Directors’ Remuneration Report

Introduction

Remuneration Committee

None of the Committee has any conflicts of interest arising from cross‑Directorships or day‑to‑day involvement in running the business. The Committee makes recommendations to the board and no Director plays a part in any discussions about his own remuneration. A sub‑group of the Committee not comprising the Chairman assesses the Chairman’s remuneration.

Remuneration Policy

Executive remuneration packages are designed to attract, motivate and retain Directors and to reward them for enhancing value to shareholders. The performance measurement of the Executive Directors’ and key members of senior management and the determination of their annual remuneration package is undertaken by the Remuneration Committee. The Board determines the remuneration of the Non‑Executive Directors.

There are 4 main elements of the remuneration policy:

• basic salaries and benefits in kind;
• shares and share option schemes;
• bonus scheme; and
• pensions.

The Company’s policy is that a substantial proportion of the remuneration of the Executive Directors should be performance related. As described below, Executive Directors may earn annual incentive payments in the range between 20% and 80% of their basic salary, together with the benefits of participation in share option schemes. Executive Directors are entitled to accept appointments outside the Company, providing these are approved by the Committee, but cannot be involved with a competing business except with the written consent of the Board.

The Executive Directors’ external remunerated appointments are as follows: Dr MJ Flynn; Axcan Pharma (Ireland) Limited €13,970 to 28 February when he resigned, Mr JAP Randall; Kinneir Dufort Limited £18,000, Silence Therapeutics PLC £30,000.

The Executive Directors also have the following non remunerated appointments: Dr MJ Flynn; Maggiore Ventures Limited, and Octagen Limited; Mr JAP Randall; Kinneir Dufort Limited, Kinneir Dufort Design Limited, Maggiore Ventures Limited, Avantis UK Limited, Tracey Malone Originals Limited, and Lubatti Limited.

(i) Basic salaries and benefits in kind

The Remuneration Committee, prior to the beginning of each year when an individual may change position or responsibility, determines basic salaries. In deciding appropriate levels, the Committee considers the Group as a whole and takes into account the performance of the individual and the rates for similar positions in comparable companies. Basic salaries were last reviewed in August 2008.

Benefits in kind are not pensionable.Directors are paid a car allowance commensurate with their position within the Company and are members of the Groups health plan schemes covering certain medical, optical and dental procedures.

(ii) Share option schemesa.

Sinclair Pharma plc 2003 Enterprise Management Incentive Share Option Scheme

The Company operates an approved share option scheme, the Sinclair Pharma Plc 2003 Enterprise Management Incentive Share Option Scheme (2003 EMI Scheme), pursuant to a resolution of the Board passed on 18 November 2003.

The Committee may grant options under the 2003 EMI Scheme to any number of employees. In order to be qualifying, an employee must:

• not own 30% or more of the issued share capital of the Company; and
• be employed by the Group for at least 25 hours a week, or, if less, for at least 75% of his working time.

Non‑Executive Directors and/or consultants to the Group are not qualifying employees.

Performance Conditions

Pursuant to Rule 3.3 of the 2003 EMI Scheme, the exercisability of a Directors’ share option is dependent upon the satisfaction of a performance condition. Set out in the table below are the performance conditions that apply to the options granted under the Scheme on 4 October 2006.

Level of Performance vs. FTSE All Share Index

Percentage of options which become exercisable

Below 20% out-performance

0%

20% out-performance

20%

Between 21% and 49% out-performance

Pro-rata between 21% and 49% on a straight line basis

50% out-performance

50%

Between 51% and 124% out-performance

Pro-rata between 51% and 99% on a straight line basis

125% out-performance

100%

The Performance Share awards granted to Executive Directors and other senior managers in December 2008 are subject to performance conditions relating to the performance of Sinclair’s TSR measured against a comparator group of companies within the industry, and achievement of Group EBITDA targets. 50% of the awards will be judged against the TSR condition and 50% against the EBITDA target.

The TSR condition seeks to align the interests of the Executive Directors and senior managers with the interests of the shareholders by comparing Sinclair’s TSR performance with other companies within the industry. The awards will vest in full if Sinclair’s TSR, over the three year performance period, ranks the Company in the upper quartile of the comparator group. 30% of the awards will vest if the Company’s TSR is equal to the median TSR of the comparator group, and no awards will vest if Sinclair’s TSR is below the median TSR of the comparator group. Between median and upper quartile performance, the number of awards which will vest will be calculated on a straight line basis.

The EBITDA target will be measured on an average basis for the three years ending 30 June 2011. The awards will vest in full if the Group’s average EBITDA for the performance period exceeds £4.0m per annum. 30% of the awards will vest if the Group’s average EBITDA for the period is £2.5m per annum, and no awards will vest if the Group’s average EBITDA for the period is below the £2.5m per annum. For average EBITDA between £2.5m and £4.0m per annum, the number of awards which will vest will be calculated on a straight line basis.

The Committee determines at the date of the award, the acquisition price payable for each ordinary share when the award vests under the EIP.

c. Replacement, New and Consultant Warrants
Replacement Warrants
On 2 December 2003, the Company and holders of 4,350,000 warrants (‘Old Warrants’) agreed to the issue of Replacement Warrants (‘Replacement Warrants’) in exchange for the release of 4,350,000 Old Warrants.

The Replacement Warrants provide the holder with a right to acquire such number of ordinary shares as are equal in amount to “target value”. Target value was calculated using the following formula:

Number of Old Warrants (or Unapproved Options) held by warrant holder multiplied by the IPO placing price per ordinary share.

Replacement Warrants are denominated in units. On the exercise of each unit of value a corresponding value of ordinary shares in the Company may be acquired. The maximum number of ordinary shares which can be acquired under the terms of the Replacement Warrants shall not exceed the number of ordinary shares that may have been acquired under the terms of the Old Warrants. The acquisition price payable for ordinary shares shall be between £0.01 and £0.33 per unit and shall, in aggregate, be equal to the acquisition price payable for ordinary shares under the terms of the Old Warrants.

The Company and the holders of the warrants also entered into a joint election under section 4(4)(a) of the UK Social Security Contributions and Benefits Act 1992 to transfer legal responsibility for payment of the employers’ national insurance contributions to the holders of the Replacement Warrants.

Replacement Warrants are not granted under a HMRC approved share scheme. There are no performance conditions relating to Replacement Warrants.

No further grants of Replacement Warrants have been made since 2 December 2003.

New Warrants
In consideration for the transfer of the employers’ national insurance liability on the Replacement Warrants, a total of 784,875 New Warrants were granted on 2 December 2003 to the warrant holders (the “New Warrants”). The New Warrants were granted under the same terms and the same exercise price as the Replacement Warrants to which they relate.

The Replacement Warrants and New Warrants are exercisable in whole or in part at any time.

These warrants shall lapse on the earlier of:

1. the tenth anniversary of the date of grant; or
2. the bankruptcy of the warrant holder.

There are no performance conditions relating to New Warrants. No further grants of New Warrants have been made since 2 December 2003.

The Sinclair Pharma Plc Employee Share Trust (ESOT)
The ESOT has been established to provide a vehicle through which share incentives and other benefits may be provided to past, present or future employees of the Company. The ESOT may for example gift, sell or grant options or warrants over shares to employees of the Company.

On 3 December 2003, the trustees of the ESOT subscribed for 6,034,875 ordinary shares for the aggregate sum of £913,853. The trustees have agreed to use these ordinary shares to settle the Replacement Warrants and New Warrants over, in aggregate up to 6,034,875 ordinary shares held by Dr MJ Flynn, Mr JAP Randall, Mr ADS Prenn, and Mr RS Harris. The trustees have allocated the ordinary shares to individual sub-funds in proportion to the warrants in issue for each holder. Further, the trustees have appointed an interest in these ordinary shares to the holders of the warrants such that following the exercise of all Replacement and New Warrants by a warrant holder, the assets in their sub-funds shall vest in their names absolutely.

Awards granted through ESOT are not granted under a HMRC approved share scheme. The performance conditions relating to awards granted through ESOT are listed above in paragraph (ii) (a) Share Option Schemes.

The interests appointed in these sub-funds to individual Directors can be summarised as follows:

At 30 June 2009 the market value of the ordinary shares held within the Sinclair Pharma plc employee share trust (ESOT) on behalf of Directors was £1,216,000.

The interest in trust property shall lapse on the earlier of:

1. the tenth anniversary of the date of appointment;
2. the bankruptcy of the beneficiary.

The Committee has responsibility for supervising the schemes and the grant of options to Executive Directors under its terms.

d. Interest in Shares
In addition, on 3 December 2003, the trustees subscribed for 1,431,129 ordinary shares in the Company. The trustees appointed an interest in these ordinary shares to the following Directors at an exercise price of £1.15. 

 
At 30 June 2009 the market value of the interests in ordinary shares held within the Sinclair Pharma plc employee share trust (ESOT) was £333,000.

The relevant trust property will vest absolutely to the above beneficiaries after the earliest of the following events.

1. the day prior to the tenth anniversary of the date of appointment of the interest; and
2. as notified to the trustees at the discretion of the Committee, or on any take over, reconstruction, or passing of a resolution for the voluntary winding up of the Company.

The trustees may resolve that the interest in the trust property should vest absolutely to the beneficiary prior to the day prior to the tenth anniversary of the date of appointment.

The interest in trust property shall lapse on the earlier of:

1. the tenth anniversary of the date of appointment;
2. the bankruptcy of the beneficiary.

There are no performance conditions relating to interests in shares.

(iii) Bonus Scheme
The Committee establishes the objectives that must be met for each financial year if a cash bonus is to be paid. Account is taken of the relative success of the different parts of the business for which the Executive Directors are responsible and the extent to which the strategic objectives are being met. The Directors’ bonus is based upon profitability and share performance subject to targets being achieved.

(iv) Pensions
The Group operates a defined contribution scheme for the benefit of the executive Directors and the employees. Both Dr MJ Flynn and Mr JAP Randall are members of the Sinclair Pharma plc retirement plan, which is a money purchase scheme. The Group contributed 20% of their pensionable pay into the scheme during the year. Their dependants are eligible for a lump sum in the event of death in service. The assets of the pension scheme are held separately from those of the Group.

Performance Graph

The following graph shows the Company’s performance, measured by total shareholder return (TSR), compared with the performance of the FTSE Pharma and Biotech Index also measured by TSR. TSR is defined as share price growth and reinvested dividend. The FTSE Pharma & Biotech Index has been selected for this comparison because it was deemed to be the most appropriate.
 

The graph below shows the percentage change in total shareholder return (with dividends reinvested) from 1 July 2004 to 30 June 2009.

Data provided by Singers Capital Markets Ltd

Executive Directors’ Contracts

It is the Group’s policy that Executive Directors should have contracts with a rolling term of 12 months providing for a maximum of 12 months notice by either party. The current contracts for both Dr MJ Flynn and Mr JAP Randall were entered into on 18 November 2003.

In the event of early termination, the Directors’ contracts provide for compensation up to a maximum of basic salary, employer’s pension contributions and other benefits in kind for the notice period.

Non‑Executive Directors’ Contracts

All Non‑Executive Directors have specific terms of engagement. Their remuneration is determined by the Board based upon surveys of fees paid to Non‑Executive Directors of similar companies with similar responsibilities, undertaken by Halliwell. It is the Group’s policy that Non‑Executive Directors should have contracts with a fixed term of 12 months providing for a maximum of 3 months notice by either party.

A basic fee is set for normal duties. Non‑Executive Directors are appointed for an initial period of 12 months and subject to continuation of satisfactory performance and re‑election at the AGM, will be renewed for a further 12 months. Non‑Executive Directors are not eligible for pensions, incentives or any similar payments other than normal out of pocket expenses incurred on behalf of the business. Compensation for loss of office is not payable to Non‑Executive Directors.

Date of Contract

Initial Period

Notice Period
(both parties)

Mr G Cook

12 July 2004

12 months

3 months

Ms P Freer

25 January 2006

12 months

3 months

Mr J-C Tschudin

8 November 2007

12 months

3 months