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DIRECTORS’ REPORT

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1.- GENERAL SITUATION

The world economy entered a new and complex situation in 2008. As the year advanced, the crisis that commenced in 2007 with the subprime mortgages not only deepened but also spread to other sectors, including banking, insurance, real estate, and investment banking. The threat of collapse in the global financial system was averted by programmes to recapitalise banks by governments throughout the world. Nevertheless, the dearth of credit for companies and individuals is still a serious problem that is undermining business. The world economies downgraded their GDP projections and governments are trying to implement joint measures to restore confidence and reactivate spending by consumers and businesses. Meanwhile, unemployment is reaching levels not seen in decades.

In Spain, 2008 marked an abrupt end to 15 years of growth, including the collapse of the construction market and the international banking crisis, which triggered a general slump in several industries, resulting directly in a severe adjustment in the labour market and a deceleration in GDP to negative growth figures by year-end. The year 2009 is expected to be marked by a shortage of liquidity.

The world pharmaceutical industry registered 750 billion dollars in sales, of which 87 billion dollars related to drugs produced by biotechnology. The world cancer market totalled 70 billion dollars in 2008, consolidating its position in terms of market size behind the CNS (Central Nervous System) market, which registered 87 billion dollars in sales, and the Cardiovascular market. The projections are for 5% growth worldwide in 2009.

In 2008, fund-raising, IPOs and capital placements, which are vital for the biotechnology industry, accounted for barely 40% of their 2007 figures. It is unsurprising, therefore, that there was considerable activity in licensing, mergers and acquisition and other strategic alliances. A total of 145 agreements were signed in the biotech industry in 2007, amounting to 43 billion dollars; in 2008, there were 150 deals, but the total amount increased by 116% to 93 billion dollars (Irving Living Associates report). This type of activity is expected to increase again in 2009.

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2.- GROUP BUSINESS PERFORMANCE

Net revenue

Group net revenues totalled 105.3 million euro in 2008, 23.2% more than in 2007 (85.45 million euro).

Revenues at the consumer chemicals subsidiaries amounted to 70.7 million euro (74.1 million euro in 2007) and accounted for 67% of total Group revenues in 2008 (87% in 2007).

Revenues in the Biopharmaceutical business amounted to 33.4 million euro (10 million in 2007): 28 million euro at PharmaMar from Yondelis sales (6.4 million euro in 2007) and 5.3 million euro at Genómica (4.0 million euro in 2007).Sales in this sector accounted for 32% of Group net revenues (12% in 2007).

R&D expenditure

R&D expenditure increased by 11.3% year-on-year. R&D expenditure in 2008 totalled 57.5 million euro, of which 40.5 were invested in PharmaMar (36.9 million euro in 2007), 13.9 million euro in Noscira (13.5 million euro in 2007), 2.4 million euro in Sylentis (0.8 million euro in 2007) and 0.71 million euro in Genómica (0.5 million euro in 2007).

Marketing and commercial expenses

Marketing and commercial expenses amounted to 32.2 million euro in 2008, 10.1% more than in 2007 (29.3 million euro).

The Consumer Chemicals division accounted for 19.6 million euro in 2008, a reduction of 14% on 2007 (22.9 million euro).

Within the Biotechnology segment, 12.6 million euro was spent developing the Yondelis sales network in Europe (6.4 million euro in 2007).

EBITDA

Group EBITDA improved by 23% year-on-year. EBITDA in 2008 amounted to -30.6 million euro, compared with -39.6 million euro in 2007.The improvement was due basically to the fact that net sales in biopharmaceuticals amounted to 33.3 million euro (of which 28 were Yondelis sales), combined with other amounts collected in the year under licence agreements, which together amounted to 10 million euro.

(EBITDA: earnings before interest, taxes, depreciation and amortisation).

Cash

The net cash position—defined as cash and cash equivalents, plus current financial assets (62.3 million euro) minus short-term financial debt (23.9 million euro)—totalled 38.4 million euro in 2008.Long-term debt amounted to 86.8 million euro, of which 55.6 million euro was bank debt and 31.2 million euro was in the form of research and development loans from official bodies which are repayable over 10 years, interest free, with a three-year grace period.

The cash and credit available amounted to 36.3 million euro at 30 September, and the Group improved its cash position by 2 million euro in the fourth quarter due to revenues in excess of expectations.

It is estimated that the cash and credit available in 2009 will be sufficient to attain the Group’s investment targets up to the potential authorisation of Yondelis for the treatment of ovarian cancer, which may come in the second half of the year. This estimate is based on rising sales and expected revenues from licences and milestones. When Yondelis is being sold throughout Europe for ovarian cancer (projected for 2010), the Group expects cash flow to be sufficient to cover R&D expenditure.

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Regarding the compounds in clinical development:

YONDELIS®

Soft-tissue sarcoma (STS).

After obtaining approval from the European Medicines Agency in 2007, Yondelis was launched for the treatment of STS throughout practically all of the EU in 2008. Nevertheless, in the search for more effective tools to cure patients, PharmaMar has started an international randomised multi-centre pivotal Phase III trial of Yondelis as first-line treatment for patients with soft-tissue sarcoma associated with specific chromosome translocations. This trial was accepted by the EMEA’s Committee for Medicinal Products for Human Use (CHMP).

And a multi-centre Phase II trial of Yondelis® (trabectedin) on children with recurring rhabdomyosarcoma, Ewing’s sarcoma or non-rhabdomyosarcomatous STS has also commenced. The trial will determine the safe and tolerable dose of Yondelis® in paediatric patients and assess the efficacy of that dose in terms of response rates.

Additionally, Yondelis® was designated an orphan drug for the treatment of soft-tissue sarcoma by Swissmedic, the Swiss Agency for Therapeutic Products.

