International Offering Memorandum

INTERNATIONAL OFFERING MEMORANDUM

International offering of up to 6,373,493 shares

Offering Price: Expected to be in a range between €4.15 and €4.80 per share, nominal value €0.05 per share

This is an initial public offering of up to 6,373,493 ordinary shares of Innate Pharma S.A., a French société anonyme. This international offering of shares to institutional investors is part of a single global offering of up to 6,373,493 Innate Pharma shares. The global offering also includes a public offering in France. The final allocation of shares between this international offering and the French public offering will be determined at the time the results of the French public offering are known. This offering memorandum relates only to the international offering.

Concurrently with this offering, we are carrying out a capital increase reserved for Novo Nordisk A/S by issuing up to 1,204,819 of our new shares at the same offering price.

We have also granted Bryan, Garnier & Co. Limited and Société Générale, the Joint Lead Managers and Joint Bookrunners, a 30-day over-allotment option to subscribe for up to 831,325 new shares of Innate Pharma, for the purpose of covering over-allotments, if any.

Prior to this offering, there has been no public market for our shares. We will apply to list our shares on the Eurolist by Euronext™ of Euronext Paris S.A. (“Eurolist”). We expect our shares to be listed and quoted on the Eurolist on or about 31 October 2006 under the symbol “IPH.”

Investing in our shares involves certain risks. See “Risk Factors” beginning on page 14 and on page 95. You should consider these factors before subscribing the new shares.

Our shares have not been and will not be registered under the United States Securities Act of 1933, as amended (the “Securities Act”) or under any securities laws of any state of the United States of America. Our shares are only being offered in transactions that are exempt from the registration requirements of the Securities Act in reliance on Regulation S under the Securities Act outside the United States and under other applicable exemptions. See “Transfer and Selling Restrictions” for additional information about eligible offerees and transfer restrictions.

The information in this offering memorandum is preliminary and will be supplemented by a pricing supplement which will contain additional information about this global offering, including, among other matters, the final price per share offered hereby and the number of shares to be sold in the French and international tranches of the offering.

The shares are expected to be delivered against payment in euro to purchasers on or about 3 November 2006.

Joint Lead Managers and Joint Bookrunners

This international offering memorandum is dated 18 October 2006

1 TABLE OF CONTENTS

NOTICE TO INVESTORS...... i TRANSFER AND SELLING RESTRICTIONS ...... ii FORWARD-LOOKING INFORMATION...... iv SUMMARY ...... 1 INFORMATION ABOUT THE OFFERING ...... 13 1. NOT APPLICABLE ...... 14 2. RISK FACTORS RELATED TO THE OFFERING ...... 14 3. BASIC INFORMATION...... 15 4. INFORMATION ON SECURITIES TO BE OFFERED AND LISTED FOR TRADING ...... 17 5. OFFERING PROCEDURES ...... 30 6. ADMISSION TO TRADING AND TRADING METHODS ...... 44 7. SALES BY SECURITIES HOLDERS AND RETENTION COMMITMENTS...... 47 8. ISSUE-RELATED EXPENSES...... 49 9. DILUTION ...... 49 10. ADDITIONAL INFORMATION...... 51 RECENT INFORMATION ABOUT THE COMPANY...... 52 11. UPDATE OF INFORMATION ON OUR COMPANY...... 53 11.1Changes in our Products ...... 53 11.2Interim Financial Statements Prepared under Accounting Principles Generally Accepted in France and IFRS Rules as of 30 June 2006...... 55 11.3A Review of Our Company’s Financial Position and Results of Operations as of 30 June 2006 ...... 79 11.4Classes of Shares - Conversion of Classes C and D Preferred Shares to Ordinary Shares ...... 89 11.5Acquisition by Our Company of its own Shares ...... 89 11.6 Exercise of Warrants (BSA)...... 89 11.7Delegated Powers Granted by the General Meeting of Shareholders to the Executive Board ...... 90 INFORMATION ABOUT THE COMPANY ...... 91 CHAPTER 1. NOT APPLICABLE ...... 93 CHAPTER 2. AUDITORS ...... 93 2.1 Statutory Auditors ...... 93 2.2 Substitute Auditors ...... 93 CHAPTER 3. SELECTED FINANCIAL AND OPERATING INFORMATION...... 94 CHAPTER 4. RISK FACTORS...... 95 4.1 Risks Related to our Company ...... 95 4.2 Financial Risks ...... 101 4.3 Legal Risks...... 103 4.4 Industrial Risks Related to the Environment...... 106 4.5 Insurance and Risk Coverage ...... 107 4.6 Market Risks ...... 108 CHAPTER 5. INFORMATION ABOUT OUR COMPANY ...... 109 5.1 History and Development of our Company ...... 109 5.2 Investments...... 111 CHAPTER 6. BUSINESS OVERVIEW...... 112 6.1 Introduction...... 112 6.2 Strategy and Strengths ...... 113 6.3 Presentation of our Company ...... 115 6.4 Industrial and Scientific Context...... 122 6.5 Our Therapeutic Approach...... 124 6.6 Regulatory Environment...... 150 6.7 Dependency Factors...... 153 6.8 Competitive Position...... 153 CHAPTER 7. ORGANISATIONAL CHART...... 155 CHAPTER 8. REAL ESTATE...... 155 CHAPTER 9. A REVIEW OF OUR COMPANY’S FINANCIAL POSITION AND RESULTS OF 156 2 OPERATIONS ...... 9.1 General Presentation ...... 156 9.2 Comparison of the Last Three Fiscal Years ...... 157

9.3Liquidity and Sources of Financing...... 163 9.4Analysis of the Historical Changes in Cash Flows ...... 165 9.5 Off Balance Sheet Commitments...... 165 9.6 Exposure to Exchange Rate Fluctuations ...... 166 9.7 Future Prospects ...... 166 9.8 Fees Paid to the Statutory Auditors And Members of their Networks ...... 167 CHAPTER 10. LIQUIDITY AND CAPITAL RESOURCES...... 168 10.1 Information about our Capital ...... 168 10.2 Cash Flows...... 168 10.3 Information on Borrowing Terms and Financing Structure ...... 168 10.4 Restrictions on Use of Capital...... 168 10.5 Sources of Financing...... 168 CHAPTER 11. RESEARCH DEVELOPMENT – PATENTS AND LICENCES...... 169 11.1 Research and Development Activities ...... 169 11.2 Intellectual Property...... 169 CHAPTER 12. INFORMATION ON TRENDS...... 172 CHAPTER 13. PROFIT FORECASTS OR ESTIMATES ...... 174 CHAPTER 14. ADMINISTRATION, MANAGEMENT AND SUPERVISORY AND GENERAL MANAGEMENT BODIES ...... 174 14.1 Composition of the Executive Board, Supervisory Board and General Management Bodies 174 14.2 Conflicts of Interest in the Executive Board, Supervisory Board and General Management Bodies ...... 180 CHAPTER 15. COMPENSATION AND BENEFITS ...... 181 15.1 Compensation and Benefits Provided to Members of the Executive Board, Supervisory Board and General Management Bodies ...... 181 15.2 Total Amounts in Reserve for Paying Pensions, Retirement or other Benefits...... 182 CHAPTER 16. OPERATION OF THE EXECUTIVE BOARD, SUPERVISORY BOARD AND GENERAL MANAGEMENT BODIES ...... 183 16.1 Operation of the Executive Board ...... 183 16.2 Operation of the Supervisory Board ...... 183 16.3 Committees, the Scientific Advisory Board and the Shareholders’ Observer Panel ...... 184 16.4 Statement Regarding Corporate Governance ...... 187 CHAPTER 17. EMPLOYEES ...... 188 17.1 Human Resources ...... 188 17.2 Employee Participation in the Executive Board, Supervisory Board and Executive Committee...... 189 17.3 Employee Profit Sharing ...... 192 CHAPTER 18. PRINCIPAL SHAREHOLDERS ...... 193 18.1 Identity of the Principal Shareholders ...... 193 18.2 Stock Split and Voting Rights ...... 193 18.3 Principal Shareholders’ Control over our Company...... 194 18.4 Shareholders’ Agreements ...... 194 CHAPTER 19. RELATED-PARTY TRANSACTIONS...... 195 CHAPTER 20. INFORMATION REGARDING OUR ASSETS, FINANCIAL SITUATION AND RESULTS ...... 196 20.1 Accounts Prepared under Generally Accepted Accounting Principles in France as at 31 December 2003, 2004 and 2005...... 196 20.2 Statutory Auditors’ Reports for the Statutory Financial Statements Prepared under French GAAP for the Years Ended 31 December 2003, 2004 and 2005 ...... 223 20.3 Accounts Prepared under International Financial Reporting Standards as at 31 December 2003, 2004 and 2005 ...... 224 20.4 Statutory Auditors’ Report on the Financial Statements Presented under IFRS as at 31 December 2003, 2004 and 2005...... 257 20.5 Date of the Latest Financial Information...... 258 20.6 Dividend Distribution Policy...... 258 20.7 Judicial and Arbitration Procedures...... 258 3 20.8 Significant Changes in the Financial or Business Situation ...... 258 CHAPTER 21. ADDITIONAL INFORMATION...... 259 21.1 General Information about our Share Capital...... 259 21.2 Articles of Incorporation and By-laws ...... 266

CHAPTER 22.MAJOR CONTRACTS ...... 269 CHAPTER 23.INFORMATION FROM THIRD PARTIES, DECLARATIONS BY EXPERTS AND DECLARATION OF INTERESTS ...... 269 CHAPTER 24.DOCUMENTS ACCESSIBLE TO THE PUBLIC...... 269 CHAPTER 25.INFORMATION ON HOLDINGS...... 269

GLOSSARY...... 270

BIBLIOGRAPHY ...... 277 LEGAL MATTERS...... 279 INDEPENDENT AUDITORS ...... 279

4 NOTICE TO INVESTORS

This offering memorandum is confidential and is being furnished solely for the purpose of enabling a prospective investor to consider whether to subscribe shares as described herein. Any reproduction or distribution of this offering memorandum, in whole or in part, and any disclosure of its contents or use of any information herein for any purpose other than considering an investment in the shares is prohibited. Each person, by accepting delivery of this offering memorandum, agrees to the foregoing.

The distribution of this offering memorandum and the subscription of new shares in certain jurisdictions may be restricted by law. We require persons into whose possession this offering memorandum comes to inform themselves about and to observe any such restrictions. For a description of certain restrictions on the subscription of our shares, see “Transfer and Selling Restrictions.” This offering memorandum does not constitute an offer of, or an invitation to purchase, any shares in any jurisdiction in which such offer or invitation would be unlawful.

This offering memorandum has not been, and will not be, submitted to the clearance procedures of the French Autorité des marchés financiers (the “AMF”) and, accordingly, may not be used in connection with any offer or issuance of shares to the public in France or within the European Economic Area. For the purposes of the French public offering and the listing of the shares on the Eurolist, a French prospectus in the French language has been prepared, consisting of a summary of our French prospectus, our Document de Base, registered with the AMF on 19 June 2006 under number I.06-102 and our Note d’opération filed with the AMF under number 06-373 and dated 18 October 2006. Such French prospectus is the only offering document by which offers to subscribe shares may be made in France.

In making an investment decision, prospective investors must rely on their own examination of our company and the terms of this offering, including the merits and risks involved. Prospective investors should not treat the contents of this offering memorandum as advice relating to legal, taxation or investment matters and are advised to consult their own professional advisers concerning the acquisition, holding or disposal of the shares. No person is authorized to give any information or to make any representation not contained in this offering memorandum in connection with any offering of shares and, if given or made, such information or representation must not be relied upon as having been authorized by us, the underwriters or any other person. Neither the delivery of this offering memorandum nor any subscription made in connection with this offering shall, under any circumstances, create any implication that the information contained in this offering memorandum is correct as of any time subsequent to the date of this offering memorandum or that there has been no change in our financial condition or affairs since the date of this offering memorandum.

In connection with this offering, Société Générale, as stabilizing manager on behalf of the underwriters (the “Stabilizing Manager”), or any person acting for it, may over-allot shares or effect transactions with a view to maintaining the market price of the shares at a level higher than that which might otherwise prevail. However, there is no assurance that the Stabilizing Manager or any of its agents will take any stabilizing action and if begun, stabilizing action may be ended at any time. Any stabilization action may begin on the date trading begins, which is expected to be on 1 November 2006 and end on 29 November 2006. Such stabilizing, if commenced, may be discontinued at any time, and must be brought to an end after the aforementioned period.

Prospective investors are urged to carefully review and consider the various disclosures we have made in this offering memorandum which describes the factors that may affect our business, in particular, the disclosures made under “Risk Factors.”

5 TRANSFER AND SELLING RESTRICTIONS

General

Except in relation to the offering of shares in France, no action has been or will be taken in any jurisdiction by our company or the underwriters that would permit a public offering of the shares or possession or distribution of an offering memorandum in any jurisdiction where action for that purpose would be required. This offering memorandum may not be used for, in connection with, and does not constitute any offer to, or solicitation by, anyone in any jurisdiction in which it is unlawful to make such an offer or solicitation. Persons into whose possession this offering memorandum may come are required to inform themselves about, and to observe, all such restrictions. Neither our company nor any of the underwriters accepts any responsibility for any violation by any person, whether or not it is a prospective purchaser of shares, of any such restrictions. Each underwriter has agreed to comply with all applicable laws and regulations in each jurisdiction in which it acquires, offers, sells or delivers shares or has in its possession any offering documents or any amendment or supplement thereto or any other offering or publicity material.

United States

Regulation S shares

Each purchaser of the shares being offered in reliance on Regulation S will be deemed to have represented, agreed and acknowledged that it has received a copy of this offering memorandum and that:

(1) the purchaser is outside the United States;

(2) the purchaser is aware that the shares have not been and will not be registered under the Securities Act and that the shares are being offered outside the United States in reliance on Regulation S;

(3) the shares may not be resold in the United States except pursuant to an exemption from the registration requirements of the Securities Act;

(4) if the purchaser is acquiring the shares as a fiduciary or agent for one or more other investor accounts, with respect to each such account it has sole investment discretion and it has full power to make these acknowledgements, representations and agreements on behalf of such account; and

(5) Innate Pharma, the underwriters and their affiliates, and others will rely upon the truth and accuracy of the foregoing acknowledgements, representations and agreements of or by the purchaser.

In addition, until 40 days after the commencement of the offering, any offer or sale of the shares that is made within the United States by any dealer (whether or not participating in the offering) may violate the registration requirements of the Securities Act.

France

This offering memorandum has not been and will not be submitted to the clearance procedures of the French Autorité des marchés financiers (the “AMF”) and, accordingly, may not be used in connection with any offer to purchase, subscribe or sell shares to the public in France. For the purposes of the French public offering and the listing of the shares on the Eurolist, a French prospectus in the French language has been prepared, consisting of a summary of our French prospectus, our Document de Base, registered with the AMF on 19 June 2006 under number I.06-102 and our Note d’opération filed with the AMF under number 06-373 and dated 18 October 2006. Such French prospectus is the only offering document by which offers to subscribe shares may be made in France.

6 United Kingdom

This offering memorandum is for distribution only to persons who (i) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the “Financial Promotion Order”), (ii) are persons falling within Article 49(2)(a) to (d) (“high net worth companies, unincorporated associations etc”) of the Financial Promotion Order, (iii) are outside the United Kingdom, or (iv) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with the issue or sale of any Securities may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as “relevant persons”). This offering memorandum is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this offering memorandum relates is available only to relevant persons and will be engaged in only with relevant persons. Each underwriter has represented, warranted, and covenanted, severally and not jointly, to us that such underwriter, its affiliates and any other person acting on its or their behalf:

(a) have only communicated or caused to be communicated, and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000, as amended (the “FSMA”)), received by it in connection with the offer or issuance of any new shares in circumstances in which section 21(1) of the FSMA does not apply to our company; and

(b) have complied and will comply with all applicable provisions of the FSMA with respect to anything done by such parties in relation to the new shares in, from or otherwise involving the United Kingdom.

European Economic Area

In relation to each member state of the European Economic Area which has implemented the Prospectus Directive (defined below) other than France (each, a “Relevant Member State”), each underwriter has represented, warranted and covenanted, severally and not jointly, to us that such underwriter, its affiliates and any other person acting on its or their behalf have not made and will not make an offer of new shares to the public in that Relevant Member State in any manner requiring the publication of a prospectus pursuant to Article 3 of the Prospectus Directive, as implemented in each Relevant Member State. For the purposes of this offering memorandum, the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.

FORWARD-LOOKING INFORMATION

This offering memorandum may contain forward-looking statements that are inherently uncertain, and, because Innate Pharma’s actual results may differ materially from those anticipated, you should not rely on these statements. These forward- looking statements are usually accompanied by words such as “believe,” “anticipate,” “plan,” “envisage,” “expect,” “will,” “may,” “should,” “project,” “forecast,” “intend,” “contemplate” or similar expressions. The actual results of Innate Pharma may differ materially from those anticipated in these forward-looking statements as a result of the factors described under the “Risk Factors” sections and elsewhere, in this offering memorandum, and other factors. Unless otherwise specified herein, the statements in this offering memorandum speak only as of the date of this offering memorandum and Innate Pharma does not undertake to update any statements to reflect events or circumstances after the date such statements are made even if new information becomes available.

7 SUMMARY

The following summary forms the initial part of our Note d’Opération, dated 18 October 2006

NOTE

In this Note d’Opération, the terms “we,” “our company” or the “Company” refer to mean Innate Pharma S.A. (“Innate Pharma”).

This Note d’Opération presents, in particular, our financial statements for the six-month periods ended as of 30 June 2005 and 2006, which are prepared in accordance with the accounting standards generally applicable in France (the “French GAAP Half-year Financial Statements”) and which appear in Section 11.2 of this Note d’Opération. As we have no subsidiaries, we do not prepare consolidated financial statements.

As of and for the six-month periods ended on 30 June 2005 and 2006, we prepared financial statements restated in accordance with IAS 34 “Interim Financial Reporting” (the “IFRS Half-year Financial Statements”). The IFRS Half-year Financial Statements were prepared by the Executive Board on 29 August 2006. They appear in Section 11.2 of this Note d’Opération.

This Note d’Opération contains forward-looking statements and information concerning our objectives, particularly in Section 6.2.1 “Our strategy” of our Document de Base, which are sometimes identified by the use of the future tense, the conditional tense and forward-looking terms such as “believe,” “estimate,” “feel,” “ has as objective,” “ intend,” “consider,” “anticipate,” “expect,” “hope,” “must,” “wish,” “may” and other similar terms. This information is based on data, assumptions and estimates that we consider reasonable. These forward-looking statements and this information concerning objectives may be affected by both known and unknown risks, uncertainties related, in particular, to the regulatory, economic, financial and competitive environment and other factors, which, if they were to materialize, could mean that our future earnings, performance and actual results would be significantly different from the objectives set or suggested by the members of our Executive Board, our Supervisory Board and our senior management. These factors may include, in particular, the factors presented in Section 4 – “Risk factors” of the Document de Base and in Section 2 of this Note d’Opération. We, our shareholders and the underwriters therefore make no commitment and give no guarantees that these prospective data will materialize and that these objectives will be achieved.

Investors should carefully consider the risk factors described in Section 4 –“Risk Factors” of the Document de Base and in Section 2 of this Note d’Opération before making any decision to invest. If some or all of these risks were to materialize, they could have a material adverse effect on our activities, outlook, financial position, earnings, growth or objectives. Furthermore, other risks that we have not yet identified or that we currently consider insignificant could have the same negative effect, and investors could lose all or part of their investment.

This Note d’Opération also contains information relating to the markets in which we do business, developments in these markets, our competitors and our competitive position, particularly in Sections 6.4 and 6.8 of the Document de Base. This information was obtained, in particular, from studies conducted by outside sources and from our own estimates. The information available to the public contained in this Note d’Opération or that we use to make our own estimates and which we consider to be reliable has not been verified by an independent expert, and we cannot guarantee that a third party using different methods to compile, analyze or calculate market data would obtain the same results. It is also possible that these data and estimates are wrong or are no longer up-to-date, or that the changes envisioned will not occur, for the same reasons as those indicated above. This could have a material adverse impact on our activity, outlook, financial position, earnings, growth or objectives. We, our shareholders and the underwriters make no commitment and give no guarantees as to the accuracy of this information.

A glossary defining certain technical terms that we use, together with a bibliography, can be found at the end of the Document de Base.

8 SUMMARY

Notice to Investors

This summary must be read as an introduction to our Note d’Opération. Any decision to invest in the securities offered through this offering must be based on an exhaustive review of our Note d’Opération. If an investor brings a claim or lawsuit concerning information contained in our Note d’Opération before a court, he may, depending on the national laws of the Member States of the European Union or parties to the European Economic Area Agreement, have to pay for the costs of having the Note d’Opération translated before the start of the legal proceedings. The persons who presented the summary, including, if applicable, its translation, and who requested its distribution as per article 212-42 of the General Regulations of the French Autorité des marchés financiers, may be held civilly liable only if the contents of this summary are misleading, inaccurate or contradictory to other parts of the Note d’Opération.

1. DESCRIPTION OF THE OFFERING AND TENTATIVE TIMETABLE

We have requested the admission for trading on the Eurolist market of Euronext Paris (Compartment C) of 17,264,080 shares comprising our share capital as of the date of this Note d’Opération, as well as a maximum of 7,578,312 new shares1 to be issued in connection with the Offering (as defined below) and in connection with the concurrent capital increase reserved for Novo Nordisk A/S (“Novo Capital Increase”).

Tentative timetable for the Offering

19 October 2006 Opening of the OPO and the Institutional Offering (as defined below)

30 October 2006 End of the OPO (5 p.m. Paris time)

End of the Institutional Offering (barring early closure) (5 p.m. Paris time.)

31 October 2006 Determination of the number of Offered Shares and of the Offering Price (as defined below)

Initial listing

1 November 2006 Start of trading

3 November 2006 Settlement and delivery of the OPO, the Institutional Offering and of the capital increase reserved for Novo Nordisk A/S

29 November 2006 Deadline for exercising the Over-allotment Option, which is further described below

Structure of the Offering

The new shares offered are to be distributed in connection with a global offering (the “Offering”) that includes:

- a public offering in France in the form of an “open price offer,” primarily intended for individual investors (the “OPO”); and

- an institutional offering in France and in certain other countries, primarily intended for institutional investors (the “Institutional Offering”).

If the demand in connection with the OPO is sufficient, the number of shares allocated to the OPO in response to orders placed will be equal to at least 10% of the total number of shares offered in the Offering (after the Extension Option is exercised, if at all, but excluding any exercise of the Over-allotment Option).

1 Including the new shares to be issued if the entire Extension Option (defined below) and the Over-allotment Option are exercised.

9 Number and source of the shares we wish to have listed for trading

Nature, number and The shares that we wish to have listed for trading on the Eurolist market of Euronext Paris nominal value of the (Compartment C) are: shares for which listing – the 17,264,080 shares that were already issued and outstanding on the date of this Note is requested d’Opération, with a nominal value of €0.05 each (the “Existing Shares”);

- – a maximum of 4,819,277 new shares to be issued as part of a capital increase by way of a public offering, which may be increased to 6,373,493 new shares if the entire Extension Option is exercised (the “Offered Shares”) and the Over-allotment Option is fully exercised, which consists of a maximum of 831,325 new shares (the “Additional New Shares”);

- – a maximum of 1,204,819 new shares (the “Novo Shares”) to be issued as part of a capital increase reserved for Novo Nordisk A/S. The Novo Shares, together with the Offered Shares, are referred to as the “New Shares.”

Extension Option Based on the demand indicated in connection with the Offering, the initial number of Offered Shares may be increased by a maximum of 722,891 shares, or 15% of the initial number of Offered Shares, for a maximum of 5,542,168 new shares, or 32% of the share capital on the date of this Note d’Opération. Any exercise of the Extension Option will be decided by the Executive Board, which will determine the final terms and conditions of the Offering, tentatively scheduled for 31 October 2006.

Over-allotment Option In order to cover any over-allotments, we will grant the underwriters an option allowing the subscription at the Offering Price of a maximum of 831,325 additional new shares, or 15% of the number of Offered Shares if the Extension Option is exercised in full. This option may be exercised either fully or partially by the Joint Lead Managers and Joint Bookrunners on a one-time-only basis, up to and including 29 November 2006.

If the entire Extension Option and the Over-allotment Option are exercised, a maximum of 6,373,493 new shares will be issued, representing 37% of the capital on the date of this Note d’Opération.

Underwriting

The placement of new shares in connection with the Offering is subject to a Subscription Agreement covering all of these shares, which we will enter into with Bryan, Garnier & Co. Limited and Société Générale acting as joint lead managers and joint bookrunners (the “Joint Lead Managers and Joint Bookrunners,” or the “underwriters”). The Subscription Agreement will be signed no later than the date the Offering Price is fixed, which is tentatively scheduled for 31 October 2006.

The Subscription Agreement may be terminated up to (and including) the settlement and delivery date for the new shares under certain conditions that may affect the success of the Offering.

Novo Capital Increase

Novo Nordisk A/S has agreed to subscribe a maximum amount of €5 million in a reserved capital increase of our new shares, concurrently with a share capital increase of €20 million (before the exercise of the Extension Option and the Over-allotment Option) in connection with this Offering. If the amount of the Offering, before the exercise of the Extension Option and the Over-allotment Option, is less than €20 million, the amount of the Novo Capital Increase will be proportionately reduced. In addition, the closing of the Novo Capital Increase is conditioned on the closing of the Offering.

Based on the median point within the suggested price range, the number of new shares, with a nominal value of €0.05, that corresponds to an investment of €5 million would be equal to 1,117,318 shares, or approximately 6.5% of our share capital at the date of this Note d’opération.

Suggested price range

Between €4.15 and €4.80 per share. This suggested price range does not make any assumptions about the final price of the Offering (the “Offering Price”), which may fall outside this range.

Gross proceeds and net proceeds from the issuance of New Shares

Assuming an Offering Price equal to the mid-point of the suggested price range, or €4.475 per share we expect the following:

- gross proceeds from the issuance in connection with the Offering: €19,999,996.68, which may be increased to €26,449,988.70 if the entire Extension Option and the Over-allotment Option are exercised;

- estimated net proceeds from the issuance in connection with the Offering: approximately €17.9 million, which may be increased to approximately €24.0 million if the entire Extension Option and the Over-allotment Option are exercised; and

- gross proceeds from the issuance reserved for Novo Nordisk A/S: €5,000,000.

Points in common between the Offering and the Novo Capital Increase

Price of the Novo Shares: The Offering Price

Dividend entitlement date: 1 January 2006

Settlement and delivery: Tentatively, 3 November 2006

Purpose of the Offering

The Offering and the listing for trading of our shares on the Eurolist will give us additional means to finance our operations, and in particular our plan for the clinical development of our lead drug candidate, IPH 1101. The net proceeds should also enable us to strengthen our position in the innate immunity field by taking advantage of the opportunity to acquire new products or companies. Finally, as a listed company, we will also benefit from greater visibility on the financial markets, a factor which cannot be overlooked in industrial and commercial negotiations with the major players in the pharmaceutical and biotechnology industries.

Lock-up agreements

The lock-up agreements will be entered into as of the date of the Subscription Agreement and in effect for a period following the date of the initial listing of the shares on the Eurolist, expiring after the following length of time:

• 365 days for our management;

• 270 days for our principal shareholders other than our management (or approximately 93% of our share capital and voting rights at the date of this Note d’Opération); and

• 270 days for members of our Supervisory Board.

Certain of our existing shareholders, management, and members of our Supervisory Board described below may not, except for certain legal persons making inter-company transfers, make any offer or sale, or any pledge of shares or securities directly or indirectly granting access to our shares without the prior consent of the Joint Lead Managers and Joint Bookrunners.

The Novo Shares will be subject to the lock-up terms; however, the New Shares which existing shareholders, management, or members of our Supervisory Board subscribe to in connection with the Offering and the shares which they acquire on the financial market are not subject to the lock-up provisions.

As of the date on which the Subscription Agreement is signed and for a period of 180 days following the initial listing date of our shares on the Eurolist market of Euronext Paris, we will undertake, with respect to the underwriters and with the exception of New Shares and Additional New Shares, not to issue, offer or sell shares or securities directly or indirectly granting access to our shares without the prior consent of the Joint Lead Managers and Joint Bookrunners. This agreement contains standard exceptions (granting of free shares to our employees, stock options, existing securities granting access to our share capital, stock splits and other transactions of a similar nature, liquidity contract) and also allows us to issue shares in connection with an external growth transaction, provided that it does not require the issuance of shares representing more than 10% of our share capital at the time of the transaction, and only then if the transferee or beneficiary of the shares accepts the lock-up provisions for the remaining portion of our lock-up agreement.

11 Initial listing date

31 October 2006

Start of trading

From 1 November 2006 to 3 November 2006, trading will be conducted on a single quotation line entitled “Innate Pharma – promises,” subject to the condition precedent that the custodian’s certificate evidencing the subscription of the new shares has been issued.

ISIN code

FR 0010331421

Ticker symbol

IPH

ICB sector of activity

4573 Biotechnology

2. BASIC INFORMATION CONCERNING OUR COMPANY

We are a biopharmaceutical company specializing in immunology, and we focus on developing new classes of drugs that target innate immunity, a special compartment of the immune system the importance of which was recognized at the end of the 1990s. Our drug candidates are “first-in-class” drugs that rely on new mechanisms of action. These products could open important prospects in the treatment of cancers, as well as infectious diseases and chronic inflammatory pathologies.

Innate immunity pharmacology is our scientific foundation and the focus of the intellectual property we own. This immunotherapy approach makes it possible to combine with a single pharmacological agent two activities that could prove advantageous from a clinical standpoint, specifically in oncology: an immediate anti-tumour effect and a long-term effect that may help prevent recurrences.

The total market for our product candidates exceeds one billion euros in annual sales. The market for anti-cancer therapies is growing faster than average on the world pharmaceutical market and, in this market, we are positioned within the fast- growing anti-cancer immunotherapy segment, which is expected to grow at 24% on average per year between 2004 and 2008.

Since our creation in 1999, we have received a total of approximately €50 million through four venture capital fundraising campaigns (in 2000, 2002, 2004 and 2006), including two capital increases reserved for our strategic partner, Novo Nordisk A/S, one in March 2004 and the other in March 2006. Our venture capital investors are reference investors in the biotechnology field worldwide.

Due to our original positioning and our intellectual property portfolio, we believe that we have a strong competitive position in a large and growing market.

12 3. SELECTED FINANCIAL DATA

We have prepared our individual financial statements for the fiscal years 2003, 2004 and 2005 in accordance with accounting principles generally accepted in France. In anticipation of our initial public offering, we also prepared financial statements for the fiscal years 2003, 2004 and 2005 and for the first half of 2006 in accordance with International Financial Reporting Standards (“IFRS”) and the policies described in the notes to such financial statements. The following table provides selected financial data for our Company prepared in accordance with IFRS for each of the fiscal years 2003, 2004 and 2005 and the six months ended on 30 June 2005 and 2006:

Six months ended Fiscal Years ended 31 December 30 June (in thousands of euros, except for data per share) 2003 2004 2005 2005 2006 Licensing revenue 240 2,110 1,300 900 1,908 Government financing for research expenditure 1,061 943 1,144 519 838 Operating revenue 1,301 3,053 2,444 1,419 2,746 Research and development expenses (5,789) (6,921) (7,224) (3,446) (5,375) General and administrative expenses (914) (1,154) (1,635) (721) (1,514) Net operating expenses (6,703) (8,075) (8,859) (4,167) (6,890) Operating income (loss) (5,402) (5,022) (6,415) (2,748) (4,144) Interest income/ (expense) net 391 289 286 224 405 Net loss (5,011) (4,733) (6,129) (2,524) (3,739)

Number of shares in issue Average number of shares in issue (€0.05) 10,525,680 13,079,140 14,900,680 14,900,680 16,051,985 Loss per share attributable to the equity holders of the Company (basic) (0.48) (0.36) (0.41) (0.17) (0.23)

Balance sheet items Cash, cash equivalents and current financial

instruments 14,882 25,225 18,342 33,556

Total assets 19,763 30,305 24,766 40,503 Total capital and reserves attributable to equity holders of the Company 15,246 25,751 20,065 25,820

Total financial debt 2,309 2,345 2,594 3,381

The principal changes in the first six months ended 30 June 2006, compared with the first six months ended 30 June 2005, are the following:

• Operating revenue increased to €2.7 million compared to €1.4 million for the first six months of 2005; this change is essentially due to the signing of a strategic collaboration and license agreement in March 2006 with the Danish group, Novo Nordisk A/S.

• Net operating expenses increased to €6.9 million compared to €4.2 million for the first six months of 2005; this change (a €2.7 million increase) is essentially explained by the increase in research and development expenses (an increase of €1.9 to €5.4 million for the first six months of 2006).

• Cash, cash equivalents and current financial instruments amounted to €33.6 million as of 30 June 2006, while total financial debt (primarily composed of repayable Oséo-Anvar subsidies) amounted to €3.4 million at the same date.

We do not anticipate paying any dividends in the near future.

4. WORKING CAPITAL STATEMENTS

We state that, in our opinion, our working capital is sufficient (i.e., we have sufficient cash flow excluding the funds raised through the Offering) to meet our obligations for the next 12 months as of the date of this offering memorandum.

13 5. CAPITALISATION AND INDEBTEDNESS

Our capitalisation and indebtedness as of 31 July 2006, determined on the basis of financial information prepared in accordance with accounting standard IAS 34 Interim Financial Information, is as follows:

In thousands of euros 31 July 2006

Shareholders’ equity, including...... 26,047

Share capital ...... 861 Share premium...... 48,926 Other reserves ...... (23,740)*

Debt, including ...... 5,830

Total current debt...... 2,615

Guaranteed ...... 0 Secured ...... 0 Unguaranteed/Unsecured ...... 2,615 Total non-current debt ...... 3,215 Guaranteed ...... 0 Secured ...... 0 Unguaranteed/Unsecured ...... 3,215

* This includes net loss for the first six months of 2006 and retained earnings as of 30 June 2006 (notwithstanding CESR’s recommendations).

In thousands of euros 31 July 2006

A. Cash...... 1,022 B. Cash equivalents...... 16,554 C. Current financial instruments ...... 14,441 D. Liquidity (A+B+C)...... 32,017 E. Current financial receivable...... 1,861 F. Current bank debt ...... 0 G. Current portion of non current debt...... 165 H. Other current financial debt...... 2,450 I. Current financial debt (F+G+H)...... 2,615 J. Net current financial indebtedness (I-E-D) ...... (31,263) K. Non current bank loans...... 0 L. Bonds issued...... 0 M. Other non current loans ...... 3,215 N. Non current financial indebtedness (K+L+M)...... 3,215 O. Net financial indebtedness (J+N)...... (28,048)

6. RECENT FACTS AND EVENTS

a) Development of our products

IPH 1101

The final results of the Phase I trial for solid tumours (trial D004-101) are satisfactory: good tolerance of the product, new demonstration of the specific and reproducible pharmacologic activity of IPH 1101 on T γδ cells as well as encouraging clinical data. We have observed a stabilization of the disease over 35 weeks for eight metastatic renal cell carcinoma patients out of 15 evaluable patients. These data confirm the data presented to the ASCO meeting last June, where encouraging clinical signs were obtained from a population with advanced-stage renal cancer. These data support the further evaluation of IPH 1101 in this same type of population as part of a randomized, Phase II trial ongoing in Europe (trial D004-201), for which patient recruitment and treatment began last July.

We have made progress in preparing other Phase II trials for Non-Hodgkin’s lymphoma in combination with rituximab (trial D004-202) and in chronic myeloid leukaemia (trial D004-203), which we still plan to begin in 2007.

14 IPH 1201

The drug candidate IPH 12XX* became IPH 1201 after milestone M1 was met in September 2006. This milestone corresponds to the initiation of the pre-clinical and pharmaceutical development of the drug candidate: it was reached ahead of the initial deadline.

IPH 2101 and other drug candidates from the strategic partnership with Novo Nordisk A/S

We signed a strategic partnership agreement with Novo Nordisk A/S in March 2006 for all of our drug candidates in the field of NK cells. This partnership, the collaboration phase of which was initially set at three years, is progressing in accordance with the initial plan in terms of the contributions by the two parties and the advancement of the programs.

Our most advanced NK drug candidate, IPH 2101, should enter the clinical phase by the end of 2006 with a Phase I clinical trial for acute myeloid leukaemia patients. The first IMPD filing for the first clinical trial by Novo Nordisk A/S with this compound will trigger a milestone payment to Innate Pharma.

The development of the drug candidates, IPH 22XX* and IPH 23XX*, is also progressing in accordance with the initial plan.

* The name “IPH–XX” corresponds to drug candidates which have not yet passed milestone “M1”.

7. SUMMARY OF MAIN RISK FACTORS

Investors are asked to consider the following risks, which are described in Section 4 of our Document de Base and in Section 2 of this Note d’Opération, before making their investment decision:

• Risks relating to our company and our activities;

• Risks relating to our structure and strategy;

• Risks relating to third parties;

• Legal risks;

• Financial risks;

• Risks relating to our intellectual property rights and those of third parties; and

• Risks relating to the Offering.

The realization of these risks, or of any of them, could have a material adverse effect on our activities, financial situation, outlook and earnings, on the Offering or on our share price.

It is also possible that other risks not yet identified or that are currently deemed to be insignificant could materialize and may have a material adverse effect on our activities, financial situation, outlook and earnings or on our share price.

8. MANAGEMENT AND STATUTORY AUDITORS

8.1 Executive Board

Hervé Brailly ...... (Chairman) François Romagné ...... Chief Scientific Officer Stéphane Boissel...... Chief Financial Officer, Corporate Development and Investor Relations

8.2 Supervisory Board

Philippe Desmarescaux...... (Chairman) Jean Deleage Frank Mörich Sofinnova Partners represented by Denis Lucquin Philippe Pouletty Frank Bulens

8.3 Statutory Auditors

Statutory Auditors:

Audit Conseil Expertise, SA – PricewaterhouseCoopers Audit Member of PKF International

Substitute Auditors:

Norbert Muselier Etienne Boris

9. ADDITIONAL INFORMATION

9.1 Share Capital as of 18 October 2006

As at the date of this Note d’Opération, our share capital was €863,204, divided into 17,264,080 shares with a nominal value of €0.05, comprising (a) 13,250,080 ordinary class O shares, (b) 1,110,000 class A preferred shares and (c) 2,904,000 class B preferred shares, all of which will be converted into the same class of shares. According to articles 12 I (c) and 12 II (g) of the by-laws, class A and B preferred shares will automatically cease to exist as soon as our shares are listed on the Eurolist market and will be exchanged into ordinary Class O shares, at one Class O share for one preferred share, effective as of the first listing date, and as a result, losing all of their rights and privileges on the same date.

16 9.2 Principal Shareholders as of the Date of this Note d’Opération and Shareholders After Completion of the Offering

Distribution of capital and voting rights after the completion of the Offering will be as follows, assuming the Novo Capital increase is successful:

After completion of the Novo Capital After completion of the Novo Capital Distribution as of the date of Increase and the Offering, excluding Increase and the Offering, including After completion of the Novo Capital After completion of the Novo Capital this Note d’Opération possible exercise of the Extension full exercise of the Extension Option Distribution as of the Increase and the Offering, excluding Increase and the Offering, including (Diluted basis, i.e., after exercise of all Option and Over-allotment Option and the Over-allotment Option date of this (1) (2) Shareholders possible exercise of the Extension full exercise of the Extension Option stock options, warrants and (Diluted basis, i.e., after exercise of (Diluted basis, i.e., after exercise of Note d’Ope´ration (3) Option and Over-allotment Option and Over-allotment Option founder warrants outstanding on all stock options,(1) warrants(2) and all stock options,(1) warrants(2) and (Undiluted basis) (3) (3) (Undiluted basis) (Undiluted basis) the date of this Note d’Opération and founder warrants outstanding on founder warrants outstanding on final acquisition of free shares(4)) the date of this Note d’Opération and the date of this Note d’Opération and final acquisition of free shares(4)) final acquisition of free shares(4)) Shares % Capital Shares % Capital Shares % Capital Number % Shares % Capital Shares % Capital Members of the Executive Board and the Supervisory Board 761,481 4.41 761,481 3.33 761,481 3.13 1,631,481 8.42 1,631,481 6.53 1,631,481 6.18 Employees 43,920 0.25 43,920 0.19 43,920 0.18 1,096,580 5.66 1,096,580 4.39 1,096,580 4.15 Novo Nordisk A/S 3,580,540 20.74 4,697,858 20.56 4,697,858 19.34 3,580,540 18.47 4,697,858 18.82 4,697,858 17.79 Venture capital companies or funds or financial partners, or other existing shareholders 12,878,139 74.59 12,878,139 56.36 12,878,139 53.01 13,071,939 67.45 13,071,939 52.36 13,071,939 49.50 Public - - 4,469,273 19.56 5,910,612 24.33 - - 4,469,273 17.90 5,910,612 22.38 Total 17,264,080 100.00 22,850,671 100.00 24,292,010 100.00 19,380,540 100.00 24,967,131 100.00 26,408,470 100.00 (1) The stock options currently outstanding permit subscription for a maximum of 905,660 new shares. (2) The warrants (BSA) currently outstanding permit subscription for a maximum of 253,800 new shares. (3) The founder warrants (BSPCE) currently outstanding permit subscription for a maximum of 212,000 new shares. (4) 745,000 free shares.

17 9.3 Factors in Evaluating the Approximate Price Range

The following valuation methods were used (see Section 5.3.1.2 of this Note d’Opération): (a) the “market comparable” method, which aims to determine the value of our company by comparing it with listed companies in our sector that have similar business models, (b) the “Risk Adjusted Discounted Cash Flows” method, which determines the intrinsic value of our company based on the assessment of the future cash flows generated by each of our products and adjusted by the probability of success of the products based on their level of clinical development and (c) the acquisition or merger transaction method of comparable compromise.

The results obtained by these methods provide results that are consistent with the proposed approximate price range.

Consideration was also given to the price per share that Novo Nordisk A/S paid at the time of our last capital increase on 29 March 2006, i.e., €4.45 per share.

9.4 Organisation of Documents and By-laws

We are a société anonyme with an Executive Board and a Supervisory Board, organized pursuant to the laws of France, governed by our by-laws and by Book II of the French Commercial Code.

9.5 Documents Available to the Public

The legal and financial documents that must be made available to our shareholders may be consulted at our registered corporate headquarters at Innate Pharma, 121, ancien chemin de Cassis, 13009 Marseille.

Copies of this Note d’Opération are available, free of charge, from our company, Bryan, Garnier & Co. Limited and Société Générale. This Note d’Opération may be consulted on our website (http://www.innate-pharma.com) and the AMF, Autorité des marchés financiers website (http://www.amf-france.org).

18 INFORMATION ABOUT THE OFFERING

The following information forms Sections 1 to 10 of the Note d’Opération of the Company, dated 18 October 2006

19 1. NOT APPLICABLE

1.1 Not Applicable

1.2 Not Applicable

1.3 Investor Contact

Stéphane Boissel, Chief Financial officer, Corporate Development and Investor Relations 121, ancien chemin de Cassis 13009 Marseille Tel: +33 (0)4 96 19 05 50 Fax: +33 (0)4 96 19 05 55 Email: [email protected]

2. RISK FACTORS RELATED TO THE OFFERING

In addition to the risk factors described in Section 4 “Risk Factors” of the Document de Base that was registered by the French Autorité des marchés financiers on 19 June 2006 under No. I. 06-102 (the “Document de Base”), the attention of investors is drawn to the risks involved in any decision is made to invest in our shares. Above and beyond the information in the Document de Base, the risk factors described below in this Note d’Opération should be given careful consideration before any decision to invest in our shares. The occurrence of one or more of those risks could affect our activities, financial situation and/or earnings. Furthermore, our share price may drop if these risks materialize, and investors could lose all or part of the amounts that they have invested in our shares. These risks and uncertainties may not be the only ones to which we could be exposed. Risks or uncertainties that are unknown today or which we believe to be insignificant could also have an unfavourable effect on our activities, financial situation or earnings or on our share price.

2.1 Our Shares Have Never Been Traded on a Financial Market and, Once Public, it is Not Certain That There Will be an Active Market.

Prior to the Offering (as defined in Section 5.1.1 of this Note d’Opération), our ordinary shares have never been traded on a financial market. The trading volume of our shares might not increase as a result of completion of the Offering or, in the event it is successful, might not be maintained. The lack of an active market may affect the value of our shares and the ability of our shareholders to sell their shares when they wish. A sluggish market could affect our ability to raise funds by issuing shares or acquiring companies, products or technologies through a transaction for which shares provide the consideration.

2.2 The Price of Our Shares May Fluctuate Significantly and Therefore it is Possible That Shareholders Who Have Acquired Shares as Part of the Offering or on the Financial Market May be Unable to Sell Their Shares at a Price Higher Than the Offering Price.

We will set the Offering Price in collaboration with the underwriters, considering a number of factors, specifically, market conditions and economic conditions prevailing at the date the Offering Price is set, a comparison of indications of interest by investors, the earnings of our company and the current status of our activity. Due to the lack of any previous valuation of our company, the Offering Price might not reflect the market price of our shares after the Offering.

Moreover, it is probable that the price of our shares may be affected significantly by events such as fluctuations in our financial performance, changes in market conditions specific to our business sector, announcements of new contracts, technological innovations or collaborations by our company or our primary competitors, developments concerning intellectual property rights, including patents, announcements of results of product trials that we or our main competitors are currently conducting, obtaining the required regulatory approvals or authorizations and the development, launch and sale of new products by us or by our primary competitors.

Furthermore, stock markets have experienced significant price fluctuations in recent years and, more particularly, in recent months, which often do not reflect the operational and financial performance of listed companies. Specifically, share prices of biotechnology companies have been very volatile and may prove to be even more volatile in the future. Stock market fluctuations and the current economic climate may significantly affect our share price.

20 2.3 The Subscription Agreement Concerning the Placement of Our Shares Contains Termination Clauses.

All of the Offered Shares will be underwritten by the underwriters. The Subscription Agreement concerning the placement of our shares in connection with the Offering may be terminated by the Joint Lead Managers and Joint Bookrunners up until (and including) the date of settlement and delivery of the Offered Shares under certain circumstances (see Section 5.4.3 of this Note d’Opération). In the event the Subscription Agreement is terminated, all trades that had been made since the first listing date will be cancelled retroactively, and each investor will personally absorb any lost profits and costs resulting from such termination.

2.4 Certain of Our Shareholders Together Hold a Significant Percentage of Our Share Capital. It is Therefore Possible That Our Share Price May Be Significantly Affected if Those Shares are Sold after the Expiration of the Lock-up Agreements or if the Provisions of the Lock-up Agreements are Waived.

Certain shareholders (who together hold approximately 93% of our share capital on the date of this Note d’opération), management and members of our Supervisory Board entered into lock-up agreements covering their Existing Shares (as well as Novo Shares), lasting up to between 270 and 365 days (see Section 7.3.2 of this Note d’Opération). The new shares which the existing shareholders, management or members of our Supervisory Board could subscribe in connection with the Offering and the shares which they could acquire on the financial market are not subject to lock-up conditions.

The ability of these shareholders, even if they are not acting in concert, to freely sell all or part of their interest in our company at the end of the period for which they have signed the lock-up agreements or to the extent the terms of these agreements are partially or completely waived, may have a materially adverse effect on our share price.

2.5 We do Not Intend to Pay any Dividends in the Near Future.

We intend to retain all available funds and all future revenue for reinvestment in connection with our operations and the growth of our business, and we do not anticipate paying any cash dividends in the near future.

3 BASIC INFORMATION

3.1 Working Capital Statements

3.2 Capitalisation and Indebtedness

Pursuant to the recommendations of the CESR (CESR 05.054B, paragraph 127), our shareholders’ capitalisation and indebtedness as of 31 July 2006, determined based on financial information prepared in accordance with accounting standard IAS 34 Interim Financial Reporting, is as follows:

In thousands of euros 31 July 2006

Shareholders’ equity, including...... 26,047

Share capital ...... 861 Share premium...... 48,926 Other reserves ...... (23,740)*

Debt, including ...... 5,830

Total current debt...... 2,615

Guaranteed ...... 0 Secured...... 0 Unguaranteed / Unsecured ...... 2,615

Total non-current debt ...... 3,215

Guaranteed ...... 0 Secured ...... 0 Unguaranteed / Unsecured ...... 3,215

* This includes the net loss for the first six months of 2006 and retained earnings as of 30 June 2006 (notwithstanding CESR’s recommendations).

In thousands of euros 31 July 2006

A. Cash...... 1,022 B. Cash equivalents...... 16,554 C. Current financial instruments ...... 14,441 D. Liquidity (A+B+C)...... 32,017 E. Current financial receivable...... 1,861 F. Current bank debt ...... 0 G. Current portion of non current debt ...... 165 H. Other current financial debt...... 2,450 I. Current financial debt (F+G+H) ...... 2,615 J. Net current financial indebtedness (I-E-D) ...... (31,263) K. Non current bank loans...... 0 L. Bonds issued...... 0 M. Other non current loans ...... 3,215 N. Non current financial indebtedness (K+L+M)...... 3,215 O. Net financial indebtedness (J+N)...... (28,048)

3.3 Interest of Individuals and Legal Entities in the Offering

The underwriters and some of their affiliates have rendered and may render in the future various banking, investment, commercial or other services to us or to our shareholders, for which they may receive compensation.

3.4 Reasons for the Offering and Use of Proceeds from the Offering

The Offering and the listing for trading of our shares on the Eurolist will give us additional means to finance our operations, and in particular our plan for the clinical development of our lead drug candidate, IPH 1101. The net proceeds should also enable us to strengthen our position in the field of innate immunity by taking advantage of the opportunity to acquire new products or companies. Finally, as a listed company, we will also benefit from greater visibility on the financial markets, a factor which cannot be overlooked in industrial and commercial negotiations with the major players in the pharmaceutical and biotechnology industries.

4. INFORMATION ON SECURITIES TO BE OFFERED AND LISTED FOR TRADING

4.1 Information on Securities to be Offered and Listed for Trading

Type, number and nominal value of shares for which a listing is being requested

We are seeking admission to trading on the Eurolist market of Euronext Paris (Compartment C) for the following shares:

- 17,264,080 shares comprising the issued and outstanding share capital of our company as of the date of this Note d’Opération, with a nominal value of €0.05 per share, which are fully subscribed, fully paid up and of the same class (“Existing Shares”);

- a maximum of 4,819,277 new shares to be issued in connection with a capital increase by way of a public offering, which may be increased to a maximum of 6,373,493 new shares if the entire Extension Option is exercised (“Offered Shares”) and the Over-allotment Option of a maximum of 831,325 shares (“Additional New Shares”) is fully exercised; and

- a maximum of 1,204,819 new shares to be issued in connection with a capital increase in cash reserved for Novo Nordisk A/S (“Novo Capital Increase,” “Novo Shares” and, together with the Offered Shares, “New Shares”).

Date of dividend rights

As of their issuance, the New Shares and the Additional New Shares will be likened to Existing Shares. They will bear dividend rights as of the starting date of the current fiscal year, i.e., 1 January 2006.

ISIN code

FR0010331421

Ticker code

IPH

ICB sector of activity

4573 Biotechnology

The first listing of the Offered Shares (in the form of share promises pursuant to article L. 228-10 of the French Commercial Code), the Novo Shares and the Existing Shares on the Eurolist should occur on 31 October 2006 and trading should start on 1 November 2006.

From 1 November 2006 until the date of settlement and delivery of the New Shares, which should occur on 3 November 2006, trading will be conducted under the conditions stipulated in article L. 228-10 of the French Commercial Code, on a single listing line entitled “Innate Pharma – promises” and will be subject to the condition precedent that the custodian’s certificate evidencing the subscription for the New Shares has been issued.

4.2 Applicable Law and Courts of Competent Jurisdiction

Our shares are issued pursuant to French law.

The courts with competent jurisdiction in the event of litigation are those of our registered office when we are the defendant and are designated based on the nature of the litigation when we are the plaintiff, barring any contrary provision in the New Code of Civil Procedure.

4.3 Form and Registration of Shares

Our shares, including the Existing Shares, the New Shares and any Additional New Shares, if applicable, may be in registered or bearer form, at the discretion of the shareholders.

Pursuant to the provisions of article L. 211-4 of the French Monetary and Financial Code, our shares, regardless of their form, must be entered in accounts kept, as the case may be, by us or by an authorized intermediary. The rights of the holders will be represented by an entry in their name at:

- Société Générale (32, rue du Champ-de-Tir – BP 81236 – 44312 Nantes Cedex 3), which received a mandate from our company for directly registered shares;

- an authorized financial intermediary of their choosing and Société Générale (32, rue du Champ-de-Tir – BP 81236 – 44312 Nantes Cedex 3), which received a mandate from our company, for administered registered shares;

- an authorized financial intermediary of their choosing for bearer shares.

Our shares, including the Existing Shares, the New Shares and any Additional New Shares, if applicable, that are described in this Note d’Opération, will be the subject of an application for admission to trading for Euroclear France S.A. as central custodian, as well as for the settlement-delivery systems of Euroclear France S.A., Euroclear Bank S.A. and Clearstream Banking S.A. (Luxembourg).

The transfer of their ownership will result from the posting to the buyer’s account, pursuant to the provisions of article L. 431-2 of the French Monetary and Financial Code.

The Existing Shares and the New Shares are expected to be posted to accounts as of 3 November 2006.

4.4 Currency of the Issue

The New Shares will be issued in euros.

4.5 Rights Attached to Shares

Our shares, with a nominal value of €0.05 each, are subject to statutory provisions and the stipulations of our by-laws. Any change in the share capital or the rights attached to the shares comprising the share capital will be subject to relevant legal provisions, as the by-laws do not contain any specific provisions.

23 Right to dividends

Each share entitles its holder to ownership of the assets and the profits in proportion to the percentage of our share capital that it represents.

The distributable profit will consist of the profit for the fiscal year, minus previous losses and amounts to be posted to reserves pursuant to law or the by-laws, plus retained earnings.

The general shareholders meeting deliberating on the accounts for the fiscal year has the power to grant each shareholder the option to receive all or part of the dividends or interim dividends to be paid in cash or in shares.

Any dividends that have not been claimed five years after their payment date will be time-barred pursuant to law. Dividends paid to non-residents are subject to tax deduction at source in France (see Section 4.11.2 of this Note d’Opération).

The dividend distribution policy is described in Section 20.6 of the Document de Base.

Voting rights

The voting rights attached to shares are proportional to the percentage of share capital that they represent, and each share entitles its holder to one vote.

Pursuant to current laws, when our shares are subject to beneficial ownership, the voting rights attached to those shares shall belong to the beneficial owners at the annual general shareholders meetings and to the legal title holder at extraordinary shareholders meetings. However, shareholders may agree among themselves on any other distribution for exercising voting rights at annual general shareholders meetings, provided that the beneficial owner is not deprived of the right to vote on decisions concerning profits; in that case, the shareholders concerned must inform us of their agreement by registered letter sent to the registered office. Because we are required to observe that agreement for any meeting of shareholders held more than one month after the registered letter is sent, the postmark will be used to determine the mailing date.

Pre-emptive right to subscribe for shares of the same class

In accordance with current French law and specifically with article L. 225-132 of the French Commercial Code, any capital increase in cash gives the shareholders, in proportion to the number of their shares, a pre-emptive right to subscribe for new shares.

Our company’s general shareholders meeting that decides on or authorizes a capital increase may, pursuant to article L. 225- 135 of the French Commercial Code, eliminate the pre-emptive subscription rights for the entire capital increase or for one or more series of that increase and may or may not stipulate that the capital increase has a priority subscription period for the shareholders. When the issue is done by public offering with elimination of the pre-emptive subscription rights, the issue price must be set in accordance with the provisions of article L. 225-136 of the French Commercial Code.

Moreover, our company’s general shareholders meeting that decides on a capital increase may reserve it for specifically designated persons or for categories of persons who meet specific criteria, pursuant to article L. 225-138 of the French Commercial Code, and for members of a company savings plan, pursuant to article L. 225-138-1 of the French Commercial Code. For that purpose, it may eliminate the pre-emptive subscription rights.

Capital increases by contributions in kind in favour of the contributors are subject to a different procedure as stipulated in article L. 225-147 of the French Commercial Code.

Our company’s general shareholders meeting that decides on or authorizes a capital increase may also reserve it for the shareholders of another company that is the subject of a stock-for-stock takeover bid that we initiate pursuant to article L. 225-148 of the French Commercial Code.

Right to share in company profits

Our shareholders are entitled to profits under the conditions defined by articles L. 232-10 et seq. of the French Commercial Code.

Right to share in any surplus in the event of liquidation

Each of our shares gives its holder a right in the ownership of company assets, the distribution of profits and the liquidation surplus, in proportion to the percentage of the capital stock that it represents, considering any amortized and unamortized capital, which may or may not be paid up, subject to the creation of preferred shares.

Our shares are indivisible.

Right of repurchase – conversion clause

The by-laws do not contain any clause regarding the repurchase or conversion of shares.

Other

Our company’s by-laws allow us to take advantage of legal provisions for identifying the holders of shares.

Article 9 of our by-laws gives us the option to identify the holders of bearer shares pursuant to the provisions of articles L. 228-2 et seq. of the French Commercial Code. Therefore, we are entitled at any time—in return for compensation payable by us—to ask the central custodian that keeps the issue account of our shares, for the personal name or entity name, the year of birth or date of incorporation, address and nationality of shareholders and the number of securities held by each shareholder that gives access to the capital, and any restrictions that may apply to the securities.

4.6 Authorizations

4.6.1 Our Company’s General Shareholders Meeting Authorizing the Issuance of Offered Shares through a Public Offering

The issuance of the Offered Shares was authorized by the Second resolution of our company’s combined shareholders meeting that was held on 30 May 2006, the text of which is reproduced below:

“Subject to the condition precedent of the favourable vote of the Special Meeting of holders of class C and D shares, the general meeting of shareholders, deliberating under the conditions of quorum and majority required for extraordinary meetings of shareholders, having considered the report from the Executive Board and the special report of the Statutory Auditors, and after having ascertained that the share capital is fully paid up, pursuant to the provisions of articles L. 225-129 to L. 225-129-6, L. 225-135 and L. 225-136, and L. 228-91 to L. 228-97 of the French Commercial Code:

1) delegates to the Executive Board, with the power to sub-delegate under the conditions stipulated by law, the authority to execute—one or more times, in the proportions and at the times that it will see fit, both in France and abroad—one or more capital increases by issuing, without the pre-emptive subscription right of shareholders, by public offering:

a) shares or any securities that give access, by any means, immediately or in the future, to the capital of the company (except for preferred shares or securities that entitle their holders to preferred shares), including if those securities are issued pursuant to article L. 228-93 of the French Commercial Code;

b) any securities that give access, by any means, immediately or in the future, to the capital (i) of a company that directly or indirectly owns more than half of the capital stock of our company or (ii) a company in which we own directly or indirectly more than half of the capital stock, provided that the securities issued are authorized by the extraordinary meetings of shareholders of those companies;

2) decides that the Executive Board may, if applicable, use this delegation of authority in connection with the admission of the Company’s shares for trading on the Eurolist market by Euronext™ of Euronext Paris;

3) decides to eliminate the pre-emptive subscription right of the shareholders to the shares or other securities that might be issued by virtue of this delegation of authority;

4) delegates to the Executive Board the authority, when the shares of the Company will be admitted to a regulated market, to evaluate whether the issue of shares or other securities carried out pursuant to this delegation of authority will have a priority subscription period in favour of the shareholders under the conditions that it will determine pursuant to the provisions of article L. 225-135 of the French Commercial Code;

5) decides that, when the shares of the Company will be admitted to a regulated market, the Executive Board may use this delegation of authority to issue shares or other securities for the purpose of compensating securities that would be contributed to the Company in connection with a stock-for-stock takeover bid under the circumstances stipulated in article L. 225-148 of the French Commercial Code;

25 6) sets the total nominal maximum of any capital increases that may be made, directly or indirectly, immediately or in the future, by virtue of this delegation of authority, at one million two hundred thousand euros (€1,200,000) (or the value equivalent to that amount in any other currency of legal tender or in any other unit of account established by reference to a group of currencies). However, that maximum is set without considering the nominal value of any additional shares that may be issued to preserve, pursuant to law and applicable contractual stipulations, the rights of holders of securities that give access to the capital of the Company. The nominal value of any capital increase carried out, directly or indirectly, immediately or in the future, by virtue of the First, Fourth, Fifth and Ninth Resolutions hereof shall be counted toward the maximum set in this paragraph 6);

7) authorizes the Executive Board, under this delegation of authority, to exercise either of the following powers in the order that it sees fit, if the subscriptions have not absorbed the entirety of an issue:

a) to limit the amount of the capital increase to the amount of the subscriptions that have been received, provided that this amount totals at least three quarters of the decided increase;

b) to freely distribute all or some of the unsubscribed securities;

8) acknowledges that, pursuant to the provisions of article L. 225-132 of the French Commercial Code, this delegation automatically requires the shareholders to waive their pre-emptive rights to subscribe to the shares to which they are entitled, in favour of holders of securities that give access immediately or in the future to the Company’s capital that may be issued by virtue of this delegation;

9) decides that, pursuant to article L. 225-136 of the French Commercial Code:

- after the admission to trading and the initial listing of the shares of the Company on a regulated market, the issue price of the shares issued directly will at least be equal to the weighted average of the first prices quoted on the last three days of trading on the Eurolist of Euronext Paris before the subscription price of the increase is set, minus five percent (5%) after any correction of that average if there is a difference between the dates of dividend rights;

- until the admission for trading and the initial listing of the shares of the Company on a regulated market and for capital increases carried out at that time, the issue price of the shares issued directly will at least be equal to the percentage of shareholders’ equity per share, as determined by the last balance sheet approved at the date of the issue, and will be set pursuant to standard market practices, such as in connection with an institutional offering, by reference to the price offered to institutional investors in connection with such an institutional offering in accordance with the price to emerge from the comparison of supply and demand in compliance with the so called bookbuilding technique developed by professional practice;

- the issue price of securities that give access to the capital will be such that the amount received immediately by the Company, plus any amount that it may receive subsequently, will be, for each share issued as a result of the issue of those securities, at least equal to the minimum subscription price defined in the preceding two paragraphs; and

- the conversion, redemption or general conversion into shares of each security that gives access to the capital will result, based on the face value of the bond or said security, in a number of shares such that the amount received by the Company, for each share, will at least be equal to the minimum subscription price defined for the issue of shares in this Resolution;

10) decides that the Executive Board will have full powers, with authority to sub-delegate this delegation of authority, under the conditions stipulated by law, to implement this delegation of authority, under the conditions set by law and within the limits set by this Resolution, for the specific purpose of:

- setting the date of the issues and the respective amounts involved within the limit of the maximum indicated in paragraph 6 above;

- establishing the type, form and features of the securities to be created, which may or may not specifically take the form of subordinated securities, with or without a specific term;

- defining the terms and conditions of the issue(s), and specifically:

• setting the issue price of the securities to be issued in compliance with the conditions indicated in paragraph 9) above,

• establishing the terms for release of the subscriptions, with the understanding that it may offset certain liquid and enforceable claims against the Company;

• setting the effective date of dividend rights for the securities to be issued, even retroactively;

- setting the terms and conditions for protecting the rights of the holders of securities that give access to the share capital, in compliance with statutory and regulatory provisions and any contractual stipulations that provide for other cases of adjustment, and taking any measure for that purpose;

- modifying, during the life span of the securities issued on the basis of this delegation, the terms and conditions indicated above, in compliance with statutory and regulatory provisions and applicable contractual stipulations;

- suspending the exercise of the rights attached to the securities issued that give access, immediately or in the future, to the capital of the Company, for a maximum period of three months, in compliance with statutory and regulatory provisions;

- solely at its initiative, charging the costs of the capital increase to the amount of premiums that pertain to it and withdrawing from that amount the sums necessary to bring the reserve to one tenth of the new capital after each increase;

- generally, signing any agreement, taking any measures and performing any formalities useful for the issue and financial service of securities issued by virtue of this delegation and exercising the rights that are attached to them; and

- confirming that the issue has taken place, amending the by-laws of the Company accordingly, and in general doing everything that will be useful and necessary pursuant to current laws and regulations;

11) decides that this delegation of authority may be used during a stock-purchase takeover bid or stock-swap takeover bid for the shares of the Company, in compliance with the provisions of articles L. 233-32 and L. 233-33 of the French Commercial Code;

12) acknowledges that, in the event that the Executive Board uses this delegation of authority, the Executive Board will report to the General Meeting of Shareholders regarding the use of the authorizations granted in this Resolution pursuant to current laws and regulations and specifically to article L. 225-129-5 of the French Commercial Code;

13) decides that, if the Executive Board uses the power of sub-delegation that is granted to it, the designated person(s) will report to the Executive Board regarding the use of the powers granted, in compliance with the conditions stipulated by the Executive Board;

14) determines that this delegation will be valid for twenty-six (26) months as of this General Meeting of Shareholders;

The Meeting of Shareholders recognizes that, pursuant to the provisions of article L. 225-129-2 of the French Commercial Code, this delegation supersedes any prior delegation authorized for the same purpose.”

The issuance of the Additional New Shares was authorized by the Fourth resolution of the combined meeting of shareholders of the Company held on 30 May 2006, the text of which is reproduced below:

“The meeting of shareholders, deliberating under the conditions of quorum and majority required for extraordinary meetings of shareholders, having taken cognizance of the report of the Executive Board and the special report of the statutory auditors, subject to the condition precedent of the favourable vote at the Special Meeting of holders of class C and D shares and subject to the adoption of the First and Second Resolutions above, decides that, at the time of a given issue executed by virtue of the delegations of authority covered under the First and Second Resolutions above (as completed by the Third Resolution, if applicable), the Executive Board, with the power to sub-delegate under the conditions provided by law, will, in compliance with the conditions stipulated in article L. 225-135-1 of the French Commercial Code, and for a period of thirty (30) days after the close of subscription, up to the limit of fifteen percent (15%) of the initial issue, have the authority to increase the number of shares or other securities issued under the same conditions as those used for the initial issue, specifically with respect to price.”

27 4.6.2 Meeting of the Executive Board of our Company which Decided on the Issuance

By virtue of the delegation of authority indicated in Section 4.6.1 above granted by the extraordinary meeting of shareholders on 30 May 2006 in its Second resolution, as completed by the terms of its Fourth resolution, our Executive Board, at its meeting on 17 October 2006:

• decided on the principle of a capital increase to be executed in cash for a maximum nominal amount of €277,108.40 per issue, with elimination of the pre-emptive subscription right and by the public offering of a maximum number of 5,542,168 new shares with a nominal value of €0.05 each (including a maximum number of 722,891 shares to result from the possible decision by the Executive Board, on the date the final conditions of the Offering are set, to increase by a maximum of 15%, the number of Offered Shares beyond the number of shares initially set (the “Extension Option”)) (see Section 5.2.5.1 of this Note d’Opération), representing approximately 32% of the capital and voting rights on the date of this Note d’Opération;

• set the approximate range of the placement price of the Offered Shares between €4.15 and €4.80 per share; and

• granted an option to the underwriters enabling them to increase, one time only, pursuant to the provisions of article L. 225-135-1 of the French Commercial Code, during the 30 calendar days following the closing date of the Institutional Offering, approximately until 29 November 2006, the amount of the aforementioned capital increase by a maximum nominal amount of €41,566.25 through the issue of a maximum number of 831,325 Additional New Shares with a nominal value of €0.05 each (i.e., 15% of the number of Offered Shares), at the same price as the price used for the issue of the Offered Shares (“Over-allotment Option”) (see Section 5.2.5.2 of this Note d’Opération); this capital increase, which is intended to cover any over-allocations in connection with the Offering, will be, if applicable, implemented by the Joint Lead Managers and Joint Bookrunners, and the issue of Additional New Shares will then be the subject of a specific decision of the Executive Board.

The final terms of the capital increase, including specifically the number and the issue price of the Offered Shares, will be determined by our Executive Board at a meeting that should be held on 31 October 2006.

4.7 Scheduled Dates for the Issue, Settlement and Delivery of the Offered Shares

The scheduled date for the issue, the settlement and the delivery of the New Shares is 3 November 2006.

4.8 Restrictions on Free Trading of our Shares

There is no stipulation in the by-laws that limits the free trading of the shares comprising our share capital. However, Section 7.3.2 of this Note d’Opération provides a description of the obligations and restrictions on the issue or sale that we or some of our shareholders assume.

4.9 French Regulations for Public Offerings

Once our shares have been admitted for trading on the Eurolist market of Euronext Paris, we will be subject to French rules on takeover bids and, specifically, mandatory takeover tenders, buyout bids and squeeze-outs.

4.9.1 Mandatory Takeover Bid

Article L. 433-3 of the French Monetary and Financial Code and articles 234-1 et seq. of the General Regulations of the Autorité des marchés financiers stipulate the conditions for filing a mandatory takeover bid aimed at all shares of our capital.

4.9.2 Price Guarantee

Article L. 433-3 of the French Monetary and Financial Code and articles 235-1 et seq. of the General Regulations of the Autorité des marchés financiers stipulate the conditions under which a price guarantee covering all our shares of the capital must be filed.

4.9.3 Buyout Bid and Squeeze-out

Article L. 433-3 of the French Monetary and Financial Code and articles 236-1 et seq. (buyout bid) and 237-1 et seq. (squeeze-out) of the General Regulations of the Autorité des marchés financiers stipulate the conditions for filing a buyout bid, which may be accompanied by a squeeze-out of our minority shareholders.

28 4.10 Takeover Bid Initiated by Third Parties for our Capital During the Last Fiscal Year and Current Fiscal Year

As at the date of this Note d’Opération, because none of our shares have been admitted for trading on a regulated or non- regulated financial market, no takeover bid from a third party was made for our capital during the last fiscal year or the current fiscal year.

4.11 Tax Rules Applicable to Shares

Under current French laws and regulations, the tax rules described below apply to the individuals or legal entities that will hold our shares.

The attention of investors is drawn to the fact that the information in this Note d’Opération is merely a summary of the applicable tax rules; investors should therefore review their specific situations with their usual tax advisor.

Persons who are not residents of France for tax purposes must comply with the tax laws effective in their country of residence, subject to the application of a tax treaty signed between France and that country.

Furthermore, the tax rules described below correspond to the rules that are currently in effect; these rules may be modified by future changes in laws and regulations, which investors should review with their usual tax advisor.

4.11.1 French Tax Resident Shareholders

4.11.1.1 Individuals Holding Shares as Part of their Private Assets who do not Conduct Stock Market Transactions on a Regular Basis

4.11.1.1.1 Dividends

The dividends that we distribute will be factored into the taxable income of the shareholder in the category of income from movable capital in the year in which they are collected.

These dividends will be subject to income tax on a sliding scale after application of a general deduction of 40% of the distributed income, with no cap, followed by a second fixed deduction. This second deduction amounts to €3,050 for married couples and partners in a civil union subject to joint taxation, and €1,525 for single persons, widows, divorcees, and married couples or partners in a civil union subject to separate taxation.

These dividends also benefit from a tax credit equal to 50% of the amount of dividends collected, before application of the above-mentioned deductions, with an annual cap of €230 for married couples and partners in a civil union subject to joint taxation, and €115 for single persons, widows, divorcees, and married couples or partners in a civil union subject to separate taxation. This tax credit can be applied to the total income tax payable for the year in which the dividends were collected and can be refunded in the case of a surplus equal to or greater than €8.

Finally, the dividends that we pay, before application of the two above-mentioned deductions, but after deduction of the expenditures for acquisition and preservation of income, will also be subject to the following social security withholding taxes:

- The Contribution Sociale Généralisée (CSG) (General Social Security Contribution) at a rate of 8.2%, of which 5.8% can be deducted from income subject to income tax for the year in which the CSG is paid;

- The Contribution Additionnelle pour le Remboursement de la Dette Sociale (CRDS) (Additional Contribution for Reduction of the Social Security Debt) at a rate of 0.5%, not deductible from the income tax base;

- The 2% Social Security Withholding Tax, not deductible from the income tax base; and

- The Contribution Additionnelle au Prélèvement Social (Additional Contribution to the Social Security Withholding Tax) at a rate of 0.3%, not deductible from the income tax base.

29 4.11.1.1.2 Capital Gains

In compliance with article 150-0 A of the Code général des impôts (General Tax Code), capital gains from the transfer of our shares will be taxable, from the first euro, at a rate of 16% for income tax and at a total rate of 11% for Social Security Withholding taxes as described below, if the total amount of transferred securities and other rights or negotiable instruments cited in article 150-0 A of the General Tax Code (excluding transfers benefiting from deferred taxation or which are exempt due to a special tax provision, particularly transfers of instruments held within a stock savings plan) realized during the course of the calendar year exceeds €15,000 per tax domicile.

However, to determine the income tax base at the proportional rate of 16%, the capital gains from the transfer of our shares may, subject to certain conditions, be decreased by a deduction of one-third per year for each year that they were held beyond the fifth year (article 150-0 D bis of the General Tax Code).

For the application of this article, the term of holding is prorated as follows:

- For our shares acquired or subscribed after 1 January 2006, starting as of 1 January of the year of acquisition or subscription;

- For our shares acquired or subscribed prior to 1 January 2006, starting as of 1 January 2006; and

- For our shares held within the framework of a Stock Savings Plan and transferred after the closure of this Stock Savings Plan or withdrawn from this Stock Savings Plan after the eighth year, starting as of 1 January 2006, or, if this closure or withdrawal is subsequent to 1 January 2006, starting as 1 January of the year of such closure or withdrawal.

Any capital losses suffered during the year in which our shares are transferred may be offset against similar gains realized during the year of transfer or the following ten years, provided that the threshold of transfer cited above was exceeded in the year of realization of the capital loss (Article 150-0 D 11 of the General Tax Code).

Moreover, the one-third deduction mentioned above will apply to capital losses from the transfer of our shares under the same conditions as for capital gains (particularly as concerns the calculation of the term of holding). Therefore, the capital losses suffered on the transfer of our shares held for more than five years can only partly offset similar capital gains and the capital losses suffered on the transfer of our shares held for more than eight years will be permanently lost.

It is stipulated that, regardless of how long the shares are held, all net capital gains from the transfer (before application of the one-third deduction cited above) are subject to Social Security Withholding Taxes, itemized as follows:

- The CSG at a rate of 8.2%, not deductible from the income tax base;

- The CRDS at a rate of 0.5%, not deductible from the income tax base;

- The 2% Social Security Withholding Tax, not deductible from the income tax base; and

- The Additional Contribution to the Social Security Withholding Tax at a rate of 0.3%, not deductible from the income tax base.

4.11.1.1.3 Special System for Stock Savings Plans

Our shares can be subscribed or acquired within the framework of a Stock Savings Plan.

Subject to certain conditions, the Stock Savings Plan provides a right, (i) during the term of the Stock Savings Plan, to an exemption from income tax and Social Security Withholding Taxes due to net dividends and net capital gains generated by the investments made within the framework of the Stock Savings Plan, provided, in particular, that these dividends and capital gains remain in the Stock Savings Plan, and (ii) when the Stock Savings Plan is closed (if it occurs more than five years after the date of opening of the Stock Savings Plan) or during a partial withdrawal (if it occurs more than eight years after the date of opening of the Stock Savings Plan), to an income tax exemption in the amount of the capital gains realized since the opening of the plan. These dividends or capital gains are nonetheless still subject to CSG, CRDS, the 2% Social Security Withholding Tax and the Additional Contribution to this withholding tax at the rate in effect on the date of realization of the gains.

30 The capital losses realized on shares held within the framework of a Stock Savings Plan can be offset only against capital gains realized within the same framework. In case of early closing of the Stock Savings Plan (i) before the end of the fifth year or (ii) after the fifth year but provided, in this case, that the liquidation value of the Stock Savings Plan (or the liquidation value of the investment contract) on the date of withdrawal is less than the amount of the payments made to the Stock Savings Plan since its date of opening (not taking into account those related to withdrawals or redemptions that did not result in the closure of the Stock Savings Plan), and that, as of the date of closing of the Stock Savings Plan, the securities in it have been transferred in whole (or the investment contract was subject to full redemption), any losses confirmed on this occasion can be offset against similar gains realized during the same year or the following ten years, provided that the annual threshold for the transfer of securities cited above (currently set at €15,000) is exceeded during the year of realization of the loss.

The table below summarizes the various taxes that are, in principle, applicable as of 1 January 2006, depending on the date of closing of the Stock Savings Plan.

Social Security Term of the Stock Savings Withholding CSG CRDS Income Tax Total Plan Tax(1) Less than two years 2.3% 8.2% 0.5% 22.5% 33.5%(2) From 2 to 5 years 2.3% 8.2% 0.5% 16.0% 27.0%(2) Longer than 5 years 2.3% 8.2% 0.5% 0.0% 11.0%(3) (1) Including the additional contribution of 0.3%. (2) Calculated on all gains if the annual threshold for the transfer of securities and social contributions cited above (currently set at €15,000) is exceeded. (3) The amount of CSG, and CRDS and the Social Security Withholding Tax (including the Additional Contribution) may vary depending on the date on which the gains are realized.

The dividends collected within the framework of a Stock Savings Plan also provide rights to a tax credit equal to 50% of the dividend, with a cap of €115 or €230 depending on the family situation of the beneficiary as indicated above; this tax credit is not paid into the Stock Savings Plan but can be offset, under the same conditions as the tax credit related to dividends collected for stock held outside a Stock Savings Plan, against the total amount of the income tax owed by the taxpayer for the year in which the dividends are collected, after applying other reductions and tax credits and other final and non-final withholdings. This tax credit can be refunded in case of a surplus equal to or greater than €8.

4.11.1.1.4 Wealth Tax

Our shares held by individuals as part of their private assets will be included in their assets subject to the wealth tax, if applicable.

4.11.1.1.5 Inheritance and Gift Tax

Our shares transferred by succession or gift will result in the application of the inheritance and gift tax in France.

4.11.1.2 Legal Entities Subject to Corporate Income Tax

4.11.1.2.1 Dividends

Legal entities not having the status of parent company in France

The dividends collected by French legal entities subject to Corporate Income Tax will generally be taxable under common law conditions, i.e., in principle, at the normal tax rate for the Corporate Income Tax, currently equal to 33 1/3%, plus, if applicable, the Social Security contribution of 3.3% (Article 235 ter ZC of the General Tax Code) based on the Corporate Income Tax after application of a deduction that may not exceed €763,000 per twelve-month period.

Some legal entities are entitled, under the provisions of Articles 219-I-b and 235 ter ZC of the General Tax Code, to benefit from a reduction in Corporate Income Tax to 15% within the limit of €38,120 twelve–month period for companies and an exemption from the Social Security contribution of 3.3%.

31 Legal entities with the status of parent company in France

In compliance with the provisions of Articles 145 and 216 of the General Tax Code, legal entities subject to Corporate Income Tax, holding at least 5% of the capital of our company for a period of at least two years, can benefit, under certain conditions, and at their choosing, from the system for parent and subsidiary companies under which the dividends collected by the parent company are not subject to Corporate Income Tax, with the exception of a portion of these dividends representing expenses and charges paid by this parent company. This portion is equal to 5% of the amount of these dividends but with a cap set at the total amount of the expenses and charges of any kind incurred by the parent company during the course of the year in question.

Capital Gains

Common law system

The capital gains realized and capital losses suffered during the transfer of our company’s shares are, in principle, included in the results subject to Corporate Income Tax at the common law rate, i.e., the current rate of 33 1/3% possibly increased by the Social Security contribution of 3.3% (Article 235 ter ZC of the General Tax Code) under the conditions cited above (or, if applicable, for companies meeting the conditions cited in Article 219–I–b of the General Tax Code, at the rate of 15% within the limit of an amount of €38,120 per 12-month period).

The capital losses realized during the transfer of our shares will be deducted from the results subject to Corporate Income Tax.

Special system for long-term capital gains

In compliance with the provisions of Article 219 I a quinquies of the General Tax Code, net gains realized on the transfer of shares held for at least two years at the time of transfer that are recognized as investment securities within the meaning of this Article are eligible for the long-term capital gains taxation system.

In particular, investment securities within the meaning of Article 219 I a quinquies of the General Tax Code are securities recognized as such in the accounting plan, as well as securities to which the tax system for parent and subsidiary companies can be applied, as provided in Articles 145 and 216 of the General Tax Code, provided that they are recorded under the investment securities account or a special subdivision of another balance sheet account corresponding to their description for accounting purposes.

Long-term capital gains realized during the year starting on 1 January 2006, from the transfer of such investment securities are subject to Corporate Income Tax at the reduced rate of 8%, plus, if applicable, the Social Security contribution of 3.3% cited above. Long-term capital gains realized during the years starting on 1 January 2007, from the transfer of such investment securities will be exempt from the Corporate Income Tax, subject to the reservation of a portion of the expenses and charges equal to 5% of the net results from capital gains that will be taxed under the common law conditions.

Long-term capital losses suffered during the transfer of our shares eligible for the system under Article 219 I a quinquies of the General Tax Code can only offset similar long-term capital gains realized during the same year. Therefore, the long-term capital losses suffered on the transfer of such investment securities during the year starting on 1 January 2006, will only be applied to similar capital gains taxable at the rate of 8%. The long-term capital losses suffered on the transfer of such investment securities during the years starting on 1 January 2007, will only be applied to similar capital gains realized during the same year, thus reducing the amount of the 5% portion of the expenses and charges reintegrated into the results subject to Corporate Income Tax at the common law rate.

