As filed with the Securities and Exchange
Commission on April 6, 2017






UNITED
STATESSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________



FORM 20-F



(Mark One)



| | ☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ----------------------------------------------------------------------------------------------



OR



| | ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December
31, 2016
| | - | --------------------------------------------------------------------------------------------------------------------------------



OR



| | ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ----------------------------------------------------------------------------------------



OR



| | ☐ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | -------------------------------------------------------------------------------------------



Commission file number: 001-37965



TiGenix



(Exact name of Registrant as specified in
its charter)



KINGDOM OF BELGIUM



(Jurisdiction of incorporation or organization)



Romeinse straat 12, box 2



3001 Leuven



Belgium



(Address of principal executive offices)



An Moonen, General Counsel



Tel: +32 016 39 7937



Romeinse straat 12, box 2



3001 Leuven



Belgium



an.moonen@tigenix.com



(Name, Telephone, E-mail and/or Facsimile
number and Address of Company Contact Person)

____________________



Securities registered or to be registered
pursuant to Section 12(b) of the Act:



|Title
        of each class                                                                      | Name
        of each exchange on which registered
|------------------------------------------------------------------------------------------------ | -------------------------------------------------
|American Depositary Shares, each representing 20 ordinary shares with no nominal value per share | The Nasdaq Stock Market LLC                      
|                                                                                                 |                                                  
|Ordinary shares, no nominal value per share*                                                     | The Nasdaq Stock Market LLC*                     
|                                                                                                 |                                                  
|*Not for trading, but only in connection with the registration of the American Depositary Shares |                                                  
|                                                                                                 |                                                  

____________________



Securities registered or to be registered
pursuant to Section 12(g) of the Act: None

____________________

i





Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act: None

____________________



The number of outstanding shares of each
class of capital stock of TiGenix. at December 31, 2016 was:



259,956,365 Ordinary Shares



Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.



Yes ☐	          No☒



If this report is an annual or transition
report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.



Yes ☐	          No
☒





Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.



Yes
 ☒No ☐



Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).



Yes ☐	       No
☒



Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):



Large Accelerated
Filer ☐	     Accelerated Filer ☐	     Non-accelerated Filer☒



Indicate by check mark which basis of accounting
the registrant has used to prepare the financial statements included in this filing:



☐U.S.
GAAP



☒International
Financial Reporting Standards as issued by the International Accounting Standards Board

☐Other



If “Other” has been checked
in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.



☐  Item
17☐Item
18



If this is an annual report, indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Yes ☐	          No
☒














table
of contents

____________________

Page



|CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS           | 1  
|------------------------------------------------------------------- | ---
|PART I                                                              | 3  
|Item 1. Identity of Directors, Senior Management and Advisors       | 3  
|A.  Directors and Senior Management                                 | 3  
|B.  Advisers                                                        | 3  
|C. Auditors                                                         | 3  
|Item 2.  Offer Statistics and Expected Timetable                    | 3  
|Item 3.  Key Information                                            | 3  
|A.  Selected Financial Data                                         | 3  
|B. Capitalization and Indebtedness                                  | 4  
|C. Reasons for the Offer and Use of Proceeds                        | 4  
|D. Risk Factors                                                     | 5  
|Item 4. Information on the Company                                  | 32 
|A. History and Development of the Company                           | 32 
|C. Organizational Structure                                         | 87 
|D. Property, Plant and Equipment                                    | 87 
|Item 4A. Unresolved Staff Comments                                  | 88 
|Item 5. Operating and Financial Review and Prospects                | 88 
|A. Operating Results                                                | 88 
|B. Liquidity and Capital Resources                                  | 107
|C. Research and Development, Patents and Licenses, etc.             | 112
|D. Trend Information                                                | 112
|E. Off-Balance Sheet Arrangements                                   | 112
|F. Tabular Disclosure of Contractual Obligations                    | 113
|Item 6. Directors, Senior Management and Employees                  | 113
|A. Directors and Senior Management                                  | 113
|B. Compensation                                                     | 116
|C. Board Practices                                                  | 124
|D. Employees                                                        | 126
|E. Share Ownership                                                  | 126
|Item 7. Major Shareholders and Related Party Transactions           | 127
|A. Major Shareholders                                               | 127
|B. Related Party Transactions                                       | 127
|Item 8. Financial Information                                       | 128
|Item 9. The Offering and Listing                                    | 130
|A. Listing Details                                                  | 130
|B. Plan of Distribution                                             | 131
|C. Markets                                                          | 131
|D. Selling Shareholders                                             | 131
|E. Dilution                                                         | 131
|F. Expenses of the Issue                                            | 132
|Item 10. Additional Information                                     | 132
|A. Share Capital                                                    | 132
|B. Memorandum and Articles of Association                           | 132
|C. Material Contracts                                               | 132
|D. Exchange Controls                                                | 132
|E. Taxation                                                         | 132
|F. Dividends and Paying Agents                                      | 139
|G. Statements by Experts                                            | 139
|H. Documents on Display                                             | 139
|I. Subsidiary Information                                           | 139
|Item 11. Quantitative and Qualitative Disclosures About Market Risk | 139





i







|Item 12. Description of Securities Other Than Equity Securities                       | 140
|------------------------------------------------------------------------------------- | ---
|A.   Debt Securities                                                                  | 140
|B. Warrants and Rights                                                                | 140
|Part II                                                                               | 141
|Item 13. Defaults, Dividend Arrearages and Delinquencies                              | 141
|A.   Defaults                                                                         | 141
|B. Arrears and delinquencies                                                          | 141
|Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds | 141
|Item 15. Controls and Procedures                                                      | 141
|A.   Disclosure controls and procedures.                                              | 141
|B. Management’s annual report on internal control over financial reporting            | 142
|C. Attestation report of the registered public accounting firm                        | 142
|D. Changes in internal control over financial reporting                               | 142
|Item 16. [Reserved]                                                                   | 142
|Item 16A. Audit Committee Financial Expert                                            | 142
|Item 16B. Code of Ethics                                                              | 142
|Item 16C. Principal Accountant Fees and Services                                      | 142
|Item 16D. Exemptions from the Listing Standards for Audit Committees                  | 143
|Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers      | 143
|Item 16F. Change in Registrant’s Certifying Accountant                                | 143
|Item 16G. Corporate Governance                                                        | 143
|Item 17. Financial Statements                                                         | 144
|Item 18. Financial Statements                                                         | 144
|Item 19. Exhibits                                                                     | 144



ii


Table of Contents


CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS



This Annual Report contains forward-looking
statements and our estimates with respect to our anticipated future performance and the market in which we operate. Certain of
these statements, forecasts and estimates can be recognized by the use of words such as, without limitation, “believes,”
“anticipates,” “expects,” “intends,” “plans,” “seeks,” “estimates,”
“may,” “will,” “predicts,” “projects” and “continue” and similar expressions.
Such statements, forecasts and estimates are based on various assumptions and assessments of known and unknown risks, uncertainties
and other factors, which may or may not prove to be correct. Actual events are difficult to predict and may depend upon factors
that are beyond our control. Therefore, our actual results, financial condition or performance may turn out to be materially different
from such statements, forecasts and estimates. Factors that might cause such a difference include, but are not limited to, those
discussed in the section “Risk Factors” included elsewhere in this Annual Report.



By their nature, forward-looking statements
involve risks and uncertainties because they relate to events, competitive dynamics and industry change, and depend on economic
circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. Although we
believe that we have a reasonable basis for each forward-looking statement contained in this Annual Report, we caution you that
forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other
factors that are in some cases beyond our control. All of our forward-looking statements are subject to risks and uncertainties
that may cause our actual results to differ materially from our expectations.



Actual results could differ materially
from our forward-looking statements due to a number of factors, including, without limitation, the following:



| | · | We may experience delays or failure in the preclinical and clinical development of our product pipeline.
| | - | --------------------------------------------------------------------------------------------------------



| | · | Regulatory approval of our products may be delayed, not obtained or not maintained.
| | - | -----------------------------------------------------------------------------------



| | · | We work in a strict regulatory environment, and future changes to any pharmaceutical legislation or guidelines or unexpected
events or new scientific insights occurring within the field of cell therapy, could affect our business.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | If we fail to obtain additional financing, we may be unable to complete the development and commercialization of our product
candidates.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------



| | · | We have a history of operating losses and an accumulated deficit and may never become profitable.
| | - | -------------------------------------------------------------------------------------------------



| | · | We had an accumulated deficit of 116.2 million euros as of December 31, 2016 and our net losses and significant cash used
in operating activities have raised substantial doubt about our ability to continue as a going concern.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The manufacturing facilities at which our product candidates are made are subject to regulatory requirements, which may affect
the development of our product pipeline and the successful commercialization of our products.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | We may not be able to adequately protect our proprietary technology or enforce any rights related thereto.
| | - | ----------------------------------------------------------------------------------------------------------



| | · | Third party claims of intellectual property infringement may prevent or delay our product discovery and development efforts.
| | - | ----------------------------------------------------------------------------------------------------------------------------



| | · | We may need to rely on distributors and other third parties to commercialize our product candidates, and such distributors
may not succeed in commercializing our product candidates effectively or at all.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | We rely on third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual
duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our product candidates.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



1


Table of Contents


| | · | The allocation of available resources could affect our ability to carry out our business plan.
| | - | ----------------------------------------------------------------------------------------------



The preceding list is not intended to be
an exhaustive list of all of our forward-looking statements. Except as required by law, we undertake no obligation to update publicly
any forward-looking statements for any reason after the date of this Annual Report or to conform these statements to actual results
or to changes in our expectations.



2


Table of Contents


PART I



Item 1. Identity of Directors, Senior Management and Advisors



A. Directors and Senior Management



Not applicable.



B. Advisers



Not applicable.



C. Auditors



Not applicable.



Item 2. Offer Statistics and Expected Timetable



Not applicable.



Item 3. Key Information



A. Selected Financial Data



The tables below present our summary historical
consolidated financial data. Our summary historical consolidated financial data as of December 31, 2016, 2015 and 2014 and
for the years ended December 31, 2016, 2015 and 2014 has been derived from our audited consolidated financial statements,
which are included elsewhere in this Annual Report. The consolidated financial statements have been prepared and presented in accordance
with IFRS as issued by the IASB. As an emerging growth company, we are not required to present, and have not presented, selected
financial data for any period prior to our most recently completed three fiscal years.



The following summary historical consolidated
financial data should be read in conjunction with our historical consolidated financial statements and the related notes thereto
and “Item5. Operating and Financial Review and Prospects.” included elsewhere in this Annual Report. The historical
results for any prior period are not necessarily indicative of results to be expected for any future period.



Consolidated Income Statement Data:



|Years ended December 31,                                               |  |                                             
|---------------------------------------------------------------------- |  | --------------------------------------------
|                                                                       |  | 2016                                        
|                                                                       |  | In
thousands of euros, except per share data
|                                                                       |  |                                             
|CONTINUING OPERATIONS                                                  |  |                                             
|Revenues                                                               |  |                                             
|Royalties                                                              |  |                                             
|License revenues                                                       |  |                                             
|Grants and other operating income                                      |  |                                             
|Total revenues                                                         |  |                                             
|Research and development expenses                                      |  |                                             
|General and administrative expenses                                    |  |                                             
|Total operating charges                                                |  |                                             
|Operating Loss                                                         |  |                                             
|Financial income                                                       |  |                                             
|Interest on borrowing and other finance costs                          |  |                                             
|Fair value gains                                                       |  |                                             
|Fair value losses                                                      |  |                                             
|Impairment and gains/(losses) on disposal of financial instruments     |  |                                             
|Foreign exchange differences, net                                      |  |                                             
|Profit (Loss) before taxes                                             |  |                                             
|Income tax benefits / (losses)                                         |  |                                             
|Profit (Loss) for the year from continuing operations                  |  |                                             
|DISCONTINUED OPERATIONS                                                |  |                                             
|Profit (Loss) for the year from discontinued operations                |  |                                             
|Profit (Loss) for the year                                             |  |                                             
|Attributable to equity holders of TiGenix                              |  |                                             
|Basic and diluted profit (loss) per share                              |  |                                             
|Basic and diluted profit (loss) per share from continuing operations   |  |                                             
|Basic and diluted profit (loss) per share from discontinued operations |  |                                             

3


Table of Contents


Consolidated Statements of Financial Position Data—Summary



|                                      |  | As
at December 31,   
|------------------------------------- |  | ---------------------
|                                      |  | 2016                 
|                                      |  | In thousands of euros
|ASSETS                                |  |                      
|Non-current assets                    |  |                      
|Current assets                        |  |                      
|TOTAL ASSETS                          |  |                      
|EQUITY AND LIABILITIES                |  |                      
|Equity attributable to equity holders |  |                      
|Total equity                          |  |                      
|Non-current liabilities               |  |                      
|Current liabilities                   |  |                      
|TOTAL EQUITY AND LIABILITIES          |  |                      



Consolidated Statements of Cash Flows Data—Summary



|                                                      |  | As at December 31,   
|----------------------------------------------------- |  | ---------------------
|                                                      |  | 2016                 
|                                                      |  | In thousands of euros
|Net cash (used in) /provided by operating activities  |  |                      
|Net cash (used in) / provided by investing activities |  |                      
|Net cash provided by financing activities             |  |                      
|Cash and cash equivalents at end of year              |  |                      



B. Capitalization and Indebtedness



Not applicable.



C. Reasons for the Offer and Use of Proceeds



Not applicable.



D. Risk Factors



4


Table of Contents


RISK FACTORS



You should carefully consider the risks
and uncertainties described below, together with other information contained in this Annual Report. Any of the following risks
and uncertainties could have a material adverse effect on our business, prospects, results of operations and financial condition.
Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business
operations.



Risks Related to the Clinical Development and Regulatory
Approval of Our Product Candidates



We may experience delays or failure in
the preclinical and clinical development of our product candidates.



As part of the regulatory approval process,
we conduct preclinical studies and clinical trials for each of our unapproved product candidates to demonstrate safety and efficacy.
The number of required preclinical studies and clinical trials varies depending on the product, the indication being evaluated,
the trial results and the applicable regulations. Clinical testing is expensive and can take many years to be completed, and its
outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of preclinical studies
and initial clinical trials do not necessarily predict the results of later-stage clinical trials, and products may fail to show
the desired safety, efficacy and quality despite having progressed through initial clinical trials. The data collected from preclinical
studies and clinical trials may not be sufficient to support the U.S. Food and Drug Administration, or FDA, the European Medicines
Agency, or EMA, or other regulatory approval or approval by ethics committees in various jurisdictions. In addition, the review
of a study by an independent data safety monitoring board or review body does not necessarily indicate that the clinical trial
will ultimately be successfully completed.



We cannot accurately predict when our current
preclinical studies and clinical trials or future clinical trials will be completed, if at all, nor when planned preclinical studies
and clinical trials will begin or be completed. Successful and timely completion of clinical trials will require us to recruit
a sufficient number of patient candidates, locate or develop manufacturing facilities with regulatory approval sufficient for production
of the product to be tested and enter into agreements with third party contract research organizations to conduct the trials. We
may need to engage or further engage in preclinical studies and clinical trials with partners, which may reduce any future revenues
from any future products.



Our products may cause unexpected side
effects or serious adverse events that could interrupt, delay or halt the clinical trials and could result in the FDA, the EMA
or other regulatory authorities denying approval of our products for any or all targeted indications. An institutional review board
or ethics board, the FDA, the EMA, any other regulatory authorities or we ourselves, based on the recommendation of an independent
data safety review board or otherwise, may suspend or terminate clinical trials at any time, and none of our product candidates
may ultimately prove to be safe and effective for human use.



In addition, even if the data from our
clinical trials is sufficient to support an application for marketing authorization, detailed analysis of such data, including
analysis of secondary end-points and follow-up data from later periods, and the interpretation of such data by the regulatory authorities,
prescribing physicians and others, including potential partners, could have a significant impact on the value of the asset and
our ability to realize its full value.



If the EMA does not approve Cx601 for
the treatment of complex perianal fistulas in patients with Crohn’s disease, Takeda may not be able to commercialize Cx601
in Europe, and we may not receive our milestone payment in connection with approval of marketing authorization and subsequent milestone
payments and royalties in a timely manner or at all.



In March 2016, we submitted a marketing
authorization application for Cx601 to the EMA for the treatment of complex perianal fistulas in adult patients with non-active
or mildly active luminal Crohn’s disease whose fistulas have shown an inadequate response to at least one conventional or
biologic therapy. In July 2016, the EMA sent us its initial response to our application for marketing authorization, which we refer
to as “the Day 120 List of Questions”. In its response, the EMA informed us of certain major objections and, following
its standard protocol for review at day 120, stated that our application was not approvable at the present time. These objections
would preclude a recommendation for marketing authorization, unless we were able to address them adequately. These objections were
as follows:



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| | · | inadequate data with respect to the stability of the intermediate master cell stock for Cx601 and the questionable relevance
of the potency test for stability of the master cell stock
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | incomplete information with respect to the details on donor selection and testing
| | - | ---------------------------------------------------------------------------------



| | · | an insufficient viral safety risk assessment
| | - | --------------------------------------------



| | · | uncertainty as to whether the primary endpoint of the trial is adequately representative of complete closure of fistulas and
is adequately sensitive as a measure of improvement.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, as part of the marketing authorization
application process, we had a routine Good Clinical Practice inspection in September 2016. The inspectors identified certain
critical and major deviations from Good Clinical Practices, in particular, a potential violation of patient privacy. In their report
to the EMA’s Committee for Human Medicinal Products, the inspectors recommend that the data from the trial should be disregarded
as part of the marketing authorization application. We included our replies to the issues raised in the inspection report as part
of our replies to the Day 120 List of Questions, which we submitted in December 2016. In February 2017, the EMA sent TiGenix its
“Day 180 List of Outstanding Issues”.



While we believe that we will be able to
provide adequate responses to the outstanding issues, the EMA reviewers may not be satisfied with our responses or may require
additional information, which we may not be able to provide in a timely manner or at all. If we are not able to provide the EMA
with satisfactory responses, we may not receive marketing authorization for Cx601, or if we need additional time to provide the
required information, approval for marketing authorization could be delayed. This would delay or preclude our receipt of the milestone
payment of 15 million euros from Takeda for receipt of marketing authorization of Cx601 in Europe, additional milestone payments
for favorable pricing decisions in certain European markets and royalties from sales of Cx601 in Europe. In addition, Takeda has
the option to terminate the licensing agreement if we do not receive marketing authorization in Europe by July 2020.



Regulatory approval of our product candidates
may be delayed, not obtained or not maintained.



In the United States, all of our cell-based
product candidates are subject to a biologics license application, or BLA, issued by the FDA. In Europe, all of our product candidates
require regulatory approval through the centralized marketing authorization procedure coordinated by the EMA for advanced therapy
medicinal products.



Besides the marketing authorization, we
also need to obtain and maintain specific national licenses to perform our commercial operations, including manufacturing and distribution
licenses, as well as authorizations to obtain and handle human cells and tissues.



Regulatory approval may be delayed, limited
or denied for a number of reasons, most of which are beyond our control, including the following:



| | · | The requirement to perform additional clinical trials.
| | - | ------------------------------------------------------



| | · | The failure of the product to meet the safety or efficacy requirements.
| | - | -----------------------------------------------------------------------



| | · | Our ability to successfully conclude the transfer of our technology to our contract manufacturers.
| | - | --------------------------------------------------------------------------------------------------



| | · | Our ability to scale up manufacturing processes to the level required to successfully run the clinical trials for our product
candidates and to commercialize them.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The failure of the relevant manufacturing processes or facilities to meet the applicable requirements.
| | - | ------------------------------------------------------------------------------------------------------



Any delay or denial of regulatory approval
of our product candidates or any failure to comply with post-approval regulatory policies is likely to have a significant impact
on our operations and prospects, in particular on our expected revenues.



Regulatory authorities, including the FDA
and the EMA, may disagree with our interpretations of data from preclinical studies and clinical trials, our interpretation of
applicable regulations including, without limitations, regulations relating to patent term extensions or restorations. They may
also approve a product for narrower



6


Table of Contents


spectrum of indications than requested or
may grant approval subject to the performance of post-marketing studies for a product. Such post-approval studies, if required,
may not corroborate the results of earlier trials. Furthermore, the general use of such products may result in either or both of
the safety and efficacy profiles differing from those demonstrated in the trials on which marketing approval was based, which could
lead to the withdrawal or suspension of marketing approval for the product. In addition, regulatory authorities may not approve
the labelling claims that are necessary or desirable for the successful commercialization of our products.



In addition, a marketed product continues
to be subject to strict regulation after approval. Changes in applicable legislation or regulatory policies or discovery of problems
with the product, production process, site or manufacturer may result in delays in bringing products to the market, the imposition
of restrictions on the product’s sale or manufacture, including the possible withdrawal of the product from the market, or
may otherwise have an adverse effect on our business.



The failure to comply with applicable regulatory
requirements may, among other things, result in criminal and civil proceedings and lead to imprisonment, fines, injunctions, damages,
total or partial suspension of regulatory approvals, refusal to approve pending applications, recalls or seizures of products and
operating and production restrictions.



We may not receive regulatory clearance
for trials at each stage and approval for our products and product candidates still in development without delay or at all. If
we fail to obtain or maintain regulatory approval for our products, we will be unable to market and sell such products, and such
failure or any delay could prevent us from ever generating meaningful revenues or achieving sustained profitability.



We work in a strict regulatory environment,
and future changes in any pharmaceutical legislation or guidelines, or unexpected events or new scientific insights occurring within
the field of cell therapy, could affect our business.



Regulatory guidelines may change during
the course of a product development and approval process, making the chosen development strategy suboptimal. This may delay development,
necessitate additional clinical trials or result in failure of a future product to obtain marketing authorization or the targeted
price levels and could ultimately adversely impact commercialization of the authorized product. Market conditions may change, resulting
in the emergence of new competitors or new treatment guidelines, which may require alterations in our development strategy. This
may result in significant delays, increased trial costs, significant changes in commercial assumptions or the failure of future
product candidates to obtain marketing authorization.



In the past, the regulatory environment
in Europe and certain EU member states has negatively affected our ChondroCelect business. In accordance with applicable advanced
therapy medicinal product regulations, after January 1, 2013, in principle, all advanced therapy medicinal products required
central marketing authorization from the EMA. This should have been beneficial for ChondroCelect, which was the first advanced
therapy medicinal product to have obtained such central marketing authorization. However, the advanced therapy medicinal product
regulation provided for an exemption for hospitals, which allowed EU member states to permit the non-routine production of advanced
therapy medicinal product in their markets without central marketing authorization from the EMA. The implementation of this exemption
by certain EU member states, notably Spain and Germany, which had very developed markets for autologous chondrocyte implantation
procedures, has allowed such countries to keep local products in the market without central marketing authorization from the EMA
even after January 1, 2013, thereby significantly reducing the market potential for ChondroCelect.



Although the basic regulatory frameworks
appear to be in place in the United States and in Europe for cell-based products, at present regulators have limited experience
with such products and the interpretation of these frameworks is sometimes difficult to predict. Moreover, the regulatory frameworks
themselves will continue to evolve as the FDA and the EMA issue new guidelines. The interpretation of existing rules or the issuance
of new regulations may impose additional constraints on the research, development, regulatory approval, manufacturing or distribution
processes of future and existing product candidates, and could prevent us from generating revenues or achieving sustained profitability
and force us to withdraw our products from the market.



Unexpected events may occur in the cell
therapy field, in particular unforeseen safety issues of any cell therapy product. Moreover, scientific progress might yield new
insights on the biology of stem cells which might in turn impact the requirements of safety and efficacy demonstration for stem
cell or other cell therapies. Such events or



7


Table of Contents


new insights might change the regulatory requirements
and framework, in particular strengthening the required clinical research package and increasing the amount of data required to
be provided. This could result in additional constraints on our product development process and lead to significant delays, which
could prevent us from ever generating meaningful revenues or achieving sustained profitability.



Expedited pathways for Cx601, if obtained,
may not lead to a faster development process.



We intend to seek expedited review for
Cx601 in the United States. The fast track program is intended to expedite or facilitate the process for reviewing new drugs and
biologics that meet certain criteria. Specifically, new drugs and biologics are eligible for expedited review if they are intended,
alone or in combination with one or more drugs or biologics, to treat a serious or life-threatening disease or condition and demonstrate
the potential to address unmet medical needs for the disease or condition. Expedited review applies to the combination of the product
candidate and the specific indication for which it is being studied. The FDA has broad discretion in determining whether to grant
review under any of its expedited development and review programs for a drug or biologic. Obtaining expedited review does not change
the standards for product approval, but may expedite the development or approval process. There is no assurance that the FDA will
grant such review. Even if the FDA does grant expedited review for Cx601, it may not actually result in faster clinical development
or regulatory review or approval. Furthermore, such a review does not increase the likelihood that Cx601 will receive marketing
approval in the United States.



In addition, we are broadly exploring available
options, which could result in the BLA being filed before the Phase III study (which we expect to begin during the first half of
2017) is complete. There is no guarantee, however, that any of these options will be successful.



Although we have entered into a special
protocol assessment, or SPA, agreement with the FDA relating to the U.S. Phase III trial of Cx601 for the treatment of perianal
fistulas, this agreement does not guarantee any particular outcome with respect to regulatory review of the trial or any associated
biologics license application, or BLA.



The protocol for our U.S. Phase III
trial of Cx601 for the treatment of perianal fistulas was reviewed and agreed upon by the FDA under an SPA agreement in 2015. The
FDA’s SPA process is designed to facilitate the FDA’s review and approval of drugs by allowing the FDA to evaluate
the proposed design and size of clinical trials that are intended to form the primary basis for determining a drug product’s
safety and efficacy. Upon specific request by a clinical trial sponsor, the FDA will evaluate the protocol and respond to a sponsor’s
questions regarding, among other things, primary efficacy endpoints, trial conduct and data analysis. The FDA ultimately assesses
whether the protocol design and planned analysis of the trial are acceptable to support regulatory approval of the product candidate
with respect to the effectiveness of the indication studied.



Because the SPA provides for the evaluation
of protocols for trials that have not been initiated, the conduct and results of the subsequent trial are not part of the evaluation.
Therefore, the existence of an SPA agreement does not guarantee that the FDA will accept a new drug application or a BLA or that
the trial results will be adequate to support approval. Those issues are addressed during the review of a submitted application;
however, it is hoped that trial quality will be improved by the SPA process.



In rare cases, the FDA may rescind an SPA
agreement. In particular, an SPA agreement is not binding on the FDA if public health concerns emerge that were unrecognized at
the time of the SPA agreement, other new scientific concerns regarding product safety or efficacy arise, the sponsor company fails
to comply with the agreed upon trial protocols, or the relevant data, assumptions or information provided by the sponsor in a request
for the SPA change or are found to be false or omit relevant facts.



An SPA agreement may be modified, and such
modification will be deemed binding on the FDA review division, except under the circumstances described above, if the FDA and
the sponsor agree in writing to modify the protocol and such modification is intended to improve the study.



In January 2017, we had a Type C meeting
(which is any meeting other than a Type A or Type B meeting between CBER or CDER and a sponsor or applicant regarding the development
and review of a product) with the FDA to discuss changes to our Phase III Cx601 clinical trial protocol relating to sample size
and patient recruitment, among other aspects. Based on feedback from that meeting, we submitted a revised protocol in February
2017. There is no guarantee, however, that our revised protocol will be accepted by the FDA.



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Risks Related to Our Financial Condition and Capital Requirements



If we fail to obtain additional financing,
we may be unable to complete the development and commercialization of our product candidates.



Our operations have consumed substantial
amounts of cash since inception. We expect to continue to spend substantial amounts to continue the clinical development of our
product candidates. If our product candidates are approved, we will require significant additional funds in order to launch and
commercialize such product candidates in the United States and internationally. We may also need to spend substantial amounts to
expand our manufacturing infrastructure.



As at December 31, 2016, we had cash and
cash equivalents of 78.0 million euros, and we believe that this amount will be sufficient to fund our operations through
at least 12 months. However, changing circumstances may cause us to consume capital significantly faster than we currently anticipate,
and we may need to spend more money than currently expected because of circumstances beyond our control. As a result, we may require
additional capital for the further development and commercialization of our product candidates.



Our future funding requirements, both near
and long-term, will depend on many factors, including, but not limited to, the following:



| | · | The initiation, progress, timing, costs and results of clinical trials for our product candidates.
| | - | --------------------------------------------------------------------------------------------------



| | · | The clinical development plans we establish for these product candidates.
| | - | -------------------------------------------------------------------------



| | · | The number and characteristics of the product candidates that we develop and for which we seek regulatory approval.
| | - | -------------------------------------------------------------------------------------------------------------------



| | · | The outcome, timing and cost of regulatory approvals by the FDA, the EMA and any other comparable foreign regulatory authorities,
including the potential for the FDA, the EMA or any other comparable foreign regulatory authorities to require that we perform
more studies than those that we currently expect.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The ability to enter into licensing agreements with appropriate partners and to negotiate favorable terms with such partners.
| | - | -----------------------------------------------------------------------------------------------------------------------------



| | · | The cost of preparing, filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.
| | - | -----------------------------------------------------------------------------------------------------------------------------



| | · | The effects of competing technological and market developments.
| | - | ---------------------------------------------------------------



| | · | The cost and timing of completing the technology transfer to contract manufacturing organizations in the United States and
other international markets.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The ability to scale up manufacturing activities for our product candidates and approved products to a commercial scale.
| | - | ------------------------------------------------------------------------------------------------------------------------



| | · | The cost and timing of completion of commercial-scale manufacturing activities.
| | - | -------------------------------------------------------------------------------



| | · | The cost of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive
regulatory approval in regions where we choose to commercialize our products on our own.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The cost of obtaining favorable pricing and market access decisions from public and private payers for our products.
| | - | --------------------------------------------------------------------------------------------------------------------



Additional funding may not be available
on a timely basis, on favorable terms, or at all, and such funds, if raised, may not be sufficient to enable us to continue to
implement our business strategy. Our ability to borrow may



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also be affected by the conditions under our
financing agreements, including our 9% senior unsecured bonds due 2018 for 25.0 million euros in total principal amount, convertible
into our ordinary shares, that we issued on March 6, 2015. If we are unable to raise additional funds through equity or debt
financing, we may need to delay, scale back or eliminate expenditures for some of our research, development and commercialization
plans, or grant rights to develop and market products that we would otherwise prefer to develop and market ourselves, thereby reducing
their ultimate value to us.



We have a history of operating losses
and an accumulated deficit and may never achieve sustained profitability.



We experienced operating losses since our
founding in February 2000 until December 31, 2015. We experienced net losses of 13.0 million euros for the year ended December 31,
2014, net losses of 35.1 million euros for the year ended December 31, 2015 and net income of 3.8 million euros
for the year ended December 31, 2016. As of December 31, 2016, we had an accumulated deficit of 116.2 million euros.
Our losses resulted mainly from the following:



| | · | Preclinical, clinical, manufacturing and regulatory efforts we undertook to advance the product candidates in our pipeline
and to obtain marketing authorization from the EMA with respect to ChondroCelect and Cx601.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Our commercial efforts in launching ChondroCelect.
| | - | --------------------------------------------------



| | · | General and administrative costs associated with our operations.
| | - | ----------------------------------------------------------------



Except for the year ended December 31,
2016, our costs have always exceeded our revenues, which have been historically generated mainly through grants and income from
the sale of ChondroCelect. In July 2016, TiGenix requested the withdrawal of marketing authorization for ChondroCelect for commercial
reasons, which became effective as of November 30, 2016. TiGenix no longer generates revenues from ChondroCelect.



Our ability to achieve sustained profitability
depends on our ability to develop and commercialize our product candidates, and we do not know when, or if, we will generate significant
revenues from their sale in the future.



Even if we do generate sales from our product
candidates in the future, we may never achieve sustained profitability. We anticipate substantial operating losses over the next
several years as we execute our plan to expand our research, development and commercialization activities, including the clinical
development and planned commercialization of our product candidates, and incur the additional costs of operating as a U.S.-listed
public company. In addition, if we obtain regulatory approval of our product candidates, we may incur significant sales and marketing
expenses. Because of the numerous risks and uncertainties associated with developing pharmaceutical products, we are unable to
predict the extent of any future losses or when we will become profitable, if ever.



Our net losses and significant cash used
in operating activities have raised substantial doubt regarding our ability to continue as a going concern.



We have a limited operating history and
have experienced net losses and significant cash used in operating activities in each period since inception except for the year
ended December 31, 2016. We expect to have significant cash outflows for at least the next twelve months following that date and
had an accumulated deficit of 116.2 million euros as of December  31, 2016. In addition, we have debt service obligations
under our convertible bonds and the loan facility agreement with Kreos Capital IV (UK) (“Kreos”), which have
an impact on our cash flow. These conditions, among others, raise substantial doubt about our ability to continue as a going concern.
Our ability to continue as a going concern could materially limit our ability to raise additional funds through the issuance of
new debt or equity securities or otherwise. Future reports on our financial statements may include an emphasis of matter paragraph
with respect to our ability to continue as a going concern. Except for the year 2016, we have not been profitable since inception,
and it is possible we will never achieve sustained profitability. None of our product candidates can be marketed until governmental
approvals have been obtained. Accordingly, there is no substantial source of revenues, much less profits, to sustain our present
activities, and no substantial revenues will likely be available until, and unless, our product candidates are approved by the
EMA, FDA or comparable regulatory agencies in other countries and successfully marketed, either by us or a partner, an outcome
which may not occur. Based upon our currently expected level of operating expenditures, we expect to be able to fund our operations
through at least 12 months after December 31, 2016 but we will require significant additional cash resources to



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launch new development phases of existing
projects in our pipeline. In addition, this period could be shortened if there are any significant increases in planned spending
on development programs or more rapid progress of development programs than anticipated. Other financing may not be available when
needed to allow us to continue as a going concern. The perception that we may not be able to continue as a going concern may cause
others to choose not to deal with us due to concerns about our ability to meet our contractual obligations.



Our revenues and operating results may fluctuate and may
not be sufficient to cover our fixed costs.



Our revenues and operating results have
fluctuated in the past and are likely to do so in the future due to a number of factors, many of which are not under our control.
Some of the factors that could cause our operating results to fluctuate include, but are not limited to, those listed below and
identified throughout this Annual Report:



| | · | The (positive or negative) success rate of our development efforts.
| | - | -------------------------------------------------------------------



| | · | Our ability to manage future clinical trials, given the regulatory environment.
| | - | -------------------------------------------------------------------------------



| | · | The timing of approval, if any, of our products by the appropriate regulatory bodies.
| | - | -------------------------------------------------------------------------------------



| | · | Our ability to commercialize our products whether by ourselves or in conjunction with licensing partners (including our ability
to obtain funding or reimbursement from public and private payers for our products).
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Our ability to scale up manufacturing activities for our product candidates and approved products to a commercial scale.
| | - | ------------------------------------------------------------------------------------------------------------------------



There is no direct link between the level
of our expenses in connection with developing our pipeline of expanded adipose-derived stem cell-based, or eASC-based, product
candidates or our pipeline of cardiac stem cell-based, or CSC-based, product candidates and our revenues, which will primarily
consist of royalties from sales of Cx601 under our licensing agreement with Takeda, once the product comes to market until we are
able to bring another product to market. Accordingly, if revenues decline or do not grow as we expect, we may not be able to reduce
our operating expenses correspondingly and may suffer losses accordingly.



Our ability to borrow and maintain outstanding
borrowings is subject to certain restrictions under our convertible bonds.



On March 6, 2015, we issued 9% senior
unsecured bonds due 2018 for 25.0 million euros in total principal amount, convertible into our ordinary shares. Under the
terms of the convertible bonds, we are restricted from creating any security interests over any of our assets, including any part
of our business, unless certain conditions are met. We may not be able to meet the conditions imposed by the trustee under the
notes or the bondholders, which may restrict our ability to borrow and maintain outstanding borrowings. In addition, a breach of
the covenant or other provisions of the bonds could result in an event of default, which, if not cured or waived, could result
in outstanding borrowings becoming immediately due and payable.



The allocation of available resources
could affect our ability to carry out our business plan.



We have significant flexibility and broad
discretion to allocate and use our available resources. If such resources are not wisely allocated, our ability to carry out our
business plan could be threatened. Our board of directors and management determines, in their sole discretion and without the need
for approval from the holders of our ordinary shares and ADSs, the amounts and timing of our actual expenditures, which will depend
upon numerous factors, including the status of our product development and commercialization efforts, if any, and the amount of
cash received resulting from partnerships and out-licensing activities.



For example, after our acquisition of Coretherapix,
we decided to prioritize the ongoing Phase I/II clinical trial of AlloCSC-01 in acute myocardial infarction, which resulted
in our decision to put our planned Phase IIb trial for Cx611 in early rheumatoid arthritis on hold. Likewise, in prior years, we
did not have sufficient resources to both pursue the clinical development of the products coming from the allogeneic eASC platform
while simultaneously aggressively commercializing ChondroCelect. As a result, our board of directors decided to license ChondroCelect
to Sobi in order to concentrate our existing human and capital resources on the clinical development of product candidates from
the eASC-based platform, which we perceived to be of more value than commercializing ChondroCelect. In July 2016, TiGenix requested
the withdrawal of marketing authorization for ChondroCelect for commercial reasons, which became effective as of November 30, 2016.
TiGenix no longer generates revenues from ChondroCelect.



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More generally, before the launch of ChondroCelect,
we were expecting the product to be approved in both Europe and the United States. In order to approve the product in the United
States, the FDA would have required us to perform a second Phase III trial in the United States, and the costs associated
with such a trial made it impossible for us to launch the product into the United States, which we perceive to be our most important
market. In Europe, we had anticipated that funding or reimbursement would be granted more rapidly in Spain and in the United Kingdom,
that reimbursement would be approved on an unrestricted basis in Germany, and that reimbursement would be approved in France (see
also “—There may be uncertainty over reimbursement from third parties for newly approved healthcare products or
such reimbursement may be refused, which could affect our ability to commercialize our product candidates” below). We
had also expected that the advanced therapy medicinal product regulation would be more strictly enforced (see “—We
work in a strict regulatory environment, and future changes in any pharmaceutical legislation or guidelines, or unexpected events
or new scientific insights occurring within the field of cell therapy, could affect our business” above), which would
have forced all existing autologous chondrocyte implantation products that had not been approved through the advanced therapy medicinal
product regulation to exit the market. Therefore, our expectations in respect of the potential market and the uptake of the product
were higher than the results that were effectively obtained.



In addition, we constantly evaluate opportunities
to acquire businesses and technologies that we believe are complementary to our business activities, such as our acquisition of
Coretherapix, which has a platform of allogeneic cardiac stem cell products, and we also expend our human and capital resources
on the integration of such acquired businesses and the development of their technologies, which may affect our ability to develop
our own product candidates.



Our international operations pose currency
risks, which may adversely affect our operating results and net income.



Our operating results may be affected by
volatility in currency exchange rates and our ability to manage effectively our currency transaction risks. We use the euro as
our currency for financial reporting purposes. In the future, a significant portion of our operating costs may be in U.S. dollars,
because we have entered into an agreement with Lonza, a U.S.-based contract manufacturing organization, to manufacture our lead
product candidate in the United States, and will enter into research and development collaborations, trial collaborations, and
professional services contracts in the United States. We also expect a share of our future revenues to be in U.S. dollars. Our
exposure to currency risks could increase over time. We do not currently manage our foreign currency exposure in a manner that
would eliminate the effects of changes in foreign exchange rates. For example, we have not engaged in any active hedging techniques,
and we have not employed any derivative instruments to date. Therefore, unfavorable fluctuations in the exchange rate between the
euro and U.S. dollars could have a negative impact on our financial results.



