabetes that usually occurs in children and adolescents. Type 1 diabetes results from a deficiency of insulin caused by an autoimmune attack on the body s own blood sugar-regulating beta cells in the pancreas. For the majority of people diagnosed with type 1 diabetes, insulin requirements must be entirely satisfied by means of injections or an insulin pump. The purpose of Diamyd is to prevent, delay, or stop the autoimmune attack on beta cells in type 1 diabetes, thereby preserving the body s capacity to regulate blood sugar. A completed Phase II placebo controlled study of 70 children and adolescents with type 1 diabetes published in the prestigious New England Journal of Medicine in autumn 2008 showed that Diamyd significantly slowed the progress of the disease in subjects with newly-diagnosed type 1 diabetes for at least 30 months versus placebo. Two parallel Phase III studies, one in Europe and the other in the US and each with 320 participants with type 1 diabetes, have been in progress since autumn Results from the European study are scheduled to be announced in the spring of The treatment, which is evaluated in clinical studies, consists of two to four injections, each administered in the arm on separate occasions, and does not require hospitalization. Diamyd has not been associated with any serious adverse effects in previous studies and has been well received by patients, parents and physicians alike. The safety profile is extremely important in the treatment of diabetes, since children and adolescents represent a significant proportion of people with type 1 diabetes. LADA Like type 1 diabetes, LADA (Latent Autoimmune Diabetes in Adults), also known as type 1.5 diabetes, is an autoimmune form of diabetes, but it strikes during adulthood. This disease is similar to type 1 diabetes in many respects and it, too, eventually leads to an absolute need for insulin treatment. However, the progress of the disease is slower than in type 1 diabetes. Because the disorder mainly affects adults and does not immediately require insulin treatment, LADA is often incorrectly diagnosed as type 2 diabetes. Diamyd estimates that about 10 percent of all those diagnosed with type 2 diabetes actually have LADA 13). Diamyd for the treatment of LADA has progressed to Phase II clinical trials. In April 2009, the scientific journal Diabetologia published clinical results from the Phase II trial in which treatment with Diamyd, versus placebo treatment, significantly reduced the risk that LADA patients needed insulin therapy, even after five years. Only 14 percent of the patients in the group that received 20 μg of Diamyd needed insulin after five years, compared with 64 percent in the placebo group. No serious side effects related to Diamyd treatment were reported in the study. Prevention of type 1 diabetes In type 1 diabetes, the autoimmune attack and the destruction of blood sugar-regulating beta cells in the pancreas starts long before the symptoms arise. If the autoimmune attack could be halted at an early stage, before the destruction of the beta cell function has lead to the appearance of overt symptoms, it would be possible to prevent the disease from developing at all. Earlier studies have shown that Diamyd is most effective when administered early in the course of the disease in patients with newly diagnosed type 1 diabetes. If these results can be confirmed by larger studies, the next logical step is to extend testing of Diamyd to individuals who are at high risk of developing diabetes, thus preventing the disease before it manifests. A small-scale Swedish study of Diamyd encompassing 50 children from the age of four at high risk of developing type 1 diabetes, has been in progress since The purpose of the study is to evaluate whether treatment with Diamyd as a preventive measure could delay or halt disease progression, thus preventing the children from developing type 1 diabetes. 16

19 BUSINESS AREA DIABETES Change in meal-stimulated C-peptide, mean values Time since diagnosis at start of study: 0 18 months Change in meal-stimulated C-peptide, mean values Time since diagnosis at start of study: 0 3 months pmol/ml/2 hours pmol/ml/2 hours Diamyd n=35 Placebo n= Diamyd n=4 Placebo n=7-0.4 p= p= p=0.02 p= Diamyd injections Time in months Diamyd injections Time in months In a Phase II study of 70 children and adolescents with type 1 diabetes, patients who received Diamyd lost significantly less of their meal-stimulated insulin secreting capacity (as measured by C-peptide) compared to the patients that received placebo (left graph)*. In the subgroup of patients treated within three months of being diagnosed with type 1 diabetes, the Diamyd group on average experienced an increase in their insulin-secreting capacity over the first 15 months of the study (right graph). * ) Ludvigsson et al. N Engl J Med 2008;359: CLINICAL TRIALS A comprehensive Phase III program involving the Diamyd drug candidate is in progress in the US and Europe, encompassing children and adolescences with newly diagnosed type 1 diabetes. In addition to Diamyd s own clinical trials, a number of external studies of Diamyd are being conducted by independent researchers and research organizations. Diamyd has participated in the design of all of the external studies and has rights to the study results. Since the mid-1990s, Diamyd has completed several preclinical trials and four clinical trials, including a Phase II trial in LADA patients and a Phase II trial in children and adolescenses with type 1 diabetes. The Phase II trial in children and adolescenses with type 1 diabetes has been extended to follow the study participants for a total of seven years. Phase III program Type 1 diabetes Two parallel Phase III studies of the Diamyd diabetes vaccine are being conducted in nine European countries and the US. Both studies are randomized, double-blind and placebo controlled. Approximately 320 newly diagnosed type 1 diabetes patients between 10 and 20 years old are included in each study. The purpose of the Phase III studies is to confirm and evaluate the ability of the Diamyd treatment to halt or slow the autoimmune destruction of the beta cells in the pancreas, thereby preserving the body s own ability to control the blood sugar in people with type 1 diabetes. Each study includes three treatment arms in which one third of the patients are treated with two injections of Diamyd 20μg (days 1 and 30) as well as two injections of placebo; one third are treated with four injections of Diamyd 20μg (days 1, 30, 90 and 270); and one third receive four injections of placebo. The results from each study will be analyzed 15 months after all patients have received their first injection. If the studies have a positive result, they will be used for market registration. Professor Johnny Ludvigsson of the Linköping University Hospital in Sweden is the lead investigator for the European study, while Professor Jerry Palmer of the University of Washington in Seattle is the lead investigator for the US study. Phase II study Type 1 diabetes During 2005 to 2007 a 30-month randomized, double-blind, placebocontrolled Phase II study of Diamyd was carried out, encompassing 70 children and adolescents between 10 and 18 years old with type 1 diabetes. Significant long-term efficacy in slowing the destruction of beta cell function, i.e. the body s own capacity to control blood sugar, was demonstrated. The treatment was well received by patients, their doctors, and family members. No serious side effects related to the Diamyd treatment were reported in the study. The study was published in autumn 2008 in The New England Journal of Medicine. The study has now been extended to in total seven years with the purpose of confirming the long-term effects of the treatment. Follow-up of Phase II study Type 1 diabetes In February 2009, Diamyd received approval from the Swedish Medical Products Agency to conduct a follow-up study on the children and adolescents with type 1 diabetes who participated in the Phase II study of Diamyd. An analysis of the data shows that those patients who had received Diamyd, and who had recently developed the disease when the study began, still had a significantly better diabetes status than corresponding patients who had received placebo, even four years after treatment. The safety data also continued to look promising, with no serious side effects associated with the treatment. The patients will also be monitored to track their quality of life and diabetes complications. The study participants will be followed for a total of seven years. annual report 09/10 17

20 Phase II study LADA Diamyd has completed a randomized, double-blind, placebocontrolled Phase II study encompassing 47 LADA patients, where various doses of Diamyd were tested. Depending on their study arm, the patients received two injections of either 4, 20, 100 or 500 μg Diamyd or placebo at a four-week interval. The study was unblinded after six months and the patients were followed for another four and a half years. The study results show that the most efficacious dosage of Diamyd was 20 μg. A five-year follow-up of the participants showed that the risk that a LADA patient will need to begin insulin treatment is significantly reduced after treatment with Diamyd compared to placebo treatment. Only 14 percent of the patients in the group that received 20 μg of Diamyd and completed the study needed insulin treatment five years after the initial injection, compared with 64 percent in the placebo group. No serious side effects from the treatment were reported during the five-year period. The results were presented at the European Association for the Study of Diabetes (EASD) meeting in September 2008, and were published in Diabetologia, the leading scientific diabetes journal in Europe, in April Phase II study Prevention of type 1 diabetes This is an ongoing Swedish researcher-initiated study in children at high risk of developing type 1 diabetes. The study includes a total of 50 children aged four and older. Half of the children receive two injections of Diamyd and half receive placebo. The aim is to evaluate whether vaccination with Diamyd can delay or halt the progression of the disease so that the children do not develop type 1 diabetes. The study is being conducted by a research group at Lund University and is led by Dr. Helena Elding Larsson, a pediatrician in Malmö and researcher at Lund University. Phase II study Type 1 diabetes This is an ongoing, researcher-initiated study of 126 patients from three years of age with newly diagnosed type 1 diabetes. The aim is to assess whether injections of Diamyd preserve the body s own beta cell function. In addition, the mechanism of action of the treatment is being studied in detail, and its effect on the immune system is being analyzed. This study is being conducted by the American network TrialNet, funded by the NIH (National Institutes of Health) and the NIDDK (National Institute of Diabetes and Digestive and Kidney Diseases). Diamyd has designed the clinical study protocol in collaboration with TrialNet. List of clinical development programs with Diamyd Phase & Country Skin prick test, Sweden 1995 Phase I, UK 1999 Year initiated Participants Age, years Type 1 diabetes patients and healthy individuals Adolescents N=15 Healthy individuals N=24 Phase IIa, Sweden 2000 LADA patients N=47 Phase IIb, Sweden 2005 Type 1 diabetes patients N=70 Phase IIb, Sweden 2004 LADA patients N=160 Phase III, Europe 2008 Phase III, USA 2008 Type 1 diabetes patients N=320 Type 1 diabetes patients N=320 Number of patients Trial period Purpose Trial period: 28 days. Completed. Trial period:10 weeks. Completed. Trial period: 6 months. Follow-up: 4,5 years. Completed. Trial period: 15 months. Follow-up: 15 months. Prolonged follow-up ongoing. Trial period: 18 months. Follow-up: 12 months. Completed. Trial period: 15 months. Follow-up: 15 months. In progress. Trial period: 15 months. Follow-up: 15 months. In progress. Safety Safety and tolerability Dose-finding, safety and efficacy Safety and efficacy Safety Safety and efficacy Safety and efficacy 18

21 BUSINESS AREA DIABETES FOR THE FIRST TIME DIAMYD IS TESTED AS A PREVENTIVE MEASURE IN CHILDREN WHO have NOT YET DEVELOPED DIABETES Long before type 1 diabetes is diagnosed, a process takes place in which the body s own immune system destroys the insulin-producing beta cells in the pancreas. When the classic symptoms of diabetes emerge, only a small proportion of the beta cell function remain. By measuring diabetes markers, known as autoantibodies, in the bloodstream, we can trace this process and thus predict which children are at an elevated risk of developing type 1 diabetes. In Skåne, we have been conducting annual follow-ups since 2000 on children with an elevated risk of developing type 1 diabetes, using blood tests to assess whether they have developed antibodies. Children who develop several different autoantibodies, and are thus at a significantly elevated risk of developing type 1 diabetes, are monitored every three months. However, we have not had any treatment to offer these children. It was therefore very encouraging when, in the spring of 2009, we were given the unique opportunity to start the DiAPREV-IT study Diabetes Prevention Immune Tolerance. This study tests the Diamyd drug candidate for the first time as a preventive measure in children who have not yet developed diabetes. By vaccinating the children with Diamyd, we hope to be able to halt the process in which the body s own immune system destroys the insulin-producing beta cells, thus preventing or delaying the onset of type 1 diabetes in the child. In a Phase II study from Linköping, Diamyd was shown to be able to preserve part of the insulin production that remains when type 1 diabetes is diagnosed. The children in the study will be monitored for five years A total of 50 children aged four and older with autoantibodies against GAD65 and a minimum of one other autoantibody are administered two doses of Diamyd or placebo. Children who develop diabetes and who have been administered placebo will receive Diamyd if diagnosed with diabetes. To date, 33 children have been included in the study and enrolment is currently in progress. The children will be monitored for five years by means of sampling and glucose tolerance tests to evaluate the beta cell function. As the main person responsible for DiAPREV-IT, it feels great to finally be able to offer children with autoantibodies and an elevated risk of developing diabetes a study in which we try to prevent type 1 diabetes. If the results show that Diamyd can halt the process that destroys the insulin-producing beta cells among children who have not yet developed diabetes and thus delay or even prevent the disease, this would be a unique and major gain for the child and the family as well as the society. Dr Helena Elding Larsson Pediatrician in Malmö, Sweden and researcher at Lund University, Sweden annual report 09/10 19

22 FUTURE MARKET POTENTIAL The market for Diamyd s diabetes products is global but primarily located in the Western world, where the prevalence of type 1 diabetes is at its highest. Since Diamyd does not provide forecasts, it will not speculate on the size of any future sales figures or profits. The initial target group for Diamyd is newly diagnosed type 1 diabetes patients. Researchers have found that the risk of diabetic complications can be percent lower in type 1 diabetes patients who still have some remaining beta cell function of their own 11). Based on this, together with information obtained from reports and publications about the prevalence and treatment costs of the various types of diabetes complications, Diamyd and its expert consultants estimate a potential saving to society of more than USD 15,000 in treatment costs per patient if the rate of certain common complications in type 1 diabetes can be reduced 12). If additional complications are included in the calculation, this saving could be considerably greater. And this figure does not include the reduction in lost working hours or, indeed, individual suffering. Such health economic calculations will be used to justify the future pricing of the treatment. Estimates based on data from reports and articles about the number of people of different ages who develop type 1 diabetes, as well as on the rate of increase in different regions, show that in the US and Europe alone about 80,000 people develop type 1 diabetes annually. 7) At an assumed selling price of USD 15,000 per treatment, the market for newly diagnosed type 1 diabetes would be worth more than USD 1 billion annually. In addition, patients with LADA are a significant future target group for Diamyd. Several studies and Diamyd s own clinical trials have shown that about 10 percent of all those diagnosed with type 2 diabetes actually have LADA 13). In 2007 it was estimated that around 246 million people worldwide have diabetes, of whom percent have type 2 diabetes 5). This translates into an estimated total of more than 20 million LADA sufferers worldwide. If Diamyd can be used to prevent the disease in individuals at high risk of developing type 1 diabetes, the estimated market potential would be significantly greater. PATENT PROTECTION Diamyd has secured exclusive patent licenses for the manufacturing and therapeutic use of GAD65 and the GAD65 gene from the University of California, USA, and the University of Florida, USA. In addition to patent protection the Diamyd candidate drug could be eligible for protection in Europe via data and market exclusivity for eight to eleven years after gaining marketing authorization by EMA, the European Medicines Agency, and up to twelve years after gaining marketing authorization in the US. In the US, the FDA has also granted Diamyd orphan drug designation. Orphan drugs are given market exclusivity for seven years in the US. Furthermore, Diamyd has submitted its own patent applications, which if approved, would further extend the patent protection. In addition to the exclusive rights to therapeutic use of GAD65, Diamyd licenses non-exclusive rights to GAD-based diagnostic applications. COMPETING PRODUCTS AND THERAPIES UNDER DEVELOPMENT No product in the market currently addresses the autoimmune process that causes type 1 diabetes and LADA. Accordingly, Diamyd defines its competitors as other diabetes treatments under development that aim to prevent or slow down the autoimmune attack on the blood sugar-regulating beta cells. Although this is a very active area of research and development, only two other main treatment strategies for type 1 diabetes can currently be regarded as competing with Diamyd. These, like Diamyd, have succeeded in reaching Phase III in clinical development. The two alternative competing strategies currently undergoing Phase III trials are the monoclonal anti-cd3 antibodies, specifically the drug candidate Otelixizumab, and the synthetic peptide DiaPep277. Recently, Macrogenics and Eli Lilly announced that their competing anti-cd3 antibody Teplizumab did not meet the endpoints set in a Phase III trial in type 1 diabetes and that they will stop the clinical development of Teplizumab for the treatment of type 1 diabetes. Otelixizumab Tolerx, Inc. is developing this monoclonal anti-cd3 antibody in collaboration with GlaxoSmithKline. Otelixizumab is an antibody to the CD3 receptor, which is present on all T cells. T cells are a sub-group of white blood cells called lymphocytes and represent an important part of our immune system. In type 1 diabetes, certain T cells, called effector T cells, mistakenly attack and destroy the beta cells of the pancreas. Treatment with an intravenous infusion of Otelixizumab temporarily destroys the T cells and weakens the immune system, a process called immunosuppression. DiaPep277 Andromeda Biotech Ltd, jointly owned by Clal Biotechnology Industries and Teva Pharmaceutical Industries, is developing a synthetic immunomodulatory peptide, DiaPep277, for the treatment of type 1 diabetes. This product is based on an immunodominant epitope from the autoantigen heat-shock protein 60 (hsp60). Like Diamyd s GAD65 molecule, this peptide modulates the immune system in type 1 diabetes, and could thereby reduce or prevent the destruction of the blood sugar-regulating beta cells. No effect was observed in a Phase II clinical trial in children with type 1 diabetes and Phase III trials are being conducted only in adult patients. 20

23 BUSINESS AREA PAIN BUSINESS AREA PAIN Business Area Pain consists of development projects that use the Company s patented NTDDS technology (Nerve Targeting Drug Delivery System) to introduce pain-relieving drugs into the nervous system. The pain portfolio includes the candidate drugs NP2 Enkephalin (Phase I), NG2 GAD (preclinical) and NE2 Endomorphin (preclinical). Drug Candidate Indication Preclinic Phase I Phase II Phase III BUSINESS AREA Pain NP2 Enkephalin NG2 GAD NE2 Endomorphin Cancer pain Diabetes pain Chronic pain Pain Pain is an unpleasant sensation that normally occurs when the body s tissues are damaged. Pain changes behavior and acts as a protective mechanism by, for example, stopping weight bearing on a broken leg and making the injury worse. Normal pain is triggered by activation of pain receptors on peripheral nerve endings. Noxious stimuli activate these receptors that send signals along the nerve through the spinal cord, where they are routed on to the brain. This type of normal and functional pain perception is termed nociceptive pain. Apart from accidental injury, nociceptive pain can also be caused by inflammation, such as in rheumatism or surgical procedures. In some conditions, pain can occur in the absence of any injury or following healing of an injury. If this pain results from a nervous system disorder, it is called neuropathic, or nerve pain. Phantom limb pains and sciatica are some examples of nerve pain. Nerve damage with consequent pain is a common complication of diabetes and is often called diabetes pain. Other causes of nerve pain include nerve damage due to direct trauma, back problems such as herniated disc, cancer, nerve infections such as shingles and herpes, and brain damage from stroke or MS. Allodynia and trigeminal neuralgia are examples of nerve pain in which the lightest of touches can trigger unbearable pain. If the damage is located in peripheral nerves that lie outside the brain and spinal cord, the resulting pain is called peripheral neuropathic pain. If, on the other hand, the damage occurs within the brain or spinal cord, the resulting pain is called central neuropathic pain. Nociceptive and neuropathic pain can be either acute or chronic. The pain is termed chronic if it lasts for three months or longer. Pain, by definition, implies considerable suffering. People who are in pain often lose interest in many or even all of the typical pleasures of life. Currently available treatments often cause sedation, and many patients are forced to choose between pain and alertness. In palliative care, many relatives find that drowsiness caused by pain-relieving medication impairs their ability to say their proper goodbyes to the patient. Cancer pain Cancer often causes pain. The WHO estimates that 40 percent of patients with cancer develop pain early in the course of their disease, and as many as 90 percent have debilitating pain in advanced stages. Cancer pain can be both nociceptive/inflammatory and neuropathic and is generally chronic in nature. The pain is often a combination of multiple pain types. Cancer may cause compression of, or direct damage to soft tissue, bone, muscle and nerves, and cancer treatments e.g. chemotherapy, radiation and surgery may also cause different types of pain. annual report 09/10 21