Moreover, in compliance with Article 219 I a ter of the General Tax Code, net capital gains realized on the transfer of securities that are not investment securities as defined above may, however, benefit from a reduced taxation at the rate of 15% (plus, if applicable, the Social Security contribution of 3.3% cited above), subject to a holding period of two years, if (i) the securities transferred meet the conditions for application of the parent company system other than the holding of at least 5% of the capital, (ii) their cost price is equal to at least €22.8 million and (iii) they are recorded in the accounts as investment securities or a special sub-division of another balance sheet account corresponding to their description for accounting purposes.

The long-term capital losses suffered upon the transfer of our shares eligible for taxation at the reduced rate of 15% will be applied against similar capital gains realized during the course of the year that they are recorded, or, in the case of net capital losses for that year, those realized in one of the following ten years. These capital losses cannot be deducted from the results taxable at the normal Corporate Income Tax rate.

It is important to note, however, that the draft of the Finance Law for 2007 provides, in its current version, for the elimination in the years closed as of 31 December 2006, of the long-term capital gains and losses system for the investments described in the two preceding paragraphs that do not meet the conditions for the parent and subsidiary company system.

4.11.2 French Tax Non-resident Shareholders

4.11.2.1 Dividends

The dividends paid by a company with headquarters in France to its shareholders whose tax domicile or headquarters are located outside of France are, in principle, subject to withholding at the source of 25%.

However, shareholders whose actual management headquarters are located in a Member State of the European Community may, subject to compliance with the conditions provided for in Article 119 ter of the General Tax Code, benefit from an exemption from withholding at the source.

Moreover, shareholders whose tax domicile or headquarters are located in a State bound to France by a tax convention may, under certain conditions dealing mainly with compliance with the procedure for granting benefits under the convention, benefit from a reduction, in whole or in part, of the withholding at the source.

In addition, shareholders who are individuals and benefit from the provisions of an international tax convention can, under certain conditions and subject to the deduction of the applicable withholding at the source, have a right to refund of the tax credit of 50% with a cap of €115 or €230 as mentioned in Section 4.11.1.1.1 above, if the tax convention between France and the State in which they reside so provides (Instruction 5 I-2-05 of 11 August 2005; No. 107 et seq., and Exhibit 7). The French tax authorities have not yet established the practical procedures for refunding this tax credit to the eligible non- resident shareholders.

The shareholders in our company to whom this may apply must contact their usual tax advisors to determine whether the provisions of these types of conventions apply to their particular case and to determine the consequences, for their particular situation, of the subscription for or acquisition of stock in our company.

4.11.2.2 Capital Gains

Subject to the possible application of the more favourable conditions of a tax convention, the capital gains realized upon transfer for consideration of our shares by persons who do not have tax domiciles in France within the meaning of Article 4 B of the General Tax Code or whose headquarters are located outside France, and whose ownership of the shares is not related to a stable establishment or a fixed base subject to taxation in France, cannot be taxed in France to the extent that the transferor has not held, directly or indirectly, alone or with his/her family group, more than 25% of the rights to profits in the company whose shares are being transferred, at any time during the five years preceding the transfer.

The capital gains realized at the time of transfer of a holding that exceed or exceeded the 25% threshold during the period cited above are subject to taxation in France at the proportional rate currently set at 16%, subject to the possible application of the more favourable provisions of a tax convention.

4.11.2.3 Wealth Tax

Individuals who do not have their tax domiciles in France are not subject to the wealth tax in France for their financial investments.

However, investment securities (i.e., under the terms of Administrative Doctrine 7-S-346 of 1 October 1999, securities that allow an influence to be exerted in the issuing company and, in particular, securities representing at least 10% of the capital of the issuing company that are either subscribed for issuance or are held for at least two years) are not considered financial investments and are therefore subject to the wealth tax, unless subject to the application of the more favourable provisions of a tax convention.

4.11.2.4 Inheritance and Gift Tax

Subject to the provisions of international tax conventions, securities in French companies acquired by individuals by inheritance or gift are subject to inheritance and gift tax in France.

33 4.11.3 Other Situations

Shareholders subject to a tax system other than those cited above will have to obtain information from their usual tax advisors about the tax system applying to their particular case.

4.11.4 Stock Market Tax and Registration Fee

The purchase or sale of our shares on the Eurolist market of Euronext Paris is generally subject to a tax on stock market transactions, withheld at the rate of 0.3% on the amount of transactions equal to or less than €153,000 and at the rate of 0.15% above that amount. The amount of the tax owed is decreased by an allowance of €23 per transaction, with a ceiling of €610 per transaction. The tax on stock market transactions does not apply to French non-residents. Pursuant to the provisions of Article 980 bis 7 of the General Tax Code, the Stock Market Tax does not apply to transactions linked to capital increases and the introduction of a security on a regulated market. Moreover, pursuant to the provisions of Article 980 bis 4 ter of the same code, the stock market tax does not apply to purchase and sale transactions involving securities of companies with a stock market capitalization that does not exceed €150 million.

Generally, no registration fee is required in France for the transfer of shares in a company whose capital securities are traded on a regulated market, unless the transfer is recorded in an instrument executed in France. In this case, the transfer instrument must be registered, and this registration will result in the payment of a fee of 1.1% with a cap of €4,000.

5. OFFERING PROCEDURES

5.1 Offering Procedures, Tentative Timetable and Procedures for the Application for Subscription

5.1.1 Offering Procedures

Prior to the initial listing of our shares, plans have been made to distribute the Offered Shares to the public through a global offering (the “Offering”), involving:

- A public offering in France in the form of an open price offering, pursuant to the regulations of Euronext Paris, intended primarily for individuals (the “OPO”);

- An institutional offering (the “Institutional Offering”), intended primarily for institutional investment, involving:

• an investment in France, and

• an international private placement in certain other countries.

The distribution of shares among the public in France will take place pursuant to the provisions of articles P 1.2.1 et seq. of Book II of the Euronext Market Regulations related to the particular regulations applicable to French regulated markets.

The distribution of Offered Shares between the OPO and the Institutional Offering will be based on the nature and size of the demand in compliance with the principles dictated by article 321-115 of the General Regulations of the Autorité des marchés financiers. If the demand expressed within the framework of the OPO so permits, the number of shares allocated in response to orders placed within the framework of the OPO will be at least equal to 10% of the number of shares offered within the framework of the Offering, including, if applicable, the shares deriving from the exercise of the Extension Option but outside of any exercise of the Over-allotment Option (see Sections 4.6.2 and 5.2.5 of this Note d’Opération).

The maximum number of shares initially offered within the framework of the Offering may be increased by a maximum number of 722,891 new shares in case of full exercise of the Extension Option and a maximum number of 831,325 Additional New Shares in case of full exercise of the Over-allotment Option (assuming that the Extension Option in exercised in full) (see Sections 4.6.2 and 5.2.5 of this Note d’Opération). In this case, the maximum total number of offered shares within the framework of the Offering will be increased to 6,373,493 shares.

At the same time as the Offering, our company will proceed with issuing Novo Shares within the framework of a capital increase reserved for Novo Nordisk A/S (see Section 6.3.1 of this Note d’Opération).

Tentative Timetable:

18 October 2006 Approval of this Note d’Opération by the Autorité des marchés financiers

19 October 2006 Publication of the opening notice for the OPO by Euronext Paris

Our issuance of a press release announcing this approval and the characteristics of the Offering

19 October 2006 Opening of the OPO and the Institutional Offering

20 October 2006 Publication of the legal notice in BALO (Mandatory Legal Announcements Gazette)

30 October 2006 End of the OPO at 5:00 p.m. (Paris time)

End of the Institutional Offering at 5:00 p.m. noon (Paris time), unless closed early

31 October 2006 Establishment by our Executive Board of the final number of Offered Shares (including the possible exercise of the Extension Option) and the Offering Price

Signature of the Subscription Agreement

Publication by Euronext Paris of the notice on the results of the OPO

Distribution of a press release indicating the Offering Price and the results of the OPO

Initial listing of our shares on the Eurolist market of Euronext Paris

1 November 2006 Start of trading in our shares on the Eurolist market of Euronext Paris (under the conditions provided in Article L. 228-10 of the French Commercial Code)

3 November 2006 Payment and delivery of the Offered Shares within the framework of the Offering and the Novo Shares within the framework of the Novo Capital Increase

29 November 2006 Deadline for exercise of the Over-allotment Option

5.1.2 Amount of the Offering

Plans have been made for us to carry out a capital increase by issuing a maximum initial number of 4,819,277 new shares, representing approximately 28% of the capital and voting rights in our company as of 18 October 2006. This initial number can be increased to a maximum of 5,542,168 shares if the Extension Option is exercised in full (as defined in Section 5.2.5.1 of this Note d’Opération) and to a maximum of 6,373,493 shares if the Extension Option and the Over-allotment Option (as defined in Section 5.2.5.1 of this Note d’Opération) are fully exercised. If the Extension Option and Over-allotment Option are fully exercised, the total number of shares issued would represent approximately 37% of the capital and the voting rights in our company as of 18 October 2006.

5.1.2.1 Gross Proceeds from the Issuance of the Offered Shares

Assuming that the Offering Price is equal to the median point of the suggested price range, i.e., €4.475, the gross proceeds from the issuance of the Offered Shares would be €19,999,996.68. If the Extension Option and the Over-allotment Option are fully exercised, the gross proceeds from the issuance of the Offered Shares and the Additional New Shares would be €26,449,988.

35 5.1.2.2 Expenses Linked to the Offering

According to the same hypothesis regarding the Offering Price, the overall compensation for the underwriters and the amount of legal, accounting and administrative fees is estimated at approximately €2.1 million likely to increase to approximately €2.4 million in the case of the full exercise of the Extension Option and the Over-allotment Option. These expenses will be allocated to the share premium.

5.1.2.3 Net Proceeds from the Issuance of the Offered Shares

For the same hypothesis regarding the Offering Price, the net proceeds from the issuance of the Offered Shares would be approximately €17.9 million. If the Extension Option and the Over-allotment Option are fully exercised, the net proceeds from the issuance of the Offered Shares and the Additional New Shares would be about €24.0 million.

5.1.3 Subscription Procedures and Period

5.1.3.1 Principal Characteristics of the OPO

Length of the OPO

The OPO will start on 19 October 2006 and will end on 30 October 2006, at 5:00 p.m. (Paris time). The closing date of the OPO may be changed (see Section 5.3.2 of this Note d’Opération).

Number of Offered Shares within the framework of the OPO

If the demand expressed within the framework of the OPO so permits, the number of shares allocated in response to orders issued within the framework of the OPO will be at least equal to 10% of the number of offered shares within the framework of the Offering, including, if applicable, the shares from the possible exercise of the Extension Option, but before the possible exercise of the Over-allotment Option.

Authorized persons, receiving and transmission of subscription and purchase orders

The persons authorized to issue orders within the framework of the OPO are primarily individuals.

Investors who do not have accounts in France allowing them to subscribe for shares within the framework of the OPO will have to open such accounts for this purpose with an intermediary authorized at the time of placement of their orders.

Categories of orders that can be issued in response to the OPO

Persons wishing to participate in the OPO will have to place their orders with a financial intermediary authorized in France, no later than 30 October 2006, at 5:00 p.m. (Paris time).

In application of article P 1.2.16 of Book II of the Euronext Market Regulations relating to particular regulations applicable to French regulated markets, the orders will be broken down based on the number of shares requested:

- between 1 and 300 shares, inclusive,

- above 300 shares.

Fractions equal to or less than 300 shares in orders will benefit from preferential treatment if all of the orders cannot be filled completely.

It is stipulated that:

- a single client can issue only one order which cannot be divided among several financial intermediaries and must be assigned to a single financial intermediary;

- the amount of each order cannot represent more than 20% of the number of Offered Shares within the framework of the OPO;

- if the application of the reduction rates would not lead to the allocation of a whole number of shares, this number will be rounded down to the next whole number;

- the orders will be expressed in number of shares with no indication of price and will be considered stipulated at the Offering Price;

- the orders will be irrevocable, even in case of reduction, subject to the guidelines in the paragraph “Results of the OPO and Allocation Methods” below.

The financial intermediaries authorized in France will send the orders to Euronext Paris according to the timetable and the procedures set out in the Notice of Opening of the OPO that will be published by Euronext Paris.

Reduction of orders

The fraction of orders equal to or less than 300 shares and the fraction of orders greater than 300 shares may each be subject to a proportional reduction. Note that the fraction of orders equal to or less than 300 shares will benefit from a preferential service rate compared to the fraction of orders greater than 300 shares.

If the application of the reduction procedures would lead to a fractional number of shares, this number will be rounded down to the next whole number, and the odd lots thus formed will then be allocated according to market practices.

Revocation of orders

The purchase orders received within the framework of the OPO will be irrevocable even in case of reduction, subject to the stipulations applicable in case of modifications of the terms of the Offering (see Section 5.3.2 of this Note d’Opération).

Results of the OPO

The results of the OPO will be the subject of a notice to be published by Euronext Paris at the latest on 31 October 2006, and of a press release that we will issue.

This notice and press release will detail the reduction rate potentially applicable to orders.

5.1.3.2 Principal Characteristics of the Institutional Offering

Length of the Institutional Offering

The Institutional Offering will start on 19 October 2006 and will end on 30 October 2006 at 5:00 p.m. (Paris time). If the end date for the OPO is extended (see Section 5.3.2 of this Note d’Opération), the end date of the Institutional Offering may also be extended correspondingly.

The Institutional Offering may end early without prior notice (see Section 5.3.2 of this Note d’Opération).

Persons authorized to issue orders within the framework of the Institutional Offering

The Institutional Offering will be conducted with institutional investors in France and certain other countries.

Orders that can be issued within the framework of the Institutional Offering

The orders will be expressed in number of shares or in the amount requested. They may include conditions related to the price.

Receiving and transmission of orders that can be issued within the framework of the Institutional Offering

To be taken into account, the orders issued within the framework of the Institutional Offering will have to be received by one of the underwriters (as defined in Section 5.4.3 of this Note d’Opération) no later than 30 October 2006 at 5:00 p.m. (Paris time) except in case of early closing.

Only orders at a limit price equal to or greater than the Offering Price will be taken into consideration in the allocation procedure.

Reduction of orders

The orders issued within the framework of the Institutional Offering may be subject to reduction in whole or in part.

Results of the Institutional Offering

The results of the Institutional Offering will be the subject of a notice to be published by Euronext Paris and a press release that we will issue on 31 October 2006, except in the case of early closing (see Section 5.3.2 of this Note d’Opération).

5.1.4 Revocation of the Offering

The execution of the Offering is subject to the condition that the Subscription Agreement cited in Section 5.4.3 below is not terminated and the certificate of the depositaries of the funds confirm that the subscriptions for the Offered Shares are issued.

Therefore, in case of termination of the Subscription Agreement, the subscription orders, the capital increases and the Offering will be cancelled retroactively. All trading carried out prior to the date of payment and delivery of the shares will be null and void and will have to be reversed retroactively. More precisely:

- The OPO and, the Institutional Offering, as well as all subscription orders placed, will be null and void, retroactively; and

- All trades carried out prior to the date of payment and delivery of the shares will be null and void and will have to be reversed retroactively, with each investor personally bearing the failure to earn and any applicable costs, if any, of such a termination.

In case of termination of the Subscription Agreement by the underwriters, we will issue a press release and immediately inform Euronext Paris, which will publish a notice.

5.1.5 Reduction of Orders

See Section 5.1.3 of this Note d’Opération for a description of the reduction of orders issued within the framework of the Offering.

5.1.6 Minimum and Maximum Amounts of Orders

There is no minimum amount for orders that can be issued within the framework of the OPO. The maximum amount of orders that can be issued within the framework of the OPO is indicated in Section 5.1.3 of this Note d’Opération.

There is neither a minimum nor a maximum amount for orders that can be issued within the framework of the Institutional Offering.

5.1.7 Revocation of Orders

See Sections 5.1.3 and 5.3.2 of this Note d’Opération for a description of the conditions for revocation of orders issued within the framework of the OPO.

5.1.8 Payment of Funds and Procedures for Delivery of the Offered Shares

The price of the Offered Shares subscribed within the framework of the Offering will have to be paid in cash by the clients as of the date scheduled for the payment and delivery of the New Shares, i.e., 3 November 2006.

The shares will be recorded in the account as of the date of payment and delivery, i.e., 3 November 2006, the date on which the payment to us for the proceeds of the issuance of the New Shares will also take place.

5.1.9 Publication of the Results of the Offering

The results of the OPO and the Institutional Offering will be the subject of a press release that we will issue and a notice from Euronext Paris scheduled for 31 October 2006 at the latest, except in case of early closing (see Section 5.3.2 of this Note d’Opération).

5.1.10 Preferential Subscription Rights

The capital increases within the framework of the Offering and the Novo Capital Increase are carried out with the elimination of the preferential subscription rights.

5.2 Distribution Plan and Allocation of the Transferable Securities

5.2.1 Categories of Potential Investors

5.2.1.1 Categories of Potential Investors and Countries in which the Offering will be Open

38 The Offering involves:

- An offering to the public in France in the form of an OPO intended primarily for individuals,

- An institutional offering intended primarily for institutional investors, involving:

• A placement in France; and

• An international private placement in certain other countries.

5.2.1.2 Restrictions Applicable to the Offering

The release of this Note d’Opération, the Document de Base or any other document prepared within the framework of this Offering, and/or the offer or sale of our shares may be subject to specific regulation in certain countries. Persons in possession of this Note d’Opération and/or the Document de Base and/or any other document prepared within the framework of the Offering must inform themselves about any restrictions resulting from local regulations and conform thereto.

This “Note d’Opération,” the Document de Base and the other documents related to the Offering do not constitute an offer to sell or the solicitation of an offer to buy any securities in any country in which such an offer or solicitation would be illegal. The Offering has not been registered or approved outside of France.

The underwriters will not offer the shares for sale except pursuant to the laws and regulations in effect in any country where they make such an offer to sell.

Restrictions Concerning the States in the European Economic Area (Other than France)

The Existing Shares, New Shares and Additional New Shares have not been and will not be offered to the public in the Member States of the European Economic Area other than France, since Directive 2003/71/CE, known as the “Prospectus Directive”, was transposed prior to the admission of such shares to the Eurolist Market of Euronext Paris, with the exception of transactions conducted in these Member States (a) with legal entities authorized or approved to operate on the financial markets, or, in their absence, legal entities whose company objective consists exclusively of investing in securities; (b) with legal entities meeting at least two of the following three conditions: (1) an average staff of at least 250 employees during the past business year; (2) a company balance sheet in excess of €43,000,000, and (3) annual net revenue in excess of €50,000,000, as indicated by the most recent company or consolidated financial statements, (c) at least 100 individuals or legal entities (other than qualified investors, as this term is defined in the Prospectus Directive) subject to obtaining the prior approval of the Joint Lead Managers and Joint Bookrunners for such an offer; or (d) in all other cases where the publication of a Note d’Opération is not required under the provisions of Article 3.2 of the Prospectus Directive.

For the purposes of this restriction, the concept of a “Public Offering” is understood in each of the Member States of the European Economic Area as defined in the Prospectus Directive, i.e., with regard to the Offering, as any communication sent to persons, regardless of the form and by any means whatsoever, and presenting sufficient information on the conditions of the Offering and the shares that will be offered, so as to permit investors to acquire or subscribe these shares. The concept of a “Public Offering” of shares also covers, for the purposes of this restriction, any transposition of this concept into national law by one of the Member States of the European Economic Area.

Restrictions concerning the United States of America

Our Existing Shares, New Shares and Additional New Shares that are the subject of the Offering have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”), and cannot be transferred or otherwise assigned in the absence of an effective registration document pursuant to the Securities Act or an exemption from the registration obligation provided in the Securities Act. The Document de Base, this Note d’Opération and any other document prepared within the framework of the Offering may not be distributed in the United States of America.

Restrictions concerning the United Kingdom

The underwriters have acknowledged and warranted (a) that they have complied and will comply with all provisions of the Financial Services and Markets Act 2000, as amended (the “FSMA”) applicable to the Offering, whether in the United Kingdom, from the United Kingdom or in any other circumstance involving the United Kingdom; and (b) that they have not sent or caused to be sent and will not send or cause to be sent any invitation whatsoever or any inducement to engage in an investment activity (within the meaning of Article 21 of the FSMA) related to the Offering, except under the circumstances in which Article 21(1) of the FSMA does not apply to such communication or pursuant to an applicable exemption.

5.2.2 Intention to Subscribe by the Principal Shareholders in our Company or the Members of our Administrative or Management Bodies or by any Person who Intends to Make a Subscription for more than 5%

On 3 October 2006, the Innoveris Group, currently a shareholder with 4.22% of our share capital, indicated to us its intention to place orders (through two of its funds) for approximately €3 million in the Institutional Offering. This is an intention and not a commitment, and the amount that the Innoveris Group proposes subscribing for could be more or less than such amount. Moreover, the orders placed by funds in the Innoveris Group could be reduced at the time of the allocation procedure.

On 6 October 2006, Gilde Healthcare Partners B.V., currently a shareholder through one of its funds with 6.33% of our share capital, indicated its intention to place orders for approximately €2 million in the Institutional Offering. This in an intention and not a commitment, and the amount that Gilde Healthcare Partners B.V. proposes subscribing for could be less. Moreover, the orders placed by Gilde Healthcare Partners B.V. could be reduced at the time of the allocation procedure.

On 5 October 2006, Philippe Pouletty, a member of our Supervisory Board, indicated to us his intention to place an order for approximately €200,000 in the Institutional Offering. This in an intention and not a commitment, and the amount that Philippe Pouletty proposes subscribing could be more or less. Moreover, the orders placed by Philippe Pouletty could be reduced at the time of the allocation procedure.

No other existing shareholder has formally declared to us its intention to participate in the Offering. We cannot rule out the possibility that certain existing shareholders will place orders, which could be partially or completely filled, or on the contrary reduced.

5.2.3 Pre-Allocation Information

See Sections 5.1.1 and 5.1.3 of this Note d’Opération.

5.2.4 Notices to Subscribers

Within the framework of the OPO, the investors will be informed of their allocations through their financial intermediary.

Within the framework of the Institutional Offering, the investors will be informed of their allocations through their underwriters.

5.2.5 Extension Option and Over-allotment Option

5.2.5.1 Extension Option

Depending on the size of the demand, we may decide to increase the initial number of shares under the Offering to within the limit of 15% of this initial amount, i.e., a maximum of 722,891 shares (the “Extension Option”), to increase, if applicable, the total number of Offered Shares to a maximum of 5,542,168 shares. This decision will be taken no later than the time of setting of the final conditions of the Offering, i.e., on 31 October 2006.

The final number of Offered Shares, after the possible exercise of the Extension Option, will be reported in our press release and in the notice of Euronext Paris related to the results of the Offering (see Section 5.1.1 of this Note d’Opération).

5.2.5.2 Over-allotment Option

We will grant the underwriters an Over-allotment Option (the “Over-allotment Option”) permitting subscription for additional new shares within the limit of 15% of the number of Offered Shares, i.e., a maximum of 722,891 shares (or a maximum of 831,325 shares in case of the full exercise of the Extension Option) (the “Additional New Shares”), at the Offering Price.

This Over-allotment Option, which will allow us to cover any over-allotments and will facilitate stabilization transactions, may be exercised all at one time, in whole or in part, up to the thirtieth calendar day following the closing date of the Institutional Offering, i.e., as an indication, no later than 29 November 2006.

If the Over-allotment Option is fully exercised, the total number of shares issued within the framework of the Offering would be increased to a maximum of 5,542,168 shares (of which a maximum of 722,891 Additional New Shares) in the absence of the exercise of the Extension Option, and would be increased to a maximum of 6,373,493 shares (of which a maximum of 831,325 Additional New Shares) assuming that the Extension Option is fully exercised.

If the Over-allotment Option is exercised, this information and the number of Additional New Shares so issued would be announced to the public by means of a press release that we issue and a notice from Euronext Paris.

5.3 Setting the Offering Price

5.3.1 Method for setting the Offering Price

5.3.1.1 Price of Offered Shares within the Framework of the OPO and the Institutional Offering

The price of shares offered within the framework of the OPO will be equal to the price of the shares offered within the framework of the Institutional Offering (the “Offering Price”).

It is anticipated that the Offering Price will be set by our Executive Board on 31 October 2006. Note that this date could be postponed if market conditions and the results of the building of the order book do not permit the setting of the Offering Price under satisfactory conditions. The date for setting the Offering Price could also be advanced in case of early closure of the OPO and the Institutional Offering.

The Offering Price set by our Executive Board will result from the comparison of the shares offering within the framework of the Offering and the demands issued by investors according to the technique known as the “order book building” method, as developed by professional practices.

This comparison will be made based on the following market conditions:

- Ability of investors selected to ensure orderly development of the secondary market,

- Order of arrival of the investors’ demands,

- Quantity demanded, and

- Sensitivity of price to the demands expressed by the investors.

The Offering Price could fall in a range between €4.15 and €4.80 per share, the range established by our Executive Board at its session on 17 October 2006, and could be changed at any time by the Executive Board up to and including the day scheduled for setting the Offering Price (see Section 5.3.2 of this Note d’Opération). This information is provided purely as guidance and does not, in any way, prejudice the Offering Price, which may be set outside of this range.

If the Offering Price is set outside the suggested price range, the investors are invited to refer to Section 5.3.2 of this Note d’Opération for more details on the price publication procedure and changes in the details of the Offering.

5.3.1.2 Factors in Evaluating the Suggested Price Range

The suggested price range, as proposed in this Note d’Opération, resulting from the decision made by our Executive Board on 17 October 2006, which highlights our company’s capitalization (after the Extension Option is fully exercised, but before any exercise of the Over-allotment Option and taking into account the Novo Capital Increase), of €105.26 million for a Offering Price that would be equal to the median point of this suggested price range, is consistent with the results provided by the evaluation methods usually used in conformity with market practices within the framework of stock market listing projects and applicable to us.

Our Executive Board determined this suggested price range in conformity with market practices after a process during which a series of factors were taken into account, among them several independent financial analyses of our company and perception of the Offering by investors in our company, our company’s valuation at the time of the capital increase subscribed on 29 March 2006 by Novo Nordisk A/S, the knowledge of the underwriters of our industry and the current state of the financial markets. The suggested price range was finally set by the Executive Board of our company based on a summary of the information provided to the Executive Board as a result of this process by the underwriters.

The final price selected will be determined based on the procedure described in Section 5.3.1.1 of this Note d’Opération.

To obtain the suggested price range, the following factors were used:

41 Price per share at the last capital increase executed by our company

On 29 March 2006, we carried out a reserved capital increase fully subscribed for by Novo Nordisk A/S. The proceeds of the capital increase were €10.0 million (including issuance premium) and the price per share was €4.45. This price highlighted a total value for the shares making up the capital of our company (including shares issued on this occasion) of €76.3 million after taking the proceeds of the subscription of Novo Nordisk A/S into account.

Novo Nordisk A/S has agreed to subscribe a maximum amount of €5 million in a reserved capital increase of our new shares, concurrently with a share capital increase of €20 million (before the exercise of the Extension Option and the Over-allotment Option) in connection with this Offering (see Section 6.3.1 of this Note d’Opération). This agreement demonstrates Novo Nordisk A/S’s support of our continuing development.

Risk-adjusted discounted cash flows method

The Risk-Adjusted Discounted Cash Flows method allows the intrinsic value of a company to be determined based on the estimate of future cash flows generated by each of its products and adjusted by the probability of success of the products based on their level of clinical development (Phase I, Phase II or Phase III).

For biotechnology companies such as Innate Pharma, this valuation method must take the atypical profile of their cash flows into account, marked by short- and medium-term operating losses. The capacity of a biotechnology company to generate positive cash flows is evaluated over a medium- to long-term period (more than five years).

The use of this method, based on working hypotheses from independent financial analyses, provides results consistent with the suggested price range proposed in this Note d’Opération. We have not reported any projected data.

Comparable Listed Companies Method

The comparable listed companies method is intended to determine the value of our company by comparison with companies listed in our industry that present similar activity models. This method presents the advantage of approaching the valuation of our company with an approach more representative of the functioning of financial markets, but nonetheless has the following limits:

- The specific characteristics of biotechnology companies do not lend themselves to an analysis of comparisons by multiples of financial aggregates, since most of these companies have not yet attained their threshold of profitability. The method must therefore be based solely on observation of the stock market value of companies considered comparable.

- Biotechnology companies all present relatively different economic models so it is difficult to create a sample of companies with sufficiently comparable characteristics.

42 As an illustration, an analysis of valuations of biotechnology companies is presented below and shows results consistent with the suggested price range proposed in this Note d’Opération.

Comparable Companies Stock Market Estimated Valuation (and their principal product candidates) Capitalization(a) of the company(a)

(millions of euros) (millions of euros)

Innate Pharma (a product candidate in Phase II (IPH1101)) 102(b) 47(c)

European biotechnology companies with a comparable economic model:

Bioxell (a product candidate in Phase II (Elocalcitol)) 165 99

Nicox (a product candidate in Phase III (Naproxcinoda), product candidate in 395 294 Phase II (NCX4016))

Transgene (two product candidates in Phase II (TG4010 and TG4001), a product 141 122 candidate in Phase I/II (TG1042))

Companies in the innate immunity sector:

Anadys Pharmaceuticals (a product candidate in preclinical development 68 -7 (ANA773))

Dynavax (a product candidate in Phase III (Heplisav), two product candidates in 209 184 Phase II/III (Tolamba and Supevax) and a product candidate in Phase I/II (ISS))

Idera Pharmaceuticals (a product candidate in Phase II (IMO-2055)) 54 51

Coley Pharmaceuticals (a product candidate in Phase II (ACTILON)) 277 180

Median 165 122

Average 187 132 (a) Source : Reuters, 16 October 2006

(b) After taking into account the Novo Capital Increase and the Offering (excluding the exercise of the Extension Option and the Over-allotment Option), based on the mid point of the suggested Offering price range.

Method of Mergers and Acquisitions of Comparable Companies

The method of mergers and acquisitions of comparable companies tends to capture the value of our company by comparison to the value of comparable companies as shown by recent merger and acquisition transactions with or by another company in the same sector. This method shows the type of premium freed up by the transaction in relation to the stock market a so- called “industrial” buyer is prepared to pay to take majority control of a company in the sector. It nonetheless presents limits similar to the comparable listed companies method.

As an illustration, the following table shows the premiums compared to the most recent listing for recent transactions conducted in this sector in Europe:

Transaction Date of the notice of Size of the transaction Premium in relation the transaction (1) to the last listing (2) Acquisition of Schwarz 25/09/2006 EUR 4.4 billion 20.4% Pharma by UCB Acquisition of Serono by 21/09/2006 CHF16.6 billion 20.0% Merck Acquisition of Corixa Corp 29/04/2005 US$301 million 47.7% by GlaxoSmithKline Acquisition of CAT by Astra 15/05/2006 GBP702 million 66.9% Zeneca Acquisition of AnorMed by 26/09/2006 US$515 million 21.0% Millennium Acquisition of Myogen by 02/10/2006 US$2.5 billion 50.0% Gilead (1) Corresponds to the number of shares in the share capital of the target per price per share proposed by the issuer.

(2) The premium is equal to the relationship between the price per share proposed by the issuer of the offering and the closing price of the share on the day preceding the announcement.

5.3.2 Notification of the Offering Price and any Changes in Scope of the Offering

The Offering Price and the final number of Offered Shares will be announced to the public no later than 31 October 2006, unless the Offering Price is set earlier, by means of a notice published by Euronext Paris and a press release that we will issue.

If there is a change in the suggested price range, if the Offering Price is set outside the initial suggested price range or, if applicable, altered, or if the number of Offered Shares is changed, the new procedures for the Offering, as determined by our Executive Board, will be announced to the public by means of a notice published by Euronext Paris, a press release that we will issue and a financial notice that we will publish in France in at least one daily financial paper with nationwide distribution.

The closing date for the OPO may be advanced (although, the length of the OPO cannot be shorter than three trading days) or extended, provided that the new closing date is announced to the public by means of a notice published by Euronext Paris, a press release that we will issue and a financial notice that we will publish in France in at least one daily financial paper with nationwide distribution, no later than the eve of the new closing date under consideration.

If one of the events listed below occurs, the clients within the framework of the OPO will have at least two trading days from our publication of the financial notice cited above to revoke, if they so wish, prior to the closing of the OPO the orders issued to establishments that received these orders prior to this publication. New irrevocable orders may be issued up to the new closing date for the OPO.

In case of a change in other procedures initially established for the Offering not provided in this Note d’Opération, an additional memorandum will be submitted for approval by the Autorité des marchés financiers. Orders issued within the framework of the OPO and the Institutional Offering will be void if the Autorité des marchés financiers does not approve this supplemental memorandum.

5.3.3 Restriction or Elimination of Shareholders’ Preferential Subscription Rights

The Offered Shares and the Additional New Shares, if applicable, will be issued pursuant to the Second and Fourth Resolutions of the combined general shareholders meeting of our company of 30 May 2006 authorizing a capital increase with elimination of the preferential subscription rights and for public investment (see Section 4.6.1 of this Note d’Opération).

Moreover, the Novo Shares will be issued pursuant to the Seventh and Eighth resolutions of the combined general meeting of shareholders of our company of 30 May 2006 authorizing a capital increase reserved for Novo Nordisk A/S (see Section 6.3.1 of this Note d’Opération).

5.3.4 Price Disparities

The table below shows the sale of shares as well as the exercise of warrants since 1 January 2006:

Sales

Seller Buyer Number of Price Date of sale shares sold François Romagné Stéphane Boissel 1,429(1) €35(1) 20/01/06 François Romagné Jérôme Tiollier 1,429(1) €35(1) 20/01/06 Inserm Transfert Patrick Squiban 1,000 € 3.5 13/10/06 (1) Before division of the nominal value by 20, (value of share decreased from €1.00 per share to €0.05 per share) at the General Shareholders’ Meeting on 29 March 2006.

44 Exercise of warrants (BSA)

Warrant Holders Number of Date of exercise Price of exercise Number of Warrants and delivery of shares issued exercised funds

Inserm Transfert 3,810 Warrants2001 28/07/2006 € 2.975 76,200

Philippe Pouletty 2,000 Warrants2001-1 09/10/2006 € 1.525 40,000

5.4 Placement and Guarantee

5.4.1 Contact Information for the Joint Lead Managers and Joint Bookrunners

Bryan, Garnier & Co. Limited, 36 Queen Street, London EC4R 1BW is registered in England and Wales under number 303 4095, subject to the regulations of the FSA and represented by Bryan, Garnier & Co. Limited, 33 avenue de Wagram, 75017 Paris.

Société Générale, 29, boulevard Haussmann, 75009 Paris.

5.4.2 Contact Information for the Intermediaries Entrusted with the Financial Services and the Depositaries in each Country Involved

Service of the securities and the financial service of our shares is handled by Société Générale (32, rue du Champ-de-Tir – BP 81236 – 44312 Nantes Cedex 3).

5.4.3 Guarantee

The placement of the Offered Shares will be the subject of a placement guarantee by Bryan, Garnier & Co. Limited and Société Générale (the “Joint Lead Managers and Joint Bookrunners” or the “underwriters”) for all Offered Shares and Additional New Shares within the framework of the Offering. Each of the underwriters agrees to underwrite or, if applicable, to have the Offered Shares at the Offering Price underwritten, as of the date scheduled for payment and delivery of such Offered Shares. Under the terms of the Subscription Agreement, we are committed to indemnifying each of the underwriters under certain circumstances. As concerns the New Shares, this guarantee does not constitute a performance guarantee under article L. 225-145 of the French Commercial Code.

The Subscription Agreement will be executed no later than the day on which the Offering Price is set, scheduled for 31 October 2006.

The Subscription Agreement may be terminated by the Joint Lead Managers and Joint Bookrunners, after having notified us, up to and including the date scheduled for payment delivery of the Offered Shares, under certain circumstances, such as, in particular:

• with respect to the events and circumstances below, if, in the reasonable judgment of the Joint Lead Managers and Joint Bookrunners, after consultation with us, any such event or circumstance would either (i) make it impracticable to proceed or (ii) materially compromise the success of the offer or settlement and delivery of the shares subscribed in connection with the Offering:

- a general suspension or material limitation in trading in securities on the New York Stock Exchange, the London Stock Exchange or Euronext Paris, or trading of our shares on the Eurolist has been suspended or materially limited;

- a general moratorium on banking activities has been declared by competent authorities in France, the United Kingdom or the United States;

- the occurrence of any financial, political or economic event having immediate adverse and serious consequences on the financial, political or economic conditions applicable in or involving France, the United Kingdom or the United States of America, the declaration of a national emergency (excluding existing emergencies) or war or geopolitical situation of equivalent seriousness involving France, the United States of America or the United Kingdom, or an act of terrorism on the territory of France, the United States or the United Kingdom having immediate adverse consequences; or

- a material adverse effect has occurred with respect to our ability to perform our obligations under the Subscription Agreement or with respect to our financial condition, results of operations, properties, prospects, preclinical and/or clinical trials or business, taken as a whole.

• the inaccuracy of or non-compliance with the representations, warranties or covenants that we make in the Subscription Agreement; or

• the non-performance of one of the conditions precedent included in the Subscription Agreement as of the date of payment and delivery of the Offered Shares, in the absence of the waiver of such conditions by the Joint Lead Managers and Joint Bookrunners.

If the Subscription Agreement is terminated, the certificate of the depositary of the funds would not be issued on the date scheduled for payment delivery of the Offered Shares and all trading carried out from the date of the initial trading of the Offered Shares would be cancelled retroactively. More specifically,

- the OPO and the Institutional Offering, as well as all subscription orders placed theretofore would be null and void retroactively; and

- All trades carried out prior to the scheduled date for payment and delivery of the Offered Shares would be null and void and will have to be reversed retroactively, with each investor personally bearing the failure to earn and any applicable cost of such a termination.

In case of termination of the Subscription Agreement by the Joint Lead Managers and Joint Bookrunners, we will issue a press release and immediately inform Euronext Paris, which will publish a notice.

5.4.4 Date of Execution of the Subscription Agreement

The Subscription Agreement should be executed on 31 October 2006, and the payment and delivery of the shares should take place on 3 November 2006.

6. ADMISSION TO TRADING AND TRADING METHODS

6.1 Admission to Trading

The admission of all of our shares, including the New Shares and Additional New Shares, if applicable, on the Eurolist market of Euronext Paris (Compartment C) has been requested.

The conditions for listing the Existing Shares, New Shares and Additional New Shares, if any, will be set in a notice from Euronext Paris to appear no later than the day of the start of trading, i.e., 1 November 2006.

We have made no other request for admission to trading on a regulated market or any other market.

6.2 Listing Stock Exchange

As of the date of this Note d’Opération, our shares have not been admitted for trading on any market, whether or not regulated.

6.3 Simultaneous Offers of our Shares

6.3.1 Capital Increase Reserved for Novo Nordisk A/S

The healthcare company, Novo Nordisk A/S, is the worldwide leader in the treatment of diabetes. Novo Nordisk A/S also occupies a leadership position in the areas of haemophilia, growth hormones, and hormonal replacement treatments for menopause. Novo Nordisk A/S is a Danish company with its Class B shares listed on the securities exchanges of Copenhagen and London (ISIN Code: DK001028081-7). Its ADRs are listed on the New York Stock Exchange (symbol “NVO”).

We signed a preliminary strategic partnership agreement with Novo Nordisk A/S at the end of 2003 concerning the development of IPH 2101 (NN 1975), an immuno-modulator targeting a receptor of NK cells. Under that agreement we transferred the rights to that product to Novo Nordisk A/S in exchange for initial payments, milestone payments, and royalties on the future sales of IPH 2101 (NN 1975). This preliminary agreement was followed by the acquisition by Novo Nordisk A/S of equity in our company in March of 2004.

In March of 2006, we entered into another agreement with Novo Nordisk A/S extending the initial agreement to all of the drug candidates of the NK platform, in particular the products IPH 22XX and IPH 23XX. Under this agreement, we, while retaining certain rights to niche applications, transferred the rights to all NK products to Novo Nordisk A/S in exchange for an initial payment, financing for research and development for a minimum of three years, milestone payments, and royalties on future sales. Furthermore, at the time, Novo Nordisk A/S increased its stake in the equity of our company, which, as of the date of this Note d’Opération, amounts to 20.74% of the share capital (see Section 6.5.8.1 of the Document de Base for further information on the agreements between us and Novo Nordisk A/S).

Issuance of shares reserved for Novo Nordisk A/S authorized by the general meeting of shareholders

The issuance of new shares was authorized by the Seventh and Eighth resolutions of the combined general meeting of shareholders of our company held on 30 May 2006, the text of which is reproduced below:

“Seventh Resolution:

Within the context of the listing of the shares of the Company for trading on a regulated market under the conditions precedent of a favourable vote to such effect by the Special Meeting of Shareholders of the holders of shares of Classes C and D and under reservation of the vote for the Eight Resolution, below, the General Meeting of Shareholders, deliberating under the conditions of quorum and of majority required for extraordinary general meetings of shareholders, having reviewed the report from the Executive Board and the special report of the Statutory Auditors, and after having verified that the share capital is fully paid in, in application of the provisions of articles L. 225-129 to L. 229-129-6 and L. 225-138 of the French Commercial Code:

1) authorizes the Executive Board, with the power of sub-delegation under the conditions provided for by the law, to proceed, by its own decision, in such proportion and at such time as it may see fit, to carry out an increase in the reserve capital of at most seventy-eight thousand (€78,000) euros by means of the issuance of at most one million five hundred and sixty thousand (1,560,000) common shares with a nominal value of five one hundredths of a euro (€0.05);

2) decides that the shares are to be subscribed for a subscription price, including the issue premium, equal to the Offering Price decided upon by the Executive Board for the needs of the capital increase by raising funds from investment for public investment carried out by the Company simultaneously with the initial listing of the shares of the Company for trading on a regulated market;

3) the shares issued shall be common shares, subject, commencing from their creation, to all of the provisions of the charter/by-laws and fully assimilated into the former shares of the same class after payment, as the case may be, of the dividend pertaining to the preceding fiscal year;

4) decides that the Executive Board shall have all powers to implement the present delegation of powers with the power of sub-delegation under the conditions provided for by the law, to implement, under the conditions established by the law and within the limitations set by the First Resolution and, for such purpose, in particular:

- To set the issue date and the amount thereof within the limitation of the cap decided in paragraph 1), above;

- To determine the conditions and procedures of the issue, in particular:

- To decide the procedures for paying in the subscriptions, with the understanding that they may take place by means of set-off against certain claims that are liquid and payable against the Company;

- To set the opening and closing dates for the subscription period for the said shares;

- To set the vesting date, even if retroactive, for the common shares to be issued; 47

- Upon its sole initiative, to apply the expenses of the increases in the share capital to the amount of the premiums pertaining thereto and to deduct from such amount the sums necessary for bringing the reserve to the level of one tenth of the new capital after each increase;

- In a general manner, to make any agreement, take all measures, and carry out all formalities useful for the issuance of the common shares issued by virtue of the present delegation;

- To determine the completion of the issue, to consequently modify the charter/by-laws of the Company, and, in general, to do everything useful and necessary within the framework of the law and regulations in force;

5) decides that the present delegation shall expire, at latest, upon the passage of a period of eighteen (18) months commencing from the date of this General Meeting of Shareholders.”

“Eighth Resolution:

As a result of the preceding resolution, the General Meeting of Shareholders, deliberating under the conditions of quorum and of majority required for extraordinary general meetings of shareholders, upon hearing the reading of the report from the Statutory Auditors, has decided to eliminate the pre-emptive right of subscription reserved for the shareholders upon the occasion of the issuance of at most one million five hundred and sixty thousand (1,560,000) common shares with a nominal value of five one hundredths of a euro (€0.05), the subject matter of the Seventh Resolution, in favour of the following class of subscribers, in accordance with the decision of the Executive Board, which shall be availed of all powers for such purpose:

- NOVO NORDISK A/S A company organized under the law of Denmark Registered office: Novo Alle, 2880 Bagsvaerd (Denmark),

- Any company or any company or entity (i) the control of which, within the meaning of article L. 233-3 of the French Commercial Code (hereinafter referred to as “Control”), may be held, directly or indirectly, by NOVO NORDISK A/S or (ii) may hold, directly or indirectly, the Control of the latter or (iii) the Control of which may be held, directly or indirectly, by such person or entity as itself directly or indirectly holds the Control of one of such companies or entities.

The Meeting of Shareholders acknowledges that, if the Executive Board uses this delegation of powers, the Executive Board shall render an account to the General Meeting of Shareholders as to the use made of the authorization conferred in this resolution in accordance with the provisions of the law and regulations in force, in particular those of articles L. 225-129-5 and L. 225-138 I of the French Commercial Code.”

Issuance of shares reserved for Novo Nordisk A/S decided upon by the Executive Board

By virtue of the delegation of powers mentioned in Section 4.6.1, above, and that conferred by the combined general meeting of shareholders of 30 May 2006 in the Seventh and Eighth resolutions, our Executive Board of our company, at the time of the meeting thereof on 17 October 2006:

- decided in principle on a capital increase to be carried out in cash at a maximum nominal amount of €78,000 with elimination of the pre-emptive right of subscription, reserved for Novo Nordisk A/S, that is, a maximum number of 1,560,000 new shares with a nominal value of 0.05 euro each, representing, at a maximum, about 9% of the capital and voting rights as of the date of this Note d’Opération; and

- decided that the subscription price for these new shares is to be equal to the Offering Price.

The final terms and conditions of the capital increase reserved for Novo Nordisk A/S are to be decided on by the Executive Board of the Company at the time of a meeting which is to be held on 31 October 2006.

6.3.2 Offering Reserved for our Employees

No offering reserved for our employees is contemplated.

6.4 Liquidity Agreement on our Shares

No liquidity agreement relating to our shares has been entered into as of the date of this Note d’Opération.

48 6.5 Stabilization

For a period starting from the date of the trading of New Shares, that is, according to the tentative timetable, 1 November 2006, and ending 29 November 2006, Société Générale Corporate & Investment Banking, acting as stabilization agent, may – on behalf of the underwriters (but in no case shall be required to do so), in accordance with the provisions of the statutory law and regulations applicable, in particular those of Articles 7, et seq., of Regulation No. 2273/2003, of the European Commission of 22 December 2003 relating to the terms and conditions for the application of Directive 2003/06/EC of the European Parliament and of the Council of 28 January 2003 (the “European Regulation”) – carry out stabilization transactions for the purpose of stabilizing or maintaining the price of our shares on the Eurolist market of Euronext Paris.

It is specified that there is no assurance that the aforementioned stabilization transactions will actually be undertaken. If such transactions are undertaken, they may be ceased at any time.

The reporting for the appropriate marketing authorities and for the public will be provided in accordance with the provisions of Article 9 of the European Regulation. Such transactions are to be likely to affect the price for the shares and may result in the establishment of a market price that is higher than the price that would prevail in the absence of such transactions. The underwriters may carry out over-allotments within the framework of the Offering up to the number of shares covered by the Over-allotment Option, plus, if applicable, 5% of the number of Offered Shares.

7. SALES BY SECURITIES HOLDERS AND RETENTION COMMITMENTS

7.1 Identity of Holders of Securities Expecting to Sell Them

Not applicable.

7.2 Number and Class of Securities Offered by the Holders of Securities Expecting to Sell Them

Not applicable.

7.3 Retention Commitments

7.3.1 Retention Commitments Made in Relation to Euronext Paris and to the Autorité des marchés financiers

None.

7.3.2 Lock-up Agreements of the Principal Shareholders and of our Management

Lock-up agreements of the principal shareholders other than our management

By letter dated the same day as the Subscription Agreement mentioned in Section 5.4.3 of this Note d’Opération, most of the existing shareholders, who represent approximately 93% of the share capital and voting rights of our company as of the date of this Note d’Opération will undertake, to the underwriters, commencing from the date of the signing of the Subscription Agreement referred to above and up to the expiration of a period of 270 calendar days following the date of the initial listing of our shares on the Eurolist, in particular, not to offer, assign, pledge, or transfer our shares in any other manner, whether directly or indirectly, without the prior consent of the Joint Lead Managers and Joint Bookrunners, with the understanding that the following are excluded from the scope of application of this lock-up agreement: (i) our shares subscribed by these shareholders within the context of the Offering and the shares which they can acquire on the financial market, and (ii) intragroup transactions among affiliates, provided that each affiliate transferee thereof shall execute and deliver to the underwriters a duplicate form of the “lock-up” covenants set forth in the lock-up agreement.

The shareholders who are entering into a lock-up agreement are the following:

Sofinnova Capital III FCPR Alta Group (ALTA BIOPHARMA PARTNERS II LP, ALTA EMBARCADERO BIOPHARMA PARTNERS II LLC) GIMV Group (ADVIESBEHEER G.I.M.V. LIFE SCIENCES NV, G.I.M.V) AXA Group (AXA PLACEMENT INNOVATION II, AXA PLACEMENT INNOVATION III) Gilde Europe Food & Agribusiness Fund BV Auriga Ventures I FCPR Innoveris Group (INNOVERIS 3 FCPI, INNOVERIS 4 FCPI, INNOVERIS 2 FCPI) Pechel Industries NIF Group (NIF 21-ONE 2A, NIF 21-ONE 2B, NIF SMBC VENTURES CO LTD) Quilvest Capital France 49 Novo Nordisk – including the Novo Shares Inserm Transfert Initiative SC Pajol

Lock-up agreements of the management of our company

By letter dated the same day as the Subscription Agreement mentioned in Section 5.4.3 of this Note d’Opération, the members of the Executive Committee and of the Executive Board undertake, to the underwriters, commencing from the date of the signing of the Subscription Agreement referred to above and up to the expiration of a period of 365 calendar days following the date of the initial listing of our shares on the Eurolist, in particular, not to offer, assign, pledge, or transfer our shares in any other manner, whether directly or indirectly, without the prior consent of the Joint Lead Managers and Joint Bookrunners, with the understanding that our shares subscribed by such executives within the context of the Offering or shares which they can acquire on the market are excluded from the scope of application of this lock-up agreement.

Lock-up agreements of the members of the Supervisory Board of our company

By letter dated the same day as the Subscription Agreement mentioned in Section 5.4.3 of this Note d’Opération, the members of the Supervisory Board undertake, to the underwriters, commencing from the date of the signing of the Subscription Agreement referred to above and up to the expiration of a period of 270 calendar days following the date of the initial listing of our shares on the Eurolist, in particular, not to offer, assign, pledge, or transfer our shares in any other manner, whether directly or indirectly, without the prior consent of the Joint Lead Managers and Joint Bookrunners, with the understanding that our shares subscribed by such members of the Supervisory Board within the context of the Offering or shares which they can acquire on the market are excluded from the scope of application of this lock-up agreement.

7.3.3 Commitment of Abstention by our Company

Within the context of the Subscription Agreement mentioned in Section 5.4.3 of this Note d’Opération we shall undertake, to the underwriters, commencing from the date of the signing of the Subscription Agreement and during a period to terminate 180 calendar days following the date of the initial listing of the shares offered within the context of the Offering, not to offer, assign, pledge, or transfer, in any other manner, common shares or equity securities or securities giving access to the capital of our company, or to carry out transactions that have or may have the same effect (including forward sales and hedging transactions), without the prior written consent of the Joint Lead Managers and Joint Bookrunners, with the understanding that this lock-up agreement is made under reservation of the following exceptions: (i) the issuance of the Offered Shares and, as the case may be, of the Additional New Shares, and the Novo Shares, and (ii) the granting of free shares to our employees within the limit of the authority granted by our extraordinary shareholders’ meeting of 29 March 2006 and the granting of stock options to purchase or subscribe to shares of our company, provided that such stock options cannot be exercised prior to the end of the 180-day period mentioned above, (iii) the issuance of shares by exercise of the rights attached to securities granting access to our share capital and stock options described in this international offering memorandum, (iv) the issuance of shares pursuant to a stock split of our shares or pursuant to a modification in the structure of our share capital, (v) the sale, on behalf of our company by an investment service provider, of shares purchased pursuant to a share buy back program set up by our company, and (vi) the issuance of shares in connection with an external growth transaction in connection with an industrial transaction in the form of a public exchange offer, merger, de-merger, contribution in kind, asset contribution or of any other similar transaction, provided that (a) such an external growth transaction does not require the issuance of shares representing more than 10% of our share capital at the time of the issuance, and (b) the transferee or beneficiary of the shares in connection with such transaction accepts lock-up provisions similar to those set forth in our agreement with the underwriters for the remaining duration of our lock-up agreement.

7.3.4 Market information

In the event that the underwriters accept to waive the lock-up conditions for one of the shareholders subject to the lock-up agreements described in Sections 7.3.2 and 7.3.3 above, we will inform the market of the conditions and subject to exceptions provided in articles 222-1 and following of the General Regulations of the French Autorité des marchés financiers. As a result, with respect to the lock-up agreements entered into with existing shareholders, management and members of the Supervisory Board, the underwriters will inform us of their decision to relieve anyone of their commitment.

8. ISSUE-RELATED EXPENSES

See Section 5.1.2.2 of this Note d’Opération.

50 9. DILUTION

9.1 Impact of the Issuance on the Shareholders’ Equity of our Company

On the basis of the shareholders’ equity under accounting principles generally accepted in France at 30 June 2006 and of the number of our shares that compose the share capital at that date, the shareholders’ equity per share, prior to and subsequent to the completion of the Offering, will be established as follows, assuming the completion of the Novo Capital Increase and assuming the Offering Price is equal to the median point in the price indicator range (that is, €4.475), and after the deduction of expenses and remuneration of the financial intermediaries under our responsibility:

After Completion of the After Completion of the Offering and of the Novo Offering and of the Novo Capital Increase, not Capital Increase, Prior to the including eventual including full exercise of Offering exercise of the Extension the Extension Option and (as of 30 June Option and of the Over- of the Over-allotment 2006) allotment Option Option Shareholders’ equity (in thousands of euros) 26,318 51,318 57,768 Number of shares comprising the share capital 17,264,080 22,850,671 24,292,010 Shareholders’ equity per share (in euros) 1.52 2.25 2.38

9.2 Amount and Percentage of Dilution Directly Resulting from the Offering

9.2.1 Impact on our Shareholders’ Interest in our Share Capital

A shareholder who holds, as of the date of this Note d’Opération, 1% of the share capital of our company (that is, 172,641 shares) and does not participate in the Offering, will have his interest in our share capital become, based on the median point of the price range, 0.76% subsequent to completion of the Novo Capital Increase and, after issuance of the New Shares within the context of the Offering, 0.73% in the event of the full exercise of the Extension Option and 0.71% in the event of full exercise of the Extension Option and of the Over-allotment Option.

51 9.2.2 Distribution of the Share Capital and of the Voting Rights in our Company

If all of the transactions described in this Note d’Opération are actually carried out, based on the median price range, the distribution of the share capital of our company would have to be modified as follows:

After completion of After completion of After completion of the Novo Capital After completion of the Novo Capital the Novo Capital the Novo Capital Increase and the Offering, excluding Increase and the Offering, including Increase and the Increase and the Distribution as of the date of possible exercise of the Extension full exercise of the Extension Option Distribution as of the Offering, excluding Offering, including this Note d’Opération Option and Over-allotment Option and the Over-allotment Option date of this Shareholders possible exercise of full exercise of the (Diluted basis, i.e., after exercise of all (Diluted basis, i.e., after exercise of (Diluted basis, i.e., after exercise of Note d’Opération (1) (2) (1) (2) (1) (2) the Extension Extension Option stock options, warrants and all stock options, warrants and all stock options, warrants and (Undiluted basis) (3) (3) (3) Option and Over- and Over-allotment founder warrants outstanding on founder warrants outstanding on founder warrants outstanding on allotment Option Option the date of this Note d’Opération and the date of this Note d’Opération and the date of this Note d’Opération and (Undiluted basis) (Undiluted basis) final acquisition of free shares(4)) final acquisition of free shares(4)) final acquisition of free shares(4)) Shares % Capital Shares % Capital Shares % Capital Number % Shares % Capital Shares % Capital Members of the Executive Board and the Supervisory Board 761,481 4.41 761,481 3.33 761,481 3,13 1,631,481 8.42 1,631,481 6.53 1,631,481 6.18 – Hervé Brailly 494,960 2.87 494,960 2.17 494,960 2,04 779,960 4.02 779,960 3.12 779,960 2.95 – François Romagné 197,840 1.15 197,840 0.87 197,840 0,81 377,840 1.95 377,840 1.51 377,840 1.43 – Stéphane Boissel 28,580 0.17 28,580 0.13 28,580 0,12 373,580 1.93 373,580 1.49 373,580 1.41 – Philippe Desmarescaux 20 ns 20 ns 20 ns 20 ns 20 ns 20 ns – Philippe Pouletty 40,020 0.23 40,020 0.18 40,020 0,16 100,020 0.52 100,020 0.40 100,020 0.38 – Frank Mörich 20 ns 20 ns 20 ns 20 ns 20 ns 20 ns – Frank Bulens 20 ns 20 ns 20 ns 20 ns 20 ns 20 ns – Sofinnova Partners SA 1 ns 1 ns 1 ns 1 ns 1 ns 1 ns – Jean Deleage 20 ns 20 ns 20 ns 20 ns 20 ns 20 ns Employees, including 43,920 0.25 43,920 0.19 43,920 0.18 1,096,580 5.66 1,096,580 4.39 1,096,580 4.15 – Jérôme Tiollier 28,580 0.17 28,580 0.13 28,580 0.12 258,580 1.33 258,580 1.04 258,500 0.98 – Patrick Squiban 1,000 0.01 1,000 ns 1,000 ns 198,500 0.51 98,500 0.39 98,500 0.37 Novo Nordisk A/S 3,580,540 20.74 4,697,858 20.56 4,697,858 19.34 3 580 540 18.47 4,697,858 18.82 4,697,858 17.79 Venture capital companies or funds or financial partners, or other existing shareholders 12,878,139 74.59 12,878,139 56.36 12,878,139 53.01 13,071,939 67.45 13,071,939 52.36 10,071,939 49.50 – Sofinnova Capital III FCPR 2,533,519 14.68 2,533,519 11.09 2,533,519 10.43 2,533,500 13.07 2,533,500 10.15 2,533,500 9.59 – Alta Group 2,128,500 12.33 2,128,500 9.31 2,128,500 8.76 2,128,500 10.98 2,128,500 8.53 2,128,500 8.06 – GIMV Group 1,925,000 11.15 1,925,000 8.42 1,925,000 7.92 1,925,000 9.93 1,925,000 7.71 1,925,000 7.29 – Axa Group 1,637,880 9.49 1,637,880 7.17 1,637,880 6.74 1,637,880 8.45 1,637,880 6.56 1,637,880 6.20 – Gilde Europe food & Agribusiness Fund BV 1,089,880 6.31 1,089,880 4.77 1,089,880 4.49 1,089,880 5.62 1,089,880 4.37 1,08 9,880 4.13 – Auriga Ventures I FCPR 865,320 5.01 865,320 3.79 865,320 3.56 865,320 4.46 865,320 3.47 865,320 3.28 – Innoveris Group 724,940 4.20 724,940 3.17 724,940 2.98 724,940 3.74 724,940 2.90 724,940 2.75 – Pechel Industries 558,820 3.24 558,820 2.45 558,820 2.30 558,820 2.88 558,820 2.24 558,820 2.12 – NIF SMBC Group 533,340 3.09 533,340 2.33 533,340 2.20 533,340 2.75 533,340 2.14 533,340 2.02 – Quilvest Capital France 266,680 1.54 266,680 1.17 266,680 1.10 266,680 1.38 266,680 1.07 266,680 1.01 – Inserm Transfert Initiative 125,200 0.73 125,200 0.55 125,200 0.52 199,000 1.03 199,000 0.80 199,000 0.75 – SC Pajol 98,980 0.57 98,980 0.43 98,980 0.41 98,980 0.51 98,980 0.40 98,980 0.37 – Other Existing Shareholders 390,080 2.26 390,080 1.71 390,080 1.61 390,080 2.01 390,080 1.56 390,080 1.48 Public - - 4,469,273 19.56 5,910,612 24.33 - - 4,469,273 17.90 5,910,612 22.38 Total 17,264,080 100.00 22,850,671 100.00 24,292,010 100.00 19,380,540 100.00 24,967,131 100.00 26,408,470 100.00

(1) The stock options currently outstanding permit subscription for a maximum of 905,660 new shares.

52 (2) The warrants (BSA) currently outstanding permit subscription for a maximum of 253,800 new shares. (3) The founder warrants (BSPCE) currently outstanding permit subscription for a maximum of 212,000 new shares. (4) 745,000 free shares. * ns = not significant

53 10. ADDITIONAL INFORMATION

10.1 Advisors Involved with the Offering

Not applicable.

10.2 Other Information Verified by the Statutory Auditors

None.

10.3 Expert’s Report

Not applicable.

10.4 Information from Third Parties

Not applicable.

54 RECENT INFORMATION ABOUT THE COMPANY

The following information forms Section 11 of the Note d’Opération of the Company, dated 18 October 2006

11. UPDATE OF INFORMATION ON OUR COMPANY

The information appearing in the Document de Base remains accurate as of the date of this Note d’Opération, subject to the additional information presented above.

11.1 Changes in our Products

IPH 1101

This past 6 September we announced the final results of our Phase I trial in solid tumours (trial D004-101). A total of 28 patients, suffering from various solid tumours, 18 of whom were suffering from metastatic renal carcinoma (mRCC), were treated in this trial. The results, which are encouraging, are summarized as follows:

In terms of safety, the product has been well tolerated with main adverse events being transient signs of cytokine release (fever, hypotension, nausea). Most of these adverse events were only observed at the first administration of IPH 1101 alone, and were of less intensity in subsequent cycles, with co-treatment with Aldesleukin. Two patients experienced dose limiting toxicities at 1800 mg/m² - one patient had fever and hypertension (CTC grade 3) and the other had hypotension (CTC grade 3) - leading to confirm good tolerance and safety of a lower dose of 1500 mg/m², tested on ten patients and which has been considered as the maximum tolerated dose as well as the recommended dose for further development.

In terms of biological activity, this phase I clinical trial provides further evidence of the specific and reproducible pharmacological activity of IPH1101 toward human gδ cytotoxic T cells. Among the 25 evaluable patients for pharmacodynamic evaluation, 21 patients showed a significant increase of their circulating gδ T cells, evaluated by dedicated flow cytometry analysis. In parallel, no other immune cell type (NK, T cells) showed any amplification, demonstrating the specific targeting of the gδ population. The gδ T cell amplification correlated with the IPH 1101 dose. In the highest dose- groups, four patients (including three mRCC patients), showed gδ T cell increases ranging from 50 to 240 times the basal values. In most patients, IPH1101 also induced early release of immunomodulatory and antitumoral soluble factors, such as INFg, MIP1a, IL-8, IL-6, MCP-1 and TNFα.

In terms of clinical activity, tumour evaluations performed in the 15 mRCC patients evaluable for efficacy (out of 18 mRCC patients treated) showed a disease stabilisation of more than 35 weeks for eight patients out of 15. These in vivo data, which confirmed the data generated ex vivo with the IPH 1101 (in a cellular therapy setting) and published at ASCO in June 2006, are encouraging signals in such an advanced kidney cancer patient population, supporting further evaluation in this indication with the ongoing randomised Phase II for mRCC patients (trial D004-201).

We have started to recruit and treat patients in the Phase II trial D004-201 this past July. The 15 clinical research centres have all been operational since the start of September, and we envision recruiting patients in line with our initial forecasts.

We have progressed in the preparation of other Phase II studies on non-Hodgkin’s lymphoma in combination with rituximab (trial D004-202) and in chronic myeloid leukaemia (trial D004-203), the start-up of which is still forecast for 2007, in accordance with the deadline set in Section 12 of the Document de Base.

IPH 1201 (formerly 12XX*)

The drug candidate IPH 12XX became IPH 1201 after passing the M1 milestone in September 2006. As explained in Section 6.3.3 of our Document de Base, this milestone corresponds to the initiation of pre-clinical and pharmaceutical development of the candidate drug. The milestone was reached ahead of the initial deadline (end of 2006).

IPH 1201 and Other Candidate Drugs of the Partnership with Novo Nordisk A/S

As described in Section 6.5.8.1 of this Note d’Opération, we signed a strategic partnership with Novo Nordisk A/S in March of 2006 covering all of our candidate drugs of the NK cells platform.

This strategic partnership, the collaboration phase of which was initially set at three years, is progressing in line with the initial plan in terms of the contributions of the two parties and in conformity with the initial work-plan.

55 As indicated in Section 6.5.2.2.1 of our Document de Base, the most advanced drug candidate of the NK platform, IPH 1201, should enter the clinical phase between now and the end of the year 2006 with a Phase I trial for acute myeloid leukaemia patients. The IMPD filing, or regulatory submission, for the first clinical trial by Novo Nordisk A/S with this product, will trigger a milestone payment to Innate Pharma.

The development of the drug candidates IPH 22XX* and IPH 23XX*, products described in Sections 6.5.2.2.2 and 6.5.2.2.3 of the Document de Base, is also progressing in line with the initial plan.

IPH 31XX

The development of the drug candidate IPH 31XX* has progressed in line with the goals set in Section 6.5.3.3 of our Document de Base.

* The name “IPH – XX” corresponds to drug candidates which have not yet passed milestone “M1”.

56 11.2 Interim Financial Statements Prepared under Accounting Principles Generally Accepted in France and IFRS Rules as of 30 June 2006

11.2.1 Interim Financial Statements Prepared under Accounting Principles Generally Accepted in France as at 30 June 2006

Balance Sheet (in thousands of euros)

Note 31 December 2005 30 June 2006

Assets

Non-current assets

Intangible fixed assets...... 34 29

Buildings...... 3 204 194

Technical installations, equipment and tools ...... 3 454 556

Other tangible fixed assets...... 26 53

Prepayments...... 3 20 641

Financial fixed assets...... 29 29

Total fixed assets...... 766 1,503

Current assets

Trade accounts receivables ...... 39 25

Other receivables ...... 4 4,025 4,404

Investment securities ...... 5 17,692 32,569

Cash ...... 5 206 815

Total current assets...... 21,962 37,813

Adjustment accounts

Prepaid expenses...... 6 1,614 1,663

Unrealized foreign exchange losses...... 1 -

Total adjustment accounts ...... 1,615 1,663

Total assets ...... 24,344 40,979

Liabilities

Shareholders’ equity

Share capital ...... 7 745 857

Share premium...... 38,891 48,688

Retained earnings...... (14,236) (20,152)

Net loss ...... (5,956) (3,251)

Tax regulated provisions...... 222 176

Total shareholders’ equity ...... 19,666 26,318

Other equity

Conditional subsidies...... 8 2,015 2,824

Total other equity ...... 2,015 2,824

Provisions for contingencies and losses

Provisions for risks ...... 9 62 -

Pensions and similar obligations...... 9 16 106

Total provisions for contingencies and losses ...... 77 106

Liabilities

Borrowings ...... 8 559 538

Trade accounts payable...... 1,355 2,289

Tax and social liabilities ...... 649 762

Other liabilities ...... 16 -

Prepaid income ...... 10 7 8,142

Total liabilities...... 2,586 11,731

Total liabilities...... 24,344 40,979 57 Income Statement (in thousands of euros)

6-month period ended 30 June, 31 December, Note 2005 2006 2005

Turnover ...... 10 900 1,908 1,300

Operating subsidies...... 69 137 198

Reversal of provisions, transfer of charges...... 8 73 62

Total operating income...... 977 2,118 1,560

Purchase of raw materials and other supplies ...... 11 (903) (841) (858) Other purchases and external expenses...... 12 (2,254) (3,571) (4,724)

Taxes...... (33) (60) (72) Salaries...... 13 (905) (1,456) (2,288) Social charges ...... 13 (209) (329) (507)

Depreciation expense and impairment of fixed assets ...... (147) (153) (293) Provisions for risks and liabilities...... 9 - (90) (8)

Other expenses...... (19) (18) (37)

Total operating expenses...... (4,469) (6,518) (8,787)

Operating result...... (3,492) (4,400) (7,227)

Financial income / (expense), net ...... 14 224 403 285

Ordinary loss before tax...... (3,268) (3,997) (6,941)

Exceptionnal income / (expense)...... 15 7 46 39 Research tax credit...... 4 450 700 946

Net loss...... (2,812) (3,251) (5,956)

58 Statement of cash flows (in thousands of euros)

31 December, 30 June, 2005 2006 (12 months) (6 months)

Cash flows from operating activities

Net loss ...... (5,956) (3,251)

Depreciation, amortization and provisions ...... 313 136

Changes in working capital from operating activities...... (1,614) 8,156

Exchange (gains) / losses on the USD bank account ...... 6 (9)

Net cash generated from / (used in) operating activities...... (7,263) 5,032

Cash flows from investing activities

Acquisitions of fixed assets ...... (108) (247)

Net cash used in investing activities (108) (247)

Cash flows from financing activities

Gross proceeds from issuance of share capital ...... - 10,000

Fees on issuance of share capital ...... - (51)

Costs attributable to issuance of share capital in progress...... - (633)

Changes in working capital from financing activities...... - 589

Increase in indebtedness ...... 265 791

Debt repayment...... (12) (3)

Net cash generated from financing activities...... 253 10,693

Exchange gains / (losses) on cash...... 6 9

Net increase / (decrease) in cash and investment securities ...... (7,112) 15,487

Cash and investment securities at the beginning of the period ...... 25,009 17,897

Cash and investment securities at the end of the period ...... 17,897 33,384

Of which:

Cash ...... 206 815

Investment securities ...... 17,692 32,569

Total cash and investment securities at the end of the period...... 17,898 33,384

59 Statement of changes in shareholders’ equity (in thousands of euros)

Tax Total Number of Share Share Retained regulated shareholders’ shares capital premium earnings provisions equity Note Net loss Balance as at 31 December,

2004 ...... 745,034 745 38,891 (9,697) (5,140) 210 25,009

Net loss appropriation 2004... - - - (5,140) 5,140 - -

Net loss for the year 2005...... - - - - (5,956) - (5,956) Excess tax depreciation over economic depreciation, net.... - - - - - 12 12 Change in accounting principles – consumables...... - - - 956 - - 959 Change in accounting principles - fixed assets...... - - - (355) - - (355)

Balance as at 31 December,

2005 ...... 745,034 745 38,891 (14,236) (5,956) 222 19,666

Net loss appropriation 2005... - - - (5,956) 5,956 - - Increase in share capital...... 7 112,360 112 9,836 - - - 9,948

Issuance of free shares...... - - (40) 40 - - - Net loss for the six-month period ended June 30, 2006 ... - - - - (3,251) - (3,251) Reversal of excess tax depreciation over economic depreciation ...... - - - - - (46) (46) Division by 20 of par value ... 7 17,147,880 ------

Balance as at 30 June, 2006.. 17,147,880 857 48,688 (20,152) (3,251) 176 26,318

60 Notes to the interim condensed financial statements

1) Events with a financial impact in the period and seasonality

The principal events with a financial impact in the period are presented in the notes hereafter.

The Company’s activity is not subject to seasonal fluctuations.

2) Accounting policies

The accounting policies and calculation methods adopted in the financial statements for the six-month period ended 30 June 2006 are identical to those used in the accounts prepared under Generally Accepted Accounting Principles in France as at 31 December 2005 presented in paragraph 20.1 of the ‘document de base’ (Document de Base) filed on 19 June 2006 under the reference number I.06-102.

These interim financial statements have been prepared in conformity with the recommendation by the Conseil National de la Comptabilité N° 99-R-01.

These interim financial statements should be read in conjunction with the financial statements prepared in accordance with French GAAP as at 31 December 2005 as these condensed accounts do not contain all of the information required by French GAAP for an annual closing.

3) Fixed assets

Tangible fixed assets can be analyzed as follows (in thousands of euros):

Machinery and Total tangible fixed Buildings equipment assets

Year ended 31 December 2005 Net opening balance ...... 230 637 867 Acquisitions...... 6 52 58 Disposals...... - - - Depreciation...... (31) (235) (266)

Net closing balance ...... 204 454 658

6-month period ended 30 June 2006 Net opening balance ...... 204 454 658 Acquisitions...... 6 267 273 Disposals...... - (12) (12) Depreciation...... (16) (153) (169)

Net closing balance ...... 194 556 750

Costs attributable to the issuance of share capital for planned initial public offering have been recorded as prepayments in fixed assets as at 30 June 2006 for an amount of 633 thousand euros.

4) Other receivables

Other receivables mainly relate to the research tax credit receivable (3,495 thousand euros as at 30 June 2006), the grants and reimbursable public funding receivable (392 thousand euros as at 30 June 2006) and the VAT credit (494 thousand euros as at 30 June 2006).

5) Cash and investment securities

Current accounts are EUR and USD accounts that were opened with two banks, Société Générale and Crédit Lyonnais.

Investment securities are mainly composed of Société Générale and Crédit Lyonnais money market mutual funds. These funds have money market objectives and the funds’ management target is to yield a return close to that of EONIA, the EU inter-bank reference rate.

The unrealized gain relating to these securities amounted to 172 thousand euros as at 30 June 2006.

61 6) Prepaid expense

Prepaid expense relate mainly to product supplies not yet used in research activities (1,462 thousand euros as at 30 June 2006).

7) Capital

As at 31 December 2005 and 30 June 2006, the breakdown of the share capital can be analyzed as follows, in number of shares:

31 December 30 June 2005 2006

Common stock (series O stock)...... 8,200 164,000 Series A preferred stock...... 55,500 1,110,000 Series B preferred stock...... 145,200 2,904,000 Series C preferred stock...... 336,134 6,722,680 Series D preferred stock...... 66,667 6,247,200 Series D BIS preferred stock ...... 133,333 -

Share capital, in number of shares...... 745,034 17,147,880 Par value of share (in euros) ...... 1.00 0.05

Share capital, in euros ...... 745,034 857,394

The above amounts do not include warrants (“BSA”), founder warrants (“BSPCE”), stock options and free shares granted to certain investors and individuals, particularly employees. As at 30 June 2006, the fully diluted share capital would comprise 19,453,880 shares (with a par value of 0.05 euro) considering the exercise of all warrants (BSA and BSPCE), stock options and free shares issued at that date.

On 29 March 2006 the Company increased its share capital. Novo Nordisk A/S subscribed to 112,360 Series D preferred shares and simultaneously the Company split the par value of the share by 20 (value of share decreased from 1.00 per share to 0.05 euro per share). The Company then amalgamated its series D preferred stock with its series D Bis preferred stock so as to have one single category entitled series D preferred stock.

8) Conditional subsidies and borrowings

The reimbursable part of conditional subsidies, which are subject to technical or commercial success conditions can be analyzed as follows (in thousands of euros):

31 December 30 June 2005 2006

ANVAR ADI - 17/02/2000...... 223 223 ANVAR ADI - 17/02/2000 (Conseil Général) ...... 46 46 ANVAR ADI - 15/02/2002...... 1,255 1,655 ANVAR ADI - 15/02/2002 (Conseil Général) ...... 91 121 ANVAR EUREKA - 03/12/2003 ...... 400 509 ANVAR - 23/06/06 - IPO project...... - 270

Conditional subsidies...... 2,015 2,824

The reimbursable part of conditional subsidies, which is dependent on technical or commercial success conditions, amounted to 538 thousand euros as at 30 June 2006. This amount was recorded in the line item borrowings.

9) Provisions for risks

From 2002 and up until 20 June 2006 a provision for the amount of 60 thousand euros was recorded for a litigation with a former employee who was dismissed by the Company for professional misconduct in 2002. This amount corresponded to the amount that was claimed by the former employee for damages before the Social Court of Justice.

The first decision made by the Social Court of Justice in June 2005 rejected the former employee’s demand. The former employee appealed this decision, the appeal judgment was made in May, 2006 whereby the former employee’s demand was rejected for a second time. As there has been no further appeal the Company reversed this provision as at 30 June 2006.

62 10) Turnover and prepaid income

The Company’s turnover stems entirely from collaboration and licensing agreements with Novo Nordisk A/S. The prepaid income as at 30 June 2006 mainly relates to the collaboration agreement signed with Novo Nordisk A/S in March 2006.

11) Purchases of raw materials and other supplies

The purchases of raw materials and other supplies include purchase costs from third parties of products developed by the Company that has no production capacity. These costs also include the purchase costs of pharmaceutical products and substances bought by the Company from third parties and used in its research and development activity.

12) Other purchases and external expenses

Other purchases and external expenses are analyzed as follows (in thousands of euros):

6-month period ended 30 June 2005 2006

Subcontracting ...... (1,231) (1,479) Intellectual property expenses ...... (176) (565) Scientific, medical and regulatory advice...... (78) (120) Leasing, maintenance and utility ...... (185) (277) Travel and conventions...... (220) (374) Non-scientific advisory and consulting ...... (203) (433) Marketing, communication and public relations...... (28) (85) Telecommunications...... (18) (43) Insurance...... (28) (39) Bank charges...... (3) (3) Others, net...... (84) (153)

Other purchases and external expenses...... (2,254) (3,571)

13) Personnel costs

The Company had 64 employees as at June 30, 2006, compared with 54 as at 31 December 2005.

In 2004, the Company was granted the Jeune Entreprise Innovante (“JEI”) status for the first time. This allows the Company to benefit from social security cost exemptions for employees involved in research projects. The Company still benefits from the JEI status for the fiscal year 2006, as the status ends at the 8th anniversary of the Company based on the current law.

14) Financial income and expense, net

The financial income and expense, net can be analyzed as follows (in thousands of euros):

6-month period ended 30 June 2005 2006

Net gain on disposal of investment securities...... 230 394 Interest on borrowings ...... - - Foreign exchange gains / (losses) ...... (6) 9

Financial income / (expense), net...... 224 403

63 15) Exceptional income and expense, net

The exceptional income and expense are analyzed as follows (in thousands of euros):

6-month period ended 30 June 2005 2006

Exceptional income Income on previous periods...... 8 - Selling price of assets sold...... - 2 Reversal of excess tax depreciation ...... - 60

Exceptional expense Expenses on previous periods...... 1 - Net book value of fixed assets disposed of...... - 3 Excess tax depreciation...... - 13

Exceptional income / (expense) net...... 7 46

16) Commitments

Obligations under operating lease agreement

As at 30 June 2006, future lease payments relating to lease contracts amounted to 68 thousand euros for ECS and 26 thousand euros for Dell.

17) Post balance sheet events

None.

18) Related party transactions

The following compensations were expensed to the benefit of the five members of the executive committee of the Company (in thousands of euros):

6-month period ended 30 June 2005 2006

Salaries and other short-term benefits...... 248 438 Contributions to supplementary pension plans ...... 3 5

Key management compensation ...... 251 443

11.2.2 Statutory Auditors’ Report on Interim Financial Statements Prepared in Accordance with Accounting Principles Generally Accepted in France as of 30 June 2006

This is a free translation into English of the statutory auditors’ report issued in the French language and is provided solely for the convenience of English speaking readers. This report should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France.

To the Shareholders

Dear Sir/Madam,

Following your request and in our capacity as the statutory auditors of Innate Pharma, we have performed a limited review of the Company’s interim financial statements relating to the period January 1 to June 30, 2006. These interim financial statements are attached to this report.

These interim condensed statements are the responsibility of the Company’s Executive Board. Our responsibility is to issue a report on these interim financial statements based on our review.

64 We conducted our review in accordance with the French Standards on Auditing applicable to review engagements. A limited review of interim financial statements consists in obtaining the information deemed as necessary, principally from persons responsible for accounting and financial matters and applying analytical procedures and any other procedure deemed appropriate. A review of this nature is substantially less in scope than an audit conducted in accordance with French Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not issue an audit opinion.

Based on our review, we have not identified any significant anomalies, which would cause us to believe that the accompanying interim financial statements are not prepared, in all material respects, in accordance with accounting principles generally accepted in France.

Marseille, September 1, 2006

Statutory Auditors

Audit Conseil Expertise Pricewaterhouse Coopers Audit Member of PKF International

Guy Castinel Philippe Willemin

65 11.2.3 Accounts prepared under IAS 34 as of 30 June 2006

As we have no subsidiaries, we do not prepare consolidated financial statements but only individual financial statements. According to current French legislation, individual financial statements must be prepared in accordance with accounting principles generally accepted in France. Our interim financial statements prepared under accounting principles generally accepted in France as of 30 June 2006 can be found in section 11.2.1 of this Note d’operation. In addition, similar to our annual accounts in the Document de Base, we decided to prepare our financial statements as of 30 June 2006 in accordance with IFRS (IAS 34) standards, which are presented below.

