General

PolyPeptide Group AG (the “Company”) is the holding company of a group of companies (the “Group”) engaged in the development, manufacturing and marketing of peptide based compounds for use in the pharmaceutical and related research industries. The group companies offer a full service concept from early stage custom development to contract manufacturing in both solid phase and solution phase technology. In addition, the group companies also market a wide range of generic peptides.

Since 2007, PolyPeptide Laboratories Holding B.V. (incorporated under the laws of The Netherlands) was the holding company of the Group which consists of six integrated operating subsidiaries located in Sweden, USA, France, India, and Belgium plus a holding company located in Sweden, a dormant company located in Denmark, and a dormant company located in Germany which as of 31 December 2021 was in the process of a merger into the Swedish holding company.

As part of the preparations for the IPO on SIX Swiss Exchange on 29 April 2021, all the shares of PolyPeptide Laboratories Holding B.V. were contributed into the new Swiss entity, PolyPeptide Group AG, in the form of a capital contribution. As a result, PolyPeptide Group AG became the new parent holding company of the Group.

PolyPeptide Group AG (the “Company”) was incorporated in Switzerland on 6 April 2021. As of 31 December 2021, the registered office of the Company is Dammstrasse 19, 6300 Zug, Switzerland. As of 31 December 2021, the Company was a 55.54% subsidiary of Draupnir Holding B.V., a company registered in The Netherlands. Draupnir Holding B.V.'s ultimate parent entity is Foundation Mamont, a foundation registered on Guernsey of which Mr. Frederik Paulsen (1006 Lausanne, Vaud, Switzerland) is at present the principal beneficiary pursuant to the charter of the Mamont Foundation governed by the laws of Guernsey.

1 Summary of significant accounting policies

Basis of preparation

The consolidated financial statements of PolyPeptide Group AG and its subsidiaries have been prepared in accordance with the International Financial Reporting Standards (IFRS).

Under IFRS 3 - Business Combinations the aforementioned reorganization is not considered to be a business combination, but rather the continuation of the existing business activities of the Group with a new parent entity. As a result, the consolidated financial statements of PolyPeptide Group AG are presented using the values from the consolidated financial statements of the previous group holding entity, PolyPeptide Laboratories Holding B.V, which were also prepared in accordance with IFRS. Equity figures for the comparative period are based on actual circumstances and therefore presented for the preceding holding company, PolyPeptide Laboratories Holding B.V. See Note 6 for further details.

The financial year for the Group is 1 January – 31 December 2021.

All amounts are stated in thousands of Euros, unless otherwise indicated.

Going concern

Due to the pharmaceutical industry the Group is operating in, PolyPeptide has weathered the pandemic reasonably well through 2021, even capitalizing on new opportunities. We expect to continue to capitalize on some of these new opportunities in 2022. The pandemic is therefore not expected to impact the going concern of the Group.

Changes in accounting policies and presentation

The following amendments became mandatorily effective from 1 January 2021:

• Amendments to IFRS 4, IFRS 7, IFRS 9, IFRS 16 and IAS 39 in the IBOR Reform

The adoption of these amendments to the IFRS Standards has not had any significant impact on the financial statements of the Group.

As a result, the accounting policies are consistent with prior years. However, share-based payment to eligible members of the Board of Directors, the Executive Committee and certain other senior managers was introduced during the first half year of 2021. In consequence, IFRS 2 – Share-based Payment now applies for the consolidated financial statements.

Changes in presentation

Effective 1 January 2021, the Group changed its presentation of the cash flow statement. In previous years, the Group presented movements in provisions and movements in pensions together on one line named “Increase in provisions”. However, to increase transparency of the figures the Group has decided to split the adjustments arising from movements in provisions and movements in pensions into two separate line items within the category “Adjustments to reconcile cash generated by operating activities”. The change is only a matter of disaggregation and has thus no impact on “Cash generated from operations”.

Furthermore, the Group previously presented movements in financial assets and other current assets together on one lined named “(Increase)/Decrease in other current assets”. To increase the transparency of the figures the Group has decided to split the line into two separate line items where movements in other current assets are shown on a separate line within “Cash generated from operations” and movements in other financial assets are shown on a separate line within “Net cash flows from investing activities”.

Comparative figures have been restated to reflect all changes in the presentation.

Except from the changes described above, the presentation of the consolidated financial statements is consistent with prior year.

Principles of consolidation

The consolidated financial statements include the Company and its subsidiaries as at 31 December of each year. Subsidiaries are all entities over which the group has control. The group controls an entity where the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are consolidated from the date the Company obtains control until such time as control ceases.

The financial statements of the subsidiaries are prepared for the same reporting year as the parent company, using consistent accounting policies. Reference is made to Note 11 for information regarding the consolidated subsidiaries. All intra-group balances, income and expenses and unrealized gains and losses resulting from intra-group transactions are eliminated in full. A change in the ownership interest of a subsidiary, without loss of control, is accounted for as an equity transaction.

Translation of foreign currencies

The Group’s consolidated financial statements are presented in Euros. The functional currency of the parent company is CHF. Each entity within the group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency.

Translation of transactions and balances
Transactions in foreign currencies are initially recorded by the Group’s entities at their functional currency spot rate at the date the transaction first qualifies for recognition. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency spot rate of exchange at the reporting date. Differences arising on settlement or translation of monetary items are recognized in the income statement.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using exchange rates as at the dates of the initial transactions. When a gain or loss on a non‑monetary item is recognized in other comprehensive income, any exchange component of that gain or loss is recognized in other comprehensive income. Conversely, when a gain or loss on a non‑monetary item is recognized in profit or loss, any exchange component of that gain or loss is recognized in profit or loss.

Translation of subsidiaries
The functional currencies of the foreign operations are predominately the Euro, US Dollar and the Swedish Krona. As at the reporting date, the assets and liabilities of the subsidiaries with other functional currency than the Euro are translated into the presentation currency of the Group (the Euro) at the rate of exchange ruling at the reporting date and their income statements are translated at the weighted average exchange rates for the year. The exchange differences arising on the translation are recorded in other comprehensive income. On disposal of a foreign entity, the component of other comprehensive income relating to that foreign operation is recognized in the income statement.

