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  • Location: ZUID-HOLLAND 
  • Founded: 1998-05-29
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    PHARMING ANNUAL REPORT 2014


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    PHARMING ANNUAL REPORT 2014 TABLE OF CONTENTS Highlights 2014 3 About Pharming Group N.V. 4 CEO’s statement 5 Management report 7 Statement of the Board of Management 15 Management of the Company 16 Corporate governance and risk management 21 Report of the Board of Supervisory Directors 26 Report of the Remuneration Committee 30 Corporate social responsibility 36 Information for shareholders and investors 41 Financial statements 42  Consolidated statement of income 43  Consolidated statement of comprehensive income 44  Consolidated balance sheet 45  Consolidated statement of changes in equity 46  Consolidated statement of cash flows 48  Notes to the consolidated financial statements 49  Company balance sheet 88  Company statement of income 89  Notes to the company financial statements 90  Independent auditor’s report 94  Other financial information 101 Glossary 102 Appendix: Publications on Ruconest 2014 106 1


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    Forward-looking statements This Annual Report 2014 may contain forward-looking statements including without limitation those regarding Pharming’s (the “Company”) financial projections, market expectations, developments, partnerships, plans, strategies and capital expenditures. The Company cautions that such forward-looking statements may involve certain risks and uncertainties, and actual results may differ. Risks and uncertainties include without limitation the effect of competitive, political and (macro) economic factors, legal claims, the Company’s ability to protect intellectual property, fluctuations in exchange and interest rates, changes in tax rates, changes in legislation and the Company’s ability to identify, develop and successfully commercialize new products, markets or technologies. As a result, the Company’s actual performance, position and financial results may differ materially from the plans, goals and expectations set forth in such forward-looking statements. The Company assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates, unless required by law or regulations. 2


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    HIGHLIGHTS 2014 HIGHLIGHTS 2014 OPERATIONAL  Following the FDA approval for the treatment of acute attacks of angioedema in patients with Hereditary Angioedema (HAE), Ruconest was launched by partner Salix Pharmaceuticals, Inc. (NASDAQ:SLXP) in the US in November 2014.  Receipt of a US$20.0 million milestone payment in November 2014 from Salix for first commercial sale of Ruconest in the US, following the FDA approval.  Initiated direct commercialisation activities for Ruconest in Austria, Germany and the Netherlands; hired a small team of HAE commercialisation and medical affairs experts.  Developed RucoVitae™, a full service programme for the treatment of acute attacks of HAE with Ruconest, for eligible HAE patients in Austria, Germany and the Netherlands, during the first quarter of 2015.  Acquired certain assets from Transgenic Rabbit Models SASU (TRM), for €0.5 million in cash, including product leads for the development of new Enzyme Replacement Therapies (ERT) for Pompe, Fabry’s and Gaucher’s disease and rhFactor VIII for the treatment of Haemophilia A.  Initiated a randomised double blind placebo controlled Phase II clinical trial to investigate Ruconest for the prophylaxis of HAE. The first patient was enrolled in early January 2015, patient enrollment for the study continues. FINANCIAL  Revenues increased to €21.2 million (2013: €6.8 million).  Mainly as a result of higher license fees, including the receipt of a US$20.0 million (€16.0 million) milestone from US partner Salix, while 2013 included a US$5.0 million (€3.8 million) milestone from Santarus (now Salix Pharmaceuticals, Inc.).  Product sales increased to €3.0 million (2013: €0.9 million) as a result of increased sales in the EU and initial sales orders in the US of €0.3 million.  Operating result improved to an operating profit of €2.9 million in 2014 from a loss of €6.9 million in 2013.  Net loss decreased from €15.1 million to €5.8 million in 2014.  The equity position increased to €29.8 million at year-end 2014 (2013: €5.0 million), mainly as a result of the receipt of the US$20.0 million milestone, a private equity placement of net €14.0 million and the exercise of warrants.  In preparation of further commercialisation of Ruconest, the inventories of Ruconest, including work in progress and skimmed milk, increased to €13.4 million at year-end 2014 (2013: €4.8 million).  The cash position, including restricted cash, improved to €34.4 million at year-end 2014 (2013: €19.2 million), mainly as a result of the receipt of the milestone payment from Salix, the private equity placement of net €14.0 million and the exercise of warrants of €4.6 million. 3


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    ABOUT PHARMING GROUP N.V. ABOUT PHARMING GROUP N.V. Pharming Group N.V. is developing innovative products for the treatment of unmet medical needs. Ruconest® (conestat alfa) is a recombinant human C1 esterase inhibitor approved for the treatment of angioedema attacks in patients with HAE in the US, Israel, all 28 EU countries plus Norway, Iceland and Liechtenstein. Ruconest is commercialised by Pharming in Austria, Germany and the Netherlands. Ruconest is distributed by Swedish Orphan Biovitrum AB (publ) (SS: SOBI) in the other EU countries and in Azerbaijan, Belarus, Georgia, Iceland, Kazakhstan, Liechtenstein, Norway, Russia, Serbia and Ukraine. Ruconest is partnered with Salix Pharmaceuticals, Inc. (NASDAQ: SLXP) in North America. Ruconest is also being investigated in a randomised Phase II clinical trial for prophylaxis of HAE and evaluated for various additional follow-on indications. Pharming has a unique GMP compliant, validated platform for the production of recombinant human proteins that has proven capable of producing industrial volumes of high quality recombinant human protein in a more economical way compared to current cell-based technologies. Leads for Enzyme Replacement Therapy (ERT) in Pompe, Fabry’s and Gaucher’s diseases are under early evaluation. The platform is partnered with Shanghai Institute of Pharmaceutical Industry (SIPI), a Sinopharm Company, for joint global development of new products. Pre-clinical development and manufacturing will take place at SIPI and are funded by SIPI. Pharming and SIPI initially plan to utilise this platform for the development of recombinant human Factor VIII for the treatment of Haemophilia A. Additional information is available on the Pharming website: www.pharming.com. STRATEGIC FOCUS  Generating value from its lead product Ruconest for treating acute HAE attacks by:  Commercialisation of Ruconest in the US, certain EU countries and Israel through commercialisation partners and distributors;  Direct commercialisation of Ruconest in Austria, Germany and the Netherlands;  Pursuing regulatory approvals for Ruconest in other markets;  Broadening the application of Ruconest to other indications, including prophylaxis of HAE, in order to expand the potential market for the product.  Development of new Enzyme Replacement Therapies products for certain rare genetic disorders from product leads obtained from Pharming’s in-house biologics technology platform.  Leveraging the inherent value of its biologics technology platform through development of certain new compounds under strategic collaboration with SIPI.  Pro-actively evaluating external opportunities to further enhance the development pipeline. COMMITMENT  Fostering an entrepreneurial culture through appropriate recognition and efficient management of opportunities and risks.  Communicating in a timely, transparent and consistent manner to all internal and external stakeholders.  Maintaining a high level of social and corporate responsibility. We operate to high ethical, environmental and animal welfare standards. 4


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    CEO’S STATEMENT CEO’S STATEMENT For Pharming, 2014 was a long-awaited year of important transitions: After starting the year with a significant positive correction in valuation, the Company was able to solidify its balance sheet by means of a private equity placement in April that yielded net proceeds of €14.0 million. In July, the FDA approved Ruconest for acute attacks of angioedema in patients with Hereditary Angioedema (HAE). The approval is a major milestone for Pharming. Until now, there has not been an FDA approved recombinant C1 esterase inhibitor option to treat symptoms of HAE. Sijmen de Vries For many years we have strived to make Ruconest available to the HAE patient community in the US, because we are aware of the great value and benefit this product adds to patients’ lives. The unpredictability of HAE can make patients feel uncertain about when their next attack might strike, which is why it is important to have a medicine that can be administered by the patient themselves. The US market for acute and prophylaxis HAE continued to expand during 2014 and is now estimated at almost US$1 billion. Ruconest was subsequently launched by US commercialisation partner Salix Pharmaceuticals, in November. In the same month the receipt of a US$20.0 million milestone payment was triggered from Salix for the first commercial sale of Ruconest in the US. In September, the Company acquired certain assets from TRM SASU for €0.5 million in cash, including product leads for the development of Enzyme Replacement Therapies (ERT) for Pompe, Fabry’s and Gaucher’s disease and Factor VIII for the treatment of Haemophilia A. To facilitate optimisation of these products and to broaden the pipeline beyond the Ruconest franchise, we have set up an in-house Paris-based research group for the creation of new product leads from our biologics technology platform and for the subsequent development of the product leads to approvable products. This will be done either through the strategic collaboration with SIPI for products of mutual interest to SIPI and Pharming, such as Factor VIII for Haemophilia A or through Pharming’s in-house new product development group (NPD), based in Boston. The NPD group was initiated early in 2015. Dr. Perry Calias, our newly appointed Chief Scientific Officer (CSO), will have overall responsibility for the development of these ERT programmes and will be based in Boston. In October, we announced the initiation of direct commercialisation of Ruconest in Austria, Germany and the Netherlands. We have hired a small European team of experienced HAE commercialisation and medical affairs specialists to lead the direct commercialisation activities in these countries. This step forward into direct commercialisation of Ruconest became possible as result of our improved balance sheet and opens up new opportunities for Pharming to not only grow revenues, but also, as those revenues build, to put in place the right size of specialist commercial infrastructure which could, over time, be leveraged through the marketing of other products. Another potential driver of such transition is the ongoing Phase II study for Ruconest in the additional indication of prophylaxis of HAE. This study is the first step of a 50/50 shared cost development programme with our US partner Salix. The study was started in September and is being conducted at sites in Europe and the United States. 5


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    CEO’S STATEMENT The first patient was enrolled in early January 2015, patient enrollment for the study continues. Pharming and Salix will equally share the development costs for Ruconest for HAE prophylaxis and Pharming will receive an undisclosed milestone payment from Salix at FDA approval for this additional indication. All of this means that we have now established a platform from which we can confidently build a financially sustainable enterprise with a pipeline beyond the Ruconest franchise. To effectuate the transition into a financially sustainable enterprise we depend on revenues from Ruconest sales from:  Salix launched Ruconest in November 2014 in the US. Ruconest is made available to eligible HAE patients in the US under a full service patient support programme; Ruconest Solutions.  Swedish Orphan Biovitrum AB (Sobi) continues to be the distributor for the EU countries and former CIS countries.  Pharming’s direct commercialisation activities in Austria, Germany and the Netherlands. Early 2015, Pharming developed RucoVitae™; a full service support programme for the treatment of acute attacks of HAE with Ruconest for eligible HAE patients in Austria, Germany and the Netherlands.  MegaPharm Ltd. launched Ruconest during the 2nd half of 2014 in Israel. As a result of our achievements in 2014 and the ongoing development projects, we look forward with confidence to an exciting 2015, with potentially significant value-inflexion points and again increasing Ruconest sales, both from our partners and as a result of our own commercialisation activities. I would like to thank all of our employees, investors and partners for their ongoing commitment and support during 2014 and for keeping faith in Pharming’s potential to be unlocked. I look forward to the continued delivery on our challenging objectives during what promises to be yet another very busy year in the continuing transition of Pharming. Leiden, 18 March 2015 Sijmen de Vries Chief Executive Officer and Chairman of the Board of Management 6