Balance Sheet (in thousands of euros)

31 December 30 June Note 2005 2006

Assets

Current Assets Cash and cash equivalents ...... 3 2,585 19,112 Current financial instruments...... 3 15,757 14,444 Current receivables and prepayments ...... 4 2,866 3,533

Total current assets...... 21,209 37,089

Non-current assets Non-current receivables...... 5 2,792 2,547 Property, plant and equipment...... 6 707 819

Other fixed assets...... 59 49

Total non-current assets...... 3,558 3,414

Total assets ...... 24,766 40,503

Liabilities

Current liabilities Trade payables...... 7 2,030 7,988 Borrowings ...... 8 169 383 Provisions ...... 10 61 -

Total current liabilities...... 2,260 8,371

Non-current liabilities Trade payables...... 7 - 3,208 Conditional subsidies and grants ...... 9 2,015 2,724 Borrowings ...... 8 411 274 Pension benefits...... 11 16 106

Total non-current liabilities ...... 2,442 6,312

Equity

Capital and reserves attributable to equity holders of the Company Share capital ...... 12 745 857

Share premium...... 39,089 48,703

Retained earnings...... (14,084) (20,173)

Net loss for the year or the period...... (6,129) (3,739) Other comprehensive income ...... 3 444 172

Total capital and reserves attributable to equity holders of the

Company...... 20,065 25,820

Total liabilities and equity...... 24,766 40,503

66 Income Statement (in thousands of euros)

6-month accounting period ended

30 June Note 2005 2006

Licensing revenue...... 18 900 1,908

Government financing for research expenditure...... 519 838

Operating revenue ...... 1,419 2,746

Cost of supplies and consumable materials ...... 13 (595) (900)

Intellectual property expenses ...... (233) (582) Other purchases and external expenses...... 13 (2,024) (2,934) Employee benefits other than share-based compensation...... 14 (1,114) (1,785) Share-based compensation...... 15 (29) (451)

Depreciation and amortisation ...... (150) (157) Other income and expenses, net...... 16 (22) (82)

Net operating expenses ...... (4,167) (6,890)

Operating income / (loss)...... (2,748) (4,144)

Interest income / (expense), net ...... 17 224 405

Income / (loss) before tax...... (2,524) (3,739)

Income tax expense...... - -

Net loss...... (2,524) (3,739)

Loss per share attributable to the equity holders of the Company:

(in € per share) - basic...... 21 (0.17) (0.23) - diluted...... 21 (0.17) (0.23)

67 Statement of cash flows (in thousands of euros)

6-month accounting period ended

30 June Note 2005 2006

Cash flows from operating activities

Net loss ...... (2,524) (3,739)

Adjustments to reconcile net loss to net cash from operating activities:

Depreciation and amortisation ...... 150 157 Provisions ...... 10,11 - 29 Share-based compensation...... 15 29 451

Changes in working capital from operating activities...... (202) 8,146

Other items not included in operating activities ...... (110) (356)

Net cash generated from / (used in) operating activities...... (2,657) 4,688

Cash flows from investing activities

Acquisition of fixed assets...... (54) (249)

Sale / (purchase) of current financial instruments...... (3,821) 1,340

Net cash generated from / (used in) investing activities...... (3,875) 1,091

Cash flows from financing activities

Gross proceeds from issuance of share capital ...... - 10,000

Fees on issuance of share capital ...... - (51)

Costs attributable to issuance of share capital in progress...... - (633)

Changes in working capital from financing activities...... - 589

Increase in indebtedness ...... 265 791

Debt repayment...... (10) (5)

Net cash generated from financing activities...... 255 10,691

Changes in cash and cash equivalents not arising from cash flows ...... (54) 57

Net increase / (decrease) in cash and cash equivalents ...... (6,331) 16,527

Cash and cash equivalents at the beginning of the period ...... 11,015 2,585

Cash and cash equivalents at the end of the period ...... 4,684 19,112

68 Statement of changes in Equity (in thousands of euros)

Total attributable to equity Other holders of Number of Share Share Retained comprehensive the Note shares capital premium earnings Net loss income Company

Balance as at December 31,

2004 (restated) ...... 745,034 745 38,875 (9,351) (4,733) 215 25,751

Net loss appropriation 2004 .. - - - (4,733) 4,733 - - Share-based compensation .... 15 - - 29 - - - 29 Net loss for the six-month period ended June 30, 2005... - - - - (2,524) - (2,524) Unrealised gains on securities available for sale ... 3 - - - - - 82 82

Balance as at June 30, 2005 745,034 745 38,904 (14,084) (2,524) 297 23,338

Share-based compensation .... 15 - - 185 - - - 185 Net loss for the six-month period ended December 31,

2005...... - - - - (3,605) - (3,605) Unrealised gains on securities available for sale ... 3 - - - - - 147 147

Balance as at December 31,

2005...... 745,034 745 39,089 (14,084) (6,129) 444 20,065

Net loss appropriation 2005 .. - - - (6,129) 6,129 - - Increase in share capital ...... 12 112,360 112 9,836 - - - 9,948 Fees on issuance of share capital in progress ...... - - (633) - - - (633)

Issuance of free shares ...... - - (40) 40 - - - Share-based compensation .... 15 - - 451 - - - 451 Net loss for the six-month period ended June 30, 2006... - - - - (3,739) - (3,739) Unrealised gains on securities available for sale ... 3 - - - - - (272) (272) Division by 20 of par value... 12 17,147,880 ------

Balance as at June 30, 2006 17,147,880 857 48,703 (20,173) (3,739) 172 25,820

69 Notes to the Interim Condensed Financial Statements

1) The Company

The company Innate Pharma SA is a biotechnological company. Its activity is centered on the development of immunology- based therapies for tumor related illnesses. The Company has a technological platform that combines immunology and chemistry of natural substances. The Company’s main research field within immunology targets innate immunity, that is the activation of non conventional lymphocytes, such as gamma delta T cells, NK and NK.T cells and Toll Like Receptors (TLR).

As at 30 June 2006 the Company had seven products under development, none of which have been marketed yet.

In the short run, potential clients for the Company are players in the pharmaceutical industry through out-licensing. In 2003, a first license agreement for a product was signed with the Danish laboratory Novo Nordisk A/S, who became a minority shareholder in the Company in 2004. The signature of a second agreement in March 2006 has strengthened this relationship with Novo Nordisk A/S.

In the long term, the Company intends to deliver its products to patients through anti-cancer treatment centers.

The Company’s activity is not subject to seasonal fluctuations.

These half year condensed financial statements have been closed by the Executive Board on 29 August 2006. They are not subject to approval from the Shareholders’ meeting.

2) Accounting policies a) Basis of preparation

The condensed financial statements for the six-month period ended 30 June 2006 have been prepared in accordance with IAS 34 Interim Financial Reporting. They should be read in conjunction with the annual financial statements as at 31 December 2005 prepared in accordance with IFRS and presented in paragraph 20.3 of the ‘Document de Base’ (Document de Base) filed on 19 June 2006 under the reference number I.06 – 102. b) Accounting policies

The accounting policies applied are the same as those adopted in the preparation of the annual financial statements in accordance with IFRS as at 31 December 2005, presented in paragraph 20.3 of the Document de Base filed on 19 June 2006 under the reference number I.06.102.

The following new standards, amendments to standards and interpretations are mandatory for periods beginning on or after 1 January 2006:

• IAS 19 (Amendment) Employee Benefits • IAS 21 (Amendment) Net investment in foreign operation • IAS 39 (Amendment) Cash Flow Hedge Accounting of Forecast Intragroup Transactions • IAS 39 (Amendment) The Fair Value Option • IAS 39 and IFRS 4 (Amendment) Financial Guarantee Contracts • IRFS 1 and IFRS 6 (Amendment) Exploration for and Evaluation of Mineral Resources • IFRIC 4 Determining whether an Arrangement contains a Lease • IFRIC 5 Rights to Interests arising from Decommissioning, Restoration, and Environmental Rehabilitation Funds • IFRIC 6 Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment.

After analysis of these standards, interpretations and amendments, the management has concluded that they have had no impact on the Company’s financial statements.

70 3) Cash, cash equivalents and current financial instruments

Cash and cash equivalents

Cash and cash equivalents are analyzed as follows (in thousands of euros):

31 December 30 June 2005 2006

Current accounts ...... 206 814 Securities available for sale ...... 2,379 18,298

Cash and cash equivalents ...... 2,585 19,112

Current accounts are EUR and USD accounts that were opened with two banks, Société Générale and Crédit Lyonnais.

Securities available for sale were mainly composed of Société Générale and Crédit Lyonnais money market mutual funds. These funds have money market objectives and the funds’ management target is to yield a return close to that of EONIA, the EU inter-bank reference rate.

The unrealized gain relating to the securities available for sale amounted to 51 thousand euros as at 30 June 2006.

Current financial instruments

Current financial instruments are analyzed as follows (in thousands of euros):

31 December 30 June 2005 2006

CAAM - IP Fund ...... 10,318 - CAAM - CLAM Tréso 6 months...... 1,327 - CAAM - Tréso club...... 4,112 7,695 CAAM - CLAM Tréso 3 months...... - 2,745 CAAM -Tréso 9 months ...... - 4,004 Current financial instruments ...... 15,757 14,444

The Company invested in several available-for-sale financial assets in 2005 and 2006 and had the following current financial instruments in its portfolio as at 30 June 2006.

CAAM – IP Fund: Nil. The gain realized at the sale of this financial instrument in January 2006 amounted to 322 thousand euros.

CAAM – CLAM TRESO CLUB 6 months – Nil. The gain realized at the disposal of this financial instrument in January 2006 amounted to 21 thousand euros.

CAAM – TRESO CLUB: 4,000,000 euros invested on January 28, 2005 and 3,609,438 invested on January 27, 2006 in an open investment fund managed by Crédit Agricole Assets Management (“CAAM”). This fund benefits from a 100% capital guarantee if held to maturity on July 28, 2006. The unrealized gain amounted to 86 thousand euros as at June 30, 2006.

CAAM – CLAM TRESO CLUB 3 months. : 9,947,847 euros invested on January 13, 2006 in an open investment fund managed by Crédit Agricole Asset Management (“CAAM”). The sale of part of this fund on January 27, 2006 generated a gain of 7 thousand euros. The unrealized gain on the remaining balance of the fund amounted to 32 thousand euros on June 30, 2006.

CAAM – TRESO CLUB 9 months. 4,000,000 euros invested on January 27, 2006 in an open investment fund managed by Crédit Agricole Assets Management (“CAAM”). This fund benefits from a 100% capital guarantee if held to maturity on October 28, 2006. The unrealized gain amounted to 4 thousand euros as at June 30, 2006.

The unrealized gain relating to current financial instruments amounted to 121 thousand euros as at 30 June 2006.

71 4) Current receivables and prepayments

Current receivables and prepayments are analyzed as follows (in thousands of euros):

31 December 30 June 2005 2006

VAT refund...... 460 503 Grants and government subsidies ...... - 435 Prepaid expenses...... 118 146 Other receivables ...... 103 39 Research Tax Credit (CIR) 2002 ...... 688 - Research Tax Credit (CIR) 2003 ...... - 948 Prepaid consumables ...... 1,497 1,462 Current receivables and prepayments ...... 2,866 3,533

5) Non-current receivables

Non-current receivables are analyzed as follows (in thousands of euros):

31 December 30 June 2005 2006

Research Tax Credit (CIR) 2003 ...... 948 - Research Tax Credit (CIR) 2004 ...... 897 897 Research Tax Credit (CIR) 2005 ...... 947 947 Research Tax Credit (CIR) 2006 ...... - 700 Others...... - 3

Non-current receivables ...... 2,792 2,547

The 2006 research tax credit corresponds to management’s best estimate of the portion of the annual tax credit for FY 2006, taking into account all available information when the accounts for the six-month period ended 30 June 2006 were closed, which relates to the first 6 months of the financial year.

6) Property, plant and equipment

Property, plant and equipment can be broken down as follows (in thousands of euros):

Equipment and Buildings machinery Total

Year ended 31 December 2005 Net opening balance ...... 230 690 920 Acquisitions...... 6 63 69 Disposals...... - - - Depreciation...... (31) (250) (282)

Net closing balance ...... 204 503 707

6-month period ended 30 June 2006 Net opening balance ...... 204 503 707 Acquisitions...... 6 269 275 Disposals...... - (12) (12) Depreciation...... (16) (135) (151)

Net closing balance ...... 194 625 819

72 7) Trade payables

This line item is analyzed as follows (in thousands of euros):

31 December 30 June 2005 2006

Suppliers ...... 1,341 2,235 Tax and social liabilities ...... 597 763 Prepaid income ...... 32 8,198 Other payables ...... 60 -

Trade payables...... 2,030 11,196 Less: non-current portion of prepaid income...... - (3,208) Trade payables - current portion...... 2,030 7,988

Prepaid income as at 30 June 2006 is mostly related to the Novo Nordisk agreement signed in March 2006. This relates to revenue to be recognized up until March 2007 for research and development funding in the scope of this agreement and also to revenue to be recognized in the second half year of 2006 and the fiscal years 2007 and 2008 as well as the first half year of 2009 relating to the upfront payment by Novo Nordisk A/S of a technology access fee.

8) Borrowings

This line item was broken down per maturity as follows (in thousands of euros):

31 December 30 June 2005 2006

Current liabilities ANVAR ADI - 15/02/2002...... 145 345 ANVAR ADI - 15/02/2002 (Conseil Général) ...... 13 31 Bank loans ...... 3 - Finance leases ...... 8 7

Total current liabilities...... 169 383

Non-current liabilities ANVAR ADI - 15/02/2002...... 200 - ANVAR ADI - 15/02/2002 (Conseil Général) ...... 18 - ANVAR EUREKA - 03/12/2003 ...... 180 162 ANVAR - 23/06/06- IPO project...... - 100 Finance leases ...... 13 12

Total non-current liabilities ...... 411 274

Total...... 580 657

The amounts due to the ANVAR agency represent the unconditionally repayable portion of the innovation grants as detailed in Note 12 to paragraph 20.3 of the Document de Base filed on 19 June 2006 under the reference number I.06-102.

The figures presented as current liabilities as at 30 June 2006 are reimbursable between July 2006 and June 2007.

73 9) Subsidies and government grants

The reimbursable part of conditional subsidies which are subject to technical or commercial success conditions can be analysed as follows (in thousands of euros):

31 December 30 June 2005 2006 Current Liabilities ANVAR ADI – 17/02/2000...... 223 223 ANVAR ADI – 17/02/2000 (Conseil Général)...... 46 46 ANVAR ADI – 15/02/2002...... 1,255 1,655 ANVAR ADI – 15/02/2002 (Conseil Général)...... 91 121 ANVAR EUREKA - 03/12/2003 ...... 4,000 509 ANVAR - 23/06/06 IPO project ...... - 170

Conditional subsidies...... 2,015 2,724

The reimbursable part of conditional subsidies, which is not dependent on technical or commercial success conditions, amounted to 638 thousand euros as at 30 June 2006. This amount was recorded in the line item borrowings.

10) Provisions

The first decision made in June 2005 by the Social Court of Justice was to reject the former employee’s demand. The former employee appealed this decision, the appeal judgment was made in May 2006 whereby the former employee’s demand was rejected for a second time. As there has been no further appeal the Company reversed this provision as at 30 June 2006.

11) Pension benefits

The Company’s pension benefits correspond to indemnities due to employees who leave the Company for the purpose of retirement. The Company uses an external actuary firm so as to evaluate this provision.

12) Capital

Share Capital

As at 31 December 2005 and 30 June 2006, the breakdown of share capital can be analyzed as follows, in number of shares, after division by 20 of the par value of the share as at 29 March 2006:

31 December 30 June 2005 2006

Common stock (series O stock)...... 164,000 164,000 Series A preferred stock...... 1,110,000 1,110,000 Series B preferred stock...... 2,904,000 2,904,000 Series C preferred stock...... 6,722,680 6,722,680 Series D preferred stock...... 1,333,340 6,247,200 Series D BIS preferred stock ...... 2,666,660 -

Share capital, in number of shares...... 14,900,680 17,147,880 Par value of share (in euros) ...... 0.05 0.05

Share capital, in euros ...... 745,034 857,394

On 29 March 2006 the Company increased its share capital. Novo Nordisk A/S subscribed to 112,360 Series D preferred shares and simultaneously the Company split the par value of the share by 20 (par value of share decreased from 1.00 per share to 0.05 euro per share). The Company then amalgamated its series D preferred stock with its series D Bis preferred stock so as to have one single category entitled series D preferred stock. 74

All shares allow the holder a proportional part of the net income and assets of the Company.

Remuneration warrants, stock options and free shares

Since being founded the Company has issued remuneration warrants (‘BSA’) and founder warrants (‘BSPCE and stock- options) as described in Note 11 to paragraph 20.3 of the Document de Base filed on 19 June 2006 under the reference number I.06-102 for the financial year ended 31 December 2005. On 29 March 2006, the Company authorized the distribution of 800,000 free shares, of which 751,000 were allocated to employees in April 2006.

Furthermore, the Company has issued anti-dilutive warrants attached to the shares issued in share capital increases (‘ABSA’). These BSA will reach maturity, under certain conditions, the day of the issuance of Company securities on a regulated stock market and will not be exercisable after that date.

13) Cost of supplies and consumable materials, other purchases and external expenses

Cost of supplies and consumable materials consists mainly in procurement of the Company’s drug substance and/or drug product that is manufactured by third-parties.

Other purchases and external expenses are analyzed as follows (in thousands of euros):

6-month accounting period ended

30 June 2005 2006

Subcontracting ...... 1,231 1,474 Scientific, medical and regulatory advice fees...... 70 125 Leasing, maintenance and utility ...... 202 301 Travel and conventions...... 202 339 Non-scientific advisory and consulting ...... 183 396 Marketing, communication and public relations...... 57 136 Telecommunications and postal services...... 18 43 Insurance...... 26 39 Bank charges...... 3 3 Others, net...... 32 78

Other purchases and external expenses...... 2,024 2,934

14) Employee benefits other than share-based compensation

The Company had 64 employees as at 30 June 2006, to be compared with 54 as at 31 December 2005.

15) Share-based compensation

The share-based compensation expenses are broken down as follows (in thousands of euros):

6-month period ended 30 June 2005 2006

BSA 2001 ...... (1) (1) BSCPE 2001...... (2) (8) ESOP 2003 ...... (24) (78) BSA 2003 ...... (3) (4) ESOP 2004 ...... - (135) Free shares 2006 ...... - (225)

Share-based compensation...... (29) (451)

The Company uses an external actuary to calculate the expense relating to share based payments in accordance with IFRS 2.

75 16) Other income and expenses, net

Other income and expenses are analyzed as follows (in thousands of euros):

6-month accounting period ended

30 June 2005 2006

Taxes...... (33) (60) Assets disposed of...... 7 (3) Investment subsidies brought back to profit ...... 10 10 Changes in provisions...... - (29) Others...... (6) -

Other income and expenses, net ...... (22) (82)

17) Interest income / (expense), net

Interest income and (expense) can be analyzed as follows (in thousands of euros):

6-month accounting period ended

30 June 2005 2006

Foreign exchange gain / (loss)...... 9 (3) Interest income and gain on sales of securities...... 215 408

Interest income / (expense), net...... 224 405

18) Licensing revenue

The Company’s licensing revenue relates fully to licensing agreements with Novo Nordisk A/S.

19) Commitments and contingencies

Obligations under operating lease agreement

As at 30 June 2006, future lease payments relating to lease contracts amounted to 68 thousand euros for ECS and 26 thousand euros for Dell.

The Company is not aware of any contingent liabilities as at 30 June 2006.

20) Related party transactions

The following compensations were expensed to the benefit of the five members of the executive committee of the Company (in thousands of euros):

6-month accounting period ended

30 June 2005 2006

Salaries and other short-term employee benefits ...... 248 438 Contributions to supplementary pension plans ...... 3 5 Share-based compensation...... 14 276

Key management compensation ...... 265 719

76 21) Earnings per share

Basic

Basic earnings per share are calculated by dividing the net earnings attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the period.

6-month accounting period ended

30 June 2005 2006

Net earnings for the period ...... (2524) (3739) Weighted average number of ordinary shares in issue (in thousands)...... 14,901 16,052

Basic earnings per share (€ per share)...... (0.17) (0.23)

Diluted

Diluted earnings per share are calculated by adjusting the weighted number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. As at 30 June 2006, warrants, stock options and free shares do not have any dilutive impact.

6-month accounting period ended

30 June 2005 2006

Net earnings for the period ...... (2,524) (3,739) Weighted average number of ordinary shares in issue (in thousands)...... 14,901 16,052 Adjustment for warrants, stock options and free shares (in thousand of shares) — —

Diluted earnings per share (€ per share) ...... (0.17) (0.23)

22) Post balance sheet events

None

23) Difference between International Financial Reporting Standards and French accounting principles

The principal differences between the financial statements for the six-month period ended 30 June 2006 prepared in accordance with IAS 34 and French accounting principles are shown in the table below, together with explanations of certain adjustments that affect net income and shareholders’ equity (in thousands of euros):

Change Change Change in in in Year ended 31 December 31 December share share retained 31 December 2004 Net loss capital premium earnings Others 2005 2005

Shareholders’ equity in accordance with French GAAP 25,009 (5,956) - - 601 12 19,666 Tax regulated provisions...... - 12 - - - (12) - Licenses and options on licenses...... (385) 6 - - 356 - (23) Finance leases ...... - 2 - - - - 2 Investment subsidies...... (44) 20 - - - - (24) Share-based compensation...... - (214) - 214 - - - Unrealized gains on securities available for sale ...... 215 - - - - 229 444 Prepaid consumables...... 956 - - - (956) - -

Equity in accordance with IFRS (restated as at 31 December 2004)...... 25,751 (6,129) - 214 - 229 20,065

Change Change Change in in in 6-month period ended 31 December share share retained 30 June 2005 Net loss capital premium earnings Others 2006 30 June 2006

Shareholders’ equity in accordance with French GAAP... 19,666 (3,251) 112 9,796 40 (46) 26,317 Tax regulated provisions ...... - (46) - - - 46 - Licenses and options on licenses. (23) - - - - - (23) Finance leases...... 2 (1) - - - - 1 Investment subsidies ...... (24) 10 - - - - (14) Share-based compensation ...... - (451) - 451 - - - Unrealized gains on securities available for sale...... 444 - - - - (272) 172 Costs attributable to issuance of share capital in progress ...... - - - (633) - - (633)

Equity in accordance with IFRS ...... 20,065 (3,739) 112 9,614 40 (272) 25,820

International Financial Reporting Standards require that incremental external costs directly attributable to an equity transaction, such as fund raising expenses, be accounted for as a deduction from equity. This treatment applies for the costs of the initial public offering of the Company’s shares in progress as at 30 June 2006.

The latter has been recorded as intangible assets in progress under French accounting principles.

24) Income statement by function

The income statement by function is set out below (amounts in thousands of euros):

6-month period ended 30 June 2005 2006

Licensing revenue...... 900 1,908 Government financing for research expenditure...... 519 838

Operating revenue ...... 1,419 2,746

Research and development expenses...... (3,446) (5,375) General and administrative expenses...... (721) (1,514)

Net operating expenses ...... (4,167) (6,890)

Operating income / (loss)...... (2,748) (4,144) Interest income / (expense), net ...... 224 405

Net loss...... (2,524) (3,739)

11.2.4 Statutory Auditors’ Report on Condensed Financial Statements in Accordance with IAS 34 as at 30 June 2006

To the Executive Board

Dear Sirs,

In our capacity as the statutory auditors of the Company, and at your request, we have performed a limited review of the condensed financial statements of Innate Pharma, prepared in accordance with IAS 34 for the half-year ended 30 June 2006, as attached to this report.

These interim condensed financial statements are the responsibility of the Company’s Executive Board. Our responsibility is to issue a report on these financial statements based on our review.

We conducted our review in accordance with the French Standards on Auditing applicable to review engagements. A limited review of interim financial statements consists in obtaining the information deemed as necessary, principally from persons responsible for accounting and financial matters and applying analytical procedures and any other procedure deemed appropriate. A review of this nature is substantially less in scope than an audit conducted in accordance with French Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not issue an audit opinion.

Based on our review, we have not identified any significant anomalies, which would cause us to believe that the accompanying interim condensed financial statements are not prepared, in all material respects, in accordance with IAS 34 – International Financial Reporting Standard as adopted in the European Union with regards to interim financial information.

Marseille, September 1, 2006

Statutory Auditors

Audit Conseil Expertise Pricewaterhouse Coopers Audit

Member of PKF International

Guy Castinel Philippe Willemin

11.3 A Review of Our Company’s Financial Position and Results of Operations as of 30 June 2006

11.3.1 Selected Financial Information

The following table shows our selected financial information, prepared in accordance with International Accounting Standard 34, from our income statement for the six months ended 30 June 2005 and 2006, and from our balance sheet as of 31 December 2005 and 30 June 2006 (in thousands of euros, except for per-share information):

Selected Income Statement Items 30 June 2005 30 June 2006

Licensing revenue...... 900 1,908 Government financing for research expenditure...... 519 838

Operating revenue ...... 1,419 2,746

Research and development expenses...... (3,446) (5,375) General and administrative expenses...... (721) (1,514)

Net operating expenses ...... (4,167) (6,890)

Operating income/(loss)...... (2,748) (4,144)

Interest income/expense, net ...... 224 405

Net loss...... (2,524) (3,739)

Number of shares in issue Average number of shares in issue ...... 14,900,680(1) 16,051,985 Average number of shares, diluted basis (2) ...... 16,002,255(1) 17,316,224

Net loss per share (in euros per share) -Basic...... (0.17) (0.23) -Diluted...... (0.17) (0.23)

Selected Balance Sheet Items 31 December 2005 30 June 2006

Cash, cash equivalents and current financial instruments...... 18,342 33,556 Total assets ...... 24,766 40,503 Total shareholders’ equity ...... 20,065 25,820 Total financial debt...... 2,594 3,381

(1) After a 20-for-1 split, on 29 June 2006 (2) Not including the anti-dilution warrants (BSA) (see Section 21.1.3.1 in our Document de Base). 79

11.3.2 Review of Financial Position and Results of Operations

11.3.2.1 General Presentation

Our half-year accounts prepared in accordance with generally accepted accounting principles in France for the six months ended 30 June 2005 and 2006 are included in paragraphs 11.2.1 in this Note d’opération. Since we have no subsidiaries, we do not produce consolidated accounts.

In addition, our accounts for the six months ended 30 June 2005 and 2006 were prepared in accordance with IAS 34 and were approved by our Executive Board on 29 August 2006. As such accounts are not required by law, we will not submit them for approval at our General Shareholders’ Meeting.

The analysis presented below is based on our accounts prepared in accordance with IAS 34 and should be read together with our accounts which appear in paragraphs 11.2.3 of this Note d’opération.

11.3.2.1.1 Pro Forma Financial Statements

None.

11.3.2.1.2 Principal Factors Affecting Our Business and Operating Results

See our Document de Base.

11.3.3 Comparison of the Last Two Six-Month Periods Ended 30 June 2006 and 2005

11.3.3.1.1 Presentation of Components of Operating Results

(i) Operating Revenue

Currently, our operating revenue is derived mainly from collaboration and licensing agreements, as well as from government funding for research expenditure. Our operating revenue was 1.4 million euros and 2.7 million euros for the six-month periods ended 30 June 2005 and 2006, respectively, and is broken down as follows:

Six months ended 30 June 2005 2006 In thousands of euros Licensing revenue from collaboration and licensing agreements ...... 900 1,908 Government funding for research expenditure ...... 519 838 Operating Revenue ...... 1,419 2,746

The government funding for research expenditures, consisting mainly of a research tax credit, increased strongly between the two periods under review. This increase is mainly explained by the increase in the research tax credit, as discussed below. Revenue from the collaboration and licensing agreements also increased significantly, which is explained by the signing of a major strategic agreement with Novo Nordisk A/S in the first half of 2006. The agreement is described in Section 6.5.8 of our Document de Base.

We do not anticipate any operating revenue of any other kind before the initial marketing of our products, which may occur in 2011 or 2012.

Licensing revenue

Our licensing revenue for the six months ended 30 June 2005 and 2006 is the result of agreements signed with Novo Nordisk A/S in 2003 and 2006 (see Note 2.1 to our IFRS Accounts appearing in Section 20.3 of our Document de Base, for an explanation of the principles for recognising revenue from collaboration and licensing agreements). The differences in our six months ended 30 June 2005 and 2006 are due to the recording in the first half of 2006, of 1.26 million euros in revenue from the major strategic agreement signed in March 2006, and 0.65 million euros in revenue from the agreement signed in 2003, while in the first half of 2005, we recorded 0.9 million euros in revenue from the agreement signed in 2003.

80 The revenue from the major strategic agreement signed in March 2006 consists of the revenue receivable up front in exchange for access to technology, as well as payments for the annual costs of research and development. As our employees are involved in a research programme continuing after the agreement was signed, revenue under the terms of the agreement are spread over the duration of the collaborative research program, initially set at three years. The annual funding of research and development costs are intended to cover one year of research and development starting on 1 April 2006, so that only three months had been recorded as of 30 June 2006.

Government Funding for Research Expenditure

The following table details this item for the six months ended 30 June 2005 and 2006.

Six months ended 30 June 2005 2006 In thousands of euros

French and foreign subsidies ...... 69 138

Research tax credit...... 450 700

Total government funding for research expenditure...... 519 838

In 2005, French and foreign subsidies were mainly European subsidies for research and development programmes with which we are associated. In the first half of 2006, we also received two grants from the French Agence Nationale de la Recherche (ANR, or National Research Agency) for a total of 466 thousand euros, 47 thousand euros of which were recorded for the first half of 2006. These subsidies are booked as revenue in our income statement, as opposed to repayable advances which are recorded as debts on our balance sheet (see Note 2h to our IFRS Accounts, included in Section 20.3 of our Document de Base, for an explanation of the principles used to record government subsidies).

The research tax credit is calculated and declared annually. The amounts used for the six months ended 30 June 2005 and 2006 are the best estimate made by management of the share of the annual tax credit for the 2006 fiscal year, based on information available when the half-year accounts were prepared for the first half of the fiscal year. The estimate is based on an analysis of the eligible costs actually incurred up to 30 June of that year to determine a budget of eligible costs over the twelve months of the fiscal year.

The increase in the research tax credit between the first half of 2005 and the first half of 2006 is linked to an increase in eligible expenses and to a change in the tax regulations applicable starting on 1 January 2006 for calculating the research tax credit.

The following table shows the amount of costs (net of subsidies) eligible for the six months ended 30 June 2005 and 2006:

Six months ended 30 June 2005 2006 In thousands of euros Net costs eligible for the research tax credit...... 2,933 3,618

The eligible expenses followed the increase in research and development costs, which increased to 3.4 million euros and 5.4 million euros, respectively, for the six months ended 30 June 2005 and 2006.

Until the fiscal year ended on 31 December 2005, the research tax credit was calculated based on a share referred to as “increasing” which corresponds to 45% of the increase in eligible research and development costs for year N, compared to the average amount of eligible research and development costs for years N-1 and N-2, revised annually by applying a revaluation factor fixed by decree, and a share referred to as “volume” corresponding to 5% of the volume of eligible costs for year N. Starting on 1 January 2006, the volume portion of the research tax credit went up from 5% to 10%, while the “increasing” portion decreased from 45% to 40%. The change in the tax regulations relating to the method by which the research tax credit is calculated had a significant positive impact on calculating the research tax credit for our company: we estimate that, if the calculation method had not been changed, the research tax credit for the first half of 2006 would have been 564 thousand euros instead of 700 thousand euros.

81 (ii) Operating Expenses by Business Function

Six months ended 30 June 2005 2006 In thousands of euros

Operating revenue ...... 1,419 2,746

Research and development expenses...... (3,446) (5,375)

General and administrative expenses...... (721) (1,514)

Net operating expenses ...... (4,167) (6,890)

Operating income/(loss)...... (2,748) (4,144)

Research and development expenses mainly include the cost of research and development personnel (including those for employees assigned to work under our collaboration and licensing agreements), product manufacturing costs, sub-contracting costs (research, pre-clinical and clinical development), and purchases of materials (reagents and other consumables) and pharmaceutical products. Research and development expenditure amounted to 3.4 million euros and 5.4 million euros, respectively, for the six months ended 30 June 2005 and 2006. This change is a reflection of our increased efforts in research and development. These expenditures represented 83% and 78%, respectively, of the net operating expenses for the six months ended 30 June 2005 and 2006. The relative drop in research and development expenditure as a percentage of our total net operating expenses between the first half of 2005 and the first half of 2006 is due to a relative increase in general and administrative costs.

General and administrative expenses mainly include expenses for employees not working on research and development, as well as expenses for management and development of our business. General and administrative expenses amounted to 0.7 million euros and 1.5 million euros, respectively, for the six months ended 30 June 2005 and 2006. This line item represented 17% and 22%, respectively, of the net operating expenses for the six months ended 30 June 2005 and 2006. This change is mainly due to:

• an increase in costs for support staff, associated with salary increases as of 1 January 2006, but also with the recruitment of a business development director in April 2005,

• an increase in costs for external providers to support our business development activities, in particular, the costs involved in signing the strategic agreement with Novo Nordisk A/S in March 2006, and

• a sharp increase in costs for share based compensation (a charge referred to as “IFRS 2”) in the first half of 2006 mainly associated with the distribution of free shares in April 2006, as discussed below.

(iii) Operating Expenses by Nature

Six months ended 30 June In thousands of euros 2005 2006

Operating revenue ...... 1,419 2,746

Cost of supplies and consumable materials ...... (595) (900)

Intellectual property expenses ...... (233) (582)

Other purchases and external expenses...... (2,024) (2,934)

Employee benefits costs...... (1,114) (1,785)

Share-based compensation...... (29) (451)

Depreciation and amortisation ...... (150) (157)

Other income and expenses ...... (22) (82)

Net operating expenses ...... (4,167) (6,890)

Operating income/(loss)...... (2,748) (4,144)

Cost of Supplies and Consumable Materials

The cost of supplies and consumable materials represented 595 thousand euros and 900 thousand euros, respectively, in the six months ended 30 June 2005 and 2006.

82 The cost of supplies and consumable materials is separated into two categories: (i) costs for manufacturing pharmaceutical ingredients and products, and (ii) purchasing of products and consumables, broken down as follows for the six months ended 30 June 2005 and 2006:

Six months ended 30 June In thousands of euros 2005 2006

Cost of manufacturing consumable products...... (196) (173)

Other consumable purchases ...... (398) (727)

Cost of supplies and consumable materials ...... (595) (900)

Cost of manufacturing consumable products

As we have no manufacturing facilities, our whole chain of production is outsourced. Our most advanced product, IPH 1101, is manufactured in several stages by several sub-contractors, from the manufacturing of the pharmaceutical ingredients, to the intermediate stage of production, and eventually to the delivery of the pharmaceutical product lots, which constitute the finished product (see Section 6.3.5 of our Document de Base).

The reduction in the line item “cost of manufacturing consumable products” between the first half of 2005 and the first half of 2006 is mainly due to the gradual completion of our D004-101 clinical trial of IPH 1101.

Other consumable purchases

Expenses for other consumable products include the cost of products consumed in our laboratories and by third parties with whom we collaborate, or in connection with our clinical trials. These purchases are divided into purchases of consumables and purchases of pharmaceutical products with the following breakdown for the six months ended 30 June 2005 and 2006:

Six months ended 30 June 2005 2006 In thousands of euros Purchases of consumables ...... (331) (688) Pharmaceutical product purchases...... (67) (39)

Other consumable purchases...... (398) (727)

Consumable purchases mainly refer to laboratory reagents. Changes in these purchases are basically in line with changes in our staff working on research and development. Our employees working on research and development increased from an average of 33.0 to 44.0 individuals between the first half of 2005 and the first half of 2006. This increase in staff was due mainly to the opening of our laboratories in Dardilly (Department 69 in France) in September 2005, under the terms of our intellectual property agreement with Schering-Plough in relation to TLRs (see Section 6.5.8.2 of our Document de Base).

Our purchases of pharmaceutical products include purchases of IL-2, a product for use in the clinical phase in combination with IPH 1101.

Intellectual Property Expenses

These costs were 233 thousand euros and 582 thousand euros, respectively, in the six months ended 30 June 2005 and 2006.

These include costs for filing and protecting our patents (including patents for which we acquired the rights from third parties and have assumed the costs for filing and protection under the terms of agreements with the patent owners) as well as the costs for obtaining an option or licence for intellectual property.

The costs for filing and protecting our patents were 112 thousand euros and 195 thousand euros, respectively, in the six months ended 30 June 2005 and 2006. We filed 55 patent applications (initial applications or applications for extensions of patents we hold in our own right or jointly with others) during the six-month period ended 30 June 2006.

The costs of obtaining an option or licence or acquiring intellectual property came to 121 thousand euros and 387 thousand euros, respectively, during the six months ended June 30, 2005 and 2006. We signed five new option, licensing or acquisition agreements during the six-month period ended 30 June 2006, most notably the agreement with IGR and Schering-Plough relating to TLRs and the renewal of a collaborative research agreement with the University of Genoa in the area of NK.

83 Other Purchases and External Expenses

Other purchases and external expenses were 2.024 million euros and 2.934 million euros, respectively, for the six months ended 30 June 2005 and 2006, broken down as follows:

Six months ended 30 June 2005 2006 In thousands of euros

Subcontracting ...... (1,231) (1,474)

Scientific consultants and services...... (69) (125)

Leasing, maintenance and utility costs ...... (202) (301)

Travel and conventions...... (203) (339)

Non-scientific advisory and consulting ...... (183) (396)

Marketing, communication and public relations...... (57) (136)

Other ...... (79) (163)

Other purchases and external expenses...... (2,024) (2,934)

Outsourcing costs basically cover research study costs (financing outside research, particularly academic research, antibody humanisation technologies, manufacturing process development etc.); pre-clinical development (pilot manufacturing, tolerance and pharmacology studies, etc.), or clinical costs (clinical trial management, etc.) outsourced to third parties.

The following table details these costs by category for the periods under review:

Six months ended 30 June 2005 2006 In thousands of euros

Research subcontracting ...... (660) (535)

Clinical subcontracting ...... (356) (861)

Pre-clinical subcontracting ...... (208) (78)

Other subcontracting...... (7) -

Subcontracting ...... (1,231) (1,474)

The reduction in research subcontracting between the first half of 2005 and the first half of 2006 is mainly due to the absence in the first half of 2006 of significant research costs for IPH 12XX, and the signing of the strategic agreement with Novo Nordisk A/S in March 2006, which is now assuming all the research costs associated with the whole NK platform. The increase in clinical subcontracting costs is particularly due to the use of services from a CRO company from January 2006 to monitor our IPH 1101 Phase II trial for metastatic renal carcinoma (D004-201 study).

Scientific consulting and services consist of costs invoiced by outside consultants assisting us in the research and development of our products. They also include fees paid to members of our Scientific Advisory Board. This increase is in line with the general expansion of our research and development activities.

Leasing, maintenance and utility costs cover rental costs and charges for our building in Marseille and, starting on 1 September 2005, rents and charges for our laboratories in Dardilly (Department 69 in France), as well as the leasing costs for our computer equipment. The increase in this item between the first half of 2005 and the first half of 2006 is mainly due to recording six months of rent and charges for our laboratories in Dardilly in the first half of 2006.

Travel and conventions costs mainly cover costs for employee travel to and attendance at conferences, especially business development conferences. The increase in these costs between the first half of 2005 and the first half of 2006 is due to an increase in the number of employees, travel related to the signing and execution of the strategic agreement signed in March 2006 with Novo Nordisk A/S, the implementation of the Phase II study of IPH 1101 for metastatic renal carcinoma (D004- 201 study) in Russia and Ukraine, as well as travel required by our planned initial public offering on the Eurolist market of Euronext.

Non-scientific fees mainly cover fees for our auditors; fees paid to our accountant for assistance in accounting, tax and employee matters; fees to our attorneys for their assistance in negotiating collaboration and licensing agreements and for general legal assistance; fees paid to business development and strategy consultants; as well as recruitment fees. The increase between the first half of 2005 and the first half of 2006 is primarily due to the fees we paid in relation to the strategic agreement signed in March 2006 with Novo Nordisk A/S.

84 Marketing, communications and public relations costs include fees billed by our communications and public relations consultants as well as the costs for developing and producing communications platforms, such as our web site and our business reports. The increase for this item recorded between the first half of 2005 and the first half of 2006 is mainly due to the significant increase in our communications activities, particularly the creation of our new website and our communications activities in the first half of 2006 (press conference, press releases, press kit, etc.).

Employee Benefits

Employee benefit costs other than share-based compensation, were 1.114 million euros and 1.785 million euros, respectively, for the six months ended 30 June 2005 and 2006. This item includes salaries as well as social costs borne by our Company. The increase in employee costs other than share-based compensation is due to salary increases as of 1 January 2006 (approximately 6.5% for our permanent employees), as well as the increase in the number of our employees.

Our average payroll included 43.5 individuals and 59.0 individuals for the six months ended 30 June 2005 and 2006, respectively. The increase in payroll includes the impact of our recruitment in September 2005 of six employees as a result of opening our laboratories in Dardilly (Department 69 in France).

The distribution of our employees working on research and development, and employees working in support operations (general and administrative expenses) was as follows for the six months ended 30 June 2005 and 2006:

Six months ended 30 June 2005 2006

(1) Employees at the beginning of the period (A)

Research and development ...... 32.0 41.0

General expenses ...... 9.0 13.0

Total...... 41.0 54.0 (1) Employees at the end of the period (B)

Research and development ...... 34.0 47.0

General expenses ...... 12.0 17.0

Total...... 45.0 64.0 (1) Average employees for the period ((A + B) / 2)

Research and development ...... 33.0 44.0

General expenses ...... 10.5 15.0

Total...... 43.5 59.0

(1) As is standard, this calculation only includes full-time employees or those employees working more than 80% of the time.

In 2004, we received Jeune Entreprise Innovante (“JEI” or Young Innovative Company) status in France. The savings in employee costs resulting from this status is estimated at about 225 thousand euros and 311 thousand euros respectively for the six months ended 30 June 2005 and 2006, in the form of exemptions from social contributions for employees working on our research and development projects.

Share-based Compensation

Share-based compensation was 29 thousand euros and 451 thousand euros, respectively, for the six months ended 30 June 2005 and 2006. These are costs associated with the potential compensation given to managers and employees of securities which would give them part ownership of our share capital, recorded as a charge under IFRS 2.

The increase in share-based compensation in 2006 is mainly due to the distribution of free shares during fiscal year 2006 and to the distribution of stock options at the end of June 2005 (see Sections 17.2.5 and 17.2.3 in our Document de Base).

Depreciation and Amortisation

These costs represented 150 thousand euros and 157 thousand euros, respectively, for the six months ended 30 June 2005 and 2006. These are basically costs for depreciating laboratory equipment.

Other Income and Expenses, net

This item represented net expenses of 22 thousand euros and 82 thousand euros, respectively, for the six months ended 30 June 2005 and 2006. Other income and expenses include taxes as well as exceptional income and expenses. The main differences between the six months ended 30 June 2005 and 2006 result from the increase in taxes, particularly based on our

85 invoiced turnover, and from the net effect on provisions of increasing the provision for pension benefits for an amount of 90 thousand euros on 30 June 2006, while in the same period a reversal of 61 thousand euros associated with a labour court case where the judgments in the district court and on appeal were in our favour was also recorded.

11.3.3.1.2 Presentation of Components of Net Income/(Loss)

(i) Net Interest Income

Our net interest income represented 224 thousand euros and 405 thousand euros, respectively, for the six months ended 30 June 2005 and 2006.

This item includes the interest paid by the Company for borrowings and finance leases, realised or unrealised exchange gains and losses on our U.S. dollar bank account and interest income from our investments.

The increase in net interest income between the first half of 2005 and the first half of 2006 is due to an increase in yields, itself explained by:

• an increase in interest rates in the money markets (the average EONIA rate was 2.07% and 2.52%, respectively, for the first half of 2005 and first half of 2006), and

• an increase in the average balance of cash, cash equivalents and current financial instruments of 24.1 million euros and 25.9 million euros, respectively, for the six months ended 30 June 2005 and 2006.

For the purposes of this analysis, the average balance of cash, cash equivalents and current financial instruments for the period is defined as the arithmetical average of the cumulative balance for these items between the beginning and end of the period.

(ii) Income Tax

Due to the deficits reported for the last three years, we have not paid any income tax. No deferred tax asset has been recorded in the absence of sufficient likelihood of recovery. The research tax credit is not income tax according to IFRS.

11.3.3.1.3 Presentation of Components of Net Income/(Loss) per Share

The net loss per share authorized and issued was 0.17 euros and 0.23, respectively, for the six months ended 30 June 2005 and 2006.

11.3.3.2 Liquidity and Sources of Financing

As of 30 June 2006, the amount of our cash, cash equivalents and current financial instruments held were 33.6 million euros, compared to 18.3 million euros as of 31 December 2005. Cash, cash equivalents and current financial instruments mainly include monetary mutual funds (SICAV or FCP) as well as structured monetary products with a fixed maturity date. These cash, cash equivalents and current financial instruments are used to finance our business, and in particular, our research and development costs.

As of 30 June 2006, our investment securities included in cash equivalents and current financial instruments were all invested in products with maturities of less than 12 months. We may make investments with longer maturities to improve the yield.

Since our creation in 1999, we have been primarily financed by issuing new securities, the majority of which were shares with attached warrants (Actions à Bons de Souscription d’Actions or ABSA), income from the agreements signed with Novo Nordisk A/S, repayable advances and subsidies received from various French and foreign government agencies (including ANVAR), a refund of the research tax credit accumulated for the first four fiscal years and VAT refunds.

11.3.3.2.1 Capital Financing

See Section 9.3.1 of our Document de Base.

11.3.3.2.2 Debt Financing

Since our creation, we have received financing from ANVAR in the form of repayable interest-free advances. As of 30 June 2006, the amount owed for these repayable advances was 3.3 million euros, 0.6 million euros of which was repayable regardless of any successful outcome from a technical or business standpoint, and therefore recorded as borrowings, and 2.7 million euros repayable only in case of a successful outcome from a technical and/or business standpoint, and therefore recorded as conditional subsidies and grants. 86

Currently, we believe that the programmes covered by these repayable advances meet the criteria for a successful outcome from a technical and/or business perspective. We therefore envisage repaying this assistance in full.

The following table presents a simplified repayment schedule of these advances as of 30 June 2006 (for a total of 3.3 million euros):

Year Repayment Amount

2006 0.2 million euros 2007 0.4 million euros 2008 0.6 million euros 2009 0.9 million euros 2010 1.1 million euros 2011 0.1 million euros

The repayment of 0.2 million euros planned for 2006 should occur in the second half of 2006.

In June 2006, ANVAR informed us that we had obtained a repayable advance of 360 thousand euros intended to cover part of the costs of a possible IPO on the Eurolist market of Euronext Paris. Of this amount, 360 thousand euros is repayable if such a transaction is successful and 100 thousand is repayable even if the transaction fails.

We use finance leases and bank loans to finance the acquisition of laboratory equipment and to set up new laboratories. Our future obligations resulting from this type of financing were less than 0.1 million euros as of June 30, 2006.

We envisage financing part of the renovations and equipment of offices and laboratories for our future head offices by using bank loans and finance leases. The precise method of financing, which may involve a total of 2.0 million euros, has not yet been determined.

In addition, we rely on finance leases for our computer equipment. The table below shows the instalment payments owed on 30 June 2005 and 2006 under the terms of these contracts:

As of June 30 2005 2006 In thousands of euros

ECS...... 127 68

Dell Financing ...... - 26

Instalment payments owed for operating lease contracts...... 127 94

We will continue to finance the acquisition of our computer equipment by operating lease agreements in the years to come.

11.3.3.3 Analysis of the Historical Changes in Cash Flows

11.3.3.3.1 Cash Flows from Operating Activities

Our net cash flows used in operating activities were 2.7 million euros in the first half of 2005. Operations generated net cash flows of 4.7 million euros in the first half of 2006. The fluctuating nature of our cash flows from operating activities is basically due to cash receipts under the terms of the agreement signed with Novo Nordisk A/S in March 2006, while our operating cash payments increased more linearly (see Section 2.2.1.2 of this Note d’operation).

11.3.3.3.2 Cash Flows from Investing Activities

Our operations generally require little investment in tangible assets because we subcontract most of our manufacturing and validation activities to third parties. Our investments in tangible assets, mainly laboratory equipment, amounted to 54 thousand euros and 249 thousand euros, respectively, for the six months ended 30 June 2005 and 2006. In 2006, we acquired laboratory equipment in the amount of 57 thousand euros from Schering-Plough under the terms of the agreement referred to in Section 6.5.8.2. of our Document de Base.

We lease our computer equipment and the buildings we occupy under operating lease agreements. Our payments for these items are therefore recorded as used in operating activities.

We plan to carry out significant construction work and purchases in relation to the transfer of our head offices and laboratories in Marseille to a new site in 2008. This operation could have a significant impact (a total of about 2.0 million euros) on our cash flows from investing activities for the year 2006 and beyond. 87

The line item purchase and sale of current financial instruments concerns the purchase and resale (usually at maturity) of current financial instruments, which do not meet the conditions set by IAS 7 to be considered as cash equivalents (see Note 2e to the IFRS Accounts in Section 20.3 of our Document de Base). The purchase and sale of current financial instruments does not have any impact on the total amount of cash, cash equivalents and current financial instruments.

11.3.3.3.3 Cash Flows from Financing Activities

We carried out a capital increase in March 2006 for a total gross amount of 10.0 million euros, of which Novo Nordisk A/S was the sole subscriber. Of this amount, a total of 51 thousand euros, corresponding to the costs associated with this capital increase, were deducted from the share premium.

We also recorded a total of 633 thousand euros as a deduction from the share premium for the costs incurred on 30 June 2006 for the future listing of our shares on the Eurolist market of Euronext Paris.

The increase in debt during the six months ended 30 June 2005 and 2006 (265 thousand euros and 791 thousand euros, respectively) is mainly due to the partial payments of the repayable advances from ANVAR.

11.3.3.4 Off-Balance Sheet Commitments

Our off-balance sheet commitments are described in Note 19 to our IAS 34 Accounts as of 30 June 2006 as well as in Section 9.5 of our Document de Base.

11.3.3.5 Exposure to Exchange Rate Fluctuations

See Section 9.6 of our Document de Base.

11.3.3.6 Future Prospects

See Section 9.7 of our Document de Base.

11.4 Classes of Shares – Conversion of Classes C and D Preferred Shares to Ordinary Shares

Between 10 October and 13 October 2006, all of the holders of our 6,722,680 class C preferred shares and 6,247,200 class D preferred shares (see Section 21.1.1 of the Document de Base) asked if, in accordance with articles 12 III (i) and 12 IV (f) of the by-laws, the conversion of all of their preferred shares to ordinary class O Company shares, because of a preferred share for an ordinary share, under the condition of avoidance of the payment-delivery of the Offering. This conversion took effect, for each shareholder, at the date of notification of conversion to one company and its shares, at that date, ceased to exist and lost all of their rights and privileges.

As of the date of this Note d’Opération, our share capital amounted to €863,204, divided by 17,264,080 shares of a nominal value of €0.05 per share, fully paid and composed of :

- 13,250,080 Class O ordinary shares,

- 1,110,000 Class A preferred shares, and

- 2,904,000 Class B preferred shares,

all with a nominal value of €0.05 per share.

According to articles 12 I (c) and 12 II (g) of the by-laws, classes A and B preferred shares will automatically cease to exist as soon as our shares are listed on the Eurolist market and will be exchanged for ordinary class O shares, at one class O share for one preferred share, effective as of the first listing date, and as a result will lose all of their rights and privileges on the same date.

11.5 Acquisition by Our Company of its own Shares

The meeting of our combined general meeting of shareholders on 30 May 2006 authorized our Executive Board – under the condition precedent of the listing of our shares for trading on the Eurolist – to implement a program for the reacquisition of our shares within the framework of the provisions of article L. 225-209 of the French Commercial Code and in compliance with the General Regulations of the Autorité des marchés financiers.

As of the date of this Note d’Opération, no program for the acquisition of our shares has been implemented.

11.6 Exercise of Warrants (BSA)

On 18 July 2006, Inserm Tranfert exercised 3,810 Warrants2001, which gave each the right to subscribe to 20 class O ordinary shares at the price of €2.975 per share, for a total of 76,200 shares.

On 9 October 2006, Mr. Philippe Pouletty exercised 2 000 Warrants2001-1, which gave each the right to subscribe to 20 ordinary class O shares at the price of €1.525 per share, for a total of 40,000 shares.

11.7 Delegated Powers Granted by the General Meeting of Shareholders to the Executive Board

The table below summarizes the delegations of power in force that have been granted by the general meeting of shareholders of our company to the Executive Board:

Duration of the Delegations of powers given to the Executive Board Maximum nominal amount of delegation of by the general meeting of shareholders the capital increase (in euros) powers(1) 1. Capital increase keeping the pre-emptive right of subscription €1.2 million(2) 26 months

2. Capital increase without the pre-emptive right of subscription €1.2 million(2) 26 months and by raising funds for public investment

3. Capital increase within the limitation of 10% at a price freely 10% of the share capital(2) 26 months set by the Executive Board within the framework of exercise of the delegation of power referred to in point 2

4. Increase in the number of securities to be issued within the 15% of the initial issue(2) 26 months framework of the issues referred to at points 1 and 2

5. Capital increase for the purpose of remunerating contributions 10% of the share capital(2) 26 months in kind

6. Issue of securities giving the right to the attribution of debt €50 million 26 months securities

7. Capital increase reserved in favour of Novo Nordisk A/S or €78,000(3) 18 months entities affiliated with the latter

8. Capital increase by capitalization of premiums, reserves, €1.2 million(2) 26 months profits, or others

9. Issue of BSA share warrants in favour of members of the 100,000 warrants representing a future 18 months Supervisory Board capital increase of €5,000

10.Attribution, without charge, of existing shares or shares to be 800,000 shares free of charge 38 months issued (4) representing a future capital increase of €40,000

(1) Commencing from the date of the combined general meeting of shareholders of 30 May 2006, with the exception of the delegation of powers referred to in point 10, the duration of which starts to run as of the combined general meeting of shareholders of 29 March 2006.

(2) These authorizations are applied to the overall cap of €1.2 million in the second resolution of the extraordinary general meeting of shareholders of 30 May 2006.

(3) By means of the issuance of a maximum of 1,560,000 shares with a nominal value of €0.05 per share.

(4) Authorized by the combined general meeting of shareholders of 29 March 2006. In the exercise of this delegation, the Executive Board, at its meeting held on 24 April 2006, attributed 751,000 shares of €0.05 per share to our employees. They will be acquired definitively by the beneficiaries on 24 April 2008.

89 INFORMATION ABOUT THE COMPANY

Document de Base of the Company dated 19 June 2006

90 NOTE

In this Document de Base, the terms “we”, “our company” or the “Company’s” refer to Innate Pharma S.A. (“Innate Pharma”).

This Document de Base includes the annual accounts of our Company prepared in accordance with generally accepted accounting principles in France (the “Annual Accounts”) for the fiscal years ended on 31 December 2003, 2004 and 2005 as shown in Section 20.1 of this Document de Base. As we have no subsidiaries, no consolidated accounts are included.

We have restated our accounts according to International Financial Reporting Standards (“IFRS”, “IFRS Accounts”) for the fiscal years ended on 31 December 2003, 2004 and 2005. IFRS Accounts were closed by the Executive Board on 28 April 2006. As their presentation is not required by law, they will not be submitted for approval at our General Shareholders’ Meeting. They are shown in Section 20.3 of this Document de Base.

This Document de Base contains forward-looking statements and information about our plans and objectives, especially in Section 6.2.1 “Our Strategy”, which may be identified by the use of the future or conditional tenses, and terms which are speculative in nature such as “believe,” “estimate,” “consider,” “with the aim of,” “intend to,” “plan to,” “anticipate,” “expect,” “should,” “hope,” “may” and other similar terms. These forward-looking statements are based on data, hypotheses and estimates which we consider reasonable. The forward-looking speculative statements and information about our plans, intentions or expectations may be affected by known and unknown risks and uncertainties in the regulatory, economic, financial and competitive environment, and other factors which may result in future financial performances, operations and results by our Company that are significantly different from the plans developed or proposed by the members of our Board, the Supervisory Board and Directors. Specifically, these factors may include those described in Section 4 – “Risk Factors” of this Document de Base. Our Company, shareholders and investment service providers therefore assume no liability and give no guarantees whatsoever about the attainment of the forward-looking figures and goals.

Investors are asked to pay careful attention to the risk factors described in Section 4 “Risk Factors” of this Document de Base before making the decision to invest. Any or all of these risks are likely to have a significant adverse effect on our business, prospects, financial situation, results and growth of our Company or our goals. In addition, other risks, which we have not yet identified or consider insignificant, may have the same adverse effect and investors could lose all or part of their investment.

This Document de Base also contains information about the markets in which we operate, changes in them, and our competitors as well as their competitive position, as detailed in Sections 6.4 and 6.8. This information is taken from studies carried out by external sources and from our own estimates. Information that is available in the public domain that we consider reliable and which is repeated in this Document de Base or used by us to make our own estimates has not been verified by an independent expert, and we cannot guarantee that a third party, using other methods to gather, analyse or calculate information about the markets, would obtain the same results. It is also possible that this market information is incorrect or no longer up-to-date, or that expected changes have not taken place for the same reasons as those given above. This could have a significant adverse effect on our business, prospects, financial situation, results and growth or our goals. Our Company, shareholders and investment service providers do not assume any liability and give no guarantee whatsoever as to the accuracy of this information.

A glossary defining some technical terms and a bibliography are given at the end of this Document de Base.

91 CHAPTER 1. NOT APPLICABLE

CHAPTER 2. AUDITORS

2.1 STATUTORY AUDITORS

Audit Conseil Expertise, SA Member of PKF International 71, chemin Charmasson 13016 Marseille

Appointed at the Ordinary General Shareholders’ Meeting held on 29 June 2000 to serve until the General Shareholders’ Meeting called to approve the financial statements for the fiscal year ending 31 December 2005. This appointment was renewed by the General Shareholders’ Meeting held on 29 March 2006 for a period of six fiscal years and will expire at the end of the Ordinary General Shareholders’ Meeting called to approve the financial statements for the fiscal year ending 31 December 2011.

PricewaterhouseCoopers Audit 63, rue de Villiers 92200 Neuilly-sur-Seine

Appointed by the written consultation with all the partners on 18 October 2002, for a period of six fiscal years until the General Shareholders’ Meeting called to approve the financial statements for the fiscal year ending 31 December 2007. This appointment was confirmed1 by the General Shareholders’ Meeting held on 13 June 2005, and will expire at the end of the Ordinary General Shareholders’ Meeting called to approve the financial statements for the fiscal year ending 31 December 2007.

2.2 SUBSTITUTE AUDITORS

Mr. Norbert Muselier 71, Chemin Charmasson 13016 Marseille

Appointed at the General Shareholders’ Meeting held on 29 March 2006 for a period of six fiscal years, expiring at the end of the General Shareholders’ Meeting called to approve the financial statements for the fiscal year ending 31 December 2011.

Mr. Etienne Boris 63, rue de Villiers 92200 Neuilly-sur-Seine

Appointed at the General Shareholders’ Meeting held on 30 May 2006 for a period of six fiscal years, expiring at the end of the General Shareholders’ Meeting called to approve the financial statements for the fiscal year ending 31 December 2011.

1 When our Company was converted into a société anonyme with shares.

92 CHAPTER 3. SELECTED FINANCIAL AND OPERATING INFORMATION

The table below sets forth our selected financial information prepared in accordance with IFRS for each fiscal year since the fiscal year ending 31 December 2003:

In thousands of euros, except for data per share 2003 2004 2005

Licensing revenue...... 240 2,110 1,300 Government financing for research expenditure...... 1,061 943 1,144 Operating revenue ...... 1,301 3,053 2,444

Research and development expenses...... (5,789) (6,921) (7,224) General and administrative expenses...... (914) (1,154) (1,635) Net operating expenses ...... (6,703) (8,075) (8,859)

Operating income (loss)...... (5,402) (5,022) (6,415)

Interest income/(expenses), net...... 391 289 286

Net loss...... (5,011) (4,733) (6,129)

Number of shares in issue ...... Average number of shares in issue before 20-1 stock split (€1) ...... 526,284 653,957 745,034 Average number of shares, diluted basis (1) before 20-1 stock split (€1) 588,284 712,110 811,551 Average number of shares in issue after 20-1 stock split (€0.05)...... 10,525,680 13,079,140 14,900,680 Average number of shares, diluted basis (1) after 20-1 stock split (€0.05) 11,765,680 14,242,200 16,231,020

Net loss per share, pro forma, after 20-1 stock split (in euros per

share) Net loss per share (basic)...... (0.48) (0.36) (0.41)

Balance sheet items

Cash, cash equivalents and current financial instruments...... 14,882 25,225 18,342

Total assets ...... 19,763 30,305 24,766

Total capital and reserves attributable to equity holders of the Company...... 15,246 25,751 20,065

Total financial debt...... 2,309 2,345 2,594

(1) Not taking anti-dilutive warrants into account (see Section 21.1.3.1 of this Document de Base).

93 CHAPTER 4. RISK FACTORS

Our business operates in a constantly evolving environment involving many risks, some of which are beyond our control. Before subscribing or buying our shares, investors are asked to examine all the information contained in this Document de Base, including the risks described below. As of the date of this Document de Base, these risks are those that we believe could have a significant adverse effect on our business, prospects, financial situation, results and growth, and which we consider important for making any investment decision. Investors’ attention is also drawn to the fact that the list of risks presented in Section 4 is not exhaustive and that other risks, currently unknown or considered unlikely as of the registration date of this Document de Base to have a significant adverse affect on our business, prospects, financial situation, results and growth, may exist or could occur.

4.1 RISKS RELATED TO OUR COMPANY

Risks related to the delay in or failure of the development of our products

We are a biopharmaceutical company specialised in immunology. Currently, we are developing three new classes of drug candidates, immuno-modulators, targeting innate immunity cells (“gamma-delta T” or “γδ T” cells, “Natural Killer” or “NK” cells and receptors of the Toll family or “TLR”). In each of these classes, our products are at different pre-clinical and clinical stages. The development of a drug candidate is a long, expensive and uncertain process that occurs in several phases, with the objective of showing the therapeutic benefit provided by this drug candidate in one or more indications.

We may be unable to demonstrate efficacy, good tolerance or the absence of unwanted side-effects in one or more of our products in animals during pre-clinical testing or in humans during clinical testing. Any delay in the pre-clinical development of a product could lead to a delay in initiating clinical development of a product. A failure in the pre-clinical development of a product could lead to abandoning its development. Any failure at the various clinical stages for a given indication could delay the development, production and commercialisation of the product, or even lead to abandonment of its development. If we are unable to show a therapeutic benefit for all the products of a class being developed, it could lead to terminating development for this class.

If our products are found to be ineffective or if they lead to unacceptable side effects, it would be impossible for us to market them, which could have a material adverse effect on our business, prospects, financial situation, results and development.

Risk of dependence on our two most advanced products: IPH 1101 and IPH 2101 (NN 1975)

At the date of this Document de Base, our two most advanced products in development are the drug candidates IPH 1101 and IPH 2101 (NN 1975) (see Sections 6.5.1.2.1 and 6.5.2.2.1 of this Document de Base). Furthermore, the development, production and commercialisation of IPH 2101 (NN 1975) takes place in the framework of a collaboration agreement and exclusive licence with Novo Nordisk A/S signed in November 2003, and extended on 28 March 2006, to other products targeting NK cells.

The development of these two drug candidates has so far required, and will continue to require, considerable investments of time, financial resources and qualified personnel by us for IPH 1101 and by Novo Nordisk A/S for IPH 2101 (NN 1975). Our future success and ability to generate income will depend on the technical and commercial success of these two most advanced products, particularly on factors such as:

• the success and future launch of the clinical programmes of our products (Phase II and III trials for IPH 1101 in the treatment of metastatic renal carcinoma (mRCC) and for other solid or hematologic tumours, and Phase I, II, and III trials for IPH 2101 (NN 1975));

• the authorisation by regulatory authorities to sell our products;

• the commercial success of the launch;

• the production of pharmaceutical batches of IPH 1101 and IPH 2101 (NN 1975) on an industrial scale and in sufficient amounts and with a constant and reproducible quality; and

• the acceptance of our products by the medical community, health care providers and third-party payers (such as social security systems).

If we are not able to develop and market our two most advanced products, our business, prospects, financial situation, results and development could be significantly affected.

Risk of dependence on the strategic partnership with Novo Nordisk A/S

We recently signed a collaboration and licence agreement with Novo Nordisk A/S for the development and marketing of IPH 2101 (NN 1975) and other products targeting NK cells. This collaboration and licence agreement is complex. It specifies, among other terms, future research and development funding, various payments by Novo Nordisk A/S to us upon achievement of different pre-clinical and clinical milestones and royalties to be paid by Novo Nordisk to us in the event that a product is introduced to the market (see Section 6.5.8.1 of this Document de Base). Novo Nordisk A/S is responsible for conducting and financing any future pre-clinical and clinical developments relating to NK products aimed at treating cancer and other pathologies, as well as any requests for marketing authorisation from regulatory authorities. Novo Nordisk A/S will primarily control the implementation and the time schedule for drug candidates under the agreement. We cannot guarantee that this collaboration will be successful. Should this collaboration terminate or should Novo Nordisk A/S be unable to develop and market IPH 2101 (NN 1975) or other products, specifically IPH 22XX and IPH 23XX, or should there be any delay in production, there could be a material adverse effect on our business, prospects, financial situation, results and development.

Risk of dependence on other current and future partners

In order to develop and market our products, we enter into collaboration, research and licence agreements with companies or academic institutions. These agreements are necessary for research, pre-clinical and clinical development, manufacturing and marketing our products. We may not be able to maintain existing agreements or establish new ones on acceptable terms. Moreover, our existing and future collaboration, research and licence agreements may not be successful. If we are unable to maintain our existing agreements or to sign new ones, we would have to consider alternative development and marketing options, which could impede or limit our growth and increase our need for capital.

We cannot control the amount of resources that our existing or future partners will dedicate to research, pre-clinical and clinical development, manufacturing or marketing of our products. These partners may not perform their obligations as expected. In this case, we may encounter significant delays or be unable to introduce our products to certain markets.

In addition, although we seek to include non-competition clauses in our collaboration, research and licence agreements, these restrictions may not provide adequate protection. Our partners could pursue alternative and competitive technologies, either alone or in collaboration with others.

Our rights under existing collaborative, research and licence agreements could expire or be terminated at critical periods. In addition, we may be unable to obtain licences for other rights that we may need. If we are unable to obtain or maintain such rights or licences, we may have to find other alternatives or develop the relevant products by ourselves to avoid infringing the patents or technologies belonging to third parties. These alternatives may not exist or may significantly increase our costs and delay our product development.

In order to carry out successfully very specific tasks in the research and development of our products, we rely on a network of outside scientific collaborators, including researchers at academic institutions. To build and maintain such a network under acceptable terms, we are faced with intense competition. Such external collaborators may end, at any time, their involvement. We can exert only limited control over their activities. We may be unable to obtain the intellectual property rights on the inventions targeted by collaboration, research and licence agreements under acceptable terms. Moreover, these scientific collaborators may assert intellectual property rights or other rights beyond the terms of the agreement.

One or more of these risks could have a material adverse effect on our business, prospects, financial situation, results and development.

Specific risks relating to pre-clinical studies and clinical trials

We conduct exhaustive pre-clinical studies and clinical trials on humans and must ensure the pharmaceutical quality of our products and demonstrate their safety and efficacy in the targeted indications. Each clinical trial on humans is subject to preliminary authorisation and/or of control a posteriori and all the development data must be evaluated by the competent regulatory authorities.

These regulatory authorities may prevent us from starting clinical trials or continuing clinical development if the data were not produced following applicable regulations or if they consider that the balance between the expected benefits of the product and its possible risks is not sufficient to justify the trial. In addition, we may decide, or the regulatory authorities may request, to interrupt or end clinical trials if patients were exposed to unexpected and severe risks. Fatalities and other undesirable events, whether related to the treatment under trial or not, may occur and force us to delay or suspend the trial, thereby preventing us from continuing the development of our product in the targeted indication or in other indications. 95

Moreover, the completion of clinical trials and our ability to recruit patients to conduct such trials depend on numerous factors such as:

• the type of the targeted indication;

• the number of affected patients eligible for the treatment;

• the evolution of the pathology of patients included in the trials;

• the existence of other clinical trials targeting the same population;

• our ability to convince clinical investigators to recruit patients for our trials;

• the possibility of recruiting and treating patients at a given clinical investigation centre; and

• the availability of sufficient amounts of the product.

For trials that are partly or fully carried out by subcontractors, we depend on the ability of these subcontractors to perform their work under the agreed terms and time schedules. The distance or the geographical distribution of clinical investigation centres could raise operational and logistic difficulties, leading to costs and delays.

Numerous pharmaceutical companies have encountered significant setbacks during clinical trials at an advanced stage or during the regulatory authorisation procedure, even after promising initial results.

If we are unable to conduct clinical trials successfully, it could have a material adverse effect on our business, prospects, financial situation, results and development.

Specific risks related to obtaining the authorisation to sell our products

To obtain marketing authorisation for one or more of our products, we or our partners, must prove the quality, safety and efficacy of our products in the targeted indications to the competent regulatory authorities.

Our ability to obtain marketing authorisation for our products will depend on several factors, including whether:

• we are allowed to continue development of our products currently in early clinical stages or to advance our products currently in the pre-clinical development stage to the clinical stage;

• we or our partners are able to conduct successfully clinical trials on time and within the budgeted resources;

• our products have received prior marketing authorisation for another indication; and

• our competitors announce clinical results likely to change the evaluation criteria used by the competent regulatory authorities.

If we do not obtain marketing authorisation, we will not be able to sell our product in the targeted indication. In addition, our product might not obtain marketing authorisation in a given geographical area, which could significantly restrict its sales potential.

The occurrence of one or more of these risks could have a material adverse effect on our business, prospects, financial situation, results and development.

Risks of commercial failure

If we obtain marketing authorisation allowing us to sell our products, it may take time for our product to gain market acceptance with the medical community, health care providers, and third-party payers.

The degree of market acceptance will depend on several factors, including:

• health care providers’ perceptions of the product’s therapeutic benefit;

• clinical developments after marketing authorisation;

• unwanted effects occurring after marketing authorisation;

• ease of the product’s use, especially in the method of administration;

• cost of treatment;

• reimbursement policies of governments and other third parties;

• effective implementation of a marketing strategy; and

• support from recognised experts.

Poor market penetration resulting from one of these factors could have a material adverse effect on our business, prospects, financial situation, results and development.

Risks related to externally manufacturing the products

We frequently use subcontractors in our business. We entrust subcontractors with the manufacture and development of complex methods which must be carefully monitored. We depend on third parties to manufacture all of our products, including our most advanced product, IPH 1101.

We may be unable to enter into subcontracting agreements for the production, development and future marketing of our products, or to do so on acceptable terms. If we are unable to enter into acceptable subcontracting agreements, we will not be able to successfully produce, develop or market our products.

In addition, reliance on third-party manufacturers creates additional risks which we would not face if we produced our products ourselves, including:

• failure of third-party manufacturers to comply with regulatory and quality control standards;

• breach of our agreements by third-party manufacturers; and

• termination or non renewal of these agreements for reasons beyond our control.

If products manufactured by third-party suppliers fail to comply with regulatory standards, sanctions would be imposed on us. These sanctions could include fines, injunctions, civil penalties, refusal by regulatory organisations to grant approval to conduct clinical trials or marketing authorisation for our products, delays, suspension or withdrawal of approvals, licence revocation, seizure or recalls of our products, operating restrictions and legal proceedings. All of these measures could have a considerable negative impact on our activities.

In the event that we change manufacturers for our products, we would be required to undergo revalidation of the new manufacturers’ methods and manufacturing procedures in accordance with applicable Good Manufacture Practices (“GMP”) standards. This revalidation could be expensive, time-consuming and require the attention of our most qualified personnel. If revalidation is not successful, we may be forced to look for another supplier, which could delay the production, development and marketing of our products and increase their manufacturing costs. We would also be required to demonstrate through clinical studies that our products, as produced by new manufacturers, were comparable to those used in our most advanced clinical trials. New clinical studies may also be required if pre-clinical studies do not fully demonstrate product similarity.

Such events could have a material adverse effect on our business, prospects, financial situation, results and development.

Risks related to a shortage of raw materials needed for our operations

We are reliant on third parties to supply various materials and chemical or biological products that are necessary to manufacture our drug candidates and conduct our clinical trials; for example, Interleukin-2 (“IL-2”), which is a pharmaceutical product used in combination with IPH 1101 in our clinical trials.

97 Our supply of any of these products could be limited, interrupted or restricted. In such a case, we may not be able to find from alternative suppliers materials or chemical or biological products of acceptable quality, in appropriate quantities and at an acceptable cost. If our key suppliers or manufacturers are unreliable or if our supply of products or materials is reduced or interrupted, we may be unable to develop, produce and market our products on a timely and competitive basis. Our materials are subject to stringent manufacturing requirements and rigorous tests. Delays in completing and validating our suppliers’ facilities and manufacturing methods for these materials could affect our ability to complete clinical trials and to market our products in a profitable and timely manner.

If we are not able to maintain our subcontracting agreements, sign new agreements, or obtain materials, chemical or biological products necessary for the development and manufacturing of our products in the future, our business, prospects, financial situation, results and development could be significantly affected.

Risks related to attracting and retaining key personnel and scientific consultants

Our success largely depends on the efforts and the expertise of our executive committee members and key scientific personnel, particularly: Dr. Hervé Brailly, our principal founder and Chairman of the Executive Board; Dr. François Romagné, our Vice President, Scientific Director and member of the Executive Board; Mr. Stéphane Boissel, our Vice President, Director of Finance and Development, member of the Executive Board; Dr. Patrick Squiban, our Vice-President and Medical and Regulatory Director; and Dr. Jérôme Tiollier, our Vice-President and Director of Pharmaceutical and Pre- Clinical Operations. The loss of their skills could alter our ability to reach our objectives.

In addition, we will need to recruit new executive committee members and qualified scientific personnel to carry out our clinical trials and expand into areas that require specialised skills, such as marketing, manufacturing and regulatory matters. We compete with other companies, research organisations and academic institutions in recruiting and retaining highly qualified scientific, technical and management personnel. As this competition is very intense in our field, we may not be able to attract or retain key personnel and scientific consultants under commercially acceptable conditions.

If we are unable to keep, attract and retain key personnel, it could prevent us from reaching our overall objectives, and thus have a material adverse effect on our business, prospects, financial situation, results and development.

Risks related to the management of our internal growth

We expect our business will experience significant growth. We will need to recruit personnel and to expand our operational capabilities, which could place a significant strain on our internal resources. In order to do this, we must:

• train, manage, motivate and retain an increasing number of employees;

• anticipate expenses related to this growth as well as the associated financing needs;

• accurately forecast the demand for our products and the revenue they are likely to generate; and

• expand existing operational, financial and management information systems.

If we are unable to manage this growth or if we encounter unexpected difficulties during our expansion, it could have a material adverse effect on our business, prospects, financial situation, results and development.

Risks related to acquisitions

Our strategy also involves continuing the growth of our business externally, through selective acquisitions of complementary companies, products or technologies in Europe and elsewhere.

Our ability to implement this strategy depends, in part, on our success in making such acquisitions on satisfactory terms and integrating them into our operations or technology. Implementing a strategy to pursue external growth opportunities may impose significant strains on our managers, management and operating systems. It may also be difficult to integrate these acquisitions into our operations. In addition, we may finance such acquisitions by the incurrence of debt or issuing equity, which would impose certain constraints or have a dilutive effect on our shareholder.

If we are unable to integrate such acquisitions, it could have a material adverse effect on our business, prospects, financial situation, results and development.

98 Risks related to a limited experience of sales, marketing and distribution

We have limited experience in sales, marketing and distribution. We will have to develop, in the medium term, marketing and sales capacities, either on our own or with strategic partners, such as Novo Nordisk A/S for NK platform products. As part of our strategy, we may seek partners for the clinical development and marketing of our other potential products. If we establish our own sales and marketing infrastructure, we will require additional funds, management resources, new skills and time to establish the appropriate organisation and structure to support our products according to the applicable legislation, and more generally, to optimise our marketing efforts. We will also evaluate the strategic and financial advantages of entering into an agreement with a partner for marketing our products. It is possible that we may not succeed in finalising a partnership for the sale and marketing of our products outside the NK platform on commercially reasonable terms or in maintaining such partnerships or in marketing our products independently. In addition, our partners in control of marketing some of our products may also be faced with difficulties when those products involve areas where their commercial experience is limited.

Such events could have a material adverse effect on our business, prospects, financial situation, results and development.

Risks related to competition

The market for anti-cancer treatments is characterised by rapidly evolving technologies, an emphasis on products protected by intellectual property rights and intense competition. Numerous entities, including pharmaceutical laboratories, biotechnology companies, academic institutions and other research organisations, are actively engaged in the discovery, research, development and sale of immunotherapy and other products to treat cancer. Should we obtain marketing authorisation for one of our immunotherapy products, it would compete against several other established therapies or innovative therapies under development or recently introduced to the market, such as targeted therapies, monoclonal antibodies, anti-cancer vaccines, cell therapy, gene therapy, angiogenesis inhibitors and signal transduction inhibitors.

Many of our competitors developing anti-cancer therapies have considerably greater management, manufacturing, marketing and research resources and experience than we do. In particular, large pharmaceutical laboratories such as Roche, Novartis, Bayer and Pfizer, have substantially more experience than we have of conducting clinical trials and obtaining regulatory authorisations. Smaller or early-stage companies, mainly in the immunotherapy field such as Coley Pharmaceuticals, who recently signed an agreement with Pfizer, could also be significant competitors. These companies are also likely to compete with us to acquire rights for promising products and other complementary technologies.

Finally, we cannot ensure that our products will:

• obtain the regulatory authorisations, be protected by patents or be introduced to the market more rapidly than those of our competitors;

• be safer, more effective or less expensive than our competitors’ products;

• more effective in their production and marketing than our competitors’ products;

• be commercially successful; or

• not become obsolete or unprofitable because of technological progress or other therapies developed by our competitors.

Such events could have a material adverse effect on our business, prospects, financial situation, results and development.

4.2 FINANCIAL RISKS

History of operational losses – Risks related to forecast losses

Since our operations began in 1999, we have incurred operational losses. On 31 December 2005, our cumulative net losses amounted to 20.2 million euros, including a net loss of 6.1 million euros for the tax year ended on 31 December 2005. Such losses result principally from significant investments in research and development for conducting pre-clinical studies and clinical trials of our drug candidates.

We expect to incur substantial operational losses in the coming years as our research and development activities continue particularly as:

• certain of our products move from the pre-clinical development stage to the clinical development stage;

• we face increased regulatory requirements for manufacturing and testing products in later stages of development;

• we pay fees associated with filing marketing authorisation requests with regulatory agencies;

• we expand our product portfolio through the addition of new products for future development;

• we pay milestone payments to third parties that have licensed their technologies to us;

• we expand our research and development activities and purchase new technologies, products or licences; and

• we develop our operations outside France.

To date, none of our products has generated revenues from commercial sales. Our current revenues are derived from instalment payments made under our collaboration agreement with Novo Nordisk A/S. Our profitability will depend on our ability, alone or with other partners, to successfully develop, produce and sell our products. We expect that our only revenue sources for the next five to six years will be:

• payments from Novo Nordisk A/S and any other future partner;

• public subsidies and tax credit refunds; and

• income from our investments and financial instruments.

The interruption of one of those sources of income could have a material adverse effect on our business, prospects, financial situation, results and development.

Uncertain capital and investment needs

We have made substantial investments since our business began in 1999 and have generated negative cash flows during the last three years. The negative cash flows totalled 5.1 million euros, 4.5 million euros and 7.2 million euros for the tax years ended on 31 December 2003, 2004 and 2005, respectively. In the near future, we anticipate that our capital needs will increase in order to develop our research and development activities in existing and new products. We expect that the cash flow and short-term financial instruments, together with the share capital increase from our introduction to the Eurolist of Euronext Paris and milestone payments from our collaboration agreement with Novo Nordisk A/S, are adequate to meet our capital needs over the next several years. However, we may be unable to finance our future growth, in which case we may need to seek other financing sources, in particular through new capital increases.

Our future capital requirements will depend on numerous factors, such as:

• higher costs and slower progress than expected for our research and development programmes;

• higher costs and unexpected delays for obtaining regulatory approvals, including preparatory submissions to regulatory agencies;

• costs for preparing, filing, defending and enforcing our patents and other intellectual property rights;

• costs for technological and market developments, establishing and maintaining collaboration agreements and ensuring the efficient manufacturing and marketing of our products; and

• new opportunities for developing promising new products or opportunities to acquire technologies, products or companies.

We may be unable to raise sufficient funds on acceptable terms, when we require them. If the necessary funds are not available, we may have to:

• delay, reduce or eliminate research and development programmes or reduce our headcount;

• close some of our sites;

100

• obtain funds through partnership agreements that may require us to assign rights to technologies or products, which we would have retained under different circumstances;

• grant licences or sign new collaboration agreements that may be less favourable for us than those that would have been obtained under different circumstances; or

• consider transferring assets or even merging with another company.

In addition, further capital could be raised by issuing new shares, which would dilute our shareholders’ interests. Debt financing, if available, may also include restrictive conditions.

The occurrence of one or more of these risks could have a material adverse effect on our business, prospects, financial situation, results and development, as well as on our shareholders’ situation.

Risk of possible dilution

Since our creation, we have regularly allocated or issued stock options, warrants and free shares to motivate our managers, employees and consultants. In the future, we anticipate offering other securities giving access to share capital.