24 Diabetes pain Diabetes pain is a very common complication of diabetes. It is estimated that 50 percent of diabetes patients develop some form of diabetes-related nerve damage, which means that diabetes is one of the most common causes of neuropathy. The precise pathological mechanisms of diabetes pain are unclear, but it is quite clear that poorly controlled diabetes with consistently elevated and fluctuating blood sugar levels results in peripheral nerve damage. Diabetic vascular complication causes further damage to the nervous system by reducing blood flow to the nerves. The most common form of diabetic neuropathy is peripheral nerve damage, resulting in pain and associated loss of touch sensation and numbness of the feet, legs, hands and arms. Other forms that can affect diabetics include autonomic neuropathy, which can affect digestion, intestinal and bladder function, sweat regulation and sexual function, proximal neuropathy and focal neuropathy. The last two may cause pain and sudden weakness. Treatment There are several standard treatment options for nociceptive pain. One way is to eliminate the actual cause and stop the stimulation of pain receptors. Anti-inflammatory drugs reduce the production of the chemical agents that stimulate pain receptors. Alternatively, local anesthesia can prevent nerves from transmitting pain signals. And finally, opiate drugs such as morphine, act on the body s own paininhibiting receptors in the brain, spinal cord, and peripheral nerves. Commonly used painkilling drugs have little effect on neuropathic pain, for which other methods e.g. TENS (transcutaneous electrical nerve stimulation), antidepressant drugs and anti-epileptic drugs are used, often with limited effect. Surgical transection of nerves has also been tried, but with limited success and this can often makes matters worse. The lack of treatments for neuropathic pain constitutes a great unmet medical need. NTDDS NERVE TARGETING DRUG DELIVERY SYSTEM NTDDS is a patented technology for delivering drugs directly to the nervous system, and forms the basis of Diamyd s pain portfolio. Research and development based on the NTDDS platform is being carried out by the Company s subsidiary, Diamyd, Inc., focusing on the development of products and treatments for pain relief. Apart from its use in pain relief, the NTDDS technology is also targeting several other diseases of the peripheral and central nervous systems, e.g. peripheral neuropathy a condition for which there is currently no effective treatment. Local treatment using the NTDDS technique to deliver growth factors could prove very important clinically if it is able to protect nerve cells and stimulate their regeneration. Peripheral neuropathy is a common complication of diabetes. Erectile dysfunction (impotence) is one example of the consequences of neuropathy in men with diabetes or in men who have had prostate surgery. NTDDS could also be useful in the treatment of cancer of the nervous system, i.e. glioma, when it could be used to transport cellkilling substances directly to the malignant tumor. Glioma is a form of neurological cancer in which a malignant tumor develops from the glial cells of brain connective tissue. NTDDS delivers drugs directly to nerve cells NTDDS represents a new class of pharmaceutical products that delivers gene-based drugs directly to nerve cells, providing a direct effect in the cells targeted by the treatment. NTDDS carrying the gene for a painkilling substance such as human enkephalin, is injected into the skin over the painful area, and is transported along the local peripheral nerve fibers to the spinal cord where the drug exerts its effect by stopping the transmission of pain signals from the peripheral nerves to the nerves of the spinal cord. NTDDS uses the nerve cell s own processes for continually producing the painkilling substance locally on site at the spinal cord. As the drug is gene-based, one treatment can produce a long-term therapeutic effect. NTDDS has several advantages over other pain relieving therapies, as it is nerve specific and acts locally (the treatment does not enter the bloodstream), reducing the risk of side effects. NTDDS is not integrated into the chromosomes of the host cell and does not induce an immune reaction, reducing the risk of side effects compared to other gene therapy methods. CANDIDATE DRUGS IN DEVELOPMENT The Company s project portfolio in Business Area Pain consists of the candidate drugs NP2 Enkephalin, NG2 GAD and NE2 Endomorphin. These candidate drugs are based on treatment strategies that target the body s three most important pain signal pathways, with good potential, therefore, for the development of a competitive pain product portfolio. Pain signals can be inhibited in several ways at the synaptic junction between the peripheral and central nervous systems. Neurotransmitter substances in these synapses transfer information between nerve cells originating in the skin and internal organs and nerve cells in the spinal cord which connect with the brain. The body has its own painkilling system which is mediated by signals being sent down from the brain along nerve cells known as interneurons to the spinal cord, where substances such as endorphins and enkephalins are released, inhibiting the upward transmission of incoming peripheral pain signals to the brain. GABA (gamma-aminobutyric acid) also inhibits pain signal transmission. GABA is intimately associated with GAD (glutamic acid decarboxylase) which catalyzes the transformation of glutamate to GABA in the nervous system. Diamyd s pain products exploit this understanding of how the body itself relieves pain, by delivering natural painkilling substances, e.g. enkephalin, directly to the synapse between the peripheral and central nervous system. 22

25 BUSINESS AREA PAIN Nerve Targeting Drug Delivery System 1. The NTDDS vector carrying the gene for a pain relieving substance is injected into the skin at site of pain. 2. The NTDDS vector is taken up by nerve endings in the skin. 3. The NTDDS vector is transported along the body s nerve pathways to the spinal cord. 4. The NTDDS vector continuously produces the pain relieving substance at the spinal cord. 5. The pain relieving substance is released into the synapse between the peripheral and central nervous system and binds to pain inhibiting receptors. 6. The pain signal is stopped and is not transmitted to the central nervous system and the brain. Human nervous system Synapse in the spinal cord Pain area Nerve endings in the skin annual report 09/10 23

26 NP2 Enkephalin NP2 Enkephalin is the furthest developed candidate drug that uses the Company s NTDDS technology. It delivers the natural opioid enkephalin directly to the nervous system for the treatment of pain. NP2 Enkephalin is being evaluated in a clinical Phase I study of the treatment of chronic cancer pain. Based on the findings of the Phase I study, the Company has decided to carry out a multi-center, randomized, double blind, placebo controlled Phase II study of NP2 Enkephalin in the USA. The results of previous preclinical studies show that a single dose of NP2 Enkephalin provides effective relief of pain behavior for several weeks. The treatment works locally and may be repeated several times without causing habituation or tolerance to enkephalin. The treatment has not had any undesirable effects in preclinical studies, in contrast to conventional treatment such as morphine. Phase I study of NP2 Enkephalin A Phase I study of NP2 Enkephalin is in progress at five sites in the USA. This study is designed to evaluate the safety of NP2 Enkephalin and the NTDDS platform. Professor David Fink, Chair of the Department of Neurology at the University of Michigan, is the principal investigator. The study is an open label, dose-escalation study in patients with intractable pain due to malignant cancer. In addition to safety, data is being collected about pain relief and consumption of other painkilling medication. Three different dose levels have been tested, and at the four-week evaluation there were eight patients remaining in the study. Substantial and sustained pain relief was reported in the groups treated with the two highest doses. No serious side effects related to the treatment have been reported by any participant in the study. NG2 GAD The NG2 GAD candidate drug delivers GAD locally to nerve cells. In disease models it has been shown to be effective in the treatment of chronic neuropathic pain that can result from nerve damage such as spinal cord injury or diabetes. Preclinical studies of NG2 GAD are in progress and these are being funded by grants from the United States Department of Veterans Affairs. Clinical studies of diabetes pain are planned in NTDDS delivering GAD could also be used in the treatment of several other disease indications. NE2 Endomorphin The candidate drug NE2 Endomorphin is being developed for the treatment of chronic pain and delivers endomorphin locally to the painful area via the Company s NTDDS technology. Endomorphin is an opioid with morphine-like effects. Morphine has been used for centuries for pain relief and remains an important tool in modern clinical pain management but often does not achieve the desired effect in chronic severe pain because of habituation. Morphine has several problematic side effects, and locally acting endomorphin is thought to lack the systemic side effects of morphine itself. NE2 Endomorphin is currently in the preclinical phase. FUTURE MARKET POTENTIAL The total market for pain management reached USD 46 billion in 2007, and is expected to increase by over three percent annually to USD 57 billion by ). There is a great unmet medical need for new forms of treatment for the different types of chronic and neuropathic pain. Apart from inadequate and transient efficacy, current treatments of severe and chronic pain often have side effects and may lead to tolerance, habituation and abuse. Most companies that are developing new products for pain relief are focusing on improving formulations of existing substances where the patents have expired. New formulations may be more convenient to take, provide more rapid and long-lasting relief, and have fewer side effects. There are relatively few genuinely innovative pain relief projects in development. 38 million people are today thought to be suffering from neuropathic pain, of which nearly seven million have diabetes pain 15). Back pain is the most common form of neuropathic pain 15). The potential market for neuropathic pain is estimated to reach USD five billion by ). Nearly 30 million people are estimated to be suffering from cancer pain in the West, and this number is expected to increase in the future with the ageing population and improved cancer survival 15). The potential market for cancer pain is estimated to be more than USD two billion per annum 17). PATENT PROTECTION Diamyd has been granted exclusive rights to the NTDDS platform by the University of Pittsburgh, USA. The licensed patents and patent applications protect the NTDDS technology, production methods and components, e.g. cell lines and vectors. Patent protection in the USA is projected to last until at least European and Asian patent applications are being processed. 24

27 BUSINESS AREA PAIN WITH NTDDS WE HAVE CREATED AN INTUITIVE YET NOVEL PLATFORM FOR PAIN THERAPEUTICS Just over 15 years ago, a new idea was conceived for a novel way of distributing drugs via nerve pathways, laying the foundation for Diamyd s NTDDS platform. This idea provides the basis for all candidate drugs in the Company s pain portfolio. NTDDS stands for Nerve Targeting Drug Delivery System and is a gene-based drug delivery system which makes use of a vector to deliver drugs specifically into nerves. The vector is based on a common virus which naturally seeks out nerves. By modifying the virus, we have created a vector that, when injected into the skin, gains entry to local nerve endings and is then naturally transported along the nerves as far as the spinal cord. When it reaches the spinal cord, the vector starts to produce the drug with which it has been loaded, such as a painkiller that inhibits the transmission of pain signals to the spinal cord and brain. Using the natural attributes of the vector, combined with the body s own natural pain reliving systems we have created an intuitive yet novel platform for pain therapeutics. NTDDS research and development started at the University of Pitts burgh and has been moved forward by a dedicated research team that included David Krisky, James Wechuck and myself among many others. All three of us are now working for Diamyd, Inc., the American subsidiary of Diamyd Medical. Over the years we have construct ed and tested innumerable variants of vectors, cell lines, and manufacturing methods. Preclinical studies into a large number of diseases have been carried out Our research has primarily focused on developing the NTDDS platform, but it has simultaneously provided answers to many basic scientific questions and made important advances in the development of new research tools and methods. Preclinical studies into a large number of diseases have been carried out as part of the development of the NTDDS platform. These include pain, Parkinson s disease, cancer and nerve damage, to name but a few. All this work yielded a broad and layered patent portfolio related to the NTDDS platform. Nurel Therapeutics, Inc. was initially created to commercialize the NTDDS platform. Diamyd Medical became interested in the technology just after Nurel was established and acquired the business in The many synergies that were identified at that time have continued to be developed, resulting in the business that is now being run in Pittsburgh, USA. Diamyd, Inc. is the Diamyd group s research and development division, which is not only developing the NTDDS platform, but is also supporting the manufacture, preclinical and clinical development of the Diamyd candidate drug. It is gratifying to be associated with the dedicated team of innovative people within Diamyd committed to advancing biologics to treat significant unmet medical needs. Darren Wolfe CEO Diamyd, Inc. annual report 09/10 25

28 SCIENTIFIC AND MEDICAL ADVISORY BOARD Diamyd Medical has access to a Scientific and Medical Advisory Board composed of leading scientists from the US, the Netherlands, England and Sweden. The advisory board communicates and meets on a regular basis, discussing results that have been obtained, as well as research and development plans. The advisory board is an important information source for Diamyd, which often consults with individual members concerning medical and scientific questions that continually arise in Diamyd s activities. In addition, the members serve as Diamyd s ambassadors to researchers in academia and industry. The following individuals are members of the advisory board: BUSINESS AREA DIABETES Professor Mark Atkinson, Ph.D., USA, is the American Diabetes Association Eminent Scholar in Diabetes Research at the University of Florida. Atkinson was part of one of the first groups of researchers to identify the value of measuring immune responses against GAD in persons with type 1 diabetes. Atkinson holds positions on a number of scientific advisory boards/research panels including the Juvenile Diabetes Research Foundation ( JDRF), the American Diabetes Association (ADA) and the National Institutes of Health (NIH) in the USA. His research efforts have resulted in him being one of the five most cited authors in diabetes research as well as his receipt of the highest awards for research accomplishments from the JDRF and ADA. Atkinson s current research contributes to the understanding of the immunological mechanisms underlying the formation of diabetes, with his primary research goal involving the development of an effective method for preventing and reversing type 1 diabetes. Atkinson has been a member of the Scientific and Medical Advisory Board since Professor Daniel Kaufman, Ph.D., USA, is Professor in the Department of Molecular and Medical Pharmacology at the UCLA School of Medicine in Los Angeles, California, USA. Kaufman s current research is focused on GAD and its relation to diabetes. In a research paper in November 1993, Kaufman demonstrated that the administration of GAD to mice that would otherwise develop type 1 diabetes prevented the outbreak of this disorder. Kaufman was the first to clone a GAD gene, and his lab was the first to demonstrate that a GAD treatment could inhibit diabetes in mice with established autoimmune responses. Kaufman was a member of the group associated with Allan J. Tobin, which was the first to submit a patent application for the full cdna code for GAD, the patent portfolio that Diamyd Medical licenses. Kaufman has been a member of the Scientific and Medical Advisory Board since Professor Lars Klareskog, Ph.D., M.D., Sweden, is Professor of Rheumatology and Head of the rheumatology Research Laboratory at the Center for Molecular Medicine at Karolinska University Hospital/Karolinska Institute, Sweden. Klareskog s research is specifically aimed at the origin and treatment of autoimmune disorders. Klareskog has been a member of the Scientific and Medical Advisory Board since Professor Åke Lernmark, Med. D., Sweden, is Professor of Experimental Diabetes at Lund University in the Department of Clinical Sciences, at the University Hospital MAS in Malmo, Sweden. Lernmark s research is focused on diabetes, and at an early stage he identified the antigen that later proved to be GAD65. He and his colleagues were the first to clone GAD65 from human islets of Langerhans using biochemical methods, and was thus the first to define antibodies against GAD65 in patients with type 1 diabetes. Lernmark was also first to use molecular methods to identify HLA genes that are necessary, but not sufficient to develop the disorder. Lernmark has been a member of the Scientific and Medical Advisory Board since Professor David Leslie, M.D., Ph.D., U.K., is Professor of Diabetes and Autoimmunity at the Royal London and St. Bartholomew s School of Medicine, University of London. He has been involved in diabetes research and clinical studies since Since 1982 Leslie has been Director of the British Diabetic Twin Study, the world s largest twin study of its type, as well as Principal Investigator of the European Action LADA Consortium. By studying twins, Leslie has been able to show the possibilities for predicting and preventing autoimmune diabetes. Leslie has been a member of the Scientific and Medical Advisory Board since

29 SCIENTIFIC AND MEDICALADVISORY BOARD Professor Bart O. Roep, M.D., Ph.D., the Netherlands, is Associate Professor of Medicine and Director of the Division of Autoimmune Diseases at the Leiden University Medical Center in the Netherlands. He is also Director of the National Diabetes Expert Center for Immunoprotection. Roep has focused on the role of autoreactive T cells in diabetes by assessing human cellular immune responses, autoantigen identification, islet allograft rejection and the design and immunological monitoring of immunointervention strategies in clinical type 1 diabetes. Roep holds positions on a number of scientific advisory boards/research panels, including the Juvenile Diabetes Research Foundation International ( JDRF), the Dutch National Research Council, the European Union, the European Foundation for Diabetes Research (EFSD) and the National Institutes of Health (NIH) in the USA. Roep is also the founder and chair of the National Diabetes TrialNet Platform in the Netherlands. He has been a member of the Scientific and Medical Advisory Board since Professor Allan J. Tobin, PhD, USA, is Senior Scientific Advisor to the CHDI Foundation, a private not-for-profit research organization dedicated to finding therapies that slow the progression or delay the onset of Huntington s disease. Previously, Tobin was Eleanor Leslie Chair of Neuroscience and Director of the Brain Research Institute at UCLA, Los Angeles, USA. Until 2002, Tobin was also Scientific Director of the Hereditary Disease Foundation, which organized the identification of the gene that causes Huntington s disease. Tobin has specialized in the use of molecular methods for synthesis, function and breakdown of GABA, which serves as the major inhibitory signal in the brain and the pancreas. Tobin has been a member of the Scientific and Medical Advisory Board since BUSINESS AREA PAIN Professor Joseph Glorioso, Ph.D., USA, is a Professor in the Department of Molecular Genetics and Biochemistryat the University of Pittsburgh, Pennsylvania, USA. Glorioso is the founder and Director of the University of Pittsburgh Molecular Medicine Institute. Glorioso is a recognized expert on herpes simplex virus and gene therapy, and is the former president of the American Society for Gene. Glorioso is an inventor on several of the Diamyd NTDDS platform patents and was one of the founders of Nurel Therapeutics. Glorioso has been a member of the Scientific and Medical Advisory Board since Paul Kornblith, M.D. USA, is a Director of Pennsylvania BIO (Western PA) and a consultant to the Pittsburgh Life Sciences Greenhouse. Kornblith is the Founder and Chairman Emeritus of Precision Therapeutics, Inc. and the Chairman of Celsense Inc. Kornblith is an expert in neurology and neurooncology. He is the former Assistant Professor and Director of Neurooncology at Harvard University, the former Chief of Surgical Neurology at NIH-NIHDS/NCI and the former Vice Chairman and Professor of Neurosurgery at the University of Pittsburgh. Kornblith has been a member of the Scientific and Medical Advisory Board since Professor Hans Wigzell, MD, Ph.D., Sweden, is emeritus professor of immunology of the Karolinska Institutet with which he is still associated and where he was also the President from 1995 to In addition, Wigzell was Chairman of the Nobel Assembly at Karolinska Institute in 2000, and a scientific advisor to the Swedish government from 1999 to Wigzell also presently holds professorial chairs at the Ehime University in Japan and the University of Baltimore in the USA. He is currently the leader of the EU s major HIV vaccine research project (EUROPRISE). Wigzell is a Board member of Karolinska Development, Biovitrum AB, Raysearch AB, Probi AB and Intercell (Austria). He is a former member of the Diamyd Medical AB Board. annual report 09/10 27