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    MANAGEMENT REPORT MANAGEMENT REPORT OPERATING REVIEW 2014 Highlights:  Following the FDA approval for the treatment of acute attacks of angioedema in patients with Hereditary Angioedema (HAE), Ruconest was launched in the US in November 2014.  Receipt of a US$20.0 million milestone payment in November 2014 from US partner Salix Pharmaceuticals for first commercial sale of Ruconest in the US.  As a result of the continued roll-out of Ruconest across Europe and the initial sales in the US, revenue from product sales increased from €0.9 million in 2013 to €3.0 million in 2014.  Announced the initiation of direct commercialisation activities in Austria, Germany and the Netherlands; a small team of HAE commercialisation and medical affairs experts was hired.  Developed RucoVitae™, a full service programme for the treatment of acute attacks of HAE with Ruconest for eligible HAE patients in Austria, Germany and the Netherlands, during the first quarter of 2015.  Acquired certain assets from TRM SASU, for €0.5 million in cash, including product leads for the development of new Enzyme Replacement Therapies (ERT) for Pompe, Fabry’s and Gaucher’s disease and rhFactor VIII for the treatment of Haemophilia A.  Initiated a randomised double blind placebo controlled Phase II clinical trial to investigate Ruconest for the prophylaxis of HAE. The first patient was enrolled early January 2015, patient enrollment for the study continues. During the year, the following important multi-year project was completed: FDA approval Ruconest After a fifteen month review cycle, on 16 July 2014 the FDA approved the BLA for Ruconest for the treatment of acute attacks of HAE. Salix Pharmaceuticals (NASDAQ: SLXP) launched Ruconest in November. Ruconest is offered to eligible HAE patients under Ruconest Solutions, a full service patient care programme. Regional Market and Product overview US The transition as result of the acquisition of Santarus by Salix in January 2014 was executed smoothly. Salix took over the task of regulatory agent to the FDA from Santarus. Salix engaged in regulatory discussions regarding the development path of Ruconest in prophylaxis in HAE and the Santarus plan for development of Ruconest for acute pancreatitis. The US market for acute and prophylaxis HAE continued to expand during 2014 and is now estimated at almost US$1 billion, mainly driven by the growth of Shire’s Firazyr® in the treatment of acute attacks and an increased estimate of Berinert® sales. We estimate the acute segment at almost US$500+ million (based on Shire’s, and Dyax’s SEC filings and estimates of US Berinert sales). 7


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    MANAGEMENT REPORT As consideration for the licenses and rights granted under the license agreement and as compensation for the commercial supply of Ruconest, Salix will pay Pharming a tiered supply price based on a percentage of net sales of Ruconest, which starts at 30% of net sales, increasing to a maximum of 40% depending on the amount of annual net sales. The consideration is subject to reduction in certain events. Both parties also agreed to extend the partnership by exploring certain additional indications, such as prophylaxis therapy for HAE and acute pancreatitis. During 2014, under the terms and conditions of the license agreement Pharming and Salix agreed to 50/50 fund the development costs of the prophylaxis indication for HAE. Pharming is entitled to use the data of the programme for regulatory submission elsewhere and will receive an undisclosed milestone payment from Salix upon receipt of FDA approval. Furthermore, Salix will be required to pay one-time performance milestones if they achieve certain aggregate net sales levels of Ruconest. EU The commercialisation of Ruconest by Sobi in the EU continues to progress. Revenues from sales to Sobi increased during 2014. In October Sobi and Pharming agreed to extend the Sobi territories by adding a number of countries representing the former CIS, and Sobi returned commercialisation rights for Austria, Germany and the Netherlands to Pharming. At the beginning of 2015, Pharming started to provide Ruconest under the RucoVitae™ patient care programme, a full service care programme for eligible HAE patients into these markets. China The strategic collaboration with Shanghai Institute of Pharmaceutical Industry (SIPI), effectuated in 2013, represented an important step forward towards building a pipeline of new products using our technology platform. Under the collaboration our entire technology platform, quality assurance and quality control (QA/QC) processes, and production system are being transferred to the SIPI Shanghai facilities. Pharming and SIPI intend to develop new compounds from this facility. SIPI will fund the pre-clinical and manufacturing development; Pharming will obtain IND clearance from the EMA and the US authorities, which will enable SIPI to obtain a clinical trial permit for China. SIPI will have commercialisation rights for China and its territories. Pharming will have commercialisation rights ex-China. SIPI will supply Pharming at a “cost–plus” basis. Both parties will pay each other (reciprocal) royalties of 4% on net sales in their respective territories. The first new compound to be jointly developed is recombinant human Factor VIII for the treatment of Haemophilia A. Haemophilia A is an X chromosome linked hereditary disorder caused by defects in the Factor VIII gene that leads to lower levels of the functional Factor VIII protein. Lack of functional Factor VIII diminishes the body’s clotting ability, which in turn can lead to damaging or fatal bleeding episodes. The global Factor VIII market is worth over US$4 billion with 90% of sales in the developed markets and very high unmet medical needs in the developing markets, such as China. In addition, only approximately 50% of the world-wide estimated Haemophilia A market can currently be supplied with appropriate Factor VIII therapy. Hence, there is still a high unmet medical need in this field and the Factor VIII market is estimated to grow to US$6.5 billion in 2020. SIPI also obtained development and commercialisation rights for China and its territories for Ruconest. The manufacturing process for Ruconest is also being duplicated at SIPI, under all of the Pharming QA/QC and manufacturing standards, such that SIPI could manufacture rhC1 inhibitor for China and its territories, but could also supply Pharming in the future. Other Markets Ruconest was launched in Israel in 2014 by our partner MegaPharm. The Turkish Ministry of Health materially completed all of their review activities and our Turkish partner, EIP Eczacibaşi Ilac Pazarlama A.S., is now expecting regulatory approval of our product in the course of 2015. 8


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    MANAGEMENT REPORT Although Pharming remains fully confident in the ability of all of our partners to successfully commercialise Ruconest across global territories, it should be noted that Pharming depends on its commercial partners to market its product in the various territories. Pharming is therefore also indirectly exposed to the risks of its chosen partners. We continue to believe that Ruconest is a valuable addition to the therapeutic options available to HAE patients and we continue to support our commercialisation partners in their endeavours. Development of Ruconest Ruconest for Heredity Angioedema (HAE) Ruconest has been developed for the treatment of acute attacks of HAE. HAE is a rare genetic deficiency of C1 inhibitor activity resulting in recurrent attacks of local swelling (edema), which may present as abdominal pains, airway obstruction or swelling of the skin. These attacks are painful and disabling and attacks obstructing the airway can be fatal. Estimates of HAE prevalence vary between 1 in 10,000 and 1 in 50,000. Acute angioedema attacks often begin in childhood or adolescence, but due to the rarity of HAE, the disease is often not correctly diagnosed for many years. The frequency of HAE attacks varies between patients, from extreme cases with several attacks per week, to less severe cases with less than one attack per year, with an estimated average of eight treated attacks per year whilst using steroid prophylaxis. Abdominal attacks cause abdominal pain and vomiting, potentially leading to unnecessary surgery in undiagnosed patients, and swelling of the skin leads to disfigurement, disability and pain. Untreated, attacks can last between 48 and 120 hours. Additional information about the disease is available on the international patient association’s website, www.haei.org. 9


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    MANAGEMENT REPORT Administration of C1 inhibitor protein can stop these angioedema attacks. Ruconest is a recombinant version of the human protein C1 inhibitor (rhC1INH). It is produced through Pharming’s proprietary technology in milk of transgenic rabbits. Ruconest offers higher purity and batch consistency compared to plasma derived C1 inhibitors and no risk of human virus transmission. The 50 U/kg dose studied and approved in the EU, US and Israel and under review with the Turkish Ministry of Health, restores C1INH function to physiological levels and is a highly effective treatment of acute HAE attacks. Additional indications for Ruconest HAE in children Pharming is conducting an open-label Phase II clinical study evaluating Ruconest for the treatment of acute attacks of angioedema in paediatric patients with HAE. The Ruconest paediatric study has been agreed with the European Medicine Agency’s (EMA) Paediatric Committee and is expected to enrol approximately 20 patients, from 2 up to and including 13 years of age. This study, if successful, could broaden the label for Ruconest in Europe and also has the additional benefit of extending the regulatory exclusivity period, both of which are commercially important. Ruconest has regulatory exclusivity in Europe until late 2025 and paediatric exclusivity will add another six months, extending the exclusivity period to 2026. In 2013 we received feedback from the EMA on the clinical data in treating adolescent HAE patients (ages 14-17 years) with Ruconest. The EMA agreed with our proposal that based on the data in 16 adolescents treated for 50 HAE attacks, no further clinical studies are required in this population. Pharming is reviewing regulatory options to expand the Ruconest EU label to include adolescents on the basis of this data. 10


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    MANAGEMENT REPORT Prophylaxis in HAE Ruconest has been developed as treatment for acute HAE. In acute therapy, each individual attack is treated. In prophylaxis therapy, the patient receives the drug on a regular basis with the intention of preventing or reducing the frequency of attacks. In the US, the market size of prophylactic therapy segment in HAE is significant. Cinryze® (previously marketed by Viropharma Inc, now by Shire plc), which in the US is only approved for the prophylactic indication, had US sales in 2014 of almost US$500 million. Following the results of our encouraging open label exploratory study (OPERA) with Ruconest in HAE prophylaxis in 2013, we engaged in discussions with FDA to obtain regulatory guidance towards obtaining a label for the prophylaxis of HAE. These discussions were initiated with our US commercial partner Santarus (acquired by Salix), and we initiated a double blind randomised placebo controlled Phase II trial in the second half of 2014. Ischaemia-Reperfusion Injury Ischaemia-Reperfusion Injury (IRI) is a complication arising from lack of oxygen due to an interruption of the blood supply (ischaemia) and subsequent resolution (reperfusion) resulting in tissue damage. This can occur in a transplanted organ, in the brain as a result of stroke and in the heart in the case of myocardial infarction ('heart attack'). It has been shown in various pre-clinical models that Ruconest can limit the extent of the IRI. Dr. Thierry Hauet and colleagues from the University of Poitiers showed that Ruconest was effective in reducing IRI in a pig model when given to recipient animals prior to kidney transplantation. In addition to the short-term effects, it was demonstrated that treatment with Ruconest results in long-term beneficial effects on kidney function and morphology. These data support the assumption that prevention of IRI improves donor kidney function and graft survival. In addition to the work in transplantation, Pharming is continuing its collaboration with the US Army Institute of Surgical Research (US Army) to evaluate the potential for Ruconest to reduce IRI in haemorrhagic shock, a serious complication of civilian and military traumatic injuries. Further results are expected this year and we are exploring options, together with the US Army, on how to move the development of Ruconest forward in this important indication. Together, the data provide strong support to evaluate Ruconest in clinical conditions with IRI, such as transplantation and acute myocardial infarction. Acute Pancreatitis Acute Pancreatitis (AP) is an acute inflammatory disorder of the pancreas for which there are currently no approved medical therapies. With approximately 300,000 hospitalisations per year in the US (an increase of more than 2-fold since 1988), AP represents the single most frequent gastrointestinal cause of hospital admissions. AP begins as a local process in the pancreas and eventually results in systemic activation of the contact and complement inflammatory cascades, leading to organ failure and death in severely affected patients. Based on the broad anti-inflammatory properties of C1 esterase inhibitor (C1INH), plasma-derived C1INH (pdC1INH) and recombinant C1INH (rhC1INH) have been studied in a variety of clinical conditions and animal models of numerous conditions involving contact and complement system activation with a vascular/capillary leak component. These studies have included models of pancreatitis, sepsis, and thermal injury. On the whole, these studies suggest that rhC1INH may be able to interrupt the pro-inflammatory processes in patients with AP, and thereby resolve the ongoing systemic inflammatory response syndrome to ultimately prevent the complications related to AP. Santarus began exploring clinical and regulatory strategies to evaluate Ruconest for the treatment of AP. This included discussions with FDA on a pre-IND briefing package for a Phase II clinical study. Salix is now further evaluating the opportunity in AP and will carry on the next steps in development work for this indication. 11


