Corporate Governance Report

COMPLIANCE WITH THE COMBINED CODE ON CORPORATE GOVERNANCE

The Board supports the ideals of the Combined Code on Corporate Governance (the 'Code'), issued by the Financial Services Authority in June 2006. This statement describes how the Company applies the principles of the Code and the Company's compliance with the specific provisions of the Code. The principles set out in the Code cover four areas: the Board, Directors' remuneration, accountability and audit and relations with shareholders. With the exception of the Directors' remuneration (which is dealt with separately in the Directors' Remuneration Report) the following section sets out how the Board has applied such principles.

The Board considers that it has complied with provisions of the Code throughout the year ending 30 June 2008, unless otherwise indicated below.

BOARD AND BOARD COMMITTEES

The Board of Directors

The Board of the Company is responsible for the Group's system of corporate governance. At 30 June 2008 the Board comprised six Directors: an Executive Chief Executive Officer, Dr MJ Flynn; a Chief Financial Officer, Mr JAP Randall and four Non-Executive Directors including the Non-Executive Chairman.

Mr RS Harris is Non-Executive Chairman and Mr G Cook is the Senior Independent Director.

Details of Directors' service contracts are given in the Directors' Remuneration Report on page 32.

All the Directors have access to advice and services of the Company Secretary, who is responsible for ensuring that Board procedures and applicable regulations under the Company's Articles of Association or otherwise are complied with. Each Director is entitled, if necessary, to seek independent professional advice at the Company's expense.

Board meetings

The Board of Directors meets at least bi-monthly and has a defined schedule of matters reserved for its decision. It is responsible for the overall Group strategy, approval of major capital expenditure projects, and consideration of major financing matters of the Group. The Board met six times during the year. All Board members attended each meeting, other than Mr A Sinclair who attended one meeting and missed one meeting prior to his resignation, and Mr J-C Tschudin who attended all four meetings following his appointment.

Board Committees

The Board Committees, which are comprised solely of Non-Executive Directors, operate within clearly defined terms of reference and report regularly to the Board. The terms of reference of the Board committee's are available for inspection on the Company's registered website (www.sinclairpharma.com) and at the AGM (for 15 minutes prior to the meeting and during the meeting).

Audit Committee and auditors

The audit committee is composed entirely of independent Non-Executive Directors and is chaired by Mr G Cook and comprises Ms P Freer and Mr J-C Tschudin (appointed to the committee on 19 December 2007). Mr RS Harris stood down from the committee on 19 December 2007. The committee's main responsibility is to review any reports from management and the auditors regarding the financial statements or the internal control systems implemented throughout the Group along with consideration of both interim and annual financial statements. It will also make recommendations to the Board on the appointment of the auditors and their audit fee. The Board considers that the members of the Audit Committee possess recent and relevant financial experience. The audit committee has unrestricted access to the Group's auditors. Meetings are also attended, by invitation, to the Chief Executive and the Chief Financial Officer, and Finance Director. The audit committee met three times during the year. Each meeting was attended by all current members.

The terms of reference of the audit committee include the following responsibilities:

monitoring the integrity of the financial statements of the Company, and any formal announcements relating to the Company's financial reporting performance, and reviewing financial reporting judgments contained in them;
reviewing the Company's internal financial controls and reviewing the Company's internal control and risk management systems;
establishing and reviewing the Company's 'whistle-blowing' arrangements;
review and challenge where necessary the Company's financial statements, before submission to the Board;
making recommendations to the Board, for it to be put to shareholders for their approval in the AGM, in relation to the appointment, re-appointment and removal of the external auditor and to approve the remuneration and terms of engagement of the external auditor;
reviewing the need for a separate internal audit function;
reviewing and monitoring the external auditor's independence and objectivity and the effectiveness of the audit process, taking into consideration relevant professional and regulatory requirements;
developing and implementing policy on engagement of the external auditor to supply non-audit services, taking into account relevant ethical guidance regarding the provision of non-audit services by the external audit firm;
to review the consistency and application of accounting policies;
to establish procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls and auditing matters;
to meet with the external auditors at least twice each year; and
to review any auditors management letters and management's responses.

The Group's auditors, PricewaterhouseCoopers LLP, provide non-audit services in addition to the provision of audit services. In the year ending 30 June 2008, non-audit services provided by PricewaterhouseCoopers LLP comprised advice with regard to taxation, International Financial Reporting Standards compliance, financial due diligence and other miscellaneous services. Where appropriate the partner managing the provision of non-audit services is different from the partner managing audit services and as such the Board believes the auditors remain objective and independent. The Board also considers the level of fees charged by PricewaterhouseCoopers LLP is not disproportionate or inappropriate to the size of the business and considers the Company therefore compliant with provision C3.2 of the Combined Code with regard to independence and objectivity.

Nomination Committee

The nomination committee is chaired by Mr RS Harris and comprises Ms P Freer, Mr G Cook and Mr J-C Tschudin (appointed to the committee on 19 December 2007). The committee is responsible to the full Board for determining the qualities and experience required of the Company's Executive and Non-Executive Directors and for identifying suitable candidates. In appropriate cases, recruitment consultants assist in the process. The Committee is responsible for succession planning. Executive and Non-Executive Directors are subject to election by shareholders at the first opportunity after their appointment and to re-election thereafter by the shareholders at least every three years. The nomination committee met once during the year, prior to Mr Tschudin's appointment, the meeting was attended by all members.

The terms of reference of the nomination committee include the following responsibilities:

to review the structure, size and composition of the Board;
to prepare a description of the role and capabilities required for a particular appointment;
to identify and nominate candidates required for a particular appointment; and
to satisfy itself with regard to succession planning.

Remuneration Committee

The Remuneration Committee is made up entirely of independent Non-Executive Directors and is chaired by Ms P Freer and comprised Mr G Cook, and Mr J-C Tschudin (appointed to the committee on 19 December 2007). Mr RS Harris stood down from the committee on 19 December 2007. The committee is responsible for making recommendations to the Board on remuneration policy for the Company's Executive Directors and the terms of their service contracts, with the aim of ensuring that their remuneration, including share options and awards under the Share Schemes, is based both on their own performance and that of the Group generally. The remuneration committee will also administer and establish performance targets for the Share Schemes and approve further grants or awards under them. In addition, it will advise on the remuneration policy for the Group's employees. The remuneration committee met three times during the year, each meeting was attended by all members.

The terms of reference of the Remuneration Committee include the following responsibilities:

to determine the framework and policy and the individual packages for the remuneration of the Executive Directors, Chairman and members of the executive management;
to determine targets for any performance-related pay schemes;
to approve overall remuneration policy;
to review employee benefit structures; and
to produce an annual report of the Committee's remuneration policy.

Appointments to the Board

Appointments to the Board are made on merit and against objective criteria. Care is taken to ensure that appointees have enough time to devote to the job. The Board keeps under review, and takes appropriate action, to ensure orderly succession for appointments to the Board and to senior management, so as to maintain an appropriate balance of skills and experience within the Company and on the Board. The Code provisions require the formation of a Nomination Committee to lead and oversee the application of the Code principles as they relate to Board and senior management appointments.

The Board considers the other significant commitments of Non-Executive Directors prior to appointment, to ensure that they have sufficient time to meet what is expected of them, and keeps changes to these commitments under review. The terms and conditions of appointment of Non-Executive Directors are available for inspection at the Company's registered office during normal business hours and at the AGM (for 15 minutes prior to the meeting and during the meeting).

Chairman and Chief Executive

The roles of chairman and executive management, led by the Chief Executive Officer, are separated and clearly defined:

the Non-Executive chairman, Mr RS Harris, is responsible for leadership of the Board, ensuring effectiveness in all aspects of its role, setting the Board's agenda and conducting Board meetings, and ensuring effective communication with shareholders and the conduct of shareholders meetings; and

Executive management are led by the Chief Executive Officer, Dr MJ Flynn, who has been delegated responsibility by the Board for the day-to-day management of the Company within the control and authority framework set up by the Board. The levels of authority for management are periodically reviewed by the Board and are documented. The Chief Financial Officer, Mr JAP Randall and Directors of the Sinclair Pharmaceuticals Limited Board assist the Chief Executive Officer, in managing the business.

The division of responsibility between the chairman and the chief executive is clearly established, set out in writing and agreed by the Board.

Board balance and independence

The Board includes a balance of Executive and Non-Executive Directors such that no individual or small group of individuals can dominate the Board's decision taking. The size of the Board and balance of skills is considered appropriate for the requirements of the business. No one other than the committee chairman and members is entitled to be present at a meeting of the audit, nomination or remuneration committees, but others may attend at invitation of the committee.

As a smaller company, Code provision A3.2 requires the Company to have at least two independent Non-Executive Directors. The Board considers that Mr RS Harris, Mr G Cook, Ms P Freer, and Mr J-C Tschudin are independent for the reasons set out below.

The Board has reviewed the independence of the Non-Executive Directors, including an assessment of their overall character and approach, and concluded based on the following guiding principles that they are independent throughout the year. They have not been previous employees of the Group, have no material business relationships with the Group, are not members of the Company's pension scheme or share option schemes (except for Mr RS Harris), have no close family ties with the Company's advisers, Directors or senior employees, hold no cross directorships linking them with the other Directors, do not represent significant shareholders and, in the case of Mr G Cook, Ms P Freer, and Mr J-C Tschudin have served on the Board for less than five years. All the Non-Executive Directors have nominal shareholdings in the Company, which the Board considers appropriate without compromising independence. The Board considers that Mr RS Harris remains independent even in his capacity as Chairman.

INFORMATION AND PROFESSIONAL DEVELOPMENT

The Board is supplied in a timely manner with information in a form and of quality appropriate to enable it to discharge its duties. The Chief Financial Officer is responsible for ensuring the Directors receive accurate, timely and clear information, which is provided by operational management and enhanced or clarified where necessary.

All Directors receive induction on joining the Board and the chairman ensures that Directors continually update their skills and knowledge and familiarity with the Company required to undertake their role both on the Board and on Board committees. The Company provides the necessary resources for developing and updating its Directors' knowledge and capabilities.

Under the direction of the Chairman, the Company Secretary's responsibilities include good information flows within the Board and its committees and between senior management and Non-Executive Directors, as well as facilitating induction and assisting with professional development as required. The Company Secretary is responsible for advising the Board, through the Chairman, on all governance matters and for ensuring that Board procedures are complied with and applicable rules and regulations are followed. The appointment and removal of the Company Secretary is a matter for the Board as a whole.

The Directors have access to independent professional advice at the Company's expense where they judge it necessary to discharge their responsibilities as Directors. Committees are also provided with sufficient resources to undertake their duties.

ANNOUNCEMENTS

All major announcements are approved by the Chairman, the Executive Directors and panel of senior executive management and then circulated to the Board prior to issue. The Group also has internal and external checks to guard against unauthorised release of information.

PERFORMANCE EVALUATION

A formal performance review of the Board, audit and remuneration committees and their chairmen were performed during the year by a process of self-assessment. In performing these reviews, criteria that were taken into account included the ability of the Director to: take the perspective of creating shareholder value; to contribute to the development of strategy and identification of risks; to provide clarity of direction to management; to be a source of wise counsel; to bring a broad perspective to discussions and an understanding of key issues; to commit the time required to fulfil the role; and to listen to and respect the ideas of fellow Directors and management.

The senior Non-Executive Director Mr G Cook is responsible for the performance evaluation of the Chairman, taking into account the views of the Executive Directors.

RE-ELECTION

All Directors are submitted for re-election at regular intervals, subject to continued satisfactory performance. The Board keeps under review the need for refreshing the Board and takes appropriate action.

All Directors are subject to election by shareholders at the first AGM after their appointment, and to re-election annually. Non-Executive Directors are appointed for specified terms subject to re-election and to Companies Act provisions relating to the removal of a Director.

ACCOUNTABILITY

Financial reporting

The Board is responsible for presenting a balanced and understandable assessment of the Company's position and prospects, extending to interim reports and other price-sensitive public reports and reports to regulators as well as to information required to be presented by statutory requirements.

INTERNAL CONTROL

The Directors are responsible for reviewing the effectiveness of the Group's internal controls on an annual basis. There is an ongoing process to identify, evaluate and manage risk, which has been in place throughout the period and up to date of approval, in accordance with the Turnbull guidance, and it is regularly reviewed by the Board. The system is designed to manage rather than eliminate risk of failure to achieve business objectives. The system includes internal controls covering financial, operational and compliance areas, and risk management. There are limitations in any system of internal control, which can provide reasonable but not absolute assurance with respect to the preparation of financial information, the safeguarding of assets and the possibility of misstatement or loss.

The additional key procedures designed to provide an effective system of internal control are the:

annual review of the control environment and procedures;
review and update of the Group's policy and procedures;
review of external audit plans;
review of significant issues arising from the external audit; and
discussions with management on risk areas identified by the management and the Board.

A risk assessment and review of internal controls was carried out during the year in compliance with the Turnbull guidelines. Risks were categorised by level of impact and likelihood of occurrence and for the high impact and high likelihood risks identified, the associated internal controls were reviewed and approved by the Board.

CONTROL ENVIRONMENT

The Group operates within a control framework developed and strengthened over a number of years and communicated as appropriate by a series of written procedures. These lay down accounting and financial control procedures, in addition to controls of a more operational nature. The key procedures that Directors have established with a view to providing internal control are as follows:

the establishment of the organisational structure and the delegated responsibilities of operational management;
the definition of authorisation limits, including matters reserved for the Board;
the establishment of detailed operational budgets for each financial year;
reporting and monitoring performance against budgets and rolling forecasts;
the security of physical property and computer information;
establishment and annual review of a Group wide insurance program;
detailed financial, legal and environmental due-diligence on all acquisitions; and
the establishment of in-house legal and human resource functions.

The Board has reviewed the need for an internal audit function and, based on advice from the Audit Committee and the relative size of the Group, has concluded that for the time being it would not be appropriate to establish an internal audit function.

RELATIONS WITH SHAREHOLDERS

The Directors place great importance on maintaining good communications with both institutional and private investors. The Company reports formally to shareholders twice a year with the publication of its interim and annual reports. More regular communication is provided through the website www.sinclairpharma.com where all press releases are posted. The Executive Directors also present to institutional shareholders and analysts at the time of the interim and full year results. Feedback from these meetings is provided to the Board through the Company's brokers. Mr G Cook, the senior independent Director, is available to shareholders if and when required.

The AGM provides an opportunity to communicate with private and institutional shareholders and the Company welcomes their participation.

CORPORATE SOCIAL RESPONSIBILITY

The Company operates in the highly regulated pharmaceutical and medical devices sector. Hence every aspect of the products for which the Company owns the intellectual property and which are marketed or which are approved for marketing will have gone through an approval process overseen by EU, US or other national authorities to ensure their safety and efficacy.

The Company operates in a socially and environmentally responsible manner. Despite being in a relatively low-impact industry, the Company, proactively seeks ways of reducing any adverse impact upon our surroundings through recycling schemes, making more efficient use of utilities and seeking ways to reduce waste. The Group's UK offices are designed with energy saving devices and a new recycling scheme has significantly increased the amount of paper recycled. In order to reduce unnecessary air travel, video conferencing facilities are available to employees. The Group adheres to relevant legislative, regulatory and environmental codes of practice.

STATEMENT OF COMPLIANCE WITH THE PROVISIONS OF THE COMBINED CODE

The Board confirms that throughout the year ended 30 June 2008 the Company has complied with the provisions set out in Section 1 of the 2006 Combined Code on Corporate Governance issued by the Financial Services Authority, with the exception of C.3.4, a whistleblowing policy was approved by the Audit Committee at its meeting in June 2008 but this was not in place throughout the year.

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