30 ADMINISTRATION REPORT 2009/2010 The Board of Directors and Chief Executive Officer for Diamyd Medical AB (publ), corporate registration number with its registered office in Stockholm, Sweden, hereby presents its Administration Report regarding the operations of the Group and Parent Company for the fiscal year beginning September 1, 2009 and ending August 31, OPERATIONS Diamyd Medical is a Swedish pharmaceutical company that focuses on the development of pharmaceuticals for the treatment of autoimmune diabetes and pain. Diamyd s operations are divided into two business areas, Diabetes and Pain. The Diabetes business area consists of the Diamyd candidate drug for the treatment and prevention of autoimmune diabetes. The Pain business area consists of three drug candidates in clinical and preclinical phases for the treatment of chronic pain. GROUP STRUCTURE AND OWNERSHIPS The Diamyd Group consists of the Parent Company Diamyd Medical AB (publ) and wholly-owned subsidiaries, Diamyd Diagnostics AB, Diamyd Therapeutics AB and Diamyd, Inc., in Pittsburgh, USA. IMPORTANT EVENTS DURING THE FISCAL YEAR In September 2009 an initial analysis of new data from the follow-up on the children and adolescents with type 1 diabetes, who participated in the Company s Phase II study, showed that four years after treatment, those patients who received Diamyd and who had recently developed the disease when the study began, still had a better diabetes status than corresponding patients who received placebo. The safety data also continued to look promising, with no serious side effects associated with the treatment. In October 2009 Diamyd signed an agreement with Inclinix Inc. to accelerate the recruitment of patients for the US Phase III study of Diamyd. Inclinix is a global patient recruitment company with extensive experience in recruiting type 1 diabetes patients in the US. They recruit using directed Internet advertising, social media, regional recruitment staff and patient referrals from clinics close to the clinics participating in the study. The American recruitment campaign was launched in cooperation with Inclinix under the name DiaPrevent. In October 2009 Diamyd executed a settlement agreement with Apoteket AB regarding a clinical study of LADA patients, which was invalidated in Diamyd had claimed damages from Apoteket AB for unnecessary costs related to the invalidated study. The settlement agreement included a payment of MSEK 11 to Diamyd as compensation for the insufficiencies in Apoteket s routines and documentation causing Diamyd to invalidate the study. The payment of MSEK 11 has been received and been accounted as a revenue during the first quarter 2009/2010. During October and November 2009 a rights issue of just under MSEK 220 was oversubscribed. Subscriptions equal to a total sum of MSEK 384 was received. An extra shareholders meeting held October 7, 2009, decided, in accordance with the proposal put forward by the Board of Directors, to implement a new share issue of just under MSEK 220 with preferential rights for existing shareholders. Record day was October 14, 2009, and the Subscription period was October 16 30, Every twenty-five (25) existing shares entitled to subscription of seven (7) new shares. The issue price was SEK 70 per share. The additional capital was required to cover with margin the costs that the Company anticipated incurring up to spring 2011, when data from the current Phase III program is expected to be available, and to strengthen the Company s bargaining position in the current partnership negotiations. The Board of Directors then prepared a prospectus relating to the rights issue. In November 2009 the US Department of Veterans Affairs (VA) awarded a grant of MUSD 1.84 to support the development of Diamyd s Nerve Targeting Drug Delivery System (NTDDS) for Diabetic Neuropathic Pain. In November 2009 the last patient was included in the European Phase III study of Diamyd diabetes vaccine. 320 children and adolescents between the ages of 10 and 20 and recently diagnosed with type 1 diabetes have been identified and included in the Company s European Phase III study, and have received their first injection of Diamyd or placebo. In December 2009 the US FDA approved the experimental use of Diamyd in children down to three years of age in the TrialNet GAD study, enrolling 126 new onset type 1 diabetes patients in North America. The study, which is being conducted by an international network of leading endocrinologists and immunologists, had previ- 28

31 ADMINISTRATION REPORT ously received approval to recruit recent-onset type 1 diabetes patients between the ages of 16 and 45. In January 2010 Diamyd executed a division of the Company s shares (a split), meaning that each share was divided into two shares of the same class. Due to increased turnover in Diamyd Medical s B share, the Company s liquidity provider agreement with Mangold Fondkommission AB was terminated on March 5, A new liquidity provider has not been appointed. In March 2010 the US FDA granted Orphan Drug Designation of Diamyd Medical s lead drug candidate Diamyd in the USA. Orphan drugs qualify for seven years of market exclusivity from the date of US marketing approval, tax credits for clinical research and a waiver for FDA user fees. Diamyd accepted an offer from an investment fund managed from New York by a Swedish-American team to issue 291,667 new B shares in a direct placement at SEK 120 per share. The issue price corresponded to the average market price of the past 30 trading days. Total proceeds for Diamyd amounted to MSEK 35. The new shares represented 1.0 % of the capital and 0.7 % of the votes. The Board of Diamyd decided on the new issue based on the authorization given by the Annual General Meeting on December 11, In June 2010 Diamyd signed an agreement with Ortho-McNeil- Janssen Pharmaceuticals, Inc. (OMJPI), to develop and commercialize the Diamyd diabetes therapy. Diamyd received an upfront payment of MUSD 45, and under the terms of the agreement, Diamyd has the potential to receive additional development and sales milestone payments of up to MUSD 580, as well as tiered royalties on future sales. The parties will equally share costs for the development program until results from the ongoing EU Phase III study, expected in the first half of OMJPI has the right to fully assume responsibility for the development program upon reviewing the results. Following its strategy, Diamyd has secured exclusive rights for commercialization in the Nordic countries. Diamyd also retains the rights to the therapeutic use of the GAD65 gene and derivatives, fragments and variants of the GAD65 protein. IMPORTANT EVENTS AFTER THE END OF THE FISCAL YEAR In September 2010 Diamyd reported promising safety findings from Phase I study in chronic pain. No drug related Serious Adverse Events have been reported by any patient included in Diamyd s Phase I clinical trial investigating NP2 as a potential therapy for chronic pain. In October 2010 Diamyd reported that the Phase I study in chronic pain showed pain relief. Substantial and sustained reduction in pain scores were reported in the middle and high dose cohorts. The clinical Phase I study is intended to test the safety of NP2 Enkephalin and the NTDDS platform. In addition to safety, measurements of pain relief and concomitant pain medications were collected. The clinical trial was designed as an open label, dose escalation study in patients with intractable pain due to cancer. Three dose levels were investigated and eight patients were evaluable at the four week time point. Based upon the Phase I findings to date, the Company is planning a multi-center, randomized, double-blind, placebo controlled Phase II clinical trial with NP2 in the United States. In November 2010 Diamyd completed the screening of patients for the US Phase III study, DiaPrevent, ending the recruitment campaign. THE DIAMYD GROUP S REVENUES AND COSTS Net sales The Group s net sales amounted to MSEK (1.1) and included an upfront payment of MSEK 97.5 received on the signing of an agreement between Diamyd Medical AB and Ortho-McNeil-Janssen Pharmaceuticals, Inc. (OMJPI) for the development and commercialization of the antigen-based candidate drug Diamyd. The payment from OMJPI has been subjected to accrual accounting rules for the period until February 2011 in accordance with the Company s interpretation of IAS 18. Costs The Group s operating costs were MSEK (89.8). The cost increase is attributable to the expansion of internal and external resources to pursue the Company s global Phase III program. The Group s net loss The Group s net loss after financial items amounted to MSEK 0.3 (loss: 81.8). The Group s cash flow The Group s cash flow amounted to MSEK (negative 46.7). The improvement in the cash flow is primarily attributable to the upfront payment equivalent to MSEK in conjunction with signing the agreement between Diamyd Medical AB and Ortho-McNeil-Janssen Pharmaceuticals, Inc. (OMJPI) and new share issues totaling MSEK (28.1) after transaction costs. annual report 09/10 29

32 Cash and cash equivalents The Group s cash and cash equivalents, including short-term investments with a maturity of less than three months, amounted to MSEK (37.3) at August 31, During the years , the Group has raised funds from shareholders amounting to MSEK 702. Shareholders equity At August 31, 2010, shareholder s equity amounted to MSEK (70.7). Investments No investments were made during the year, except for a limited amount of office equipment. External research and development costs The Group s costs for research and development (R&D) were MSEK 80.8 (47.2). In accordance with the accounting policies being used, these costs were expensed on an ongoing basis rather than being capitalized in the balance sheet. Earnings from other shares and participations Diamyd Medical owns 19 % of Mercodia AB (Sweden). The Company has received dividends of MSEK 0.4 (0.4) from Mercodia this year. On the balance sheet date the carrying amount for this holding was MSEK 0.8. Diamyd Medical has a holding of 6.7 % after full dilution in Protein Sciences Corporation (US). On the balance sheet date, the carrying amount for this holding was MSEK Staff As of August 31, 2010, the Group had 24 (12) employees. The average number of employees during the year was 19 (14). The personnel are employed within the subsidiaries Diamyd Therapeutics AB 17 (9) and Diamyd, Inc. 7 (3). Personnel expenses for the Group were MSEK 31.2 (21.1). For additional information on the average number of employees, salaries, other remuneration and social security costs, see Note 5. Diamyd Medical AB (publ) parent company The Parent Company had net sales of MSEK (0). Profit before appropriations and tax amounted to MSEK 7.1 (loss: 82.3). Change in cash and cash equivalents totaled MSEK (negative 41.8). CLINICAL TRIALS A comprehensive Phase III program involving the Diamyd drug candidate is in progress in the US and Europe, encompassing children and adolescences with newly diagnosed type 1 diabetes. In addition to Diamyd s own clinical trials, a number of external studies of Diamyd are being conducted by independent researchers and research organizations. Diamyd has participated in the design of all of the external studies and has rights to the study results. Since the mid-1990s, Diamyd has completed several preclinical trials and four clinical trials, including a Phase II trial in LADA patients and a Phase II trial in children and adolescenses with type 1 diabetes. The Phase II trial in children and adolescenses with type 1 diabetes has been extended to follow the study participants for a total of seven years. Phase III program Type 1 diabetes Two parallel Phase III studies of the Diamyd diabetes vaccine are being conducted in nine European countries and the US. Both studies are randomized, double-blind and placebo controlled. Approximately 320 newly diagnosed type 1 diabetes patients between 10 and 20 years old are included in each study. The purpose of the Phase III studies is to confirm and evaluate the ability of the Diamyd treatment to halt or slow the autoimmune destruction of the beta cells in the pancreas, thereby preserving the body s own ability to control the blood sugar in people with type 1 diabetes. Each study includes three treatment arms in which one third of the patients are treated with two injections of Diamyd 20μg (days 1 and 30) as well as two injections of placebo; one third are treated with four injections of Diamyd 20μg (days 1, 30, 90 and 270); and one third receive four injections of placebo. The results from each study will be analyzed 15 months after all patients have received their first injection. If the studies have a positive result, they will be used for market registration. Professor Johnny Ludvigsson of the Linköping University Hospital in Sweden is the lead investigator for the European study, while Professor Jerry Palmer of the University of Washington in Seattle is the lead investigator for the US study. Phase II study Type 1 diabetes During 2005 to 2007 a 30-month randomized, double-blind, placebocontrolled Phase II study of Diamyd was carried out, encompassing 70 children and adolescents between 10 and 18 years old with type 1 diabetes. Significant long-term efficacy in slowing the destruction of 30

33 ADMINISTRATION REPORT beta cell function, i.e. the body s own capacity to control blood sugar, was demonstrated. The treatment was well received by patients, their doctors, and family members. No serious side effects related to the Diamyd treatment were reported in the study. The study was published in autumn 2008 in The New England Journal of Medicine. The study has now been extended to in total seven years with the purpose of confirming the long-term effects of the treatment. Follow-up of Phase II study Type 1 diabetes In February 2009, Diamyd received approval from the Swedish Medical Products Agency to conduct a follow-up study on the children and adolescents with type 1 diabetes who participated in the Phase II study of Diamyd. An analysis of the data shows that those patients who had received Diamyd, and who had recently developed the disease when the study began, still had a significantly better diabetes status than corresponding patients who had received placebo, even four years after treatment. The safety data also continued to look promising, with no serious side effects associated with the treatment. The patients will also be monitored to track their quality of life and diabetes complications. The study participants will be followed for a total of seven years. Phase II study LADA Diamyd has completed a randomized, double-blind, placebocontrolled Phase II study encompassing 47 LADA patients, where various doses of Diamyd were tested. Depending on their study arm, the patients received two injections of either 4, 20, 100 or 500 μg Diamyd or placebo at a four-week interval. The study was unblinded after six months and the patients were followed for another four and a half years. The study results show that the most efficacious dosage of Diamyd was 20 μg. A five-year follow-up of the participants showed that the risk that a LADA patient will need to begin insulin treatment is significantly reduced after treatment with Diamyd compared to placebo treatment. Only 14 percent of the patients in the group that received 20 μg of Diamyd and completed the study needed insulin treatment five years after the initial injection, compared with 64 % in the placebo group. No serious side effects from the treatment were reported during the five-year period. The results were presented at the European Association for the Study of Diabetes (EASD) meeting in September 2008, and were published in Diabetologia, the leading scientific diabetes journal in Europe, in April Phase II study Prevention of type 1 diabetes This is an ongoing Swedish researcher-initiated study in children at high risk of developing type 1 diabetes. The study includes a total of 50 children aged four and older. Half of the children receive two injections of Diamyd and half receive placebo. The aim is to evaluate whether vaccination with Diamyd can delay or halt the progression of the disease so that the children do not develop type 1 diabetes. The study is being conducted by a research group at Lund University and is led by Dr. Helena Elding Larsson, a pediatrician in Malmö and researcher at Lund University. Phase II study Type 1 diabetes This is an ongoing, researcher-initiated study of 126 patients from three years of age with newly diagnosed type 1 diabetes. The aim is to assess whether injections of Diamyd preserve the body s own beta cell function. In addition, the mechanism of action of the treatment is being studied in detail, and its effect on the immune system is being analyzed. This study is being conducted by the American network TrialNet, funded by the NIH (National Institutes of Health) and the NIDDK (National Institute of Diabetes and Digestive and Kidney Diseases). Diamyd has designed the clinical study protocol in collaboration with TrialNet. ENVIRONMENTAL AND ETHICAL POLICIES AND QUALITY ASSURANCE Diamyd s primary focus is the development of pharmaceuticals for autoimmune diabetes, a chronic disease in great need of new treatment regimens. The Company s vision is to be able in the future to prevent the disease from manifesting, and to cure patients who have already developed the disease. Diamyd s responsibility towards society and the patient is part of its business as a research pharmaceutical company, and influences its work in developing new pharmaceutical products and performing clinical trials. Diamyd s work has a great effect on people s lives and health, so it is of the utmost importance for Diamyd to not only follow applicable laws and regulations, but also to act in a manner that is responsible and ethically proper. Pre-clinical and clinical studies of Diamyd s substances or products are conducted in cooperation with partners, such as contract research organizations or research groups associated with universities. The studies should always be designed in consultation between Diamyd annual report 09/10 31

34 and its partners, and approved by Diamyd. The Company s clinical trials are conducted in accordance with Good Clinical Practice (GCP), and they are managed in cooperation with well-established contract research organizations. The performance and purchase of study-related services are regulated according to special process descriptions, i.e. Standard Operating Procedures, as well as quality agreements, in order to ensure that Diamyd s trials are always conducted according to applicable practice and that laws and regulations are followed. Diamyd always strives to maintain a high level of environmental awareness throughout its entire business. Diamyd does not do any manufacturing itself, and its direct environmental impact is considered to be low. However, like most other companies, its business causes a certain degree of impact on the environment, primarily through emissions for travel and shipments as well as energy consumption for its offices. In addition some environmental impact may occur in connection with the manufacture of the Company s products by external manufacturers, as well as from outsourced research activities. To ensure that Diamyd strives to conduct its activities with the smallest possible environmental impact, both in its operational activities and in cooperation with manufacturers, researchers and other partners, Diamyd pursues its work according to an established environmental policy. The policy is revised on an annual basis to consider how the Company s environmental efforts can be improved. PRINCIPLES FOR REMUNERATION FOR MANAGEMENT Principles applied to remuneration and other terms of employment for the CEO and other key executives are that the total remuneration package is according to market conditions and is a weighted-mix of salary, pension benefits or other benefits as well as terms for notice. Diamyd has no bonus program. The Board proposes that the same guidelines should be in force next year as those adopted at the 2009 AGM. These are proposed to apply for the year, and they are subject to approval at the AGM. OPTION PROGRAM Employee stock option program 2007/2010 On December 11, 2007, the Annual General Meeting of Diamyd Medical AB (publ) approved an employee stock option plan comprising 200,000 employee stock options. This was a modification to the employee stock option plan that was approved at the extraordinary shareholders meeting in May, (For more information about the employee stock option plan approved on May 22, 2007, see the 2006/2007 annual report.) The issue price for shares was set at SEK 81 per share and the options were received free of charge. The employee stock options vest annually over one, two and three years and are exercisable from November 15, 2008, November 15, 2009, November 15, 2010 and until December 31, 2010, assuming continued employment. The cost of the employee stock option program is at market rates and the Black & Scholes model for option pricing was used for the valuation. At August 31, 2010, 73,409 options were still outstanding. After the fiscal year s new share issues and split, the issue price has been adjusted to SEK and each option entitles the holder to 2.26 shares. Employee stock option program 2008/2011 On December 11, 2008, the Annual General Meeting of Diamyd Medical AB (publ) approved an employee stock option plan totaling 220,000 employee stock options in Diamyd Medical. The issue price for shares was set at SEK 66 per share for the stock options, which were allocated free of charge. One-third of the program is exercisable on November 15, 2009 another third on November 15, 2010 and the final third from November 15, 2011 until December 31, In addition to the 166,650 options that have been allocated to employees and management, Group subsidiaries have subscribed for 53,350 options intended to be used to cover the social security expenses that can arise from the option program when the options are exercised by their holders. Valuation of the program has been carried out in accordance with the Black & Scholes method and the primary parameters have been volatility 49 % and the issue price of SEK 66 per share. Interest rates comparable to a one-year treasury bill and two-year and three-year government bonds have been utilized for calculating costs. At August 31, 2010, 150,700 options were still outstanding. After the fiscal year s new share issues and split, the issue price has been adjusted to SEK Each option entitles the holder to subscribe for 2.26 shares. Employee stock option program 2009/2012 on December 11, 2008, the Annual General Meeting of Diamyd Medical AB (publ) approved an employee stock option plan totaling 580,000 employee stock options in Diamyd Medical. The issue price 32

35 ADMINISTRATION REPORT for shares was set at SEK 124 per share for the stock options, which were allocated free of charge. One-third of the program is exercisable on November 15, 2010 another third on November 15, 2011 and the final third from November 15, 2012 until December 31, In addition to the 353,200 options that have been allocated to employees and management and the 80,800 that have as yet to be allocated, Group subsidiaries have subscribed for 146,000 options intended to be used to cover the social security expenses that can arise from the option program when the options are exercised by their holders. Valuation of the program has been carried out in accordance with the Black & Scholes method and the primary parameters have been volatility 51 % and the issue price of SEK 124 per share. Interest rates comparable to a one-year treasury bill and two-year and threeyear government bonds have been utilized for calculating costs. At August 31, 2010, 353,200 options were still outstanding. risk factors Development of a medicinal drug often takes a considerable time, is capital intensive and associated with great levels of uncertainty due to its dependence on unpredictable and complex parameters regarding the course of biological and medical processes. The following risks comprise internal and external factors that can affect Diamyd s development and growth. Uncertainty regarding whether and to what extent these factors could affect Diamyd s operations or financial position constitutes a risk. Commercial risk and development risk No guarantee can be given that Diamyd s research and development projects will lead to commercially viable drugs. No guarantee exists either for the Company s clinical trials resulting in products that can be launched in the market or that they will achieve commercial success. Financing risk At present, Diamyd has no products in the market and the business is therefore not profitable. The Company may therefore need to return to the capital markets in the future to raise funds to ensure the future of the business and of research and development projects. No guarantees are available regarding the requisite financing being in place on a timescale and cost that is acceptable to Diamyd. For more information, see Note 16, page 56 for a statement regarding the Group s financial risks and risk management. Risk regarding intellectual property rights There are no guarantees that the Company will develop products that can be patented, nor that granted or licensed patents can be retained, renewed, or provide sufficient protection for current or future discoveries. There is no guarantee that disputes concerning contracts and patents will not arise, or that disputes that do arise can be resolved to the Company s advantage. Risk regarding key personnel Diamyd Medical is dependent on its staff and certain key personnel. Diamyd s organizational model consisting of a small number of staff leading projects in clinical and preclinical research, regulatory issues and production, sets high requirements for broad leadership skills and specialist knowledge. There is a risk that the Company s projects will be delayed or cannot be completed if key personnel leave the Company or, for any reason, cannot complete their duties. In addition, there is a risk that the Board of Directors, the management or key personnel may negatively impact the Company through incorrect decisions. Risk regarding collaboration and licensing Diamyd s strategy builds on development projects being licensed to collaborative partners on reaching a certain stage in their development. The Company may also assume projects or products under license. No guarantees exist that Diamyd will, in the future, succeed with obtaining collaboration agreements and/or license agreements under advantageous business terms for Diamyd. Risks regarding government agency decisions The risk cannot be discounted of the regulatory approval process at government agency level changing in regard to requirements regarding details, the scope of the documentation or some other area. Such decisions can be applied generally to the industry or applied to Diamyd in particular and may entail increased costs and delays in projects or even lead to project cancellations. Legal risk Diamyd s success depends on the Company successfully monitoring its intellectual property rights including patents and other rights regulated by agreement. From time to time, this entails the Company being forced to pursue litigation. It cannot be guaranteed that such disputes can be resolved advantageously for the Company. annual report 09/10 33

36 Assets whose value entails risk Investment in Protein Sciences Corporation At August 31, 2010, the Company owned 6.7 % of the shares of Protein Sciences Corporation. The value of this asset depends on Protein Science s business proceeding according to plan. For further information, see Note 16 and 30. Investment in Mercodia AB At August 31, 2010, the Company owned 19.0 % of the shares of Mercodia AB. The value of this asset depends on Mercodia AB s business proceeding according to plan. The NTDDS research and development project The variables that are most sensitive when estimating the value of this asset are the likelihood that the project will reach commercial viability and the discount factor. The impairment test that was conducted in the third quarter did not show any impairment requirement. For further information, see Note 12. THE SHARE AND SHARE CAPITAL At August 31, 2010, the share capital of Diamyd Medical amounted to SEK 29,060,277 (22,364,944 adjusted after split 09/10), divided among 27,622,401 (21,241,602 adjusted after split 09/10) shares of Series B (1/10 vote) and 1,437,876 (1,123,342 adjusted after split 09/10) shares of Series A (one vote), with each Series A and B share having a quotient value of SEK 0.5. The stock is denominated in Swedish kronor (SEK). GROUP STRUCTURE AND OWNERSHIP At August 31, 2010, the number of shareholders was 6,829 (4,938). The ten largest shareholders held Diamyd Medical shares corresponding to 65 % (65) of the capital and 76 % (76) of the votes. Series B and A shares can be transferred freely. According to a shareholders agreement between the main holders Bertil Lindkvist and Anders Essen-Möller, the sole Series A holder, Anders Essen-Möller may not transfer shares of Series A to a third party (inheritance transfer excepted) unless the third party buyer concurrently commits to offer to purchase series B shares on the same financial terms and conditions. The shareholders with more than a 10 % share of voting power are Bertil Lindkvist, % and Anders Essen-Möller, %. THE GROUP S FUTURE DEVELOPMENT Diamyd Medical intends to continue to focus on building shareholder value. The Company is conducting Phase III studies, which are necessary for market approval. At the end of the year, Diamyd Medical had MSEK in cash and cash equivalents. The Board of Directors and CEO assessment is that existing cash and cash equivalents cover the Company s need for capital for the coming 12-month period by a comfortable margin. PROPOSED ALLOCATION OF AVAILABLE FUNDS The Parent Company s available funds according to the balance sheet: KSEK Share premium reserve, non-restricted 337,442 Retained earnings -138,767 Net profit for the year 5,154 Available funds 203,829 The Board of Directors proposes that the Parent Company s accumulated profit of KSEK 5,154 is carried forward to a new account. The Company s result for the fiscal year and financial balance at August 31, 2010 are presented in the attached income statement, balance sheet, cash flow statement and compilation of changes in shareholders equity with accompanying notes. DIVIDEND The Board proposes that no dividend should be paid for fiscal year 2009/

37 financial information CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Sep-Aug Sep-Aug KSEK Note 09/10 08/09 OPERATING INCOME Net sales 1, 2 113,028 1,105 Other operating income 18,330 4,295 Total operating income 131,358 5,400 OPERATING EXPENSES Raw materials and consumables External research and development costs -80,845-47,218 External patent and license expenses -2,916-3,836 Personnel 5, 6-31,215-21,059 Other external expenses 7, 8-19,095-17,515 Depreciation, equipment Total operating expenses -134,321-89,773 OPERATING LOSS -2,963-84,373 FINANCIAL INCOME AND EXPENSES Dividend from other bonds Financial income 10 2,278 2,435 Financial expenses Total financial income and expenses 2,687 2,570 Loss before taxes ,803 Taxes NET LOSS FOR THE PERIOD ,945 Other comprehensive income for the period Translation gains/losses Other comprehensive income for the period, net of tax TOTAL COMPREHENSIVE INCOME FOR THE PERIOD ,056 Earnings per share before and after dilution, SEK Number of shares 3 29,060,277 22,364,944 Average number of shares before dilution 3 27,595,347 22,001,696 Average number of shares after dilution 3 27,595,347 22,001,696 annual report 09/10 35

38 CONSOLIDATED STATEMENT OF FINANCIAL POSITION Aug 31, Aug 31, KSEK Note ASSETS Non-current assets Intangible assets 12 16,627 16,627 Tangible assets Financial assets 13 30,678 21,418 Total non-current assets 48,160 38,410 Current assets Inventory Trade receivables 1,721 4 Other receivables 1,768 1,603 Prepaid tax 822 Prepaid expenses and accrued income 15 16,195 3,018 Financial assets that can be sold 30 7,841 Liquid assets 4 501,332 37,287 Total current assets 521,033 50,600 TOTAL ASSETS 569,193 89,010 SHAREHOLDERS EQUITY AND LIABILITIES Shareholders equity Share capital 25, 26, 27, 28 14,530 11,183 Other capital contributions 687, ,924 Other reserves Accumulated losses including results for the period -387, ,550 Total shareholders equity 314,783 70,717 Current liabilities Trade payables 7,083 11,651 Other payables 1, Prepaid income and accrued expenses ,893 5,673 Total current liabilities ,410 18,293 TOTAL EQUITY AND LIABILITIES 569,193 89,010 36

39 financial information CONSOLIDATED STATEMENT OF CHANGES IN EQUITY KSEK Share Capital Other capital contributions Reserves Accumulated losses Total Opening balance, September 1, , , , ,776 Comprehensive income Net loss for the year -81,945-81,945 Other comprehensive income Translation gains/losses Total comprehensive income ,945-82,056 Transactions with owners New share issue, before expenses ,809 28,090 New share issue expenses Employee options, see Note 26, 27, 28 3,907 3,907 Closing balance, August 31, , , ,550 70,717 Opening balance, September 1, , , ,550 70,717 Comprehensive income Net loss for the year Other comprehensive income Translation gains/losses Total comprehensive income Transactions with owners New share issue, before expenses 3, , ,531 New share issue expenses -19,670-19,670 Employee options, see Note 26, 27, 28 5,551 5,551 Closing balance, August 31, , , , ,783 annual report 09/10 37

40 parent company s income statement Sep-Aug Sep-Aug KSEK Note 09/10 08/09 OPERATING INCOME Net sales 2 112,039 Other operating income 3,267 4,048 Total operating income 115,306 4,048 OPERATING EXPENSES Personnel Other external expenses 7, 8-29,207-16,896 Other operating expenses Total operating expenses -29,796-17,170 OPERATING LOSS 85,510-13,122 FINANCIAL INCOME AND EXPENSES Results from group participation 21, 29-81,308-71,828 Dividend from holdings Interest income and similar items 10 2,499 2,554 Interest expense and similar items Total financial income and expenses -78,399-69,134 Earnings before taxes 7,111-82,256 Taxes 11-1,957 NET PROFIT/LOSS FOR THE PERIOD 5,154-82,256 38

41 financial information PARENT COMPANY S BALANCE SHEET KSEK Note Aug 31, 2010 Aug 31, 2009 ASSETS Non-current assets Intangible assets Acquired research and development 12 16,627 16,627 Financial assets Shares in Group companies 23 1,200 1,200 Receivables at Group companies 24 20,612 3,970 Other long-term bond holdings 13 21,418 21,418 Other long-term receivables 13 9,260 Total non-current assets 69,117 43,215 Current assets Other receivables Prepaid expenses and accrued income 15 15,591 1,117 Financial assets that can be sold 30 7,841 Total trade and other receivables 15,743 9,158 Liquid assets 4, 16,17 478,882 26,138 Total current assets 494,625 35,296 TOTAL ASSETS 563,742 78,511 SHAREHOLDERS EQUITY AND LIABILITIES Shareholders equity Restricted equity Share capital 25, 26, 27, 28 14,530 11,183 Statutory reserve 96,609 96,609 Non-restricted equity Share premium reserve non-restricted 337, ,928 Profit or loss brought forward -138,767-56,576 Net profit/loss for the period 5,154-82,256 Total shareholders equity 314,968 70,888 Liabilities to subsidiary 22 17,515 5,625 Current liabilities Trade payables Prepaid income and accrued expenses ,961 1,021 Total current liabilities 231,259 1,998 TOTAL EQUITY AND LIABILITIES 563,742 78,511 Assets pledged Contingent liabilities annual report 09/10 39

42 CHANGE IN SHAREHOLDERS EQUITY PARENT KSEK Share Capital Statutory reserve Share premium reserve non restricted Accumulated losses Total shareholder s equity Opening balance, September 1, ,902 96,609 74,120-60, ,147 New share issue, before expenses ,809 28,090 New share issue expenses Employee options, see Note 26, 27, 28 3,907 3,907 Net loss of the period -82,255-82,255 Closing balance, August 31, ,183 96, , ,832 70,889 Opening balance, September 1, ,183 96, , ,832 70,889 Group contribution -7,444-7,444 Tax effects on group contribution 1,957 1,957 New share issue, before expenses 3, , ,531 New share issue expenses -19,670-19,670 Employee options, see Note 26, 27, 28 5,551 5,551 Net profit of the period 5,154 5,154 Closing balance, August 31, ,530 96, , , ,968 40

43 financial information CONSOLIDATED STATEMENT OF CASH FLOW KSEK GROUP Sep-Aug Sep-Aug 09/10 08/09 Parent Company Sep-Aug Sep-Aug 09/10 08/09 Cash flow from operations before changes in working capital Operating profit/loss -2,962-84,373 85,509-13,122 Interest received 1,402 2,204 1,620 2,857 Interest paid Dividend received Non-cash flow items Depreciation Other non-cash flow items ,773 Income tax paid Net cash flow from operating activities before changes in working capital -1,856-80,946 88,175-11,898 Increase (-) decrease (+) inventory Increase (-) decrease (+) receivables -14,749-2,621-14, Increase (+) decrease (-) liabilities 242,370 8, ,175 1,186 Net cash flow from operating activities 225,774-74, ,384-11,366 Cash flow from investing activities Shareholders' contribution -81,308-67,921 Change in long-term subsidiary balances -4,751 10,089 Purchase of tangible assets Purchase of financial assets -732 Cash flow from investing activities ,059-58,564 Cash flow from financing activities Option premiums New share issue 238,861 28, ,861 28,090 Group contribution recieved/paid -7,442 Cash flow from financing activities 238,861 28, ,419 28,090 Total cash flow for the period 463,935-46, ,744-41,840 Cash and cash equivalents at beginning of period 37,287 81,890 26,138 67,978 Net foreign exchange difference 110 2,094 Cash and cash equivalents at end of period, see Note 4 501,332 37, ,882 26,138 annual report 09/10 41

44 ACCOUNTING POLICIES GROUP Diamyd prepares its consolidated financial statements in accordance with International Financial Reporting Standards, IFRS, as endorsed by the EU. In addition to IFRS, the Group also observes the Swedish Financial Reporting Board, RFR s, recommendations RFR 1.3 (Supplementary accounting rules for groups), RFR s statements and the Swedish Annual Accounts Act. The Diamyd Group presents its income statement by cost class, implying that operating costs are divided between external research and development costs, other external costs and personnel costs as well as depreciation, amortization and impairment. The key accounting principles applied in the preparation of these consolidated financial statements are specified below. These are the same principles as applied in the 2008/2009 Annual Report and have been consistently applied to all years reported unless stated otherwise. PARENT COMPANY Diamyd Medical AB, domiciled in Stockholm, continues to apply those accounting principles relevant to legal entities that prepare consolidated financial statements and are listed on a stock exchange. In brief, this means that the Company continues to apply the statements by the Swedish Financial Reporting Board, to the extent that they are appropriate for a Parent Company. Accordingly, Diamyd Medical AB observes RFR 2.3, Accounting for legal entities. The Parent Company s accounting principles are consistent with the Group s unless stated otherwise below. Pursuant to RFR 2, the Parent Company should structure its reports in accordance with all applicable IFRS/ IAS regulations unless the standards state an exception from their application. On November 24, 2010, the Board of Directors approved this Consolidated Financial Statement for publication. CONSOLIDATED FINANCIAL STATEMENTS The Group comprises the Parent Company Diamyd Medical AB, the wholly-owned Swedish subsidiaries Diamyd Therapeutics AB and Diamyd Diagnostics AB and the US subsidiary Diamyd, Inc. The consolidated financial statements have been prepared according to the cost method, except for revaluations of financial instruments available for sale, which are valued at fair value. Subsidiaries are all of the companies for which the Group has the right to establish financial and operative strategies in a way that usually follows with a holding in shares of more than 50 % of the total voting rights. The existence and effects of potential voting rights that may currently be utilized or converted are considered when assessing whether the Group has a controlling influence over another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given in the form of payment, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group s share of the identifiable net assets, liabilities and contingent liabilities acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets, liabilities and contingent liabilities of the subsidiary acquired, the difference is recognized directly in the income statement. Intra-group transactions and balance sheet items, as well as unrealized profits and losses on transactions between companies are eliminated. The accounting principles for subsidiaries have been altered where appropriate in order to guarantee that the Group principles are applied consistently. FOREIGN CURRENCY TRANSLATION Functional currency and presentation currency Diamyd has a foreign subsidiary, Diamyd, Inc. Items included in the financial reports for this entity within the Group are valued in the currency used in the primary economic environment in which the Company operates (functional currency). The Swedish krona (SEK), which is the Parent Company s functional and presentation currency, is utilized in the consolidated financial statements. Transactions and balances Foreign currency transactions are translated to the functional currency using the exchange rates prevailing on the transaction date. Foreign exchange gains and losses resulting from the settlement of such transactions, and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies, are recognized in the Income statement. Gains and losses on trading receivables and liabilities are recognized net under other operating income or other operating costs. Group companies The results and financial positions of all the group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (I) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; (II) income and expenses for each income statement are translated at average exchange rates. If the average exchange rate is not a reasonable estimate of the year s total exchange rate differences from each transaction day, income and expenses for each transaction day are translated instead and (III) all resulting exchange differences are recognized as a separate component of equity. 42

45 ACCOUNTING POLICIES FINANCIAL INSTRUMENTS, ACOUNTING, DISCLOSURE AND CLAsSIFICATION At every balance sheet date, the Group evaluates whether there is objective evidence of any impairment requirement for a financial asset or a group of financial assets. Regular purchases and sales of financial assets are recognized on the trade date the date on which the Group commits to purchase or sell the asset. Financial instruments are initially recognized at fair value plus transaction costs. Financial assets are derecognized from the balance sheet when the rights to receive cash flows from the instruments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. FINANCIAL ASSETS VALUED AT FAIR VALUE IN THE INCOME STATEMENT Financial assets valued at fair value in the income statement are financial assets that are held for trade. A financial asset is classified in this category if it was acquired with the primary objective of being sold in the near future. Derivatives are classified as being held for trade if they are not identified as hedging instruments. The assets in this category are classified as current assets. On the balance sheet date, the Group does not recognize any financial instruments in the balance sheet valued at fair value in the income statement. FINANCIAL ASSETS AVAILABLE FOR SALE Financial assets available for sale are assets that are not derivatives and are identified as sellable or not classified in some other category. They are included in non-current assets as long as management does not intend to dispose of the assets within 12 months of the balance sheet date. Investments in companies, with the exception of companies classified as associated companies, are recognized through equity at market value. Dividends on shares that can be sold are recognized in the income statement as a dividend from other securities when the Group s right to receive the payment has been established. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include the use of recent arm s length transactions, reference to the fair value of other instruments that are substantially the same, discounted cash flow analysis and option pricing models, making maximum use of market inputs and relying as little as possible on entity-specific inputs. Changes in the fair value of securities in foreign currencies that are classified as financial assets available for sale are divided between translation differences due to changes in the securities accrued acquisition value and other changes in the securities carrying amount. Translation gains/losses attributable to changes in the accrued historical cost are recognized in the income statement, while other changes to reported value are recognized in equity. When securities that are classified as financial assets available for sale are sold or impaired, the accumulated adjustments to fair value are transferred from equity to the income statement as profits and losses from financial instruments. In the case of shares classified as available for sale, a significant or prolonged decline in the fair value of the share below its cost is considered as an indicator that an impairment requirement exists. If any such evidence exists for financial assets available for sale, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the income statement is removed from equity and recognized in the income statement. Impairment losses on equity instruments recognized in the income statement are not reversed through the income statement. Short-term investments in the balance sheet are classified as financial assets available for sale and fair value adjustments are accounted for directly in equity through the change in shareholders equity, except for impairments and currency gains (losses), until the financial assets are derecognized at which date the accumulated gains or losses that had previously been recognized in shareholders equity are recognized in the income statement. CASH AND CASH EQUIVALENTS Cash and cash equivalents includes cash, cash in banks and other short-term investments with maturity dates within three months of their acquisition date. LOANS AND RECEIVABLES Accounts receivable are non-derivative financial assets, with determined or determinable payments that are not listed on an active market. Their distinguishing feature is that they arise when the Group provides funds, goods or services directly to a customer without any intention to trade in the resulting receivable. They form part of current assets, except for items with maturities more than 12 months from the balance sheet date, which are classified as non-current assets. Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The amount of the provision is recognized in the income statement. Other receivables, and where applicable interim receivables, are recognized pursuant to the same principles ACCOUNTS PAYABLE Accounts payable are initially recognized at fair value and thereafter at amortized cost. EMPLOYEE STOCK OPTION PLANS Scope As of balance sheet date, Diamyd has three outstanding employee stock option plans. Upon conversion/exercise, cash and cash equivalents would increase by the exercise/conversion price and the share capital by a nominal SEK 0.5 per share, with the remaining deposited annual report 09/10 43

46 amount increasing other capital contributions. For more details on the various effects of each plan and the number of outstanding options, please see Notes 26, 27 and 28. Accounting policies for employee stock option plans Diamyd recognizes its employee stock option plans in accordance with IFRS 2 and IFRIC 11. The recommendation implies that Diamyd values the current plans 2007/2010, 2008/2011 and 2009/2012 at the date of issuance at fair value and then distributes the value over the vesting period as a personnel expense. This remuneration to personnel implies that Diamyd issues its own equity instrument (warrants to which personnel are entitled, pursuant to the plan s agreements) and thus, for the cost associated with each period, achieves the corresponding decrease in accumulated losses (other non-restricted equity in the Parent Company). The issuance of the Company s own capital instrument is here considered to be a shareholder contribution provided by the Parent Company to the subsidiary, which is why it is recognized as an investment in a subsidiary. Like other contributions, the investment is then evaluated for any write-down requirement. If there is a need to impair shares in a subsidiary, the effect is that a financial cost is recognized in Diamyd Medical AB s (the Parent Company s) income statement. Social security costs on employee stock option plans For each outstanding plan, Diamyd makes provisions for social security costs at the end of each accounting year. The provision for social security costs is calculated according to UFR 7, IFRS 2 and Social Security Contributions for Listed Enterprises, with the application of the same valuation model used when the options were issued. The provision is revalued on each reporting date on the basis of a calculation of the charges that may be payable when the options are exercised. Diamyd performs the valuation according to the Black & Scholes model, which takes into account factors including the share price, remaining time until exercise, volatility and risk-free interest rates. Payments of social security costs in connection with employee exercise of options are offset against the provision made according to the above. To cover the social security costs inherent in its employee stock option plans, Diamyd is in possession of a number of options intended for conversion into shares, which can then be sold to finance payment of the associated social security costs. Because a taxable benefit (the difference between the redemption/exercise price and market value of shares) arises when stock options are exercised, Diamyd can cover the social security costs on the taxable benefit by converting a portion of its options to shares and then selling them. However, the personnel cost arising in the income statement, which is provisioned progressively pursuant to UFR 7, will not be offset by a cost reduction (income), but the effect appears exclusively in cash flow terms. INTANGIBLE ASSETS Intangible assets refer to license rights, acquired directly or via a business acquisition. Expenses for acquiring patent licenses are shown as an asset if the patent is considered to be the basis for a marketable product. This applies even if the licensing rights are deemed to be transferable for at least their carrying amount. The licenses are amortized using the straight line method during their useful life from the date the licenses can be utilized. Proprietary patent rights, technology rights, brands and other similar assets do not constitute any value. The research activities Diamyd conducts are associated with sufficient uncertainty that the capitalization criteria of IAS 38, Intangible Assets, cannot be considered satisfied. Accordingly, all research and development costs are expensed as they arise. TANGIBLE ASSETS Amortization Diamyd calculates depreciation using the straight line method to allocate the cost of property, plant and equipment over its estimated useful life. In accordance with IAS 16 for property, plant and equipment and IAS 38 for intangible assets, depreciation/amortization according to plan is calculated on original acquisition values with depreciation rates based on estimates of the assets financial life-span. None of the tangible assets are deemed to have any residual value at the end of their useful lives, so this value is zero when calculating recognized depreciations. IMPAIRMENT Review of tangible and intangible fixed assets for impairment is performed whenever internal or external indications of a potential impairment requirement arise pursuant to IAS 36. For assets with an unlimited useful life, including goodwill, and assets that have not yet been depreciated, this examination is performed per the third quarter balance sheet date, irrespective of whether there is an indication of decreased value or not. Examination is performed through an estimation of the recoverable amount. The recoverable amount is the higher of an asset s value in use and fair value less costs to sell. If the recoverable value is lower than the asset s carrying amount, an impairment loss is recognized. SHAREHOLDERS EQUITY Changes in equity, with comparative year, in the Group and Diamyd Medical AB in the context of recognized profits, loss carry forward, appropriation of profits, exchange rate differences and share capital, is recognized on pages 37 and 40. Consolidated shareholders equity is recognized in accordance with the Swedish Financial Accounting Standards Council s instructions UFR 8 Accounting for Group Equity. REVENUE RECOGNITION Revenue comprises the fair value of what has been or may be received for research collaboration agreements, goods and services sold, other services in the Group s continuing operations and interest income. The revenue is recognized exclusive of value added tax, returns and discounts and after elimination of intra-group sales. Diamyd recognizes revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the Group s activities as described below. 44

47 ACCOUNTING POLICIES Revenue from research collaboration agreements Upfront payments Upfront payments are received on entering a collaboration agreement and are not refundable. According to Diamyd s interpretation of IAS 18, an upfront payment for which the Company has obligations remaining regarding the execution of services is to be recognized as a prepayment. In such a case, the Company has not fully discharged its obligations connected with earning the revenue until the estimated or stipulated collaboration period expires. The amount is then treated as accrued income from the date of the agreement until the expiration of the estimated or stipulated collaboration period. If no reservation or other obstacle exists to receive the consideration and it is not related to future performance by Diamyd, the initial consideration is recognized as revenue on entering the agreement. Milestone payments Milestone payments agreed with counterparties are recognized when the criteria defined in the out-licensing agreement have been met and agreed with the counterparty. Such criteria can comprise study results, registration of pharmaceuticals or sales goals achieved. Research services Research services, performed by Diamyd in accordance with collaboration agreements and which generate payments from collaboration partners, are recognized as revenue in pace with Diamyd s performance of the services. Revenue from the sale of goods Revenue is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer and the amount of revenue can be measured reliably. Revenue from other services Revenue from other services primarily comprises research support received by the subsidiary Diamyd, Inc. These are recognized as other operating revenues in the income statement for the same period as the costs the research support is intended to compensate. Interest Income Interest income is recorded in the period to which it is attributable. The calculation is based on the underlying yield of the asset according to the effective interest method. Dividends Dividend income is recognized when the right to receive dividends is established. BUSINESS SEGMENTS From September 1, 2009, Diamyd applies IFRS 8 Operating Segments, which has resulted in a change to how the Group identifies its operating segments. The new standard requires companies to provide expanded financial and descriptive disclosures regarding their reportable operating segments and for the segment information to be presented from the management s perspective, which entails reporting information in the same manner it is reported internally. The reportable operating segments are defined by the internal reporting as it is reported and followed up by the chief operating decision maker (CODM). As the CODM in this context, the Group has identified the CEO. Change in segment classification The Group has identified which segments are followed up via the Company s internal reporting, which has resulted in the Company presenting the segments divided into countries. As this comprises a change in accounting policy, the comparative figures in the segment reporting have been recalculated. The performance measurement that is followed up is the operating result, i.e. operating result before financial items, see Note 1. PENSION LIABILITY AND PENSION COSTS Diamyd applies IAS 19. All company employees are provided with individual pension schemes which are defined contribution plans and for which the Company has an agreement with an insurance company to administer these schemes. For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognized as employee benefit expenses when they fall due. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in the future payments will fall in favor of the Company. INCOME TAX Deferred tax is recognized in total in accordance with the balance sheet method, on all temporary differences that arise between the tax base on assets and liabilities and their recognized values in the consolidated financial statement. The deferred tax is not recognized if it arises from a transaction that constitutes the first recognition of an asset or a liability that does not arise from the acquisition of a business and, which at the time of the transaction, affects neither the recognized earnings nor the earnings for tax purposes. Deferred tax assets are calculated according to the applicable tax rates (and laws) that have been adopted or announced by the closing date and are expected to be in force when the deferred tax will be realized or the deferred tax liability will be settled. Deferred tax is calculated on temporary differences which arise on participation in Group companies and in associated companies except when the timing of the deferred tax assets can be controlled by the Group and it is likely that the temporary difference will not be reversed in the foreseeable future. Pursuant to IAS 12, deferred tax assets should only be recognized to the extent that it is likely that deductions will be utilized. Note 11 reports items including the estimated deductible deficits accumulated in the Group. The taxable deficits of the Group have no annual report 09/10 45

48 expiry date. The treatment of potential deferred tax on temporary differences is reported and explained in Note 11. The various constituent items of consolidated total tax are also explained. RELATED-PARTY TRANSACTIONS Diamyd recognizes remuneration and benefits to key executives pursuant to IAS 19 Employee benefits and IFRS 2 Share-based payments. Other information on closely related parties is reported pursuant to IAS 24. The various amounts are specified in Note 6. SIGNIFICANT ESTIMATES When the Board and CEO prepare reports in accordance with generally accepted accounting principles, certain assessments and assumptions must be made that affect the values recorded in the final accounts. These assessments and assumptions constitute the basis of the carrying amounts of assets, liabilities, revenues and expenses in those cases where these cannot be determined simply through information from other sources. The areas which contain a high degree of assessment, which are complex or in which assumptions and estimations are of considerable importance comprise above all the Diamyd Group s non-current assets, which are not subject to trade. The development of the various research projects is the most important consideration in the assessment of the assets below. As long as the projects are proceeding ahead, the project constitutes value and there is no impairment requirement. Intangible assets Licenses and intellectual property rights are valued at acquisition value with straight-line amortization during the estimated economic life time. The impairment requirement is assessed on the basis of the expected future return. For further details on the impairment test, see Note 12. Financial assets Holdings in companies other than associated companies are impaired if a decrease in value is determined as permanent. These assets are valued based on available information on an ongoing basis, see Note 13. Revenue recognition Diamyd s interpretation of IAS 18 is that payment received on signing a license agreement, so-called upfront payments, for which obligations remain for the licenser to perform services, is to be recognized as a prepayment, see Note 2. CASH FLOW STATEMENT The cash flow statement has been prepared in accordance with IAS 7 and is reported by applying the indirect method. Recognized cash flow only encompasses those transactions that have caused payments to be made or received. Cash and cash equivalents include cash and bank balances, plus short-term investments including commercial paper with maximum duration of three months, and are recognized in accordance with IAS 7. LEASING Leasing where a substantial part of the risks and advantages of ownership are retained by the lessor is classified as operational leasing. Payments that are made during the lease period are expensed in the income statement straight-line over the duration of the lease. The Group has no financial lease agreements. INVENTORY Inventories are stated at the lower of cost and net realizable value. Clinical study drugs are not recorded in inventory. PROVISIONS Provisions are recorded when the Group enters into legal or informal undertakings arising from earlier events, where resources will likely be expended to settle the obligation and the amount has been reliably calculated. In cases where it has not been possible to make a reliable assessment or where there is uncertainty about the obligation, the obligation/relationship is shown as a contingent liability. EVENTS AFTER THE BALANCE SHEET DATE Any events after the balance sheet date that confirm the circumstances on that date are considered and shown in the annual report. NEW AND REVISED STANDARDS TO BE APPLIED BY THE GROUP IFRS 8 Operating Segments and IAS 1 (Revised) Presentation of Financial Statements must be applied for fiscal years beginning on or after January 1, These two standards have been applied from fiscal year 2009/2010 and have had the following effects on the Company s financial statements. New and revised standards applied by Diamyd applicable from January 1, 2009 IFRS 7 Financial instruments Disclosures (amendment). The amendment requires enhanced disclosures about fair value measurement and liquidity risk, and more specifically requires a hierarchy of levels for fair value measurement. As this change in accounting policy only results in additional disclosures, there is no impact on earnings per share. IFRS 8 Operating Segments According to the new standard for segment reporting, operating segments must be presented on the basis of how the Company follows up the operation and on the basis of available reports, which are continually reviewed by the chief operating decision maker (CODM). For Diamyd, the implementation of IFRS 8, from September 1, 2009, has implied that the presentation of information has been changed from fields of research to geographic areas. This segmentation also follows the Company s Diabetes (Sweden) and Pain (USA) business areas. IAS 1 (Revised) Presentation of Financial Statements (applicable from January 1, 2009.) Application of this standard has implied changes in the design and content of the financial statements to en- 46

49 ACCOUNTING POLICIES sure comparability between Group companies and other companies. As a result of these changes in the standard, all non-owner changes in equity are presented separately to all owner changes in equity in the consolidated statement of comprehensive income. The change in accounting policy only affects presentation aspects and thus has no impact on the earnings per share. Standards, amendments and interpretations of existing standards that have not yet come into effect and have not been applied in advance by Diamyd IFRS 9 Financial Instruments (applicable to fiscal years beginning on or after January 1, 2013). IFRS 9 addresses the recognition and measurement of financial instruments. The standard contains two primary categories: amortized costs and fair value. Classification takes place based on the Company s business model and characteristics of the contractual cash flows. If the Company s business model includes holding the financial asset in order to receive contractual cash flows and these contractual cash flows are solely payments of principal and interest, the asset is measured at amortized cost. All other financial assets are measured at fair value. The standard will be supplemented with additional sections. Its impact on the Group s financial statements will be evaluated once the standard is complete. IAS 1(Revised) Presentation of Financial Statements (applicable from January 1, 2010.) The amendment makes clear that the potential adjustment of a liability through the issue of shares bears no relevance regarding the classification of the liability as a current or long-term liability. Changes in the definition of a current liability, allows the reclassification of a liability as long-term even though the counterpart can at any moment demand settlement with shares. IAS 1 (Revised) is not expected to have any material impact on the Group s financial statements. IAS 38 (Amendment) Intangible assets (applicable from January 1, 2010.) The amendment clarifies the measuring at fair value of an intangible asset acquired in a business acquirement. According to the amendment, intangible assets may be grouped and treated as an asset if the assets have similar maturities. The amendment will not have any material impact on the Group s financial statements. Otherwise, none of the other standards that have been updated have any effect on the Diamyd Group s accounting, which is why no information on other standards has been provided. annual report 09/10 47

50 notes NOTE 1 SEGMENT REPORTING GROUP As of September 1, 2009, the Group has applied IFRS 8 Operating Segments, which has resulted in a change to how the Group identifies its operating segments. The new standard requires companies to provide expanded financial and descriptive disclosures regarding their reportable operating segments and for the segment information to be presented from the management s perspective. The management follows up operations through reports from two geographical areas, Sweden and the US. This includes following the Group s business areas; Diabetes (Sweden) and Pain (US). The operating segments derive their income primarily from research collaboration agreements and research services. The performance measurement that is followed up is the operating result. Segment reporting for the fiscal year 09/10 08/09* KSEK Sweden USA Group Sweden USA Group Total net sales for segments 127,305 7, , ,106 8,009 Inter-segment sales -14,583-7,608-22, ,882-6,904 Total net sales 112, , ,105 Operating result -3, ,963-85, ,373 Segment assets and liabilities 09/10 08/09* KSEK Sweden USA Group Sweden USA Group Assets 565,870 3, ,193 85,347 3,663 89,010 Liabilities 253, ,410 18, ,293 Investments * Comparative figures have been restated in accordance with current standards. Inter-segment sales are completed under market terms. The asset totals reported to the management are valued according to the same principles as in the annual report. These assets are distributed according to the operations of the segment and the physical location of the asset. Income from external customers is derived primarily from research collaboration agreements and research services, see Note 2. Of the total income from external customers of MSEK 113.0, MSEK 15.8 represented income from external customers in Sweden. 48

51 NOTES NOTE 2 SALES GROUP group PARENT COMPANY KSEK 09/10 08/09 09/10 08/09 Income from research collaboration agreements 97,494 97,494 Research services 14,545 14,545 Other services 989 1,105 Total 113,028 1, ,039 In June 2010, Diamyd Medical signed an agreement with Ortho- McNeil-Janssen Pharmaceuticals, Inc. (OMJPI), regarding the development and commercialization of Diamyd. The agreement covers the development and commercialization of the antigen-based candidate drug Diamyd for the treatment and prevention of autoimmune diabetes. Diamyd Medical received an upfront payment of MSEK on signing the agreement. The amount is recognized subject to accrual accounting rules in accordance with Diamyd Medical s interpretation of IAS 18. Accrual reporting continues until the end of the 15-month-long European study period. The agreement entails the parties sharing the development costs equally until the result of the ongoing European Phase III study has been obtained, which is expected during the first half of As of August 31, 2010, this amounts to MSEK 14.5 in research services. NOTE 3 EARNINGS PER SHARE The calculation of earnings per share before dilution is based on the division of the earnings assignable to the shareholders of Diamyd Medical AB by the number of shares outstanding during the period. KSEK 09/10 08/09 Net loss for the year ,945 Average number of shares outstanding before and after dilution 27,595 22,002 Earnings per share before and after dilution For calculation of earnings per share after dilution, adjustments are made in the weighted-average number of shares outstanding for dilution effects of potential ordinary shares. The Company only holds outstanding employee stock options. The calculation of options is based on the number of shares that could have been bought at the share s average market price over the year. Because the result was negative, earnings per share are improved if dilution effects were to be taken into account. This is incompatible with IAS 33, which is why the average number of shares after dilution is the same number as the average number of shares before dilution, with the result that earnings per share before and after dilution is identical. annual report 09/10 49

52 NOTE 4 CASH AND CASH EQUIVALENTS Other cash and cash equivalents apart from cash and bank balances are short-term investments with durations of less than three months from the date of acquisition. They comprise liquid investments that can easily be converted into a known amount and that are exposed to an insignificant risk of change in value. group PARENT COMPANY KSEK 09/10 08/09 09/10 08/09 Short-term investments Cash and bank balances 501,332 37, ,882 26,138 Total cash and cash equivalents 501,332 37, ,882 26,138 NOTE 5 PERSONNEL COSTS AND REMUNERATION OF THE BOARD, KEY EXECUTIVES AND EMPLOYEES GROUP Average number of employees 09/10 women men 08/09 women men Sweden % 29 % % 27 % USA 5 57 % 43 % % Total % 33 % % 43 % August 31, 2010 August 31, 2009 Gender balance among the Board and key executives women men women men Board of Directors 17 % 83 % 0 % 100 % Key executives 67 % 33 % 60 % 40 % Foreign subsidiaries 0 % 100 % 0 % 100 % Sick Leave Over the year, sick leave amounted to 0 % (0). Sick leave is defined as the absence from work divided by the available working time adjusted for leave of absence. 50

53 NOTES REMUNERATION AND PENSIONS DURING THE FISCAL YEAR The Board of Directors The Board Chairman and the members elected at the Annual General Meeting (AGM) are remunerated according to the resolution of the AGM. The Executive Chairman of the Board received a fixed salary and occupational pension insurance premiums amounting to 35 % of annual salary. No other benefits are paid to the Board. During the year, KSEK 500 (550) in remuneration was paid to the Board. As Executive Chairman of the Board, Anders Essen-Möller was paid a fixed salary of KSEK 1,483 (1,458). Pension costs for the Chairman of the Board were KSEK 519 (510) for fiscal year 2009/2010. The Chairman of the Board holds 10,000 employee options. Key executives CEO During the year, CEO Elisabeth Lindner received salary and remuneration amounting to KSEK 1,805 (1,482), other benefits totaling KSEK 12 (0) and a bonus of KSEK 0 (15). The Company pays occupational pension insurance premiums amounting to 35 % of annual salary to the CEO, which amounted to KSEK 585 (524) during the year. Pension benefits are based on a retirement age of 65. The CEO holds 91,234 employee options. The contract between the Company and the CEO is subject to twelve months notice from the Company and six months notice from the CEO. The CEO s employment agreement does not include any provisions for severance pay. Other key executives Other key executives refers to the five people who make up the executive management team in addition to the CEO. The other key executives have received KSEK 3,823 (3,609) in salary and remuneration, other benefits of KSEK 26 (0) and bonuses of KSEK 0 (77). The Company pays occupational pension insurance premiums amounting to 20 % of annual salary to the other key executives, which amounted to KSEK 531 (531) for fiscal year 2009/2010. Pension benefits are based on a retirement age of 65. The group holds 217,627 employee options. The contracts between the Company and key executives are subject to three months notice by either party. Employment agreements make no provisions for severance pay. For information regarding guidelines for remuneration of key executives, see page 32. For further information regarding the Board of Directors and key executives, see pages or the Company website Other personnel Other personnel have received salaries and other remuneration amounting to KSEK 7,055 (3,760), benefits of KSEK 29 (0) and bonuses of KSEK 0 (26). The Company pays occupational pension insurance premiums amounting to 20 % of annual salary to the permanent employees and 5 % to temporary employees, which amounted to KSEK 630 (436) during the year. This group of individuals holds 258,448 employee options. Salaries, other remuneration and social security costs 09/10 08/09 Group and Parent Company Salaries and remuneration Social security costs Pension costs Salaries and remuneration Social security costs Pension costs Parent Company Subsidiaries 14,234 8,330 2,265* 10,401 2,869 2,001 Group total 14,734 8,419 2,265* 10,951 2,943 2,001 * Of the Group s total pension costs KSEK 1,104 (1,034) relates to the Board of Directors and CEO, KSEK 531 (531) other key executives and the remaining KSEK 630 (436) other personnel. Salaries and other remuneration allocated by country and for the Board of Directors and CEO, the key executives and other personnel. 09/10 08/09 Group and Parent Company Board of Directors and CEO Other key executives and other personnel Board of Directors and CEO Other key executives and other personnel Parent Company Sweden Total Subsidiaries Sweden 3,300 7,162 3,155 4,734 USA 3,772 2,512 Total 3,300 10,934 3,155 7,246 Group total 3,800 10,934 3,705 7,246 annual report 09/10 51

54 Salaries and remuneration the Board of Directors, CEO and other key executives 2009/2010 KSEK Salary/ Remuneration Pension costs Other benefits Equity related remuneration* Other remuneration Total Anders Essen-Möller, Chairman of the Board 1, ,099 Lars Jonsson, Board Member Sam Lindgren, Board Member Henrik Bonde, Board Member Maria-Teresa Essen-Möller, Board Member Göran Pettersson, Board Member Elisabeth Lindner, CEO 1, ,378 Total, Board of Directors and CEO 3,788 1, ,073 5,977 Other key executives 3, ,124 6,504 Total 7,611 1, ,197 12,481 * Share-based payments relate to the value of holdings of employee options at August /2009 KSEK Salary/ Remuneration Pension costs Other benefits Equity related remuneration* Other remuneration Total Anders Essen-Möller, Chairman of the Board 1, ,265 Lars Jonsson, Board Member Sam Lindgren, Board Member Henrik Bonde, Board Member Christer Hägglund, Board Member Elisabeth Lindner, CEO 1, ,728 Total, Board of Directors and CEO 3,490 1, ,343 Other key executives 3, , ,542 Total 7,099 1,565 2, ,885 * Share-based payments relate to the value of holdings of employee options at August 31. NOTE 6 RELATED PARTY TRANSACTIONS During the year, companies represented by immediate family members of the Chairman of the Board were retained as consultants. Total fees paid during the year amounted to KSEK 650 (760) excluding VAT. Fees were for IT services, website maintenance and press release expenses. Pricing has been set by the arm s length principle. Remuneration of immediate family members of the Chairman amounted to a total of KSEK 1,376 (991) during the year. No other Board member, key executive or related party to these have been directly or indirectly involved in any business transaction with the Company that is or was unusual in its character or terms and conditions and took place during the current fiscal year. Neither has the Company granted any loans, provided any guarantees or surety for the benefit of any member of the Board of Directors, key executives or auditors in the Company. For further information regarding remuneration of key personnel, see Note 5. KSEK 09/10 08/09 Purchase of intercompany services * 22,192 6,903 Salaries 1, Share-based payments ** Consultant fees * Regards transactions between subsidiaries ** For more information, see Note 5 52

55 NOTES NOTE 7 OTHER EXTERNAL EXPENSES During the fiscal year 2009/2010, auditing expenses for the Diamyd Group amounted to KSEK 539 (544) and consultancy fees amounted to KSEK 226 (137). Auditing costs are part of the total external expenses. group PARENT COMPANY KSEK 09/10 08/09 09/10 08/09 Öhrlings PricewaterhouseCoopers AB Audit engagement fees and other auditing services Other services Total Lally & Lally & Co. Audit engagement fees and other auditing services Other services Total Audit Engagement refers to auditing of the annual report, the accounts and the administration of the Board of Directors and the CEO and other assignments for the Company s auditor and advice or other assistance or other guidance caused by observations at the audit or during other assignments. Everything else is other services. NOTE 8 LEASE CONTRACT The Company s premises leasing agreement runs until December 31, Notice of termination must be given at least nine months before the contractual end date; otherwise the contract is automatically renewed for an additional three years. The Company (incl. Diamyd, Inc.) has paid rent amounting to KSEK 1,143 (812) during the fiscal year 2009/2010. For the upcoming fiscal year 2010/2011, the rent will amount to KSEK 1,333 according to the contracts. The leasing agreement for Diamyd, Inc. s premises has a notice period of one month. NOTE 9 TANGIBLE ASSETS AND DEPRECIATION Equipment is depreciated over five years and computers over three years. KSEK 09/10 08/09 Cost, opening balance Investments during the year Cost, closing balance 1, Opening depreciation Depreciation for the year Closing depreciation Net book amount, August The Parent Company has no tangible assets. annual report 09/10 53

56 NOTE 10 FINANCIAL INCOME AND COSTS group PARENT COMPANY KSEK 09/10 08/09 09/10 08/09 Interest income, bank 36 1,703 1,425 Interest income, Group companies Foreign currency fluctuation gains 2, , Financial income 2,278 2,435 2,499 2,554 Interest expenses Financial expenses NOTE 11 TAX The Company does not have any temporary differences other than tax loss carry-forwards. Deferred income tax assets are recognized for tax loss carry-forward to the extent that the realization of the related tax benefit through the future taxable profits is probable. Diamyd, Inc. recognizes a deferred tax income of KSEK 56 (142) due to the utilization of capitalized tax loss carry-forwards in the Company. The Group did not recognize deferred tax assets amounting to KSEK 100,349 (102,597) in respect of accumulated losses for tax purposes amounting to KSEK 386 (390,103) that can be carried forward against future taxable income. For Swedish limited companies, there is no expiration date regarding the possibility of utilizing loss carry-forwards. The weighted average tax rate for the Group was % (0.2). During the year, the Parent Company utilized all losses for tax purposes from preceding years, in total KSEK 75,672. KSEK 09/10 08/09 Tax Deferred tax Total Reconciliation between actual and nominal tax group PARENT COMPANY KSEK 09/10 08/09 09/10 08/09 Reported profit/loss before tax ,803 7,111-82,256 Tax according to applicable Swedish tax rate of 26.3 % (28.0) 72 22,905-1,870 23,032 Effect of foreign tax rate Tax effect of non-taxable revenue Tax effect of non-deductible items -2,477-1,294-20,097-20,136 Tax effect on profit/loss carry-forward 0-2 Tax loss carry-forwards for which no deferred tax claim has been recognized -21,902-3,060 Utilization of tax loss carry-forwards which previously were not recognized 2,248 19,902 Tax on reported profit/loss ,

57 NOTES NOTE 12 INTANGIBLE ASSETS AND DEPRECIATIONS Intangible assets are partly composed of the Company s licensed patent rights regarding GAD65 from the University of Florida and the University of California. These are utilized in research and are amortized over five years. The acquisition value amounts to KSEK 10,200. They were amortized over five years, and were completely amortized as of August 31, During the third quarter, the NTDDS research and development project acquired by the Company was subjected to an impairment test, as required by IFRS for intangible assets that are not amortized on an ongoing basis. The Company has not begun amortizing this intangible asset, because it has not yet been utilized. On the balance sheet date, the net book value of the intangible asset was KSEK 16,627 (16,627). The impairment test did not show any impairment requirement. The impairment test was performed the same way as for the annual accounts on August 31, 2009, where future estimated cash flows generated by this asset were discounted, using a discount rate of 14 % (annual accounts on August 31, 2009: 14 %). The cash flows used in the impairment test were adjusted for the estimated likelihood that the project would come to commercial fruition and thus generate cash flow. This discount rate varies depending on the phase each project is in, and is based on statistical information obtained from external sources. A sensitivity analysis was performed which raised the discount rate to 19 %. This higher discount rate did not show any impairment requirement, either. No impairment test was performed in the fourth quarter. The risk-free interest that was used in deriving the discount rate corresponds to a ten-year treasury bill. group PARENT COMPANY KSEK 09/10 08/09 09/10 08/09 Cost opening balance, patent 10,200 10,200 Cost opening balance, research project 16,627 16,627 16,627 16,627 Additions, research projects Disposals, research projects Cost, closing balance 26,827 26,827 16,627 16,627 Accumulated depreciation opening balance, patent -10,200-10,200 Disposals Depreciation for the year, patents Closing balance depreciation -10,200-10,200 Net book value, August 31 16,627 16,627 16,627 16,267 NOTE 13 FINANCIAL ASSETS GROUP/PARENT COMPANY Financial fixed assets consist of a holding of shares in Mercodia AB, Corporate Registration Number , and a holding of shares in Protein Sciences Corporation, Corporate Registration Number Holdings in Mercodia AB are 19 % of capital, or 1,000 shares with a net book value of KSEK 800. The Group s holding in Protein Sciences Corporation is 6.7 % of capital, or 3,943,151 shares. The net book value is KSEK 20,618. A reclassification was made of the promissory note that the Company holds over Protein Sciences from current assets to fixed assets for KSEK 9,260. The holdings are classified as assets available for sale. KSEK 09/10 08/09 Opening balance, cost 21,418 21,418 Additions Reclassification* 9,260 Cost, closing balance, 30,678 21,418 Net book value, August 31 30,678 21,418 * For more information, see Note 30. NOTE 14 INVENTORY The inventory consists of GAD protein for sale. There has been no obsolescence deduction. annual report 09/10 55

58 NOTE 15 PREPAID EXPENSES AND ACCRUED INCOME group PARENT COMPANY KSEK 09/10 08/09 09/10 08/09 Prepaid patent fees Prepaid insurance fees Accrued research services 14,545 14,545 Accrued interest income Other prepaid expenses 968 1,987* Total 16,195 3,018 15,591 1,117 * ) Consists in part of prepaid legal expenses NOTE 16 FINANCIAL RISKS The Group is exposed to various financial risks in the course of its business. The financial operations of the Group primarily include exposure to financing risk, currency risk, credit risk and interest rate risk. Financial policy Diamyd s financial policy specifies goals, governing principles and assignment of responsibility within the financial operations. The financial policy regulates the principles applied for calculation, control and reporting of financial risks. Diamyd s financial policy is evaluated and approved annually by the Board of Directors. Financial risk management is conducted by the Group s central accounting and finance function in accordance with the guidelines of the financial policy. Financing risk The financing risk is defined as the risk of the Company having insufficient funds to operate its business. Diamyd s policy is to ensure that cash and cash equivalents are available to finance operations for a period of at least 12 months ahead. Since Diamyd is a research and development company, sources of finance primarily comprise revenues from licensing agreements and the new issue of equities. Evaluation of various forms of financing is conducted on an ongoing basis. The Group has no interest-bearing liabilities. Current liabilities comprise accounts payable that fall due within 30 days. Forecasts and follow-up of the cash flow is carried out on a monthly basis to assess the need for liquidity. At August 31, 2010, cash and cash equivalents amounted to MSEK 501. Foreign exchange risk Foreign exchange risk is defined as the risk that the Group s earnings and cash flow are affected by fluctuations in the exchange rate. The Group operates in an international market with a relatively high proportion of incoming and outgoing payments in foreign currencies. The Group has its greatest exposure to the US dollar (USD), Euro (EUR) and to a lesser extent the British pound (GBP). A portion of the Group s foreign exchange risk arises from transactions between the Parent Company and the American subsidiary, Diamyd, Inc., including the purchase of research services. In addition, an exchange rate effect arises on translation of Diamyd, Inc. s income statement and balance sheet to SEK, which affects the Group s equity. The amount totaled KSEK 14 for the 2009/2010 fiscal year. The Group s expenses during the fiscal year amounted to MSEK 134, of which approximately 50 % was expenses in foreign currencies, primarily USD and EUR. Exchange rate movements have positive and negative effects on the Company s earnings. Fluctuations are reduced through the Company holding a certain degree of cash and cash equivalents in USD and EUR for current payments and utilizing currency futures contracts for more substantial transactions. Expenses in USD are balanced, to a certain extent, by income in the same currency from research collaboration projects. The Group s policy is to hedge 100 % of foreign currency flows that are known with a high degree of probability. During the fiscal year, an average USD/SEK exchange rate 10 % higher would have resulted in increased expenses of MSEK 5. A comparably higher EUR/SEK exchange rate would have resulted in increased expenses of MSEK 2. Credit risk Credit risk is defined as the risk that a counterpart cannot fulfill its financial obligations to Diamyd. A credit risk arises in cash management when excess liquidity is invested. The credit risk is managed through only investing in counterparties of a high credit rating within investment limits set in the financial policy. The maximum duration of an investment until maturity is six months. A number of the Group s credit risks originate from business operations and consist of the holding of convertible debentures in Protein Sciences for which the conversion period has expired. The credit risk entailed by the holding is assessed on an ongoing basis from financial information received from the Company. Capital risk The Group s objective regarding the capital structure is tailored to ensure the ability of operations to continue to be able to generate a return to shareholders and benefit for other stakeholders in the longterm. The capital structure can be maintained or adjusted through the issue of new shares. Interest rate risk The interest rate risk is defined as the risk that the Group s earnings are affected by changes in interest rate levels. Diamyd has no interest-bearing liabilities. Interest rate risk arises in Diamyd s financial operations in conjunction with investment of cash and cash equivalents and that the return on these investments can vary in relation to the general interest rate levels depending on the tenor of the investment. Investments are made so they mature at regular intervals to enable, in so far as is possible, the matching of investment maturities with the consumption rate of Group funds by operations. 56

59 NOTES NOTE 17 FINANCIAL INSTRUMENTS BY CATEGORY KSEK Loans and accounts receivable Financial assets that can be sold Total Assets in the balance sheet Financial assets available for sale 9,260 9,260 Accounts receivable and other receivables 3,489 3,489 Cash and cash equivalents 501, ,332 Total at August 31, ,821 9, ,081 KSEK Loans and accounts receivable Financial assets that can be sold Total Assets in the balance sheet Financial assets available for sale 7,841 7,841 Accounts receivable and other receivables 1,607 1,607 Cash and cash equivalents 37,287 37,287 Total at August 31, ,894 7,841 46,735 KSEK Other financial liabilities Total Liabilities on the balance sheet Accounts payable and other liabilities 8,517 8,517 Total at August 31, ,517 8,517 KSEK Other financial liabilities Total Liabilities on the balance sheet Accounts payable and other liabilities 12,620 12,620 Total at August 31, ,620 12,620 NOTE 18 CASH FLOW ANALYSIS The Parent Company manages the majority of the Group s funds. Funds are transferred to subsidiaries throughout the year when needed and settlements are made through invoices, Group contributions or shareholders contributions. Cash and cash equivalents refers to cash and bank balances and short-term investments with a maximum maturity of three months. Cash and cash equivalents amounted to KSEK 501,332 (37,287) at August 31, NOTE 19 LIABILITIES All company liabilities are non-interest bearing. annual report 09/10 57

60 NOTE 20 PREPAID INCOME AND ACCRUED EXPENSES group PARENT COMPANY KSEK 09/10 08/09 09/10 08/09 Accrued vacation pay Accrued social security expenses -1, Accrued social security expenses on employee options -3, Accrued research expenses -9,920-2,524 Other accrued expenses -1,603-1,989-1,108-1,021 Prepaid income -229, ,806 Total -245,893-5, ,961-1,021 NOTE 21 RESULTS FROM GROUP PARTICIPATION Shares in Group companies were impaired by KSEK 81,308 (71,828) during the year. Impairment of shares during the year in Group companies refers to the impairment of shares equivalent to shareholders contributions during the year. These contributions amounted to KSEK 81,308 (71,828) to Diamyd Therapeutics. NOTE 22 LONG-TERM LIABILITIES TO SUBSIDIARIES KSEK 09/10 08/09 Liabilities, Diamyd Therapeutics AB 14,450 5,625 Liabilities, Diamyd, Inc. 3,065 Total 17,515 5,625 NOTE 23 SHARES IN SUBSIDIARIES Subsidiary Corporate Registration Number Registered office Equity (KSEK) Earnings (KSEK) Shareholding Number of shares Book value (SEK) Diamyd Therapeutics AB Stockholm 1,000-86, ,000,000 1,100,000 Diamyd Diagnostics AB Stockholm , ,000 Diamyd, Inc Pittsburgh, PA, USA ,000 7 KSEK 09/10 08/09 Opening book value 1,200 1,200 Shareholder contribution provided 81,308 71,828 Impairment of book value -81,308-71,828 Closing book value 1,200 1,200 58

61 NOTES NOTE 24 PARENT COMPANY S LONG-TERM RECEIVABLES FROM SUBSIDIARIES KSEK 09/10 08/09 Long-term receivables from Diamyd Therapeutics AB 14,192 Long-term receivables from Diamyd Diagnostics AB Long-term receivables from Diamyd, Inc. 6,264 3,781 Total 20,612 3,970 NOTE 25 SHARE CAPITAL A specification of the changes in shareholder s equity can be found in the summary Changes in shareholder s equity - Group (page 37). At August 31, 2010, the assets of Diamyd Medical were divided among 27,622,401 (21,241,602 adjusted after split 2009/2010) series B shares (1/10 vote) and 1,437,876 (1,123,342 adjusted after split 2009/2010) series A shares (1 vote). At the end of the fiscal year, the share capital in Diamyd Medical was SEK 14,530, (11,182,472). The quotient value is SEK 0.5 (1). All shares issued are fully paid. Year Transaction A shares (increase, number) B shares (increase, number) Number of shares (accumulated, number) At September 1, ,200 7,874,280 8,345, /2005 Exercise of warrants 72,563 8,418, /2006 Non-cash issue 317,173 8,735, /2007 Warrants 90, ,791 9,647, /2007 Exercise of warrants 30,000 9,677, /2007 Exercise of warrants 25,000 9,702, /2007 Private placement 70,000 9,772, /2008 Exercise of warrants 138,092 9,910, /2008 Private placement 991,000 10,901, /2009 Exercise of warrants 280,902 11,182, /2010 Private placement 157,267 2,973,824 14,313, /2010 Exercise of warrants 16,931 14,330, /2010 Split 1:2 718,938 13,611,556 28,660, /2010 Exercise of warrants 47,450 28,708, /2010 Private placement 291,668 29,000, /2010 Exercise of warrants 15,066 29,015, /2010 Exercise of warrants 30,042 29,045, /2010 Exercise of warrants 15,063 29,060,277 At August 31, ,437,876 27,622,401 29,060,277 annual report 09/10 59