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    MANAGEMENT REPORT Pipeline development With the acquisition of certain assets of TRM, a private French company in liquidation, for € 0.5 million in cash, access was gained to four potential new product leads (founder rabbits); recombinant human alpha-glucosidase for the treatment of Pompe disease, rh-alpha-galactosidase for the treatment of Fabry’s disease, rh-beta- glucocerebrosidase for the treatment of Gaucher’s disease and rhFactor VIII for the treatment of Haemophilia A. In addition, Pharming gained access to transgenic rabbit founder technology and know-how developed by TRM. A small (French) research group was formed to facilitate further optimisation of these product leads, the further enhancement of the rabbit founder technology & know-how and for the generation of additional potential future products. As next step, a Chief Scientific Officer; Dr. Perry Calias, was hired. Dr. Calias is highly skilled in development of Enzyme Replacement Therapies (ERT) and in order to take advantage of the available ERT development networks and expertise, Pharming also plans to open a small R&D office in Boston, Massachusetts. This group initiated the prioritisation of the assets acquired from TRM, taking into account developability, unmet medical need and commercial potential of the acquired assets. Dr. Calias will be based in Boston and will split his time between Boston, Paris and Leiden. FINANCIAL REVIEW 2014 The financial objectives for 2014 were focussed on:  accessing capital to ensure that the Company had sufficient resources to fund the operations while the BLA process with the US FDA was ongoing and to provide working capital to build up a stock of finished goods to prepare for further commercialisation;  identification and acquisition of new development projects to leverage the technology platform and create a development pipeline. Gross profit Gross profit increased from €5.7 million in 2013 to €17.8 million in 2014, mainly as a result of a milestone payment from Salix and increased product sales in the EU. Revenues increased to €21.2 million, from €6.8 million in 2013. The increase is mainly a result of the receipt of a US$20.0 million (€16.0 million) milestone payment from US partner Salix in 2014, following the launch of Ruconest in the US, while the Company received a US$5.0 million (€3.8 million) milestone payment in 2013. Revenues from product sales increased to €3.0 million (2013: €0.9 million) due to higher sales in the EU and first sales (€0.3 million) in the US. Other license fee income increased to €2.2 million from €2.1 million in 2013. This license fee income reflects the release of accrued deferred license fees following receipt of in total €21.0 million upfront and milestone payments in 2010 and 2013 from Sobi, Salix and SIPI. Cost of product sales in 2014 amounted to €2.9 million (2013: €0.5 million). In 2014 the Company incurred €0.6 million (2013: €0.6 million) of impairment of inventories related to cost of goods exceeding the anticipated sales price for the product. 12


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    MANAGEMENT REPORT Operating costs Operating costs increased to €15.0 million from €12.8 million in 2013. The increase is a result of the combined effect of the start of a Phase II clinical study of Ruconest as prophylaxis for HAE, the expenses related to the (non-cash) accrual for share-based compensation as well as the expansion of the workforce, mainly in research and development. Research and Development costs increased to €11.7 million from €10.2 million in 2013 and General and Administrative costs increased to €3.3 million in 2014 from €2.5 million in 2013. Operating result Mainly as a result of the receipt of a US$20.0 million milestone in November, the operating result improved from a loss of €6.9 million in 2013 to an operating profit of €2.9 million in 2014. Financial income and expenses The 2014 net loss on financial income and expenses was €8.6 million, compared to a €8.1 million net loss on financial income and expenses in 2013. The 2014 financial expenses included losses due to the increase of the fair value of outstanding and exercised warrants of €9.1 million. The 2013 financial income and expenses included settlement losses of the convertible bonds in the amount of €4.6 million and effective interest of the convertible bond of €3.2 million. Net result As a result of the above items, the net loss decreased by €9.3 million to €5.8 million in 2014 (2013: €15.1 million). The net loss per share for 2014 decreased to €0.015 (2013: €0.071). Inventories In preparation of further commercialisation of Ruconest, the inventories of Ruconest, including work in progress and skimmed milk, increased from €4.8 million at year-end 2013 to €13.4 million at year-end 2014. Cash flows Total cash and cash equivalents (including restricted cash) increased by €15.2 million from €19.2 million at year-end 2013 to €34.4 million at the end of 2014. The increase follows from net cash outflows from operations of €2.6 million and investing activities of €0.7 million with net cash inflows from financing activities amounting to €18.0 million and exchange rate effects amounting to €0.5 million. Net cash flows from financing activities mainly follow from the April 2014 equity issue of net €14.0 million and the exercise of warrants of €4.6 million. Equity Since the private placement in October 2013, the Company’s equity position is positive and amounted to €29.8 million at year-end 2014 (2013: €5.0 million). In addition, it should be noted that the Company has an amount of deferred license fee income (year-end 2014: €12.2 million) regarding non-refundable license fees received in 2010 and 2013 which fees will be recognised in the statement of income over the term of the license agreements involved. Performance of Pharming shares During 2014 our stock enjoyed a sharp increase in valuation, which enabled a non-discounted placement with a net yield of €14.0 million in April, which provided a significant strengthening of the balance sheet and allowed for planning the development of our pipeline which was initiated with the acquisition of certain assets of TRM. 13


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    MANAGEMENT REPORT OUTLOOK Following the Ruconest launch in the US, the Company continues to invest in purification of sufficient quantities of Ruconest, out of the existing bulk inventory buffers (frozen milk). The Company also expects to make investments in the continuing Phase II clinical trial for prophylaxis of HAE, which is a 50/50 cost sharing project with US partner Salix. In addition the (early) development of new pipeline projects driven by the French Research Group and the Boston- based NPD group, will require new investments. Direct commercialisation in Austria, Germany and the Netherlands will require investments. The Company continues to support its partners to market its products in the various territories in order to grow sales as it believes that Ruconest is a valuable addition to the therapeutic options available to HAE patients. GOING CONCERN Pharming’s 2014 financial statements have been drawn up on the basis of a going concern assumption. The 2014 year-end cash balance of €34.4 million is expected to fund the Company for at least one year from the date of the report. The receipts from commercial supply of product to our partners in the EU, Israel and the US and proceeds from direct sales in Austria, Germany and the Netherlands will further increase our financial reserves. Pharming has a history of operating losses and anticipates that it will continue to incur losses until such quantities of Ruconest are sold, that the proceeds to Pharming from such sales have become sufficient to off-set our losses. Presently, no assurance can be given both on the timing and size of future profits and if profitability can ever be achieved on this basis. In addition, to the extent the Company needs to raise capital by issuing additional shares, shareholders’ equity interests will be diluted. SUMMARY OF GOALS FOR 2015  Achievement of (internal) market share/sales targets for Ruconest, in the US by Salix Pharmaceuticals.  Achievement of (internal) market share/sales targets for Ruconest in Europe and other territories by our partners Sobi and MegaPharm and by direct commercialisation in Austria, Germany and the Netherlands.  Completion of the Phase II randomised clinical trial of Ruconest for the prophylaxis of HAE.  Prioritisation of new development projects and execution of the new products’ early development plans.  Develop the Company’s visibility amongst investors and other market participants (both buy- and sell-side analysts and financial press and trade press journalists). No guidance on total revenues from sales is provided for the financial results in 2015. 14


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    STATEMENT OF THE BOARD OF MANAGEMENT STATEMENT OF THE BOARD OF MANAGEMENT On the basis of the above and in accordance with best practice II.1.5 of the Dutch corporate governance code effective as of 1 January 2009, and Article 5:25c of the Financial Markets Supervision Act, the Board of Management confirms that internal controls over financial reporting provide a reasonable level of assurance that the financial reporting does not contain any material inaccuracies and confirms that these controls functioned properly in the year under review. It should be noted that the above does not imply that these systems and procedures provide absolute assurance as to the realisation of operational and strategic business objectives, or that they can prevent all misstatements, inaccuracies, errors, fraud and non-compliances with legislation, rules and regulations. The Board of Management declares that to the best of its knowledge and in accordance with applicable reporting principles, the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the group, and the Management Report incorporated in this Annual Report includes a fair review of the development and performance of the business and the position of the group, together with a description of the principal opportunities and certain risks associated with the expected development of the group. For a detailed description of the risk factors, we refer to the ‘Corporate governance and risk management’ chapter in this report. Leiden, 18 March 2015 The Board of Management The original copy has been signed by the Board of Management 15


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    MANAGEMENT OF THE COMPANY MANAGEMENT OF THE COMPANY MANAGEMENT STRUCTURE Pharming has a two-tier board structure, consisting of a Board of Management (in Dutch: Raad van Bestuur) and a Board of Supervisory Directors (in Dutch: Raad van Commissarissen). MANAGEMENT POWERS AND FUNCTION The Board of Management is entrusted with the management of the Company and is responsible for the policy and the central management of the Company under the supervision of the Board of Supervisory Directors. The Board of Management is authorised to commit the Company in contractual obligations to third parties. The Board of Management has adopted the Board of Management Regulations, which provide for certain duties, composition, procedures and decision-making of the Board of Management. The Board of Supervisory Directors is charged with supervising the policy of the Board of Management and the general course of the Company's affairs and the enterprise connected therewith. The Board of Supervisory Directors assists the Board of Management by rendering advice. In performing their duties, the members of the Board of Management are obliged to act in the best interests of the Company and the enterprise connected therewith. The Board of Supervisory Directors has adopted the Board of Supervisory Directors Regulations, which provide for certain duties, composition, procedures and decision-making of the Board of Supervisory Directors. The members of the Board of Management and the members of the Board of Supervisory Directors are appointed at a General Meeting of Shareholders from nominations made by the Board of Supervisory Directors. If the nomination comprises two or more persons for each vacancy, the nomination shall be binding. In addition, the Board of Supervisory Directors is authorised to make a non-binding nomination for a vacancy, consisting of one person. If the Board of Supervisory Directors fails to submit the nominations in time, the General Meeting of Shareholders has the authority to appoint any person it chooses. Notwithstanding the foregoing, the General Meeting of Shareholders may at all times, by a resolution adopted by a majority of the votes cast representing more than one third of the Company's issued share capital, deprive the nominations of their binding effect. The General Meeting of Shareholders may adopt or reject a non-binding nomination by a resolution adopted with a majority of the votes cast. The members of the Board of Management and the members of the Board of Supervisory Directors may at any time be suspended or dismissed by a resolution adopted by a majority of the votes cast representing more than one third of the Company's issued share capital. The members of the Board of Management may also be suspended by a resolution of the Board of Supervisory Directors. If in the aforementioned cases, the quorum of one third of the Company's issued share capital is not met, a new meeting will be convened in which a nomination can be rejected or a dismissal or suspension can be resolved by a majority of the votes cast. 16


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    MANAGEMENT OF THE COMPANY COMPOSITION BOARD OF MANAGEMENT During 2014, the Board of Management was composed of the following members: Name Position Member since Term Mr. Sijmen de Vries Chief Executive Officer 13 October 2008 Up to AGM in 2017 Mr. Bruno Giannetti Chief Operations Officer 1 December 2006 Up to AGM in 2015 Sijmen de Vries, MD MBA (1959) Title Chief Executive Officer Nationality: Dutch Date of initial appointment: 13 October 2008 Other current board positions: Mr. De Vries holds non-executive directorships in Midatech Pharma plc and Sylus Pharma Ltd. During 2014, Mr. De Vries was responsible for the overall management of the Company including financial accounting, investor relations and IT. Mr. De Vries has extensive senior level experience in both the pharmaceutical and biotechnology industry. He joined Pharming from Switzerland-based 4-Antibody where he was CEO. Mr. De Vries has also been CEO of Morphochem AG and prior to this he worked at Novartis Pharma and Novartis Ophthalmics and at SmithKline Beecham Pharmaceuticals plc where he held senior business and commercial positions. Mr. De Vries holds an MD degree from the University of Amsterdam and a MBA in General Management from Ashridge Management College (UK). Bruno M.L. Giannetti, MD PhD (1952) Title: Chief Operations Officer Nationality: Italian Date of initial appointment: 1 December 2006 Other current board positions: Mr. Giannetti holds no other board positions. During 2014, Mr. Giannetti was responsible for the Company’s operations including research and development and manufacturing activities as well as medical governance and non-clinical and clinical development, regulatory affairs, drug safety, and medical information teams. He has more than 25 years of experience in the pharmaceutical and biotech industry. Previously, he was the President and founder of CRM Clinical Trials GmbH (now Topcro GmbH), CEO of AM-Pharma B.V. and President and CEO of Verigen AG. He has served as senior management consultant for pharmaceutical R&D projects at Coopers & Lybrand (in Switzerland and the UK). Mr. Giannetti was also worldwide Vice-President Marketing and Medical Information at Immuno, Austria and Head of Clinical Research at Madaus AG. Mr. Giannetti holds a PhD in Chemistry and a MD PhD degree in Medicine from the University of Bonn and has been appointed visiting Professor at the Pharmaceutical Faculty of the University of Seville (Spain). 17