PharmaMar’s extensive activities in connection with tumours of this type led to it being awarded the ‘Supporting A Cure In Our Time’ Sarcoma Foundation Of America Award, which was presented at the Connective Tissue Oncology Society (CTOS) meeting in London on 13-15 November. In the words of Matthew Alsante, Executive Director of the SFA: “It is with great pleasure that I present PharmaMar with a ‘Supporting A Cure in our Time’ Award. PharmaMar has been a leader in sarcoma research and treatment, a cancer population that is very underserved. It is with great appreciation that the Sarcoma Foundation of America recognises PharmaMar for their innovative efforts to improve the care and lives of patients affected with sarcoma. With few new and effective treatments for sarcoma patients, the development of Yondelis® as a treatment option has been an important breakthrough for sarcoma patients.”

3.-GROUP COMPANIES:

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Ovarian cancer.

The organising committee of the 33rd congress of the European Society for Medical Oncology (ESMO) chose the pivotal Phase III trial of Yondelis® on ovarian cancer for presentation at a Presidential Symposium on 15 September. Generally only clinical trials whose results augur a change in standard clinical practice are selected for the ESMO Presidential Symposium.

The presentation highlighted that the pivotal OVA-301 trial had successfully attained its objectives. Progression-free survival (PFS), the trial’s main end-point, was longer in the case of Yondelis® (trabectedin) in combination with Doxil® than in the case of Doxil® alone, and the difference was both statistically significant and clinically relevant.

The results are also supported by a higher response rate to Yondelis® in combination and met the benchmarks agreed upon beforehand with the regulatory authorities. The safety profile of Yondelis® in this randomised test was in line with previous results with the drug, whose side effects are manageable. Combining Yondelis® with Doxil® did not lead to any unexpected toxic effects.

This pivotal randomised Phase III trial is one of the largest ever conducted on refractory ovarian cancer, as it recruited 672 patients in a range of centres.

In November, Johnson&Johnson subsidiary Ortho Biotech Products LP filed a new drug application (NDA) with the US Food & Drug Administration (FDA) for the use of Yondelis® (trabectedin) in combination with Doxil for treating refractory ovarian cancer (ROC), based on the OVA-301 trial.

Some days later, on 4 December, PharmaMar presented an application for the same therapeutic use to the European Medicines Agency. If Yondelis® is authorised for sale for this therapeutic use, it will give patients in Europe a new non-platin therapy option.

Breast cancer.

Recruitment for the stratified Phase II clinical trial was satisfactory and the trial is under way; it is expected to be completed in 2009.

This is a multi-centre international clinical trial involving research centres around the world (France, Italy, Poland, Israel and the USA).One of the trial’s primary goals is to establish a relationship between the tumour’s biological characteristics and the efficacy of treatment with Yondelis® (pharmacogenomic analysis).The preliminary results of the pharmacogenomic analysis show an increase in progression-free survival (PFS) in patients whose primary tumours have a high level of expression of the XPG gene, which is linked to DNA repair and which must be functioning properly in order for Yondelis® to be effective.

Lung cancer.

A multi-centre trial in Spain was started in 2008 under the sponsorship of PharmaMar and with the support of research centres linked to the Spanish Lung Cancer Group (Grupo Español de Cancer de Púlmon). This clinical trial uses patients chosen on the basis of pharmacogenomics and its main objective is to establish the efficacy of Yondelis on patients with NSCLC who have been previously treated with platin-based chemotherapy. The patients’ tumours must present specific alterations to the DNA repair genes, whose functionality is necessary for Yondelis to act (high expression of XPG or ERCC1 and low expression of BRCA1).

Prostate cancer.

Recruitment was completed in 2008 for the international multi-centre clinical trial of patients with androgen- and docetaxel-resistant prostate cancer. The objective of the trial is to determine the efficacy and safety of Yondelis® in this population of patients using two treatment patterns: a 3-hour infusion once per

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week, and a 24-hour infusion once every three weeks. Yondelis® is well tolerated by this particularly fragile group of patients and produces a significant decline in PSA accompanied by symptomatic improvements in some patients (10%-15%), including cases that are refractory to docetaxel.

Marketing

At the end of the year, Yondelis® had received price and reimbursement authorisation and was being sold to treat soft-tissue sarcoma in the vast majority of countries in the European Union. The commercial structure (sales and marketing team) and distribution infrastructure were developed for all European countries during the year.

Johnson&Johnson has applied for authorisation to market Yondelis for soft-tissue sarcoma in more than 20 countries, and has already received approval for South Korea and Russia.

Yondelis in Japan:

PharmaMar has been in charge of developing and marketing Yondelis® in Japan since July 2008, including the possibility of working with other licensees in Japan. PharmaMar had licensed that territory to Johnson&Johnson subsidiary Ortho Biotech Products (OBI) under the licensing agreement signed by the two companies in August 2001. However, the special clinical trials required for the Japanese ethnic group did not commence. In addition to recovering the rights to market Yondelis® in that territory, PharmaMar collected 10 million dollars from OBI and OBI remains obliged to pay PharmaMar a milestone payment once authorisation is obtained to market Yondelis® in Japan. The Company is currently at an advanced stage of negotiations with another potential licensee. The agreement with respect to Japan does not affect the relationship between PharmaMar and OBI with respect to Yondelis® in any other country in the world.

APLIDIN®

The clinical development of Aplidin® includes trials, as monotherapy and in combination, on solid and haematological tumours. Among the haematological tumours, good preliminary results with aggressive non-Hodgkin’s Lymphoma supported expanding the trial to include patients with peripheral T-cell lymphoma.

T-cell Lymphoma

The study has been expanded with a view to focusing recruitment on peripheral T-cell lymphoma, confirming activity and obtaining sufficient information to discuss a registration strategy for this indication with the EMEA and the FDA. The number of participating centres, including hospitals, has increased to include Italy, Argentina, Peru and the US.

Multiple Myeloma

The ethics committees and competent authorities have authorised the commencement of studies with Aplidin® in combination with lenalidomide and bortezomib for patients with multiple myeloma.