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising from the acquisition are treated as assets and liabilities of the foreign operation and translated at the closing rate.

Revenue recognition

Revenue is recognized to the extent it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured, regardless of when the payment is being made. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, VAT and other taxes and duties. Revenue is recognized when a performance obligation is satisfied.

Performance obligations and timing of revenue recognition
The Group earns the majority of its revenues from the sale of goods. Therefore, most of the Group’s revenues are recognized at a point in time when control of the goods has transferred to the customer. This is generally when the goods are delivered to the customer. There is limited judgement needed in identifying the point of control passes: once physical delivery of the products to the agreed location has occurred, the Group no longer has physical possession, usually will have a present right to payment (as a single payment on delivery) and retains none of the significant risks and rewards of the goods in question. The Group has no sales contracts that include performance obligations relating to warranties or returns.

The Group also incurs a portion of its revenues in connection with pharmaceutical services like development and analytical services. In some cases, these contracts run longer than a year with revenue recognized typically on an over time basis. These service contracts are set up in a way to be distinct and the consideration related to the services is based upon standard hourly prices. For these services, the Group recognizes revenues based upon stage of completion which is estimated by comparing the number of hours actually spent on the project with the total number of hours expected to complete the project (i.e., an input-based method). This is considered a faithful depiction of the transfer of services as the contracts are initially priced on the basis of anticipated hours to complete the projects and therefore also represent the amount to which the Group would be entitled based on its performance to date.

Determining the transaction price
With respect to the sale of goods, a transaction price is agreed in an order or order confirmation, between the Group and its customer. Prices are also included in the master service agreements which are usually updated every year. However, the price in the order confirmation is leading. There are no other variable components included in the transaction price such as financing components, payables to the customer, non-cash considerations, etc. All other special considerations such as volume discounts are calculated on a calendar year basis and therefore do not result in any uncertainties about the amount of the transaction price at the end of the financial year. The transaction price for services is based upon a price list with standard prices (fair value) for different kind of services.

Allocating amounts to performance obligations
As each performance obligation in a customer contract is generally priced against its fair value, only limited judgment is involved in the allocation of the total contract price to the individual performance obligations. This allocation will usually be determined by dividing the total contract price by the number of units ordered or hours spent.

Other income and expenses

Interest
For all financial instruments measured at amortized cost, interest income or expense is recorded using the effective interest rate. Interest income and expense is included in financial income and expense in the income statement.

Other income, costs and expenses
Other income, costs and expenses are allocated to the year to which they relate. Losses are accounted for in the year in which they arise.

Share-based payment

Share-based compensation is provided to members of the Board of Directors, the Executive Committee and certain other senior managers.

The programs are classified as equity arrangements where the fair value of the shares granted under the programs are recognized as an expense with a corresponding increase in equity. The fair value of the shares is measured at the market share price of PolyPeptide Group AG’s shares, adjusted to take into account terms and conditions upon which the shares were granted.
The total expense is recognized over the vesting period which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each period, the Company revises its estimates of the number of shares that are expected to vest based on the non-market vesting and service conditions. It recognizes the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity.

Government grants

Government grants are recognized when there is reasonable assurance that the grant will be received and all associated conditions will be complied with. When the grant relates to an expense item, it is recognized as other operating income over the period necessary to match the grant on a systematic basis to the costs that it is intended to compensate. When the grant relates to an asset, it is recognized as deferred income and released to other operating income in equal annual amounts over the expected useful life of the related asset.

Tax credits that can only be realized by a reduction of current or future corporate tax payments, rather than being directly settled in cash, are presented as part of the income tax charge for the year.

Taxes

Current income tax
Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date. Corporate income tax is calculated on taxable profit according to the applicable tax rates in the various countries.

Current income tax relating to items recognized outside profit or loss is recognized outside profit or loss. Current income tax items are recognized in correlation to the underlying transaction either in profit or loss, through other comprehensive income or directly in equity.

Deferred income tax
Deferred income tax is provided using the liability method on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred income tax liabilities are recognized for all taxable temporary differences, except:

• When the deferred income tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

• in respect to taxable temporary differences associated with investments in subsidiaries, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred income tax assets are recognized for all deductible temporary differences, the carry-forward of unused tax credits and any unused tax losses.

Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax credits and unused tax losses can be utilized, except:

• When the deferred income tax asset relating to the deductible temporary difference arises from initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither accounting profit nor taxable profit or loss; and
• in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are only recognized to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income tax assets are reassessed at each reporting date and are recognized to the extent that it is probable that future taxable profit will allow the deferred tax asset to be recovered.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the assets are realized and the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.

Deferred income tax relating to items recognized outside profit or loss is recognized outside profit or loss. Deferred tax items are recognized in correlation to the underlying transaction in other comprehensive income or directly in to equity.

Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.

VAT
Income, expenses and assets are recognized net of the amount of VAT, except:

• When the VAT incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the VAT is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable; and
• receivables and payables are stated with the amount of VAT included.

The net amount of VAT recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position.

Fair value measurements

The Group measures certain financial instruments at fair value. The fair values of financial instruments measured at amortized costs are disclosed in the financial statements. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

• In the principal market for the asset or liability; or
• in the absence of a principal market, in the most advantageous market for the asset or liability.

The Group must be able to access the principal market or the most advantageous market at the measurement date.

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimizing the use of unobservable inputs significant to the fair value measurement as a whole:

• Level 1 – Quoted (unadjusted) market prices in active markets for identical assets or liabilities.
• Level 2 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable.
• Level 3 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly unobservable.

For assets and liabilities that are recognized in the financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

Business combinations and goodwill

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the Group elects whether it measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition costs incurred are expensed and included in general and administrative expenses. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is re-measured to fair value at the acquisition date through profit or loss.

Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability will be recognized in accordance with IFRS 9 either in profit or loss or as a change to other comprehensive income. If the contingent consideration is classified as equity, it will not be remeasured. Subsequent settlement is accounted for within equity. In instances where the contingent consideration does not fall within the scope of IFRS 9, it is measured in accordance with the appropriate IFRS.

Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognized for the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in profit or loss.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.

Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained.

Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. At the acquisition date, any goodwill acquired is allocated to each of the cash-generating units expected to benefit from the business combination’s synergies. Impairment is determined by assessing the recoverable amount of the cash-generating unit to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognized, firstly on goodwill and then on the other assets.

Intangible assets

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is the fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at costs less any accumulated amortization and any accumulated impairment losses. Internal development of software for internal use is recognized as intangible assets if the recognition criteria are met. Otherwise, the expenditure is reflected in the income statement in the year in which it is incurred. The useful lives of intangible assets are assessed to be either finite or indefinite.

Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible with a finite useful life are reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite useful lives is recognized in the income statement in the expense category consistent with the function of the intangible asset.

Gains or losses arising from the derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the income statement when the asset is derecognized.

Research and development costs

Research costs are expensed as incurred. Development expenditures on an individual project are recognized as an intangible asset when the Group can demonstrate:

• The technical feasibility of completing the intangible asset so that the asset will be available for use or sale
• Its intention to complete and its ability to use or sell the asset
• How the asset will generate future economic benefits
• The availability of resources to complete the asset
• The ability to measure reliably the expenditure during development
• The ability to use the intangible asset generated

Amortization of the asset begins when development is complete and the asset is available for use. It is amortized over the period of expected future benefit.

The Group’s intangible assets consist of software and other intangible assets. Software is amortized on a straight-line basis over five to ten years whereas other intangible assets are amortized on a straight-line basis over five years.

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Such cost includes the costs of replacing part of the plant and equipment and borrowing cost for long term construction projects, if the recognition criteria are met. Likewise, when a major inspection is performed, its cost is recognized in the carrying amount of the plant and equipment as a replacement, if the recognition criteria are satisfied. All other repair and maintenance costs are recognized as dwelling costs in the income statement.

Depreciation is calculated on a straight-line basis over the estimated useful life of the asset, as stated hereunder.

• buildings (and leasehold improvements)

  10 to 50 years

• machinery and equipment

  3 to 16 years

• other

  3 to 5 years

An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognizing the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement in the year the asset is derecognized.

The assets’ residual values, useful lives and methods of depreciation are reviewed at each financial year end, and adjusted prospectively, if appropriate.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of the respective assets. All other borrowing costs are expensed in the period they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

Impairment of non-financial assets

The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or cash-generating unit exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.

Financial assets

Initial recognition and measurement

Financial assets are classified at initial recognition and subsequently measured at amortized cost, fair value through other comprehensive income or fair value through profit or loss.

The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Group’s business model for managing them. With the exception of trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient, the Group initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs. Trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient are measured at the transaction price determined under IFRS 15.

In order for a financial asset to be classified and measured at amortized cost or fair value through other comprehensive income, it needs to give rise to cash flows that are “solely payments of principal and interest” on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level.

The Group’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both.

Subsequent measurement
The subsequent measurement of financial assets depends on their classification as described below:

Financial assets at amortized cost (debt instruments)
This category is most relevant to the Group. The Group’s financial assets at amortized cost mainly include trade receivables.

The Group measures financial assets at amortized cost if both of the following conditions are met:

• The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows.

And

• The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

Financial assets at amortized cost are subsequently measured using the effective interest method and are subject to impairment. Gains and losses are recognized in profit or loss when the asset is derecognized, modified or impaired.

Impairment of financial assets

The Group recognizes an allowance for expected credit losses for all debt instruments not held at fair value through profit or loss. Expected credit losses are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from credit enhancements that are integral to the contractual terms.

Financial assets at amortized cost (debt instruments)
For trade receivables and contract assets, the Group applies a simplified approach in calculating expected credit losses. Therefore, the Group does not track changes in credit risk, but instead recognizes a loss allowance based on lifetime expected credit loss at each reporting date.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed, to the extent that the carrying value of the asset does not exceed its amortized cost.

The Group considers a financial asset to be in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Group. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows.

Inventories

Inventories are valued at the lower of cost and net realizable value.

Costs incurred in bringing each product to its present location and condition are accounted for as follows: Raw materials are stated at the purchase cost on a first in, first out basis. Finished goods and work-in-progress include costs of direct materials and labour and a proportion of manufacturing overhead based on normal operating capacity but excluding borrowing cost as the production does not require a substantial period of time.

Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale.

Other current assets

All other current assets are stated at the amounts at which they were acquired or incurred.

Cash and short-term deposits

Cash and short-term deposits in the statement of financial position and in the statement of cash flows comprise cash on hand and in banks and short-term deposits with an original maturity of three months or less.

Financial liabilities

Initial recognition and measurement
Financial liabilities are classified at initial recognition as financial liabilities at fair value through profit or loss, loans and borrowings and payables as appropriate.

All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs. The Group’s financial liabilities include trade and other payables, loans and borrowings including bank overdrafts.

Subsequent measurement
The subsequent measurement of financial liabilities depends on their classification as described below:

Financial liabilities at fair value through profit or loss
This category comprises the contingent consideration payable following from the acquisition of Lonza Braine S.A. (renamed into PolyPeptide S.A.) on 3 January 2017 as further disclosed in Note 19. This contingent consideration is carried in the statement of financial position at fair value with changes in fair value recognized in the statement of income in the finance income or expense line. As of 31 December 2021, the contingent consideration was fully paid. The Group has no other financial liabilities being classified at fair value through profit or loss.

Other financial liabilities
All loans and borrowings, (trade) payables and other financial liabilities are initially recognized at fair value of the consideration received less directly attributable transaction costs. After initial recognition, these financial liabilities are subsequently measured at amortized cost using the effective interest rate method. Gains and losses are recognized in the income statement when the liabilities are derecognized as well as through the effective interest rate amortization process. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate. The effective interest rate amortization is included in finance costs in the income statement.

Derecognition of financial assets and liabilities

Financial assets
A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized when:

• the rights to receive cash flows from the asset have expired; or
• the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a “pass-through” arrangement and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Group’s continued involvement in the asset. If there is an associated liability the Group recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.

Continued involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the net of the carrying amount and the maximum amount of the consideration that the Group could be required to repay.

Financial liabilities
A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the income statement.