Risks Related to Our Business



The manufacturing facilities where our
product candidates are made are subject to regulatory requirements that may affect the development of our product candidates and
the successful commercialization of our product candidates.



Our product candidates must be manufactured
to high standards in compliance with regulatory requirements. The manufacture of such product candidates is subject to regulatory
authorization and to the current good manufacturing practice, or cGMP, requirements prescribed in the relevant country or territory
of manufacture or supply.



The cGMP requirements govern quality control
of the manufacturing process and require written documentation of policies and procedures. Compliance with such procedures requires
record keeping and quality control to ensure that the product meets applicable specifications and other requirements including
audits of vendors, contract laboratories and suppliers. Manufacturing facilities are subject to inspection by regulatory authorities
at any time. If an inspection by a regulatory authority indicates that there are deficiencies, we or our contract manufacturer
could be required to take remedial actions, stop production or close the relevant facility. If we fail to comply with these requirements,
we also may be required to curtail the relevant clinical trials, might not be permitted to sell our product candidates or may be
limited as to the countries or territories in which we are permitted to sell them.



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Our eASC-based development and clinical
stage product candidates are manufactured in our facilities in Madrid, Spain, which have been certified by the Spanish Medicines
and Medical Devices Agency under cGMP requirements. Cx601 will be manufactured by Lonza, a U.S.-based contract manufacturing organization,
at its facility in Walkersville, Maryland, for our expected Phase III trial following the completion of technology transfer.
Outside the United States, under our licensing agreement, we expect Takeda to assume responsibility for manufacturing Cx601 following
the completion of technology transfer no later than January 1, 2021. AlloCSC-01, the CSC-based product candidate developed
by our subsidiary Coretherapix, is manufactured by 3P Biopharmaceuticals, which has been certified as cGMP-compliant by the
Spanish Medicines and Medical Devices Agency, based on a process developed by Coretherapix. However, the certification may be interrupted,
suspended or discontinued because of a failure to maintain compliance or for any other reason. In addition, the regulations or
policies applied by the relevant authorities may change, and any such change would require us to undertake additional work, which
may not be sufficient for us to comply with the revised standards.



Any failure to comply with applicable cGMP
requirements and other regulations may result in fines and civil penalties, suspension of production, product seizure or recall,
import ban or detention, imposition of a consent decree, or withdrawal of product approval, and may limit the availability of our
product candidates. Any manufacturing defect or error discovered after our product candidates have been produced and distributed
also could result in significant consequences, including adverse health consequences, injury or death to patients, costly recall
procedures, damage to our reputation and potential for product liability claims. An inability to continue manufacturing adequate
supplies of our product candidates at our facilities in Madrid, Spain, or elsewhere could result in a disruption in the supply
of our product candidates.



There may be uncertainty over funding
or reimbursement from third parties for newly approved healthcare products or such funding or reimbursement may be refused, which
could affect our ability to commercialize our product candidates.



Our ability to commercialize future product
candidates will depend, in part, on the availability of reimbursement from government and health administration authorities, private
health insurers, managed care programs and other third-party payers. Significant uncertainty exists as to the pricing, market access
or reimbursement status of newly approved healthcare products. In many countries, medicinal products are subject to a regime of
reimbursement by government health authorities, private health insurers or other organizations. Such organizations are under significant
pressure to limit healthcare costs by restricting the availability and level of reimbursement. For example, we were not successful
in obtaining certain forms of reimbursement with respect to ChondroCelect, such as the opinion of the French Haute Autorité
de la Santé that ChondroCelect should not be reimbursed in France, the delays in obtaining funding or reimbursement in Spain
and the United Kingdom, the decision to grant limited reimbursement in Germany, and the reversal of the decision to reimburse ChondroCelect
in Belgium. Negative decisions or reversals of reimbursement decisions by certain authorities or third-party payers may have an
unfavorable spillover effect on pending or future funding or reimbursement applications.



We may not be able to obtain or maintain
prices for products sufficient to realize an appropriate return on investment if adequate public health service or health insurance
coverage is not available. In addition, rules and regulations regarding funding or reimbursement may change, in some cases at short
notice, especially in light of the global cost pressures on healthcare and pharmaceutical markets. Such changes could affect whether
funding or reimbursement is available at adequate levels or at all.



The regulatory landscape that will govern
our product candidates is evolving, and changes in regulatory requirements could result in delays or discontinuation of development
of our product candidates or unexpected costs in obtaining regulatory approval.



Because we are developing novel stem cell
therapy product candidates that are unique biological entities, the regulatory requirements that we will be subject to may change.
Even with respect to more established products that fit into the categories of cell therapies, the regulatory landscape is still
developing and will likely continue to change in the future. In particular, such products may be subject to increased scrutiny
by regulatory authorities. For example, the EMA established a special committee called the Committee for Advanced Therapies to
assess the quality, safety and efficacy of advanced-therapy medicinal products, a category that includes cell therapy products
including our product candidates. This committee advises the Committee for Medicinal Products for Human Use, or CHMP, which is
responsible for a final opinion on the granting, variation, suspension or revocation of an application for marketing authorization
in the European Union.



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Likewise, in the United States, the FDA
has established the Office of Tissues and Advanced Therapies (OTAT), formerly known as the Office of Cellular, Tissue and Gene
Therapies (OCTGT) within its Center for Biologics Evaluation and Research, or CBER, to consolidate the review of cell therapy and
related products, and the Cellular, Tissue and Gene Therapies Advisory Committee to advise CBER on its review. Cell therapy clinical
trials are also subject to review and oversight by an institutional biosafety committee, or IBC, a local institutional committee
that reviews and oversees basic and clinical research conducted at the institution participating in the clinical trial. Although
the FDA decides whether individual cell therapy protocols may proceed, review process and determinations of other reviewing bodies
can impede or delay the initiation of a clinical study, even if the FDA has reviewed the study and approved its initiation. Conversely,
the FDA can place an IND application on clinical hold even if such other entities have provided a favorable review. Furthermore,
each clinical trial must be reviewed and approved by an independent institutional review board, or IRB, at or servicing each institution
at which a clinical trial will be conducted. Similarly complex regulatory environments exist in other jurisdictions in which we
might consider seeking regulatory approvals for our product candidates, further complicating the regulatory landscape.



As we advance our product candidates, we
will be required to consult with these regulatory and advisory groups and comply with all applicable guidelines, rules and regulations.
If we fail to do so, we may be required to delay or discontinue development of our product candidates. Delay or failure to obtain,
or unexpected costs in obtaining, the regulatory approval necessary to bring a potential product to market could decrease our ability
to generate sufficient product revenue to maintain our business.



These various regulatory review committees
and advisory groups may also promulgate new or revised guidelines from time to time that may lengthen the regulatory review process,
require us to perform additional studies, increase our development costs, lead to changes in regulatory positions and interpretations,
delay or prevent approval and commercialization of our product candidates or lead to significant post-approval limitations or restrictions.
Because the regulatory landscape for our stem cell therapy product candidates is evolving, we may face even more cumbersome and
complex regulations in the future. Furthermore, even if our product candidates obtain required regulatory approvals, such approvals
may later be withdrawn as a result of changes in regulations or the interpretation of regulations by applicable regulatory agencies.



In addition, adverse developments in clinical
trials of cell therapy products conducted by others may cause the FDA or other regulatory bodies to change the requirements for
approval of any of our product candidates.



Tissue-based products are regulated differently
in different countries. These requirements may be costly and result in delay or otherwise preclude the distribution of our products
in some foreign countries, any of which would adversely affect our ability to generate operating revenues.



Tissue-based products are regulated differently
in different countries. Many foreign jurisdictions have a different and sometimes more difficult regulatory pathway for human tissue-based
products, which may prohibit the distribution of these products until the applicable regulatory agencies grant marketing approval
or licensure. The process of obtaining regulatory approval is lengthy, expensive and uncertain, and we may never seek such approvals,
or if we do, we may never gain those approvals. Any adverse events in our clinical trials for a future product under development
could negatively impact our products.



Safe and efficacious human medical applications
may never be developed using cell therapy products or related technology.



If serious adverse events related to cell
therapy products were to arise in clinical trials or after marketing approval, the EMA or FDA could impose more restrictive safety
requirements on cell therapy products generally, including in the manner of use and manufacture, could require safety warnings
in product labeling, and could limit, restrict or deny permission for new cell therapy products to enter clinical trials or to
be marketed.



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Our cell therapy product candidates represent
new classes of therapy and may not be accepted by patients or medical practitioners.



Our ability to commercialize Cx601 and
future product candidates will depend, in part, on market acceptance, including the willingness of medical practitioners to invest
in training programs to use the products. Cell therapy products are a novel treatment, and such products may not be immediately
accepted as complementary or alternative treatments to the current standards of care. We may not be able to obtain or maintain
recommendations and endorsements from influential physicians, which are an essential factor for market acceptance of our product
candidates, or our product candidates may not gain sufficient market recognition in spite of favorable opinions from key leaders.



The degree of market acceptance of our
cell therapy product candidates will depend on a number of factors, including the following:



| | · | The clinical safety and effectiveness of our products and their demonstrated advantage over alternative treatment methods.
| | - | --------------------------------------------------------------------------------------------------------------------------



| | · | Our ability to demonstrate to healthcare providers that our products provide a therapeutic advancement over standard of care
or other competitive products or methods.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Our ability to educate healthcare providers on the use of patient-specific human tissue, to avoid potential confusion with
and differentiate ourselves from the ethical controversies associated with human fetal tissue and engineered human tissue.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Our ability to educate healthcare providers, patients and payers on the safety and adverse reactions involving our products.
| | - | ----------------------------------------------------------------------------------------------------------------------------



| | · | Our ability to meet supply and demand and develop a core group of medical professionals familiar with and committed to the
use of our products.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------



| | · | The cost-effectiveness of our products and the reimbursement policies of government and third-party payers.
| | - | -----------------------------------------------------------------------------------------------------------



If the medical community or patients do
not accept the safety and effectiveness of our product candidates or they fail to demonstrate a favorable risk/benefit profile,
this could negatively affect any future sales.



Ethical, legal, social and other concerns
surrounding the use of human tissue in synthetic biologically engineered products may negatively affect public perception of us
or our product candidates, or may result in increased scrutiny of our product candidates from a regulatory perspective.



The public perception of ethical and social
issues surrounding the use of tissue-engineered products or stem cells may limit or discourage the use of our product candidates.
The use of human cells, such as differentiated cartilage cells, eASCs, CSCs and other adult stem cells, as starting material for
the development of our product candidates could generate negative public perceptions of our product candidates and public expressions
of concern could result in stricter governmental regulation, which may, in turn, increase the cost of manufacturing and marketing
our product or impede market acceptance of our product candidates.



The manufacture of cell therapy products
is characterized by inherent risks and challenges and may be a more costly endeavor than manufacturing other therapeutic products.



The manufacture of cell therapy products,
such as our product candidates, is highly complex and is characterized by inherent risks and challenges, such as raw material inconsistencies,
logistical challenges, significant quality control and assurance requirements, manufacturing complexity, and significant manual
processing. Unlike products that rely on chemicals for efficacy, such as most pharmaceuticals, cell therapy products are difficult
to characterize due to the inherent variability of biological input materials. As a result, assays of the finished product may
not be sufficient to ensure that the product will perform in the intended manner. Accordingly, we employ multiple steps to control
our manufacturing process to ensure that the process works and that our product candidate is made strictly and consistently in
compliance with the process. Problems with the manufacturing process, even minor deviations from the normal process, could result
in product defects or manufacturing failures that result in lot failures, product recalls, product liability claims or insufficient
inventory, which could be costly to us or result in reputational damage. We have experienced lot failures in the past and we might
experience such failures in the future.



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We may encounter problems achieving adequate
quantities and quality of clinical-grade materials that meet EMA, FDA or other applicable standards or specifications with consistent
and acceptable production yields and costs. In addition, the FDA, the EMA and other foreign regulatory authorities may require
us to submit samples of any lot of any approved product together with the protocols showing the results of applicable tests at
any time. Under some circumstances, the FDA, the EMA or other foreign regulatory authorities may require that we not distribute
a lot until the agency authorizes its release.



Successfully transferring complicated manufacturing
techniques to contract manufacturing organizations and scaling up these techniques for commercial quantities is time consuming
and subject to potential difficulties and delays. We have entered into an agreement with Lonza, a leading U.S.-based contract manufacturing
organization active in biological and cell therapy manufacturing, to produce Cx601 in the United States in connection with the
proposed Phase III clinical trial to register Cx601 in the United States. Our technology transfer to Lonza may result in setbacks
in replicating the current manufacturing process at a new facility and in scaling up production. Likewise, we or any other third
parties with whom we enter into strategic relationships, including Takeda, might not be successful in streamlining manufacturing
operations or implementing efficient, low-cost manufacturing capabilities and processes that will enable us to meet the quality,
price and production standards or production volumes to achieve profitability. Our failure to develop these manufacturing processes
in a timely manner could prevent us from achieving our growth and profitability objectives as projected or at all.



We face competition and technological
change, which could limit or eliminate the market opportunity for our product candidates.



The pharmaceutical industry is characterized
by intense competition and rapid innovation. Our product candidates will compete against a variety of therapies in development
for inflammatory and autoimmune diseases that use therapeutic modalities such as biologics and cell therapy, including products
under development by Anterogen, Delenex Therapeutics, Novartis, Celgene, Bristol Myers Squibb, Sanofi/Regeneron, Johnson &
Johnson, GlaxoSmithKline and others, including various hospitals and research centers. Finally, with respect to the product candidates
of our subsidiary Coretherapix, there are a variety of cell therapy treatments in development for acute myocardial infarction,
including products under development by Pharmicell, Caladrius, Athersys, Mesoblast and Capricor.



Our competitors may be able to develop
other products that are able to achieve similar or better results than our product candidates. Our potential competitors include
established and emerging pharmaceutical and biotechnology companies and universities and other research institutions. Many of our
competitors have substantially greater financial, technical and other resources, such as larger research and development staff
and experienced marketing and manufacturing organizations and well-established sales forces. Smaller or early-stage companies may
also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Mergers
and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated in our
competitors. Competition may increase further as a result of advances in the commercial applicability of technologies and greater
availability of capital for investment in these industries. Our competitors may succeed in developing, acquiring or licensing on
an exclusive basis products that are more effective or less costly than our product candidates. We believe the key competitive
factors that will affect the development and commercial success of our product candidates are efficacy, safety and tolerability
profile, reliability, price and reimbursement.



Our employees may engage in misconduct
or other improper activities, including noncompliance with regulatory standards and requirements.



We are exposed to the risk of employee
fraud or other misconduct. Misconduct by employees could include intentional failures to comply with EMA or FDA regulations, to
provide accurate information to the EMA or FDA, to comply with manufacturing standards we have established, to comply with federal
and state healthcare fraud and abuse laws and regulations, to report financial information or data accurately or to disclose unauthorized
activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive
laws and regulations intended to prevent off-label promotion, fraud, kickbacks, self-dealing and other abusive practices in



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the United States and in jurisdictions outside
of the United States where we conduct our business. These laws and regulations may restrict or prohibit a wide range of pricing,
discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct
could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory
sanctions and serious harm to our reputation. If governmental investigations or other actions or lawsuits stemming from a failure
to be in compliance with such laws or regulations are instituted against us, and we are not successful in defending ourselves or
asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines
or other sanctions, up to and including criminal prosecution, fines and imprisonment.



We could face product liability claims,
resulting in damages against which we are uninsured or underinsured.



Our business exposes us to potential product
liability and professional indemnity risks, which are inherent in the research, development, manufacturing, marketing and use of
medical treatments. It is impossible to predict the potential adverse effects that our product candidates may have on humans. The
use of our product candidates in human clinical trials may result in adverse effects, and long-term adverse effects may only be
identified following clinical trials and approval for commercial sale. In addition, physicians and patients may not comply with
any warnings that identify the known potential adverse effects and the types of patients who should not receive our product candidates.
We may not be able to obtain necessary insurance at an acceptable cost or at all. We currently carry 20-million euros of liability
insurance. In the event of any claim, the level of insurance we carry now or in the future may not be adequate, and a product liability
or other claim may materially and adversely affect our business. If we cannot adequately protect ourselves against potential liability
claims, we may find it difficult or impossible to commercialize our product candidates. Moreover, such claims may require significant
financial and managerial resources, may harm our reputation if the market perceives our drugs or drug candidates to be unsafe or
ineffective due to unforeseen side effects, and may limit or prevent the further development or commercialization of our product
candidates and future product candidates.



We use various chemical and biological
products to conduct our research and to manufacture our medicines. Despite the existence of strict internal controls, these chemical
and biological products could be the object of unauthorized use or could be involved in an accident that could cause personal injury
to people or damage to the environment, which could result in a claim against us. Our activities are subject to specific environmental
regulations that impose obligations which, if not complied with, could give rise to third party or administrative claims and could
even result in fines being imposed or, in the worst case scenario, to our operations being suspended or shut down.



Our international operations subject
us to various risks, and our failure to manage these risks could adversely affect our results of operations.



We face significant operational risks as
a result of doing business internationally, such as the following:



| | · | fluctuations in foreign currency exchange rates;
| | - | ------------------------------------------------



| | · | potentially adverse and/or unexpected tax consequences, including penalties due to the failure of tax planning or due to the
challenge by tax authorities on the basis of transfer pricing and liabilities imposed from inconsistent enforcement;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | potential changes to the accounting standards, which may influence our financial situation and results;
| | - | -------------------------------------------------------------------------------------------------------



| | · | becoming subject to the different, complex and changing laws, regulations and court systems of multiple jurisdictions and compliance
with a wide variety of foreign laws, treaties and regulations;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | difficulties in attracting and retaining qualified personnel;
| | - | -------------------------------------------------------------



| | · | rapid changes in global government, economic and political policies and conditions, political or civil unrest or instability,
terrorism or epidemics and other similar outbreaks or events, and potential failure in confidence of our suppliers or customers
due to such changes or events; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | tariffs, trade protection measures, import or export licensing requirements, trade embargoes and other trade barriers.
| | - | ----------------------------------------------------------------------------------------------------------------------



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Our inability to manage our expansion,
both internally and externally, could have a material adverse effect on its business.



We may in the future acquire other businesses,
companies with complementary technologies or products to expand our activities. As a consequence, intangible assets, including
goodwill, may account for a larger part of the balance sheet total than is currently the case. Despite the fact that we carefully
investigate every acquisition, the risk remains, amongst others, that corporate cultures may not match, expected synergies may
not be  fully realized, restructurings may prove to be more costly than initially anticipated and that acquired companies may
prove to be more difficult to integrate than foreseen. We can therefore not guarantee that we will successfully be able to integrate
any acquired companies.



Our ability to manage our growth effectively
will require us to continue to improve our operations, financial and management controls, reporting systems and procedures, and
to train, motivate and manage our employees and, as required, to install new management information and control systems. We may
not be able to implement improvements to our management information and control systems in an efficient and timely manner or such
improvements, if implemented, may not be adequate to support our operations.



The results of the United Kingdom’s
referendum on leaving the European Union may have a negative effect on our business.



On June 23, 2016, a majority of voters
in the United Kingdom voted to leave the European Union in a referendum and on March 29, 2017 the United Kingdom delivered its
official withdrawal notification to the President of the European Council. The terms of the United Kingdom’s withdrawal are
subject to a negotiation period that could last up to two years from the date the withdrawal notification was delivered. The United
Kingdom’s decision has created significant uncertainty about the future relationship between the United Kingdom and the European
Union, including with respect to the laws and regulations that will apply in the future. These developments have had and may continue
to have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly
reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Any
of these factors could depress economic activity and restrict our access to capital. In addition, it is uncertain whether our EMA
approvals, if granted, will cover the United Kingdom. If not, it is not yet known what the new U.K. approval process will involve.



Risks Related to Our Intellectual Property



We may not be able to protect adequately
our proprietary technology or enforce any rights related thereto.



Our ability to compete effectively with
other companies depends, among other things, on the exploitation of our technology. In addition, filing, prosecuting and defending
patents on all of our product candidates throughout the world would be prohibitively expensive. Our competitors may, therefore,
develop equivalent technologies or otherwise gain access to our technology, particularly in jurisdictions in which we have not
obtained patent protection or in which enforcement of such protection is not as strong as it is in the United States.



Patents might not be issued with respect
to our pending or future applications. The lack of any such patents may have a material adverse effect on our ability to develop
and market our proposed product candidates. We may not be able to develop product candidates that are patentable, or our current
or future patents may not be sufficiently broad in their scope to provide commercially meaningful protection against competition
from third parties. The validity or scope of any of our patents may be insufficient, claims relating to our patents may be asserted
by other parties and, if challenged, our patents may be revoked. Even if competitors do not successfully challenge our patents,
they might be able to design around such patents or develop unique technologies or products providing effects similar to our product
candidates.



If our intellectual property rights, trade
secrets and know-how are infringed, litigation may be necessary to protect our intellectual property rights, trade secrets and
know-how, which could result in substantial costs and diversion of efforts with no guarantee of success. Our attempts to obtain
patent or other protection for certain of our product candidates or technologies may also be subject to opposition. We may need
to incur substantial costs to overcome such opposition with no guarantee of success. From time to time, we engage in opposition
or interference proceedings to prevent third parties from obtaining relevant patent or other protection, which may be expensive
and time-consuming again with no guarantee of success.



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Developments in U.S. patent law may prevent
us from obtaining or enforcing patents directed to our stem cell technologies, which could have a material adverse effect on our
business.



U.S. courts have recently issued decisions
limiting the patent eligibility of natural products and natural correlations. On June 13, 2013, in Association for Molecular
Pathology v. Myriad Genetics, the U.S. Supreme Court held that isolated genomic DNA segments are not patentable subject matter,
but complementary DNA molecules are patentable subject matter. On May 8, 2014, the U.S. Court of Appeals for the Federal Circuit
held that cloned animals are not patentable subject matter. Furthermore, on March 20, 2012, in Mayo Collaborative Services
v. Prometheus Laboratories, the U.S. Supreme Court held that certain algorithms for measuring drug metabolite levels from patient
samples and correlating them to drug doses are not patentable subject matter. On June 19, 2004, in Alice Corporation Pty. Ltd.
v. CLS Bank International, et al., a case involving patent claims directed to a method for mitigating settlement risk, the
Court held that the patent eligibility of claims directed to abstract ideas, products of nature, and laws of nature should be determined
using the same framework set forth in Prometheus.



The Patent and Trademark Office has issued
guidelines setting forth procedures for determining patent eligibility of claims directed to abstract ideas, product of nature
and laws of nature in line with the Prometheus, Myriad, and Alice decisions. The guidelines indicate that
a claim reciting any natural phenomenon or natural product will be treated as ineligible for patenting unless the claim as a whole
recites something significantly different from the natural product. The effect of these decisions on patents for inventions relating
to other natural phenomena and natural products, such as stem cells, is uncertain. Because our patent portfolio is largely directed
to stem cells and their use, as well as to uses of naturally-occurring biomarkers, these developments in U.S. patent law could
affect our ability to obtain new U.S. patents or to enforce our existing patents. In some of our pending U.S. patent applications
the Patent and Trademark Office has questioned whether certain of our claims are eligible for patenting. If we are unable to procure
additional U.S. patents or to enforce our existing U.S. patents, we would be vulnerable to competition in the United States.



Third-party claims of intellectual property
infringement may prevent or delay our product discovery and development efforts.



Our commercial success depends in part
on avoiding infringement of the patents and proprietary rights of third parties. There is a substantial amount of litigation involving
patents and other intellectual property rights in the biotechnology and pharmaceutical industries, as well as administrative proceedings
for challenging patents, including interference and reexamination proceedings before the Patent and Trademark Office or oppositions
and other comparable proceedings in foreign jurisdictions. Recently, under U.S. patent reform, new procedures including inter
partes review and post grant review have been implemented. This reform is untried and untested and will bring uncertainty to
the possibility of challenge to our patents in the future. Numerous U.S. and non-U.S. issued patents and pending patent applications,
which are owned by third parties, exist in the fields in which we are developing our product candidates. As the biotechnology and
pharmaceutical industries expand and more patents are issued, the risk increases that our product candidates may give rise to claims
of infringement of the patent rights of others.



Third parties may assert that we are employing
their proprietary technology without authorization. There may be third-party patents of which we are currently unaware with claims
to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of our product candidates.
Because patent applications can take many years, there may be currently pending patent applications that may later result in issued
patents that our product candidates may infringe. In addition, third parties may obtain patents in the future and claim that the
use of our technologies infringes upon these patents. If any third-party patents were held by a court of competent jurisdiction
to cover the manufacturing process of our product candidates, any molecules formed during the manufacturing process or any final
product itself, the holders of any such patents might be able to block our ability to commercialize the product candidate, unless
we were to obtain a license under the applicable patents, or until such patents expired or they were finally determined to be invalid
or unenforceable. Similarly, if any third-party patent were held by a court of competent jurisdiction to cover aspects of our formulations,
processes for manufacture or methods of use, the holders of any such patent might be able to block our ability to develop and commercialize
our product candidate unless we were to obtain a license or until such patent expired or was finally determined to be invalid or
unenforceable. In either case, such a license might not be available on commercially reasonable terms or at all. If we are unable
to obtain a necessary license to a third-party patent on commercially reasonable terms, or at all, our ability to commercialize
our product candidates might be impaired or delayed, which could in turn significantly harm our business.



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Parties making claims against us may seek
and obtain injunctive or other equitable relief, which could effectively block our ability to develop further and commercialize
our product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would
be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against
us, we might have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain
one or more licenses from third parties, pay royalties or redesign our infringing products, which might be impossible or require
substantial time and monetary expenditure. We cannot predict whether any such license would be available at all or whether it would
be available on commercially reasonable terms. Furthermore, even in the absence of litigation, we might need to obtain licenses
from third parties to advance our research or allow commercialization of our product candidates. We may fail to obtain any of these
licenses at a reasonable cost or on reasonable terms, if at all.



Our future development may depend on
our ability to obtain and maintain licenses to certain technologies.



We might further expand our activities
in the future by in-licensing certain technologies. Collaboration and integration may have an important impact on the success of
our expansion strategy. In such a case, we might not own the patents or supplementary protection certificates on the basis of which
these licenses may be granted. These licenses may generally be terminated by the licensor if we breach certain of our obligations
under the license and in other specified circumstances. If any of our license agreements were to be terminated, the further development
and commercialization of some of our product candidates could be prevented or delayed, reducing their potential revenues. The scope
of our rights under such licenses may be subject to dispute by licensors or third parties. We might not control the filing or the
prosecution of all the patents to which we hold licenses and may need to rely upon our licensors to enforce the patents and to
prevent or to challenge possible infringement by third parties. We might not be able to obtain licenses for the technologies that
we require in the future.



We may be involved in lawsuits to protect
or enforce our patents, which could be expensive, time-consuming and unsuccessful.



Competitors may infringe our patents. To
counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming.
In addition, in an infringement proceeding, a court may decide that one or more of our patents is not valid or is unenforceable,
or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology
in question. An adverse result in any litigation or defense proceedings could expose one or more of our patents to the risk of
being invalidated, held unenforceable, or interpreted narrowly and could put our patent applications at risk of not issuing. Defense
of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of
employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial
damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties,
pay royalties or redesign our infringing products, which may be impossible or require substantial time and monetary expenditure.



Interference proceedings provoked by third
parties or brought by the Patent and Trademark Office may be necessary to determine the priority of inventions with respect to
our patents or patent applications. An unfavorable outcome could require us to cease using the related technology or to attempt
to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license
on commercially reasonable terms. Litigation or interference proceedings may fail and, even if successful, may result in substantial
costs and distract our management and other employees. We may not be able to prevent misappropriation of our confidential information,
particularly in countries where the laws may not protect those rights as fully as in the United States and in Europe.



Furthermore, because of the substantial
amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential
information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements
of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive
these results to be negative, it could have a substantial adverse effect on the price of our ADSs.



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We are currently engaged in proceedings
challenging a patent owned by the University of Pittsburgh and may choose to delay the launch of our eASC-based products in the
United States until the expiration of the patent on March 10, 2020 due to the risk of patent infringement or further litigation.



On April 1, 2011, Cellerix (the predecessor
entity of our subsidiary TiGenix SAU) filed an inter partes re-examination request with the Patent and Trademark Office regarding
the patent US6777231, owned by the University of Pittsburgh. The Patent and Trademark Office examiner issued a decision concluding
that all ten originally issued and all eighteen newly submitted claims of the patent granted to the University of Pittsburgh were
invalid. The University of Pittsburgh then appealed the examiner’s decision, but only with respect to two of the newly submitted
claims. We cross-appealed the examiner’s refusal to reject those two newly submitted claims as anticipated by the prior art.
The Patent Trial and Appeal Board issued a decision simultaneously granting both appeals, thus confirming that all claims of the
patent were invalid, but with respect to the newly submitted claims, on different grounds than those cited in the decision by the
initial examiner. On this basis, the University of Pittsburgh filed a request to reopen prosecution and submitted claim amendments
to those newly submitted claims to the Patent and Trademark Office for further consideration in an attempt to overcome the Patent
Trial and Appeal Board’s institution of a new ground for rejection as anticipated by the prior art. We submitted comments
to the Patent and Trademark Office arguing that these claim amendments did not overcome the anticipated rejection. On March 16,
2015, the examiner issued her determination that the claim amendments did not overcome the anticipated rejection and further adopted
our proposed anticipated rejections over two additional prior art references and two proposed indefiniteness rejections. We and
the University of Pittsburgh have submitted comments on the examiner’s determination and replied to each other’s comments.
The comments and replies have been entered into the record, and the proceedings were forwarded to the Patent Trial and Appeal Board
(PTAB) on December 18, 2015. The proceedings were docketed at the PTAB as of September 13, 2016; accordingly a decision could
be rendered by the PTAB at any time. We do not know exactly when a final decision will be rendered, and at this stage, we are not
in a position to assess the probable outcome of these proceedings.



This proceeding may take longer than expected
and may not ultimately succeed, which may result in unexpected additional costs and may have a material adverse effect on our future
business, financial condition, operating results and cash flow. If the re-examination is not successful, we may be required to
obtain a license on unfavorable terms, or may not be able to obtain a license at all in order to commercialize our adipose-derived
stem cell products in the United States. We would potentially be susceptible to patent infringement or litigation regarding patent
infringement while commercializing our eASC products in the United States. We may, therefore, choose to delay the launch of our
adipose-derived stem cell products in the U.S. market until the expiration of the patent US6777231 on March 10, 2020. To avoid
infringing granted patents equivalent to US6777231 in other countries, we may at any given point in time be forced to develop and
utilize alternative technology, to exploit our current technology and products under a royalty-bearing license with respect to
the intellectual property rights of other parties or to delay the launch of our adipose-derived stem cell products in the relevant
market until patent expiration.



Risks Related to Our Dependence on Third Parties



In the future, we may rely on third parties
to manufacture our product candidates in Spain and the United States; a failure of service by such parties could adversely affect
our business and reputation.



We have entered into an agreement with
Lonza, a leading U.S.-based contract manufacturing organization active in biological and cell therapy manufacturing, to produce
Cx601 in the United States in connection with the proposed Phase III clinical trial to register Cx601 in the United States.
Outside the United States, under our licensing agreement, we expect Takeda to assume responsibility for manufacturing Cx601 following
the completion of technology transfer no later than January 1, 2021. Our CSC-based product candidates are manufactured by
3P Biopharmaceuticals in Spain. We are, therefore, exposed to risks relating to the conduct of business of such parties, including
the following:



| | · | Their ability to employ and retain suitably qualified staff and maintain good labor relations with their workforce.
| | - | -------------------------------------------------------------------------------------------------------------------



| | · | Their ability to meet the required legal, regulatory or quality control standards, including the cGMP requirements prescribed
in the relevant country or territory of manufacture or supply.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Their level of investment in their facilities and equipment and their ability to consistently manufacture our product candidates
to the required standard.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------



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In addition, we may face challenges in
communicating with such third parties, which could potentially lead to mistakes and difficulties in coordinating activities. We
could also face unexpected cost increases that are beyond our control.



Any failure by such parties to meet the
required standards could have a materially adverse effect on our reputation or expose us to legal liability, with respect to which
we may have limited recourse to the defaulting party. If such a party were to breach its contractual commitments to us, our only
option might be to seek a legal remedy, which could be costly or time-consuming and, even if successful, may not fully compensate
us for our damages. If we have to terminate our relationship with such a party due to problems with the timeliness or quality of
their work, we may not be able to replace them on commercially acceptable terms, or at all, which could delay or threaten our ability
to generate meaningful revenue from product sales as a result of which we may have insufficient capital resources to support our
operations.



We will depend heavily on our licensing
arrangement with Takeda for the success of Cx601 for complex perianal fistulas outside of the United States. If Takeda terminates
our licensing agreement or is unable to meet its contractual obligations, it could negatively impact our business.



In July 2016, we entered into a licensing
agreement pursuant to which we granted exclusive rights to Takeda to commercialize and develop Cx601 for complex perianal fistulas
outside of the United States.



Under the terms of the licensing agreement,
we are entitled to receive specified regulatory and sales milestone payments, as well as royalty payments and an equity investment.
In addition, as part of the licensing agreement with Takeda, we will expand our production facility in Madrid, the cost of which
we have agreed to share equally with Takeda. In addition, Takeda will be solely responsible for all commercialization activities
and associated costs, relating to the licensed product in the licensed territories.



Unless earlier terminated, the licensing
agreement will expire on a country-by-country basis upon the expiration of the royalty term in such country for such licensed product.
Either party may, subject to a cure period, terminate the licensing agreement in the event of the other party’s uncured material
breach. Takeda may also terminate the licensing agreement under specified circumstances relating to regulatory approval, infringement
of intellectual property rights or increases in production costs.



If Takeda were to terminate the licensing
agreement or fail to meet its contractual obligations, the assumption by us of all costs related to the development of Cx601 and
the establishment of a commercial infrastructure in the licensed territories would require substantial resources, financial and
otherwise, and could result in us incurring greater expenses than the increase in revenues from our direct sales of the licensed
product in the licensed territories. It could also cause a delay in the development of Cx601. Seeking and obtaining a viable, alternative
collaborator to partner on the development and commercialization of the licensed product may not be available on similar terms
or at all.



We may need to rely on distributors and
other third parties to commercialize our product candidates, and such distributors may not succeed in commercializing our product
candidates effectively or at all or maintain favorable reimbursement decisions by private and public insurers.



For some market opportunities, we may need
to enter into co-development, co-promotion or other licensing arrangements with larger pharmaceutical firms to increase the chances
of commercial success of our product candidates. For example, with respect to Cx601, we have entered into a licensing agreement
with Takeda, a large pharmaceutical company active in gastroenterology, under which Takeda currently has the exclusive right to
commercialize Cx601 outside the United States. Previously, with respect to ChondroCelect, we entered into an exclusive distribution
agreement with Sobi for the European Union (excluding Finland, where we had a pre-existing distribution agreement with Finnish
Red Cross Blood Service) as well as several other countries. In July 2016, TiGenix requested the withdrawal of marketing authorization
for ChondroCelect for commercial reasons, which became effective as of November 30, 2016. TiGenix no longer generates revenues
from ChondroCelect. In the future, we may enter into additional distribution agreements in other territories. We may not be able
to establish sales, marketing and distribution, pricing, reimbursement and market access capabilities of our own or to enter into



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arrangements with contract sales organizations
or larger pharmaceutical firms in a timely manner or on acceptable terms. Additionally, building marketing and distribution capabilities
may be more expensive than we anticipate and may require us to divert funds from other intended purposes or prevent us from building
our own marketing and distribution capabilities to desired levels.



Therefore, the performance of our product
candidates will depend in part on our ability to attract and retain suitable partners that will be able to market and support our
products effectively. We may lose one or more of our distributors or might not be able to recruit additional or replacement distributors.



Our dependence on third parties may also
reduce our profit margins and delay or limit our ability to develop and commercialize our products on a timely and competitive
basis.



Our distributors may be faced with hurdles
in reimbursement, market acceptance, distribution and competition that delay or even prevent the commercialization of our product
candidates or result in the early termination of licensing agreements. The ability of our distributors to commercialize our product
candidates also depends, in part, on the extent to which our competition will react.



We rely on third parties to conduct our
clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines or if
we or these third parties do not comply with applicable regulatory requirements, we may not be able to obtain regulatory approval
for, or commercialize, our product candidates.



We rely on third-party contract research
organizations to conduct clinical trials for our product candidates, and we control only certain aspects of their activities. Nevertheless,
we are responsible for ensuring that each of our studies is conducted in accordance with applicable protocol, regulatory and scientific
standards, and our reliance on our contract research organizations does not relieve us of our regulatory responsibilities. We and
our contract research organizations will be required to comply with good clinical practices, or GCP, requirements, and good tissue
practice, or GTP, requirements, which are a collection of regulations enforced by the FDA, the EMA and/or comparable foreign regulatory
authorities for product candidates in clinical development. These GCP and GTP requirements are intended to protect the health,
safety and welfare of study subjects through requirements such as informed consent and to ensure data integrity, among other things.
Regulatory authorities enforce these GCP and GTP requirements through periodic inspections of trial sponsors, contract research
organizations, principal investigators and study sites. If we or any of our contract research organizations fail to comply with
applicable GCP and GTP regulations, the clinical data generated in our clinical trials may be deemed unreliable and the FDA, the
EMA or a comparable foreign regulatory authority may require us to perform additional clinical trials before approving our marketing
applications. Upon inspection, such regulatory authorities might determine that any of our clinical trials do not comply with GCP and
GTP regulations. In addition, for biological products, our clinical trials must be conducted with products made under cGMP regulations
and will require a large number of test subjects. Our failure or any failure by our contract research organizations to comply with
these regulations or to recruit a sufficient number of patients may disregard the clinical data generated in such trial and require
us to repeat clinical trials, which would delay the regulatory approval process. Moreover, we may be implicated or subject to civil
or criminal liability if any of our contract research organizations violates fraud and abuse or false claims laws and regulations
or healthcare privacy and security laws in any jurisdiction in which we conduct our trials.



For example, as part
of the marketing authorization application process, we had a routine Good Clinical Practice inspection in September 2016.
Following this inspection, we received an inspection report identifying certain critical and major deviations from Good Clinical
Practices. We submitted our initial replies to the report from this inspection, including the corresponding planned “corrective
and preventive actions”, on October 21, 2016. We received the inspector’s report to the EMA’s Committee
for Human Medicinal Products, or the Integrated Inspection Report, in November 2016, which indicated that the inspectors continue
to be concerned about potential critical GCP deviations, in particular a potential violation of patient privacy due to the presence
of a company-sponsored healthcare professional during the administration of Cx601. The inspectors recommended to the EMA that the
data from the trial should be disregarded as part of the marketing authorization application. In making their recommendation, the
inspectors focused on the infringement of the patient’s right to consent to the presence of a company-sponsored healthcare
professional. Due to the nature of this finding, the inspectors deemed the trial not to be conducted in accordance with ethical
principles, including GCP and applicable regulatory requirements. We included our replies to the issues raised in the Integrated
Inspection Report as part of our replies to the Day 120 List of Questions, which we submitted in December 2016. In February 2017,
EMA sent its “Day 180 List of Outstanding



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Issues.” We believe
we have adequate answers to the issues identified by EMA, but if our replies are not deemed sufficient by the EMA, we may face additional
consequences, including rejection of data or other direct action by national regulatory authorities, which could require us to
conduct additional clinical trials or other supportive studies to obtain EMA approval.