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    MANAGEMENT OF THE COMPANY COMPOSITION BOARD OF SUPERVISORY DIRECTORS During 2014, the Board of Supervisory Directors was composed of the following Members: Name Position Member since Term Mr. Jaap Blaak Chairman 23 May 2007 Up to AGM in 2015 Mr. Juergen Ernst Vice Chairman 15 April 2009 Up to AGM in 2017 Mr. Barrie Ward Member 23 May 2007 Up to AGM in 2015 Mr. Aad de Winter Member 15 April 2009 Up to AGM in 2017 Jaap Blaak, MSc (1941) Chairman, member of the Remuneration Committee Nationality: Dutch Date of initial appointment: 23 May 2007 Other current board positions: Mr. Blaak is co-founder & shareholder of VenGen Holding B.V. and the founder & shareholder of TailWind B.V. Mr. Blaak has held managerial positions with Hoogovens and Indivers N.V. and Interturbine Holding B.V. in the Netherlands, US, Germany and Singapore. In 1983, he was involved with the foundation of the MIP Equity Fund, one of the largest venture capital groups in Europe, and was appointed CEO in 1986. MIP made several investments in Life Sciences companies and was the driving force behind the BioScience Park in Leiden. MIP merged with the ABN AMRO Venture Capital Group to form AlpInvest in 1990. Mr. Blaak has been an advisor to the Dutch Ministry of Economic Affairs for the Biopartner and Technopartner Program and other innovative projects related to Entrepreneurship and Innovation. Amongst others, Mr. Blaak has held non-executive directorships in FlexGen Holding B.V., to-BBB Holding B.V. and Centocor B.V. Mr. Blaak holds an MSc in Physics and Business Economics from the Free University of Amsterdam and followed the Advanced Management Program of the Harvard Business School (AMP ‘81). Juergen H.L. Ernst, MBA (1939) Vice Chairman, member of the Audit, Corporate Governance and Remuneration Committees Nationality: German Date of initial appointment: 15 April 2009 Other current board positions: Mr. Ernst is lead director of the supervisory board of Aeterna Zentaris Inc. Mr. Ernst has extensive senior level experience in the field of pharmaceutical development and marketing. From 1969 until 1989 he held several positions at Kali-Chemie AG (subsidiary of Solvay SA), including Head of Pharmaceutical Marketing and Head of Pharmaceutical Division. In 1989, Mr. Ernst continued his career at Solvay and held several positions until he retired in 2004. Amongst others, Mr. Ernst was chairman of the supervisory board of Aeterna Zentaris Inc., member of the board of Pharmaceutical Division, CEO of Health Divisions, General Manager Pharmaceutical Sector and supervisory director and member of the Executive Committee. Mr. Ernst holds an ISMP Degree from Harvard University and an MBA from the University of Cologne. 18


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    MANAGEMENT OF THE COMPANY J. Barrie Ward, PhD (1938) Member, Chairman of the Corporate Governance and Remuneration Committees and member of the Audit Committee Nationality: British Date of initial appointment: 23 May 2007 Other current board positions: Mr. Ward is a board member of BergenBio AS and ADC Therapeutics SARL. Mr. Ward has a broad international network and experience in managing and financing biopharmaceutical companies. He has held senior management positions in the UK, US and Singapore at several pharmaceutical and biotechnology companies, including Glaxo Group Research Ltd, Virus Research Institute Inc., Avant Immunotherapeutics Inc and KuDOS Pharmaceuticals Ltd. and board positions at Cancer Research Technology Ltd. and Spirogen SARL and CellCenteric Ltd. His most recent senior management position was CEO of KuDOS Pharmaceuticals Ltd, which was sold to Astra-Zeneca in 2006. Mr. Ward holds a PhD in microbiology from the University of Bath, UK. Aad de Winter, LLM (1953) Member, Chairman of the Audit Committee and member of the Corporate Governance Committee Nationality: Dutch Date of initial appointment: 15 April 2009 Other current board positions: Mr. De Winter holds no other board positions. Mr. De Winter has extensive financial experience. He started his career at AMRO Bank in 1980. He worked in the areas of capital markets, investment banking and institutional investor relationship management. In 1990, Mr. De Winter became senior Advisor Corporate and Institutional Finance at NIBC (formerly 'De Nationale Investerings Bank'). As of 1998, Mr. De Winter was at NYSE Euronext (now Euronext), Amsterdam responsible for advising and admitting companies to the stock exchange in Amsterdam as Director Listing & Issuer Relations. As of January 2009, Mr. De Winter is an Associate Partner of First Dutch Capital, Amsterdam and from 2008 to end of 2013, he was a member of the China and India working group at the Holland Financial Centre which was, inter alia, focused on attracting Chinese and Indian companies to a (cross) listing on the Euronext Amsterdam. He is also an Associate Partner at Nederlandsche Participatie Exchange (NPEX), an innovative online trading platform for securities of SME companies. Mr. De Winter has more than three decades of experience in assisting companies with stock exchange listings for various capital markets instruments. He holds a law degree from Erasmus University, Rotterdam, specialising in corporate law. BOARD OF SUPERVISORY DIRECTORS COMMITTEES The Board of Supervisory Directors has appointed from among its members an Audit Committee, a Remuneration Committee and a Corporate Governance Committee. The Audit Committee consists of Mr. De Winter (Chairman), Mr. Ernst, and Mr. Ward. The tasks performed by the Audit Committee include reviewing the scope of internal controls and reviewing the implementation by the Board of Management recommendations made by the independent auditors of Pharming. The Remuneration Committee consists of Mr. Ward (Chairman), Mr. Ernst and Mr. Blaak. The Remuneration Committee advises the Board of Supervisory Directors with regard to salaries, grants and awards under incentive plans, benefits and overall compensation for the individual members of the Board of Management. 19


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    MANAGEMENT OF THE COMPANY The Board of Supervisory Directors decides upon remuneration of the Board of Management. The remuneration of each of the members of the Board of Supervisory Directors is determined by the General Meeting of Shareholders. The Corporate Governance Committee consists of Mr. Ward (Chairman), Mr. Ernst and Mr. De Winter. The Corporate Governance Committee is responsible for monitoring compliance with the Dutch Corporate Governance Code. 20


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    CORPORATE GOVERNANCE AND RISK MANAGEMENT CORPORATE GOVERNANCE AND RISK MANAGEMENT CORPORATE GOVERNANCE The Board wishes to draw attention to Pharming’s compliance with the majority of the provisions in the prevailing Corporate Governance Code. Details of Pharming’s position regarding our formal Corporate Governance Statement as required by Dutch Law can be found on our website: www.pharming.com. RISK MANAGEMENT AND CONTROL Pharming’s Board of Management is responsible for designing, implementing and operating the Company’s internal risk management and control systems. The purpose of these systems is to manage in an effective and efficient manner the significant risks to which the Company is exposed and that provide reasonable assurance that the financial reporting does not contain any errors of material importance. The Company’s internal risk management and control systems are designed to provide reasonable assurance that strategic objectives can be met. The Company has developed an internal risk management and control system that is tailored to the risk factors that are relevant to the Company, allowing for its small size. Such systems can never provide absolute assurance regarding achievement of Company objectives, nor can they provide an absolute assurance that material errors, losses, fraud, and the violation of laws or regulations will not occur. A summary of the risks that could prevent Pharming from realising its objectives is included in the section ‘Risk Factors’ of this report. Our internal risk management and control systems make use of various measures including:  Annual objective setting by the Board of Supervisory Directors and evaluation of realised objectives;  Periodic operational review meetings of the Board of Management with departmental managers;  Periodical updates to the Board of Supervisory Directors reviewing developments in the areas of operations, finance, research and development, business development, clinical development, and investor relations;  Quarterly review of the financial position and projections as part of the meetings of the Board of Management with the Board of Supervisory Directors;  A planning and control cycle consisting of annual, quarterly and monthly procedures, including budgets which incorporate both financial and operational objectives, cash flow forecasts and subsequent follow-up on achievements of targets set;  A whistleblowers procedure, which is published on the Company’s website. An effective system of (internal) controls and procedures are maintained and these include:  Regular meetings of the Audit Committee with each of the Board of Management and the Independent Auditor to discuss the financial results and the controls and procedures;  Periodical update of the Risk Assessment by an internal Risk Assessment Team. The Company maintains records and procedures designed to:  Ensure the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the Company;  Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only by authorised employees in accordance with documented authorisations;  Provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 21


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    CORPORATE GOVERNANCE AND RISK MANAGEMENT Also, projections of any evaluation of effectiveness for future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate. The complete internal risk management and control systems of the Company are regularly discussed by the Board of Management with the Board of Supervisory Directors, its Audit Committee and Corporate Governance Committee and, in addition, procedures and controls are reviewed and areas requiring improvement are identified in audits from external parties, for example financial and IT experts, including findings in the internal controls regarding financial reporting reported in the Management Letter of the Independent Auditor. Pharming is subject to many risks and uncertainties that may affect its financial performance. If any of the events or developments described below (see Risk factors) occurs, Pharming's business, financial condition or results of operations could be negatively affected. In that case, the trading price of the Shares could decline and investors could lose all or part of their investment in the Shares. With respect to the financial reporting risks reference is made to the ‘Statements of the Board of Management’ in this report. Refer to the ‘Notes to the consolidated financial statements’ under ’31. Financial risk management’. Risk factors In the description of the risk factors below we focus on the risks we consider the main threats to achievement of our strategic goals. Although many risk factors can have been identified in a Risk Assessment, we are limiting the description to four factors that we consider the principal ones. We describe these risks together with the risk- mitigating actions we have taken to address them. Commercial risk Pharming faces and expects to remain confronted with intense competition in the various markets for its lead product Several other companies develop products for the treatment of Hereditary Angioedema (HAE) attacks. Although Pharming is the sole provider of a recombinant therapy (either on the market or in development), the product will face competition from these and existing products used to treat HAE attacks. In Europe, two other human plasma derived C1 inhibitor products and one product using another mechanism of action have been approved, each for the treatment of acute HAE attacks. In the US one human blood plasma derived C1 inhibitor product and two products with alternative mechanisms of action have been approved for certain types of acute HAE attacks as well as one human blood plasma derived C1 inhibitor product for preventive treatment (prophylaxis) of HAE attacks. As a consequence, Pharming’s commercialisation partners; Salix Pharmaceuticals, Sobi and MegaPharm and Pharming’s direct commercialisation in Austria, Germany and the Netherlands may together not obtain sufficient market penetration with Ruconest to allow Pharming to become profitable. Pharming’s future success depends upon the commercial strength of its partners Our strategy for the commercialisation has been to partner or out-license our products to third parties. We have established partnerships for the most important markets, the United States of America and Europe, to Salix and Sobi, respectively. Therefore the commercial success of our lead product Ruconest is to a very significant extent dependent on the capabilities of these partners to distribute and sell our product in their sales regions. Our products may not gain market acceptance Sales of medical products depend on physicians’ willingness to prescribe the treatment, which is likely to be based on a determination by these physicians that the products are safe and efficacious from a therapeutic and cost perspective relative to competing treatments. We cannot predict whether physicians will make this determination in respect of our products. Even if our products achieve market acceptance, the market may prove not to be large enough to allow us to generate sufficient revenues. 22