Provisions

Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax discount rate that reflects, when appropriate, the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognized as financial expenses in the income statement.

Pensions

The Group has insured contributory pension plans covering substantially all employees. Pension obligations are funded through annual premiums. The Group has defined benefit obligations to employees. The cost of providing benefits under the defined benefit plans is determined separately for each plan using the projected unit credit actuarial valuation method.

Remeasurements, comprising of actuarial gains and losses and the return on plan assets (excluding net interest), are recognized immediately in the statement of financial position with a corresponding debit or credit to retained earnings through other comprehensive income in the period in which they occur. Remeasurements are not reclassified to profit or loss in subsequent periods.

Past service costs are recognized in profit or loss on the earlier of:

• The date of the plan amendment or curtailment; and
• the date that the Group recognizes restructuring-related costs

Net interest is calculated by applying the discount rate to the net defined benefit liability or asset.

The Group recognizes the following changes in the net defined benefit obligation under cost of revenues and general and administrative expenses in consolidated income statement:

• Service costs comprising current service costs, past-service costs, gains and losses on curtailments and non-routine settlements
• Net interest expense or income

The defined benefit liability is the aggregate of the present value of defined benefit obligation and the fair value of plan assets out of which the obligations are to be settled. Plan assets are assets that are held by a long-term employee benefit fund or qualifying insurance policies.

Plan assets are not available to the creditors of the Group, nor can they be paid directly to the Group. Fair value is based on market price information and in the case of quoted securities it is the published bid price.

Leases

All leases are accounted for by recognizing a right-of-use asset and a lease liability, except for:

• Leases of low value assets; and
• Leases with a term of 12 months or less.

Lease liabilities are measured at the present value of the contractual payments due to the lessor over the lease term, with the discount rate determined by reference to the rate inherent in the lease unless (as is typically the case) this is not readily determinable, in which case the group’s incremental borrowing rate on commencement of the lease is used. Variable lease payments are only included in the measurement of the lease liability if they depend on an index or rate. In such cases, the initial measurement of the lease liability assumes the variable element will remain unchanged throughout the lease term. Other variable lease payments are expensed in the period to which they relate.

On initial recognition, the carrying value of the lease liability also includes:

• Amounts expected to be payable under any residual value guarantee;
• the exercise price of any purchase option granted in favour of the group if it is reasonable

certain to assess that option;

• any penalties payable for terminating the lease, if the term of the lease has been estimated on the basis of termination option being exercised.

Right-of-use assets are initially measured at the amount of the lease liability, reduced for any lease incentives received, and increased for:

• Lease payments made at or before commencement of the lease;
• initial direct costs incurred; and
• the amount of any provision recognized where the Group is contractually required to dismantle, remove or restore the leased assets.

Subsequent to initial measurement lease liabilities increase as a result of interest charged at a constant rate on the balance outstanding and are reduced for lease payments made. If the lease transfers ownership of the underlying asset by the end of the lease term or if the cost of the right-of-use asset reflects that a purchase option will be exercised, the right-of-use asset is depreciated from the commencement date to the end of the useful life of the underlying asset. Otherwise, the right-of-use asset is depreciated from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term.

When the Group revises its estimate of the term of any lease (because, for example, it re-assesses the probability of a lessee extension or termination option being exercised), it adjusts the carrying amount of the lease liability to reflect the revised net present value of future lease payments. The carrying amount of lease liabilities is similarly revised when the variable element of future lease payments dependent on a rate or an index is revised. In both cases an equivalent adjustment is made to the carrying amount of the right-of-use asset, with the revised carrying amount being depreciated over the remaining (revised) lease term.

Other liabilities

All other liabilities are stated at the amounts at which they were acquired or incurred.

Cash flow statement

The cash flow statement is prepared according to the indirect method. Cash and short-term deposits consist of current accounts with banks (including short-term deposits with an original maturity of three months or less) and cash in hand. Interest and income tax cash flows are included in the cash flow from operating activities.

Future changes in accounting policies

The following standards, amendments to standards, and interpretations have been issued by the IASB and are mandatorily effective for reporting periods beginning 1 January 2022 or later. The Group has not early adapted any of these and do not expect them to have a significant impact on the consolidated financial statements:

• Covid-19-Related Rent Concessions beyond 30 June 2021 (Amendments to IFRS 16)
• Annual Improvements to IFRS Standards 2018-2020 (Amendments to IFRS 1, IFRS 9, IFRS 16 and IAS 41)
• Conceptual Framework (Amendments to IFRS 3)
• Onerous Contracts – Costs of Fulfilling a Contract (Amendments to IAS 37)
• Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16)
• IFRS 17 Insurance Contracts
• IAS 1 Presentation of Financial Statements (Amendment - Classification of Liabilities as Current or Non-Current)
• Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2)
• Definition of Accounting Estimates (Amendments to IAS 8)
• Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12)

Significant accounting judgments and estimates

The preparation of the Group’s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.

Estimates and assumptions

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The Group based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of the Group. Such changes are reflected in the assumptions when they occur.

Impact of Covid-19
Covid-19 provided more opportunities than issues for PolyPeptide in 2021. Through 2021 our supply chain was in relatively good shape. Although some delays were experienced, we were able to modify and prioritize production schedules to accommodate delays. We will continue to monitor material supplies and adjust as needed. To date, we are able to maintain full production schedules at all sites. We have not experienced any significant cancellation of orders in 2021 due to Covid-19. On the contrary, we received additional orders of the Matrix-M adjuvant components for the Novavax Covid vaccine.

Impairment of non-financial assets
The Group assesses whether there are any indicators for impairment for all non-financial assets at each reporting date and tests for impairment when there are indicators that the carrying amounts may not be recovered. When value in use calculations are undertaken, management must estimate the expected future cash flows from the asset or cash-generating unit and choose a suitable discount rate in order to calculate the present value of those cash flows (see Note 8, 9 and 10). As discussed above, Covid-19 did not result in any significant negative impact for the Group and hence did not result in any impairment of non-current assets during the year.

Pension and other employment benefits
The cost of defined benefit pension plans is determined using actuarial calculations. The actuarial calculations involve making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates and future pension increases. Due to the complexity of the valuation, the underlying assumptions and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions (see Note 16).