The contract research organizations will
not be employed directly by us and, except for remedies available to us under our agreements with such contract research organizations,
we cannot control whether they devote sufficient time and resources to our ongoing preclinical and clinical programs. These contract
research organizations may also have relationships with other commercial entities, including our competitors, for whom they may
also be conducting clinical studies or other product development activities, which could affect their performance on our behalf.
If these contract research organizations do not successfully carry out their contractual duties or obligations or meet expected
deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the
failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our clinical trials may be extended,
delayed or terminated or be deemed unreliable, and we may not be able to complete development of, obtain regulatory approval for,
or commercialize our product candidates.



Switching or adding contract research organizations
involves substantial cost and requires extensive management time and focus. In addition, there is a natural transition period when
a new contract research organization commences work. As a result, delays may occur, which could materially affect our ability to
meet our desired clinical development timelines, and the quality of work may be affected. We are not experiencing, nor do we expect
to experience in the foreseeable future, any problems with our contract research organizations that may have a significant effect
on our business. However, there is no assurance that we will not encounter challenges in our relationships with our contract research
organizations or delays in the future.



We may form or seek strategic alliances
in the future, and we might not realize the benefits of such alliances.



We may form or seek strategic alliances,
create joint ventures or collaborations or enter into licensing arrangements with third parties that we believe will complement
or augment our development and commercialization efforts with respect to our product candidates and any future products that we
may develop. Any of these relationships may require us to incur non-recurring and other charges, increase our near and long-term
expenditures, issue securities that dilute our existing shareholders or disrupt our management and business. In addition, we face
significant competition in seeking appropriate strategic partners, and the negotiation process is time-consuming and complex. Moreover,
we may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for our product
candidates, because they may be deemed to be at too early of a stage of development for collaborative effort and third parties
may not view our product candidates as having the requisite potential to demonstrate safety and efficacy. If we license products
or businesses, we may not be able to realize the benefit of such transactions if we are unable to integrate them with our existing
operations and company culture. Following a strategic transaction or license, we might not be able to achieve the revenues or specific
net income that justifies such transaction. Any delays in entering into new strategic partnership agreements related to our product
candidates could delay the development and commercialization of our product candidates in certain geographies for certain indications.



Risks Related to ownership of our ADSs



There is no established trading market
for the ADSs.



Our ADSs are listed in the United States
on the NASDAQ Global Select Market under the symbol “TIG”. However, we cannot assure you that an active public market
in the United States for the ADSs will develop on that exchange, or if developed, that this market will be sustained.



The ADSs may experience price and volume
fluctuations.



Stock markets have experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of listed companies.
Broad market and industry factors may negatively affect the market price of our ordinary shares and ADSs, regardless of our actual
operating performance. The market price and liquidity of the market for the ADSs may be significantly affected by numerous factors,
some of which are beyond our control. These factors include:



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| | · | Significant volatility in the market price and trading volume of securities of companies in our sector, which is not necessarily
related to the operating performance of these companies.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Delays between our expenditures to develop and market new products and the generation of sales from those products.
| | - | -------------------------------------------------------------------------------------------------------------------



| | · | Changes in the amount that we spend to develop, acquire or license new products, technologies or businesses.
| | - | ------------------------------------------------------------------------------------------------------------



| | · | Changes in our expenditures to promote our products and services.
| | - | -----------------------------------------------------------------



| | · | Success or failure of research and development projects of us or our competitors.
| | - | ---------------------------------------------------------------------------------



| | · | Announcements of acquisitions by us or one of our competitors.
| | - | --------------------------------------------------------------



| | · | The general tendency towards volatility in the market prices of shares of companies that rely on technology and innovation.
| | - | ---------------------------------------------------------------------------------------------------------------------------



| | · | Changes in regulatory policies or tax guidelines.
| | - | -------------------------------------------------



| | · | Changes or perceived changes in earnings or variations in operating results.
| | - | ----------------------------------------------------------------------------



| | · | Any shortfall in revenue or net income from levels expected by investors or securities analysts.
| | - | ------------------------------------------------------------------------------------------------



| | · | Disputes or other developments relating to proprietary rights, including patents, and our ability to obtain patent protection
for our technologies.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Departures of key scientific or management personnel.
| | - | -----------------------------------------------------



| | · | Significant lawsuits, including patent litigation.
| | - | --------------------------------------------------



| | · | General economic trends and other external factors, many of which are beyond our control.
| | - | -----------------------------------------------------------------------------------------



In addition, the stock market in general,
and the NASDAQ Global Select Market and pharmaceutical companies in particular, have experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to the operating performance of these companies.



In the past, securities class action litigation
has often been instituted against companies following periods of volatility in the market price of a company’s securities.
This risk is especially relevant for us because pharmaceutical companies have experienced significant share price volatility in
recent years. This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention
and resources.



Raising additional capital may cause
dilution of the percentage ownership of our shareholders, restrict our operations, require us to relinquish rights to our technologies,
products or product candidates and could cause our share price to fall.



We expect that significant additional capital
may be needed in the future to continue our planned operations, including conducting clinical trials, commercialization efforts,
expanded research and development activities and costs associated with operating as a U.S.-listed public company. To raise capital,
we may issue new ordinary shares, ADSs, convertible securities or other equity securities in one or more transactions at prices
and in a manner we determine from time to time. If we issue new ordinary shares, ADSs, convertible securities or other equity securities,
investors may be materially diluted by subsequent sales. Such issuances or sales may also result in material dilution to our existing
shareholders, and new investors could gain rights, preferences and privileges senior to the holders of our ordinary shares or ADSs.
The incurrence of indebtedness could result in increased fixed payment obligations and could involve certain restrictive covenants,
such as limitations on our ability to incur additional debt and other operating restrictions that could adversely impact our ability
to conduct our business. If we raise additional funds through strategic partnerships and alliances and licensing arrangements with
third parties, we may have to relinquish valuable rights to our technologies, products or product candidates, or grant licenses
on terms unfavorable to us.



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Conversion of the 25.0 million euros
senior unsecured convertible bonds due 2018 and contractual obligations with Genetrix resulting from the acquisition of Coretherapix
may result in a dilution of existing shareholders.



We have issued 25.0 million euros
of senior unsecured convertible bonds due 2018. The bonds were issued on March 6, 2015 at 100 per cent of their principal amount
(100,000 euros per bond) and have a coupon of 9% per annum. On December 20, 2016 the conversion price was adjusted downward
to 0.893 euros as a result of our U.S. initial public offering. The conversion price is subject to customary adjustment mechanisms.
At the current conversion price, the bonds will be convertible into 27,830,346 fully paid ordinary shares. If the bonds are converted
into new shares, and assuming that the conversion price will be lower than the then prevailing market price of the shares, the
conversion will entail a financial dilution of the existing shareholders.



On July 31, 2015, we
acquired Coretherapix from Genetrix for an upfront payment of 1.2 million euros in cash and 7.7 million new shares issued
in connection with the acquisition. Additionally, Genetrix may receive up to 5.0 million euros in new TiGenix shares
 (down from 15 million because of the result of the clinical trial in March 2017), which would result in a dilution of existing
shareholders. The issue price for these new TiGenix shares will be calculated on the basis of the average closing share price
of the Company’s shares on Euronext Brussels over the ninety day period immediately preceding the date of completion of
the clinical trial.



Fluctuations in the exchange rate between
the U.S. dollar and the euro may increase the risk of holding our ADSs and shares.



Our shares currently trade on Euronext
Brussels in euros, and our ADSs trade on the NASDAQ Global Select Market in U.S. dollars. Fluctuations in the exchange rate between
the U.S. dollar and the euro may result in temporary differences between the value of our ADSs and the value of our ordinary shares,
which may result in heavy trading by investors seeking to exploit such differences.



In addition, as a result of fluctuations
in the exchange rate between the U.S. dollar and the euro, the U.S. dollar equivalent of the proceeds that a holder of our ADSs
would receive upon the sale in Belgium of any shares withdrawn from the depositary and the U.S. dollar equivalent of any cash dividends
paid in euros on our shares represented by the ADSs could also decline.



Holders of ADSs are not treated as shareholders
of our Company, do not have the same voting rights as the holders of our ordinary shares and may not receive voting materials in
time to be able to exercise their right to vote.



Holders of ADSs are not treated as shareholders
of our Company, unless they withdraw our ordinary shares underlying the ADSs. The depositary is the holder of the ordinary shares
underlying the ADSs. Holders of ADSs therefore do not have any rights as shareholders of our Company, other than the rights that
they have pursuant to the deposit agreement.



Except as described in this Annual Report
and the deposit agreement, holders of ADSs are not able to exercise voting rights attaching to the ordinary shares evidenced by
the ADSs on an individual basis. Under the terms of the deposit agreement, holders of ADSs may instruct the depositary to vote
the ordinary shares underlying their ADSs, but only if we ask the depositary to ask for their instructions. Otherwise, holders
of ADSs will not be able to exercise their right to vote unless they withdraw ordinary shares underlying their ADSs to vote them
in person or by proxy in accordance with Belgian corporate law and our articles of association. Even so, holders of ADSs may not
know about a meeting far enough in advance to withdraw those ordinary shares. If we ask for the instructions of holders of ADSs,
the depositary, upon timely notice from us, will notify holders of ADSs of the upcoming vote and arrange to deliver our voting
materials to them. Upon our request, the depositary will mail to holders of ADSs a shareholder meeting notice that contains, among
other things, a statement as to the manner in which voting instructions may be given, including an express indication that such
instructions may be given or deemed given to the depositary to give a discretionary proxy to a person designated by us if no instructions
are received by the depositary from holders of ADSs on or before the response date established by the depositary. No voting instruction
shall be deemed given and no such discretionary proxy shall be given with respect to any matter as to which we inform the depositary
that (i) substantial opposition exists, or (ii) such matter materially and adversely affects the rights of shareholders.
We cannot guarantee that holders of ADSs will receive the voting materials in time to ensure that they can instruct the depositary
to vote their shares. A shareholder is only entitled to participate in, and vote at, the meeting of shareholders, provided that
its shares are recorded in its name at midnight (Central European Time) at



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the end of the fourteenth day preceding the
date of the meeting of shareholders. Failure by the depositary to record your shares by the record date, could result in the inability
to participate and vote at the relevant meeting of shareholders. In addition, the depositary’s liability to holders of ADSs
for failing to execute voting instructions or for the manner of executing voting instructions is limited by the deposit agreement.
As a result, holders of ADSs may not be able to exercise their right to give voting instructions or to vote in person or by proxy
and they may not have any recourse against the depositary or our Company if their shares are not voted as they have requested or
if their shares cannot be voted.



We have no present intention to pay dividends
on our ordinary shares in the foreseeable future and, consequently, your only opportunity to achieve a return on your investment
during that time is if the price of the ADSs appreciates.



We have no present intention to pay dividends
in the foreseeable future. Any recommendation by our board of directors to pay dividends will depend on many factors, including
our financial condition, results of operations, legal requirements and other factors. Furthermore, pursuant to Belgian law, the
calculation of amounts available for distribution to shareholders, as dividends or otherwise, must be determined on the basis of
our non-consolidated statutory accounts prepared in accordance with Belgian accounting rules. In addition, in accordance with Belgian
law and our articles of association, we must allocate each year an amount of at least 5% of our annual net profit under our non-consolidated
statutory accounts to a legal reserve until the reserve equals 10% of our share capital. Therefore, we are unlikely to pay dividends
or other distributions in the foreseeable future. If the price of the ADSs or the underlying ordinary shares declines before we
pay dividends, you will incur a loss on your investment, without the likelihood that this loss will be offset in part or at all
by potential future cash dividends.



As a foreign private issuer, we are exempt
from a number of rules under the U.S. securities laws and are permitted to file less information with the SEC than U.S. domestic
issuers. This may limit the information available to holders of ADSs.



We are a “foreign private issuer,”
as defined in the SEC rules and regulations, and, consequently, we are not subject to all of the disclosure requirements applicable
to U.S. domestic issuers. For example, we are exempt from certain rules under the Exchange Act that regulate disclosure obligations
and procedural requirements related to the solicitation of proxies, consents or authorizations applicable to a security registered
under the Exchange Act. In addition, our officers, directors and principal shareholders are exempt from the reporting and “short-swing”
profit recovery provisions of Section 16 of the Exchange Act and related rules with respect to their purchases and sales of
our securities. Moreover, we are not required to file periodic reports and consolidated financial statements with the SEC as frequently
or as promptly as U.S. domestic issuers. Accordingly, there may be less publicly available information concerning our Company than
there is for U.S. public companies. As a foreign private issuer, we file an annual report on Form 20-F within four months
of the close of each year ended December 31 and furnish reports on Form 6-K relating to certain material events promptly
after we publicly announce these events. However, we are not required to publish quarterly financial information, and, therefore,
our shareholders will not be afforded the same information generally available to investors holding shares in public companies
organized in the United States.



We are an “emerging growth company,”
and we intend to take advantage of reduced disclosure and governance requirements applicable to emerging growth companies, which
could result in the ADSs being less attractive to investors.



We are an “emerging growth company,”
as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we continue to be an emerging
growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies
that are not emerging growth companies, including the following:



| | · | Exemption from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002.
| | - | -----------------------------------------------------------------------------------------------------



| | · | Reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.
| | - | -------------------------------------------------------------------------------------------------------------



| | · | Exemptions from the requirements to hold nonbinding advisory votes on executive compensation and to seek shareholder approval
of any golden parachute payments not previously approved.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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We could be an emerging growth company
for up to five years from December 2016, although circumstances could cause us to lose that status earlier, including if the market
value of our ordinary shares held by non-affiliates exceeds $700.0 million as of any June 30 before that time or if we
have total annual gross revenue of $1.0 billion or more during any fiscal year before that time, in which cases we would no
longer be an emerging growth company as of the following December 31 or, if we issue more than $1.0 billion in non-convertible
debt during any three-year period before that time, we would cease to be an emerging growth company immediately. We cannot predict
if investors will find our ADSs less attractive because we may rely on these exemptions. If some investors find our ADSs less attractive
as a result, there may be a less active trading market for our ADSs, and our share price may be more volatile.



If we fail to maintain an effective system
of internal control over financial reporting in the future, we may not be able to report accurately our financial condition, results
of operations or cash flows, which may adversely affect investor confidence in us.



The Sarbanes-Oxley Act requires, among
other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular,
in the future, we will be required, under Section 404 of the Sarbanes-Oxley Act, to perform system and process evaluations
and testing of our internal controls over financial reporting to allow management and our independent registered public accounting
firm to report on the effectiveness of our internal control over financial reporting. This assessment will need to include disclosure
of any material weaknesses in our internal control over financial reporting identified by our management or our independent registered
public accounting firm. Section 404 of the Sarbanes-Oxley Act also generally requires an attestation from our independent
registered public accounting firm on the effectiveness of our internal control over financial reporting. However, for as long as
we remain an emerging growth company as defined in the JOBS Act, we intend to take advantage of the exemption permitting us not
to comply with the independent registered public accounting firm attestation requirement. At the time when we are no longer an
emerging growth company, our independent registered public accounting firm may issue a report that is adverse in the event it is
not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may not enable
us to avoid a material weakness in the future.



Our compliance with Section 404 will
require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal
audit group, and we may need to hire additional accounting and financial staff or a third-party service provider with the appropriate
experience, as well as understanding of internal control processes around supervision and monitoring of our accounting and reporting
functions and technical accounting knowledge and application, and compile the system and process documentation necessary to perform
the evaluation needed to comply with Section 404.



We may not be able to complete our evaluation,
testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more
material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over
financial reporting is effective. We cannot assure you that there will not be material weaknesses or significant deficiencies in
our internal control over financial reporting in the future. If we are unable to conclude that our internal control over financial
reporting is effective, or if our independent registered public accounting firm determines we have a material weakness or significant
deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness
of our financial reports, the market price of the ADSs could decline, and we could be subject to sanctions or investigations by
the NASDAQ Stock Market, the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control
over financial reporting, or to implement or maintain other effective control systems required of public companies, could also
restrict our future access to the capital markets.



We have incurred and will continue to
incur significant increased costs as a result of operating as a company whose ADSs are publicly traded in the United States, and
our management will continue to be required to devote substantial time to new compliance initiatives.



As a company whose ADSs have recently begun
to be publicly traded in the United States, we have incurred and will continue to incur significant legal, accounting, insurance
and other expenses that we did not previously incur. In addition, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and
Consumer Protection Act and related rules implemented by the SEC and the NASDAQ Stock Market have imposed various requirements
on public companies, including requiring establishment and maintenance of effective disclosure and financial controls.



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These costs will increase at the time when
we are no longer an emerging growth company eligible to rely on exemptions under the JOBS Act from certain disclosure and governance
requirements. Our management and other personnel will need to continue to devote a substantial amount of time to these compliance
initiatives. Moreover, these rules and regulations have increased and may continue to increase our legal and financial compliance
costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make
it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur
substantial costs to maintain the same or similar coverage. These laws and regulations could also make it more difficult and expensive
for us to attract and retain qualified persons to serve on our board of directors or its committees. Furthermore, if we are unable
to satisfy our obligations as a U.S.-listed public company, we could be subject to delisting of the ADSs, fines, sanctions and
other regulatory action and potentially civil litigation.



You may be subject to limitations on
the transfer of your ADSs.



ADSs are transferable on the books of the
depositary. However, the depositary may close its books at any time or from time to time when it deems doing so expedient in connection
with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in
connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number
of ADS holders on its books for a specified period. The depositary may also close its books in emergencies and on weekends and
public holidays. The depositary may refuse to deliver, transfer or register transfers of the ADSs generally when our share register
or the books of the depositary are closed, or at any time if we or the depositary thinks that it is advisable to do so because
of any requirement of law or of any government or governmental body or of any regulatory authority, or under any provision of the
deposit agreement, or for any other reason in accordance with the terms of the deposit agreement.



You may not receive distributions on
our ordinary shares represented by the ADSs or any value for them if it is illegal or impractical to make them available to holders
of ADSs.



While we do not anticipate paying any dividends
on our ordinary shares in the foreseeable future, if any dividend is declared, the depositary for the ADSs has agreed to pay to
you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities
after deducting its fees and expenses. You will receive these distributions in proportion to the number of our ordinary shares
your ADSs represent. However, it may be unlawful or impractical to make a distribution available to holders of ADSs. We have no
obligation to take any other action to permit the distribution of the ADSs, ordinary shares, rights or anything else to holders
of the ADSs. This means that you may not receive the distributions we make on our ordinary shares or any value from them if it
is unlawful or impractical to make them available to you. These restrictions may have a material adverse effect on the value of
your ADSs.



If securities or industry analysts do
not publish research or reports about our business, or if they adversely change their recommendations regarding the ADSs, the market
price for the ADSs and trading volume could decline.



The trading market for our ordinary shares
and ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more
analysts who cover us downgrade the ADSs, the market price for the ADSs would likely decline. If one or more of these analysts
cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which, in turn,
could cause the market price or trading volume for the ADSs to decline.



It may be difficult for investors outside
Belgium to serve process on, or enforce foreign judgments against, us or our directors and senior management.



We are a Belgian public limited liability
company. Only one member of our board of directors and no member of our executive management is a resident of the United States.
All or a substantial portion of the assets of such non-resident persons and most of our assets are located outside the United States.
As a result, it may not be possible for investors to effect service of process upon such persons or on us or to enforce against
them or us a judgment obtained in U.S. courts. Original actions or actions for the enforcement of judgments of U.S. courts relating
to the civil liability provisions of the federal or state securities laws of the United States are not directly enforceable in
Belgium. The United States and Belgium do not currently have a multilateral or bilateral treaty providing for reciprocal recognition
and enforcement of judgments, other than arbitral awards, in civil and commercial matters. In



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order for a final judgment for the payment
of money rendered by U.S. courts based on civil liability to produce any effect on Belgian soil, it is accordingly required that
this judgment be recognized or be declared enforceable by a Belgian court in accordance with Articles 22 to 25 of the 2004
Belgian Code of Private International Law. Recognition or enforcement does not imply a review of the merits of the case and is
irrespective of any reciprocity requirement. A U.S. judgment will, however, not be recognized or declared enforceable in Belgium
if it infringes upon one or more of the grounds for refusal that are exhaustively listed in Article 25 of the Belgian Code
of Private International Law. These grounds mainly require that the recognition or enforcement of the foreign judgment should not
be a manifest violation of public policy, that the foreign courts must have respected the rights of the defense, that the foreign
judgment should be final, and that the assumption of jurisdiction by the foreign court may not have breached certain principles
of Belgian law. In addition to recognition or enforcement, a judgment by a federal or state court in the United States against
us may also serve as evidence in a similar action in a Belgian court if it meets the conditions required for the authenticity of
judgments according to the law of the state where it was rendered. The findings of a federal or state court in the United States
will not, however, be taken into account to the extent they appear incompatible with Belgian public policy.



We believe we were not a passive foreign
investment company, or PFIC, for U.S. federal income tax purposes for the 2016 taxable year. However, because our PFIC status for
any taxable year is a factual determination that is made annually and may depend, in part, on the market value of our shares or
ADSs from time to time, there can be no assurance that we will not be a PFIC for any taxable year. If we were a PFIC for any taxable
year, this could result in adverse U.S. federal income tax consequences to U.S. investors.



Based on the composition of our income
and assets and the market value of our shares and ADSs for 2016, we believe that we were not a PFIC for U.S. federal income tax
purposes for the 2016 taxable year, but this conclusion is a factual determination that is made annually and thus may be subject
to change. Because PFIC status must be determined annually based on factual tests, our PFIC status for any taxable year will depend
on the composition of our income and assets and our activities in those years—for example, the timing of receipt of, or entitlement
to, certain royalty or milestone payments. Furthermore, because we hold a substantial amount of cash and cash equivalents, our
PFIC status for any taxable year may depend on the value of our goodwill, which may be determined by reference to our market capitalization
(which may be especially volatile given the nature of our business). Therefore, a decline in the value of our shares or ADSs could
result in us being a PFIC. In general, we will be a PFIC for any taxable year in which either of the following is true:



| | · | At least 75% of our gross income (looking through certain corporate subsidiaries) for the taxable year is “passive income.”
| | - | ---------------------------------------------------------------------------------------------------------------------------



| | · | At least 50% of the value, determined on the basis of a quarterly average, of our gross assets (looking through certain corporate
subsidiaries) is attributable to assets that produce or are held for the production of “passive income.”
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Passive income generally includes dividends,
interest, royalties, rents (other than certain rents and royalties derived in the active conduct of a trade or business), annuities
and gains from assets that produce passive income. Cash is a passive asset for PFIC purposes, even if held as working capital.
If we are a PFIC for any taxable year during which you own our shares or ADSs, and you are a U.S. holder, you will generally be
subject to additional taxes and interest charges on the sale of our shares or ADSs or upon receipt of an “excess distribution”
with respect to the shares or ADSs. In general, a U.S. holder would receive an “excess distribution” if the amount
of any distribution for U.S. federal income tax purposes in respect of the shares or ADSs is more than 125% of the average
distributions made with respect to the shares or ADSs within the three preceding taxable years (or shorter period in which such
U.S. holder held the shares or ADSs). A “market-to-market election,” if available to and made by a U.S. holder generally
would result in alternative treatment. In addition, as a PFIC, dividends on the shares or ADSs would not be eligible for the special
tax rate available to non-corporate U.S. holders applicable to “qualified dividend income.” U.S. owners of shares or
ADSs should consult their own U.S. tax advisors regarding the potential application of the PFIC rules. See “Item 10, Additional
Information—E. “Taxation.”



We are a Belgian public limited liability
company, and shareholders of our Company may have different and in some cases more limited shareholder rights than shareholders
of a U.S. listed corporation.



We are a public limited liability company
incorporated under the laws of Belgium. Our corporate affairs are governed by Belgian corporate law. The rights provided to our
shareholders under Belgian corporate law and our articles of association differ in certain respects from the rights that you would
typically enjoy as a shareholder of a U.S. corporation under applicable U.S. federal and state laws.



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Under Belgian corporate law, other than
certain limited information that we must make public and except in certain limited circumstances, our shareholders may not ask
for an inspection of our corporate records, while under Delaware corporate law any shareholder, irrespective of the size of its
shareholdings, may do so. Shareholders of a Belgian corporation are also unable to initiate a derivative action, a remedy typically
available to shareholders of U.S. companies, in order to enforce a right of our Company, in case we fail to enforce such right
ourselves, other than in certain cases of director liability under limited circumstances. In addition, a majority of our shareholders
present or represented at our meeting of shareholders may release a director from any claim of liability we may have, including
if he or she has acted in bad faith or has breached his or her duty of loyalty, provided, in some cases, that the relevant acts
were specifically mentioned in the convening notice to the meeting of shareholders deliberating on the discharge. In contrast,
most U.S. federal and state laws prohibit a company or its shareholders from releasing a director from liability altogether if
he or she has acted in bad faith or has breached his or her duty of loyalty to the company. Finally, Belgian corporate law does
not provide any form of appraisal rights in the case of a business combination.



As a result of these differences between
Belgian corporate law and our articles of association, on the one hand, and the U.S. federal and state laws, on the other hand,
in certain instances, you could receive less protection as a shareholder of our Company than you would as a shareholder of a listed
U.S. company.



Because we are a foreign private issuer
and intend to follow certain home country corporate governance practices, our shareholders may not have the same protections afforded
to shareholders of companies that are subject to all NASDAQ Global Select Market corporate governance requirements.



As a foreign private issuer, we have the
option to follow Belgian corporate law and the Belgian Corporate Governance Code rather than the corporate governance practices
of the NASDAQ Global Select Market, except to the extent that such laws would be contrary to U.S. securities laws, and provided
that we disclose the requirements we are not following and describe the home country practices we follow instead. As a result,
our shareholders may not have the same protections afforded to shareholders of companies that are subject to all the NASDAQ Global
Select Market corporate governance requirements. See “Item 16G. Corporate Governance.”



Holders of ADSs or ordinary shares have
limited rights to call meetings of shareholders or to submit shareholder proposals.



Except under limited circumstances, only
the board of directors or the statutory auditor may call a meeting of shareholders. Shareholders that collectively own at least
20% of the share capital of our Company may require the board of directors or the statutory auditor to convene a special or an
extraordinary general meeting of shareholders. Provided that certain conditions are satisfied, one or more shareholders holding
at least 3% of our share capital may request for items to be added to the agenda of any convened meeting and submit proposed resolutions
in relation to existing agenda items or new items to be added to the agenda. As a result, the ability of holders of the ADSs or
ordinary shares to participate in and influence the governance of our Company is limited.



Holders or beneficial owners of the ADSs
have limited recourse if we or the depositary fail to meet our respective obligations under the deposit agreement or if they wish
us or the depositary to participate in legal proceedings.



The deposit agreement expressly limits
the obligations and liability of us and the depositary. Neither we nor the depositary will be liable to the extent that liability
results from the fact that we:



| | · | Are prevented, forbidden from or delayed in doing or performing any obligation under the terms of the deposit agreement by
reason of any provision of any present or future law or regulation of the United States, any state thereof, Belgium or any other
country, or governmental or regulatory authority or stock exchange, or on account of possible civil or criminal liabilities or
by reason of any provision of our constitutional documents or any other provision governing the ordinary shares or by reason of
any act of God, war or other circumstances beyond our or their control.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | · | Exercise or fail to exercise discretion under the deposit agreement or our constitutional documents or any other provision
governing the ordinary shares.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Perform our obligations without gross negligence or willful misconduct or bad faith.
| | - | ------------------------------------------------------------------------------------



| | · | Take any action or fail to take any action based upon advice of or information from legal counsel, accountants, any person
presenting shares for deposit, any holder of the ADSs or any other person believed in good faith to be competent to give such advice
or information.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Rely on any documents we believe to be genuine and properly executed.
| | - | ---------------------------------------------------------------------



In addition, neither we nor the depositary
has any obligation to participate in any action, suit or other proceeding in respect of the ADSs which may involve it in expense
or liability unless it is indemnified to its satisfaction. Additionally, neither we nor the depositary will incur any liability
for any special, consequential, indirect or punitive damages for any breach of the deposit agreement or otherwise. These provisions
of the deposit agreement will limit the ability of holders or beneficial owners of the ADSs to obtain recourse if we or the depositary
fail to meet our respective obligations under the deposit agreement or if they wish us or the depositary to participate in a legal
proceeding.



Investors may not be able to participate
in equity offerings, and ADS holders may not receive any value for rights that we may grant.



In accordance with Belgian corporate law,
our articles of association provide for preferential subscription rights to be granted to our existing shareholders to subscribe
on a pro rata basis for any issue for cash of new shares, convertible bonds or warrants that are exercisable for cash, unless such
rights are canceled or limited by resolution of our meeting of shareholders or the board of directors. Our meeting of shareholders
or board of directors may cancel or restrict such rights in future equity offerings. In addition, certain shareholders (including
those in the United States, Australia, Canada or Japan) may not be entitled to exercise such rights even if they are not canceled
unless the rights and related shares are registered or qualified for sale under the relevant legislation or regulatory framework.
As a result, there is the risk that investors may suffer dilution of their shareholding should they not be permitted to participate
in preference right equity or other offerings that we may conduct in the future.



If rights are granted to our shareholders,
as the case may be, but the depositary is unable to sell rights corresponding to shares represented by ADSs that are not exercised
by, or distributed to, ADS holders, or if the sale of such rights is not lawful or reasonably practicable, the depositary may allow
the rights to lapse, in which case ADS holders will receive no value for such rights.



Item 4. Information on the Company



A. History and Development of the Company



We are an advanced biopharmaceutical company
focused on developing and commercializing novel therapeutics from our proprietary technology platforms of allogeneic, or donor-derived,
stem cells. We have completed, and received positive data in, a single pivotal Phase III trial in Europe of our most advanced product
candidate Cx601, a potential first-in-class injectable allogeneic stem cell therapy indicated for the treatment of complex perianal
fistulas in patients suffering from Crohn’s disease. A complex perianal fistula consists of abnormal tracts between the rectum
and the exterior surroundings of the anus, and is commonly associated with Crohn’s disease. It is a serious clinical condition
affecting the anal sphincter and is potentially associated with a perianal abscess. Cx601 has been granted orphan designation by
the European Medicines Agency, or EMA, in recognition of its potential application for the treatment of anal fistulas, which affect
approximately 120,000 adult patients in the United States and Europe and for which existing treatment options are inadequate. The
EMA grants orphan designation to medicinal products for indications that affect no more than five out of 10,000 people in the European
Union. The benefits of orphan designation include a streamlined process for obtaining relevant regulatory approvals and up to ten
years of exclusivity in the European market.



Cx601 is our lead product candidate based
on our platform of expanded adipose, or fat tissue, derived stem cells, known as eASCs. On July 4, 2016, we entered into a
licensing agreement with Takeda, a large pharmaceutical company active in gastroenterology, under which Takeda acquired the exclusive
right to commercialize and develop



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Cx601 for complex perianal fistulas outside
the United States, Japan and Canada. The licensing agreement included an option for Takeda to expand the scope of the license to
Japan and Canada, which Takeda exercised on December 20, 2016. As a result, Takeda now has the exclusive right to commercialize
and develop Cx601 for complex perianal fistulas in all countries outside the United States.



In the randomized, double-blind Phase III
study in Europe and Israel, with a single treatment of Cx601 the rate of combined remission in patients treated with Cx601 compared
with patients who received placebo was statistically significant, meeting the primary endpoint of combined remission of complex
perianal fistulas at twenty four weeks. In the ‘intention to treat,’ or ITT, population, which was comprised of 212
Crohn’s disease patients with inadequate response to previous therapies, 49.5% of patients treated with Cx601 had combined
remission compared to 34.3% in the placebo arm. The trial’s results indicated that patients receiving Cx601 had a 44.3% greater
probability of achieving combined remission than placebo patients. The efficacy results had a p-value, the statistical measure
used to indicate the strength of a trial’s observations, of 0.024. (A p-value of 0.024 is equivalent to a probability of
an effect happening by chance alone being less than 2.4%.) A p-value less than 0.05 is a commonly used criterion for statistical
significance. Moreover, the trial confirmed a favorable safety and tolerability profile, and treatment-emergent adverse events
(non-serious and serious) and discontinuations due to adverse events were comparable between the Cx601 and placebo arms.



The results of the follow up analysis after
fifty-two weeks were also positive. A single injection of Cx601 was statistically superior to placebo in achieving combined remission
in 54.2% of patients treated with Cx601 compared to 37.1% of patients in the placebo arm. The result had a p-value of 0.012, indicating
high statistical significance. In addition, after fifty-two weeks, 75.0% of patients treated with Cx601 who were in combined remission
at week twenty four did not relapse, compared to 55.9% for patients in the placebo arm who were in combined remission at week twenty-four.
The results also confirmed the favorable safety and tolerability profile of Cx601.



The top-line data at week 104 were consistent
with the results communicated at week 24 and week 52. The clinical remission rate and difference between groups, as was previously
observed at week 24 and week 52, was maintained at week 104. The tolerability of Cx601 was also maintained. The safety profiles
of Cx601 and placebo (control) were similar for the duration of the trial. No new safety signals were reported during the two years
extended follow up.



Based on the data from our pivotal Phase III
trial in Europe, we submitted a marketing authorization application for Cx601 to the EMA in March 2016. In July 2016, the EMA sent
us their initial response to our application for marketing authorization, which we refer to as the “Day 120 List of Questions”.
As part of its standard process, the EMA prepares a list of potential outstanding issues, including major objections (if any),
120 days after an application is submitted. In this response, the EMA informed us of certain major objections related to the
stability of the master cell stock we proposed, donor selection, viral safety and the potential inadequacy of the primary endpoint
of the trial. Given the existence of major objections, the EMA followed its standard protocol for review at day 120 and stated
in its response that our application was not approvable at that time. These objections would preclude a recommendation for marketing
authorization unless we are able to address them adequately. In August 2016, we had a clarification meeting with the EMA reviewers
during which we discussed our strategy to address their major objections. Based on this meeting and the results of the follow-up
analysis after fifty-two weeks, we believe we have reasonable replies to each of the major objections identified by the EMA. We
submitted our replies to the Day 120 List of Questions in December 2016 and the EMA sent their responses, which we refer to as
“Day 180 List of Outstanding Issues” in February 2017. We are confident in our ability to provide adequate responses
and remain on track to receive a marketing authorization decision for Cx601 in 2017. The Day 120 List of Questions and the Day
180 List of Outstanding Issues are part of the EMA’s official review timetable. In addition, as part of the marketing
authorization application process, we had a routine Good Clinical Practice inspection in September 2016. The inspectors identified
certain critical and major deviations from Good Clinical Practices, in particular, a potential violation of patient privacy. We
included our replies to the issues raised in the inspection as part of our replies to the Day 120 List of Questions. Although we
expect a decision from the EMA on our marketing authorization application during the second half of 2017, our reply might not be
satisfactory and our marketing authorization application might not be approved by the EMA. If marketing authorization were to be
approved by the second half of 2017, Takeda could begin to commercialize Cx601 in Europe thereafter.



In the first half of 2017, we intend to
initiate a pivotal Phase III trial for Cx601 for the treatment of complex perianal fistulas to register Cx601 in the
United States and have begun the technology transfer process to Lonza, a U.S.-based contract manufacturing organization. Based
on discussions with the U.S. Food and Drug Administration,



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or FDA, we believe that the U.S. Phase III
trial, if successful, could, together with the European Phase III data, serve as evidence for filing a biologics license application,
or BLA, for regulatory approval with the FDA. We reached an agreement with the FDA through a special protocol assessment, or SPA,
procedure for our proposed protocol in August 2015. The agreed primary endpoint for the U.S. Phase III trial is the same as the
one for the European Phase III trial. In addition, the required p-value is less than 0.05 for the U.S. trial, compared to the more
stringent threshold of less than 0.025 that Cx601 was successfully able to meet in the European trial. The FDA indicated that the
design and planned analysis of our study sufficiently addressed the study’s objectives and that this study is adequately
designed to provide the necessary data that, depending upon outcome, could support a license application submission. In January
2017, we had a Type C meeting in which changes to the protocol were discussed with the FDA. The FDA agreed that the BLA could be
filed based on the efficacy and safety follow-up of patients assessed at week 24, instead of week 52. Furthermore, the FDA has
agreed to accept fewer patients than originally planned in the study, and has endorsed a broader target population that will ultimately
facilitate the recruitment process. With these adjustments, the study will benefit from an expedited recruitment process that should
lead to shorter timelines, an earlier filing, and the possibility of an earlier approval in the United States. As a result of these
modifications, the trial design is even more similar to the European ADMIRE-CD than it was before. Based on feedback from that
meeting, we submitted a revised protocol in February 2017. We are currently exploring options for expedited pathways that could
facilitate and accelerate the development of Cx601 and the review of its future BLA.



Our eASC-based platform has generated other
product candidates, including Cx611 for the treatment of severe sepsis. We have already completed a European Phase I safety trial
and in January 2017, we enrolled and treated the first patient in the Phase Ib/IIc clinical trial in Europe.



On July 31, 2015, we acquired Coretherapix,
a Spanish biopharmaceutical company focused on developing cost-effective regenerative therapeutics to stimulate the endogenous
repair capacity of the heart and mitigate the negative effects of myocardial infarction, or a heart attack. Coretherapix has developed
an allogeneic platform of expanded cardiac stem cells, or CSCs, and its lead product candidate, AlloCSC-01, employs allogeneic
CSCs as a potential treatment for acute ischemic heart disease. We are sponsoring a European Phase I/II trial to evaluate the safety
and efficacy of the intracoronary infusion of AlloCSC-01 in patients with acute myocardial infarction.



We received six-months interim exploratory
data in June 2016, and top-line one-year results were made available on March 13, 2017. The top-line one-year results from the
Phase I/II trial confirm that all safety objectives of the study have been met. No mortality or major cardiac adverse events (MACE)
have been found at 30 days, meeting the primary end-point of the study. Moreover, no mortality and MACE have been found at 6 months
or 12 months follow-up. Of particular relevance to this allogeneic approach, no immune-related adverse events have been recorded
at one-year follow-up. Although not powered to establish efficacy, the study showed a larger reduction in infarct size in one pre-specified
subgroup associated with poor long-term prognosis and representing more than half of the patient population of the randomization
phase of the study. Evaluation of these findings is currently ongoing.



We are also developing AlloCSC-02, the
second product candidate from the CSC-based platform, which is in a preclinical proof of concept stage for a chronic cardiac indication.



Our eASC-based product candidates are manufactured
at our facility in Madrid which has been approved by the Spanish Medicines and Medical Devices Agency as being compliant with current
Good Manufacturing Practices, or cGMP, requirements, which are the standards prescribed by regulatory agencies that control and
license the manufacture and supply of pharmaceutical products, such as eASCs. Through our expansion process, we can generate up
to 2,400 doses of Cx601 from cells extracted from a single healthy donor. Our CSC-based product candidates are manufactured in
Spain by 3P Biopharmaceuticals, a sub-contractor, which has been approved by the Spanish Medicines and Medical Devices Agency as
being compliant with cGMP requirements, based on a manufacturing process developed by Coretherapix. We expect to continue producing
Cx601 at our facility until Takeda assumes responsibility for manufacturing. Other than our licensing agreement with Takeda, under
which Takeda has the exclusive right to commercialize Cx601 outside the United States, we currently hold the worldwide rights
for all of the product candidates we have developed.



Our therapeutic approach is to focus on
the use of living cells, rather than conventional drugs, for the treatment of inflammatory and autoimmune diseases, through our
eASC-based platform, and heart disease, through our CSC-based platform. Cells target different pathways than conventional drugs
and may be effective in patients who fail to respond to such drugs, including the biologics currently used to treat inflammatory
and autoimmune conditions. Our pipeline is based on proprietary platforms of allogeneic stem cells, which are extracted from human



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adipose tissue from healthy adult donors or
myocardial tissue that would typically be discarded during a routine valvular replacement operation. We have conducted a full spectrum
of studies analyzing various routes of administration and indications to further the preclinical and clinical development of our
platform. We have also had extensive discussions with the EMA regarding our eASC platform through their established procedures
for scientific advice regarding chemistry, manufacturing and control (CMC) packages and preclinical packages as well as a scientific
advice meeting with respect to Cx601 that has allowed us to pursue an expedited route to clinical development. In addition, we
have had various meetings with the Center for Biologics Evaluation and Research within the FDA on the non-clinical, clinical and
CMC development of Cx601 in the United States, including a pre-IND meeting. We believe we already have the capacity to scale up
the production of our eASC-based products on a late-stage clinical as well as commercial scale and have successfully obtained a
manufacturing license from the Spanish Medicines and Medical Devices Agency for the commercial production of Cx601.