Solid tumours

The ethics committees and competent authorities in France have authorised the commencement of a trial with Aplidin® in combination with sorafenib and gemcitabine on solid tumours and lymphomas. Also, authorisation has been obtained from the ethics committees and competent authorities in France and Belgium to commence a study with Aplidin® in combination with bevacizumab and docetaxel on solid tumours.

Recruitment for the Aplidin® trial in combination with dacarbazine to treat metastatic myeloma exceeded expectations for this quarter.

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Data from a paediatric trial with Aplidin® conducted with the European Consortium for Innovative Therapies for Children with Cancer (ITCC), which reveal that Aplidin® is active on paediatric patients with advanced cancer and cancer that is resistant to conventional treatment, was presented at the ASCO meeting in June. The data confirm the product’s efficacy and good safety profile.

Results obtained with Aplidin® in two Phase II trials, one on peripheral T-cell lymphoma and the other on refractory and recurring multiple myeloma, plus a third study with the compound on animal models of myelofibrosis, were presented at the American Society of Hematology (ASH) meeting in San Francisco. The trial concluded that the compound improves most indicators of clinical manifestations of myelofibrosis that cause morbility. A Phase II clinical trial will be conducted following those results.

The Food & Drug Administration (FDA) has accepted PharmaMar’s proposal regarding the process of producing Aplidin®. The intermediate products through which the company commences the drug production process have been approved.

ZALYPSIS®

Dose escalation in the various Phase I trials progressed sufficiently in 2008 to set the maximum tolerated dose (MTD) and recommended dose of Zalypsis® for three different administration patterns.

It can be concluded that Zalypsis® has a good safety profile and is easily used in clinical trials. Recruitment of patients continues to confirm the recommended dose (RD) and the best administration pattern for future Phase II trials. Data from a clinical trial with weekly administration were presented at the 20th Annual Symposium of the European Organization for Research and Treatment of Cancer (EORTC), the US National Cancer Institute (NCI) and the American Association for Cancer Research (AACR), held on 21-24 October in Geneva (Switzerland). The results show that this administration pattern for Zalypsis® has a good safety profile and is tolerable, as well as showing preliminary evidence of anti-tumour activity characterised by clinically-significant stabilisation of various tumour types.

Promising pre-clinical data on the compound’s activity against multiple myeloma were presented to the 50th Annual Meeting of the American Society of Hematology (ASH). The new study, published in “Blood”, shows that Zalypsis® is a powerful inhibitor of growth by multiple myeloma cells and recommends trials on patients with multiple myeloma. The paper concluded that Zalypsis® is one of the most powerful agents yet tested against multiple myeloma.

IRVALEC® (formerly PM02734)

The recommended dose for the 24-hour infusion was attained in 2008 and the process has commenced to launch two new clinical trials: a Phase I trial in combination with tarceva, and a Phase II trial as monotherapy against lung cancer.

A Phase I study was presented at the ASCO meeting in June which showed that Irvalec has a high therapeutic index, with evidence of tumour control in patients that are resistant or recalcitrant to conventional therapy while offering a good safety profile, with reversible asymptomatic side effects.

A study evaluating Irvalec® in colon, breast, ovarian, lung, prostate, head, neck and pancreas cancer cell lines was presented at the 20th Annual Symposium of the European Organization for Research and Treatment of Cancer (EORTC), the US National Cancer Institute (NCI) and the American Association for Cancer Research (AACR), held on 21-24 October in Geneva (Switzerland). Cytoxicity data obtained with

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Irvalec® was compared with five other compounds that inhibit the Erb-B/HER pathway. Irvalec® showed significant anti-proliferative activity at doses that can be attained in clinical trials, and a more powerful effect than obtained with the other five inhibitors used in the trials; it also displays a distinctive activity profile. The trial was carried out in collaboration with Beaujon University Hospital (Clichy, France).

Phase I/II trials of Irvalec® with Tarceva® (erlotinib) on solid tumours commenced in December. The combination of Irvalec and Tarceva has shown considerable synergy in pre-clinical models, including resistant NSCLC cell lines. And a preliminary pharmacogenomic (FgX) trial will be conducted to find molecular factors predictive of a response to ErbB receptor antagonists and Irvalec.

A new multi-centre Phase II trial with Irvalec® to treat NSCLC commenced in December. The trial is evaluating the therapy on patients that have progressed after receiving at least one line of platin-based chemotherapy.

OTHER R&D ACTIVITIES

In 2008, a total of 7,800 new samples of macro-organisms were added to the collection; they were gathered on 9 expeditions in four different regions of the world: Indo-Pacific Ocean, Pacific Ocean, Indian Ocean and Atlantic Ocean, and 4,172 new strains of bacteria and fungi were isolated to add to our library of over 70,000 samples.

The pace of research to find new compounds was maintained throughout the year. The compounds which have been isolated will enter initial pre-clinical trials in 2009 with a view to selecting candidates for chemical synthesis.

The activity of PM050489 and its analogues was analysed in pre-clinical trials with a view to selecting, in 2009, the next candidate to enter clinical trials late in 2010. Additionally, the regulatory toxicology testing was completed for PM01183, and the company expects it to enter clinical trials in Europe and the US during 2009.

Non-clinical trials of Zalypsis and PM02734 continued on a range of animal models with a view to defining therapeutic uses to explore during Phase II trials.

INTELLECTUAL PROPERTY

By the end of 2008, the company had 1.862 patent applications on file, 1,180 of which had been granted and 682 were pending. They represent a total of 109 families of patents, each protecting a specific invention.

In 2008, 16 patent priorities (i.e. first national patents) were filed. Also, eight international patents (PCT) were filed and ten families of patents entered the national phase. And 208 patent applications filed in previous years were granted in 2008.

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Noscira’s progress and the compounds in clinical development in 2008 are described below:

NP-12 Alzheimer’s disease

In October 2008, the Austrian health authorities approved the commencement of a Phase II trial of NP12 with Alzheimer’s patients. Three different Phase I trials in 160 healthy young people and seniors confirmed NP-12’s safety. The protocol for this first Phase II trial was reviewed by the medical directors of the hospitals where it will be conducted.