Deferred income tax assets
Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Management’s judgement is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profits together with future tax planning strategies (see Note 5).

Financial Report

2Segment information

The segment disclosures provided below reflect the information used by the Executive Committee for allocating resources and assessing the performance of the business.

The segments have been derived from internal reporting and the performance is assessed by revenues generated.

Revenue - business segments

Revenues – major customers (10% or more of total revenue)

In 2021, revenues of approximately kEUR 57,600 and kEUR 35,900 were derived from two customers.
In 2020, revenues of approximately kEUR 39,100 were derived from a single customer.

Geographical areas

Shown below are the carrying amounts of non-current assets other than deferred income tax assets and other financial assets, broken down by location of the assets. Related additions to intangible assets and property, plant and equipment (PP&E) during the year and revenues generated from the location of the assets are shown as well.

Financial Report

3Revenue and expenses

Revenue from contracts with customers

Revenues from Active Pharmaceutical Ingredients (API) fully relate to the sale of goods and revenues from related services relate to the rendering of services. All revenues from contracts with customers classify as business-to-business.

Revenue by geographical area

Revenue is attributed to the individual geographical area based on the invoice address of the respective customer.

Contract assets and contract liabilities

Contract assets

Contract liabilities

Contract assets and contract liabilities arise at each facility because cumulative payments received from customers at each balance sheet date do not necessarily equal the amount of revenue recognized on the contracts. Contract assets and liabilities are presented on the face of the consolidated statement of financial position.

Other operating income

The research refund of kEUR 1,190 (2020: kEUR 1,122) relates to a deduction on tax paid due qualified research in chemistry. The investment grants of kEUR 115 (2020: kEUR 67) relates to improving air emission handling, etc.
US government loans waived of kEUR 2,370 in the context of the coronavirus pandemic is included as “Other” in 2021.

Marketing and sales expenses

Research expenses

General and administrative expenses

IPO cost

The following IPO-related expenses are included within “General and administrative expenses” in the income statement:

The IPO cash bonus amount relates to the bonus award made by the Group after the IPO to selected non-executives involved in the IPO process. The IPO share bonus amount relates to expenses incurred by the Group in relation to the shares awarded by Draupnir Holding B.V. in the IPO process. These expenses were fully reimbursed by Draupnir Holding B.V in H2 2021.

In addition, an amount of kEUR 4,652 relating to consultancy services, Swiss Federal Issue Stamp Tax and Bank Commissions has been charged directly to the share premium reserve in accordance with IAS 32.

Financial income

Financial expenses

Staff costs and employee information

An amount of kEUR 74,363 (2020: kEUR 64,250) relating to salaries and employee benefits has been included in cost of sales.

The average number of FTEs of the principal departments is as follows:

Average number of employees

Depreciation and amortization included in the income statement

Included in Cost of sales:

Included in General and administrative expenses:

4Share-based payment

Share-based payment was introduced in the Group as part of the IPO on SIX Swiss Exchange on 29 April 2021.

For the year ended 31 December 2021, the following equity-settled share-based payment arrangements have been recognized in the financial statements:

IPO share bonus

Eligible members of the Board of Directors, the Executive Committee and certain other senior managers were granted a total of 51,434 number of shares upon the successful listing on SIX Swiss Exchange. The fair value at grant date amounted to kEUR 2,998 and was measured based on the initial public offering price of EUR 58 (CHF 64) per share.

Since all the shares vested immediately upon the listing, the full amount has been recognized in the income statement in 2021 as “General and administrative expenses” (see Note 3). The amount was subsequently fully reimbursed by Draupnir Holding B.V. which has been recognized directly in equity on “Other capital reserves”.

Board of Directors

Members of the Board of Directors have the option to elect to be paid up to 100% of their fixed fee in shares. For Board members electing to receive more than 50% of their fixed fee in shares, the shares exceeding the 50% portion are granted at a discount of 20% to market price. The proportion between shares and cash is selected by each Board member upon election at the annual general meeting and is fixed until next annual general meeting. For the current period (i.e., until the annual general meeting in 2022), the Board of Directors is compensated on a pro-rata basis for the period of service even in the case of early termination or removal.

The fair value at grant date amounted to kEUR 731, reflecting a measurement based on a total number of shares of 12,540 and the initial public offering price of EUR 58 (CHF 64) per share.

Under IFRS, all shares will be fully vested at the annual general meeting in April 2022. In 2021, a total amount of kEUR 713 was recognized as “General and administrative expenses” in the income statement according to the principles of graded vesting in IFRS 2.

Chief Executive Officer

The CEO of the Group, Raymond De Vré, has during 2021 been granted three separate share-based payment arrangements:

• A one-time grant of shares at a value of kCHF 750 which was calculated at a 20% discount to the initial public offering price of CHF 64 as compensation for the loss of unvested options from his previous employer. The fair value at grant date amounted to kEUR 854, reflecting a measurement based on 14,648 number of shares and the initial public offering price of EUR 58 (CHF 64) per share. The grant includes a service condition of three years, one-third vesting each year as of 1 June (starting in 2022). The expenses are recognized in the income statement according to the principles of graded vesting in IFRS 2, resulting in an amount of kEUR 401 recognized as “General and administrative expenses” in 2021.

• A grant of shares at a value of kCHF 100 at 15% discount to the initial public offering price of CHF 64 as compensation for his loss of variable payments for 2020 and 2021 from his previous employer. The fair value at grant date amounted to kEUR 107, reflecting a measurement based on 1,838 number of shares and the initial public offering price of EUR 58 (CHF 64) per share. The grant includes a service condition of one year and will vest at 1 July 2022. The expenses are recognized on a straight-line basis in the income statement, resulting in an amount of kEUR 66 recognized as “General and administrative expenses” in 2021.

• During the second half of 2021, the Board of Directors adopted a Long Term Incentive Plan (“LTIP”) for Executive Committee members and other members of senior management of the Group. Under this share-based incentive program, eligible participants will be awarded the contingent right to receive a certain number of shares in the future (“PSU(s)”) in the Company subject to continued employment and achievement of non-market performance targets. The actual number of PSUs that will eventually vest and be settled in shares depend on the RONOA and EPS performance of the Group over a three-year performance period.
    