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    CORPORATE GOVERNANCE AND RISK MANAGEMENT Disappointing reimbursements paid by third parties and disappointing cost-effectiveness of Pharming's products once approved for marketing may have a material adverse effect on Pharming's financial results Pharming's success is dependent on the reimbursement of Ruconest by third parties like the government health administration authorities, private health insurers and other organisations. There is an increasing tendency of health insurers to reduce healthcare cost by limiting both coverage and the level of reimbursement for new therapeutic products and by refusing, in some cases, to provide coverage altogether. In addition to reimbursements from third parties, the Company, if it succeeds in bringing a product to the market, also faces uncertainties about the cost-effectiveness of the product. The prices for the product that health care insurers and/or consumers are willing to pay may be lower than the production costs which may make the product uncompetitive. Development of additional indications of HAE The prophylaxis segment of HAE appears an attractive addition to the current product and could add significant additional value to the market. Failing to develop and commercialising this additional product could influence future success. Pharming faces significant margin pressure With the increasing pressure on healthcare costs in general and pharmaceuticals pricing in particular, the importance of a competitive COGS (Cost of Goods Sold) increases. This applies in particular to low-risk development projects such as fast followers and biosimilars. In most cases the Pharming platform should be able to deliver lower COGS than current competing cell-based systems. On the other hand Pharming will only be able to provide good margins, if the sales will achieve certain minimal volumes triggering a decrease of COGS. Pharming's supplies of Ruconest are dependent on third parties Pharming has entered into (downstream) manufacturing and supply agreements for the production of rhC1INH (conestat alfa), the drug substance of Ruconest, namely with Sanofi Chimie S.A. (Sanofi) and Merck Sharp & Dohme B.V. (MSD). The possibility exists that these partners fail to live up to the agreements made with them. Risk-mitigation actions Pharming has established partnerships in the most important geographical areas with partners, capable of commercialising Ruconest in their local markets. The North-American market, which we believe is the most important one, has been partnered with Santarus, which was acquired by Salix in January 2014. Salix is a company with an excellent commercialisation track record. The European market has been partnered with Sobi. Sobi has a specialised sales team that works closely with the physicians that treat the HAE patients in order to gain market acceptance for our product. Recently Pharming initiated commercialisation in Austria, Germany and the Netherlands. The issue of reimbursement mainly affects the European market. Sobi is addressing this on a country-by-country basis, and insofar (part-) reimbursement has been obtained in the majority of the EU countries. In the US, the product, once approved, will have to be covered under the various reimbursement programmes that are applicable for various groups of US citizens. Information on sales progression and marketing and sales planning and execution will be exchanged on a regular basis with our commercial partners through Joint Steering Committees. To ensure the development of prophylaxis HAE Pharming carefully evaluates the development costs and risks together with their US partner Salix. Correct execution of the clinical trial programme will be closely monitored. Continuous evaluation and implementation of improvements in both up-stream and down-stream manufacturing processes should reduce the COGS and the margin pressure. 23


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    CORPORATE GOVERNANCE AND RISK MANAGEMENT Furthermore Pharming has started to mitigate the issue of dependency on third parties in the downstream production process, however it will take several years before this mitigation has been fully implemented to cover all aspects of the downstream production process, including inspection and approval by governmental regulatory agencies. The chosen approach is to engage other partners to create alternatives and/or additional capacity to existing suppliers in an effective and cost-efficient way. Macro risks The macroeconomic environment is volatile The macro environment cannot be influenced by Pharming, however, it does have impact on Pharming’s risk assessment. The biotech industry historically has been resilient through the economic cycle, however the current economic downturn is impacting all industries, including biotech, especially through the limited availability of funds. The US market is reviving since the year 2014 and also the EU market is slowly recovering. High profile failures of biotech companies alters investment environment Next to economic behaviour investors in biotechnology are also driven by sentiment and news flow. Performance of other biotech companies have an impact on the investment environment. This could also have an impact on Pharming’s stock price development and availability of funding. Risk-mitigation actions Pharming tries to mitigate the impact of the macro environment by planning financing activities well in advance to ensure that the Company is not running out of cash. In order to do so, Pharming maintains relationships/contacts with an international spread of banks and investors. Besides that Pharming needs to identify the different audiences, determine their relative importance for the Company’s immediate future and assess the information needs for the audiences. Pharming communicates important developments in press releases, on their website and in the annual report. Research Pipeline is dependent on C1 franchise Up to now the pipeline has been heavily dependent on C1 franchise as this was the only viable product available. Any negative finding on the properties, efficacy or safety of the rabbit derived rhC1INH may have a vital impact on the Company’s existence. Pipeline is early stage Since 2011 the Pipeline Team Pharming has been focusing on identifying potential projects with a relatively short development time based on the assumption that the main advantage of a potential new product as compared to existing alternatives on the market should derive from the advantages provided by the Company’s proprietary rabbit platform including a significant commercial upside due to lower cost of goods. Risk-mitigation actions The Company is looking to further reduce the development timelines by searching for new projects in areas where core competence and know-how are already available in the Company. 24


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    CORPORATE GOVERNANCE AND RISK MANAGEMENT A set of new activities to expand the pipeline according to the results of the Pipeline Team has been implemented including but not limited to:  Collaboration with US company Renova Life to produce Factor VIII transgenic rabbits (achieved, Factor VIII expression to be tested);  Assets of the French Company TRM SASU were acquired to expand rabbit platform (alpha-glucosidase, alpha- galactosidase, Factor VIII and beta-glucocerebrosidase). Transgenic rabbits for Factor VIII, a-Glu and a-Gal have been produced – milk expression is still to be verified. Financial risks Finance organisation Since 2012 the Chief Financial Officer (CFO) role within the Company has been combined with the position of the CEO. As the Company further develops, its financial complexity will be increasing thus requiring strengthening of its financial functions to create more balance and control in both management and operations. At the moment an interim Finance Director is contracted. Going forward we have the intention to identify a suitable candidate to become CFO. The Company is dependent on access to external funding Pharming does not yet generate sufficient cash from product revenues to meet its current working capital requirements and is, as has been the case since its incorporation, partially dependent on financing arrangements with third parties. The ability of Pharming to attract external funding is (inter alia) dependent on the external market conditions (equity and/or debt), the Company’s ability to generate cash inflows from supplying Ruconest to its commercialisation partners and proceeds from direct commercialisation. Pharming has a history of operating losses and will continue to incur losses. No assurance can be given that we will achieve profitability in the future. Furthermore, if our products do not gain all regulatory approvals sought, or if our products do not achieve market acceptance, we may never achieve profitability. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. We expect to need additional funding in the future, which may not be available to us on acceptable terms, or at all, which could force us to delay or impair our ability to develop or commercialise our products. There can be no assurance that additional funds will be available on a timely basis, on favourable terms, or at all, or that such funds, if raised, would be sufficient to enable us to continue to implement our long-term business strategy. If we are unable to raise such additional funds through equity or debt financing, we may need to delay, scale back or cease expenditures for some of our longer-term research, development and commercialisation programmes, or grant rights to develop and market products that we would otherwise prefer to develop and market ourselves, thereby reducing their ultimate value to us. In addition, to the extent we raise capital by issuing additional shares, shareholders’ equity interests will be diluted. 25


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    REPORT OF THE BOARD OF SUPERVISORY DIRECTORS REPORT OF THE BOARD OF SUPERVISORY DIRECTORS The Board of Supervisory Directors, in general, supervises the Board of Management in its duty to manage the Company. It performs its duties and activities in accordance with the Articles of Association of the Company, its regulations, which are posted on the Company’s website, the applicable law and the Dutch Corporate Governance Code applicable as of 1 January, 2009 (the “Code”). The supervision of the Board of Management by the Board of Supervisory Directors includes: (a) the achievement of the Company’s objectives; (b) the corporate strategy and the risks inherent in the business activities; (c) the structure and operation of the internal risk management and control systems; (d) the financial reporting process; (e) compliance with primary and secondary regulations; (f) the Company-shareholders relationship; and (g) corporate social responsibility issues that are relevant to the Company. The Board of Supervisory Directors determines, together with the Board of Management, the corporate governance structure of the Company and ensures compliance with the Code and other (foreign) applicable rules and regulations, assisted by its Corporate Governance Committee. Assisted by its Audit Committee, it supervises the financial reporting process and assisted by its Remuneration Committee, it determines the remuneration of the individual Board of Management members within the remuneration policy adopted by the Annual General Meeting of Shareholders. The report of the Remuneration Committee is presented separately in this report. COMPOSITION AND REMUNERATION In 2014 the composition of the Board of Supervisory Directors was as follows: Mr. Blaak (Chairman), Mr. Ward, Mr. Ernst and Mr. De Winter. The remuneration of the members of the Board of Supervisory Directors is determined by the General Meeting of Shareholders. The annual remuneration is based on the position an individual has in the Board of Supervisory Directors, the Audit Committee and the Remuneration Committee, no additional remuneration was agreed for members of the Corporate Governance Committee. For 2014 the annual compensation was as follows (unchanged from 2013):  Board of Supervisory Directors: Chairman €44,000 and Member €31,000;  Audit Committee: Chairman €9,000 and Member €3,000;  Remuneration Committee: Chairman €6,000 and Member €3,000; and  an additional compensation of €1,000 per day is paid in case of extraordinary activities. No current member of the Board of Supervisory Directors holds shares in the Company, however, the members of the Board of Supervisory Directors do participate in the Company’s LTIP. No loans or other financial commitments were made to any member of the Board of Supervisory Directors on behalf of the Company. In the view of the Board of Supervisory Directors, best practice provision III.2.1 of the Code has been fulfilled by the Company and all members of the Board of Supervisory Directors consider themselves independent, within the meaning of best practice provision III.2.2 of the Code. Pharming does not require its Board of Supervisory Directors members to disclose any holdings in other listed and/or unlisted companies. 26


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    REPORT OF THE BOARD OF SUPERVISORY DIRECTORS ACTIVITIES The Board of Supervisory Directors met 9 times in 2014, the individual presence of the Supervisory Directors is reflected in the following schedule: Date 16 Jan 05 Mar 07 Apr 28 Apr 14 May Extra participants CEO*/ COO*/ CEO/COO/ CEO/COO/ CEO/COO/ CEO/COO/ Staff Staff Staff Staff Staff Mr. Blaak ✓* ✓* ✓ ✓ ✓ Mr. Ernst ✓* ✓ ✓* ✓* ✓ Mr. Ward ✓* ✓ ✓* ✓* ✓ Mr. De Winter ✓* ✓ ✓ ✓ ✓ Date 18 Jun 30 Jul 29 Oct 18 Dec Extra participants CEO/COO/ CEO/COO/ CEO/COO/ CEO/COO/ Staff Staff Staff Staff Mr. Blaak ✓ ✓ ✓ ✓ Mr. Ernst ✓ ✓ ✓ ✓ Mr. Ward ✓ ✓ ✓ ✓ Mr. De Winter ✓ ✓ ✓ ✓ * Joined by teleconference call At each of these meetings all Members attended. The Board of Management attended these meetings except when the composition, performance, remuneration of the Board of Management and the self-evaluation of the members of the Board of Supervisory Directors and its committees were discussed. The Board of Supervisory Directors has received from each of the committees a report of its deliberations and findings. As part of good governance, the Board of Supervisory Directors conducts a self-evaluation annually. These evaluations cover two parts; one part is the work of the Board of Supervisory Directors in relation to key objectives of the Company and the second part is the structure of the Board of Supervisory Directors to ensure that the members bring the correct skills and background knowledge for the benefit of the Company. The annual self-evaluation took place after the BOSD meeting of 18 June 2014 on the basis of a questionnaire completed by all members. At the meetings of the Board of Supervisory Directors, the Company’s financial and operational targets, strategy and accompanying risks, the latter always formulated in an appropriated Risk Assessment document, were extensively discussed. Amongst other topics, a considerable amount of time was spent on discussing regulatory issues with regard to Ruconest, the competitive landscape, partnerships, licensing opportunities, refinancing of the Company, succession planning, corporate governance, the financial performance and structure of the Company, the targets for 2014 and the operational and financial risks to which the Company is exposed. During its meetings, the Board of Supervisory Directors paid special attention to the following risks:  the Company’s progress on the achievement of certain milestones. There is no certainty that these milestones will actually be achieved;  the Company does not yet have a positive operational cash flow and therefore will be dependent on financial markets and/or partnership revenues for funding;  the Company is largely dependent on the success of one key product; Ruconest in one market, the US. In other markets, the outcome of any registration process is uncertain and may be influenced by unpredictable events;  the Company is almost entirely dependent on third party commercial performance for the receipts of proceeds from sales; 27


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    REPORT OF THE BOARD OF SUPERVISORY DIRECTORS  the Company is dependent on the availability and commitment of key employees;  the Company is active on a niche market for an orphan drug product with at least three competitors;  the timely development of the Company’s products is dependent on the ability to attract partnerships or capital under attractive conditions. All these risks have been thoroughly discussed with the Board of Management and, where possible, actions have been undertaken to minimise the Company’s exposure. Financial risks are actively monitored by the finance department, whose findings are discussed with the Board of Management on a monthly basis or whenever deemed necessary. The finance department also maintains a close working relationship with the legal counsel and company secretary to monitor other corporate and contractual risks. The risks are further described in the ‘Corporate governance and risk management’ chapter in this report. AUDIT COMMITTEE The Audit Committee in 2014 consisted of Mr. De Winter (Chairman), Mr. Ernst, and Mr. Ward. During the five Audit Committee meetings held in 2014, the financial statements were discussed with a special emphasis on complex transactions and the impact of IFRS related issues. In addition, the external Auditor’s audit plan 2014, its management letter and board report were discussed. The main topics discussed related to revenue recognition, the valuation of inventories, the accounting for financial derivatives, the development of the finance function and funding. The quarterly financial statements are circulated to the full Board of Supervisory Directors in advance of every Audit Committee meeting. The individual presence of its Members is reflected in the following schedule: Date 5 Mar 28 Apr 14 May 30 July 29 Oct Extra participants CEO/COO/ CEO/COO*/ CEO/COO/ CEO/Staff/ CEO/COO/ Staff/PwC Staff/PwC* Staff/PwC/ Mr. Blaak Staff/PwC/ Mr. Blaak Mr. Blaak Mr. Blaak Mr. Ernst ✓ ✓* ✓ ✓ ✓ Mr. Ward ✓ ✓* ✓ ✓ ✓ Mr. De Winter ✓ ✓ ✓ ✓ ✓ * Joined by teleconference call PwC = PricewaterhouseCoopers Accountants N.V. CORPORATE GOVERNANCE COMMITTEE The Corporate Governance Committee consisted of Mr. Ward (Chairman), Mr. Ernst and Mr. De Winter. During 2014, it was decided to include Corporate Governance as a mandatory and separate topic during every meeting of the Board of Supervisory Directors. The Corporate Governance Committee did not meet separately during 2014. A report of the Remuneration Committee can be found on pages 30-35. 28


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    REPORT OF THE BOARD OF SUPERVISORY DIRECTORS FINANCIAL STATEMENTS The Financial Statements of Pharming Group N.V. for 2014, as presented by the Board of Management, have been audited by PricewaterhouseCoopers Accountants N.V. Their report is included in this Annual Report on pages 94- 100. The Financial Statements were unanimously approved by the Board of Supervisory Directors and the Board of Management has signed these Statements. The Board of Supervisory Directors recommends the General Meeting of Shareholders to adopt the 2014 Financial Statements and to discharge the Board of Management and the Board of Supervisory Directors from liability for their management and supervisory activities on behalf of the Company. Leiden, 18 March 2015 The Board of Supervisory Directors The original copy has been signed by the Board of Supervisory Directors 29


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    REPORT OF THE REMUNERATION COMMITTEE REPORT OF THE REMUNERATION COMMITTEE The Remuneration Committee proposes the remuneration policy to the Board of Supervisory Directors as well as the remuneration of the individual members of the Board of Management. The policy includes the remuneration structure, defining the amount of fixed remuneration, shares and/or options to be granted and the variable benefits, pension rights, severance pay and other forms of compensation. The Remuneration Committee also prepares the remuneration report that accounts for the implementation of the remuneration policy over the past financial year. It includes an overview of the remuneration policy for the next financial year and subsequent years, both in accordance with the Company’s current Board of Supervisory Directors Regulations and Remuneration Committee Regulations. The objectives of the remuneration policy are to attract, motivate and retain good management by means of a competitive policy linked to the Company objectives and the overall performance of the Board of Management and to create a long-term relationship with the Company. The Remuneration Committee recognises that the Company is increasingly competing in an international environment. The policy and its implementation are reviewed by the Remuneration Committee at least annually. 2014 REMUNERATION POLICY AND STRUCTURE The remuneration policy for 2014 was a continuation of the 2013 policy and was approved in the Annual General Meeting of June 2014. The main items of this policy are:  The remuneration of each member of the Board of Management consists of a fixed salary, an annual bonus as a percentage of the fixed component, short- or long-term incentives by way of shares and/or options to shares in the Company and benefits in kind such as health insurance and participation in a pension plan, as further specified in Note 25 to the Financial Statements. In general, employment contracts or management contracts, with members of the Board of Management, provide for annual bonuses based on personal and/or extraordinary performance and/or the achievement of predetermined objectives. These contracts have included provisions for an individual bonus in cash or shares of up to 60% (for the CEO) and up to 50% for the other member(s) of the gross annual salary (including holiday allowance). Other benefits, such as health insurance and pension schemes are in accordance with the applicable staff manual of the Company. Severance pay cannot exceed the member’s gross annual salary. The notice period for each member is two months;  Members of the Board of Management as well as other key individuals are eligible to participate in the Company’s Long Term Incentive Plan (LTIP). Under the plan, participants receive shares in the Company, the number of which is dependent upon the performance of the Company share price, during a three year period, compared to a peer group of European Biotech Companies (see page 34). MEETINGS AND COMPOSITION During the 2014 financial year the Remuneration Committee consisted of Mr. Ward (Chairman), Mr. Blaak and Mr. Ernst. The Remuneration Committee met three times in 2014. The individual presence of its Members is reflected in the following schedule: Date 16 January 05 March 18 December Extra participants Mr. De Winter/CEO Mr. De Winter/CEO Mr. De Winter/CEO Mr. Blaak ✓ ✓ ✓ Mr. Ernst ✓ ✓ ✓ Mr. Ward ✓ ✓ ✓ 30


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    REPORT OF THE REMUNERATION COMMITTEE During these meetings the performance of the Board of Management in general and its individual members in particular were reviewed and discussed relative to pre-agreed targets and to define targets for the coming year. The remuneration packages, long-term incentive plan and achievements versus 2014 objectives were also discussed and agreed in the last meeting. REMUNERATION REPORT 2014 Following the recommendations of the Remuneration Committee, the Board of Supervisory Directors decided to grant 19,200,000 stock options to the Board of Management; (12,000,000 options to Mr. de Vries and 7,200,000 options to Mr. Giannetti). These options will vest in five equal tranches on 31 January of 2015, 2016, 2017, 2018 and 2019, as outlined below under the terms and conditions of the Board of Management Option Plan (as approved by the AGM on 18 June 2014), in line with the achievement of targets for the Board of Management. The exercise price of these options, on a tranche by tranche basis, shall be equal to the VWAP measured over the 20 trading days prior to the date of the Annual General Meeting. For the first tranche of 3,840,000 (2,400,000 options for Mr. de Vries and 1,440,000 options for Mr. Giannetti) this resulted in a strike price of €0.505; being the VWAP measured over the 20 trading days prior to 18 June 2014. The stock options will expire on 17 June 2019. The Remuneration Committee carefully reviewed the performance of the Board of Management against both the corporate and personal objectives that had been set for 2014. The Remuneration Committee recommended and the Board of Supervisory Directors concurred that the Board of Management had to a major extent met the corporate and personal objectives set for 2014 and contributed to positioning the Company for the future in particular by the following accomplishments:  Increased the value of the Ruconest franchise through support of our existing partners and through geographical expansion of partnerships and the initiation of direct commercialisation in Austria, Germany and the Netherlands;  Built the C1 Inhibitor franchise by securing US regulatory approval and by progressing the development of C1 inhibitor in indications beyond acute HAE attacks;  Developed the Factor VIII programme according to plan;  Leveraged the embedded value of the transgenic technology platform by initiation of additional new projects, through the acquisitions of certain assets of TRM;  Operated within agreed budgets at the department and company level;  Created a basis for long-term sustainability through rationalisation of the current portfolio and concurrently broaden the portfolio with new projects, through a rational process of commercially led asset evaluations;  Improved the Company’s visibility amongst investors and other market participants (both buy- and sell-side analysts and financial press and trade press journalists). Following the recommendations of the Remuneration Committee, the Board of Supervisory Directors decided therefore that both Mr. Giannetti and Mr. De Vries had achieved 80% of the corporate and personal objectives that had been set to determine their individual bonus award. Following the recommendations of the Remuneration Committee, the Board of Supervisory Directors decided to pay out the regular bonus 75% in cash and 25% in shares. The share component of the 2014 bonus payments was valued at the volume weighted average price (VWAP) measured over the 20 trading days prior to 31 January 2015 (€0.381). A detailed overview of the compensation of the members of the Board of Management can be found in note 25 of this Annual Report. The individual remuneration of the members of the Board of Management was reviewed. In the light of the recent increases (following the FDA approval of Ruconest), it was decided not to increase the base salaries at this point in time. 31


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    REPORT OF THE REMUNERATION COMMITTEE REMUNERATION POLICY 2015 AND THE FUTURE To continue to be able to attract and retain top talent in a competitive and global environment and to focus management and staff on creation of sustainable added value, total compensation continues to be significantly driven by variable performance dependent income components and continues to be kept in line with industry standards of companies at a comparable stage of development. For 2015, the Remuneration Committee will continue to implement the compensation policy as approved at the 2010 AGM. All remuneration elements described below are consistent with and covered by the current compensation policy. 1. Fixed salary determined by the Board of Supervisory Directors. 2. Target bonus in cash and/ or shares percentage to be adapted following the FDA approval of Ruconest. In accordance with the compensation policy approved at the 2010 AGM, the basis for the annual cash bonus shall be adapted as follows and effective from the date of receipt of the FDA approval of Ruconest: CEO: to a maximum of 60% of annual salary. Other Board of Management members: to a maximum of 50% of annual salary. The issuance of any share-based bonus component for the cash bonus 2015 shall be valued at the VWAP measured over the 20 trading days prior to 31 January 2016. Payment of the bonus remains dependent on the achievement of pre-defined milestones, which are a combination of corporate and personal milestones. Proposals on the potential award of a bonus, achievement of milestones and an increase of fixed salary is made by the Remuneration Committee towards the end of the year and formally approved by the Board of Supervisory Directors in the first meeting of the next year but in any case before or on the date of approval of the Annual Report. The Board of Supervisory Directors has defined a mix of corporate and personal milestones that will be used to measure performance and potential award of bonus payments for 2015. The main corporate objectives for 2015 for the Board of Management can be summarised as follows:  Increase the value of the Ruconest franchise through support of our existing partners and through geographical expansion by securing new partnerships;  Build the C1 Inhibitor franchise by progressing the development of C1 inhibitor in indications beyond acute HAE attacks;  Develop the Factor VIII programme according to plan;  Leverage the embedded value of the transgenic technology platform by prioritisation and development of the new products leads according to the development plan;  Operate within agreed budgets at the department and company level;  Create a basis for long-term sustainability by broadening the portfolio with new projects, through a rational process of commercially led asset evaluations;  Improve the Company’s visibility amongst investors and other market participants (both buy- and sell-side analysts and financial press and trade press journalists). For competitive reasons further details of these milestones and the personal milestones are not publicly disclosed. 3. Share options dependent on defined parameters. From 2014 onwards, the Board of Management had the expectation that, following a considerable period of significant dilution of the share capital necessary to maintain the operations, such further highly dilutionary financings should not appear on the agenda going forward. 32