As of December 31, 2016, we believe
that our pipeline portfolio was the most advanced cell therapy platform in Europe, with positive pivotal Phase III data for
our lead product candidate and three further product candidates in Phases II and I and preclinical development.



Capital Expenditures



Our actual capital expenditures for
the years ended December 31, 2016, 2015 and 2014 amounted to 2.1 million euros, 0.6 million euros and 0.4 million euros,
respectively. These capital expenditures primarily consisted of intangible assets related to our intellectual property and
the acquisitions of our subsidiaries, property plant and equipment related to our facilities in Madrid and in Leuven. We
expect our capital expenditures to increase in absolute terms in the near term as we continue to advance our research and
development programs and grow our operations. We anticipate our capital expenditure in 2017 to be financed from our cash and
cash equivalents on hand.



The table below shows our capital expenditures
for the years ended December 31, 2016, 2015 and 2014:



|                              |  | At December 31,     
|----------------------------- |  | --------------------
|                              |  | 2016                
|                              |  | (thousands of euros)
|Long-term intangible assets   |  |                     
|Property, plant and equipment |  |                     
|Total                         |  |                     



B. Business Overview



Please see “Item 4.A. History and
Development of the Company” above for additional information regarding our business.



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The following chart summarizes our product
candidates:







1 Covered by 29 patent families

2 To be distributed outside the United States by Takeda



Our Strategy



Our objective is to leverage our cell-therapy
experience to develop innovative and safe treatment options for a broad range of inflammatory and autoimmune diseases using our
eASC-based technology platform and cardiology indications using our CSC-based technology platform. Key elements of our strategy
for achieving this objective are as follows:



| | · | Advance the clinical development of Cx601 and secure regulatory approval in Europe and the United States.Leveraging
our experience with ChondroCelect, the first cell-based product to be granted centralized marketing authorization in Europe as
an advanced therapy medicinal product, we intend to secure regulatory approval for our eASC-based product candidates, starting
with Cx601.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Europe. Based on the results of our successful pivotal Phase III trial in Europe, we filed for marketing
authorization in Europe in the first quarter of 2016. We received EMA’s Day 120 List of Questions in July 2016 with certain
major objections, we submitted our responses in December 2016. We received EMA’s 180 Day List of Outstanding Issues in February
2017 and we are confident that we are able to provide adequate responses.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | United States. We received positive feedback in our meeting with the Center for Biologics Evaluation and Research
within the FDA, which has agreed to review the results of the recently completed European Phase III trial as supportive evidence
for filing for regulatory approval in the United States. The FDA has agreed with the design of our proposed single pivotal trial
in the United States through the SPA procedure and we intend to explore options for expedited development and review. We have started
the process of technology transfer to Lonza, a U.S.-based contract manufacturing organization. We therefore have all the elements
in place in preparation for an IND application for a Phase III trial to register Cx601 in the United States, which, if successful
and together with positive Phase III data from the European trial, would enable us to file a BLA with the FDA. We expect
to initiate the Phase III trial to register Cx601 in the United States in the first half of 2017.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Achieve global commercialization of Cx601.On July 4, 2016, we entered into a licensing agreement with Takeda,
a large pharmaceutical company active in gastroenterology, under which Takeda acquired the exclusive right to commercialize Cx601
for complex perianal fistulas outside the United States, Japan and Canada. The licensing agreement included an option for Takeda
to expand the scope of the license to Japan and Canada, which Takeda exercised on December 20, 2016. As a result, Takeda now has
the exclusive right to commercialize and develop Cx601 for complex perianal fistulas in all countries outside the United States.
We will follow a commercial strategy to increase the probability of Cx601’s ultimate success and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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may consider other partnerships
in the United States. Complex perianal fistula in patients with Crohn’s disease, for which Cx601 is being developed, is a
debilitating condition with a well-defined patient population managed by a limited number of medical specialists, which we believe
will allow us to rely on a relatively small and effective commercialization structure to manage the relevant reference centers.
Based on the positive Phase III data in Europe and a standard regulatory pathway for advanced therapy medicinal products,
we anticipate generating our first royalties from Cx601 within the next two years.



| | · | Advance our product candidates Cx611, Cx621, AlloCSC-01 and AlloCSC-02 in the United States and the rest of the world.As with Cx601, we are focusing on a well-defined patient population with respect to Cx611 and have selected a subgroup
of patients suffering from severe sepsis within the otherwise relatively large indications in inflammatory disease. We successfully
concluded a Phase I safety trial in the first quarter of 2015, and we enrolled the first patient for a Phase I/II trial
in January 2017. We believe that if Cx611 were approved, it would supplement existing therapies and would have the potential to
reduce mortality in patients with severe sepsis. With Cx621, we have explored the intra-lymphatic administration of allogeneic
eASCs and have generated positive safety and feasibility information in a Phase I trial in Europe. With AlloCSC-01, we are
targeting patients who have suffered from acute myocardial infarction and we believe that it can limit the extent of tissue damage
if used within a few days after the treatment of the initial infarction. AlloCSC-01 is currently in a Phase I/II trial and the
top-line one-year results confirm that all safety objectives of the study have been met. We are also developing AlloCSC-02, the
second product candidate from the CSC-based platform, which is in a preclinical proof of concept stage for a chronic cardiac indication.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Discover, develop and commercialize first-in-class novel therapeutics for areas of high unmet medical need by leveraging
our proprietary allogeneic stem cell-based technology platforms and our experience in bringing stem-cell based products to market.We intend to advance our position through the continuing discovery and development of new product candidates for multiple
indications. We believe that our technology platforms as well as our in-house expertise allow us to achieve candidate selection
and proof-of-concept in an efficient manner. Our product candidates use novel mechanisms of action offering benefits that are expected
to be superior to existing treatment options in terms of efficacy and safety in the selected indications, and we believe that they
have the potential to be effective in a broad range of indications. We will continue to invest in our eASC and CSC-based platforms,
and identify, develop and manufacture additional product candidates from them. As our subsequent product candidates advance in
their development for more prevalent indications, we aim to achieve substantial growth.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Strengthen our competitive position by leveraging our experienced management team and reinforcing key opinion leader
support.Our management team is comprised of highly experienced professionals with track records in the biomedical and
pharmaceutical fields. The team has demonstrated its ability to create value by bringing the first cell therapy-based medicinal
product in Europe to market and achieving key value enhancing milestones in all other areas of pharmaceutical development, including
clinical development, regulatory, manufacturing and commercialization. In doing so, our team has acquired a unique expertise in
the field of cell therapy. As a cell therapy pioneer, we have developed and will continue to capitalize on our strong relationships
with key opinion leaders who have collaborated and consulted with us in developing our product candidates. As a result, we have
established strong scientific advisory boards that share our belief in the therapeutic potential of cell therapies. With respect
to Cx601, we have advisory boards in Europe and in the United States. For Cx611, we have an advisory board in Europe for severe
sepsis, and for AlloCSC-01, we have an international advisory board for cardiology.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Technology Platforms



Our product candidates are based on our
proprietary allogeneic stem cell-based platforms, which offer significant market opportunities in both inflammatory and autoimmune
diseases and heart disease, based on the following distinguishing factors:



| | · | Our use of allogeneic adult stem cells.Our platforms use allogeneic stem cells because this approach offers
clear advantages over autologous cells, i.e., cells extracted from each individual patient and subsequently processed, which are
summarized below:
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | · | Efficient production of large batches of cells.Economies of scale can be applied with respect to manufacturing
and quality control tests, reducing the cost of manufacturing and leading to a more consistent end product, i.e., individual lots
of a large batch. For eASCs, up to 360 billion cells can be obtained upon expansion of cells extracted from a single donor. At
current scale, this could be used to generate up to 2,400 doses of Cx601.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | No patient biopsy/tissue procurement needed.The use of allogeneic cells also benefits physicians and patients,
because the treatment can be administered readily in a single procedure, taking less clinical time and resources. The process avoids
taking biopsies from patients and allows for the treatment of patients who do not possess sufficient healthy tissue or who for
any other medical reason cannot undergo tissue procurement.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Immediate and consistent availability of cells.The use of allogeneic cells, which are extracted from healthy
donors and processed in large batches and are therefore available to physicians whenever required, enables the use of stem cells
for the immediate treatment of acute conditions such as severe sepsis and acute myocardial infarction, because the additional step
of procuring and processing autologous cells, which need to be extracted from each individual patient, is eliminated. This could
potentially increase patient throughput significantly, creating a more attractive commercial opportunity than would be possible
using autologous cells.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Our expertise in optimizing the delivery of stem cells as required by different indications.This expertise is
evidenced by the preclinical and clinical data we have generated with respect to our product candidates:
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Local administration.For local diseases or tissue damage, we believe that depositing the cells as close as possible
to the affected tissue or organ optimizes the effect of the cells, which are not diluted and thus achieve the highest concentration
at the site of action, and have developed the appropriate expertise in administering the cells. The cells immediately encounter
the affected environment leading to direct activation of the cells thereby exerting their immunomodulatory and/or repair-supporting
actions. Therefore, for a disease like fistulas or myocardial infarction, we locally administer the cells.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Systemic administration.For systemic diseases like sepsis, where the cells need to act at several places in
the body, we believe that systemic administration of the cells, through either the blood or the lymphatic system, is preferred.
With this method of administration, which we use for our eASCs in certain applications, the cells are distributed across the body
and are able to reach the affected tissues. We believe that the capacity of eASCs to detect inflammation and to accumulate at the
site of inflammation will result in an efficient mechanism of action.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Our use of human-derived adipose tissue for our eASC-based platform.We use eASCs extracted from the human adipose
tissue of healthy volunteers. We believe that this type of cell offers significant advantages over other cell types, such as stem
cells sourced from bone marrow. The key advantages of this approach are the following:
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Ease and amount of supply.The cells can be collected through standard liposuction.
| | - | ----------------------------------------------------------------------------------



| | · | Rich supply of stem cells.Stem cells can represent up to 2% of the total cells of the stromal vascular fraction
of the fat tissue, a potential yield of 100 to 1,000 times higher than other possible sources of stem cells.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Robust phenotype.The eASCs do not require overly elaborate growth conditions and can be grown continuously without
loss of their immunomodulatory characteristics. They have also been shown to maintain cell stability during expansion.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Pharmacological profile.The eASCs have low immunogenicity as defined by the low presence or absence of human
leukocyte antigens, co-stimulatory molecules and ligands for neurokinin receptors and are therefore considered to be applicable
for allogeneic treatment.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Our use of human-derived cardiac tissue for our CSC-based platform.We use CSCs extracted from a small amount
of myocardial tissue that would typically be discarded during a routine valvular replacement operation. We expect these stem cells
to support the regeneration process in the infarcted heart upon their administration, since heart stem cells have a natural role
in cardiac tissue renewal. These CSCs can also be readily expanded, and have low immunogenicity.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Mechanism of Action of our eASC-based
Product Candidates



Our eASC-based product candidates are derived
from a proprietary technology platform exploiting their recognized mechanism of action in immune-mediated inflammatory processes.
Our basic preclinical package for eASCs is based on a full spectrum of studies focusing on three indications—inflammatory
bowel disease, sepsis and rheumatoid arthritis—and five possible routes of administration—local (perianal), rectovaginal,
intraperitoneal, intravenous and intralymphatic. In these preclinical studies, we have found no indications of toxicity; tumorigenicity,
which is the potential of the cells to cause tumors; or ectopic tissue growth, which is the growth of new tissue at a site within
the body where such tissue would not occur naturally. We have extensively characterized our eASC platform to establish the potency,
identity and purity of our eASC based product candidates and had discussions with the EMA via their established procedures for
scientific advice regarding our chemistry, manufacturing and control package. Based on these discussions, we have validated our
manufacturing process and our platform associated analytical procedures as per the EMA’s guidelines, including the quality
guidelines of the International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human
Use.



There are two main biological pathways
that underlie the efficacy of adipose-derived stem cells, or ASCs, in disease treatment: their anti-inflammatory properties and
their secretion of repair and growth promoting molecules.



In particular, the immunomodulatory properties
of these cells offer potential novel treatments for autoimmune and inflammatory diseases, as evidenced by promising preclinical
and clinical results. The eASCs exhibit broad immunomodulatory properties, including the regulation of immune cells such as B lymphocytes,
T lymphocytes, natural killer cells, monocytes or macrophages and neutrophils. These modulatory effects rely on a direct interaction
between eASCs and immune cells as well as the effect of substances secreted by the eASCs on tissues and cells through a broad panel
of soluble factors. In particular the degradation of the amino acid tryptophan by the enzyme indoleamine 2,3 dioxygenase, is of
key importance because it halts the growth of T cells, and enhances the activity of suppressor cells, such as regulatory T
cells and anti-inflammatory macrophages.





The following charts illustrate two mechanisms
of action through which eASCs regulate inflammation, inhibition of immune cell proliferation and reduction of pro-inflammatory
cytokines:



Inhibition of Immune Cell Proliferation







The left bar of the chart above depicts
the activation of peripheral blood mononuclear cells, or PBMCs, with specific antibodies that cause the proliferation of T cells,
constituting the majority of the observed effect on the PBMC population.



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When ASCs are added or co-cultured with
the PBMCs, the T cells are largely inhibited, as indicated in the middle bars. This effect is due to the ASCs’ expression
of Indoleamine 2,3-dioxygenase, or IDO enzyme, a tryptophan degrading enzyme. The addition of an IDO-inhibitor largely reverses
the inhibitory effect, as shown in the right bars. This inhibitory effect is mediated through the medium as demonstrated by the
fact that separating the two cell types with a transwell, or semi-permeable membrane, as indicated by the black bars, results in
comparable inhibition as when the cells are in contact with each other, as indicated by the white bars.



Reduction of Pro-Inflammatory Cytokines







In non-stimulated conditions, as indicated
by the above bars titled “PBMC,” “ASC” and “PBMC+ASC,” there is no secretion of the pro-inflammatory
cytokines, interferon-γ, or IFN-γ, or Tumor Necrosis Factor-α, or TNF-α. Upon stimulation, PBMCs secrete
these cytokines, as indicated by the bar “Activated PBMC.” In the presence of ASCs, as indicated by the bar “Activated
PBMC + ASC,” this secretion is strongly reduced. The p-value is below 0.05 for this effect, indicating that it
is statistically significant and unlikely to occur by chance.



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More broadly, the following image depicts
the mechanism of action of mesenchymal stem cells, or MSCs, a category that includes eASCs:







MSCs can interact with the different cells
of the immune system, including T cells; B cells, which secrete the immunoglobulins IgG, IgM and IgA; NK cells; and macrophages
and dendritic cells. The effects of the MSCs on such cells can be decreasing, or inhibitory (-), or increasing, or stimulatory
(+). The overall effect of these interactions aims at dampening the inflammatory intensity of the immune reaction.



Our eASC-based product candidates leverage
this recognized mechanism of action of MSCs in immune-mediated and inflammatory processes, which should enable us to develop rapidly
and bring to market groundbreaking products that have the potential to treat safely a broad range of inflammatory and autoimmune
diseases. We have had extensive discussions with the EMA regarding chemistry, manufacturing and control packages and preclinical
packages in connection with our eASCs platform, which have allowed us to advance rapidly our clinical development with respect
to our pipeline candidates.



Mechanism of Action of our CSC-based
Platform



Our allogeneic CSC-based products are derived
from a proprietary platform developed by Coretherapix to exploit their regenerative potential. Starting from myocardial muscle
obtained from donor tissue that would typically be discarded during a routine valvular replacement operation, the CSCs are isolated
and then expanded in-vitro. We believe that the mechanism of action relies on three potential biological pathways: (i) cardio
protection of damaged tissue, (ii) modulation of the immune response to reduce scarring and dampen the effects of chronic
inflammation and (iii) support of the inherent regeneration of myocardial tissue. Based on these expected mechanisms, the
product candidates derived from this platform are likely to find application in the acute and chronic settings of heart disease.



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The following diagram shows the three axes
of the mechanism of action of CSCs:



Transplanted Allogeneic Cardiac Stem
Cell







Firstly, secretion of protective factors
by the cells in the recently damaged cardiac tissue could reduce cell death caused when both blood flow is interrupted and when
it is restored, thus salvaging valuable tissue. Secondly, the cells could control the inflammatory process, limiting the extent
of scarring in the cardiac tissue in the infarcted region. Finally, the cells could promote regeneration of viable new tissue,
improving the functional capacity of the myocardium. The efficacy of the platform has been demonstrated in a pig model in which
the cells were shown to prevent remodeling of the heart after an infarction, preserving heart function and reducing the scar size,
with results improving significantly when a higher dose was administered.



Product and Product Candidates



Our pipeline is derived from our proprietary
platforms of allogeneic stem cells. Our stem cells are extracted and cultured from tissue sourced from consenting adult donors
and for administration in our clinical studies targeting autoimmune and inflammatory diseases and heart disease. Cx601, our lead
product candidate, is being studied for the treatment of complex perianal fistulas in Crohn’s disease patients, and met the
primary endpoint of its single pivotal European Phase III clinical trial in August 2015. We filed for marketing authorization
in Europe during the first quarter of 2016, and a decision by the EMA could be expected during the second half of 2017. We received
EMA’s Day 120 List of Questions in July 2016 with certain major objections, and we submitted our responses in December 2016.
We received EMA’s 180 Day List of Outstanding Issues in February 2017 and we are confident that we are able to provide adequate
responses. Cx601 was also granted orphan drug designation by the EMA in 2009. The FDA has agreed to review the results of this
pivotal Phase III trial as supportive evidence for filing for future regulatory approval in the United States, and agreed
with our proposed design for a Phase III trial for registration in the United States through an SPA. In the first half of
2017, we intend to initiate a pivotal Phase III trial for Cx601 for the treatment of complex perianal fistulas to register
Cx601 in the United States. On July 4, 2016, we entered into a licensing agreement with Takeda, a large pharmaceutical company
active in gastroenterology, under which Takeda acquired the exclusive right to commercialize and develop Cx601 for complex perianal
fistulas outside the United States, Japan and Canada. The licensing agreement included an option for Takeda to expand the scope
of the license to Japan and Canada, which Takeda exercised on December 20, 2016. As a result, Takeda now has the exclusive right
to commercialize and develop Cx601 for complex perianal fistulas in all countries outside the United States. Cx611, our next most
advanced clinical stage product candidate from our eASC-based technology platform, has completed a Phase I challenge study
in sepsis and a successful Phase I/IIa trial for the treatment of refractory rheumatoid arthritis, both in Europe. On January
1, 2017 we enrolled and treated the first patient in a Phase Ib/IIa clinical trial in severe sepsis in Europe. We have also explored
the intra-lymphatic administration of allogeneic eASCs with Cx621 and generated positive safety and feasibility information in
a Phase I trial in Europe.



AlloCSC-01 is in the second stage of a
European Phase I/II trial in acute myocardial infarction and has demonstrated a good safety profile. We are also developing
AlloCSC-02, a second product candidate from the CSC-based platform, which is currently in a preclinical proof of concept stage
for a chronic cardiac indication.



We also had one commercial product, ChondroCelect,
that was indicated for cartilage repair in the knee and was the first cell-based medicinal product to receive centralized marketing
authorization from the EMA. In July 2016, we requested the withdrawal of marketing authorization for ChondroCelect for commercial
reasons, which became effective as of November 30, 2016.



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Cx601



Cx601, our lead product candidate, is a
suspension of allogeneic eASCs administered locally in the perianal fistula through intra-lesional injection as a single treatment.
Cx601 has completed a Phase III trial in Europe and Israel, and we are planning to initiate a Phase III trial to register Cx601
in the United States for the treatment of complex perianal fistulas in patients suffering from Crohn’s disease.



In the randomized, double-blind Phase III
study, with a single treatment of Cx601 the rate of combined remission in patients treated with Cx601 compared with patients who
received placebo was statistically significant, meeting the primary endpoint of combined remission of complex perianal fistulas
at twenty four weeks. In the ITT population, which was comprised of 212 Crohn’s disease patients with inadequate response
to previous therapies, 49.5% of patients treated with Cx601 had combined remission compared to 34.3% in the placebo arm. The trial’s
results indicated that patients receiving Cx601 had a 44.3% greater probability of achieving combined remission than placebo patients.
The efficacy results were consistent and robust across all statistical populations with a p-value of less than 0.025. Moreover,
the trial confirmed a favorable safety and tolerability profile, and treatment-emergent adverse events (non-serious and serious)
and discontinuations due to adverse events were comparable between the Cx601 and placebo arms.



The results of the follow up analysis after
fifty-two weeks were also positive. In the ITT population, 54.2% of patients treated with Cx601 had combined remission compared
to 37.1% of patients in the placebo arm. The result had a p-value of 0.012, indicating high statistical significance. In addition,
after fifty-two weeks, 75.0% of patients treated with Cx601 who were in combined remission at week twenty-four did not relapse,
compared to 55.9% for patients in the placebo arm who were in combined remission at week twenty-four. The results also confirmed
the favorable safety and tolerability profile of Cx601.



The top-line data at week 104 were consistent
with the results communicated at week 24 and week 52. The clinical remission rate and difference between groups, as was previously
observed at week 24 and week 52, was maintained at week 104. The tolerability of Cx601 was also maintained. The safety profiles
of Cx601 and placebo (control) were similar for the duration of the trial. No new safety signals were reported during the two years
extended follow up.



We have a clear and potentially rapid pathway
to the market for Cx601. On July 4, 2016, we entered into a licensing agreement with Takeda, a large pharmaceutical company
active in gastroenterology, under which Takeda acquired the exclusive right to commercialize and develop Cx601 for complex perianal
fistulas outside the United States, Japan and Canada. The licensing agreement included an option for Takeda to expand the scope
of the license to Japan and Canada, which Takeda exercised on December 20, 2016. As a result, Takeda now has the exclusive right
to commercialize and develop Cx601 for complex perianal fistulas in all countries outside the United States. Takeda agreed to make
an upfront non-refundable payment of 25 million euros, a further payment of 15 million euros if and when Cx601 receives
marketing authorization from the EMA, an equity investment of 10 million euros within one year of the effective date of the
agreement (which it made on December 29, 2016), additional sales and reimbursement milestone payments up to a total of 340 million
euros and royalty payments ranging from 10% to 18% on net sales by Takeda. Based on the positive results of our single pivotal
Phase III trial in Europe and Israel, we submitted the marketing authorization application to the EMA in March 2016, and a
decision by the EMA is expected in the second half of 2017. We received EMA’s Day 120 List of Questions in July 2016 with
certain major objections, and we submitted our responses in December 2016. We received EMA’s 180 Day List of Outstanding
Issues in February 2017 and we are confident that we are able to provide adequate responses. In 2009, the EMA granted Cx601 orphan
designation for the treatment of anal fistulas, recognizing the debilitating nature of the disease and the lack of treatment options
for this indication that affects no more than five out of 10,000 people in the European Union. Cx601 enjoys significant benefits
due to its designation as an orphan drug by the EMA, including the streamlined process for obtaining the relevant regulatory approvals
in Europe and up to ten years of exclusivity in the European market from the date of the product’s launch.



We have also had a meeting with the FDA
to discuss the adequacy of our clinical and non-clinical data to support an IND application for a Phase III trial to register Cx601
in the United States. We received positive feedback regarding our pivotal European Phase III trial design for supporting a BLA
and have reached an agreement with the FDA through an SPA procedure for our proposed protocol for a Phase III trial to register Cx601
in the United States. In the first half of 2017, we intend to initiate a pivotal Phase III trial for Cx601 for the treatment
of complex perianal fistulas to register Cx601 in the United States. We filed for orphan designation for the treatment of



43


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anal fistulas in the United States and have
received feedback from the FDA indicating that it believes fistulizing Crohn’s disease to be a chronic disease with a potential
patient population in excess of the threshold for orphan designation, which is 200,000 patients in the United States. We commissioned
a study to explore in more detail the prevalence of fistulizing Crohn’s disease in the United States. Given the results of
the study, we are considering the resubmission of our application for orphan designation in the United States. We intend to explore
our options with respect to expedited FDA programs that could facilitate and expedite development and review of Cx601.



We will follow a commercial strategy to
increase the probability of Cx601’s ultimate success.



Complex Perianal Fistulas in Crohn’s
Disease Patients



Crohn’s disease is a chronic inflammatory
disease of the intestine. It is characterized by focal or segmental transmural inflammation, or inflammation of the intestinal
wall, which may occur in any part of the digestive tract with occasional granuloma formation. The transmural inflammation disrupts
intestinal mucosal integrity, which frequently leads to the development of abscesses and fistulas. A fistula is an abnormal tract
connecting two surfaces; a perianal fistula is defined as a tract between the anal canal and the epithelial surface proximal to
the anus.



Although multiple schemes of fistula classification
have been proposed, no scheme has been universally adopted. The American Gastroenterology Association recommends classification
according to complexity as either simple or complex (source: Sandborn WJ, Fazio VW, Feagan BG, et al. American Gastroenterological
Association Clinical Practice C. AGA technical review on perianal Crohn’s disease. Gastroenterology 2003;125:1508–30):



| | · | A simple perianal fistula is a superficial fistula having only a single external opening, without pain or fluctulence to suggest
an abscess.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------



| | · | A complex perianal fistula is a serious condition that typically involves more of the anal sphincters, can have multiple tracts,
is associated with a perianal abscess and may be recurrent. Patients with complex fistulas are at an increased risk for incontinence
following aggressive surgical intervention and have a smaller chance of healing. The American Society of Colorectal Surgeons considers
“complex” any fistula in Crohn’s disease patients.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Individuals who suffer from the condition
are often unable to carry out ordinary daily activities and have significant decrease in their quality of life due to the recurring
nature of the condition. They generally experience severe discomfort, pain and embarrassment and, in many cases, have significant
psychological problems, requiring additional treatment and often causing substantial burdens for the health care systems that cover
the associated treatment costs. Current treatment options, which include antibiotics, immunosuppressants, biologics and surgical
treatment, do not offer a long-term solution and the risk of recurrence is high.



Market Opportunity



Complex perianal fistulas in patients suffering
from Crohn’s disease tend to occur in individuals between the ages of twenty and forty, though 10-15% of patients are diagnosed
before adulthood. We have estimated the worldwide incidence of Crohn’s disease in Europe and the United States on the basis
of collated scientific publications on the following basis:



| | · | Known Crohn’s disease epidemiology.
| | - | -----------------------------------



| | · | Approximately 11% of adult patients suffering from Crohn’s disease suffer a perianal fistula.
| | - | ---------------------------------------------------------------------------------------------



| | · | Of these fistulas, 75% will be classified as complex.
| | - | -----------------------------------------------------



The following chart provides an overview
of the estimated population of Crohn’s disease patients suffering from complex perianal fistulas in Europe and the United
States based on the assumptions stated above:



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Cx601: Estimated Patient Population (European
Union and United States)







The burden of perianal fistulas in Crohn’s
disease is high, both to the individual patient and to the health care provider. In 2010, we commissioned a study by IMS Health,
an independent provider of market research, that concluded that the total mean cost of treatment of a patient with complex perianal
fistulas due to Crohn’s disease was approximately $38,000 per patient, of which approximately $30,000 was spent on pharmaceutical
treatment alone. A systemic literature review conducted for us in 2016 by Quintiles, a pharmaceutical outsourcing services company,
revealed that the mean annual total direct costs of patients with perianal fistulas may reach up to $43,500 in the United States.



We have conducted market research with
physicians in the five largest Western European markets, which suggests that physicians would consider using Cx601 in 55% to 100%
of patients with complex perianal fistulas who have never been treated with anti-TNFs and 100% of patients who have taken anti-TNFs
but whose fistulas did not respond.



Taking into consideration a target population
of approximately 118,000 patients with complex perianal fistulas (approximately 72,000 patients in Europe and approximately 46,000
patients in the United States) and assuming a cost per patient range of $30,000 to $50,000, we estimate the market size range for
complex perianal fistulas to be approximately $3.5 billion to $5.9 billion for Europe and the United States combined.



Patented biopharmaceuticals in most markets
in the world are subject to pricing decisions from payers representing government authorities or private health insurance. In most
major markets, payers base their pricing decisions on the perceived therapeutic improvement as compared to existing therapies,
the unmet need in the indication and population size. We believe that Cx601 represents a significant improvement as compared to
existing therapies and serves a well-defined patient population with a high unmet need.



If we receive marketing authorization in
Europe in the second half of 2017, Takeda could start the first wave of launches in selected European markets thereafter and a
second wave by the end of 2018.



Current Treatment Options



For Crohn’s patients with complex
perianal fistulas, medical treatments of choice are antibiotics and azathioprine or 6-mercaptopurine, as first-line therapy, and
the biologic Remicade® (Infliximab), as second-line therapy. Both offer limited long-term efficacy and in many instances have
notable side effects, such as the reactivation of tuberculosis and increased risk of bacterial infection with Aspergillus, Listeria
and Cryptococcus.



The table below gives an overview of the
most common drug treatments for complex perianal fistulas in patients suffering from Crohn’s disease:



|Antibiotics                                                                     | Immunosuppressants                                                              | Antibiotics +Immunosuppressants                                                     | Biologics                                                                                                                                                                                                                                
|------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|First-line or adjuvant therapy to treat infections and abscesses from fistulas. | Azathioprine and 6-mercaptopurine used as first-line after antibiotics therapy. | Antibiotics and immunosuppressants often used in combination as first-line therapy. | Remicade® (Infliximab) is the only approved biologic
        drug for fistulizing Crohn’s disease.
        
        Used as a second-line therapy in Europe.
        
        Recent U.S. guidelines recommend use as first-line therapy.

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The standard second-line treatment of complex
perianal fistula in patients suffering from Crohn’s disease involved the prescription of anti-tumor necrosis factors, or
anti-TNFs. As of December 31, 2016, Remicade® (Infliximab), a chimeric monoclonal antibody, is the only biologic
approved for the treatment of fistulizing Crohn’s by the FDA and the EMA. In a pivotal fifty-four week trial, 306 patients
with Crohn’s disease with some sort of disease-related fistulas were administered Infliximab at weeks zero, two and six.
Patients who had ongoing fistula response to the drug at week fourteen were randomized and placed on a maintenance regimen administered
every eight weeks thereafter. By the end of the trial, 36% of the patients who went on to receive a maintenance therapy continued
to be in complete remission; complete remission is defined here as the absence of draining fistulas. If remission for the total
population who started treated treatment with Infliximab is taken into account, efficacy of Infliximab at one year is limited to
only 23%.



Other biologics used in the treatment of
luminal Crohn’s but not specifically approved for the treatment of fistulizing Crohn’s are the following:



| | · | Humira (adalimumab)—Abbvie.Second generation anti-TNF approved for the treatment of Crohn’s disease (but
not fistulizing Crohn’s). Humira has the advantages of requiring only subcutaneous dosing (instead of intravenous infusion)
and being a fully human antibody. Fistula healing was studied as a secondary endpoint in the Humira maintenance trial. Efficacy
results were a 33% rate of complete closure at fifty-six weeks.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Cimzia (certolizumab)—UCB.Although not developed for the treatment of fistulizing Crohn’s directly, fistula
healing was a secondary endpoint in two of Cimzia’s maintenance trials. In neither of the two trials did Cimzia outperform
the efficacy of the placebo. The EMA refused the marketing authorization for Cimzia to treat active Crohn’s disease. Nevertheless,
Cimzia received FDA approval for treating adults with moderate to severe Crohn’s disease who have not responded to conventional
therapies.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The results of these other biologics that
have been evaluated for the treatment of perianal fistula in patients suffering from Crohn’s disease confirm the limited
efficacy of the existing approaches.



The following chart summarizes the current
treatment algorithm for complex perianal fistulas in patients suffering from Crohn’s disease:







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Phase III Clinical Results



In our Phase III pivotal trial, we
have demonstrated that Cx601 can be used to treat complex perianal fistulas in patients suffering from Crohn’s disease. Cx601
utilizes eASCs derived from adipose tissue, which we believe have anti-inflammatory and repair and growth-promoting properties
and are an effective treatment for fistulas.



In mid-2012, we initiated a randomized,
double-blind, placebo-controlled European Phase III trial for Cx601 with 289 recruited patients in fifty centers in eight
countries, which was the largest study conducted in complex perianal fistulas as of December 31, 2016. Recruitment for the trial
was completed in November 2014, after initial delays due to a change in the third-party contract research organization in charge
of conducting the trial.



The protocol of this Phase III program
was approved by the ethics committees and regulatory agencies in all eight participating countries: Spain, Italy, Austria, Belgium,
Germany, France, the Netherlands and Israel. The Committee for Medicinal Products for Human Use of the EMA indicated that the proposed
single pivotal Phase III study, if successful, could suffice to demonstrate the efficacy required to support the marketing
authorization application to the EMA.



The clinical trial included males and females
who were allowed to maintain their current treatment of their underlying Crohn’s disease as long as the dose was not modified
during the course of the study and who met the following criteria:



| | · | Older than eighteen years.
| | - | --------------------------



| | · | Had been diagnosed with perianal Crohn’s disease with non-active or mildly active luminal disease (with a Crohn’s
disease activity index score of 220 or lower) and had failed at least one previous treatment for the fistulas (antibiotics, immunosuppressants
or biologics). Patients refractory to antibiotics were restricted to fewer than 25% of patients included in the study.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Had fistulas with up to two internal orifices and up to three external orifices.
| | - | --------------------------------------------------------------------------------



| | · | Were diagnosed with Crohn’s disease more than six months prior to their inclusion in the trial.
| | - | -----------------------------------------------------------------------------------------------



| | · | Had their fistulas draining for at least six weeks prior to their inclusion in the trial.
| | - | -----------------------------------------------------------------------------------------



The study was designed as a two-group,
double-blind placebo controlled trial, in which patients were randomly assigned to either a placebo control group or an active
treatment group in a 1:1 ratio. The active treatment group received a single treatment of 120 million eASCs.



The patients participating in the trial
had similar demographics and perianal disease activity index scores between the two arms of the study in both the ITT population,
which is comprised of all patients included and randomized, regardless of their having received the study treatment or having any
post-baseline measurements (212 patients) and the safety population, which includes those patients who were randomized and treated
(205 patients). However, a higher proportion of patients with multiple-tract fistulas were in the group that received Cx601. The
total dose of Cx601 administered was the same regardless of the number of tracts. The following table provides a demographic breakdown
of the patients in the active treatment arm and the placebo arm in the ITT population:



|                                              |  | Cx601 n=107 |             | Placebo n=105
|--------------------------------------------- |  | ----------- | ----------- | -------------
|Demographics                                  |  |             |             |              
|Age (years) mean (standard deviation)         |  |             | 39.0 (13.1) |              
|Men (%)                                       |  |             | 60 (56.1)   |              
|Caucasian (%)                                 |  |             | 100 (93.5)  |              
|Weight (kg) mean (standard deviation)         |  |             | 73.9 (15.0) |              
|Perianal disease activity index               |  |             |             |              
|Mean (standard deviation)                     |  |             | 6.8 (2.5)   |              
|Topography of internal & external openings(1) |  |             |             |              
|One-tract fistula (%)                         |  |             | 51.4        |              
|Multiple-tract fistula (%)                    |  |             | 44.8        |              

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| | (1) | Topography of internal and external openings was not available for seven patients in the ITT population.
| | --- | --------------------------------------------------------------------------------------------------------



The study’s endpoints were as follows:



| | · | Primary endpoint at a follow-up visit twenty-four weeks post-treatment:
| | - | -----------------------------------------------------------------------



| | · | Combined remission of the fistulous disease, defined as 100% closure of all treated external openings draining at baseline
despite gentle finger compression and the lack of collections, or fluid deposits, larger than two centimeters confirmed by MRI.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Secondary endpoints at follow-up visits twenty-four and fifty-two weeks post-treatment:
| | - | ---------------------------------------------------------------------------------------



| | · | Clinical remission (closure of all treated external openings draining at baseline despite gentle finger compression).
| | - | ---------------------------------------------------------------------------------------------------------------------



| | · | Response (closure of at least 50% of all treated external openings draining at baseline despite gentle finger compression).
| | - | ---------------------------------------------------------------------------------------------------------------------------



| | · | Relapse in patients with primary endpoint of combined remission (reopening of any of the treated external openings with active
drainage as clinically assessed or the development of a collection larger than two centimeters confirmed by MRI on the treated
fistula).
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Time to clinical remission.
| | - | ---------------------------



| | · | Time to response.
| | - | -----------------



| | · | Time to relapse.
| | - | ----------------



| | · | Perianal disease activity index and other scores.
| | - | -------------------------------------------------



| | · | Safety data.
| | - | ------------



| | · | Tolerability data.
| | - | ------------------



The trial has produced safety and efficacy
results from a first analysis of data obtained from a follow-up visit twenty-four weeks post-treatment. We have also received results
from a second follow-up analysis performed at fifty-two weeks post-treatment, and top-line data at 104 weeks post-treatment.



On August 24, 2015 we announced that
Cx601 had met the primary endpoint in the pivotal Phase III trial based on the analysis of the data obtained twenty-four weeks
post-treatment. A single treatment of Cx601 was statistically superior to placebo in achieving combined remission of complex perianal
fistulas in Crohn’s disease patients with inadequate response to previous therapies, including anti-TNFs, after twenty-four
weeks.



In the ITT population of 212 patients,
Cx601 achieved statistically significant superiority, with a p-value of 0.024, with 49.5% combined remission at week twenty-four
compared to 34.3% in the placebo arm. In the safety population, which includes all patients randomized and treated, of 205 treated
patients, the combined remission rates at week twenty-four were 51.5% and 35.3% for Cx601 and placebo, respectively, with a p-value
of 0.019. These results translate into an observed relative risk of 1.443, meaning that patients receiving Cx601 had a 44.3% greater
probability of achieving combined remission than placebo patients. Efficacy results were robust and consistent across all statistical
populations.



In particular, we observed that results
were comparable in patients with single or multiple tracts and in patients treated with or without biologics.



The difference between the ITT population
and the safety population consists of seven patients who did not receive the study treatment, as follows:



| | · | In the active treatment arm, four patients were not treated for the following reasons:
| | - | --------------------------------------------------------------------------------------



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| | · | Two patients withdrew due to adverse events (one due to a recurrence of Crohn’s disease and one due to deep vein thrombosis).
| | - | -----------------------------------------------------------------------------------------------------------------------------



| | · | One patient withdrew informed consent.
| | - | --------------------------------------



| | · | Data is missing with respect to one patient.
| | - | --------------------------------------------



| | · | In the placebo arm, three patients were not treated, for the following reasons:
| | - | -------------------------------------------------------------------------------



| | · | Two patients withdrew informed consent.
| | - | ---------------------------------------



| | · | One patient had to be excluded because he or she did not meet the inclusion criteria.
| | - | -------------------------------------------------------------------------------------



The full set of safety and efficacy results
was announced at the eleventh Congress of the European Crohn’s and Colitis Organization in March 2016.



The secondary endpoint results were broadly
consistent with the benefit observed on the primary endpoint, with borderline statistical significance. The safety population showed
improvements in both response (with a p-value of 0.039) and clinical remission (with a p-value of 0.052), as demonstrated in the
chart below, which compares the safety population to the ITT population.









The statistical significance of the results
with respect to the key secondary endpoints, clinical remission and response, is lower than that with respect to the primary endpoint
of combined remission. In setting up our Phase III clinical trial, we calculated the sample size to enable us to find a statistically
significant difference for the primary endpoint, for which a larger difference between the Cx601 and placebo arms was expected,
compared to the differences anticipated between the two arms for the key secondary endpoints. Key secondary endpoints are defined
to be less stringent efficacy indicators. For example, a patient could exhibit the closure of all treated external openings, which
would indicate that he is in clinical remission, even though an MRI might still show internal abscesses larger than two centimeters,
indicating that he is not in combined remission. For this reason, a fraction of patients in the placebo group, who, under the protocol
for the study, continued with their ongoing treatment of their underlying Crohn’s disease showed sufficient improvement to
meet the requirements for these less stringent secondary endpoints.



The perianal disease activity index score,
which measures the severity of the disease, fell by more than 30% in the Cx601 group and maintained a statistically significant
difference over placebo at six, twelve and eighteen weeks.



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In the trial, Cx601 had a safety and tolerability
profile comparable to placebo. In contrast, treatment with immunosuppressants or anti-TNFs can be related to a range of serious
adverse events. Use of immunosuppressants has been connected to bone marrow suppression, hypersensitivity, lymphoma, liver toxicity
or pancreatitis and use of anti-TNFs has been associated with hypersensitivity, serious infections, and lymphoma among other adverse
events.



The favorable safety and tolerability profile
of Cx601 is likely connected to both its mechanism of action and to its local method of administration at the site of the fistula
in a single treatment. This maximizes the action of the cells at the local fistula site, as compared to immunosuppressants or anti-TNFs,
which are administered systemically over a long period of time.



In addition, the median time to clinical
remission was 6.7 weeks with Cx601, compared to 14.6 weeks in the placebo group, as shown in the chart below:







On March 7, 2016, we announced the
positive results of the fifty-two week follow-up analysis for Cx601. We analyzed combined remission, defined as closure of all
treated external openings draining at baseline despite gentle finger compression and lack of collections larger than two centimeters
confirmed by MRI, which was the study’s primary endpoint at week twenty-four, as a secondary variable after fifty-two weeks.



In the ITT population, 54.2% of patients
treated with Cx601 had combined remission compared to 37.1% of patients in the placebo arm. The result had a p-value of 0.012,
indicating high statistical significance.



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The chart below shows the rate of combined
remission in the ITT population after twenty-four and fifty-two weeks respectively.







In addition, in the ITT population, after
fifty-two weeks, 75% of patients treated with Cx601 who were in combined remission at week twenty-four did not relapse, compared
to 55.9% of patients in the placebo arm. In the safety population, the results also confirmed the favorable safety and tolerability
profile of Cx601, with comparable number of patients with treatment-emergent adverse events, both serious and non-serious, and
discontinuations due to adverse events across the two groups.



Treatment emergent adverse events (both
non-serious and serious) and discontinuations due to adverse events were comparable between patients who received Cx601 and placebo
both at twenty-four weeks and fifty-two weeks.



|Number
of Patients with (%)                                | Cx601
n=103 | Placebo
n=102
|---------------------------------------------------------- | ----------- | -------------
|                                                           | W24         | W52          
|Treatment emergent adverse events                          | 68 (66.0)   | 79 (76.7)    
|Related treatment emergent adverse events                  | 18 (17.5)   | 21 (20.4)    
|Withdrawn due to treatment emergent adverse events         | 5 (4.9)     | 9 (8.7)      
|Treatment emergent serious adverse events                  | 18 (17.5)   | 25 (24.3)    
|Related treatment emergent serious adverse events          | 5 (4.9)     | 7 (6.8)      
|Withdrawn due to treatment emergent serious adverse events | 4 (3.9)     | 6 (5.8)      



We evaluated treatment emergent adverse
events both at twenty-four weeks and at fifty-two weeks. At the most complete and up-to-date assessment of adverse events at fifty-two
weeks, nine patients withdrew in each of the Cx601 and placebo arms.



In
the Cx601 arm, patients withdrew for the following reasons:



| | · | One withdrew due to proctalgia.
| | - | -------------------------------



| | · | One withdrew due to Crohn’s disease.
| | - | ------------------------------------



| | · | One withdrew due to an anal fistula.
| | - | ------------------------------------



| | · | One withdrew due to an intestinal obstruction.
| | - | ----------------------------------------------



| | · | One withdrew due to an infected fistula.
| | - | ----------------------------------------



| | · | One withdrew due to pregnancy.
| | - | ------------------------------



| | · | Three withdrew due to anal abscesses.
| | - | -------------------------------------



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In the placebo arm, patients withdrew for
the following reasons:



| | · | One withdrew due to proctalgia.
| | - | -------------------------------



| | · | One withdrew due to Crohn’s disease.
| | - | ------------------------------------



| | · | One withdrew due to a fistula.
| | - | ------------------------------



| | · | One withdrew due to a B-cell lymphoma.
| | - | --------------------------------------



| | · | One withdrew due to a female genital tract fistula.
| | - | ---------------------------------------------------



| | · | Four withdrew due to anal abscesses.
| | - | ------------------------------------



Phase II Clinical Results



Prior to the Phase III trial, we had
conducted a single-arm non-controlled Phase II trial in which twenty-four patients suffering from complex perianal fistulas
were treated. Due to the design of the trial, in which patients were required to stop their existing treatment in order to isolate
the effect of the therapy, four patients dropped out due to the exacerbation of their underlying Crohn’s disease, while others
dropped out due to anal abscesses and significant deviations from the study protocol. The results of the Phase II clinical
trial were as follows:



| | · | Efficacy in treating fistula tracts, defined as the complete closure and re-epithelization of the fistula being treated with
absence of drainage, at twenty-four weeks was 56.3%, which is more than twice as high as the anti-TNF, the prevalent standard of
care for fistulizing Crohn’s disease.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | 69.2% of patients experienced a reduction in the number of initially draining tracts.
| | - | -------------------------------------------------------------------------------------



| | · | Safety of the use of allogeneic stem cells for the treatment of perianal fistula was demonstrated.
| | - | --------------------------------------------------------------------------------------------------



Subjects were followed until twenty-four
weeks after the initial administration of the cells. The primary objective was to assess the safety (i.e., the incidence
of drug-related adverse events). Secondary endpoints were as follows:



| | · | To assess the efficacy of Cx601 for the closure of complex perianal fistulas in perianal Crohn’s disease patients after
twelve and twenty-four weeks.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------



| | · | To evaluate the changes over time in the Perianal Disease Activity Index, or PDAI, and in the Crohn’s Disease Activity
Index, or CDAI.
| | - | --------------------------------------------------------------------------------------------------------------------------------------



| | · | To evaluate the changes over the time in the MRI Score of Severity, or MSS.
| | - | ---------------------------------------------------------------------------



| | · | To assess the reduction in the number of draining fistulas at twelve and twenty-four weeks.
| | - | -------------------------------------------------------------------------------------------



| | · | To track the percentage of subjects with MRIs indicating fistula healing at twelve and twenty-four weeks (i.e., the
absence of collections greater than two centimeters).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Clinical and Regulatory Development
in Europe



Based on the data from our pivotal Phase III
trial in Europe, we submitted a marketing authorization application for Cx601 to the EMA in March 2016. In July 2016, the EMA sent
us the Day 120 List of Questions, their initial response to our application for marketing authorization. In this response, the
EMA informed us of certain major objections and, following its standard protocol for review at day 120, stated that our application
was not approvable at that time. These objections would preclude a recommendation for marketing authorization unless we were able
to address them adequately. The major objections identified by the EMA in the Day 120  List of Questions—and elaborated
upon by EMA during an August 2016 clarification meeting, during which we discussed our strategy to address the major objections—relate
to the following principal deficiencies:



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| | · | The EMA questioned whether the stability data available to date adequately supports the stability of the intermediate master
cell stock and also questioned the relevance of the potency test for stability of the master cell stock. We have updated the stability
data in our application based on data that has been generated as part of the stability protocols currently in place. In particular,
in our replies to the Day 120 List of Questions we have included additional one year stability data for older batches, and one
year stability data for more recent batches of the master cell stock. We believe that this data provide adequate information about
the behavior of the master cell stock while in storage.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The EMA noted that the information provided on the starting material with respect to details on the donor selection and testing
is incomplete. We acknowledge that the information about donor testing included in our initial submission was limited and we provided
additional information in our responses, which included other information about the tests performed on the donors, including the
list of the viral markers that were tested and the names and addresses of the centers where the lipoaspirates, or the material
removed through a liposuction procedure that we use to produce our eASCs, are collected along with information about the inspection
status of these centers.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The EMA deemed our viral safety risk assessment to be insufficient. Although we performed a safety risk assessment prior to
submission of our application for marketing authorization, we did not believe such assessment was relevant and, therefore, did
not include it in our application materials. We are updating this risk assessment following the requirements outlined in the relevant
directives of the European Commission and the general text of the European Pharmacopeia on viral safety, as directed by the EMA,
and we provided this updated risk assessment as part of our replies to the Day 120 List of Questions.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The EMA questioned the clinical relevance of the observed treatment effect as defined by the primary endpoint used. Specifically,
the EMA raised three key questions related to the primary endpoint definition and results:
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Question on MRI-based endpoint as representative of complete closure of fistulas: The EMA requested justification of
the imaging portion of the primary endpoint. We provided additional clarifications and two expert opinions on the justification
of the primary endpoint in our replies to the Day 120 List of Questions, including justification of the greater than two centimeter
cutoff and re-reading of the data using different cutoffs. During the August 2016 clarification meeting, the reviewers acknowledged
the clinical relevance of the selection of absence of collections for the imaging part of the primary endpoint and they also acknowledged
the clinical justification provided for the selected cut-off.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Question on whether the primary endpoint is adequately sensitive as a measurement of change given the exclusion criterion
of collections greater than two centimeters: In light of this question, the EMA requested to see data based on absence of collections
as assessed by MRI. We provided the required data as part of our replies to the Day 120 List of Questions.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Question on long-term efficacy: The EMA requested to see data on development of new fistulas at a time point later than
twenty-four weeks. We believe that the data from the follow-up analysis at fifty-two weeks, which was not available as part of
our initial submission, and which demonstrates, among other findings, that 75% of patients treated with Cx601 who achieved combined
remission at twenty-four weeks did not relapse by week fifty-two, is of clinical relevance. We submitted this data as part of our
replies to the Day 120 List of Questions. During the August 2016 clarification meeting, the reviewers acknowledged the clinical
relevance of this data.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Based on the August 2016 clarification
meeting and the results of the follow-up analysis after fifty-two weeks, we believe we provided reasonable replies to each of the
major objections identified by the EMA.



The Day 120 List of Questions also included
a number of technical questions and comments that do not rise to the level of major objections. We believe that we provided adequate
replies to all of these questions and comments.



We submitted our replies to the Day 120
List of Questions in December 2016, and EMA sent us their Day 180 List of Outstanding Issues in February 2017. We are confident
in our ability to provide adequate responses and remain on track to receive a marketing authorization decision for Cx601 in 2017.
The Day 120 List of Questions and the Day 180 List of Outstanding Issues are part of the EMA’s official review timetable.



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In addition, as part of the marketing authorization
approval process, we had a Good Clinical Practice, or GCP, inspection in September 2016. The EMA indicated that this was a
routine inspection and was not the result of any specific concerns identified by the reviewers during their ongoing evaluation
of our application. The inspectors identified certain critical and major deviations from GCP. We submitted our initial replies
to the report from this inspection, including the corresponding planned “corrective and preventive actions” on October 21,
2016. We received the inspector’s report to the EMA’s Committee for Human Medicinal Products, or the Integrated Inspection
Report, in November 2016, which indicated that the inspectors continue to be concerned about potential critical GCP deviations,
in particular a potential violation of patient privacy due to the presence of a company-sponsored healthcare professional during
the administration of Cx601. This healthcare professional was trained or had previous experience in the administration of Advanced
Therapy Medicinal Products. This professional was present at the time of administration of Cx601 or placebo by the surgeon in the
initial administrations at each trial site to ensure proper understanding and therefore compliance with the surgical protocol.
This enabled us to standardize the surgical procedure to administer Cx601 and placebo to help ensure the quality of the safety
and efficacy data generated. The presence of this additional healthcare professional was not disclosed to patients prior to the
procedure when they gave informed consent or included in the clinical protocol that was evaluated by an ethics committee. In their
Integrated Inspection Report, the inspectors recommend that the data from the trial should be disregarded as part of the marketing
authorization application. In making their recommendation, the inspectors focused on the infringement of the patient’s right
to consent to the presence of a company-sponsored healthcare professional irrespective of mitigating factors. Due to the nature
of this finding, the inspectors deemed the trial not to be conducted in accordance with ethical principles, including GCP and applicable
regulatory requirements. We believe that we provided reasonable replies to the inspectors’ concerns, including an evaluation
of the impact of the potential privacy violation on the patients and our proposed preventive actions, which we submitted as part
of our replies to the Day 120 List of Questions. We believe that any potential violation of patient privacy due to the presence
of an additional individual would be limited, since this individual was a healthcare professional subject to a duty of confidentiality,
did not have access to any patient information and was only present during the surgical procedure, usually entering the room after
the patient was anesthetized and covered. In addition, we believe that given the lack of treatment alternatives and the heavy commitment
of the patients for invasive procedures under the treatment protocol, it is unlikely that the patients would not have given specific
consent for the presence of an additional specifically trained healthcare professional to ensure the safety and efficacy of the
intervention. Moreover, it is our view that the presence of this professional does not affect the integrity of the trial data.



Although we expect a decision from the
EMA on our marketing authorization application during the second half of 2017, our replies might not be satisfactory and our marketing
authorization application might not be approved by the EMA. If marketing authorization were to be approved by the second half of
2017, Takeda could begin to commercialize Cx601 in Europe thereafter.



While we believe that the data we have
announced to date is sufficient for us to receive marketing authorization in Europe, the data we are continuing to collect and
analyze, and the interpretation of such data by the regulatory authorities, prescribing physicians and others, including potential
partners, could have a significant impact on the value of the asset and our ability to realize its full value.



Commercialization in Europe and the rest of
the world



On July 4, 2016, we entered into a
licensing agreement with Takeda, a large pharmaceutical company active in gastroenterology, under which Takeda acquired the exclusive
right to commercialize and develop Cx601 for complex perianal fistulas outside the United States, Japan and Canada. The licensing
agreement included an option for Takeda to expand the scope of the license to Japan and Canada, which Takeda exercised on December
20, 2016. As a result, Takeda now has the exclusive right to commercialize and develop Cx601 for complex perianal fistulas in all
countries outside the United States. If TiGenix develops a new indication for Cx601 and wants to license out such new indication,
Takeda will also have a right of first offer to be awarded a license grant for such new indication outside the United States. Takeda
agreed to make an upfront non-refundable payment of 25 million euros, a further payment of 15 million euros if and when
Cx601 receives marketing authorization from the EMA, an equity investment of 10 million euros within one year of the effective
date of the agreement (which it made on December 29, 2016), additional sales and reimbursement milestone payments up to a total
of 340 million euros and royalty payments ranging from 10% to 18% on net sales by Takeda.



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Clinical and Regulatory Development
in the United States



In addition to allowing us to file for
marketing authorization in Europe, the pivotal Phase III study we have just completed will serve as a key supportive study
in filing for approval in many other jurisdictions, including the United States. We had a Type B meeting with the Center for
Biologics Evaluation and Research within the FDA in December 2013, at which we discussed the following issues:



| | · | The adequacy of the existing non clinical data available from previous trials to support an IND for a pivotal U.S.-based Phase III
study.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------



| | · | Guidance on the design of such pivotal U.S.-based Phase III study.
| | - | ------------------------------------------------------------------



| | · | Confirmation of the acceptability of using the data from the ongoing European Phase III study to support a BLA filing
in the United States.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



A Type B meeting is a category of
meetings that includes each of the following:



| | · | Pre-IND application meetings.
| | - | -----------------------------



| | · | Certain end-of-Phase I meetings.
| | - | --------------------------------



| | · | End-of-Phase II and pre-Phase III meetings.
| | - | -------------------------------------------



| | · | Pre-new drug application or BLA meetings.
| | - | -----------------------------------------



Based on the advice received at this Type B
meeting, in December 2014 we asked the FDA to review our proposed design for a Phase III registration trial in the United
States by filing a special protocol assessment, or SPA. In August 2015, we reached an agreement with the FDA on our proposed design
for a Phase III trial to register Cx601 in the United States as part of an SPA.



The agreed trial will be a randomized,
double-blind, parallel group, placebo-controlled multicenter study in complex perianal fistulas in Crohn’s disease patients.
We expect to randomize approximately 320 to 330 patients to assess the efficacy and safety of Cx601 twenty-four and fifty-two weeks
after a single dose of the product candidate is administered. The SPA describes the primary endpoint as combined remission, defined
as 100% closure of all treated external openings draining at baseline despite gentle finger compression, and the lack of abscesses
greater than two centimeters confirmed by magnetic resonance imaging, or MRI, by twenty-four weeks after administration. The agreed
primary endpoint is the same as the one for the European Phase III trial. In addition, the required p-value for the U.S. registration
trial, the statistical measure that will be used to measure the strength of the trial’s observations, is less than 0.05,
compared to the more stringent threshold of less than 0.025 which Cx601 was successfully able to meet in the European trial.



In January 2017, the Company had a Type
C meeting in which changes to the protocol were discussed with the FDA. The FDA agreed that the BLA could be filed based on the
efficacy and safety follow-up of patients assessed at week 24, instead of week 52. Furthermore, the FDA has agreed to accept fewer
patients than originally planned in the study, and has endorsed a broader target population that will ultimately facilitate the
recruitment process. With these adjustments, the study will benefit from an expedited recruitment process that should lead to shorter
timelines, an earlier filing, and the possibility of an earlier approval in the United States. As a result of these modifications,
the trial design is even more similar to the European ADMIRE-CD than it was before. Based on feedback from that meeting, the Company
submitted a revised protocol in February 2017. We expect an answer before the end of April 2017.



We are currently exploring the options
for expedited pathways that could facilitate and accelerate the development of Cx601 and the review of its future BLA. In order
to further expedite clinical development in the United States, in February 2015 we entered into an agreement with Lonza to manufacture
Cx601 in Lonza’s Walkersville, Maryland facility. The technology transfer with Lonza is now underway in preparation for an
IND application for the pivotal Phase III study to register Cx601 in the United States. We expect to initiate the Phase III
trial for the registration of Cx601 in the United States in the first half of 2017 (first at trial sites in Europe and later at
trial sites located in the United States and Canada).



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Cx611



Cx611 is an allogeneic cellular suspension
of eASCs that is injected intravenously. We have completed a Phase I sepsis challenge trial in which we studied the effect
of Cx611 on volunteers with induced sepsis-like symptoms and we initiated a Phase IB/IIa clinical trial for Cx611 (SEPCELL) in
the treatment of severe sepsis in community-acquired pneumonia, both in Europe. We also completed a Phase I/IIa trial for
Cx611 for the treatment of refractory rheumatoid arthritis. We intend to develop Cx611 for patients suffering from severe sepsis.



Severe Sepsis



Sepsis is a potentially life-threatening
condition that arises when the body’s response to infection injures its own tissues and organs by releasing inflammatory
molecules. This inflammation can lead to a cascade of detrimental changes that damage multiple organ systems, causing them to fail.
Sepsis first produces a pro-inflammatory response and then an anti-inflammatory response. The pro-inflammatory responses lead to
organ failure and coagulation, leading to tissue hypo perfusion and tissue injury; the anti-inflammatory responses produce a susceptibility
to infection. When sepsis is complicated by organ failure, which may include respiratory compromise, cardiovascular compromise,
central nervous system dysfunction or acute kidney injury, it is considered severe. Patients with severe sepsis require close monitoring
and treatment in a hospital intensive care unit. If sepsis progresses to septic shock, the patient’s blood pressure drops
dramatically, potentially leading to death. Mortality increases as the condition progresses, with estimates ranging from 10-20%
in sepsis to 20-50% in severe sepsis to 40-80% in patients who progress to septic shock.



Drug therapy is likely to include broad-spectrum
antibiotics, corticosteroids or vasopressor drugs to increase blood pressure, along with oxygen and large amounts of intravenous
fluids. Supportive therapy may be needed to stabilize breathing and heart function and to replace kidney function.



Market Opportunity



An estimated 15 million to 19 million
cases of sepsis occur worldwide every year, according to an article published in The Lancet, in 2012. The incidence rate has dramatically
increased over the last decade due to an aging population, the increasing use of high-risk interventions in all age groups, and
the development of drug-resistant and more virulent varieties of microbes. The sepsis mortality rate was estimated at 36% in a
recent major European study and is the most common cause of death in non-coronary intensive care units (source: Martin GS Expert
Rev Anti Infect Ther. 2012 June; 10(6): 701–706). In the case of septic shock, mortality can reach up to 80%, with 28 to
50% of patients dying within the first month of diagnosis.



Approximately 70% of patients with sepsis
require treatment in critical care units (incorporating intensive care and high dependency care), with treatment of sepsis accounting
for approximately 40% of total expenditure in intensive care units.



In 2016, GlobalData projects the sepsis
market to be valued at $25.7 million across the six main markets, the United States, Spain, Germany, the United Kingdom, Italy
and France. The United States is expected to account for 80% of the 2016 market share, with sales of $20.3 million. In the
five EU countries, sales are expected to reach $5.4 million. By 2021, GlobalData expects sales to reach a total of $354.0 million
across these six markets, at a compound annual growth rate of 69% over the period. GlobalData believes that this growth will be
driven by the increased uptake of novel therapies in select patients as the critical care community regains confidence in sepsis-specific
products and as more data is generated on their overall efficacy and safety.



Current Treatment Options



Severe sepsis represents a high unmet medical
need. Current treatments are insufficient and mainly symptomatic, and aim at controlling the infection with antibiotics, improving
some of the symptoms, as with vasopressor treatment, or providing supportive treatment such as haemodialysis or mechanical ventilation.
Biologics are also used but generally have limited effect. There is a clear need for a product that could impact both the pro-inflammatory
and the anti-inflammatory pathways.



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Clinical Development



In the fourth quarter of 2014, we began
a randomized placebo-controlled Phase I trial to test the safety and study the mechanism of action of Cx611 in healthy volunteers
challenged with a low dose of bacterial endotoxin (lipopolysaccharide), a potent pro-inflammatory constituent of the outer membrane
of gram-negative bacteria, which elicits a strong inflammatory response inducing sepsis-like symptoms. A total of thirty-two volunteers
were recruited for the study, and divided into four groups of eight patients each. Patients in the first three groups received
Cx611 in different doses and patients in the final group received placebo.



The endpoints of the study included the
following:



| | · | Vital signs including blood pressure, pulse rate, temperature and heart rate.
| | - | -----------------------------------------------------------------------------



| | · | Laboratory measures and functional assays of innate immunity.
| | - | -------------------------------------------------------------



In May 2015, we reported positive results
from this trial. Cx611 demonstrated a favorable safety and tolerability profile. However, the volunteers’ lipopolysaccharide-induced
symptoms were short-lived and no significant effect of Cx611 could be detected prior to the dissipation of symptoms.



Based on the results of this study, we
have designed a follow-on trial in severe sepsis patients with the help of our Advisory Board. In January 2017, we enrolled and
treated the first patient in a Phase Ib/IIa clinical trial in Europe for Cx611 in the treatment of severe sepsis.



The Phase I/II trial is designed to
be a randomized double-blind placebo controlled multicenter study with two parallel arms. We expect to recruit 180 patients in
at least fifty centers in at least four countries, with ninety patients in each group. We will recruit patients with severe community-acquired
bacterial pneumonia, or pneumonia acquired outside a hospital setting, who are admitted into intensive care units requiring either
or both of mechanical ventilation and vasopressors. Patients will receive 160 million cells of eASCs or doses of placebo on
each of the first and third days of the treatment in addition to the standard of care therapy. We will follow up with the patients
for two years, with visits at three, six and twelve months, and telephone calls to the patients and their general practitioners
only for safety purposes and to record any serious adverse events at eighteen and twenty-four months after the first dose is administered.



The endpoints of the study will be as follows:



| | · | Primary endpoint: Safety profile—any adverse event and potential immunological host responses against the administered
cells.
| | - | -----------------------------------------------------------------------------------------------------------------------------



| | · | Secondary endpoints:
| | - | --------------------



| | · | Reduction in the duration of either or both of mechanical ventilation or vasopressors needed.
| | - | ---------------------------------------------------------------------------------------------



| | · | Improved survival.
| | - | ------------------



| | · | Clinical cure of the community-acquired bacterial pneumonia.
| | - | ------------------------------------------------------------



| | · | Other infection related endpoints.
| | - | ----------------------------------



We received a grant from the European Commission
Horizon 2020 program for the Phase I/II trial. Horizon 2020 is the European Union framework program for research and innovation.
We will receive 1.3 million euros directly and will be responsible for managing a further 4.1 million euros. We received
3.2 million euros on October, 2015. The balance will be received from 2017 onwards.



Preclinical Development



MSCs have been shown in the literature
to reduce mortality in several animal models of sepsis. Our eASCs have also been shown to reduce mortality in animal sepsis models
of acute periponitis, an infection of the intestine, and endotoxemia, a bacterial infection. The effect is due to a combination
of reducing pro-inflammatory and increasing anti-inflammatory mediators, the production of antimicrobial effectors and increased
absorption of pathogens by specially adapted cells known as phagocytes.



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Rheumatoid Arthritis



Rheumatoid arthritis is a chronic system
disorder characterized by inflammation of the joint tissues, leading to degeneration of the joint bone and cartilage. It is a common
autoimmune disease, and according to a report by GlobalData, in 2011, approximately 4 million people in the United States,
France, Germany, Italy, Spain, the United Kingdom and Japan had been diagnosed with rheumatoid arthritis. In 2011, the prevalence
of rheumatoid arthritis in the adult population in the United States was estimated to be 0.6%. The economic burden associated with
the treatment of rheumatoid arthritis is huge for any healthcare system. In the United States, sales of drugs to treat rheumatoid
arthritis were estimated to be approximately $9.5 billion in 2011.



The treatment of rheumatoid arthritis comprises
four general classes of drugs: non-steroidal anti-inflammatory agents, or NSAIDs, corticosteroids, synthetic disease modifying
anti-rheumatic drugs, or DMARDs, and biologics. However, rheumatoid arthritis remains an insufficiently met clinical need due to
the shortcomings of existing treatment options.



Clinical Results



In January 2012, we completed a Phase I/IIa
clinical trial in Europe using allogeneic eASCs for the intravenous treatment of refractory rheumatoid arthritis in twenty-three
centers.



The Phase I/IIa clinical trial was
a twenty-four week, single blind dose-escalating study. Fifty-three patients with moderate to high disease activity (disease activity
score in twenty-eight joints, or DAS 28, greater than 3.2), who all were under treatment with one synthetic DMARD participated
in the study. Forty-six participants received eASCs, and seven received placebo. All patients received three intravenous infusions
on days one, eight and fifteen of the trial. Patients in different cohorts received placebo, low (1 million eASCs per kg),
medium (2 million eASCs per kg) and high (4 million eASCs per kg) doses of Cx611.



As follow-up, we conducted a detailed monthly
workup of each patient measuring all the pre-defined parameters. We aimed to evaluate the safety, tolerability and optimal dosing
over the full six months of the trial, as well as to explore therapeutic activity.



The primary end-points (safety) of the
study were as follows:



| | · | Tolerability.
| | - | -------------



| | · | Treatment emergent adverse events, including the following:
| | - | -----------------------------------------------------------



| | · | Dose limiting toxicities.
| | - | -------------------------



| | · | Serious adverse events.
| | - | -----------------------



| | · | Non-serious adverse events.
| | - | ---------------------------



The secondary end-points (therapeutic activity)
were as follows:



| | · | American College of Rheumatology scores (known as ACR20/50/70, which measures the percentage of patients who experience 20%,
50% and 70% improvement, respectively, in tender or swollen joint counts, as well as, three out of five additional parameters identified
by the American College of Rheumatology).
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The European League against Rheumatism, or EULAR, criteria, which are based on the improvement in the DAS 28.
| | - | -------------------------------------------------------------------------------------------------------------



| | · | A short-form health survey measuring patients’ quality of life.
| | - | ---------------------------------------------------------------



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We reported the final results of the Phase I/IIa
study in April 2013, which included positive safety data as well as a first indication of therapeutic activity on standard outcome
measures and biologic markers of inflammation, the results of which were as follows:



| | · | Patient and disease characteristics were comparable for all three dose groups.
| | - | ------------------------------------------------------------------------------



| | · | There was no major safety signal from the repeated intravenous infusion of eASCs, and the dose-limiting safety signal was not
identified.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------



| | · | Three serious adverse event were reported (lacunar infarction, peroneal palsy and fever of unknown origin) of which lacunar
infarction was thought to be possibly related to the treatment and led to the discontinuation of the treatment. The patient subsequently
recovered. A lacunar infarction is a small deep infarction in the subcortical regions of the brain. Peroneal palsy is a lower limb
neuropathy consisting of the loss of motor function and/or sensation in the foot and leg due to the compression of the perineal
nerve in its course around the head of the fibula, or the calf bone.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The most frequent non-serious adverse effects, occurring in more than 10% of patients treated with eASCs, included the following:
| | - | ---------------------------------------------------------------------------------------------------------------------------------



| | · | Fever (20%).
| | - | ------------



| | · | Headache (13%).
| | - | ---------------



| | · | Urinary tract infection (13%).
| | - | ------------------------------



| | · | Upper respiratory tract infection (11%).
| | - | ----------------------------------------



| | · | Nausea (11%).
| | - | -------------



With respect to the secondary end-points,
our findings were as follows:



| | · | A clear dose response effect was not observed.
| | - | ----------------------------------------------



| | · | With respect to the American College of Rheumatology scores, after three months, 20% of patients achieved a 20% improvement
versus no patient in the placebo group; 11% of patients achieved 50% improvement versus no patient in the placebo group; and 4%
of patients achieved 70% improvement versus no patient in the placebo group.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | With respect to the EULAR criteria based on the improvement in the DAS 28 (ESR, or erythrocyte sedimentation rate), three months
after the treatment, 39% of patients had a good to moderate response compared to no patient in the placebo group.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | With respect to the disease activity score, in twenty-eight joints as modified to measure the C-reactive protein value, or
DAS 28 (CRP), 11% of patients achieved remission after three months compared to no patient in the placebo group.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



These clinical results were the first to
suggest that intravenous infusion of eASCs has a favorable safety profile, is well tolerated along twenty four weeks and could
be associated with clinical benefits in the treatment of refractory rheumatoid arthritis. The results of the study were presented
at a plenary session of the American College of Rheumatology meeting in San Diego on October 29, 2013 and were published in
May 2016.



Given the increased competition and the
arrival of oral products in the rheumatoid arthritis (RA) field, we have decided to keep the program on hold as we believe there
were better opportunities for TiGenix to pursue: Cx611 in severe sepsis, AlloCSC-01 in AMI and potential new indications for Cx601
although they are still not decided. We do not anticipate coming back to RA with Cx611.



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Cx621



Cx621 is an allogeneic cellular suspension
of eASCs for the potential treatment of a variety of autoimmune diseases via a proprietary technique of intra-lymphatic administration,
or the injection of eASCs into the lymphatic system rather than the blood stream or the affected tissue.



Clinical Development



Based on positive preclinical data on toxicology,
biodistribution and efficacy, we conducted a Phase I protocol to assess safety, tolerability and pharmacodynamics of intranodal
injected allogeneic eASCs in healthy volunteers in 2012.



We conducted a randomized, controlled,
single-blind Phase I trial in Europe to assess the intra lymphatic administration of two fixed doses (2.5 and 5 million)
of eASCs in two different cohorts of five healthy volunteers each. Each dose was administered twice with an interval of seven days
and was injected into two inguinal lymph nodes. Two volunteers per cohort received treatment with HypoThermosolTM as a control
group. The primary objective was to determine the safety, feasibility and tolerability of intra-lymphatic eASCs administration.
The safety assessment was performed over twenty-one days after the second administration. It included signs and symptoms, laboratory
tests, chest x-ray and appearance of the injected lymph nodes by ultrasound. Pharmacodynamic parameters were included as an exploratory
measure. No serious or severe adverse events occurred.



The confirmation of the safety of intra-lymphatic
administration of our eASCs could have significant clinical and commercial implications. This use of a different route of administration
has the potential to enable applications in other autoimmune diseases.



AlloCSC-01



AlloCSC-01 is a suspension of allogeneic
CSCs administered into the coronary artery of the patient. AlloCSC-01 is currently in the second stage of a two-stage Phase I/II
trial in acute myocardial infarction in Europe.



Acute Myocardial Infarction



Acute myocardial infarction, the medical
term for a heart attack, occurs when blood circulation stops to a part of the heart, causing damage to the heart muscle. It is
most commonly treated by percutaneous coronary angioplasty, a non-surgical procedure to widen the coronary artery by inserting
a catheter, or a small tube with a balloon tip, into the obstructed coronary artery and inflating the balloon to open the artery.
A wire mesh tube, known as a stent, is then usually placed in the artery to keep it open.



However, myocardial infarction can leave
non-functional scar tissue, leading to a process of ventricular remodeling, whereby the cardiac muscle tries to compensate for
the effect of the injury. Over time, the heart becomes enlarged and cannot pump blood efficiently, causing the onset of congestive
heart failure, a terminal disease. Survivors of myocardial infarction are at increased risk of recurrent infarctions and have an
annual mortality rate of 5%, which is six times higher than in people of the same age who do not suffer from coronary heart disease.
There is no curative treatment for congestive heart failure other than a heart transplantation.



Market Opportunity



Cardiovascular disease is the most common
cause of death, leading to 17.5 million deaths worldwide in 2012, of whom 7.4 million people died of ischemic heart disease,
or decreased blood flow to the heart, according to the World Health Organization. Up to 1.9 million people annually are diagnosed
with acute myocardial infarction in the United States, Europe and Japan, according to the Acute Coronary Syndrome Cardium Study
by Decision Resources (January 2015), most of whom are treated by percutaneous coronary angioplasty and the implantation of one
or more stents. Congestive heart failure following myocardial infarction affects 26 million patients.



In 2016, the American Heart Association
estimated that the direct and indirect cost of coronary heart disease, the main cause of myocardial infarction, was $182 billion
and is expected to reach $322 billion in 2030. Similarly the cost of heart failure in the United States was estimated at $24 billion
for 2015, reaching $47 billion in 2030.



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Clinical Development



We believe that AlloCSC-01 can be used
within a few days after the stent is inserted to limit the extent of tissue damage, through three potential modes of action:



| | · | By secreting protective factors in the recently damaged cardiac tissue, AlloCSC-01 could reduce cell death produced both when
blood flow is interrupted and when it is restored, thus salvaging valuable tissue.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | By controlling inflammation, AlloCSC-01 could limit the scarring of cardiac tissue in the infarcted region, which would lead
to an improved prognosis.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | AlloCSC-01 could support the regeneration of new viable tissue from resident cardiac cells, improving the functional capacity
of the cardiac muscle.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------



AlloCSC-01 is in a Phase I/II trial
initiated in June 2014 to evaluate the safety and efficacy of intracoronary infusion in patients who have suffered from acute myocardial
infarction. The study includes both males and females who meet the following criteria:



| | · | Are between eighteen and eighty years of age.
| | - | ---------------------------------------------



| | · | Suffer from a ST segment elevation myocardial infarction, or STEMI, which is the more severe type of heart attack in which
the coronary artery is completely blocked by a blood clot, leading to infarction of virtually all of the cardiac muscle being supplied
by the artery.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Have a Killip classification of two or less on admission, meaning that these patients are less likely to die in the thirty
days following the myocardial infarction.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Have been successfully treated by percutaneous coronary angioplasty within twelve hours of the onset of symptoms, with a thrombolysis
in myocardial infarction (TIMI) score of three, meaning that the flow of blood to the heart has been successfully restored, lowering
the patient’s risk of death or ischemic events.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Have an ejection fraction, which is the percentage of blood that is pumped out of the ventricles with each contraction, less
than or equal to 50% as measured by echocardiography on the second day after showing infarct symptoms (which is lower than a normal
ejection fraction of 55-75%, indicating impaired function, according to the American Heart Association).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Have an ejection fraction less than or equal to 45% as measured by magnetic resonance imaging, or MRI, three to five days following
the STEMI.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------



| | · | Have an infarct size greater than or equal to 25% of the left ventricle, as measured by the first MRI after the STEMI.
| | - | ----------------------------------------------------------------------------------------------------------------------



| | · | Have a bare-metal stent or a second generation drug-eluting stent inserted in the coronary artery after the percutaneous coronary
intervention.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------



| | · | Have an infarct culprit coronary artery adequate for treatment administration such that the treatment is technically feasible.
| | - | ------------------------------------------------------------------------------------------------------------------------------



| | · | Are in stable and adequate clinical condition to undergo the procedure.
| | - | -----------------------------------------------------------------------



Phase I of the trial was an open label
dose-escalation phase in which six patients received a single injection of 11 million, 22 million or 35 million
cells of AlloCSC-01 by intracoronary infusion five to seven days after percutaneous coronary intervention. Five of the patients
were followed up for six months.



Phase II, which is ongoing, is a double-blind
placebo-controlled randomized trial in which the forty-nine patients will be either assigned to an active treatment group or a
placebo control group in a 2:1 ratio. The active treatment group will receive one dose of 35 million cells, while patients
receiving placebo will be injected with human serum albumin. The study’s endpoints will be as follows:



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| | · | Primary endpoint (acute safety of treatment):
| | - | ---------------------------------------------



| | · | Mortality from any cause within thirty days.
| | - | --------------------------------------------



| | · | Other safety events:
| | - | --------------------



| | · | In the dose-escalation phase: all adverse events from any cause observed from inclusion, which is the moment at which the first
magnetic resonance imaging, or MRI, scan is performed, until seven days after treatment administration.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | In the randomized phase: major adverse cardiac events, or MACE, during the first thirty days.
| | - | ---------------------------------------------------------------------------------------------



| | · | Secondary endpoints:
| | - | --------------------



| | · | Follow-up on safety:
| | - | --------------------



| | · | Adverse events during the clinical trial.
| | - | -----------------------------------------



| | · | Major adverse cardiac events at six months and twelve months after treatment.
| | - | -----------------------------------------------------------------------------



| | · | Mortality from any cause during the clinical trial.
| | - | ---------------------------------------------------



| | · | Evaluation of efficacy:
| | - | -----------------------



| | · | Evolution of the size of the infarcted region.
| | - | ----------------------------------------------



| | · | Evolution of the biomechanical parameters by MRI including the absolute change in the ejection fraction at six and twelve months
after treatment.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Evolution of the edema.
| | - | -----------------------



| | · | Clinical parameters analysis: Testing for B-type natriuretic peptide or BNP, which is secreted in response to changes in pressure
that occur with heart failure; testing for C-reactive protein, a marker for inflammation in the body; performing a six-minute walking
test to determine the functional capacity of the heart; determining the New York Health Association scale, which classifies patients’
heart failure according to the severity of their impairment; and obtaining the Minnesota Living with Heart Failure Questionnaire,
which aims to determine the ways in which heart failure and treatments affect physical, emotional, social and mental dimensions
of quality of life, among others.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Clinical Results



The first phase of the study was completed
successfully, demonstrating a good safety profile for AlloCSC-01, with no adverse events or major adverse cardiac events observed
during the six-month follow-up period. In addition, patients showed a reduction in infarct size, and an improvement in the left
ventricular ejection fraction as measured by MRI over the six-month follow-up period for five of the six patients treated, with
a p-value below 0.05 for both parameters, indicating that these results are statistically significant. However, given the design
of this phase of the trial, in which all six patients received AlloCSC-01 along with the standard of care for the indication, it
is not possible to isolate the effect of AlloCSC-01 on efficacy. These results were presented at the meeting of the European Society
of Cardiology in London between August 29 and September 2, 2015.



The second phase of the study is ongoing
in eight sites in Belgium and Spain. Recruitment of forty-nine patients was completed in November 2015.



On June 17, 2016, we announced the
preliminary interim data from the trial, which was comprised of the six-month follow-up results of the forty-nine randomized patients,
plus two patients from the initial dose-escalation phase who received similar target doses of 35 million cells. No mortality
from any cause within one month was recorded in either the placebo group or the AlloCSC-01 group. Similarly, there was no major
adverse cardiac event in either group within one month. At six months, no major adverse cardiac event was recorded in either group.



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Preliminary efficacy data was limited to the
evolution of the size of the infarcted region, defined as a change in the percentage of the left ventricular mass measured by magnetic
resonance imaging. The mean absolute change in the size of the infarcted region from the baseline to the six-month analysis was
similar in the AlloCSC-01 and placebo groups. On March 13, we announced the top-line one-year results. The main findings of the
study are:



| | · | All safety objectives of the study have been met. No mortality or major cardiac adverse events (MACE) have been found at 30
days, meeting the primary end-point of the study. Moreover no mortality and MACE have been found at 6 months or 12 months follow-up;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Of particular relevance to this allogeneic approach, no immune-related adverse events have been recorded at one-year follow-up;
| | - | -------------------------------------------------------------------------------------------------------------------------------



| | · | A larger reduction in infarct size was found in one pre-specified subgroup associated with poor long-term prognosis and representing
more than half of the patient population of the randomization phase of the study. This finding has revealed valuable insight, and
provides a specific direction for potential studies in a targeted subset of high-risk patients.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



AlloCSC-02



We are carrying out a preclinical proof
of concept to develop AlloCSC-02, the second product from our CSC-based platform, for a chronic heart disease indication, based
on preclinical and clinical observation that the size of scar tissue is reduced following the administration of CSCs in the chronic
setting.



Based on preliminary preclinical data in
a pig model, we are exploring the design of a clinical study, and gathering additional preclinical evidence and applied for funding
for this purpose in the form of a government loan of a below-market rate (a soft loan) of 1.6 million euros from the RETOS
program, a national collaborative research subsidy program run by the Spanish Ministry for the Economy and Competitiveness, along
with a grant of 0.6 million euros to the Gregorio Marañon Hospital, the clinical partner in this project.



ChondroCelect



We have one discontinued product: ChondroCelect,
a cell-based medicinal product for cartilage repair in the knee. It was the first approved cell-based product in Europe that successfully
completed the entire development track from research through clinical development to European approval. ChondroCelect received
marketing authorization in October 2009 as an advanced therapy medicinal product, a new medical product category regulated by the
EMA that includes products based on gene therapy, cell therapy or tissue engineering.



In July 2016 for commercial reasons, we
decided to terminate our distribution agreements with Sobi and Finnish Red Cross Blood Service and our manufacturing agreement
with PharmaCell and we requested the withdrawal of marketing authorization which became effective as of November 30, 2016. We no
longer generate revenues from ChondroCelect.



Competition



The biopharmaceutical industry is characterized
by intense and dynamic competition to develop new technologies and proprietary therapies. Any product candidates that we successfully
develop and commercialize will have to compete with existing therapies and new therapies that may become available in the future.
While we believe that our eASC platform and scientific expertise in the field of cell therapy provide us with competitive advantages,
we face potential competition from various sources, including larger and better-funded pharmaceutical, specialty pharmaceutical
and biotechnology companies, as well as from academic institutions, hospitals, governmental agencies and public and private research
institutions.



Cx601 will compete against a variety of
therapies in development for perianal fistulas in patients suffering from Crohn’s disease, using therapeutic modalities such
as biologics and cell therapy, including products under development by Delenex Therapeutics, Novartis and Celgene as well as various
hospitals and research centers, as well as a product marketed in Korea by Anterogen. In addition, there are products in development
for the treatment of Crohn’s disease that do not focus on the treatment of fistulas.



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Likewise, with respect to Cx611, for the
sepsis indication, there is a limited late-stage pipeline of candidates addressing the underlying immune dysfunction, with the
two non-antibiotic front runners being developed by Asahi Kassey and Toray Industries. Other compounds by InflaRX GmbH, Ferring
and Baxter are currently in earlier stages of development.



AlloCSC-01 will compete against a variety
of cell therapy treatments in development for acute myocardial infarction, including products under development by Pharmicell,
Caladrius, Athersys, Mesoblast and Capricor, as well as treatments using other therapeutic modalities such as tissue engineering
and gene therapy approaches.



Many of our competitors, either alone or
with their strategic partners, have substantially greater financial, technical and human resources than we do and significantly
greater experience in the discovery and development of product candidates, obtaining FDA, EMA and other regulatory approvals of
treatments and commercializing those treatments.



Accordingly, our competitors may be more
successful in obtaining approval for treatments and achieving widespread market acceptance. Our competitors’ treatments may
be more effective, or more effectively marketed and sold, than any treatment we may commercialize and may render our treatments
obsolete or non-competitive before we can recover the expenses of developing and commercializing any of our treatments.



Mergers and acquisitions in the biotechnology
and pharmaceutical industries may result in even more resources being concentrated among a smaller number of our competitors. These
competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical
study sites and in recruiting patients for clinical studies. Smaller or early-stage companies may also prove to be significant
competitors, particularly through collaborative arrangements with large and established companies.



We anticipate that we will face intense
and increasing competition as new drugs enter the market and advanced technologies become available. We expect any treatments that
we develop and commercialize to compete on the basis of, among other things, efficacy, safety, convenience of administration and
delivery, price, the level of competition and the availability of reimbursement from government and other third-party payers.



Our commercial opportunity could be reduced
or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side
effects, are more convenient or are less expensive than any products that we may develop. Although we believe that our cell therapy
pipeline is the most advanced in Europe as of the date of this Annual Report, our competitors also may obtain FDA, EMA or other
regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors
establishing a strong market position before we are able to enter the market.



Intellectual Property



Our commercial success depends in part
on our ability to obtain and maintain proprietary or intellectual property protection in key markets for certain aspects of our
cell therapy products, processes and related technologies to operate without infringing on the proprietary rights of others and
to prevent others from infringing our proprietary or intellectual property rights. Our policy is to seek to protect our proprietary
and intellectual property position by, among other methods, filing U.S., international and foreign patent applications related
to multiple aspects of our proprietary products, processes and technologies.



As of December 31, 2016, we owned or co-owned
twenty-nine patent families and had more than one hundred granted patents in more than twenty jurisdictions, including the United
States, with expiration dates from 2020 onwards. Of these patents, twenty are related to our eASC-based technology platform, with
expiration dates from 2024 onwards. Some of our pending patent applications are filed under the Patent Cooperation Treaty, or PCT,
an international patent law treaty that provides a unified procedure for filing a single initial patent application to seek patent
protection for an invention simultaneously in each of the 151 jurisdictions, followed by the process of entering into national
phases in each of the jurisdictions, which requires a separate application in each of the jurisdictions when continued protection
is sought.



A number of our patent families are the
result of collaborations with academic parties, and are jointly owned. Co-ownership agreements are in place with respect to all
but one of such patent families, and certain types of exploitation of such patents may be subject to the co-owner’s approval.
We exclusively own the patents and patent applications that form the remainder of our patent portfolio.



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Our patent portfolio includes the following:



| | · | Certain key foreign base patents and U.S. and foreign patent applications related to our eASC platform.
| | - | -------------------------------------------------------------------------------------------------------



| | · | U.S. and foreign patents and patent applications for other cell therapy applications.
| | - | -------------------------------------------------------------------------------------



| | · | U.S. and foreign patents and patent applications with respect to chondrocyte markers.
| | - | -------------------------------------------------------------------------------------



| | · | A U.S. patent and U.S. and foreign patent applications for cell therapy delivery mechanisms.
| | - | --------------------------------------------------------------------------------------------



| | · | U.S. and foreign patent applications for technology improvements with respect to our eASC platform.
| | - | ---------------------------------------------------------------------------------------------------



The following patent families are materially
relevant to our eASC pipeline:



| | · | “Identification and isolation of multipotent cells from non osteochondral mesenchymal tissue.” (PCT Application
Publication WO2006037649; TiGenix Reference PCX006): a patent family claiming a non osteochondral derived multipotent adult stem
cell population characterized by a set of biological markers. Additionally the patent family claims methods for identifying and
isolating such cells, as well as pharmaceutical compositions and therapeutic uses in healing and tissue regeneration. This patent
family is of relevance to our eASC platform. The patent family is comprised of seven granted patents (in Spain, Australia, Europe,
Japan, Canada, China and Israel) and pending patent applications in Singapore, the United States, Europe (the European Patent Office,
or EPO) and India derived from the PCT application or its priority documents. Oppositions have been filed against the patents issued
in Europe. The anticipated expiration date of the granted Spanish patent ES2313805 is October 4, 2024, and the anticipated
expiration date of the remaining granted patents (AU2011253985, EP2292736, JP5732011, CA2583151, CN101056974 and IL182441) is October
4, 2025. This is also the anticipated expiration date of all pending patent applications. We jointly own this patent family with
the Universidad Autónoma de Madrid, with which we have a co-ownership agreement that provides us with an exclusive license.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “Use of adipose tissue derived stromal stem cells in treating fistula.” (PCT Application Publication WO2006136244;
TiGenix Reference PCX007): a patent family claiming an adipose derived stem cell composition characterized by a panel of cell surface
markers, methods of preparation of such a composition and adipose tissue derived stromal stem cells for use in treating fistula
and wounds. This patent family is relevant to Cx601. The patent family is comprised of granted patents in Australia, Israel, Mexico,
New Zealand, Russia, Singapore, the United States, Canada and Europe and pending patent applications in China, Japan, the United
States, Brazil, Europe (the EPO), Russia and Hong Kong, derived from the PCT application. An opposition to this patent has been
filed in Europe. The anticipated expiration date of these patents and patent applications is May 16, 2026 for patents filed
by means of the PCT application, and February 14, 2025 or June 24, 2025, without taking into account any patent term
adjustment, for U.S. patents derived from US 11/167,061 without the benefit of the PCT application filing. We jointly own
this patent family with the Universidad Autónoma de Madrid, and it is subject to the co-ownership agreement mentioned above
with respect to PCX006, which provides us with an exclusive license.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “Cell populations having immunoregulatory activity, method for isolation and uses.” (PCT  Application
Publication number WO2007039150; TiGenix Reference PCX008): a patent family claiming a stem cell population, methods for the isolation
of such stem cells, their use in the preparation of regulatory T cells and cell therapy of immune and inflammatory diseases.
This patent family is relevant to Cx611 and Cx601. The patent family is comprised of four granted patents in Mexico, South Korea,
Japan and Europe (the EPO) (MX342474, KR10-1536239, JP5925408 and EP1926813) and pending patent applications in Canada, China,
Europe, Singapore, Hong Kong, Israel, Japan the United States and Australia derived from the PCT. The anticipated expiration date
of the granted patent and all these patent applications is September 22, 2026. We jointly own this patent family with the
Consejo Superior de Investigaciones Cientificas, the Spanish National Research Council, with which we have a co-ownership agreement
providing us with an exclusive license.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “Uses of mesenchymal stem cells.” (PCT Application Publication number WO/2010/015929; TiGenix Reference
PCX011): a patent family claiming the use of mesenchymal stem cells in the treatment of systemic inflammatory response syndrome.
This patent family is relevant to the use of Cx611 for the
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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treatment of sepsis. The patent
family is comprised of granted patents in Australia and Europe (the EPO) and pending patent applications in Australia, Canada,
Europe, Japan, the United States, and South Korea derived from the PCT application. The anticipated expiration date of all these
patent applications is August 3, 2029. We jointly own this patent family with the Consejo Superior de Investigaciones Cientificas,
the Spanish National Research Council, and the University of Seville, with which we have a co-ownership agreement providing us
with an exclusive license.



| | · | “Methods and compositions for use in cellular therapies.” (PCT Application Publication number WO 2011/004264;
TiGenix Ref. PCX019): a patent family claiming therapeutic uses of cells by administration to lymphatic organs. This patent
family is relevant to Cx621. The patent family is comprised of granted patents in the United States, New Zealand, Australia, Europe
and Japan and pending patent applications in Brazil, Canada, Mexico, Singapore, China, Hong Kong, Israel, South Korea, India and
Russia derived from the PCT application. The anticipated expiration date of these patents and patent applications is July 9,
2030. We are the sole owners of this patent family.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “Adipose-derived mesenchymal stem cells for intralymphatic administration in autoimmune and inflammatory diseases.”
(PCT Application Publication number WO/2012/095743; TiGenix Ref. PCX022): a patent family claiming therapeutic uses of cells
by administration to lymphatic organs. This patent family is relevant to Cx621. The patent family is comprised of a granted patent
in Japan and pending applications in the United States, South Korea and Europe (the EPO) derived from the PCT application. The
anticipated expiration date of these patent applications is January 12, 2032. We are the sole owners of this patent family.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The patent family related to the cardiac
stem cell platform and AlloCSC-01 consists of one application filed under the Patent Cooperation Treaty, or PCT, and a parallel
application filed directly with the US Patent and Trademark Office. Overall the application has entered national prosecution in
eight jurisdictions. A more detailed description of the patent family is as follows:



| | · | “Adult cardiac stem cell population” (PCT Application publication no. WO 2014/141220; TiGenix Reference Ctx-3):
a patent family claiming an isolated multipotent adult cardiac stem cell characterized by the presence and absence of particular
biological markers, and the ability of the cell to differentiate into at least adipocytes, osteocytes, endothelial cells and smooth
muscle cells. The PCT application claims are also directed to a substantially pure population of the claimed cells, methods for
preparing such a population of cells, as well as pharmaceutical compositions and methods of treating cardiovascular disease, ischemic
injury and autoimmune diseases and preventing allogeneic organ transplant rejection. The international application has recently
entered into the national phase in Australia, Canada, China, Israel, Japan, Europe, South Korea and the United States. The PCT
application was filed on March 17, 2014 and the anticipated expiration date of any patents stemming from the international
application is therefore March 17, 2034.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “Adult cardiac stem cell population” (U.S. application Number 14/213868; publication no. US 2014-0271575;
TiGenix Reference Ctx-3): a separate U.S. application claiming a substantially pure population of adult cardiac stem cells
characterized by the presence and absence of a set of biological markers, and pharmaceutical compositions comprising the claimed
population of cells. Claims directed to methods of preparing the population of cells and to methods of treating cardiovascular
disease, ischemic injury, autoimmune disease, inflammatory processes and chronic ulcers and preventing allogeneic organ transplant
rejection can be pursued in a divisional application if required. The U.S. application was filed on March 14, 2014 and the
anticipated expiration date (without taking into account any patent term adjustment) is March 14, 2034.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, we have over fifty registered
trademarks and trademark applications.



Finally, several elements of our cell therapy
program involve unpatented proprietary technology, processes, know-how or data, including cell isolation, production and release
processes, which we consider to be part of our intellectual property. With respect to proprietary technology, know-how and data
that are not patentable or potentially patentable, or processes other than production processes for which patents are difficult
to enforce, we have chosen to protect our interests by relying on trade secret protection and confidentiality agreements with our
employees, consultants and certain contractors and collaborators. All our employees are parties to employment agreements that include
such confidentiality provisions.



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Partnerships, Licensing and Collaboration



We have entered into partnerships and collaborations
in the past and will consider such opportunities in the future.



ChondroCelect



During the first six months of 2014, we
completed the discontinuation of our operations in connection with ChondroCelect, our commercialized product, through the combination
of the sale of TiGenix B.V., our Dutch subsidiary, that held our production facility for ChondroCelect, to PharmaCell, a leading
European contract manufacturing organization active in the area of cell therapy, for a total consideration of 4.3 million
euros and the entry into an agreement with Sobi for the exclusive marketing and distribution rights for ChondroCelect. Under the
terms of the share purchase agreement with PharmaCell, we received an upfront payment of 3.5 million euros when the sale became
effective on May 30, 2014 and a final payment of 0.8 million euros in December 2016.



In connection with the sale of TiGenix
B.V., we also entered into a long-term manufacturing agreement with to continue to manufacture ChondroCelect in its facility. Under
the agreement, our former subsidiary continued to manufacture ChondroCelect at the facility, which we purchased, with the price
being determined based on the volume of ChondroCelect purchased. We also received cost relief in the form of aggregate pricing
discounts of up to 1.5 million euros on our purchases of ChondroCelect over an initial three-year period. Our former subsidiary
was responsible for ensuring that the facility and their services comply with cGMP requirements. Under the agreement, our former
subsidiary was our exclusive supplier of ChondroCelect within the European Union, and a potential supplier for any sales in certain
additional territories in the Middle East and North Africa; however, we retained the right to appoint additional suppliers within
those territories. The agreement also included standard provisions regarding the protection of each party’s intellectual
property and confidential information. The agreement had an initial term of ten years, after which it had the option to be automatically
renewed for consecutive one-year terms, unless either party gave written notice of termination at least three years prior to the
expiration of the initial term or any renewal period. Either party had the option to terminate the agreement with immediate effect
in the event of a material breach that was not remedied within thirty calendar days by the other party or the insolvency of the
other party. We also had the right to terminate the agreement in the case of a change of control of our former subsidiary, if it
was acquired by one of our direct competitors or if there was any condition that made it reasonably likely that our former subsidiary
or its successor entity would fail to meet its obligations under the agreement. In addition, we had the right to terminate the
agreement with twelve months’ notice if we decided to terminate the ChondroCelect business, either due to a change in European
regulatory conditions or a decision by the EMA that rendered ChondroCelect commercially unviable and, after the second anniversary
of the agreement, we also had the right to terminate the agreement if we determined that the ChondroCelect business was not commercially
viable.



Effective June 1, 2014, we entered
into a distribution agreement with Sobi for the exclusive marketing and distribution rights with respect to ChondroCelect. Sobi
marketed and distributed the product within the European Union (excluding Finland), Switzerland, Norway, Russia, Turkey and the
Middle East and North Africa region. The agreement was for a ten-year term during which we received royalties of 22% on the net
sales during the first year of the agreement and 20% on the net sales of ChondroCelect thereafter. Sobi reimbursed nearly all of
our costs in connection with the product. We passed on the cost relief of 1.5 million euros received from our former subsidiary
under the terms of the long-term manufacturing agreement on a like-for-like basis to Sobi, which purchased ChondroCelect from us
at cost. Under the distribution agreement with Sobi, we continued to hold the marketing authorization for ChondroCelect in the
European Union, and retained the discretion to decide whether to obtain regulatory approval for ChondroCelect in other jurisdictions,
including the territories covered under the distribution agreement. Sobi assumed responsibility for certain other regulatory procedures
and entering into contracts with hospitals to distribute ChondroCelect, managing orders and invoicing, training hospital staff
in the use of ChondroCelect (after we provided initial training to certain key personnel at Sobi) and providing customer support
to such hospitals, with the exception of hospitals in Belgium and the Netherlands, where we continued to provide local customer
support on behalf of Sobi.



The agreement with Sobi included commitments
for minimum quantities of ChondroCelect that Sobi was required to purchase from us. If Sobi’s actual purchases were lower
than the required minimum, we would nevertheless be entitled to receive payment from Sobi up to a maximum amount of 8.8 million
euros, which we were required to pass on to PharmaCell under the long-term manufacturing agreement with our former subsidiary.
If Sobi’s purchases were lower than the required minimum amount for two consecutive years, we would be entitled to terminate
unilaterally the agreement or render it non-exclusive towards Sobi, which would permit us to enter into additional distribution
agreements for the territories covered under the agreement.



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After the initial ten-year term of the
distribution agreement, the distribution agreement with Sobi automatically renewed for successive two-year terms. Either party
had the right to request a renegotiation of terms in connection with a renewal of the agreement, and if we failed to reach an agreement
on terms, the agreement would be terminated. Either party also had the right to terminate the agreement immediately under certain
limited circumstances including the insolvency of the other party or a material breach of the provisions of the agreement, and
in addition, after the fifth year of the agreement, either party had the right to terminate the agreement with six months’
notice if the agreement became commercially non-viable, meaning that one party, despite its best efforts had made or could demonstrate
that it would make a loss over a consecutive two-year period, and the situation is not just temporary.



In addition to the Sobi agreement, we had
a distribution agreement in place with Finnish Red Cross Blood Service to conduct and facilitate the ChondroCelect business in
the Finnish territory. The revenues from this agreement are not material to our operations as a whole; only five patients in Finland
were treated with ChondroCelect in 2014, resulting in revenues of 84,305 euros.



In July 2016, for commercial reasons, we
decided to terminate our contracts with Sobi and Finnish Red Cross Blood Service and our manufacturing agreement with our former
subsidiary purchased by PharmaCell and we requested the withdrawal of marketing authorization for ChondroCelect, which became effective
as of November 30, 2016. We no longer generate revenues from ChondroCelect.



Lonza manufacturing agreement



In February 2015, we entered into an agreement
with Lonza, a U.S.-based contract manufacturing organization and started the process for technology transfer in connection with
a proposed Phase III study to register Cx601 in the United States. Under the agreement, Lonza will manufacture some of the
material for the Phase III trial to register Cx601 in the United States at Lonza’s cell therapy production facility
in Walkersville, Maryland. The agreement will continue until February 9, 2020 unless earlier terminated or extended by the
parties. Pursuant to the agreement, the parties will develop certain statements of work, which describe the process or product
to be developed and the related activities to be performed by both parties or the technology to be transferred to Lonza for the
manufacturing of the product. Lonza will be responsible for complying with cGMP requirements and will maintain any licenses, permits
and approvals necessary.



We will make payments to Lonza in the amounts
and dates set forth in the statements of work, and we will also pay a security deposit equal to the lesser of 20% of the budgeted
costs of the statement of work or $100,000.



The agreement includes standard provisions
regarding the protection of each party’s intellectual property and confidential information.



Either party may terminate the agreement
for any material breach that is not cured within thirty days (or one hundred eighty days in case of payment default). We also have
the right to terminate the agreement with a written notice of no less than twelve months; Lonza may terminate the agreement with
a written notice of twenty-four months. In case of suspension or termination of production by a regulatory authority, we may terminate
the agreement with a written notice of no less than two months. Finally, either party may terminate the agreement upon written
notice in case of insolvency.



We submitted the first statement of work
on May 18, 2015. This provides a description of the activities, timelines and budgets for the initial set-up and one-year
maintenance for the provision of clinical/GMP grade human adipose tissue to be used for manufacturing allogenic mesenchymal adult
stem cells.



The estimated program set-up fees amount
to $22,400. Other fees (including contingency fees) amount to $6,500.



On October 14, 2015 we executed the
second statement of work. This describes the activities, timelines and budgets for the development/optimization of the GMP manufacturing
process of Cx601.



In 2016, we submitted five additional statements
of work. The aggregate estimated total fees payable by TiGenix for these statements of work amount to $6,303,025.



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Takeda licensing agreement



On July 4, 2016, we entered into a
licensing agreement with Takeda, a large pharmaceutical company active in gastroenterology, under which Takeda acquired the exclusive
right to commercialize and develop Cx601 for complex perianal fistulas outside the United States, Japan and Canada. The licensing
agreement included an option for Takeda to expand the scope of the license to Japan and Canada, which Takeda exercised on December
20, 2016. As a result, Takeda now has the exclusive right to commercialize and develop Cx601 for complex perianal fistulas in all
countries outside the United States. Under the agreement, Takeda paid an upfront non-refundable licensing fee of 25 million
euros and will make an additional payment of 15 million euros if and when Cx601 receives marketing authorization from the
EMA.



The agreement excludes clinical development
and commercialization rights in the United States, where we will continue to develop Cx601 for complex perianal fistulas. We also
retain the right to develop Cx601 in any indications outside the indication of complex perianal fistulas. Furthermore, if Takeda
has not presented us with a plan accepted by the regulatory authorities of either Canada or Japan to access the market in those
countries by the second anniversary of the receipt of marketing authorization from the EMA, we have the option of unilaterally
excluding those territories from the scope of the agreement. Takeda will pay us 1.5 million euros upon receipt of regulatory
approval for the sale of Cx601 to patients in each of Canada and Japan. In addition, if Cx601 is approved for reimbursement in
either or both of Canada or Japan at a price equivalent to 30,000 euros per patient or more, Takeda will pay us a further
1 million euros per country.



In Europe, we will transfer the marketing
authorization to Takeda once it is granted by the EMA. Takeda will also make milestone payments for positive pricing and market
access decisions from payers in France, Germany, Italy, Spain and the United Kingdom of 2 million euros per country, if Cx601
is approved at a price of 30,000 euros or equivalent per patient or more, or 1 million euros per country, if Cx601 is
approved at a price between 26,000 euros and 30,000 euros or equivalent per patient.



Under the agreement, we will receive tiered
quarterly royalty payments on net sales of Cx601 on a country-by-country basis, ranging from 10% to 18%, and calculated based on
the price of Cx601 in each country during that quarter. We will also receive one-time sales milestone payments ranging from 15 million
euros, if net sales in the territory reach 150 million euros, to 100 million euros, if net sales reach 1 billion
euros. The potential sales and reimbursement milestones could total up to 340 million euros, and are in addition to any royalty
payments we receive under the agreement.



Takeda also agreed to invest 10 million
euros in equity within one year of the effective date of the agreement. Takeda made its 10 million euro investment on December
29, 2016. The shares will be subject to a one-year lock-up, subject to certain exceptions.



Under the agreement, we will cooperate
closely with Takeda and will set up a number of joint committees to oversee the overall commercialization process; operational
matters including product development, intellectual property and regulatory matters; and manufacturing. We will initially continue
to manufacture Cx601 at our facility in Madrid, and we and Takeda will share equally the cost of expanding the facility to increase
the manufacturing capacity up to 1,200 doses of Cx601 per year at an estimated cost of 3 million to 3.5 million euros.
We intend to transfer manufacturing responsibilities to Takeda once the technology transfer process is complete, which is expected
to be by January 1, 2021 at the latest.



The agreement will expire on a country-by-country
basis at the occurrence of the latest any of the following:



| | · | The twentieth anniversary of the date of the first commercial sale of Cx601 in such country.
| | - | --------------------------------------------------------------------------------------------



| | · | The expiration of the last valid patent claim covering Cx601 or its use in such country.
| | - | ----------------------------------------------------------------------------------------



| | · | The expiration of market exclusivity in such country granted under the marketing authorization of the product as an orphan
drug.
| | - | --------------------------------------------------------------------------------------------------------------------------------



| | · | The expiration of any data exclusivity with respect to Cx601.
| | - | -------------------------------------------------------------



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Either party may terminate the agreement
with thirty days’ written notice in case of insolvency of the other party. Either party may terminate the agreement upon
a change of control of the other party with sixty days’ written notice. Either party may terminate the agreement in case
of a material breach or non-performance by the other party with immediate effect or, in case of a curable material breach, if such
breach should not be cured within sixty days after receipt of such notice.



We also have a right to terminate the agreement
on a region-by-region basis with thirty days’ written notice if expected royalties from a key market within the region are
at least 25% lower than expected based on the commercialization plan provided by Takeda for at least three consecutive years and
we reasonably determine that Takeda did not use commercially reasonable efforts to meet the established sales target. If we cannot
mutually resolve any dispute related to such a claim either within the established committees or through negotiations between senior
management or the board of directors within thirty days, the dispute shall be referred to a third party expert for adjudication.
In addition, we can terminate the agreement with thirty days’ notice if Takeda or one of its affiliates challenges or takes
any material steps to assist a third party in challenging the validity of our intellectual property rights.



Takeda has a right to terminate the agreement
with thirty days’ written notice if we do not obtain marketing authorization from the EMA within four years of the entry
into the agreement. Takeda can also terminate the agreement with thirty days’ written notice on a country-by-country basis
if there is a third party claim of infringement of intellectual property rights provided that external counsel confirms that there
is a greater than 50% probability of a finding of infringement, or in the case of a final court decision confirming such infringement.



In addition, we remain solely responsible
for certain third party obligations arising from sales of the product, including with respect to the rights licensed from the Universidad
Autonóma de Madrid or the Consejo Superior de Investigaciones Científicas. In case we decide to terminate any such
existing license and Takeda disagrees with our decision, they may request that we assign them the license or terminate the agreement
on a country-by-country basis.



Finally, Takeda has the right to terminate
the agreement with thirty days’ written notice in case any changes to the production or quality control process required
by regulatory authorities lead to the production costs increasing by more than 15%.



Other agreements



We also rely on third-party contract research
organizations to conduct our clinical trials.



In addition, a number of our patent families
are the result of collaborations with academic parties, including with Universidad Autónoma de Madrid and Consejo Superior
de Investigaciones Científicas, and are jointly owned. Co-ownership agreements are in place with respect to all but one
of such patent families, and certain types of exploitation of such patents may be subject to the co-owner’s approval.



The patent families referred to as PCX006
and PCX007 are the subject of a co ownership agreement dated November 3, 2004, between our subsidiary TiGenix SAU (formerly
Cellerix), and the Universidad Autónoma de Madrid. Under the terms of this agreement, the Universidad Autónoma de
Madrid assigned all exploitation rights to TiGenix SAU, including the right to license or sub-license to third parties. We are
obligated to provide fifteen days’ notice to the Universidad Autónoma de Madrid prior to the execution of any such
license or sub license. The agreement will remain in force throughout the legal life of the patents covered by this agreement,
unless it is terminated by mutual agreement. Under the terms of an amendment dated April 24, 2008, we are obliged to make
the following royalty payments to the Universidad Autónoma de Madrid as consideration for the exclusive assignment:



| | · | 1.0% on net sales less than 50 million euros.
| | - | ---------------------------------------------



| | · | 1.5% on net sales between 50 million euros and 100 million euros.
| | - | -----------------------------------------------------------------



| | · | 2.0% on net sales over 100 million euros.
| | - | -----------------------------------------



The annual royalty rights we owe with respect
to net sales generated in any country where a patent has not been granted will be halved until a patent is granted in such country.



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The anticipated expiration date of the
patents and patent applications of the patent family referred to as PCX006 is of October 4, 2024 for the granted Spanish patent
ES2313805 and of October 4, 2025 for the patent applications.



The anticipated expiration date of patents
and patent applications of the patent family referred to as PCX007 is May 16, 2026, with the exception of U.S. patents derived
from US 11/167,061 without the benefit of the PCT filing, for which the anticipated expiration date is February 14, 2025 or
June 24, 2025, without taking into account any patent term adjustment.



The patent family referred to as PCX008
is the subject of a co-ownership agreement dated June 1, 2009 between TiGenix SAU (formerly Cellerix) and the Consejo Superior
de Investigaciones Científicas, under which ownership interests were allocated between TiGenix SAU and the Consejo Superior
de Investigaciones Científicas in a ratio of two-thirds to one-third. We have an exclusive worldwide license, with the right
to sub license all the exploitation rights. The agreement will remain in force until the end of the life of the patent, unless
it is terminated by mutual consent. If we wish to assign our interest in the patent family to a third party the Consejo Superior
de Investigaciones Científicas shall have a first right of refusal. Our payment obligations under the agreement are as follows:



| | · | An initial payment of 30,000 euros on signing the agreement.
| | - | ------------------------------------------------------------



| | · | A payment of 120,000 euros on the date on which any product that incorporates any of the patent’s claims is brought onto
the market.
| | - | ------------------------------------------------------------------------------------------------------------------------------------



| | · | Royalty payments to be determined on the following basis:
| | - | ---------------------------------------------------------



| | · | 0.1% of net sales equal to or less than 50 million euros.
| | - | ---------------------------------------------------------



| | · | 0.2% of net sales between 50 million euros and 100 million euros.
| | - | -----------------------------------------------------------------



| | · | 0.3% of net sales greater than 100 million euros.
| | - | -------------------------------------------------



If we sub-license the rights to exploit
the patent in Europe, the Consejo Superior de Investigaciones Científicas must receive consideration not less than it would
receive if we exploited the patent rights ourselves. If we sub-license the rights to exploit the patent outside Europe, the Consejo
Superior de Investigaciones Científicas must receive consideration equal to 1.5% of the amount of the royalties based on
net sales. If we enter into a cross-license agreement with a third party whereby we authorize the third party to exploit the patent
in exchange for the right to exploit any rights of that third party, net sales shall be deemed to be our sales from the exploitation
of the rights acquired under the cross-license agreement, after first deducting any amount we may owe under the cross-license agreement.
In addition, we will pay the Consejo Superior de Investigaciones Científicas 1.5% of any of the non-percentage-based fixed
amounts, whether payable once or at regular intervals, that we may receive from sub-licensees for the sub-licensing of the rights
to exploit the patent, on the same terms as agreed by us with such sub-licensee. Consequently, if our payment for the sub license
is wholly or partly conditional on market introduction, the Consejo Superior de Investigaciones Científicas will also be
paid all or a pro rata amount of such percentage after the conditions are met.



The anticipated expiration date of all
patent applications of the patent family referred to as PCX008 is September 22, 2026.



PCX011 is subject to a co-ownership agreement
dated January 17, 2011, between TiGenix SAU (formerly Cellerix), the Consejo Superior de Investigaciones Científicas
and the University of Seville determining ownership of the patent family, with 50% belonging to TiGenix SAU, 45% to the Consejo
Superior de Investigaciones Científicas and 5% to the University of Seville. Under this agreement, we have an exclusive
worldwide license to the rights, without the right to sub-license. The agreement shall remain in force until the end of the life
of the patent, unless it is terminated by mutual consent. Our payment obligations under the agreement are as follows:



| | · | An initial payment of 5,000 euros on signing the agreement.
| | - | -----------------------------------------------------------



| | · | A payment of 35,000 euros on the first visit by the first patient in a clinical trial for a product we promote that incorporates
the patent rights.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------



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| | · | A payment of 35,000 euros on the first visit by the first patient in a pivotal Phase III clinical trial of a product we
promote that incorporates the patent rights.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | A payment of 35,000 euros upon submission of a marketing authorization request dossier to a regulatory authority for a product
that incorporates the patent rights.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | A payment of 100,000 euros upon approval of the product by the first regulatory agency.
| | - | ---------------------------------------------------------------------------------------



| | · | A royalty to be determined on the following basis on worldwide sales:
| | - | ---------------------------------------------------------------------



| | · | 0.2% of net sales equal to or less than 50 million euros.
| | - | ---------------------------------------------------------



| | · | 0.3% of net sales between 50 million euros and 100 million euros.
| | - | -----------------------------------------------------------------



| | · | 0.4% of net sales more than 100 million euros.
| | - | ----------------------------------------------



All payments shall be distributed between
the Consejo Superior de Investigaciones Científicas, which will receive 90% and the University of Seville, which will receive
10%. If we sub-license exploitation rights to the patent rights to which we provide added value, our counter parties will receive
15% of the total consideration. If such rights are sub-licensed to a third party outside Europe, our counterparties will receive
10% of the total consideration. In the event that we sublicense exploitation rights to the patent rights to which we have not provided
any added value our counterparties will receive consideration no less than what they would have received had we directly exploited
the patent. All parties have the right to terminate the agreement in case of a breach. We are permitted to terminate the agreement
with ninety days’ notice if we terminate development or commercialization of a product falling under the scope of the agreement.



The anticipated expiration date of all
patent applications of the patent family referred to as PCX011 is August 3, 2029.



We will consider partnerships in the United
States and other markets to rapidly bring Cx601, Cx611 or any of our other future products to market and maximize our value.



The Acquisition of Coretherapix



On July 29, 2015, we entered into
a contribution agreement with Genetrix, to acquire 100% of the shares of Coretherapix, as well as certain receivables of Genetrix
on Coretherapix, for 1.2 million euros in cash and 7.7 million new ordinary shares.



Under the contribution agreement, Genetrix
is also entitled to receive contingent payments subject to the achievement of certain milestones, as follows:



| | · | Up to 15 million euros, payable in new ordinary shares, subject to the results of the ongoing clinical trial of Coretherapix.
Based on clinical trial results received in March 2017, the potential amount Genetrix could receive is now limited to 5 million
euros.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Up to 245 million euros, subject to obtaining marketing authorization from the European Medicines Agency (EMA) or the
U.S. Food and Drug Administration (FDA) for the first product or indication based on AlloCSCs in acute myocardial infarction, and
further subject to obtaining certain future sales milestones, with the first sales milestone being reached when annual net sales
reach 150 million euros and the last sales milestone being reached when annual net sales are above 750 million euros.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Tiered royalties ranging from 6% to 16% of the direct net sales of the first product or indication based on AlloCSCs in acute
myocardial infarction, if we commercialize the product ourselves, with similar sales milestones as the sales milestones mentioned
immediately above, or certain percentages ranging from 10% to 35% of any third-party royalties and sales milestones that we receive
from a third party, if we license the rights to commercialize the first product or indication to a third-party licensee.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | · | If Coretherapix obtains marketing authorization from the EMA or the FDA for any additional product or indication resulting
from its portfolio as at June 29, 2015, Genetrix shall be entitled to a payment of 25.0 million euros upon receipt of
marketing authorization for each such product.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Manufacturing and Logistics



Our eASC-based Product Candidates



Our eASC-based product candidates are considered
medicinal products pursuant to the European regulation governing advanced therapy medicinal products and Spanish Order SCO/3461/2003
and therefore must be manufactured in compliance with cGMP requirements in an authorized pharmaceutical establishment. This also
applies to the medicinal products manufactured for use in clinical trials. We have successfully obtained a manufacturing license
from the Spanish Medicines and Medical Devices Agency for the commercial production of Cx601.



Our product candidates are allogeneic eASCs
that are originally derived from the subcutaneous fat tissue of a healthy donor. The fat biopsy tissue is first enzymatically digested
and stem cells are recovered from it through a series of cell culture steps. In this first series of expansion steps, we create
a master cell stock and extensively test the quality and safety of these first large cell stock. Once the master cell bank is qualified,
it can be used to generate sequentially a large number of so called final drug substances cell stock. These final drug substances
are obtained by expanding the cells of the master cell stock with a new series of cell expansions in cell culture. The final drug
substances are then cryopreserved, or frozen at very low temperatures, until final use. When a final product needs to be provided
to the physician, the required amount of frozen cells are thawed and recovered in cell culture. These cells are then subsequently
collected for final formulation in excipient, or inert, medium. The amounts of cells and excipient volume depend on the particular
product and their use in the clinics.



During the entire manufacturing process,
there are specific quality controls to guarantee that the product complies with the adequate specifications for use. The controls
applied during the process on raw materials and on the finished product before and after it is packaged are particularly important.
We also conduct microbiological and environmental controls and process controls to ensure that the manufacturing conditions are
compliant for the manufacturing and distribution of the finished product as required by cGMP requirements.



The EMA has established the characterization
of eASCs in terms of identity, purity, potency, morphology, viability and cell growth kinetic according to the Guideline on Cell
Based Medicinal Products (EMA/CHMP/410869/2006) and the Reflection Paper on Stem Cells (EMA/CAT/571134/2009, adopted on January 14,
2011) in order to set the routine controls that will be applied at final product release as well as those to be performed at different
stages of the manufacturing process to guarantee the batch consistency. We obtained scientific advice from the EMA to ensure that
our manufacturing process is aligned with their requirements.



Our facilities for the manufacture of eASCs
are located in Madrid, Spain and consist of two separate clean rooms and adjacent support rooms. The facilities have been approved
by the Spanish Medicines and Medical Devices Agency as being compliant with cGMP requirements for the manufacture of cellular medicinal
products for investigational use (i.e., clinical trials) and commercial use of approximately 400 patient lots, or finished products,
per year. We expect to complete the expansion of the facility to increase production capacity to approximately 1,200 finished products
per year by the end of 2017. The estimated cost of this expansion is 3 million to 3.5 million euros which we expect to
share equally with Takeda. A modest additional investment would enable us to further expand our capacity to serve the European
market on a commercial basis for Cx601.



The logistics for our eASC-based products
include the transport of the finished product in a special temperature controlled shipping container. The shipping process has
been validated with specialist courier services. Based on our experience with these companies and the proximity of our manufacturing
facility to the Madrid international airport of Barajas, we have demonstrated that we can reliably deliver the finished product
to treatment sites anywhere in Europe and Israel within twenty-four hours.



Our CSC-based Product Candidates



Our CSC-based product candidates are also
considered medicinal products pursuant to the European regulation governing advanced therapy medicinal products and Spanish Order SCO/3461/2003
and therefore must be manufactured in compliance with cGMP requirements in an authorized pharmaceutical establishment.



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AlloCSC-01 and AlloCSC-02 are allogeneic
CSC-based product candidates that are originally derived from a small amount of myocardial tissue that would typically be discarded
during a routine valvular replacement operation. Coretherapix developed a manufacturing process compliant with cGMP that can produce
hundreds of doses from a single biopsy to provide clinicians with an off-the-shelf product. The final product is cryopreserved
in liquid nitrogen tanks to keep the cellular material in optimal condition until it is administered to patients.



We use 3P Biopharmaceuticals in Pamplona,
Navarra, Spain, as a sub-contractor for manufacturing our CSC-based product candidates.



United States Government Regulation



Biological products, such as our product
candidates, are subject to regulation under the Federal Food, Drug, and Cosmetic Act, or FD&C Act, and the Public Health Service
Act, or the PHS Act, as well as other federal, state and local statutes and regulations. Both the FD&C Act and the PHS Act
and their corresponding regulations govern, among other things, the testing, manufacturing, safety, efficacy, labeling, packaging,
storage, record keeping, distribution, reporting, advertising and other promotional practices involving biological products. FDA
approval must be obtained before clinical testing of biological products. FDA approval also must be obtained before marketing of
biological products. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state,
local and foreign statutes and regulations require the expenditure of substantial time and financial resources, and each process
may take several years to complete, although certain expedited programs potentially applicable to our product candidates, such
as FDA fast track approval processes for certain new drugs with the potential to address unmet medical needs for certain serious
or life-threatening conditions, may potentially expedite approval processes. Certain federal incentive programs are also potentially
applicable to our product candidates, such as for “orphan drugs” that treat rare conditions. Data obtained from clinical
activities, including late stage clinical trials, is not always conclusive and may be susceptible to varying interpretations, which
could delay, limit or prevent regulatory approval. The FDA may not grant approval on a timely basis, or at all, and we may encounter
difficulties or unanticipated costs in our efforts to secure necessary governmental approvals, which could delay or preclude us
from marketing our product candidates. In addition, the FDA may limit the indications for use or place other conditions on any
approvals that could restrict the commercial application of the products. After approval, some types of changes to the approved
product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further testing requirements
and FDA review and approval. In addition, our failure, or the failure of our third-party manufacturers, to comply with applicable
regulations could result in sanctions being imposed on us, including clinical holds, fines, injunctions, civil penalties, delays,
suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions
and criminal prosecutions, any of which could adversely affect our ability to commercialize our product candidates.



The BLA Approval Process



The process required by the FDA before
a biological product may be marketed in the United States generally involves the following:



| | · | completion of preclinical laboratory tests and animal studies according to good laboratory practices, or GLPs, and applicable
requirements for the humane use of laboratory animals or other applicable regulations;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | submission to the FDA of an application for an IND, which must become effective before human clinical trials may begin and
which must include approval by an independent IRB at each clinical site before the trials may be initiated;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | performance of adequate and well controlled human clinical trials according to the FDA’s regulations commonly referred
to as good clinical practices, or GCPs, and any additional requirements for the protection of human research subjects and their
health information, to establish the safety and efficacy of the proposed biological product for its intended use;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | submission to the FDA of a BLA for marketing approval that includes substantive evidence of safety, purity, and potency from
results of preclinical testing and clinical trials, and detailed information about the chemistry, manufacturing and controls for
the product, reports of the outcomes and full data sets of the clinical trials and proposed labeling and packaging for the product;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | · | satisfactory completion of an FDA inspection of the manufacturing facility or facilities where the biological product is produced
to assess compliance with cGMPs, to assure that the facilities, methods and controls are adequate to preserve the biological product’s
identity, strength, quality and purity and, if applicable, the FDA’s current good tissue practices, or cGTPs, for the use
of human cells, tissues and cellular and tissue-based products;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | potential FDA audit of the preclinical and clinical trial sites that generated the data in support of the BLA; and
| | - | ------------------------------------------------------------------------------------------------------------------



| | · | FDA review and approval, or licensure, of the BLA, including agreement on post-marketing commitments, if applicable.
| | - | --------------------------------------------------------------------------------------------------------------------



Before testing any biological product candidate
in humans, the product candidate enters the preclinical study stage. Preclinical studies include laboratory evaluations of product
chemistry, toxicity and formulation, as well as animal studies to assess the potential safety and activity of the product candidate.
The conduct of certain preclinical studies must comply with federal regulations and requirements including GLPs.



The clinical trial sponsor must submit
the results of the preclinical tests, together with manufacturing information, analytical data, any available clinical data or
literature and a proposed clinical protocol, to the FDA as part of the IND. Some preclinical studies may continue even after the
IND is submitted. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA places the clinical
trial on a clinical hold within that 30-day time period. In such a case, the IND sponsor and the FDA must resolve any outstanding
concerns before the clinical trial can begin. The FDA may also impose clinical holds on a biological product candidate at any time
before or during clinical trials due to safety concerns or non-compliance. If the FDA imposes a clinical hold, studies may not
recommence without FDA authorization and then only under terms authorized by the FDA. Accordingly, we cannot be sure that submission
of an IND will result in the FDA allowing clinical trials to begin, or that, once begun, issues will not arise that suspend or
terminate such studies.



Clinical trials involve the administration
of the biological product candidate to healthy volunteers or patients under the supervision of qualified investigators. Clinical
trials are conducted under protocols detailing, among other things, the objectives of the clinical trial, dosing procedures, subject
selection and exclusion criteria, and the parameters to be used to monitor subject safety, including stopping rules that assure
a clinical trial will be stopped if certain adverse events, or AEs, should occur. Each protocol and any amendments to the protocol
must be submitted to the FDA as part of the IND. Clinical trials must be conducted and monitored in accordance with the FDA’s
regulations comprising the GCP requirements, including the requirement that all research subjects provide informed consent. Further,
each clinical trial must be reviewed and approved by an IRB at or servicing each institution at which the clinical trial will be
conducted. An IRB is charged with protecting the welfare and rights of trial participants and considers such items as whether the
risks to individuals participating in the clinical studies are minimized and are reasonable in relation to anticipated benefits.
The IRB also approves the form and content of the informed consent that must be signed by each clinical trial subject or his or
her legal representative and must monitor the clinical trial until completed. Federal regulations governing the protection of human
subjects in clinical trials have remained generally consistent for many years, subject to certain amendments. On September 8,
2015, the U.S. Department of Health and Human Services and other federal agencies issued a notice of proposed rulemaking seeking
comments on proposals to substantially change aspects of these regulations, for example, mandating the use of a single institutional
review board for multi-site trials, imposing specified data security and information regulations on trials, and involving imposing
new consent requirements with respect to the use of biospecimens. The outcome of this regulatory review is not yet certain



Human clinical trials are typically conducted
in three sequential phases that may overlap or be combined:



| | · | Phase I. The biological product is initially introduced into a small group of healthy human subjects (e.g., 10 to
20 volunteers) and tested for safety. In the case of some products for severe or life-threatening diseases, especially when the
product may be too inherently toxic to ethically administer to healthy volunteers, the initial human testing is often conducted
in patients.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Phase II. The biological product is evaluated in a larger but limited patient population (e.g., a few
hundred patients) to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product
for specific targeted diseases and to determine dosage tolerance, optimal dosage and dosing schedule.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | · | Phase III. Clinical studies are undertaken to further evaluate dosage, clinical efficacy, potency and safety in an expanded
patient population (e.g., several hundred to several thousand patients) at geographically dispersed clinical trial sites.
These clinical studies are intended to establish the overall risk/benefit ratio of the product and provide an adequate basis for
product labeling.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Post-approval clinical studies, sometimes
referred to as Phase IV clinical studies, may be conducted after initial marketing approval. These clinical studies are used
to gain additional experience from the treatment of patients in the intended therapeutic indication, particularly for long-term
safety follow-up.



During all phases of clinical development,
regulatory agencies require extensive monitoring and auditing of all clinical activities, clinical data and clinical trial investigators.
Annual progress reports detailing the results of the clinical studies must be submitted to the FDA. Written IND safety reports
must be promptly submitted to the FDA, the NIH and the investigators for serious and unexpected AEs, any findings from other studies,
tests in laboratory animals or in vitro testing and other sources that suggest a significant risk for human subjects, or any clinically
important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigator brochure.
The sponsor must submit an IND safety report within fifteen calendar days after the sponsor determines that the information qualifies
for reporting. The sponsor also must notify the FDA of any unexpected fatal or life-threatening suspected adverse reaction within
seven calendar days after the sponsor’s initial receipt of the information. Phase I, Phase II and Phase III
clinical studies may not be completed successfully within any specified period, if at all. The FDA or the sponsor may suspend a
clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to
an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the
clinical trial is not being conducted in accordance with the IRB’s requirements or if the biological product has been associated
with unexpected serious harm to patients.



Concurrent with clinical studies, companies
usually complete additional animal studies, develop additional information about the physical characteristics of the biological
product and finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. To
help reduce the risk of the introduction of adventitious agents with use of biological products, the PHS Act emphasizes the importance
of manufacturing control for products whose attributes cannot be precisely defined. The manufacturing process must be capable of
consistently producing quality batches of the product candidate and, among other things, the sponsor must develop methods for testing
the identity, strength, quality, potency and purity of the final biological product. Additionally, appropriate packaging must be
selected and tested and stability studies must be conducted to demonstrate that the biological product candidate does not undergo
unacceptable deterioration over its shelf life.



Review and Approval Processes



After the completion of clinical trials
of a biological product, FDA approval of a BLA must be obtained before commercial marketing of the biological product. The testing
and approval processes for a BLA require substantial time and effort and there can be no assurance that the FDA will accept the
BLA for filing and, even if filed, that any approval will be granted on a timely basis, if at all. The BLA must include results
of product development, laboratory and animal studies, human studies, information on the manufacture and composition of the product,
proposed labeling and other relevant information.



In addition, under the Pediatric Research
Equity Act, or PREA, a BLA or supplement to a BLA must contain data to assess the safety and effectiveness of the biological product
for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric
subpopulation for which the product is safe and effective. However, the FDA may grant deferrals for submission of data or full
or partial waivers.



Under the Prescription Drug User Fee Act,
or PDUFA, as amended, each BLA must be accompanied by a significant user fee. PDUFA also imposes an annual product fee for biologics
and an annual establishment fee on facilities used to manufacture prescription biologics. Fee waivers or reductions are available
in certain circumstances, including a waiver of the application fee for the first application filed by a small business.



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Within 60 days following submission
of the application, the FDA reviews the BLA to determine if it is substantially complete before the agency accepts it for filing.
The FDA may refuse to file any BLA that it deems incomplete or not properly reviewable at the time of submission and may request
additional information. In this event, the BLA must be resubmitted with the additional information. The resubmitted application
also is subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth
substantive review of the BLA. The FDA reviews the BLA to determine, among other things, whether the proposed product is safe and
potent, or effective, for its intended use, and has an acceptable purity profile, and whether the product is being manufactured
in accordance with cGMP to assure and preserve the product’s identity, safety, strength, quality, potency and purity. The
FDA may refer applications for novel biological products or biological products that present difficult questions of safety or efficacy
to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation
as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory
committee, but it considers such recommendations carefully when making decisions. During the biological product approval process,
the FDA also will determine whether a Risk Evaluation and Mitigation Strategy, or REMS, is necessary to assure the safe use of
the biological product. If the FDA concludes a REMS is needed, the sponsor of the BLA must submit a proposed REMS; the FDA will
not approve the BLA without a REMS, if required.



Before approving a BLA, the FDA will inspect
the facilities at which the product is manufactured. The FDA will not approve the product unless it determines that the manufacturing
processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within
required specifications. Additionally, before approving a BLA, the FDA will typically inspect one or more clinical sites to assure
that the clinical trials were conducted in compliance with IND study requirements and GCP requirements. To assure cGMP, GTP and
GCP compliance, an applicant must incur significant expenditure of time, money and effort in the areas of training, record keeping,
production and quality control.



Notwithstanding the submission of relevant
data and information, the FDA may ultimately decide that the BLA does not satisfy its regulatory criteria for approval and deny
approval. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than we interpret
the same data. If the agency decides not to approve the BLA in its present form, the FDA will issue a complete response letter
that usually describes all of the specific deficiencies in the BLA identified by the FDA. The deficiencies identified may be minor,
for example, requiring labeling changes, or major, for example, requiring additional clinical trials. Additionally, the complete
response letter may include recommended actions that the applicant might take to place the application in a condition for approval.
If a complete response letter is issued, the applicant may either resubmit the BLA, addressing all of the deficiencies identified
in the letter, or withdraw the application.



If a product receives regulatory approval,
the approval may be significantly limited to specific diseases and dosages or the indications for use may otherwise be limited,
which could restrict the commercial value of the product. Further, the FDA may require that certain contraindications, warnings
or precautions be included in the product labeling. The FDA may impose restrictions and conditions on product distribution, prescribing,
or dispensing in the form of a risk management plan, or otherwise limit the scope of any approval. In addition, the FDA may require
post marketing clinical trials, sometimes referred to as Phase 4 clinical trials, designed to further assess a biological
product’s safety and effectiveness, and testing and surveillance programs to monitor the safety of approved products that
have been commercialized.



Post-Approval Requirements



After regulatory approval of a product
is obtained, there may be a number of post-approval requirements. For example, as a condition of approval of a BLA, the FDA may
require post-marketing testing and surveillance to monitor the product’s safety or efficacy. In addition, holders of an approved
BLA are required to keep extensive records, to report certain adverse reactions and production problems to the FDA, to provide
updated safety and efficacy information and to comply with requirements concerning advertising and promotional labeling for their
products. Also, quality control and manufacturing procedures must continue to conform to cGMP regulations and practices, as well
as the manufacturing conditions of approval set forth in the BLA. The FDA periodically inspects manufacturing facilities to assess
compliance with cGMP, which imposes certain procedural, substantive and recordkeeping requirements. Accordingly, manufacturers
must continue to expend time, money and effort in the area of production and quality control to maintain compliance with cGMP and
other aspects of regulatory compliance.



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Future FDA inspections may identify compliance
issues at manufacturer facilities or at the facilities of third-party suppliers that may disrupt production or distribution, or
require substantial resources to correct and prevent recurrence of any deficiencies, and could result in fines or penalties by
regulatory authorities. In addition, discovery of problems with a product or the failure to comply with applicable requirements
may result in restrictions on a product, manufacturer or holder of an approved BLA, including withdrawal or recall of the product
from the market or other voluntary, FDA-initiated or judicial action, including fines, injunctions, civil penalties, license revocations,
seizure, total or partial suspension of production or criminal penalties, any of which could delay or prohibit further marketing.
Newly discovered or developed safety or efficacy data may require changes to a product’s approved labeling, including the
addition of new warnings and contraindications.



Certain U.S. Regulatory Incentives and
Other Programs



Marketing Exclusivity for Reference Biological
Products



As part of the ongoing efforts of governmental
authorities to lower health care costs by facilitating generic competition to pharmaceutical products, the BPCIA, enacted as part
of the Health Care Reform Law, created a new abbreviated regulatory approval pathway in the United States for biological products
that are found to be biosimilar to or interchange with a biological “reference product” previously licensed under a
BLA. This abbreviated approval pathway is intended to permit a biosimilar to come to market more quickly and less expensively by
relying to some extent on the data generated by the reference product’s sponsor, and the FDA’s previous review and
approval of the reference product. Under the BPCIA, a biosimilar sponsor’s ability to seek or obtain approval through the
abbreviated pathway is limited by periods of exclusivity granted by the FDA to the holder of the reference product’s BLA,
and no biosimilar application may be accepted by the FDA for review until four years after the date the reference product was first
licensed by the FDA, and no biosimilar application, once accepted, may receive final approval until 12 years after the reference
product was first licensed by the FDA.



While we would expect to be granted this
12-year period of exclusivity for our product candidates, if approved, notably, this period of reference product market exclusivity
applies only to the biosimilar pathway and will not, for example, provide protection against any biological product for a similar
indication that achieves FDA approval under a traditional BLA based on the sponsor’s own research data There is also risk
that the 12-year period of biological reference product exclusivity could be shortened due to congressional action, or that the
FDA will not consider our product candidates, if they are approved, to be reference products for competing products, potentially
creating the opportunity for competition sooner than anticipated.



Once approved, biosimilars likely would
compete with, and in some circumstances may be deemed under the law to be “interchangeable with,” the previously approved
reference product. To date, only one biosimilar has been licensed under the BPCIA framework, and the extent to which a biosimilar,
once approved, will be substituted for any one of our product candidates, if approved, in a way that is similar to traditional
generic substitution for non-biological products is not yet clear, and will depend on a number of marketplace and regulatory factors
that are still developing. Although there is uncertainty regarding the impact of this new program, it seems likely that if any
of our product candidates are approved by the FDA, there is risk that the approval of a biosimilar competitor to one of our products
could have an adverse impact on our business. In particular, a biosimilar could be significantly less costly to bring to market
and priced significantly lower than our product, if approved by the FDA.



Special Protocol Assessment



Under the FD&C Act, the FDA will evaluate
certain protocols, upon sponsor request, to generally determine if the study design is adequate to meet sponsor goals, including,
among others, protocols for certain Phase III clinical trials that will form the primary basis of an efficacy claim for a
marketing authorization, such as a BLA. The procedure, known as a special protocol assessment or SPA, may be used in connection
with sponsors that have been issued an IND, but also may be available prior to the issuance of an IND where the FDA is sufficiently
informed of the overall development plan for the investigational drug. Generally, as part of the SPA process, the FDA will meet
with sponsors for the purpose of reaching agreement on the design, execution and analyses proposed for the clinical trial, such
as clinical endpoints, size and statistical design. If an agreement is reached, the FDA will reduce the agreement to a writing,
which becomes part of the study’s administrative record. When an SPA agreement has been reached, it is possible, but not
certain, that if a study is conducted according to the protocol, and if the study achieves its agreed-upon objectives, then the
FDA will support the approval of a marketing application, such as a BLA. However, this cannot be assured. Although the SPA program
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change without the agreement by the FDA and
the sponsor, the program also permits the FDA to rescind an SPA agreement, in particular where the FDA has found that a “substantial
scientific issue essential to determining the safety or effectiveness of the drug has been identified after the testing has begun.”
From time to time the FDA will rescind SPA agreements, and the basis for those rescissions may be the subject of significant dispute.
By letter dated August 3, 2015, the FDA provided a favorable SPA determination for our proposed Phase III study design
to register Cx601 in the United States, noting that the study may proceed only when an IND is in effect. In January 2017, we had
a Type C meeting with the FDA in which changes to the protocol were discussed. Based on feedback from that meeting, we submitted
a revised protocol in February 2017.



FDA Expedited Programs for Serious Conditions



Certain FDA programs are intended to speed
the availability of drugs and biologics that treat serious diseases, which could potentially apply to our product candidates, although
this cannot be assured, and we do not currently have any products with fast track designation or designation under other FDA expedited
development and review programs. The FDA’s expedited programs are generally intended to facilitate and expedite development
and review of new drugs and biologics to address unmet needs in the treatment of a serious or life-threatening condition. Two programs
potentially relevant to our product candidates are fast track designation and breakthrough therapy designation.



Fast track designation applies to a combination
of the product candidate and the specific indication or use for which it is being studied. Thus, it is the development program
for a specific product candidate for a specific indication that receives fast track designation. Fast track designation requires
showing that the product candidate will fill an unmet medical need, generally defined as providing a therapy where none exists,
or providing a therapy which may be potentially better than available therapy. Breakthrough therapy designation applies to product
candidates that treat a serious condition and where there is preliminary clinical evidence indicating that the product candidate
may demonstrate substantial improvement over available therapy on one or more clinically significant endpoints, such as substantial
treatment effects observed early in clinical development. As with fast track designation, breakthrough therapy designation applies
to both the product candidate and the specific use for which it is being studied. A significant feature of both fast track designation
and breakthrough therapy designation is an opportunity for early and frequent communication with the FDA, as well as eligibility
for what is known as “rolling review,” an opportunity for sponsors to submit completed portions of a marketing application,
such as a BLA, before the entire application is completed.



Product candidates granted fast track designation
or breakthrough therapy designation may lose that designation, and be subject to standard FDA development and review requirements,
if the FDA finds that the designation is no longer supported by emerging data, or the designated drug development program is no
longer being pursued. For example, a product candidate granted designation under the fast track program may lose that designation
if a newly approved product meets the unmet medical need for the same indication, and a product candidate granted breakthrough
therapy designation may lose that designation if a product is approved for the same indication and the sponsor fails to demonstrate
substantial improvement over the recently approved product.



In January 2017, as part of the recent
21st Century Cures Act, the FDA unveiled a new drug designation process for regenerative advanced therapies (“RAT”)
which intends to facilitate expedited review and approval of stem cell therapies and other cellular and tissue products for use
in serious or life threatening diseases. The RAT designation affords the following benefits to sponsors: expedited development
and review by the FDA (i.e., the same actions as for breakthrough therapy designation); early interactions “to discuss any
potential surrogate or intermediate endpoint to be used to support the accelerated approval of the product;” and eligibility
for accelerated approval under current FDA preapproval standards but with new post approval requirements.



We are currently exploring the options
for expedited pathways that could facilitate and accelerate the development of Cx601 and the review of its future BLA.



Pediatric Exclusivity



Under the BPCIA, which was part of the
Health Care Reform Law, biologics, such as our product candidates, may be eligible for pediatric exclusivity, an incentive intended
to encourage medical product research for children. Pediatric exclusivity, if granted, adds six months to existing exclusivity
periods applicable to biological products under the BPCIA—namely, the four-year period during which the FDA will not consider
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biosimilar product, and the twelve-year period
during which the FDA will not approve a biosimilar application. This six-month exclusivity, which runs from the end of these exclusivity
protection periods, may be granted based on the voluntary completion of a pediatric trial in accordance with an FDA-issued “written
request” for such a trial. It is possible, but not assured, that certain of our current or future product candidates may
be targeted to pediatric populations, and so pursuit of this incentive may be relevant to us.



Orphan Drug Designation



The FDA may grant orphan drug designation
to drugs intended to treat a “rare disease or condition” that affects fewer than 200,000 individuals in the United
States, or that affects more than 200,000 individuals in the United States and for which there is no reasonable expectation that
the cost of developing and making available in the United States a drug for such a disease or condition will be recovered from
sales in the United States for that drug. Orphan drug designation must be requested before submitting an application for marketing
approval. Orphan drug designation can provide opportunities for grant funding towards clinical trial costs, tax advantages and
FDA user fee exemptions. In addition, if a product that has an orphan drug designation subsequently receives FDA approval for the
indication for which it has such designation, the product may be entitled to orphan drug exclusivity, which means the FDA would
not approve any other application to market the same drug for the same indication for a period of seven years, except in limited
circumstances, such as a showing of clinical superiority to the product with orphan exclusivity or a meaningfully different mode
of administration. It is possible, but not assured, that certain of our current or future product candidates may be targeted to
rare diseases or conditions and so pursuit of this incentive may be relevant to us. With respect to our product candidate Cx601,
we filed for orphan designation for the treatment of anal fistulas in the United States in 2012. In January 2014, we received feedback
from the FDA indicating that it believes fistulizing Crohn’s disease to be a chronic disease with a potential patient population
in excess of the threshold for orphan designation, which is 200,000 patients in the United States. We commissioned a study to explore
in more detail the prevalence of fistulizing Crohn’s disease in the United States. Given the results of the study, we are
considering the resubmission of our application for orphan designation in the United States.



U.S. Regulations Affecting Certain Federally
Funded Programs, such as Medicare and Medicaid



Pharmaceutical manufacturers with products
that are reimbursed by U.S. federally funded programs such as Medicare and Medicaid are subject to regulation by CMS and enforcement
by HHS OIG, and in the event our product candidates are approved, regulation by CMS and enforcement by HSS OIG would be relevant
to us. The Anti-Kickback Law prohibits providers and others from directly or indirectly soliciting, receiving, offering or paying
any remuneration with the intent of generating referrals or orders for services or items covered by a government health care program.
Many states have similar laws. Courts have interpreted this law very broadly, including by holding that a violation has occurred
if even one purpose of the remuneration is to generate referrals, even if there are other lawful purposes. There are statutory
and regulatory exceptions, or safe harbors, that outline arrangements that are deemed lawful. However, the fact that an arrangement
does not fall within a safe harbor does not necessarily render the conduct illegal under the Anti-Kickback Law. In sum, even legitimate
business arrangements between the companies and referral sources could lead to scrutiny by government enforcement agencies and
require extensive company resources to respond to government investigations. Violations of the Anti-Kickback Law may be punished
by civil and criminal penalties or exclusion from participation in federal health care programs, including Medicare and Medicaid.



The FCA is violated by any entity that
“presents or causes to be presented” knowingly false claims for payment to the federal government. In addition, the
Health Care Reform Law amended the FCA to create a cause of action against any person who knowingly makes a false statement material
to an obligation to pay money to the government or knowingly conceals or improperly decreases an obligation to pay or transmit
money or property to the government. For the purposes of these recent amendments, an “obligation” includes an identified
overpayment, which is defined broadly to include “any funds that a person receives or retains under Medicare and Medicaid
to which the person, after applicable reconciliation, is not entitled ....”



The FCA is commonly used to sue those who
submit allegedly false Medicare or Medicaid claims, as well as those who induce or assist others to submit a false claim. “False
claims” can result not only from non-compliance with the express requirements of applicable governmental reimbursement programs,
such as Medicaid or Medicare, but also from non-compliance with other laws, such as the Anti-Kickback Law (which was explicitly
confirmed in the Health Care Reform Law), or laws that require quality care in service delivery. The qui tam and whistleblower
provisions of the FCA allow private individuals to bring actions on behalf of the government alleging that the



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government was defrauded, with tremendous
potential financial gain to private citizens who prevail. When a private party brings a whistleblower action under the FCA, the
defendant is not made aware of the lawsuit until the government starts its own investigation or makes a decision on whether it
will intervene. Many states have enacted similar laws that also apply to claims submitted to commercial insurance companies. The
bringing of any FCA action could require us to devote resources to investigate and defend the action. Violations of the FCA can
result in treble damages, and each false claim submitted can be subject to a penalty of up to $11,000 per claim.



A provision of the Health Care Reform Law,
generally referred to as the Physician Payment Sunshine Act or Open Payments Program, imposes new reporting and disclosure requirements
for pharmaceutical and medical device manufacturers that have at least one product that is reimbursed by Medicare, Medicaid or
the Children’s Health Insurance Program with regard to payments or other transfers of value made to certain U.S. health care
practitioners, such as physicians and academic medical centers, and with regard to certain ownership interests held by physicians
in reporting entities. Data collection activities under the Physician Payment Sunshine Act began on August 1, 2013, and as
required under the Physician Payment Sunshine Act, CMS published information from these reports on a publicly available website,
including amounts transferred and the physician and teaching hospital identities, on September 30, 2014. Beginning in 2014
and each year thereafter, data collection for each calendar year must be submitted by June 30 of the subsequent year, and
will be published annually. It is difficult to predict how the new requirements, which also preempt similar state law reporting
requirements, may impact our relationships with physicians and teaching hospitals.



U.S. Patent Term Restoration and Marketing
Exclusivity



Depending upon the timing, duration, and
specifics of the FDA approval of the use of our product candidates, some of our U.S. patents may be eligible for limited patent
term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-Waxman
Amendments. Patent term restoration can compensate for time lost during product development and the regulatory review process by
returning up to five years of patent life for a patent that covers a new product or its use. However, patent term restoration cannot
extend the remaining term of a patent beyond a total of fourteen years from the product’s approval date. The period
of patent term restoration is generally one-half the time between the effective date of an IND (falling after issuance of the patent)
and the submission date of a BLA, plus the time between the submission date of the BLA and the approval of that application, provided
the sponsor acted with diligence. Only one patent applicable to an approved biological product is eligible for the extension and
the application for the extension must be submitted prior to the expiration of the patent. The application for patent term extension
is subject to approval by the Patent and Trademark Office in consultation with the FDA.



A patent term extension is only available
when the FDA approves a biological product for the first time. We believe that our eASC-based platform and the manner in which
it is manufactured and used have not been previously approved by the FDA. However, we cannot be certain that the Patent and Trademark
Office and the FDA will agree with our analysis or will grant a patent term extension.



Government Regulation in Europe



The European Medicines Agency, or EMA,
operates in the European Union and its main responsibility is the protection and promotion of public and animal health, through
the evaluation and supervision of medicines for human and veterinary use. More specifically, it coordinates the evaluation and
monitoring of centrally authorized products and national referrals, developing technical guidance and providing scientific advice
to sponsors. Its scope of operations is medicinal products for human and veterinary use including biologics and advanced therapies,
and herbal medicinal products.



Clinical trials in Europe fall under the
remit of National Competent Authorities.



Advanced Therapy Medicinal Products



Advanced therapy medicinal products are
new medical products based on genes (gene therapy), cells (cell therapy) or tissues (tissue engineering). These advanced therapies
herald revolutionary treatments of a number of diseases and have huge potential for patients and industry.



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The lack of an EU-wide regulatory framework
in the past led to divergent national approaches which hindered patients’ access to products, hampered the growth of this
emerging industry and ultimately affected the European Union’s competitiveness in a key area of biotechnology.



In 2007, the EU institutions agreed on
Regulation (EC) 1394/2007, a regulation on advanced therapies designed to ensure the free movement of advanced therapy products
within Europe, to facilitate access of such therapies to the European Economic Area market and to foster the competitiveness of
European companies in the field, while guaranteeing the highest level of health protection for patients.



The main elements of the regulation are
the following:



| | · | A centralized marketing authorization procedure, to benefit from the pooling of expertise at European level and direct access
to the European Economic Area market.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | A new and multidisciplinary expert committee, the Committee for Advanced Therapies, within the EMA, to assess advanced therapy
products and follow scientific developments in the field.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Technical requirements adapted to the particular characteristics of these products.
| | - | -----------------------------------------------------------------------------------



| | · | Special incentives for small and medium-sized enterprises.
| | - | ----------------------------------------------------------



ChondroCelect was the first product to
receive centralized authorization as an advanced therapy medicinal product.



Centralized Authorization Procedure



The EMA is responsible for the centralized
procedure, resulting in centralized marketing authorization, the single marketing authorization that is valid across the European
Economic Area.



The centralized authorization procedure
is required for the following types of products:



| | · | Medicinal products developed by using recombinant DNA technology, the controlled expression of genes coded for biologically
active proteins in prokaryotes and eukaryotes, including transformed mammalian cells, or hybridoma or monoclonal antibody methods.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Advanced therapy medicinal products, such as gene-therapy, somatic cell-therapy or tissue-engineered medicines.
| | - | ---------------------------------------------------------------------------------------------------------------



| | · | Medicinal products for human use containing a new active substance that did not receive community marketing authorization when
the community authorization procedure was first implemented, for which the therapeutic indication is the treatment of AIDS, cancer,
neurodegenerative disorders, diabetes, autoimmune diseases and other immune dysfunctions or viral diseases.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Officially designated orphan medicines.
| | - | ---------------------------------------



The Pediatric Regulation places some obligations
for the applicant when developing a new medicinal product, in order to ensure that medicines to treat children are subject to ethical
research of high quality and are appropriately authorized for use in children, and to improve collection of information on the
use of medicines in the various subsets of the pediatric population. The application will have to include the pediatric investigation
plan decision but also the results in accordance with the agreed pediatric investigation plan.



The Pediatric Committee of the EMA issued
a positive opinion on the pediatric investigation plan for Cx601 in September 2014.



Applications through the centralized authorization
procedure are submitted directly to the EMA. The centralized procedure enables applicants to obtain a marketing authorization that
is valid in all European Union member states based on a single application. Under the centralized procedure, the EMA’s Committee
for Human Medicinal Products, or CHMP, is required to adopt an opinion on a valid application within 210 days, excluding clock
stops, when additional written or oral information is to be provided by the applicant in response to questions. More



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specifically, on day 120 of the procedure,
once the CHMP has received the preliminary assessment reports and opinions from the rapporteur and co-rapporteur, it prepares a
list of potential outstanding issues, referred to as “other concerns” or “major objections”, as part of
its day 120 list of questions. These are sent to the applicant together with the CHMP’s recommendation. The CHMP generally
makes one of two recommendations: (1) the marketing authorization application for the product could be approvable provided
that satisfactory answers are given to the “other concerns” identified and that all other conditions outlined are implemented
and complied with; or (2) the marketing authorization application for the product is not approvable at that time since “major
objections” have been identified. Applicants have three months from the date of receiving the day 120 list of questions to
respond to the CHMP, and can request a three-month extension if necessary. The rapporteur and co-rapporteur assess the applicant’s
replies, revise the assessment report as necessary and may prepare a list of outstanding issues. The revised assessment report
and list of outstanding issues are sent to the applicant together with the CHMP’s recommendation by day 180 of the procedure.
Applicants then have one month to respond to the CHMP (and can request a one or two-month extension). The granting of marketing
authorization will depend on the recommendations and potential major objections identified by the CHMP as well as the ability of
the applicant to respond adequately to these findings. According to a presentation published by the EMA, for the period from December
2005 to December 2010, of the eighteen marketing authorization applications that received a positive opinion from the EMA, the
number of major objections received during the EMA review period ranged from zero to ten, with an average of four major objections,
and of the twenty marketing authorization applications that either received a negative opinion from the EMA or were otherwise withdrawn
by the applicant, the number of major objections received during the EMA review period ranged from one to thirty-four, with an
average of ten major objections. After the adoption of the CHMP’s opinion, a decision on the marketing authorization application
must be adopted by the European Commission, after consulting the European Union member states, which in total can take more than
sixty days. An applicant for a marketing authorization may request a re-examination in the event of a negative opinion, at which
time the CHMP appoints new rapporteurs. Within sixty days of receipt of the negative opinion, the applicant must submit a document
explaining the basis for its request for re-examination. The CHMP has sixty days to consider the applicant’s request for
re-examination. The applicant may request an oral explanation before the CHMP, which is routinely granted, following which CHMP
will adopt a final opinion. The final opinion, whether positive or negative, is published by the CHMP shortly following the CHMP
meeting at which the oral explanation takes place.



Once centralized marketing authorization
has been granted for a medicinal product, the holder of that authorization can make the medicinal product available to patients
and healthcare professionals in all European Economic Area countries.



Orphan Drug Designation



Applications for designation of orphan
medicines are reviewed by the EMA through the Committee for Orphan Medicinal Products. The criteria for orphan designation are
as follows:



1.       either
(i) the medicinal product is intended for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating
condition affecting no more than five in 10,000 persons in the European Union at the time of submission of the designation application
or (ii) the medicinal product is intended for the diagnosis, prevention or treatment of a life-threatening, seriously debilitating
or serious and chronic condition, and without incentives it is unlikely that the revenue after marketing of the medicinal product
would cover the investment in its development and



2.       either
(i) no satisfactory method of diagnosis, prevention or treatment of the condition concerned is authorized or (ii) if such
method exists, the medicinal product will be of significant benefit to those affected by the condition.



Companies with an orphan designation for
a medicinal product benefit from incentives such as the following:



| | · | Protocol assistance (scientific advice for orphan medicines during the product-development phase).
| | - | --------------------------------------------------------------------------------------------------



| | · | Direct access to centralized marketing authorization and ten-year marketing exclusivity.
| | - | ----------------------------------------------------------------------------------------



| | · | Financial incentives (fee reductions or exemptions).
| | - | ----------------------------------------------------



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| | · | National incentives detailed in an inventory made available by the European Commission.
| | - | ---------------------------------------------------------------------------------------



| | · | Since December 2011, orphan medicinal products are eligible for the following level of fee reductions:
| | - | ------------------------------------------------------------------------------------------------------



| | · | Full (100%) reduction for small- and medium-sized enterprises, or SMEs, for protocol assistance and follow-up, full reduction
for non-SME sponsors for pediatric-related assistance and 40% reduction for non-SME sponsors for non-pediatric assistance.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Full reduction for pre-authorization inspections and 90% reduction for post-authorization inspections for SMEs.
| | - | ---------------------------------------------------------------------------------------------------------------



| | · | Full reduction for SMEs for new applications for centralized marketing authorization.
| | - | -------------------------------------------------------------------------------------



| | · | Full reduction for post-authorization activities including annual fees only to an SME in the first year after granting a marketing
authorization.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------



To qualify for assistance, companies must
be established in the European Economic Area, employ fewer than 250 employees and have an annual revenues of not more than 50 million
euros or an annual balance sheet total of not more than 43 million euros.



Cx601, our leading therapeutic product
candidate, was granted orphan drug designation for the treatment of anal fistulas in 2009.



While the same product can receive centralized
marketing authorization for both orphan and “non-orphan” indications, orphan and “non-orphan” indications
cannot be covered by the same marketing authorization, and the product would have to go through a second authorization process
to receive marketing authorization for the second indication.



Expedited Development and Review Programs
in Europe



Accelerated Assessment



The maximum timeframe for the evaluation
of a marketing authorization application under the Centralized Procedure is 210 days, excluding clock stops when additional
written or oral information is to be provided by the applicant in response to questions asked by the Committee for Medicinal Products
for Human Use (CHMP). However the applicant may request an accelerated assessment procedure in order to meet, in particular the
legitimate expectations of patients and to take account of the increasingly rapid progress of science and therapies, for medicinal
products of major interest from the point of view of public health and in particular from the viewpoint of therapeutic innovation.
Applicants requesting an accelerated assessment procedure should justify that the medicinal product is expected to be of major
public health interest. Based on the request, the justifications presented, and the recommendations of the Rapporteurs, the CHMP
will formulate a decision. Such a decision will be taken without prejudice to the CHMP opinion (positive or negative) on the granting
of a marketing authorization. If the CHMP accepts the request, the timeframe for the evaluation will be reduced to 150 days.



Any request for accelerated assessment
should be made as early as possible before the actual submission of the marketing authorization application. The request together
with supporting documentation should be sent electronically to the EMA. In order to allow sufficient time to assess the request
and prepare for the accelerated procedure, it is recommended to submit the request at least two to three months before the actual
submission of the marketing authorization application.



Applicants requesting an accelerated assessment
procedure should duly substantiate the request and in particular, justify their expectation that the medicinal product is of major
public health interest particularly from the point of view of therapeutic innovation. There is no single definition of what constitutes
major public health interest. This should be justified by the applicant on a case-by-case basis. The justification should include
the major benefits expected and present the arguments to support the claim that the medicinal product introduces new methods of
therapy or improves on existing methods, thereby addressing to a significant extent the greater unmet needs for maintaining and
improving public health. The key items to be described in the justification, and the appropriate level of detail, should be evaluated
on a case-by-case basis. The request should be presented as a short but comprehensive document. The following list of key items
would normally be addressed in the justification:



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| | · | The unmet needs and the available methods of prevention, diagnosis or treatment.
| | - | --------------------------------------------------------------------------------



| | · | The extent to which the medicinal product is expected to have major impact on medical practice, its major added value, and/or
how it addresses the greater unmet needs.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | A brief outline of the main available evidence on which the applicant bases its claim of major public health interest.
| | - | ----------------------------------------------------------------------------------------------------------------------



Conditional Marketing Authorization



For certain categories of medicinal products,
in order to meet unmet medical needs of patients and in the interest of public health, it may be necessary to grant marketing authorizations
on the basis of less complete data than is normally required. In such cases, it is possible for the CHMP to recommend the granting
of a marketing authorization subject to certain specific obligations to be reviewed annually.