  For the year ended 31 December 2021 the only eligible participant in the LTIP was the CEO of the Group, Raymond De Vré. However, the Remuneration and Nomination Committee is currently evaluating the expansion of the LTIP to cover additional members of the Executive Committee as well as other members of senior management in future periods.
  
  The PSUs were granted to Raymond De Vré on 29 November 2021. In accordance with IFRS 2, the maximum number of shares potentially vesting has been used for the determination of the fair value of the grant. As a result, the fair value at grant date amounted to kEUR 1,241, reflecting a measurement based on 9,909 number of PSUs and the share price of PolyPeptide Group AG as of the grant date of EUR 125 (CHF 131). The shares will vest 10 trading days after the shareholders approve the 2023 audited financial statements.
  
  In 2021 an amount of kEUR 28 has been recognized as “General and administrative expenses” in the income statement.

Financial Report

5Taxation

Taxation includes local and foreign taxation. Major components of the tax expense were:

Amounts recorded in the consolidated statement of comprehensive income relate to deferred income taxes on actuarial gains and losses on defined benefit plans as a result of IAS 19.

A reconciliation of the income tax charge applicable to profit from operating activities before income tax at the statutory income tax rate to income tax expense at the Company’s effective income tax rate for the years ended 31 December was as follows:

The applicable tax rate has changed in 2021 due to the change of the parent company of the Group. In 2020 the parent company, PolyPeptide Laboratories Holding B.V., was incorporated in The Netherlands (with a statutory income tax rate of 25.0%), whereas the parent company in 2021, PolyPeptide Group AG, is incorporated in Switzerland (with an effective statutory income tax rate of 11.8%).

The effective income tax rate has increased from 16.9% in 2020 to 21.0% in 2021. The increase in effective tax rate is impacted by non-capitalized tax losses in 2021 and smaller R&D tax credits compared to result before income taxes.

The current corporate income tax liabilities include an amount of kEUR 1,616
(2020: kEUR 1,683) relating to US R&D tax credits that have been claimed but for which uncertainty exists on whether these will be sustained by the US tax authorities.

Deferred income tax assets as at 31 December relate to the following:

The deferred tax asset for losses carried forward mainly relates to the taxable losses of PolyPeptide S.A. and will be settled with future taxable profits to be realized by this group company. The deferred tax asset for temporary differences mainly relate to the IAS 19 pension provision of PolyPeptide S.A. and PolyPeptide Laboratories (Sweden) AB.

Deferred income tax liabilities as at 31 December relate to the following:

Differences in carrying amount and tax values of assets and liabilities mainly relate to differences in valuation of land & buildings and machinery & equipment.

The Group has unrecognized tax loss carry forwards available for related losses incurred in various countries approximating EUR 10,841,731 (2020: EUR 2,888,145), of these tax losses, EUR 2,323,649 has no expiration date, whereas the rest will expire after seven years from 2021. No deferred income tax asset has been recognized due to uncertainty with respect to available taxable profits in the future for these tax jurisdictions and the limitations imposed in tax legislation in order to utilize the tax losses.

The deferred income tax charge relates to the following:

Translation differences mainly relate to the Swedish Krona, Indian Rupee and United States Dollar.

Financial Report

6Shareholders' equity

Share capital

The parent company of the Group, PolyPeptide Group AG, was incorporated on 6 April 2021 with 30,000,000 shares with a nominal value of CHF 0.01 each, corresponding to a share capital of CHF 300,000.

The contribution of all the shares of PolyPeptide Laboratories Holding B.V. into PolyPeptide Group AG in exchange for one share increased the share capital by CHF 0.01.

In connection with the IPO, PolyPeptide Group AG further increased its initial share capital by issuing 3,125,000 shares with a nominal value of CHF 0.01 each, corresponding to an increase in its share capital of CHF 31,250. This transaction increased the share premium reserve by CHF 199,968,750.

As a result, the share capital of PolyPeptide Group AG comprised 33,125,001 shares of CHF 0.01 each as of 31 December 2021. All shares are fully paid.

The share capital of the former parent company, PolyPeptide Laboratories Holding B.V, comprised 50,000,000 shares of EUR 0.66 each as of 31 December 2020.

Treasury shares

On 29 April 2021, PolyPeptide Group AG purchased 93,750 own shares at the IPO offer price of CHF 64 to be held as treasury shares. 73,379 number of shares have been transferred to employees and board members as part of their share-based remuneration during 2021, including as part of the IPO recognition bonus reimbursed by Draupnir Holding B.V.
(see Note 4).

Financial Report

7Earnings per share

Basic earnings per share has been calculated by dividing the result for the year attributable to the owners of PolyPeptide Group AG by the weighted average number of shares outstanding during the year. Treasury shares are not considered as outstanding shares.

As described in the first section of the notes to the consolidated financial statements, the parent company of the Group changed during 2021. However, due to the predecessor accounting for this reorganization, basic earnings per share for 2020 has been calculated based on the total number of outstanding shares of 30,000,001, corresponding to the share capital of PolyPeptide Group AG prior to the capital increase of 3,125,000 shares, cf. the description above.

Diluted earnings per share is calculated by dividing the result for the year attributable to the owners of the PolyPeptide Group AG by the weighted average number of shares outstanding adjusted for all potentially dilutive shares. Dilutive shares arise from the share-based payment described in note 4. Since share-based payment was not introduced in 2020, there is no dilution effect on earnings per share in 2020.

Financial Report

8Intangible assets

As at 31 December 2021, the carrying amount of software includes an amount of EUR 4.3 million (2020: EUR 4.5 million) that is still under construction. This software will be taken into use in subsequent periods and hence no amortization has been recognized over this software yet.

Other intangible assets mainly consist of customer contracts and supply agreements.

The Group assesses whether there are any indicators for impairment for all non-financial assets at each reporting date. If this is the case the Group calculates the amount of impairment as the difference between the recoverable amount of the asset and its carrying value and recognizes the amount in the income statement. The Group has not identified any indicators for impairment during the year.