The application to conduct another clinical trial with NP-12 in Germany was also approved. The centres have been selected and the necessary contracts signed, all the material requirements have been fulfilled and the necessary documentation has been drafted.

Results obtained in the administration of NP-12 to a double transgenic mouse as a model of Alzheimer’s disease were presented at the end of July at the International Congress on Alzheimer’s Disease (ICAD), held in Chicago. Administering NP-12 to these mice, which present deposits of hyperphosphorylated tau protein and Beta-amyloid plaques, led to a significant reduction in both types of deposits, a reduction of inflammatory gliosis, and, most importantly, a reduction of neuron loss (the ultimate cause of the progressive extensive deterioration), all of which are decisive factors associated with Alzheimer’s disease. This trial was carried out to complement the preclinical information already available, in parallel with our trials with healthy volunteers, and the results confirm the compound’s potential modifying effect.

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NP-12 PSP

Progressive Supranuclear Palsy (PSP) is a neurodegenerative disorder which is manifested clinically in the form of bradykinesia, gait disorders, oculomotor dysfunction, dysarthria, dysphagia and mental deterioration; pathologically, it is characterized by hyperphosphorylated tau deposits in the brain. By avoiding the hyperphosphorylation of tau deposits through inhibition of the GSK 3 enzyme, NP-12’s action mechanism makes it a possible option for treating PSP, a highly debilitating disease for which there is no effective treatment at the moment. The phase I trial with NP-12 for Alzheimer’s is also applicable to PSP; for this reason we will directly commence Phase II trials with NP-12 for PSP.

Preparatory work for the Phase II trial of NP-12 on PSP patients is proceeding on schedule. The trial was designed in collaboration with a group of clinical experts in the area, and various Contract Research Organisations have been contacted with a view to selecting the best one. In parallel, the company has filed an investigational new drug (IND) application with the FDA and requested orphan drug status from the EMEA.

NP-61

The second phase 1 trial with this compound has commenced and is proceeding on schedule at the Clinical Pharmacology unit of MDS in Belfast.

CELL THERAPY (GLIA PROJECT)

On 11 November, Noscira presented its project of Cellular Therapy using the Olfactory Glial Sheath for the treatment of medullary lesions to the European Medicines Agency (EMEA) in London. The EMEA was represented by a large panel of experts from its various committees (cell therapy, gene therapy, etc.) and delegates from national agencies throughout Europe attended the presentation.

Among the various items of technical and regulatory advice given at the event, the EMEA indicated that if the project maintains its positive expectations, orphan drug status should be applied for given that medullary lesions fulfil all the necessary requisites.

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NEUROPROTECTOR PROJECT

Among the various therapeutic approaches Noscira has been developing in the last few years, we recently isolated and identified a family of molecules of marine origin with the ability to inhibit the formation of amyloid peptides, whose abnormal aggregation (amyloidogenesis) leads to the formation of senile plaques, one of the two lesions characteristic of Alzheimer’s disease. It has a highly-innovative action mechanism: the activation of alpha-secretase, an enzyme (protease) in the non-amyloidogenic pathway. A solid medical chemistry prototype-optimisation programme has been established with a view to obtaining compounds with greater activity and the best Administration, Distribution, Metabolism and Excretion (ADME) properties for the organism. There is currently a sizeable number of analogues with a strong activity pattern and improved ADME properties.

Two compounds in this family recently proved their capacity to protect dopaminergic neurons from induced neuron death in animal models. One of these compounds, NP-17, has been selected for regulatory preclinical trials in early 2009.

INDUSTRIAL PROPERTY

By the end of 2007, Noscira had 297 patent applications on file, 108 of which had been granted and 189 were pending. They represent a total of 26 families of patents, each protecting a specific invention.

In 2008, two patent priorities (i.e. first national patents) were filed. Also, two international patents (PCT) were filed and two families of patents entered the national phase. And 33 patent applications were granted in 2008.

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Genómica obtained over 5 million euro in revenues in 2008, a 33% increase with respect to 2007.

Of the two large areas into which Genómica’s activities are divided, Clinical Diagnostics accounted for 75% of revenues, and Forensic Genetics for 25%.

Clinical Diagnostics revenues increased by 36% to over 4 million euro (2.9 million euro in 2007).

Revenues for the CLART-Clinical Arrays Technology platform increased by 44% in 2008.

Domestic sales amounted to 2.12 million euro in 2008 (1.43 million euro in 2007), while exports amounted to 1.08 million euro (0.8 million euro in 2007): i.e. increases of 49% and 37%, respectively.

Because of the outstanding position of the CLART®Papillomavirus product marketed by Genómica in diagnostics in Spain, on 1 August the company signed a contract with the Castilla-La Mancha Regional Government Health Ministry to supply reagents for automatic detection and typing of HPV using in vitro molecular diagnostic testing techniques as part of that government’s Programme of Prevention and Early Detection of Cervical Cancer.

The screening programme is included in the on schedule (ECCSN), as part of the Europe Against Cancer programme.

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In the area of forensic genetics, in which Genómica is the only privately-owned laboratory in Spain with ENAC-ISO 17.025 certification for genetic-forensic identification and analysis on human tissues and fluids, stem cells, adipocytes and cells in suspension, revenues increased by 40% with respect to 2007, to 1.3 million euro in 2008 (0.9 million euro in 2007). As a result of the company’s good performance in this field, in September it obtained the renewal of the cooperation agreement with the Spanish Civil Guard Forensics Unit to provide human DNA identification services.

In the area of industrial property connected with products that are in the market, in 2008 the national phase of the patent for CLART® Papillomavirus commenced in Australia, Brazil, Canada, China, Egypt, Europe, India, Israel, Japan, Korea, Mexico, Russia and the USA.

Also, a preliminary patent was filed for CLART®ENTHERPEX and a new preliminary patent for CLART®PneumoVir.

INTELLECTUAL PROPERTY

At the end of 2008, the company had filed 19 patent applications, two of which had been granted and 17 were pending. They represent a total of five families of patents, each protecting a specific invention.

In 2008, three patent priorities (i.e. first national patents) were filed. Also, international patents (PCT) were filed and one family of patents entered the national phase. And patent applications filed in previous years were granted in 2008.

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Sylentis was founded in 2006 as a spin-off from Genómica within the Zeltia Group with the aim of establishing a therapeutic platform based on interference RNA.

The Sylentis pipeline of products is focused on indications with strong market potential, such as eye pathologies, inflammatory diseases and pathologies of the central nervous system.

In this line, during 2008 Sylentis continued with its research and development, completing pre-clinical trials of interference RNA for the treatment of ocular hypertension and glaucoma. The products proved to effective in proof-of-concept tests in animal models for dry eye syndrome, inflammatory bowel disease and neurodegenerative disease. Specifically, a product based on RNAi has been chosen to commence pre-clinical trials for dry eye syndrome in 2009.

Sylentis established two new departments in 2008: Regulatory Affairs, to advance interference RNA products to clinical trials, and Analytical Chemistry.

As part of the Cenit research project, we developed a number of techniques for improving ocular release of RNAi compounds targeting glaucoma.

INTELLECTUAL PROPERTY

By the end of 2008, Sylentis had filed 72 patent applications, all of which were pending. They represent a total of six families of patents, each protecting a specific invention. Three families of patents entered the national phase in 2008.

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The Spanish economy declined steadily in 2008, and consumer spending slipped inexorably in line with decelerating residential construction (which declined 28% year-on-year in 2007).

Against this backdrop, Xylazel’s sales fell by just 9.59% with respect to 2007. The decline was focused almost entirely in the specialised paint retail channel, which is closely related to the construction industry, and the reduction was much smaller in the other channels (DIY, hardware stores and industrial buyers).

The company implemented a cost-containment programme with the result that, despite the decline in revenues, EBITDA increased by 21% over 2007 to 3.4 million euro (2.8 million euro in 2007), i.e. a 19.2% EBITDA margin.

Net income in the year, after the provision for income tax, amounted to 2.04 million euro, 28.5% more than in 2007.

A number of new products were launched in the second half of the year, specifically a range of water-based special paints and rust-proofing products. This was a first in Spain and was welcomed by the majority of customers, who are increasingly seeking “greener” products. The launch proved very satisfactory despite the difficult situation and helped partly mitigate the decline in sales. In fact, contrasting with general market performance, our sales fell by less in the second half of the year than in the first. The new products accounted for approximately 4% of total sales in 2008.

This success encourages us to continue researching and developing new products, mostly water-based, and we expect to continue launching new items on the market in 2009.

Last September we commenced an innovative project in cooperation with a private research institution in the Basque Country and the University of Santiago de Compostela to use nanotechnology as a “green” option for wood preservation; we are optimistic about the outcome.

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The year can be divided into two distinct periods in terms of Zelnova’s sales: Up to September, sales remained stable with respect to 2007 despite adverse weather conditions in May and June; however, sales slipped sharply in the fourth quarter due to the weak general economic situation.

The decline in domestic sales was partly offset by improved exports by both Zelnova and Copyr, which has begun to export its ecological farming products to France, Greece and Slovenia; as a result, the decline was attenuated to 2.9%.

Zelnova launched two new products under the Casa Jardín brand in the fourth quarter: Casa Jardín Laca and El Casa Jardín Exteriores. They met with a very warm response in the market and are expected to be very successful in 2009.

A manufacturing agreement was reached in Portugal with a multinational company that operates in the garden centre business; the agreement will be extended to the Spanish market in 2009.

Copyr also filed dossiers to register its ecological farming products and it expects to obtain authorisation for four countries (Germany, Cyprus, Morocco and Turkey) in 2009 and another five countries (Spain, Portugal, the UK, Egypt and Austria) in 2010.

The table below shows the change in revenues in the various channels.

(Thousand euro) 2007 2008 ChangeDomestic own brands (*) 39.437 37.346 -2.091 - 5,3 %Domestic private label brands (*) 6.530 6.531 +1 =%Exports 8.080 8.612 +532 + 6,7%Total net sales 54.047 52.489 -1.558 -2,9 %

(*) Domestic: Spain and Italy

Another significant factor in 2008 was the sharp increase in the cost of petroleum derivatives that are used as raw materials, such as butane and solvents. Fortunately, the situation returned to normal in the fourth quarter, when prices fell back to their 2007 levels.

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4.- OTHER DISCLOSURES ABOUT THE GROUP

PERSONNEL

The Group had an average workforce of 661 in 2008.The consumer chemicals companies employed 225 and the biotech companies employed 389 people. A total of 47 employees were not assigned to either segment. Women accounted for 52% of the total workforce in 2008.The breakdown by gender and professional category is as follows:

PUBLIC AID FOR RESEARCH AND DEVELOPMENT

The Group participates very actively in a range of European research consortia under the European Framework Programme. The Dendrimers and Nanother projects, in which PharmaMar participates, and the Neuro-GSK3 project, in which Noscira participates, were approved in 2008.

Through the CENIT programme organised by the Centro de Desarrollo Tecnológico e Industria (CDTI), PharmaMar and Noscira head the Nanofarma and Melius projects, respectively (Sylentis also participates in the latter). In 2008, the CDTI also approved the MIND consortium project, in which Noscira participates.

And in 2008, the Group obtained repayable advances for projects presented by PharmaMar, Noscira, Genomica, Zelnova and Xylazel under Spanish programmes such as the Ministry of Science and Innovation’s Applied Industrial Research Programme. These repayable advances are in the form of 10-year interest-free loans with a three-year grace period.

Applications were also filed and aid was obtained from the Madrid Development Institute’s Business Innovation Programme (PIE) and the Madrid Department of the Economy, Statistics and Technological Innovation’s Biotechnology and Biopharmaceuticals Programme.

