2006 annual report - btg plc report 2006 3 the business biocompatibles is a world leader in...

2006 ANNUAL REPORT

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BIOCOMPATIBLES

Contents1 Financial Summary

2 Chairman’s Statement

6 Operational Review

12 Financial Review

13 Principal Advisors

14 Board of Directors

16 Senior Management

17 Directors’ Report

22 Statement of Directors’ Responsibilities

23 Independent Auditor’s Report

25 Corporate Governance Report

32 Directors’ Report on Remuneration

40 Consolidated Income Statement

41 Consolidated Balance Sheet

42 Consolidated Statement of Changes in Equity

43 Consolidated Cash Flow Statement

44 Company Balance Sheet

45 Company Statement of Changes in Equity

46 Company Cash Flow Statement

47 Notes to the Consolidated Financial Statements

76 Glossary of Terms

77 Advisors & Investment Information

Biocompatibles International plc is a medicaltechnology company focused on drug deviceCombination Products principally for use in oncology.

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ANNUAL REPORT 2006

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� Revenue increase of 75% to £6.0m (2005: £3.4m).

� Gross profit increase of 136% to £3.8m (2005: £1.6m).

� Operating loss of £8.0m (2005: £11.0m).

� Cash, cash equivalents and available-for-sale financial assets at 31 December 2006

of £37.2m (2005: £41.0m).

� Further £10.3m gain on sale of discontinued activities.

Our Vision

2006 Highlights

Our Vision for Biocompatibles as a whole is the development of a high margin, high growth business based on a range ofvaluable drug device combination products.

The vision of the Biocompatibles business based in Farnham is the creation and leadership of a market for Drug ElutingBeads and the recognition of our products as a Gold Standardtreatment for HCC and mCRC.

CellMed’s vision is to be first to market with an engineered stem cell product.

Each of the 2007 Goals is a milestone on the way to therealisation of these ambitions.

2006 Financial Summary

‘‘

’’

� CellMed retained, put option waived.

� New distribution agreements with Angiodynamics (US), Terumo (EU), SciClone

(China) and 5 regional distributors.

� Start of metastatic colo-rectal cancer programme (Irinotecan Bead).

� US sales growth (56%) – increased traction in key market.

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BIOCOMPATIBLES

Biocompatibles made good progress in 2006 with the Group’s prime

focus, the Drug Eluting Bead programme, managed from Farnham,

UK; and also with CellMed’s programmes, managed from Alzenau,

Germany. We consolidated a solid base of sales, with growth of 75%

in 2006 and continued to build momentum in the important US

market. But the year was clouded by the failure of Abbott’s ZoMaxx

Drug Eluting Stent programme on which we had expected to earn

royalties. Further detail on the ZOMAXX trial is provided in the

Operational Review.

The Drug Eluting Bead programme progressed through some

important milestones – notably the publication of clinical trial results

in the Journal of Hepatology and in Anticancer Research; the start

of the PRECISION V randomised Phase II clinical trial; and the

establishment of three important distribution agreements. These new

agreements contributed to the strong growth in the sales of the

DC Bead and LC Bead products – the real test of a product’s

competitiveness.

CellMed also made good progress. The collaboration with Merz for

the Cosmetic Dermatology market proceeded according to plan and

the filing of a regulatory submission for the treatment of stroke

with the CellBeads™ product was a significant accomplishment.

Our programmes are focused on diseases where medical progress has

been limited and where there is significant market potential. The prize

for success in these programmes therefore remains attractive from the

standpoint of both patients and investors.

The main tasks for the coming year are to maintain the sales and

clinical trial momentum – especially in the first target indication,

Hepatocellular Carcinoma (HCC, the predominant form of primary

liver cancer); to continue to build clinical data to support the Drug

Eluting Bead in the treatment of the more prevalent metastatic

colorectal cancer (mCRC); and to start the CellBeads stroke trial.

Chairman’s Statement

PatientTrial Name Location Objective Indication Status Number

PRECISION I Barcelona Safety, Dose HCC Submitted for publication 28

PRECISION II Hong Kong Safety, Dose HCC Submitted for publication 35

PRECISION IV Multi-Centre US Randomised Controlled Trial: HCC Awaiting NCI funding decision 300Safety, Efficacy

PRECISION V Multi-Centre Randomised Controlled Trial: HCC Recruiting 200Efficacy, Quality of Life

PRECISION VI Frankfurt Safety, Efficacy Lung Recruiting 20

Athens Athens Safety, Efficacy HCC Publication in draft 60

Baltimore US US feasibility HCC Recruitment complete 10

Irinotecan DC Italy Safety, Efficacy, Technique Colorectal Cancer Ongoing 25Bead Metastases

Irinotecan Trials Frankfurt Safety, Efficacy, Technique Colorectal Cancer Recruiting 10Metastases

Paris IGR Safety, Efficacy Neuroendocrine Publication in draft 20Metastases

Pisa + RF Pisa Safety, Efficacy HCC Recruiting 20

Vienna Vienna Safety, Efficacy, Technique HCC Publication in draft 28

Drug Eluting Bead: A Comprehensive Programme of Clinical Trials

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The BusinessBiocompatibles is a world leader in technology for “Combination

Products” – medical products that combine the functionality of a

medical device, like an orthopaedic spinal implant or a coronary

pacemaker, with the ancillary therapeutic action of a drug, like a bone

growth factor or an anti-inflammatory steroid. The growth in the

global market for drug eluting coronary stents, from $1.6bn in 2003

to $5.1bn in 2006 was a significant factor in the growth of the wider

market for Combination Products whose sales are estimated to reach

$10bn in 2009.

We have two businesses – Biocompatibles in Farnham (UK) and

CellMed in Alzenau (Germany). Both divisions use bead technology

to deliver a therapeutic agent – Farnham delivers established

chemical formulations and CellMed delivers novel biological

formulations, including stem cell-based therapies. Many drugs are

limited by toxicity or related delivery problems and Biocompatibles’

core technology has been developed specifically to overcome

these challenges.

Each business uses a proprietary polymer system for bead production

and both businesses have first-generation bead products that do not

contain any drug – Bead Block and the Alginate Bead, respectively.

The Board has decided that the Company should, in the next two or

three years, focus its management resource and its capital on two

parallel goals – establishing a strong package of clinical trial results

and maintaining our commercialisation momentum.

We have established distribution agreements with Terumo, a leading

supplier of products for interventional medicine, headquartered

in Japan; with RITA Medical Systems whose acquisition by

Angiodynamics, another leading supplier of products for

interventional medicine and headquartered in New York State,

was announced in December; and with SciClone Pharmaceuticals,

the leading supplier of imported branded pharmaceutical products

in China, headquartered in California. These distribution agreements

have an average of three years to run and as they expire, we will

be reviewing our distribution strategy with an emphasis on

demonstrating value for shareholders.

LC BeadTM is cleared by FDA for the embolisation ofhypervascularised tumours and arteriovenous malformations(AVMs).

DC BeadTM is CE Mark approved and is intended to be loaded withdoxorubicin for the purpose of:

• Embolisation of vessels supplying malignant hypervascularised tumour(s)

• Delivery of a local, controlled, sustained dose of doxorubicin to the tumour(s)

PRECISION BeadTM is a drug eluting bead loaded

with doxorubicin, available for sale in Hong Kong and in

submission for CE Mark review.

Irinotecan BeadIrinotecan Bead is a drug eluting

bead loaded with irinotecan, currentlyin pre-clinical development. It is intended for

the treatment of liver metastases of the colon.

Ibuprofen BeadIbuprofen Bead is a drug eluting bead loaded with

Ibuprofen, currently in clinical development. It is intended for themanagement of post embolisation pain.

Cell BeadCell Bead is a bead in development for the encapsulation of cells or

tissues for long term biologic drug delivery.

Biodegradable Bead

Biodegradable Bead is a bead being developed to offer delivery solutions where biodegradabilityof the bead is a requirement or an advantage.

Drug Eluting Bead: Pipeline

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BIOCOMPATIBLES

Chairman’s StatementContinued

The TechnologyBiocompatibles has a portfolio of granted patents around three

biomedical polymer systems – the NFil Technology™ licensed from

the Biocure affiliate of Novartis’ Ciba Vision subsidiary, which is

used in the Drug Eluting Beads programme; the CellMed technology,

CellBeads®, which is required for the encapsulation of the biological

agents delivered in the CellMed programmes; and the PC

Technology™ that was the Group’s original platform.

During the course of the year, a transaction to out-license certain PC

technology patents for commercialisation by Seal Sands Chemicals

Ltd was completed. Seal Sands is a subsidiary of Vertellus Specialties

Inc., a specialty chemical organisation. The licence covered the use

of PC technology for application to medical devices and excluded the

fields of cardiovascular stents, soft contact lenses, embolisation and

drug delivery to tumours. An upfront payment of £1.5m was received

with the potential for an additional £2m of deferred consideration

as well as a share of milestones and royalties secured by Seal Sands

from new licenses. This transaction is consistent with the Board’s

focus on proprietary products in general and the Drug Eluting Bead

programmes in particular.

The Group’s intellectual property assets comprise our people and

their expertise and know-how, the patent portfolio and the trial data

published in scientific journals. The progress made last year in relation

to the Group’s technology is described in the Operational Review.

The VisionOur Vision for Biocompatibles as a whole is the development of a

high margin, high growth business based on a range of valuable

drug device combination products.

The vision of the Biocompatibles’ business based in Farnham is the

creation and leadership of a market for Drug Eluting Beads and the

recognition of our products as a Gold Standard treatment for HCC

and mCRC.

CellMed’s vision is to be first to market with an engineered stem

cell product.

Each of the 2007 Goals is a milestone on the way to the realisation

of these ambitions.

Building ValueBiocompatibles’ financial profile is being transformed by the growth

in sales and gross margin; but the Group is not yet profitable and the

most commonly accepted measure of business success is therefore not

available to investors or other stakeholders. This imposes an obligation

on the Board and management to be very specific about how the value

of the Group is to be increased and risk is to be managed.

There are three ways in which this issue is addressed. First, the Group

lays out a vision in the medium-term which is described above, along

with annual goals. The Board anticipates that the vision should create

value for shareholders. Shareholders can monitor progress in the

annual and interim reports. Second, management undertakes the

discipline of providing financial guidance to investors and the rest of

the financial community on the level of sales and cash consumption.

This guidance appears in the Financial Review. Again, shareholders

can monitor delivery against these targets. Third, the Board and

management review whether there are specific opportunities for

accelerating the delivery of value to shareholders. This approach was

taken in 2002 with the sale of the cardiovascular stent and contact

lens businesses, and the subsequent return to shareholders of £123m

of capital. These kinds of strategic initiatives are available with high

growth product lines with the potential for significant and sustainable

profitability at the gross margin level. The focus of our operational

activities is on building such product lines.

Acquisition and BusinessDevelopment ActivityThe Board monitors a short list of acquisition and in-licensing

opportunities, which are typically companies that would strengthen

the competitiveness of our Bead product lines.

Corporate GovernanceThe Directors place a high priority on maintaining high standards

of corporate governance and rigorous management systems, and the

Company is in compliance with the Combined Code on Corporate

Governance, published in June 2006. Biocompatibles’ quality

management system incorporates a number of relevant provisions

from the Code (and the Turnbull Guidance), including those relating

to risk management and internal control. The internal control risk

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ANNUAL REPORT 2006

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review ensures that, as the Group and its technology evolves, its

approach to risk keeps pace. The Company’s continued accreditation

to the ISO 9001-2000 quality standard represents independent

verification of the Company’s compliance with some of the key

elements of corporate governance.

Since 2001, the Company has also held both the FTSE4Good and

Investor in People accreditations. The FTSE4Good status symbolises

a commitment to high standards of corporate and social responsibility,

and Investor in People recognises the Group’s dedication to

employee development.

Management of Risk The Biocompatibles’ share price is more volatile than the average

share on the London stock market, not least because the Company is

part of a volatile sector – of small/mid size healthcare technology

companies. The Directors take the view that the Company’s investors

are aware of this “sector risk” and that they are looking for the

exceptional returns that can be achieved when healthcare technology

is successfully commercialised. The Directors therefore focus their

review of risk on the issues that can cause a delay to ultimate success

as well as on those that can cause failure. For further details of the

Group’s risk assessment and mitigation plan see the Corporate

Governance Report on page 29. The principal risks and uncertainties

the Group faces are set out in the Directors’ Report on page 17.

Board Changes I was appointed to the Board on 10 January 2006 and succeeded

Sir Richard Needham as Chairman following his retirement after

the AGM on 22 June. The Board is grateful to Sir Richard for his

significant contribution and commitment over his six years as

Chairman. In addition, following the year end we welcomed Tony

Weir, Finance Director of Vernalis plc, as a non-executive director,

who will also chair the Audit Committee in succession to David

Hankinson who retired from the Board on 25 January 2007 following

over 9 years of service to the Company. David’s wise counsel and

independent judgement has been of great benefit to the Company.

Jeremy Curnock Cook succeeds David Hankinson in the role of

Senior Independent Director.

OutlookThe Group recognises that regular updates on the progress being

made with existing and new product programmes are important. The

Group made nine such announcements in 2006 and the Board has

identified nine priority news flow items to mark the progress of the

Group in 2007 and these are identified in the Operational Review.

The strong results of the clinical trials in HCC, the promising data on

mCRC, the commitment, capability and product commercialisation

record of our distribution partners and the enthusiasm, generally, of

physicians who now regularly use Biocompatibles’ Bead products

provide the Directors with confidence that Biocompatibles’ products

can deliver growth for the Company, development opportunities for

our people, benefit to patients and value for our shareholders.

Managing the kind of leading edge development programmes that

Biocompatibles is undertaking requires exceptional technology,

certainly, but also dedicated and expert employees. Before I accepted

Biocompatibles’ invitation to join the Board, I conducted a personal

review of the Company and its reputation from a variety of angles.

I was impressed with what I heard and have been subsequently

pleased to find a quality of person both in Germany and in the

UK – that exceeds the earlier favourable impressions. On behalf of

the Board I express my sincere appreciation of their effort and of

their achievements.

The technology and know-how in both Farnham and Alzenau is

very promising and the progress with the core managed programmes

has been good; but the creation of shareholder value is the

fundamental goal and this is where the Board and all our people

are firmly focused.

Gerry Brown

Chairman

Chairman’s StatementContinued

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BIOCOMPATIBLES

Biocompatibles made good progress in 2006 with the Group’s

prime focus, the Drug Eluting Bead programme and also with

CellMed’s programmes.

In the 2005 Annual Report the Company established six goals that

were planned for announcement during the course of the year.

These Goals serve as Key Performance Indicators for the purposes

of managing the Company’s performance. The goals under the more

direct control of Biocompatibles were largely achieved. The goals

relating to the Abbott Drug Eluting Stent programme were not.

A review of the performance against the 2006 goals is shown below:

Operational Review

� Drug Eluting Bead: Final data from Precision II (Hong Kong).

This goal was achieved.

� Drug Eluting Bead: Launch of the DC Bead™ in Europe.

This goal was achieved.

� Drug Eluting Bead (CellMed): Start of a clinical trial for a CellMed therapeutic product.

This goal now expected to be achieved H1 2007. Application submitted to the agent of German Ministry of Health in November

� Drug Eluting Stent: Abbott’s ZoMaxx™ launch in Europe, and first royalties.

This goal was not achieved as Abbott abandoned development of the ZoMaxx Drug Eluting Stent.

� Drug Eluting Stent: ZoMaxx clinical data.

This goal was achieved but not in the way intended. The data was presented but the results were a disappointment.

� Sales growth in the range 47% to 91% (69% at the mid point).

This goal was achieved. Sales growth was 75%.

2006 Goals

2007 Goals

� Financial

1 Achieve the revenue guidance (£8-10m), which represents 51% growth at the mid-point.

2 Achieve the cash guidance (£30m), which reflects expenditure of £7m, or 19% of the Group’s opening cash.

� Farnham/International

1 Launch DC Bead in China, which will require regulatory approval by the Chinese State Food and Drug Administration.

2 PRECISION V Safety Committee report, of the first sixty patients.

3 Recruit first patient into HCC Survival trial.

4 IDE approval of US Phase IIb Irinotecan Bead in metastatic colo-rectal cancer (mCRC).

5 Further survival data to be presented at CIRSE in September on European Phase IIb Irinotecan Bead trial in mCRC.

� CellMed

1 Start Phase I/II trial for the treatment of stroke.

2 Start CE Mark trial for the cosmetic bead, managed by our licencee, Merz Pharmaceuticals.

3 Out-licence CellMed peptide, a proprietary drug.

The 2007 Goals are as follows:

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Operational ReviewContinued

Business Unit Developments

� Biocompatibles: Farnham/International

Vision Delivery Update: Our vision for the Biocompatibles

business in Farnham is the creation and leadership of a market for

Drug Eluting Beads and the recognition of our products as a Gold

Standard Treatment for HCC and mCRC.

On track: We estimate that the penetration rate in 2006 was 9%

of procedures1 and 15% by market value. In a few hospitals the

penetration rate was 100%. We continue to believe that the

100% penetration goal is achievable on the basis of successful

completion of our clinical programme. We estimate that indications

other than HCC account for around 14% of Drug Eluting

Bead procedures.

1Potential Drug Eluting Bead procedures in EU and US.

Biocompatibles is seeking to establish Drug Eluting Bead therapy

as the Gold Standard treatment for certain cancers. Our products are

regulated as medical devices, as distinct from drugs, and as such

can be marketed before the completion of the clinical development

programme. They have duly established an initial market position

on the basis of the early clinical trials but will reach their maximum

sales potential only when the clinical trial programme progresses

successfully.

The Company’s approach to this unusual position is to refer to initial

safety and efficacy trials as Phase I/II; to randomised controlled trials

with an efficacy primary end-point as Phase II; and to randomised

controlled trials that are intended to be the definitive assessment of

the efficacy of the new therapy, as Phase III. The normal use of the

term Phase III trials to refer to a final pre-registration trial does not,

therefore, apply.

� Commercial Development

Sales of the Company’s Bead Products – Bead Block™ and the drug eluting DC Bead and PRECISION Bead™ products – grew by114% in comparison with 2005 through Biocompatibles’ principal

distribution partners, Terumo Corporation, AngioDynamics and threeother distributor customers. US sales of the Company’s Bead Productsgrew by 56% and European sales grew by 179%. The Companyachieved the sales guidance established at the beginning of the year.

We estimate that the world market for spherical embolic products

grew, over 2006, to approximately $34m. There are two principal

segments in the market for spherical embolisation products – uterine

fibroids and cancer. We estimate that Biocompatibles’ Bead Products

increased their share of the market from approximately 13% to 27%.

The market leader has a market share of approximately 60%, based on

a high share of the currently larger fibroid segment, where we have a

Drug Eluting Bead product in development. Our goal remains the

leadership of the market for spherical embolic products through the

development of the cancer segment into a substantial product market.

The Company continues to estimate that the initial market opportunity

for the Drug Eluting Bead products in HCC is approximately $70m.

With positive survival data we estimate that the ultimate market

opportunity is up to $400m; while the potential market for colo-rectal

metastases in the liver has the potential to be greater than the market

for HCC.

We described our distribution plans for the next phase of our

development in the 2006 Interim Statement, having concluded

distribution agreements in seven of the ten territories we have

identified, including AngioDynamics in the US, Terumo in Europe

and SciClone in China. We continue to work on our distribution

plans for Japan and Korea.

We continue to emphasise that sales of Bead Products booked by

Biocompatibles are sales to distributors and pass into their supply

chain before their ultimate sale to hospitals. We are monitoring the

stock situation against the increase in demand that we expect from the

gradual erosion of the barriers to account conversion. These include

physician familiarity with the clinical data, sales representative

effectiveness, the development of randomised trial data and individual

physician experience with the products.

“The results from our trial in Hong Kong show good response and excellent tolerability in ademanding set of patients.”

Professor Ronnie Poon, Queen Mary Hospital, Hong Kong and Principal Investigator, PRECISION II

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BIOCOMPATIBLES

With respect to new regulatory approvals, the Company is awaiting

review of the submission for a CE Mark of the PRECISION

Bead; and for the DC Bead in China. New regulatory approvals,

reimbursement codes and labelling improvements are all expected

to open and expand markets during the course of 2007 and 2008.

We increased our list price for the Drug Eluting Bead product from

$1,200 to $1,595 in response to market acceptance of the value of

the technology.

We estimate that Drug Eluting Beads have been used in more than

3,000 procedures in 21 countries; and that 410 patients have now been

treated in 7 company-sponsored and 7 physician-sponsored clinical

trials, all with the necessary hospital ethics committee approvals.

The results of these trials are described in the Clinical Development

section below and are the basis of our belief in the significant potential

of our Drug Eluting Bead products.