At the date of this Document de Base, the exercise of all of the financial instruments giving access to share capital (excluding Redeemable Warrants (see Section 21.1.3.1 of this Document de Base) which would become void in the event of an initial public offering), would allow the subscription to 2,306,000 new shares representing approximately 13.4% of the share capital (see Sections 17.2 and 21.1.3 of this Document de Base). The exercise of financial instruments giving access to the share capital in circulation as well as all allocations or new issues would lead to a significant dilution for the shareholders.

4.3 LEGAL RISKS

Risks relating to uncertainty protecting our patents and other intellectual property rights

It is important for our success that we and our licensors and licensees be in a position to obtain, maintain and enforce patents and intellectual property rights in Europe, the United States and other countries. It is possible that:

• we may not develop new patentable inventions;

• patents for which applications are pending, including important patents in certain jurisdictions, may not be issued;

• patents granted or licensed to us or our partners may be challenged, or held invalid or unenforceable;

• the scope of any patent protection may be insufficient to protect us from competitors; or

• third parties may claim rights on patents or other intellectual property rights that we own or license.

Issuing a patent does not guarantee its validity or enforceability and third parties may challenge these two aspects. The issuance and enforceability of a patent in the field of biotechnology are highly uncertain and raise complex legal and scientific issues. So far, no uniform worldwide policy has emerged concerning the content of patents granted in the field of biotechnology and the scope of allowable claims. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets or determine the validity and scope of our intellectual property rights. Any dispute could result in considerable expenses, reduce our profits and fail to offer us adequate protection. Our competitors might successfully dispute patents issued or licensed to us in court or other proceedings, which could result in reducing the scope of our patents. Moreover, such patents may be infringed or successfully circumvented through design innovations.

Some of our patents and patent applications are jointly owned with our partners. In many countries, both owners have full rights under a jointly-owned patent. In the absence of a specific agreement, our partners may use such jointly-owned patents to compete with us or to grant a licence to our competitors. In addition, co-owners may not cooperate with us to enforce or to defend a jointly-owned patent when necessary to protect our rights.

Any of these events concerning one of our patents or intellectual property rights could have a material adverse effect on our business, prospects, financial situation, results and development.

101 Specific risks relating to patents and intellectual property rights owned by third parties

The expansion of the biotechnology industry and the growing number of patents issued increase the risk that third parties consider that our products or technologies infringe their intellectual property rights. In general, patent applications are not published until 18 months after the date of priority applications. In the United States, some patent applications are not published before the patent itself is issued and patents can be awarded on the basis of their invention date, which does not always result in a patent being issued to the party who was first to file an application. Discoveries are sometimes published or patented months, often even years, later. We cannot be sure that third parties have not been the first to invent products or to file patent applications relating to inventions also covered by our pending patent applications or those of our partners. In such instances, we may need to obtain licences to patents from those third parties (licences which may not be obtained under reasonable terms, if at all), or cease production and sale of certain products or develop alternative technologies.

Any litigation or claim against us, whatever its outcome, could result in substantial costs and could compromise our reputation. Some of our competitors with greater resources may be better able to meet the costs of complex litigation. Any dispute of this type could severely affect our ability to continue our operations. Specifically, intellectual property litigation could force us to:

• cease selling or using any of our products that are involved in the disputed intellectual property, which would reduce our revenues;

• obtain a licence from the owner of the intellectual property rights, which may not be obtainable on reasonable terms, if at all; and

• redesign or, in the case of trademark claims, rename our products to avoid infringing intellectual property rights of third parties, which may be impossible and could therefore become an obstacle to our marketing efforts.

Our trademark is an important element our Company’s identity and our products. Although the principal elements of our trademark have been registered in France and in Europe and are being registered in the United States, other companies in the pharmaceutical field might use or attempt to use elements of this trademark, and thereby create confusion in the mind of third parties (see Section 11.2.2 of this Document de Base).

One or more of these risks could have a material adverse effect on our business, prospects, financial situation, results and development.

Risks relating to our inability to protect the confidentiality of our information and our know-how

Occasionally, we provide information and materials to researchers in academic institutions or other public or private entities and request them to conduct certain tests. In both cases, we rely on confidentiality agreements. Our business also depends on our own non-patented technologies, processes, know-how and data that we consider as trade secrets and that we protect in part through confidentiality agreements with our employees, consultants and certain sub-contractors. It is possible that these agreements or trade secret protection may not ensure sufficient protection or be breached, that we may not have adequate remedies for any breach, or that our trade secrets may be disclosed to our competitors or developed independently by them.

Any of these risks could have a material adverse effect on our business, prospects, financial situation, results and development.

Risks related to regulations

To date, none of our products has received a marketing authorisation from a regulatory agency. We cannot be sure that we will receive the necessary authorisations to sell our products. Our products are subject to extensive regulations and the applicable regulatory requirements are complex, potentially difficult to apply and subject to modification. The Agence Française de Sécurité Sanitaire des Produits de Santé (“AFSSAPS”), the European Medecine Agency (“EMEA”) and the United States Food and Drug Administration (“FDA”), and their counterparts in other countries, regulate the research and development, pre-clinical testing, clinical trials, manufacture, safety, efficacy, record-keeping, labeling, marketing, sale and distribution of pharmaceutical products. In particular, in the absence of authorisation from the FDA, it would be impossible for us to have access to the American market, the world’s largest pharmaceutical market in terms of value (see Section 6.4.2 of this Document de Base).

The regulatory authorisation process for new therapeutic products requires us to submit detailed product characterisation, manufacturing and control, pre-clinical and clinical data and any information establishing the safety and potential efficacy of the product for each indication. It may also require ongoing studies after marketing authorisation as well as manufacturing and quality controls. 102

Such regulatory procedures are expensive, may take many years to complete and their results are unpredictable. Data from pre-clinical and clinical developments are likely to give rise to different interpretations, which could delay regulatory authorisation or restrict its scope. The regulatory requirements and processes vary widely among countries, and we or our strategic partners may be unable to obtain timely authorisation within each relevant country.

Our immunotherapy products are based on new technologies that are constantly evolving and have not been extensively tested on humans. The applicable regulatory requirements are also complex, potentially difficult to apply and subject to significant modifications. Modifications to regulations during the development of a product and regulatory review may lead to delays or refusal of authorisation.

In Europe, the United States and other countries, regulations are likely to:

• significantly delay or increase the cost of development, testing, manufacturing and marketing of our products;

• limit the indications for which we will be authorised to market our products;

• impose new more stringent requirements, suspend authorisation, or request the suspension of clinical trials or sale of our products if unexpected results are obtained during trials by other researchers on products similar to ours; or

• impose burdensome labelling procedures.

Finally, if we do not comply with the laws and regulations governing our business, we could be subject to sanctions that could include refusal to authorise pending requests, product recalls, sales restrictions and temporary or permanent suspension of our operations or civil or legal proceedings.

One or more of these risks could have a material adverse effect on our business, prospects, financial situation, results and development.

Risks related to product liability

We are exposed to potential liability, including product liability, inherent to conducting trials, manufacturing and marketing human therapeutic products. We could also be liable in connection with clinical trials, including the preparation of therapeutic product candidates and unexpected side effects resulting from the administration of such products. Claims or legal proceedings may be filed or brought against us by patients, regulatory agencies, biopharmaceutical companies or other third parties using or selling our products. These legal proceedings could include complaints arising from actions taken by our partners, licensees and subcontractors, over whom we exercise little or no control. We cannot ensure that our current insurance coverage is sufficient to protect us against such proceedings. If we, our partners, licensees and subcontractors were found liable in a proceeding and were unable to obtain and maintain an appropriate insurance coverage at an acceptable price, or to protect ourselves by whatever means, it could seriously affect the sale of our products and could adversely affect our business, prospects, financial situations, results and development.

Risks relating to the evolution of drug reimbursement policies

If we are successful in launching our products or products developed by our partners, market acceptance will depend, in part, on the extent to which public and private insurers will reimburse their costs. Public health insurance and other third-party payers will try to limit the cost of care by limiting or denying coverage for expensive products and therapeutic procedures. There are currently few immunotherapy products against cancer on the market, so there is little experience or precedent of the potential coverage of such treatments by insurance companies.

Our ability to market successfully our products will partially depend on the extent to which governmental authorities, private insurers and other organisations in Europe and in the United States establish sufficient reimbursement rates for the cost of our products and related treatments. Third-party payers frequently challenge the price of therapeutic products and medical services. Cost control measures that health care providers and reimbursement organisations implement and the effect of possible health care reforms could negatively affect our operating results. We may not obtain sufficient reimbursement for our products, which would negatively affect their acceptance by the market, in which case we would be unable to achieve a sufficient return on our research and development investments.

One or more of these risks could have a material adverse effect on our business, prospects, financial situation, results and development.

103 4.4 INDUSTRIAL RISKS RELATED TO THE ENVIRONMENT

Our research and development activities expose us to chemical, biological and radiological risks and impose preventative and protective measures on us for the protection of our workforce and waste control management in accordance with applicable laws.

In our research and development programmes and pre-clinical tests, we use hazardous materials and biological materials, particularly radio-labelled molecules, solvents and other potentially genotoxic chemicals, and we handle genetically recombined material, genetically modified species and pathological biological samples. Consequently, in the jurisdictions where we operate, we are subject to environment and safety laws and regulations governing the use, storage, handling, discharge and disposal of hazardous materials, including chemical and biological products and radioactive materials. In France, we are required to comply with a number of national, regional and local legislative or regulatory provisions regarding radiation and hazardous materials, including specific regulations regarding the use, handling and storage of radioactive materials and the potential exposure of employees to hazardous materials and radiation. We must also comply with the French, European and American regulations concerning the use and handling of genetically modified organisms.

If we do not comply with applicable regulations, we could be subject to fines and might have to suspend all or part of our operations. Compliance with the environmental, health and safety regulations requires additional costs, and we may have to incur significant costs to comply with future laws and regulations in relevant jurisdictions. Compliance with environmental laws and regulations could require us to purchase equipment, modify facilities and undertake considerable expenses. We could be liable for any inadvertent contamination, injury or damage, which could negatively affect our business, although we have subscribed to an insurance policy covering certain risks inherent to our business.

One or more of these risks could have a material adverse effect on our business, prospects, financial situation, results and development.

4.5 INSURANCE AND RISK COVERAGE

We have implemented a coverage policy for the principal insurable risks that we consider compatible with our cash flow requirements. The total of premiums paid for all insurance policies amounted to 17 thousand, 27 thousand and 38 thousand euros for the fiscal years ending 31 December 2003, 2004 and 2005, respectively. In the absence of any direct damage rate or damage indicators in our field of activity, we are not able to determine the risk coverage rate of these insurance policies, even for civil liability.

We have subscribed to several insurance policies, including the following:

• a “multi-risk” policy covering fire, water damage, theft, and damage to equipment in our facilities in Marseille and Lyon, with a maximum coverage of 1.5 million euros;

• a “civil liability for operation” policy covering personal injury and consequential damage, with an annual maximum coverage of 6.0 million euros per accident;

• a “civil liability for operation-related property and consequential damage” with a maximum coverage of 888 thousand euros per accident.

Such damage insurance does not cover our possible losses from operations. We estimate that the cost/benefit ratio of covering losses from operations at our stage of development, particularly given the lack of revenue on sales of our products, does not justify subscribing to such coverage. However, we have implemented safety procedures for our original biological materials and our computer data.

Our liability resulting from clinical trials is covered by specific agreements associated with the “civil liability” policy, the price and guaranteed amounts of which depend on the local regulations applicable in the jurisdiction where the clinical examination is located; for example, in France the Code de la Santé Publique specifies obligatory insurance for clinical trial promoters and the terms of such insurance. The overall amount of the premium and guarantees subscribed for the trials therefore depends on the number of trials, their location and the number of patients involved in the trial.

We have also subscribed to an insurance covering the civil liability of our managers in executing their duties, with a total annual maximum guarantee of 3.0 million euros.

104 We cannot guarantee that we will always be able to maintain or obtain similar insurance coverage at an acceptable price, which could lead us to accept more expensive insurance policies and to assume a higher level of risk, particularly as our business develops. Moreover, one or more significant accidents, even if they are covered by such insurance policies, could seriously affect our business and our financial situation if the accident interrupts our business activities, there are delays in receiving reimbursements from our insurers, the policy limits are exceeded, and premium increases that would result from the accident.

One or more of these risks could have a material adverse effect on our business, prospects, financial situation, results and development.

Taking into account the outlook of our Company and, in particular, future clinical trials, as described in Section 6.5 of this Document de Base, we anticipate that our insurance premiums will continue to rise while remaining insubstantial in relation to the amount of our research and development costs, our annual losses and the value of our assets.

4.6 MARKET RISKS

Exchange rate risk

We are partially exposed to currency exchange rate risk with respect to the U.S. dollar in relation to the euro because a portion of our operating expenses is incurred in U.S. dollars (see Section 9.6 of this Document de Base). This exposure could increase if we expand our business in the United States, the world’s largest anti-cancer therapy market. In addition, if we succeed in marketing products in the United States, part of our revenue will be in U.S. dollars. We have not entered into any hedging arrangements to protect our business against exchange rate fluctuations. We will monitor our exposure to exchange rate risk as our business develops. If we do not enter into effective hedging arrangements in the future, our operating results could be affected.

Cash flow risk

Historically, we have financed our growth by means of capital increases (see Section 9.3.1 of this Document de Base). We have not substantially relied on bank financing (see Section 9.3.2 of this Document de Base). Consequently, we are not exposed to cash flow risks resulting from the implementation of early bank loan reimbursements.

Interest rate risk

Our exposure to interest rate variations mainly relates to two elements of the balance sheet: cash flow and current financial instruments. The latter includes money market funds and money investment common trusts, i.e. investment securities that can be transferred into variable rate instruments. Interest rate variations have a direct impact on our cash flow and current financial instruments and, therefore, on financial products (see Section 9.2.2.1 of this Document de Base).

Risk on shares

None.

105 CHAPTER 5. INFORMATION ABOUT OUR COMPANY

5.1 HISTORY AND DEVELOPMENT OF OUR COMPANY

5.1.1 History of Our Company

Our Company was founded in September 1999 by six individuals, including Hervé Brailly, the current Chairman of the Executive Board, and François Romagné, a member of the Executive Board. The founding members also included four French and Italian scientists who have made significant contributions in the area of unconventional lymphocyte biology. During the start-up phase, we signed our first licensing, research and collaboration agreements with academic institutions, especially INSERM (French National Institute of Health and Medical Research) and the University of Genoa in Italy. We created our Scientific Advisory Board and recruited employees to launch our first research and development operations. During this period, we received significant aid from ANVAR (French Agency for Research Evaluation).

In April 2000, our first round of financing raised 4.5 million euros from venture capital investors led by Sofinnova Partners (Paris), also including GIMV (Antwerp) and Auriga Partners (Paris). This cash infusion allowed us to start our research and development programmes, select our first lymphocyte agonist drug candidate T γ9δ2 (IPH 1101) and to validate the principle of immunomodulators targeting NK cells. In 2001, we established our laboratories at our current head offices in Marseille. Jérôme Tiollier, currently a member of the Executive Committee in charge of pre-clinical development and pharmaceutical operations, joined us in 2001. At the end of 2001, we had 20 employees.

In 2002, we conducted a second round of financing which raised an additional 20.0 million euros from venture capital investors, including the initial investors along with the American firm, Alta Partners, one of the first transatlantic investors in biopharmaceuticals, and The Axa Group, one of the world’s leading insurance companies, through their investment structures. This financing round was one of the largest in Europe in the biopharmaceutical sector in 2002.

These funds allowed us to advance the development of our principal products and initiate our first clinical testing in oncology. At the end of 2002, we began our first clinical trials for metastatic renal carcinoma (mRCC) by using a cell therapy procedure using IPH 1101 to carry out an ex vivo expansion of the T γ9δ2 lymphocytes. At the end of 2003, our IPH 1101 drug candidate was tested on a human subject for the first time in a Phase I trial targeting solid tumour indications. At the same time, we continued our work on NK cells and validated our first target receptor for the development of immunomodulators targeting these cells.

We strengthened our management team with the recruitment of Stéphane Boissel in 2002. He is currently a member of the Executive Board and the Executive Committee in charge of Finance, Development and Investor Relations. At the end of 2002, we had 27 employees.

At the end of 2003, we signed a collaborative research and licensing agreement with the Danish pharmaceutical company Novo Nordisk A/S for the development of IPH 2101 (NN 1975), an immunomodulator targeting an NK cell receptor. Under this agreement, we gave the rights to the product to Novo Nordisk A/S in exchange for initial payments, milestone payments and royalties on future sales of IPH 2101 (NN 1975).

At the same time, in 2003, we began pre-clinical development of IPH 12XX, a new family of γδ T cell agonists, which should reach the clinical phase in 2008.

In 2004, we obtained a third round of financing when Novo Nordisk A/S made a capital contribution (in March 2004). In addition to some of the initial investors (who had made contributions to the 2000 and 2002 pools), we added the Japanese investment company NIF to our list of investors, now NIF SMBC, a member of one of the largest financial groups in Japan. This new capital increase allowed us to continue our pre-clinical and clinical research and development operations and expand our business in the area of innate immunity pharmacology.

In 2005, we received ISO 9001:2000 certification for our research and development activities. Patrick Squiban, currently a member of the Executive Committee in charge of clinical development and regulatory affairs, joined our management team in July 2005. We had 54 employees at the end of 2005.

In June 2005, 18 months after we signed our first agreement with Novo Nordisk A/S, IPH 2101 (NN 1975), a human antibody that activates NK cells, was qualified by our partner to start the preclinical development. Novo Nordisk A/S plans to start the first Phase I clinical trials of this product at the end of 2006 in an onco-hematology indication (see Section 6.5.2.2.1 of this Document de Base). The success of this first collaboration led us to discuss the possibility of expanding our agreement. In March 2006, we signed an agreement with Novo Nordisk A/S covering all of the drug candidates in the NK platform, particularly the products IPH 22XX and IPH 23XX. Based on this agreement, we transferred the rights to all the NK products to Novo Nordisk A/S, while retaining certain rights for niche applications, in exchange for an initial payment, 106 research and development funding for a minimum of three years, milestone payments and royalties on future sales. In addition, Novo Nordisk A/S increased its holdings in our share capital.

At the end of 2005, we initiated a third product platform in the area of TLR pharmacology. For this project, we recruited a team of researchers from the American company Schering-Plough and opened a second facility near Lyon. In June 2006, we signed and announced agreements giving us intellectual property rights over some items from Schering-Plough and the French Institut Gustave Roussy (“IGR”) anti-cancer centre, enabling us to develop drug candidates targeting the TLR3 receptor. The first drug candidate resulting from this programme (IPH 31XX) should enter the clinical phase in 2008.

In May 2006, we began our first multicentric international Phase II clinical trial with IPH 1101 in metastatic renal cancer. The results of this significant trial are expected at the end of 2007.

5.1.2 Company Name

Our Company’s name is Innate Pharma.

5.1.3 Business and Company Registry

Innate Pharma is registered in the Marseille Business and Company Registry as number SIREN 424 365 336 RCS Marseille.

Our NAF Code is 731 Z. This is the code for Research and Development in Physical and Natural Sciences.

5.1.4 Company Incorporation and Term

Our Company was incorporated on 15 September 1999, as a closely-held company (société par action simplifiée) and then converted into a limited liability company (société anonyme) with shares on 13 June 2005. It was registered on 23 September 1999, for a term expiring on 23 September 2098.

5.1.5 Head Offices, Legal Form and Applicable Law

5.1.5.1 Head Offices

Immeuble le Grand Pré 121 Ancien Chemin de Cassis 13009 Marseille

5.1.5.2 Legal Form and Applicable Law

A société anonyme with an Executive Board and Supervisory Board subject to the provisions of Book II of the Code of Commerce and Decree No. 67-236 of 23 March 1967 on business corporations.

5.1.6 Fiscal Year

The fiscal year starts on 1 January and ends on 31 December of each year.

5.2 INVESTMENTS

Due to our organisational structure, which uses subcontractors to perform the majority of our research and development activities and manufacturing, our investments in tangible assets are relatively low in value compared to our research and development expenses.

We lease two buildings in Marseille and Lyon and our computer equipment.

5.2.1 Historical Investments

Since 2001, our offices and laboratories have been located at our head offices in Marseille. We have made investments in facilities, laboratory materials and office equipment.

The total initial investment in our Marseille laboratories was approximately 1.2 million euros, including various kinds of equipment that is required to perform our activities (see Section 9.4.2 of this Document de Base).

On 31 December 2005, the gross value of our tangible fixed assets came to 1.6 million euros.

107 5.2.2 Current Investments

We have agreed to take over the laboratory materials belonging to Schering-Plough located in our laboratories in Dardilly (Lyon). The total amount for these investments, which we will pay in June or July 2006, is estimated at 50 thousand euros. In addition, we have spent approximately 150 thousand euros on investments in laboratory materials since the beginning of 2006.

5.2.3 Future Investments

We plan to renovate a building with a surface area of 2,400 square meters located in Luminy (south of Marseille) and to relocate our corporate headquarters there, including our offices and main laboratories, between now and the third quarter of 2008. Although we will not own the building, which belongs to the urban community of Marseille-Provence-Métropole, we will pay the cost of the renovations and installations in the building. We are planning for a total of approximately 2.0 million euros in investment spread over 2007 and 2008. We plan to finance a portion of this investment by using a direct financing lease. In addition, we plan to negotiate an option to buy the buildings and land with the landlord (see Section 8 of this Document de Base.)

Under the terms of the current lease for our headquarters, we may have to return the premises to their original condition before moving to Luminy.

108 CHAPTER 6. BUSINESS OVERVIEW

6.1 INTRODUCTION

Our company is a biopharmaceutical company specialising in immunology. We are developing new drug classes which target innate immunity, a particular function of the immune system, the importance of which was recognised in the late 1990s. Our drug candidates are “first-in-class” products based on new mechanisms of action. These products could lead to significant advances in the treatment of cancer, as well as in the treatment of infectious diseases and chronic inflammatory pathologies.

Our scientific base and the field in which we develop our intellectual property is the pharmacology of innate immunity. Innate immunity cells (non conventional lymphocytes and dendritic cells) make up an organism’s first line of defence and regulate its adaptative immune response, which is the basis of immunological memory. Some innate immunity cells, in particular, the non conventional lymphocytes, can be activated in order to destroy malignant cells or cells infected by viruses. Innate immunity activation also plays a key role in regulating immune responses, particularly by implementing an immune memory and controlling tolerance of potentially pathogenic elements. This is particularly important in the case of cancer, which the immune system is not able to control because as it becomes tolerant to a tumour, the tumour is no longer recognised as a foreign element. Our approach to anti-cancer immunotherapy thus allows the combination of two activities that could be found to be clinically advantageous in a single pharmacological agent: an immediate anti-tumour effect and the long-term effect of preventing a relapse.

The indications targeted by our drug candidates correspond to areas of considerable unsatisfied medical needs. We decided to focus our clinical development effort in the cancer research field; however, the mechanisms of action of our drug candidates make it possible to envisage other indications, such as controlling viral infections and chronic inflammation associated with auto-immune pathologies. The overall market targeted by our products in cancer indications alone is over one billion euros and we are well-positioned in the rapidly expanding sector of anti-cancer immunotherapy, which is heading for considerable growth, estimated at 24% on average between 2004 and 2008. Due to our original scientific approach and our intellectual property portfolio, we believe we enjoy a strong competitive position in a large and rapidly growing market.

We are currently developing three product classes, which target different sub-populations of innate immunity cells. In the first group (gamma delta activators or “γδ”), our most advanced drug candidate, IPH 1101, is currently in a Phase II clinical trial for a solid tumour indication, metastatic renal cell carcinoma. The second group (immuno-modulators targeting the “Natural Killer” cells or “NK”) has given rise to a major strategic partnership with the Danish company Novo Nordisk A/S. The most advanced product of this second group, IPH 2101 (NN 1975), is currently in pre-clinical development and should be subject to clinical trials by the end of 2006. The third group (immuno-modulators targeting receptors from the Toll family or “TLR”) is currently in the pre-clinical development phase, the start of clinical trials being envisaged for 2008. For the most advanced product in our portfolio, IPH 1101, the first Phase II trial results for the γδ platform should be available in late 2007 and could constitute our first direct evidence for the clinical concept. We currently have clinical data or retrospective studies providing elements of indirect validation for each of the three classes of products being developed.

In order to carry out internal research and development programmes successfully, we have both specific scientific expertise in the field of immuno-pharmacology and the skills which allow the implementation of complex programmes calling on numerous disciplines, which we largely implement through subcontracting and collaboration agreements. At the registration date of this Document de Base, we have 62 staff members, of whom 17 are doctors of science, medicine or pharmacy. We implemented a quality policy based on the ISO 9001:2000 certification that was granted in 2005 to ensure control over our principal operational processes, compliance with regulations applicable to our activities and the availability of adequate resources to achieve our research and development objectives. In addition to our specific scientific expertise, we believe that our ability to manage in a coordinated, flexible and responsive way to implement multi-disciplinary research and development programmes, integrating both internal research and subcontracting, gives us a significant competitive advantage.

As a result of our research and development expertise and our competitive position in innate immunity pharmacology, we plan to become a major player in the emerging field of anti-cancer immunotherapy. This strategy is based both on the development of our portfolio of developing products and on targeted acquisitions, of products or of companies, consistent with our scientific and clinical position. Our current financial situation allows us to finance our clinical development programme as far as the first effective data, which leads to the decision to carry out large scale studies aimed at the registration of one or more drug candidates. The market access strategy will be defined on a case-by-case basis, depending on the results obtained, on the means to be implemented for obtaining marketing authorisation and on marketing. The application of this strategy is based on agreements with partners in the pharmaceutical industry, especially for drug

109 candidates that require large investments. In order to allow the long-term evolution of our Company into an integrated biopharmaceutical company, we are looking to retain marketing rights for some of our products. Our long-standing strategic partnership with Novo Nordisk A/S demonstrates our ability to generate and manage major agreements with partners in the pharmaceutical industry.

The following diagram shows the state of progression of our product portfolio development:

6.2 STRATEGY AND STRENGTHS

6.2.1 Our Strategy

Based on our research and development expertise and our competitive position in innate immunity pharmacology, we plan to become a major player in the emerging field of anti-cancer immunotherapy.

The key elements of our strategy are as follows:

Research and development strategy

• Continue and expand the clinical development of our IPH 1101 drug candidate for metastatic renal cell carcinoma (mRCC) and in other cancer research indications until the demonstration of product efficacy, and, if necessary, until one or more marketing authorisations are obtained and marketing begins;

• Within the scope of our structured relationship with Novo Nordisk A/S, support the clinical development in onco- hematology of the IPH 2101 (NN 1975) drug candidate and identify new drug candidates, including IPH 22XX and IPH 23XX, that Novo Nordisk A/S could progress into clinical development in the near future;

• Initiate the clinical development of our IPH 31XX drug candidate, which targets the TLR3 receptor in breast cancer and, in parallel, gain acceptance of this product’s use in other solid tumour indications; and

• Initiate exploratory clinical trials to demonstrate the efficacy of our drug candidates (IPH 1101 and IPH 12XX) targeting the γ9δ2 T lymphocytes in indications outside of oncology, particularly in infectious diseases.

Other strategy elements

• In oncology, depending on the resources needed for reaching the various targeted market segments, enter into new strategic partnerships with companies in the pharmaceutical industry with the aim of marketing our drug candidates, while insofar as possible, retaining commercial rights;

• Outside of oncology, initiate new strategic collaborations with partners in the pharmaceutical industry for developing and marketing our drug candidates;

• Reinforce our competitive position by strengthening our intellectual property portfolio by filing new patent applications and by acquiring licences, especially through our collaborative research agreements; and 110

• Enlarge our product portfolio by acquiring the rights to new products in the field of anti-cancer immunotherapy or by acquiring companies that present scientific, industrial and commercial synergies with our activities.

6.2.2 Strengths

The major strengths of our Company are as follows:

• we are one of the first companies active in the recent and expanding field of innate immunity pharmacology, which represents a major technological change and could open significant prospects in the treatment of cancer, as well as in the treatment of infectious diseases and chronic inflammatory pathologies;

• we have adopted a biopharmaceutical business model with a high potential for creating value based on developing “first- in-class” proprietary drug candidates; i.e., making use of new mechanisms of action;

• our strategy is primarily to target cancer, a field with significant unsatisfied medical needs in which therapeutic innovations lead strong market growth, while complementing established treatments at price levels commensurate with their therapeutic benefit;

• we have several drug candidates with significant sales potential in the rapidly growing market sector of anti-cancer immunotherapy, with possible developments in indications outside the cancer research field;

• we have a rich and evenly distributed product portfolio centred on three product platforms, allowing a balance of development risks and the creation of valuable strategic partnership opportunities, each platform having the additional advantage of indirect and effective validation elements;

• there is high visibility for future value creating stages, especially with Phase II trial results expected by late 2007 for IPH 1101 and an intensified clinical development programme in 2006;

• we have a structured strategic partnership with Novo Nordisk A/S, offering us both a validation of our therapeutic approach by a major pharmaceutical company and complementary resources to bring some of our products to the market;

• we have a well-established ability to manage complex multi-disciplinary research and development programmes integrating internal research and subcontracting in a coordinated, flexible and responsive way;

• we have a strong intellectual property portfolio built by our internal research effort and through a worldwide network of scientific collaboration involving laboratories and experts in our field;

• we have a strong financial position, compared with European biopharmaceutical companies with a comparable maturity and stage of development, allowing us to dedicate future financial resources to accelerating development programmes and to enlarging the product portfolio;

• we have a well-established ability to negotiate and generate strategic industrial and commercial agreements, both through outsourcing and asset transfer (the agreement with Novo Nordisk A/S) as well as through insourcing or asset acquisition;

• we benefit from the continuous involvement and support of top tier international specialist private investors comprising European, American and Japanese financial or industrial investors; and

• we have a highly qualified, experienced and complementary management team, bringing together all the skills needed to reach strategic objectives.

111 6.3 PRESENTATION OF OUR COMPANY

6.3.1 Scientific Bases of Our Company

Our products are active in innate immunity cells, some of which can then be activated to destroy tumour cells or cells infected by viruses. The activation of innate immunity also plays a key role in regulating immune responses, particularly in implementing an immune memory and in controlling the tolerance of potentially pathogenic elements. This is particularly important in the case of cancer, which the immune system is not able to control because as it becomes tolerant to a tumour, the tumour is no longer recognised as a foreign element.

In the 1990s, a number of scientific breakthroughs made it possible to describe the activation mechanisms of innate immunity cell populations at the molecular level:

– The discovery of the natural cytotoxicity receptors (NK activating receptors) by the Alessandro and Lorenzo Moretta group from the University of Genoa in Italy (Alessandro Moretta is one of our Company’s founders) (1-3) (see Section 6.5.2 of this Document de Base);

– The characterisation of the inhibition mechanisms of NK cell activation (4-5), thereby giving a molecular base to the “missing self” hypothesis as formulated by Klas Karre (6) (see Section 6.5.2 of this Document de Base);

– The discovery by Marc Bonneville and Jean-Jacques Fournié of a new class of small synthetic molecules that are agonists of the Gamma 9 Delta 2 T lymphocytes (“γ9δ2 T”) (7) (Marc Bonneville and Jean-Jacques Fournié are two of our Company’s founders) (see Section 6.5.1 of this Document de Base); and

– The discovery of the Toll receptor family (TLR) by Jules Hoffman (8) (CNRS Strasbourg), Bruce Beutler (SCRIPPS United States) (9) and Ruslan Medzhitov and Charles Janeway from Yale University (10) (United States) (see Section 6.5.3 of this Document de Base).

These scientific breakthroughs have led the way to developing new drug candidate classes. Historically, we primarily focused on non conventional lymphocytes (NK and “γ9δ2 T” cells), a field in which the scientific creators of our Company made a significant contribution, and more recently we started a programme targeting a TLR receptor.

In early 2002, the role played by γδ lymphocytes in preventing the occurrence of tumours induced by mutagenic agents was confirmed using an animal model (11). Our feasibility studies which began in April 2000 made it possible to confirm the anti-tumour activity of γ9δ2 T cells in various in vitro and in vivo models, then to select a drug candidate, IPH 1101, that specifically activates the γ9δ2 T lymphocytes to progress into clinical development in a cancer indication. The first doses were administered to humans in a cell therapy model in 2002 and then as an injectable drug in 2003. The cell therapy trial provided us with indirect preliminary clinical data to validate our approach (see Section 6.5.1.2.1 of this Document de Base).

A powerful demonstration of the anti-tumour effect of NK activation and of NK involvement in implementing a long-term protective anti-tumour response was provided using an animal model by David Raulet’s group (a member of our scientific board) in 2002 (12). A clear anti-tumour effect of the NK populations was shown in humans by Andrea Velardi (the University of Perugia, Italy, collaborating with us under our collaboration and research agreement), in situations of allogenic marrow grafts carried out in patients suffering from acute and chronic myeloid leukaemias (see Section 6.5.2.1 of this Document de Base). In these clinical trials, a major therapeutic effect (recovery of most patients confirmed by five years of monitoring), without any noticeable toxic effect, was attributed to NK cells. This was the first conclusive demonstration in humans of the efficacy of non conventional lymphocytes (13). These results gave us a very important validation in a clinical situation, our objective being to mimic the situation as observed in the case of a graft by the use of pharmacological agents targeting NKs. At the same time, we continued our research on immuno-modulators targeting NK lymphocytes, leading to our first collaborative research and licence agreement with Novo Nordisk A/S for the IPH 2101 (NN 1975) NK activator, which was signed in late 2003. This agreement was extended in 2006 to immuno-modulators specifically targeting NK cells, providing validation from a major worldwide player in the field of biopharmaceuticals (see Section 6.5.8.1 of this Document de Base).

In 2005, we started developing a product, IPH 31XX, targeting the TLR3 receptor. Validation for this product was provided by results obtained at the Gustave Roussy Institute in a retrospective analysis of 175 cases of female patients with breast cancer who had received treatment more than 20 years prior to the analysis in a random study with a molecule currently in the public domain, Poly(A:U). At the time of the clinical trial, the target receptor of Poly(A:U) was not identified, but was later shown to be the TLR3 receptor. Based on these results, the team at the Gustave Roussy Institute studied the expression of the receptor on tumour cells of patients treated with Poly(A:U) and revealed an over-expression of the receptor in approximately 10% of patients. By re-examining the previous clinical study in light of this new data, it was then shown that

112 the survival rate at 20 years of patients having a tumour expressing the TLR3 receptor and treated at that time with Poly(A:U) was considerably higher than that of patients having a tumour expressing the TLR3 receptor and who received the placebo. This led to the development of a treatment of the sub-population of patients expressing the TLR3 receptor by a poly(A:U) type molecule (see Section 6.5.3.2 of this Document de Base).

In cancer research, the objective of the first generation of our products is to offer consolidation or second line treatments able to complement existing treatments for indications that currently have no satisfactory therapeutic solution. In the future, we could develop immuno-modulators targeting innate immunity for use in other therapeutic fields (infectious diseases, auto- immune diseases, allergies).

The table below presents the innate immunity receptors and the drugs marketed or being developed by us and our competitors:

TLR Targets

Company Drug candidates Target Indications Status

3M Imiquimod (Aldara) TLR7 Genital herpes Marketed Pharmaceuticals

Imiquimod (Aldara) TLR7 Basal cell carcinoma Marketed

Imiquimod (Aldara) TLR7 Actinic keratosis Marketed

Resiquimod TLR7/8 Genital herpes Phase II trial

Anadys ANA245 (isatoribine) TLR7 Hepatitis C virus Phase II trial with Pharmaceuticals (“HCV”), Hepatitis B Novartis virus (“HBV”)

ANA975 (ANA245 oral HCV, HBV Phase II trial with pro-drug) Novartis

Coley CPG-7909 TLR9 Lung cancer Phase III trial with Pharmaceuticals Pfizer

CPG-7909 (Class B TLR9 Cutaneous T-cell Phase II trial CpG-ODN) lymphoma

CPG-7909 (in TLR9 NHL Phase I/II trial combination with Rituximab)

CPG-7909 TLR9 HBV (vaccine Phase II trial adjuvant)

CPG-10101 (Class C TLR9 HCV (IFN Phase I trial CpG-ODN) combination)

Dynavax ISS-1018 (Class B CpG- HBV (vaccine Phase II trial ODN) adjuvant)

ISS-1018 (covalent link Allergies to ambrosia Phase II trial to the allergen)

Idera Hyb 2055 (Imoxine) TLR9 Metastatic renal cell Phase II trial Pharmaceuticals (class C CpG-ODN) carcinoma (ex Hybridon)

HYB 2055 (vaccine TLR9 HIV Pre-clinical adjuvant)

Oligovax Oligonucleotide TLR9 Glioblastoma Phase II trial

113

Corixa (GSK) MPL (Lipid-A TLR4 HBV Marketed derivative) vaccine adjuvant

MPL vaccine adjuvant TLR4 Papilloma virus Phase III trial

MPL vaccine adjuvant TLR4 Genital herpes Phase III trial

MPL vaccine adjuvant TLR4 Cancers Phase I and II trials (therapeutic vaccines)

CRX-675 TLR4 Allergy Phase I trial

Vaxinnate Flagellin/antigen fusion TLR5 Flu, HIV Pre-clinical protein (vaccine)

Innate Pharma IPH 31XX TLR3 Breast cancer Pre-clinical

Non Conventional Lymphocyte Targets

Company Drug candidates Target Indication Status

Innate Pharma IPH 1101 TcRγ9δ2 mRCC Phase II

IPH 1101 TcRγ9δ2 NHL Phase I

IPH 2101 (NN 1975) KIR Leukaemia Pre-clinical (with Novo Nordisk)

Kirin KRN7000 Va24TcR Solid tumours Phase I

Innate Immune Antibodies NK-T Asthma Pre-clinical

6.3.2 From the Discovery of a Drug Candidate to its Registration

Our activities consist of discovering, characterising and developing drug candidates whose mechanism of action involves the modulation of the activity of innate immunity cells. While our scientific field and the activities of our Company are very specialised, the research and development process, from the discovery of a drug candidate to the registration of a new drug, comprises elements common to all companies in the biopharmaceutical field.

The initial research phase aims at identifying a drug candidate and characterising its pharmacological properties with a view for therapeutic use. These activities are closely related to our scientific position. The development phase targets an issue common to all drug candidates: the development objective is to determine the clinical efficacy and the safety in using the drug candidate and to ensure its pharmaceutical quality. All three aspects namely efficacy, safety and quality, are evaluated by regulatory agencies, first when permission to carry out clinical trials on humans is requested and then again at the marketing authorisation stage. The entire development process follows practices as codified by various texts and recommendations.

The development process comprises three types of activity:

1) Pre-clinical or non-clinical studies:

Pre-clinical and non-clinical studies consist of laboratory evaluation of the product’s potential efficacy and safety in use. The efficacy is evaluated in various cell culture models (in vitro studies) and in animal models (in vivo studies) with limitations inherent to the transposition of observations from one species to another. Immunology involves particular problems, as the receptors targeted by the products are generally very specific to each species being considered. Moreover, the biology of tumours also substantially differs from one species to another. The passage to clinical development depends on a fine appreciation of the risk incurred by patients compared to the expected therapeutic benefits. In this respect, the results of clinical studies, especially retrospective studies involving the mechanism of action of the drug candidate, can play a crucial role in the appreciation of the product’s efficacy.

The documentation of the drug candidate’s potential toxicity, the anticipated undesirable effects and the risks related to the use of the drug candidate are important parts of pre-clinical studies. Traditionally, the acute toxicity of the product is evaluated first, as observed for various doses in a single administration, followed by the evaluation of the toxic effects

114 associated with a repeated administration of the drug. These toxicology studies are complemented by specific studies in safety pharmacology that evaluate the possible effects the drug candidate has on certain physiological functions (nervous system, cardio-vascular system, respiratory system). The risks regarding carcinogenesis and reproduction alteration associated with a possible mutagenic effect of the product are also evaluated.

Finally, analytical methods must be developed to monitor the evolution of the drug candidate in the organism, to measure its concentrations in body fluids (bio-analytical method), to correlate the observed biological effects with the doses administered and to define the method of administering the product. The field of pharmacokinetic studies quantitatively describes the absorption, metabolism and elimination of the drug.

2) Clinical studies:

Clinical studies on humans are commonly conducted in three phases, which are typically sequential but can also overlap. In a Phase I clinical trial, the drug candidate is generally administered to determine its initial safety profile, to identify undesirable effects and to evaluate tolerance to the doses administered, its distribution and its metabolism. During a Phase II clinical trial, the drug candidate is studied in a limited patient population to determine preliminary efficacy and optimum dosage levels and to increase the accuracy of the tolerance profile. A Phase II trial generally comprises exploratory studies (a Phase IIa trial) primarily intended to define the dosage and to obtain the first efficacy data, sometimes using indirect biological markers of clinical efficacy (typically, in cancer research, markers correlated to tumour mass) and wider studies comprising a control group to confirm the activity of the product at the contemplated dosage (a Phase IIb trial). Phase III studies are large scale comparative trials intended to produce data demonstrating the relative efficacy and tolerance as required by the regulatory authorities. Phase IIb and Phase III studies aiming at registration are commonly referred to as “pivotal studies”.

The development cycle of a drug candidate is very long; typically, 8 to 12 years elapse between the characterisation of a product’s pharmacological activity and its marketing. It is to be noted that because the evolution of tumour pathologies may develop slowly, the patient monitoring time necessary to demonstrate therapeutic benefit can be significantly longer than for other therapeutic fields. The investments involved increase as the process advances, while the risk remains high until the most advanced stages of development, particularly in cancer research.

3) Pharmaceutical development:

Pharmaceutical development aims to produce, on an industrial scale, a drug candidate that is precisely characterised at the chemical and physicochemical levels and has constant properties in order to ensure the pharmaceutical quality of the product. The production of a drug candidate comprises two steps: the production of an active molecule through chemical synthesis or by biological means (the “active pharmaceutical ingredient”), followed by formulation and presentation in a form adapted for human administration. For each important stage in the production of the drug candidate, its specifications are defined, in particular relating to the required purity level. One of the central aspects of pharmaceutical development associated with the implementation of a robust and reproducible method is the development of analytical methods used to characterise the product and to control compliance with the specifications (quality control). During the pre-clinical and clinical development of the drug candidate, the product specifications vary, particularly contingent on regulatory requirements regarding the purity of the active ingredient and modifications to the scale of industrial production.

Currently, our activity focuses on the initial stages of the research and development process: research, pre-clinical development and exploratory clinical studies up to and including a Phase IIa trial and the corresponding pharmaceutical development. In order to carry out these complex and multidisciplinary operations, we have implemented the appropriate organisational and management procedures and brought together the know-how and expertise that we consider indispensable, or which we believe provide us a competitive advantage given that most research and development takes place through subcontracting agreements.

115 6.3.3 Organisation and Management of Research and Development

Our research and development and pharmaceutical operations are managed in a matrix organisation and in accordance with the procedures defined in our quality system, which was granted ISO 9001:2000 certification in 2005 (see Section 6.5.7 of this Document de Base).

Our research and development activities are organised in programmes corresponding both to a drug candidate or a family of drug candidates targeting a given cell receptor and to an indication or a group of related clinical indications. Each programme is under the control of a programme head and makes use of skills from various research and development groups defined by branch (e.g., cell immunology, chemistry, protein chemistry). The resources from the different research and development groups involved in a programme are defined case by case and are subject to regular evaluation and reallocation, generally on a three-month basis. Successive phases are distinguished in the progress of a programme, defined in reference to stages M0 to M3. The stage following stage M3 is the first marketing authorisation.

– M0: initial definition of a programme;

– M1: selection of a drug candidate and of an indication;

– M2: first administration to humans; and

– M3: first clinical efficacy data in humans (proof of the concept).

These stages correspond to a set of prerequisites that we determined on the basis of standard industry practice particularly for the early stages (M0 and M1) and on regulatory validation steps for the subsequent stages (M2 and M3). The decision that a development stage has been reached, with the resulting phase modification, is made by our executive committee, which carries out periodic reviews of the programmes and distributes resources accordingly. The different programme phases result from different economic and management rationales.

Before M0: this is the “exploratory research” phase when there is no defined programme but a set of possible projects identified by us or through an external opportunity. The objectives are to build a scientific rationale for pharmacological intervention on a molecular or cellular target in an indication group and to create or strengthen intellectual property elements. Projects in the exploratory research phase can lead to the implementation of a research and development programme when the prerequisites of stage M0 are achieved (validation of the contemplated molecular or cellular target and intellectual property). A programme number is attributed when stage M0 is reached, and drug candidates belonging to this programme are then referred to as IPH[programme number]XX.

Between M0 and M1: the research programme is in the “feasibility/validation” phase. This phase aims to characterise a drug candidate and demonstrate its efficacy through pre-clinical studies in cellular or animal models. From an economic and organisational point of view, the passage to stage M1 is an essential step and a notable advancement for the programme because the beginning of pharmaceutical development represents a very significant portion of research and development costs. When stage M1 is reached, we change the product designation by attributing an order number to each drug candidate (e.g., IPH 21XX corresponds to a set of pre-M1 drug candidates and IPH 2101 (NN 1975) to a drug candidate having reached M1).

Between M1 and M2: the programme is in the “pre-clinical development” phase. In the pre-clinical phase, the drug candidate is defined and studies are carried out according to a regulatory reference system. For pharmaceutical development aspects, this consists of, more precisely, the implementation of a production method, the production of pilot industrial batches, the definition of temporary product specifications and the setting-up of analytical controls. Concurrently, the non-clinical studies in pharmacology, toxicology and pharmacokinetics required for the file presented to the regulatory agencies during the start of clinical trials are carried out. This phase of the programme largely involves subcontractors. It is to be noted that pre- clinical studies and pharmaceutical development studies continue throughout the programme, depending, in particular, on regulatory requirements and any changes in the scale of industrial production of the drug candidate. The production method must be defined at the start of the Phase IIb/III pivotal studies.

Between M2 and M3: the programme is in the phase of “clinical development aimed at proving the concept”. The first administration to humans, which is stage M2, is subject to authorisation by the competent regulatory authorities. Stage M3 corresponds to the end of one or more Phase IIa studies. A summary of the results is generally submitted to the regulatory authorities at the end of the Phase II trial.

After reaching stage M3, a decision is made whether to continue development with large scale studies aimed at obtaining a marketing authorisation (Phase IIb and Phase III trials) and whether to continue studies with our own resources or through a strategic partnership, which permits the sharing of costs by sharing the commercial rights if the programme is successful. 116

6.3.4 Expertise and Know-how of Our Company

6.3.4.1 Research Activities (pre-M1)

The starting point for our research is mainly external to our Company. To build our drug candidate portfolio, we acquired patent rights mainly from academic research: these are patents for active molecules, therapeutic methods or ensuring some exclusivity for the exploitation of drug candidates targeting a given receptor expressed by innate immunity cells. In order to acquire commercial rights from research institutions, we must maintain a high level of expertise and recognition in the scientific community, so that we are viewed as a legitimate and reliable business with the ability to continue development for laboratories working in the field of innate immunity. Our specialisation plays a predominant role and ensures our visibility. The involvement of our founders who are scientists and who have made very significant contributions to the progress in our field is another key element.

We focus our research resources on the high value-added stage, between stages M0 and M1, and do not carry out the high risk stage of initial identification of drug candidates ourselves, but rather by collaborating with third parties who have a command of the technologies involved. Therefore, we do not have in-house technologies for the discovery of drug candidates targeting a given receptor. We depend on third parties for generating humanised or human antibodies and for undertaking large scale programmes for high throughput screening or for medical chemistry to obtain an optimum drug candidate through chemical synthesis. For example, our partner Novo Nordisk A/S gave us access to antibody engineering technologies required for developing an optimum drug candidate (IPH 2101 (NN 1975)), starting with the receptor which was the result of our first collaboration.

Our added value in research lies within the characterisation stage of the pharmacological activity of a drug candidate and in the selection of the relevant indication for clinical development. This validation stage for a therapeutic concept requires in vitro and in vivo efficacy models, the ability to evaluate pharmacodynamic activity in the relevant animal models, and expertise in clinical biology permitting the design and realisation of retrospective studies in collaboration with hospital staffs.

6.3.4.2 Development

The questions raised during development are relatively standardised, but each development involves specific problems related to the mechanism of action of the drug candidate. These consist, in particular, of the implementation of pre-clinical pharmacology and toxicology methods in animal models. Our specialisation in immunopharmacology and in clinical immunology provides us with special expertise in the mechanisms of action common to all our products, which is an important asset for this part of the development.

In addition to those questions relevant to the mechanism of action of our products, we must monitor the development carried out by subcontractors. Analytical and bio-analytical methods are initially developed in our laboratories before being transferred to third parties who generate data by methods in accordance with the regulatory requirements relating to these activities (“Good Laboratory Practices” or “GLP”). Similarly, we conduct in-house preliminary studies to implement methods for the production and formulation of the active ingredient.

Our expertise lies primarily in immunopharmacology and in cellular immunology. We have established in our laboratories the tools and skills required for implementing this special expertise (cell culture laboratories, generation of non-standard animal models, flow cytometry, etc.). Approximately half of our research and development staff specialises in immunology. The other half specialises in the various branches involved in development: chemistry and analytical chemistry, protein chemistry, bio-analytical and pharmacokinetic methodology, pharmaco-toxicology. For some fields (chemistry of phosphorylated compounds, dosage tests through immuno-analysis, freeze-drying technologies), we believe we possess a specific expertise which gives us a competitive advantage beyond our main field of expertise.

We conduct clinical studies and currently act as the trial promoter. As such, we established a dedicated organisation ensuring that the design of clinical trials and the conditions of their implementation are in accordance with the “Good Clinical Practices” or “GCP” defined by regulation. The biological follow-up of the trials (“immuno-monitoring”) is essential for extracting the relevant biological information and evaluating the activity of our drug candidates in patients on the basis of immunological markers. This aspect is part of our expertise in clinical immunology. We are involved in the definition of measured parameters and the implementation of tests, particularly cytometry tests. The production of data is then usually transferred to third parties.

117 6.3.5 Subcontracting

We have adopted a flexible model in which a significant part of our activity is subcontracted, in particular after passing stage M1. All of our main suppliers are selected and monitored pursuant to procedures set out in our ISO 9001:2000 certified quality system. Our suppliers and subcontractors are subject to regular audits conducted by our quality guarantee department.

Our company does not currently have the status of “Pharmaceutical Company” and therefore we are not authorised to approve the administration of a set of drug candidates to humans. Moreover, we do not have our own industrial production ability. All the production and distribution operations of the drug candidates required for clinical studies are performed by subcontractors in compliance with the regulatory requirements in the field (“Good Manufacturing Practices” or “GMP”). Monitoring such operations is undertaken by our pharmaceutical operations department. In the future, we may contemplate acquiring the status of “Pharmaceutical Company”.

In view of the regulatory requirements concerning the implementation of studies in compliance with GLP, a major part of our pre-clinical development is carried out by specialised service companies working in compliance with these requirements. These are, in particular, regulatory studies in relation to toxicology, pharmacology safety and pharmaco-kinetic studies. As previously stated, the methods used are frequently developed in our laboratories before being transferred to the service provider.

For our clinical development, we subcontract certain tasks such as the treatment of clinical data, bio-statistics and drug monitoring. The decision to use a specialised service provider to monitor the trials is dependent on the size, complexity and geography of the trial being considered. For example, we monitored one of our two first Phase I trials internally but subcontracted the monitoring of our first multicentric and international Phase II trial to a specialised external provider.

A particular aspect of subcontracting is the involvement of specialised external consultants. For each programme, we establish a group of scientific, medical and technical-regulatory experts who collaborate with us on all aspects of development. These experts participate in drafting the development plan and provide us with important external validations of the results obtained, especially at stages M0 and M1 and when we must submit files to regulatory agencies. In addition, we are advised by a consultant specialised in U.S. regulations for matters involving the United States Food and Drug Administration (“FDA”).

6.4 INDUSTRIAL AND SCIENTIFIC CONTEXT

Cancer consists of a group of related diseases, characterised by the uncontrolled proliferation of abnormal cells. Cancer is caused or advanced by internal factors (immune conditions, hormones, acquired mutations, etc.) and by external factors (tobacco, irradiation, chemicals, viruses, etc.). Cancer cells accumulate locally, creating tumours, and are able to diffuse throughout the entire organism (known as “metastases”). Proliferating tumours are able to destroy healthy tissues and organs, which potentially can lead to fatal results. The treatment of cancer is characterised by a major medical need for new therapies, as conventional treatments generally do not allow for recovery and their benefits are often limited by side effects.

6.4.1 Cancer Epidemiology

The unmet medical needs in oncology are immense. The estimated number of new cancer cases (“incidence”) is approximately 10 million per year throughout the world, of which approximately half are in Asia, a little more than one- quarter in Europe and approximately 15% in North America (source: World Health Organisation “WHO”, 2003).

Cancer causes more than 6 million deaths throughout the world per year and is the second cause of death in developed countries, after cardiovascular diseases. As cancer is a slowly progressing disease, the total number of individuals living with a cancer (prevalence) significantly exceeds the number of patients diagnosed with cancer in a given year.

The medical needs related to cancer increase with the aging of a population. According to the American Cancer Society in 2005, 76% of people with cancer in the United States were older than 55 at the time of diagnosis. In their 2003 report on cancer, WHO estimated that the occurrence of cancer could increase by 50% to 15 million cases per year by 2020.

118 The following table summarises the estimated number of new cases for certain types of cancer and the associated death rate in the United States during 2005:

Estimated number of cancer cases in

the United States in 2005 Death due to

New cancer cases cancer

Type of cancer Lung and bronchus (men and women)...... 172,570 163,510 Colon and rectum (men and women)...... 145,290 56,290 Breast (women)...... 211,240 40,410 Pancreas (men and women) ...... 32,180 32,030 Prostate (men)...... 232,090 30,350 Leukaemia (men and women)...... 34,810 22,570 Lymphoma (men and women)...... 63,740 20,610 Kidney (men and women)...... 36,160 12,660 Multiple myeloma (men and women)...... 15,980 11,300 Others (men and women)...... 428,850 180,550

Total...... 1,372,910 570,280

Source : American Cancer Society, 2005.

Based on the 2005 data from the American Cancer Society, lung and bronchus cancer is the most frequent fatal cancer for men, accounting for approximately 32% of deaths, followed by prostate cancer (10%), colon cancer (10%) and kidney cancer (3%). For women, lung and bronchus cancer is also the most frequent fatal cancer, representing approximately 25% of deaths per year, followed by breast cancer (15%) and by colon cancer (10%). For both men and women, leukaemia and lymphoma account for approximately 8% of deaths caused by cancer.

6.4.2 Market Data

Worldwide pharmaceutical market

The worldwide pharmaceutical market is estimated at 518 billion U.S. dollars in 2004, representing a 9.0% increase compared to 2003 with a constant U.S. dollar (source: IMS Health, 2005). The following table sets forth the geographical distribution of the market:

Market in 2004 in Growth % value (billions of U.S. % of the total compared to Geographical area dollars) market 2003

North America ...... 248 48% +7.8% European Union...... 144 28% +5.7% Rest of Europe ...... 9 2% +12.4% Japan ...... 58 11% +1.5% Asia, Africa and Australia ...... 40 8% +13.0% Latin America ...... 19 3% +13.4% Worldwide market...... 518 100% +9.0% Source : IMS Health, 2005.

Market growth is driven by the Chinese market (9.5 billion U.S. dollars in 2004, increasing 29.0% compared to 2003), by generic drugs, which already account for 8% of combined sales in the European Union and the United States (source: IMS Health, 2005), and by cancer therapeutics.

The biopharmaceutical industry accounts for 27% of the industry pipeline and 10% of worldwide drug sales (source: IMS Health, 2005).

It is estimated that the number of drugs with annual sales that exceed one billion U.S. dollars, the “blockbusters”, increased from 65 to 82 between 2003 and 2004, among which 11 come from the biopharmaceutical industry (source: IMS Health, 2005).

The growth of the world market is expected to continue at an average annual rate of 6 to 9% between 2006 and 2009 (source: IMS Health, 2005). 119

Worldwide market for anti-cancer treatments

The worldwide market for anti-cancer treatments has been dominated historically by cardiovascular treatments and treatments of the central nervous system. Cancer treatment, representing 20 billion U.S. dollars in 2004 value (source: Datamonitor, 2004), currently accounts for 40% of the development pipeline of the industry (source: IMS Health, 2005) and is expected to develop rapidly, reaching 40 billion U.S. dollars in 2008, representing an average annual growth of 19% between 2004 and 2008, which is higher than the average annual growth of the worldwide drug market.

This growth is fuelled by an increase in volume, resulting from an increase in the number of people with cancer as well as the introduction of new products. Moreover, the numerous therapeutic innovations introduced have resulted in an increase in the costs of treatment.

According to the Pharmaceutical Research and Manufacturers of America (PhRMA), approximately 400 drug candidates for oncology indications were in development in the United States in 2005. Additionally, approximately 20% of the products approved by the FDA since 2003 have been oncology products (source: Centerwatch, 2006).

The worldwide market for anti-cancer treatments has been dominated historically in terms of value by the cytotoxic agents (chemotherapy) and hormone treatments, but their respective market shares are tending to decrease. Anti-cancer immunotherapy, a recent sector whose sales we estimate at 3 billion U.S. dollars in 2004, is expected to experience strong growth with improving knowledge of tumour biology allowing targeted therapy approaches to emerge. This increase will occur (i) in volume, particularly through the introduction of new treatments that are gradually being used in addition to the well-established therapies and often in connection with them, and (ii) in price, because of a favourable risk/benefit ratio for the patients. It should be noted that in 2004, 7 out of the 11 blockbusters developed by the biopharmaceutical industry were anti-cancer drugs, such as, rituximab, a monoclonal antibody that was the largest anti-cancer product in the United States in terms of market.

Approximately 70% of anti-cancer drug candidates in clinical development are immunotherapy products (the remainder are conventional agents, primarily, the reformulation of existing cytotoxic agents). Such developments could bring the market for anti-cancer immunotherapy to 7 billion U.S. dollars by 2008 (source: Decision Resources, 2003), representing an average annual growth of approximately 24%.

Our target market is in immunotherapy, immuno-stimulation or immuno-modulation. This is an emerging market. It could follow the growth of the immunotherapy market and already relates to approximately 40% of the identified clinical potential of innovative immuno-therapeutic agents (source: Decision Resources, 2003).

6.5 OUR THERAPEUTIC APPROACH

The objective of an effective anti-cancer treatment is the total removal of cancer cells from the original tumour site and from sites where they have metastasised. Different types of cancer can be brought into remission (clinical symptoms of the disease are no longer observed) through standard treatments such as surgery, chemotherapy, radiotherapy and hormonotherapy. Radiotherapy and chemotherapy are toxic treatments that affect not only cancer cells, but also healthy cells, and cause a degradation of the immune system and severe side-effects in the rapidly dividing tissues, such as blood cells and digestive tract cells. A high proportion of cancer is recurrent because microscopic deposits of tumour cells may remain undetectable or tumour growth may resume (residual disease). In addition, a large number of tumours are inoperable or resist chemotherapy at the beginning of the treatment or after prolonged administration (escape).

The principal positioning considered for immunotherapy in therapeutic strategies is twofold:

– consolidation treatment to control the residual disease after the first line of conventional treatment has led to a remission; and

– second or third line treatment in case the first or second line treatment was unsuccessful.

In oncology, effective new products do not generally substitute existing products, but are used as part of a therapeutic strategy involving a combination of products, administered either sequentially or simultaneously. For this reason, promising positioning approaches are also contemplated with immunotherapy approaches and in combination with existing therapies (chemotherapies, radiotherapies, etc.) in adjuvant treatments or neo-adjuvant treatments.

120 Anti-cancer immunotherapy products belong to several therapeutic classes:

– The cytotoxic monoclonal antibodies represent an important contribution to immunotherapy in oncology and are now part of the therapeutic arsenal established for the treatment of some cancers. Such products are effective, especially in association with conventional agents, and are generally well tolerated. The marketing of rituximab was the start of a new era in the treatment of non-Hodgkin’s lymphoma and is the first blockbuster in this area. Such products, nevertheless, have limitations, particularly antibodies targeting tumour antigens in the distribution of the expression of these molecules: only tumours expressing the tumour antigen can be treated and the loss of expression of this antigen during the progress of the disease could make the treatment ineffective;

– Cytokines (IL-2, Interferons) are systemic immuno-modulators that demonstrate some efficacy in restricted indications; however, their use is limited by toxicity problems. These products have quite a large effect on the cells of the adaptative and innate immune system. Because of the short life of these products in the organism, relatively high doses, close to the tolerated limits, must be administered to attain a concentration of the drug that is sufficient for obtaining the desired activity. Interferons are commonly used for treating certain hematological tumours and IL-2 is marketed for the treatment of melanoma and metastatic renal cell cancer;

– Numerous therapeutic vaccines are under development, following the discovery of antigens specifically expressed by tumour cells. This approach aims to implement a long-lasting protective cellular immune response that should interfere with adaptative immunity and the immunological memory. Cellular adjuvants, such as preparations of dendritic cells, are also being developed in order to improve the efficacy of these vaccines by stimulating an immune response and then directing this response toward the generation of cytotoxic effector cells by the tumour. These promising approaches are, however, limited by the difficulties associated with the immunological escape of tumours and their antigenic variability, as well as by the lack of a pharmacological definition of the adjuvants. Significant progress is expected in these various approaches. To our knowledge, there is currently no therapeutic vaccine being marketed. It is to be noted that a “conventional” vaccine, BCG, is used as a reference treatment in superficial bladder cancers. However, the mechanism of action of BCG is only partially known and appears to predominantly involve the mobilisation of innate immunity, particularly of non conventional γδ lymphocytes; and

– Ex vivo cell therapy by effector cells aims to force a cytotoxic response towards the tumour by administering the patient’s own cells after an ex vivo amplification or activation step. These methods are difficult to implement and to standardise, and, to our knowledge, there is no product marketed either in Europe or the United States. Encouraging results have, however, been obtained, especially in melanoma.

The first drug candidates developed by us are specific immuno-modulators, following the example of Imiquimod (a product marketed by 3M Pharmaceuticals) or oligonucleotides of the CPG type (developed by Coley Pharmaceuticals and currently in Phase III clinical trial). These products aim to activate a functionally specific cell population, with a higher action specificity than that of cytokines.

Our products have certain advantages resulting from their mechanisms of action :

– The non conventional lymphocyte populations can exert a cytotoxic activity on several tumour types. For each product, the efficacy spectrum should be established, but it should theoretically comprise both solid tumours and haematopoietic origin tumours. Our drug candidates are likely to undergo development in various cancer research indications. For example, our most advanced product, IPH 1101, is currently in clinical trials for metastatic renal cell carcinoma but also for one form of lymphoma.

– We expect good patient tolerance of the treatment, based on the pre-clinical and clinical data and the demonstrated lack of reactivity of innate immunity cells against the organism’s normal cells that could lead to side-effects of the auto-immune type (lack of auto-reactivity).

– Agents activating non conventional lymphocytes could be associated with other therapeutic agents, particularly with monoclonal antibodies, which could increase the effect by stimulating the antibody dependant cell cytotoxicity.

– At advanced stages, some tumours, such as melanoma, escape control by adaptative immunity cells because of the expression loss of the molecules of the major histocompatibility complex (“MHC”). However, such advanced tumours could still remain susceptible to the cytotoxic action of non conventional lymphocytes, which are active against targets that do not express any MHC molecule. There is, in this respect, some complementarity between the cytotoxic action of the effector cells of the adaptative immunity and that of non conventional lymphocytes.

121

We believe we could benefit from our intellectual property portfolio and our unique scientific positioning, particularly in the field of the pharmacology of non conventional lymphocytes (NK cells and γδ), to gain significant competitive advantages for demonstrating the potential therapeutic benefit of products targeting innate immunity cells. Such a direct demonstration depends on our ability to identify drug candidates with features suitable for clinical use, and on our ability to continue clinical development until we have data on efficacy in cancer pathologies.

6.5.1 Immuno-modulation of Gamma Delta T Cells or “γδT”

6.5.1.1 Scientific Principle

The therapeutic principle of the γδ platform is to activate specifically a sub-population of immune cells (γ9δ2 T lymphocytes) that can exhibit anti-tumour and anti-infectious activity. We have a family of proprietary cells comprising IPH 1101 and the IPH 12XX drug candidate group, which can stimulate in vivo the cytotoxic properties of these cells towards infected cancerous cells by targeting the receptor for the antigen (γ9δ2 TcR). This product family could potentially be used in numerous cancer or infectious disease pathologies. We have decided to develop IPH 1101 first in oncology (kidney cancer and lymphoma) and anticipate commencing a clinical trial outside oncology in 2007.

The γ9δ2 T lymphocytes are a subpopulation of non conventional T cells accounting for between 0.5% and 5% of peripheral T cells. This subpopulation, like NK cells, belongs to the innate immunity effectors which react rapidly towards pathogens, including certain bacteria (mycobacteria), and participate in anti-cancer and infectious immunomonitoring. The recognition of infectious agents and cancer cells is imparted by the major activating receptor of these cells, by the γ9δ2 TcR receptor and by certain other activating receptors. The γ9δ2 T lymphocytes detect metabolic alterations of the target cell related to the infection or the malignant transformation process. Thus, in the case of infections by certain mycobacteria or parasites (tuberculosis, plague, malaria, etc.), the γ9δ2 TcR receptor recognises with a high affinity metabolic intermediaries of a sterol synthesis route specific to these microorganisms (14). In mammalian cells, the alteration of a biosynthesis route linked to the malignant transformation or to a viral infection (mevalonate route) leads to an accumulation of metabolic intermediaries recognised by the γ9δ2 TcR receptor. Interestingly, certain drugs, such as the biphosphonates interfering with this biosynthesis route, sensitise cancer cells to the action of the γ9δ2 Ts (15), opening the possibility of synergic combinations of γ9δ2 T direct activators with these pharmacological agents. In general, non conventional lymphocytes recognise cells subjected to stress.

The recognition of infected or tumour cells has two major effects. The γ9δ2 T cells are directly cytotoxic towards such cells and take part in their destruction. In addition, the involvement of the γ9δ2 TcR receptor induces the production of pro- inflammatory mediators, including cytokines of the TNFα and IFNγ type, as well as chemokines (16). Such soluble mediators allow recruiting in an environment of activated γ9δ2 T cells of other effector cells of the innate immune system, including NK cells that also have cytotoxic abilities towards tumour or infected cells. The local production of pro- inflammatory mediators leads to the mobilisation and activation of antigen-presenting dendritic cells, which conducts the initiation of an adaptative response implying antibody-producing B cells and cytotoxic conventional T lymphocytes. Direct cellular interactions between γ9δ2 T cells and dendritic cells are also part of this phenomenon (17). This triggering of an efficient immune response is particularly important for cancer, in which cancer cells, often close to normal cells, are sometimes “ignored” by the immune system.

The mechanism of action of therapeutic monoclonal antibodies of the rituximab type involves cell effectors in the first rank, including NK cells that can be indirectly recruited and activated by the involvement of γ9δ2 T. Consequently, the mechanism of action of compounds targeting the γ9δ2 T permits us to consider associations with antibodies in order to stimulate the anti- tumour activity of cytotoxic antibodies.

All tumours are not recognised by the γ9δ2 T cells, but numerous experimental data have shown that the γ9δ2 T cells, specifically after stimulation by products of the IPH 1101 type, were able to kill a wide variety of cancer cells from various origins: lymphoma and leukaemia B or T cells, or myeloid (18, 19), breast carcinoma (20), glioblastoma (21), renal carcinoma (22), nasopharyngeal carcinoma (23), or lung adenocarcinoma (24). In some cases, this activity has been demonstrated in an autologous context (i.e., a patient’s cancer cells have their own activated γ9δ2 T cells). These complex experiments are the most representative of the expected therapeutic effect (25, 26).

An indirect and preliminary demonstration of the anti-tumour activity of γ9δ2 T cells was obtained in clinical trials with humans during treatments using pharmacological agents in the amino-biphosphonate family, administered in association with low doses of IL-2 for certain hematologic diseases such as the multiple myeloma and the non-Hodgkin’s lymphoma (27). Drugs from the amino-biphosphonate family, which are marketed for other therapeutic applications, are weak activators of the γ9δ2 Ts, increasing the sensitivity of tumour cells to the cytotoxic action of γ9δ2 Ts. Another indirect indication of the 122 anti-tumour efficacy of γ9δ2 T lymphocytes is provided by observations from trials carried out in superficial bladder cancer. The reference treatment of such pathology comprises the intra-vesical administration of BCG, whose clinical efficiency is proven. In patients treated with BCG, a high frequency of γ9δ2 T lymphocytes in cancer lesions is observed, in correlation with tumour regression.

When γ9δ2 T lymphocytes are activated by compounds targeting the γ9δ2 TcR receptor, such cells become able to proliferate in the presence of lymphocyte growth factors such as IL-2. An amplification of the γ9δ2 T population is observed in vivo by administering low doses of IL-2 in association with activator compounds of the IPH 1101 or IPH 12XX type, and the cytotoxic abilities of γ9δ2 T cells are increased when these are exposed to IL-2 (16). These elements have led us to consider the development of IPH 1101 in oncology in association with IL-2 at low dosage, to most efficiently amplify the anti-tumour activity of γ9δ2 T lymphocytes.

In addition to cancer research indications, the biological properties of γ9δ2 T cells have led us to consider clinical developments in infectious diseases. We could therefore take advantage of the ability of γ9δ2 Ts both to kill cells infected by viruses and to release soluble mediators, in particular interferons and chemokines, which play an important part in anti- infectious immunity. The production of gamma interferon by activated γ9δ2 Ts is particularly important for using γ9δ2 T activators in viral diseases. The first indication that could be developed is the viral hepatitis of type C (28), whose reference treatment makes use of immuno-modulators of the ß-interferon family.

Besides the direct use of γ9δ2 T activators as an anti-tumour or anti-infectious agent, we could consider developing such compounds as vaccine adjuvants, administered in conjunction with an antigenic preparation to stimulate the immune response against these antigens and to orientate the response towards the generation of cytotoxic cells, which is a particularly important consideration for the efficacy of future vaccines. The collaboration between γ9δ2 T cells and the antigen- presenting cells involved in the initial steps of the adaptative immune response specific to an antigen (17) is the basis for the rationale for exploring this type of application both in cancer research (therapeutic vaccines) and for infectious diseases (therapeutic or prophylactic vaccines). We are conducting studies to identify the behaviour of our γ9δ2 T activators as vaccine adjuvants, especially in a model indication for tuberculosis, where the direct involvement of γ9δ2 T lymphocytes has been demonstrated. It should be noted that the vaccine adjuvants meet highly specific safety requirements, particularly if prophylactic use is contemplated.

Certain observations suggest that γ9δ2 T lymphocytes could be involved in chronic inflammatory lung pathologies, such as allergic asthma and chronic obstructive pulmonary diseases, which include emphysema and chronic bronchitis. Allergic asthma is a chronic inflammatory disease characterised by an inflammation of the air tracts and bronchial hyperreactivity. In allergic asthma, the mucosal inflammation results from the exacerbation and maintaining of an immune response of the TH2 type. The activation of γ9δ2 T lymphocytes induces the secretion of cytokines of the TH1 type, and more particularly, of IFNγ which is a potent inhibitor of TH2 responses. Paradoxically, in the case of these pulmonary diseases, the usually pro- inflammatory activation of γ9δ2 T lymphocytes could be used advantageously to react with the immunological component of the physiopathological process by re-establishing the regulation of the immune response to reduce the chronic inflammation (29)(30). It has also been observed in animal models that the γδ lymphocytes present in bronchi produced growth factors that could be involved in rebuilding the damaged bronchial tissue (31). This observation is correlated with other work demonstrating the involvement of bronchial intra-epithelial γδ T cells in chronic obstructive pulmonary diseases (32).

123 6.5.1.2 Products

6.5.1.2.1 IPH 1101

Principle

IPH 1101 is an agonist of non conventional γ9δ2 T lymphocytes, obtained through chemical synthesis. It is a structural analogue of non conventional antigens of the bacterial phospo-antigen group, characterised in mycobacterial extracts as natural activators of the γ9δ2 T lymphocytes (33).

IPH 1101 belongs to a series of molecules with analogous structures that were synthesised in Jean-Jacques Fournié’s laboratory in Toulouse, which resulted in the filing of a patent by INSERM and CNRS. We acquired the commercial exploitation rights from those organisations and selected the molecule most adapted to pharmaceutical use from the chemical series. The IPH 1101 drug candidate appears under the name “Phosphostim” in certain scientific publications prior to 2006.

IPH 1101 activates populations of γ9δ2 T non conventional lymphocytes in a very specific manner. The pharmacological activity of IPH 1101 involves the γ9δ2 TcR receptor. This is, as far as we know, the first example of a drug candidate activating a lymphocyte subpopulation by means of a receptor for the T cell antigen.

The γ9δ2 T cells activated by IPH 1101 have an increased cytotoxic activity towards tumour targets and produce pro- inflammatory cytokines inducing the recruitment of other cellular effectors, such as NK cells, and facilitate the presentation of antigens to the immune system and the implementation of an adaptative response. In combination with low doses of IL-2, IPH 1101 induces an increase in the number of γ9δ2 T cells activated at the periphery. Such amplification is not observed in the absence of IL-2, but IPH 1101 alone is sufficient to target a series of activation events (16).

The objective of the treatment using IPH 1101 is to specifically enhance the direct or indirect anti-tumour or anti-infectious action the γ9δ2 T lymphocytes naturally possess. IPH 1101 is active through intravenous administration. We developed the product in association with low doses of IL-2 administered subcutaneously. This administration method for the IPH 1101 represents a limitation for use in indications outside oncology.

Pre-clinical results

We developed the industrial method of production for the active ingredient IPH 1101 in collaboration with our subcontractor and partner, PCAS. To date, five batches of the active ingredient have been produced on a scale of several kilograms per batch and the method could now be considered as viable on an industrial scale. We have developed the analytical methods required for the characterisation of the active ingredient and have characterised the impurities present at the end of the synthesis. These different active ingredient batches supplied our first pre-clinical and clinical trials. In addition, Galenic studies have allowed the definition of a satisfactory formulation of the drug candidate in a lyophilised form. We specifically invested in technical studies of freeze-drying the active ingredient. Stability studies are under way, since the currently available data is satisfactory for conducting clinical trials.

The study plans of all the pre-clinical trials were subjected to validation by external experts and were discussed with the French and American regulatory authorities (the “pre-IND” meeting with the FDA and consulting meeting with the AFSSAPS in France). Although the opinions expressed during these meetings represent an important step in the validation of the development plan, they nevertheless do not commit the agencies formally and in no way predict opinions that could be formulated subsequently during the development.

In summary, the main results observed at the pre-clinical level are as follows:

Pharmacology

Preliminary in vitro pharmacological studies have shown the specificity of the IPH 1101 compound, which has not interacted with any of the tested receptors, with the exception of the receptor expressed by the γ9δ2 T lymphocytes (33). Moreover, in in vitro cell culture systems, IPH 1101 is active only on γ9δ2 T cells. When peripheral blood cells are brought into the presence of IPH 1101 and IL-2, a cell expansion of the single γ9δ2 T compartment could be observed in the absence of any sorting or separation procedure of the various cell types. These elements allow us to conclude the specificity of the pharmacological effect. The observed intensity of proliferation directly depends on the IPH 1101 concentration used in the experiment. In the absence of IL-2, IPH 1101 induces an activation of the γ9δ2 T cells characterised by the production and the release of pro-inflammatory cytokines, but without any proliferation of those cells being observed.

In animals, we observed a strong, reproducible pharmacodynamic effect, depending on the dose administered (16). The animals were administered intravenously various doses of IPH 1101, simultaneously with IL-2 subcutaneous administrations. 124 Under these conditions, an important transient increase of the circulating number of γ9δ2 Ts is observed, which returns to the basal level after 10 to 12 days. This effect was not obtained by the injection of IPH 1101 alone. These experiments made it possible to determine the maximum effect, the first effective dose (significant increase of the number of γ9δ2 T in the periphery) and the dose at which half the maximum effect is obtained. At the highest doses, amplifications could be reached in the peripheral blood greater than 200 times the basal circulating level in such cells. In addition, we demonstrated that the γ9δ2 T cells activated in vivo by the injection of IPH 1101 showed an increased cytotoxic activity compared to the non activated γ9δ2 T cells.

Finally, we carried out various in vitro and in vivo trials to characterise the anti-tumour activity of γ9δ2 T cells activated by IPH 1101. In one of these series of experiments (26), we tested the anti-tumour activity of patients’ cells compared with lines derived from their own tumour (“autologous system”). These experiments showed that the activated γ9δ2 T cells were able to kill autologous tumour cells. In another series of experiments using immuno-deficient mice that received a graft of the human haematopoietic system, we showed that the treatment with IPH 1101 and IL-2 allowed the inhibition of the growth of a human tumour. In these experiments, we observed an infiltration of γ9δ2 T cells into the cancer tissue in animals having received IPH 1101 and IL-2.

Pharmacokinetics & Metabolism

IPH 1101 is rapidly absorbed and metabolised. The product is completely excreted within 48 hours, predominantly through urinary excretion. The pharmacodynamic effect of IPH 1101 seems to be related to the maximum concentration of IPH 1101 reached in blood (Cmax).

Safety pharmacology

The standard series of safety pharmacology tests were conducted with IPH 1101, according to methods recommended by regulatory agencies and industry groups. These trials were carried out by our subcontractors under our supervision.

No effect was observed either on the central nervous system or on the respiratory functions. In preliminary experiments, a transient alteration of the heart rhythm was noted in some animals at the highest doses, leading us to conduct further investigations to search for possible IPH 1101 effects on the cardio-vascular system. These extensive studies in animals (cardio-vascular monitoring through telemetry) complemented with in vitro pharmacology tests made it possible to definitively infer the absence of any significant pro-arrhythmogenic effect.

Toxicology

A series of acute and sub-acute toxicity studies were conducted in various animal species by specialised subcontractors working according to applicable GLP standards. The trials were carried out for IPH 1101, with or without IL-2 co- administration. These studies permitted us to infer a good systemic and local tolerance of the product even for up to doses 10 times higher than the maximum doses contemplated for the first trials in humans, thus ensuring a satisfactory safety margin for clinical trials.

Some in vitro tests of the IPH 1101 mutagenic activity (Ames’ test and TK chromosomal aberration test) had shown a possible genotoxic effect of IPH 1101 at the highest tested concentrations, and we conducted a series of in vivo complementary tests, following the regulatory recommendations relating to genotoxicity evaluation. These complementary tests (micronucleus test, UDS test) did not reveal any genotoxic activity for the intravenous administration, which is the administration selected for humans in cancer research. It should be noted that numerous products commonly used in cancer treatment, and including some cytotoxic products, have a genotoxic nature.

125 Clinical results

The IPH 1101 drug candidate is currently in clinical development Phase II trials in oncology.

To date, in Phase I studies, 34 patients with solid and liquid tumours have been treated with IPH 1101 (trials D004-101 and D004-102) and 10 patients with metastatic renal cell cancer (mRCC) have received autologous γ9δ2 T cells activated ex vivo by IPH 1101 (trial D001-101). The recruitment of studies D001-101 and D004-101 is now completed, whereas study D004- 102 is still in the recruitment stage. These Phase I studies mainly aim at establishing the product tolerance profile, rendering visible the biological activity of the product and determining the dosage which will be the subject of subsequent efficacy studies.

On the basis of preliminary information obtained during our Phase I studies and on pre-clinical data, we started a first multicentric international Phase II study in metastatic renal cancer (D004-201) which should provide efficacy data for the treatment by late 2007.

In addition, we obtained from the EMEA an orphan drug designation for the treatment of metastatic renal cell cancer (mRCC) providing an exclusive 10 year sales period and an exemption from the regulatory expenses (see Section 6.6.3 of this Document de Base).

Trial D001-101 (initiated late 2002)

Our first clinical trial was a cell therapy trial in metastatic renal cancer. In this protocol, the patient’s blood cells were taken through cytapheresis, then cultivated in the presence of IPH 1101 and IL-2, following a method that we developed. After 10 to 15 days of culture, and without a separation stage, preparations were obtained containing between 60% and 90% of γ9δ2 T cells that can be re-injected into the patient. The production of γ9δ2 T cell preparations was conducted in the Unité de Thérapie Cellulaire et Génique de Nantes (UTCG) (Nantes Cell and Gene Therapy Unit). This is one of the first hospital- university laboratories dedicated to cell therapy and the first to receive an ISO 9001 certification for these activities.

D001-101 was a Phase I trial carried out in dose escalations. The patients were treated in three successive cycles with activated γ9δ2 T lymphocytes produced ex vivo. All the patients also received IL-2, in accordance with the method used by Philip Greenberg in Seattle during cell therapy trials with autologous T clones specific to a tumour antigen.

The objective of trial D001-101 was to acquire, for the first time in humans, clinical data for a therapeutic method targeting the γ9δ2 T lymphocytes, and particularly to analyse tolerance to high amounts of activated γ9δ2 T cells. During the cell culture stage, IPH 1101 was completely metabolised and therefore was not present in the cell preparation injected into the patient. Thus, we were able to conduct trial D001-101 before all the pre-clinical data permitting the qualification of IPH 1101 as a drug candidate were available, which significantly accelerated our clinical development programme.

Ten patients were treated at three different dosage levels (up to 8 billion cells per injection). The tolerance was good, with the principal side-effects consisting of fever, shivers and asthenia. One patient displayed hypotension, and one patient in the highest dose group showed biological signs of blood clotting activation.

The evaluation of the clinical efficacy shows interesting results in terms of disease control: half of the patients showed a stabilisation of the disease for more than 24 weeks. These results were presented to the Congress of the American Association of Oncology in June 2006.

Trial D004-101 (initiated late 2003)

Trial D004-101 gave rise to the first administration to humans of our drug candidate IPH 1101.

D004-101 was a Phase I trial performed in dose escalation in patients with various solid tumours, primarily metastatic renal cancer, using IPH 1101 in combination with low doses of IL-2.

All the patients treated received three successive cycles of treatment, at three week intervals. The objectives of the trial were to evaluate tolerance at various dosage levels and to observe the biological activity of the treatment on the basis of a pharmacological marker, the number of circulating γ9δ2 T cells. This study allowed the detection of possible clinical activity within the methodological limitations inherent to a Phase I study.

The study showed that the product was globally well tolerated. The side effects were those expected for an immunotherapy treatment (mainly transient signs such as fever, nausea, hypotension) and were not aggravated by the concomitant administration of IL-2. Such effects correlated to the dose administered and the maximum dose tolerated has therefore been determined. An amplification of the target population of γ9δ2 T lymphocytes was found in nearly all patients with a link

126 between the effect observed and the dose administered. On this basis, the study permitted the definition of the dose selected for continuing development.

This study is now complete, with a total of 28 patients treated. The complete results are being analysed and were submitted to be presented to the Oncology Congress in Autumn 2006.

Trial D004-102 (initiated mid 2005)

D004-102 is a Phase I trial conducted in IPH 1101 dose escalation in association with low doses of IL-2 on patients with a low grade B cell lymphoma who are in relapse after at least two types of treatment, including chemotherapy and rituximab monoclonal antibody. The main objectives are to determine tolerance and safety in use of the product using a simplified administration schedule and to evaluate the biological activity of the product at various doses, in terms of amplification of the γ9δ2 T lymphocytes. This trial could also detect potential clinical activity. To date, six patients have been recruited for the trial with satisfactory results in terms of tolerance and biological activity for the first two evaluated dosage levels. The study is under recruitment and should be completed during the first half of 2007.

Development Programme

On the basis of the good tolerance and the demonstration of the pharmacodynamic effect (γ9δ2 T cell expansion) shown in our Phase I trials, we drafted the Phase IIa clinical development programme aimed at producing data relating to the efficacy of our drug candidate IPH 1101 in a first indication of solid tumour, metastatic renal cancer, by late 2007.

We do not anticipate that IPH 1101 will be introduced to the market before 2011 or 2012.

Phase IIa trial in renal cancer (D004-201) (initiated in May 2006)

D004-201 is a multicentric randomised Phase II study, using the IPH 1101 formulation in combination with low doses of IL- 2 for treating patients with a metastatic renal carcinoma.

The goals of this study are to evaluate the clinical efficacy, the biological activity and the tolerance of IPH 1101 in association with IL-2 and to select the optimum dosage for subsequent trials. Two IL-2 doses will be tested in trial D004-201. The choice of the IL-2 optimum dose for subsequent studies will be based on the best compromise between the highest clinical efficacy and the greatest biological activity and tolerance.

The efficacy will be evaluated on the percentage of randomised patients surviving and without progression 12 weeks after treatment. This criterion has been selected on the basis of results of the Phase III study of the newly developed sorafenib (tyrosine kinase inhibitor) for second line treatment of patients with metastatic renal cancer, which showed an improvement of the median survival time without progression: 24 weeks in the treated group compared to 12 weeks in the control group.

The population being studied has also been selected on the basis of the sorafenib study, i.e., in a second line treatment for patients with metastatic renal cancer in progression, after a first standard line of treatment. A statistical procedure will be used to ensure the homogeneity of the population between the two treatment groups in terms of prognostic criteria and anterior treatments with tyrosine kinase inhibitors.

The protocol includes 68 patients and the recruitment should take place within six to nine months following the launch of the study. The study will be conducted in France, Ukraine, and Russia, in approximately 15 hospitals.

The approval files were submitted to the various ethics committees and relevant authorities during the first quarter of 2006 and the authorisations to start the trial in the different countries are expected during the second quarter of 2006. In France, the trial was authorised by the ethics committee (CPPRB) on 11 April 2006.

The results of the study are expected by late 2007.

Phase IIa trials in onco-hematology (D004-202 and D004-203)

In the hemato-oncological field, we intend to initiate a Phase II study in patients with a non-Hodgkin’s lymphoma in combination with rituximab (D004-202) and a Phase II study (D004-203) in chronic myeloid leukaemia.

127 Hematological diseases have the distinctive characteristic of residual disease stages, or incomplete response to existing treatments, which can be quantitatively analysed by molecular markers of the disease. Such pathologies are therefore very valuable for immunotherapy approaches concerning the mechanism of action, as well as for carrying out exploratory Phase II clinical trials to evaluate the potential of the product in the intended indication based on the intermediary clinical evaluation criteria.

The first Phase II study (D004-202) will relate to the non-Hodgkin’s lymphoma in relapsing patients after a first line of treatment with chemotherapy and rituximab and is expected to be initiated early in 2007. This study is based on pre-clinical data showing the existence of a potential synergy between the γδ cell stimulation and the rituximab treatment.

This first Phase II study in onco-hematology will be followed during the third quarter 2007 by a second D004-203 Phase II in patients with chronic myeloid leukaemia in incomplete response after a standard treatment by first intention with imatinib mesylate (Glivec). The existence of molecular markers of the residual disease makes the indication particularly appropriate for carrying out clinical trials aimed at proving the concept.

Other trials

In the field of infectious diseases, we intend to start a Phase I/II study in patients with a type C viral hepatitis. The objective of such a trial is to show the potential of γ9δ2 T agonists for treating an infectious disease. However, we think that the intravenous administration of IPH 1101 could be a limiting factor for advanced development in this type of indication.

There is no relevant pre-clinical model for hepatitis C. The switch to clinical development is justified by the appreciation of the risk/benefit ratio, which is a function of the scientific rationale and of the tolerance profile of the tested product.

The trial will be addressed to patients with chronic hepatitis who did not respond to or had an incomplete response after standard treatment with the antiviral drugs ribavirine and interferon α. Such patients currently have no satisfactory therapeutic solution and it is possible to demonstrate the anti-viral efficacy of the drug candidate by the monitoring of the viral load.

We intend to initiate this first experimental trial outside the oncology field in 2007.

Market

The first indication for which we have decided to develop our drug candidate IPH 1101 is metastatic renal cell carcinoma (mRCC).

There were 36,160 new cases of renal cancer in the United States in 2005, with renal cell carcinoma (RCC) accounting for 85% of the total (source: American Cancer Society 2005). The occurrence of such tumours increases by 1.5% each year. Approximately 25% of patients develop a metastatic form (mRCC) that cannot be treated through nephrectomy. mRCCs were conventionally treated with IL-2 or interferon α, which have a poor clinical efficacy. Of note in the treatment of this pathology is the recent introduction of new products (TKI inhibitors), including Nexavar (Bayer), Sutent (Pfizer) and Avastin (Genentech), which have just been registered in the United States and are currently in the final development phase in Europe. According to Datamonitor (Pharmalicensing, 2005), the combined annual revenues of Nexavar and Sutent could reach approximately 300 million U.S. dollars in 2010. We believe that these products should rapidly replace the first line treatments currently being used. Despite progress provided by tyrosine kinase inhibitors, it seems that these products do not allow complete recovery in all patients; therefore, there is still an important medical need for effective second line products or for improving the efficacy of TKIs through combined strategies. Our product IPH 1101 aims at satisfying such a need, in second line treatments or in association with TKIs. It should be noted that the clinical stabilisation, once obtained through the introduction of more effective first line treatments, should lengthen the patients’ lives and therefore the prevalence of mRCCs, whereas currently the affected patients can only receive a single line of treatment. Such a tendency, if it is confirmed, should contribute to creating a new and important market for IPH 1101, particularly for second line treatments.

Product price is established as a function of the therapeutic benefit obtained, which is extremely difficult to evaluate before completing the clinical trials aimed at registration. However, the cost of recent treatments introduced for the same indication could give benchmark information. For example, the annual cost of treatment using Sutent in the United States is 38,000 U.S. dollars per year. (Source: www.forbes.com). Such a price reference could be relevant if we are able to demonstrate the therapeutic benefit offered by IPH 1101 in mRCC, it however being understood that our drug candidate does not aim at the same clinical position as the recently marketed TKIs.

Other indications: We also initiated the clinical development of IPH 1101 in onco-hematology indications (lymphoma, leukaemia, etc.) and in non-Hodgkin’s lymphoma.

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There were 56,390 new cases of non-Hodgkin’s lymphoma cancer in the United States in 2005 (Source: American Cancer Society, 2005).

6.5.1.2.2 IPH 12XX

As soon as the research and development programme targeting the γ9δ2 T lymphocyte populations was initiated, we conducted a medical chemistry programme to identify new analogous agonists of the drug candidate IPH 1101. The objectives of this programme are (i) to have at our disposal a molecule able to replace IPH 1101 should its development be abandoned and (ii) to envisage a clinical development in indications requiring a mode of administration different from that of IPH 1101.

In 2004, while conducting chemistry and molecule modelling, we acquired the commercial rights for a patent claiming a family of molecules described as γ9δ2 T activators. All the discovered or acquired γ9δ2 T agonists belong to the group of drug candidates IPH 12XX.

Our group of IPH 12XX molecules was screened in pharmacological tests measuring the stimulation ability of γ9δ2 T lymphocytes. The most potent activators were then tested in our animal models and pharmacokinetic studies. The feasibility of industrial synthesis and physicochemical stability are other important criteria for selecting the drug candidate. If some of the tested molecules are active at lower concentrations than IPH 1101, the maximum effect observed is not as high as that obtained with IPH 1101, which seems to show that this is indeed the same pharmacological family. Currently, the most valuable molecule of the series is a stable molecule, which could be synthesised at the level of one hundred grams. It is an extremely potent activator of γ9δ2 Ts and is subcutaneously active. We are evaluating the possibility of administering such a molecule orally.

In parallel with the chemistry and pharmacology work leading to the selection of the drug candidate, we are working in collaboration with European and American academic organisations on several efficacy models that should permit confirmation of the choice of indications where the molecule could be developed. Based on the data coming from the biology of gamma-delta cells, the projected physiopathological models are respiratory diseases and indications of infectious disease. In the latter case, IPH 12XX is evaluated both as an anti-infectious agent and as a vaccine adjuvant.

The data we have available today confirms the selection of the first drug candidate of the IPH 12XX group. We expect results from the first efficacy models to allow the passage of stage M1, corresponding to the selection of the product/indication combination and the start of pharmaceutical development and regulatory toxicology studies. This passage of stage M1 should occur in late 2006 and we hope to be able to initiate our first clinical trials in 2008.

6.5.2 Immuno-modulation of Natural Killer Cells (“NKs”)

6.5.2.1 Scientific Principle

Two of our founding scientists, Eric Vivier and Alessandro Moretta, contributed to the elucidation of the molecular mechanisms controlling the activation of NK cells. Alessandro Moretta characterised the inhibitory receptors (“KIR”) (4, 5) and the activating receptors (“NCR” or “KAR”) (1-3). The activation of NK cells is the result of an equilibrium between the negative signals provided by the KIRs, whose ligands are molecules of the major histocompatibility complex of class I (MHC.I), and the positive signals provided by the NCRs, whose known ligands are surface molecules expressed by malignant cells or by cells infected by certain pathogens. Furthermore, NK cells are the most active cells for killing cell targets coated with antibodies: this is the mechanism of action of antibody-dependent cell cytotoxicity.

Two approaches are possible for activating NK cells to develop cancer research indications: (i) the use of antagonists of the inhibitory KIR receptors and (ii) the use of agonists of the activating NCR receptors. Blocking the activation of NK cells requires the use of antagonists of NRC activating receptors. This latter mechanism could primarily be of interest for indications outside the field of oncology.

Within the field of oncology, we have convincing validation elements in both animal models and humans, which demonstrate the basic role of NK cells in establishing an effective anti-tumour immune response. A study in animal models published in 2002 by the group of David Raulet, a member of our Scientific Advisory Board, showed that a very aggressive and metastatic tumour, quickly lethal in mice, is effectively treated by NK cells, provided that the tumour expresses one of the ligands of the NCRs (12). Interestingly, in such a model a second injection of the tumour that does not express the ligand is also treated by the mouse immune system, indicating that the involvement of NK cells is satisfactory for inducing the implementation of a protective immune memory. The most compelling results are those obtained by Andrea Velardi’s group at the University of Perugia (13) in situations of allogenic marrow graft in patients with acute myeloid leukaemia. In these situations, the NK cells of some donors did not have KIR molecules compatible with the MHC.I of the host. The lack of possible interaction 129 between the KIR inhibitory receptors of the donor and the MHC.I molecules of the recipient leads to an activation of the donor’s NK cells, which are able to kill the recipient tumour cells. These NKs are referred to as alloreactive NKs (as opposed to autologous NKs whose KIR inhibitory receptors are functional). Andrea Velardi’s group was thus able to show that the presence of alloreactive NK in humans correlates with the total lack of relapse even in patients at an advanced stage of the disease, whereas the presence of autologous NKs has no effect. These results are summarised in the following table:

Donor’s NKs reactive to the host’s tumour...... NO YES Number of transplantations ...... 58 34 Graft rejection ...... 15.5% 0%* Disease of the graft against the host, level II...... 13.7% 0%* Probability of relapse at 5 years...... 75% 0%** (Acute myeloid leukaemia) * p < 0.01 ; **p< 0.008

The results have been confirmed in a study by Sebastian Giebel (49).

Andrea Velardi’s group also showed (i) that alloreactive NKs did not have any limiting toxicity with the exception of a clinically acceptable effect on the production of blood cells (haematopoiesis) and (ii) that the injection of alloreactive NK cells into immuno-deficient mice (SCID mice) protected those animals from the implantation of human leukaemia. Additionally, through our collaboration with the same group from the University of Perugia, we showed that alloreactive NKs strongly increased the antibody-dependent cell cytoxicity, validating the use of KIR inhibitors for potentiating the activity of such cytotoxic antibodies.

Our approach, developed with our partner Novo Nordisk A/S, aims at reproducing this situation by blocking the NK inhibitory receptors with a pharmacological agent, which is an antagonist of the KIR inhibitory receptors.

The NCR approach could also be pursued in cancer research. We have agonist monoclonal antibodies for activating NCR receptors that could be used in this respect. Pre-clinical studies are under way to confirm this effect.

Outside the field of oncology, NK cells seem to be involved in some chronic inflammation processes such as certain auto- immune diseases (e.g., diabetes and rheumatoid arthritis). Blocking NK activation with antagonists of activating receptor antagonists could be possible. Experiments in animal models have shown that blocking some activating receptors could improve and, in some cases, cure such diseases. Thus, in an animal model of auto-immune diabetes (NOD mouse), the injection of an antibody blocking one of the activating receptors cured this type of diabetes in those mice (34). Other studies from patient samples with rheumatoid arthritis (another auto-immune disease) are directed towards the involvement of NK cell activating receptors in the initiation and behaviour of the disease.

Trial results, especially in animal models, are often extremely complex and cannot be transposed directly to the human clinical field. As a result of our internal studies and our scientific collaboration, we have original reagents, especially mouse monoclonal antibodies, which permit the reproduction with pharmacological agents of the action of NK cells as described in these NKs.

6.5.2.2 Products Being Developed

Since the agreement was signed with Novo Nordisk A/S in March 2006, it has been the exclusive owner of the development and marketing rights for the products under the agreement. However, we have retained the rights for niche therapeutic indications, though at the discretion of Novo Nordisk A/S.

6.5.2.2.1 IPH 2101 (NN 1975)

Principle

The therapeutic principle is based on the activation of NK cells by a monoclonal antibody blocking the KIR inhibitory receptors of those cells, thereby potentiating their anti-cancer action. The benefit of blocking such targets was shown for leukaemia in mice. Interestingly, in a human clinical situation, the marrow graft provides a model where the NK inhibitory receptors are not functional (see above). It was therefore possible to show a strong anti-cancer efficacy of NK cells, allowing improvement in the survival rate of patients with onco-hematological diseases. IPH 2101 (NN 1975) aims at reproducing this effect with a pharmacological agent that is easier to use than the very complex clinical procedure of marrow graft. The pre- clinical models currently available in mice show the same efficacy by the alloreactive NK cells (obtained in a graft situation) and the NK cells blocked by IPH 2101 (NN 1975).

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The pre-clinical studies and the clinical data obtained in allogenic graft situations direct the development of the product towards onco-hematological indications. The NK cells are, however, active on numerous liquid and solid tumours (e.g., melanoma and ovarian cancer) and promise an important market in cancer research, if the efficacy is confirmed during the development.

Significantly, we demonstrated that the product had a synergic action in vitro and in mice with some already approved therapeutic antibodies (rituximab, alemtuzumab). The stimulation of NK cells increases the efficacy of one of the mechanisms of action of the cytotoxic therapeutic antibodies. This combination approach will be tested early in the clinical development and will open important prospects for existing and future markets for therapeutic monoclonal antibodies in oncology.

The product also has potential in the field of infectious diseases (especially type C viral hepatitis), but pre-clinical work is still needed before considering short-term clinical trials.

Pre-clinical results

We obtained a blocking antibody (IPH 2101 (NN 1975)) with an excellent affinity for KIR receptors. This antibody is completely human, which strongly reduces the patient’s risks of immunisation and rejection of this drug candidate. The production of this antibody in accordance with GMP conditions and compatible with its use in humans is carried out by our partner Novo Nordisk A/S. The first batches intended for clinics are currently being manufactured.

In mice, we are able to demonstrate that the homologous product used in humans (an antibody recognising the homologous target in mice) stimulated the mouse NK cells and significantly reduced the occurrence of leukaemia, while not inducing any reaction against normal cells in these mice. Moreover, in a regulatory toxicological study, repeated injections of a homologous product into mice for 13 weeks did not generate any major toxic event (the full analysis of this study is under way).

Development programme

Since its passage to stage M1 in June 2005, and according to the terms of agreement with our partner, the product is developed by Novo Nordisk A/S. We participate in the scientific monitoring of development without a significant commitment of our resources. We are now eligible for milestone payments in the event of success and at completion of certain development stages.

The next important step Novo Nordisk A/S is considering is the initiation of the first Phase I trials is planned to start by late 2006 in an onco-hematological indication.

We do not expect our product to be marketed before 2011-2012.

Market

Pre-clinical and clinical studies orientate product development towards onco-hematology indications (leukaemia and lymphomas). The occurrence of the main onco-hematology indications in the United States in 2005 are listed in the following table:

Estimated number of the main hematological cancers in the United

States in 2005 New cancer Death caused by

cases cancer

Leukaemia ...... 34,810 22,570

Lymphomas ...... 63,740 20,610

Multiple myeloma...... 15,980 11,300

Total...... 114,530 54,480

Source: American Cancer Society, 2005.

The main onco-hematology indications accounted for approximately 8% of new cancer cases and 10% of deaths from cancer in the United States in 2005.

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Leukaemia and multiple myeloma mainly affect the elderly, and the occurrence increases by approximately 1.5% per year because of the aging of the population (source: National Cancer Institute, 2003). The treatments being used mainly rely on chemotherapy using well-known but toxic products to induce a remission and consolidate the remission obtained. Marrow graft may be used for counteracting the hematological toxicity of such treatments. Targeted therapies were recently introduced such as imatinib (Glivec, Novartis) for chronic myeloid leukaemia and bortezomib (Velcade, Millenium) for multiple myeloma, which significantly modify the treatment of such disease. The effective treatment of residual disease, however, will require the combination of those products with other drugs making use of different mechanisms of action. Furthermore, the current therapeutic approaches for some types of leukaemia, such as acute myeloid leukaemia, still remain ineffective in preventing relapse, particularly in the elderly, because of the limitations associated with the tolerance of the treatment, and also in patients with a bad prognosis.

Malignant lymphomas constitute an important heterogeneous group of prevalence pathologies, much larger than leukaemia, with non-Hodgkin’s lymphoma being the most common form. Rituximab (rituxan Genentech/Biogen-Idec/Roche), a cytotoxic monoclonal antibody targeting a tumour antigen expressed by non-Hodgkin’s lymphoma, has very quickly become the reference treatment both for relapsing aggressive lymphomas and for indolent lymphomas resistant to the first line of treatment. Rituximab could impose itself in a still more general way as the maintenance treatment for non-Hodgkin’s lymphomas. In addition to this product, new antibodies and radio-labelled antibodies have been developed (bexxar, zevalin). Within this context, any new product must be positioned relative to these reference treatments, either in association or as a substitute for some categories of patients. Sales of the rituximab monoclonal antibody were more than 1.4 billion U.S. dollars in 2005.

The published scientific data from cellular models shows antitumor activity of NK cells in several types of cells: melanoma, hepatoma, carinoma, kidney cancer, neuroplastance, prostate and lung cancer.

The table below shows the potential indications for the immuno-modulators targeting NK cells based on the level of scientific validation we attain:

6.5.2.2.2 IPH 22XX

The therapeutic principle of this product is comparable to that of IPH 2101 (NN 1975): the goal is to block another inhibitory receptor that is present on NK cells.

Although the product is comparable to IPH 2101 (NN 1975), it is not, however, substitutable and we consider IPH 22XX as a product complementary to IPH 2101 (NN 1975). The final choice of indications will depend on results of pre-clinical studies in terms of efficacy and toxicity. 132

This product is at stage M0 and the signing of another agreement with Novo Nordisk A/S coincides with the start of pre- clinical studies for selecting the drug candidate and conducting efficacy experiments on animals. We identified monoclonal antibody candidates meeting the specifications of the future product, as well as animal experimental models to test the efficacy.

The initial objective of the new agreement with Novo Nordisk A/S is to provide new drug candidates at stage M1 during the first three years of the collaboration. IPH 22XX could be one of them.

6.5.2.2.3 IPH 23XX

The therapeutic principle of this product is based on blocking an activating receptor that is present in NK cells and a subpopulation of T cells to inhibit these cells in chronic inflammatory situations. Promising data were obtained in mice for type I diabetes where blocking this receptor by a monoclonal antibody prevented the disease or reduced the symptoms of an established disease. Preliminary data obtained in vitro from human cells showed that this receptor is also involved in rheumatoid arthritis. Therefore, the indications of this product are potentially applicable to auto-immune diseases or chronic inflammatory situations.

This product is also at stage M0 and the signing of another agreement with Novo Nordisk A/S coincides with the start of pre- clinical studies to select the drug candidate and conducting the efficacy experiments in animals. The pre-clinical development essentially involves the production of an antibody candidate that could be injected into humans, either a humanised mouse antibody or a completely human antibody (immunisation under way). We have appropriate animal models available to enable the product to progress to stage M1.

The initial objective of the new agreement with Novo Nordisk A/S is to bring new drug candidates to stage M1 in the first three years of the collaboration. IPH 23XX could be one of them.

6.5.2.2.4 Other NK products

Within the scope of our new agreement, we share an intellectual property portfolio with Novo Nordisk A/S, allowing us to develop products other than those already identified, including agonist products of activating receptors of NK cells. To date, there is no precise development plan and we are not considering starting development or passing stage M0 with a new product before 2007.

6.5.3 Immuno-modulation of Toll-like Receptors (“TLR”)

6.5.3.1 Scientific Principle

The project aims to develop drug candidates targeting the TLR3 receptor in solid tumour indications in patients who were selected using a diagnostic test that allows the evaluation of TLR3 expression. It is an original approach to individualised immunotherapy. This project is based on retrospective studies that provide proof of concept elements and make use of data acquired during clinical trials conducted between 1970 and 1980 with a TLR3 agonist, before the receptor was identified.

Receptors of the TLR family play an essential role in triggering an immune response, particularly in anti-infectious immunity. It has been shown that TLR involvement during infection by a pathogen induces a series of events resulting in innate immunity from the secretion of pro-inflammatory mediators to the mobilisation of cytotoxic effector cells, including NK cells. The involvement of TLR also plays a part in the implementation of the adaptative response and of immune memory. In this respect, “danger signals” have been referred to in describing the physiological role of this receptor family. To date, 10 TLR receptors have been described. They all recognise maintained structural patterns (“PAMP”, “Pathogen- Associated Molecular Patterns”), frequently associated with bacterial pathogens. This is why TLR2 recognises the walls of Gram positive bacteria and TLR4 recognises the walls of Gram negative bacteria. TLR5 recognises a bacterial protein, flagellin, and TLR3, TLR7, TLR8 and TLR9 can recognise different forms of microbial nucleic acid, including viral (35 to 37). The implication of TLR in the control of innate immunity rapidly led to the consideration of developments in anti-cancer immunotherapy. It has also been discovered that some receptors of the TLR family could also induce planned death of cells (“apoptosis”).

The first demonstration of the clinical efficacy in cancer research of TLR receptor agonists was shown by the drug developed and marketed by 3M Pharmaceuticals, imiquimod (Aldara), which targets the TLR7 receptor (38). Aldara is a locally active cream (a “topic” drug), whose mechanism of action specifically involves the recruitment of NK populations at the tumour site. This drug was initially approved for certain dermatological diseases and subsequently for the treatment of a type of skin

133 cancer (basal epithelial carcinoma) for which this product has proven effective. Aldara is currently undergoing clinical trials in other oncology indications. Anadys Pharmaceuticals, Inc., in an agreement with Novartis, is developing oral agonists of TLR7 for infectious disease indications (viral hepatitis B and C) (39).

Other approaches in Phase II or III clinical trials target the TLR9 receptor. TLR9 ligands are oligonucleotides (aptamers). Coley Pharmaceuticals, Inc. develops a TLR9 ligand class, the CPG oligonucleotides (CPG-ODN), as vaccine adjuvants and in cancer research indications. The most advanced product, CPG 7909, is currently in Phase II trials for lung cancer and was the object of a major agreement with Pfizer in 2005. Other compounds identified by Coley Pharmaceuticals, Inc. are being developed in infectious pathologies (chronic viral hepatitis C in particular) and as an adjuvant (40, 41) with pharmaceutical partners (Sanofi-Aventis, GSK, Chiron). Other developers in the field are the American companies Dynavax, Inc. (currently in Phase III trials in the treatment of some allergies and in viral hepatitis B) and Idera Pharmaceuticals, Inc. The latter signed an agreement in 2005 with Novartis to develop treatments for asthma and allergies. The private company Oligovax (Paris) is developing TLR9 synthetic ligands in glioblastoma. This product is currently in Phase II trials.

Products targeting the TLR3 receptor are also being developed in the clinical field. These are poly(A:U) and analogous products, particularly aptamers made of double-stranded RNA (dsRNA). Such dsRNAs were used in the clinical field before being identified as TLR3 receptor ligands. The most important development in cancer research was carried out by Ipsen- Beaufour with poly(A:U) in the 1970s-1980s. The results of six published random trials (42-47) for four of these studies show a certain clinical efficacy of these products (42, 43) or an increase of the response for some sub-groups of patients (44, 46). This data was considered insufficient to justify continuing the development. More recently, the American company HemispheRx, Inc. developed another dsRNA for chronic fatigue syndrome and HIV infections (Phase II trials). This company is also interested in infections caused by the hepatitis B virus and in cancer research. All the pre-clinical and clinical data acquired with dsRNA, particularly with poly(A:U); provide validation elements for drug candidates targeting TLR3.

Until now, approaches targeting TLR receptors were aimed at generating the mobilisation of a cell immune response. Another mechanism of action could be involved in the anti-tumour activity of TLR3 ligands. Recent observations have shown that the TLR3 receptor could be directly expressed by some cancer cells and that the activation of TLR3 could induce the apoptosis of these cells (48). TLR3 ligands thus seem to be able to combine two effects: a stimulation effect of the anti- tumour immune response and a direct cytotoxic effect on malignant cells. These two mechanisms of action are added to one another synergistically; the apoptosis of cancer cells allows us to present the immune system with a new repertoire of tumour antigens in a TLR activation context that is favourable for the development of a long-term immune response.

The direct cytotoxic effect of TLR3 ligands was only observed for some tumour lines strongly expressing the TLR3 receptor. This observation led to retrospective analysis of TLR3 expression in a group of patients with breast cancer who were treated in the 1980s with poly(A:U). These studies showed an unquestionable therapeutic benefit of a longer survival rate in patients treated by poly(A:U) expressing TLR3 as compared to those in control groups. Such data offers an indirect and retrospective validation of the efficacy of the treatment by anti-cancer drugs targeting the TLR3 receptor in patients expressing TLR3, which is the basis of our programme.

Beyond indications in cancer research, developments could be considered for using TLR3 ligands in the treatment of chronic viral diseases and as vaccine adjuvants.

6.5.3.2 Pre-clinical Results

We have pre-clinical data that strengthens the pharmacological and clinical rationale of the IPH 31XX project:

1) The experiments showed that TLR3 agonists can induce the apoptosis of breast cancer tumour lines expressing the TLR3 receptor.

2) Retrospective studies on patients treated with poly(A:U) showed the therapeutic benefit of this treatment in the subpopulation of patients overexpressing the receptor.

Concerning this second aspect, researchers at the Institut Gustave Roussy analysed the TLR3 expression on tumour slices taken from 175 patients with breast cancer, who were included in a random trial of poly(A:U) vs. placebo. The TLR3 receptor was strongly expressed in 18 patients (10% of the total population). It was observed, with a 20 year average hindsight after the treatment, that only the patients with a TLR3 overexpression and treated with poly(A:U) had a survival advantage. The treatment using poly(A:U) did not increase the survival of patients whose tumour did not express TLR3, and the patients whose tumour expressed TLR3 but were not treated with poly(A:U) did not have any survival advantage (see figure below). Neither the expression of TLR3 nor the recruitment in the group treated with poly(A:U) seems to correlate to one of the biological or clinical prognostic markers commonly used in breast cancer.

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This preliminary data is therefore indicative of a therapeutic effect of TLR3 ligands in the case of the overexpression of this receptor. We are currently conducting new biological studies to confirm these results on a larger population of patients.

The table below summarises the results of the study:

6.5.3.3 Development Programme

We initiated a development programme for drug candidates targeting the TLR3 receptor for the treatment of a subpopulation of patients who were selected on the basis of the over-expression of this receptor. The molecules being developed belong to the group of dsRNAs, including poly(A:U) which was administered to humans in the 1980s.

Our main objective is to put a first drug candidate in clinical trials in a solid tumour indication in 2008, in order to confirm through controlled clinical trials the preliminary efficacy data issued from retrospective studies in breast cancer.

Our intermediary objectives are to characterise the drug candidate and validate the indication in appropriate pre-clinical models, corresponding to stage M1 of the research and development programme. We think that these intermediary objectives can be reached during the first semester 2007. The most probable hypothesis is to target metastatic breast cancer for the first clinical trials of concept proof, but other indications will be evaluated during the pre-clinical development programme.

The trials conducted with poly(A:U) provide extremely useful information regarding the use of analogous molecules in humans, in particular regarding the expected toxicological profile. The pre-clinical studies and the clinical trials performed with poly(A:U) did not indicate any particular toxicity limiting the use of such compounds. This information, combined with biological data from retrospective studies, counterbalances the risk associated with the development of a new class of drugs targeting TLR3. However, the molecular characterisation of poly(A:U) is insufficient to permit any conclusion regarding the expected side effects of our drug candidate. More detailed pharmaco-toxicological features of the selected drug candidate need to be documented and compared to a poly(A:U) reference preparation.

Another important aspect of the development of the IPH 31XX drug candidate is the implementation of a method for producing the drug candidate. Considering the chemical complexity of dsRNAs, the implementation of the method and its development on an industrial scale could pose specific challenges. We are in contact with the main industrial operators controlling the dsRNA production technologies.

Our development programme associates the development of a drug candidate with a biological test that identifies patients eligible for treatment in an unique and customised immunotherapy approach. The development and validation of the diagnosis test is one of the important elements of the programme. We have available unique reagents (anti-TLR3 monoclonal antibodies) to successfully conduct this project, and we will rely on the expertise of partners specialising in the diagnosis industry during the advanced stages of the development.

6.5.3.4 Market

The first indication targeted by us is breast cancer. This is among the most frequently diagnosed type of cancer in women. In the United States in 2005, approximately 211,000 new cases were diagnosed and approximately 40,000 deaths were recorded (source: American Cancer Society, 2005).

Most treatments are based on the use of chemotherapy or on the blocking of hormone receptors. However, in 1998, the American company Genentech launched the first targeted therapy in metastatic breast cancer, trastuzumab (Herceptin), a monoclonal antibody that addresses the metastatic breast cancer sub-group expressing the HER2/neu antigen and accounts for 25% to 30% of breast cancer cases (between 50,000 and 60,000 patients per year in the United States). Herceptin generated revenues of 250 million U.S. dollars in the last quarter of 2005 (source: Genentech, 2006). 135

Our product IPH 31XX is relevant for a sub-group of 5% to 10% of patients, representing 10,000 to 20,000 new cases per year in the United States. Other solid tumours express TLR3 and could be the object of development. We intend to take the necessary steps to have this product designated an orphan drug.

6.5.4 Projects

6.5.4.1 IPH 41XX Cytotoxic Antibody

Armand Bensoussan’s team at the Hôpital Henri Mondor in Créteil, France discovered that a certain receptor normally present in sub-populations of NK cells was very specifically expressed by tumour cells of a rare form of cutaneous lymphoma, Sezary’s syndrome, an orphan tumour pathology for which there is no effective therapy. This observation led to the development of a cytotoxic antibody directed against this receptor. Through our agreement with the University of Genoa, we had access to a monoclonal antibody that could be used to generate a drug candidate. We acquired all the rights on the corresponding industrial property elements from the various relevant laboratories and organisations. A drug candidate is under evaluation in an animal model that we developed. This drug candidate could reach stage M1 in 2007.

6.5.4.2 Genetic Polymorphism of the CD16 Receptor

Considering the involvement of non conventional lymphocytes in the mechanism of action of cytotoxic antibodies, we are interested in genetic markers of the efficacy of these treatments. This type of marker was discovered by Hervé Watier’s team at the University of Tours, who described the relationship between the genetic polymorphism of the receptor for NK cell antibodies, the CD16 molecule and the efficacy of the cytotoxic antibody treatments. This treatment is less effective in some patients. A pharmacogenomic test can be derived from this discovery allowing for the selection of patients responding to the treatment or the adaptation of antibody dosages. We acquired the exclusive rights to the intellectual property concerned, which will allow us to use this marker for our own research and to develop a pharmacogenomic test for this application in collaboration with third parties.

6.5.4.3 Other Projects

We have also acquired intellectual property rights from academic organisations and are conducting, directly or through collaboration research agreements, exploratory research programmes that could give our portfolio new target receptors and new drug candidates in the field of cancer immunotherapy. We are also strengthening our technological abilities in the field of molecule engineering of monoclonal antibodies. During the exploratory stage, these research programmes only require a small fraction of our resources.

136 6.5.5 Manufacturing Process

The diagram below presents the manufacturing process development of a drug candidate:

6.5.6 Marketing of Our Products

We intend to generate income through assigning licences and direct marketing of the developed products. A distinction will be made for each case depending on the needs inherent to the various products and our financial capacity. The final marketing in cancer research occurs in a hospital environment.

6.5.7 Quality System

Since our creation, we have placed great emphasis on quality management and have structured our organisation and operations to comply with the best quality system standards in the industry.

Our quality system aims at ensuring the quality of pharmaceutical operations, the safety of patients treated with our drug candidates and the efficacy of these drug candidates. In addition, the quality system should enable us to control the costs and the progress of research and development operations, whether conducted internally or by subcontractors. The objectives and methodology are described in our quality charter, which is posted on our web site (www.innate-pharma.com).

Because of our high quality standards, our research and development activities were certified in July 2005 by the AFAQ as being compliant with the ISO 9001:2000 reference system.

We have two full-time employees in charge of quality management (out of a total of 54 employees as of 31 December 2005), whose responsibilities include:

• Management and improvement of the quality system and certification;

• Training personnel in quality control;

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• Conducting internal audits and audits of suppliers and subcontractors; and

• Management of the information system and of documentation.

6.5.8 Agreements on Assets

6.5.8.1 Agreements with Novo Nordisk A/S

In November 2003, we signed our first agreement with the Danish company Novo Nordisk A/S wherein we assigned it the exclusive development, production and marketing rights to the drug candidate IPH 2101 (NN 1975), an antagonist of a certain population of NK receptors.

This agreement included two phases: the first, the collaboration phase, lasted until stage M1 of development was reached, during which both parties collaborated in the research and development of the drug candidate IPH 2101 (NN 1975) and the second, the licence phase, started after the passage of stage M1 in June 2005 and corresponds to an exclusive licence of the intellectual property rights to the drug candidate lasting until Novo Nordisk A/S is no longer obligated to pay us royalties on sales.

In exchange for the rights and our contribution to the collaboration, we received and will continue to receive various milestone payments (for example, for the passage to stage M1) and royalties on sales should IPH 2101 (NN 1975) be marketed. The next milestone payment is expected during the first application for clinical trial of the drug candidate at the end of 2006 (see Section 6.5.2.2.1 of this Document de Base).

On 28 March 2006, we signed a second agreement with Novo Nordisk A/S. This agreement involves rights and duties similar to those in the first agreement and has the following main features:

• It cancels and replaces the November 2003 agreement relating to IPH 2101 (NN 1975); and

• It extends the collaboration between the parties and the exclusive development, production and marketing rights given by Innate Pharma to all NK targets identified and to be identified by the parties, and comprises an unlimited number of drug candidates.

This new agreement also comprises a collaboration phase and a licence phase. The collaboration phase is three years and can be extended by Novo Nordisk A/S on an annual basis, up to a maximum of two additional years (i.e., until 2009 or possibly 2011). During this phase, both parties will collaborate on common work programmes and will contribute the equivalent of at least 20 “full-time employees” per year. As in the previous agreement, the collaboration phase will last, drug candidate by drug candidate, until the passage of stage M1. The licence phase will start, drug candidate by drug candidate, at the end of this stage and will last, product by product and country by country, for the longer of the patent life or, in any case, at least 10 years after the first marketing of the products (product by product) for each country.

Even though the number of drug candidates is unlimited, our objectives of this collaboration are to have two drug candidates pass stage M1 (in addition to IPH 2101 (NN 1975), which reached stage M1 in June 2005) and an additional two new drug candidates pass stage M0 (in addition to IPH 2101 (NN 1975) and the two other drug candidates that could reach stage M1) during the collaboration phase (between three and five years).

In exchange for the rights and our contribution to the collaboration, we received and will continue to receive the following payments:

• A lump sum payment on signing the agreement, received in April 2006;

• Research and development financing, with a minimum payment equal to the funding of 20 full-time employees per year for three years (and up to five years if the agreement is extended for two years), for which the payment for the first year has been received;

• Various milestone payments during the collaboration phase (for example, for the passage to stage M1 of each of the drug candidates);

• Various milestone payments during the licence phase (for example, when first requesting authorisation to conduct clinical trials); and

• Royalties for each product that is on the market. 138

We estimate that the payments, including the lump-sum payment on signing the research and development financing and the various milestone payments during the collaboration phase of this new agreement, should reach 25 million euros over the first three years of collaboration (2006 to 2009), including 10 million euros which was already received in 2006.

After each passage of stage M1, we are eligible for regulatory and development milestone payments during the licence phase, which could reach 25 million euros per drug candidate, taking into consideration all the indications.

After the initial marketing of each of the products, we will be eligible to receive royalties on sales. The principal terms of the royalties are as follows:

• Their rate will be based on an increasing scale depending on the geographically accumulated sales of the products; the higher the accumulated worldwide sales are, the higher the royalty rates will be;

• They will be paid on net sales of the products in the territories where Novo Nordisk A/S conducts commercial activities involving these products;

• They will, in principle, not be affected by the payments that Novo Nordisk A/S makes for the technology or other expertise required for the development and effective marketing of the products; and

• They will be payable for the first ten years of the products’ marketing or for the duration of the products’ patents, whichever is longer.

In certain cases, we will have to pay part of the royalties to third parties from whom all or part of the intellectual property was previously acquired (patents, technology or expertise), as covered by the agreement with Novo Nordisk A/S.

Moreover, within the scope of this extended agreement, we retain:

• Development rights on certain products in certain niche indications, which are still to be identified. These rights are nevertheless subject to authorisation from Novo Nordisk A/S; and

• Certain rights, still to be defined, in the development of cell therapy products based on the drug candidates.

At the end of the collaboration phase, we will receive all or part of the rights on the drug candidates which have not reached stage M0, whose development we can then implement.

The agreement provides, in addition to cases of termination for failure by the parties to fulfil their obligations, that Novo Nordisk can end the agreement at any time during the collaboration phase, provided that it gives six months notice. In this case, and subject to the rights already granted to Novo Nordisk A/S, we can conduct any activity of our choice covered by the agreement independently from Novo Nordisk A/S. In addition, the parties will maintain rights acquired pursuant to the agreement; in particular, Novo Nordisk A/S must pay us:

• The amount for financing 20 full-time employees as provided in the agreement for the current year;

• The milestone payments for products having already passed stage M1 or that will pass this stage within 180 days;

• The milestone payments for products which have obtained licences; and

• The royalties due on the products already marketed by Novo Nordisk A/S.

In addition, Novo Nordisk A/S can end the agreement at any time in the event of a “change of control,” defined as:

• A merger or similar operation at the conclusion of which the former shareholders hold less than half of our share capital;

• The sale or transfer of all or substantially all of our assets; and

• The acquisition of more than 50% of our share capital and voting rights by one person or several persons acting together.

139 In this case, and subject to the rights already granted to Novo Nordisk A/S, we can conduct any activity of our choice covered by the agreement independently from Novo Nordisk A/S. In addition, the parties will maintain their rights acquired pursuant to the agreement; in particular, Novo Nordisk A/S must pay us:

• The amount for financing 20 full-time employees as provided in the agreement, prorated for the current year;

• The milestone payments for products having already passed stage M0, stage M1 and intermediate stages between stage M0 and stage M1, or reaching these stages within 180 days;

• The milestone payments for products which have obtained licences; and

• The royalties due on the products already marketed by Novo Nordisk A/S.

We believe that we have received satisfactory contractual guarantees regarding the effective development of the products by Novo Nordisk A/S, and that, if necessary, we would be able to resume the development of one or more products having passed stage M1 if they were not or were no longer developed by Novo Nordisk A/S.

In addition, under the terms of this agreement, Novo Nordisk A/S has invested 10 million euros in new Innate Pharma shares through a capital increase that occurred on 29 March 2006 (see capital structure and evolution).

6.5.8.2 Agreements Relating to Our TLR Platform

In September 2005, we started a new product development platform in the field of TLR. The launch of this platform comprised the following elements:

• A co-exclusive agreement relating to intellectual property elements belonging to the American company Schering- Plough;

• An exclusive agreement relating to intellectual property elements belonging to the Institut Gustave Roussy, one of the main cancer treatment centres in France;

• Recruiting employees who previously worked with Schering-Plough, and have expertise and know-how in the field of TLR; and

• Installing a laboratory, as part of a secondary organisation, in premises which belonged to Schering-Plough in Dardilly, France (69).

The agreements involving the intellectual property of Schering-Plough and the Institut Gustave Roussy are standard licence agreements for patent applications in the field of TLR. These agreements will result in the following payments:

• Lump sum payments upon signing;

• Milestone payments at the key stages of the development of drug candidates until their sale; and

• Royalties on net sales once the products are marketed.

In addition, the co-exclusive agreement with Schering-Plough comprises the following mutual rights should the parties sub- licence the respective drug candidates developed from the research and development within the scope of the agreement:

• Right of first negotiation for us should Schering-Plough license in Europe the drug candidates in the field before they enter a pivotal clinical trial; and

• Right of first negotiation for Schering-Plough should we license outside Europe the drug candidates in the field before they enter a pivotal clinical trial.

140 6.5.8.3 Other Agreements on the Assets

Considering the nature of our activity, signing agreements relating to the acquisition or the assignment of rights on intellectual property is part of our normal course of business. There are essentially two types of agreements:

• Exclusive collaboration and option agreements or research collaboration agreements. The terms of these agreements involve collaborating on a specific work programme or in a specific field for a limited duration and granting an exclusive option on the licence. The duration of the option for an exclusive licence varies according to contractual conditions but generally lasts for the duration of the underlying intellectual property rights. Under these agreements, we pay research and development charges associated with the collaboration and for the costs of the exclusive licence, including technology access, milestone payments which depend on the achievement of certain stages, and, in the event that the products or technology become licensed intellectual property and are marketed, royalties on sales.

• Exclusive agreements for options, licences or assignment of rights by which we acquire rights on existing intellectual property. The options are generally of limited duration, corresponding to a period when we evaluate the opportunity to license the intellectual property rights concerned, and as a compensation for this, we generally pay an option allowance as well as past and present intellectual property charges for the rights of the option. As compensation for the exclusive licence rights, the duration of which varies according to contractual conditions but generally lasts for the duration of the underlying intellectual property rights, we pay the cost of technology access, milestone payments depending on the achievement of certain stages, and, in the event that the products or technologies become licensed intellectual property and are marketed, royalties on sales.

Agreements on research collaboration

These agreements are very important agreements for us because they permit the acquisition of intellectual property rights on upstream research, i.e., before our field of activity (see Section 6.3.4.1 of this Document de Base).

The principal agreements for research collaboration are as follows:

• University of Genoa: until March 2006, we were bound with the University of Genoa, Italy by a contract initially signed in November 1999 and renewed in January 2003, which involved the discoveries by the laboratory of Alessandro Moretta, one of our founding scientists, in the field of cell and NK physiology and their therapeutic applications. Due to a 2005 modification to the legislation in Italy regarding intellectual property rights developed in Italian academic laboratories, we replaced this contract with two contracts: the first binds us with the University of Genoa and involves inventions developed prior to 2006 and the second binds us directly to Alessandro Moretta and his research team and involves inventions developed as from 2006. The first contract specifies the terms and conditions of the licences for certain intellectual property dating from before 2006, including intellectual property used for the drug candidates IPH 2101 (NN 1975) and IPH 22XX. The second contract specifies the terms and conditions of the current collaboration, which is exclusive in the field concerned, for a three year period that began in January 2006, and the conditions of the exclusive option for exclusive licences that enable us to become the exclusive licence owner of the inventions of the co- contracting party in the field. The terms and conditions of other future licences are not specified and are to be negotiated on a case by case basis.

• University of Perugia: in January 2006, we signed an amendment to our contract with the University of Perugia, Italy, originally executed in January 2003, that involved Andrea Velardi’s work on the use of NK cells in transplants and for the treatment of cancer. This contract specifies the terms and conditions for the current collaboration, exclusive in the field concerned, for a three year period that began in January 2006, and the conditions of exclusive option for exclusive licences that enable us to become the exclusive licence owner of the inventions of the co-contracting party in the field. The terms and conditions of the other future licences are not specified and remain to be negotiated for each case individually.

• Institut National de la Santé et de la Recherche Médicale (National Institute of Health and Medical Research, “Inserm”): we have a certain number of research collaboration agreements under way with Inserm, a French public, scientific and technical organisation.

141 • We signed an agreement, dated March 2006, modifying an agreement dated January 2004, relating to research work at the Centre d’Immunologie de Marseille-Luminy (Marseille-Luminy Immunology Centre, “CIML”) of the group of Eric Vivier, one of our founding scientists, in the field of cell and NK physiology and their therapeutic applications. This contract specifies the terms and conditions of the current collaboration, exclusive in the field concerned, for a three year period that began in January 2006. According to this agreement, and as compensation for the payment of a yearly lump sum, we own the inventions of Eric Vivier’s group, that are developed directly from the work programme.

• We are in the process of modifying and extending our contract with Inserm and the Institut Curie, signed in September 2004 and involving Olivier Lantz’s work on the identification of a new NKT cell population. This contract specifies the terms and conditions of the current collaboration, for a two year period that began in September 2005, and the conditions for the exclusive option for exclusive licences that enable us to become the exclusive licence owner of the inventions of the co-contracting party developed from the work programme. The terms and conditions of the future licence are not yet specified and remain to be negotiated.

• We signed an agreement dated October 2003 with the University of Rouen involving research work by the group of Gérard Coquerel in the field of the synthesis and preparation of pharmaceutical compounds. This agreement specifies the terms and conditions of the current collaboration, for a three year period. According to this agreement, and as compensation for the payment of lump sums, we own the inventions developed from the work programme.

• Institut Gustave Roussy: in December 2004, we signed a master agreement with the Institut Gustave Roussy specifying the general principles of a three year collaboration for the research and development of new molecules and innovative therapeutic approaches. According to this master agreement, each specific collaboration research project in the field is subject to a particular agreement specifying its mode of implementation. To date, three specific agreements have been signed, including one involving the TLR licence agreement as described in Section 6.5.8.2 of this Document de Base.

Option, licence or right assignment agreements

These agreements, more numerous than the collaboration agreements, are established with organisations, academic laboratories or companies, whether or not they are also bound to us through other collaboration research agreements.

The main agreements of this type are as follows:

• Licence on the compound family from which IPH 1101 is issued. We signed this licence agreement with Inserm in April 2000. In addition to the lump sum payments at certain stages of the progression of product IPH 1101 or any other product of the product family from which IPH 1101 is issued, we are required to pay royalties on sales. If a sub-licence is granted, we must refund to Inserm a portion of the amount paid by the sub-licence owners.

• Licence on the compound from which IPH 41XX is issued. We signed this licence agreement with Inserm in September 2002. In addition to lump sum payments at certain stages of the progression of product IPH 41XX, we are required to pay royalties on sales. If a sub-licence is granted, we must refund to Inserm a portion of the amount paid by the sub- licence owners.

• Licence on the compound family from which IPH 12XX is issued. We signed this licence agreement with the German company Bioagency AG in January 2004. In addition to the lump sum payments at certain stages of the progression of product IPH 12XX or of another product of the product family from which IPH 12XX is issued, we are required to pay royalties on sales. If a sub-licence is granted, we must refund to Bioagency AG a portion of the amount paid as a result of the sales by the sub-licence owners.

• Licence on the pharmacogenomic marker of the response to cytotoxic antibodies identified as CD16 in Section 6.5.4.2 of this Document de Base. We signed this licence agreement with the Centre Hospitalier Universitaire de Tours (“CHU”) in February 2003. In addition to a lump sum payment when the licence agreement was signed, we promised to pay a yearly lump sum to the co-contracting party as well as royalties on sales. If a sub-licence is granted, we must refund to CHU a portion of the amount paid by the sub-licence owners.

142 • Licence on the pharmacogenomic marker of the response to cytotoxic antibodies identified as CD16 in Section 6.5.4.2 of this Document de Base. We signed this licence agreement in June 2005 with The Hospital of Special Surgery (“HSS”), a hospital located in New York, United States. In addition to the lump sum payments at certain stages of the progression in the creation of a specific diagnosis tool, we promised to pay a yearly lump sum to the co-contracting party as well as royalties on sales. If a sub-licence is granted, we must refund to HSS a portion of the amount paid by the sub-licence owners.

6.5.9 Other Agreements

For more details regarding the other agreements, see Note 21 annexed to the Financial Statements according to the IFRS standards appearing in Section 20.3 of this Document de Base.

In addition, in April 2006, we signed an agreement with ICON, a “Contract Research Organisation” or “CRO”, to monitor the international portion (Russia and Ukraine) of their first Phase II trial of IPH 1101.

6.6 REGULATORY ENVIRONMENT

6.6.1 Introduction

The research and development, pre-clinical studies, facilities, manufacturing and sale of our products are and will continue to be subject to complex legislation and regulatory provisions specified by various public authorities in France, Europe, the United States and in other countries. The European Drug Agency (“EMEA”), the Food and Drug Administration in the United States (“FDA”), l’Agence Française de Sécurité Sanitaire des Produits de Santé (“AFSSAPS”) and the equivalent regulatory authorities in other countries impose considerable constraints on the development, clinical trials, manufacturing and sale of our products. In the event of non-compliance, the regulatory authorities may impose penalties, seize or remove products from the market or even partially or completely suspend their production. They may also revoke previously granted authorisations for sale, reject authorisation requests, and bring proceedings for non-compliance. Such regulatory constraints are important in considering whether an active ingredient can ultimately become a drug, as well as for recognising the time and investments necessary for such development.

Although there are differences from one country to another, the development of therapeutic products for human use is subject to essentially identical procedures and must comply with the same types of regulation throughout all developed countries. In order to obtain authorisation to sell a product, proof must generally be provided of its efficacy and safety, as well as detailed information on its composition and manufacturing process. In most cases, this involves conducting numerous pre-clinical developments, clinical trials and laboratory tests. The development of a new drug from the initial research to marketing comprises five steps: (i) research, (ii) pre-clinical trials, (iii) clinical trials in humans, (iv) authorisation to sell and (v) marketing.

In France, law n° 88-1138 of 20 December 1988, referred to as the Huriet-Sérusclat law, as amended by law n° 2004-806 of 9 August 2004, concerns public health policy and governs the implementation of research and development work, pre-clinical trials and clinical studies. This law introduced articles L. 1121-1 et seq. into the Code de la santé publique (the French Public Health Code) in an article devoted to biomedical research.

6.6.2 Regulation of Clinical Trials

In humans, clinical trials are usually conducted in three phases that are generally sequential, but can also overlap, and are described in Section 6.3.2 of this Document de Base. Clinical trials can be necessary after marketing to explain certain side effects, study a specific pharmacological effect or obtain more accurate complementary data. Regulatory authorisation is needed for conducting clinical trials. The regulatory authorities may block, suspend or require significant modifications to the clinical study protocols submitted by companies requesting to test products.

Clinical trial authorisation

European directive n° 2001/20/CE dated 4 April 2001, which concerns the application of good clinical practices in conducting clinical trials of drugs for human use, was adopted into the French legislation by law n° 2004-806 of 9 August 2004 and relates to the public health policy and decree n° 2006-477 dated 26 April 2006 modifying that article of the Code de la santé publique regarding biomedical research. This regulation replaces the declaration system issued from the Huriet- Sérusclat law dated 20 December 1988, which required that a biomedical research protocol be presented to a consulting committee for a consulting opinion for the protection of individuals in biomedical research, and a statement by the promoter of the protocol to the AFSSAPS before the start of clinical trials. Article L. 1121-4 of the Code de la santé publique, in the version issued from the law of 9 August 2004, now specifies a system of prior authorisation issued by the AFSSAPS, after a favourable opinion from one of the committees to protect the individuals in the location where the examiner conducts his 143 activity. According to article L. 1123-7 of the same code, the committee gives its opinion on the validity of the research conditions, especially regarding the protection of participants and their personal information and the method for acquiring their informed consent, as well as the overall relevance of the project, the evaluation of the benefits and risks and the appropriateness of the means being implemented. The AFSSAPS can inform the initiator that it has objections against the implementation of the research. The promoter can then modify the content of the research project and submit a new request to the AFSSAP; however, such a procedure is only available once. If the promoter does not modify the content of his request, it is rejected. According to the terms of the decree dated 26 April 2006, the time for examining the request for authorisation should not exceed 60 days, starting from the date when the complete file has been received. Finally, according to article L. 1123-11, should there be a public health risk or if the AFSSAPS considers that the conditions under which research is implemented no longer comply with the conditions in the request for authorisation or the terms of the Code de la santé publique, it may at any time require that the research procedures be modified, and suspend or even prohibit the research. This new system of prior authorisation will apply from the publication of the law’s decree of application dated 9 August 2004 concerning these measures. Before the publication of the law, the previous system (consultative advice and statement to the AFSSAPS) should be applied.

In the United States, an Investigational New Drug request (“IND”) detailing the contemplated clinical trial protocols must be submitted to the FDA and accepted before clinical trials can start on humans. If there is no objection from the FDA, the IND request becomes applicable 30 days after it is received. At any time during or subsequent to this 30 day period, the FDA may request the suspension of clinical trials, whether contemplated or in progress. This temporary suspension continues until the FDA receives the details it requested. In addition, any ethics committee with authority over a clinical site may delay or suspend clinical trials, either temporarily or definitively, if it thinks that the patients’ safety is not ensured or in the case of noncompliance with the regulatory provisions.

In most countries, clinical trials must comply with the Good Clinical Practice Standards as defined by the International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use (“ICH”). These Good Clinical Practices (“GCP”), which were the subject of a ministerial order dated 23 April 2004 stipulating the applicable standards, constitute a set of ethical and scientific quality requirements that must be complied with during the planning, implementation, registration and notification of clinical trials. Directive n° 2005/28/CE dated 8 April 2005 also adopted the GCP principles as part of the reinforcement of the regulatory structure specified by Directive n° 2001/20/CE. The competent authority selected in each Member Country to authorise clinical trials must take into consideration, among other things, the scientific value of the study, the safety of the participants and the possible responsibility of the clinical site.

Conducting clinical trials

When conducting clinical trials, companies must comply with complex regulations during each phase of the process, which are based on the principle of informed consent by the patient to whom the products will be administered. Articles L. 1122-1 et seq. of the Code de la santé publique specify that the patient must be kept informed of the objective, the methodology and duration of the research, and also of the expected benefits and predictable constraints and risks associated with the administration of products during clinical trials. The information is summarised in a written document given to the patient before any administration of products.

Patients must be kept regularly informed of the clinical trials’ procedure and of the overall research results. The personal data collected during clinical trials must be provided to the Commission Nationale Informatique et Liberté (“CNIL”). Patients have the right to access and correct this data according to law n° 78-17 dated 6 January 1978, as modified by law n° 2004- 801 dated 6 August 2004, concerning data processing, records and other rights.

6.6.3 Regulations Concerning the Authorisation to Sell

The results of pre-clinical developments and of clinical trials must be submitted to the EMEA in Europe and to the FDA in the United States. These results, accompanied by detailed information on the tests and the manufacturing process of the product, constitute the file requesting the authorisation to sell. The preparation of such requests and their examination by the competent authority are expensive and can take several years.

In Europe, there is a centralised procedure for the authorisation to sell drugs, specified by the Directive n° 2004/27/CE dated 31 March 2004 and Code n° 726/2004 dated 31 March 2004. Since 20 November 2005, this procedure has been compulsory for new products, in particular for new cancer products, and for drugs having orphan drug status. This procedure will also become compulsory as of 20 May 2008 for drugs targeting auto-immune disease and other immune dysfunctions. If the authorisation to sell is granted by the EMEA, it is automatically valid for all the member countries of the European Union. The AFSSAPS remains nonetheless competent for examining requests for authorisation to sell in French territory.

144 Accelerated Review and Fast track Qualification

In the United States, Congress adopted a new regulation in 1997 (“Food and Drug Administration Modernization Act” or “Modernization Act”) intended to facilitate the approval of new drugs and of effective non toxic biological and medical devices by accelerating the FDA’s examination process. The Modernization Act defines the legal framework for accelerated product examination and approval. A product is eligible for the accelerated procedure (“Fast track”) if it is a drug or biological device intended for the treatment of a severe or potentially fatal pathology and if it is able to meet an unsatisfied medical need. The promoter of a new drug or biological device may ask the FDA at any time during clinical development to apply the Fast track procedure. In the case of a Fast track authorisation request, the promoter of the product may be authorised to submit to the FDA the various components of the request for registration as they become available.

The Modernization Act specifies that the FDA should answer a Fast track qualification request during the 60 days following its reception. When making a decision, the FDA may take into account an effect, a substitution result or any other result having a reasonable chance of predicting clinical benefit, such a procedure being referred to as an “accelerated review”. A substitution result is a result obtained in a laboratory or a physical sign which does not constitute, in itself, a direct measurement of the patient’s sensations, biological functions or survival, but which makes it possible to anticipate a therapeutic benefit. Under the accelerated review procedure, the FDA may require (i) the implementation of clinical studies on the product subsequent to the authorisation in order to validate a substitution result or to confirm the effects on the clinical objective, and (ii) a preliminary review of all promotional material. If complementary research or experiments show that a marketed product presents risks, the FDA may require its immediate withdrawal. In addition, the FDA may withdraw an authorisation to sell for other reasons, especially if studies subsequent to the authorisation are not diligently carried out. Through an additional guarantee, the distribution of Fast track products may be limited to organisations able to use them without risk and to specialised physicians. The FDA may also request that specific medical procedures, such as blood analyses, be carried out if they are considered essential for ensuring the safety and the efficacy of the product.

Orphan drugs

A specific authorisation procedure is used for orphan drugs.

In the United States, the 1983 Orphan Drug Act brings together various texts that encourage the development of treatments for orphan diseases. The FDA grants the status of orphan drug to any drug aimed at treating diseases affecting less than 200,000 people per year in the United States. The Orphan Drug Act also provides the possibility of obtaining subsidies from the American government to cover clinical trials, tax credits to cover research costs, a possible exemption from procedural fees when filing a registration request with the FDA, and 7 year exclusivity in the event of authorisation to sell.

In Europe, equivalent legislation has been adopted for promoting the treatments of orphan diseases. According to Code n° 847/2000/CE dated 16 December 1999, as amended by Code n° 847/2000/CE dated 27 April 2000, a drug will be considered as an orphan drug if its promoter shows in its submission to the EMEA that it is intended for the treatment of a pathology affecting at the most 5 individuals out of 10,000 in the European Union and for which there is no satisfactory treatment. Should the product obtain the orphan drug status, it receives an exclusive 10 year marketing period, during which no similar product may be sold for the same indication, as well as an exemption from regulatory charges and other advantages.

6.6.4 Regulations Concerning the Environment, Health and Safety

We are also subject to laws and regulations concerning the environment, health and safety, including those concerning the storage, use, handling, transport and removal of dangerous, chemical, biological and radioactive products and of industrial and hospital waste. Our activities are specifically subject to regulations concerning radioactive substances, which require authorisation from the General Management of nuclear safety and radioprotection for possessing and using radionuclides, and to specific rules for training workers and applying safety instructions aimed at limiting the risk of worker exposure to ionising radiation.

6.7 DEPENDENCY FACTORS

See Section 6.5.8 and Section 11 of this Document de Base.

145 6.8 COMPETITIVE POSITION

The biotechnology and pharmaceutical industry sector, particularly in oncology, is characterised by very rapid evolution and intense competition. Numerous companies, pharmaceutical and biotechnological laboratories, academic organisations and other research centres are actively involved in the discovery, research, development and marketing of immunotherapy products and other innovative techniques and products for the treatment of cancer. According to the Pharmaceutical Research and Manufacturers of America (PhRMA), approximately 400 drug candidates were under development in 2005 for indications in oncology.

If we obtain marketing authorisation for our products, they will most likely be in competition with other immunotherapy products or with other products of targeted therapies. Among such innovative therapies under development or recently introduced to the market are monoclonal antibodies, angiogenesis inhibitors (anti-VEGF) and EGF inhibitors (Epidermal Growth Factor). It is probable, however, that the treatments as administered to patients will integrate several of these therapies.

To our knowledge, we are the only company developing an agonist specific to γδ T cells at a clinical level. In the field of NK cells, our partner Novo Nordisk A/S and the Israeli company NatSpears are, to our knowledge, the only active players. Conversely, the field of TLR is a competitive field (see Section 6.5.3 of this Document de Base), including 3M Pharmaceuticals, Coley Pharmaceuticals, Dynavax, Anadys Pharmaceuticals and Idera Pharmaceuticals. Some of these companies have recently established important collaboration and licence agreements with major players in the pharmaceutical industry, such as Pfizer and Novartis. As far as we know, none of these players has a programme at the clinical level in the field of TLR3, which is the specific field we are exploring.

Numerous companies developing anti-cancer therapies have greater financial, industrial, commercial and technological resources than we do. In particular, the major pharmaceutical laboratories have greater experience with clinical trials and regulatory procedures. In addition, they have resources allowing them to obtain regulatory authorisations and to market their new anti-cancer treatments much more rapidly than we can.

Competition between the developers of anti-cancer therapies is also strong in terms of the acquisition of new products and technologies, thereby increasing prices. We are in competition with numerous companies for acquiring the rights to use certain promising products for the development of our immunotherapy products. This competition with other pharmaceutical laboratories and academic organisations also applies to the recruitment of qualified scientific, technical and administrative personnel.

Because of the growing understanding of the biological mechanisms of cancer and the emergence of new companies dedicated to its treatment with innovative therapies, we believe that the competition in this sector will become more intense.

146 CHAPTER 7. ORGANISATIONAL CHART

Not applicable.

CHAPTER 8. REAL ESTATE

Our corporate headquarters are located in Marseille, where we conduct our research and development activities. As of 31 December 2005, we employed 50 people at this site. These facilities are located in leased premises, with a surface area of approximately 800 square meters. In February 2001, we signed a commercial lease for nine years, which can be renewed with the owner, the Marseille Chamber of Commerce. The rent for this lease was 87 thousand euros for the period ended on 31 December 2005 (see Note 21 to our IFRS Accounts and Section 9.2.1.3 of this Document de Base.

We also conduct research and development activities in Lyon and Nantes. In Lyon, we lease approximately 325 square meters of offices and laboratory space. As of 31 December 2005, we had eight full-time employees at this site. On 1 September 2005, we signed a renewable commercial lease for nine years with the owner, the Bio-optisis company (see Note 21 to our IFRS Accounts and Section 9.2.1.3 in this Document de Base.). In Nantes, we also lease approximately 50 square meters at the university hospital centre, which allows us to accommodate seconded staff. On 31 December 2005, we employed two people at this site.

In winter 2007, we plan to group all our activities in new premises belonging to the urban community of Marseille-Provence- Métropole, with a surface area of 2,400 square meters, located adjacent to the Marseille-Luminy campus.

147 CHAPTER 9. A REVIEW OF OUR COMPANY’S FINANCIAL POSITION AND RESULTS OF OPERATIONS

9.1 GENERAL PRESENTATION

We are a biotechnology company with a focus on the development of immunology-based therapies for tumour-related illnesses. Our technological platform combines immunology and chemistry of natural substances. Our principal research field targets the activation of non-conventional lymphocytes (such as gamma delta T cells, NK and NK.T cells) and Toll receptors (TLR).

As of 31 December 2005, we had seven products under development, none of which has yet been commercialised.

In the short term, our potential clients are companies active in the pharmaceutical industry to whom we will sell our products through licensing agreements. In 2003, we signed an initial product-licensing agreement with Novo Nordisk A/S, which became a minority shareholder in our company in 2004. Our relationship with Novo Nordisk A/S was strengthened by our entering into a second agreement with them in March 2006 (see Section 6.5.8.1 of this Document de Base).

In the longer term, we intend to deliver products to patients through hospital centres that specialise in treating cancer.

Our annual financial statements prepared in accordance with generally acceptable accounting principles in France for the fiscal years ended on 31 December 2003, 2004 and 2005 are included in Section 20.1 of this Document de Base. As we have no subsidiaries, we do not prepare consolidated accounts.

For the fiscal years ended on 31 December 2003, 2004 and 2005, we have also prepared our financial statements in accordance with IFRS (“IFRS Accounts”). Our IFRS Accounts were approved by our Board on 28 April 2006, however, as the preparation of these accounts is not legally required, they will not be submitted for approval at our General Shareholders’ Meeting.

The analysis presented below is based on our IFRS Accounts and should be read in conjunction with these accounts, which are included in Section 20.3 of this Document de Base.

9.1.1 Pro Forma Financial Statements

None.

9.1.2 Principal Factors Affecting Our Business and Operating Results

Our business and operating results are primarily affected by fluctuations in revenue from our collaboration and licensing agreements, which currently represent the majority of our operating revenue, and by changes in our research and development costs. In addition, we regularly issue shares to our employees and our results are affected by the associated charge, in accordance with IFRS.

The stages of the research and development of our products (M0, M1, M2, etc.) are explained in Section 6.3.3 of this Document de Base.

9.2 COMPARISON OF THE LAST THREE FISCAL YEARS

9.2.1 Presentation of Components of Operating Results

9.2.1.1 Operating Revenue

Currently, our operating revenue is derived mainly from collaboration and licensing agreements as well as government funding for research expenditure. Our operating revenue was 1.3 million euros, 3.1 million euros and 2.4 million euros for the fiscal years ended on 31 December 2003, 2004 and 2005, respectively, from the following sources:

Fiscal Year ended on 31 December In thousands of euros 2003 2004 2005

Licensing revenue ...... 240 2,110 1,300

Government financing for research expenditure...... 1,061 943 1,144

Operating Revenue ...... 1,301 3,053 2,444

148

The government funding for our research expenditures, consisting mainly of a research tax credit, has remained relatively stable. Revenue from our collaboration and licensing agreements has experienced wider fluctuations due to the structure of the payments received under the terms of the first agreement with Novo Nordisk A/S for IPH 2101, which was signed in November 2003.

We do not anticipate any operating revenue of any other kind before the initial marketing of our products, which may occur in 2011 or 2012.

Licensing Revenue

Our licensing revenue for the fiscal years ended on 31 December 2003, 2004 and 2005 is the result of the first collaboration and licensing agreement for the product called IPH 2101 and an option contract signed in November 2003 with Novo Nordisk A/S (see Note 2.l to our IFRS Accounts for an explanation of the principles for recognition of income from collaboration and licensing agreements). Variations in our revenues for the fiscal years ended on 31 December 2003, 2004 and 2005 are explained by the payment pattern set forth in these agreements and are also due to our collaborative efforts leading to Milestone 1 were carried out between November 2003 and June 2005.

Government Funding for Research Costs

The table below details government funding for the fiscal years ending 31 December 2003, 2004 and 2005:

Fiscal Year ended on 31 December In thousands of euros 2003 2004 2005

French and foreign subsidies ...... 113 46 198 Research tax credit...... 948 897 946 Total government funding for research costs...... 1,061 943 1,144

In 2003 and 2004, French and foreign subsidies consisted of subsidies for recruitment received from ANVAR and the Provence-Alpes Côte d’Azur Regional Council. In 2005, French and foreign subsidies included European funding for research and development programmes in which we participate. These subsidies affect our income statements, as opposed to repayable advances which would be recorded as debt and thus would only impact our balance sheet (see Note 2h to our IFRS Accounts for an explanation of the principles for recording government funding and Note 12 to our IFRS Accounts for a breakdown of these subsidies).

The research tax credit is reimbursed by the government during the fourth fiscal year following the fiscal year in which it was determined that no taxes are owed by the Company. The research tax credit determined for 2003 should be reimbursed in 2007 and those for 2004 and 2005 should be reimbursed in 2008 and 2009, respectively. The research tax credit was not reviewed by tax authorities in 2003, 2004 and 2005. The calculation of the research tax credit has been modified during the fiscal year under review, with the introduction of a portion of the current amount of expenses starting from the fiscal year ended on 31 December 2004. Prior to this change, i.e., up until the calculation of the research tax credit for the fiscal year ended on 31 December 2003, the research tax credit was calculated solely based on 50% of the increase in research and development costs eligible for year N compared to the average research and development costs eligible for years N-1 and N- 2, revalued each year by application of a factor determined by decree. For the fiscal years ended on 31 December 2004 and 2005, the research tax credit is calculated based on 45% of this increase plus 5% of the amount of costs eligible for year N. The table below shows the amount of costs (net of subsidies) eligible for the fiscal years ended on 31 December 2003, 2004 and 2005:

Fiscal year ended on 31 December In thousands of euros 2003 2004 2005

Net Costs Eligible for the Research Tax Credit...... 4,017 4,809 5,964

In addition, we qualify for Jeune Entreprise Innovante (“JEI” or Young Innovative Company) status up to and including the end of 2006. The main benefit of this status is a partial exemption from employer charges for a particular category of employees. The impact of this status is detailed in the section on employee costs.

149 9.2.1.2 Operating Expenses by Business Function

Fiscal Year ended on 31 December In thousands of euros 2003 2004 2005

Operating Revenue ...... 1,301 3,053 2,444 Research and development expenses...... (5,789) (6,921) (7,224) General and administrative expenses...... (914) (1,154) (1,635) Net Operating Expenses ...... (6,703) (8,075) (8,859) Operating Income / (Loss)...... (5,402) (5,022) (6,415)

Research and development expenses include the cost of research and development personnel (including employees assigned to work under our collaboration and licensing agreements), product manufacturing costs, subcontracting costs (research, pre- clinical and clinical development) and costs of materials (reagents and other consumables) and pharmaceutical products. Our research and development costs were 5.8 million euros, 6.9 million euros and 7.2 million euros for the fiscal years ended on 31 December 2003, 2004 and 2005, respectively. This increase is a reflection of our efforts to expand our research and development, particularly the start of clinical trials for IPH 1101 in 2004. These expenses represented 86%, 86% and 82% of our net operating expenses for the fiscal years ended on 31 December 2003, 2004 and 2005, respectively. The relative reduction in research and development costs as a percentage of total operating expenses in 2005 compared to the fiscal years ended on 31 December 2003 and 2004 is explained by a relative increase in general and administrative expenses.

General and administrative expenses include expenses for employees not working on research and development, as well as expenses for the management and development of our business. General and administrative expenses amounted to 0.9 million euros, 1.2 million euros and 1.6 million euros for the fiscal years ended on 31 December 2003, 2004 and 2005, respectively. These expenses represented a total of 14%, 14% and 18% of our net operating expenses for the fiscal years ended on 31 December 2003, 2004 and 2005, respectively. This increase is mainly the result of increasing costs for our support staff, particularly due to the recruitment of a business development director and an in-house counsel, and also the increasing costs of external services to support our business development activities.

9.2.1.3 Operating Expenses by Nature

Fiscal Year Ending on 31 December In thousands of euros 2003 2004 2005

Operating revenue ...... 1,301 3,053 2,444 Cost of supplies and consumable materials ...... (890) (1,191) (944) Intellectual property expenses ...... (365) (507) (489) Other purchases and external expenses...... (3,090) (3,835) (4,106) Employee benefits costs...... (1,991) (2,006) (2,795) Share-based compensation...... (99) (99) (214) Depreciation and amortisation ...... (295) (275) (293) Other income and expenses ...... 27 (163) (19) Net operating expenses ...... (6,703) (8,075) (8,859) Operating income / (loss)...... (5,402) (5,022) (6,415)

Cost of Supplies and Consumable Materials

The cost of supplies and consumable materials totalled 890 thousand euros, 1,191 thousand euros and 944 thousand euros for the fiscal years ended on 31 December 2003, 2004 and 2005, respectively.

The cost of supplies and consumable materials were separated into two categories: (i) costs for manufacturing pharmaceutical ingredients and products and (ii) purchasing of products and consumables, broken down as follows for the fiscal years ended on 31 December 2003, 2004 and 2005:

Fiscal Year ended on 31 December In thousands of euros 2003 2004 2005

Cost of manufacturing consumable products...... 186 406 190 Other consumable purchases ...... 704 785 754 Cost of supplies and consumable materials ...... 890 1,191 944

150 Cost of manufacturing consumable products

As we have no manufacturing facilities, we outsource our entire production process. Our most advanced product, IPH 1101, is manufactured by different subcontractors in several stages, from manufacturing the pharmaceutical ingredients, to the intermediate stage of production, and eventually to the delivery of the finished product lots (see Section 6.3.5 of this Document de Base).

The significant increase in the cost of manufacturing consumable products in 2004 is mainly due to the high consumption of IPH 1101 for pre-clinical uses.

Other consumable purchases

Expenses for other consumable products include the cost of products consumed in our laboratories and by third parties with whom we collaborate during our clinical trials.

Fiscal Year ended on 31 December In thousands of euros 2003 2004 2005

Purchases of consumables ...... 659 690 641 Pharmaceutical product purchases...... 45 95 113 Other consumable purchases...... 704 785 754

Consumable purchases mainly refer to laboratory reagents.

Purchases of pharmaceutical products include purchases of IL-2, a product used in the clinical phase in combination with IPH 1101. These purchases increased over the prior three years due to an increase in the doses used in the clinical phase and the use of the product during pre-clinical studies.

Intellectual Property Expenses

Costs associated with our intellectual property were 365 thousand euros, 507 thousand euros and 489 thousand euros for the fiscal years ending 31 December 2003, 2004 and 2005, respectively.

These costs include the cost of filing and protecting our patents (including patents for which we acquired the rights from third parties and assumed the costs for filing and protection under the terms of the agreements with the patent owners) as well as the costs for obtaining an option or licence for intellectual property. IAS 38 requires that we recognise all intellectual property expenses for the fiscal year in which we incur the costs.

The costs of filing and protecting our patents came to 59 thousand euros, 165 thousand euros and 252 thousand euros for the fiscal years ended on 31 December 2003, 2004 and 2005, respectively. We filed six, 21 and 52 patent applications (initial applications or applications for extensions for our patents or patents we hold jointly with others) during the fiscal years ended on 31 December 2003, 2004 and 2005, respectively.

The costs of obtaining an option or licence or acquiring intellectual property came to 306 thousand euros, 342 thousand euros and 237 thousand euros during the fiscal years ended on 31 December 2003, 2004 and 2005, respectively. We signed six, four and three new option, licensing or acquisition agreements during the fiscal years ended on 31 December 2003, 2004 and 2005, respectively.

151 Other Purchases and External Expenses

Other purchases and external expenses came to 3.1 million euros, 3.8 million euros and 4.1 million euros during the fiscal years ended on 31 December 2003, 2004 and 2005, respectively, broken down as follows:

Fiscal Year ended on 31 December In thousands of euros 2003 2004 2005

Subcontracting ...... 1,895 2,485 2,402

Scientific consultants and services...... 240 150 170

Leasing, maintenance and utility costs ...... 328 345 485

Travel and conventions...... 262 364 451

Non-scientific advisory and consulting ...... 199 260 343

Marketing, communication and public relations...... 71 92 139

Other ...... 95 139 116

Other purchase and external expenses ...... 3,090 3,835 4,106

Subcontracting expenses involve research study costs (financing outside research, particularly academic research, antibody humanisation technologies, manufacturing process development, etc.), pre-clinical development (pilot manufacturing, tolerance and pharmacology studies, etc.) or clinical costs (clinical trial management, etc.) outsourced to third parties.

The following table details these costs by category over the period under review:

Fiscal Year ended on December 31 In thousands of euros 2003 2004 2005

Research subcontracting ...... 129 789 1,115

Clinical subcontracting ...... 248 497 722

Pre-clinical subcontracting ...... 1,516 1,142 557

Other subcontracting...... 2 57 8

Subcontracting ...... 1,895 2,485 2,402

The increase in research subcontracting between 2003 and 2005 is due in particular to new collaboration agreements with academic institutions, the start of development of IPH 12XX (developing the manufacturing process) as well as clinical trials on humans for IPH 22XX and IPH 41XX, which began in 2004 and continued in 2005.

The increase in clinical subcontracting costs is due to an increase in our clinical activities, particularly the use of a specialised service provider in 2005 to manage the monitoring of the D004-102 trial of IPH 1101 (see Section 6.5.1.2 in this Document de Base).

The decrease in pre-clinical subcontracting is due to the completion of the first pre-clinical development phases of IPH 1101.

Scientific consulting and services consist of costs invoiced by outside consultants assisting in the research and development of our products. It also includes fees paid to members of our Scientific Advisory Board. The decrease between 2003 and 2004 is explained by our extensive use of consultants in relation to regulatory matters related to the initiation of our D004-101 clinical phase of IPH 1101 in 2003.

Leasing, maintenance and utility costs cover rental costs and charges for our building in Marseille and, for the fiscal year ended on 31 December 2005, the rental costs and charges for our laboratories in Dardilly (Department 69 in France), as well as the leasing costs for our computer equipment.

Travel and convention costs cover expenses for employee travel and attending conferences, particularly business development conferences.

Non-scientific fees include fees paid to auditing firms (see Section 9.8 of this Document de Base), to our accountant for his assistance in accounting, tax and employee matters, our attorneys for their assistance in negotiating collaboration and licensing agreements and general legal assistance, to business strategy or development consultants and for recruitment fees.

152

Marketing, communications and public relations costs include fees for our communications and public relations consultants and costs of developing and producing communications platforms, such as our website, and business reports. The steady increase in these three items over the last three years is principally due to the growth of our business.

Employee Benefits

Employee benefit costs, other than share-based compensation, came to 2.0 million euros, 2.0 million euros and 2.8 million euros for the fiscal years ended on 31 December 2003, 2004 and 2005, respectively.

This line item includes salaries and social costs borne by our company. Our average payroll was 30.0, 37.0 and 47.5 employees for the fiscal years ended on 31 December 2003, 2004 and 2005, respectively.

The distribution of our employees working on research and development and employees working on support operations (general and administrative expenses) was as follows for the fiscal years ended on 31 December 2003, 2004 and 2005:

Fiscal Year ended on 31 December 2003 2004 2005

(1) Employees at the beginning of the year (A)

Research and development ...... 20.0 25.0 32.0

General and administrative expenses...... 7.0 8.0 9.0

Total...... 27.0 33.0 41.0

(1) Employees at the end of the year (B)

Research and development ...... 25.0 32.0 41.0

General and administrative expenses...... 8.0 9.0 13.0

Total...... 33.0 41.0 54.0

(1) Average no. of employees over the year ((A + B) / 2)

Research and development ...... 22.5 28.5 36.5

General and administrative expenses...... 7.5 8.5 11.0

Total...... 30.0 37.0 47.5

(1) This calculation only includes full time or part-time employees working more than 80% of the time.

Calculating employee expenses (salary and social costs) for the average payroll (the average number of employees over the year) showed an annual average amount of 67 thousand euros, 54 thousand euros and 58 thousand euros per employee for the fiscal years ended on 31 December 2003, 2004 and 2005, respectively.

In 2004, we were awarded Jeune Entreprise Innovante status. The savings in employee expenses resulting from this status are estimated between 385 thousand euros and 510 thousand euros for the fiscal years ended on 31 December 2004 and 2005, respectively, in the form of exemptions from social contributions for employees working on our research and development projects.

Between 2003 and 2004, the limited increase in employee expense reflects an increase in payroll costs of approximately 9% for a comparable number of employees, in spite of an increase in staff and a reduction in the cost per employee, which was offset by a reduction in our employer social costs following the receipt of JEI status.

In 2005, the increase in employee costs and the per employee cost based on the average number of employees was due to salary increases and an increase in the number of employees, the effects of which were partially offset by the benefits of our JEI status.

Share-based Compensation

Share-based compensation came to 0.1 million euros, 0.1 million euros and 0.2 million euros for the fiscal years ended on 31 December 2003, 2004 and 2005, respectively. These are costs associated with the potential compensation given to managers and employees in the form of securities which would give them part ownership of our share capital, and the expenses are accounted for in accordance with IFRS 2.

153

The increase in share-based compensation in 2005 is due to a distribution of new stock options during the 2005 fiscal year, while the previous distribution took place during the fiscal year ended on 31 December 2003.

Depreciation and Amortisation

These costs represented 295 thousand euros, 275 thousand euros and 293 thousand euros for the fiscal years ended on 31 December 2003, 2004 and 2005, respectively. They mainly consist of depreciation charges for laboratory equipment.

Other Income and Expenses, Net

We had other income; net of 27 thousand euros for the fiscal year ending 31 December 2003 and other expenses; net of 163 thousand euros and 19 thousand euros for the fiscal years ended on 31 December 2004 and 2005. Other income and expenses include taxes as well as exceptional income and expenses. The variation between the fiscal years ended on 31 December 2003, 2004 and 2005 is due to the impairment of accounts receivable for an amount of 121 thousand euros booked in 2004 on a subsidy to be paid by the French government (see Note 12b2 to our IFRS Accounts).

9.2.2 Presentation of Components of Net Income / (Loss)

9.2.2.1 Net Interest Income

Our net interest income came to 391 thousand euros, 289 thousand euros and 286 thousand euros for the fiscal years ended on 31 December 2003, 2004 and 2005, respectively.

These totals include interest paid on our borrowings and finance leases, realised or unrealised exchange gains and losses on the U.S. dollar bank account and interest income from our investments.

Thus far, we have not relied on bank loans, leases or other forms of finance leasing and the global amount of our bank deposits has exceeded the amounts we have owed our banks, which explains the net positive financial result. Our investment policy favours guaranteed interest and low risk. We invest essentially in the money market with the goal of achieving better performance than EONIA (Euro OverNight Index Average) over 12 months, which is made possible by extending the term of the investment for a portion of our cash, cash equivalents and current financial instruments.

We estimate that the yield on our cash, cash equivalents and current financial instruments was higher than the average EONIA, which was 2.32%, 2.05% and 2.09% for the fiscal years ended on 31 December 2003, 2004 and 2005, respectively.

The reduction in net interest income between 2003 and 2005 is due to lower yields, which resulted from a reduction in money market rates (see above), in spite of an increase in the average balance of cash, cash equivalents and current financial instruments, which were 17.0 million euros, 20.0 million euros and 21.8 million euros for the fiscal years ended on 31 December 2003, 2004 and 2005, respectively. For purposes of this analysis, the average balance of cash, cash equivalents and current financial instruments for the period is defined as the arithmetical average of the cumulative balance for these items between the beginning and end of the fiscal year.

We estimate that a variation of 50 basis points in the yield from our average balance of cash, cash equivalents and current financial instruments for the period between 2003 and 2005 would have had an impact of about 100 thousand euros, annually, on our interest income.

9.2.2.2 Income Tax

Due to the deficits reported for the last three fiscal years, we have not paid income tax. No deferred tax asset has been recorded as there is insufficient likelihood of recovery. The research tax credit is not income tax according to IFRS.

9.2.3 Presentation of Components of Net Income / (Loss) per Share

The net loss per authorised and issued share came to 0.48 euros, 0.36 euros and 0.41 euros for the fiscal years ended on 31 December 2003, 2004 and 2005, respectively.

9.3 LIQUIDITY AND SOURCES OF FINANCING

As of 31 December 2005, the amount of our cash, cash equivalents and current financial instruments held came to 18.3 million euros, compared to 25.2 million euros on 31 December 2004, and 14.9 million euros on 31 December 2003. Cash and investment securities held as cash equivalents and current financial instruments include monetary mutual fund investments (SICAV or FCP) and structured monetary products with a fixed maturity date. These cash, cash equivalents and current financial instruments are used to finance our business, and in particular, our research and development costs. 154

As of 31 December 2005, our investment securities included in cash equivalents and current financial instruments were invested in products with maturities of less than 12 months. We may make investments with longer maturities to improve the yield.

Since our creation in 1999, we have been primarily financed by issuing new securities, the majority of which were shares with attached warrants (Actions à Bons de Souscription d’Actions or ABSA), income from our first agreement with Novo Nordisk A/S, repayable advances and subsidies received from various French and foreign government agencies (including ANVAR), a refund of the research tax credit accumulated for the first three fiscal years and VAT refunds.

9.3.1 Capital Financing

We have received a total of 49.5 million euros (before deducting the costs associated with capital increases) from capital increases between 1999 and 2006. The table below summarises the main capital increases, in value, between our creation and the date of this Document de Base:

Date Amount Raised

April 2000...... 4.5 million euros July 2002...... 20.0 million euros March 2004...... 5.0 million euros July 2004...... 10.0 million euros March 2006...... 10.0 million euros

With respect to the capital increases referred to above, the shares subscribed by the shareholders were preference shares, with different rankings, giving the shareholders different rights depending on when they were subscribed (see Sections 21.1.1 and 21.1.6 of this Document de Base.).

9.3.2 Debt Financing

Since our creation, we have received financing from ANVAR in the form of repayable interest-free. On 31 December 2005, the amount owed for these repayable advances was 2.6 million euros, 0.6 million of which was repayable regardless of any successful outcome from a technical or business standpoint, and therefore recorded as borrowings, and 2.0 million was repayable only in case of a successful outcome from technical and/or business standpoint, and therefore recorded as conditional subsidies and grants.

Currently, we believe that the programmes covered by these repayable advances meet the criteria for a successful outcome from a technical and/or business perspective. Therefore, we envisage repaying this assistance in full.

The table below presents a simplified repayment schedule of these advances as of 31 December 2005 (for a total of 3.2 million euros, including 0.6 million euros to be received for requests for final payments of the advances referred to above and filed with ANVAR in March 2006):

Year Repayment Amount

2006 ...... 0.2 million euros

2007 ...... 0.2 million euros

2008 ...... 0.6 million euros

2009 ...... 0.9 million euros

2010 ...... 1.1 million euros

2011 ...... 0.2 million euros

To a lesser extent, we also used finance leases and bank loans to finance the purchase of laboratory equipment and set up new laboratories. Our future obligations resulting from this type of financing were less than 0.1 million euros on 31 December 2005.

We intend to partially finance renovations and equipment for our future headquarters (office and laboratory space) by using bank loans and finance leases. The precise method of financing, which may involve a total of 2.0 million euros, has not yet been determined.

155 In addition, we rely on operating leases for our computer equipment. The table below shows the instalment payments owed on 31 December 2003, 2004 and 2005 under the terms of these contracts:

Fiscal Year ended on 31 December In thousands of euros 2003 2004 2005

ECS...... 95 104 88

Dell Financing ...... - - 25

Instalment payments owed for operating lease contracts...... 95 104 113

We will continue to finance the acquisition of our computer equipment by operating lease agreements in the years to come.

9.4 ANALYSIS OF THE HISTORICAL CHANGES IN CASH FLOWS

9.4.1 Cash Flows from Operating Activities

Our net cash flows used in operating activities for the fiscal years ended on 31 December 2003, 2004 and 2005 amounted to 5.1 million euros, 4.5 million euros and 7.2 million euros, respectively. The fluctuating nature of our cash flows from operating activities is due to the fluctuations in income combined with a steady increase in operating expenses (see Section 9.2.1.2 in this Document de Base).

9.4.2 Cash Flows from Investing Activities

Our operations generally require little investment in tangible assets because we subcontract most of the manufacturing and validation activities to third parties. Our investments in tangible assets, mainly laboratory equipment, amounted to 0.2 million euros, 0.3 million euros and 0.1 million euros for the fiscal years ended on 31 December 2003, 2004 and 2005, respectively. During this period, our most expensive investment was the acquisition of two flux cytometers for a total of 138 thousand euros during the fiscal year ended on 31 December 2004.

We lease our computer equipment and buildings under operating lease contracts. Our payments for these items is therefore recorded as used in operating activities.

We plan to carry out significant construction work and purchases in relation to the transfer of our headquarters and laboratories from Marseille to our new site in 2008. This could have a significant impact (a total of about 2.0 million euros) on our cash flows from investing activities for the fiscal year of 2006 and subsequent years.

The entry for the line item purchase and sale of current financial instruments concerns the purchase and resale (usually at maturity) of current financial instruments that do not meet the conditions under IAS 7 to be considered as cash equivalents (see Note 2.e to our IFRS Accounts). The purchase and sale of current financial instruments has no impact on the total amount of cash, cash equivalents and current financial instruments.

9.4.3 Cash Flows from Financing Activities

We carried out two capital increases in March and July 2004 for a total of 15.0 million euros (before deducting the costs associated with these capital increases). The increase in debt during the fiscal years ended on 31 December 2004 and 2005 (0.9 million euros and 0.3 million euros, respectively) is primarily due to partial payments from ANVAR of repayable advances.

9.5 OFF BALANCE SHEET COMMITMENTS

Our off balance sheet commitments are described in Note 21 to our IFRS Accounts as of 31 December 2005.

In addition, under the agreement signed with Novo Nordisk A/S on 28 March 2006 (see Section 6.5.8.1 in this Document de Base), we agreed to abide by certain obligations and gave Novo Nordisk A/S certain guarantees in return. The guarantees we granted are standard to collaboration and licensing agreements in the biopharmaceutical field and, in particular, relate to exclusivity, confidentiality, due care by the parties, and the intellectual property rights. Any demonstrated material default of our obligations could result in a unilateral termination of the agreement by Novo Nordisk A/S.

We are bound to third parties under option or licensing agreements for intellectual property rights, which could be of interest to Novo Nordisk A/S under the terms of this agreement. We are obligated to pay to Novo Nordisk A/S a maximum of 600 thousand euros if we do not obtain sufficient intellectual rights from these third parties for Novo Nordisk A/S under a sublicensing arrangement.

156 9.6 EXPOSURE TO EXCHANGE RATE FLUCTUATIONS

We have little exposure to variations in the exchange rate between the euro and the U.S. dollar. Over the last three fiscal years, our revenue has been paid in euros and the majority of our expenses have been invoiced in euros. Nevertheless, some expenses are invoiced in U.S. dollars or in Pounds Sterling. We have an account in U.S. dollars and our exchange policy is to purchase U.S. dollars based on expectations for disbursements in this currency in the months to come. Our exposure to foreign currencies may increase in the future, especially when our products are marketed.

9.7 FUTURE PROSPECTS

The development of our products and our progress towards their commercialisation will lead to increases in our expenses over the upcoming fiscal years. Our total cash, cash equivalents and current financial instruments, which increased following the signing of the agreement with Novo Nordisk A/S, may not be sufficient to finance our development requirements until our first products are commercialised, which we anticipate to happen in 2011 or 2012.

9.7.1 Expenses and Capital Expenditures

We anticipate sustained growth in our research and development costs over the upcoming fiscal years. Costs will increase in the short term because of an increase in the number of clinical trials for IPH 1101, the number of patients treated with this drug candidate, and increases in pre-clinical and pharmaceutical development costs for IPH 12XX and IPH 31XX. We also anticipate an increase in general and administrative expenses, particularly for recruiting additional support staff.

In the short term, expenses for the development of our products in the NK platform, specifically IPH 2101 (NN 1975), IPH 22XX and IPH 23XX, should be borne by Novo Nordisk A/S under the terms of our contract. However, we will be responsible for the costs of this platform, including employee costs.

Excluding laboratory equipment, we will have to invest approximately 2.0 million euros in moving our headquarters and setting up new laboratories over the 2006-2008 period.

We anticipate repaying a total of 3.2 million euros in repayable advances to ANVAR between 2006 and 2011.

9.7.2 Financial Resources

In addition to cash, cash equivalents and current financial instruments in the amount of 18.3 million euros as of 31 December 2005, we anticipate a cash inflow of approximately 35.0 million euros in financial resources between 2006 and 2008 under the terms of the new agreement signed with Novo Nordisk A/S. As of the date of this Document de Base, we have already received 10.0 million euros from a capital increase on 29 March 2006 and 10.0 million euros in payments in February and April 2006 for particular milestones set forth in the contract. The remaining balance of 15.5 million euros may be paid between 2006 and 2008 in the form of financing for research and development (a minimum of 8 million euros) and pre- clinical milestone payments if they are achieved (for the balance of 7.5 million euros).

To a lesser extent, we intend to continue taking advantage of government subsidies from France and Europe as well as the research tax credit to finance our operations.

157 9.8 FEES PAID TO THE STATUTORY AUDITORS AND MEMBERS OF THEIR NETWORKS

The table below sets forth the fees paid to our statutory auditors and members of their networks in 2004 and 2005:

Audit Conseil Expertise – Member of PKF International

Amount %

In euros 2005 2004 2005 2004

Audit

Statutory audit, certification, examination of the annual accounts according to French accounting standards...... 16,880 14,040 100 100

Non-statutory audit...... - - - -

Subtotal...... 16,880 14,040 100 100

Other services Tax-related ...... - - - -

Other...... - - - -

Subtotal...... - - - -

TOTAL ...... 16,880 14,040 100 100

PricewaterhouseCoopers Audit

Amount %

In euros 2005 2004 2005 2004

Audit

Statutory audit, certification, examination of the annual accounts according to French accounting standards...... 16,760 14,040 47 36

Non-statutory audit...... 15,203 24,471 42 64

Subtotal...... 31,963 38,511 89 100

Other services ......

Tax-related ...... - - - -

Other...... 4,120 - 11 -

Subtotal...... 4,120 - 11 -

TOTAL ...... 36,083 38,511 100 100

158 CHAPTER 10. LIQUIDITY AND CAPITAL RESOURCES

10.1 INFORMATION ABOUT OUR CAPITAL

See Note 11 to our IFRS Accounts in Section 20.3 and Sections 9.3 and 21.1 of this Document de Base.

10.2 CASH FLOWS

See IFRS Accounts in Section 20.3 and Section 9.4 of this Document de Base.

10.3 INFORMATION ON BORROWING TERMS AND FINANCING STRUCTURE

See Section 9.3 and Note 8 to our IFRS Accounts in Section 20.3 of this Document de Base.

10.4 RESTRICTIONS ON USE OF CAPITAL

None.

10.5 SOURCES OF FINANCING

See IFRS Accounts in Section 20.3 of this Document de Base and Section 9.3 of this Document de Base.

159 CHAPTER 11. RESEARCH DEVELOPMENT – PATENTS AND LICENCES

11.1 RESEARCH AND DEVELOPMENT ACTIVITIES

See Section 6.3.3 of this Document de Base.

11.2 INTELLECTUAL PROPERTY

11.2.1 Patents

Patents and other intellectual property rights are extremely important in our business sector. We regularly file patent applications to protect our technical processes and products, the processes used to prepare these products, pharmaceutical compounds contained in these products and medical treatment methods. We also regularly license or acquire rights to patents belonging to third parties, academic partners or other companies in the pharmaceutical industry which are of interest to us.

To acquire rights from third parties, we use three different types of agreements:

• Limited-time, exclusive option agreements: during an exclusive period, we evaluate whether it is appropriate to license the intellectual property rights, in exchange for which we usually pay option compensation and assume the past or present intellectual property expenses for the rights covered by the option.

• Exclusive licensing agreements: the agreements vary in length based on the terms of the contract, but generally extend over the life of the underlying intellectual property, in exchange for which we pay the costs of access to the technology, milestone payments based on the completion of certain milestones, and if the products or technologies associated with the licensed intellectual property are marketed, royalties on sales. In addition, we assume the past or present intellectual property expenses for the rights covered by the agreement.

• Exclusive option or licensing collaboration agreements: the agreements involve exclusive collaboration for a specific plan of work or in a specific area over a limited length of time and an exclusive option or licence, which varies in length depending on the terms of the contract, but generally extends over the life of the underlying intellectual property. In exchange for these agreements, we pay the research and development costs for the exclusive collaboration, and for the exclusive licence, the cost of accessing the technology, milestone payments based on the completion of certain milestones and, if the products or technologies associated with the licensed intellectual property are marketed, royalties on sales. In addition, we assume the past or present intellectual property expenses for the rights covered by the agreement.

A certain number of our patent applications which cover key technologies based on our product portfolio have been accepted or are currently being examined in a number of key countries for our industry. Our patents and intellectual property rights are divided into four groups: (1) patents and rights for the γδ product platform, (2) patents and rights for the NK platform, (3) patents and rights for the TLR product platform, and (4) other patents and rights.

The group of patents and rights for the γδ product platform covers the IPH 1101 product and the product families of IPH 12XX as well as the method of their preparation and use, specifically in combination with other pharmaceutical products or as a vaccinal adjuvant. It also includes a method of ex vivo expansion of γδ T cells.

The group of patents and rights for the NK product platform, from our company or from our partner Novo Nordisk A/S, covers the drug candidates IPH 2101 (NN 1975), IPH 22XX and IPH 23XX, as well as the method of their preparation and use, notably in combination with other pharmaceutical products.

The group of patents and rights for the TLR product platform includes families of patents included in a licensing agreement with the Institut Gustave Roussy and Schering-Plough, notably the family of patents for the TLR3 receptor and the treatment method, with certain compounds, for cancers expressing the TLR3 receptor.

The other patents and rights group includes the compounds and methods of use for other products (such as IPH 41XX) as well as technologies, particularly the CD16 marker.

These groups of patents may constitute the basis of new development projects as well as possibilities for assigning rights under collaboration and licensing agreements.

Our strategic policy is to expand the coverage of our patents to countries which could be growth markets for our products and technologies enabling us to grant licences or set up partnerships to develop our technologies and products in associated areas. We also use our expertise and regulatory strategy for orphan drugs to protect our products and technologies.

160

As of 30 April 2006, we have the rights to 51 families of patents, including 13 approved patents and 183 requests in France and other countries. The table below sets forth the number of our approved patents and patent requests by country or region:

Patent Patents Applications Country/Region Approved in Process

Country Patents

France ...... 4 2

United States...... 5 36

Australia...... 1 12

Japan ...... 0 19

Canada ...... 0 20

Israel ...... 0 4

Mexico...... 0 4

China...... 0 7

India...... 0 7

South Korea ...... 0 4

Brazil ...... 0 5

Norway ...... 0 4

Russia...... 0 3

South Africa...... 0 3

European Countries...... 2 24

Country Patents ...... 1 9

Patent Cooperation Treaty (PCT)...... - 20

Total ...... 13 183

We also protect our technology, products, expertise and data by signing confidentiality agreements with our employees, consultants, some of our subcontractors, partners and licensees.

11.2.2 Trademarks

As of 30 April 2006, we own seven trademarks registered or in the process of being registered. Of these, six have been registered in France, three in Europe (EU community trademarks) and two in the United States.

We have registered the following trademarks:

• “Innate Pharma” in France and Europe (EU community trademark);

• “Innate” in Europe (EU community trademark);

• “Phosphostim” in France and Europe (EU community trademark); and

• “Kirostim,” “Kiromab,” “Innacell” and “The Innate Immunity Company” in France.

We have filed for registration for the following trademarks:

• “Innate Pharma” in the United States; and

• “Phosphostim” in the United States.

161 We recently held discussions with Innate Pharmaceuticals AB, a Swedish company listed on the “Aktiettorget”, the Swedish stock exchange, which does business in the biopharmacy sector. On 24 March 2005, we informed Innate Pharmaceuticals AB that we believe there is a possibility of confusion between the name of their company and ours, and also that any marketing activities carried out by Innate Pharmaceuticals AB, even in Sweden, would constitute a violation of our registered community trademark, which covers all the countries in the European Union. On 3 May 2005, Innate Pharmaceuticals indicated that they saw no reason to change the name of their company, and that they could use the trademark “Innate” in the Swedish market. On 2 May 2006, we informed Innate Pharmaceuticals AB of our disagreement.

We have also become aware of the existence of a newly created biopharmaceutical company in the United States called Innate Immune, Inc.

Finally, we are currently in discussions with InnoSweet Gmbh, owner of the trademark “Innvite,” concerning our trademarks “Innate Pharma” and “Innate” in order to determine the use and registration of additional trademarks for the two companies in their respective activities. Innosweet produces and sells sweeteners.

162 CHAPTER 12. INFORMATION ON TRENDS

In accordance with our strategic goals (see Section 6.2.1 in this Document de Base) we intend to:

• Pursue and strengthen the development of our products in clinical trials until we receive approval to market and sell them, anticipated in 2011 or 2012. In 2006, we plan to begin three clinical trials of IPH 1101, including two initial Phase II clinical trials with this product, and we anticipate that Novo Nordisk A/S will have begun the first clinical trial with IPH 2101 (NN 1975) in onco-hematology cases. We are planning to begin three new clinical trials for IPH 1101 in 2007, two of which are new Phase II trials in cancer treatment (including one for a solid tumour indication which remains to be determined, that will be financed from the capital increase raised within the context of the IPO) and a non-cancer type C viral hepatitis treatment Phase I trial. We also anticipate that Novo Nordisk A/S will conduct exploratory clinical trials in onco-hematology. In 2008, in the event of positive results from the Phase IIa trial in metastatic renal cell carcinoma (see Section 6.5.1.2.1 of this Document de Base), we plan to initiate a significant trial with IPH 1101 for the same indication.

• Progress towards the clinical development stage of IPH 12XX and IPH 31XX products. We believe that we will be able to pass Milestone 1 with IPH 12XX and IPH 31XX in the first and second quarters of 2007, respectively. If we meet these deadlines, we should begin clinical trials of IPH 12XX (non-cancer treatment) and IPH 31XX (cancer treatment) in 2008. In addition, one of the goals of our new agreement with Novo Nordisk A/S is to bring new drug candidates to Milestone 1 within the first three years of our collaboration.

In the short term, our income should primarily derive from payments received under the terms of our collaboration and licensing agreements, particularly the agreement with Novo Nordisk A/S. We also believe that we will continue to receive French and European subsidies, as well as research tax credits, to support our operations. Our costs should be comprised of research and development expenses, general expenses and milestone payments to third parties that we are required to make under the terms of collaborative research, option or licensing agreements (see Section 6.5.8 in this Document de Base).

In the medium to long term, our income should come from product sales as well as royalties from sales generated by our partners under the terms of collaboration and licensing agreements for our products. Our costs should be comprised of research and development expenses, general expenses and milestone payments to third parties which we are required make under the terms of collaborative research, option or licensing agreements (see Section 6.5.8 in this Document de Base).

Our short-term financing needs will depend upon:

• our ability to maintain the collaboration and licensing agreement with Novo Nordisk A/S,

• our ability to enter into other collaboration and licensing agreements for our other products with other companies in our industry,

• constraints on developing our products to receive approval for sale, which could significantly affect our research and development costs, and

• acquisitions of intellectual property rights or companies.

In the absence of any acquisition of intellectual property rights or companies, we believe that our current company assets, based on our cash on hand and the current financial instruments available as of 31 December 2005, and following the collaboration and licensing agreement signed with Novo Nordisk A/S in March 2006, should be sufficient to finance our clinical and pre-clinical development until the end of 2008.

The goals, statements and forecasts summarised above are primarily based on the data, assumptions and estimates which we believe are reasonable. You should be aware that these forecasts depend on future circumstances or events which may or may not occur. These statements are not historical facts and should not be interpreted as guarantees that the facts and data given above will occur or that the goals will be reached. The information, assumptions, estimates and items taken into account to determine these goals, statements and forecasts, may turn out to be erroneous or not occur, and could change based on uncertainties in the economic, financial, competitive and regulatory environment. In addition, some information, assumptions and estimates are wholly or partly based on or result from assessments or decisions made by our management, directors or shareholders, and may change or be amended in the future. Also, the occurrence of certain risks described in Section 4 “Risk Factors” in this Document de Base may have an impact on our activities and the attainment of our goals, statements, and forecasts set forth above. Our Company, shareholders and investment service providers therefore assume no liability and provide no guarantees as to the achievement of these goals, statements, and forecasts shown in this section or elsewhere in the Document de Base.

163 CHAPTER 13. PROFIT FORECASTS OR ESTIMATES

None.

CHAPTER 14. ADMINISTRATION, MANAGEMENT AND SUPERVISORY AND GENERAL MANAGEMENT BODIES

The statutory stipulations set forth in this Section will be those applicable once our securities are listed on the exchange.

Our Company was incorporated on 15 September 1999, as a société par action simplifiée with an Executive Board (management body). On 13 June 2005, the Executive Board was made up of the following seven members: Messrs. Hervé Brailly, Frank Bulens, Philippe Pouletty, Frank Mörich, Jean Deleage, Philippe Desmarescaux, and the company Sofinnova Partners SA.

On 13 June 2005, our Company was converted into a société anonyme with a management board and supervisory board.

The Executive Board represents us to third parties and is responsible for producing the financial statements and our budget and is in charge of the administrative and legal operations of our Company. The Executive Board meets as often as required by our interests.

The Executive Committee, a non-statutory body, made up of members of the Executive Board, is responsible for managing our operations. The Executive Committee meets once a month.

In addition, we also have an Audit Committee, a Compensation Committee, a Scientific Advisory Board and a Shareholders’ Observers Panel.

14.1 COMPOSITION OF THE EXECUTIVE BOARD, SUPERVISORY BOARD AND GENERAL MANAGEMENT BODIES

14.1.1 Executive Board

Our Company is managed by an Executive Board with a minimum of two members and a maximum of five, who perform their duties under the control of our Supervisory Board. As of the date of this Document de Base, the Executive Board had three members.

Members of the Executive Board are appointed for renewable terms of three years. However, the appointments of the Executive Board members who were properly appointed for six-year terms by the Supervisory Board on 13 June 2005 in accordance with the by-laws applicable at that time will continue to hold their positions until the end of their original term and will be up for renewal at the Annual General Shareholders’ Meeting held to vote on the accounts for the fiscal year ending on 31 December 2010.

Under current law, the age limit for being a member of the Executive Board is 65. The appointment of any Executive Board member who reaches this legal age limit is terminated immediately and the Executive Board member is considered to have resigned.

While members of the Executive Board are not required to be shareholders, they must be natural persons.

The members of the Executive Board are appointed by the Supervisory Board, which appoints one of them as the Chairman and establishes the method and amount of their compensation when they are appointed.

If one of the seats on the Executive Board becomes vacant, the Supervisory Board must fill it within two months. The member of the Executive Board appointed as a replacement remains in office for the duration of his predecessor’s appointment.

164 As of the date of this Document de Base, the members of our Executive Board are as follows:

Other Positions and Appointments held in First and Last any other company Name, Age Length of Term Position over the last five years

Hervé Brailly(1) 1st Appointment: Chairman of the Member of the age 44 Supervisory Board meeting Executive Board Supervisory Board of of 13/6/05 Inserm Transfert

Term expires: Annual General Shareholders’ Meeting called to vote on the accounts for the fiscal year ending on 31/12/2010

François Romagné(2) 1st Appointment: Member of the Member of the Executive age 42 Supervisory Board meeting Executive Board – Board of the French of 13/6/05 Scientific Manager National Research Agency

Term expires: Annual General Shareholders’ Meeting called to vote on the accounts for the fiscal year ending on 31/12/2010

Stéphane Boissel 1st Appointment: Member of the Member of the age 38 Supervisory Board meeting Executive Board – Supervisory Board of of 13/6/05 Director of Finance, Erytech Pharma Development and Investor Relations Term expires: Annual General Shareholders’ Meeting called to vote on the accounts for the fiscal year ending on 31/12/2010

1 Member of the Management Committee of the société par action simplifiée until our Company was converted into a société anonyme with a management board and supervisory board on 13 June 2005.

2 Mr. François Romagné was a member of the Management Committee from the time our Company was created (appointed in the by-laws) until 28 April 2000, when he resigned.

Chairman of the Executive Board

Hervé Brailly, Ph.D., age 44, Chairman of the Executive Board, is a co-founder and chaired the Management Committee from the time our Company was created in 1999 until it was converted into a société anonyme with a management board and supervisory board on 13 June 2005. Previously, he was a researcher at Immunotech SA, a biotechnology start-up acquired in 1995 by the American company Beckman-Coulter (1986-1994), and was in charge of marketing, business development and R&D at the same company (1994-1998). Beginning in 1998, Mr. Brailly was the director of a business unit of the company with 65 employees (R&D, marketing, manufacturing), with annual sales of 30 million U.S. dollars. He was the force behind the growth of the business activities in China for the same company between 1994 and 1998. Hervé Brailly is a graduate of the Ecole des Mines de Paris (1983) and a Doctor of Immunology, with a specialisation in immuno-pharmacology.

165 Other Members of the Executive Board

François Romagné, age 42, is an Engineering graduate of the Institut National Agronomique Paris Grignon, a Doctor (Ph.D.) of Immunology, a co-founder of Innate Pharma, and has been our Scientific Director since 1999. He is a member of the scientific committee of the French National Research Agency (Agence Nationale de la Recherche or ANR), biotechnology section. Mr. Romagné has devoted his entire career to translational research in immunology in the areas of T cell immunology and innate immunity, having authored 34 publications and been named as inventor on 10 patents. Mr. Romagné spent the first 14 years of his career at the biotechnology company Immunotech, where he held various positions in research and development while control of Immunotech changed hands (Coulter, then Beckman Coulter). At the time he held his last position at Immunotech/Beckman Coulter as the R&D manager of a business unit, he was also the coordinator of a wide European network to develop a new technology for tracking specific Antigen T cells (Tetramere Technology). His scientific work at Immunotech gave him the opportunity to establish the long-term working relationships with the other scientific founders of Innate Pharma, which finally led to the creation of our Company.

Stéphane Boissel, MBA, age 38, joined Innate in September 2002 as the Director of Finance and Development. He is in charge of Finance, Development and Investor Relations. Before joining Innate Pharma, Mr. Boissel held several positions within the Lazard Group (1995-2002) in France and other countries (Singapore and Hong Kong) in the venture capital and mergers and acquisitions advisory sectors. Before working at Lazard, he was an auditor at PWC (1990-1994), specialising in the area of support for mergers and acquisitions (1992-1994). Mr. Boissel holds several university degrees in the area of finance from various French universities (MSG or a Masters in Business Administration) and DEA (a Post-Graduate Diploma) from Lyon and Paris-Dauphine, professional diplomas DESCF (a Diploma in Advanced Studies in Accounting and Finance) and SFAF (French Society of Financial Analysts) as well as an MBA from the University of Chicago Graduate School of Business. Since 2004 he has been responsible for running the “CFO” group of the France Biotech association.

14.1.2 Supervisory Board

Our Supervisory Board is made up of a minimum of three members and a maximum of eighteen members. As of the date of this Document de Base, the Supervisory Board has six members.

Members are appointed for two years. Any member who reaches the end of his term may be reappointed. However, the appointment of any natural person comes to an end, as of right and without any chance for renewal, at the end of the ordinary General Shareholders’ Meeting held to vote on the accounts for the past fiscal year and in the year during which the person turns 70.

The Supervisory Board appoints a Chairman and a Vice-Chairman from its members, who hold these positions during their entire term as members of the Supervisory Board. The Chairman must be a natural person.

Each member must directly own at least one Innate Pharma share during the entire term of his appointment.

166 The members of our Supervisory Board as of the date of this Document de Base are as follows:

Other Positions and Appointments held in any other company First and Last Name, Age Length of Term Position over the last five years

Philippe Desmarescaux 1st appointment: General Chairman Chairman of the Supervisory age 67 Shareholders’ Meeting held on Board of Eurotab SA 22/12/2000(1) Chairman of the Supervisory Term expires: Ordinary General Board of COBEX SA Shareholders’ Meeting held to Board Member of Therascope AG vote on the accounts for the Board Member of SEB SA fiscal year ending on 31/12/2006 Member of the Supervisory Board of Auriga Partners Chairman of the Lyon Science Foundation

Jean Deleage 1st appointment: General Member of the Board Member of IDM Pharma age 66 Shareholders’ Meeting held on Supervisory BoardInc., Kosan Biosciences Inc., 25/6/2002(1) Rigel Pharmaceuticals Inc., Term expires: Ordinary General 7TMA/S, Agy Therapeutics, Shareholders’ Meeting held to Genedata AG, Intarcia vote on the accounts for the Therapeutics, Life Cycle Pharma fiscal year ending on 31/12/2006 A/S, Nereus Pharmaceuticals, U3 Pharma AG and Plexxikon Chairman of PamGene B.V. and TorreyPines Therapeutics

Frank Mörich 1st appointment: General Member of the Chief Executive Officer of age 52 Shareholders’ Meeting held on Supervisory BoardInnogenetics 19/3/2004(1) Member of the Management Term expires: Ordinary General Committee of Neuro 3D SA Shareholders’ Meeting held to Member of the Management vote on the accounts for the Committee of AM-Pharma fiscal year ending on 31/12/2006 Chairman of the Management Committee and Executive Committee of Bayer Healthcare AG

Sofinnova Partners 1st Appointment: General Member of the Board member and Deputy CEO represented by Denis Lucquin Shareholders’ Meeting held on Supervisory Boardof Sofinnova Partners SA age 49 28/4/2000(1) Board member of DBV Term expires: Ordinary General Technologies SA and Novexel SA Shareholders’ Meeting held to Supervisory Board member of vote on the accounts for the ExonHit Therapeutics and Inserm fiscal year ending on 31/12/2006 Transfert Initiative Permanent representative of Sofinnova Partners for Neuro 3D SA, Ablynx N.V., CareX SA, Fovea Pharmaceuticals, IDM Pharma Inc. and Cerenis Therapeutics SA

Philippe Pouletty 1st Appointment: General Member of the Board member of BMD, Neovacs, age 48 Shareholders’ Meeting held on Supervisory BoardTheraclion, Wittycell and Wexim, 22/12/2001(1) Cytomics, Symetics (Switzerland), Term expires: Ordinary General Conjuchem (Canada) Shareholders’ Meeting held to Board member and CEO of Invest vote on the accounts for the in Europe fiscal year ending on 31/12/2006 Manager of Nakostech

167 Frank Bulens 1st Appointment: General Member of the Executive Investment Manager of age 43 Shareholders’ Meeting held on Supervisory BoardGIMV NV 28/4/2000(1) Board member of Diatos SA, Term expires: Ordinary General Ablynx, Inpharmatica, Arrow Shareholders’ Meeting held to Therapeutics and Ceres vote on the accounts for the fiscal year ending on 31/12/2006

(1) Member of the Management Committee of the société par action simplifiée until our Company was converted into a société anonyme with a management board and supervisory board on 13 June 2005.

Philippe Desmarescaux, age 67, has been the Chairman of the Lyon and South Eastern Science Foundation since 1998. An Engineering graduate of the Ecole Nationale Supérieure de Chimie de Paris, a Doctor of Physics, he started his career as a Scientific Research Associate (CNRS). In 1961 he joined the Rhône-Poulenc group, where he became an Engineer in the Research Office of the Progil Company, then Director of Research, Industrial Director and CEO of the Agrochemical Division. After holding several management positions, he became the CEO of the Rhône-Poulenc group between 1992 and 1999. He has been the chairman of several committees, including the board of directors of the Ecole Normal Supérieure de Lyon, and La Société Française de Physique et de Chimie Industrielle in Lyon. He is a board member of SEB, Auriga and Chairman of the Supervisory Board of EUROTAB. He is also the founder and Chairman of the Biovision International Forum.

Jean Deleage, age 66, started his career in the venture capital sector in 1971 at Sofinnova in Paris and in 1976 took part in the creation of the American subsidiary of Sofinnova in San Francisco, which was very successful. In 1979, he set up Burr, Egan, Deleage & Co with Craig Burr and William Egan and diversified this venture capital company, which became Alta Partners in 1996, whose main offices are in San Francisco and Boston. He has invested in some of the leading companies in this sector (Genetech, Chiron, Cephalon). He is or has been a member of the board of directors of many companies, listed and otherwise, including Chiron, Crucell, Genset, Kosan Biosciences, Nereus Pharmaceuticals, Plexxikon, Tigel, Telik, 7TM Pharma and Versaflex. In 1993, the French government awarded him the Legion of Honor in recognition of his career and his accomplishments. He has a Masters in Electrical Engineering from the Ecole Supérieure d’Electricité and a Doctorate in Economics from the Sorbonne.

Frank Mörich, age 52, received a medical degree from the University of Marburg (Germany). After two years of postdoctoral research in immunology and cell biology, he joined Bayer in 1982 and was Director of Research and Development and director of product development at the pharmaceuticals division. In 1998 he became CEO of the “consumer care” division of Bayer AG. Two years later, he was appointed a member of the Board of Directors of Bayer AG (Germany) and Bayer Corp. (USA). In 2002, he became Chairman of the Board and the Executive Committee of the newly created Bayer Healthcare AG.

Sofinnova Partners, represented by Denis Lucquin. Denis Lucquin, age 49, is an associate partner at Sofinnova Partners SA, which he joined in 1991 and is in charge of investments in the life sciences sector. Denis Lucquin is a graduate of the Ecole Polytechnique and the Ecole du Génie Rural des Eaux et Forêts. He started his career in academic research: he was in charge of the technology transfer department at the Institut National de la Recherche Agronomique (INRA) between 1986 and 1989. In 1989, he entered the venture capital industry and worked as the investment director at Innolion (Crédit Lyonnais). He has been involved in many investments in France and Europe such as NicOx, IDM, ExonHit, Neurotech, Neuro 3D, Oxford Glycosciences, Oxford Molecular, PPL Therapeutics, Crop Design, Metris Therapeutics, Ablynx, Novexel and Cerenis. He is also a founder of the France Biotech association.

Philippe Pouletty, age 48, is a founder and partner in Truffle Venture. He currently manages a venture capital fund of 220 million euros, located in Paris. He was the President and is currently the honorary President of France Biotech, the French biotechnology association, as well as Vice-President of Europabio, the European biotechnology association. He is also the founder of three biotechnology companies in Europe and the United States which have total market capitalisation of 800 million dollars and is a member of the board of directors of seven other biotechnology and medical equipment companies in Europe and the United States (BMD, Conjuchem, Cytomics, Neovacs, Theraclion, Vexim, Wittycell). Mr. Pouletty was also behind several government initiatives in France, including the 1999 law on simplifying corporate law, the Plan Biotech 2002 to relaunch and develop biotechnology, and the Jeune Entreprises Innovantes status which affords major tax breaks for companies so designated. He is the Chairman of the Conseil Stratégique pour l’Innovation, which gives the French government independent advice on innovation and research policy, and a member of the Conseil Stratégique pour l’Attractivité de la France, chaired by the Prime Minister. Mr. Pouletty is a chevalier of the Legion of Honneur, the recipient of an award from the American Liver Foundation, a Doctor of Medicine (University of Paris VI) and conducted research for postdoctoral studies at Stanford University. He is the inventor of 21 patented products.

168

Frank Bulens, age 43, joined GIMV in July 1998 and is currently its Executive Investment Manager. After receiving his degree as a chemical and biochemical engineer in 1985, he worked as a researcher in the food industry for two years. In 1987, he became a member of the scientific team at the Centre de Biologie Moléculaire et Vasculaire in the Department of Medicine at the University of Louvain, where he earned degrees as a Master in Sciences and Doctor of Medicine. In 1998 he joined IWT, a Flemish governmental research organisation, as a senior scientific advisor. Since joining GIMV, Frank Bulens has been part of a significant number of investments in the biotechnology sector in Europe and the United States. He is currently a member of the board of Ablynx in Belgium, Inpharmatica and Arrow Therapeutics in the United Kingdom, CareX and Diatos in France, AGY Therapeutics and Ceres in the United States. He has also managed or is currently managing other investments such as Fovea and Neurotech in France, Nereus Pharmaceuticals, Aclara Biosciences (merged with Virologic and now Monogram) and X-Ceptor (acquired by Exelixis) in the United States.

14.1.3 Executive Committee

Our Executive Committee, which is comprised of the members of the Executive Board and two senior managers, meets twice a month to discuss and make decisions on issues regarding our strategy and operations management.

As of the date of this Document de Base, the Executive Committee included the following five individuals, three of whom are members of the Executive Board:

Starting Date in this Name Position Age Main Operations Responsibilities

Hervé Brailly 1999 44 CEO, General management, general corporate policy and human resources

François Romagné 1999 42 Vice-President, CSO, Scientific management, in charge of partnership with Novo Nordisk A/S

Stéphane Boissel 2002 38 Vice-President, CFO, Financial and development management, and investor relations

Patrick Squiban 2005 53 Vice-President, CMO, Medical affairs and regulations management

Jérôme Tiollier 2001 47 Vice-President, Development manager, Pharmaceutical and clinical development management

Patrick Squiban, age 53, joined Innate in July 2005. He is the Director of Medical and Regulatory Affairs, in charge of medical, regulatory and clinical development strategies. Between 1998 and 2005, Dr. Squiban worked for Transgene, a French company working to discover and develop therapeutic vaccines and gene therapy products, where he was Vice- President in charge of Medical and Regulatory Affairs. Between 1986 and 1997, he held several positions at the Danish biopharmaceutical group Novo Nordisk, including the position of Medical Director at its French subsidiary and Vice- President for Pharmacological and Medical Affairs at Zymogenetics (at that time a member of the Novo Nordisk Group). Dr. Squiban graduated from the Department of Medicine at the University of Paris in 1981.

Jérôme Tiollier, age 47, joined Innate in September 2001. He is the Director in charge of Pre-clinical and Pharmaceutical Development. Dr. Tiollier is a graduate of the University of Lyon and holds a doctorate in cell biology and immunology. He previously worked at IMEDEX SA, a division of the Institut Mérieux (1986-1997), before joining the business unit IMTIX Transplant of Pasteur Mérieux (acquired by SANGSTAT in 1998) in the position of Director of Pre-clinical development (1997-1999) and Director of Research and Development Europe (1999-2001). In this latter position, he managed pharmaceutical projects (including Thymoglobuline and Antilfa) and was involved in the company’s medication research activities.

169 14.1.4 Statement on the Executive Board, Supervisory Board and General Management Bodies

To the best of our knowledge, there are no family ties between the members of the Executive Board, Supervisory Board and Executive Committee.

In addition, to the best of our knowledge, no member of the Executive Board, Supervisory Board, or Executive Committee has been:

• found guilty of fraud during at least the last five years;

• declared bankrupt, in receivership or liquidation during at least the last five years; or

• the subject of an official public reprimand or sanction issued by the statutory or regulatory authorities during at least the last five years.

Finally, to the best of our knowledge, no member of the Executive Board, Supervisory Board, or the Executive Committee has been prohibited by a court from acting as a member of a management, administration or supervisory body of a share issuer or being involved in the management or running the affairs of a share issuer during at least the last five years.

14.2 CONFLICTS OF INTEREST IN THE EXECUTIVE BOARD, SUPERVISORY BOARD AND GENERAL MANAGEMENT BODIES

As of the date of this Document de Base and to the best of our knowledge, there is no actual or potential conflict between the private interests of the members of the Executive Board and Supervisory Board and our interests.

Furthermore, on this same date, we have no knowledge of any actual or potential conflict between the private interests of the members of the Executive Committee who are not also members of the Executive Board and our interests.

170 CHAPTER 15. COMPENSATION AND BENEFITS

15.1 COMPENSATION AND BENEFITS PROVIDED TO MEMBERS OF THE EXECUTIVE BOARD, SUPERVISORY BOARD AND GENERAL MANAGEMENT BODIES

For the fiscal year ended on 31 December 2005, the compensation and benefits given to members of the Executive Board and Supervisory Board are as follows:

Benefits (in euros)

Gross Annual Individual Other Name Position Compensation Shared Bonus(2) Bonus Benefits

Members of the Executive Board

Hervé Brailly Chairman of the 120,0001 12,5001 22,5001 Bonus shares and Executive Board options4

Retirement obligations5

François Romagné Scientific Director, 97,2001 10,1251 12,5001 Bonus shares and responsible for the options4 partnership with Novo Nordisk A/S Retirement obligations5

Stéphane Boissel Director of 97,2001 10,1251 12,5001 Bonus shares and Finance, options4 Development and Investor Relations Retirement obligations5

Members of the Supervisory Board

Philippe Chairman of the 03 — — Desmarescaux Supervisory Board

Jean Deleage Member of the 03 — — Supervisory Board

Frank Mörich Member of the 03 — Consultant’s Supervisory Board contract

Denis Lucquin, Member of the 03 — — permanent Supervisory Board representative for Sofinnova Partners

Philippe Pouletty Member of the 03 — — Supervisory Board

Frank Bulens Member of the 03 — — Supervisory Board

(1) The compensation indicated is solely for salaries paid to members of the Executive Board under the terms of their employment contracts. (2) A shared bonus was paid to all of our employees. For the year 2005, it came to 125% of the gross monthly salary of the beneficiaries. (3) The members of the Supervisory Board did not receive any attendance fees for the last fiscal year.

171 (4) The founder warrants (BSPCE) and free options and/or shares received by the members of the administration, management and supervisory and general management bodies are described in Section 17.2.4 of this Document de Base. (5) The retirement benefits given to members of the Executive Board are described in Section 19 of this Document de Base and in Note 2.i to our IFRS Accounts.

The members of the Executive Board have employment contracts with us and their base salary is fixed each year by the Supervisory Board, upon the recommendation of the Compensation Committee.

The members of the Executive Board do not receive any compensation for their membership.

We have set up a supplemental pension benefit (“Article 83”) for the members of the Executive Board and all of our salaried executives. This scheme with fixed contributions is financed by a contribution equal to 2% of the annual salary, 1.2% of which is paid by us and 0.8% by the beneficiary. (See Section 19 in this Document de Base and Note 2.i to our IFRS Accounts).

The total amount of compensation and benefits paid to the members of the Executive Committee, including the members of the Executive Board in 2005 (see table below), came to approximately 600 thousand euros. The compensation payable to the members of the Executive Committee for the fiscal year ending on 31 December 2006 is estimated to be approximately 820 thousand euros.

The compensation paid to the members of the Executive Board and other members of the Executive Committee contains a variable portion which may increase by as much as approximately 30% of the total compensation, consisting of individual and shared bonuses (paid to all of our employees). The amount of these bonuses depends on our results and each employee’s performance and is decided by the Supervisory Board upon the recommendation of the Compensation Committee, which sets the goals each year and then assesses the extent to which they have been reached. The base salary of the members of the Executive Board and the other members of the Executive Board is also fixed each year by the Supervisory Board upon the recommendation of the Compensation Committee.

We did not pay any attendance fees to the members of the Supervisory Board in 2005.

See Section 17.2 of this Document de Base for a description of the interests of the Executive Board, Supervisory Board and General Management Bodies in our share capital.

15.2 TOTAL AMOUNTS IN RESERVE FOR PAYING PENSIONS, RETIREMENT OR OTHER BENEFITS

See Note 2.i to our IFRS Accounts in this Document de Base.

172 CHAPTER 16. OPERATION OF THE EXECUTIVE BOARD, SUPERVISORY BOARD AND GENERAL MANAGEMENT BODIES

The statutory stipulations set forth in this Section will be those applicable once our shares are listed on the stock exchange.

16.1 OPERATION OF THE EXECUTIVE BOARD

Meetings of the Executive Board

The members of the Executive Board meet as often as is required by our interests, but at least once a quarter, as called for by the Chairman or a member of the Executive Board appointed for this purpose.

The meetings of the Executive Board are chaired by the President of the Executive Board. In his absence, the Executive Board appoints a Chairman for a particular meeting.

The Executive Board is not validly in session unless at least half of its members are present. Any member of the Executive Board may send a representative or attend meetings by a videoconference or any other means of telecommunication. No member of the Executive Board may hold more than one proxy. The decisions of the Executive Board are approved by a majority of the votes present and represented.

The Executive Board met twice during the period beginning with its appointment in June 2005 to the end of the fiscal year on 31 December 2005, and the average attendance rate of the members was 100%.2 Between 1 January 2006 and the date of this Document de Base, the Executive Board met five times and the average attendance rate of the members was 100%.

Powers of the Executive Board

The Executive Board is vested with broad powers to act under all circumstances on our behalf. It exercises these powers within the limits of our business purposes and subject to any powers expressly vested in the Supervisory Board and Shareholders” Meetings by law and according to the by-laws, and abiding by any restrictions on powers decided by the Supervisory Board.

Therefore, the Executive Board may not make any decisions about the sale of real property, the total or partial sale of holdings, creating sureties, pledges, warrants and guarantees, without the approval of the Supervisory Board.

If so authorised by the Supervisory Board, the members of the Executive Board may divide management tasks among themselves. However, this division may under no circumstances result in the Executive Board losing its shared responsibility for managing our Company.

16.2 OPERATION OF THE SUPERVISORY BOARD

Meetings of the Supervisory Board

The Supervisory Board meets as often as is required by our interests, but at least once a quarter, as called for by the Chairman or the Vice-Chairman, at the headquarters or any other place indicated in the notice of meeting.

The Chairman of the Supervisory Board must call a meeting of the Supervisory Board within 15 days if one or more members of the Executive Board or one-third or more of the members of the Supervisory Board present a request for him to do so. If the request remains unanswered, the members requesting the meeting may call it themselves and must provide a notice of the meeting’s agenda.

2 During the fiscal year ending 31 December 2005, the Management Committee (our management body before it converted into a société anonyme on 13 June 2005) met twice, and the average attendance rate of the members was 86.5%.

The Supervisory Board is not validly in session unless at least half of its members are present. Decisions are approved by a majority of the members of the Supervisory Board present or represented at the meeting. If there is a tie vote, the Chairman has the casting vote.

During the fiscal year ended on 31 December 2005, the Supervisory Board met three times, with an average attendance rate of the members of 94%, respectively. Since the start of the 2006 fiscal year, and up to the date of this Document de Base, it has met three times with an average attendance rate of 100%.

173 Powers of the Supervisory Board

The Supervisory Board exercises continuous oversight of the management of our Company by the Executive Board. It may therefore carry out any verifications and inspections it deems appropriate and obtain any documents it considers useful for the performance of its tasks, at any time during the year. Once a quarter, the Supervisory Board receives a report written by the Executive Board.

The Supervisory Board alone is competent to authorise certain significant operations, especially those listed in Section 16.2 of this Document de Base.

The Supervisory Board presents its comments on the Executive Board’s management report and the yearly accounts at the Annual General Shareholders’ Meeting.

The Supervisory Board may vest one or more of its members with special powers for one or more particular purposes.

The Supervisory Board may decide to create committees among its members and fix the membership and powers; such committees carry out their work under the Supervisory Board’s authority, although the powers given to the Supervisory Board itself by law or the By-laws may not be delegated to such committees, nor may such committees reduce or limit the powers of the Executive Board.

16.3 COMMITTEES, THE SCIENTIFIC ADVISORY BOARD AND THE SHAREHOLDERS’ OBSERVER PANEL

16.3.1 The Audit Committee

The Audit Committee was created by the Management Committee (we were a société par action simplifiée at that time) on 1 July 2003 and confirmed by the Supervisory Board on 27 April 2006. Its main tasks are to make recommendations to the Executive Board and Supervisory Board about internal oversight and to produce our financial statements. Currently, the members of the Audit Committee are not members of the Supervisory Board. The Audit Committee’s tasks are:

• to review our published financial information and to verify the consistency and relevance of our accounting standards and methods;

• to assess the suitability of any changes to the accounting methods;

• to evaluate the quality of our internal control and risk management procedures at least once a year, and if necessary to inform us of any irregularities or anomalies revealed in the accounts. The Audit Committee assists the Chairman of the Supervisory Board in writing the report on internal control; and

• to verify the independence and objectivity of the auditors. The Audit Committee meets as often as our interests require, but at least twice a year.

In addition to the committee members, Audit Committee meetings are also attended by representatives from our finance office and quality department, as well as the auditors.

Only independent consultant members receive any compensation for their attendance at meetings of the Audit Committee.

The members of the Audit Committee and their relationship to us are listed in the table below:

Member of the Audit Committee Name Relationship to Our Company since

Representative of Vivéris Management, Corinne Julié 2003 the Innoveris fund management company

Xavier Paper Independent Consultant 2006

Jacques Véra Independent Consultant 2006

The Audit Committee met twice during the 2005 fiscal year. The average attendance rate of the members was 100%. It has met twice since the start of 2006 with an average attendance rate of 83%.

174 16.3.2 Compensation Committee

The Compensation Committee was created by the Management Committee (we were a société par action simplifiée at that time) on 17 January 2001 and confirmed by the Supervisory Committee on 27 April 2006. Its main task is to make recommendations to the Executive Board and the Supervisory Board on our recruiting and compensation policy and on distributing investment instruments to the employees and management (subscriptions to stock options and bonus shares) and outside bodies (BSA). The tasks of the Compensation Committee are as follows:

• To review the professionalism and objectivity of the procedures for appointing officers and members of the Executive Committee, as well as certain key employees. The Committee is responsible for arranging the recruitment of independent members of the Supervisory Board;

• To analyse the relationships of the members of the Supervisory Board, verify that there is no conflict of interest and ensure their independence is not compromised;

• To make recommendations for salary adjustments for members of the Executive Board and Executive Committee;

• To set our comprehensive goals as well as the individual goals of the members of the Executive Board and Executive Committee and make proposals for appropriate bonuses;

• To assess the extent to which such goals have been reached and make recommendations about the amount of the final shared and individual bonuses to be given each year to the members of the Executive Board and the Executive Committee based on that assessment;

• To make recommendations as to our salary policy for the other members of the staff; and

• To make recommendations to the Executive Board on allocating investment instruments approved or authorised by the General Shareholders’ Meetings.

The members of the Compensation Committee and their relationship to our Company are listed in the table below:

Member of the Compensation Name Relationship to our Company Committee since

Hervé Brailly Chairman of the Executive Board 2001

Philippe Desmarescaux Chairman of the Supervisory Board 2001

Denis Lucquin (representative for Sofinnova Member of the Supervisory Board 2001 Partners)

Philippe Pouletty Member of the Supervisory Board 2003

The Compensation Committee met twice during the 2005 fiscal year, with an average attendance rate of its members of 100%. It has met once since the beginning of 2006 with an average attendance rate of 75% up to the date of this Document de Base.

The members of the Compensation Committee do not receive any compensation for their services.

We intend to amend the operating rules for the Compensation Committee to align them with the recommendations of the AFEP/MEDEF (French Association of Private Companies/French Enterprise Movement) report by 31 December 2007 (see Section 16.4 of this Document de Base.).

175 16.3.3 Scientific Advisory Board

The Scientific Advisory Board was created by the Management Committee (we were still a société par action simplifiée at that time) on 9 May 2000.

Its tasks are to:

• evaluate our new product development strategy from a scientific perspective;

• evaluate the progress of our research programmes and to implement this strategy, examining the results obtained and the skills and expertise involved; and

• propose or evaluate opportunities for acquiring new products and new technologies.

The members of the Scientific Advisory Board and their relationships to our Company are listed in the table below:

Member of the Scientific Name Relationship to our Company Advisory Board since

Bernard Malissen Shareholders’ Observer on the 2000 Supervisory Board and Consultant

David Raulet Consultant 2000

Stephan Kaufman Consultant 2000

Philip Greenberg Consultant 2000

Bernard Malissen is the Chairman of our Scientific Advisory Board and is a member of Supervisory Board as a shareholders’ observer. Barnard Malissen is an immunologist and Director of the ISERM-CNRS Immunology Centre in Marseille Luminy (CIML). He has devoted most of his working life to antigen recognition and activation of T cells, as well as the genetics of the T receptor. He is therefore one of the pioneers in the field of molecular immunology in Europe. Bernard Malissen received the CNRS silver medal for his contributions, as well as numerous international distinctions.

David Raulet is a specialist in cell and molecular immunology. In that capacity, he has made significant contributions to the advancement of knowledge on γδ T lymphocytes and NK cells. His most recent work related to stimulator and inhibitor receptors activated by NK cells to detect tumour cells, and the molecules corresponding to these receptors. Mr. Raulet was the head of the immunology department at the University of California at Berkeley and teaches immunology in the Department of Cell and Molecular Biology. He received the Choh Hao Li prize in 1999 and the William B. Coley prize for immunology in 2002 in recognition of his accomplishments. Before going to Berkeley in 1991, he was an assistant and associate professor at MIT.

Stefan Kaufmann is a member of the Max Planck society and president of the Fédération Européenne des Sociétés Immunologies (“EFIS”). He heads the Infectious Biology Department at the Max Planck Institute in Berlin and is also a professor of immunology at the Charity Hospital in Berlin. He is particularly known for his studies into how intracellular bacterial infections are controlled by the immune response (particularly in the case of tuberculosis). The results of his work are particularly important in the area of tuberculosis vaccination. Mr. Kaufmann received the Aronson Prize of the state of Berlin in 1988 and a prize from the German Society for Hygiene and Microbiology in 1993.

Philip Greenberg is a professor of medicine and immunology at the University of Washington and heads the immunology department at the Fred Hutchinson Cancer Research Center in Seattle. Philip Greenberg’s laboratory focuses on studying anti-tumour T cell response and developing new cell and molecular approaches for immune intervention in oncology. He is one of the pioneers in adoptive cell immunotherapy.

The members of the Scientific Advisory Board receive compensation based on their attendance at meetings of the Scientific Advisory Board. For fiscal 2005, the total amount of this compensation came to 19,428 euros.

During the fiscal year ended on 31 December 2005, our Scientific Advisory Board met twice and the attendance rate of the members was 100%. Since the start of fiscal 2006 until the date of this Document de Base, it has met once with an attendance rate of 100%.

176 16.3.4 Shareholders’ Observer Panel

Article 22 of the By-laws (to take effect once our shares have been admitted for trading on a regulated market) gives the General Shareholders’ Meeting the right to appoint, at its discretion, one or more observers, who may be either natural persons or legal entities, shareholders or not, for a term of one year that expires at the General Shareholders’ Meeting called to vote on the latest financial accounts prepared after the first anniversary of their appointment. These appointments are renewable indefinitely.

The observers take part in all meetings of the Supervisory Board, with the right to speak under the same procedures as those set forth for the members of the Supervisory Board. They receive the same information and communications as the latter and are bound by the same terms of confidentiality and discretion.

Currently, there are three appointed observers, renewed by the Ordinary General Shareholders’ Meeting held on 29 March 2006:

– Axa Investment Managers, a management company for the Axa Placement Innovation II and Axa Placement Innovation III funds, both shareholders in Innate;

– Gilde Europe Food & Agribusiness Fund BV, a shareholder in Innate; and

– Mr. Bernard Malissen, Chairman of our Scientific Advisory Board.

16.3.5 Internal Control

As a société anonyme (since our transformation on 13 June 2005) and not a public company, we were not obligated to issue a report on internal control in 2005.

Nevertheless, as of the date of this Document de Base, we have internal control procedures for orders and purchasing (ISO 9001:2000), disbursements and payments (not associated with manufacturing and production) and accounting (the financial director is not permitted to verify the Accounts).

Pursuant to our initial public offering, we intend to strengthen internal control measures that are already in place and maintain and develop a system of risk identification and associated control procedures. This process aims to assure the security, quality, confidentiality and availability of our financial information by establishing internal control procedures according to current standards.

The Chairman of the Supervisory Board and our statutory auditors will provide a report on our internal control procedures according to the conditions set out in Article L.225-68 of the French commercial code.

16.4 STATEMENT REGARDING CORPORATE GOVERNANCE

Two committees exist within our Company: the Audit Committee and the Compensation Committee (see Sections 16.3.1 and 16.3.2 of this Document de Base).

We have dedicated considerable time and effort to corporate governance. We intend to enhance our existing procedures by incorporating measures recommended in the October 2003 AFPEP/MEDEF report, Corporate Governance of Listed Companies, by adapting them to our Company’s size, resources and concerns.

177 CHAPTER 17. EMPLOYEES

17.1 HUMAN RESOURCES

Employment contracts for the French employees are subject to the Pharmaceutical Industry Collective Agreement. We believe we have good relations with our employees.

On 31 December 2005, we had 54 employees (full time or 4/5 time), compared to 41 on 31 December 2004 and 33 on 31 December 2003:

Management (Executive Committee) ...... 5

Scientists (Doctors of science, medicine and pharmacy)...... 13

Engineers and technicians...... 25

Other (support staff) ...... 11

On 31 December 2005, about 75% of our employees worked directly in operations. The remaining staff worked in support functions, such as intellectual property, human resources, legal affairs, accounting and computing.

On 31 December 2005, the average age of our employees was 34 and a half and 40% were men while 60% were women.

As of the date of this Document de Base, we have 62 employees.

17.2 EMPLOYEE PARTICIPATION IN THE EXECUTIVE BOARD, SUPERVISORY BOARD AND EXECUTIVE COMMITTEE

17.2.1 Summary of Current and Future Ownership of our Share Capital by Members of the Executive Board, Supervisory Board and Executive Committee

Total Number of New Shares upon Exercise of Stock Options, Warrants, Founder Number of Number of Warrants or Members of the Executive Board, Shares owned Shares owned by Acquisition of Percentage of Supervisory Board or Executive Directly Related Entities1 Total (IV) Free Shares Total Diluted Committee (I) (II) (I+II) (III) (III+IV) Capital 2

Members of the Executive Board Hervé Brailly ...... 494,960 - 494,960 285,000 779,960 4.00% François Romagné ...... 197,840 - 197,840 180,000 377,840 1.94% Stéphane Boissel...... 28,580 - 28,580 345,000 373,580 1.92%

Members of the Supervisory Board Philippe Desmarescaux3 ...... 20 98,980 99,000 - 99,000 0.51% Frank Bulens4 ...... 20 1,925,000 1,925,020 - 1,925,020 9.90% Philippe Pouletty...... 20 - 20 100,000 100,020 0.51% Jean Deleage5 ...... 20 2,128,500 2,128,520 - 2,128,520 10.94% Sofinnova Partners6, represented by Denis Lucquin...... 20 2,533,500 2,533,520 - 2,533,520 13.02% Frank Mörich ...... 20 - 20 - 20 0.00%

Executive Committee

Patrick Squiban...... - - 97,500 97,500 0.50% Jérôme Tiollier...... 28,580 - 28,580 230,000 258,580 1.33%

Total ...... 750,080 6,685,980 7,436,060 1,237,500 8,673,560 44.59%

Other Shareholders ...... 16,398,800 10,461,900 1,068,500 10,780,320 55.41%

Total ...... 17,147,880 2,306,000 19,453,880 100.00%

(1) Related entities refer to entities with which the member has a capital, statutory or contractual relationship (employment or other contract).

(2) The diluted capital is calculated after the theoretical exercise of all the stock options, founder warrants and other securities giving access to our share capital issued as of the date of this Document de Base and after a final allocation of the shares distributed on that same date but not including exercise of anti-dilutive warrants which expire at the time of the IPO (see Section 21.1.3.1 in this Document de Base).

(3) Philippe Desmarescaux is the owner and manager of SCI Pajol, which owns 94,031 Company shares.

(4) Frank Bulens is associated with the GIMV Group, which owns 1,925,000 Company shares.

(5) Jean Deleage is associated with the Alta Group, which owns 2,128,500 Company shares. 178

(6) Sofinnova Partners SA is the management company for the Sofinnova Capital III FCPR fund, which owns 2,533,500 Company shares.

17.2.2 Shares Held by the Members of the Executive Board, Supervisory Board and Executive Committee in our Share Capital

As of the date of this Document de Base, the members of our Executive Board, the Supervisory Board and the Executive Committee hold the following number of shares in our company:

Members of the Executive Board and Supervisory Board Number of Shares %1

Members of the Executive Board

Hervé Brailly ...... 494,960 2.89%

François Romagné ...... 197,840 1.15%

Stéphane Boissel...... 28,580 0.17%

Members of the Supervisory Board

Philippe Desmarescaux...... 20 ns*

Frank Bulens...... 20 ns*

Philippe Pouletty...... 20 ns*

Jean Deleage...... 20 ns*

Sofinnova Partners, represented by Denis Lucquin2 ...... 20 ns*

Frank Mörich ...... 20 ns*

Executive Committee

Patrick Squiban...... — 0.00%

Jérôme Tiollier...... 28,580 0.17%

(1) Calculated based on our share capital as determined on the date of this Document de Base.

(2) Sofinnova Partners SA is the management company for the Sofinnova Capital III FCPR fund.

* Not significant.

17.2.3 Stock Option Plans

We currently have two stock option plans:

– The first plan was approved by our Management Committee on 1 July 2003, and authorised by the General Shareholders’ Meeting held on the same day. We have issued 28,500 stock options under this plan, with each option giving the right to purchase 20 shares with a nominal value of 0.05 euros per share (the “Stock

Options2003”).

– The second plan was approved by our Management Committee on 13 June 2005, as authorised by the General Shareholders’ Meeting held on 22 July 2004. We have issued 25,000 stock options under this plan, with each option giving the right to purchase 20 shares with a nominal value of 0.05 euros per share (the “Stock

Options2005”).

Information about each of these stock option plans is provided in Section 21.1.3.2 of this Document de Base.

179 The table below shows the number of stock options held by each of the members of our Executive Board and the other members of the Executive Committee as of the date of this Document de Base:

Total Number Stock Stock of Potential Percentage of (1) Name Options2003 Options2005 Shares Diluted Capital

Mr. Hervé Brailly...... _ 3,000 60,000 0.31%

Mr. François Romagné ...... _ 2,000 40,000 0.21%

Mr. Stéphane Boissel...... 9,000 2,000 220,000 1.13%

Mr. Patrick Squiban...... _ 3,000 60,000 0.31%

Mr. Jérôme Tiollier...... 3,000 2,000 100,000 0.51%

(1) The diluted share capital is calculated after the theoretical exercise of all the stock options, founder warrants and other securities giving access to our share capital issued on the date of this Document de Base and after a final allocation of the free shares distributed on that same date, but does not include the exercise of anti-dilutive warrants which expire at the time of the IPO (see Section 21.1.3.1 in this Document de Base).

No member of the Supervisory Board has received any stock options.

17.2.4 Other Securities Giving Access to our Share Capital

17.2.4.1 Warrants Exercised by Members of the Executive Board, Supervisory Board and Executive Committee

The General Shareholders’ Meeting held on 22 December 2001 reserved the issuance of 2,000 warrants for Philippe Pouletty, who has exercised such warrants in full (the “Warrants2002-1”).

In 2003, a new issuance of 3,000 warrants reserved for Philippe Pouletty was approved by the General Shareholders’ Meeting

held on 1 July 2003; Mr. Pouletty has exercised such warrants in full (the “Warrants2003”).

The terms and conditions for these issuances are given in Section 21.1.3.1 of this Document de Base.

Total Number of Percentage of (1) Name Warrants2001-1 Warrants2003-1 Potential Shares Diluted Capital

Philippe Pouletty...... 2,000 3,000 100,000 0.51%

(1) The diluted capital is calculated after the theoretical exercise of all the stock options, founder warrants and other securities giving access to our share capital issued on the date of this Document de Base and after a final allocation of the free shares distributed on that same date but not including exercise of anti-dilutive warrants which expire at the time of the IPO (see Section 21.1.3.1 in this Document de Base).

No member of the Supervisory Board nor any member of the Executive Board or Executive Committee has exercised any warrants issued by us.

17.2.4.2 Founder Warrants Allocated to Members of the Executive Board, Supervisory Board and Executive Committee

The table below shows the founder warrants held by members of the Executive Board and the members of the Executive Committee who are not members of the Executive Board as of the date of this Document de Base (these founder warrants are shown in more detail in Section 21.1.3.3 of this Document de Base).

Total Number of Percentage of Name Founder Warrants Potential Shares Diluted Capital (1)

Mr. Hervé Brailly...... _ _ –% Mr. François Romagné ...... _ _ –% Mr. Stéphane Boissel...... _ _ –% Mr. Patrick Squiban...... _ _ –% Mr. Jérôme Tiollier...... 3,000 60,000 0.31%

180

(1) The diluted capital is calculated after the theoretical exercise of all the stock options, founder warrants and other securities giving access to our share capital issued as of the date of this Document de Base and after a final allocation of free shares distributed on that same date but not including exercise of anti-dilutive warrants which expire at the time of the IPO (see Section 21.1.3.1 in this Document de Base).

17.2.5 Free Shares Allocated to Members of the Executive Board, Supervisory Board and Executive Committee

On 24 April 2006, the Executive Board, acting as delegated by the General Shareholders’ Meeting of 29 March 2006, approved the allocation of 751,000 free shares with a nominal value of 0.05 euros each to its employees. These allocations are detailed in Section 21.1.3.4 of this Document de Base.

On the date of this Document de Base, the members of the Executive Board and the Supervisory Board and the other members of the Executive Committee hold the following free shares:

Total Number of Percentage of diluted Name Free Shares Potential Shares capital(1)

Mr. Hervé Brailly...... 225,000 225,000 1.16% Mr. François Romagné ...... 140,000 140,000 0.72% Mr. Stéphane Boissel...... 125,000 125,000 0.65% Mr. Patrick Squiban...... 37,500 37,500 0.19% Mr. Jérôme Tiollier...... 70,000 70,000 0.36%

17.3 EMPLOYEE PROFIT SHARING

17.3.1 Employee Profit Sharing

None.

17.3.2 Company Savings Plan

We created a company savings plan on 29 October 2004.

All employees who have worked at our company for at least three months may join the plan. The plan is funded through voluntary contributions by employees, profit sharing (if any), shares contributed by us, employee share ownership when provided for in an employee share ownership agreement, company contributions and frozen matured accounts.

Any employee who wishes to make payments must commit to make a payment of at least 50 euros and the total amount paid in any one year may not exceed 25% of:

• the employee’s gross annual salary if still employed or his or her retirement benefits if retired; and

• the income received for the duties performed at the Company, if the employee is a Company officer.

We must pay for at least the costs of operating the plan. No other specific contribution is required from us.

The amounts paid into an employee’s account will be available only after five years from the first day of the seventh month in the year of payment (i.e. 1 July), or the first day of the fourth month of the fifth fiscal year following the one in which they were paid in if we have set up a profit sharing plan (i.e., 1 April). The amounts paid in are used to subscribe Company shares and/or mutual fund shares (five diversified mutual funds were created as part of this plan) as specified by the employee. If the employee does not specify, the amounts paid in will be placed in a mutual investment fund devoted to this purpose and designated in the plan.

As of the date of this Document de Base, no payments have been made into this plan.

181 CHAPTER 18. PRINCIPAL SHAREHOLDERS

18.1 IDENTITY OF THE PRINCIPAL SHAREHOLDERS

As of the date of this Document de Base, our share capital was divided among 41 shareholders. As of that date, there were no other shareholders apart from those indicated in Section 18.2 below which, directly or indirectly, held shares representing more than 0.5% of our share capital or voting rights.

18.2 STOCK SPLIT AND VOTING RIGHTS

The table below shows our shareholders as of the date of this Document de Base. Some of our shareholders hold these shares directly or through related entities, i.e., placed under the joint control of another entity in the sense of Article L. 233-3 of the French Business Code or managed by an actual management company. As a result, the table below only shows the overall holding in the capital of these related entities.

Shares Voting Rights

Shareholders Number %(1) Number %(2)

Private Investors ...... 1,253,480 7.31 1,253,480 7.31 Including the following Company officers:...... 721,500 4.21 721,500 4.21 Hervé Brailly(3) ...... 494,960 2.89 494,960 2.89 François Romagné(4) ...... 197,840 1.15 197,840 1.15 Stéphane Boissel(5) ...... 28,580 0.17 28,580 0.17 Philippe Desmarescaux(6) ...... 20 0.00 20 0.00 Philippe Pouletty(7) ...... 20 0.00 20 0.00 Frank Mörich...... 20 0.00 20 0.00 Frank Bulens(8) ...... 20 0.00 20 0.00 Sofinnova Partners SA(9) ...... 20 0.00 20 0.00 Jean Deleage(10) ...... 20 0.00 20 0.00 Including the following employees(11) ...... 42,920 0.25 42,920 0.25 Jérôme Tiollier(12) ...... 28,580 0.17 28,580 0.17 Including other private investors: ...... 489,060 2.85 489,060 2.85 SC Pajol...... 98,980 0.58 98,980 0.58 Funds, Venture capital companies or financial partners...... 12,263,860 71.52 12,263,860 71.52

Including: Sofinnova Capital III FCPR ...... 2,533,500 14.77 2,533,500 14.77 Alta Group...... 2,128,500 12.41 2,128,500 12.41 GIMV Group...... 1,925,000 11.23 1,925,000 11.23 AXA Group...... 1,637,880 9.55 1,637,880 9.55 Gilde Europe food & Agribusiness Fund BV... 1,089,880 6.36 1,089,880 6.36 Auriga Ventures I FCPR ...... 865,320 5.05 865,320 5.05 Groupe Innoveris...... 724,940 4.22 724,940 4.22 Pechel Industries ...... 558,820 3.26 558,820 3.26 NIF Group...... 533,340 3.11 533,340 3.11 Quilvest Capital France...... 266,680 1.56 266,680 1.56 Strategic partners(13) ...... 3,580,540 20.88 3,580,540 20.88 Novo Nordisk...... 3,580,540 20.88 3,580,540 20.88 Other:...... 50,000 0.29 50,000 0.29 Inserm Transfert Initiative(14) ...... 50,000 0.29 50,000 0.29 Total...... 17,147,880 100 17,147,880 100

(1) Calculated based on our total share capital as determined on the date of this Document de Base.

(2) Calculated based on the total number of voting rights as of the date of this Document de Base.

(3) Hervé Brailly has also been allocated 225,000 free shares in his capacity as an employee according to the decision by the Executive Board on 24 April 2006, as delegated by the General Shareholders’ Meeting of 29 March 2006 (see

Section 17.2.5 of this Document de Base.) He also holds 3,000 Stock Options2005 allowing him to subscribe to 60,000 new shares (see Section 17.2.3 of this Document de Base).

182 (4) François Romagné has also been allocated 140,000 free shares in his capacity as an employee according to the decision by the Executive Board on 24 April 2006, as delegated by the General Shareholders’ Meeting of 29 March

2006 (see Section 17.2.5 of this Document de Base.) He also holds 2,000 Stock Options2005 allowing him to subscribe to 40,000 new shares (see Section 17.2.3 of this Document de Base).

(5) Stéphane Boissel has also been allocated 125,000 free shares in his capacity as an employee according to the decision by the Executive Board on 24 April 2006, as delegated by the General Shareholders’ Meeting of 29 March

2006 (see Section 17.2.5 of this Document de Base.) He also holds 2,000 Stock Options2005 and 9,000 Stock Options2003 allowing him to subscribe to 220,000 new shares (see Section 17.2.3 of this Document de Base).

(6) Philippe Desmarescaux is the controlling shareholder of SC Pajol, which holds 98,980 Company shares.

(7) Philippe Pouletty also holds 2,000 Warrants2001 and 3,000 Warrants2003 giving him the right to subscribe to 100,000 new shares (see Section 17.2.4.1 of this Document de Base).

(8) Frank Bulens is associated with the GIMV Group, which holds 1,925,000 Company shares.

(9) Sofinnova Partners SA is the management company for the Sofinnova Capital III FCPR fund, which holds 2,533,500 Company shares.

(10) Jean Deleage is associated with the Alta Group which holds 2,128,500 Company Shares.

(11) Four people, excluding Company officers with an employment contract with our company, none of whom holds more than 28,580 Company shares as of the registration date of this Document de Base.

(12) Jérôme Tiollier has also been allocated 70,000 free shares in his capacity as an employee according to the decision by the Executive Board on 24 April 2006, as delegated by the General Shareholders’ Meeting of 29 March 2006 (see

Section 17.2.5 of this Document de Base.) He also holds 3,000 Stock Options2003 and 2,000 Stock Options2005 allowing him to subscribe to 10,000 new shares (see Section 17.2.3 of this Document de Base). He also holds 3,000 founder warrants allowing him to subscribe to 60,000 new shares (see Section 17.2.4 of this Document de Base.).

(13) Novo Nordisk A/S signed a collaboration and licensing agreement with the company in March 2006 (see Section 6.5.8.1 of this Document de Base).

(14) Inserm Transfert Initiative also holds 7,500 warrants that are attached to shares it owns allowing it to subscribe to 150,000 new shares (see Section 21.1.3.1 of this Document de Base).

18.3 PRINCIPAL SHAREHOLDERS’ CONTROL OVER OUR COMPANY

To our knowledge:

• no single shareholder holds a majority of voting rights of our company, directly or indirectly;

• there is no agreement among the shareholders giving any single shareholder a majority of voting rights in our company;

• no shareholder has the ability to affect decisions by our shareholders solely based on the voting rights such shareholder holds; and

• no shareholder has the power to appoint or dismiss a majority of the members of the Executive Board, Supervisory Board or general management bodies of our company.

In addition, to our knowledge, no shareholder or group of shareholders directly or indirectly holds more than 40% of the voting rights of our company (Novo Nordisk A/S, the shareholder with the largest number of shares, only owns 20.88%), which would give control over our company to one shareholder or a group of shareholders.

18.4 SHAREHOLDERS’ AGREEMENTS

The shareholders’ agreement signed by our principal shareholders, effective on the date of this Document de Base, will lapse on the first day we are listed on a regulated market.

The shareholders have not indicated any intention of signing a new shareholders’ agreement, or in general any desire to act in concert.

183 CHAPTER 19. RELATED-PARTY TRANSACTIONS

Mr. Frank Mörich, a Member of the Supervisory Board

Mr. Frank Mörich provides our Company with advice on scientific strategy and development under the terms of a Consulting Service Agreement signed on 27 July 2004. This agreement states that the total amount of fees paid to Mr. Mörich will be 20,000 euros a year, which was the total amount of fees he received for the fiscal year ended on 31 December 2005.

This agreement was approved at the General Shareholders’ Meeting on 13 June 2005.

Mr. Hervé Brailly, Chairman of the Executive Board

• On 3 January 2000, we signed an “Article 83” retirement contract with France Vie for the benefit of Mr. Hervé Brailly giving him 2% of his gross compensation, 1.20% of which we will pay. This contract was approved at the General Shareholders’ Meeting 15 June 2001.

• A Social Insurance Contract for Company Directors and Managers (Convention Garantie Sociale des Chefs et Dirigeants d’Entreprise or GSC), which guarantees payment of compensation in case of dismissal (up to the limit of 70% of his last professional income) was granted to Mr. Brailly, in his capacity as a company officer, and authorised by the Supervisory Board on 23 September 2005. The premiums are estimated at 5,706 euros for 2006.

Mr. François Romagné, a Member of the Executive Board

On 1 February 2000, we signed an “Article 83” retirement contract with France Vie for the benefit of Mr. François Romagné giving him 2% of his gross compensation, 1.20% of which we will pay.

Mr. Stéphane Boissel, a Member of the Executive Board

On 2 September 2002, we signed an “Article 83” retirement contract with France Vie for the benefit of Mr. Stéphane Boissel giving him 2% of his gross compensation, 1.20% of which we will pay.

Novo Nordisk A/S, Shareholder

For a description of the collaboration agreement, see Section 6.5.8.1 of this Document de Base and Note 20 of our IFRS Accounts.