Executives Technicalprofessionals

Salespersonnel

Otherstaff

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50

100

150

200

Women Men

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5.- RISKS

Any going concern faces opportunities and risks. It has the responsibility to identify, measure and assess them so as to minimise possible impacts.

5.1 SITUATION RISKS

COMPETITION. The chemical and pharmaceutical market is highly competitive and involves multinationals, small and medium-sized domestic players, and generic producers.

The Zeltia Group’s results may be affected by the launch of novel or innovative products, technical and technological progress, and the launch of generics by competitors.

INDUSTRIAL PROPERTY. PATENTSIndustrial property is a key asset for the Zeltia Group. Effective protection of industrial property is vital for ensuring a reasonable return on investment in R&D. Industrial property can be protected by means of patents, trade marks, registration of brand names and domains, etc.

The Zeltia Group has a rigorous patent policy which seeks to protect inventions obtained through its R&D activities. In addition to the protection that can be obtained for newly-discovered active principles, we also actively pursue protection for new formulations, production processes, medical applications and even new methods of drug administration.

Patents run for 20 years in most countries, including the USA and the European Union. The effective period of protection depends on how long drug development takes before the launch. To compensate partly for such a long development period and the need to obtain authorisation before marketing a drug, a number of markets (including the USA and the European Union) offer patent extensions of up to five years in certain circumstances.

A poorly-protected invention or excessively long development times that limit a patent’s useful life are risks inherent to the pharmaceutical business.

The Group has a system for managing its patents’ life cycle, with patent departments that regularly review the patent situation in coordination with the regulatory affairs department. It is also vigilant to detect breaches of our patents by other companies with a view to taking legal action if necessary.

REGULATIONThe chemical and pharmaceutical industry is highly regulated. Regulations cover such aspects as research, clinical trials, drug registration, drug production, technical assessment of production standards, and even marketing itself. Regulatory requirements have become more stringent in recent times and this trend is expected to continue.

To offset the risk of a constant flow of new legal and regulatory requirements, the Group bases its decisions and designs its business processes on the basis of an exhaustive analysis of these issues by our own experts and prestigious external experts where necessary.

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Pharmaceutical prices are controlled and regulated by the government in most countries. In recent years, prices have been reduced and reference prices have been applied.

CAPITAL AVAILABILITYThe markets are not always open and the major investment by the Zeltia Group in R&D each year leads it to seek a range of funding sources, in both the credit and capital markets, to finance its growth, implement its strategy and generate income in the future.

SHAREHOLDERSAs in the case of any listed company, there is the risk that a shareholder may consider that a decision by the Board of Directors or the Group’s executives is harmful to his interests as a shareholder and file a complaint. The Group has arranged liability insurance for its directors and executives to cover against claims of this type.

5.2 FINANCIAL RISKS

In the normal course of business, the Zeltia Group is exposed to credit risk and to normal market risks, as well as interest rate and exchange rate fluctuations.

To minimise the impact of interest rate fluctuations, the Group arranges derivatives associated with credit transactions (interest rate risk hedges). The use of financial derivatives is subject to strict internal controls and to uniform defined criteria.

The Group’s cash is invested in low-risk products, mainly government bonds, fixed-term deposits, bank commercial paper and fixed-income mutual funds, all arranged with financial institutions that have high credit ratings. For more detail of the Group’s financial risks, see note 3 to the consolidated financial statements.

5.3 OPERATING RISKS

COMMODITY PRICESDeviations from expected price levels and the strategy of buying and accumulating inventories of commodities expose the organisation to excessive production costs and to losses on inventories.

The Group conducts an in-depth analysis of prices at the beginning of the year and tries to obtain a closed price for the year from its suppliers. The products’ cost prices are set on this basis. Prices are checked on a monthly basis to detect any need for modification, although petroleum derivatives are subject to sharp variations that are not always predictable (butane, solvents, plastics, etc.).

WORKPLACE HEALTH AND SAFETYFailure to provide a safe workplace for its employees would expose the Group to sizeable costs, loss of reputation and other costs.

Workplace health and safety is monitored exhaustively in a search for continuous improvement.

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Exposure of laboratory personnel to new compounds, natural or synthetic, whose possible adverse effects are unknown creates a theoretical health and safety risk in addition to the standard risk of handling chemicals.

Women who work in the laboratory are entitled to leave during pregnancy under the Social Security’s classification of high-risk pregnancy. Those who do not apply for high-risk pregnancy leave are transferred for the duration to another department where they do not have to handle chemicals.

The Group has implemented a workplace health and safety system, which is audited regularly to ensure compliance.

The Company has also arranged casualty and third-party liability insurance.

ENVIRONMENTALEnvironmental risks can generate enormous liabilities for companies. The greatest risk lies in third-party claims for damage to persons and property as a result of pollution.

The Group’s production processes generally have a very low risk of environmental impact (noise, smoke, discharges, etc.) and they generate very little waste. Waste management is outsourced to public recycling and waste management companies. Regular compliance checks are conducted and, where necessary, atmospheric emissions are monitored, water purification systems are installed and the Group has designated points for depositing separated waste for subsequent management.

PRODUCT DEVELOPMENTThe Group allocates a considerable volume of resources to researching and developing new pharmaceutical products. As a result of the length of this process, the technological challenges involved, the regulatory requirements and the intense competition, it is not possible to be sure that all compounds currently under development and those to be developed in the future will reach the market and attain commercial success.

To maximise the effective and efficient use of our resources, the Group has implemented a transversal working structure across the various departments, project-specific teams and reporting systems to monitor R&D projects internally. On that basis, the Group has sound reasons for expecting future success.

5.4 INFORMATION RISKS

If the Group’s internal information flows malfunction, there is the risk of misalignment with strategy and of erroneous or mistimed decisions.

The Group is also obliged to disclose certain financial information and make other regulatory disclosures that must be truthful, complete and timely. Failure to comply carries the risk of punishment and of a loss of credibility.

Zeltia’s Management and Board of Directors have inside information about the Group’s progress. There are control systems in place to know who is in possession of certain information at a given time, aimed mainly at complying with the securities market legislation governing inside information.

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INFORMATION SYSTEMSFailure to apply proper access controls in information systems (data and software) may lead to unauthorised discovery, unauthorised access to data, or the untimely delivery and improper use of confidential information.

Lack of important information at a crucial time may adversely affect the continuity of the organisation’s critical processes and operations.

The Zeltia Group has several data processing centres. As far as possible, those centres use the same technology so as to minimise technological diversity and share services that are susceptible to use by more than one business unit (basically in the area of security, support and maintenance).

Access to information is controlled on a person-by-person basis using current technology, and there are redundant fault-tolerant systems in mission-critical areas together with procedures to restore those systems in the shortest possible time. Data integrity is guaranteed using backup systems. The risk control system is congruent with the type of business in which the Zeltia Group is involved.

The Zeltia Group uses third-party technology infrastructures and has service level agreements with those third parties to minimise the impact of any degradations; it also generally has redundant or duplicate infrastructures.

As technology progresses, the Zeltia Group adapts its physical and legal security policies in connection with the information and communication systems.

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6.- ZELTIA SHARE PERFORMANCE

GENERAL SITUATION

In 2008, the financial markets experienced their worst year since the Great Depression.

The Spanish stock market index, Ibex 35, depreciated by 39.4%. That decline was matched by the main European markets, including France (-42%), the UK (-32%) and Italy (-48%). In the United States, the Dow Jones index fell by close to 35%.

ZELTIA SHARE DATA

Share information in 2008 (euro)

Total number of shares 222,204,887

Number of outstanding shares 222,204,887

Par value 0.05

Average daily trading (no. of shares) 1,209,587

Average daily trading (million euro) 5.8

Trading days 253

Year trading low (13 November)* (euro) 775,718

Year trading high (30 May)* (in euro) 35,574,627

Total trading in the year (million euro) 1,467

Lowest share price (29 December* 3.23

Highest share price (2 January)* 6.35

Share price at 31 December 3.35

Average share price in the year 4.54

Market capitalisation at 31 December 744.4

* Calculation based on closing price. Source: Bloomberg

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SHARE PERFORMANCE IN 2008

In 2008, Zeltia’s share price fluctuated between 6.35 and 3.23 euro, ending the year at 3.35 euro (a decline of 47% in the year).

Source: Bloomberg

Trading in Zeltia shares amounted to 1.467 billion euro in 2008.An average of 1,209,587 shares chan-ged hands per day.

Source: Bloomberg

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The chart below plots the performance of the Ibex-35 and Nasdaq Biotech indices and Zeltia’s share.

Source: Bloomberg

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DISCLOSURES ABOUT ASPECTS OF THE CAPITAL STRUCTURE AND THE SYSTEM OF GOVERNANCE AND CONTROL

(Article 116 bis of the Securities Market Law)

a) Capital structure

The share capital of Zeltia, S.A. is 11,110,244.35 euro, represented by 222,204,887 ordinary shares of a single class with a par value of 5 euro cent each, all of which are fully subscribed and paid and carry the same rights and obligations. The Company has not issued any securities that are convertible into shares of Zeltia, S.A.

b) Restrictions on share transfer

There are no restrictions on the transfer of shares.

c) Significant holdings in capital, both direct and indirect

Based on information disclosed by the shareholders to the Comisión Nacional del Mercado de Valores in compliance with current legislation, the significant holdings in the capital of Zeltia, S.A., both direct and indirect, are as follows:

DIRECT HOLDINGS INDIRECT HOLDINGS TOTAL

No. of shares % No. of shares % %

José Mª Fernández Sousa-Faro(1) 17,314,511 7.792 13,554,841 6.100 13.892

Montserrat Andrade Detrell 13,554,841 6.100 6.100

Rosp Corunna Participaciones 11,110,333 5.000 5.000Empresariales, S.L.

Pedro Fernández Puentes (2) 1,386,869 0.624 8,615,205 3.877 4.501

- (1) Indirect stake held through his spouse, Ms Montserrat Andrade Detrell (community property marriage).

- (2) Indirect stake held through SAFOLES, S.A., a company controlled by Mr Pedro Fernández Puentes.

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d) Restrictions on voting rights

Shareholders who own at least 100 shares can attend the Shareholders’ Meeting, provided that the shares are registered in their name in the corresponding book-entry register five days prior to the Shareholders’ Meeting and they accredit this with the corresponding attendance card or certificate issued by an entity that is legally authorised for this purpose, or by any other means accepted under current legislation; shareholders may use the attendance cards as proxy forms for the specific Shareholders’ Meeting.

Holders of less than 100 shares may group with others in that situation to attain the necessary number of shares, and grant proxy to one of them. Such grouping must be performed specifically for a given Shareholders’ Meeting and must be evidenced in writing.

Every share present or represented at the Shareholders’ Meeting has one vote, except for non-voting shares (to date, the Company has not issued any shares of this type).

Article 26 of the Bylaws establishes the following limitations on voting rights:

• No shareholder may vote more than 25% of the total voting stock existing at any given time, even where he owns more than that percentage. This limitation does not apply to proxies, although the 25% limit does apply to the votes of each individual shareholder granting proxy.

• That limitation also applies to the number of votes that can be cast, jointly or individually, by two or more share-owning companies that belong to the same business group, and likewise to a natural person who is a shareholder and the share-owning entity or entities controlled by such natural person.

• All shares present and represented at the Shareholders’ Meeting will be counted for the purposes of the quorum. The 25% cap applies only to voting.

• A shareholder who acquires shares of the Company in a takeover bid that did not target all of the outstanding shares may not vote more than 10% of the total voting stock outstanding at any given time.

The foregoing limitations apply to any matter voted at the Shareholders’ Meeting, including the appointment of directors by the proportional system, but it does not apply to amendments of article 26 of the Bylaws, which require the vote in favour of a special majority of 75% of the capital present or represented, at first or second call.

e) Shareholder agreements

No shareholders’ agreements have been notified to Zeltia, S.A. or to the Comisión Nacional del Mercado de Valores.

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f) Rules governing the appointment and removal of members of the Board of Directors and amendments of the Bylaws

f.1. Rules goveRning the appointment and Removal of membeRs of the boaRd of diRectoRs

The rules governing procedures, criteria and competent bodies to appoint, re-appoint, renew and replace directors are set out in the Spanish Corporations Law, the Mercantile Register Regulation, the Bylaws (articles 33, 34 and 37) and the Board of Directors Regulation (5, 8, 14, 18, 19 and 22); the salient points are described below.

The Board of Directors must consist of at least 3 and at most 15 directors. The Board of Directors currently comprises 11 directors.

The Shareholders’ Meeting is the body empowered to appoint and re-appoint directors, subject to the provisions of the Corporations Law. In accordance with the provisions of article 137 of the Corporations Law, shareholders who group together voluntarily so as to make up an amount of capital equal to or greater than the result of dividing the total share capital by the number of Board members shall be entitled to appoint a whole number of directors deriving from that division, excluding fractions. Where they make use of this power, the shares so grouped may not participate in voting for the other members of the Board of Directors. The Board of Directors is also empowered to provisionally fill a vacancy arising due to death or resignation before expiration of the director’s term by appointing a shareholder to the position, who will hold office until the next Shareholders’ Meeting. Persons in any of the situations of prohibition or incompatibility established by law may not be appointed as directors.

Directors need not be shareholders except by legal imperative in the case of provisional appointment by the Board (co-optation) referred to in the preceding paragraph.

The basic functions of the Appointments and Remuneration Committee include making proposals to the Board of Directors regarding the appointment of independent directors, for referral to the Shareholders’ Meeting or for approval by the Board itself by co-optation, and the consideration, at the proposal of any director, of the candidates to fill vacancies in the Board.

Directors are appointed for a term of at most five years (the year is deemed to commence and end on the date of the ordinary Shareholders’ Meeting, or the last possible day on which it should have been held), and they may be re-appointed for terms of the same duration; they are removed when their term expires, if they have not been re-appointed, and when the Shareholders’ Meeting decides.

Article 19 of the Board of Directors Regulation establishes the following cases where directors must tender their resignation and, if the Board accepts, resign:

i. On reaching the age of 75.

ii. When they fulfil any of the conditions of incompatibility or prohibition envisaged in the Law, the Bylaws or the Board of Directors Regulation.

iii. Upon removal from an executive position to which their appointment was linked and, generally, when the reasons for which they were appointed cease to hold.

iv. Where the Board considers that the director is in serious breach of his obligations or that it is in the company’s best interests that he be removed.

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v. Due to absence from four consecutive meetings of the Board of Directors without granting proxy to another director.

The Board of Directors will propose that the Shareholders’ Meeting remove a director where he fails to resign in any of the circumstances envisaged in article 19 of the Regulation.

f.2. Rules applying to amendments of the bylaws

The Shareholders’ Meeting quorums envisaged in the Spanish Corporations Law apply for the case of Bylaw amendments. Approval of amendments does not require majorities greater than those provided by law except in the case of amendments of article 26 of the Bylaws (Adoption of Resolutions), which requires the vote in favour of a special majority of 75% of the capital present or represented, at both first and second calls.

g) The powers of the members of the Board of Directors and, in particular, those relating to the possibility of issuing or buying back shares.

Under article 36 of the Bylaws, the Board as a body, and the Chairman individually, are entrusted with representing the Company, so as to facilitate the operations of the Company and of the Board of Directors in particular, with a clear separation between the delegation of powers by the Board and the granting of powers. Also, by virtue of a Board of Directors resolution on 25 May 2004, an Executive Committee was established within the Board which holds all of the powers of the Board that may be delegated.

Additionally, the executive directors of the Company (Chairman and Vice-Chairman of the Board of Directors) hold broad powers of attorney to represent and administer in accordance with the nature and needs of their offices.

The powers to implement and execute share issuance and buyback programmes are granted to the Board of Directors, in the framework of the plans to issue or buy back shares agreed upon by the Shareholders’ Meeting; the following such programmes are currently in force:

• Decision to delegate to the Board of Directors (with powers to delegate in turn) the power to increase capital, with the possibility of overriding the pre-emptive right, adopted under article 153.1.b) of the Corporations Law by the Shareholders’ Meeting on 30 June 2008 and valid until June 2013.

• Decision to delegate to the Board of Directors (with powers to delegate in turn) the power to issue debentures, bonds, commercial paper and other fixed-income securities, whether non-convertible, exchangeable and/or convertible into shares of Zeltia, S.A., with the possibility of overriding the pre-emptive right, adopted under article 319 of the Mercantile Register Regulation and the general rules on debentures by the Shareholders’ Meeting on 30 June 2008 and valid until June 2013. • Resolution to acquire own shares of Zeltia, S.A. on the market, either directly or through Group companies, adopted under article 75 of the Corporations Law by the Shareholders’ Meeting on 30 June 2008 and valid until 30 December 2009.

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h) Significant agreements entered into by the company which come into force, are amended or terminate in the event of a change of control of the company due to a takeover, and their effects. • Credit contract signed on 7 May 2007 with Instituto de Crédito Oficial and the European Investment Bank as lenders. That contract was signed by Zeltia, S.A. as guarantor of its subsidiary PharmaMar, the borrower, for up to 50 million euro.

i) Agreements between the company and its officers, executives and employees that provide indemnities for the event of unfair dismissal or of termination as a result of a takeover.

Zeltia, S.A. has no agreements with directors and/or executives providing indemnity for the event of resignation or unfair dismissal (apart from those provided by law) or the event of removal due to a takeover bid.

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