Financial Report

9Property, plant and equipment

The Group assesses whether there are any indicators for impairment for all non-financial assets at each reporting date. If this is the case the Group calculates the amount of impairment as the difference between the recoverable amount of the asset and its carrying value and recognizes the amount in the income statement. The Group has not identified any indicators for impairment during the year.

The amount of borrowing costs capitalized during the year was nil (2020: nil). Other operating assets comprise office equipment.

As at 31 December 2021, the carrying amount of land & buildings includes an amount of approximately EUR 8.9 million (2020: EUR 9.8 million) for which the legal ownership is no longer with the Group due to the sale and leaseback transaction as further disclosed in Note 19.

Financial Report

10Leases

Set out below are the carrying amounts of right-of-use assets recognized in the statement of financial position and the movements during the year:

Set out below are the carrying amounts of the lease liabilities recognized in the statement of financial position and the movements during the year:

The maturity of the total undiscounted lease liability as at 31 December is disclosed in Note 24.

The following amounts are recognized in the income statement:

The Group had total cash outflows for leases of kEUR 4,117 in 2021 (2020: kEUR 2,670).

The total lease liability of the Group mainly relates to leases of buildings in Torrance, USA. Two new building leases were signed in Torrance during 2021 (one new building lease in 2020). These leases are expected to terminate between 2031 and 2041. The remaining lease liability largely consists of machinery and company cars in various group companies, primarily having fixed monthly lease payments.

Financial Report

11Investments in subsidiaries

The consolidated financial statements include the financial statements of the Company and the subsidiaries listed below. Details of investments in subsidiaries as at 31 December are as follows:

Percentage of voting shares is equal to percentage of ownership.

PolyPeptide Laboratories Holding B.V. was merged through a reverse cross-border merger into Polypeptide Laboratories Holding (PPL) AB as recorded in the Swedish Companies Registration Office on 29 October 2021.

PolyPeptide Laboratories Spol S.r.o. was liquidated and deleted from the Czech Public Register on 6 April 2021.

As of 31 December 2021, PolyPeptide Laboratories GmbH was in the process of a merger into Polypeptide Laboratories Holding (PPL) AB. No further financial impact is expected related to the merger.

Financial Report

12Inventories

Raw materials that are expired or that are no longer used in production, and finished goods for which no future sales are expected, are fully written off at balance sheet date. Finished goods that are expected to be sold after retesting are written off for the expected loss during this retesting. The estimated loss is approximately 10% of the original weight of the batch.

Costs of inventories recognized in cost of sales in the income statement during the financial year amount to kEUR 65,998 (2020: kEUR 53,989).

Provisions for obsolete stock amounted to kEUR 27,206 as at 31 December 2021 (2020: kEUR 24,282). Inventory write-offs recognized in cost of sales in the income statement during the financial year amounted to kEUR 5,439 mainly due to inventory write-offs in the Belgium and Sweden (2020: kEUR 2,171).

Financial Report

13Trade receivables

Trade receivables are non-interest bearing and are generally on 30-90 days’ terms.

The ageing analysis of trade receivables looks as follows:

The Group applies the IFRS 9 simplified approach to measuring expected credit losses using a lifetime expected credit loss provision for trade receivables and contract assets. To measure expected credit losses on a collective basis, trade receivables and contract assets are grouped based on similar credit risk and aging. The contract assets have similar risk characteristics to the trade receivables for similar types of contracts.

A significant part of the outstanding accounts receivable balance relates to large reputable pharmaceutical companies with no known history of write-offs. The expected credit loss for these large pharmaceutical companies is estimated at nil. For smaller outstanding debtors, the expected loss rates are based on the Group’s historical credit losses experienced over the three-year period prior to the period end. These historical loss rates are then adjusted for current and forward-looking information on macroeconomic factors affecting the Group’s customers.

Movements in the bad debt allowance for trade receivables are as follows:

Financial Report

14Other current assets

Other receivables and other current assets are non-interest-bearing and are normally settled on 60-days terms.

Financial Report

15Cash and cash equivalents

For the purpose of the Consolidated Statement of Cash Flows, cash and cash equivalents comprise the following as at 31 December of each year:

The balance as at 31 December 2021 includes a term deposit of kCHF 92,500 (EUR 89,540) which is fixed until 3 February 2022.

For the purpose of the Consolidated Statement of Cash Flows, changes in liabilities arising from financing activities for the years were as follows:

Financial Report

16Pensions

Provision for pensions

The Group participates in local pension plans in countries in which they operate. There are principally two types of pension plans:

• Defined contribution plans, where the Group’s only obligation is to pay a pension premium to a fund or insurance company on behalf of the employee. Contributions to defined contribution pension schemes are charged to the consolidated income statement in the year to which they relate.
• Defined benefit plans, where the Group’s undertaking is to provide pension benefits related to services rendered based on final salary levels. This plan is managed by recording the total accumulated pension obligation as a provision on the statement of financial position with no assigned plan assets. This method is used in Sweden, France, Belgium, India and Switzerland.

In PolyPeptide Laboratories (Sweden) AB and PolyPeptide S.A. the total pension benefits are mixed plans. Some parts are defined contribution-type plans and some parts are defined benefit-type plans. For each of the defined benefit plans no trust is established and the full liability is recorded in the statement of financial position with compulsory insurance coverage. The Swedish actuarial determined liability is calculated by a third-party institution, the Pension Registration Institute (PRI), using assumptions defined by the company. PRI also administrates the pension payments to employees, which are subsequently charged to the company. The Belgium fund is outsourced to an insurance company called AXA Insurance. All funds requested to cover the year are called by and paid to the insurance company. Additionally, an actuarial evaluation is performed under IFRS rules in order to determine the liability. This computation is performed by a third-party institution.

PolyPeptide Laboratories France SAS has, in accordance with French law, accounted for a lump sum to be paid to employees upon retirement. In the consolidated numbers IAS 19 is followed regarding the accounting treatment of pensions. The French actuarial determined liability is calculated by a third-party institution, using assumptions defined by the company.

Movement in the provision for pensions for the years was as follows:

Pension expenses reflected in the income statement:

The principal assumptions used in determining pension obligations are shown hereunder:

The forecasted defined benefit obligation for the year 2022 is assessed at kEUR 40,529 (2021: kEUR 40,826).