184 CHAPTER 20. INFORMATION REGARDING OUR ASSETS, FINANCIAL SITUATION AND RESULTS

20.1 ACCOUNTS PREPARED UNDER GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN FRANCE AS AT 31 DECEMBER 2003, 2004 AND 2005

Balance Sheet (in thousands of euros)

31 December

Note 2003 2004 2005

Assets

Non-current assets Intangible fixed assets...... 3 361 392 34 Buildings...... 4 223 230 204 Technical installations, equipment and tools ...... 4 645 637 454

Other tangible fixed assets...... 19 28 26

Prepayments...... 1 2 20

Financial fixed assets...... 18 18 29

Total fixed assets...... 1,267 1,307 766

Current assets Inventory...... 5 - - - Trade accounts receivables ...... 6 1,503 10 39 Other receivables ...... 7 2,573 2,936 4,025 Investment securities ...... 8 14,470 24,850 17,692 Cash ...... 8 412 160 206

Total current assets...... 18,958 27,956 21,962

Adjustment accounts Prepaid expenses...... 9 150 245 1,614

Unrealized foreign exchange losses...... - - 1

Total adjustment accounts ...... 150 245 1,615

Total assets ...... 20,375 29,508 24,344

185 Balance Sheet (in thousands of euros)

31 December

Note 2003 2004 2005

Liabilities

Shareholders’ equity Share capital ...... 10 526 745 745 Share premium...... 10 24,091 38,891 38,891

Retained earnings...... (4,575) (9,698) (14,236)

Net loss ...... (5,122) (5,140) (5,956) Tax regulated provisions...... 12 186 210 222

Total shareholders’ equity ...... 15,105 25,009 19,666

Other equity Conditional subsidies...... 11 1,750 1,750 2,015

Total other equity ...... 1,750 1,750 2,015

Provisions for contingencies and losses

Provisions for risks ...... 12 861 61 62 Pensions and similar obligations...... 12 3 8 16

Total provisions for contingencies and losses ...... 864 69 77

Liabilities Borrowings ...... 13 556 570 559

Trade accounts payable...... 1,138 1,605 1,355

Tax and social liabilities ...... 389 426 649

Other liabilities ...... 0 66 16 Prepaid income ...... 14 573 13 7

Total liabilities...... 2,655 2,680 2,586

Total liabilities...... 20,375 29,508 24,344

186 Income Statement (In thousands of euros)

Year ended 31 December

Note 2003 2004 2005

Turnover ...... 14 1,040 1,310 1,300

Operating subsidies...... 113 32 198 Reversal of provisions, transfer of charges...... 12 6 1,431 62

Total operating income...... 1,159 2,773 1,560

Purchase of raw materials and other supplies ...... 15 (975) (1,528) (858) Variation in raw material inventory...... 16 318 397 - Other purchases and external expenses...... 17 (3,234) (4,301) (4,724)

Taxes...... (23) (38) (72) Salaries...... 18 (1,383) (1,727) (2,288) Social charges ...... 18 (608) (279) (507) Depreciation expense and impairment of fixed assets . 19 (349) (443) (293) Impairment of other assets...... 12 (560) (1,078) - Provisions for risks and liabilities...... 12 (800) (5) (8)

Other expenses...... (7) (61) (37)

Total operating expenses...... (7,621) (9,064) (8,787)

Operating result...... (6,462) (6,291) (7,227)

Financial income / (expense), net ...... 20 393 290 285

Ordinary loss before tax...... (6,070) (6,001) (6,941)

Exceptional income / (expense)...... 21 (1) (37) 39 Research tax credit...... 22 948 897 946

Net loss...... (5,122) (5,140) (5,956)

187 Statement of Cash Flows (In thousands of euros)

Year ended 31 December

Note 2003 2004 2005

Cash flows from operating activities

Net loss ...... (5,122) (5,140) (5,956) Adjustments to reconcile net loss to net cash from operating activities:

Depreciation, amortization and provisions ...... 1,738 160 313

Gain / (loss) on the disposal of assets ...... (11) 55 -

Changes in working capital...... (1,599) 529 (1,614)

Exchange (gains) / losses on the USD bank account ... 75 6 (6)

Net cash used in operating activities ...... (4,919) (4,390) (7,263)

Cash flows from investing activities

Acquisition of fixed assets...... (489) (508) (108)

Disposal of fixed assets ...... 84 - -

Net cash used in investing activities ...... (405) (508) (108)

Cash flows from financing activities Gross proceeds from issuance of share capital ...... 10 - 15,018 -

Increase in indebtedness ...... 853 23 265

Debt repayment...... (114) (9) (12)

Net cash generated from financing activities...... 739 15,032 253

Exchange gains / (losses) on cash...... (75) (6) 6

Net increase / (decrease) in cash and investment

securities ...... (4,660) (10,128) (7,112) Cash and investment securities at the beginning of the

year ...... 19,542 14,882 25,009

Cash and investment securities at the end of the year

...... 14,882 25,010 17,897

Of which:

Cash ...... 412 160 206

Investment securities ...... 14,470 24,850 17,692

Total cash and investment securities at the end of the

year ...... 14,882 25,010 17,898

188 Statement of Changes in Shareholders’ Equity (In thousands of euros)

Number Tax Total of Share Share Retained regulated shareholders’ Note shares capital premium earnings Net loss provisions equity

Balance as at 31 December 2002 ...... 526 526 24,091 (1,708) (2,867) 154 20,196

Net loss appropriation 2002...... - - - (2,867) 2,867 - - Excess tax depreciation over normal depreciation, net...... - - - - - 31 31 Net loss for the year 2003 (restated) ...... - - - - (5,122) - (5,122)

Balance as at 31 December 2003 ...... 526 526 24,091 (4,575) (5,122) 185 15,105

Net loss appropriation 2003...... - - - (5,122) 5,122 - - Net loss for the year 2004 (restated) ...... - - - - (5,140) - (5,140) Capital increase, February 2004...... 10 19 19 - - - - 19 Capital increase, March 2004...... 10 67 67 4,933 - - - 5,000 Capital increase, July 2004...... 10 133 133 9,867 - - - 10,000 Excess tax depreciation over normal depreciation, net...... - - - - - 25 25

Balance as at 31 December 2004 ...... 745 745 38,891 (9,697) (5,140) 210 25,009

Net loss appropriation 2004...... - - - (5,140) 5,140 - -

Net loss 2005 ...... - - - - (5,956) - (5,956) Excess tax depreciation over normal depreciation, net...... - - - - - 12 12 Change in accounting principles - consumables...... 2 b2 - - - 956 - - 956 Change in accounting principles - fixed assets ...... 2 b1 - - - (355) - (355) Shareholder’s equity as at 31 December

2005 ...... 745 745 38,891 (14,236) (5,956) 222 19,666

189 Notes to the Financial Statements

1) Events with a financial impact in the year

In addition to the changes in accounting principles described in Note 2 b, the circumstances that affect the comparability of the amounts reported for the periods presented are essentially those described below.

The Company has benefited from an exoneration of social security charges relating to its application of the “Jeune Entreprise Innovante” scheme since 1 January 2004.

2) Accounting policies

a) Basis of preparation

The annual financial statements of the Company have been prepared in accordance with generally accepted accounting principles in France following the principles of conservatism, cut-off and going concern.

The financial statements have been prepared under the historical cost convention.

The accounting principles have been applied in conformity with the rules of the Commercial Code, the accounting decree of 29 November 1983 as well as the CRC regulations n° 2000-06, n° 2004-06 and n° 2002-10 relating to the 2005 revised chart of accounts (“PCG”).

b) Changes in accounting principle and policies

The changes in accounting policies applied as of 1 January 2005 at the time of the first application of the new accounting regulations regarding assets (Regulation CRC n° 2004-06 relating to the definition, accounting and evaluation of assets), are presented hereafter.

In conformity with the French accounting rules (PCG, art. 314-1), the impact of the new policies after considering the impact of income tax, and calculated as though the new principle had always been applied, has been recorded in shareholders’ equity under the line item “retained earnings” on 1 January 2005. Pro forma accounts for preceding periods, prepared in accordance with the new principles, are presented in Note 25.

b1) Treatment of intangible fixed assets

In accordance with the new accounting regulations on assets, applicable as of 1 January 2005, an intangible fixed asset is accounted for if, and only if:

• It is probable that future economic benefits attributable to the asset will flow to the Company; and

• The cost of this asset can be measured reliably.

The management of the Company uses judgment to assess the degree of certainty attached to the flow of future economic benefits that are attributable to the use of the asset based on the evidence available at the time of the initial recognition.

In accordance with this new regulation it was decided that acquisitions of intellectual property rights would be accounted for in expenses, as it is difficult to evaluate the cost of these reliably upon the signature of the contract.

For the financial years 2003 and 2004:

– The payments relating to options on licences were registered in assets in the balance sheet under the line item in-progress intangible assets. A provision for impairment was accounted for as and when an uncertainty existed for the exercise of the options concerned;

– The payments relating to licences acquired, including payments for current or reimbursement of past intellectual property expenses, access costs for the technology and milestone payments, were recorded as intangible fixed assets when incurred and amortized over five years from their date of recognition as assets.

This change in policy resulted in a decrease of 355 thousand euros of shareholders’ equity as at 1 January 2005, corresponding to the amount of intangible fixed assets as at 31 December 2004.

190 b2) Treatment of consumed materials

The Company has determined that the application of the new French accounting regulation on assets, which conformed the definition of inventory with that of IAS 2 whereby only the assets held for sale or in the process of production for such sale can be recorded as “inventory”, excludes products consumed in research and development activities from its scope. However the non-consumed part of these elements at the closing date should be registered in prepaid expenses as prescribed by the PCG.

This change in accounting principle had a positive impact of 956 thousand euros on shareholders’ equity as at 1 January 2005.

b3) Absence of impact of the first application of the new regulation relating to the amortization, depreciation and impairment of fixed assets

The regulation CRC n° 2002-10 relating to the amortization, depreciation and impairment of fixed assets has not had any impact on the Company’s accounts. The analysis carried out by the Company shows that:

– The residual value at the start of the amortization/depreciation period can not be estimated reliably, and consequently, the depreciable amount is the fixed asset cost;

– No fixed asset can be broken down into components for which the following criteria would apply:

• Actual useful life differing from that of its structure and

• Replacement during useful life ;

– The tax allowed useful life does not differ from the actual one ; and

– No impairment indicator exists.

c) Property, plant and equipment

Property, plant and equipment are carried at cost. Major renewals and improvements are capitalized while repairs and maintenance are expensed as incurred.

c1) Economical depreciation

Depreciation is computed over the estimated useful lives of depreciable assets using the straight-line method. Leasehold improvements are depreciated over the shorter of the life of the improvement and the remaining lease term.

The depreciation periods are the following:

Installations and improvements on buildings...... 10 years Technical installations, equipment and tools ...... 5 years Office equipment and furniture...... 5 years Computer equipment ...... 3 years

c2) Reducing balance amortizations

A tax depreciation is recorded for tools and equipment used for research. For the acquisitions made between 1 January 2004 and 31 December 2005, the Company has opted for the application of the increased reducing balance coefficient.

In accordance with French accounting principles, the fiscal benefit calculated as the excess of the fiscal depreciation over the economic depreciation, is recorded as excess tax depreciation over normal depreciation, which is presented in the balance sheet in shareholders’ equity under the line item “tax regulated provisions”.

d) Intangible assets

An intangible fixed asset is recognized when, and only when:

• it is probable that the future economic benefits that are attributable to the asset will flow to the Company; and

• the cost of the asset can be measured reliably.

191

d1) Research and development expenses

In accordance with article 2-6 of the regulation CRC n° 2004-06 as of 1 January 2005, the research works are accounted for in expenses when incurred.

This method is identical to the accounting treatment adopted by the Company prior to the change in principle.

d2) Other intangible fixed assets

Patents, concessions and other intangible assets are valued at their acquisition cost, excluding acquisition expenses. These elements are amortized over their useful life, by applying the following annual coefficients:

Patents...... 20% Software...... 50%

e) Cash and investment securities

Cash includes petty cash and any assets, which by nature can be immediately converted into cash at their nominal value.

Investment securities held by the Company are other than equity securities, acquired as a transitory or permanent, non- speculative investment. The Company’s objective is to obtain a minimum yield close to the EONIA as reference, in the form of revenue (dividends or interest) and/or gain on resale.

At each closing the Company compares the acquisition cost of these securities with their value at the balance sheet date (for money market mutual funds their settlement value), for each category of securities.

The net earnings for the period are affected only when the value of securities has decreased, in which case a provision is recorded for the impairment. Any increase in value of these securities is not accounted for, but is nevertheless liable to income taxes.

f) Income tax and research tax credit

Only current income tax is accounted for. Under this principle, the tax expense for the fiscal year is the amount due to the State, the tax benefit for the fiscal year is the tax credit provided by the State, and deferred tax is not accounted for the future effect of temporary differences and tax losses carried forward.

Research tax credits are provided by the French government to give incentives to companies to perform technical and scientific research. Companies that can justify that their expenses meet the required criteria (research expenses generated in France, or since 1 January 2005, in the European Union, or in the agreed areas of the European Economic Area where a fiscal agreement containing an administrative assistance clause agreed with France) receive such grants in the form of a tax credit that can be used for the payment of taxes due for the period in which the expense was incurred and for the next three years, or reimbursed if not used at the end of this three-year period. Companies that benefit from a tax holiday can obtain an immediate refund of the research tax credit during the three years following their creation.

The Company has benefited from a research tax credit since its first fiscal year.

g) Conditional subsidies and other types of government assistance

The Company benefits from several government grants, in the form of either outright subsidies or conditional subsidies.

Government grants are recognized when there is a reasonable assurance that:

• the Company will comply with the conditions attached to the grants ; and

• the grants will be received.

Government subsidies are usually comprised of a mandatory redeemable portion, presented in borrowings, and a portion redeemable in the case of technical or commercial success, presented in conditional subsidies. Conditional subsidies are presented under “Other equity” on the balance sheet.

192

A government grant that becomes receivable as compensation for expenses or losses already incurred, or for the purpose of providing immediate financial support to the Company with no future related costs, is recognized as income of the period in which it becomes receivable.

Investment subsidies are accounted for in exceptional income for the period of the grant.

Since January 2004, the Company claims to be eligible to the newly created status of Jeune Entreprise Innovante, (“JEI”). As such, it has benefited from reduction in social security costs for all its employees involved primarily in research projects.

h) Provisions

Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where the Company expects 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.

i) Revenue recognition

To date, the Company’s revenue results from payments generated by development and licensing agreements entered into with pharmaceutical companies. These contracts generally provide for components such as upfront payments, milestone payments upon reaching certain predetermined development objectives, reimbursement of certain research and development expenses, as well as payment of royalties on future sales of products.

Technology access fees are recognized as income when the Company has no remaining obligations to perform after signing the contract. Milestone payments are recognized in revenue after final acceptance of the completion of the relevant development objectives by the other contracting party. Lump-sum payments for the financing of research and development are initially deferred under prepaid income and recognized in the income statement over the period of the Company’s continuing involvement under the research arrangement, the estimate of which is revised periodically.

Amounts received before meeting recognition criteria are recognized as prepaid income.

When the payments received are subject to a cancellation clause, the turnover is accounted for and a provision for risks is recorded for the same amount.

The Company records a provision for impairment in the case where the recoverability of the invoiced amounts appears uncertain.

193 3) Intangible fixed assets

Intangible fixed assets can be analysed as follows (in thousands of euros):

Options on licences and Software Patents licences Total

Year ended 31 December 2003

Net opening balance ...... 5 - 196 201 Acquisitions...... 2 - 282 284 Amortization and impairment...... - - (124) (124)

Net closing balance ...... 7 - 354 361

Year ended 31 December 2004

Net opening balance ...... 7 - 354 361 Acquisitions...... 14 30 174 218 Disposals...... - - (30) (30) Amortization and impairment...... (13) (1) (143) (157)

Net closing balance ...... 8 29 355 392

Year ended 31 December 2005

Net opening balance ...... 8 29 355 392 Change in accounting principle (Note 2 b1) - - (355) (355) Acquisitions...... 14 - - 14 Amortization and impairment...... (11) (6) - (17)

Net closing balance ...... 11 23 - 34

4) Property, plant and equipment

Property, plant and equipment can be broken down as follows (in thousands of euros):

Machinery and Buildings equipment

Year ended 31 December 2003 Net opening balance ...... 216 728 Acquisitions...... 37 125 Disposals...... (5) (37) Depreciation...... (26) (171)

Net closing balance ...... 223 645

Year ended 31 December 2004 Net opening balance ...... 223 645 Acquisitions...... 35 231 Disposals...... - (51) Depreciation...... (29) (188)

Net closing balance ...... 230 637

Year ended 31 December 2005 Net opening balance ...... 230 637 Acquisitions...... 6 52 Disposals...... - - Depreciation...... (31) (235)

Net closing balance ...... 204 454

194

5) Inventory

The line item inventory can be analysed as follows (in thousands of euros):

31 December

Note 2003 2004 2005

Components used in research and development activities:

Gross value ...... 2 b2 560 956 - Provision for impairment...... 12 (560) (956) -

Inventory ...... - - -

6) Trade accounts receivable

As at 31 December 2003 this line item included the invoices to Novo Nordisk A/S under the first collaboration and licensing agreement, for an amount of 1,500 thousand euros.

The invoices issued for operating subsidies are presented in trade accounts receivable.

7) Other receivables

Other receivables are analysed as follows (in thousands of euros):

31 December

2003 2004 2005

Other receivables - Short term ...... 936 402 1,233 Other receivables - Long term ...... 1,637 2,534 2,792 Total...... 2,573 2,936 4,025

The components of the short-term receivables are analysed as follows (in thousands of euros):

31 December

2003 2004 2005

Advances and down-payments to suppliers...... 13 11 13 VAT credit...... 138 258 397 Deductible VAT...... 88 92 63 2002 research tax credit ...... - - 688 Grants and public funding...... 690 36 63 Other receivables ...... 7 5 9 Other receivables - short term...... 936 402 1,233

As at 31 December 2003, the grants and public funding to be paid to the Company were mainly relating to the reimbursable innovation assistance from the ANVAR (538 thousand euros) as described in Note 13, as well as a grant to be provided by the Ministry of Research (121 thousand euros) fully reserved to reflect its impairment from 31 December 2004 (see Note 12).

The 2002 research tax credit is presented in this Other receivables – short term as at 31 December 2005 as it is to be recovered in 2006.

195 The components of the other receivables – long term are analysed as follows (in thousands of euros):

31 December

2003 2004 2005

Research tax credit (CIR) 2002 ...... 688 688 - Research tax credit (CIR) 2003 ...... 948 948 948 Research tax credit (CIR) 2004 ...... - 897 897 Research tax credit (CIR) 2005 ...... - - 946 Other receivables - long term...... 1,637 2,534 2,792

Since the Company was created and up to fiscal year 2001, it has benefited from a systematic reimbursement of the research tax credit in the year of the relevant tax return, i.e. the year subsequent to year the provision was accounted for in the income statement, owing to its special status as a recently established, innovative company created after 1 January 1999 and meeting conditions set out in article 44 sexies II and III of the French Tax Code. Since this status was only valid for a period of three years, the reimbursement should occur after three years for those research tax credits awarded from the fiscal year 2002 onwards. Therefore, research tax credit 2002 should be repaid in 2006 (and, as such, has been classified in Current Assets), research tax credit 2003 should be repaid in 2007, research tax credit 2004 should be repaid in 2008 and research tax credit 2005 should be repaid in 2009.

8) Cash and investment securities

Current bank accounts are in euros and US dollars and were opened with Société Générale and Crédit Lyonnais.

The investment securities are essentially composed of mutual funds acquired from Société Générale and Crédit Lyonnais.

The total amount of unrealized gains relating to these financial products amounted to 215 thousand euros as at 31 December 2004 and 444 thousands of euros as at 31 December 2005. These amounts were liable to income tax.

9) Prepaid expenses

Prepaid expenses can be analysed as follows (in thousands of euros):

31 December

2003 2004 2005

Product supplies not yet used in research activities...... - - 1,497 Other prepaid expenses...... 150 245 117 Total prepaid expenses ...... 150 245 1,614

10) Capital

As at 31 December 2003, 2004 and 2005, the breakdown of share capital can be analysed as follows, in thousands of shares (each share, with a par value of 1 euro):

31 December

2003 2004 2005

Common stock (series O stock)...... 7 8 8 Series A preferred stock...... 38 56 56 Series B preferred stock...... 145 145 145 Series C preferred stock...... 336 336 336 Series D preferred stock...... - 200 67 Series D BIS preferred stock ...... - - 133

Total...... 526 745 745

196 The above amounts do not include warrants (“BSA”), founder warrants (“BSPCE”) or stock options granted to certain investors and individuals, particularly employees. As at 31 December 2005, the fully diluted share capital would comprise 822,784 shares (with a par value of 1 euro) considering the exercise of all warrants (BSA and BSPCE) and stock options issued at that date.

Details of changes in share capital over the periods presented are further analysed below:

Following the exercise of BSPCE in February 2004, share capital was increased by 18,750 euros and was raised from 526,284 euros to 545,034 euros.

Following the Mixed General Meeting that took place on 19 March 2004, share capital was increased by 66,667 euros and was raised from 545,034 euros to 611,701 euros. The gross amount of the related share premium was 4,993 thousand euros.

Following the Mixed General Meeting that took place on 22 July 2004, share capital was increased by 133,333 euros and was raised from 611,701 euros to 745,034 euros. The gross amount of the related share premium was 9,867 thousand euros.

Following the Mixed General Meeting that took place on 13 June 2005, the 133,333 series D preferred shares were transferred into series D BIS preferred shares.

The nominal value of the share was split into twenty on 29 March 2006. The number of shares mentioned in this note reflects the situation as at 31 December 2005 and does not take into account the subsequent share split.

The Company issued remuneration warrants (“BSA”) and employee founder warrants (“BSPCE”) and stock-options as described below:

BSPCE BSA Stock options Total

Opening balance – 23 September 1999 ...... - - - - Issued warrants and options – 28 April 2000...... 18,750 - - 18,750

Balance as at 31 December 2000...... 18,750 - - 18,750 Issued warrants and options – 22 December 2001...... - 15,500 - 15,500

Balance as at 31 December 2001...... 18,750 15,500 - 34,250 Issued warrants and options – 15 May 2002...... 12,750 - - 12,750

Balance as at 31 December 2002...... 31,500 15,500 - 47,000 Issued warrants and options – 3 July 2003 ...... - 3,000 28,500 31,500 Cancelled warrants and options – 2003 ...... (1,500) - - (1,500)

Balance as at 31 December 2003...... 30,000 18,500 28,500 77,000 Cancelled warrants and options ...... (250) - (5,250) (5,500) Exercised warrants and options – February 2004 ...... (18,750) - - (18,750)

Balance as at 31 December 2004...... 11,000 18,500 23,250 52,750 Issued warrants and options – 13 June 2005...... - - 25,000 25,000

Balance as at 31 December 2005...... 11,000 18,500 48,250 77,750

As at 22 December 2001, 15,500 BSA2001 were authorized by the Extraordinary General Meeting in two separate tranches:

• A tranche of 7,500 BSA2001 relating to Series O shares with warrants attached (“ABSA”) was allocated to Inserm Transfert Initiative SA, a shareholder of the Company.

• A tranche of 8,000 BSA2001. Within this amount, 6,000 were allocated to members of the Scientific Advisory Board (1,500 for all of the four members) and 2,000 were allocated to a Director of the Company, Mr. Philippe Pouletty.

The 8,000 BSA2001 allocated to the above-mentioned individuals give the right to subscribe to new shares at a price of 30.49 euros per share, in yearly tranches of 1/4, between 22 December 2002 and 22 December 2006.

The 7,500 BSA2001 allocated to Inserm Transfert Initiative SA give the right to subscribe to new shares at a price of 59.50 euros per share, corresponding to the price per share of the capital increase that occurred on 3 July 2002. These warrants can be exercised either in full or in part from the first working day after 31 December 2002 and until 22 December 2006.

197 The 18,750 BSPCE exercised in 2004 were BSPCE2000, relating to the 1,250 BSPCE2000 that were authorized by the Extraordinary General Meeting on 28 April 2000, after division by fifteen of the nominal value as decided by the General

Meeting of 22 December 2001. These BSPCE2000 were granted to three employees: Hervé Brailly, François Romagné and Christian Belmant. These options were exercised in entirety in February 2004.

The 11,000 BSPCE left are the remaining balance of the 12,750 BSPCE2001 that were authorized by the Mixed General Meeting that took place on 22 December 2001. These options were allocated to employees by the ”Comité de Direction” on 15 May 2002. The exercise price is 30.49 euros per share. These options can be exercised at any time from their authorization date until 14 May 2007 (5 years). However, the exercise of these options is subject to the following conditions:

• An amount of up to 25% can be exercised from the first anniversary of their issue.

• For the remaining 75%, the options can be exercised in proportion to the length of time the employee has worked for the Company starting from the first anniversary of their issue and until 14 May 2006.

1,750 of the BSPCE2001 were cancelled following the resignation of employees, in 2003 and 2004.

As of 1 July 2003, the Extraordinary General Meeting authorized the issuance of 3,000 BSA2003 and 28,500 Stock-Options2003.

The BSA2003 were allocated to a Director of the Company and the Stock-Options2003 were allocated to employees by

the ”Comité de Direction” on 1 July 2003. The exercise price for both the BSA2003 and the Stock-Options2003 is 59.50 euros

per share. The Stock-Options2003 can be exercised at any time from their authorization date until 30 June 2013 (10 years).

However, the exercise of both the BSA2003 and the Stock-Options2003 is subject to the following conditions:

• An amount of up to 25% can be exercised from the first anniversary of their issue.

• For the remaining 75%, the BSA2003 and the Stock-Options2003 can be exercised in proportion to the length of time the employee has worked for the Company starting from the first anniversary of their issue and until 30 June 2007.

5,250 of the Stock-Options2003 were subsequently cancelled following the resignation of employees in 2004.

As of 22 July 2004, the Extraordinary General Meeting authorized the issuance of 25,000 Stock-Options2004. The Stock-

Options2004 were allocated to employees by the ”Comité de Direction” on 13 June 2005. The exercise price for the Stock-

Options2004 is 75.00 euros per share. The Stock-Options2004 can be exercised at any time from their authorization date until

12 June 2015 (10 years). However, the exercise of the Stock-Options2004 is subject to the following vesting conditions:

• An amount of up to 25% can be exercised from the first anniversary of their issue.

• For the remaining 75%, the Stock-Options2004 can be exercised in proportion to the length of time the employee has worked for the Company starting from the first anniversary of their issue and until 13 June 2009.

Excluding the warrants presented in the above tables, the Company has issued anti-dilutive warrants attached to the shares issued in share capital increases (“ABSA”). These BSA reach maturity the day that the Company commences trading on a regulated stock market and will not be exercisable after this date.

11) Conditional subsidies, grants and government financing

The Company receives grants from the European Commission and French government and state organisations in several different forms:

• Conditional subsidies;

• Investment and operating subsidies;

• Research tax credits.

Conditional subsidies

198 This line item can be analysed as follows (in thousands of euros):

31 December

2003 2004 2005

ANVAR ADI - 17/02/2000...... 223 223 223 ANVAR ADI - 17/02/2000 (Conseil Général) ...... 46 46 46 ANVAR ADI - 15/02/2002...... 1,255 1,255 1,255 ANVAR ADI - 15/02/2002 (Conseil Général) ...... 91 91 91 ANVAR EUREKA - 03/12/2003 ...... 135 135 400 Conditional subsidies...... 1,750 1,750 2,015

The conditional subsidies received from the ANVAR concern two research and development projects:

– A pre-clinical and clinical research and development program for one of the Company’s drug candidate, partly financed by a reimbursable subsidy for an amount of 2,420 thousand euros, of which 1,990 thousand euros was paid as at 31 December 2005;

– A pre-clinical and clinical research and development program for one of the Company’s drug candidate, partly financed by a reimbursable subsidy in the scope of a European program EUREKA, for an amount of 745 thousand euros of which 580 thousand euros was paid as at 31 December 2005.

The portion reimbursable without conditions of technical or commercial success relating to these conditional subsidies amounted to 556 thousands of euros as at 31 December 2005, as described in Note 13. The balance, recorded in conditional subsidies, is reimbursable according to the assessment criteria for technical or commercial success.

Subsidies from local government organisations

Since its creation the Company receives, due to its innovative nature, a certain number of grants or subsidies from the both the government and local government organisations in order to finance their operation or specific recruitments.

Contrary to the conditional subsidies:

• The Company has the assurance of conforming to the conditions attached to the subsidies, and

• These subsidies are not repayable.

These subsidies are accounted for in the income statement in the period in which the expenses or purchases were incurred.

Research tax credits

Research tax credits are described in Note 22.

199 12) Provisions

Provisions and the variation in provisions can be analysed as follows for the financial years 2003, 2004 and 2005 (in thousands of euros):

Year ending 31 December 2003

Decrease Balance as at Decrease amounts Balance as at Tax regulated provisions 1 Jan 2003 Increase amounts used unused 31 Dec 2003

Excess tax depreciation over normal depreciation ...... 154 45 13 - 186

Sub-Total 154 45 13 - 186

Decrease Provisions for contingencies and Balance as at Decrease amounts Balance as at losses 1 Jan 2003 Increase amounts used unused 31 Dec 2003

Litigations...... 61 - - - 61 NOVO contract provision...... - 800 - - 800 Foreign exchange losses ...... - - - - - Pensions and similar obligations...... 6 3 6 - 3

Sub-Total 67 803 6 - 864

Decrease Balance as at Decrease amounts Balance as at Provision for impairment 1 Jan 2003 Increase amounts used unused 31 Dec 2003

On intangible fixed assets...... 92 61 - - 153 On inventory and WIP...... - 560 - - 560 Other provisions for impairment...... - - - - -

Sub-Total 92 621 - - 713

Total 314 1,469 19 - 1,763

Provisions and reversals

Operating ...... 1,422 3

Financing ...... 1 -

Exceptional ...... 45 13

200 Year ending 31 December 2004

Decrease Balance as at Decrease amounts Balance as at Tax regulated provisions 1 Jan 2004 Increase amounts used unused 31 Dec 2004

Excess tax depreciation over normal depreciation ...... 186 52 28 - 210

Sub-Total 186 52 28 - 210

Decrease Provisions for contingencies and Balance as at Decrease amounts Balance as at losses 1 Jan 2004 Increase amounts used unused 31 Dec 2004

Litigations...... 61 - - - 61 NOVO contract provision...... 800 - - 800 - Foreign exchange losses ...... - - - - - Pensions and similar obligations...... 3 5 - - 8

Sub-Total 864 5 - 800 70

Decrease Balance as at Decrease amounts Balance as at Provision for impairment 1 Jan 2004 Increase amounts used unused 31 Dec 2004

On intangible fixed assets...... 153 72 29 - 197 On inventory and WIP...... 560 956 560 - 956 Other provisions for impairment...... - 121 - - 121

Sub-Total 713 1,150 589 - 1,274

Total 1,763 1,207 616 800 1,554

Provisions and reversals

Operating ...... 1,155 589 800

Financing ...... - - -

Exceptional ...... 52 28 -

201 Year ending December 31 2005

Decrease Balance as at Decrease amounts Balance as at Tax regulated provisions 1 Jan 2005 Increase amounts used unused 31 Dec 2005

Excess tax depreciation...... 210 34 22 - 222

Sub- Total 210 34 22 - 222

Decrease Provisions for contingencies and Balance as at Decrease amounts Balance as at losses 1 Jan 2005 Increase amounts used unused 31 Dec 2005

Litigations...... 61 - - - 61 Foreign exchange losses ...... - 1 - - 1 Pensions and similar obligations...... 8 8 - - 16

Sub- Total 69 8 - - 77

Decrease Balance as at Decrease amounts Balance as at Provision for impairment 1 Jan 2005 Increase amounts used unused 31 Dec 2005

On intangible fixed assets...... 197 - 197 - - On inventory and WIP...... 956 - 956 - - Other provisions for impairment...... 121 - - - 121

Sub- Total 1,274 - 1,153 - 121

Total 1,554 42 1,175 - -

Provisions and reversals

Operating ...... 8 1 -

Financing ...... 1 - -

Exceptional ...... 34 22 -

The provisions for intangible fixed assets and inventory have been reversed by the retained earnings as at 1 January 2005 due to the changes in accounting principles described in Note 2 b.

Excess tax depreciation over normal depreciation

Excess tax depreciation over normal depreciation is accounted for in accordance with the principles described in Note 2 c2.

Provision for litigations

This concerns a lawsuit with a former employee, whom the Company dismissed for professional misconduct in 2002. A provision in the amount of 61 thousand euros has been recorded for this litigation in the financial statements. This amount corresponds to the amount that was claimed by the former employee for damages before the Social Court of Justice.

The trial took place in November 2003 and the Social Court of Justice rendered a first judgment on 7 June 2005. The decision was to reject the former employee’s demand and to clear the Company from any damage’s responsibility. The former employee appealed this decision, the appeal judgment was made on 31 March 2006 and the decision is expected in May 2006.

Provision for Novo Nordisk A/S risk

A provision of 800 thousands of euros was recorded as at 31 December 2003 for the payment of an option received from the Company Novo Nordisk A/S, on the basis that a cancellation clause, maturing on 31 December 2004 was included in the agreement signed in 2003. This provision was reversed as at 31 December 2004 as the cancellation clause was not executed.

202 Pensions and similar obligations

The lumps sump indemnities paid to employees upon retirement are the only defined benefit obligation of the Company. The main actuarial assumptions used to evaluate retirement are the following:

• present value factor, net of inflation: 3%;

• future yearly increase in wages: 1%.

Provision for impairment of subsidy receivable

This provision for an amount of 121 thousand euros, recorded during the financial year closed as at 31 December 2004, reflects information received from the Ministry of Research stating that the latter has no available resources to fund this subsidy in a foreseeable future.

Provision for impairment of inventory

An impairment loss on inventory has been recorded by way of a provision to take into account the management’s estimation of their value in use as at 31 December 2003 and 2004. As indicated in Note 2 b2, the Company has determined that the application of the new French accounting regulation on assets, which came into effect on 1 January 2005, excludes products consumed for research purposes from the scope of inventory accounting. Pro forma accounts reflecting the impact of this change in accounting principle are presented in Note 25.

13) Borrowings

This line item is analysed, per maturity, as follows (in thousands of euros):

31 December

2003 2004 2005

ANVAR ADI - 15/02/2002...... - - 145 ANVAR ADI - 15/02/2002 (Conseil Général) ...... - - 13 Bank borrowing ...... - 15 3 Total - short term...... - 15 161

ANVAR ADI - 15/02/2002...... 345 345 200 ANVAR ADI - 15/02/2002 (Conseil Général) ...... 31 31 18 ANVAR EUREKA - 03/12/2003 ...... 180 180 180 Total - long term ...... 556 556 398

Total borrowings...... 556 570 559

The amounts due to the ANVAR agency represent the unconditionally repayable portion of the innovation grants as detailed in Note 11. The amounts classified in Current Liabilities as at 31 December 2005 are repayable in 2006.

14) Turnover and prepaid income

As at 31 December 2003 prepaid income was principally related to agreements with Novo Nordisk A/S.

The turnover stems entirely from collaboration and licensing agreements with Novo Nordisk A/S, and is recorded in accordance with the principles described in Note 2 i.

15) Purchases of raw materials and other supplies

The purchases of raw materials and other supplies include purchase costs from third parties of products developed by the Company, that has no production capacity. These costs also include the purchase costs of pharmaceutical products and substances bought by the Company from third parties and used in its research and development activity.

16) Variation in raw materials inventories

Before the first application of the new accounting regulation on assets on 1 January 2005 described in Note 2 b2, the materials purchased and not consumed at the closing date were recorded as inventory. A provision for impairment was accounted for to reflect management’s estimate of their value in use at the closing date.

203

17) Other purchases and external expenses

Other purchases and external expenses are analysed as follows (in thousands of euros):

Year ended 31 December

2003 2004 2005

Subcontracting ...... (1,878) (2,483) (2,434) Patent expenses...... (106) (224) (227) Licence expenses and options on licences ...... - (52) (228) Scientific advisory and consulting...... (310) (296) (231) Leasing, maintenance and utility ...... (327) (351) (439) Travel and conventions...... (262) (383) (490) Non-scientific advisory and consulting ...... (81) (213) (313) Marketing, advisory and consulting...... (71) (58) (78) Telecommunications...... (30) (35) (41) Insurance...... (17) (27) (38) Bank charges...... (4) (3) (5) Others, net...... (150) (176) (199) Other purchases and external expenses...... (3,234) (4,301) (4,724)

The Company subcontracts a significant part of its pre-clinical (pharmaceutical development, tolerance studies and other model experiments, etc.) and clinical operations (coordination of trials, hospital costs, etc.) to third parties.

Intellectual property expenses include, on the one hand, the expenses related to patents and patent applications relating to the Company’s inventions and also for third party inventions and on the other hand, the costs linked with licences and options for licences for third parties inventions. As indicated in Note 2 b1, the accounting treatment of these intellectual property expenses has been modified since 1 January 2005 following the changes in French accounting principles.

Scientific advisory and consulting expenses are in relation to consulting services performed by third parties to support the research and development activities of the Company.

The Company rents its premises (see Note 23) and uses third parties for procurement of utilities as well as for maintenance of its laboratory and office premises. The Company also rents its computer equipment.

Non-scientific advisory and consulting are services performed to support the selling, general and administration activities of the Company, such as legal, accounting and audit fees as well as business development support.

Production of marketing, communication and public relations services are, to a large extent, externalized to third parties.

As at 31 December 2005, under the line item “Others, net” were mostly expenses in relation to training of the staff.

18) Personnel costs

The Company had 54 employees as at 31 December 2005, to be compared respectively with 41 and 33 as at 31 December 2004 and 2003.

In 2004, the Company was granted the Jeune Entreprise Innovante (“JEI”) status for the first time. This allows the Company to benefit from social security cost exemptions for employees involved in research projects. The Company believes it will still benefit from the JEI status for the fiscal year 2006, as the status ends at the 8th anniversary of the Company based on the current law.

In 2005, the Company had a payroll audit performed by one of the French social security bodies. The audit covered the period ending 31 December 2002, 2003 and 2004. No adjustment was notified to the Company.

204 19) Depreciation expense and impairment of fixed assets

The depreciation expense and impairment loss on fixed assets can be analysed as follows (in thousands of euros):

Year ended 31 December

2003 2004 2005

Depreciation and amortization...... (288) (371) (293) Provision for impairment...... (61) (72) - Total...... (349) (443) (293)

The provision for impairment concerns options on licences.

20) Financial income and expense, net

The financial income and expense, net can be analysed as follows (in thousands of euros):

Year ended 31 December

2003 2004 2005

Net gain on disposal of investment securities...... 470 297 279 Interest on borrowings ...... (2) (1) - Foreign exchange gains / (losses) ...... (75) (6) 6 Financial income / (expense), net...... 393 290 285

The foreign exchange gains and losses relate to the translation of the US dollar bank account opened in 2002. The Company uses this account to pay its particular invoices in US dollars. The gains and losses recorded are unrealized differences.

21) Exceptional income and expense, net

The exceptional income and expense are analysed as follows (in thousands of euros):

Year ended December 31,

2003 2004 2005

Exceptional income Income on previous periods...... 25 9 20 Selling price of assets sold...... 84 - - Reversal of excess tax depreciation ...... 13 28 22 Schering aid for taking over Lyon location ...... - - 40

Exceptional expenses Expenses on previous periods...... - - (9) Reversal of investment subsidy ...... (6) - - Net book value of fixed assets disposed of...... (72) (22) - Excess tax depreciation...... (45) (52) (34)

Exceptional income / (expense), net...... (1) (37) 39

22) Income tax

Tax losses carried forward

Taking into account the tax regulations in force, the Company has tax losses available for carry forward with no time limit in the total amount of 24,039,226 euros as at 31 December 2005. The deferred tax asset base also includes temporary differences for an amount of 241 thousand euros (asset).

The tax rate applicable to the Company is the tax rate in force in France, i.e. 34.33%.

In accordance with the principles described in Note 2f, no deferred tax has been recorded in the Company’s accounts.

205

In 2004 and 2005, the Company has had two tax audits performed by the French tax authorities. The 2004 audit was a general audit on income tax and covered the fiscal years ending 31 December 2000, 2001 and 2002. The 2005 audit was specific to invoicing and in relation to EU regulation on VAT. No cash adjustment was notified to the Company following these two audits, which reduced the amount of tax deficits carried forward by 92 thousand euros.

Research tax credit

The Company benefits from the provisions of articles 244 quarter B and 49 of the Tax Code relating to research tax credit. In accordance with the principle described in Note 2f, research tax credit is recorded during the year in which the research expenses are eligible.

The following table presents the evolution of research tax credits recorded over the last three years (in thousands of euros):

Year ended 31 December

2003 2004 2005

Research tax credit (CIR)2003 ...... 948 - -

Research tax credit (CIR)2004 ...... - 897 -

Research tax credit (CIR)2005 ...... - - 946 Total...... 948 897 946

23) Commitments

Obligations under the terms of in-licensing agreements

The in-licensing agreements signed by the Company (i) usually require the Company to bear all expenses relating to any acquirement, examination and extension procedures of patents, as well as to uphold and defend the patents and (ii) will require, according to certain milestones, the payment of lump sums and royalties to the licensor.

Obligations under the terms of option agreements

Option agreements signed by the Company (i) usually require the Company to bear all expenses relating to any acquirement, examination and extension procedures of patents, as well as to uphold and defend the patents, (ii) require the Company to pay a lump sum of money in exchange of the option and (iii) will require, if the Company decides to later opt-in, the payment of lump sums (milestone payments) and royalties to the licensor.

Obligations under the terms of joint-ownership of intellectual property rights

The Company signed certain agreements with different partners, which defined the rules of joint-ownership and the granting of rights regarding certain aspects of intellectual property. Under these contracts, the Company usually bears all expenses relating to any acquirement, examination and extension procedures of the patents and to any procedure required to uphold and defend the patents. These agreements also usually require, in exchange of a licence over the share of rights owned by the co-owner, and according to certain milestones, the payment of lump sums and royalties to the co-owner.

Obligations under a long-term supply and manufacturing agreement

In 2004, the Company signed a long-term supply agreement with PCAS, a specialty chemistry manufacturer, regarding supply of the one of the Company’s products drug substance. Besides the contractual obligation regarding exclusivity in supply and minimum annual order, the Company could, under certain conditions, be paying a break-up fee of 250,000 euros in case of early termination.

Obligations under certain financial products

The Company is engaged in various financial products to manage its cash balance. These financial products have different maturities, the longest one currently being 18 months at the date of signature. Under the agreements signed with banks regarding these financial products, the Company usually agrees to share future profit on investment with the said banks.

Obligations under operating lease agreement

206 The Company has ongoing contracts with ECS, a subsidiary of Société Générale, and Dell Computers, to lease its computer equipment. As at 31 December 2005, the Company had the following future obligations:

ECS obligations: 12 monthly lease payments of 4,900 euros (excluding VAT), 12 monthly lease payments of 2,448 euros (excluding VAT).

Dell obligations: 33 monthly lease payments of 283 euros (excluding VAT), 34 monthly lease payments of 175 euros (excluding VAT). 34 monthly lease payments of 295 euros (excluding VAT).

The Company rents premises in Marseille, Lyon and Nantes. The premises in Nantes are rented in the context of a short-term framework agreement with the University Hospital of Nantes in exchange of an annual payment of 13,200 euros including taxes. This agreement terminated on 1 April 2006.

The Marseilles and Lyon premises are rented through long-term commercial lease agreements, which main characteristics are as follows:

Marseilles: the Company entered into a commercial lease agreement with a 9-year duration on 1 February 2001. The Company can terminate this agreement at the end of the first two 3-year periods with 6-month notice. The agreement is on around 800 square-meters of facilities with laboratory and office premises. Rental cost is automatically actualized each year at the beginning of the calendar year, based on a specific price index. For the period started 1 January 2005, the annual rental cost was set at 86,552 euros, excluding taxes and most utilities.

Lyon: the Company entered into a commercial lease agreement with a 9-year duration on 1 September 2005. The Company can terminate this agreement at the end of the first two 3-year periods with 6-month notice. The agreement is on a 324 square-metre facility with laboratory and offices. Rental cost is automatically actualized each year at the anniversary date, based on a specific price index. For the period started 1 September 2005, the rental cost was set at 106,920 euros, excluding taxes but including most utilities.

Obligations under other agreements

As several significant functions in the Company are outsourced, it is in the ordinary course of business of the Company to sign short or mid-term sub-contracting or outsourcing agreements with various third parties, in France and abroad. Under these agreements, the Company faces various obligations linked to the ordinary course of its business.

24) Post balance sheet events

On 28 March 2006, the Company signed a new strategic and commercial agreement with Novo Nordisk A/S in order to form a new collaboration on the development of additional drug candidates targeting the NK cells receptors. Under the terms and conditions of this agreement, the Company received upfront lump-sum payments, including a technology access fee and the financing of research and development expenses in the 2006 financial year. Furthermore, the Company will be entitled to future lump-sum payments as research and development funding or in the form of milestone payments based on pre-clinical and clinical milestones in the development of drug candidates. Finally, the Company will receive royalty payments when the products are marketed. Novo Nordisk A/S, already a shareholder of the Company, increased its shareholding through a dedicated share capital increase on 29 March 2006 for an amount of 10.0 million euros.

On 16 December 2005, the Company was notified by the newly created Agence Nationale de la Recherche (“ANR”) that two of its research projects had been awarded national subsidies for a total amount of 466,063 euros. As at closing date, the contracts in relation to these subsidies had not yet been signed.

On 2 February 2006, the Company signed a letter of intent to rent another 300 square-meter of office facilities in a building next to its Marseilles headquarters, at an annual rental cost of 35,108 euros excluding taxes and most utilities, for up to 31 March 2008.

The Company expects to move at the end of 2007 to new facilities, for which a commercial lease agreement should be executed in 2006.

On 15 March 2006, the Company was informed that the amount paid to a supplier was eligible for the research tax credit. The amount concerned is 413 thousand euros for 2005, therefore the research tax credit was increased by 206 thousand euros.

207 25) Pro forma accounts

As indicated in Note 2b, on 1 January 2005 the Company modified its accounting policies for intangible fixed assets and consumables.

Pro forma accounts for prior periods, prepared in accordance with the new policies are presented hereafter in order to facilitate the comparison of accounts (in thousands of euros):

Pro forma balance sheet

31 December

2003 2004 Pro forma Pro forma 2005

Assets

Non-current assets Intangible fixed assets (restated)...... 7 37 34 Buildings...... 223 230 204 Technical installations, equipment and tools ...... 645 637 454 Other tangible fixed assets...... 19 28 26 Prepayments...... 1 2 20 Financial fixed assets...... 18 18 29 Total fixed assets...... 913 951 766

Current assets Inventory...... - - - Trade accounts receivables ...... 1,503 10 39 Other receivables ...... 2,573 2,936 4,025 Investment securities ...... 14,470 24,850 17,692 Cash ...... 412 160 206 Total current assets...... 18,958 27,956 21,962

Adjustment accounts Prepaid expenses...... 710 1,201 1 614 Unrealized foreign exchange losses...... - - 1 Total adjustment accounts ...... 710 1,201 1,615

Total assets ...... 20,580 30,109 24,344

Liabilities

Shareholders’ equity Share capital ...... 526 745 745 Share premium...... 24,091 38,891 38,891 Retained earnings...... (4,771) (9,492) (14,236) Net loss ...... (4,721) (4,744) (5,956) Tax regulated provision ...... 186 210 222 Total shareholders’ equity ...... 15,311 25,609 19,666

Other equity Conditional subsidies...... 1,750 1,750 2,015 Total other equity ...... 1,750 1,750 2,015

Provisions for contingencies and losses Provisions for risks ...... 861 61 62 Pensions and similar obligations...... 3 8 16 Total provisions for contingencies and losses ...... 864 69 77

208

Liabilities Borrowings ...... 556 570 559 Trade notes payable ...... 1,138 1,605 1,355 Tax and social liabilities ...... 389 426 649 Other liabilities ...... 0 66 16 Prepaid income ...... 573 13 7 Total liabilities...... 2,655 2,680 2,586

Total liabilities...... 20,580 30,109 24,344

Pro forma income statement

Year ended 31 December

2003 2004 Pro forma Pro forma 2005

Turnover ...... 1,040 1,310 1,300 Operating subsidies...... 113 32 198 Reversal of provisions, transfer of charges...... 6 842 62 Total operating products...... 1,159 2,184 1,560

Purchase of raw materials and other supplies (restated) ...... (657) (1,132) (858) Variation in raw material inventory (restated)...... - - - Other external purchases and expenses (restated)...... (3,516) (4,475) (4,724) Taxes...... (23) (38) (72) Salaries...... (1,383) (1,727) (2,288) Social charges ...... (608) (279) (507) Depreciation expense and impairment of fixed assets (restated) . (226) (270) (293) Impairment of other assets (restated)...... - - - Provisions for contingencies and liabilities ...... (800) (126) (8) Other expenses...... (7) (32) (37) Total operating expenses...... (7,220) (8,079) (8,787)

Operating result...... 6,061 (5,895) (7,227)

Financial income/ (expense) ...... 393 290 285

Ordinary loss before tax...... 5,668 (5,605) (6,941)

Exceptional income/expense...... (1) (37) 39 Research tax credit...... 948 897 946

Net loss...... (4,721) (4,744) (5,956)

209 20.2 STATUTORY AUDITORS’ REPORT ON THE STATUTORY FINANCIAL STATEMENTS PRESENTED UNDER FRENCH GAAP FOR THE YEARS ENDED 31 DECEMBER 2003, 2004 AND 2005

Dear Sir/Madam,

In our capacity as Statutory Auditors of the Company and in application of the regulation (CE) n° 809/204 in the context of the initial public offering of its shares, we have audited the statutory financial statements of Innate Pharma prepared in accordance with the regulations and accounting principles generally accepted in France, for the years ended 31 December 2003, 2004 and 2005 as presented in the accompanying Document de Base.

These financial statements are the responsibility of the Company’s Board of Directors. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with professional standards applicable in France. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statutory financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion expressed below.

In our opinion, the accompanying statutory financial statements prepared in accordance with French GAAP give a true and fair view of the assets, liabilities and financial position of Innate Pharma as at 31 December 2003, 2004 and 2005, and of the Company’s results for each of the years then ended.

Without qualifying our opinion expressed above, we draw your attention to the changes in accounting policies applied in the year ended 31 December 2005 in accordance with the new accounting regulations outlined in Note 2 b.

Marseille, 2 June 2006

Statutory auditors

Audit Conseil Expertise PricewaterhouseCoopers Audit Member of PKF International

Guy Castinel Philippe Willemin

210 20.3 ACCOUNTS PREPARED UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS AS AT 31 DECEMBER 2003, 2004 AND 2005

Balance Sheet (in thousands of euros)

At 31 December

2003 2004 Note Restated Restated 2005

Assets

Current Assets Cash and cash equivalents ...... 3 14,882 11,015 2,585 Current financial instruments...... 3 - 14,210 15,757 Current receivables and prepayments ...... 4 2,329 1,598 2,866

Total current assets...... 17,211 26,823 21,209

Non current assets Non-current receivables...... 5 1,637 2,534 2,792 Property, plant and equipment...... 6 890 920 707

Other fixed assets...... 26 28 59

Total non-current assets...... 2,553 3,481 3,558

Total assets ...... 19,763 30,305 24,766

Liabilities

Current liabilities Trade payables...... 7 2,143 2,139 2,030 Borrowings ...... 8 4 23 169 Provisions ...... 9 61 61 61

Total current liabilities...... 2,208 2,223 2,260

Non current liabilities Conditional subsidies and grants ...... 12 1,750 1,750 2,015 Borrowings ...... 8 556 573 411 Pension benefits...... 10 3 8 16

Total non-current liabilities ...... 2,309 2,331 2,442

Equity Capital and reserves attributable to equity holders of the

Company Share capital ...... 11 526 745 745

Share premium...... 24,072 38,875 39,089

Retained earnings...... (4,341) (9,351) (14,084)

Net loss ...... (5,011) (4,733) (6,129) Other comprehensive income ...... 3 - 215 444 Total capital and reserves attributable to equity holders of the

Company...... 15,246 25,751 20,065

Total liabilities and equity...... 19,763 30,305 24,766

211 Income Statement (in thousands of euros)

Years ended 31 December

2003 2004 Note Restated Restated 2005

Licensing revenue...... 20 240 2,110 1,300 Government financing for research expenditure...... 12 1,061 943 1,144

Operating revenue ...... 1,301 3,053 2,444 Cost of supplies and consumable materials ...... 14 (890) (1 191) (944) Intellectual property expenses ...... 13 (365) (507) (489) Other purchases and external expenses...... 14 (3,090) (3,835) (4,106) Employee benefits other than share-based compensation ...... 15 (1,991) (2,006) (2,795) Share-based compensation...... 16 (99) (99) (214)

Depreciation and amortisation ...... (295) (275) (293) Other income and expenses, net...... 17 27 (163) (19)

Net operating expenses ...... (6,703) (8,075) (8,859)

Operating income / (loss)...... (5,402) (5,022) (6,415) Interest income / (expense), net ...... 18 391 289 286

Income / (loss) before tax...... (5,011) (4,733) (6,129) Income tax expense...... 19 - - -

Net loss...... (5,011) (4,733) (6,129)

Loss per share attributable to the equity holders of the Company, adjusted retrospectively to reflect the share split by twenty on 29 March 2006

(in € per share) - basic...... 23 (0.48) (0.36) (0.41) - diluted...... 23 (0.48) (0.36) (0.41)

212 Statement of cash flows (In thousands of euros)

Years ended 31 December

2003 2004 Note Restated Restated 2005

Cash flows from operating activities

Net loss ...... (5,011) (4,733) (6,129) Adjustments to reconcile net loss to net cash from operating activities:

Depreciation and amortisation ...... 235 275 301 Provisions ...... 9,10 (3) 126 - Share-based compensation...... 16 99 99 214

Gains and losses on asset disposals ...... 81 22 -

Changes in working capital...... (577) (292) (1,635) Foreign exchange (gain) / loss on bank account in USD...... 18 75 6 (6)

Net cash used in operating activities ...... (5,101) (4,497) (7,255)

Cash flows from investing activities

Acquisition of fixed assets...... (205) (328) (111) Sale / (Purchase) of current financial instruments ...... 3 - (13,995) (1,318) Sale / (Purchase) of held-to-maturity financial assets...... 3 501 - -

Net cash generated from / (used in) investing activities...... 295 (14,323) (1,430)

Cash flows from financing activities

Net proceeds from issuance of share capital...... - 14,923 - Increase in indebtedness ...... 12 853 37 265

Debt repayment...... (134) - (16)

Net cash generated from financing activities...... 719 14,960 249 Exchange gains / (losses) on cash and cash equivalents...... 18 (75) (6) 6

Net decrease in cash and cash equivalents...... (4,161) (3,867) (8,430)

Cash and cash equivalents at the beginning of the year...... 19,043 14,882 11,015

Cash and cash equivalents at the end of the year...... 14,882 11,015 2,585

213 Statement of changes in Equity (In thousands of euros)

Total attributable to equity Retained Other holders of Number of Share Share earnings Net loss comprehensive the Note shares capital premium Restated Restated income Company

Balance as at 31 December 2002 as previously reported

...... 526 526 23,972 (1,884) (2,699) - 19,915 Change in accounting policy ...... 2b2 - - - 242 - - 242

Net loss appropriation 2002 - - - (2,699) 2,699 - - Share-based compensation .. 16 - - 99 - - - 99 Net loss for the year 2003

(restated)...... - - - - (5,010) - (5,010)

Balance as at 31 December

2003 as restated ...... 526 526 24,071 (4,341) (5,010) - 15,246

Net loss appropriation 2003 - - - (5,010) 5,010 - - Share-based compensation .. 16 - - 99 - - - 99 Net loss for the year 2004

(restated)...... - - - - (4,733) - (4,733) Capital increase, February 2004 ...... 11 19 19 - - - - 19 Capital increase, March 2004 ...... 11 67 67 4,871 - - - 4,937 Capital increase, July 2004.. 11 133 133 9,834 - - - 9,968 Unrealised gains on securities available for sale ...... 3 - - - - - 215 215

Balance as at 31 December

2004 as restated ...... 745 745 38,875 (9,351) (4,733) 215 25,751

Net loss appropriation 2004 - - - (4,733) 4,733 - - Share-based compensation .. 16 - - 214 - - - 214

Net loss for the year 2005 ... - - - - (6,129) - (6,129) Unrealised gains on securities available for sale ...... 3 - - - - - 229 229

Balance as at 31 December

2005...... 745 745 39,089 (14,084) (6,129) 444 20,065

214 Notes to the Financial Statements

1) The Company

The company Innate Pharma SA (hereafter “the Company”) is a biotechnological company. Its activity is centred on the development of immunology-based therapies for tumour related illnesses. The Company has a technological platform that combines immunology and chemistry of natural substances. The Company’s main research field targets the activation of non conventional lymphocytes, such as gamma delta T cells, NK and NK.T cells and Toll Like Receptors (TLR).

As at 31 December 2005, the Company had seven products under development, none of which have been marketed yet.

In the short run, potential clients for the Company are players in the pharmaceutical industry through out-licensing. In 2003, a first licence agreement for a product was signed with the Danish laboratory Novo Nordisk A/S, who became a minority shareholder in the Company in 2004. The signature of a second agreement has strengthened this relationship with Novo Nordisk A/S in March 2006.

In the long run, the Company intends to deliver its products to patients through cancer research centres and hospitals.

The Executive Board has closed these financial statements presented under IFRS on 28 April 2006. They have not been submitted for approval at the shareholders’ meeting.

2) Accounting policies

a) Basis of preparation

The annual financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. The financial statements have been prepared under the historical cost convention, as modified by the revaluation of securities available for sale.

The preparation of financial statements in conformity with IFRS requires the Company to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Estimates are used for, but not limited to, the accounting of depreciation and provisions as well as share-based compensation. Actual results could differ from these estimates.

Application of the revised International Accounting Standards set out below was required for periods beginning on 1 January 2005:

• IAS 1 Presentation of Financial Statements • IAS 2 Inventories • IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors • IAS 10 Events after the Balance Sheet Date • IAS 16 Property, Plant and Equipment • IAS 17 Leases • IAS 21 The Effects of Changes in Foreign Exchange Rates • IAS 24 Related Party Disclosures • IAS 32 Financial Instruments: Disclosure and Presentation • IAS 36 Impairment of Assets • IAS 38 Intangible Assets • IAS 39 Financial Instruments: Recognition and Measurement • IAS 39 (Amendment) Transition and Initial Recognition of Financial Assets and Financial Liabilities.

Application of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, issued in 2004, was also required for periods beginning on 1 January 2005.

The adoption of these Standards did not result in substantial changes to the Company’s accounting policies. In summary:

– IAS 1 (revised 2003) has affected the presentation of the Balance Sheet and other disclosures; – IAS 24 (revised 2003) has created new disclosure requirements for key management personnel; – Other Standards had no material effect on the Company’s policies.

215

The application of the following amendments and interpretations are mandatory for the 2005 financial year:

• IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities • IFRIC 2 Members’ Shares in Co-operative Entities and Similar Instruments • SIC 12 (Amendment) Consolidation – Special Purpose Entities

After analysing these amendments and interpretations the management concluded that they do not apply to the Company’s activities.

Certain new standards, interpretations and amendments of existing standards have been published that are mandatory for the Company’s accounting periods beginning on or after 1 January 2006 or for later periods but which the Company has not early adopted, as follows:

• IAS 19 (Amendment) Employee Benefits • IAS 39 (Amendment) Cash Flow Hedge Accounting of Forecast Intragroup Transactions • IAS 39 (Amendment) The Fair Value Option • IAS 39 and IFRS 4 (Amendment) Financial Guarantee Contracts • IFRS 1 and IFRS 6 (Amendment) Exploration for and Evaluation of Mineral Resources • IFRS 7 Financial Instruments: Disclosures, and a complementary amendment to IAS 1, Presentation of Financial Statements – Capital Disclosures • IFRIC 4 Determining whether an Arrangement contains a Lease • IFRIC 5 Rights to Interests arising from Decommissioning, Restoration, and Environmental Rehabilitation Funds • IFRIC 6 Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment.

After analysis of these standards, interpretations and amendments, the management has concluded that the impact of these is limited to the inclusion of some supplementary information that will not modify on a substantial basis the notes to the financial statements.

b) Changes in accounting policies

b1) Early adoption of a standard in 2004

In 2004, the Company early adopted IFRS 2 “Share-based Payments”. The early adoption of IFRS 2 has resulted in a change in the accounting policy for share-based payments. Until 31 December 2003, the provision of share options to employees did not result in a charge in the income statement. In 2004, the Company charged the cost of share options to the income statement (see Note 2 m). The Company applied IFRS 2 to all grants of equity instrument to employees and individuals providing services (such as consultants) since its inception, and restated comparative information and adjusted the opening balance of retained earnings as at 1 January 2002, the first comparative period presented in the 2004 IFRS financial statements.

b2) Voluntary change in accounting policy in 2005

In the absence of a Standard or an Interpretation that specifically defines prepaid expenses, management determined that the most recent pronouncements in French GAAP, which have been amended for the financial year 2005 to define assets using a similar conceptual framework as IFRS should be applied to pharmaceutical products and other supplies used in the research programmes. Following this amendment of French GAAP, the Company voluntarily changed its accounting policy to reflect both pharmaceutical and other supplies not used at the balance sheet date as prepaid expenses.

Management considers that this change in accounting policy results in the financial statements providing reliable and more relevant information about the effects of transactions and conditions on the Company’s financial position and performance.

216 The Company applied this new accounting policy retrospectively and adjusted the opening balance of retained earnings for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied. The effect of the change is presented below. Opening retained earnings for 2003 have been increased by 242 thousand euros, which is the amount of the adjustment relating to periods prior to 2003.

2004 2003

Increase in current receivables and prepayments 956 560 Decrease in cost of supplies and consumable materials 397 318

c) Property, plant and equipment

Property, plant and equipment are carried at cost. Major renewals and improvements are capitalised while repairs and maintenance are expensed as incurred. Depreciation is computed over the estimated useful lives of depreciable assets using the straight-line method. Leasehold improvements are amortised over the shorter of the life of the improvement and the remaining lease term.

The depreciation periods are the following:

Installations and improvements on buildings...... 10 years Technical installations, equipment and tools ...... 5 years Equipment and office furniture...... 5 years Computer equipment ...... 3 years

d) Intangible assets

An intangible asset is recognised when, and only when:

• it is probable that the future economic benefits that are attributable to the asset will flow to the Company; and

• the cost of the asset can be measured reliably.

To date, the Company has not accounted for any intangible asset developed in-house or acquired. This is due to the uncertainty in successfully completing the research in progress, as well as to the future availability of technical, financial and human resources necessary to complete the development phase.

e) Cash, cash equivalents and investments

Cash equivalents are short term, highly liquid investments, that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Cash and cash equivalents comprise the cash that is held at the bank and the petty cash as well as investment securities for which the recommended maturity is less than three months and the interest rate risk is very limited.

For the purpose of establishing the statement of cash flows, cash and cash equivalents include cash in hand, sight deposits with banks and short-term highly liquid investments with original maturities of three months or less, net of bank overdrafts. In the balance sheet, bank overdrafts are included in borrowings under financial debts.

The Company’s current financial instruments comprise dynamic mutual funds subject to a change in value risk. The advised maturity date is generally greater than three months. The performance objective of these investments is to exceed the EONIA. They can be mobilised at any moment and some of them have a guaranty of capital at the maturity date. These investments are considered as available for sale securities.

The Company classifies investments into one of the following categories: “held for trading” investments, “held to maturity” investments and “securities available for sale”.

Securities that the Company purchases with the main aim of generating a profit from short-term fluctuations in price are classified as “held for trading” investments. During this period, the Company has not purchased any securities of this type.

Fixed-maturity investments that management intends and is able to hold to maturity are classified under the line item “held to maturity” investments.

217

Securities available for sale are those that are not held to maturity or held for trading. Investments with unfixed maturities or original maturities of more than three months, which could easily be sold in order to fulfil cash requirements or in reply to changes in interest rates, are treated as available-for-sale financial assets.

Held to maturity investments are valued at the amortised cost using the effective interest rate method.

Securities available for sale, mainly consisting of marketable securities, are valued at their fair value at the closing date of the reporting period. For those securities listed on active markets, the fair value is determined using quoted bid prices. Gains and losses on securities available for sale are recognised directly in equity under other comprehensive income, until the securities are sold, collected, or otherwise disposed of, or until they are determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is included in net income for the period.

Management determines the appropriate classification for the relevant investments at purchase date and reviews this classification on a regular basis in accordance with the strict conditions in IAS 39.

f) Income tax

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Main temporary differences are generally associated with the depreciation of property, plant and equipment, provisions for pension benefits and tax losses carried forward. Currently enacted tax rates are used in the determination of deferred income tax.

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Due to the Company’s present stage of development, which does not allow it to establish reliable estimations concerning future income, the Company has not accounted for net deferred tax assets.

g) Research tax credit

Research tax credits are provided by the French government to give incentives to companies to perform technical and scientific research. Companies that can justify that these expenses meet the required criteria (research expenses generated in France, or since 1 January 2005, in the European Union, or in another State having signed the agreement on the European Economic Area and a fiscal agreement with France containing an administrative assistance clause) receive such grants in the form of a tax credit that can be used for the payment of taxes due for the period in which the expense was incurred and for the next three years. Companies that have qualifying expenses can receive such grants in the form of a tax credit irrespective of taxes ever paid or ever to be paid. Therefore, these grants are presented as operating income. The Company only records the benefit of this grant when all qualifying research has been performed. Companies that benefit from a tax holiday can obtain an immediate refund of the research tax credit during the three years following their creation.

The Company has benefited from a research tax credit since its first fiscal year.

h) Other types of government assistance

The Company benefits from several government grants, in the form of either outright subsidies or conditional subsidies. Further details relating to these grants are provided in Note 12.

Government grants are recognised when there is a reasonable assurance that:

• the Company will comply with the conditions attached to the grants; and

• the grants will be received.

A non-repayable loan from the government is treated as a government grant when there is a reasonable assurance that the Company will meet the terms for non-repayment of the loan. When there is no such assurance, the loan is recorded as a liability under borrowings.

A government grant that becomes receivable as compensation for expenses or losses already incurred, or for the purpose of providing immediate financial support to the Company with no future related costs, is recognised as income of the period in which it becomes receivable.

Government grants that aim to subsidise capital investments are presented in the balance sheet as deferred income and are recognised as income on a straight line basis over the useful life of those assets that have been financed through the grants.

218

Since January 2004, we have been eligible for the newly created status of Jeune Entreprise Innovante, (“JEI”). As such, it has benefited from reduction in social security costs for all its employees involved primarily in research projects.

i) Employee benefits other than share-based compensation

Company employees’ are entitled to pension benefits, required by the law in France:

• retirement indemnity, paid by the Company on retirement (Defined Benefit Plan); and

• pension payments from social security bodies, financed by contributions from businesses and employees (Defined Contribution Plan).

Moreover, the Company has implemented an additional, non-mandatory pension plan to benefit executives. This other Defined Contribution Plan is financed through a contribution that corresponds to 2% of the yearly employee’s wage. Within this rate, the employer supports 1.2% and the employee supports 0.8%.

For the Defined Benefit Plan, the costs of the obligations are estimated using the projected unit credit method. According to this method, the retirement cost is accounted for in the income statement, using an approach that divides the cost equally over the length of time that the employee has worked for the Company in conformity with the advice given by a qualified actuary during the annual review of the valuation of this plan. Pension benefits were valued using the actual value of estimated future payments, adopting the rate of interest of government obligations that possessed a maturity equalling approximately that of the relevant liability. Actuarial differences are recognised in the period in which they occur in the income statement.

Payments made by the Company for Defined Contribution Plans are accounted for as expenses in the income statement in the period in which they were incurred.

j) Leases

Leases of property, plant and equipment where the Company has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the inception of the lease at the lower of the fair value of the leased property or the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the outstanding finance balance. The corresponding rental obligations, net of finance charges, are included in borrowings. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Property, plant and equipment acquired under finance leases are depreciated over the shorter of the useful life of the asset or the lease term.

Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases, net of any incentives received from the lessor, are charged to the income statement on a straight-line basis over the period of the lease.

k) Provisions

Provisions are recognised when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where the Company expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain.

l) Revenue recognition

To date, the Company’s revenue results from payments generated by development and licence agreements entered into with pharmaceutical companies (Note 20). These contracts generally provide for components such as upfront payments, milestone payments upon reaching certain predetermined development objectives, certain lump-sum payments for the financing of research and development expenses, as well as payment of royalties on future sales of products.

Technology access fees are recognised as income when the Company has no remaining obligations to perform after signing the contract. Milestone payments are recognised in revenue after final acceptance of the completion of the relevant development objectives by the other contracting party. Lump-sum payments for the financing of research and development are initially deferred under prepaid income and recognised in the income statement over the period of the Company’s continuing involvement under the research arrangement, the estimate of which is revised periodically.

Amounts received before meeting recognition criteria are recognised as prepaid income. 219

The Company records a provision for depreciation in the case where the recoverability of the invoiced amounts appears uncertain.

m) Share-based compensation

The Company has issued various share-based compensation tools since inception. In application of IFRS 2, the International Financial Reporting Standard on share-based compensation given to employees and other individuals in remuneration of services, it has for the first time in 2004 calculated the impact on its income statement of this type of compensation. In application of this standard, the Company has also restated the comparative financial statements.

For share-based compensation given to employees, the Company uses the Black-Scholes option pricing model to determine the fair value of the stock-options. For other individuals providing similar services, as the Company cannot estimate reliably the fair value of the goods or services received, it measures the value of share-based compensation and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted also using the Black-Scholes option pricing model.

In calculating the fair value of share-based compensation, the Company has also considered the vesting mechanism; the staff turnover weighted average probability as well as the probability of a future listing on a public stock-market at the time of issuance of the said options, as described in Note 16. Other metrics used are also explained in Note 16.

n) Other comprehensive income

Items of income and expense for the period that are recognised directly in equity are presented under “other comprehensive income”. For the periods presented, this line item includes solely the gains and losses on available-for-sale securities until the date of their disposal, reimbursement or depreciation in accordance with the policies described in Note 2 e.

o) Segment information

As of today the Company’s revenue is the sole result of collaboration and licence agreements. Research and development works taken on by the Company in the scope of these agreements or independently from them are starting and the Company does not see the marketing of these potential medications before 2011/2012. Consequently, the Company operates within a single segment, the driving of research and development of pharmaceutical products with a view to their future marketing. All of the assets and the operating loss presented are located in France.

p) Critical accounting estimates and assumptions

Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. These estimates and judgements are mainly as set out below:

Accounting for collaboration and licensing agreements

When the Company consents to undertake future research and development, the revenues are deferred on the basis of the estimated duration of its involvement. The determination of this duration is dependent on estimates. These are regularly updated to take into account the progress of developments and the remaining services to be rendered.

Valuation of stock options

The valuation of the fair value of stock options granted to employees or to service providers is carried out on the basis of actuarial models. These models require the Company to consider certain assumptions in the calculation, including the anticipated volatility of the share price, the rate of staff turnover and the probability of an initial public offering of the Company’s shares.

220 3) Cash, cash equivalents and current financial instruments

Cash and cash equivalents

Cash and cash equivalents are analysed as follows (in thousands of euros):

31 December

2003 2004 2005

Current accounts ...... 412 160 206 Securities available for sale ...... 14,470 10,855 2,379 Cash and cash equivalents ...... 14,882 11,015 2,585

Current accounts: These are EUR and USD accounts that were opened with two banks, Société Générale and Crédit Lyonnais.

Securities available for sale: As at 31 December 2003, 2004 and 2005, securities available for sale were mainly composed of Société Générale and Crédit Lyonnais money market mutual funds. These funds have money market objectives and the fund’s management target is to yield a return close to that of EONIA, the EU inter-bank reference rate.

Current financial instruments

Current financial instruments are analysed as follows (in thousands of euros):

31 December

2003 2004 2005

CAAM - IP Fund ...... - 10,087 10,318 CAAM - CLAM Tréso March 2005 ...... - 4,123 - CAAM - CLAM 6 Mois ...... - - 1,327 CAAM - TRESO CLUB...... - - 4,112 Current financial instruments ...... - 14,210 15,757

During 2005, the Company invested in several available-for-sale financial assets. As at December 31, 2005, the Company had the following current financial instruments in portfolio:

• CAAM – IP Fund: 10,007,119 euros invested on 17 September 2004 in a dedicated investment fund managed by Crédit Agricole Assets Management (“CAAM”). This product has a capital guarantee of 100% and a minimum yield of EONIA (euro zone risk-free rate) minus 0.65% if held to maturity, i.e. up to 13 January 2006. The product was held to maturity. Unrealised gains in relation to this product amounted to 311,104 euros as at 31 December 2005.

• CAAM – CLAM 6 mois: 1,305,947 euros invested on 24 March 2005 in an open investment fund managed by Crédit Agricole Assets Management (“CAAM”). Unrealised gains in relation to this product amounted to 20,616 euros as at 31 December 2005.

• CAAM – TRESO CLUB: 4,000,000 euros invested on 28 January 2005 in an open investment fund managed by Crédit Agricole Assets Management (“CAAM”). This product has a capital guarantee of 100% if held to maturity, i.e. up to 28 July 2006. Unrealised gains in relation to this product amounted to 112,488 euros as at 31 December 2005.

As at the closing date, unrealised gains in relation to these three financial products amounted to 444,208 euros. This amount has been recorded as other comprehensive income in equity.

221 4) Current receivables and prepayments

Current receivables and prepayments are analysed as follows (in thousands of euros):

31 December

2003 2004 Note Restated Restated 2005

Customers ...... 20 700 - -

VAT refund...... 226 351 460 Grants and government subsidies ...... (infra) 690 36 -

Prepaid expenses...... 150 245 118

Other receivables ...... 3 10 103

Research Tax Credit (CIR) 2002 ...... - - 688 Prepaid consumables (restated) ...... 2b2 560 956 1,497

Current receivables and prepayments (restated)...... 2,329 1,598 2,866

Subsidies and government grants receivable are further detailed as follows in thousands of euros:

31 December

Note 2003 2004 2005

Anvar Phospostim 3rd instalment...... 12.A.3. 500 - - Anvar Phosphostim 3rd instalment (Conseil Général)...... 12.A.4. 38 - - Grant from the Minister of Research – 17 December 2001 ...... 12.B.2. 121 - - Cortechs grants ...... 12.B.2. 13 - - CIFRE agreements...... 12.B.2. 8 11 - Functional subsidies from the PACA region ...... 12.B.2. 10 25 -

Net book value at closing...... 690 36 -

In accordance with the principles described in Note 2 h, government grants are recognised when the conditions attached to them are substantially met.

5) Non-current receivables

Non current receivables are analysed as follows (in thousands of euros):

31 December

2003 2004 2005

Research Tax Credit (CIR) 2002 ...... 688 688 - Research Tax Credit (CIR) 2003 ...... 948 948 948 Research Tax Credit (CIR) 2004 ...... - 897 897 Research Tax Credit (CIR) 2005 ...... - - 946 Non-current receivables ...... 1,636 2,533 2,791

Therefore, research tax credit 2002 should be repaid in 2006 (and, as such, has been classified in Current Assets), research tax credit 2003 should be repaid in 2007, research tax credit 2004 should be repaid in 2008 and research tax credit 2005 should be repaid in 2009.

222 6) Property, plant and equipment

Property, plant and equipment can be broken down as follows (in thousands of euros):

Equipment and Buildings machinery Total

Year ended 31 December 2003 Net opening balance ...... 216 788 1,004 Acquisitions...... 38 157 195 Disposals...... (6) (75) (81) Depreciation...... (26) (203) (228) Net closing balance ...... 223 667 890

Year ended 31 December 2004 Net opening balance ...... 223 667 890 Acquisitions...... 35 278 313 Disposals...... - (23) (23) Depreciation...... (29) (231) (260) Net closing balance ...... 230 690 920

Year ended 31 December 2005 Net opening balance ...... 230 690 920 Acquisitions...... 6 63 69 Disposals...... - - - Depreciation...... (31) (251) (282)

Net closing balance ...... 204 503 707

The table above includes assets leased through finance leases. The table below summarises the impact of these assets on property, plant and equipment (in thousands of euros):

31 December

2003 2004 2005

Cost - finance lease...... 16 43 47 Cumulated depreciation ...... 12 17 24 Net book value...... 3 26 23

7) Trade payables

This line item is analysed as follows (in thousands of euros):

31 December

Note 2003 2004 2005

Suppliers ...... 1,127 1,594 1,341

Tax and social liabilities ...... 368 397 597 Prepaid income ...... (below) 637 58 32

Other payables ...... 12 91 60

Trade payables...... 2,143 2,139 2,030

223 As detailed below, prepaid income as at 31 December 2003 was mostly related to the Novo Nordisk agreements (see details in Note 20):

31 December

Note 2003 2004 2005

Novo Nordisk – Licence Agreement ...... 20 560 - - Regional subsidies in relation to ISO certification ...... 12.B.2. 8 6 - Cortechs subsidies ...... 12.B.2. 2 - - Regional subsidies in relation to recruitment of executives...... 12.B.2. 3 - - Regional subsidies in relation to laboratory equipment...... 12.B.1. 65 44 24 AlloStem (European grant)...... 12.B.2. - 7 7

Prepaid income...... 637 58 32

Regional subsidies in relation to laboratory equipment represent the investment subsidy that was not brought back to earnings, granted by the PACA region on 5 July 2001 (Note 12.B.1). The income in relation to this subsidy is recorded in Other Income (Note 17).

8) Borrowings

This line item was broken down per maturity and is analysed as follows (in thousands of euros):

31 December

Note 2003 2004 2005 Current Liabilities ANVAR ADI – 15/02/2002...... 12.A.3. - - 145 ANVAR ADI – 15/02/2002 (Conseil Général)...... 12.A.4. - - 13 Bank loans ...... (below) - 15 3 Finance leases ...... (below) 4 8 8

Accrued interests ...... 0 0 -

Total...... 4 23 169

December 31

Note 2003 2004 2005 Non-Current Liabilities ANVAR ADI – 15/02/2002...... 12.A.3. 345 345 200 ANVAR ADI – 15/02/2002 (Conseil Général)...... 12.A.4. 31 31 18 ANVAR EUREKA - 03/12/2003 ...... 12.A.5. 180 180 180 Finance leases ...... (below) - 18 13

Total...... 556 573 411

Total borrowings...... 559 596 580

The amounts due to the ANVAR agency represent the unconditionally repayable portion of the innovation grants as detailed in Note 12. The amounts classified in Current Liabilities as at 31 December 2005 are repayable in 2006.

As at 31 December 2005, the Company had a bank loan from Société Générale. This loan, dated 11 February 2004, was used to finance the acquisition of laboratory equipment and set up a new cell culture room in Marseille. The loan has the following characteristics:

Nominal value: 23,000 euros Duration: 24 months Periodicity of payments: monthly Number of payments: 24 Monthly repayments: 999 euros Effective interest rate: 3.95%

There is no specific guarantee for this loan. As at 31 December 2005, the Company was not aware of any event that could alter its contractual obligations or result in the immediate repayment of the loan. The loan was fully repaid on 24 March 2006.

224 The present value of liabilities relating to finance leases (minimum lease payments) is as shown in the table below (in thousands of euros):

31 December

2004 2005

Maturity of up to 1 year ...... 9 8 Maturity of between 1 and 5 years...... 18 14 Maturity greater than 5 years...... - -

Face value of finance leases liabilities ...... 27 22

Future interest expenses on finance leases...... (2) (1)

Present value of finance leases liabilities...... 26 21

The present value of finance lease liabilities can be further analysed as follows:

31 December

2004 2005

Maturity of up to 1 year ...... 8 8 Maturity of between 1 and 5 years...... 18 13 Maturity greater than 5 years...... - -

Present value of finance lease liabilities ...... 26 21

9) Provisions

This concerns a lawsuit with a former employee, whom the Company dismissed for professional misconduct in 2002. A provision in the amount of 60 thousand euros has been recorded for this litigation in the financial statements for 2002, 2003 and 2004. This amount corresponds to the amount that was claimed by the former employee for damages before the Social Court of Justice.

10) Pension benefits

As at 31 December 2002, the Company evaluated and recorded for the first time the amount of pension liabilities corresponding to employees’ legal retirement benefits and used the basis mentioned in note 2 i to estimate the value of these obligations as at 1 January and 31 December 2001, waiving the actuarial difference. For information, these benefits will only be payable to those employees who retire from the Company.

The main actuarial assumptions used to evaluate retirement benefits in 2005, 2004 and 2003 were the following:

• present value factor, net of inflation: 3%; and

• future yearly increase in wages: 1%.

The total amount expensed in the financial year 2005 for contributions under Defined Contribution Plans (mandatory social security plan and non-mandatory plan) amounted to 208,153 euros (versus 150,687 euros in 2004).

225 11) Share capital

As at 31 December 2003, 2004 and 2005, the breakdown of share capital can be analysed as follows , in thousands of euros (each share has a par value of 1 euro):

2003 2004 2005

Total...... 526 745 745

The above amounts do not include warrants (“BSA”), founder warrants (“BSPCE”) or stock options granted to certain investors and individuals, particularly employees. As at 31 December 2005, the fully diluted share capital would comprise 822,784 shares (with a par value of 1 euro) considering the exercise of all warrants (BSA and BSPCE) and stock options issued at that date.

On 13 June 2005, the Company was transformed into a Société Anonyme with a Supervisory Board (Conseil de Surveillance) and an Executive Board (Directoire). This had no impact on the share capital structure. The members of the Supervisory Board are elected for a period of two years whereas the members of the Executive Board are elected for a period of six years. Members of the Supervisory Board are non executive individuals or companies, representing shareholders or not. Members of the Executive Board are Company’s executives.

All shares allow the holder a proportional part of the net income and assets of the Company.

The table below summarises the history of capital of the Company since its creation on 23 September 1999:

Fair value of Number of shares Par value Share premium share

23 September 1999 – Creation...... 37,500 1.02 - 1.02

28 February 2000 – Share capital increase ...... 2,550 1.02 - 1.02

28 February 2000 – Balance...... 40,050 1.02 1.02

28 April 2000 – Share capital increase ...... 38,700 1.02 29.47 30.49

28 April 2000 – Balance...... 78,750 1.02 30.49

27 March 2001 – Exercise of warrants ...... 108,900 1.02 29.47 30.49

27 March 2001 – Balance ...... 187,650 1.02 30.49

22 December 2001 – Conversion into euros...... -0.02

22 December 2001 – Balance after division of par value 187,650 1.00 22 December 2001 – Share capital increase ...... 2,500 1.00 29.49 30.49 22 December 2001 – Balance after division of par value

...... 190,150 1.00

3 July 2002 – Share capital increase...... 336,134 1.00 58.50 59.50

3 July 2002 – Balance ...... 526,284 1.00

28 February 2004 – Exercise of stock-options...... 18,750 1.00 - 1.00

28 February 2004 – Balance...... 545,034 1.00

19 March 2004 – Share capital increase ...... 66,667 1.00 74.00 75.00

19 March 2004 – Balance ...... 611,701 1.00

22 July 2004 – Share capital increase...... 133,333 1.00 74.00 75.00

22 July 2004 – Balance...... 745,034 1.00

226 Details of changes in share capital over the periods presented are further analysed below:

Following the exercise of BSPCE in February 2004, share capital was increased by 18,750 euros and was raised from 526,284 euros to 545,034 euros.

Following the Mixed General Meeting that took place on 19 March 2004, share capital was increased by 66,667 euros and was raised from 545,034 euros to 611,701 euros.

Following the Mixed General Meeting that took place on 22 July 2004, share capital was increased by 133,333 euros and was raised from 611,701 euros to 745,034 euros.

Following the Mixed General Meeting that took place on 13 June 2005, the 200,000 series D preferred shares were split into 66,667 series D preferred shares and 133,333 series D bis preferred shares.

The par value of the share was split into twenty on 29 March 2006. The number of shares mentioned in this note reflects the situation as at 31 December 2005 and does not take into account the subsequent share split.

Remuneration warrants and stock options

The Company issued remuneration warrants (“BSA”) and employee founder warrants (“BSPCE”) and stock-options as described below:

Stock BSPCE BSA options Total

Opening balance – 23 September 1999 ...... - - - - Issued warrants and options – 28 April 2000...... 18,750 - - 18,750

Balance as at 31 December 2000...... 18,750 - - 18,750 Issued warrants and options – 22 December 2001...... - 15,500 - 15,500

Balance as at 31 December 2001...... 18,750 15,500 - 34,250 Issued warrants and options – 15 May 2002...... 12,750 - - 12,750

Balance as at 31 December 2002...... 31,500 15,500 - 47,000 Issued warrants and options – 3 July 2003 ...... - 3,000 28,500 31,500 Cancelled warrants and options – 2003 ...... (1,500) - - (1,500)

Balance as at 31 December 2003...... 30,000 18,500 28,500 77,000 Cancelled warrants and options – 2004 ...... (250) - (5,250) (5,500) Exercised warrants and options – February 2004 ...... (18,750) - - (18,750)

Balance as at 31 December 2004...... 11,000 18,500 23,250 52,750 Issued warrants and options – 13 June 2005...... - - 25,000 25,000

Balance as at 31 December 2005...... 11,000 18,500 48,250 77,750

Each BSA, BSPCE or Stock Option issued as at 31 December 2005 gives the right to subscribe to twenty new common shares, taking into account the share split by twenty on 29 March 2006.

As at 22 December 2001, 15,500 BSA2001 were authorised by the Extraordinary General Meeting in two separate tranches:

• A tranche of 7,500 BSA2001 relating to Series O shares with warrants attached (“ABSA”) was allocated to Inserm Transfert Initiative SA, a shareholder of the Company.

227

The 18,750 BSPCE exercised in 2004 were BSPCE2000, relating to the 1,250 BSPCE2000 that were authorised by the Extraordinary General Meeting on 28 April 2000, after division by fifteen of the nominal value as decided by the General

Meeting of 22 December 2001. These BSPCE2000 were granted to three employees: Hervé Brailly, François Romagné and Christian Belmant. These options were exercised in entirety in February 2004.

The 11,000 BSPCE left are the remaining balance of the 12,750 BSPCE2001 that were authorised by the Mixed General Meeting that took place on 22 December 2001. These options were allocated to employees by the “Comité de Direction” on 15 May 2002. The exercise price is 30.49 euros per share. These options can be exercised at any time from their authorisation date until 14 May 2007 (5 years). However, the exercise of these options is subject to the following conditions:

• An amount of up to 25% can be exercised from the first anniversary of their issue.

1,750 of the BSPCE2001 were cancelled following the resignation of employees, in 2003 and 2004.

As of 1 July 2003, the Extraordinary General Meeting authorised the issuance of 3,000 BSA2003 and 28,500 Stock-Options2003.

The BSA2003 were allocated to a Director of the Company and the Stock-Options2003 were allocated to employees by the

“Comité de Direction” on 1 July 2003. The exercise price for both the BSA2003 and the Stock-Options2003 is 59.50 euros per share. The Stock-Options2003 can be exercised at any time from their authorisation date until 30 June 2013 (10 years).

However, the exercise of both the BSA2003 and the Stock-Options2003 is subject to the following conditions:

• An amount of up to 25% can be exercised from the first anniversary of their issue.

5,250 of the Stock-Options2003 were subsequently cancelled following the resignation of employees in 2004.

As of 22 July 2004, the Extraordinary General Meeting authorised the issuance of 25,000 Stock-Options2004. The Stock-

Options2004 were allocated to employees by the “Comité de Direction” on June 13, 2005. The exercise price for the Stock-

Options2003 is 75.00 euros per share. The Stock-Options2004 can be exercised at any time from their authorisation date until

12 June 2015 (10 years). However, the exercise of the Stock-Options2004 is subject to the following vesting conditions:

• An amount of up to 25% can be exercised from the first anniversary of their issue.

Financial impact of the share-based compensation on financial statements for 2005, 2004 and 2003 is discussed in Note 16.

12) Subsidies and government grants

The Company receives grants from the European Commission and French government and state organisations in several different forms:

• Conditional subsidies;

• Investment and operating subsidies; and

• Research tax credits.

228 12.A. Conditional subsidies and grants

This line item in the balance sheet is analysed as follows (in thousands of euros):

31 December Note 2003 2004 2005

ANVAR ADI - 17/02/2000...... 12.A.1. 223 223 223 ANVAR ADI - 17/02/2000 (Conseil Général) ...... 12.A.2. 46 46 46 ANVAR ADI - 15/02/2002...... 12.A.3. 1,255 1,255 1,255 ANVAR ADI - 15/02/2002 (Conseil Général) ...... 12.A.4. 91 91 91 ANVAR EUREKA - 03/12/2003 ...... 12.A.5. 135 135 400

Conditional subsidies and grants...... 1,750 1,750 2,015

Conditional subsidies and loans from state organisations are composed of several contracts and various additional clauses that the Company signed with the National Agency of Research (Agence Nationale de Valorisation de la Recherche - “ANVAR”).

12.A.1. ANVAR ADI – 17/02/2000

(Contract A9912293U/AF dated 17 February 2000 )

Object: The financing of an innovation scheme entitled: “Development of anti-tumoral treatments and cellular therapy methods using the non conventional lymphoid immunity: feasibility phase”.

Total amount:...... 222,576 euros Total received: ...... 222,576 euros Total repaid:...... -

Net book value as at 31 December 2005:...... 222,576 euros

In the event of technical and / or commercial success, this non interest-bearing subsidy is repayable in full at nominal value. The due date for repayment is connected to the additional clause A9912293 U N°1 dated 15 February 2002, which is described hereafter.

12.A.2. ANVAR ADI – 23/06/2000 (Conseil Général)

(Additional clause A9912293 U BR dated 23 June 2000)

Object: Identical to the contract A9912293U/AF. This concerns a complementary aid granted by ANVAR on finances made available to the agency by the Bouches-du-Rhône Department.

Total amount:...... 45,734 euros Total received: ...... 45,734 euros Total repaid:...... -

Net book value as at 31 December 2005:...... 45,734 euros

In the event of technical and / or commercial success, this non interest-bearing subsidy is repayable in full at nominal value. The due date for repayment is connected to the additional clause A9912293 U/BR N°1 dated 13 March 2002, which is described hereafter.

229 12.A.3. ANVAR ADI – 15/02/2002

(Additional Clause A9912293 U N°1 dated 15 February 2002)

Object: Identical to the contract A9912293U/AF. This concerns a complementary aid granted by ANVAR for pre-clinical and clinical development plans: “Pre-clinical and clinical development of an immuno-modulator agent and cellular therapy methods based on the exploitation of the non conventional lymphoid immunity”.

Total amount:...... 2,000,000 euros Total received: ...... 1,600,000 euros Total recorded as borrowings (Note 8):...... (345,000 euros) Total repaid:...... -

Net book value as at December 31, 2005:...... 1,255,000 euros

In the event of technical and / or commercial success, this non interest-bearing subsidy is repayable in full at nominal value. This subsidy is attached to a clause stating the minimum fixed repayment, which amounts to 345,000 euros, regardless of the technical and / or commercial success of the financed developments. This latter amount has been recorded as borrowings. Out of the 345,000 euros, 145,000 euros are repayable in 2006.

12.A.4. ANVAR ADI – 13/03/2002 (Conseil Général)

(Additional clause A9912293 U/BR N°1 dated 13 March 2002)

Object: Identical to the additional clause A9912293 U N°1. This is a complementary aid granted by ANVAR on finances made available to the agency by the Bouches-du-Rhône Department.

Total amount:...... 152,449 euros Total received: ...... 121,959 euros Total recorded as borrowings (Note 8):...... (30,762 euros) Total repaid:...... -

Net book value as at December 31, 2005:...... 91,196 euros

In the event of technical and / or commercial success, this non interest-bearing loan is repayable in full at nominal value. This subsidy is attached to a clause stating the minimum fixed repayment, which amounts to 30,762 euros, regardless of the technical and / or commercial success of the financed developments. This latter amount has been recorded as borrowings. Out of the 30,762 euros, 13,000 euros are repayable in 2006.

12.A.5. ANVAR EUREKA – 03/12/2003

(Contract A0311336U dated 3 December 2003)

Object: The financing of an innovation scheme entitled: “Feasibility of the development of a therapeutic monoclonal antibody immuno-stimulator of NK cells”.

Total amount:...... 745,000 euros Total received: ...... 580,000 euros Total recorded as borrowings (Note 8):...... (180,000 euros) Total repaid:...... -

Net book value as at 31 December 2005:...... 400,000 euros

In the event of technical and / or commercial success, this non interest-bearing subsidy is repayable in full at nominal value. This subsidy is attached to a clause stating the minimum fixed repayment, which amounts to 180,000 euros, regardless of the technical and / or commercial success of the financed developments. This latter amount has been recorded as borrowings.

12.B. Investment and operating subsidies and research tax credits

12.B.1. Investment subsidies

Investment subsidy from the PACA region dated 5 July 2001

Object: Partial financing (up to 15%) of the installation of a research and development laboratory.

230

This subsidy, amounting to 114,711 euros, is recorded in earnings at the same rate as the rate of depreciation on the financed equipment, i.e. between five and ten years. In the balance sheet, this subsidy was recorded in Current Liabilities as prepaid income (Note 7). The income was recognised in Other Income (Note 17).

12.B.2. Government financing for research expenditure

The total amount for government financing for research expenditure recorded as income in the income statement can be analysed as follows (in thousands of euros):

Years ended 31 December

Note 2003 2004 2005

Grant from the Ministry of Research N° 01 H 0464...... 64 - -

CIFRE agreement dated April 1, 2003 ...... 11 15 -

CORTECHS grant from ANVAR dated 1 July 2003 ...... 13 - -

Functional subsidy from the PACA region dated 15 July 2003...... 13 3 -

Functional subsidy from the PACA region dated 30 July 2003...... 2 2 3

CORTECHS grant from ANVAR dated 28 August 2003...... 11 2 -

Functional subsidy from the PACA region dated 24 September 2004 - 15 -

Grant from the European commission ALLOSTEM...... - 10 20

Grant from the European commission TB VAC...... - - 83

Grant from the European commission MUGEN...... - - 80

Grant from ANVAR (internship of an Engineer) ...... - - 5

Assedic (recruitment of a Manager, Legal Affairs) ...... - - 7 Research tax credit...... 12.B.3 948 897 946

Government financing for research expenditure...... 1,061 943 1,144

Operating subsidies

Since the Company was first created and due to the innovative nature of its operations, it has received several grants and subsidies from the government or state organisations intended to finance its operations or the recruitment of certain employees.

Contrary to conditional subsidies:

• the Company rests assured that it will be able to satisfy the terms and conditions attached to these subsidies; and

• the Company is not required to repay these subsidies.

These subsidies were accounted for as earnings in the period that the corresponding charges or expenses were incurred.

Grant from the Ministry of Research N° 01 H 0464 dated 17 December 2001

Object: Provide finance for the implementation of the following project: “Pre-clinical validation and strategies for the selection and activation of NK cells using specific receptors, based on the transplant of allogeneic and autologous haematopoietic cells”. This grant represented a total amount of 152,449 euros including VAT over a period of 24 months.

There is no repayment clause stipulating the conditions in the event of technical and / or commercial success of the project. However, if the following circumstances occur, the Company might be required to repay the grant in full or partially:

• The overrun of the rate of 80% for grant financing, providing that the total relating to this overrun is either non deductible from the remaining receivable balance or exceeds it;

• If the project is not implemented within the scheduled time period;

• In the event of either a partial or total failure to implement the project; and

• In the event of any alteration, without prior permission from the Ministry, of the purpose of the subsidised project, its length, or the division of expenditures between the different operations and equipment, if the change in this division represents an amount greater than 30% of the sacrificed caption.

231 As at 31 December 2003, Company management believed that the occurrence of any of the above events requiring a potential repayment of the grant was improbable. Thus, the grant has been accounted for as income using the straight-line method over the project’s financing period (24 months). As at 31 December 2005, the gross receivable related to this grant amounted to 121,092 euros corresponding to the total outstanding balance (excluding VAT) of the grant. Since the Ministry of Research informed the Company that it had no financial resource to fund this grant in a foreseeable future, the Company management has decided to depreciate 100% of this balance (Note 17).

CIFRE Agreement dated 1 April 2003

Object: The Company signed a CIFRE agreement with the National Agency of Technical Research (Agence Nationale de la Recherche Technique - “ANRT”) in order to finance the academic work of a PhD student for the Company’s R&D department.

This grant, amounting to 14,635 euros per year over a 3-year period, was received on a quarterly basis.

CORTECHS grant from ANVAR dated 1 July 2003

Object: Recruitment of a technician.

This grant, which amounts to 12,800 euros, was provided in the form of the reimbursement of a technician’s wages over a one-year period. As the technician was an employee of the Company since 12 December 2002, the grant has been recorded in full in the financial year 2003.

Functional subsidy from the PACA region dated 15 July 2003

Object: Recruitment of a medical executive.

This grant, amounting to 30,000 euros in two equal instalments, was provided in the form of the reimbursement of an executive’s wages over a one-year period. The first payment of 15,000 euros was received in 2003. The executive left in 2004 and only 6 months of the grant have been recorded in the financial years 2003 (5/6) and 2004 (1/6).

Functional subsidy from the PACA region dated 30 July 2003

Object: Financing advisory services in relation to ISO certification.

This grant, amounting to 10,293 euros, is provided in the form of partial reimbursement of expenses invoiced by a selected consulting firm in relation to the Company’s ISO certification. From an accounting standpoint, the amount recorded in the financial years under review corresponds to the advancement of the project, in relation to the consulting firm’s invoicing pattern.

CORTECHS grant from ANVAR dated 28 August 2003

Object: Recruitment of a technician.

This grant, which amounts to 12,800 euros, was provided in the form of the reimbursement of a technician’s wages over a one-year period. The technician was recruited in March 2003 and the grant has been recorded accordingly.

Functional subsidy from the PACA region dated 24 September 2004

Object: Recruitment of an intellectual property engineer.

This grant, amounting to 15,000 euros, has been recorded in full in the financial year 2004.

European grant – Allo Stem

Object: European R&D project

This grant, originally amounting to 20,400 when granted in 2004, was increased to 37,251 in 2005. This is to fund a joint European R&D project over 24 months from 1 May 2004. The Company has received 17,000 euros in July 2004 and 20,251 euros in September 2005. The revenue recognition over 2004 and 2005 were respectively 10,000 euros and 19,875 euros, representing the achievement of approximately 20/24 of the program as at 31 December 2005.

European grant – TB Vac

Object: European R&D project 232

The Company was awarded a grant, amounting to 82,500 euros, to fund a joint European R&D project over 18 months from 1 May 2004. The Company has received 66,000 euros in May 2004. The revenue recognition over 2005 was 82,500 euros, corresponding to 100% of the program (since the contract had yet to be signed at the closing of the fiscal year 2004, no revenue were booked for that period).

European grant – MUGEN

Object: European R&D project

The Company was awarded a grant, amounting to 120,700 euros, to fund a joint European R&D project over 18 months from 1 January 2005. The Company has received 96,560 euros in July 2005. An amount of 80,467 euros was recognised as revenue in 2005, corresponding to 12/18 of the program.

Grant from ANVAR dated 8 April 2005

Object: Recruitment (internship) of an engineer.

This grant, amounting to 5,400 euros, is provided in the form of the reimbursement of an engineer internship’s compensation and has been recorded in full in the financial year 2005.

“Aide Dégressive à l’employeur” from ASSEDIC dated 7 February 2005

Object: Recruitment of a Manager, Legal Affairs.

The Company was compensated to the amount of 6,534 euros by one of the French unemployment bodies for the recruitment in 2005 of a Manager, Legal Affairs, who was previously unemployed for a certain period of time.

12.B.3. Research Tax Credits

The Company meets certain conditions stipulated in article 244 quater B and 49 septies F of the French Tax Code with reference to the allocation of research tax credits. In compliance with the principles described in Note 2 g), the research tax credit is accounted for as operating income in the year that the associated research expenditure is incurred.

The following table shows the impact of the research tax credit on the Income Statement of the Company over the last three financial years (in thousands of euros):

Years ended 31 December

2003 2004 2005

Research Tax Credit (CIR) 2003 ...... 948 - - Research Tax Credit (CIR) 2004 ...... - 897 - Research Tax Credit (CIR) 2005 ...... - - 946 Research tax credit ...... 948 897 946

13) Intellectual property expenses

Intellectual property expenses are analysed as follows (in euros):

Years ended 31 December

2003 2004 2005

Licences...... (245) (270) (141) Options on licences...... (61) (72) (96) Patent fees...... (59) (165) (252) Intellectual property expenses ...... (365) (507) (489)

233 For the acquisition of intellectual property rights from third parties, excluding the acquisitions of patents, the Company has three different types of agreements:

• The limited exclusive option agreement, which corresponds to an exclusive period during which the Company evaluates the opportunity to obtain the licensing rights of the concerned intellectual property. The Company will generally pay an option indemnity and will pay for the past and/or present expenses related to the intellectual property for the rights related to the option.

• The exclusive licensing agreement of which the duration varies depending on contractual conditions but which is generally the same as the duration of the life of the underlying intellectual property. The Company pays the past and/ or present expenses related to the intellectual property and will also pay the costs that relate to access to technology, milestone payments as/when they are completed and in the case of marketing of the products/technologies covered by the intellectual property royalties based on turnover.

• Exclusive collaboration and licensing agreements including some exclusive collaboration on a specific work program or for a specific area of which the duration is limited in time, and an exclusive licence of a varying duration depending on contractual conditions but which generally coincides with the underlying intellectual property duration. The Company agrees to look after research and development expenses for the exclusive collaboration part, and pays for the exclusive licence part notably access to technology costs, intellectual property expenses, milestone payments as/when they are completed and in the case of marketing of the products/technologies covered by the intellectual property royalties based on turnover.

14) Cost of supplies and consumable materials, other purchases and external expenses

Cost of supplies and consumable materials consist mainly in procurement of the Company’s drug substance and/or drug product that is manufactured by third-parties.

Other purchases and external expenses are analysed as follows (in thousands of euros):

Years ended 31 December

2003 2004 2005

Subcontracting ...... (1,896) (2,485) (2,402) Scientific advisory and consulting...... (239) (150) (170) Leasing, maintenance and utility ...... (328) (345) (485) Travel and conventions...... (262) (364) (451) Non-scientific advisory and consulting ...... (199) (260) (343) Marketing, communication and public relations...... (71) (92) (139) Telecommunications and postal services...... (35) (45) (41) Insurance...... (17) (27) (38) Bank charges...... (4) (3) (6) Others, net...... (39) (64) (31) Other purchases and external expenses...... (3,090) (3,835) (4,106)

Scientific advisory and consulting expenses are in relation to consulting services performed by third parties to support the research and development activities of the Company.

The Company rents its premises (see Note 21) and uses third parties for procurement of utilities as well as for maintenance of its laboratory and office premises. The Company also rents its computer equipment.

Production of marketing, communication and public relations services are, to a large extent, externalised to third parties. Services range from web-design to organisation of press interviews.

As at 31 December 2005, under the line item “Others, net” were mostly expenses in relation to training of the staff. 234

15) Employee benefits other than share-based compensation

The Company had 54 employees as at 31 December 2005, to be compared respectively with 41 and 33 as at 31 December 2004 and 31 December 2003.

In 2004, the Company was granted the Jeune Entreprise Innovante (“JEI”) status for the first time. This allows the Company to benefit from social security cost exemptions for employees involved in research projects. The Company believes it will still benefit from the JEI status for the fiscal year 2006, as the status ends at the 8th anniversary of the Company based on the current law.

16) Share-based compensation

The share-based compensation expenses are broken down as follows (in thousands euros):

Years ended 31 December

2003 2004 2005

BSCPE 2000...... 0 0 - BSA 2001 ...... 6 3 1 BSCPE 2001...... 12 6 3 ESOP 2003 ...... 74 79 48 BSA 2003 ...... 7 10 5 ESOP 2004 ...... - - 156 Share-based compensation...... 99 99 214

For calculation of the share-based compensation expenses, the main assumptions used in the Black-Scholes option pricing model were as follows:

Prior to 2005 2005

Dividend yield: Nil Nil Volatility: 55% 61% Risk free rate: 3% 3%

The respective strike prices, expected life and fair value of the underlying shares at the time of issuance of the options were used for each category of share-based remuneration. A staff turnover weighted average probability of 1% was used as well as the following probabilities for a public stock-market listing at time of issuance of each category of options:

– 5% for options issued in 2000 (BSPCE2000),

– 20% for options issued in 2001 (BSA2001) and 2002 (BSPCE2001),

– 30% for options issued in 2003 (BSA2003 and ESOP2003),

– 50% for options issued in 2005 (ESOP2004).

Details on numbers and strike prices of each category of options are given in Note 11.

235 17) Other income and (expenses), net

Other income and (expenses) are analysed as follows (in thousands of euros):

Years ended 31 December

2003 2004 2005

Taxes...... (23) (38) (72) Assets disposed of...... 9 (22) - Investment subsidies brought back to profit ...... 20 20 20 Provision for depreciation...... - (121) - Others...... 21 (2) 33 Other income and expenses, net ...... 27 (163) (19)

The provision for depreciation relates to the grant from the Ministry of Research N° 01 H 0464 dated 17 December 2001, as further explained in Note 12.B.2.

18) Interest income / (expense), net

Interest income and (expense) can be analysed as follows (in thousands euros):

Years ended 31 December

2003 2004 2005

Interests on borrowings and finance leases...... (4) (1) - Foreign exchange (loss) / gain...... (75) (6) 6 Interest income and gain on sales of securities...... 470 297 280 Interest income / (expense), net...... 391 289 286

The foreign exchange (loss) / gain represents the exchange difference on the USD bank account opened in 2002. It is the intention of the Company to use this bank account to pay its USD denominated invoices. Gains and losses are only potential gain or losses.

Interest income and gain on sales of securities mainly include the latter as no material interest has been received.

The Company did not pay any significant interest during the current period.

19) Income Tax

Taking into account the tax regulations in force, the Company has tax losses available for carry forward with no time limit in the total amount of 24,039,225 euros as at 31 December 2005. The deferred tax asset base also includes temporary differences due to reverse in 2006 for an amount of 182 thousand euros (liability).

The tax rate applicable to the Company is the tax rate in force within France, i.e. 34.33%.

Using the principles detailed in Note 2f, the Company has not accounted for any net deferred tax asset.

20) The agreements with Novo Nordisk A/S

In 2003, the Company signed two contracts with Novo Nordisk A/S (“Novo”), a Danish pharmaceutical company.

The first contract, with the longest duration, is a Research, Development and Licensing Agreement (the “Licensing Agreement”) regarding the out-licensing by the Company of a compound modulating a certain NK receptor. Under certain conditions of technical and / or commercial success, the Licensing Agreement entitles the Company to milestone payments as well as to royalty payments.

236

The second contract was an Option Agreement (the “Option Agreement”). The Option Agreement ended at the end of December 2004. This contract was giving the possibility to Novo to, at its demand, negotiate the access to other compounds of the Company. There was no obligation for the Company under the Option Agreement but (i) to negotiate in good faith with Novo and (ii) not to negotiate the same rights with a third party. As at 31 December 2004, Novo had not exercised its option under this Option Agreement, therefore the Company was no longer bound by any obligation regarding this agreement after that date.

The global amount of revenue for the periods presented stem from these two contracts.

21) Commitments

Obligations under the terms of in-licensing agreements

Obligations under the terms of option agreements

Obligations under the terms of joint-ownership of intellectual property rights

Obligations under a long-term supply and manufacturing agreement

Obligations under certain financial products

Obligations under operating lease agreement

The Company has ongoing contracts with ECS, a subsidiary of Société Générale, and Dell Computers, to lease its computer equipment. As at 31 December 2005, the Company had the following future obligations:

ECS obligations:

– 12 monthly lease payments of 4,900 euros (excluding VAT). – 12 monthly lease payments of 2,448 euros (excluding VAT).

Dell obligations:

– 33 monthly lease payments of 283 euros (excluding VAT). – 34 monthly lease payments of 175 euros (excluding VAT). – 34 monthly lease payments of 295 euros (excluding VAT).

237

The Company rents premises in Marseilles, Lyon and Nantes. The premises in Nantes are rented in the context of a short- term framework agreement with the University Hospital of Nantes in exchange of an annual payment of 13,200 euros including taxes. This agreement terminated on 1 April 2006.

The Marseilles and Lyon premises are rented through long-term commercial lease agreements, which main characteristics are as follows:

• Marseilles: the Company entered into a commercial lease agreement with a 9-year duration on 1 February 2001. The Company can terminate this agreement at the end of the first two 3-year periods with 6-month notice. The agreement is on around 800 square-meters of facilities with laboratory and office premises. Rental cost is automatically actualised each year at the beginning of the calendar year, based on a specific price index. For the period started 1 January 2005, the annual rental cost was set at 86,552 euros, excluding taxes and most utilities.

• Lyon: the Company entered into a commercial lease agreement with a 9-year duration on 1 September 2005. The Company can terminate this agreement at the end of the first two 3-year periods with 6-month notice. The agreement is on a 324 square-metre facility with laboratory and offices. Rental cost is automatically actualised each year at the anniversary date, based on a specific price index. For the period started 1 September 2005, the rental cost was set at 106,920 euros, excluding taxes but including most utilities.

Obligations under other agreements

22) Related party transactions

During the period under review, the following compensations were expensed to the benefit of the five members of the executive committee of the Company (in thousands of euros):

Years ended 31 December

2003 2004 2005

Salaries and other short-term employee benefits ...... 407 451 574 Contributions to supplementary pension plans ...... 5 5 7 Share-based compensation...... 42 43 100 Key management compensation ...... 453 499 681

Calculation of the share-based compensation is detailed in Note 16.

23) Earnings per share

Basic

Basic earnings per share are calculated by dividing the net earnings attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the period. This calculation takes into account the split by twenty of the nominal share, which took place on 29 March 2006.

Years ended 31 December

2003 2004 2005

Net earnings for the year...... (5,011) (4,733) (6,129) Weighted average number of ordinary shares in issue, pro forma (in thousands)...... 10,526 13,079 14,901 Basic earnings per share, pro forma (€ per share)...... (0.48) (0.36) (0.41)

238 Diluted

Diluted earnings per share are calculated by adjusting the weighted number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. This calculation takes into account the split by twenty of the nominal value of the share on 29 March 2006. As at 31 December 2003, 2004 and 2005, warrants and stock options do not have any dilutive impact.

Years ended December 31

2003 2004 2005

Net earnings for the year...... (5,011) (4,733) (6,129) Weighted average number of ordinary shares in issue, pro forma (in thousands)...... 10,526 13,079 14,901 Adjustments for warrants and share options...... - - - Diluted earnings per share, pro forma (€ per share)...... (0.48) (0.36) (0.41)

24) Financial risk management

The Company’s principle financial instruments include financial assets, cash and securities. The objective in the management of these instruments is to allow the financing of the Company’s activities. The Company’s policy is not to subscribe to speculative financial instruments. The Company does not use derivative financial instruments.

The principle risks to which the Company is exposed include the foreign exchange risk, liquidity risk, interest and credit risks.

Foreign exchange risk

The Company is exposed to a foreign exchange risk with regards to the conversion of the US dollar into euros, as part of its operating expenses are paid out in the US dollar. The Company has not hedged this exposure.

Liquidity risk

The Company does not have any substantial borrowings. Consequently it is not exposed to any significant liquidity risks, which would arise from early reimbursement clauses.

Interest rate risk

The Company’s exposure to an interest rate risk mainly relates to securities held, which comprise monetary mutual funds. Fluctuations in interest rates have a direct impact on the yields of these securities in terms of interest rates and cash inflows. These instruments can be converted to cash at any time before maturity, in which case their capital is not guaranteed.

Credit risk

Based on the experience of the Company, the payment of certain public research financing is subject to a credit risk (see Notes 12.B.2 and 17).

The credit risk linked to the cash and cash equivalents and to current financial instruments is not significant with regards to the quality of counterparty financial institutions.

Fair value

The fair value of financial instruments traded in active markets such as securities available for sale, is based on the quoted market prices at the balance sheet date. The quoted price used for financial assets held by the Company is the current bid price.

239 25) Post balance sheet events

On 16 December 2005, the Company was notified by the newly created Agence Nationale de la Recherche (“ANR”) that two of its research projects had been awarded national subsidies for a total amount of 466 thousand euros. As at closing date, the contracts in relation to these subsidies had not yet been signed.

The Company expects to move at the end of 2007 to new facilities, for which a commercial lease agreement should be executed in 2006.

240 26) Differences between International Financial Reporting Standards and French accounting principles

The Company’s financial statements were prepared in accordance with International Financial Reporting Standards (IFRS), which differ in certain respects from accounting principles generally accepted in France (French GAAP), the country in which the Company is domiciled. The principal differences between IFRS and French accounting principles are shown in the table next page, together with explanations of certain adjustments that affect net income and shareholders’ equity (in thousands of euros):

Change in Change in 31 December Change in share retained 31 December Year ended December 31, 2003 2002 Net loss share capital premium earnings Others 2003

Shareholders’ equity in accordance with French GAAP.... 20,196 (5,122) - - - 31 15,105 Tax regulated provisions ...... - 31 - - - (31) - Licences and options on licences . (196) (159) - - - - (354) Finance leases ...... (1) - - - - - (1) Investment subsidies ...... (85) 20 - - - - (65) Share-based compensation ...... - (99) - 99 - - -

Exchange gains / (losses) ...... Prepaid consumables (restated).... - 318 - - 242 - 560

Equity in accordance with IFRS (restated) ...... 19,915 (5,011) - 99 242 - 15,246

Change in Change in 31 December Change in share retained 31 December Year ended 31 December 2004 2003 Net loss share capital premium earnings Others 2004

Shareholders’ equity in accordance with French GAAP.... 15,105 (5,140) 219 14,800 - 24 25,009 Tax regulated provisions ...... - 24 - - - (24) - Licences and options on licences . (354) (31) - - - - (385) Finance leases ...... (1) 1 - - - - - Investment subsidies ...... (65) 20 - - - - (44) Fund raising fees ...... - 95 - (95) - - -

Share-based compensation ...... - (99) - 99 - - Unrealised gains on securities available for sale ...... - - - - - 215 215 Prepaid consumables (restated).... 560 397 - - - - 956

Equity in accordance with IFRS (restated) ...... 15,246 (4,733) 219 14,804 - 215 25,751

Change in Change in 31 December Change in share retained 31 December Year ended 31 December 2005 2004 Net loss share capital premium earnings Others 2005

Shareholders’ equity in accordance with French GAAP.... 25,009 (5,956) - - 601 12 19,666 Tax regulated provisions ...... - 12 - - - (12) - Licences and options on licences . (385) 6 - - 356 - (23) Finance leases ...... - 2 - - - - 2 Investment subsidies ...... (44) 20 - - - - (24) Share-based compensation ...... - (214) - 214 - - - Unrealised gains on securities available for sale ...... 215 - - - - 229 444 Exchange gains / (losses) ...... - 1 - - - - 1 Prepaid consumables (restated).... 956 - - - (956) - -

Equity in accordance with IFRS (restated) ...... 25,751 (6,129) - 214 - 229 20,065

241

Tax-regulated provisions are set up in the French accounts. They do not qualify under the accounting policies described in Note 2 k and consequently, they are reversed in the financial statements prepared in accordance with International Financial Reporting Standards.

Conditions set by International Financial Reporting Standards for the recognition of intangible assets, as described in Note 2 d), were more restrictive than those under French regulations until 31 December 2004. In particular IAS 38, “Intangible Assets”, stipulates that the existence of future economic benefits attributable to the assets must be demonstrated. Accordingly, the payments relating to the licensing of technologies (including options for such licensing) and patent inscription and maintenance were expensed in the financial statements prepared under International Financial Reporting Standards, whilst they could be booked as assets under French regulations until 31 December 2004. The Company changed its accounting policy under revised French GAAP on January 1, 2005. Under this revised policy, licences and options for licensing are recognised as an expense.

All lease contracts are treated as operating leases in individual financial statements prepared under French generally accepted accounting principles. As described in Note 2 j, leases of property, plant and equipment, where the Company has substantially all the risks and rewards of ownership, are classified as finance leases in financial statements prepared in accordance with International Financial Reporting Standards.

In financial statements prepared under accounting principles generally accepted in France, investment grants may be recognised linearly in income, or alternatively, immediately upon reception; the Company elected the latter policy for the recognition of the investment subsidy from the PACA region dated 5 July 2001 (see Note 12). In the financial statements prepared in accordance with International Financial Reporting Standards, government grants relating to assets are recognised as income using the straight line method over the useful life of those assets that have been financed through the grants, as described in Note 2 h).

International Financial Reporting Standards require that incremental external costs directly attributable to an equity transaction, such as fund raising expenses, be accounted for as a deduction from equity. This treatment is optional under accounting principles generally accepted in France; the Company elected to expense such costs in the statutory financial statements for the years ended 31 December 2000, 2002 and 2004.

IFRS 2 “Share-based payments”, which the Company early adopted in 2004, requires the recognition of an expense for equity-settled share-based payment transactions, in which the Company receives goods or services. These transactions are off-balance sheet under accounting principles generally accepted in France.

Unrealised gains on marketable securities are not recognised under accounting principles generally accepted in France, whilst unrealised losses are provided for as finance costs. Under International Financial Reporting Standards, unrealised gains and losses on securities available for sale have been recognised directly in equity through other comprehensive income.

As described in note 2b2, the Company changed its accounting policy for the recognition of pharmaceutical products and other materials used in the research programmes. Materials not consumed at the year-end are now reflected in the balance sheet under both French GAAP and IFRS. Under IFRS, the effects of a change in accounting policy are reflected by adjusting the opening balance of retained earnings for the earliest period presented. Under French GAAP, such effects are reflected by adjusting the opening balance of retained earnings in the year of the change.

242 The income statement by function is set out below (amounts in thousands of euros):

Years ended 31 December

2003 2004 Restated Restated 2005

Licensing revenue...... 240 2,110 1,300 Government financing for research expenditure...... 1,061 943 1,144 Operating revenue ...... 1,301 3,053 2,444

Research and Development ...... (5,789) (6,921) (7,224) General and Administrative...... (914) (1,154) (1,635) Net operating expenses ...... (6,703) (8,075) (8,859)

Operating income / (loss)...... (5,402) (5,022) (6,415)

Interest income / (expense), net ...... 391 289 286

Net loss...... (5,011) (4,733) (6,129)

As the licensing agreements do not require a specific follow-up of the means that are used at their performance, their direct cost was initially evaluated but was not accounted for separately in management accounts. The corresponding costs are included in the line item “Research and Development”.

243 20.4 STATUTORY AUDITORS’ REPORT ON THE FINANCIAL STATEMENTS PRESENTED UNDER IFRS AS AT 31 DECEMBER 2003, 2004 AND 2005

Dear Sir/Madam,

In our capacity as Statutory Auditors of the Company and in the context of the initial public offering of its shares, we have audited the financial statements of Innate Pharma, prepared in accordance with the requirements of IFRS as endorsed for application in the European Union for the years ended 31 December 2003, 2004 and 2005 as presented in the accompanying Document de Base.

These financial statements are the responsibility of the Company’s Board of Directors. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with professional standards applicable in France. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion expressed below.

In our opinion, the accompanying financial statements prepared in accordance with the requirements of IFRS as endorsed for application in the European Union give a true and fair view of the assets, liabilities and financial position of Innate Pharma as at 31 December 2003, 2004 and 2005, and of the Company’s results for each of the years then ended.

Without qualifying our opinion expressed above, we draw your attention to the changes in accounting policies applied in the years ended 31 December 2004 and 2005 described in Note 2b.

Marseille, 2 June 2006 Statutory auditors

Audit Conseil Expertise PricewaterhouseCoopers Audit Member of PKF International

Guy Castinel Philippe Willemin

244 20.5 DATE OF THE LATEST FINANCIAL INFORMATION

See Sections 20.1 and 20.3 of this Document de Base.

20.6 DIVIDEND DISTRIBUTION POLICY

Since the creation of our Company, we have made no profit and have therefore distributed no dividends.

Distribution Policy

We predict that we will continue to experience substantial losses over the next few years as our research and development activities continue. Therefore, we will not be in a position to distribute dividends in the near future.

Legal Deadline

Dividends unclaimed five years after they have been authorised for payment will be given to the State.

20.7 JUDICIAL AND ARBITRATION PROCEDURES

We are not a party to any judicial or arbitration procedure which had or could have an effect on our business, financial situation, prospects, results or development over the last 12 months.

On 31 December 2005, the amount in reserve for legal proceedings, involving a company lawsuit, came to 60 thousand euros (see Note 9 to our IFRS Accounts).

20.8 SIGNIFICANT CHANGES IN THE FINANCIAL OR BUSINESS SITUATION

In March 2006, we signed a collaboration and licensing agreement with Novo Nordisk A/S concerning our intellectual property in the area of NK cells. Novo Nordisk A/S also increased its holdings in our share capital through a reserved capital increase of 10.0 million euros. This capital increase, as well as the various payments made under the collaboration and licensing agreement, should represent an additional cash infusion of approximately 35 million euros between 2006 and 2008 (see Sections 6.5.8.1 and 9.7.2 in this Document de Base).

In May 2006, we started our first multicentric and international Phase II clinical trials with IPH 1101 for metastatic renal carcinoma (mRCC). The results of this important trial are expected at the end of 2007.

We intend to begin treatment for our first patient in this study in June 2006 and to treat all patients to be recruited between now and the end of the first quarter of 2007.

In June 2006, we signed agreements with the American company Schering-Plough and with the Institut Gustave Roussy, a leading French hospital in the treatment of cancer, to acquire intellectual property rights supporting the development of our product IPH 31XX (see Sections 6.3.1 and 6.5.8.2 in this Document de Base). These agreements will not have a significant impact on our assets.

In 2006, we will sign a commercial lease with the urban community of Marseille-Provence-Métropole and transfer our headquarters and laboratories, after renovations paid for by us, into a 2,400 square-meter building in Luminy, south of Marseille.

245 CHAPTER 21. ADDITIONAL INFORMATION

The statutory stipulations set forth in this Section will be applicable once we are a listed company.

21.1 GENERAL INFORMATION ABOUT OUR SHARE CAPITAL

21.1.1 Amount of Share Capital (Article 7 of our By-laws)

As of the date of this Document de Base, our share capital amounted to 857,394 euros consisting of 17,147,880 shares with a nominal value of 0.05 euros each, divided into five classes: 164,000 class O shares, 1,110,000 class A preferred shares, 2,904,000 class B preferred shares, 6,722,680 class C preferred shares, and 6,247,200 class D preferred shares.

The holders of class A, class B and class C preferred shares have the right to be represented on our Supervisory Board. Also, the holders of our class B, class C and class D preferred shares have additional rights regarding access to financial information, auditing our company and a preferential liquidation right in the event our company is liquidated. The shareholders holding our class C and class D preferred shares also have the right to give advance approval for certain decisions through a Special Joint Meeting of all such shareholders.

Under the terms of our By-laws, our preferred shares, regardless of the class to which they belong, will automatically cease to exist once our shares are admitted for trading to the Eurolist Market of Euronext Paris and will be converted into ordinary class O shares, at a ratio of one class O share per each preferred share, effective as of the listing date, thereby losing on that same date all the rights and privileges associated with such preferred shares. With respect to the class and class D preferred shares, this automatic conversion is subject, however, to the class C and class D preferred shares have a total market value of at least 20 million euros and whether the individual value of these shares is at least 4.46 euros (with a nominal value of 0.05 euros per share).

Our shares are fully subscribed and fully paid.

21.1.2 Securities Not Representing Our Share Capital

None.

21.1.3 Other Securities Giving Access to Our Share Capital

21.1.3.1 Warrants

We have issued 18,500 warrants giving the right to subscribe to a total of 370,000 new shares with a nominal value of 0.05 euros each, representing approximately 2.16% of our share capital based on the number of our outstanding shares as of the date of this Document de Base.

The table below shows the outstanding warrants as of the date of this Document de Base.

Number of Shares to be Issued with a Subscription Warrants Warrants Warrants Warrants in Nominal Value Price per Share Expiration Date of Issue Authorised Issued Recipients Exercised Circulation(3) of € 0.05 in Euros Date

27/12/2001 1 (Warrants2001) 7,500 7,500 Inserm Transfert 0 7,500 150,000 € 2.975 22/12/2006 28/12/2001 Certain outside (Warrants2001-1) 8,000 8,000 consultants and 0 8,000 160,000 € 1.525 22/12/2006 Philippe Pouletty(2) 4/7/2003 3,000 3,000 Philippe Pouletty 0 3,000 60,000 € 2.975 1/7/2008 (Warrants2003-1)

1 These warrants are attached to those shares issued by the General Shareholders’ Meeting on 22 December 2001 to Inserm Transfert. These warrants are not detachable from such shares. 2 Philippe Pouletty subscribed to 2,000 Warrants2001-1. 3 The beneficiaries are allowed to exercise the warrants they receive starting on various dates e.g., 22 December 2002, 22 December 2003, 22 December 2004 or 22 December 2005, depending on the relevant tranche.

In addition to the warrants set forth above, we have issued warrants which protect against dilution (“anti-dilutive warrants”) which are attached to those shares (“ABSA”) issued in exchange for the share capital increases we executed during certain financing transactions (see Section 21.1.6 of this Document de Base). These anti-dilutive warrants expire on the day our shares are admitted for trading on a regulated market and cannot be exercised after that date.

246 21.1.3.2 Stock Options

As of the date of this Document de Base, the number of outstanding stock options was:

– 23,250 stock options authorised by the General Shareholders’ Meeting on 1 July 2003; if all these stock options are exercised they will result in the issuance of 465,000 new shares with a nominal value of 0.05 euros per share; these stock options can be exercised for a price of 2.975 euros per share;

– 25,000 stock options authorised by the General Shareholders’ Meeting on 22 July 2004; if all these stock options are exercised they will result in the issuance of 500,000 new shares with a nominal value of 0.05 euros each; these stock options can be exercised for a price of 3.75 euros per share.

As a result, as of the date of this Document de Base, the stock options allocated under these two stock option plans allow for the subscription of a total of 965,000 shares.

The tables below detail our stock option plans as of the date of this Document de Base.

2003 PLAN

Date of General Shareholders’ Meeting 1 July 2003 Date of Management Committee Meeting (1) 1 July 2003 Number of stock options authorised ...... 28,500 Number of stock options allocated ...... 28,500 Number of expired stock options...... 5,250(2) Number of shares that may be issued for each option ...... 20(3) Number of shares that may be subscribed per fiscal year in connection with the stock options allocated to: - Company officers, i.e., Stéphane Boissel ...... 180,000 - Ten employee beneficiaries who are not officers, including:...... 222,000 - Jérôme Tiollier...... 60,000 Starting date for exercising the stock options(4) ...... 1/7/2004 Expiration date for exercising the stock options...... 30/6/2013 Subscription price per share...... € 2.975 Number of shares subscribed as of the date of this Document de Base ...... 0 Balance of shares that may be subscribed as of the date of this Document de Base ...... 465,000

(1) The Management Committee was our company’s management body when we were a société par action simplifiée, prior to our conversion into a société anonyme on 13 June 2005.

(2) Options that expired following the departure of three of our employees who had originally been granted 250 stock options each.

(3) After dividing the nominal value of our shares by 20, approved at the General Shareholders’ Meeting on 29 March 2006.

(4) Under the 2003 plan, all beneficiaries are allowed to exercise 1/4 of the total number shares they hold one year after the date they are granted, and thereafter1/50th per full month completed for the following 36-months, with the remaining stock options to be exercised four years after the grant date.

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2005 PLAN

Date of General Shareholders’ Meeting 22 July 2004 Date of Management Committee Meeting (1) 13 June 2005 Number of stock options authorised ...... 25,000 Number of stock options allocated ...... 25,000 Number of expired stock options...... 0 Number of shares that may be issued for each stock option ...... 20(2) Number of shares that may be subscribed per fiscal year in connection with the stock options allocated to: - Company officers, i.e...... 140,000 - Hervé Brailly ...... 60,000 - François Romagné ...... 40,000 - Stéphane Boissel...... 40,000 - Ten employee beneficiaries who are not officers, including:...... 302,000 - Patrick Squiban...... 60,000 - Jérôme Tiollier...... 40,000 Starting date for exercising the stock options(3) ...... 6/13/2006 Expiration date for exercising the stock options...... 6/12/2015 Subscription price per share...... € 3.75 Number of shares subscribed as of the date of this Document de Base ...... 0 Balance of shares that may be subscribed as of the date of this Document de Base... 500,000

(1) The Management Committee was our company’s management body when we were a société par action simplifiée, prior to our conversion into a société anonyme on 13 June 2005.

(2) After dividing the nominal value of our shares by 20, approved at the General Shareholders’ Meeting on 29 March 2006.

(3) Under the 2005 plan, all beneficiaries are allowed to exercise 1/4 of the total number of shares they hold one year after the date they are granted, and thereafter 1/50th per full month completed for the following 36 months, with the remaining stock options to be exercised four years after the grant date.

21.1.3.3 Founder Warrants

There are 11,000 founder warrants giving the right to subscribe to a total of 220,000 new shares with a nominal value of 0.05 euros, representing approximately 1.3% of our share capital based on the number of existing shares as of the date of this Document de Base.

The table below shows the outstanding founder warrants as of the date of this Document de Base.

Shares to be Issued Founder Founder Founder Founder (nominal Subscription Warrants Warrants Warrants Warrants in value of Price per Expiration Issue Date Authorised Issued Beneficiaries Exercised Circulation €0.05 each ) Share in Euros Date

15/05/20021 12,750 12,750 Employees 0 11,0002 220,000 € 1.525 15/5/2007

1 Date of the approval by the Management Committee (we were still a société par action simplifiée at that time) as delegated by the General Shareholders’ Meeting of 21 December 2001. 2 1,750 warrants assigned on 15 May 2002 expired following the resignation of the beneficiaries.

248 21.1.3.4 Grant of Free Shares

As decided by the Executive Board on 24 April 2006, and under the terms of the delegated powers given to it for this purpose by the General Shareholders’ Meeting held on 29 March 2006, we allocated 751,000 free shares with a nominal value of 0.05 euros in application of Articles L. 225-197-1 et seg. of the French Business Code.

Number of Free Shares Authorised Number of Free Number of Shares still Issue Date for Allocation Shares Allocated to be Allocated Beneficiaries Final Acquisition Date

Employees (including managers of our 24/4/2006 800,000 751,000 49,000 24/4/2008 company with an employment contract(1)

1 Our issuances of securities giving access to our share capital executed to our managers are summarised in Section 17.2 of this Document de Base.

According to current regulations, these shares will not be issued to their recipients until two years after they have been granted. In addition, after being granted, these shares must be held for two years in accordance with the legally required minimum.

21.1.3.5 Summary of Potential Share Capital

As of the date of this Document de Base, the total number of our shares which could be issued following an exercise of the outstanding warrants (370,000) (excluding the anti-dilutive warrants), founder warrants (220,000), outstanding unexercised stock options (965,000) or as a result of allocated free shares (751,000) was a total of 2,306,000 shares, which represented approximately 13.45% of our share capital based on the existing number of our shares on the date of this Document de Base.

249 The following table shows all the stock options, founder warrants and warrants issued (except for anti-dilution warrants) and free shares allocated as of the date of this Document de Base.

Founder Stock Options Warrants Warrants Free Share Grants

Date of the General Shareholders’ Meeting ...... 1/7/2003 22/7/2004 22/12/2001 22/12/2001 22/12/2001 1/7/2003 29 March 2006

Date of the Executive Board Meeting or Management Committee Meeting ...... 1/7/2003 13/6/2005 15/5/2002 — — — 24 April 2006

Number of stock options /authorised warrants/shares ...... 28,500 25,000 12,750 7,500 8,000 3,000 800,000

Number of stock options allocated/warrants issued/shares allocated...... 28,500 25,000 12,750 7,500 8,000 3,000 751,000

Number of shares that could be subscribed by exercising the allocated options, warrants issued (nominal value €0.05)/ number of shares allocated(A)...... 570,000 500,000 255,000 150,000 160,000 60,000 751,000

Including: number of managers involved2 ...... 1 3 0 0 1 1 3

Number of expired options/warrants ...... 5,2503 0 1,750 0 0 0 0

Number of shares which could have been subscribed by exercising expired stock options (B)/warrants (B)...... 105,000 0 35,000 0 0 0 0

Balance of stock options/warrants/shares as of the date of this Document de Base ...... 23,500 25,000 11,000 7,500 8,000 3,000 751,000

Starting date for exercising options/warrants...... 1/7/20044 13/6/20065 15/5/20026 2/1/2003 22/12/20027 1/7/2004 N/A

Expiration date for exercising options/warrants ...... 30/6/2013 12/6/2015 15/5/2007 22/12/2006 22/12/2006 1/7/2008 N/A

Final date for acquiring shares...... N/A N/A N/A N/A N/A N/A 24/4/2008

Subscription price per share...... € 2.975 € 3.750 € 1.525 € 2.975 € 1.525 € 2.975 N/A

Number of shares subscribed as of 30 April 2006 (C)...... 0 0 0 0 0 0 N/A

Balance of shares that could be subscribed as of the date of this Document de Base(A-B-C) ...... 465,000 500,000 220,000 150,000 160,000 60,000 751,000

* The figures and information per security have been restated to show 15-1 stock split approved by the Extraordinary General Shareholders’ Meeting held on 22 December 2001, and the 20-1 stock split approved by the Extraordinary General Shareholders’ Meeting of 29 March 2006.

1 For issuances prior to 13 June 2005, the date on which our Company was converted into a société anonyme, the Management Committee was the body which exercised this delegated power.

2 Members of the Executive Board or Supervisory Board as shown in Sections 14.1.1 and 14.1.2 of this Document de Base.

3 Options cancelled following the departure of three employees before they were exercised.

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4 Under the 2003 plan, all beneficiaries are allowed to exercise 1/4 of the total number of stock options they hold one year after the date they are granted, thereafter 1/50th per full month completed for 36 months with the remaining options to be exercised four years after the grant date.

5 Under the 2005 plan, all beneficiaries are allowed to exercise 1/4 of the total number of stock options they hold one year after the date they are granted, thereafter 1/50th per full month completed for 36 months with the remaining options to be exercised four years after the grant date.

6 These warrants are subject to contractual restrictions in terms of when they can be exercised. However, these restrictions are null and void as soon as our shares are listed on the Eurolist of Euronext Paris.

7 The beneficiaries are allowed to exercise the warrants they receive starting on various dates i.e., 22 December 2002, 22 December 2003, 22 December 2004 or 22 December 2005, depending on the tranche to which the warrants relate.

251 21.1.4 Share Capital Authorised but Unissued

As of the date of this Document de Base, we have not authorised any unrealised capital increase other than capital increases authorised for the purposes of exercising the warrants, founder warrants and stock options or as a result of an allocation of free shares, as these instruments are described in Sections 17.2.4 to 21.1.3 of this Document de Base.

21.1.5 Obligations to Buy and Sell

None.

252 21.1.6 Changes in Share Capital as of the Date of this Document de Base

The table below shows changes in our share capital from 1 January 2004 up to the date of this Document de Base:

Final Date Nominal Unitary for Value of Value of Nominal Successive Executing Number the the Value of the Successive Cumulative Number Nominal the Category of of Shares Shares Shares Capital Total Issue Amounts of Shares Composing Value of Transaction Transaction Shareholders Issued Issued Issued Increase / Premium of Capital the Share Capital Shares

Officers and Capital increase employees 20/3/2004 (exercise of Founder including: and warrants-General 18,750 € 1 € 1 € 18,750 € 0 € 545,034 545,034 € 1 Hervé Brailly, 23/3/2004 Shareholders’ Meeting François 28/2/2000) Romagné

Capital Increase (issuance of shares with Strategic partner 29/3/2004 66,667 € 1 € 75* € 66,667 € 4,933,358 € 611,701 611,701 € 1 attached warrants (Novo Nordisk) (ABSA)

Funds, venture Capital Increase issuance capital 22/7/2004 of shares with attached 133,333 € 1 € 75* € 133,333 € 9,866,642 € 745,034 745,034 € 1 companies or warrants (ABSA) financial partners

Stock split (20 new 29/3/2006 — — — — € 745,034 14,900,680 € 0.05 shares for 1 old one)

Capital Increase issuance Strategic partner 14/4/2006 of shares with attached 2,247,200 € 0.05 € 4.45** € 112,360 € 9,887,680 € 857,394 17,147,880 € 0.05 (Novo Nordisk) warrants (ABSA)

* Corresponds to a value of 3.75 euros for one share with a nominal share value of 0.05 euros. ** Corresponds to a value of 89 euros for one share with a nominal share value of 1 euro.

In addition to the transactions shown in the table above, share movements since 1 January 2004 comprising our share capital resulted in consumer loans for the benefit of members of the Supervisory Board and sales negotiated at less than 30,000 shares (after taking into account the division of the nominal value by 20, (rounding to the nearest 5/100 of a euro).

253 21.1.7 Pledges

21.1.7.1 Pledges of Company Shares

None.

21.1.7.2 Pledges of Company Assets

None.

21.2 ARTICLES OF INCORPORATION AND BY-LAWS

The By-laws were written in accordance with the regulations applicable to a société anonyme under French law. The principal provisions of the By-laws described in this section are applicable from the time our shares are listed on the exchange, and resulted from the By-laws adopted at the mixed General Shareholders’ Meeting held on 30 May 2006.

21.2.1 Business Purpose (Article 4 of the By-laws)

Our Company’s business purpose, directly or indirectly, in France or other countries is to:

– perform any and all operations involving research, development, studies, perfecting production processes and marketing products of pharmaceutical interest;

– register or grant any patents or licences relating directly or indirectly to our business; and

– perform any operation, whether economic, legal, financial, civil or commercial, which may be directly or indirectly related to our business purpose or any similar, associated or complementary purpose.

21.2.2 Executive Board, Supervisory Board and General Management Bodies (Articles 14 to 24 of the By- laws)

21.2.2.1 Executive Board (Articles 14 to 16 of the By-laws)

The Executive Board is responsible for managing our Company and is composed of a minimum of two members and a maximum of five members who perform their duties under the supervision of the Supervisory Board.

Members of the Executive Board

The members of the Executive Board are appointed or have their appointments renewed by the Supervisory Board. The members of the Executive Board must be natural persons but are not required to be shareholders. They may be French citizens or citizens of other countries.

The age limit for being a member of the Executive Board and the limitations on holding such an appointment concurrently with an appointment in another company are subject to the applicable legal and regulatory provisions.

The term of office for the members of the Executive Board is three years and may be renewed. If there is a vacancy, the Supervisory Board must fill the vacancy within two months. The replacement is appointed for the time remaining until the Executive Board is up for reappointment.

Chairman of the Executive Board

The Executive Board elects a Chairman from among its members to serve for the duration of his appointment as a member of the Executive Board. The Chairman of the Executive Board represents us in our relations with third parties.

The Supervisory Board may assign this power of representation to one or more other members of the Executive Board; such persons then have the title of Chief Operating Officer.

Meetings and powers of the Executive Board

The Executive Board meets as often as our interests require, but at a minimum of once a quarter. Meetings are called by the Chairman or a member of the Executive Board appointed for this purpose.

The Executive Board is vested with the broadest powers to act on our behalf in all circumstances; it exercises these powers within the scope of our business purpose and subject to those powers expressly assigned by law to the Supervisory Board and the General Shareholders’ Meetings and the restrictions, if any, as determined by the Supervisory Board. 254

21.2.2.2 Supervisory Board (Articles 17 to 21 of the By-laws)

Members of the Supervisory Board

The Executive Board is supervised by a Supervisory Board made up of a minimum of three members and a maximum of eighteen. The members of the Supervisory Board are appointed for a renewable term of two years at the Ordinary General Shareholders’ Meeting, which may revoke their appointments at any time. The appointees are selected from among the shareholders and may be natural persons or legal entities. Each member must own at least one of our shares for the entire term of the appointment.

The age limit for being a member of the Supervisory Board and the limitations on holding such an appointment concurrently with an appointment in another company are subject to the applicable legal and regulatory provisions.

Chairman of the Supervisory Board

The Supervisory Board appoints a Chairman and a Vice-Chairman from its members who are natural persons.

Meetings and powers of the Supervisory Board

The Supervisory Board meets as often as our interests require but at a minimum of once a quarter. Meetings are called by the Chairman or Vice-Chairman, or by a member of the Executive Board or one-third of the members of the Supervisory Board, under the circumstances and according to the conditions set forth in the By-laws.

The Supervisory Board exercises ongoing oversight over our Company’s management by the Executive Board. It alone has the authority to give permission for certain significant operations.

Committees

The Supervisory Board may decide to establish committees responsible for studying matters which the Supervisory Board or its Chairman wish to submit to them for examination and advice.

21.2.2.3 Shareholders’ Observers (Article 22 of the By-laws)

At the Ordinary General Shareholders’ Meeting, one or more shareholders’ observers may be appointed, at the discretion of the shareholders for a renewable term of one year. Shareholders’ observers may be natural persons or legal entities and are not required to be shareholders.

The observers attend all Supervisory Board meetings, with the right to speak but not to vote.

21.2.3 Rights, Privileges and Restrictions Attached to Shares

Each Company share gives the right to a share of our profits and assets in proportion to the amount of capital it represents. It also gives the right to vote and be represented in the General Shareholders’ Meetings under the conditions set forth by the law and the By-laws.

We have not issued any shares giving holders privileged rights compared to those attached to other shares.

The By-laws do not contain any provision restricting the rights attached to shares.

21.2.4 Rights and Obligations Attached to Shares and the Associated Changes (Article 8 of the By-laws)

Any change to the capital or the rights attached to our shares is subject to regulations under law, as our By-laws do not set forth any particular specifications.

21.2.5 General Shareholders’ Meetings (Articles 26 to 34 of the By-laws)

21.2.5.1 Calling Meetings and Conditions for Admission (Articles 27 to 30 of the By-laws)

General Shareholders’ Meetings are called by the Executive Board, or failing that, by the Supervisory Board. They can also be called by the auditor(s) or an officer appointed by a court upon request, by any interested party in an emergency, or by one or more shareholders holding at least five percent of our shares.

255 The meeting must be announced at least 15 days prior to the date of the General Shareholders’ Meeting by a notice placed in a journal that publishes legal announcements in the department where the headquarters are located, and in the Bulletin of Obligatory Legal Notices (Bulletin des Annonces Légales Obligatoires or BALO). Holders of registered shares who have owned them for at least one month as of the date on which the latest notice is published receive individual notices. When a General Shareholders’ Meeting is unable to take action because the requisite quorum is not present, a second meeting is called at least six days in advance using the same procedure as the first one.

The General Shareholders’ Meeting may only take action on items on the agenda. However, it may dismiss and replace one or more members of the Supervisory Board at any time. One or more shareholders representing at least the percentage of share capital fixed by law, and acting according to the legally required conditions and deadlines, are allowed to request that draft resolutions be added to the agenda of the General Shareholders’ Meeting.

Any shareholder has the right to attend General Shareholders’ Meetings in person or to appoint a proxy holder, in accordance with the legal and statutory requirements, and to take part in deliberations by presenting proof of identity and ownership of shares, subject to:

• for holders of registered shares, an entry in our shareholder registry; and

• for holders of bearer shares, the filing of a certificate issued by an authorised intermediary at the location indicated in the notice for the meeting, certifying that their shares are on held account and not available until the date of the meeting.

21.2.5.2 Shareholder Identification (Article 9 of the By-laws)

Shares may be registered or bearer shares, at the option of the shareholder, subject to the applicable legal requirements.

To identify the holders of bearer shares, in accordance with current legal and regulatory requirements, we are authorised to ask the central depositary that maintains the records of the issue of these shares, in exchange for a fee, for the holders’ name or business name, year of birth or year of incorporation, address and nationality, number of securities held giving access to our capital and any restrictions to which the securities are subject.

21.2.5.3 Voting Rights (Article 32 of the By-laws)

The voting rights attached to shares are in proportion to the amount of capital they represent and each share gives the right to one vote.

21.2.5.4 Double Voting Rights

None.

21.2.5.5 Limitation on Voting Rights

None.

21.2.6 Crossing the Threshold set in the By-laws (Article 11 of the By-laws)

Without prejudice to the legal or regulatory stipulations, any natural person or legal entity who goes above or below, directly or indirectly, acting alone or together with others, a percentage of our share capital or voting rights equal to or higher than 1% or a multiple of this percentage, must inform us of the total number of shares, voting rights and securities giving access to capital or voting rights that it or he owns immediately or within the term set forth in the By-laws within five trading days of the date on which such ownership threshold is crossed.

CHAPTER 22. MAJOR CONTRACTS

The collaboration agreement with Novo Nordisk A/S is described in Section 6.5.8.1 of this Document de Base.

CHAPTER 23. INFORMATION FROM THIRD PARTIES, DECLARATIONS BY EXPERTS AND DECLARATION OF INTERESTS

None.

256 CHAPTER 24. DOCUMENTS ACCESSIBLE TO THE PUBLIC

Our corporate documents (By-laws, minutes of General Shareholders’ Meetings and other documents) and, if applicable, reports, letters, evaluations and declarations produced by an expert at our request, and our historical financial information may be found at our headquarters and a copy may be obtained.

The person responsible for the information is:

Stéphane Boissel Innate Pharma S.A. 121, Ancien Chemin de Cassis 13009 Marseille Tel.: (+33) 4 96 19 05 50 e-mail: [email protected]

CHAPTER 25. INFORMATION ON HOLDINGS

Not applicable.

257 GLOSSARY

AFSSAPS Agence Française de Sécurité Sanitaire des Produits de Santé: French Agency for the Sanitary Safety of Health Products. This is the organisation in France responsible for monitoring the clinical trials of our drug candidates, and for authorising their sale.

Adjuvant treatment Treatment which complements the primary treatment to increase therapeutic efficacy or involve different mechanisms of action.

Adoptive cell Immunotherapy technique consisting of removing lymphocytes from the patient, activating them in a immunotherapy laboratory to give them an increased ability to recognise and/or destroy a targeted tumour and then reinjecting them into the patient. It is hoped that this will counteract certain mechanisms which allow the tumour to escape the immune system.

Agonist For a given receptor, an “agonist” molecule is a molecule interacting with this receptor which triggers biochemical and cellular events observed under physiological conditions or with a reference molecule. An agonist is generally a molecule showing some structural similarities with a physiological ligand for which it can be substituted.

Antagonist For a given receptor, an “antagonist” molecule is a molecule interacting with this receptor and blocks the triggering of biochemical and cellulard events observed under physiological conditions or with a reference molecule. An antagonist could be a molecule showing some structural similarities with a physiological ligand that binds to the receptor in a competitive manner, thereby displacing interaction between the receptor and its physiological ligand(s).

Antibody/Monoclonal Protein produced by a B lymphocyte cell in response to an antigen. Some antibodies bind to the Antibody (MAb) membrane of tumour cells and this phenomenon results in the destruction of the cell by the immune system, mainly through the action of NK cells. Monoclonal antibodies (MAbs) are antibodies produced from a single B lymphocyte clone that, once generated in laboratory, can be produced on an industrial scale. Monoclonal antibodies binding to tumour antigens are used as injectable drugs to trigger the recognition and suppression of a tumour.

Antigen Molecule recognised as not belonging to the “self” by the immune system. It can be a molecule foreign to the body, a pathogenic micro-organism, a molecule expressed by a tumour cell, etc. The range of recognised antigens is widely different from one individual to another. Tumour cells can express tumour antigens and therefore they can be recognised as “to be destroyed” by cells of the immune system, but very often they are able to deceive the immune system and thereby escape it, which results in disease progression.

Anti-tumour Treatment aimed at destroying the tumour indirectly, through stimulation of the immune system. The immunotherapy strategies used focus on forcing recognition of the tumour by the immune system, at increasing the ability to suppress recognised targets, or at generally increasing all immune responses. In the latter case, the lack of specificity of the approach could result in severe side effects and limit the therapeutic benefits. Innate Pharma is developing immunotherapy treatments based on the manipulation of non conventional lymphocyte sub-populations.

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Apoptosis Also referred to as “Programmed Cell Death”. An active mechanism found in all cell types resulting, through a series of energy consuming biochemical events, in the fragmentation of genetic material and, subsequently, in the death of a cell. Apoptosis can be triggered by cell stress, by killer cells of the immune system, or more generally by cell interactions in the course of normal development processes in multicellular organisms.

Auto-immunity Alteration of the function of the immune system to recognise as foreign elements which are normally present in the organism (auto-reactivity), which triggers the destruction of normal cells or the production of auto-reactive antibodies, thereby resulting in chronic inflammation. Auto-immunity lies at the origin of numerous diseases. In auto-immune pathologies, the target may be a specific organ (e.g., in auto-immune diabetes) or the immune system can exert an activity against varied targets (e.g., in lupus).

Autologous Refers to the interaction of elements from an individual with other elements from the same individual. Thus, in an autologous cell therapy process, patients are treated with their own cells. In an anti-tumour cytotoxic activity test performed under autologous conditions, cells from the tumour of a patient are exposed to effector cells taken from the same patient.

Auto-reactivity Ability of the immune system to recognise and react with elements of the self. Auto-reactivity is the phenomenon involved in auto-immune pathologies (see auto-immune).

Benefit / risk ratio For any drug candidate, the evaluation of the expected therapeutic benefits in relation to possible unwanted effects and the probability of their occurrence is the basis for the decision to conduct clinical trials on humans, and constitutes the main criterion of judgment for regulatory agencies. This evaluation of probabilities lies at the root of medical judgment. Unwanted effects considered unacceptable for a benign pathology may thus be acceptable in a more critical context.

Biological marker Measurable biological parameter whose quantitative variations are linked to the mechanism of action of a drug candidate, and permit the evaluation of its biological activity in patients. For example, the number of circulating γδ cells is a biological marker of the activity of γδ agonists.

Cell therapy Treatment in which the therapeutic product being administered to the patient involves a cell preparation obtained from the patient’s own cells in the laboratory.

Chemotherapy Treatment of a cancer disease using chemical agents toxic for malignant cells (cytotoxic) or inhibiting cell growth (cytostatic) so as to reduce the tumour.

Clinical Studies of a drug candidate conducted on humans, under the control of the health authorities with the development ultimate goal of obtaining authorisation to market and sell the product. Such studies usually take place in three phases. In a Phase I study, the product is administered to healthy volunteers in order to evaluate the tolerance and to measure some

259

pharmacokinetic parameters. In a Phase II study, the product is administered to small patient groups with particular pathologies in order to determine the active dose and show any biological effects. The therapeutic efficacy is determined in a Phase III study on large patient groups, possibly in comparison with a reference treatment.

Concept proof In our operations, concept proof means the first indication of the clinical efficacy of a drug candidate obtained during one of our clinical trials.

Consolidation treatment Treatment to prevent relapses. The control of residual disease is the objective of consolidation therapies. For numerous cancer pathologies, the patients’ survival depends on the efficacy of the consolidation treatment. Immunotherapy is mainly intended as consolidation treatment.

Conventional T A conventional T lymphocyte specifically recognises the complex formed by an antigen bound to lymphocyte an MHC molecule, through a dedicated receptor, the receptor for the T lymphocyte antigen (alpha beta TcR). Some T lymphocytes have the ability to destroy target cells (cytotoxic T lymphocytes), whereas others play a regulatory role in the immune system. Conventional lymphocytes support the immunological memory: successive exposures to a same antigen trigger immune responses with increasing intensity. Such an immune response, referred to as an adaptative immune response, lies at the basis of vaccination.

Effector cells Cells of the immune system that are able to kill a recognised target cell. More generally, the immune system may be analysed as the coupling of recognition abilities, involving dedicated receptors (such as antibodies or the receptor for the T cell antigen) and effector mechanisms resulting in the suppression of the recognised element. The main effector mechanisms are: cell lysis, involving killer cells (cytotoxic cells) and antibody dependent mechanisms. NK cells are typically effector cells.

EMEA (European Agency for the European regulatory agency responsible for evaluating requests for authorisation to sell within a Evaluation of Medicinal centralised procedure. The EMEA coordinates with national agencies. For the development of Products) orphan drugs, the pharmaceutical industry is in direct contact with the EMEA.

FDA (Food and Drug Administration) This U.S. agency monitors clinical trials and authorises their commercialisation.

First intention treatment Treatment applied upon diagnosis of tumourous disease.

First-in-class A class of drug within a set of drugs with the same mechanism of action, generally targeting the same receptor. In this context, a “first-in-class” drug is a drug involving a new mechanism of action or targeting a new receptor, as opposed to a “best-in-class” drug, which is the drug with the best benefit/risk ratio in an existing class.

Galenics Pharmaceutical formulation technology of an active ingredient, i.e. putting it into the pharmaceutical form of a molecule in a state ready for administration to humans and allowing the expected therapeutic effect to be reached. The pharmaceutical form must also be stable and must remain constant in its properties during the storage life intended.

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Gamma delta Type of non-conventional lymphocytes expressing an antigen receptor structurally related to the receptor of cells conventional T cells. The predominant sub-population in blood (gamma9delta2) recognises phosphoantigens coating the surface of numerous micro-organisms and of some cancer cells.

GCP Good Clinical Practices (Bonnes Pratiques Cliniques). Set of French standards applying to clinical trials on humans, aimed at ensuring the security of patients involved in the trials as well as the quality of the information collected during such trials.

GLP Good Laboratory Practices (Bonnes Pratiques de Laboratoire). Set of French standards applying to trials conducted in a laboratory during the development of a drug candidate. Such standards apply in particular to trials implemented for controlling drugs and for checking whether the specifications that have been defined are met (quality control), as well as to pre-clinical trials conducted for evaluating the safety of products. The international GLP system and recommendations from the International Committee of Harmonisation (ICH) common to the United States, Europe and Japan are also taken into account.

GMP Good Manufacturing Practices (Bonnes Pratiques de Fabrication). Set of compulsory French standards applying to the industrial production of drugs, in particular, to guarantee the pharmaceutical quality and, therefore, the security of patients. These standards relate more particularly to the design of industrial facilities, to operation processes, to the traceability of production data, and to the storage and labelling of products. The international GMP system and recommendations from the International Committee of Harmonisation (ICH) common to the United States, Europe and Japan are also taken into account.

Immune In the presence of an antigen, dedicated cells from the immune system with a receptor specific to this antigen response on their surface, are activated and proliferate, and some acquire the ability to suppress the antigen. All of these molecule and cell events constitute an immune response. The occurrence of the response is accurately regulated, and involves numerous cell types.

Immune All the biological mechanisms allowing an organism to recognise and tolerate what belongs to itself (“the system self”) and to reject what is foreign to it (the “non-self”): foreign substances or infectious agents to which it is exposed, but also its own components that have been altered (such as tumour cells).

Informed According to controlling legislation in France, any patient involved in a clinical trial should be informed of the consent objective, the methodology and the duration of the research, as well as of the expected benefits, predictable constraints and risks implied by the administration of products used to clinical trials. The information supplied is summarised in a written document that is given to the patient before any experimental treatment. Patients sign an informed consent document stating their willingness to take part in the trial after having received this information.

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Innate immunity Immune responses are not affected by preliminary exposure to the antigen: innate immunity is characterised by lack of memory. The non conventional lymphocytes belong to innate immunity, as opposed to the conventional lymphocytes which support of the immunological memory.

Intermediary marker Measurable biological parameter whose quantitative variations are considered to have predictive value (“Surrogate marker”) in relation to the expected therapeutic effect. In cancer research, the measurement of tumour mass is frequently used as an intermediary marker of therapeutic efficacy.

ISO 9001:2000 International standard reference system applicable to quality management within an organisation, which requires the continuous improvement of the processes constituting the activity of the organisation. The ISO 9001 standard applies particularly to organisations with research and development activities. Compliance with this standard reference system is certified by an independent agency.

Lymphocytes Cells in the immune system with a receptor for the antigen. Lymphocytes are present in blood and the lymphoid organs (spleen, ganglion) and can infiltrate tumours in the event of an effective anti-tumour response. B lymphocytes produce soluble proteins binding to the antigen referred to as antibodies (tumour immunity). T lymphocytes are able to destroy cell targets (cell immunity) directly. Non conventional lymphocytes constitute part of cell immunity which is defined by a particular recognition mode of the antigen.

MHC Group of molecules involved in the recognition of the antigen by conventional T lymphocytes. MHC molecules are present at the surface of nearly all the cells of the organism. Such molecules show large variations from one individual to another, and define partly the “immunological identity” of each individual by controlling the repertoire of T antigens recognised by each one. Non conventional lymphocytes are not submitted to this control, and can recognise MHC deficient cells (see “missing self”). In the advanced stages of the disease, tumours often lose the expression of MHC molecules, thereby escaping suppression by conventional T lymphocytes, while remaining sensitive to non conventional lymphocytes.

Missing self Non conventional lymphocytes express inhibitor receptors for MHC molecules that are able to block the activation effect by the antigen. Thus, detrimental responses to the organism that would be directed against the cells of the self are usually restricted, in the absence of strong stimulation. When the MHC is not expressed (“missing self”), non conventional lymphocytes are activated. A normal expression of the MHC could be counteracted by powerful activator signals provided by the recognition of the antigen. Such a mechanism is very important for controlling the activity of NK cells, which have a high ability to destroy their targets. The “missing self” was discovered by Klas Karre, Alessandro and Lorenzo Moretta, who received the Yvette Mayent – Institut Curie prize in June 2001 for their accomplishments. Most conventional lymphocytes are not subject to this type of control by inhibitor receptors.

Mutagenic Exposure to a mutagenic (or genotoxic) product is likely to result in alterations of the genetic material (mutations) which may result in the occurrence of cancers (cancerogenesis) or congenital malformations (teratogenicity).

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NCE (“New New synthetic organic molecule developed for pharmaceutical use. Chemical Entity”)

NK cells NK cells (“Natural Killer”) are non conventional lymphocytes present in large amounts in blood (up to 10% of circulating lymphocytes). NK have unique abilities to kill varied tumour targets with a very high efficiency. The recognition of tumour targets is performed through antibodies bound to the surface of the malignant cell, or through dedicated receptors, the NCR (Natural Cytotoxicity Receptors or NCR), recently discovered by Alessandro Moretta et al. As A. Moretta, K. Karre et al. have also shown, NK cells are submitted to a particular regulation (see “missing self”) inhibiting the responses directed against the self’s molecules.

Non conventional Non conventional lymphocytes constitute a specific cellular part of the immune system. The recognition lymphocytes of the antigen by non conventional lymphocytes does not involve MHC, and thereby works identically for each individual, opening the way to a pharmacological manipulation of such cells.

As opposed to the conventional lymphocyte recognising a single structure, the non conventional lymphocyte recognises a wide range of structurally related target antigens. In blood, non conventional lymphocytes (NK cells, γδ and NKT) account for 5 to 10% of circulating lymphocytes and a significant fraction of such cells can be simultaneously involved in the response of a given antigen, whereas the frequency of conventional T lymphocytes recognising a given antigen rarely exceeds 0.01%. Non conventional lymphocytes are immediately mobilisable for an immune response, with abilities to suppress tumour targets that are analogous to or even higher than those of cytotoxic T lymphocytes. In addition, such cells initiate and coordinate the conventional immune response producing numerous soluble mediators and are involved at this level in vaccination, auto-immune pathologies and allergies. We are developing innovative therapeutic products based on the manipulation of non conventional lymphocytes.

Occurrence Number of new cases diagnosed over one year for a given pathology.

Orphan drug Status granted by the EMEA or the FDA to a drug developed for a rare disease, whose occurrence or prevalence is lower than certain thresholds defined by the regulatory authorities. Such a status allows a drug candidate to benefit from advantages such as temporary commercial exclusivity, registry right exemptions, technico-regulatory advice provided by agencies.

Pharmacokinetics Study of the evolution of a molecule in the organism, including the absorption, metabolisation and elimination of molecule. Pharmacokinetic studies in animals, and later in humans, allow the development of a quantitative model describing these various steps according to the time elapsed and the physiological parameters in order to determine the method of administration and the dosage to be used at a clinical level that will obtain the expected effect for the drug candidate.

Pharmacology Central scientific branch of the discovery and development of drugs dealing with the mechanism of action of substances active on the organism. During the development of a drug candidate, non clinical

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pharmacology studies relate to the description of the mechanism of action at cellular and molecular levels, and clinical pharmacology studies aim at revealing relationships between the mechanism of action and the expected therapeutic effect or the possible toxic effects on patients.

Phosphoantigen Antigen with a low molecular weight comprising a phosphate group. M. Bonneville and J.J. Fournié discovered that gamma9 delta2 lymphocytes, which constitute the major type of non conventional lymphocytes in blood, are activated by molecules of the phosphoantigen type. Gamma9 delta2 activating compounds as developed by the Company are synthetic analogues (NCE) of natural phosphoantigens.

Pre-clinical development Studies carried out on a drug candidate before the first administration to humans in order to evaluate its toxicity and its efficacy.

Prevalence Number of patients with a given pathology.

Random study Clinical study wherein patients are divided into several groups receiving different treatments, according to a statistical procedure that is intended to ensure that the recruitment of different groups is not biased. The effect of differing dosage levels of a drug candidate can thus be tested, and the treatment by a drug candidate can be compared to a reference treatment. Data concerning a drug’s efficacy, which serves as a basis for the registration of a new product is generally produced in random studies.

Receptor Molecule expressed on the surface of a cell allowing it to communicate with its environment. Each receptor is able to establish a specific contact with another membrane or soluble molecule (ligand), and then to deliver a signal inside the cell that will be followed by biological effects. For example, the binding of the antigen to a T cell antigen receptor results, under some conditions, in the division and proliferation of the T lymphocyte.

Residual disease Malignant cells present in patients in remission after the primary tumour has been removed (by surgery, radiotherapy or chemotherapy). Residual disease lies at the origin of disease propagation (metastases) and of the development of new tumour sources (secondary tumours).

Second intention treatment Treatment applied in the event that first intention treatment should fail or in case of relapse.

Validation As used by our Company, indirect validation is validation provided, prior to the clinical development of a drug candidate by clinical studies underlining the efficacy of its mechanism of action in an indication or in a group of indications; for example, retrospective studies of clinical biology, or a clinical trial of cell therapy. Pre-clinical efficacy studies, particularly in animals, could also provide direct pre-clinical validation elements for a drug candidate.

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266 LEGAL MATTERS

The validity of our shares will be passed upon for us by our counsel, Norton Rose LLP, and for the underwriters, Shearman & Sterling LLP, counsel to the underwriters.

INDEPENDENT AUDITORS

Our audited financial statements for the years ended 31 December 2005, 2004 and 2003 included in this offering memorandum were audited by PricewaterhouseCoopers Audit S.A. and Audit Conseil Expertise, SA – Member of PKF International, independent auditors, as set forth in their audit reports included in this offering memorandum.

267 PRINCIPAL OFFICE OF THE COMPANY

Innate Pharma S.A. 121, ancien chemin de Cassis 13 009 Marseille 424 365 336 RCS Marseille

LEGAL ADVISERS TO THE COMPANY

Norton Rose Washington Plaza 42, rue Washington 75408 Paris, France

LEGAL ADVISERS TO THE UNDERWRITERS

Shearman & Sterling LLP 114, Avenue des Champs-Elysées 75008 Paris, France

AUDITORS OF THE COMPANY

Audit Conseil Expertise, SA – Member of PKF International PricewaterhouseCoopers Audit S.A. 71 ch. Gilbert Charmasson Les Docks, Atrium 10.1 BP 162 10, place de la Joliette BP 81525 13322 Marseille, France 13567 Marseille, France

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