62 NOTE 26 EMPLOYEE STOCK OPTION PLAN 2007/2010 On December 11, 2007, the Annual General Meeting of Diamyd Medical AB (publ) approved an employee stock option plan with underlying warrants. This was a modification to the employee stock option plan that was approved at the extraordinary shareholders meeting on May 22, (For more information about the employee stock option plan approved on May 22, 2007, see the 2006/2007 annual report.) The program is an employee stock option plan settled with shares in Diamyd Medical AB and covers permanent employees of the Diamyd Group. The financial exposure from the employee stock option plan is hedged by warrants issued to a wholly-owned subsidiary. A specified portion of the warrants is reserved to cover social security contributions and other related costs. The terms of the employee stock option plan provide for adjustments of the exercise price and number of shares for each stock option if new shares are issued with preferential rights to existing shareholders. The program includes 200,000 employee stock options, which also cover social security expenses. The allocation of employee stock options was 10,000 options per employee. The valuation was made in accordance with IFRS 2 Share-Based Payments. The Black & Scholes model for option pricing was used for the valuation. The following assumptions were used in the calculation for the allocation on December 20, 2007: Share value SEK 62, exercise price SEK 81, volatility 79 %, duration 726, 901 and 1,082 days for the respective programs, no expected dividends and a risk-free interest rate of 4.1 %, 4.1 % and 4.1 % for each respective duration and a liquidity discount due to the fact that no organized trading will exist for these securities. The value was set at SEK 22.90, SEK and SEK Volatility was determined at the average volatility for the previous six months before the valuation date. For each quarterly report a revaluation is made to account for the social security expenses for the program according to URA 46. Employee stock options vest annually over one, two and three years and are exercisable from November 15, 2008, November 15, 2009, November 15, 2010 and until December 31, 2010, assuming continued employment. The options are received free of charge. After new issues and splits during the fiscal year 2009/2010, the issue price has changed to SEK Each option entitles the holder to 2.26 shares. Effect on financial statements The accounting policies for employee stock option programs are described above. The cost charged to the income statement in 2009/2010 regarding the program issued in May 2007 amounts to KSEK 400 (1,154), with a corresponding entry to equity and a social security cost of KSEK 0. The cost charged to the income statement in 2009/2010 regarding the program issued in December amounts to KSEK 504 (1,149), with a corresponding entry to equity and a social security cost of KSEK 959 (321). The future exercise of employee stock options will have a positive effect on the Company s financial position, since plan participants will pay monies to the Company to exercise options in accordance with the exercise price. Additional costs occurring as an effect of the program, consisting primarily of payroll taxes levied upon exercise, will be covered by the exercise of the additional warrants held to cover such costs. There will be no adverse effect on the Company s financial position from the program, provided that the percentage at which payroll taxes are levied does not change significantly during the remainder of the exercise period. Increase in number of shares Exercise of all options outstanding in the program would lead to an increase of the number of shares by approximately 2.5 %, including the warrants required to cover social security expenses. The issued warrants do not imply dilution of earnings per share in 2009/2010, since a conversion to shares would lead to a decrease in the recognized loss per share. Allocation of stock options 09/10 Number of stock options approved on December 11, ,000 Allocated 150,000 Forfeited -20,000 Exercised -56,591 Outstanding on August 31, ,409 60

63 NOTES NOTE 27 EMPLOYEE STOCK OPTION PLAN 2008/2011 On December 11, 2008, the Annual General Meeting of Diamyd Medical AB (publ) approved an employee stock option plan totaling 220,000 employee stock options in Diamyd Medical. The issue price for shares was set at SEK 66 per share for the stock options, which were allocated free of charge. One-third of the program is exercisable on November 15, 2009 another third on November 15, 2010 and the final third from November 15, 2011 until December 31, In addition to the 166,650 options that have been allocated to employees and management, Group subsidiaries have subscribed for 53,350 options intended to be used to cover the social security expenses that can arise from the option program when the options are exercised by their holders. Valuation of the program has been carried out in accordance with the Black & Scholes method and the primary parameters have been volatility 49 % and the issue price of SEK 66 per share. Interest rates comparable to a one-year treasury bill and two-year and threeyear government bonds have been utilized for calculating costs. After the fiscal year s new share issues and split, the issue price has been adjusted to SEK Each option entitles the holder to subscribe for 2.26 shares. will pay monies to the Company to exercise options in accordance with the exercise price. Additional costs occurring as an effect of the program, consisting primarily of payroll taxes levied upon exercise, will be covered by the exercise of the additional warrants held to cover such costs. There will be no adverse effect on the Company s financial position from the program, provided that the percentage at which payroll taxes are levied does not change significantly during the remainder of the exercise period. Increase in number of shares Exercise of all options outstanding in the program would lead to an increase of the number of shares by approximately 2 %, including the warrants required to cover social security expenses. The issued warrants do not imply dilution of earnings per share in 2009/2010, since a conversion to shares would lead to a decrease in the recognized loss per share. Effect on financial statements The accounting policies for employee stock option programs are described above. The cost charged to the income statement in 2009/2010 amounts to KSEK 2,025 (1,605), with a corresponding entry to equity and a social security cost of KSEK 1,847 (315). The future exercise of employee stock options will have a positive effect on the Company s financial position, since plan participants Allocation of stock options 09/10 Number of stock options approved on December 11, ,000 Allocated 166,650 Forfeited -9,900 Exercised -6,050 Outstanding on August 31, ,700 annual report 09/10 61

64 NOTE 28 EMPLOYEE STOCK OPTION PLAN 2009/2012 On December 11, 2008, the Annual General Meeting of Diamyd Medical AB (publ) approved an employee stock option plan totaling 580,000 employee stock options in Diamyd Medical. The issue price for shares was set at SEK 124 per share for the stock options, which were allocated free of charge. One-third of the program is exercisable on November 15, 2010 another third on November 15, 2011 and the final third from November 15, 2012 until December 31, In addition to the 353,200 options that have been allocated to emplo yees and management and the 80,800 that have as yet to be allocated, Group subsidiaries have subscribed for 146,000 options intended to be used to cover the social security expenses that can arise from the option program when the options are exercised by their holders. Valuation of the program has been carried out in accordance with the Black & Scholes method and the primary parameters have been volatility 51 % and the issue price of SEK 124 per share. Interest rates comparable to a one-year treasury bill and two-year and three-year government bonds have been utilized for calculating costs. program, consisting primarily of payroll taxes levied upon exercise, will be covered by the exercise of the additional warrants held to cover such costs. There will be no adverse effect on the Company s financial position from the program, provided that the percentage at which payroll taxes are levied does not change significantly during the remainder of the exercise period. Increase in number of shares Exercise of all options outstanding in the program would lead to an increase of the number of shares by approximately 2 %, including the warrants required to cover social security expenses. The issued warrants do not imply dilution of earnings per share in 2009/2010, since a conversion to shares would lead to a decrease in the recognized loss per share. Effect on financial statements The accounting policies for employee stock option programs are described above. The cost charged to the income statement in 2009/2010 amounts to KSEK 2,621, with a corresponding entry to equity and a social security cost of KSEK 758. The future exercise of employee stock options will have a positive effect on the Company s financial position, since plan participants will pay monies to the Company to exercise options in accordance with the exercise price. Additional costs occurring as an effect of the Allocation of stock options 09/10 Number of stock options approved on December 11, ,000 Allocated 353,200 Forfeited Exercised Outstanding on August 31, ,200 62

65 NOTES NOTE 29 DEFICITS IN SUBSIDIARIES The Parent Company grants capital cover annually for the Swedish subsidiaries since they are running deficits. For 2009/2010, the Parent Company s outstanding capital cover amounted to KSEK 81,308 (71,828) which was settled via a shareholder contribution. NOTE 30 FINANCIAL ASSETS AVAILABLE FOR SALE In the 2007/2008 fiscal year, the Company invested in a convertible debt instrument in Protein Sciences Corporation, Meriden CT, USA. As the convertible has not been converted as of December 31, 2008, the debt instrument continues to run indefinitely with an interest rate of 5 %. It was initially determined, that an adjustment of the debt instrument would be conducted within 12 months. The assessment reached at the year-end is that repayment will be completed, but as Protein Sciences is a research and development company, this will not occur within 12 months and the debt instrument has therefore been reclassified as a fixed asset. The opening value for the current year is KSEK 7,841. A foreign currency gain of KSEK 301 and interest of KSEK 1,118 were subsequently recorded. The closing book value is KSEK 9,260 at August 31, In addition to this investment, the Group has owned 6.7 % of Protein Sciences Corporation, since 2006/2007, see Note 13. annual report 09/10 63

66 NOTE 31 ASSETS PLEDGED AND CONTINGENT LIABILITIES KSEK 09/10 08/09 Diamyd Medical AB (leasing warranty) 157 Total 157 The Board of Directors and the President assure that the consolidated Financial Statement as well as the Annual Report have been prepared according to the international accounting standards as intended in the European Parliament and Council s regulation (EC No 1606/2002) of July 19, 2002 concerning the application of international accounting standards and generally accepted accounting principles and gives a fair overview of the Group s and the Parent s position and results. The Administration Report for the Group and the Parent Company gives a fair overview of the Group s and the Parent Company s operations, position and results, and describes significant risks and uncertainties faced by the Parent Company and Group member companies. The balance sheet and income statement will be presented for adoption at the Annual General Meeting of Shareholders on December 9, Stockholm, November 24, 2010 Elisabeth Lindner President and CEO Anders Essen-Möller Henrik Bonde Maria-Teresa Essen-Möller Lars Jonsson Chairman of the Board Board Member Board Member Board Member Sam Lindgren Board Member Göran Pettersson Board Member Our auditor s report has been submitted on November 24, Öhrlings PricewaterhouseCoopers AB Eva Blom Authorized Accountant 64

67 Audit Report Audit Report To the annual meeting of the shareholders of Diamyd Medical AB (PuBL) Corporate identity number We have audited the annual accounts, the consolidated accounts, the corporate governance report, the accounting records and the administration of the board of directors and the managing director of Diamyd Medical AB for the year beginning 1st of September 2009 to 31st of August The board of directors and the managing director are responsible for these accounts and the administration of the Company as well as for the application of the Annual Accounts Act when preparing the annual accounts and the corporate governance report and the application of international financial reporting standards IFRSs as adopted by the EU and the Annual Accounts Act when preparing the consolidated accounts. Our responsibility is to express an opinion on the annual accounts, the consolidated accounts, the corporate governance report and the administration based on our audit. We conducted our audit in accordance with generally accepted auditing standards in Sweden. Those standards require that we plan and perform the audit to obtain reasonable assurance that the annual accounts, the consolidated accounts and the corporate governance report are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the accounts. An audit also includes assessing the accounting principles used and their application by the board of directors and the managing director and significant estimates made by the board of directors and the managing director when preparing the annual accounts and the consolidated accounts as well as evaluating the overall presentation of information in the annual accounts, the consolidated accounts and the corporate governance report. As a basis for our opinion concerning discharge from liability, we examined significant decisions, actions taken and circumstances of the Company in order to be able to determine the liability, if any, to the Company of any board member or the managing director. We also examined whether any board member or the managing director has, in any other way, acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Association. We believe that our audit provides a reasonable basis for our opinion set out below. The annual accounts have been prepared in accordance with the Annual Accounts Act and give a true and fair view of the Company s financial position and results of operations in accordance with generally accepted accounting principles in Sweden. The consolidated accounts have been prepared in accordance with international financial reporting standards IFRSs as adopted by the EU and the Annual Accounts Act and give a true and fair view of the group s financial position and results of operations. The corporate governance has been prepared according to the Annual Accounts Act. The statutory administration report and the corporate governance report are consistent with the other parts of the annual accounts and the consolidated accounts. We recommend to the annual meeting of shareholders that the income statements and balance sheets of the parent company and the group be adopted, that the profit of the parent company be dealt with in accordance with the proposal in the administration report and that the members of the board of directors and the managing director be discharged from liability for the financial year. Stockholm, November 24, 2010 Öhrlings PricewaterhouseCoopers AB Eva Blom Authorized Accountant annual report 09/10 65

68 CORPORATE GOVERNANCE REPORT Diamyd Medical AB is a Swedish public company listed on Nasdaq OMX Stockholm. Corporate governance is based on the Swedish Companies Act, the Nasdaq OMX Rules for Issuers and the Swedish Code of Corporate Governance (the Code), and other applicable Swedish laws and regulations. This corporate governance report forms an integrated part of the annual report for 2009/2010 and has been reviewed by the Company s auditors. The Company has no deviations to report. SHARES AND SHAREHOLDERS Diamyd s share capital consists of Series A shares (one vote) and Series B shares (1/10 vote). On August 31, 2010, the number of shareholders was 6,829, which is an increase of 28 % compared with the preceding year. Major shareholders The table below shows the equity ownership in Diamyd representing the ten largest shareholders in the Company at August 31, Name Number of Series A shares Number of Series B shares Share of equity (%) Share of voting power (%) Lindkvist, Bertil 10,024, Avanza Pension _ 2,510, Östersjöstiftelsen 1,957, Anders Essen-Möller 1,437, , Nordnet Pensionsförsäkring AB 1,330, Ålandsbanken AB, W8IMY 449, SIX SIS AG, W8IMY 394, Robur Försäkring AB 186, Försäkrings AB Skandia 156, Gålöstiftelsen 152, ,437,876 17,582, OVERVIEW OF DIAMYD S CORPORATE GOVERNANCE Responsibility for corporate governance at Diamyd is divided among the Annual General Meeting and any Extraordinary General Meetings, the Board of Directors, the Board s committees and the CEO. NASDAQ OMX s Rules for issuers are available at com and the Swedish Code of Corporate Governance is available at ANNUAL GENERAL MEETING Notice of the Annual General Meeting (AGM) and an Extraordinary Shareholders Meeting (EGM), at which proposed changes to the Articles of Incorporation are considered, must be provided not earlier than six weeks and not later than four weeks before the meeting. Notice of any EGM must be provided not earlier than six weeks and not later than two weeks before the meeting. Notice of a meeting must be provided through an advertisement in the newspapers Svenska Dagbladet and Post- och Inrikes Tidningar. To be entitled to participate in a general meeting of shareholders, shareholders must be recorded in the Company s register of shareholders administered by Euroclear Sweden AB at least five business days before the AGM and have provided notification of attendance within the time period stipulated in the notification. There are no limitations regarding the number of votes each shareholder may cast at the AGM. At the AGM held on December 11, 2009, a resolution was passed to change the Articles of Incorporation to enable notification of a general meeting of shareholders to be conducted in the simplified manner specified in certain proposed law amendments, this includes notification being published on the Company s website and through advertisement in Post- och Inrikes Tidningar. The AGM s resolution is conditional on these proposed law amendments entering into force. ANNUAL GENERAL MEETING, DECEMBER 11, 2009 The resolutions passed at the AGM included the following: A resolution to cover the Parent Company s accumulated deficit of KSEK 36,904 by utilizing KSEK 36,904 from the statutory reserve and to abstain from distributing a dividend to shareholders. 66

69 CORPORATE GOVERNANCE REPORT A resolution to re-elect Anders Essen-Möller, Lars Jonsson, Sam Lindgren and Henrik Bonde and to elect Göran Pettersson and Maria-Teresa Essen-Möller to the Board and re-elect Anders Essen- Möller as Chairman of the Board. A resolution to authorize the Board of Directors to resolve on one or more new share issues up to a limit of 10 % of the total number of shares, and to be able to deviate from the shareholders preferential rights in so doing. Approval of a 2:1 share split, resulting in one old share becoming two new shares. A stock option plan was approved. For additional information, see page 32 and Note 28 page 62 of the annual report. The minutes of the AGM are available on Diamyd s website, NOMINATION COMMITTEE The principles applied for appointing the nomination committee for the AGMs in 2009 and 2010 have been as follows: The nomination committee is to be comprised of representatives of the three principle (by voting power) shareholders of the Company and the Chairman of the Board, who convenes the meetings. The nomination committee must be made public at least six months before the AGM. Nomination committee for the AGM for fiscal year 2008/2009, December 11, 2009 Before the 2008/2009 AGM, a nomination committee consisting of Johannes Falk (Chairman and representative of shareholder and Chairman of the Board, Anders Essen-Möller), lawyer Erik Nerpin, (representative of shareholder, Bertil Lindkvist) and Åke Smids (representative of shareholder, Östersjöstiftelsen). The nomination committee formulated proposals regarding the Board and the Chairman of the Board, directors remuneration, chairman of the AGM and proposals for the nomination process before the AGM for the fiscal year 2009/2010. Nomination committee for the AGM for fiscal year 2009/2010, December 9, 2010 The existing nomination committee of Diamyd comprises Johannes Falk, (Chairman and representative of shareholder and Chairman of the Board, Anders Essen-Möller), lawyer Erik Nerpin, (representative of shareholder, Bertil Lindkvist) and Åke Smids (representative of shareholder, Östersjöstiftelsen). The Board finds that the existing nomination committee has met the requirements of the Code regarding independence and composition. The nomination committee held one meeting during the course of the year. The proposals of the nomination committee will be presented in conjunction with the notification of the AGM at the latest. THE BOARD OF DIRECTORS According to the Articles of Incorporation, the Board must consist of between three and eight members, and from zero to three alternates. The current Board of Directors and its Chairman were elected at the AGM on December 11, The Board consists of Anders Essen- Möller (Chairman), Lars Jonsson, Sam Lindgren, Henrik Bonde, Göran Pettersson, Maria-Teresa Essen-Möller and no alternates. The Board s work is regulated primarily by the Companies Act, the Articles of Incorporation, the Code and the work plan that the Board has established for its work. According to its work plan, the Board must hold at least six ordinary board meetings between each AGM. At four of the meetings, quarterly reports and year-end reports are considered. According to the work plan, a meeting notice and supporting documents for decisions and reports must be distributed to the Board of Directors one week before each board meeting. The Company s auditor attends board meetings as needed, normally twice per year. Pursuant to the Companies Act, the Board s work plan is reviewed on an annual basis. The Chairman of the Board, Anders Essen-Möller, must ensure that the Board s work is performed efficiently and that the Board carries out its duties. In addition, the Chairman must verify that the Board s decisions are effectively implemented, and that the Board s work is evaluated annually. In addition to his duties as the Chairman of the Board, the founder of the Company Anders Essen-Möller is also a Diamyd employee. His primary job duties consist of dealing with long-term strategic issues that are outside the scope of the CEO s strategic work with respect to the business plan, out-licensing of the Company s development projects and patent issues. In addition, his duties include supporting the executive management in the recruitment of staff with key competence. The Chairman is not part of the Group s executive management. The CEO participates in the meetings of the Board of Directors. In the Board s judgment, it fulfills the Code s requirements for independence from the Company, Company management and major shareholders (owners, directly or indirectly, of more than 10 % of the shares or votes in the Company). Name Member since Independent Board meeting attendance Anders Essen-Möller 1996, Chairman No* 19/19 Lars Jonsson 2007 Yes 14/19 Sam Lindgren 2007 Yes 14/19 Henrik Bonde 2007 Yes 19/19 Göran Pettersson 2008 Yes 12/12 ** Maria-Teresa Essen-Möller 2009 No * 12/12** * Anders Essen-Möller is not considered independent because he is a major shareholder in the Company as well as an employee. Maria-Teresa Essen-Möller is not considered independent because she is the daughter of the Chairman of the Board Anders Essen-Möller. The other Members of the Board are considered independent of both the Company and its major shareholders. ** Göran Pettersson and Maria-Teresa Essen-Möller were elected in December For information regarding the age, education, experience and any other assignments in the Company and other material commitments as well as holdings in the Company of the Board Members, please see pages of the annual report. annual report 09/10 67

70 THE BOARD OF DIRECTORS WORK DURING FISCAL YEAR 2009/2010 During the year, the Board of Directors held 19 meetings for which minutes were taken, including one meeting conducted by correspondence. The work of the Board of Directors has been intensive due to the growing pace of development of the Company and the strategic phase in the Company s development, which has entailed a greater number of board meetings than normal. Particular importance has been placed on issues regarding the out-licensing of the candidate drug Diamyd and issues regarding the establishment of two separate business areas, Diabetes and Pain. The Company s auditor was present and reported her findings at the board meetings in October 2009 and October 2010 when the annual financial statements were reviewed. The Company s auditor also reported on the review of the interim financial statements and the internal control at the meeting in July Other material issues dealt with during the year have included: The goals and strategic direction of the business Business plans, financial plans and forecasts Capital and financing issues Interim reports and the annual financial statements Evaluation of the work of the Board, the CEO and the Group s management Members of the executive management have participated in certain meetings to make presentations. During the year, the Company s CFO functioned as the Secretary to the Board of Directors. For information regarding the remuneration of the Board of Directors, see Note 5 in the annual report, pages AUDIT COMMITTEE The audit committee has supervised the Company s financial reporting, risk management and the effectiveness of internal controls. Particular importance has been placed on the discussion and analysis of financial risk management and particularly dealing with the increasing cash flows in foreign currencies in the Company. In conjunction with the adoption of the annual financial statements and the third quarter interim report, the Company s auditor reported the audit findings from the review of the annual financial statements and the interim financial statements and gave an opinion of the internal controls. In accordance with the Swedish Companies Act, the Board of Directors has elected to omit establishing an audit committee and instead to allow the entire Board of Directors to perform the duties of the audit committee according to the Code and the Swedish Companies Act. The Board of Directors has evaluated the need for an independent audit committee and still deems the performance of the audit committee s duties by the entire Board of Directors as fully adequate. COMPENSATION COMMITTEE During fiscal year 2009/2010, the compensation committee was made up of independent Board member Henrik Bonde and Chairman Anders Essen-Möller. In accordance with guidelines approved at the previous AGM, December 11, 2009, the committee is charged with considering and deciding questions concerning the compensation of key executives, with the exception of the CEO. The committee is also charged with proposing guidelines for compensation of key executives at the next AGM. Issues concerning incentive programs and the CEO s remuneration are considered and decided by the Board of Directors. The compensation committee has held three meetings where minutes were taken during the fiscal year, where both members attended. The committee reports directly to the Board of Directors. From July 1, 2010, the duties of the compensation committee, according to the Code, have been broadened and the committee s evaluation function clarified. Therefore, the Board of Directors has not formally examined the committee s report and intends to state its position in conjunction with the AGM For information on the principles for remuneration of key executives and other terms of employment which were adopted at the AGM on December 11, 2009, and on remuneration during the fiscal year 2009/2010, see page 32 and Note 5, pages in the annual report. CEO AND EXECUTIVE MANAGEMENT Since 2008, the CEO is Elisabeth Lindner. The CEO leads the Company s operations and day-to-day administration in accordance with the instructions of the Board of Directors and is responsible for keeping the Chairman of the Board and other Board Members informed regarding development of the Company and for ensuring that requisite information is made available to the Board of Directors. The Company s executive management comprised six people including the CEO during the year. The executive management normally meets once per week and deals with issues regarding clinical operations, the financial position and business development. Diamyd s steering model builds on having a small organization with a limited number of employees that lead projects in research, regulatory issues and production, where the main portion of operations are out-sourced to qualified collaboration partners. A key element of the executive management s duties is the control and monitoring of these operations. The person responsible for a function is responsible for implementing decisions, taken at the management meetings regarding that particular function and monitoring results. For information regarding the age, education, experience and any other material assignments outside the Company as well as holdings in the Company, please see pages of the annual report. For more information regarding Diamyd s organizational structure and steering model, please see pages in the annual report. AUDIT The Company s auditors are PricewaterhouseCoopers AB. Eva Blom is the principal auditor. Eva Blom has been an authorized public accountant since She is a member of FAR, and has been Diamyd s principal auditor since February 19, Eva Blom is an auditor for Unilever Sverige AB, NCC Roads Holding AB, Baxter Medical AB, Glaxo Smith Kline AB and Orion Pharma AB among others. Since 2007, PricewaterhouseCoopers AB has been selected for a term of four years. For information on audit fees, see Note 7, page 53. INTERNAL CONTROLS AND RISK MANAGEMENT IN CONJUNCTION WITH FINANCIAL REPORTING Internal controls and risk management regarding financial reports is a process intended to provide reasonable certainty concerning the reli- 68

71 CORPORATE GOVERNANCE REPORT ability of public financial reporting and to ensure that financial reports are developed and published in accordance with generally accepted accounting principles, applicable laws and regulations and other requirements for listed companies. Diamyd s internal controls in this respect consist of five primary components: a control environment, risk assessment, control activities, information and communication, and monitoring. Control environment Diamyd s control environment is the foundation of internal controls regarding financial reports. The control environment is composed of the Company s organizational structure, decision paths, work procedures and the powers and responsibilities of management and other personnel, as well as their attitudes and values. The control environment is documented and communicated in governing documents, such as the Board of Directors work plan, the CEO s directions and policies and other instructions including the Business handbook, finance policy and authorization manual. These documents must be evaluated and updated at least once a year, and in connection with changes to legislation, accounting standards or listing rules, for example. Financial reports are to be prepared on a monthly and quarterly basis for the Group, the Parent Company and the subsidiaries. The Board bears the overall responsibility for internal controls regarding financial reports. The Board also bears the overall responsibility for meeting the Company s auditor on a regular basis to keep up to date on the scope and direction of the audit, as well as to discuss the risks facing the Company and the coordination of internal controls and the external audit. Risk assessment Diamyd s risk assessment consists of identifying, measuring (as far as possible in practice) and surveying the sources of the risks that affect internal controls regarding financial reporting. This task also includes reviewing documents and policies according to the above. Risk assessment is an integrated part of the reports made to management and the Board of Directors. Risk assessment is focused on critical accounting issues, and encompasses issues including the identification of entries in the income statement and balance sheet with an elevated risk of significant errors or deficiencies, either typically or in an individual instance. In Diamyd s case, accrued project expenses may reach significant amounts, the size of which is largely based on management s judgment. This has been deemed as possibly giving rise to risks, since such judgments are always associated with a certain degree of uncertainty. Other critical accounting issues may be changes to estimates or judgments or events after the balance sheet date, revenue recognition and valuation of the Company s financial assets. For a more detailed description of various financial risks and their management, please see the risk section of the Administration Report in the annual report pages instructions and are prepared on a monthly basis. They are analyzed by the Company s accounting and finance department, which includes a thorough analysis and control of important accounting entries. The analysis and control of items is conducted by several people and comprises the comparison of actual outcome with the budget and forecast. Monthly monitoring is conducted in part through meetings with project managers and in part through meetings with the CEO. This monitoring makes it possible to analyze important changes, which reduces the risk of errors in the financial reports. In the course of preparing the accounts and report, particular emphasis is placed on specifying and commenting on important income statement and balance sheet entries. The control activities also involve applying the principle of duality in the accounting and finance department and instructions to the CEO, which indicate which decisions require the Board s consent. Information and communication The Company s information policy regulates the communication of financial information internally between management and other employees, and externally to the market. The Company s information must be correct, relevant and presented in a clear and integrated manner. All communication must be conducted in accordance with the NASDAQ OMX Rules for Issuers. The Company s small organization enables internal information to be communicated directly and concisely. Information is provided to shareholders through the annual report, interim reports, press releases and the Company s website. Monitoring At every board meeting, the Board of Directors considers the Company s and the Group s financial situation through reports including the financial statements that the CEO continually provides to the Board of Directors. The reports include outcomes versus budget and earnings and cash flow forecasts, all with their accompanying variance analysis and management comments. The Board of Directors is kept continually updated of the financial risks of the Group and how they are managed. The financial reports enable the Board of Directors to continually monitor the performance of the business. Internal audit function Diamyd has no dedicated internal audit function. In the Board of Directors judgment, the internal controls have worked well and have been sufficiently effective. The organization is small and easily supervised, which is why various executives of the Company are well capable of fulfilling the internal control function. Therefore, in the Board of Directors view there has been no need to appoint a dedicated internal audit function. The Board of Directors of Diamyd Medical AB Control activities Control activities encompass both general and more detailed controls, which are intended to prevent, detect and correct errors and deviations in financial reports. Financial reports are built on policies and annual report 09/10 69

72 THE BOARD Anders Essen-Möller Chairman Born in M.Sc. Founder and former CEO of Diamyd Medical. Board member since 1996, Chairman since Anders Essen- Möller also founded Synectics Medical AB, which was sold to Medtronic Inc. in Other assignments: Member of the Armea AB board. Holdings in Diamyd as of August 31, 2010: 1,437,876 A shares; 420,308 B shares; and 10,000 employee options 2007/2010. Henrik Bonde Independent Board Member Born in M.Sc. in Business Administration. Board member since Henrik Bonde is the Chief Investment Officer of the Östersjöstiftelsen. Treasurer and board member at Gålöstiftelsen. Other assignments: Member of the Boards of Morphic Technologies AB, Iris Holding AB, Iris Group AB and chairman at Iris Förvaltning AB Holdings in Diamyd as of August 31, 2010: 1,024 B shares. MARIA-TERESA ESSEN-MÖLLER Board Member Born in M.Sc. in Business Administration. Board member since Founder and CEO of Essen-Möller Consulting. Maria-Teresa Essen-Möller was Head of Investor Relations and Corporate Communications for Diamyd Other Assignments: Board member of Stiftelsen Adolf Fredriks och Gustav Vasa Barnkrubba. Holdings in Diamyd as of August 31, 2010: 36,000 B Shares. 70

73 THE BOARD and key EXECUTIVES Lars Jonsson Independent Board Member Born in B.Sc. Stanford Graduate Business School Senior Executive Program. Lars Jonsson has been a Board member since Chairman and CEO of Stellar Holdings. Swedish Honorary Consul in Seattle, founder and majority owner of the international group Stellar Holdings. Ambassador for Barndiabetesfonden (The Childhood Diabetes Foundation). Other assignments: None. Holdings in Diamyd as of August 31, 2010: 2,300 B shares. Sam Lindgren Independent Board Member Born in MD, Ph.D., MBA. Sam Lindgren has been a Board member since More than 15 years experience from leading positions in the pharmaceutical industry, in the areas of diabetes (Novo Nordisk), CNS (Lundbeck) and asthma (Astra). Senior Research Physician, Astrazeneca. Other assignments: None. Holdings in Diamyd as of August 31, 2010: 1,280 B shares. GÖRAN PETTERSSON Independent Board Member Born in M.Pharm.Sc., MBA. Board member since years experience from leading positions in Sweden and abroad in Astra, KabiVitrum, Pharmacia, Pharmacia&UpJohn and Meda. Other assignments: Chairman in Medivir AB, OxyPharma AB and Vivoxid Oy. Member of the boards of Recipharm AB, and Pfizer Pensionsstiftelse 1. Holdings in Diamyd as of August 31, 2010: 0. annual report 09/10 71

74 KEY EXECUTIVES Elisabeth Lindner President and CEO Born in M.Sc. and MBA, Stockholm and Uppsala. Long-standing experience with Pharmacia Corporation and Octapharma AG. Elisabeth Lindner has been Diamyd s President and CEO since Other assignments: Member of the Board of BioInvent International AB (publ) and SwedenBio, CEO and Board member of Biosource Europe AB, Member of the Board of the Royal Swedish Academy of Engineering Sciences (IVA) and European Framework 7, Advisory Group for Health Research. Holdings in Diamyd as of August 31, 2010: 16,956 B shares, 3,334 employee options 2007/2010, 42,900 employee options 2008/2011 and 45,000 employee options 2009/2012. KERSTIN ANNAS Director of Quality Born in M.Sc. in Chemistry from Stockholm University. Previous experience includes Qualified Person of manufacturing and wholesale at SBL Vaccin/Crucell Sweden and quality assurance at FreseniusKabi. Kerstin Annas joined Diamyd in Other assignments: None. Holdings in Diamyd Medical AB as of August 31, 2010: 0. Erika Hillborg Director of Clinical Development Born in M.Sc. in Biomedicine from the Karolinska Institute in Stockholm, with a Science Journalism degree from Uppsala University. Erika Hillborg has worked for Diamyd since Other assignments: None. Holdings in Diamyd as of August 31, 2010: 17,601 B shares, 3,334 employee options 2007/2010, 16,500 employee options 2008/2011 and 25,000 employee options 2009/2012. Natalie Jelveh Director of Business Control Born in M.Sc. in Economics and Applied Biotechnology from Södertörn University College. Since receiving her degree Natalie Jelveh has been involved with sales and finance issues. Natalie Jelveh joined Diamyd in Other assignments: None. Holdings in Diamyd as of August 31, 2010: 10,000 employee options 2007/2010; 16,500 employee options 2008/2011; and 25,000 employee options 2009/

75 THE BOARD and key EXECUTIVES Anna Styrud Chief Financial Officer Born in BSc in Business Administration from Uppsala University. Previous experience includes Group Treasurer of Vasakronan and various positions within finance, treasury and control at Fläkt AB and National Board of Public Building. Anna Styrud joined Diamyd in Other assignments: None. Holdings in Diamyd Medical AB as of August 31, 2010: 500 B- shares and 25,000 employee options 2009/2012. Darren Wolfe CEO, Diamyd, Inc., USA. Born in Ph.D. in Molecular Biology and Biochemistry, Pennsylvania State University. Darren Wolfe was previously a Research Assistant Professor in the Department of Molecular Genetics and Biochemistry at the University of Pittsburgh. Darren Wolfe has worked for Diamyd since Other assignments: None. Holdings in Diamyd as of August 31, 2010: 15,977 B shares, 3,338 employee options 2007/2010, 16,500 employee options 2008/2011 and 25,000 employee options 2009/2012. Peter Zerhouni Director of Business Development Born in M.Sc. in Biology and a B.Sc. in Economics & Business Administration from Lund University and UC Berkeley. From 1999 to 2006 Peter Zerhouni held various positions at ING Bank in Brussels and Amsterdam, most recently within Structured Finance. Peter Zerhouni joined Diamyd in Other assignments: None. Holdings in Diamyd as of August 31, 2010: 1,284 B shares, 10,000 employee options 2007/2010, 16,500 employee options 2008/2011 and 25,000 employee options 2009/2012. AUDITORS Diamyd s auditors are Öhrlings PricewaterhouseCoopers AB, domiciled at Stockholm. Eva Blom is the principal auditor. Eva Blom has been an authorized public accountant since Eva Blom is a member of FAR, and has been Diamyd s principal auditor since February 19, The auditing firm was chosen in 2007 for a four year period. annual report 09/10 73

76 ORGANIZATION, EMPLOYEES AND SUSTAINABLE DEVELOPMENT The foundation of Diamyd s success is the strong desire to discover a treatment for diabetes and to find new ways to treat pain. Achieving success in research, clinical trials and future market launches demands a highly qualified and committed staff with the desire to succeed. Diamyd s ambition is to preserve the small-company advantages of a flat organization and short decision paths as Diamyd grows. Board of Directors President and CEO Elisabeth Lindner Accounting and Finance Information and Marketing Scientific Advisory Board Legal Pre-clinical Clinical Production Business Development ORGANIZATION AND EMPLOYEES The Diamyd Group consists of the Parent Company Diamyd Medical AB (publ) and the wholly-owned subsidiaries, Diamyd Diagnostics AB, Diamyd Therapeutics AB and Diamyd, Inc., in Pittsburgh, USA. The head office is in Stockholm, Sweden. Diamyd is managed using an outsourcing model providing low costs and an efficient organization. Some of its operations have been outsourced to qualified partners with expert qualifications, and a limited number of permanent employees manage, lead and implement projects in areas such as clinical trials, regulatory issues and production. This enables Diamyd to pursue external research from the point of early discovery, conduct pre-clinical and clinical trials, and manage registration processes and future market launches. The model also contributes to a high degree of flexibility, where resources can be quickly reallocated among different projects as needed. As of August 31, 2010 the Group had 24 employees, whereof 8 men and 16 women. The level of qualifications among employees is high, with a large percentage having academic degrees, including several Ph.D.s. The CEO and Board of Directors have extensive experience in the pharmaceutical industry. In addition, Diamyd has access to expertise in its areas of research via a scientific and medical advisory board composed of leading scientists from the US, the Netherlands, England and Sweden. Highly qualified and loyal employees are an important factor for Diamyd s continued success and development. Diamyd continually invests in the development of its employees skills through both internal and external training initiatives, which are linked to each employee s individual goals. In addition to possibilities for professional growth as well as competitive salaries and pension agreements, Diamyd also offers employee options to the personnel. Women yrs University education Gender balance Men Age distribution yrs yrs yrs Level of education yrs Other education Doctorate 74

77 organization The level of qualifications among employees is high, with a large percentage having academic degrees, including several Ph.D.s. HEALTH AND WORK ENVIRONMENT Diamyd shall provide a safe and healthy work environment. Diamyd observes established policies concerning issues such as ethics and the environment, work environment, quality and equality. Diamyd shall offer equal opportunity to all employees and applicants, regardless of gender, nationality, religion, age, disability or sexual orientation. Diamyd s outlook is that a good work environment aids workplace morale, reduces sick leave and supports the efforts of its employees. Work loads must be customized to the individual and make a healthy balance between work and leisure possible. To avoid work related strain injuries all employees are offered ergonomic working tools and subsidized massage during working hours. Health awareness is encouraged through fitness subsidies and free fruit at the workplace. RESPONSIBILITY, ENVIRONMENT AND QUALITY CONTROL Diamyd s primary focus is the development of pharmaceuticals for autoimmune diabetes and pain, both serious conditions in great need of new treatment regimens. Diamyd s responsibility toward society and the patient is part of its business as a research pharmaceutical company, and influences its work in developing new pharmaceutical products and performing clinical trials. Diamyd s work has a great impact on people s lives and health, so it is of the utmost importance for Diamyd to not only follow applicable laws and regulations, but also to act in a manner that is responsible and ethically proper. Pre-clinical and clinical studies of Diamyd s substances or products are conducted in cooperation with partners, such as contract research firms or research groups associated with universities. The studies should always be designed in consultation between Diamyd and its partners, and approved by Diamyd. Diamyd s clinical trials are conducted in accordance with Good Clinical Practice (GCP), and they are managed in cooperation with well-established contract research firms. The performance and purchase of trial-related services are regulated according to special process descriptions, i.e. Standard Operating Procedures, as well as quality agreements, in order to ensure that Diamyd s trials are always conducted according to applicable practice and that laws and regulations are followed. Diamyd always strives to maintain a high level of environmental awareness throughout its entire business. Diamyd does not do any manufacturing itself, and its direct environmental impact is considered to be low. However like most other companies, its business causes a certain degree of impact on the environment, primarily through emissions for travel and shipments as well as energy consumption for its offices. In addition some environmental impact may occur in connection with the manufacture of Diamyd s products by external manufacturers, as well as from outsourced research activities. To ensure that Diamyd always strives for long-term environmental efforts with the smallest possible environmental impact, both in its operational activities and in cooperation with manufacturers, researchers and other partners, Diamyd pursues its work according to an established environmental policy. annual report 09/10 75