Sensitivity to changes in assumptions

Changes in the assumptions will impact the defined benefit pension obligation as at 31 December 2021 as follows:

Financial Report

17Provisions

The provision for pension taxes relates to wage taxes of 24.26% on Swedish pension premiums.

The provision for product warranty mainly relates to an extremely rare undetected equipment issue, which impacted multiple batches produced for one customer in 2020.

The provision for restoration costs relates to the requirement to return leased properties of the Torrance facility into the conditions required by the terms and conditions of the lease agreements.

The provision for litigation relates to labour law claims from former employees.

Movement of the provision for the years was as follows:

Financial Report

18Interest-bearing loans and borrowings

As at 31 December 2020, the Group had a kEUR 25,000 Term loan from Danske Bank (due 29 August 2022) included as non-current liabilities. The Group refinanced this Term loan in June 2021 and instead agreed to a kEUR 25,000 short term Money Market loan from Danske Bank, which was paid back in Q3 2021.

Financial Report

19Other financial liabilities

Contingent consideration due to acquisition of a subsidiary

The contingent consideration relates to the acquisition of Lonza Braine S.A. (renamed into PolyPeptide SA) on 3 November 2017.

A reconciliation of the contingent consideration for the years is as follows:

The current part of the contingent consideration of kEUR 6,702 as per 31 December 2020 is based on the agreed percentage over actual revenues realized in 2020. This payable was due and paid in 2021 and therefore not further discounted.

The non-current part of the contingent consideration of kEUR 5,795 as per 31 December 2020 was originally payable in 2022 but agreed to be paid end of 2021. The final payment end 2021 was kEUR 5,846.

Financial liability to Monedula AB

In December 2019, PolyPeptide Laboratories (Sweden) AB sold all its shares in PolyPeptide Fastighets AB to related party Draupnir Holding B.V. PolyPeptide Fastighets AB was subsequently renamed into Monedula AB.

Monedula AB is owner of the premises that are leased by PolyPeptide Laboratories (Sweden) AB. At transaction date, PolyPeptide Laboratories (Sweden) AB and Monedula AB also extended the existing lease agreement to 31 December 2035.

Although the legal ownership of the premises was transferred to the buyer, management concluded that the transfer of the premises did not satisfy the requirements of IFRS 15 and hence that the transaction should not be accounted for as a sale of the asset. Therefore, the carrying value of the premises as at transaction date remained on the consolidated statement of financial position of the Group. The consideration received for the premises in the amount of SEK 124.8 million (EUR 11,947,000) was recognized as other financial liability accounted for in accordance with IFRS 9 as prescribed in IFRS 16.103(a).

The financial liability is currently measured at amortized cost using an effective interest rate of 5.57% (2020: 5.57%). The financial liability matures on 31 December 2035 and will be settled with future lease terms payable to Monedula AB, being quarterly instalments of SEK 2.8 million (kEUR 286). The total carrying value of the liability as at 31 December 2021 amounts to SEK 117.3 million (kEUR 11,447) of which SEK 11.7 million (kEUR 1,145) is presented as current financial liability. The total carrying value of the liability as at 31 December 2020 amounted to SEK 120.7 million (kEUR 12,044) of which SEK 11.4 million (kEUR 1,147) was presented as current financial liability.

Paycheck Protection Program (“PPP”) Loans

On 2 May 2020, the two US group companies both obtained a forgivable Paycheck Protection Program (“PPP”) loan from First Republic Bank for a total amount of USD 2.8 million (kEUR 2,355). The loans are subject to the Coronavirus Aid, Relief, and Economic Security Act and bear a fixed interest rate of 1.0%. The US group companies applied for forgiveness and such forgiveness is provided. The release of this loan has been recognized as a gain in the income statement under “Other operating income” (see Note 3).

Financial Report

20Short-term borrowings from banks

As at 31 December 2020, the Group had a kEUR 25,000 Term loan from Danske Bank (due 29 August 2022) included as non-current liabilities. The Group refinanced this Term loan in June 2021 and instead agreed to a kEUR 25,000 short term Money Market loan from Danske Bank presented as Current loan in the Half-year report 2021. This loan was paid back in Q3 2021.

As at 31 December 2021, the Group is granted multiple overdraft facilities for a total amount of kEUR 26,200 (2020: kEUR 26,200).

An amount of kEUR 25,000 is granted by Danske Bank (2020: kEUR 25,000) of which nil was drawn as at 31 December 2021 (2020: nil). The interest rate on the DANSKE Bank facility amounts to DANSKE BOR plus a margin of 0.80% (2020: 1.05%) on the amounts drawn.

The remaining kEUR 1,200 was granted by ING Bank (2020: kEUR 1,200) of which nil was drawn as at 31 December 2021 (2020: nil). The interest rate on the ING Bank credit facility amounts to EURIBOR plus a margin of 1.5% (2020: 1.5%) on the amounts drawn.

Financial Report

21Trade payables and other current liabilities

Trade payables and other current liabilities are non-interest-bearing.

Financial Report

22Contingent liabilities and guarantees

Limited Partnership Investment
From November 2021 the Group entered into a limited partnership agreement with a commitment to invest a maximum amount of kUSD 30,000. An amount of kUSD 3,000 has been paid as of 31 December 2021 and recognized in the balance sheet as “Other financial assets”. As a result, the Group has a contingent liability of kUSD 27,000 (kEUR 24,203). If the general partner of the limited partnership makes an additional capital call, the Group would be obliged to pay the amount within ten business days.

Guarantee pension fund
All members of the PRI Pensionsgaranti, the issuer of the definied benefit plan in Sweden, are subject to a mutual liability. This liability would only be invoked in the event that PRI Pensionsgaranti has consumed all ist assets. The mutual liability of the Group is limited to a maximum of two percent of the Group's individual pension liability with PRI Pensionsgaranti. As such, the Group has a contingent liability of kEUR 182 as at 31 December 2021 (2020 kEUR 173) for which it has issued a guarantee to PRI Pensionsgaranti.

Financial Report

23Related parties

The following transactions have been entered into with related parties: