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Statutory financial

statements

at 31 December 2011

Approved by the

Shareholders Meeting

of 23 April 2012

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MolMed S.p.A. is a biotechnology company focused on research,

development and clinical validation of novel anticancer therapies.

MolMed’s pipeline includes two novel anticancer therapeutics in

clinical development: TK, a cell-based therapy enabling bone

marrow transplants from partially compatible donors, in Phase III

for high-risk leukaemia, and NGR-hTNF, a novel vascular targeting

agent, in Phase III for malignant pleural mesothelioma and in Phase

II for six other different types of solid tumours: colorectal,

small-cell lung, non-small-small-cell lung, liver and ovarian cancers, and soft

tissue sarcomas.

MolMed is headquartered at the San Raffaele Biomedical Science

Park in Milan, Italy. The company’s shares (MLM.MI) are listed on

the Milan Stock Exchange (Standard segment, class I) of the MTA

managed by

Borsa Italiana

.

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Page 1

Table of contents

General Company Information ... 3

Corporate Bodies ... 4

Letter to the Shareholders ... 6

Report on operations ... 7

1. Corporate Information ... 7

2. Fighting cancer ... 8

2.1 A global challenge ... 8

2.2 MolMed’s investigational therapeutics address severe oncology indications with high unmet medical need ... 9

3. Product pipeline ... 10

3.1 TK - A cell-based therapy for the treatment of leukaemia ... 10

3.2 NGR-hTNF - A biological drug targeting tumour blood vessels for the treatment of solid tumours ... 12

3.3 Vascular/tumour targeting programme ... 15

4. Development and GMP production activities ... 16

4.1 Development ... 16

4.2 GMP production ... 17

5. IP protection activities ... 18

6. Business Development activities ... 18

7. Communication and Investor Relations activities ... 18

8. Organisation and Human resources ... 19

9. Research & development grants and other financial support ... 20

10. Corporate Governance... 21

10.1 Direction and coordination activities ... 21

10.2 Implementing the Model of Organisation, Management and Control, following the Italian Legislative Decree 231/2001 ... 21

10.3 Transactions with related parties ... 21

11. Main risks and uncertainties to which MolMed is exposed ... 23

11.1 Risks associated with external factors ... 23

11.2 Strategic and operating risks ... 24

11.3 Financial risks ... 27

12. Other information ... 28

12.1 Own shares ... 28

12.2 Protection of sensitive data and information ... 28

12.3 MolMed and the environment, health and safety in the workplace ... 28

12.4 Shares held by Directors, General Managers, Statutory Auditors and other executives with strategic responsibilities (art. 79 of Consob Regulations, Resolution n°11971 of May 14, 1999) ... 29

13. Key achievements in year 2011 ... 30

14. Economic and financial data ... 31

14.1 Income statement data ... 31

14.2 Equity and financial results ... 33

15. Outlook ... 36

15.1 Significant events subsequent to the end of fiscal year 2011 ... 36

15.2 Business outlook ... 36

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Page 2

Financial Statements at December 31, 2011 ... 37

1. Statement of Financial Position ... 37

2. Income Statement ... 38

3. Statement of Comprehensive Income ... 39

4. Statement of Cash Flow ... 40

5. Statement of Changes in Shareholders’ Equity ... 41

6. Statement of Financial Position pursuant to Consob resolution no. 15519 of July 27, 2006 .... 42

7. Income Statement pursuant to Consob resolution no. 15519 of July 27, 2006 ... 43

Notes ... 44

1. General information ... 44

2. Accounting principles and valuation policies ... 45

3. Segment reporting ... 56

4. notes to the statement of financial position ... 57

5. Notes to the Income statement ... 66

6. Other notes ... 72

Certification of the Statutory Financial Statements, pursuant to Article 81-ter of Consob Regulation no. 11971 of May 14, 1999, and subsequent amendments and integrations ... 86

Report of the External Auditors ... 87

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Page 3

General Company Information

Registered office: Via Olgettina, 58 – 20132 MILANO (Italy)

Tax Number: 11887610159

VAT Number: IT 11887610159

Milan Company Register: n.11887610159

REA: 1506630

Share capital: € 43,609,036.42 fully paid

Borsa Italiana Code: MLM

ISIN: IT0001080248

Ticker Reuters: MLMD.MI

Ticker Bloomberg: MLM IM

Circulating shares: 210,541,926

(100% ordinary shares with no par value)

Disclaimer

This financial report may contain certain forward-looking statements. Although the company believes its expectations are based on reasonable assumptions, these forward-looking statements are subject to numerous risks and uncertainties, including scientific, business, economic and financial factors, which could cause actual results to differ materially from those anticipated in the forward-looking statements. The company assumes no responsibility to update forward-looking statements or adapt them to future events or developments. This document does not constitute an offer or invitation to subscribe or purchase any securities of MolMed S.p.A.

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Corporate Bodies

Board of Directors

Chairman and Chief Executive Officer Claudio Bordignon

Directors Luigi Berlusconi

Silvio Bianchi Martini (independent)

Maurizio Carfagna

Paolo M. Castelli

Riccardo Cortese (independent) Marina Del Bue

Alessandro De Nicola (independent)

Massimiliano Frank

Sabina Grossi

Alfredo Messina

Maurizia Squinzi

Maurizio Tassi

The Board of Directors, appointed by the Shareholders’ Meeting held on April 26, 2010, will remain in charge until the date of the Shareholders’ Meeting convened to approve the Financial Statements as of December 31, 2012.

On February 6, 2011, Maurizia Squinzi was appointed as member of the Board, in replacement of Renato Botti who resigned on November 4, 2011.

Board of Statutory Auditors

Chairman Fabio Scoyni

Statutory Auditors Antonio Marchesi

Enrico Scio

Substitute Statutory Auditors Alberto Gallo

Francesca Meneghel

The Board of Statutory Auditors, appointed by the Shareholders’ Meeting held on April 26, 2010, will remain in charge until the date of the Shareholders’ Meeting convened to approve the Financial Statements as of December 31, 2012.

Internal Control Committee(

)

Chairman Silvio Bianchi Martini (independent Director)

Members Alessandro De Nicola (independent Director)

Maurizio Tassi (Director)

() By Board resolution of November 11, 2010, the Internal Control Committee also carries out the functions of

Committee for Transactions with Related Parties.

Remuneration Committee

Chairman Alessandro De Nicola (independent Director)

Members Riccardo Cortese (independent Director)

Sabina Grossi (Director)

External Auditing Firm

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Scientific Advisory Board

MolMed’s Scientific Advisory Board (SAB), chaired by Professor Claudio Bordignon, is an independent advisory body, peculiar of Companies where the quality of projects is determined by the value of their scientific contents. The SAB contributes significantly to MolMed’s decisions on its R&D pipeline by providing guidance on novel therapeutic strategies, as well as external assessment of results obtained.