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    REPORT OF THE REMUNERATION COMMITTEE In the light of these expectations and in order to improve the longer-term alignment of interests of the shareholders and Board of Management, it was decided and approved by the Annual General Meeting at 18 June 2014, that share options should no longer be given annually but to grant share options in 2014 to the Board of Management that will vest in equal tranches over a five-year period going forward. This implied that the approved 2014 option grants for the Board of Management and Staff pool are covering the period 2014-2018, with annual vesting of tranches as outlined below. No additional options are therefore now granted. Description of the approved 2014 option grants, covering the period 2014-2018 and the division of the annually vesting tranches to the Board of Management: Number of options Grant 2014 for period 2014-2018 Mr. Sijmen de Vries 12,000,000 Mr. Bruno Giannetti 7,200,000 Annual vesting tranches Parameters Mr. Sijmen de Vries 2,400,000 Vested (strike price €0.505) 2,400,000 In service at 31 January 2016 2,400,000 In service at 31 January 2017 2,400,000 In service at 31 January 2018 2,400,000 In service at 31 January 2019 Mr. Bruno Giannetti 1,440,000 Vested (strike price €0.505) 1,440,000 In service at 31 January 2016 1,440,000 In service at 31 January 2017 1,440,000 In service at 31 January 2018 1,440,000 In service at 31 January 2019 It is proposed to reserve an additional 3,000,000 options for the Staff option pool. The strike price of the 2015 share options grant for the Board of Management (being the second tranche of 2,400,000 options for Mr. Sijmen de Vries and the second tranche of 1,440,000 options for Mr. Bruno Giannetti) and the additional Staff option pool options for 2015 shall be equal to the VWAP measured over the 20 trading days prior to the date of the Annual General Meeting of Shareholders (30 April 2015). Going forward the strike price of the options will be set each year at a value equal to the VWAP measured over the 20 trading days prior to the date of the Annual General Meeting of Shareholders. In the event of a change of control of the Company all of the above options will vest immediately at the strike price of the last tranche. In case of an event resulting in a change of control and in case of the announcement of a (contemplated) public offer for the shares in the Company, the Board of Supervisory Directors can decide to settle the options for the Board of Management in cash. 4. The Long Term Incentive Plan (LTIP) Under this LTIP, restricted shares are granted conditionally to the Board of Management and certain eligible managers each year with a target value of 30% of annual salary. These shares will vest after three years provided that the share price has increased (i.e. increased total shareholder value). The number of shares vested will be based on the relative performance of the share price compared to a group of 31 European Small Cap (< €500 million) listed companies active in Life Sciences over the preceding 36 months. 33


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    REPORT OF THE REMUNERATION COMMITTEE The reference group consists of the following companies: Ablynx (BE) Addex Therapeutics (CH) Allergy Therapeutics (UK) Ark Therapeutics (UK/FI) Basilea Pharmaceutica (CH) Bavarian Nordic (DK) Biotie Therapies (FI) Cellectis (FR) Cytos (CH) Diaxonhit (FR) Evotec (DE) Galapagos (BE) Genmab (DE) GW Pharmaceuticals (UK) Hybrigenics (FR) ImmuPharma (UK) Innate Pharma (FR) Medigene (DE) Medivir (SE) Morphosys (DE) Neurosearch (DK) Newron Pharmaceuticals (IT) Oxford Biomedica (UK) Photocure (NO) Renovo (UK) Santhera Pharmaceuticals (CH) Ti-Genix (BE) Transgene (FR) Veloxis Pharmaceuticals (DK) Vernalis (UK) Wilex (DE) The vesting schedule will be as follows: Ranking in the top 5% of the group: 100% Ranking in the top 5-10% of the group: 80% of maximum Ranking in the top 10-20% of the group: 60% of maximum Ranking in the top 20-30% of the group: 50% of maximum Ranking in the top 30-50% of the group: 20% of maximum Ranking lower than 50% of the group: 0% LTIP 2012 expired without pay-outs At 1 January 2015, after three years of the three-year period of the 2012 LTIP, the Pharming share price has not increased over the period. As a result none of the allocated shares have vested. The allocations under the 2013 and 2014 LTIP still have one and two years respectively to run. The minimum share prices (hurdles) for the 2013 and 2014 allocations to qualify for (part-)vesting, subject to meeting the relative performance criteria as outlined above, are: (1) €0.25, being the closing price 31 at December 2012 for the LTIP 2013 and (2) €0.143, being the closing price at 31 December 2013 for the LTIP 2014. LTIP 2015 For 2015, the Board of Supervisory Directors, following the recommendation of the Remuneration Committee, has determined that the number of shares (calculated at the closing price of 31 December 2014 of €0.389) shall be equal to 30% of each of the Board of Management’s 2015 base salaries. In addition to this, in order to be able to attract and retain members of the Board of Supervisory Directors with relevant industry experience in a competitive and global environment and in line with global pharmaceutical/biotech industry practice, the Annual General Meeting of 18 June 2014 approved to re-install the LTIP participation for the Board of Supervisory Directors according to the participating numbers of shares described below. This results in the following allocations: Board of Management: Mr. S. de Vries 332,884 shares, Mr. B.M.L. Giannetti 217,450 shares. Senior managers: For a selected group of senior managers, 1,400,000 shares are available. A maximum amount of 100,000 shares per senior manager can be allocated. Board of Supervisory Directors: Chairman 150,000 shares, Vice-Chairman and/or Board Committee Chairs 125,000 shares, other members 100,000 shares. 34


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    REPORT OF THE REMUNERATION COMMITTEE In the event of a change of control of the Company all outstanding LTIP share allocations will vest automatically and unconditionally. In case of an event resulting in a change of control and in case of the announcement of a (contemplated) public offer for the shares in the Company, the Board of Supervisory Directors can decide to settle the allocated shares for the Board of Management and for the Board of Supervisory Directors in cash. The Notes to the Financial Statements contain further details with regard to the remuneration of the Board of Supervisory Directors and the Board of Management, as well as the Company’s remuneration policy and pension schemes. 35


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    CORPORATE SOCIAL RESPONSIBILITY CORPORATE SOCIAL RESPONSIBILITY INTRODUCTION Our employees dedicate themselves to providing the most high end quality products. The quality, safety and efficacy of our products and the animal welfare are our top priority. Next to that, we take our obligation to behave in a sustainable, safe and responsible manner very seriously; we are aware of our responsibility towards all stakeholders. Our Corporate Social Responsibility pillars at a glance: Medical need Pharming is developing therapeutic products for specific rare diseases (Orphan Drug development) and other significant medical needs. Through our current product Ruconest and the development of new products currently in its pipeline, Pharming can offer alternative treatment options to patients, improve the quality of life and in some cases save lives. As such, we believe that Pharming makes a valuable contribution to society. Patient safety Pharmaceutical products need to be as safe as possible and fully compliant with regulatory guidelines. Therefore, in the development of therapeutics, the evaluation of safety and efficacy of the products is mandatory. Several studies need to be performed, ranging from early research studies in animals to clinical studies in healthy volunteers and patients. These studies are highly regulated and thoroughly monitored, reviewed and evaluated both by Pharming and the regulatory authorities. The risk benefit of the products in each indication under development or marketed is continuously evaluated. Findings, and Pharming’s interpretation thereof, are reported to the relevant authorities according to legal timelines, and result in appropriate actions such as updating investigator brochures and product labelling. In the most extreme cases a safety concern can result in suspension of enrolment in a clinical trial or withdrawal of the product from the market. Clinical studies are carried out in compliance with legal and regulatory requirements and according to Good Clinical Practice (GCP) guidelines. All production processes and analytical testing comply with regulatory current Good Manufacturing Practice (cGMP) guidelines and are warranted by Pharmacovigilance. 36


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    CORPORATE SOCIAL RESPONSIBILITY Pharming’s Quality Assurance department conducts internal and external audits of manufacturing facilities, testing laboratories and suppliers of materials and services on a regular basis. All these procedures have been implemented to monitor, control, ensure and continuously improve the quality of Pharming's products. Code of Conduct Pharming endeavours to carry out its business fairly and honestly, at the same time taking into account the interests of all those who may in any way be affected by its activities. A good reputation is of major importance to the Company and its stakeholders. In order to achieve success, the members of the Board of Supervisory Directors, Board of Management and employees must comply with a number of behavioural standards, which have been stated in a set of general principles referred to as the Code of Conduct. This Code of Conduct has been designed to provide guidance on acting in accordance with the Company’s high level of principles and standards as this is of the utmost importance for Pharming’s reputation. The Code of Conduct is available on the Company’s website. Whistleblowers procedure Pharming has a whistleblowers policy which can be found on the Company’s website. This policy describes the internal reporting procedures of suspected irregularities with regard to a general, operational and financial nature in the Company. The whistleblowers procedure applies to all Pharming entities. Pharming will not discharge, demote, suspend, threaten, harass, or in any other matter discriminate against an employee in the terms and conditions of employment because of any lawful or other actions by the employee with respect to good faith reporting of complaints or participation in a related investigation. Health and safety Daily activities at the Company include working with materials that might harm employees and/or our environment. To create a work environment that is as safe as possible, we have created an internal Health and Safety specialist position. Our internal standard operating procedures are designed to protect our people and the environment from any harm. All employees receive safety training and training to deal with work related risks. Our extensive health and safety policy is published on the Intranet and is revised annually. The emergency response teams at our sites are trained to perform first aid, fight small fires and to manage an evacuation. Safety is continuously monitored in everything we do. For that reason we pay serious attention to education and information on all aspects of Safety. Animal Care Code of Conduct and Welfare Policy Pharming’s transgenic technology involves animals and therefore animal safety and welfare are crucial. The Company produces products in animal systems, i.e. in the mammary glands of rabbits. Pharming’s specific protein products are purified from the milk of these transgenic animals. Pharming has an Animal Care Code of Conduct in place, which focuses on the strict regulatory control of transgenic materials and animals in regard to the environment. Our Animal Care Code of Conduct emphasises the importance of carrying out our activities with transgenic animals in a consistent and safe manner, and in conformity with the laws and regulations in force in the countries of operation. Special attention is given to the strict separation of transgenic and non-transgenic materials and animals. In addition, the Company follows strict procedures to prevent the prohibited release of transgenic animals, their semen or any other reproductive transgenic material into nature. Pharming is largely dependent on its transgenic animals and highly values animal health and welfare. The Company has an Animal Welfare Policy, which amongst others, imposes that Pharming will not develop products with unacceptable adverse effects on animal health and welfare. Accordingly, Pharming carefully and continuously monitors the health and welfare of its animals. 37


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    CORPORATE SOCIAL RESPONSIBILITY Environment and traceability of supply chain As a biotechnology company that manufactures and develops biopharmaceuticals, Pharming complies with the applicable environmental rules and regulations. Such rules include disposal of animal waste products from our farm, the environmental impact of which is compensated for. The entire supply chain; from animal feed to animal waste products and from rabbit milk to the finished pharmaceutical product is covered by our highly detailed and fully cGMP compliant (industry standards) quality systems. Suppliers and contractors are audited on a regular basis. All elements of our operations are inspected by various specialised governmental agencies on a regular basis. As per the international biopharmaceutical regulations, the entire supply chain is fully traceable. Our staff is permanently trained and periodically requalified on a regular basis for compliance with the total quality system in our entire supply chain. New suppliers and contractors related to our primary processes have to be pre-qualified and are therefore audited by our Quality Assurance department prior to engagement. Our offices are located in a modern and environmental friendly building. We stimulate the use of telephone and video conferencing to limit business travel and stimulate the use of public transport, bicycles and environmentally friendly cars for business travel. Our office waste is separated prior to disposal or recycling. Human Resources Pharming sees its employees as the key driver of business success. Our Human Resources policy aims to assure the Company of the necessary expertise, skills and knowledge. We are committed to attracting, developing and retaining the most talented employees within our expertise field. Pharming is operating in a fast-paced environment. Our organisation and thus our employees need to keep up with increasing internal and external changes. The biggest internal challenge in 2014 was to further evolve into a commercial driven company. New commercial departments were set up which brought new and provocative ideas and insights. In our business field, there has been a lot of movement during 2014. Several take-overs and management buy-outs took place. As a relatively small biotech company, it is of great importance to be aware of our Unique Selling Points and strengths. The HR initiative “Encourage to Change” has been an efficient and pleasant way to create awareness for the internal and external changes and employee satisfaction. We aim to provide a motivating working environment to increase (cross functional) collaboration, encourage employees to take ownership and responsibility and coach employees by improving management skills. During this initiative, we redefined our internal mission and long-term vision. These parameters are “translated” by the departments into their own responsibilities. Departmental and personal action plans were created, in order to increase employee satisfaction and therewith increase productivity and thus shareholder value. This initiative will continue during 2015, where we will primarily focus on employee growth by strategic workforce planning, succession planning, training and management development. Employee participation In 2013 and 2014, Pharming’s workforce counted less than 50 employees employed in the Netherlands. During the course of 2014, the term of the Works Council ended. Due to Dutch legislation, the Works Council body was therefore discontinued. We do believe employee participation is valuable. Therefore, elections will be held to elect candidates to form a workers representative advisory council. 38


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    CORPORATE SOCIAL RESPONSIBILITY International human resources management With the acquisition of certain assets of TRM, we started a recruitment strategy in France. Eventually, we hired four experienced France-based employees. With the decision to start a Boston-based ERT development group, our existing US based staff will be expanding. With these hires, our span of control is expanding globally. International management and long-distance leadership will become more important in the future. Employee statistics As per 31 December 2014, the majority of staff is employed at Pharming’s headquarters in Leiden; with approximately twenty employees working at other locations in the Netherlands, the US and France. The Company’s business involves specific high-tech processes and technologies and requires the employment of highly skilled and motivated personnel. Therefore, it is important for Pharming to create an attractive work environment that retains and motivates personnel and attracts talent in a competitive and global environment. During 2014, the Company hired 14 new employees (2013: 11) and 7 employees left the Company. As per 31 December 2014, 57 people (53.8 FTE) were employed (2013: 44). Headcount per 31 December 2014 2013 2012 G&A 9 8 14 Manufacturing 19 16 19 R&D 29 20 28 Total 57 44 61 Diversity 39


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    CORPORATE SOCIAL RESPONSIBILITY Providing equal opportunities We value and support diversity – of culture, gender and age – in our organisation. The relatively low number of women in senior management positions has been and remains a point for attention. However, as a small and highly specialised organisation, Pharming is committed to recruiting and promoting employees on the basis of talent and ability, without negative or positive bias and irrespective of absence of diversity in gender, nationality or age in the organisation. No reports of gender discrimination have ever been made. Performance management cycle Pharming carries out a yearly performance management cycle: Performance Management and Development System (PMDS). PMDS is a process for establishing shared understanding about what is to be achieved and an approach to managing and developing people in such a way that the individual and company goals can most likely be achieved. It is all about the achievement of job-related success for individuals so that they can make the best use of their abilities, realise their potential and maximise their contribution to the success of Pharming. Final individual reviews are enhanced and objectives identified during “calibration sessions” where the management team discuss their reviews. 40


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    INFORMATION FOR SHAREHOLDERS AND INVESTORS INFORMATION FOR SHAREHOLDERS AND INVESTORS GENERAL Pharming’s policy is to provide all Shareholders and other parties with timely, equal and simultaneous information about matters that may influence the share price. In addition, we aim to explain our strategy, business developments and financial results. We communicate with our Shareholders and investors through the publication of the Annual Report, meetings of Shareholders, press releases and our website. Pharming organises analysts and press meetings and/or conference calls, when presenting half year and annual financial results or other significant news. These meetings and/or conference calls are announced in advance by means of press releases and on Pharming’s website. Audio and/or web casts of these conference calls and corporate presentations are made available on the website after the meetings. In addition to the scheduled half-yearly and yearly result presentations, we maintain regular contact with financial analysts and institutional investors through meetings and road shows. The Company is regularly present at conferences and corporate and scientific presentations are made available at the Company’s website. Activities in 2014 for shareholders and investors included:  a full presentation of our annual results to financial journalists and analysts, including audio commentary, Q&A sessions and posting on our website;  various additional conference calls with analysts, investors and providers of finance;  regular road show meetings with potential and existing shareholders and sell side analysts;  timely updates in the Investor Relations section of our website;  a new “in the news” section on our website to provide additional updates aside from press releases. SHARE INFORMATION Pharming Group N.V.’s shares are listed on Euronext Amsterdam (symbol: PHARM) since 1999. The Shares (ISIN Code: NL0010391025) are only traded through the book-entry facilities of Euroclear Nederland. The address of Euroclear Nederland is: Herengracht 459-469, 1017 BS Amsterdam, the Netherlands. ABN AMRO Bank N.V. is the paying agent with respect to the Shares. The address of the paying agent is: ABN AMRO Bank N.V., Gustav Mahlerlaan 10, 1082 PP Amsterdam, the Netherlands. FINANCIAL CALENDAR FOR 2015 30 April 2015 Publication of first quarter 2015 financial results at 07.00 CET. 30 April 2015 Annual General Meeting of Shareholders Location: Hotel Holiday Inn, Haagse Schouwweg 10, 2300 PA Leiden, the Netherlands at 14.00 CET. 30 July 2015 Publication of first six months 2015 financial results at 07.00 CET. 29 October 2015 Publication of first nine months 2015 financial results at 07.00 CET. 41


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    FINANCIAL STATEMENTS FINANCIAL STATEMENTS 42


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    FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF INCOME For the year ended 31 December Amounts in €‘000 Notes 2014 2013 License fees 5 18,190 5,903 Product sales 5 2,996 941 Revenues 4 21,186 6,844 Costs of product sales 7 (2,853) (533) Inventory impairments 7 (574) (579) Costs of sales (3,427) (1,112) Gross profit 17,759 5,732 Income from grants 6 105 106 Other income 105 106 Research and development 7 (11,663) (10,232) General and administrative 7 (3,324) (2,518) Costs (14,987) (12,750) Operating result 2,877 (6,912) Interest income cash and cash equivalents 8 180 91 Financial income 180 91 Effective interest convertible bonds 22 - (3,178) Settlement convertible bonds 22 - (4,555) Other interest expenses 9 (175) (198) Foreign currency results 8 457 (214) Fair value loss derivatives 11 (9,106) (12) Other financial expenses 12 - (82) Financial expenses (8,824) (8,239) Result before income tax (5,767) (15,060) Income tax expense 13 - - Net result for the year from continuing operations (5,767) (15,060) Net result for the year from discontinued operations - - Net result for the year (5,767) (15,060) Attributable to: Owners of the parent (5,767) (15,060) Non-controlling interests - - Total net result (5,767) (15,060) Basic earnings per share (€) from continuing operations 32 (0.015) (0.071) The notes are an integral part of these financial statements. 43


  • Page 46

    FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December Amounts in €‘000 Notes 2014 2013 Net result for the year (5,767) (15,060) Currency translation differences 19 45 - Items that may be subsequently reclassified to profit or loss 45 - Other comprehensive income, net of tax 45 - Total comprehensive income for the year (5,722) (15,060) Attributable to: Owners of the parent (5,722) (15,060) Non-controlling interests - - The notes are an integral part of these financial statements. 44


  • Page 47

    FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET As at 31 December Amounts in €‘000 Notes 2014 2013 Intangible assets 14 777 405 Property, plant and equipment 15 5,598 6,228 Restricted cash 16 200 176 Non-current assets 6,575 6,809 Inventories 17 13,404 4,763 Trade and other receivables 18 1,554 860 Restricted cash 16 - 2,008 Cash and cash equivalents 16 34,185 16,968 Current assets 49,143 24,599 Total assets 55,718 31,408 Share capital 19 4,077 3,346 Share premium 19 282,260 254,901 Other reserves 19 36 - Accumulated deficit 19 (256,530) (253,237) Shareholders’ equity 19 29,843 5,010 Deferred license fees income 20 10,022 12,222 Finance lease liabilities 21 965 1,207 Other liabilities 15 44 Non-current liabilities 11,002 13,473 Deferred license fees income 20 2,200 2,200 Derivative financial liabilities 22 4,266 4,147 Trade and other payables 23 7,781 5,812 Finance lease liabilities 21 626 766 Current liabilities 14,873 12,925 Total equity and liabilities 55,718 31,408 The notes are an integral part of these financial statements. 45


  • Page 48

    FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December Attributable to owners of the parent Amounts in €‘000 Notes Number of Share Share Other shares Capital Premium reserves Balance at 1 January 2013 100,918,910 10,092 231,866 - Result for the year - - - Other comprehensive income for the year - - - Total comprehensive income for the year - - - Share-based compensation 19, 24 - - - - Bonuses settled in shares 19 1,003,977 10 135 - Bond payments in shares 19, 22 127,369,530 2,894 13,825 - Shares issued for cash 19 102,841,903 1,029 8,703 - Warrants exercised 19, 22 2,483,404 24 370 - Options exercised 19, 22 37,500 - 2 - Adjustment nominal value per share 19 - (10,703) - - Total transactions with owners, recognised directly in equity 233,736,314 (6,746) 23,035 - Balance at 31 December 2013 334,655,224 3,346 254,901 - Result for the year - - - Other comprehensive income for the year - - 36 Total comprehensive income for the year - - 36 Share-based compensation 19, 24 - - - - Bonuses settled in shares 19 963,066 10 440 - Shares issued for cash 19, 22 30,000,000 300 13,704 - Warrants exercised/ issued 19, 22 42,012,059 420 13,213 - Options exercised 19, 22 56,250 1 2 - Total transactions with owners, recognised directly in equity 73,031,375 731 27,359 - Balance at 31 December 2014 407,686,599 4,077 282,260 36 The notes are an integral part of these financial statements. 46


  • Page 49

    FINANCIAL STATEMENTS Attributable to owners of the parent Amounts in €‘000 Accumulated Total Non- Total deficit controlling Equity interest Balance at 1 January 2013 (249,610) (7,652) - (7,652) Result for the year (15,060) (15,060) - (15,060) Other comprehensive income for the year - - - - Total comprehensive income for the year (15,060) (15,060) - (15,060) Share-based compensation 730 730 - 730 Bonuses settled in shares - 145 - 145 Bond payments in shares - 16,719 - 16,719 Shares issued for cash - 9,732 - 9,732 Warrants exercised - 394 - 394 Options exercised - 2 - 2 Adjustment nominal value per share 10,703 - - - Total transactions with owners, recognised directly in equity 11,433 27,722 - 27,722 Balance at 31 December 2013 (253,237) 5,010 - 5,010 Result for the year (5,767) (5,767) - (5,767) Other comprehensive income for the year 9 45 - 45 Total comprehensive income for the year (5,758) (5,722) - (5,722) Share-based compensation 2,465 2,465 - 2,465 Bonuses settled in shares - 450 - 450 Shares issued for cash - 14,004 - 14,004 Warrants exercised/ issued - 13,633 - 13,633 Options exercised - 3 - 3 Total transactions with owners, recognised directly in equity 2,465 30,555 - 30,555 Balance at 31 December 2014 (256,530) 29,843 - 29,843 The notes are an integral part of these financial statements. 47


  • Page 50

    FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December Amounts in €‘000 Notes 2014 2013 Receipts from license partners, including product sales 20 18,544 5,626 Receipt of Value Added Tax 971 882 Interest received 185 49 Receipt of grants - 145 Other receipts 283 300 Payments of third party fees and expenses, including Value Added Tax (7,851) (8,492) Payments of manufacturing expenses (10,124) (1,456) Net compensation paid to (former) board members and (former) employees (2,472) (3,136) Payments of pension premiums, payroll taxes and social securities, net of grants settled (2,109) (2,211) Other payments - - Net cash flows from operating activities 16 (2,573) (8,293) Proceeds of sale of assets 15 - 262 Purchases of property, plant and equipment 15 (154) (21) Acquisition of business 29 (500) - Net cash flows from investing activities 16 (654) 241 Proceeds of equity and warrants issued 19 19,375 12,178 Proceeds of convertible bonds issued 19, 22 - 16,023 Repayments of convertible bonds 22 - (4,746) Payments of transaction fees and expenses 19 (697) (1,485) Payments of finance lease liabilities 21 (682) (881) Net cash flows from financing activities 16 17,996 21,089 Increase/(decrease) of cash 16 14,769 13,037 Exchange rate effects 464 (199) Cash and cash equivalents at 1 January 19,152 6,314 Total cash at 31 December 16 34,385 19,152 Of which restricted cash 16 200 2,184 Cash and cash equivalents at 31 December 16 34,185 16,968 The notes are an integral part of these financial statements. 48

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