Competition for our marketed products varies between indications.

Intermediate HCC is currently commonly treated with a cocktail of

products that were not designed for the purpose. While this cocktail

is cheaper than the DC Bead technology, clinical data shows that the

DC Bead technology is superior from a clinical perspective. Another

medium-sized company is seeking to establish a product for TACE.

The principal focus of our marketing is seeking to shift doctors from

the traditional TACE cocktail to the PRECISION TACE approach.

The competitive dynamics of the mCRC opportunity are different

from the HCC opportunity. TACE is not an accepted treatment for

mCRC patients, for whom systemic chemotherapy is the standard.

There is competition from established drug regimens, from new,

recently approved, biological drugs and from a substantial number

of drugs in development. But while the resources available to the

sponsoring companies are very considerable, the improvement in

outcomes over the years has been modest – especially in patients

who have failed two lines of chemotherapy, where the response

to treatment is around 10%. The initial clinical data from our

Irinotecan Bead programme have strengthened our conviction

that our technology can make a difference.

� Clinical Development

During the course of 2006, the Company made excellent progress

with its principal focus – the clinical development of the Drug Eluting

Bead product line.

The PRECISION programme of clinical trials is primarily designed

to establish Biocompatibles’ Drug Eluting Bead products as the gold

standard in the treatment of intermediate HCC; and the Irinotecan

Bead programme is designed to establish the Drug Eluting Bead

products in the indication of hepatic colo-rectal metastases.

The focus of these trials is the establishment of clinical data to

support product acceptance rather than product regulatory approval,

which has already been secured for our flagship products in the

EU and US.


0

10

20

30

40

50

60

70

80

90

100

89%

63%

% A

live

Precision TACE Conventional TACE

Drug Eluting Beads: Survival Benefitat 24 months

Chemoembolization of Hepatocellular Carcinoma with Drug Eluting Beads: Efficacy and Doxorubicin PharmacokineticsMaría Varela, María Isabel Real, Marta Burrel, Alejandro Forner, Margarita Sala, Mercé Brunet, Carmen Ayuso, Lluis Castells, Xavier Montañá, Josep M. Llovet,Jordi Bruix. Journal of Hepatology 46 (2007) 474-481.

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ANNUAL REPORT 2006

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The Doxorubicin Bead, including the PRECISION Bead

programme made good progress. Results of the PRECISION I

clinical trial managed by the Barcelona Liver Cancer Group led by

Professors Jordi Bruix and Josep Llovet have now been published in

the Journal of Hepatology. The paper reported that one and two year

survival were 92.5% and 88.9% respectively. These data compare

favourably to previously-reported one and two-year survival of 82%

and 63% for conventional TACE. A peer-reviewed article in a leading

medical journal and the reporting of a survival benefit are both

critical milestones. Investigators also presented positive data from

studies in Hong Kong (PRECISION II), Vienna and Athens.

Amongst the other PRECISION trials, recruitment in PRECISION V,

a randomised Phase II trial in Europe for the treatment of HCC,

made good progress, reaching 156 patients out of the target 200,

by the 7 March 2007. The Company will report the conclusion

of the Safety Monitoring Committee’s review of the first 60 patients

at around the middle of the year. The conclusion of the Data

Management Committee, which will review the primary end-point of

tumour response, is expected in the third quarter. We had previously

intended to publish a full interim analysis of these patients but

recruitment is still in progress and the FDA has recently published

guidelines1 which recommend that interim data from randomised

trials is not disseminated, on the grounds that it introduces bias.

We intend to use the data from PRECISION V for future regulatory

submissions in the United States and will therefore comply with

the new guidelines. The analysis of data from all 200 patients in

PRECISION V is now expected to be in mid-2008.

Discussions with the US National Cancer Institute (NCI) for funding

of a US randomised controlled trial in HCC continued and we remain

hopeful that these efforts will bear fruit during the course of 2007.

We expect a multi-centre prospective randomised Phase III trial

to be initiated during the course of 2007, evaluating the survival

advantage of the Drug Eluting Bead loaded with doxorubicin in

the treatment of patients with HCC, against the current standard

of conventional TACE.

The Irinotecan Bead programme made good progress, with data

presented after the year end at the 2007 Gastrointestinal Cancers

Symposium (ASCO-GI). Professor Giammaria Fiorentini, Professor

of Medical Oncology at the Department of Oncology at the San

Giuseppe Hospital in Empoli, near Florence, provided an update on

a Prospective Phase II study evaluating the DC Bead loaded with

Irinotecan in patients with liver metastases from colo-rectal cancer.

The initial group of twenty patients treated had either failed one

or more lines of chemotherapy or had contra-indications to further

therapy. At the reporting date, 17 patients (85%) were alive, with a

median time since treatment of 160 days. With more than 50% of

patients still alive, the point of median survival had not been reached.

The procedure was well tolerated by all the patients, and eighteen

patients (90%) expressed themselves as having experienced an

improvement in ‘Quality of Life’. In a simultaneously assessed

comparator group, eleven patients meeting the criteria for this

study and who refused treatment with the DC Bead, received best

supportive care. At the reporting date, three patients (27%) were alive,

and the median survival was 99 days. In this group, three patients

(27%) expressed themselves as having experienced an improvement

in Quality of Life. Further survival data from this trial is expected to

be presented at CIRSE in September 2007; and Professor Fiorentini

has started to plan a Phase III trial.

During the course of 2007, Biocompatibles expects to initiate

several clinical trials which, if positive, can be expected to

increase substantially the value of the Drug Eluting Bead

technology. Trials initiated by respected physicians form an

important part of the process of developing the value of the

Drug Eluting Bead technology. The principal focus of clinical

trial activity initiated by Biocompatibles will be a trial in the

United States to evaluate the Irinotecan Bead for the treatment of

patients with hepatic colorectal metastases. The plan is for around

60 patients to be treated at three hospitals in the United States.

It is expected that the first patient will be treated in the fourth

quarter of the year.

In summary, the Drug Eluting Bead products are in clinical evaluation

in two Phase II trials (PRECISION V and the European Irinotecan

Bead trial) that are nearing completion and we plan that by year-end a

further Phase II trial (the US Irinotecan Bead trial) and two Phase III

trials (in HCC and mCRC) will also be underway.

The Drug Eluting Stent programme was effectively terminated

by Abbott’s 3 October 2006 announcement that it would abandon

development of the ZoMaxx Drug Eluting Stent, on which

Biocompatibles had expected to earn royalties. The study chairman

subsequently presented data from the ZOMAXX I trial at the

Transcatheter Therapeutics Conference in Washington, DC.

1 Guidance for Clinical Trial Sponsors – Establishment and Operation of Clinical Trial Data Monitoring Committees; and, FDA guideline 21CFR 860.7(f)(1)

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BIOCOMPATIBLES


“The survival data is promising and the tolerability continues to look good. I look forward to evaluating the technology further in randomised controlled trials.”

Professor Giammaria Fiorentini, Professor of Medical Oncology at the Department of Oncology at the San Giuseppi Hospital, Empoli,Florence commenting on a Prospective Phase II study evaluating DC Bead loaded with Irinotecan in patients with liver metastases fromcolorectal cancer.

The ZoMaxx stent failed to meet its primary endpoint of

non-inferiority in comparison to the FDA-approved, market-leading

Taxus stent. The measure of “late loss” measures the extent to which

the gain in the diameter of the coronary vessel immediately post

procedure is lost in subsequent months. The late loss on the ZoMaxx

stent was 0.27mm greater than the Taxus stent and thus exceeded the

non-inferiority margin of 0.25 mm, by 0.02 mm.

After reviewing the clinical results from the ZoMaxx I trial,

Abbott concluded that “the ZoMaxx drug-eluting stent would not be

competitive in today’s marketplace”. Medtronic’s Endeavor™ Drug

Eluting Stent uses the same drug and coating (through a sub-licence

from Abbott) as the ZoMaxx stent. Market analysts are forecasting

sales of the Endeavor stent at $300m in 2007. Abbott earns a royalty

on the Endeavor stent.

DC Bead Bibliography

1. DC Bead: In Vitro Characterization of a Drug-Delivery Device for Transarterial ChemoembolizationLewis, A.L., Gonzalez, V., Lloyd A.W., et al. J Vasc Interv Radiol 2006. 17.335-342

2. New intra-arterial Drug Delivery System for theTreatment of Liver Cancer: Pre-clinical Assessment ina Rabbit Model of Liver CancerHong, K., Khwaja, A., Liapi, E., et al.Clin Canc Res 2006. 12(8): 2563-2567

3. Pharmacokinetic and Safety Study of DoxorubicinDrug Eluting Beads in a Porcine Model of HepaticArterial EmbolizationLewis, A.L., Gonzalez, V., Lloyd A.W., et al. J Vasc Interv Radiol 2006. 17: 1335-1343

4. Chemoembolization of hepatocellular carcinoma withdrug eluting beads: Efficacy and doxorubicinpharmacokineticsVarela, M., Real, M.I., Burrel, M. et alJournal of Hepatology 46 (2007) 474-481.

5. Irinotecan drug eluting beads for use in chemo-embolization: In vitro and in vivo evaluation ofdrug release propertiesTaylor, R.R., Tang, Y., Gonzalez, M.V. et alEuropean Journal of Pharmaceutical Sciences 30(2007) 7 – 14

6. Trans-arterial Chemoembolization (TACE) of LiverMetastases from Colorectal Cancer using Irinotecan-Eluting Beads: Preliminary ResultsAliberti C., Tilli M., Benea G., Fiorentini G.Anticancer Research 26:3779-3782 (2006)

70412 pre 16/5/07 19:17 Page 10

ANNUAL REPORT 2006

11


� CellMed: CellBeads®

Vision Delivery Update: Our Vision for CellMed is to be first to

market with an engineered stem cell product.

On track: We made a submission to the regulatory authorities

for the start of the Stroke clinical trial. No other stem cell drug

delivery product is further advanced.

CellMed made good progress during the year with programmes that

are at the leading edge of medical science and we were pleased to

retain CellMed by the waiver of a put option negotiated at the time

of the acquisition in March 2005.

Sales grew by more than 100% from a small base, but the highlight

was the filing of a regulatory submission for a Phase I/II trial for the

treatment of Intra-Cerebral Haemorrhage (ICH), a severe form of

stroke. Every year, 125,000 people in the US and the five leading

European countries suffer an ICH and treatment options are limited.

The CellBeads technology will deliver therapeutic proteins from stem

cells encapsulated in alginate polymer beads. The programme is being

managed in collaboration with the world-renowned International

Neuroscience Institute (INI) in Hannover, Germany. A response from

the regulatory authorities is expected during the course of 2007.

Despite the number of people affected, CellMed’s stroke programme

has very limited competition. In recent years, the most valuable

developments have been improved patient management protocols,

rather than new therapeutic agents whose progress has been

consistently disappointing. CellMed aims to be the first company

to treat a stroke patient with a stem cell product. At least two other

companies have stem cell programmes for stroke and at least seven

other companies have announced that they are close to the start of a

clinical trial for a stem cell product in indications that include stroke,

diabetes and cancer. The scientific and regulatory challenge to this

type of technology remains considerable for all companies.

The Cosmetic Dermatology programme is carried on in partnership

with the pharmaceuticals subsidiary of the Merz Group, and is

focused on the dermal filler market segment. The programme made

good progress in 2006 and the product is expected to enter clinical

trials in the second half of 2007. Merz selected CellMed’s technology

because it was looking for a next-generation material to improve on

the products that make up the current $900m US market and the

proprietary alginate material continues to look very promising in

the pre-clinical phase.

Crispin Simon

Chief Executive

70412 pre 16/5/07 19:17 Page 11

12

BIOCOMPATIBLES

The profit for the year ended 31 December 2006 was £5.0m,including £10.3m of gain on sale of discontinued operations (2005: loss of £4.7m, which included £1.4m of gain on sale ofdiscontinued operations).

Revenue increased by 75% to £6.0m in 2006 (2005: £3.4m). Sales of Bead Products grew 114% to £3.6m (2005: £1.7m), Licensingrevenue declined 15% to £1.4m (2005: £1.6m) and CellMed revenueincreased to £1.0m (2005: £0.1m). Other operating income relates to government grants received by CellMed. Gross profit increased by 136% to £3.8m (2005: £1.6m) as a result of sales of the highermargin DC and LC Bead™ products and from the CellMed CosmeticDermatology programme.

Operating expenses decreased by 5%, from £12.9m in 2005 to£12.2m in 2006. Selling and marketing costs decreased by 37% to£1.8m (2005: £2.9m) mainly driven by a reduction in the intangibleasset amortisation relating to the Bead Licence, which is now fullyamortised. Research and development costs increased by 9% to £8.4m(2005: £7.7m) mainly due to investment in the CellMed programmes.Administrative expenses decreased by 13% to £2.0m (2005: £2.3m),due to one-off, property related income.

Overall, the operating loss decreased from £11.0m in 2005 to £8.0m in 2006.

Interest receivable reduced to £1.7m (2005: £4.4m) mainly because2005 benefited from a one-off receipt of £2.1m following the releaseof the funds held in the escrow account.

The Group has recognised Research and Development tax credits of £0.8m (2005: £0.4m) which are receivable in cash from the Inland Revenue. A deferred tax credit of £0.2m (2005: £0.1m) wasrecognised in the Income Statement in respect of the amortisation ofthe intangible assets recognised on the acquisition of CellMed andthis took the total income tax credit to £1.0m (2005: £0.5m).

On 3 October 2006 Abbott announced that it would not pursuecommercialisation of its ZoMaxx Drug Eluting Stent on which wewere expecting to receive royalties. Following this announcement,management does not believe that further royalties will be earnedfrom Abbott and has therefore released an amount of £5.1m fromother payables to the income statement as part of the gain on sale of discontinued operations. This payable was created on signing theTechnology Licence in 2002 and represented an amount of royaltyincome that we would earn before Abbott was required to payroyalties in cash.

Following the positive outcome of the HMRC enquiry into the 2002 business disposals, £4.0m of tax provisions will not becomepayable and have also been released to the income statement as part of the gain on sale of discontinued operations. An additionalprovision release of £1.2m left the remaining disposal provisionbalance at £0.6m to cover the liabilities associated with the remainingwarranties and indemnities given as part of the 2002 disposals of the cardiovascular, eyecare and urology divisions. Overall, a gain on sale of discontinued operations of £10.3m was made in 2006 (2005: £1.4m).

At the year-end the Group had 93 employees (2005: 91).

The net cash used in operating activities was £4.1m (2005: £7.4m).Net cash generated from investing activities was £14.2m (2005:£16.2m). This primarily represented the cash inflow from the sale and redemption of available-for-sale financial assets, following thedecision to exit the corporate bond investment portfolio.

Net assets at 31 December 2006 were £41.7m (2005: £37.6m) whichincluded cash, cash equivalents and available for sale financial assetsof £37.2m (2005: £41.0m) and goodwill and intangible assets arisingfrom the acquisition of CellMed of £7.1m (2005: £9.2m).

The Company expects total 2007 cash outflow to be around £7m. The increase reflects the absence of the licence fee received from SealSands in 2006 coupled with an increase in clinical trial expenditure.This will leave our cash, cash equivalents and available for salefinancial assets at around £30m at the end of the year.

The Company expects to achieve consolidated revenue in the range of £8m to £10m, the mid point of which represents growth ofapproximately 51%. This growth is expected from sales of the DrugEluting Bead products and from CellMed’s programmes.

Ian Ardill

Finance Director

Financial Review

0

1,000

2,000

3,000

4,000

5,000

6,000

20062005200420032002

70412 pre 21/5/07 11:07 Page 12

ANNUAL REPORT 2006

13

Professor Dr Thomas BrinkerInternational Neuroscience Institute, Hannover, Germany.

Dr Jordi Bruix Head of the Barcelona Clinic Liver Cancer Group within the

Liver Unit at the Hospital Clinic in Barcelona, Spain.

Dr Jeff GeschwindAssociate Professor of Radiology, Surgery and Oncology;

Director of Cardiovascular and Interventional Radiology;

Section Chief, Interventional Radiology; Director, Interventional

Radiology Research at The Johns Hopkins University School of

Medicine in Baltimore, USA.

Professor Philip JohnsonProfessor of Oncology & Translational Research

Director of the Clinical Trials Unit

Cancer Research UK Institute for Cancer Studies

The University of Birmingham, U.K.

Professor Dr Johannes LammerProfessor of Radiology, Department of Angiography and

Interventional Radiology, Medical University Vienna, Austria.

Professor Riccardo LencioniAssociate Professor of Radiology

University of Pisa, Italy.

Dr Josep M. LlovetAssociate Professor of Medicine, HCC Research, Division of

Liver Diseases, Mount Sinai Medical Center, New York.

Professor of Research-ICREA, BCLC Group, IDIBAPS,

Hospital Clinic, Barcelona, Spain.

Professor Andrew LloydProfessor of Biomedical Materials and Dean of the Faculty of Science

and Engineering, University of Brighton, U.K.

Professor Dr Matthias LöhrClinical Cooperation Unit Molecular Gastroenterology,

German Cancer Research Centre, Heidelberg, Germany.

Professor Ronnie PoonAssociate Professor and Assistant Dean in Research Affairs of the

Faculty of Medicine Department of Surgery, Queen Mary Hospital,

The University of Hong Kong.

Professor Thomas VoglDiagnostic and Neuroradiologist.

Chairman of the Department of Diagnostic and

Interventional Radiology,

Goethe University of Frankfurt, Germany.

Professor Anthony WatkinsonProfessor of Radiology (Consultant Clinical Radiologist)

The Peninsula Medical School, Royal Devon & Exeter Hospital, U.K.

Principal Advisors

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14

BIOCOMPATIBLES

Gerry BrownChairman and Non-Executive Director

Gerry Brown joined the Board in 2006 and was

appointed Chairman of the Company in June 2006.

He is Chairman of Quintiles Transnational Europe

and of NFT Distribution Holdings. He is also a

non-executive director of Forth Ports plc and Keller

plc. He was formerly Chairman of Upol Ltd and a

non-executive director of Vantec Ltd, CH Jones Ltd,

Michael Gerson Ltd and Datrontech plc. His executive

career included directorships with Exel Logistics plc,

TDG plc and Tibbett & Britten plc. Age 63 years.

Crispin Simon Chief Executive

Crispin Simon joined the Company in June 1998.

After working at NM Rothschild and McKinsey &

Company, he gained general management experience

at senior executive level with Rexam plc (then

Bowater) and then as President of the Endoscopy

Division of Smith & Nephew plc, based in Boston,

USA. Crispin Simon is a non-executive director of

Eumedic Limited. Age 49.

Jeremy Curnock CookSenior Independent Non-Executive Director

Jeremy Curnock Cook joined the Board in 1990. He is

Executive Chairman of Bioscience Managers Limited,

an investment advisory company to the biotechnology

industry. He served as Managing Director of the

Rothschild Bioscience Unit from 1987 until his

retirement in 2000. Other directorships include:

Chairman of Targeted Genetics Inc. (USA), atugen AG

(Germany) and Inflazyme Pharmaceuticals (Canada),

and director of SR Pharma plc (UK), Osteologix Inc

(USA), International Bioscience Managers Limited

(UK), Intersuisse Bioscience Managers Pty. (Aus.),

BML Canada Limited and Millenium Biologics

(Canada). Age 57.

Sir Thomas HarrisIndependent Non-Executive Director

Thomas Harris joined the Board in 2005. He is Vice

Chairman of Standard Chartered Capital Markets Ltd,

a director of the Imperial War Museum and a Trustee

of Asia House. He was Director General of Trade &

Investment USA responsible for British business and

technology promotion throughout the USA. He served

as British Ambassador to Korea in Seoul, Deputy High

Commissioner in Lagos, Nigeria and Commercial

Counsellor in the British Embassy in Washington DC.

Age 62.

Board of Directors

70412 pre 16/5/07 19:17 Page 14

ANNUAL REPORT 2006

15

Anthony WeirIndependent Non-Executive Director

Tony Weir was appointed to the Board on 1 January

2007. He serves as Chairman of the Audit Committee

and is a member of the Remuneration and Nomination

Committees. Tony is Chief Financial Officer of

Vernalis plc., a position he has held since 1999 having

joined that company in 1990. Previously Tony was

with Cooper Deloitte, Financial Training Limited and

KPMG. He has a degree in Mathematics from Oxford

University and is a Fellow of the Institute of Chartered

Accountants. Age 46.

Ian Ardill Finance Director & Company Secretary

Ian Ardill, appointed to the Board in October 2004,

joined Biocompatibles in January 2003 having spent

the previous five years working for Novartis

Pharmaceuticals in a variety of financial positions

covering Financial Accounting, Systems

Implementation, and Treasury. Prior to that, he worked

for Letheby & Christopher, a subsidiary of Compass

Group PLC; NHA International, a sales and

management consultancy; and qualified as an

accountant with Grant Thornton. He has a BSc in

Accounting and Financial Analysis from Warwick

University, England. Age 39.

Peter Stratford Managing Director, Farnham Product Development

Centre

Peter Stratford was appointed to the Board in

September 2002. Peter joined Biocompatibles in

January 1990. After completion of development work

in contact lens application, he joined the management

team of the Cardiovascular Division at its creation in

1993. He took the role of Group Director Research and

Development in 1998 and has since transitioned the

group to the current drug delivery focus. Peter has a

BSc in Chemistry, a MSc in Polymer Synthesis and a

PhD in Pharmaceutical Synthesis. Age 43.

John SylvesterManaging Director, International

John Sylvester joined the Company in June 2005 and

was appointed to the Board on 1 July 2005. His career

covers a series of commercial roles for Rio Tinto Zinc

plc, ICI plc and English China Clays where he was

General Manager for their European and Asian

Operations. Previously he was with Baxter Healthcare

where he was VP Marketing for their European

Medication delivery business. Age 43.

Board of DirectorsContinued

70412 pre 16/5/07 19:17 Page 15

16

BIOCOMPATIBLES

Biocompatibles UK

Paul BaxterDirector, Intellectual Property

Paul Baxter is responsible for the management of the Company’s

Intellectual Property, provides contract management and supports

the Company’s licensing activities. Paul has an MBA and is a Fellow

of the Royal Society of Chemistry.

Andy LewisResearch & Technology Director

Andy Lewis directs projects within the Farnham Product Development

Group and coordinates the external research programmes with

academic collaborators. Andy has a BSc in Biochemistry and

Chemistry and a PhD in Chemistry. He is a fellow of the Royal Society

of Chemistry, a Chartered Scientist and is named on over 140 scientific

publications and patents in the fields of polymers and biomaterials.

Tim MaloneySales Director

Tim Maloney’s responsibility lies with the embolisation product

range focusing on the global sales of the DC Bead and Bead Block.

Tim has a BA in History and a BA in Philosophy from Holy Cross

in the United States.

Mike MotionMarketing Director

Mike Motion is responsible for all marketing activities. He has

experience in sales and marketing of both devices and pharmaceutical

drugs having previously been European Director of Oncology with

Baxter Healthcare Limited. He has a BSc in Pharmacy.

Alistair Taylor Director of Regulatory, Quality and Clinical Affairs

Alistair Taylor is responsible for the regulatory affairs activities for

all programmes within the Group. He obtained a BSc in Applied

Chemistry, an MSc in Colloid and Interface Science and a PhD on

the Behaviour of Artificial Tears on the Human Cornea from the

University of Strathclyde, Scotland.

Geoff Tompsett Director of IT and HR

Geoff Tompsett joined Biocompatibles in January 2001 as Group

Information Technology Director, having previously held senior IT

roles in Sanofi-Synthelabo and Sterling Winthrop. He took over

responsibility for Human Resources in March 2003.

CellMed, Germany

Peter GeigleDirector

Peter Geigle is one of the founding shareholders of CellMed AG.

Peter has a medical degree from the Johann Wolfgang Goethe

University in Frankfurt. He is specialised in the collection and

engineering of human cells.

Olaf AlthausDirector

Olaf Althaus is one of the founding shareholders of CellMed AG.

Olaf has a degree in business and engineering from the University

of Karlsruhe.

Roland ReinerDirector

Roland Reiner is a member of the CellMed Management Board and

has a PhD in chemistry and more than 20 years in management

experience.

Senior Management

The following senior managers, along with the four executive directors on Biocompatibles’ Board, make up the Company’s Senior ManagementTeam. Jointly the individuals combine a broad array of disciplines and experience to provide the vision and leadership of the Company.

70412 pre 16/5/07 19:17 Page 16

ANNUAL REPORT 2006

17

The Directors present their annual report on the affairs of the Group

to the shareholders, together with the audited financial statements

for the year ended 31 December 2006.

BUSINESS REVIEWThe Chairman’s Statement, the Operational Review and the Financial

Review, shown on pages 2 to 5, pages 6 to 11 and on page 12

respectively, together contain details of the Company’s principal

activities, development of the business during the year and likely

future developments. These reviews have been prepared in accordance

with the recommendations of the European Union Modernisation

Directive. In preparing these, our aim is to present a fair assessment

of the Company’s business development and performance during

the financial year and its position at the end of the year. The reviews

are written in the context of the principal risks and uncertainties

facing the business and aim to provide a commentary which is both

balanced and comprehensive, and that is consistent with the size

and complexity of our business.

Principal Risks and UncertaintiesThe Chairman’s Statement refers to the Board approach to the

management of risk.

The Board formally reviews the control of risks and appropriate

processes are put in place to monitor and mitigate against them.

The principal categories of risk on which management regularly

reports its risk mitigation plans to the Board include:

� Commercialisation risk. The Group’s aim of achieving a

sustainable cash generation position requires a number of key

factors: clinical data (see below) to support the sales of its

products, sales traction in key countries, good relationships

with distributors and the achievement and maintenance of a

leadership position against its competitors. As the products are

used in treating an increasing number of cancers, the Group will

have to deal more with oncologists and this introduces further

uncertainties. The Group works closely with its distributors

to provide clinical data, product training and brand awareness

for its products to support the sales of its products and its

employees spend a significant amount of their time with

distributors and customers and in attending the major medical

congresses in its field of operations. Close attention is paid

to competitive products, technology and clinical trials.

� Regulatory risk. The Group’s lead products are drug device

combination products and as such are subject to relatively new

product approval regulations. The path is clear in the US market

but is much less clear in other countries. This lack of clarity can

add time delays as well as additional cost to the process of

product approval. The Group’s regulatory team keeps abreast of

changes in the regulatory environment and uses consultants for

advice in specific countries. The team maintains a regular

dialogue with the key regulatory agencies.

� Clinical risk. The ultimate success of medical devices is

dependent on, among others, the strength of the clinical data

supporting the products. Clinical trials need to be correctly

designed to satisfy regulators, investigators, hospital ethics

committees, customers and distributors and within appropriate

cost constraints. Trials carry risks in relation to the time to

recruit patients, the rate and seriousness of adverse events and

the efficacy of the product under investigation. The Group has

a clinical team which maintains a regular dialogue with key

opinion leaders in the medical community, regulators and

customers and with the marketing team to help ensure that

its clinical strategy is appropriate and cost effective. The team

ensures appropriate safeguards are in place to minimise the

risk to patients treated with the Group’s products.

� Product supply. The Group needs to ensure continuity of product

supply for commercial and clinical trial customers and as the

number of geographical markets served by the Group expands,

so does the complexity of the manufacturing and supply chain.

The Group operates a dual sourcing system under which its

products can be manufactured in-house and by a third party

supplier. In addition, a disaster recovery plan is in place and

is reviewed annually.

Directors’ ReportFor the year ended 31 December 2006

70412 pre 16/5/07 19:17 Page 17

18

BIOCOMPATIBLES

� Financing risk. Medical device research, development and

clinical trials are expensive to finance and the Group has limited

funds to invest in these activities. It applies a prudent treasury

policy in managing its cash reserves to minimise the risk of

loss and maintains a strict annual cash expenditure limit in its

budgeting process. These are combined with a strong commercial

and marketing focus to drive sales and gross profit to fund its

research, development and clinical activities.

Competition comes in the form not only of established treatments

where our products need to demonstrate their superior value, but also

products in the pipeline of other companies.

The failure of Abbott’s ZoMaxx programme underlined the fact that

partnering with large, well-resourced companies does not itself

eliminate risk.

EARNINGS AND DIVIDENDSThe profit for the financial year of £5,023,000 (2005: loss of

£4,691,000) has been taken to reserves. The Directors do not

recommend the payment of a dividend.

DIRECTORSNames and biographies of the current directors are detailed on

pages 14 and 15. All directors served for the full year except

Sir Richard Needham who retired on 22 June 2006 and Gerry Brown

who was appointed a non-executive director on 10 January 2006.

Subsequent to the year end, Tony Weir joined the Board on

1 January 2007 as a non-executive director and David Hankinson

retired from the Board on 25 January 2007.

DIRECTORS’ INTERESTSThe beneficial interests of the directors in the Company’s share

capital at 31 December 2006 and 1 January 2006, or upon

appointment, are set out below. No director holds shares

non-beneficially.

Directors’ ReportContinued

Ordinary Shares Ordinary Shares Ordinary Shares Options over Ordinary Options over Ordinary Options over Ordinaryof 21 53/94 p on of 21 53/94 p on of 21 53/94 p on Shares of 21 53/94 p Shares of 21 53/94 p Shares of 21 53/94 p

26.03.2007 31.12.2006 01.01.2006 on 26.03.2007 on 31.12.2006 on 01.01.2006

Ian Ardill 7,211 7,035 6,104 210,422 173,070 208,070

Gerry Brown (appointed 10.01.2006) 40,000 40,000 – – – –

Jeremy Curnock Cook 11,291 11,291 11,291 – – –

David Hankinson (retired 25.01.2007) – 4,558 4,558 – – –

Thomas Harris 3,494 3,494 – – – –

Richard Needham (retired 22.06.2006) – – 19,800 – – –

Crispin Simon 138,377 138,201 117,270 1,104,906 1,067,554 1,102,554

Peter Stratford 1,211 1,035 26,708 258,010 220,658 255,958

John Sylvester 5,487 5,311 5,000 185,474 148,122 183,122

Tony Weir (appointed 01.01.2007) – – – – – –

None of the directors at any time during the year ended 31 December 2006 had any material interest in any contracts with the Company or any

of its subsidiaries. None of the directors at any time during the year ended 31 December 2006 or subsequent to 31 December 2006 held any

debentures of the Company or shares or debentures of the Company’s subsidiaries. Details of options granted and exercised by the directors are

set out on page 38.

The executive directors, together with all employees of the Group, are potential beneficiaries of the Company’s Employee Share Ownership

Plan (‘ESOP’) and are therefore interested in 112,803 (2005: 112,803) ordinary shares held in Trust at 31 December 2006. No shares have

been acquired by the ESOP following the 2006 year end.

70412 pre 16/5/07 19:17 Page 18

ANNUAL REPORT 2006

19

SUBSTANTIAL SHAREHOLDINGSAs at 26 March 2007 the Company has been notified, in accordance

with sections 198 to 208 of the Companies Act 1985 (or is otherwise

aware) of the following interests in 3% or more of the ordinary share

capital of the Company.

Shareholding %

Hunter Hall Investment Management Limited 8,892,717 23.94

Aberforth Smaller Companies Trust plc 4,433,350 11.93

Dresdner Bank AG 3,778,722 10.17

AMVESCAP plc 2,203,752 5.93

Lloyds TSB Group plc 1,849,136 4.97

Barclays plc 1,599,315 4.45

RESEARCH AND DEVELOPMENTThe Group is committed to research and development activities in

order to develop its business. Costs of £8,375,000 (2005: £7,678,000)

have been charged to the income statement in the year. Details of

the Group’s research and development activities are contained on

pages 6 to 11.

DONATIONSIn 2006 total charitable donations were £10,334 (2005: £5,500) and

details of fundraising activities and fund recipients can be found in

the Corporate and Social Responsibility section of the Corporate

Governance Report. No donations were made to political parties.

EMPLOYEES Biocompatibles’ people are fundamental to the success of the

business. Their skills and intellect are vital components in the

successful implementation of the Group’s business strategy. An

effective human resource policy drives the Group’s ability to attract

and retain high calibre people.

The Group is committed to a working environment of mutual trust

and respect where each individual is responsible for the performance

and reputation of the Group. A system of open and transparent

communication is considered of paramount importance and the Group

consults its employees on matters likely to affect their interests.

Biocompatibles is committed to human resource policies free from

discrimination against potential or existing staff on the grounds of

age, gender, race, nationality, faith, sexual orientation or disability.

The Group promotes a policy of recruiting talented and committed

people with a positive attitude and sense of urgency.

In Biocompatibles UK, information and progress updates are

provided in a number of ways including regular monthly all-employee

briefings, notice boards and other communication channels,

promoting a common awareness of the Group’s business performance.

The Group encourages employee participation in its performance

through share schemes: a Performance Share Plan for the more senior

employees and a Share Incentive Plan for all employees.

The Board places considerable emphasis on the development and

motivation of its employees to enable them to fulfil their potential

for the benefit of both themselves and the Group. Within the UK

company, accreditation as an “Investor in People”, the National

Standard which sets a level of good practice for improving

organisations’ performance through its people, demonstrates such

commitment. All employees undergo an induction programme and

have quarterly reviews that have a clear focus on their development.

Internal promotion is encouraged and all open positions are

advertised internally.

In CellMed, employee involvement is maintained through the open

interaction at all levels on a daily basis that is possible with a relatively

small total staff. There are fortnightly all-employee briefings to

supplement information communicated via noticeboards and other

media on the CellMed’s performance and the Group as a whole.

The principle of employee participation through share incentives

is also applied within CellMed. CellMed’s employees are now

included in the Share Incentive Plan.

A strong emphasis is placed on developing employees to fulfil

their potential. All employees take part in a formal induction

programme and have frequent reviews that focus on performance

and development. Internal promotion is encouraged and all open

positions are advertised internally.


70412 pre 16/5/07 19:17 Page 19

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BIOCOMPATIBLES


HEALTH, SAFETY AND ENVIRONMENTPOLICY

Summary Management actively addresses the possible effects of the Company’s

activities on employee health and safety and on the environment.

The obligation to provide a safe working environment for employees

is paramount. The Group’s policy is to operate in a socially and

environmentally responsible manner, and to seek ways of reducing any

adverse impact upon its surroundings through waste reduction and

recycling schemes and programmes to improve energy efficiency.

CommunicationHealth, Safety and Environmental performance is reported to

shareholders in the annual report and to staff through internal

communication channels, such as induction, all-company briefings,

and through notice boards. The Group reports environmental policy

and performance through agencies such as EIRIS and will strive to

maintain membership of the FTSE4Good index.

Health, Safety & Environment CommitteeThe Committee is responsible for implementing and monitoring the

Group’s policy on health, safety and environmental issues. The Chief

Executive is the Board member with responsibility for HSE matters.

The Committee reports formally to the Board bi-annually.

The Biocompatibles Health, Safety & Environment Committee meets

monthly in order to review performance, improve systems and set

policy with a vision of providing a safe working environment for

employees and visitors; operating in a socially and environmentally

responsible manner and in compliance with health & safety and

environmental regulations; seeking ways of reducing any adverse

impact upon the environment; and minimising accidents through

education, awareness training and effective management.

Health & Safety PerformanceDetailed procedure training in risk assessment and handling of

cytotoxic drugs has been provided to staff as a result of the increased

handling of cytotoxic compounds in the research, development

and manufacturing of our Drug Eluting Bead products. Both

Biocompatibles UK and CellMed ensure the correct personal

protective equipment and procedures are in place for working with

hazardous compounds and regular blood screening is in place for all

lab workers at risk of exposure. The Company also invests in safety-

enhancing process equipment, an example of which is a new isolator

in Farnham for the handling of cytotoxic drugs.

The Biocompatibles UK accident rate was reduced again in 2006,

to 0.27 accidents per 10,000 hours worked. All accidents were minor

and there were no notifications under RIDDOR (Reporting of Injuries,

Diseases and Dangerous Occurrences Regulations). There were no

accidents at CellMed.

Number of Accidents

70412 pre 21/5/07 11:42 Page 20

ANNUAL REPORT 2006

21


Environmental PerformanceBoth Biocompatibles UK and CellMed maintained their records of

compliance with environmental regulations. Total energy usage and

carbon emissions increased at both sites but energy efficiency

improved. A number of environmental measures are in place at the

CellMed site, including the use of clean gas for heating, the use of

cool water in the concrete elements of the building for economic

cooling and the use of greywater in the bathrooms. Cathode Ray

Tube computer monitors have been replaced by low power LCD

versions; low energy lightbulbs are in standard use and printer

consumables are recycled. Paper is recycled at both sites and

consumption was reduced at Biocompatibles UK as a result of

the introduction of duplex printing.

2003 2004 2005 2006

Biocompatibles UK (2003=100)

Energy Usage

Total kGJ 100 100 120 125

Absolute usage in 2003 4kGJ

Carbon emissions

CO2 equivalent (tonnes) 100 102 111 113

Absolute emissions in 2003 394t

2005 2006

CellMed (2005=100)

Energy Usage

Total kGJ 100 116

Absolute usage in 2005 0.97kGJ

Carbon emissions

CO2 equivalent (tonnes) 100 115

Absolute emissions in 2005 108t

FINANCIAL INSTRUMENTSThe Group’s policies on the management of financial risks are shown

in the Accounting Policies (Section 2) on page 54.

CREDITOR PAYMENT POLICYThe payment policy for the Group and Parent Company is to negotiate

terms with its suppliers at the time they are engaged and to abide by

the terms agreed. The Company’s average creditor payment period at

31 December 2006 was 30 days (2005: 30 days).

AUDITORSSo far as each director is aware, there is no relevant audit information

(that is, information needed by the Company’s auditors in connection

with preparing their report) of which the Company’s auditors are

unaware, and each director has taken all the steps that they ought to

have taken as a director in order to make themselves aware of any

relevant audit information and to establish that the Company’s auditors

are aware of that information.

A resolution to reappoint PricewaterhouseCoopers LLP as auditors

to the Company will be proposed at the Annual General Meeting.

ANNUAL GENERAL MEETINGNotice of the 2007 Annual General Meeting and Chairman’s letter

setting out explanations for the Resolutions to be proposed are given

in a separate notice to shareholders.

By order of the Board.

Ian Ardill

Company Secretary

26 March 2007

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BIOCOMPATIBLES

The Directors are responsible for preparing the Annual Report, the

Directors’ Report on Remuneration and the financial statements in

accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements

for each financial year. Under that law the Directors have prepared

the Group and Parent Company financial statements in accordance

with International Financial Reporting Standards (IFRSs) as adopted

by the European Union. The financial statements are required by law

to give a true and fair view of the state of affairs of the Company and

the Group and of the profit or loss of the Group for that period.

In preparing those financial statements, the Directors are required to:

� select suitable accounting policies and then apply them

consistently;

� make judgements and estimates that are reasonable and prudent;

� state that the financial statements comply with IFRSs as adopted

by the European Union; and

� prepare the financial statements on the going concern basis,

unless it is inappropriate to presume that the Group will continue

in business, in which case there should be supporting

assumptions or qualifications as necessary.

The Directors confirm that they have complied with the above

requirements in preparing the financial statements.

The Directors are responsible for keeping proper accounting records

that disclose with reasonable accuracy at any time the financial

position of the Company and the Group and to enable them to

ensure that the financial statements and the Directors’ Report on

Remuneration comply with the Companies Act 1985 and, as regards

the Group financial statements, Article 4 of the IAS Regulation.

They are also responsible for safeguarding the assets of the

Company and the Group and hence for taking reasonable steps

for the prevention and detection of fraud and other irregularities.

The maintenance and integrity of the Biocompatibles website is the

responsibility of the directors; the work carried out by the auditors

does not involve consideration of these matters and, accordingly,

the auditors accept no responsibility for any changes that may

have occurred to the financial statements since they were initially

presented on the website.

Legislation in the United Kingdom governing the preparation and

dissemination of financial statements may differ from legislation

in other jurisdictions.

By order of the Board

Ian Ardill

Company Secretary

26 March 2007

Statement of Directors’ ResponsibilitiesFor the year ended 31 December 2006

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ANNUAL REPORT 2006

23

We have audited the Group and Parent Company financial statements

(the ‘‘financial statements’’) of Biocompatibles International plc for

the year ended 31 December 2006 which comprise the Consolidated

Income Statement, the Consolidated Balance Sheet, the Consolidated

Cash Flow Statement, the Consolidated Statement of Changes in

Equity and the related notes. These financial statements have been

prepared under the accounting policies set out therein. We have also

audited the information in the Directors’ Report on Remuneration

that is described as having been audited.

Respective responsibilities of directors and auditorsThe Directors’ responsibilities for preparing the Annual Report, the

Directors’ Report on Remuneration and the financial statements in

accordance with applicable law and International Financial Reporting

Standards (IFRSs) as adopted by the European Union are set out in

the Statement of Directors’ Responsibilities.

Our responsibility is to audit the financial statements and the part of

the Directors’ Report on Remuneration to be audited in accordance

with relevant legal and regulatory requirements and International

Standards on Auditing (UK and Ireland). This report, including the

opinion, has been prepared for and only for the Company’s members

as a body in accordance with Section 235 of the Companies Act 1985

and for no other purpose. We do not, in giving this opinion, accept or

assume responsibility for any other purpose or to any other person to

whom this report is shown or into whose hands it may come save

where expressly agreed by our prior consent in writing.

We report to you our opinion as to whether the financial statements

give a true and fair view and whether the financial statements and the

part of the Directors’ Report on Remuneration to be audited have

been properly prepared in accordance with the Companies Act 1985

and, as regards the Group financial statements, Article 4 of the IAS

Regulation. We also report to you whether in our opinion the

information given in the Directors’ Report is consistent with the

financial statements.

In addition we report to you if, in our opinion, the Company has

not kept proper accounting records, if we have not received all

the information and explanations we require for our audit, or if

information specified by law regarding directors’ remuneration

and other transactions is not disclosed.

We review whether the Corporate Governance Statement reflects the

Company’s compliance with the nine provisions of the Combined

Code (2003) specified for our review by the Listing Rules of the

Financial Services Authority, and we report if it does not. We are

not required to consider whether the Board’s statements on internal

control cover all risks and controls, or form an opinion on the

effectiveness of the Group’s corporate governance procedures or

its risk and control procedures.

We read other information contained in the Annual Report and

consider whether it is consistent with the audited financial statements.

The other information comprises only the Directors’ Report, the

unaudited part of the Directors’ Report on Remuneration, the

Chairman’s Statement, the Operational and Financial Review and

the Corporate Governance Statement. We consider the implications

for our report if we become aware of any apparent misstatements

or material inconsistencies with the financial statements. Our

responsibilities do not extend to any other information.

Basis of audit opinionWe conducted our audit in accordance with International Standards

on Auditing (UK and Ireland) issued by the Auditing Practices

Board. An audit includes examination, on a test basis, of evidence

relevant to the amounts and disclosures in the financial statements

and the part of the Directors’ Report on Remuneration to be audited.

It also includes an assessment of the significant estimates and

judgments made by the Directors in the preparation of the financial

statements, and of whether the accounting policies are appropriate

to the Group’s and Company’s circumstances, consistently applied

and adequately disclosed.

Independent Auditor’s Reportto the shareholders of Biocompatibles International plc

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BIOCOMPATIBLES

Independent Auditor’s ReportContinued

We planned and performed our audit so as to obtain all the

information and explanations which we considered necessary in order

to provide us with sufficient evidence to give reasonable assurance

that the financial statements and the part of the Directors’ Report on

Remuneration to be audited are free from material misstatement,

whether caused by fraud or other irregularity or error. In forming our

opinion we also evaluated the overall adequacy of the presentation of

information in the financial statements and the part of the Directors’

Report on Remuneration to be audited.

OpinionIn our opinion:

� the Group financial statements give a true and fair view, in

accordance with IFRSs as adopted by the European Union, of

the state of the Group’s affairs as at 31 December 2006 and

of its loss and cash flows for the year then ended;

� the Parent Company financial statements give a true and fair

view, in accordance with IFRSs as adopted by the European

Union as applied in accordance with the provisions of the

Companies Act 1985, of the state of the Parent Company’s affairs

as at 31 December 2006 and cash flows for the year then ended;

� the financial statements and the part of the Directors’ Report on

Remuneration to be audited have been properly prepared in

accordance with the Companies Act 1985 and, as regards the

Group financial statements, Article 4 of the IAS Regulation; and

� the information given in the Directors’ Report is consistent with

the financial statements.

PricewaterhouseCoopers LLP

Chartered Accountants and Registered Auditors

Uxbridge

26 March 2007

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ANNUAL REPORT 2006

25

Corporate Governance ReportAnnual Report 2006

Biocompatibles is committed to upholding the principles of corporate

governance as part of its policy to achieve best practice in standards

of business integrity. This section of the Annual Report and the

Report on Directors’ Remuneration on pages 32 to 39 describe how

the Company has applied the principles set out in the Combined Code

on Corporate Governance published in July 2003 (the “Code”) and

the related guidelines produced by Derek Higgs and Sir Robert Smith.

Compliance with the Combined CodeThe Board confirms that the Company has complied throughout the

period with the requirements of Section 1 of the Code.

BOARD AND BOARD COMMITTEES

BoardThe Company is managed by its Board of Directors. The Board is

responsible to shareholders for providing entrepreneurial leadership

within a framework of controls for managing risk. It determines

the Company’s strategic objectives and ensures that the necessary

financial and other resources are made available to meet those

objectives. It also reviews management performance.

The Board, which met on ten occasions during the year, has a

schedule of matters reserved for its approval (available on the

Company’s website www.biocompatibles.com) including: the

Company’s strategy and the annual budget, the full year and half-year

accounts, acquisitions and disposals and other major capital or

operational expenditure. The Board reviews the Company’s system of

financial control and risk management, monitors health, safety and

environmental performance, approves appointments to the Board and

to the position of Company Secretary, and ensures that a satisfactory

dialogue takes place with shareholders. A comprehensive set of

papers is provided to each director in advance of each Board meeting.

The Board currently comprises four executive directors and four non-

executive directors. The non-executive directors of the Company bring

a wide range of experience and expertise to the Company’s affairs and

they carry significant weight in the Board’s decisions. The directors’

names and biographical details are set out on pages 14 and 15.

The Board delegates defined responsibilities in relation to specific

projects to Board Committees. In addition, there is frequent contact

between directors outside formal meetings. The annual schedule

of meetings includes meetings between the Chairman and the non-

executive directors (without the executive directors present) as well

as a meeting between the Senior Independent Director and the other

non-executive directors (without the Chairman present) to appraise

the Chairman’s performance.

Director Board Audit Nomination RemunerationCommittee Committee Committee

Sir Richard Needham (retired 22.06.2006) 4 4 – – 1 1 – –

Gerry Brown (resigned from Audit Committee 22.06.2006) 9 10 1 1 2 2 – –

David Hankinson 8 10 2 2 2 2 4 4

Jeremy Curnock Cook 10 10 2 2 2 2 5 5

Sir Thomas Harris 8 10 – – – – 5 5

Crispin Simon 10 10 – – – – – –

Peter Stratford 10 10 – – – – – –

Ian Ardill 10 10 – – – – – –

John Sylvester 10 10 – – – – – –

Figures in bold indicate the number of meetings held in the period in which the individual was a Board or Committee member.

Figures not in bold show the number of meetings actually attended by each director.

The attendance of individual directors at scheduled meetings of the Board and at meetings of the Audit, Nomination and RemunerationCommittees during the year is set out in the table below.

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BIOCOMPATIBLES

The directors have access to the advice and services of the Company

Secretary, who is responsible for ensuring that Board procedures,

corporate governance matters and applicable regulations under the

Company’s Articles of Association or otherwise are complied with.

In addition, the Board has a procedure for directors, in furtherance of

their duties, to take independent professional advice at the Company’s

expense, when the directors deem it is necessary. The Company has

in place appropriate directors and officers liability insurance.

The Company provides comprehensive induction training for all new

directors on appointment at which time they receive information on

the Company, the role of the Board and the matters reserved for its

decision, the terms of reference and membership of the Board and

Executive Committees and corporate governance practices and

procedures. Throughout their period in office the directors receive

briefings from senior management executives on developments within

the Company and its markets through regular presentations at Board

meetings. In addition, the directors receive the Monthly Management

Report which includes a full set of financial reports and updates on

all key areas of the business.

The Board initiated a new approach to the annual performance

evaluations of the Board, its Committees, and individual executive

and non-executive Board members. The new Chairman held

confidential individual meetings with each director to obtain their

views on the performance and effectiveness of the Board as a whole

and of each Board Committee. The Chairman’s questions were

based on a number of key assessment areas covering structure,

objectives, corporate governance, administration, communication

and functionality, amongst others. The Chairman summarised the

comments arising from the meetings and presented a report to the

Board for discussion. A list of action points was generated for

subsequent implementation.

The evaluation of the Chairman was led by Jeremy Curnock Cook,

the senior independent director, with input from the other

non-executive directors and executive directors. The performance

of individual non-executive directors was evaluated by the

Chairman, with input from the executive directors. The performance

of the Chief Executive was evaluated by the Chairman. The Chief

Executive reviewed the performance and effectiveness of the

executive directors and members of the Group Executive Committee.

The results of the reviews performed by the Chief Executive were

also discussed with the non-executive directors. The results of

these reviews drive training and development plans for the

individuals concerned.

With the exception of Crispin Simon who serves as a non-executive

director on the Board of Eumedic Limited, no other executive director

serves as a director on any board of directors outside the Group.

Crispin Simon is paid a fee of £12,000 (2005: £12,000) in respect

of this non-executive directorship, which he is donating to charity.

The Role of the Chairman and Chief ExecutiveGerry Brown is Chairman of the Company and Crispin Simon is the

Chief Executive, each with clearly defined responsibilities.

The ChairmanThe Chairman leads the Board and is responsible for organising

the business of the Board, ensuring its effectiveness and setting

its agenda. The Chairman has no involvement in the day-to-day

management of the Company. The Chairman facilitates the effective

contribution of non-executive directors and constructive relations

between executive and non-executive directors, ensures directors

receive accurate, timely and clear information and that effective

communication occurs with institutional shareholders. The Chairman’s

professional commitments are summarised in his biographical details

on page 14. The Chairman serves on the boards of a number of

companies but the Board is satisfied that these positions do not

interfere with the effective performance of his duties as Chairman

of the Company.

Senior Independent DirectorJeremy Curnock Cook is the Senior Independent Director, having

replaced David Hankinson when he retired on 25 January 2007.

He is available to meet shareholders on request and to ensure that

the Board is aware of shareholder concerns not resolved through the

normal channels of communication of the Chairman, Chief Executive

and Finance Director.

Corporate Governance ReportContinued

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ANNUAL REPORT 2006

27


IndependenceThe Board considers that Jeremy Curnock Cook, Sir Thomas Harris

and Tony Weir are independent of management and free from any

business or other relationship which could materially interfere with

the exercise of their independent judgement.

Jeremy Curnock Cook has served for longer than nine years as a

non-executive director and, accordingly, under the terms of the Code

is required to seek re-election annually and the Board is pleased that

he has indicated his willingness to stand for re-election at the 2007

Annual General Meeting. The Board considers Jeremy Curnock Cook

to be independent because during his tenure as a non-executive

director, the composition of the Board and the executive management

has changed significantly. Jeremy Curnock Cook brings to the Board

a wealth of knowledge and experience and his deep understanding of

the industry enables him to make significant constructive and critical

contributions to the Board and its Committees. The Board is of the

opinion that Jeremy Curnock Cook continues to act in an independent

capacity and therefore recommends his re-election.

Any director appointed since the last Annual General meeting (AGM)

of the Company is required, under the provisions of the Company’s

Articles of Association, to seek election by shareholders at the next

AGM. The Articles also require that each director retire once every

three years.

At the 2007 AGM Jeremy Curnock Cook, Ian Ardill, Crispin Simon

and Tony Weir will seek re-election to the Board. Full details are

incorporated in the AGM Notice dated 25 May 2007.

Board CommitteesThe Board Committees, which are comprised solely of non-executive

directors, operate within clearly defined terms of reference and report

regularly to the Board. The Committees are as follows:

Nomination CommitteeThe members of the Nomination Committee are Gerry Brown

(Chairman), who replaced Sir Richard Needham in June 2006,

Jeremy Curnock Cook, Sir Thomas Harris and Tony Weir, who

replaced David Hankinson following the year end.

The Committee is responsible for the process of the nomination,

selection, training and evaluation of directors and of executive

succession planning. Its aim is to appoint directors who have the

experience and track record to make a significant contribution.

When considering an appointment, the Committee will work with the

Board and the Director of Human Resources, as necessary, to prepare

a formal job specification and an assessment of the anticipated time

commitment. The Committee, in recommending appointments to the

Board, considers the balance of membership of non-executive and

executive directors and the blend of skills and experience of existing

directors and prospective candidates.

The Committee typically uses external search consultants to

identify candidates and seeks the opinions of all directors on new

appointments. Hanson Green assisted the Committee in the search

for and appointment of Tony Weir to the Board. A rigorous interview

process was conducted and Tony Weir met at length with the

executive directors prior to his recommendation to the Board.

The recommendations of the Committee are ultimately made to the

Board for consideration prior to any appointment being made.

The Committee met twice during the year and all members attended

each meeting. The terms of reference for the Committee can be found

on the Company’s website.

Remuneration CommitteeThe members of the Remuneration Committee are

Sir Thomas Harris (Chairman), Jeremy Curnock Cook and

Gerry Brown and Tony Weir, who both joined the Committee

following the year end. Jeremy Curnock Cook was succeeded as

Chairman of the Committee upon his appointment as Senior

Independent Director by Sir Thomas Harris. David Hankinson

served on the Committee until his resignation on 25 January 2007.

Details of the activities undertaken by this Committee are provided

in the Directors’ Report on Remuneration on pages 32 to 39.

The Committee has written terms of reference dealing with its

authority and duties which can be found on the Company’s website.

The Committee met on five occasions during the year and the

attendance by each member is set out in the table on page 25.

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BIOCOMPATIBLES


Audit CommitteeThe members of the Audit Committee are Tony Weir (Chairman), who

replaced David Hankinson following the year end, Jeremy Curnock

Cook and Sir Thomas Harris. Gerry Brown resigned from the

Committee upon his appointment as Chairman of the Company in

June 2006 and Sir Thomas Harris joined the Committee following the

year end. Tony Weir is considered by the Board to have recent and

relevant financial experience. The Committee met twice during the

year and has written terms of reference dealing with its authority and

duties, which are available on the Company’s website. The external

auditors, Finance Director and Financial Controller attend the

meetings by invitation. The Committee met with the external auditors

on one occasion without Executive management present. Attendance

at each meeting of the Committee is shown in the table on page 25.

The remit of the Committee is to review the effectiveness of the

Company’s system of internal controls, including financial,

operational and compliance controls and of risk management; to

agree the appointment, re-appointment or removal of auditors and the

scope of their duties; and to review the half-year and full-year results

prior to their approval by the Board. The Committee undertakes an

annual review of the performance of the external auditors, monitoring

the nature and extent of non-audit work which they undertake, thereby

ensuring that their objectivity and independence is not compromised.

The split between audit and non-audit fees for the year under review

appears on page 59. Any significant non-audit work is put out to

tender and awarded on the basis of cost, efficiency and quality.

During the year, the Company awarded tax advisory work to other

professional advisers.

The Committee has a procedure whereby employees may, in

confidence, notify management or the non-executive directors of any

concerns regarding suspected financial impropriety, fraud or other

wrongdoing. Upon being made aware of such circumstances, the

Committee would promptly undertake a thorough investigation and

ensure that any concerns are properly resolved.

The Audit Committee considered whether there was a need for an

internal audit function and recommended to the Board that, consistent

with previous years, such a function was not needed. The Board does

not consider it to be necessary for the Company to have a separate

internal audit function due to the Company’s current size and

relatively straightforward organisation and operational structure.

MANAGEMENT SYSTEM

Group Executive CommitteeThe Group Executive Committee is chaired by the Chief Executive

and consists of the executive directors and the managing director of

CellMed AG. This Committee meets monthly and is responsible for;

resource allocation across the Group’s activities, the implementation

of the strategy approved by the Board, monitoring of the performance

of the business, instigation of any necessary corrective actions, the

development of the Group’s strategy and preparation of the budget for

Board approval. The Committee has formal terms of reference laid

down by the Board which are available on the website.

Management StructureThe Company is managed as a small Group by the Chief Executive

and the Finance Director – with two additional Directors responsible

for the two parts of Biocompatibles’ activities based in Farnham,

UK. These two parts are a profitable sales/marketing activity and a

product development cost centre. CellMed is managed by an on-site

Managing Director.

Quality SystemThe Company is committed to the highest standards of business

conduct. Each employee, upon joining, undergoes a thorough

induction programme, and receives a staff handbook. All staff have

access to the document management system which includes the

Company’s management system, the key business processes and

the Company’s quality improvement tools. The Company also

has a comprehensive quality system in place, and complies with

ISO9001 and the updated standard ISO13485:2003. ISO9001 is an

internationally recognised standard that is independently audited.

ISO13485 sets out the requirements for the application of ISO9001

to medical device companies. There is comprehensive training on

compliance with the quality system for each employee.

The quality management system consists of a policy manual and

control procedures covering business planning processes, technical

methods and equipment operating procedures.

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ANNUAL REPORT 2006

29


Performance ReviewThe Board receives reports from senior management at regular

intervals assessing the performance of the operations against key

performance indicators. Reports are also made on the status of each

programme, market trends, competitor activity and intellectual

property. This information helps to identify control issues and other

business risks. This information is collated into the Monthly

Management Report.

Information and CommunicationThe Company undertakes an annual strategic review and the Board

also formally reviews presentations made by senior management for

each key area of the business including updates on human resources,

intellectual property, health and safety, environment, tax and

insurance on a bi-annual basis. Treasury matters are reported on

at every Board meeting.

Monitoring and Corrective Action The Board monitors the system of internal control through the

processes outlined above, and in addition:

Finance:

The Audit Committee meets with the external auditor and reviews

any control issues highlighted through the annual audit process.

Quality:

The Company conducts internal audits to monitor compliance of its

quality system with ISO9001 and ISO13485. There is an annual

management review of the quality system.

RISK AND CONTROLThe Board confirms that the Company has implemented the

guidelines on the management and control of risk issued by the

Turnbull Committee and that there is an ongoing process for

identifying, evaluating and managing significant risks in relation to

the Company’s business. This process was in place for the period and

will continue to be throughout 2007. The Board undertakes an annual

review of internal controls which extends to all financial and

operational controls as well as compliance controls and risk

management. The Board has overall responsibility for the Group’s

system of internal controls and risk management and for reviewing

its effectiveness. The system is designed to identify and manage the

risks of failure to achieve business objectives rather than to eliminate

them, and can only provide reasonable and not absolute assurance

against material misstatement or loss.

Review and Management of RiskThe Group Executive Committee reviews risk management

procedures throughout the year. The annual review covers sales

and marketing, manufacturing, research and development, clinical,

quality and regulatory affairs, intellectual property, IT systems,

corporate and financial functions, health, safety and environmental

matters. As part of the review, risks are identified, categorised by

reference to level of importance and probability and steps to

mitigate such risks are discussed and remedial measures put in

place. The Audit Committee is responsible for reviewing the

effectiveness of the Group’s internal control policies and procedures

for identifying, assessing and reporting risks on an annual basis.

The annual review of risks is reviewed and approved by the Board.

The risk review is incorporated within the Company’s Quality

system and is therefore subject to independent audit.

Internal ControlsThe Group has financial control procedures that are designed to

ensure complete and accurate recording of financial transactions

which limits the potential exposure to loss of assets or fraud and

ensures adherence with good business practices. Particular attention

is paid to the control of research and development expenditure and

the performance of the treasury function. Measures taken include

comprehensive authorisation approvals, physical controls to

safeguard assets, segregation of duties, management and Board

review and external audits. The approvals required for any level

of capital and revenue expenditure are documented and made

known to employees.

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BIOCOMPATIBLES


Social, Environmental and EthicalThe Group has adopted a formal statement with regard to its approach

to social, environmental and ethical issues whereby the Group and its

employees embrace the responsibility inherent in supplying healthcare

products. The Group and its employees undertake to comply with all

legal and regulatory requirements and to show personal integrity in

dealings with each other and the outside world. The Group works to

reduce any adverse impact of its business on the environment and

provide a safe working environment for its employees. Further, the

Group seeks to minimise the use of pre-clinical trials and to present

clinical data with due regard for statistical significance.

A separate report on Environmental Policy and Performance is

included on pages 20 and 21.

Treasury ManagementAfter the year-end, the Group transferred the funds it had invested

in corporate bonds out of these investments and now holds all of its

liquid assets in cash and cash equivalents. This decision was taken

following a review of the performance of the bond investments. All

investment transactions are governed by the Group’s Treasury Policy,

which is periodically reviewed by the Board.

Management performed a review of the treasury function in 2003 and

improved controls and procedures. Further enhancements to treasury

controls have been made since 2003, in particular; the reporting of

treasury performance, the implementation of a short-term cash flow

forecast and the development of a foreign currency hedging policy.

The Company’s Articles of Association allow the Company to

purchase its own shares. However, the Company does not have

distributable reserves and therefore cannot currently do so. The

Company has no intention of purchasing its own shares in the

foreseeable future.

SHAREHOLDERS

Relations with ShareholdersThe directors place great importance on maintaining clear, accurate

and timely communications with both institutional and private

investors. The Chief Executive has responsibility for day-to-day

investor relations. The Chief Executive and the Finance Director meet

regularly with the Company’s institutional shareholders and report

their views back to the Board. During 2004, the Company initiated a

project to increase communication with non-institutional investors.

This project has continued through 2006 into 2007 with the intention

of building knowledge of the Company amongst private client

brokers. The Company has adopted a policy of consulting with its

major shareholders in advance on matters which would be referred

to an Extraordinary General Meeting.

Annual General MeetingThe Company welcomes the opportunity, presented by the AGM, to

meet with individual private shareholders. The Chief Executive makes

a presentation on the Company’s business and strategy and there is an

opportunity to ask questions on these topics. Shareholders also have

an opportunity to talk informally with the directors both before and

after the AGM. The proxy votes for and against each resolution, as

well as those withheld, are counted before the AGM and the results

are made available at the meeting.

Annual and Interim ReportsEach shareholder receives a copy of the annual report and the interim

report, which includes an operational and a financial review.

Company WebsiteThe Company’s website is an important channel for communication

with shareholders. The annual and interim reports and press releases

are made available on the website. There is also information on the

Group and its products which is updated regularly. The Company’s

website is www.biocompatibles.com and shareholders can register

to receive the Company’s press announcements by email when they

are released.

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31


Corporate and Social ResponsibilityThe Company has developed a mission statement (the “Company

Statement”) which describes the way in which the Company seeks to

make a positive impact on its stakeholders. All employees receive

training on the Company Statement and performance against

Corporate and Social Responsibility (CSR) goals is monitored

through the management system. Examples of measures that relate to

CSR goals include customer satisfaction measures such as delivery

and product quality performance; the results of quality audits

designed to improve the capability of key suppliers; information

sharing, and reward and recognition systems for employees; delivery

of growth in the value of shareholders’ investments; a policy for the

environment with a commitment to a reduction in use of non-

renewable energy and an increase in the use of recycling; and targeted

levels of charitable fundraising by employees matched or exceeded by

the Company.

In 2006 the Biocompatibles’ Charities Team raised over £10,300

including Company donations for charitable projects within the local

community. The recipients included: the British Liver Trust, a national

charity supporting adult liver disease; the Primary Biliary Cirrhosis

(PBC) Foundation, a charity offering support and information to PBC

sufferers, their friends and families; The Ridgeway School, a special

school for children with severe learning needs; Christopher’s Hospice

(CHASE Guildford), a local hospice for children with life-threatening

illnesses and; Guildford Undetected Tumour Screening (GUTS)

against cancer, a screening programme based at the Royal Surrey

County Hospital to which local doctors’ surgeries refer patients

identified as being at moderate to high risk of developing bowel

cancer. In addition, the Company supported individual employees

in their more specific fund raising efforts.

In 2007 the charities team have selected to support the Phyllis

Tuckwell Hospice, a local charity providing care for people with

terminal illnesses, and the Samantha Dickson Brain Tumour Trust,

a charity funding research in order to improve treatment for those

people affected by a brain tumour.

In evidence of its focus on such issues, the Company has retained

its membership of the FTSE4GOOD index which is comprised of

companies that meet globally recognised standards of corporate

and social responsibility.

Going ConcernThe Directors confirm that, after making enquiries, they have a

reasonable expectation that the Group and Company have adequate

resources to continue in operational existence for at least twelve

months following the date of this report. For this reason, they

continue to adopt the going concern basis in preparing these accounts.

This report on Corporate Governance has been approved by the Board

and signed on its behalf by

Ian Ardill

Company Secretary

26 March 2007

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BIOCOMPATIBLES

Directors’ Report on Remuneration

This report has been prepared by the Remuneration Committee

(the “Committee”) on behalf of the Board and in accordance with

the provisions of Schedule 7A of the Companies Act 1985 and

Schedule B of the Combined Code (the “Code”) issued in July 2003.

The Committee operates according to the principles outlined in the

Listing Rules of the Financial Services Authority and this report

describes how the Board has applied these Principles of Good

Governance relating to directors’ remuneration. The Committee

met on five occasions during 2006.

A resolution to approve the Committee’s report will be proposed

at the forthcoming Annual General Meeting of the Company.

This part of the Directors’ Report on Remuneration is unaudited.

REMUNERATION COMMITTEEThe members of the Committee are Sir Thomas Harris (Chairman),

Gerry Brown, Jeremy Curnock Cook and Tony Weir, all of whom

are independent non-executive directors of the Company. On

1 January 2007 Sir Thomas Harris replaced Jeremy Curnock Cook

as Chairman and Gerry Brown and Tony Weir joined the Committee.

David Hankinson retired from both the Board and the Remuneration

Committee on 25 January 2007. No Committee member has a

personal financial interest (other than as a shareholder) in the matters

to be decided. Attendance at meetings is set out on page 25 and the

Terms of Reference for the Committee are available on the

Company’s website www.biocompatibles.com.

Geoff Tompsett, Director of Human Resources, is Secretary to the

Committee and attends the meetings. Crispin Simon, Chief Executive,

attends meetings at the invitation of the Committee, but is not present

when his own remuneration is being discussed. The Committee, in

setting executive directors’ remuneration, refer to independent data

including an annual survey undertaken by New Bridge Street

Consultants LLP, an independent executive remuneration and share

schemes consultancy, on remuneration levels amongst comparator

companies. New Bridge Street Consultants LLP provides advice on

the policy for the award of share incentives and contribute on-going

advice in this regard. Aon Consulting Limited provided advice to

the Committee in relation to executive directors’ pensions. Aon also

provided actuarial, pension and employee benefit administration

services to the Company.

POLICY ON DIRECTORS’ REMUNERATIONThe Committee’s policy on executive directors’ remuneration mirrors

the Company’s policies on pay and benefits and is subject to regular

review. This is to set salaries and benefits on the basis of median levels

within the healthcare/biotech sector with the potential to reward up to

the upper quartile of the sector through the annual bonus plan and share

incentive schemes. The packages are designed to attract, motivate and

retain talented executives. The main elements of the remuneration

package for executive directors and senior managers are basic annual

salary and associated benefits, a performance related annual bonus,

the long term incentive programme (the Performance Share Plan)

and pension arrangements. This mix of performance related and non-

performance related remuneration is designed to deliver the right level

and balance of incentive to directors and senior executives.

The principal comparator group used to set remuneration is

that defined by the participants of the Biotechnology Industry

Remuneration Survey published by New Bridge Street Consultants.

Salary and BenefitsThe Committee sets salaries after consideration of the Company’s

performance, market conditions, comparable salaries in peer

companies and the need to reward individual performance. The

Committee reviews executive directors’ basic salaries annually in

December with changes becoming applicable from the start of the

following year. In addition, salaries are reviewed at the time of the

appointment of new directors to the Board. The average increase

effective from 1 January 2007 was 1.6%, in line with the guidelines

set across the Company. Details of each executive director’s

remuneration are set out on page 36.

Executive directors’ service contracts, which include details of

remuneration, will be available for inspection at the Annual General

Meeting. In addition to basic salary, the executive directors receive

the following benefits in kind: car allowance, life assurance, private

medical insurance, pension, health screening and gym membership.

Annual Bonus PaymentsThe Company’s policy is that a substantial proportion of the

remuneration of the executive directors and senior executives should

be performance related. As described below, executive directors may

earn annual bonus payments (which are non-pensionable) of up to

50% of their basic salary.

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ANNUAL REPORT 2006

33

Directors’ Report on RemunerationContinued

The Committee establishes the targets annually. The achievement

of the 2006 annual goals is described in the Operational Review on

page 6. For 2007 the bonus payments are based on the achievement

of predefined goals and the individual weightings of those goals.

2007 Company performance targets were determined at the beginning

of the financial year based on the following criteria:

� Achievement of budgeted sales revenue target at a set

gross margin.

� Achievement of US clinical project milestones in a

specific indication.

� Achievement of clinical project milestones in a new indication.

Each of the business goals is allocated a specific bonus percentage.

The maximum bonus opportunity for executive directors if all

goals are achieved is 35% of base salary. There is a further bonus

opportunity of up to 15% based on pre-determined personal goals

for the executive directors proportionate to the achievement of the

Company’s Bonus Goals.

If the full bonus opportunity is earned the performance related

element of the executive directors’ remuneration (excluding share

awards) will be around 30%. No element of the non-executive

directors’ remuneration is performance related.

LONG TERM INCENTIVE PLANS

Performance Share PlanThe Company operates a long term incentive plan, the Performance

Share Plan (“PSP”). Awards under the PSP take the form of nil cost

options and are subject to a maximum award equivalent to one times

base salary except in exceptional circumstances such as recruitment

to senior positions where the maximum value of shares awarded is

limited to two times salary.

The awards will vest after three years, subject to a performance

condition based on the Company’s Total Shareholder Return (“TSR”)

against a comparator group comprising the constituents of the FTSE

techMARK All-Share Index of which the Company is a member.

Performance shares will only vest if the Company ranks in the top

half of the ranking table, maximum vesting will only occur if the

Company is in the upper quartile. Vesting is also conditional on an

improvement in the underlying financial performance of Company.

Awards will vest to the extent that the performance condition has

been satisfied at the end of the three-year performance period.

To the extent that the performance target is not met, the awards

will be forfeited. Where the TSR ranks between median and upper

quartile after three years the performance award will vest pro-rata

between 25% and 100%. Where the TSR ranks below median after

three years the performance target will not have been met and the

Performance Award will lapse. The relevant TSR figures will be

averaged over the three-month periods preceding the beginning and

end of the performance period. There is no opportunity for retesting

the performance condition. The TSR performance condition will be

calculated by independent advisers and verified by the Remuneration

Committee. Once vested, an award will normally only be capable of

exercise for a period of 6 months.

Measuring the Company’s TSR performance against this benchmark

will reward stock market outperformance and will create a good

alignment between the interests of executives and shareholders.

Executive Share Option Schemes The 1995 Executive Share Option Scheme, 1995 Savings-Related

Option Scheme and the 2003 Employee Share Option Scheme are

closed to further membership.

Share Incentive PlanThe Company also operates an Inland Revenue approved Share

Incentive Plan (“SIP”). In September 2006 the Board adopted

Schedule 1 to the Scheme allowing for the grant of Free shares

to the non-UK employees, in particular to qualifying CellMed

employees. The SIP is a share ownership plan open to all employees

with a qualifying period of employment of 12 months. It takes the

form of an allocation of Free Shares not exceeding £3,000 in value

in any tax year, a monthly employee purchase of Partnership Shares,

up to a maximum value of £125 per month, and a 2:1 award of

Matching Shares for each Partnership Share purchased. The Free

and Matching Shares are held in trust for a minimum of three years

and are not subject to any performance criteria. Executive directors

participate on the same terms as all other UK employees and details

of their share interests under this plan are given in the table on

page 37.

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34

BIOCOMPATIBLES


ShareholdingIn order to ensure that executive directors’ interests are aligned with

those of shareholders, the Company adopted shareholding guidelines

linked to the out-turn of the share-based incentive schemes. Executive

directors will be expected to retain no fewer than 50% of shares net

of taxes until a shareholding equivalent to 100% of base salary has

been achieved.

PENSION ARRANGEMENTSEach of the executive directors was a member of the Biocompatibles

Retirement Plan (the “Plan”), a money purchase scheme which

operated only in the UK. During 2006, the Company transferred

its continuing pension arrangements into a Group Stakeholder

Pension Plan. The principal driver for the change in the retirement

plan was a reduction in administration costs. This new plan continues

to provide for dependants’ pensions and lump sums on death-in-

service and a Trust will be introduced to provide the life insurance

element upon the wind-up of the Plan. Contributions by the director

and the Company are based on a percentage of pensionable salary

(not including bonus payments) and vary according to the age of

the director. No other payments to directors are pensionable. The

normal retirement age under the Pension Plan for executive directors

is 65 years; early retirement is permissible with Company consent

from age 55.

An additional voluntary contribution (“AVC”) matching arrangement

was introduced in 2004 whereby the Company matches AVCs

made by employees and directors up to a maximum of 3 per cent

of basic salary.

As a result of the changes affecting taxation and limits on pensions

introduced by the Finance Act 2004 and implemented on 6 April

2006, the Company will offer any employee whose benefits exceed

the Lifetime Allowance (LTA) and consequently decides to opt out

of the Retirement Plan, the alternative of receiving cash payments

(through PAYE) equal to the missed employer pension contributions

(the amounts paid would be equal to the gross employer pension

contributions netted down for Employer NIC). The policy of the

Company is not to compensate employees for changes in the taxation

treatment of pensions.

LETTERS OF APPOINTMENT AND SERVICE CONTRACTS

Director Non-Executive Director Executive Director

Effective date of Term of letterletter of appointment of appointment Unexpired Term Date of service contract Notice period

Gerry Brown (appointed 10.01.2006) 10 January 2006 3 years 2 years – –

Jeremy Curnock Cook 6 July 2006 1 year 6 months – –

David Hankinson (retired 25.01.2007) 26 September 2006 until successor appointed n/a – –

Thomas Harris 1 November 2005 3 years 1 years 10 months – –

Richard Needham (retired 22.06.2006) 6 July 2003 3 years n/a – –

Tony Weir (appointed 01.01.2007) 1 January 2007 3 years 3 years – –

Ian Ardill – – – 23 November 2004 1 year

Crispin Simon – – – 15 June 1999 1 year

Peter Stratford – – – 25 September 2002 1 year

John Sylvester – – – 21 November 2005 1 year

It is the Company’s policy that service contracts for executive directors are for an indefinite period terminable by either party with twelvemonths’ notice, and that payments in lieu of notice should not exceed the director’s salary for the unexpired term of their notice period and thedirectors’ service contracts comply with this policy. The Company has adopted a policy on mitigation to reduce any payment in lieu of notice.The Company requires employees and directors to mitigate any payment in lieu of notice.

The interests of the directors in the Company’s share capital are shown on page 18.

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ANNUAL REPORT 2006

35


NON-EXECUTIVE DIRECTORSThe remuneration of the non-executive directors is determined by the Board within limits set out in the Articles of Association, based on duties

performed, time required and independent surveys of fees paid by comparable companies. Non-executive directors have letters of appointment.

The Company’s policy is to appoint non-executive directors for an initial three-year term subject to the requirements for re-election under the

Articles of Association. Non-executive directors are not entitled to compensation for loss of office beyond the three-month notice period in their

letter of appointment. The non-executive directors do not participate in any bonus or share schemes of the Company and are not eligible to join

the Company’s pension scheme.

PERFORMANCE GRAPHThe following graph shows the Company’s performance, measured by total shareholder return, compared with the performance of the FTSE

techMARK All-Share index. The directors believe this to be the most appropriate index for comparison. It is the benchmark against which

performance is measured for the Company’s Performance Share Plan and the 1995 share option scheme and is an index of which the Company

has been a constituent member throughout the period.

0

50

100

150

200

250

31-Dec-02 31-Dec-03 31-Dec-04 31-Dec-05 31-Dec-061-Jan-02

Source: Datastream

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BIOCOMPATIBLES

The following information has been audited by the Company’s auditors, PricewaterhouseCoopers LLP, as required by Schedule 7A of the

Companies Act 1985.

DIRECTORS’ EMOLUMENTS (audited)The aggregate remuneration of the individual directors for the year ended 31 December 2006 was paid by a subsidiary company, Biocompatibles

UK Limited, and was as follows:

2006 2005

Fees Salary Bonus Benefits Total Total

Name of Director £’000 £’000 £’000 £’000 £’000 £’000

Ian Ardill – 134 41 16 191 163

Crispin Simon – 276 67 24 367 338

Peter Stratford – 161 39 19 219 198

John Sylvester – 176 48 17 241 111

Gerry Brown 40 – – – 40 –

Jeremy Curnock Cook 29 – – – 29 28

David Hankinson 29 – – – 29 28

Thomas Harris 26 – – – 26 4

Richard Needham (retired 22.06.2006) 28 – – – 28 55

Total: 152 747 195 76 1,170 925

Benefits in kind include car allowance, life insurance, private medical insurance, health screening, gym membership and professional

subscriptions.

Directors’ Pension Entitlements (audited)All the executive directors were members of the Biocompatibles Retirement Plan and are now members of the Group Stakeholder Pension Plan.

Contributions by the employee and the Company are based on a percentage of pensionable salary which excludes bonuses and benefits.

The executive directors’ contributions during the year were:

– Ian Ardill contributed £10,031 (2005: £9,375) and the Company contributed £18,307 (2005: £16,875).

– Crispin Simon contributed £56,456 (2005: £16,067) and the Company contributed £45,337 (2005: £37,489).

– Peter Stratford contributed £8,873 (2005: £8,532) and the Company contributed £20,469 (2005: £19,391).

– John Sylvester contributed £18,467 (2005: £9,188) and the Company contributed £27,589 (2005: £13,563).

The aggregate Company contribution to directors’ pensions was £89,977 (2005: £43,162).

Directors may, at their discretion, make AVCs up to the limits defined by the Inland Revenue. Any such payments and the Company’s matching

cost are included above.


70412 pre 16/5/07 19:17 Page 36

ANNUAL REPORT 2006

37


LONG TERM INCENTIVE PLANS (audited)

Performance Share Plan 2005In 2006 a total of 297,500 performance shares were awarded to the executive directors and the most senior executives equating to a dilution level

of 0.80% of the issued share capital. The maximum award to any one individual was 30% of basic annual salary with an average award of 19.5%

of basic salary.

The awards will vest on a prescribed scale subject to the Company’s TSR performance over the three year period from grant relative to the TSR

performance of the companies comprising the FTSE techMARK All-Share Index at the time of grant. In addition, no part of an award will vest

unless the Committee is satisfied that there has been a satisfactory improvement in the underlying financial performance of the Company over

the performance period. There is no provision for re-testing.

The directors’ interests in the shares under the PSP are as follows:

Total no. of End of Shares vested Total no. ofAward shares as at performance Vesting during the Shares shares as at

date 01.01.2006 period date year awarded 31.12.2006

Ian Ardill 14.10.2005 45,000 14.10.2008 14.04.2009 – –29.12.2006 29.12.2009 29.06.2010 35,000

80,000

Crispin Simon 14.10.2005 75,000 14.10.2008 14.04.2009 – –29.12.2006 29.12.2009 29.06.2010 – 35,000

110,000

Peter Stratford 14.10.2005 45,000 14.10.2008 14.04.2009 – –29.12.2006 29.12.2009 29.06.2010 35,000

80,000

John Sylvester 14.10.2005 45,000 14.10.2008 14.04.2009 – –31.10.2005 7,500 31.10.2008 31.04.2009 –29.12.2006 29.12.2009 29.06.2010 – 35,000

87,500

Total 217,500 140,000 357,500

The Market Price on 29 December 2006 was 115.75p.

Share Incentive Plan (audited)Crispin Simon, Ian Ardill and Peter Stratford were eligible to participate in the Share Incentive Plan for all of 2006 and John Sylvester became

eligible in June 2006. Their interests in the Company’s shares under this Plan as at 31 December 2006 are as follows:

Total no. of No. of Partnership Shares Matching Total no. of shares as at free shares purchased by shares shares as at 01.01.2006 awarded Director awarded 31.12.2006

Ian Ardill 1,312 – 931 1,862 4,105

Crispin Simon 1,312 – 931 1,862 4,105

Peter Stratford 1,312 – 931 1,862 4,105

John Sylvester – – 375 750 1,125

Total 3,936 – 3,168 6,336 13,440

Free Shares were awarded on 14 October 2005.

* No award of Free Shares was made in the calendar year to 31 December 2006.

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38

BIOCOMPATIBLES


Directors Share Options as at 31 December 2006 (audited)No share options were granted during the year consequent upon the close of the 1995 and 2003 Executive Share Options schemes.

01.01.2006 Number of Market 31.12.2006Number options price on Numberof shares Exercise exercised date of of shares

Date of under Price during exercise under ExerciseScheme Grant option £ the year £ option period

Ian Ardill Exec 1995 Apr 2003 20,000 1.23 – – 20,000 Apr 2006 – Apr 2013

Empl 2003 July 2003 30,000 1,47 – – 30,000 July 2006 – July 2013

Empl 2003 Apr 2004 45,000 1.96 – – 45,000 Apr 2007 – Apr 2014

Empl 2003 Oct 2004 30,000 2.19 – – 30,000 Oct 2007 – Oct 2014

125,000

Crispin Simon Exec 1995 June 1998 316,874 1.262 – – 316,874 June 2001 – June 2008

Exec 19951 June 1998 316,875 1.262 – – 316,875 June 2003 – June 2008



Exec 1995 Sept 2000 28,500 3.84 – – 28,500 Sept 2003 – Sept 2010


Exec 1995 Aug 2001 31.250 1.89 – – 31,250 Aug 2004 – Aug 2011

Exec 19951 Aug 2001 31,250 1.89 – – 31,250 Aug 2006 – Aug 2011

Empl 2003 July 2003 50,000 1.47 – – 50,000 July 2006 – July 2013

Empl 2003 Apr 2004 60,000 1.96 – – 60,000 Apr 2007 – Apr 2014

1,013,249 Oct 2008 – Apr 2009

Peter Stratford Exec 1995 Aug 1999 12,588 1.26 – – 12,588 Aug 2003 – Aug 2009

Exec 1995 Sept 2000 20,000 3.84 – – 20,000 Sept 2003 – Sep 2010


Empl 2003 July 2003 50,000 1.47 – – 50,000 July 2006 – July 2013

Empl 2003 Apr 2004 60,000 1.96 – – 60,000 Apr 2007 – Apr 2014

172,588

John Sylvester Empl.2003 June 2005 95,000 1.91 95,000 June 2008 – June 2015

Total 1,405,837 – – 1,405,837

1Super options.

The market price of the Company’s shares at the end of the financial year was 115.75p and the range of market prices during the year was

between 113p and 235.50p.

70412 pre 21/5/07 12:01 Page 38

ANNUAL REPORT 2006

39


Employee Share Option Scheme 2003For those share options granted after June 2003, the performance condition is that the Total Shareholder Return of the Company’s shares must

outperform the FTSE techMARK mediscience index.

Executive Share Option Scheme 1995For those share options granted during and after August 1999 but before June 2003, the performance condition is that the total shareholder return

of the Company’s shares must outperform that of the FTSE techMARK All Share index.

For options granted prior to August 1999, the increase in Total Shareholder Return since the date of grant must be at least 10 per cent greater

than the increase in the Retail Prices index over a period of 3 years from the date of grant.

Executive Share Option Scheme 1995 – Super OptionsFor super options granted during and after June 2000, participants will be able to exercise their options if the increase in the Total Shareholder

Return since the date of grant falls within the top quartile of Total Shareholder Return performance by the constituents of the FTSE Mid-250

index of companies over the same period. Super options were created in 1998 to link higher potential reward for exceptional performance for

the most senior executives.

For super options granted before June 2000, participants will be able to exercise their options if over a period of any three months, such period

to begin no earlier than three months before the fifth anniversary of the date of grant, the average market value of an ordinary share of the

Company is at least 350p.

Super options can only be exercised after the fifth anniversary of the date of grant provided the performance criteria have been met.

Approval

This report was approved by the Board of Directors

on 26 March 2007 and signed on its behalf by:

SIGNATURE TO FOLLOW

Sir Thomas Harris

Chairman

Remuneration Committee

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40

BIOCOMPATIBLES

2006 2005

Notes £000 £000

Revenue 3 5,964 3,399

Cost of sales (2,209) (1,809)

Gross profit 3,755 1,590

Other operating income 491 247

Selling and marketing costs (1,817) (2,882)

Research and development costs (8,375) (7,678)

Administrative expenses (2,005) (2,293)

Operating loss 3, 5 (7,951) (11,016)

Interest payable and similar charges 4 – (7)

Interest receivable 4 1,696 4,369

Loss before tax (6,255) (6,654)

Tax credit 6 1,002 542

Loss for the year from continuing operations (5,253) (6,112)

Gain on sale of discontinued operation, net of tax 7 10,276 1,421

Profit/(loss) for the year attributable to equity holders 5,023 (4,691)

Earnings/(loss) per share (basic and diluted) 8 14.1p (13.4)p

Loss per share from continuing operations (basic and diluted) 8 (14.8)p (17.4)p

Earnings per share from discontinued operations (basic and diluted) 8 28.9p 4.1p

Consolidated Income Statementfor the year ended 31 December 2006

70412 ACC NOTES 16/5/07 19:34 Page 40

Consolidated Balance Sheetat 31 December 2006

ANNUAL REPORT 2006

41

2006 2005

Notes £000 £000

ASSETS

Non-current assets

Property, plant and equipment 9 787 804

Goodwill 10 2,051 3,388

Intangible assets 11 5,026 5,776

7,864 9,968

Current assets

Inventories 13 364 340

Current income tax assets 979 834

Trade and other receivables 14 2,768 1,775

Available-for-sale financial assets 15 143 14,133

Cash and cash equivalents 16 37,020 26,851

41,274 43,933

Total assets 49,138 53,901

EQUITY

Capital and reserves attributable to equity holders

Share capital 17 8,010 7,671

Share premium 19 49,781 49,760

Shares to be issued 26 – 3,246

Merger reserve 20,789 19,192

Other reserves 47,792 47,805

Retained earnings (84,670) (90,121)

Total equity 41,702 37,553

LIABILITIES

Non-current liabilities

Other payables 20 – 5,148

Deferred income tax liabilities 21 1,508 1,733

Provisions 22 820 1,197

2,328 8,078

Current liabilities

Current income tax liabilities – 3,983

Trade and other payables 23 4,540 3,185


5,108 8,270

Total liabilities 7,436 16,348

Total equity and liabilities 49,138 53,901

The notes on pages 47 to 75 are an integral part of these consolidated financial statements. The financial statements on pages 40 to 46 wereapproved by the Board of Directors on 26 March 2007 and were signed on its behalf by:

Ian ArdillFinance Director

70412 ACC NOTES 21/5/07 12:46 Page 41

42

BIOCOMPATIBLES

Share Share Shares to Merger Other Retained Totalcapital premium be issued reserve reserves earnings equity

Notes £000 £000 £000 £000 £000 £000 £000

Balance at 1 January 2005 7,480 61,173 – 17,748 47,812 (85,681) 48,532

Fair value losses, net of tax:

– available-for-sale financial assets 15 – – – – (7) – (7)

Currency translation adjustments – – – – – 3 3

Loss for the year – – – – – (4,691) (4,691)

Total recognised loss for the year – – – – (7) (4,688) (4,695)

New share capital issued 17, 19 82 175 – – – – 257

Acquisition of treasury shares – – – – – (43) (43)

Shares in respect of

acquisition of subsidiary 17 109 – 3,927 1,444 – – 5,480

Revaluation of consideration 10 – – (681) – – – (681)

Return of capital 19 – (11,588) – – – – (11,588)

Share-based schemes:

– value of employee services 18 – – – – – 291 291

Balance at 31 December 2005 7,671 49,760 3,246 19,192 47,805 (90,121) 37,553



Currency translation adjustments – – – – – (71) (71)

Profit for the year – – – – – 5,023 5,023

Total recognised profit for the year – – – – (13) 4,952 4,939




acquisition of subsidiary 17, 19, 26 312 – (1,909) 1,597 – – –

Revaluation of consideration 10 – – (1,337) – – – (1,337)



Balance at 31 December 2006 8,010 49,781 – 20,789 47,792 (84,670) 41,702

Consolidated Statement of Changes in Equityfor the year ended 31 December 2006

70412 ACC NOTES 21/5/07 12:02 Page 42

ANNUAL REPORT 2006

43

2006 2005

Notes £000 £000

Cash flows from operating activities

Cash used in operations 25 (5,840) (8,799)

Interest received 1,076 1,421

Interest paid – (7)

Tax credit received 667 –

Net cash used in operating activities (4,097) (7,385)

Cash flows from investing activities

Disposal of subsidiary (102) 16,821

Acquisition of subsidiary, net of cash acquired – (2,374)

Purchases of property, plant and equipment 9 (279) (214)

Disposals of property, plant and equipment 12 –

Purchases of available-for-sale financial assets 15 (14,133) (10,866)

Proceeds from sale/redemption of available-for-sale financial assets 15 27,517 11,829

Interest received 1,231 967

Net cash generated from investing activities 14,246 16,163

Cash flow from financing activities

Proceeds from the issue of share capital 17, 19 26 214

Return of capital 19 – (11,588)

Repayment of borrowings – (563)

Payment of finance lease liabilities – (1)

Net cash generated from/(used in) financing activities 26 (11,938)

Net increase/(decrease) in cash and cash equivalents 10,175 (3,160)

Cash and cash equivalents at beginning of year 16 26,851 30,015

Exchange losses on cash and bank overdrafts (6) (4)

Cash and cash equivalents at end of year 16 37,020 26,851

Consolidated Cash Flow Statementfor the year ended 31 December 2006

70412 ACC NOTES 21/5/07 11:59 Page 43

Company Balance Sheetat 31 December 2006

44

BIOCOMPATIBLES

2006 2005

Notes £000 £000

ASSETS

Non-current assets

Intangible assets 11 – –

Investments 12 8,042 8,384

8,042 8,384

Current assets

Trade and other receivables 14 47,211 41,590

Available-for-sale financial assets 15 – 14,133

Cash and cash equivalents 16 35,772 26,207

82,983 81,930

Total assets 91,025 90,314

EQUITY

Capital and reserves attributable to equity holders

Share capital 17 8,010 7,671

Share premium 19 49,781 49,760

Shares to be issued 26 – 3,246

Merger reserve 11,850 10,253

Other reserves 57,114 57,119

Retained earnings (37,170) (49,425)

Total equity 89,585 78,624

LIABILITIES

Non-current liabilities

Other payables 20 – 5,148


710 6,300

Current liabilities

Current income tax liabilities – 3,983

Trade and other payables 23 391 305


730 5,390

Total liabilities 1,440 11,690

Total equity and liabilities 91,025 90,314

As permitted by section 230 of the Companies Act 1985, a separate income statement for the Company is not presented.

Signed of behalf of the Board.

Ian ArdillFinance Director

26 March 2007

70412 ACC NOTES 21/5/07 12:47 Page 44

ANNUAL REPORT 2006

45

Share Share Shares to Merger Other Retained Totalcapital premium be issued reserve reserves earnings equity

Notes £000 £000 £000 £000 £000 £000 £000

Balance at 1 January 2005 7,480 61,173 – 8,809 57,126 (54,117) 80,471








acquisition of subsidiary 17 109 – 3,927 1,444 – – 5,480

Revaluation of consideration 10 – – (681) – – – (681)

Return of capital 19 – (11,588) – – – 37 (11,551)



Balance at 31 December 2005 7,671 49,760 3,246 10,253 57,119 (49,425) 78,624








acquisition of subsidiary 17, 19, 26 312 – (1,909) 1,597 – – –

Revaluation of consideration 12 – – (1,337) – – – (1,337)



Balance at 31 December 2006 8,010 49,781 – 11,850 57,114 (37,170) 89,585

Company Statement of Changes in Equityfor the year ended 31 December 2006

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BIOCOMPATIBLES

2006 2005

Notes £000 £000

Cash flows from operating activities

Cash used in operations 25 (455) (421)

Interest received 1,068 1,417

Interest paid – (3)

Net cash generated from operating activities 613 993

Cash flows from investing activities

Disposal of subsidiary (102) 18,945

Acquisition of subsidiary 12 (474) (3,096)

Loan to subsidiary (5,264) (11,043)

Purchases of available-for-sale financial assets 15 (13,982) (10,866)

Proceeds from sale/redemption of available-for-sale financial assets 15 27,517 11,829

Interest received 1,231 967

Net cash generated from investing activities 8,926 6,736

Cash flow from financing activities

Proceeds from the issue of share capital 17, 19 26 214

Return of capital 19 – (11,551)

Net cash generated from/(used in) financing activities 26 (11,337)

Net increase/(decrease) in cash and cash equivalents 9,565 (3,608)

Cash and cash equivalents at beginning of year 16 26,207 29,815

Cash and cash equivalents at end of year 16 35,772 26,207

Company Cash Flow Statementfor the year ended 31 December 2006

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47

1. Accounting PoliciesThe principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been

consistently applied to all the years presented, unless otherwise stated.

1.1 Basis of PreparationThe consolidated financial statements of Biocompatibles International plc have been prepared in accordance with EU endorsed International

Financial Reporting Standards (IFRS), International Financial Reporting Interpretations Committee (IFRIC) interpretations and with those parts

of the Companies Act 1985 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical

cost convention, except for available-for-sale financial assets that have been measured at fair value in accordance with applicable IFRS.

The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts

of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Although these estimates are based on management’s best knowledge of the amount, events or actions, actual results ultimately may differ from

those estimates.

(a) Standards, amendments and interpretations effective in 2006 but not relevant

The following standards, amendments and interpretations to published standards are mandatory for accounting periods beginning on or after

1 January 2006 but they are not relevant to the Group’s operations:

– IAS 19 (Amendment), Employee benefits;

– IAS 21 (Amendment), Net investment in a foreign operation;

– IAS 39 (Amendment), Cash flow hedge accounting of forecast intragroup transactions;

– IAS 39 (Amendment), The fair value option;

– IAS 39 and IFRS 4 (Amendment), Financial guarantee contracts;

– IFRS 1 (Amendment), First-time adoption of international financial reporting standards;

– IFRS 6, Exploration for and evaluation of mineral resources;

– IFRIC 4, Determining whether an arrangement contains a lease;

– IFRIC 5, Rights to interests arising from decommissioning, restoration and environmental rehabilitation funds; and

– IFRIC 6, Liabilities arising from participating in a specific market – Waste electrical and electronic equipment.

(b) Standards, amendments and interpretations that are not yet effective and have not been early adopted by the Group

The following standards, amendments and interpretations to existing standards that have been published, are mandatory for the Group’s

accounting periods beginning on or after 1 May 2006 or later periods but which the Group has not early adopted:

– IFRS 7, Financial instruments: Disclosures, and the complementary amendment to IAS1, Presentation of financial statements –

Capital disclosures (effective from annual periods beginning on or after 1 January 2007);

– IFRIC 8, Scope of IFRS 2 (effective from annual periods beginning on or after 1 May 2006); and

– IFRIC 10, Interim Financial Reporting and Impairment (effective for annual periods beginning on or after 1 November 2006).

Notes to the Consolidated Financial Statements

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1. Accounting Policies continued

(c) Interpretations to existing standards that are not yet effective and not relevant for the Group’s operations

The following interpretations to existing standards that have been published, are mandatory for the Group’s accounting periods beginning on or

after 1 May 2006 or later periods but are not relevant for the Group’s operations:

– IFRIC 7, Applying the restatement approach under IAS 29, Financial reporting in hyperinflationary economies

(effective from 1 March 2006); and

– IFRIC 9, Reassessment of embedded derivatives (effective for annual periods beginning on or after 1 June 2006).

1.2 Basis of Consolidation(a) Subsidiaries

Subsidiaries are entities over which the Group has the power to govern the financial and operating policies, generally accompanying a

shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or

convertible are considered when assessing whether the Group controls another entity. The financial statements of subsidiaries are included in

these financial statements from the date on which control is transferred to the Group until the date that control ceases.

(b) Method of Accounting

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, 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 acquired is recorded as goodwill (Note 1.6). If the cost of acquisition is less than

the fair value of the Group’s share of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement.

(c) Transactions and Balances

Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated in preparing these

financial statements. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

Subsidiaries’ accounting policies have been changed where necessary to ensure consistency with the policies adopted by the Group.

1.3 Foreign Currency Translation(a) Functional and Presentational Currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic

environment in which the entity operates (the ‘functional currency’). The consolidated financial statements are presented in sterling, which

is the Company’s functional and presentational currency.

(b) Transactions and Balances

Transactions in foreign currencies are translated into the functional currency using the exchange rate ruling at the date of the transaction.

Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated into the functional currency at the

foreign exchange rate ruling at that date. Foreign exchange gains and losses arising on translation are recognised in the income statement.

Notes to the Consolidated Financial StatementsContinued

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(c) Group Companies

Assets and liabilities of subsidiaries in foreign currencies are translated into the presentational currency at exchange rates ruling at the balance

sheet date. Income and expenses of foreign operations are translated at the average rates of exchange for the period. All resulting exchange

differences are recognised directly in equity.

Exchange differences arising from the translation of the net investment in foreign entities are taken to equity on consolidation. When a foreign

operation is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and

translated at the exchange rates ruling at the balance sheet date.

1.4 Segmental ReportingA business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are

different from those of other business segments. A geographical segment is engaged in providing products and services within a particular

economic environment that is subject to risks and returns that are different from those of segments operating in other economic environments.

1.5 Property, Plant and EquipmentAll property, plant and equipment is shown at cost less subsequent depreciation and impairment losses. Cost includes expenditure that is

directly attributable to the acquisition of the items.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that

future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying

amount of the replaced item is derecognised. All other repairs and maintenance are charged to the income statement during the financial

period in which they are incurred.

Depreciation on assets is charged to the income statement on a straight-line basis to allocate cost to their residual value over the estimated

useful life, as follows:

– machinery and equipment 5 – 10 years

– office equipment and furniture 4 – 10 years

– land and buildings – short leasehold 3 – 10 years

The assets’ useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down

immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 1.7).

Gains and losses on disposals are determined by comparing proceeds with carrying amount and these are included in the income statement.


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1.6 Intangible Assets(a) Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired

subsidiary at the date of acquisition. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses.

Goodwill is allocated to cash-generating units for the purpose of impairment testing. Impairment losses on goodwill are not reversed. Gains

and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

(b) License Agreements and Patents

These represent payments made to third parties, including associated acquisition costs, to acquire licenses to utilise their intellectual property.

License agreements and patents are stated at cost less accumulated amortisation. Amortisation is calculated on a straight-line basis over a

period not exceeding the remaining patent life, after taking into account the risk factors associated with pharmaceutical and medical device

development. The estimated useful lives are as follows:

– license agreements and patents 1 – 5 years

(c) Research and Development

Research expenditure is recognised in the income statement as incurred.

Expenditure incurred on internal development projects is recognised as an intangible asset when it is probable that the project will be a success,

considering its commercial and technological feasibility. This is usually at the time regulatory approval is granted.

In-process research and development projects acquired as part of a business combination are carried at fair value less accumulated amortisation.

Such intangible assets are amortised on a straight-line basis over the period of the expected benefit and are reviewed for impairment at each

balance sheet date.

The estimated useful lives are as follows:

– in-process R&D 1 – 20 years

– existing technology 1 – 3 years

1.7 Impairment of Non-financial AssetsAssets that have an indefinite useful life are not subject to amortisation and are tested for impairment annually and whenever events or changes

in circumstances indicate that the carrying amount may not be recoverable. Assets that are subject to amortisation are tested for impairment

whenever there is indication that the assets might be impaired. An impairment loss is recognised in the income statement to the extent that the

asset’s carrying amount exceeds the recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and

value in use.

1.8 InventoriesInventories are stated at the lower of cost and net realisable value. In general, cost is determined using the first-in, first-out (FIFO) method

and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of

manufactured inventories and work in progress, cost includes all direct expenditure plus related production overheads (based on normal

operating capacity). Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling

expenditure. Where necessary, provision is made for obsolete, slow moving or defective inventories.


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1.9 Trade ReceivablesTrade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less

provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will

not be able to collect all amounts due according to the original terms of the receivables. 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 effective interest rate. The amount of the

provision is recognised in the income statement within selling and marketing costs.

1.10 Available-for-sale Financial AssetsAvailable-for-sale financial assets are non-derivatives and are initially recorded at cost and then remeasured at subsequent reporting dates to

fair value. In the case of corporate bond investments, fair value is taken as the quoted market price plus the value of any accrued interest at the

reporting date. Changes in the carrying amount of available-for-sale investments are recognised directly in equity. On disposal, redemption or

impairment of the investments, the gains and losses in equity are recycled into the income statement. Corporate bond investments are recorded

in current assets unless they are expected to be sold or redeemed in more than one year. Interest on available-for-sale financial assets calculated

using the effective interest method is recognised in the income statement.

1.11 Cash and Cash EquivalentsCash and cash equivalents include cash in hand, deposits held at call with banks and other short-term highly liquid investments with original

maturities of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are

included as a component of cash and cash equivalents for the purpose of the statement of cash flows.

1.12 Share CapitalOrdinary shares are classified as equity. Deferred shares to be issued as part of consideration for the acquisition of subsidiaries are classified

within equity, when the amount is probable and can be measured reliably, and remeasured at each balance sheet date using the market bid price

of the share. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction from the proceeds,

net of tax.

1.13 Deferred Income TaxDeferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and

liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is not accounted for if it arises from

initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither

accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially

enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income

tax liability is settled.

Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the

temporary differences can be utilised. Deferred income tax assets are reduced to the extent that it is no longer probable that the related tax

benefit will be realised.


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1.14 Employee Benefits (a) Pension Obligations

The Group operates defined contribution pension schemes for certain of its employees in the UK. Fixed contributions are paid into a separate

entity and the amount charged to the income statement in respect of pension costs is the contribution payable in the year. The Group has no

further obligations once the contributions have been paid.

(b) Share-based Payments

Incentives in the form of shares are provided to employees under employee share option and share incentive plans. The fair value of equity-

settled share-based payments to employees is determined at the grant date and is charged to the Group income statement on a straight-line basis

over the relevant vesting period. In the case of options granted, fair value is measured by a stochastic pricing model. Further details are set out

in Note 18. No charge is recognised in the Company income statement as the employees to which share-based awards are granted are all

employed by subsidiary companies. The charge recognised in the Group income statement is therefore reported as an increase to investments

within the Company balance sheet.

The Group provides finance to share Trusts to purchase company shares to meet the obligation to provide shares when employees exercise

their options and when shares granted vest unconditionally. Costs of running the Trusts are charged to the income statement. Shares held by

the Trusts are deducted from retained earnings and held at cost.

1.15 ProvisionsProvisions are recognised when: the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow

of resources will be required to settle the obligation; and the amount can be reliably estimated. Provisions are measured at management’s best

estimate, at the balance sheet date, of the expenditure required to settle the present obligation.

1.16 Trade PayablesTrade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

1.17 Revenue RecognitionRevenue comprises the fair value of the consideration received or receivable for the sale of goods and services, net of value-added tax, rebates

and discounts and after eliminating sales within the Group.

The Group recognises 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. No revenue is recognised if there are

significant uncertainties regarding the recovery of the consideration due, associated costs or the possible return of goods.

(a) Sales of Goods

Revenue from the sale of goods is recognised in the income statement on delivery of the product to the customer; the customer has accepted

the product and collectibility of the related receivables is reasonably assured.


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(b) Rendering of Services

Non-refundable one time license fees are taken to the income statement when the fee is due, unless the substance of the license fee contract is

such that recognition on a contract basis is appropriate. Where this is the case, the fee is held on the balance sheet as deferred income and

recognised as revenue in accordance with the substance of the contract.

Revenue received in relation to development programmes is recognised based on the percentage of completion of the programme. Where

payments may be earned, in such programmes, based on the achievement of uncertain future milestones, revenue is restricted to the cumulative

cash received for the programme.

(c) Royalty Income

Royalty income is recognised on an accruals basis in accordance with the substance of the relevant agreement.

1.18 Government GrantsGrants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the

Group will comply with all attached conditions.

Government grants relating to costs are recognised in the income statement within other operating income over the period necessary to match

them with the costs that they are intended to compensate. Government grants relating to property, plant and equipment are presented in the

balance sheet as other receivables and are recognised in the income statement within other operating income on a straight-line basis over the

expected lives of related assets.

1.19 LeasesLeases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Rentals

under operating leases are charged on a straight-line basis over the lease term, even if the payments are not made on such a basis.

1.20 InvestmentsInvestments in group undertakings are stated at cost less accumulated impairment. As permitted by section 133 of the Companies Act 1985,

where the relief afforded under section 131 of the Companies Act 1985 applies, cost is the aggregate of the nominal value of the relevant

number of the company’s shares and the fair value of any other consideration given to acquire the share capital of the subsidiary undertakings.


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2. Financial Risk Management2.1 Financial Risk FactorsThe Group’s activities expose it to a variety of financial risks, the major risks being; currency risk, price risk, credit risk and interest risk.

The Group has in place a risk management programme that seeks to limit the adverse effects on the financial performance of the Group.

The Board has delegated to the Finance Director the responsibility for setting the risk management policies applied by the Group. The Board

reviews and agrees the policies for managing each of these risks.

(a) Market Risk

(a.i) Currency Risk

The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to

the US dollar and the Euro. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net

investments in foreign operations.

The Group has a policy of monitoring exchange rate movements in the main currencies in which it trades. Financial instruments are used to

reduce 100% of exposures to exchange rate movements where there is a significant specific asset, liability or cash flow and the risk of an

adverse exchange rate movement is high. There were no financial instruments in place at year-end.

(a.ii) Price Risk

The Group is exposed to debt market price risk because of investments held and classified on the consolidated balance sheet as available-for-

sale financial assets. The Group uses an expert fund manager to manage the portfolio of corporate bond investments and the risk arising there

from. The Group’s policy is for the weighted average life of the bond portfolio to be less than two years which, management believes, further

reduces this risk.

(b) Credit Risk

The Group is exposed to credit risk from two sources; its cash, cash equivalents and financial asset investments and its customers. It seeks to

minimise the risk arising from the former by applying a minimum credit rating of AA deposit takers. As to the latter, it has a concentration of

credit risk as the Group has a small number of large customers. For major customers the Group’s policy is to verify their credit ratings. For

smaller customers it performs credit checks and closely monitors payment history and the age of debts.

(c) Interest Risk

The Group is debt free so this risk only applies to its cash, cash equivalents and financial asset investments. The Group’s policy is to hold the

majority of these assets in sterling and, given the relative stability of UK interest rates, management deems this risk to be acceptable. The

Group holds corporate bond investments in addition to cash and cash equivalents and the policy is to limit the total value of such investments

to 50% of the total cash, cash equivalents and financial asset investments. The Group does not typically hold such bonds to maturity and

therefore does not view itself as being subject to fixed interest rates.

2.2 Fair Value EstimationThe fair values of available-for-sale financial assets are based on quoted market prices plus the value of any accrued interest at the reporting

date. The quoted market price used for financial assets held by the Group is the current bid price. The fair values of short-term deposits and

overdrafts with a maturity of less than one year are assumed to approximate to their book values. The nominal value less estimated credit

adjustments of trade receivables is assumed to approximate their fair values.


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3. Segmental Reporting(a) Primary Reporting Format – Business Segments

At 31 December 2006, the Group is organised into three main business segments: Bead Products, Licensing and CellBeads. The Operational

Review describes the composition of these segments in more detail.

The segment disclosures for the year ended 31 December 2006 are as follows:

Bead Products Licensing CellBeads Unallocated Group

£000 £000 £000 £000 £000

Revenue 3,536 1,417 1,011 – 5,964

Operating (loss)/profit (5,460) 537 (1,506) (1,522) (7,951)

Interest expense –

Interest income 1,696

Loss before tax (6,255)

Tax credit 1,002

Loss for the year from continuing operations (5,253)

Gain on sale of discontinued operation, net of tax 10,276

Profit for the year 5,023

Segment assets 2,858 519 8,191 11,568

Unallocated assets

– Property, plant and equipment 32 32

– Trade and other receivables 735 735

– Cash and cash equivalents 36,803 36,803

Total assets 2,858 519 8,191 37,570 49,138

Total liabilities 2,303 2,144 2,157 832 7,436

Other segment items

Capital expenditure (Note 9) 122 – 157 – 279

Depreciation (Note 9) 171 3 81 20 275

Amortisation of intangible assets (Note 11) – – 633 – 633

Other non-cash expenses (Note 18) 425 45 18 33 521


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3. Segmental Reporting continued

The segment disclosures for the year ended 31 December 2005 are as follows:

Bead Products Licensing CellBeads Unallocated Group

£000 £000 £000 £000 £000

Revenue 1,656 1,671 72 – 3,399

Operating (loss)/profit (7,631) 225 (1,578) (2,032) (11,016)

Interest expense (7)

Interest income 4,369

Loss before tax (6,654)

Tax credit 542

Loss for the year from continuing operations (6,112)

Gain on sale of discontinued operation, net of tax 1,421

Loss for the year (4,691)

Segment assets 1,992 938 9,820 12,750

Unallocated assets

– Property, plant and equipment 58 58

– Trade and other receivables 367 367

– Available-for-sale financial assets 14,133 14,133

– Cash and cash equivalents 26,593 26,593

Total assets 1,992 938 9,820 41,151 53,901

Total liabilities 1,663 12,022 1,967 696 16,348

Other segment items

Capital expenditure (including acquisitions) (Note 9) 65 12 328 16 421

Depreciation (Note 9) 202 50 72 53 377

Amortisation of intangible assets (Note 11) 754 – 528 – 1,282

Other non-cash expenses (Note 18) 195 61 12 23 291

There are immaterial sales between the business segments. Unallocated costs represent corporate expenses. Segment assets include property,

plant and equipment, goodwill, intangible assets, inventories, current income tax assets and debtors. They mainly exclude available-for-sale

financial assets and cash and cash equivalents. Segment liabilities comprise operating liabilities and exclude items such as corporate provisions.

Capital expenditure comprises additions to property, plant and equipment, including additions resulting from acquisitions through business

combinations.


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3. Segmental Reporting continued

(b) Secondary Reporting Format – Geographical Segments

The UK is the home country of the Company and the Group operations are mainly in Europe.

Sales are allocated based on the country in which the customer is located. This can often differ from where assets are located.

2006 2005

£000 £000

Europe 4,361 2,376

United States of America 1,558 1,009

Rest of the world 45 14

5,964 3,399

Total assets are allocated based on where the assets are located.

2006 2005

£000 £000

Europe 49,138 53,900

United States of America – 1

49,138 53,901

Capital expenditure is allocated based on where the assets are located.

2006 2005

£000 £000

Europe 279 421

Analysis of revenue by category:

2006 2005

£000 £000

Sales of products 4,031 2,591

Rendering of services 1,733 586

Royalties 200 222

5,964 3,399

The Company’s business is to invest in its subsidiaries and, therefore, it operates in a single segment.


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4. Financial Income – NetGroup Group Company Company

2006 2005 2006 2005£000 £000 £000 £000

Interest expense:

Bank overdrafts – (7) – (3)

Interest payable and similar charges – (7) – (3)

Interest income:

Bank deposits 1,061 3,585 916 3,575

Available-for-sale financial assets 635 784 635 784

Interest receivable 1,696 4,369 1,551 4,359

5. Operating LossThe following items have been included in arriving at operating loss:

Group Group Company Company2006 2005 2006 2005£000 £000 £000 £000

Employee benefit expenses (Note 27) 6,390 5,625 – –

Inventories:

– Cost of inventories recognised as an expense

(included in cost of sales) (Note 13) 1,293 1,137 – –

– Write-down of inventory (17) 23 – –

Depreciation of property, plant and equipment:

– Owned assets (Note 9) 275 377 – –

Amortisation of intangibles

(included in research and development costs) (Note 11) 633 528 – –

Amortisation of intangibles

(included in selling and marketing costs) (Note 11) – 754 – 754

Other operating lease rentals payable:

– Property - net of one-off property related income in 2006 174 457 – –

Repairs and maintenance expenditure on property, plant and equipment 140 122 – –

Research and development expenditure 8,375 7,678 – –

Income from government grants (491) (247) – –

Foreign exchange losses – 6 – –


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5. Operating Loss continued

During the year the Group obtained the following services from the Group’s auditor at costs as detailed below:

2006 2005

£000 £000

Audit services

– Fees payable to Company auditor for the audit of parent company and consolidated accounts 73 63

– Fees payable for the audit of subsidiary 10 5

Non-audit services

Fees payable to the Company’s auditor and its associates for other services:

– Tax services 78 69

– Other services 1 16

162 153

6. Taxation2006 2005

£000 £000

Current tax (812) (384)

Deferred tax (190) (158)

(1,002) (542)

The tax for the period differs from the theoretical amount that would arise using the standard rate of corporation tax in the UK (30%).

The differences are explained below:

2006 2005

£000 £000

Loss before tax (6,255) (6,654)

Expected tax credit at 30% (2005: 30%) (1,877) (1,670)

Expenses not deductible for tax 205 18

Depreciation in excess of capital allowances 58 (61)

Losses carried forward and other adjustments 853 1,075

Loss surrendered for R&D tax credits 571 480

R&D tax credit claims (812) (384)

Tax credit (1,002) (542)


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7. Gain on Sale of Discontinued OperationThis includes: £1,168,000 (2005: £1,421,000) released from provisions for warranties and indemnities created on the disposal of the

cardiovascular, eyecare and urology divisions in 2002 (Note 22); £3,983,000 (2005: £nil) of tax liabilities released to the income statement,

following the positive outcome of the HM Revenue & Customs enquiry into the 2002 business disposals, and £5,125,000 (2005: £nil) from

other payables released following the announcement made by Abbott on 3 October 2006 (Note 20).

The remaining balance sheet items related to discontinued operations at 31 December 2006 are the disposal provisions. These are reviewed,

and adjusted if appropriate, at each balance sheet date (Note 22).

8. Earnings per ShareThe calculation of basic earnings/(loss) per ordinary share has been based on the profit of £5,023,000 (2005: loss of £4,691,000) and on

35,517,062 (2005: 35,079,334) ordinary shares, being the weighted average number of ordinary shares in issue. Potential ordinary shares are

not treated as dilutive as their conversion to ordinary shares does not increase the net loss per ordinary share from continuing operations.

9. Property, Plant and EquipmentThe Company has no property, plant or equipment. Details of those relating to the Group are as follows:

Office Land and Assets in Machinery & equipment & buildings – short course of

equipment furniture leasehold construction Total

£000 £000 £000 £000 £000

Cost or valuation

At 1 January 2006 1,829 608 1,894 80 4,411

Additions at cost 268 6 – 5 279

Transfers 77 – – (77) –

Disposals (48) (255) – (2) (305)

Exchange differences (7) (2) – – (9)

At 31 December 2006 2,119 357 1,894 6 4,376

Accumulated depreciation

At 1 January 2006 1,341 547 1,719 – 3,607

Charge for the year 177 27 71 – 275

Disposals (35) (255) – – (290)

Exchange differences (2) (1) – – (3)

At 31 December 2006 1,481 318 1,790 – 3,589

Net book amount

at 31 December 2006 638 39 104 6 787


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9. Property, Plant and Equipment continuedOffice Land and Assets in

Machinery & equipment & buildings – short course of equipment furniture leasehold construction Total

£000 £000 £000 £000 £000

Cost or valuation

At 1 January 2005 1,572 549 1,858 10 3,989

Acquisition of subsidiary 189 18 – – 207

Additions at cost 58 41 36 79 214

Transfers 10 – – (10) –

Exchange differences – – – 1 1

At 31 December 2005 1,829 608 1,894 80 4,411

Accumulated depreciation

At 1 January 2005 1,181 505 1,544 – 3,230

Charge for the year 160 42 175 – 377

At 31 December 2005 1,341 547 1,719 – 3,607

Net book amount

at 31 December 2005 488 61 175 80 804

There are no assets held under finance leases.

10. Goodwill2006

Group £000

Cost

At 1 January 2006 3,388

Revaluation of consideration (Note 12) (1,337)

At 31 December 2006 2,051

Net book amount

at 31 December 2006 2,051

2005Group £000

Cost

At 1 January 2005 –

Additions 4,069

Revaluation of consideration (681)


Net book amount


During the year the goodwill acquired in 2005 in respect of CellMed AG was tested for impairment and the conclusion of the test was that no

impairment was required.


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10. Goodwill continued

All goodwill was allocated to the individual cash generating units, based on the proportional original valuation of each asset. The recoverable

amount for each intangible asset has been measured based on a value in use calculation. This used a forecast of future cash flows, over a period

of 13 years, incorporating a range of assumptions and these cash flows were then discounted using a pre-tax discount rate of 13% or 16%.

These rates were from a range of weighted average cost of capitals for the Group, produced by an external, expert valuer. The lower rate was

used for the intangible asset classed as “existing technology” as it is subject to lower risk.

The key assumptions in the value in use calculations were as follows:

– Cash generating units. Four units were used, representing the four programmes identified in the acquisition of CellMed. These were as

follows; the HB Cuvette, the Non-Protein programmes, the Cell programmes and the Tissue programmes.

– Sales. These were based on management’s estimation of; actual or potential market sizes, expected penetration and growth rates and royalty

rates if the commercialisation route is likely to involve a licence. Where possible, market size calculations were based on externally available

data, either from independent research or from the Group’s partners.

– Success factors. Published success factors showing the likelihood of progress along the clinical and regulatory pathway were applied to the

sales estimations.

– Cost of goods sold and operating expenses. Management estimations were used and were based on experience and on costs typically seen

in the medical device and pharmaceutical industries.

– Growth rates. The majority of intangible assets are classified as “in-process research and development” and by their nature have not yet

reached the market. Significant growth rates, particularly in the early years after launch, have been assumed as this is typically experienced

with successful medical devices and pharmaceutical products. A long term, average growth rate is not an applicable assumption to apply.

11. Intangible AssetsLicense In-process

agreements Existing research and and patents Technology development Total

Group £000 £000 £000 £000

Cost

At 1 January 2006 2,262 554 5,750 8,566

Exchange differences – (11) (120) (131)

At 31 December 2006 2,262 543 5,630 8,435

Amortisation

At 1 January 2006 2,262 153 375 2,790

Amortisation charge – 183 450 633


At 31 December 2006 2,262 332 815 3,409

Net book amount

at 31 December 2006 – 211 4,815 5,026


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63

11. Intangible Assets continuedLicense In-process

agreements Existing research and and patents Technology development Total

Group £000 £000 £000 £000

Cost

At 1 January 2005 2,262 – – 2,262

Acquisition of subsidiary – 555 5,756 6,311


At 31 December 2005 2,262 554 5,750 8,566

Amortisation

At 1 January 2005 1,508 – – 1,508

Amortisation charge 754 153 375 1,282

At 31 December 2005 2,262 153 375 2,790

Net book amount

at 31 December 2005 – 401 5,375 5,776

Intangibles recognised in 2005 on acquisition of CellMed AG are split between existing technology (the HB Cuvette programme) and in-process

research and development (the Non-Protein, the Cell and the Tissue programmes).

Licenseagreements and patents

Company £000

Cost

At 1 January and 31 December 2006 2,262

Amortisation


Net book amount

at 31 December 2006 –

Licenseagreements and patents

Company £000

Cost


Amortisation

At 1 January 2005 1,508

Amortisation charge 754


Net book amount

at 31 December 2005 –


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BIOCOMPATIBLES

12. InvestmentsInvestments

in subsidiaries

Company £000

Cost

At 1 January 2006 17,130

Increase of capital of subsidiary 474

Revaluation of consideration (1,337)

Share-based schemes 521

At 31 December 2006 16,788

Provision


Net book amount


Investments in subsidiaries

Company £000

Cost

At 1 January 2005 8,944

Acquisition of subsidiary 8,058

Increase of capital of subsidiary 518

Revaluation of consideration (681)

Share-based schemes 291

At 31 December 2005 17,130

Provision


Net book amount


During the year, CellMed AG increased its share capital by issuing 700,000 (2005: 750,000) shares with a nominal value of €1 each and these

were fully paid in cash by Biocompatibles International plc.

Revaluation of consideration relates to deferred consideration on acquisition of CellMed AG (Note 26).

Share-based schemes represents the fair value of equity-settled share-based payments to employees of Group subsidiaries.

The following principal subsidiary undertakings have been included in the Group consolidation. All interests are held in the form of equity shares.

Name of undertaking Principal area of activity Country of incorporation

Biocompatibles UK Limited Research and development Great Britain

Biopolymerix Inc. Research and development United States of America

CellMed AG. Research and development Germany

CellMed Inc. Research and development United States of America

All subsidiary undertakings, except for CellMed Inc., are 100% owned by the Company. CellMed Inc. is 100% owned by CellMed AG.

All subsidiary undertakings have the same reporting date as the Company and operate principally in their country of incorporation.


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65

13. InventoriesThe Company has no inventories. Details of those relating to the Group are as follows:

2006 2005

£000 £000

Raw materials 36 31

Finished goods 328 309

364 340

The cost of inventories recognised as expense (included in Cost of Sales) amounted to £1,293,000 (2005: £1,137,000).

14. Trade and Other ReceivablesGroup Group Company Company

2006 2005 2006 2005

£000 £000 £000 £000

Trade receivables 1,454 877 – –

Amounts owed by subsidiary undertakings – – 46,760 41,519

Other debtors 670 421 – –

Prepayments and accrued income 644 477 451 71

2,768 1,775 47,211 41,590

Less non-current portion:

Other debtors (215) (209) – –

Amounts owed by subsidiary undertakings – – (46,760) (41,519)

Current portion 2,553 1,566 451 71

Other debtors included in non-current receivables relate to rent deposits and the effective interest rates were 3.33% and 3.03% in 2006

(2005: 2.83% and 2.53%). Amounts owed by subsidiary undertakings are non-interest bearing and there is no date for repayment.

Despite the concentration of the customer base, management believes that the credit risk with respect to trade receivables is minimal as

customers with significant outstanding balances at year-end comprise medical devices companies with a high credit rating (A or above as rated

by the Standard and Poor’s credit rating agency). Due to this, management believes that there is no credit risk provision required (2005: £nil).

15. Available-for-sale Financial AssetsGroup Group Company Company

2006 2005 2006 2005

£000 £000 £000 £000

At 1 January 14,133 15,152 14,133 15,152

Additions 14,133 10,866 13,982 10,866

Disposals (27,517) (11,829) (27,517) (11,829)

Net transfer from equity (13) (7) (5) (7)

Revaluation deficit (593) (49) (593) (49)

At 31 December 143 14,133 – 14,133

Available-for-sale financial assets comprise corporate bonds with a high credit rating (AA or above as rated by Moody’s or Standard and Poor’s

credit ratings agencies).


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BIOCOMPATIBLES

16. Cash and Cash EquivalentsGroup Group Company Company

2006 2005 2006 2005

£000 £000 £000 £000

Cash at bank and in hand 16,431 21,658 15,183 21,014

Short-term bank deposits 20,589 5,193 20,589 5,193

37,020 26,851 35,772 26,207

The effective interest rate on short-term bank deposits was 5% (2005: 4.3%). These deposits have an average maturity of 7 days (2005: 6 days).

17. Share Capital2006 2005

£000 £000

Authorised

47,533,300 ordinary shares of 2153/94p each

(2005: 47,533,300 ordinary shares of 2153/94p each) 10,250 10,250

2006 2005

Shares £000 Shares £000

Issued and fully paid

At 1 January

Ordinary shares of 2153/94p each (2005: 194/99p each) 35,571,841 7,671 39,278,346 7,480

Allotted on exercise of share options 27,438 5 196,449 39

Allotted under share-based schemes 100,000 22 200,000 43

Allotted on acquisition of subsidiary (Note 26) 1,448,810 312 573,278 109

Consolidation – – (4,676,232) –

At 31 December

Ordinary shares of 2153/94p each 37,148,089 8,010 35,571,841 7,671

No shares were acquired by the ESOP Trust in the year (2005: nil). At 31 December 2006, the ESOP Trust held 112,803 ordinary 2153/94p

shares (2005: 112,803 ordinary 2153/94p shares) in the Company with a cost of £581,000 (2005: £581,000). The market value of the shares

held at 31 December 2006 was £131,000 (2005: £257,000).

During 2005 the Company established the Biocompatibles International plc Share Incentive Plan and on 9 October 2006 100,000 shares

(2005: 200,000) were issued to and subscribed for by the SIP Trust. At 31 December 2006 287,306 (2005: 195,514) shares had not

vested unconditionally.


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67

17. Share Capital continued

On 20 September 2005 there was a consolidation of share capital whereby every 94 ordinary shares of 194/99p each were consolidated into

83 ordinary shares of 2153/94p.

At 31 December 2006, options over 2,728,573 ordinary shares (2005: 2,799,156) were outstanding under Employee Share Option Plans.

Details of outstanding share options and performance shares awarded to employees including executive directors are set out below:

Exercise Exercisable Exercisable 2006 2005Date of grant price pence from to No of shares No of shares

Employee share option schemes

26/06/1998 126 26/06/2001 26/06/2008 293,109 293,109

26/06/1998 126 26/06/2003 26/06/2008 316,875 316,875

04/11/1998 77 04/11/2001 04/11/2008 17,930 17,930

11/08/1999 118 11/08/2002 11/08/2009 92,000 102,000

16/08/1999 126 16/08/2002 16/08/2009 61,404 68,842

14/06/2000 291 14/06/2003 14/06/2010 105,000 105,000

14/06/2000 291 14/06/2005 14/06/2010 75,000 75,000

22/09/2000 384 22/09/2003 22/09/2010 165,750 180,750

22/09/2000 384 22/09/2005 22/09/2010 28,500 28,500

17/11/2000 274 01/01/2006 01/07/2006 – 2,463

17/11/2000 274 01/01/2008 01/07/2008 – 2,682

05/01/2001 365 05/01/2004 05/01/2011 20,000 20,000

22/08/2001 189 22/08/2004 22/08/2011 31,250 31,250

22/08/2001 189 22/08/2006 22/08/2011 31,250 31,250

24/09/2001 59 24/09/2004 24/09/2011 58,505 68,505

23/04/2003 123 22/04/2006 22/04/2013 33,000 34,000

08/07/2003 147 08/07/2006 08/07/2013 485,000 495,000

02/12/2003 168 02/12/2006 02/12/2013 3,000 3,000

23/04/2004 196 24/04/2007 24/04/2014 676,500 688,500

07/10/2004 219 07/10/2007 07/10/2014 36,000 36,000

05/05/2005 189 05/05/2008 05/05/2015 103,500 103,500

13/06/2005 191 13/06/2008 13/06/2015 95,000 95,000

Total options 2,728,573 2,799,156

Long-term incentive plan – Performance Shares

14/10/2005 – 14/10/2008 14/10/2008 405,000 405,000

31/10/2005 – 31/10/2008 31/10/2008 7,500 7,500

29/12/2006 – 29/12/2009 29/12/2009 297,500 –

Total performance shares 710,000 412,500


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BIOCOMPATIBLES

18. Share Based PaymentsEmployee and Director share-based plans can be separated into employee share option and share incentive plans. The Employee and Executive

Share Options Schemes (established in 2003 and 1995 respectively) and the all-employee SAYE Scheme (established in 1995) were replaced in

2005 with share incentive schemes: the Performance Share Plan (PSP) and the Share Incentive Plan (SIP). Details of the share incentive plans

are given in the Directors’ Report on Remuneration on page 33.

The free and matching shares awarded under the SIP were valued at fair value, i.e. market value, at grant date. Share options awarded under the

PSP were valued using a stochastic model. The fair value per option granted and the assumptions used in the calculations are as follows:

PSP

Grant date 29/12/06

Number of shares 297,500

Share price at grant date 115.75p

Exercise price 0p

Expected volatility 36%

Expected life (years) 3

Risk free rate 5.15%

Expected dividend yield 0%

Performance conditions TSR

Fair value per option/award 53.17p

The expected volatility is based on historical volatility over the last three years. The expected life is the expected period to exercise. The risk

free rate is the rate of interest obtainable from government securities (i.e. UK Gilts) over the expected life of the equity-incentive. No other

movements occurred in the year in the Performance Share Plan.

During the year there were the following movements in employee share option schemes:

2006 2005Weighted Weighted

average averageNumber exercise price Number exercise price

Outstanding at 1 January 2,799,156 183.7p 2,882,621 177.3p

Granted – – 198,500 189.4p

Lapsed (43,145) 257.6p (85,516) 154.5p

Exercised (27,438) 98.7p (196,449) 108.4p

Outstanding at 31 December 2,728,573 183.4p 2,799,156 183.7p

Exercisable at 31 December 1,817,573 254.7p 1,310,443 190.5p


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69

18. Share Based Payments continued

2006 2005Weighted Weighted Weighted Weighted

Range of average Number of average average Number of averageexercise prices exercise price shares remaining life exercise price shares remaining life

0p-200p 155.88 2,298,323 5.19 155.4p 2,348,761 6.18

200p-250p 219.00 36,000 7.77 219.0p 36,000 8.77

250p-300p 291.00 180,000 3.45 290.5p 185,145 4.37

350p-400p 382.23 214,250 3.76 382.3p 229,250 4.75

The weighted average share price for options exercised over the year was 185.5p (2005: 249.9p). The total charge for the year relating to

employee share-based plans was £521,000 (2005: £291,000), all of which related to equity-settled share-based payment transactions.

19. Share Premium2006 2005

£000 £000

At 1 January 49,760 61,173

Premium on shares issued under share-based schemes 21 175

Return of capital – (11,588)

At 31 December 49,781 49,760

20. Other PayablesGroup and CompanyFollowing the announcement from Abbott on 3 October 2006 management does not believe further royalties will be earned from the sales of

ZoMaxx Drug Eluting Stent and has therefore released an amount of £5,125,000 from other payables to the income statement as part of the gain

on sale of discontinued operation. This payable was created on signing the Technology Licence in 2002 and represented an amount of royalty

income that Biocompatibles would earn before Abbott was required to pay royalties in cash.


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BIOCOMPATIBLES

21. Deferred Income TaxDeferred Tax AssetsThe Group has a potential deferred tax asset, which is not recognised as follows:

2006 2005

£000 £000

Accelerated capital allowances (785) (472)

Short-term timing differences (222) (866)

Losses (22,239) (23,554)

(23,246) (24,892)

The deferred tax asset has not been recognised as the Directors consider it more likely than not that the asset will not crystallise in the

foreseeable future.

Deferred Tax LiabilitiesThe movement on the Group deferred tax liabilities is as shown below:

2006 2005

£000 £000

At 1 January 1,733 –

Acquisition of subsidiary – 1,893

Credit to income statement (Note 6) (190) (158)

Exchange differences (35) (2)

At 31 December 1,508 1,733

The Company has no deferred tax assets or liabilities.

22. Provisions Group Group Company Company

2006 2005 2006 2005

£000 £000 £000 £000

At 1 January 2,299 4,102 2,254 4,102

Additional provision 549 385 255 340

Utilised during the year (292) (767) (292) (767)

Released to the income statement (1,168) (1,421) (1,168) (1,421)

At 31 December 1,388 2,299 1,049 2,254


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71

22. Provisions continued

Provisions have been analysed between current and non-current as follows:

Group Group Company Company2006 2005 2006 2005

£000 £000 £000 £000

Current 568 1,102 339 1,102

Non-current 820 1,197 710 1,152

1,388 2,299 1,049 2,254

Provisions represent the potential outflow of funds in relation to the Group’s legal contracts, of which £644,000 (2005: £1,914,000) relate to the

disposals made in 2002. These provisions are not discounted as the time value of money is not considered material.

23. Trade and Other PayablesGroup Group Company Company

2006 2005 2006 2005

£000 £000 £000 £000

Trade payables 508 800 42 22

Other tax and social security payable 182 166 – –

Other creditors 137 91 – –

Accruals and deferred income 3,713 2,128 349 283

4,540 3,185 391 305

24. Financial InstrumentsFair Value of Non-derivative Financial Assets and Financial Liabilities

Where market values are not available, fair values of financial assets and liabilities have been calculated by discounting expected future cash

flows at prevailing interest rates and by applying year-end exchange rates.

The carrying amounts of short-term receivables and payables, available-for-sale financial assets and cash and cash equivalents at 31 December

2006 approximate to their fair values.


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BIOCOMPATIBLES

25. Cash Flow from Operating Activities2006 2005

Group £000 £000

Continuing operations

Loss for the year (5,253) (6,112)

Adjustments for:

Tax (Note 6) (1,002) (542)

Depreciation (Note 9) 275 377

Amortisation (Note 11) 633 1,282

Share-based schemes: value of employee services (Note 18) 521 291

Interest income (Note 4) (1,696) (4,369)

Interest expense (Note 4) – 7

Changes in working capital:

(Increase)/decrease in inventories (25) 47

(Increase)/decrease in trade and other receivables (1,014) 411

Increase/(decrease) in other payables 1,362 (576)

Increase in provisions 359 385

Cash used in continuing operations (5,840) (8,799)

Discontinued operations

Profit for the year 10,276 1,421

Adjustment for tax (3,983) –

Decrease in trade and other payables (5,125) –

Decrease in provisions (1,168) (1,421)

Cash flow for discontinued operations – –

Cash used in operations (5,840) (8,799)


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25. Cash Flow from Operating Activities continued2006 2005

Company £000 £000

Continuing operations


Adjustments for:

Amortisation (Note 11) – 754

Interest income (Note 4) (1,683) (4,359)

Interest expense (Note 4) – 3

Changes in working capital:

Increase in other receivables (400) –

Increase/(decrease) in trade and other payables 83 (145)

Increase in provisions 65 340

Cash used in continuing operations (455) (421)

Discontinued operations


Adjustment for tax (3,983) –

Decrease in trade and other payables (5,125) –

Decrease in provisions (1,168) (1,421)

Cash flow for discontinued operations – –

Cash used in operations (455) (421)

26. Business CombinationsOn 7 March 2005, the Group acquired 100% of the share capital of CellMed AG, a medical technology company developing medical device

and drug delivery products in Germany. The purchase consideration for the acquisition of CellMed AG included the following:

Deferred Consideration

The deferred shares consideration, representing a fixed number of shares, was valued at £3,246,000 at 31 December 2005. As the put option

was not exercised during the year, 373,920 of these deferred shares were issued on 30 June 2006 and valued at £674,000 on issue and the

remaining 1,074,890 were issued on 15 December 2006 and valued at £1,235,000 on issue.

Contingent Consideration

The total consideration included contingent consideration which may become payable in shares and cash calculated on cash received from the

commercialisation of certain intellectual property. The Company continues not to value this consideration because: due to the early clinical stage

of the programme, it does not believe the consideration to be probable and; due to the ground-breaking nature of the programme, it is not able to

measure the consideration reliably. The maximum contingent consideration payable is €3,608,000 in cash and the issue of 2,418,823 shares.

Put Option

A put option was negotiated which allowed the Company to sell the CellMed AG share capital acquired back to the original holders at two

dates: 30 June 2006 and 31 December 2006. The option was included as a means of mitigating risk in the acquisition to protect the Company in

the event that the Company’s programmes did not proceed according to plan. The option was not exercised at either date and has now expired.


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BIOCOMPATIBLES

27. Employee Benefit ExpensesStaff costs for the Group during the year were as follows:

2006 2005

£000 £000

Wages and salaries, including termination benefits 4,895 4,441

Social security costs 551 555

Pension costs – defined contribution plans (Note 28) 423 338

Share-based payments granted to employees and directors (Note 18) 521 291

6,390 5,625

Directors’ emoluments and options are disclosed in the Directors’ Report on Remuneration on pages 32 to 39. Key management compensation,

which includes directors, was as follows:

2006 2005

£000 £000

Salaries and short-term employee benefits 1,284 1,003

Pension costs – defined contribution plans 112 87

Share-based payments 196 93

1,592 1,183

The average monthly number of persons (including executive Directors) employed by the Group during the year was:

2006 2005

Number Number

Manufacturing and production 9 11

Selling, marketing and distribution 8 5

Research and development 56 53

General and administrative 19 20

92 89

There are no employees in the Company (2005: nil).


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28. Pension CommitmentsThe Group operates a defined contribution pension scheme for certain of its employees in the UK and charges the amount of employer’s

contributions payable during the year to the income statement. The charge for the year was £423,000 (2005: £338,000).

29. Non-cash TransactionsThe principal non-cash transaction was the issue of shares as consideration for the acquisition of CellMed AG (Note 26) and the charge for the

employee share based plans (Note 18).

30. Operating Lease Commitments – Minimum Lease PaymentsThe future aggregate minimum lease payments under non-cancellable operating leases are as follows:

2006 2005Land & Land &

buildings buildings

£000 £000

Not later than 1 year 648 484

Later than 1 year and not later than 5 years 2,386 1,936

Later than 5 years 1,584 124

4,618 2,544

31. Other Financial CommitmentsAt 31 December 2006 the Group had commitments to pay £493,500 to one of its suppliers for the manufacturing of finished goods in 2007

(2005: £511,000).

32. Related-party TransactionsDr. Peter Geigle, Chief Executive Officer of CellMed AG, is also an executive Board member of Geigle Verwaltungs GmbH, a company that

leases the premises to CellMed AG. The rental cost for the year was £134,000 (2005: £97,000).


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BIOCOMPATIBLES

Arteriovenous malformation A knot of distended blood vessels often overlying and compressing the surface of the brain.

CE Mark A European standard for medical devices, a CE Mark indicates that a device meets the requirements of theMedical Device Directive and appropriate Quality System standards.

CIRSE The Cardiovascular and Interventional Radiological Society of Europe.

Conventional TACE Trans-Arterial Chemo-Embolisation - a procedure whereby a chemotherapeutic agent is mixed into a slurryand injected via a catheter, locally at a tumour site.

Cosmetic Bead This product is an alginate bead for use as a dermal filler to address facial wrinkles.

DC BeadTM This product has a CE Mark. In Europe, DC Beads are intended to be loaded with doxorubicin for thepurpose of:

– Embolisation of vessels supplying malignant hypervascularised tumour(s),

– Delivery of a local, controlled, sustained dose of doxorubicin to the tumour(s).

Embolisation The introduction of material to reduce or completely obstruct bloodflow.

Doxorubicin A widely used chemotherapeutic agent for the treatment of a large number of cancers. It is a powerfulcytotoxic drug that is not cell cycle specific.

FDA The United States Food and Drug Administration, which regulates drugs and medical devices.

Hepatic colo-rectal metastases Colo-rectal cancer that has spread to the liver.

HCC Hepatocellular Carcinoma, primary tumour of the liver.

Hypervasculared Tumour A growth of tissue with an abnormally increased blood supply which may be malignant or benign.

IDE Investigational Device Exemption - The approval by the US Food and Drug Administration (FDA) to carryout a clinical trial in the US with an unapproved device.

LC BeadTM This product has 510k clearance from the FDA. LC Bead is intended for the embolisation ofhypervascularised tumours and arteriovenous malformations.

Irinotecan A widely used chemotherapeutic agent for the treatment of colorectal cancer. It is a topoisomerase Iinhibitor that interferes with DNA replication during cell division, leading to cell death.

Irinotecan Drug Eluting A family of clinical trials sponsored by Biocompatibles for the evaluation of Drug Eluting Beads for the Bead Clinical Trials treatment of hepatic colorectal metastases.

mCRC Metastatic colo-rectal cancer is cancer of the colon or rectum that has spread, or metastasised, through eitherthe bloodstream or the lymph node system, to other parts of the body, such as the liver, lung, or ovary.

Metastatic disease The spread of a cancer from its original site (primary) to other locations within the body (secondary). In the case of colorectal cancer, the liver is the most common site of secondary tumours.

PRECISION BeadTM Biocompatibles' proprietary Drug Eluting Bead product containing doxorubicin.

PRECISION A family of clinical trials sponsored by Biocompatibles for the evaluation of the Drug Eluting Beads Clinical Trials with Doxorubicin.

PRECISION TACE The use of either PRECISION Bead or DC Bead in the TACE procedure. PRECISION TACE results in a lower systemic drug exposure and more drug at the tumour site.

Systemic chemotherapy Treatment with anticancer drugs that travel through the bloodstream, reaching and affecting cells all over the body.

Glossary of Terms

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Advisors & Investment Information

Board CommitteesAudit Committee*Members of the Audit Committee are:Tony Weir (Chairman)Jeremy Curnock CookSir Thomas Harris

Remuneration Committee*Members of the Remuneration Committee are:Sir Thomas Harris (Chairman)Gerry BrownJeremy Curnock CookTony Weir

Nomination Committee*Members of the Nomination Committee are:Gerry Brown (Chairman)Jeremy Curnock CookSir Thomas HarrisTony Weir

*Terms of reference for the Board Committees are available on the Company’sWebsite: www.biocompatibles.com

Company SecretaryIan Ardill

Registered OfficeBiocompatibles International plc,Chapman House,Farnham Business Park,Weydon Lane,Farnham,Surrey GU9 8QLTelephone: +44 (0) 1252 732732Fax: +44 (0) 1252 732777

Registered in England Wales No: 2703724

StockbrokersPiper Jaffray Limited,5th Floor,One South Place, London EC2M 2RB

RegistrarsLloyds TSB Registrars,The Causeway,Worthing,West Sussex BN99 6DA Telephone: 0870 600 3964

AuditorsPricewaterhouseCoopers LLP,The Atrium,1 Harefield Road, Uxbridge,Middlesex UB8 1EX

SolicitorsLinklaters,One Silk Street,London EC2Y 8HQ

UK BankersHSBC Bank plc.,33 The Borough,Farnham,Surrey BU9 7NJ

Trading Symbol: LSE:BII

Shares Outstanding: 37m

Employees as at 26 March 2007:UK: 76 (47 in R&D)CellMed: 26 (21 in R&D)

Major Holders as at 26 March 2007Aberforth Smaller Companies Trust plcAMVESCAP plcBarclays plcDresdner Bank AGHunter Hall Investment Management LimitedLloyds TSB Group plc

Analyst CoverageNomura Code Securities Piper Jaffray Limited

2007 CalendarPreliminary Results: 8 MarchAnnual General Meeting: 18 JulyInterim Results: September

Registered OfficeBiocompatibles International plc,Chapman House,Farnham Business Park,Weydon Lane,Farnham,Surrey GU9 8QL

Corporate WebsiteInformation about the Company is availableat www.biocompatibles.com

Initial Design by Pierrot Print & Designwww.pierrot.uk.com

and printed by Folium www.folium.co.uk

This Annual Report is printed in Englandusing vegetable based inks onenvironmentally friendly paper made from sustainable forest sources. It is both recyclable and bio-degradable.

Our printers and paper merchant are fullyaccredited to the ISO 14001 environmentalmanagement standard.

Biocompatibles International plc is a public limited company incorporated in England on 3 April 1992.

70412 ACC NOTES 21/5/07 13:33 Page 77

Registered Office:

Biocompatibles International plc

Chapman House,

Farnham Business Park,

Weydon Lane,

Farnham,

Surrey GU9 8QL

Telephone: +44 (0) 1252 732732

Fax: +44 (0) 1252 732777

www.biocompatibles.com

70412 COV NEW 16/5/07 18:47 Page 2

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