MolMed’s Scientific Advisory Board combines the knowledge and experience of leading international scientific experts. Its membership includes:

Claudio Bordignon, Chairman - Member of the Scientific Council of the European Research Council, and full Professor of haematology at the University Vita-Salute San Raffaele in Milan (Italy)

Carl-Henrik Heldin - Branch Director of the Ludwig Institute for Cancer Research in Uppsala (Sweden), and Professor of Molecular and Cell Biology at Uppsala University

Robert Kerbel - Senior Scientist in the Molecular and Cellular Biology Research Program at the Sunnybrook Health Sciences Centre in Toronto (Canada), Professor in the Departments of Medical Biophysics and of Laboratory Medicine & Pathobiology at the University of Toronto, and Canada Research Chair in Tumour Biology, Angiogenesis and Antiangiogenic Therapy

Alberto Sobrero - Head of the Medical Oncology Unit at the clinical centre Ospedale San Martino

in Genova (Italy), and member of the Protocol Review Committee of the European Organisation for Research and Treatment of Cancer (EORTC)

Didier Trono - Deputy Director of the Swiss National Science Foundation’s “Frontiers in Genetics” area, and Professor and Dean of the School of Life Sciences at the ÉcolePolytechnique Fédérale in Lausanne (Switzerland)

The professional profiles of the members of the Scientific Advisory Board are available on the Company website (www.molmed.com).

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Letter to the Shareholders

Dear Shareholders,

We are pleased to report the progress made in 2011.

Regarding clinical development, we presented for NGR-hTNF new Phase II data in three indications, ovarian cancer, small-cell lung cancer and non-small cell lung cancer; altogether, the clinical data obtained provide additional evidence on the antitumour activity of the molecule. For TK, we presented additional data showing restoration of a fully functional immune system in high-risk leukaemia patients treated with our cell-based therapy; the same benefit has been observed also in the first patients enrolled in the ongoing Phase III trial.

As planned, we pursued the international expansion of our two ongoing pivotal Phase III trials, with 24 centres in Europe, the US, Canada and Egypt participating in the trial of NGR-hTNF in mesothelioma. In the trial of TK for high-risk leukaemia patients, 7 centres in Italy, Germany, Greece and Spain are participating, and IND clearance was received from the FDA. Unfortunately, additional and higher than expected regulatory requirements in some countries of the European Union have delayed patient enrolment; therefore, MolMed plans to include additional centres besides the 15 centres originally planned.

In line with our objective to maintain a constant dialogue with the regulatory authorities, we held three meetings with the FDA - two regarding NGR-hTNF and one regarding TK - and one meeting with the EMA regarding TK.

I would also like to highlight the importance of our collaboration with Telethon Foundation and GlaxoSmithKline. These agreements represent a major recognition of our long-standing expertise in the field of gene therapy treatments for different pathologies, leading to a positive impact on our revenues which is expected to continue in 2012.

The increase in operating costs was expected and is mostly related to the progress of clinical trials of NGR-hTNF and its industrial manufacturing process, as well as to the intensification of our GMP production activities on behalf of third parties. Taking into account a strict control of our costs, we managed to close the year with a positive net financial position of € 38.7 million.

In 2012, we will maintain our focus on advancing the development of our investigational therapies NGR-hTNF and TK, while we will continue to expand the provision of strategic services in cell and gene therapy.

Dear Shareholders, even though important milestones were achieved, we have not yet completed our mission, which is that of bringing our investigational therapeutics to the market and respond to critical patients’ needs.

On behalf of all my collaborators and myself, let me assure you that we will continue our full commitment and devote our energies to achieve this objective, both in the interest of patients and shareholders.

Finally, I would like to thank you All for the confidence and support you have granted us so far.

[Signed by]

Claudio Bordignon

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Report on operations

1.

CORPORATE INFORMATION

MolMed is a medical biotechnology company established in 1996, focused on research, development and clinical validation of innovative therapies to cure cancer. Since March 2008, MolMed is a public company listed on the Milan Stock Exchange - Standard segment, class I - of the MTA managed by

Borsa Italiana.

MolMed was born as a spin-off of the San Raffaele Institute, based on its core knowledge in the field of gene and cell therapy applied to rare genetic diseases and to haematological malignancies, with the first clinical trials on patients suffering from leukaemia. From year 2000, it started its evolution from service to product company, with a primary focus on novel anticancer therapies. Today, MolMed is an established business, with the capability to cover all functions of a biotech product company, from basic research to production, up to the carrying out of proof-of-concept clinical trials of its investigational therapies.

MolMed’s approach to cancer therapy is characterised by an integrated strategy, aimed on one side at identification and development of bio-pharmaceuticals reducing the tumour mass and slowing down its growth, and on the other side at the development of highly selective therapies to eliminate residual tumour tissue.

MolMed has a unique pipeline in terms of novelty, diversification of therapeutic approaches and technological peculiarity. Its investigational therapies are new, completely original, first-in-class candidate products building up new therapeutic classes.

MolMed is based in Milan, within the San Raffaele Biomedical Science Park. This location offers important advantages, allowing MolMed to integrate its own R&D capabilities with the cutting-edge scientific, technological and clinical resources of its host institution. In particular, MolMed holds an option right to all IP generated from research projects run by the San Raffaele Scientific Institute in the field of gene and molecular therapy of cancer and AIDS.

At international level, since 2003 MolMed has entered into a strategic alliance with Takara Bio, an important Japanese biotechnology company listed on the Tokyo Stock Exchange, through a co-development and out-licensing agreement for MolMed’s cell-based therapies in major Asian markets. MolMed’s mission is to concentrate commitment and resources on the development of new cures for cancer by combining scientific and research excellence with a high effectiveness of business management, focused on a clear industrial project.

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2.

FIGHTING CANCER

2.1

A global challenge

MolMed’s activities are focused on medical oncology, the therapeutic area devoted to cancer treatment. Cancer (i.e. tumour or neoplastic disease) is any type of malignant cell growth caused by abnormal and uncontrolled local cell proliferation that can have origin in different tissues, and its spread to other organs through the lymphatic system or the blood stream, giving origin to metastases.

In fact, cancer is actually a wide and heterogeneous group of diseases, made up of over 200 different types of tumour, commonly divided into two broad categories: solid tumours, and blood tumours (or haematological malignancies).

Conventional treatment options available for solid tumours are surgery, radiotherapy and pharmacotherapy (or chemotherapy). Early surgical removal is potentially curative for some tumour types. But sometimes surgical treatment proves not to be sufficient, and the surgical option is unavailable for patients with advanced and/or metastatic disease. In this case, available options are only radio- and pharmacotherapy, often used in sequential combination. For haematological malignancies (e.g. leukaemia and lymphomas), radio- and pharmacotherapy are often followed by transplants of haematopoietic stem cells.

Within pharmacotherapy, the most commonly used regimens are based on cytotoxic agents, known as chemotherapies and characterised by high toxicity, lack of specificity and loss of efficacy over time, leading patients to undergo a particular line of treatment until they become refractory or reach the maximum tolerated cumulative toxicity, and then having to switch to another line of treatment (when available).

Clinical benefits limited over time and high levels of toxicity of current standard treatments translate into a significant level of unmet medical need in oncology, making it an area of high intensity in terms of research and development investments, with high potential for new therapies based on a better understanding of the mechanisms implied in tumour genesis and growth, and thus able to provide increased selectivity, reduced toxicity, enhanced therapeutic efficacy and improved survival of patients.

Currently, oncology is the largest segment of the global pharmaceutical market, and it is also the one with the fastest growth1. In Europe, the United States and Japan, cancer is the second most common

cause of death, and recently a rise in incidence has been observed. This phenomenon is due to a combination of several factors, first of all to the ageing of the population worldwide: this leads per se to an increased incidence of cancer, as the risk of all tumours increases with age. Moreover, as treatments for cancer become more effective at prolonging patient survival, the number of patients living with the disease expands.

The very high level of unmet medical need in oncology has driven the emergence of the so-called innovative therapies, either biologics or anyway biotechnology-derived. Such innovative therapies have as a common trait the fact of being specific and/or targeted, i.e. directed at specific molecular targets involved in tumour genesis and/or tumour growth, and thanks to their targeted action they have a remarkably lower systemic toxicity as compared to conventional regimens.

The molecular targets of novel therapeutics may be tumour type-specific, or common to different tumour types, or specific to the blood vessels feeding the tumour mass or to the factors supporting their formation and growth: in the second and third case, they offer the potential for application of a therapy in several different oncology indications.

Novel targeted therapies often can act both as single-agent alternatives, and as enhancers of or in synergy with existing treatments. The current focus in tumour therapy improvement is to use a combination of different classes of agents rather than a single therapeutic approach: the introduction of next-generation biotech-derived cancer therapies could enable further extension of patients’

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survival and improvement of their quality of life, eventually reducing tumours from rapidly progressing and life-threatening diseases to well-managed chronic pathologies.

The investigational therapeutics developed by MolMed belong to the context of novel anti-tumour biologics.

2.2

MolMed’s investigational therapeutics address severe oncology indications

with high unmet medical need

MolMed’s activities are primarily focused on identification, characterisation, and preclinical, clinical and pharmaceutical development of novel therapies for tumours with very different patterns and very different levels of incidence: however, they all share the common traits of severity and actual need of new therapeutic options.

Figure 1. Indications addressed by of MolMed’s investigational therapies in ongoing clinical trials

Sources: Globocan Database 2008; 1MolMed estimate

On one hand, MolMed is addressing tumours considered to be uncommon - although with ever-growing incidence because of exposure to environmental conditions that contribute to disease onset - that have no or very few therapeutic options available, such as high-risk leukaemia, malignant pleural mesothelioma, primary liver cancer, small-cell lung cancer (SCLC) and soft-tissue sarcomas.

On the other hand, clinical investigation of MolMed therapies includes much more widespread indications, thus having indeed a much wider range of treatments available or in development - such as colorectal, ovarian and non-small cell lung cancer (NSCLC) - but with many patients becoming either intolerant (because reaching cumulative toxicity) or refractory (because of loss of disease control over time) to all possible treatment lines. For these heavily pre-treated patients with no efficacious treatment lines left, MolMed devotes its efforts to offer a new therapeutic option.

To successfully address the cure of each of these tumours, MolMed is developing two distinct investigational therapies. Both are new, entirely original and giving origin to novel therapeutic classes, but each of them is relying on a different technological approach:

TK, a cell therapy product for blood tumours:this approach is aimed at making available to all patients the curative potential of transplants of haematopoietic stem cells derived from the bone marrow of a healthy donor, that is currently feasible in a safe and effective way only if the donor is fully compatible with the patient, a condition that can be satisfied only for approximately 50% of candidates to the transplant;

No or few therapeutic options available or in development: First/second line Third/fourth line Orphan Drug designation in EU & US

Unmet medical need 0 100,000 0.00 0.33 0.67 1.00 Leukaemia Colon-rectum Liver Lung (NSCLC) Ovary Mesothelioma1 TK TK Lung (SCLC) Sarcomas1 NGR-hTNF NGR-hTNF 200,000 300,000 400,000 500,000 600,000 700,000 In ci de n ce (E ur op e, Nor th A m er ic a, J ap an , Au st ra li a) Mortality/incidence ratio No or few therapeutic options available or in development: First/second line Third/fourth line Orphan Drug designation in EU & US

Unmet medical need 0 100,000 0.00 0.33 0.67 1.00 Leukaemia Colon-rectum Liver Lung (NSCLC) Ovary Mesothelioma1 TK TKTK TK Lung (SCLC) Sarcomas1 NGR-hTNF NGR-hTNF 200,000 300,000 400,000 500,000 600,000 700,000 In ci de n ce (E ur op e, Nor th A m er ic a, J ap an , Au st ra li a) Mortality/incidence ratio

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NGR-hTNF, a biological drug targeting blood vessels for solid tumours: this approach is based on the use of a highly selective vascular targeting agent whose molecular target is a structure which is only present on blood vessels that feed the tumour mass. The antivascular effect of the drug cuts off supplies of oxygen and nutrients to the tumour, thus blocking its growth.

3.

PRODUCT PIPELINE

MolMed’s product pipeline is headed by the two investigational anticancer therapies TK and NGR-hTNF. Further advancement of the clinical and pharmaceutical development of these two investigational products has been the chief focus of activities carried out by the Company functions in year 2011.

Figure 2. MolMed clinical development pipeline at 31 December 2011

3.1

TK - A cell-based therapy for the treatment of leukaemia

TK is an investigational cell therapy product based on genetically engineered cells, allowing more safe and effective transplant of haematopoietic stem cells (HSCT) even from a partially compatible donor, thus opening to all patients the door of this practice, which is the only potentially curative treatment available, especially for high-risk leukaemia.

HSCT allows regenerating the haematopoietic and immune system of a leukaemic patient, which is severely compromised by the disease and by the radiotherapy and pharmacotherapy endured before the transplant; but it needs time - several months - in order to give origin to the mature cells characterising a fully functional immune system. In the meantime, the patient lacks any defence against both infections and possible disease relapse, so it is in absolute need of a vicarious protection: when the donor is fully compatible, this can be provided by donor T cells, thanks to their ability to fight infections and to detect and eliminate residual leukaemic cells. But, at present, donor T cells cannot be used as vicarious protection when the donor is only partially compatible with the patient, because in this case they become a double-edged sword: on one hand, they provide an effective immunotherapeutic benefit against infections and leukaemia relapse, but on the other hand they carry a very high risk of eliciting an attack to the normal tissues of the patient, known as graft-versus-host disease (GvHD), that can produce very serious damage. This risk has so far prevented the

Product Indication Trial code Phase I Phase II Phase III

TK

High-risk leukaemia TK007, TK008 random. Leukaemia (Japan/Takara Bio)

NGR-hTNF

Solid tumours MTD EORTC 16041 Solid tumours – low dose NGR002 Solid tumours – high dose NGR013 Monotherapy

Colorectal cancer NGR006

Liver cancer NGR008

Mesothelioma NGR010, NGR015 random.

Mesothelioma/maintenance NGR019 random. + doxorubicin Solid tumours NGR003

Lung cancer/SCLC NGR007

Ovarian cancer NGR012

Ovarian cancer NGR018 random. Soft tissue sarcomas NGR016 random.

+ Xelox Colorectal cancer NGR005

+ cisplatin Solid tumours NGR004

Lung cancer/NSCLC NGR014 random.

Product Indication Trial code Phase I Phase II Phase III

TK

High-risk leukaemia TK007, TK008 random. Leukaemia (Japan/Takara Bio)

NGR-hTNF

Solid tumours MTD EORTC 16041 Solid tumours – low dose NGR002 Solid tumours – high dose NGR013 Monotherapy

Colorectal cancer NGR006

Liver cancer NGR008

Mesothelioma NGR010, NGR015 random.

Mesothelioma/maintenance NGR019 random. + doxorubicin Solid tumours NGR003

Lung cancer/SCLC NGR007

Ovarian cancer NGR012

Ovarian cancer NGR018 random. Soft tissue sarcomas NGR016 random.

+ Xelox Colorectal cancer NGR005

+ cisplatin Solid tumours NGR004

Lung cancer/NSCLC NGR014 random.

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use of donor T cells as add-backs to HSCT in all cases of partial incompatibility between donor and recipient, thus making the transplant option unavailable for approximately the half of leukaemia patients.

TK therapy was designed in order to allow keeping the protective action of donor T cells, which is vital for the transplant to be really successful, even in the case of partial incompatibility between donor and recipient. This is achieved by the genetic engineering of donor T cells, in order to endow them with a selective elimination system acting only on the cells actively involved in a GvHD reaction.

To this end, donor T cells are transduced with a gene (TK) making them sensitive to the common antiviral drug ganciclovir. In the case of GvHD onset, T cells involved in the aggression can be promptly eliminated by administering the drug at the very first symptoms. Thus, TK allows to take advantage of the vicarious protection of a fully functional immune system provided by donor T cells, while the new immune system entirely reconstitutes from the transplanted haematopoietic stem cells, and therefore it opens the door of HSCT to all patients, since a partially compatible family donor is available for nearly every candidate to the transplant.

TK was granted Orphan Drug designation both in the European Union and in the United States.

Figure 3. Overview of TK therapy application in HSC transplant from a partially compatible donor

In 2011, MolMed started the international expansion of Phase III trial (TK008) for the treatment of high-risk leukaemia in adult patients undergoing HSCT from partially compatible donors (haplo-HSCT). TK008 is a pivotal trial - which will compare the outcome of haplo-HSCT with or without TK add-backs, with a randomisation ratio of 3:1 in favour of TK add-back - aimed at assessing efficacy and safety of TK in its final formulation, in compliance with regulatory requirements in view of registration and market launch. The trial is expected to involve 15 centres in several European countries, Israel and the US.

In 2011, MolMed obtained clearance of the IND filed with the U.S. Food and Drug Administration (FDA) to include patients enrolled in U.S. clinical centres in Phase III trial TK008. Following a meeting with the FDA, the new trial design has been confirmed with a wider primary end-point, i.e. disease-free survival - which includes also disease relapse in addition to transplant-related mortality - evaluated on a patient population increased to 170 patients. Secondary end-points include overall survival, reduction of transplant-related mortality associated with the haplo-HSCT procedure, safety and patients’ quality of life.

At European level, in 2011 patient recruitment in the trial continued in Italy, and two clinical centres were activated in Spain and Greece, with recruitment of the first patient in Spain. So far, recruitment in the trial has been slower than expected due to additional regulatory requirements of

Genetic engineering of donor T cells Day 21+ Protection from infections Protection from leukaemia relapse No immune-suppression needed (prompt abrogation of GvHD by administration of ganciclovir) Donor T cells TK cells Day 0 T cells Haemat. stem cells TK cells Donor haematopoietic stem cells HSV-TK Haplo-identical donor Hospital MolMed GMP facility Genetic engineering of donor T cells

Day 21+ Protection from infections Protection from leukaemia relapse No immune-suppression needed (prompt abrogation of GvHD by administration of ganciclovir) Donor T cells TK cells TK cells Day 0 T cells Haemat. stem cellsHaemat. stem cells TK cells Donor haematopoietic stem cells HSV-TK HSV-TK Haplo-identical donor Hospital MolMed GMP facility

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some EU Member States, which delayed the activation of clinical centres. Taking also into account the increased number of patients, the planned regulatory submissions have be postponed accordingly, since the primary analysis is expected not before 2013. (Trial identifier in clinicaltrials.gov: NCT00914628).

Results of a completed Phase II trial (TK007), published by The Lancet Oncology2, demonstrated that

TK add-backs after haplo-HSCT allow to achieve a rapid and efficient immune-reconstitution in adult patients affected by high-risk leukaemia, substantially reducing transplant-related mortality and leading to long-term disease-free survival. In 2011, new clinical data from the long-term monitoring of the trial were presented3, giving evidence of the clinical benefit following treatment with TK:

patients treated - including the first patients enrolled in the ongoing Phase III trial - show restoration of a fully functional immune system. Data presented in December 2011 at ASH show - in patients treated with TK cells - a regeneration and renewed functionality of the thymus, which results into circulation of T cell precursors mediating a robust and specific immune protection. This effect is due to TK cells, which stimulate the production and release of interleukin-7, an important mediator in the development of the immune system: without TK cells engraftment no rise in levels of interleukin-7 is observed and no immune-reconstitution is achieved.

The IP coverage of TK progressed in 2011 with the grant of a key European patent (EP1781789) covering the gene forming the basis of TK. This new composition of matter patent, part of a large patent family owned by MolMed, covers a non-splicing variant of the HSV-TK gene, i.e. a variant that is transcribed in a stable and unmodifiable manner. The patent affords protection until 2025 with the possibility of a 5-year term extension, and gives right to market exclusivity in 29 designated countries within the European Patent Convention, including all major countries of the European Union, Switzerland and Turkey. Equivalent patent applications are pending in the United States, Japan and important emerging markets. Moreover, in 2011 MolMed was granted another European patent (EP1743029) covering a closed system for the production of TK cells, with the same terms of validity and the same geographic coverage.

Concerning TK manufacturing, in 2011 MolMed continued the project for the development of an automated production process, carried on in collaboration with Areta International S.r.l. and Datamed S.r.l. The enjoys a non-refundable grant of approximately Euro 1.4 million awarded by

Regione Lombardia - of which MolMed’s share is Euro 449,000 - that will partially cover the R&D costs incurred for a period of 36 months. Areta is in charge of the development and implementation of an optimised production and purification process for the monoclonal antibody used for the selection of TK cells, while Datamed carries out design and optimisation of the automated system modules and related engineering work.

Abstracts of the key publications concerning TK, as well as posters of clinical results, are available on MolMed’s website (www.molmed.com).

3.2

NGR-hTNF - A biological drug targeting tumour blood vessels for the

treatment of solid tumours

NGR-hTNF is a selective vascular targeting agent characterised by a unique mode of action, and is first-in-class in the class of peptide-cytokine complexes targeting tumour blood vessels. It is a homotrimeric protein, where each of the three subunits is formed by combining a tumour homing peptide (NGR) with the human cytokine Tumour Necrosis Factor (hTNF). NGR targets a particular receptor complex including CD13, selectively expressed by endothelial cells of human tumour vessels. NGR-hTNF acts specifically on blood vessels feeding the tumour mass, inducing an anti-vascular effect that allows, inter alia, an improved penetration into the tumour tissue of other anticancer drugs administered in combination, thereby enhancing their therapeutic effectiveness. Therefore, NGR-hTNF can be used both as new single-agent therapeutic option, and in combinations with most cytotoxic-based chemotherapeutic regimens currently available.

2

Ciceri, Bonini et al, Lancet Oncol. 2009 May 1;10:489-500

3

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Unlike all other drugs commonly classified as vascular targeting/disrupting agents (VTAs/VDAs), NGR-hTNF appears to exert its antivascular and antitumour activity without inducing harmful counter-regulatory mechanisms: neither increase at the tumour site of bone marrow-derived cell infiltrates nor increase in circulating growth factors are induced, i.e. two phenomena that stimulate angiogenesis, post-therapy tumour re-growth and metastasis.

Figure 4. The NGR-hTNF molecule: properties of its moieties

The clinical development of NGR-hTNF includes clinical trials both as monotherapy and in combination with different chemotherapeutic regimens, in a total of seven indications: colorectal, liver, small-cell lung, non-small-cell lung and ovarian carcinomas, soft tissue sarcomas and malignant pleural mesothelioma. For mesothelioma and liver cancer, NGR-hTNF has received Orphan Drug designation both in the U.S. and in the European Union, where it is now listed in the Register of orphan medicines for human use under the code EU/3/08/549 for malignant mesothelioma, and under the code EU/3/09/686 for primary liver cancer. Clinical data obtained by MolMed to date demonstrate the antitumour activity of NGR-hTNF in six different types of solid tumours; these include two orphan indications as well as more widespread diseases, which altogether account for more than 1.4 million new cases each year in Europe, North America and Japan.

In 2011, MolMed implemented the international expansion of pivotal Phase III trial (NGR015) for the treatment of malignant pleural mesothelioma, with 24 centres participating in Europe (Italy, the UK, Ireland and Poland), the US, Canada and Egypt. 124 patients were enrolled at 31 December 2011. The trial is expected to include more than 40 centres worldwide, with primary data analysis expected in 2013. NGR015 is a randomised, double-blind, placebo-controlled trial, expecting to enrol 390 adult patients affected by malignant pleural mesothelioma with disease progressing after a pemetrexed-based chemotherapy. The primary endpoint of the trial is overall survival; secondary endpoints include progression-free survival, disease control rate, safety profile and patient quality of life. In 2011, new data of five clinical trials of NGR-hTNF were presented:

First results of a randomised Phase II trial of NGR-hTNF in combination with cisplatin-based chemotherapy as first-line treatment for non-small cell lung cancer4.In this ongoing trial,

MolMed presented interim data for safety and preliminary antitumour activity on the first 100 patients enrolled, showing evidence of clinical improvement in terms of disease control and duration of progression-free survival as compared to chemotherapy alone, particularly in younger patients and in patients with squamous cell histology. Absence of pulmonary haemorrhage or bleeding events (which are associated to the use of antiangiogenic drugs in patients with squamous cell histology) was also confirmed. Patient recruitment is continuing beyond the initially planned population of 102 patients in order to ensure the inclusion of an adequate number of

4

EMCC 2011, poster # 9014; ASCO 2011, poster # 7568

Cyclic CNGRCG peptide:

selectively binds receptor CD13, expressed on the surface of newly formed tumour blood vessels

Human TNF (hTNF):

powerful antitumour activity Approved only for loco-regional treatment – systemic use hampered by toxicity Destroys blood vessel functions

Cyclic CNGRCG peptide:

selectively binds receptor CD13, expressed on the surface of newly formed tumour blood vessels

Human TNF (hTNF):

powerful antitumour activity Approved only for loco-regional treatment – systemic use hampered by toxicity Destroys blood vessel functions

Cyclic CNGRCG peptide:

selectively binds receptor CD13, expressed on the surface of newly formed tumour blood vessels

Human TNF (hTNF):

powerful antitumour activity Approved only for loco-regional treatment – systemic use hampered by toxicity Destroys blood vessel functions

Cyclic CNGRCG peptide:

selectively binds receptor CD13, expressed on the surface of newly formed tumour blood vessels

Human TNF (hTNF):

powerful antitumour activity Approved only for loco-regional treatment – systemic use hampered by toxicity Destroys blood vessel functions

Cyclic CNGRCG peptide:

selectively binds receptor CD13, expressed on the surface of newly formed tumour blood vessels

Human TNF (hTNF):

powerful antitumour activity Approved only for loco-regional treatment – systemic use hampered by toxicity Destroys blood vessel functions

Cyclic CNGRCG peptide:

selectively binds receptor CD13, expressed on the surface of newly formed tumour blood vessels

Human TNF (hTNF):

powerful antitumour activity Approved only for loco-regional treatment – systemic use hampered by toxicity Destroys blood vessel functions

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Page 14

patients with squamous cell histology for a deeper primary analysis in this tumour subtype. Availability of trial results is expected in 2012 and will be one of the key determinants for selection of the second indication to take to Phase III, after mesothelioma. As a consequence, the start of a Phase III trial in a second indication is expected in 2012.

Follow-up of a completed Phase II trial of NGR-hTNF in combination with doxorubicin for the treatment of relapsed ovarian cancer5. The primary endpoint - six partial responses on the entire

study population - was met after the recruitment of less than half of the patients. The primary endpoint of the trial - six partial responses in the entire study population - was met after enrolment of less than half of patients. Long term follow-up data show that disease control was achieved in 50% of patients resistant/refractory to prior platinum-based regimens, with a median duration of 5.0 months, and in most patients partially sensitive to prior platinum-based therapy, with a median duration of 7.8 months. Resistant/refractory patients with a normal immune response (measured as normal/high baseline lymphocyte counts) experienced a prolonged clinical benefit, with median progression-free survival of 4.9 months and median overall survival of 15.8 months. On the basis of this positive outcome, MolMed has started a randomised Phase II trial (NGR018).

Follow-up of a completed Phase II trial of NGR-hTNF in combination with doxorubicin for the treatment of relapsed small-cell lung cancer6. Disease control was achieved in more than half

the patients, with similar antitumour activity in terms of disease regression in both chemo-sensitive and chemo-refractory patients. Prolonged clinical benefit was also observed in patients heavily pre-treated with two or more prior therapies. Patients with a normal immune response (i.e. normal/high baseline lymphocyte counts) had an almost double median overall survival time (8.4 months) compared to patients with a weak immune response (4.6 months).

Long-term follow up of a completed Phase II trial in malignant pleural mesothelioma7. the long-term analysis confirms a strong advantage of the weekly over the tri-weekly administration schedule in prolonging disease control: the 2-year survival rate was three-fold higher considering the entire patient population and five-fold higher in patients who achieved disease control at the first tumour re-assessment. In both cohorts, patients who achieved disease control at the first tumour re-assessment and continued therapy had a double median survival time with respect to patients who progressed at the first tumour re-assessment and consequently discontinued treatment (16.7 v 8.3 months). On the basis of these evidences, MolMed started a randomised Phase II trial (NGR019) of NGR-hTNF as first-line maintenance therapy.

Outcome of a Phase I and pharmacodynamic trial of NGR-hTNF at high doses8. This trial tested

the administration of NGR-hTNF at escalating dose levels higher than the previously established maximum tolerated dose. Results of the dose escalation up to 325 μg/m2 showed that NGR-hTNF

can be safely administered by using a prolonged (2-hour) infusion time and a mild pre-medication with paracetamol. The trial plans to explore further dose escalation. Antivascular effects were registered by dynamic imaging (DCE-MRI) in 80% of patients.

As previously recalled, in 2011 MolMed started two new randomised Phase II trials: a double-blind, placebo controlled trial as monotherapy for first line maintenance treatment in patients affected by malignant pleural mesothelioma who completed the pemetrexed-based chemotherapy (NGR019), and a trial in combination with pegylated liposomal doxorubicin in ovarian cancer refractory/resistant to prior platinum-baed regimens (NGR018). Moreover, recruitment progressed in a randomised Phase II trial (NGR016) for the treatment of soft tissue sarcomas, investigating the administration of NGR-hTNF either as monotherapy or in combination with doxorubicin.

In February 2011, the positive outcome of a Phase I trial (NGR004) in combination with cisplatin, leading the way to the ongoing randomised Phase II trial in non-small cell lung cancer, was published as a full paper by Clinical Cancer Research9.

5

EMCC 2011, poster # 8030: ASCO 2011, poster # 5022

6

EMCC 2011, poster # 9103; ASCO 2011, poster # 7077

7

ASCO 2011, poster # 7089

8

EMCC 2011, oral presentation # 1205; ASCO 2011, poster # 2522

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Page 15

Posters and presentations of the results of NGR-hTNF clinical trials, as well as abstracts - or full-text in the case of open-source articles - of the key publications on NGR-hTNF are available on MolMed’s website (www.molmed.com).

In terms of manufacturing, scale-up and formulation, NGR-hTNF is a fusion protein suited for industrial development; it is produced by recombinant DNA technology in the host bacterium

Escherichia coli with a fermentation process. Manufacturing of the protein - representing the bulk drug substance, i.e., the active pharmaceutical ingredient, or “API” - and of the drug product in its final formulation are outsourced to external specialised CMOs. To date, a total of nine GMP batches of NGR-hTNF have been produced: seven batches of bulk drug substance were used for Phase I and Phase II trials, and the last two batches of bulk drug substane yielded two batches of drug product to cover Phase III trials. MolMed is currently working on further scale-up of the manufacturing process for commercial production of the drug, following the same outsourcing strategy.

3.3

Vascular/tumour targeting programme

NGR-IFN

NGR-hTNF is the first molecule resulting from MolMed’s vascular/tumour targeting programme. A second compound issued from this programme, again formed by the combination of the NGR peptide with a cytokine, is NGR-IFN, associating NGR with the cytokine interferon-, now in preclinical development.

Similarly to NGR-hTNF, NGR-IFN shows a targeted location on newly formed tumour blood vessels, mediated by interactions between the two moieties of the molecule - the NGR peptide and IFNγ - and both their receptors, CD13 and IFN-R, while no location on healthy tissues has been observed. In animal models, antitumor activity was observed in the absence of significant toxic effects, and especially an antitumour activity at low dose in mouse models of lymphoma, colon cancer and prostate cancer: in the latter, a prolonged survival was observed following multiple injections of NGR-IFN.

New molecules

In view of feeding MolMed’s anticancer pipeline, the programme is currently carrying on the exploration of other possible targeting molecules, either to tumour blood vessels or to other tumour targets including cancer cells, and of effector molecules with strong anti-tumour activity. The programme plans to identify and validate targeting moieties and appropriate effector moieties to be conjugated or used in combination. So far, three new targeting molecules (targeting peptides) have been identified, characterised by specificity for vascular or tumour targets and high stability; moreover, some molecules with anti-tumour properties have been selected, including a class of kinase inhibitors.

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4.

DEVELOPMENT AND GMP PRODUCTION ACTIVITIES

Over the years, MolMed has developed a specific expertise in the field of gene and cell therapy, including the use of stem cells for the treatment of different pathologies and tissues, positioning the Company among the leading players at international level. The area “GMP Solutions” provides tailor-made services to third parties for cell and gene therapy projects, offering top-level expertise to develop, conduct and validate custom studies from preclinical to Phase III trials, devising innovative testing procedures and addressing the unique test specifications required for novel cell-based therapeutics. MolMed holds leading expertise in development, manufacturing and clinical trials of ex vivo cell and gene therapeutics, including scale-up and cGMP production of clinical-grade viral vectors, and manufacturing of patient-specific genetically engineered cells.

In 2011 there were important achievents in this area, with the signature of two agreements for development and production of novel gene therapy treatments for seven rare genetic diseases, all caused by a single defective gene, thus making it possible to develop a potential cure by inserting the correct form of the gene into the patient’s own stem cells derived from the bone marrow, through ex vivo gene transfer technology.

In March 2011, MolMed signed an agreement with the Telethon Foundation to develop and manufacture novel gene therapy treatments for four more rare genetic diseases, in addition to pursuing the production of investigational gene therapies for the treatment of metachromatic leukodystrophy (MLD) and of Wiskott-Aldrich syndrome (WAS), started under a previous agreement. The four new diseases involved are beta-thalassemia, mucopolysaccharidosis type I (MPS I), globoid leukodystrophy (GLD) and chronic granulomatous disorder (CGD). Under the agreement, providing for MolMed up to € 8.3 million in revenues over a 4-year period, MolMed will develop and produce clinical grade lentiviral vectors carrying the relevant therapeutic gene and manufacture patients’ cells to be investigated in clinical trials, already ongoing for MLD and WAS since 2010.

In August 2011, MolMed signed an agreement with GlaxoSmithKline (GSK) to develop a retroviral vector-based production process for the investigational gene therapy of ADA-SCID, a severe form of immunodeficiency (the so-called “bubble boy disease”). This gene therapy, which is in late stage clinical trials, has been developed by the San Raffaele Telethon Institute for Gene Therapy (HSR-TIGET) and was in-licensed by GSK for further development and commercialisation. The agreement is worth up to € 5.5 million in revenues over a two-year period.

These activities on behalf of Telethon and GSK are consolidating the Company's leadership in the field and is producing a significant increase in revenues, as well as providing new opportunities for innovative partnerships in the context of cell-based therapies.

4.1

Development

Development activities, conducted by staff with high experience in the fields of cell biology, molecular biology and virology, involve design and optimisation of processes and analytical methods in order to transfer methods from the lab to GMP production. In this context, development projects currently include implementing a technology platform for the large-scale, semi-stable and stable production of lentiviral vectors.

In 2011, new activities were started related to development of investigational gene therapy treatments:

 development activities for the production of lentiviral vectors to be used in clinical trials of gene therapy treatments for beta-thalassemia and mucopolysaccharidosis type I, as well as support activities for the GMP validation of such vectors. These activities were carried out under the new agreement with the Telethon Foundation;

 characterisation of two cell lines for the production of retroviral vectors to be used in manufacturing of ADA-SCID gene therapy, and development of analytical methods for GMP production of such vectors. These activities were carried on under the agreement with Glaxosmithkline.

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Moreover, activities carried on in 2011 included pursuing projects ongoing since 2010:

 development of a stable packaging cell line prototype for the production of third-generation lentiviral vectors;

 development activities related to the production of lentiviral vectors to be used in clinical trials of gene therapy for MLD and WAS, and support to their GMP validation. These activities were carried on under the previous and the new agreement with the Telethon Foundation;

 scale-up of mesangioblast cell cultures for the subsequent GMP production phase, under the EU-FP7 co-funded project OPTISTEM;

 development and optimisation of the production process of lentiviral vectors for in vivo preclinical studies, under the EU-FP7 co-funded project PERSIST;

 development and optimisation of the production process of lentiviral vectors and transduction of haematopoietic stem cells for in vivo preclinical studies, under the EU-FP7 co-funded project CELL-PID.

4.2

GMP production

MolMed has been granted the status of Drug Company by the Italian healthcare authority AIFA (Agenzia Italiana del Farmaco), and runs an in-house GMP facility authorised for the production of cell-based medicinal products used in clinical trials, and qualified to support all stages of drug development of cell-based therapies, including pivotal clinical trials.

The facility - which includes six aseptic rooms, five production rooms, one quality control room, separate areas dedicated to fermentation and purification processes, and to research laboratories, having a total surface area of approximately 1,400 square meters - satisfies EMA and FDA requirements for the production of clinical-grade sterile investigational medicines.

Besides manufacturing TK for its own Phase III trial, the facility also provides GMP production services in gene and cell therapy to third parties, representing a source of revenues. Provision of services is regulated by dedicated contracts that often include also the relevant regulatory support activities. Altogether, these service activities allow MolMed to optimise the use of its GMP facility, as well as building and maintaining strategic collaborations in the field of cell and gene therapy.

In 2011, the following activities ongoing since 2010 were pursued:

 production of patient-specific transduced cells using lentiviral vectors for the investigational treatment of MLD and WAS, again under the mentioned agreement with the Telethon Foundation;

 production of cells for the investigational treatment of patients affected by Duchenne muscular dystrophy;

 service activities provided under several different agreements with the San Raffaele Foundation, including cell selection and manipulation, and manufacturing and release of clinical-grade lots of genetically modified patient-specific cells for use in cell- or gene therapy trials of rare diseases

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5.

IP PROTECTION ACTIVITIES

In 2011, activities were focused on consolidating the intellectual property protection for TK and NGR-hTNF, with the prosecution of patent applications in countries belonging to the major industrialised areas, as well as in important emerging markets.

Regarding TK, in 2011 MolMed was granted two new European patents: a key composition of matter patent (EP1781789) covering a non-splicing variant of the gene forming the basis of TK, i.e. a variant that is transcribed in a stable and unmodifiable manner (see also chapter 3.1), and a patent (EP1743029) covering a closed system for the production of TK cells. Both patents afford protection until 2025 with the possibility of a 5-year term extension, and give right to market exclusivity in 29 designated countries within the European Patent Convention, including all major countries of the European Union, Switzerland and Turkey. Equivalent patent applications are pending in the United States, Japan and important emerging markets.

With regard to NGR-hTNF, in 2011 the key patent on the molecule - already granted in Europe and the US - was granted in Japan.

6.

BUSINESS DEVELOPMENT ACTIVITIES

In 2011, the Business Development function focused its activities on exploring collaboration agreement opportunities - from co-development to out-licensing - for MolMed’s investigational therapeutics TK and NGR-hTNF. Such activities were oriented along two action lines: on one hand there was an intensification of long-term relationships with major pharmaceutical companies, and on the other hand actions were taken to increase the visibility of MolMed to new potential partners. The first line led to a doubling, with respect to 2010, of one-to-one meetings aimed at evaluating opportunities to maximise Molmed’s products value, while the second line resulted into presenting the company and its products and holding new one-to-one meetings at several international conferences devoted to partnering opportunities between biotech and pharmaceutical companies. The Business Development function also continued its contribution to the selection of providers for crucial activities linked to the development and forthcoming commercialisation of MolMed’s investigational therapies, and performed analyses for their positioning in the competitive scenario.

7.

COMMUNICATION AND INVESTOR RELATIONS ACTIVITIES

In 2011, MolMed intensified contacts with investors and the financial community, with a particularly intense IR activity towards institutional investors, including two international road shows, in the US in June and in Switzerland in July.

MolMed held company presentations at several international meetings, particularly in Europe and the US, aimed at bringing together public biotech companies and specialised investors. The presentations, some of which with live and replay audio webcast, were published on the home page of the Company’s website.

The Company held a live meeting with the financial community and the National press, organised in Milan on April 5, 2011.

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8.

ORGANISATION AND HUMAN RESOURCES

MolMed’s organisation structure in 2011 is reported here below.

Figure 6. Functional organisation flow chart at 31 December 2011

In the beginning of 2011, MolMed significantly strengthened its company organisation and top management team with the arrival of Germano Carganico to serve as General Manager responsible for Research & Development and Operations, in charge of coordinating the final development stages and registration of MolMed’s investigational therapeutics, as well as their market launch.

MolMed’s staff at 31 December 2011 counted 88 employees and 11 project workers.

MolMed is aware that staff members are a very important factor for the successful achievement of its target objectives. Respect, fair treatment, professional development, team work, continuous training and communication are key values for MolMed.

In 2011, overall staff training activities were focused on deepening some aspects of the Model of organisation, management and control - pursuant to Legislative Decree 231/2001 - adopted by MolMed (see also chapter 11.2), through a workshop on "Legislative Decree 231, 10 years after". The workshop training material was made available to MolMed staff through the Company intranet.

The upgrading of skills through scientific and professional training programmes and opportunities (courses, seminars and other events) for specific roles and tasks, were pursued as usual. In particular, internal courses were organised to enhance skills in statistics-computer science and in project management.

Chairman & Chief Executive Officer

C. Bordignon

Administration, Finance & Control

General Manager Business & Administration

M. Del Bue

Clinical Development Research & Development

Intellectual Property Information Technology Operations Business Development &

Investor Relations

General Manager R&D and Operations

G. Carganico

Special Projects

Human Resources Corporate GovernanceLegal Affairs &

Regulatory Affairs Quality Assurance & CMC Chairman &

Chief Executive Officer C. Bordignon

Administration, Finance & Control

General Manager Business & Administration

M. Del Bue

Clinical Development Research & Development

Intellectual Property Information Technology Operations Business Development &

Investor Relations

General Manager R&D and Operations

G. Carganico

Special Projects

Human Resources Corporate GovernanceLegal Affairs & Human Resources Corporate GovernanceLegal Affairs &

Regulatory Affairs Quality Assurance & CMC Regulatory Affairs Quality Assurance & CMC

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9.

RESEARCH & DEVELOPMENT GRANTS AND OTHER FINANCIAL SUPPORT

As a R&D-based company, MolMed enjoys some benefits derived from funding schemes and other financial measures - at European, National or regional level - aimed at supporting and promoting innovation.

MolMed is a strategic partner in four projects co-funded by the European Union under the Seventh Framework Programme of Research and Development (EU FP-7), with different international research teams. The projects, named “PERSIST”, “OPTISTEM”, “ATTRACT” and “CELL-PID”, do involve MolMed for development and manufacturing activities related to highly innovative investigational therapies, as well as for education, training and exchange activities involving highly qualified staff. Activities within these projects will continue throughout the forthcoming years: funding granted goes from 50% to 75% of incurred costs throughout the whole duration of the projects, for a total amount of Euro 1,948 million.

At regional level, MolMed applied for a grant from the regional authority Regione Lombardia for a project called “INNOPROTEGE - New manufacturing system of genetically modified cells for innovative therapies in the fields of oncology, infectious diseases and genetic diseases”, under a call for process and service organisation innovation. The project was approved and funded under the regional Decree nr. 3432, and was awarded a contribution of Euro 322,000 over a 18-month period. Again at regional level, MolMed - together with two industrial partners - is carrying on another project approved for co-funding by the regional authority on 7 June 2010, under a “Call for industrial research and experimental development activities in the priority thematic areas”. The project is devoted to the development of an innovative automated manufacturing process for MolMed’s cell-based therapy product TK (see also Chapter 3.1). The non-refundable grant awarded amounts to Euro 1,438 million, that will partially cover the R&D costs incurred for a period of 36 months: MolMed’s share of the grant amounts to Euro 499,000.

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10.

CORPORATE GOVERNANCE

MolMed adheres to the Code of Conduct of public companies set forth in March 2006 by the Corporate Governance Committee promoted by Borsa Italiana, as subsequently amended. In compliance with law requirements, MolMed publishes an annual Report on the company’s Corporate Governance, providing information on ownership, on adherence to codes of conduct and on compliance with arising commitments, highlighting the choices of the Company regarding the application of the principles of self-discipline.

The Report is available (in Italian) on MolMed’s website (www.molmed.com), as well as on the website of Borsa Italiana.

10.1

Direction and coordination activities

MolMed’s shareholders structure is such that no shareholder controls a majority of the votes or has enough votes to exercise dominant influence over the Company. There is no obligation to consolidate the statutory financial statements.

10.2

Implementing the Model of Organisation, Management and Control,

following the Italian Legislative Decree 231/2001

According to the Legislative Decree 231/2001, entered into force on June 8, 2001, legal entities respond, by way of administrative responsibility, of crimes committed by Directors, officers or employees to the benefit or in advantage of the entity, unless it is demonstrated that, among other things, a Model of organisation, management and control adequate to prevent the commission of these crimes has been adopted and practically implemented.

In 2007 MolMed approved the adoption of a Model of organisation, management and control for the prevention of crimes, and established a Supervisory Body characterised by the appropriate requirements of autonomy, independence and professionalism, and endowed with the powers of inspection and control of the Company’s powers and functions as provided for by the Model itself. In 2011, in accordance with the Audit plan presented to the Board of Directors, the Supervisory Body pursued the assessment of the Operating procedures (forming Annex 6 to the Model) with the relevant heads of function; the assessment outcome will be reported by the Body to the Board of Directors in its usual half-year report.

Furthermore, following the tutorial plan presented to the Board of Directors, the Supervisory Body prepared and delivered to Company staff a multiple choice questionnaire in order to assess the actual knowledge of the principles underlying Law 231 and identify any gaps to be filled by forthcoming training initiatives.

An English translation for convenience of the public version of the Model is available on MolMed’s website (www.molmed.com).

10.3

Transactions with related parties

MolMed has adopted the new procedure for transactions with related parties, unanimously approved by the The Board of Directors on 11 November 2010 upon unanimous favourabel opinion expressed by the ad hoc Committee formed by the three independent directors.

The procedure has been adopted by MolMed in order to implement the provisions of Consob (Resolution nr. 17221 of March 12, 2010, as amended by Resolution nr. 17389 of June 23, 2010), by which Consob issued the "Regulations containing provisions on transactions with related parties" pursuant to Article 2391-a of the civil code and Articles. 113-ter, 114, 115 and 154-ter of the consolidated text on finance (“TUF”, i.e. Legislative Decree nr. 58 of 24 February 1998, n. 58), and taking into account the findings and the guidelines set forth in Consob Communication nr. DEM/10078683 of 24 September 2010.

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The procedure for transactions with related parties currently in force is available (in Italian) on MolMed’s website (www.molmed.com).

For information on transactions with related parties, please the Notes to the statutory financial statements.

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11.

MAIN RISKS AND UNCERTAINTIES TO WHICH MOLMED IS EXPOSED

11.1

Risks associated with external factors

Risks associated with products in the clinical development stage

The Company has still not completed the development of its experimental products which are currently at the clinical testing stage, in particular TK and NGR-hTNF. In regard to the experimental products TK and NGR-hTNF, which have the largest revenue prospects, no guarantee can be provided that the Company will successfully complete Phase III of the clinical testing.

The experimental products which are being developed by the Company could still prove to be ineffective or cause side effects during clinical trials and might not receive the necessary approvals from the competent authorities or may not obtain such approvals in good time for marketing the products. In addition, it might happen that the non-randomised studies of Phase II, which were successfully completed, do not provide the same positive results in subsequent stages of development. Moreover, clinical trials may be suspended at any time by the Company or its partners, or by the competent authorities in the interest of the patients’ health. Even after approval by the competent authorities, a product might prove to be unsafe or not have the envisaged effects (for example, side effects might emerge after the product is launched or the product’s real effectiveness may be lower than that which emerged in the experimental stages), or, in any case, it might not be accepted by market operators (who might prefer rival products) or, generally, for other reasons which are beyond the Company’s control, thus preventing the product’s use on a wide scale or forcing its withdrawal from the market. The inability of the Company or its partners to achieve timely completion of the development programs and clinical trials for its products may materially and adversely affect MolMed’s business, and its income, equity and/or financial position.

Risks associated with strong competition

The biotechnology and pharmaceutical products markets are characterised by significant competition. This is especially true in the field of oncology. The Company may face competition from pharmaceutical corporations and companies that have much greater financial resources and are able to take advantage of economies of scale, making possible more effective and timely development of their products. Because of their greater financial resources, this kind of competitors may also be better able to in-license new products and technologies than the Company.

Moreover, the Company competes with companies of similar sise and operational features to sign out-licensing agreements or partnerships with other bio-pharmaceutical companies. In the future, these competitors might be able to develop safer, more effective or cheaper products than those developed by MolMed. In addition, these companies might be more effective at manufacturing and marketing their own products, due to the quality of their staff or that of their licensors and/or licensees.

The level of competition in the reference market and the presence of well-structured and bigger competitors might therefore in the future cause a loss of market shares, with a negative impact on the Company’s positioning as well as a fall in possible revenues and profits.

Such circumstances might limit the Company’s chances of competing on the market, with a possible impact on its income, equity and/or financial position.

Risks associated with sector regulation

The Company’s activities are subject to strict regulation by Italian and European laws, and the Company is also subject to similar regulation in any country in which it may wish to test or commercialise its products. The Ministry of Health in Italy, the European Medicines Agency (“EMEA”) throughout Europe and the Food and Drug Administration (“FDA”) in the United States, plus similar institutions in other countries, impose detailed restrictions on the production and commercialisation of therapeutic products, all of which, together with the complex, time-consuming authorisation

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