This may apply to medicinal products for
human use that fall under one of the following categories:



| | · | Medicinal products that aim at the treatment, the prevention or the medical diagnosis of seriously debilitating diseases or
life-threatening diseases.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Medicinal products to be used in emergency situations, in response to public threats duly recognized either by the World Health
Organization or by the Community in the framework of Decision (EC) No 2119/98.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Medicinal products designated as orphan medicinal products in accordance with Article 3 of Regulation (EC) No 141/2000.
| | - | -----------------------------------------------------------------------------------------------------------------------



A conditional marketing authorization may
be granted where the CHMP finds that, although comprehensive clinical data referring to the safety and efficacy of the medicinal
product have not been supplied, all the following requirements are met:



| | · | The risk-benefit balance of the medicinal product, as defined in Article 1(28a) of Directive 2001/83/EC, is positive.
| | - | ---------------------------------------------------------------------------------------------------------------------



| | · | It is likely that the applicant will be in a position to provide the comprehensive clinical data.
| | - | -------------------------------------------------------------------------------------------------



| | · | Unmet medical needs will be fulfilled.
| | - | --------------------------------------



| | · | The benefit to public health of the immediate availability on the market of the medicinal product concerned outweighs the risk
inherent in the fact that additional data are still required.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Conditional marketing authorizations are
valid for one year, on a renewable basis. The holder will be required to complete ongoing studies or to conduct new studies with
a view to confirming that the benefit-risk balance is positive. In addition, specific obligations may be imposed in relation to
the collection of pharmacovigilance data.



The granting of a conditional marketing
authorization will allow medicines to reach patients with unmet medical needs earlier than might otherwise be the case, and will
ensure that additional data on a product are generated, submitted, assessed and acted upon.



Marketing Authorization in Exceptional Circumstances



Conditional marketing authorizations are
distinct from marketing authorizations granted in exceptional circumstances in accordance with Article 14(8) of Regulation
(EC) No 726/2004. In the case of the conditional marketing authorization, an authorization is granted before all data are available.
The authorization is not intended, however, to remain conditional indefinitely. Rather, once the missing data are provided, it
should be possible to replace it with a marketing authorization which is not conditional, that is to say, which is not subject
to specific obligations. In contrast, it will normally never be possible to assemble a full dossier in respect of a marketing authorization
granted in exceptional circumstances.



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Market Access



Sales of pharmaceutical products depend,
in part, on the extent to which the payments for the products will be covered by third-party payers, such as national health insurance
programs, government health programs or private insurance programs or managed health care organizations. Such third-party payers
in both the United States and Europe are increasingly challenging the prices charged for medical products and services. Additionally,
the containment of health care costs has become a priority, and governments have shown significant interest in implementing cost-containment
programs for medicinal products, including price controls, restrictions on reimbursement and requirements for substitution of generic
or biosimilar products. Adoption of price controls and cost-containment measures and adoption of more restrictive policies in jurisdictions
with existing controls and measures could limit our revenues. If these third-party payers do not consider our products to be clinically
effective or cost-effective compared to other available therapies, they may not cover, fund or reimburse our products or, if they
do, the level of payment may not be sufficient to allow us to sell our products at a profit.



In many countries, the proposed pricing
for a drug must be approved before it may be lawfully marketed. The requirements governing the pricing of medicinal products vary
widely from country to country. For example, the European Union member states may restrict the range of medicinal products for
which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use.
A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls
on the profitability of the company placing the medicinal product on the market. Countries that have price controls or reimbursement
limitations for pharmaceutical products may or may not allow favorable reimbursement and pricing arrangements for any of our products.



Thus, pricing and reimbursement are not
harmonized across Europe and are within the exclusive discretion of the national authorities. Market access limitations or usage
restrictions for private and public health insurers vary from country to country and occasionally across different regions of the
same country. In public health insurance systems, reimbursement is determined by procedures established by the relevant authority
of the EU member state. Funding of a product is dependent on many factors, including proof of the product’s therapeutic value
(efficacy, safety, effectiveness, convenience) and economic value as compared to existing alternatives for a specific disease with
a clear medical need. Reimbursement is subject to considerations of cost, use and volume that can vary from country to country.



Certain European countries are also establishing
increasingly specific policies for market access, pricing and reimbursement of orphan drugs, including the following:



| | · | France offers tax exemptions for orphan drugs for which the revenue is below 30 million euros in France.
| | - | --------------------------------------------------------------------------------------------------------



| | · | Spain imposes a deduction on the agreed price of drugs paid for by the Spanish Healthcare System, which is 7.5% for non-orphan
drugs. For orphan drugs, the deduction is reduced to 4%.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | In Germany, the Gemeinsamer Bundesausschuss (Joint Federal Committee) performs an early benefit assessment for all reimbursable
pharmaceuticals to be marketed based on materials submitted by the manufacturer. For orphan drugs, manufacturers are allowed to
submit an abbreviated dossier (without proof of medical benefit and additional medical benefit over an appropriate comparative
product) for the early benefit assessment by the Gemeinsamer Bundesausschuss if sales in Germany in the previous twelve
months are below 50 million euros.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Italy has a national orphan drug center, registry and network, and typically provides more flexibility for orphan drugs in
negotiations with the payer agency, the Agenzia Italiana del Farmaco.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | In England, orphan drugs may receive centralized funding from NHS England (as opposed to funding by local entities). There
may be an assessment by the National Institute for Health and Care Excellence (NICE), a public body that publishes binding guidelines
on the use of health technologies in the NHS in England and Wales, based primarily on evaluations of clinical evidence and cost-effectiveness,
which is commonly required for non-orphan drugs.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Historically, products launched in the
European Union do not follow price structures of the United States, and generally prices tend to be significantly lower.



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Environmental Matters



We use various chemical and biological
products to conduct our research and to manufacture our products and are subject to specific environmental and occupational health
and safety laws and regulations in the jurisdictions in which we operate. These laws and regulations govern, among other things
the generation, storage, handling, use, transportation and disposal of hazardous materials and wastes and the health and safety
of our employees. If we violate or fail to comply with these laws and regulations, we could be subject to third-party or administrative
claims or fines or other sanctions by regulators. We could also be held responsible for costs and damages arising from any contamination
at our past or present facilities or at third party waste disposal sites.



We have established procedures to ensure
our compliance with environmental laws and regulations, and such compliance has not had a material impact on our capital expenditures,
earnings or competitive position.



Insurance



We maintain business liability insurance
of 20 million euros. In addition, we have obtained liability insurance with respect to our directors and officers, which covers
expenses, capped at a certain amount, that our board members and our senior management may incur in connection with their conduct
as members of our board of directors or senior management. We also maintain insurance policies with respect to our manufacturing
facilities, insurance policies with respect to the clinical trials we conduct as sponsor, group insurance policies for our employees
in connection with occupational accidents and a legal expenses insurance policy. We consider our insurance coverage to be adequate
in light of the risks we face.



C. Organizational Structure



The following chart illustrates our corporate
structure as of the date of this Annual Report:







D. Property, Plant and Equipment



Our registered office is in
Leuven, Belgium. We have facilities in Madrid, Spain, where we lease two adjacent buildings. The first building houses
our administrative offices, while the other building hosts our pharmaceutical development laboratories and a facility
compliant with cGMP requirements for the manufacturing of clinical eASC products. The facility contains two separate clean
rooms and adjacent support rooms and is currently undergoing expansion work. We expect to complete the expansion of the
facility to increase production capacity to approximately 1,200 finished products per year by the end of 2017. The estimated
costs of this expansion is 3 million to 3.5 million euros which we expect to share equally with Takeda. A modest additional
investment would enable us to further expand our capacity to serve the European market on a commercial basis for Cx601. The
clean rooms have been approved by the Spanish Medicines and Medical Devices Agency as complying with cGMP requirements for
the manufacture of cellular medicinal products for investigational use, i.e., clinical trials.



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Our subsidiary Coretherapix also has leased
office space and laboratory facilities in Madrid, Spain and hosts our research and development facilities. The laboratory facilities
are equipped with scientific equipment appropriate for molecular and cell biology research.



Item 4A. Unresolved Staff Comments



None.



Item 5. Operating and Financial Review and Prospects



You should read the following discussion
and analysis of our financial condition and results of operations in conjunction with the section entitled “Selected Financial
Data” and our consolidated financial statements and accompanying notes included elsewhere in this Annual Report. In addition
to historical consolidated financial information, this section contains forward-looking statements that reflect our plans, estimates
and opinions. Our actual results could differ materially from those discussed in the forward-looking statements as a result of
many factors, including but not limited to those described under “Risk Factors” and elsewhere in this Annual Report.



A. Operating Results



Overview



We are an advanced biopharmaceutical company
focused on developing and commercializing novel therapeutics from our proprietary technology platforms of allogeneic, or donor-derived,
stem cells. We have completed, and received positive data in, a single pivotal Phase III trial in Europe and Israel of our
most advanced product candidate Cx601, a first-in-class injectable allogeneic stem cell therapy indicated for the treatment of
complex perianal fistulas in patients suffering from Crohn’s disease. A complex perianal fistula consists of abnormal tracts
between the rectum and the exterior surroundings of the anus, and is commonly associated with Crohn’s disease. It is a serious
clinical condition affecting the anal sphincter and is potentially associated with a perianal abscess. Cx601 has been granted orphan
designation by the European Medicines Agency, or EMA, in recognition of its potential application for the treatment of anal fistulas,
which affect approximately 120,000 adult patients in the United States and Europe and for which existing treatment options are
inadequate.



Key Income Statement Items



Revenues



Historically, we have generated revenues
from sales of ChondroCelect, our commercialized product, for which we received marketing authorization from the EMA in 2009. During
the first half of 2014, we transformed our operations to focus fully on realizing the value of our eASC platform and pipeline by
discontinuing our operations in connection with ChondroCelect.



Effective June 1, 2014, we entered
into an agreement with Swedish Orphan Biovitrium, or Sobi, for the exclusive marketing and distribution rights with respect to
ChondroCelect within the European Union (excluding Finland, where we have a pre-existing distribution agreement with Finnish Red
Cross Blood Service), Switzerland, Norway, Russia, Turkey and the Middle East and North Africa region. We also completed the sale
of TiGenix B.V., our Dutch subsidiary, which held our manufacturing facility for ChondroCelect, to PharmaCell, a leading European
contract manufacturing organization active in the area of cell therapy, for an upfront payment of 3.5 million euros when the
sale became effective on May 30, 2014. We received a payment of 0.8 million euros on December 2016 for a total consideration
of 4.3 million euros.



As a result of the discontinuation of our
operations related to ChondroCelect, we reclassified all ChondroCelect operations as discontinued in our consolidated financial
statements for the year ended December 31, 2014, which are included elsewhere in this Annual Report.



In July 2016, we decided to terminate our
distribution agreements with Sobi and Finnish Red Cross Blood Service and our manufacturing agreement with our former subsidiary.
We also requested the withdrawal of our marketing authorization, which became effective as of November 30, 2016. We no longer
generate any revenues from ChondroCelect.



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License revenues



On July 4, 2016, we entered into a
licensing agreement with Takeda, in connection with which we received 25 million euros as an upfront non-refundable payment,
and will receive a further payment of 15 million euros if and when Cx601 receives marketing authorization from the EMA, additional
revenues of up to a total of 340 million euros in connection with various sales and reimbursement-related milestones and royalty
payments ranging from 10% to 18% on net sales by Takeda.



License revenues are recognized when all
significant risks and rewards derived from the ownership and right of use of the license in its current state have been transferred
to the customer, for those other milestones not yet reached because there are some pending performance obligations to be satisfied
or because there are future approvals, which do not depend only in the Company performance, the revenues are not recognized. The
Company has analyzed and separated the different performance obligations and how will they be remunerated. If substantive contractual
obligations are satisfied over time or over the life of the contract, revenue will be recognized over their performance. Milestone
payments are immediately recognized as revenue when the condition is met, when performance obligations related to that milestone
are fulfilled and if the milestone is not a condition to future deliverables and collectability is reasonably assured. Otherwise,
they are recognized over the remaining term of the agreement or the performance period.



Royalties



Going forward, we expect to receive ongoing
royalty payments from Takeda and other partners with whom we may enter into distribution agreements or license agreements. Until
December 2016, we only received royalty payments generated from the sale of ChondroCelect by Sobi. Such income is presented in
our consolidated financial statements in revenues under the line item “royalties.”



Grants and Other Operating Income



We also receive a portion of our revenues
in the form of government grants directly related to our research and development efforts, which are presented in our consolidated
income statement under the line item “grants and other operating income.”



We do not recognize government grants until
we have reasonable assurance that we will be able to comply with their terms and that the grants will be received. Government grants
are recognized as income on a systematic basis over the periods in which we recognize expenses related to the costs for which the
grants are intended to compensate. Specifically, for grants whose primary condition is the purchase, construction or acquisition
of non-current assets, we recognize the grants as deferred revenue in our consolidated balance sheet and transfer them to the income
statement on a systematic and rational basis over the useful life of the related assets. Grants that are receivable as compensation
for expenses or losses already incurred or for immediate financial support with no related costs are recognized in the period in
which they are received. We also treat the benefit of government loans, which we receive at below-market rates of interest, as
government grants (measured as the difference between the proceeds received and the fair value of the loan based on prevailing
market conditions), only when we have sufficient assurance that we will be able to comply with the terms and conditions of the
loan and will not be required to return the funds prematurely. We recognize these loans as grants in our income statement under
the line item “grants and other operating income.”



In addition, we present any payments we
receive with respect to ChondroCelect other than royalties from Sobi, for example from Finnish Red Cross Blood Service, and any
revenues from Sobi that we occasionally receive from certain non-recurring items in our income statement under the line item “grants
and other operating income.”



Research and Development Expenses



Our research and development activities
primarily consist of preclinical research; Phase I, Phase II and Phase III of various clinical studies; the production
of eASCs and CSCs used in our preclinical and clinical studies; regulatory activities and intellectual property activities to protect
our know how. Research and development expenses include, among others, employee compensation, including salary, fringe benefits
and share-based compensation; expenses related to our manufacturing facilities, including operating costs for such facilities;
and regulatory expenses and activities related to the development of our product pipeline, including reimbursement, market access,
general and administrative expenses and amortization of intangible assets related to our research programs.



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Our eASC-based product candidates are derived
from the technology platform we acquired as part of our acquisition of Cellerix in May 2011 and our CSC-based product candidates
are derived from the technology platform we acquired as part of our acquisition of Coretherapix in July 2015.



Since May 2011 and through December 31,
2016, we spent a total of 80.9 million euros on research and development expenses, of which 26.9 million euros were incurred
in connection with Cx601; 8.4 million euros were incurred in connection with Cx611; 3.0 million euros were incurred in
connection with AlloCSC-01 since July 2015 and the remaining 42.6 million euros were non-allocated research and development
expenses.



We recognize expenditure on research activities
as an expense in the period in which it is incurred.



An internally-generated intangible asset
arising from development is capitalized to the extent that all the following can be demonstrated:



| | · | The technical feasibility of completing the intangible asset so that the asset will be available for use or sale.
| | - | -----------------------------------------------------------------------------------------------------------------



| | · | The intention to complete and the ability to use or sell the asset.
| | - | -------------------------------------------------------------------



| | · | How the asset will generate future economic benefits.
| | - | -----------------------------------------------------



| | · | The availability of resources to complete the asset.
| | - | ----------------------------------------------------



| | · | The ability to measure reliably the expenditure during development.
| | - | -------------------------------------------------------------------



Accordingly, during 2010 and 2011 we capitalized
the development costs related to ChondroCelect with a useful life of ten years.



The amount initially recognized for internally-generated
intangible assets is the sum of the various expenses needed to generate the related intangible assets. Amortization starts from
the date that the intangible asset first meets the recognition criteria. These intangible assets are amortized on a straight-line
basis over their estimated useful life of between five to ten years from the moment they are available for use. Where no internally-generated
intangible asset can be recognized, development expenditure is recognized in the income statement in the period in which it is
incurred.



Subsequent to initial recognition, internally-generated
intangible assets are reported at cost less accumulated amortization and accumulated impairment losses, on the same basis as intangible
assets that are acquired. In 2015, we recognized an impairment loss of 1.1 million euros in relation to the capitalized development
costs of ChondroCelect. No impairment loss was recognized in 2016 or 2014.



General and Administrative Expenses



Our general and administrative expenses
are costs to support our operations and consist of employee compensation, including salary, fringe benefits and share-based compensation
for our core corporate supporting functions including, among others, finance, human resources, legal, information technology, business
development and investor relations. Other significant expenses include external corporate costs consisting of outside legal counsel,
independent auditors and other outside consultants, insurance, facilities and depreciation.



Interest on Borrowings and Other Finance
Costs



Interest on borrowings include both cash
financial expenditures and non-cash financial expenditures resulting from the recording of financial liabilities under our debt
instruments, including government loans (or so-called “soft” loans), our loan facility with Kreos and our 9% senior
unsecured convertible bonds due 2018 issued in March 2015 at amortized cost.



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Fair Value Gains and Losses



Our fair value gains and losses are financial
expenditures, resulting from the change in fair value of the warrant component of our 9% senior unsecured convertible bonds due
2018, the warrants issued for the Kreos loan and, for the year ended December 31, 2015, the contingent components of the consideration
for the acquisition of Coretherapix, which are subject to certain milestones connected to the results of the ongoing clinical trial
and the receipt of marketing authorization, as well as royalty payments based on sales of products derived from our CSC-based platform.



Discontinued Operations



The results of operations discontinued
during the year are included in our consolidated income statements up to the date of discontinuation.



A discontinued operation is a component
of our business that represents a separate major line of business or geographical area of operations or is a subsidiary acquired
exclusively with a view to resale, that has been discontinued, has been abandoned or that meets the criteria to be classified as
held for sale.



Discontinued operations are presented in
our consolidated income statements as a single line item that is comprised of the post-tax profit or loss of the discontinued operation
along with the post-tax gain or loss recognized on the re-measurement to fair values less costs to sell or on disposal of the assets
or disposal groups constituting discontinued operations.



Income Taxes



Income tax expense represents the sum of
the tax currently payable and deferred tax. We calculate our current tax using tax rates that have been enacted or substantively
enacted by the end of the reporting period. We recognize deferred tax liabilities for all taxable temporary differences between
the carrying amount of assets and liabilities in the consolidated financial statements and in the corresponding tax bases used
in the computation of taxable profit.



In the course of 2013, a new Spanish tax
law became applicable retrospectively from January 1, 2013 under which eligible companies could claim certain research and
development investment tax credits instead of deducting the costs from their taxable base and carrying them forward until the expiration
date. An applicant is required to provide an audit report from an independent third party certifying that research and development
activities were performed and reported as eligible for this purpose. We recognize this income at the time when we receive these
reports.



We have tax losses carried forward, which
amounted to 200.3 million euros as of December 31, 2016. These tax losses generate a potential deferred tax asset of 61.8
million euros, and do not have an expiration date. Because we are uncertain whether we will be able to realize taxable profits
in the near future, we did not recognize any deferred tax assets in our balance sheet. In addition to these tax losses, we have
unused tax credits amounting to 20.8 million euros as of December 31, 2016.



Critical Accounting Policies



Our financial statements are prepared in
accordance with IFRS as issued by the IASB. The preparation of our financial statements in accordance with IFRS as issued by the
IASB requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue,
cost of sales, operating expenses and related disclosures. We consider an accounting policy to be critical if it is important to
our financial condition or results of operations, and if it requires significant judgment and estimates on the part of management
in its application. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable
under the circumstances, and we evaluate our estimates on an ongoing basis. Our actual results may differ from these estimates
under different assumptions or conditions. If actual results or events differ materially from the judgments and estimates that
we have made in reporting our financial position and results of operations, our financial position and results of operations could
be materially affected.



The summary of significant accounting policies
and critical accounting judgments and key sources of estimation uncertainty can be found in notes 2 and 3 respectively in
the consolidated financial statements included elsewhere in this Annual Report.



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Going Concern



We have experienced net losses and significant
cash used in operating activities for most of our history since our inception in 2000 except for the year ended December 31, 2016.
As of December 31, 2016, we had an accumulated deficit of 116.2 million euros. Even though for the year ended December
31, 2016 we had net income of 3.8 million euros and net cash from operating activities of 3.5 million euros, our management
expects us to incur net losses and have significant cash outflows for at least the next twelve following such date. As of December 31,
2015 we had an accumulated deficit of 120.0 million euros, and for the year ended on that date we had a net loss of 35.1 million
euros and net cash used in operating activities of 19.6 million euros. These conditions, among others, raise substantial doubt
about our ability to continue as a going concern. The consolidated financial statements included elsewhere in this Annual Report
have been prepared assuming that we will continue as a going concern. This basis of accounting contemplates the recovery of our
assets and the satisfaction of liabilities in the normal course of business. A successful transition to attaining profitable operations
is dependent upon achieving a level of positive cash flows adequate to support our cost structure.



As at December 31, 2016, we had cash and
cash equivalents of 78.0 million euros, compared to 18.0 million euros at the beginning of the year. Taking into account
this liquidity position and the future milestone payments related to the licensing deal with Takeda, our board of directors is
of the opinion that this cash position is sufficient to continue operating for at least twelve months following such date but that
we will require significant additional cash resources to launch new development phases of existing or new projects in our pipeline.



In order to continue financing our operations,
we intend timely to obtain additional non-dilutive funding, such as from partnering, and/or additional dilutive funding. In addition,
a successful transition to attaining profitable operations is dependent upon achieving a level of positive cash flows adequate
to support our cost structure.



Business Combinations and Goodwill



We account for business combinations using
the acquisition method of accounting, which requires that the assets acquired and liabilities assumed be recorded at the date of
acquisition at their respective fair values. Any excess of the fair value of consideration given over the fair values of the identifiable
assets and liabilities acquired is recorded as goodwill. The determination of estimated fair values of acquired intangible assets,
as well as the useful economic life ascribed to finite lived intangible assets, requires the use of significant judgment. The use
of different estimates and assumptions to those we use could result in a materially different valuation of acquired intangible
assets, which could have a material effect on our results of operations.



Several methods may be used to determine
the estimated fair value of intangible assets acquired in a business combination, all of which require multiple assumptions.



We used the relief from royalty method,
which is a variant of the income valuation approach, to determine the fair value of the intangibles related to the acquisition
of TiGenix SAU. It is based on the principle that ownership of the intangible asset relieves the owner of the need to pay a royalty
to another party in exchange for rights to use the asset.



We determined the fair value of assets
related to the acquisition of Coretherapix by taking into account the sum of the survival probability discounted present values
of Coretherapix’s projected cash flows in each year of its key product’s development and commercialization life.



Goodwill is capitalized. Any impairment
in carrying amount is charged to the consolidated income statement. Where the fair value of identifiable assets and liabilities
exceeds the fair value of consideration paid, the excess is credited in full to the consolidated income statement on the acquisition
date.



The fair value of any contingent consideration
at the date of acquisition is computed as the sum of the probability weighted values of the fair values of the purchase prices
associated with each of the potential product development routes. The fair value of each route is in turn computed as the sum of
the survival probability discounted present values of the contingent payments in each such route including the milestone and commercialization
payments.



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The nine routes considered in the development
process of Coretherapix are the result of combining multiple variables. The structure of these routes and the probability assigned
to each route are reassessed by management at every reporting date and every time the development process reaches a milestone.



Any contingent consideration included in
the consideration payable for a business combination is recorded at fair value at the date of acquisition. The fair values are
reviewed on a regular basis, and at least at each reporting date, and any changes are reflected in the income statement.



Acquisition costs incurred are expensed
and included in general and administrative expenses.



Revenue and Other Income Recognition



Revenue from sale of products is recognized
when:



| | · | the ownership of the products is transferred to the buyer;
| | - | ----------------------------------------------------------



| | · | the amount of revenue can be measured reliably;
| | - | -----------------------------------------------



| | · | it is probable that the economic benefits associated with the transaction will flow to the entity; and
| | - | ------------------------------------------------------------------------------------------------------



| | · | the costs incurred or to be incurred in respect of the transaction can be measured reliably.
| | - | --------------------------------------------------------------------------------------------



Revenue from the royalties related to the
sale of the ChondroCelect is recognized when implantation has occurred. Provisions for rebates, product returns and discounts to
customers are provided for as reductions to revenue in the same period as the related royalties are recorded.



Recognition
of Government Grants



We do not recognize government grants until
there is reasonable assurance that we will comply with the conditions attaching to them and that the grants will be received.



The benefit of a government loan at a below-market
rate of interest is treated as a government grant, measured as the difference between proceeds received and the fair value of the
loan based on prevailing market interest rates. Only when there is sufficient assurance that we will comply with the conditions
attached to the grant, the grant is recognized in profit or loss (under “other operating income”). Determination of
the appropriate amount of grant income to recognize involves judgments and estimates that we believe to be reasonable, but it is
possible that actual results may differ from our estimates. When we receive the final written reports confirming that we have satisfied
the requirements of the grantor, to the extent these are not received within a reasonable time frame following the end of the period,
we record any differences between estimated grant income and actual grant income in the next reporting period once we determine
the final amounts. During the period that these benefits cannot be considered as grants due to the insufficient assurance that
all the conditions have been met, these grants are included in the liabilities as financial loans and other payables.



Revenue
Recognition in Respect of License Arrangements



The Company recognizes revenue from licensing
arrangements which may include multiple elements. Revenue arrangements with multiple elements are reviewed in order to determine
whether the multiple elements can be divided into separate units of accounting, if certain criteria are met. If separable, the
consideration receivable is allocated amongst the separate units of accounting based on their respective fair values and the applicable
revenue recognition criteria are applied to each of the separate units. If not separable, the applicable revenue recognition criteria
are applied to combined elements as a single unit of accounting.



The Company may enter into licensing and
collaboration agreements for supply and distribution for its product. The terms of the agreements may include non-refundable signing
and licensing fees, milestone payments and royalties on any product sales derived from licensing arrangements. These multiple element
arrangements are analyzed to determine whether the deliverables can be separated or whether they must be accounted for as a single
unit of accounting. License fees are recognized as revenue when persuasive evidence of an arrangement exists, the Company has transferred
to the licensee the risks and rewards of the product, the Company retains neither continuing managerial involvement nor effective
control over the product sold, the fee is fixed or determinable,



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delivery or performance has substantially
completed and collection is reasonably assured. The delivery of a license is to be deemed substantially completed when the licensee
can use, license, exploit, develop and obtain a profit from it without further licensor’s involvement.



The Company analyses and separates the
different performance obligations and how they will be remunerated. If substantive contractual obligations are satisfied over
time or over the life of the contract, revenue will be recognized over their performance. Milestone payments are immediately recognized
as revenue when the condition is met, when performance obligations related to that milestone are fulfilled and if the milestone
is not a condition to future deliverables and collectability is reasonably assured. Otherwise, they are recognized over the remaining
term of the agreement or the performance period.



Management’s assessment related
to the recognition of revenues for arrangements containing multiple elements are based on estimates and assumptions. Judgment
is necessary to identify separate units of accounting and to allocate related consideration to each separate unit of accounting.
Where deferral of upfront payments or license fee is deemed appropriate, subsequent revenue recognition is often determined based
on certain assumptions and estimates, the Company’s continuing involvement in the arrangement, the benefits expected to
be derived by the customer and expected patent lives. To the extent that any of the key  assumptions or estimates change,
future operating results could be affected.



The Company analyses, at each Reporting date, any executory contract that could be
onerous to account for the corresponding provision. This estimation is based on the unavoidable expected costs and expected incomes
derived from the executory contract, its  remaining duration and the potential exit compensation that could be included in
those contracts. The above mentioned calculation also considers past performance evidences and future expected developments based
on the most reliable information existing at each reporting period.



Discontinued Operations



The results of operations disposed during
the year are included in our consolidated statement of comprehensive income up to the date of disposal.



A discontinued operation is a component
of our business that represents a separate major line of business or geographical area of operations or is a subsidiary acquired
exclusively with a view to resale, that has been disposed of, has been abandoned or that meets the criteria to be classified as
held for sale.



Discontinued operations are presented in
our consolidated statement of comprehensive income as a single line item that is comprised of the post-tax profit or loss of the
discontinued operation along with the post-tax gain or loss recognized on the re measurement to fair value less costs to sell or
on disposal of the assets or disposal groups constituting discontinued operations.



At the end of 2013, our board of directors
decided to withdraw from the ChondroCelect business and to focus on the development of its platform and pipeline of allogeneic
treatments, using expanded adipose-derived stem cells (eASCs) for the benefit of patients suffering from a range of inflammatory
and immunological conditions.



Consequently, we developed a single, coordinated
plan under which discussions were entered into with one potential purchaser for the manufacturing facility and with another for
the sales and marketing activities. Both of these transactions were discussed in parallel with Pharmacell (for the manufacturing
facility) and Sobi (for the sales and marketing activities). The arrangement with Pharmacell initially progressed faster, but ultimately
both transactions were completed at almost the same time (May 30 and June 1, 2014).



The transaction with Pharmacell included
a supply contract under which we purchased the ChondroCelect product; a mirror image sales contract was entered into with Sobi.
The purchase agreement with Pharmacell included a discounted price for the first three years of supply, and exactly the same prices
were included in the sales contract with Sobi.



The agreement with Sobi for the sales and
marketing activities had a term of ten years and includes the European Union (excluding Finland, where we have a pre-existing distribution
agreement with Finnish Red Cross Blood Service), Switzerland, Norway, Russia, Turkey and the Middle East and North Africa region.
The agreement included the transfer of staff previously employed by us to carry out those activities to Sobi and involved the payment
of a license fee by Sobi which was calculated as a percentage of the net sales generated by Sobi of ChondroCelect. At the end of
the ten-year term of the agreement with Sobi, no further development costs for ChondroCelect would be left to be amortized.



Consequently, during 2014, all activities
relating to the manufacture, marketing and sale of ChondroCelect were transferred to Pharmacell and Sobi through contractual arrangements
that were entered into at almost the same time and were made in contemplation of each other. The effect of the arrangements is
that we received a license fee from Sobi but, other than acting as a ‘pass through’ intermediary for ChondroCelect
(which was purchased from Pharmacell and sold to Sobi through back to back, identical contractual arrangements), we had no involvement
in activities relating to that product.



On July 4, 2016, we decided to terminate
our distribution agreements with Sobi and Finnish Red Cross Blood Service and our manufacturing agreement with our former subsidiary
purchased by Pharmacell, and we requested the withdrawal of marketing authorization for ChondroCelect, which became effective as
of November 30, 2016. We no longer generate revenues from ChondroCelect.



We have accounted for the ChondroCelect
activities as discontinued operations in accordance with IFRS 5.



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Impairment of Assets



We review the carrying value of intangible
assets with indefinite lives for potential impairment on a periodic basis and also whenever events or changes in circumstances
indicate the carrying value of an asset may not be recoverable. We review the carrying value of tangible assets and intangible
assets with definitive lives for potential impairment whenever events or changes in circumstances indicate the carrying value of
an asset may not be recoverable. We determine impairment by comparing the recoverable amount to its carrying value. If impairment
is identified, a loss is recorded equal to the excess of the asset’s carrying amount over its recoverable amount.



In the context of the business combination
with TiGenix SAU in 2011, development costs related to product Cx601 were capitalized in an amount of 1.7 million euros. These
costs were not amortized at December 31, 2015 because the product was not yet available for use and was, therefore, subject to
an annual test for impairment. In July 2016, the product Cx601 (1.7 million euros) was considered as available for use and consequently
subject to amortization. As a result of that, we have reclassified it from development to intellectual property. The estimated
useful economic life has been determined to be 10 years, which is the remaining period for the patents related to it.



On July 31, 2015, we acquired 100%
of the issued share capital of Coretherapix. The most significant part of the purchase price has been allocated to in-process research
and development (17.4 million euros) as well as certain other intangible assets (277 thousand euros). The difference between
the fair values of the assets acquired and liabilities assumed and the purchase price comprises the value of expected synergies
arising from the acquisition and has been recorded as goodwill (717 thousand euros).



For impaired assets, we recognize a loss
equal to the difference between the carrying value of the asset and its estimated recoverable amount. The recoverable amount is
based on discounted future cash flows of the asset using a discounted rate commensurate with the risk. Estimates of future costs
savings, based on what we believe to be reasonable and supportable assumptions and projections, require management’s judgment.
Actual results could vary from these estimates. When it is not possible to estimate the recoverable amount of an individual asset,
we estimate the recoverable amount of the cash generating unit to which the asset belongs.



Recognition and Measurement of Internally-Generated
Intangible Assets



An internally-generated intangible asset
is recognized if it can be documented with sufficient certainty that the future benefits from the development project will exceed
the aggregate cost of production, development and the sale and administration of the product. A development project involves a
single product candidate undergoing a high number of tests to illustrate its safety profile and the effect on human beings prior
to obtaining the necessary approval of the product from the appropriate authorities. The future economic benefits associated with
the individual development projects are dependent on obtaining such approval. Considering the significant risk and duration of
the development period related to the development of our products, our management has concluded that the future economic benefits
associated with a particular project cannot be estimated with sufficient certainty until the project has been finalized and the
necessary regulatory final approval of the product has been obtained.



Accordingly, we have capitalized such intangible
assets for the development costs related to ChondroCelect with a useful life of ten years. In 2015, we recognized an impairment
in relation to the asset for an amount of 1.1 million euros (corresponding to its net carrying amount prior to its impairment).



Research and Development Costs



Research and development costs are charged
to expense as incurred and are typically made up of salaries and benefits, clinical and preclinical activities, drug development
and manufacturing costs, and third-party service fees, including for clinical research organizations and investigative sites. Costs
for certain development activities, such as clinical trials, are periodically recognized based on an evaluation of the progress
to completion of specific tasks using data such as patient enrollment, clinical site activations, or information provided by vendors
on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may
differ from the pattern of costs incurred, and are reflected in the financial statements as prepaid or accrued expenses.



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Foreign Exchange Differences



Foreign exchange differences are related
to the intercompany loan (expressed in U.S. dollars) granted by us to our subsidiary, TiGenix Inc. The exchange difference
arises as a result of the translation of the intercompany loan in TiGenix NV. As the dollar appreciated during the year, the
receivable granted to our subsidiary Tigenix Inc. has increased recognizing an exchange difference.



Management is of the opinion that under
the strategy of Cx601 in the United States, where we currently expect TiGenix Inc. to play a role, TiGenix Inc. will
be able to settle the intercompany loan in the foreseeable future. As a consequence, the arisen exchange difference is recognized
in financial results in the consolidated income statements, instead of recognizing it in the consolidated statements of comprehensive
income.



Deferred Taxes



Deferred tax assets are recognized for
unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized.
Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the
likely timing and the level of future taxable profits together with future tax planning strategies.



As of December 31, 2016 we had a tax
loss carried forward of 200.3 million euros compared to 180.7 million euros as of December 31, 2015 and 143.4 million
euros as of December 31, 2014. In 2016 we applied the patent box legislation in relation to revenues obtained through the
license deal with Takeda. Under this regime, qualified incomes are exempt from income taxes. This is the reason why our tax losses
increased in 2016 even though we recorded a profit for the year. These tax losses generated a potential deferred tax asset of 61.8 million
euros, and do not have an expiration date. Because we are uncertain whether we will be able to realize taxable profits in the near
future, we did not recognize any deferred tax assets in our balance sheet. In addition to these tax losses, we have unused tax
credits amounting to 20.8 million euros as of December 31, 2016 compared to 20.1 million euros as of December 31,
2015 and 15.0 million euros as of December 31, 2014.



Our tax losses do not have an expiration
date. Most tax credits expire after ten to eighteen years. The notional interest deduction of 1.7 million euros at December 31,
2016 expires within three years. Tax deductions may not be used to offset taxable income elsewhere in our group.



With respect to our net operating losses,
no deferred tax assets have been recognized, given that there is uncertainty as to the extent to which these tax losses will be
used in future years.



Derivative Financial Instruments



Derivatives are initially recognized at
fair value at the date the derivative contracts are entered into and are subsequently re-measured to their fair value at the end
of each reporting period. The resulting gain or loss is recognized in profit or loss immediately.



Pursuant to the terms and conditions of
the loan facility agreement that we entered into with Kreos, on April 22, 2014, an extraordinary meeting of our shareholders
issued and granted 1,994,302 new cash-settled warrants, including a put option to Kreos Capital IV (Expert Fund). These warrants
have been designated at fair value through profit or loss. We recognize the warrants, including the put option, as one instrument,
because we believe that the put option is unconditionally linked to the warrant. Because the issued warrants can be settled in
cash, the instrument is considered as a financial derivative liability measured at fair value with changes in fair value recognized
immediately in profit or loss.



The measurement of the warrant (and the
put option) at fair value is based on the Black-Scholes option pricing model taking into account the following variables:



| | · | The share price.
| | - | ----------------



| | · | The strike price.
| | - | -----------------



| | · | The volatility of the share, which has been determined based on historical stock prices of our shares.
| | - | ------------------------------------------------------------------------------------------------------



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| | · | The dividend yield, which has been estimated as zero, as we have never paid a dividend due to the past experience of losses.
| | - | ----------------------------------------------------------------------------------------------------------------------------



| | · | The duration, which has been estimated as the difference between the valuation date of the warrant plans and final exercise
date.
| | - | ---------------------------------------------------------------------------------------------------------------------------------



| | · | The risk free interest rate, which has been calculated based on the discount curve composed based on liquid euro deposit rates
for periods shorter than one year and futures typically for maturities between one and six years.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We will continue to use judgment in evaluating
the risk-free interest rate, dividend yield, duration and volatility related to our cash-settled warrant plan on a prospective
basis and incorporating these factors into the Black-Scholes option pricing model. If in the future we determine that other methods
are more reasonable and provide better results, or other methods for calculating these assumptions are prescribed by authoritative
guidance, we may change or refine our approach, and our share based payment expense in future periods could change significantly.



Pursuant to the terms and conditions of
the convertible bonds issued on March 6, 2015, the warrant is reflected at any reporting period at its fair value. Measurement
of the fair value is determined using methodologies such as Black-Scholes, binominal lattices or Monte Carlo simulations. The conversion
features of the 9% senior unsecured convertible bonds due 2018 are complex and render Black-Scholes and binominal trees inapplicable.
The measurement of the warrant at fair value is based on a Monte Carlo valuation model.



The resetting and the early redemption
clauses embedded in the instrument result in the conversion price being dependent upon an unknown share price path.



| | · | The Conversion Price depends on the evolution of the share price through the Resetting period.
| | - | ----------------------------------------------------------------------------------------------



| | · | The Early Redemption Clause will, for certain share price paths compel noteholders, to accelerate conversion in order to avoid
the loss on the Warrant value that would result from the Instrument being called by Issuer.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Such conversion features cannot be factored
into a fixed conversion price continuous or discrete model, such as Black-Scholes or binomial lattices, respectively. However,
they can be incorporated in a Monte Carlo model.



On the other hand, a Monte Carlo model
can indeed incorporate not only the market parameters such as volatility, risk-free interest rates and share price, but all the
contractual characteristics of the Warrant such as Present Date (31/12/2016), Conversion Date (06/03/18), Present Price (0.71),
Conversion Price (0.8983), Interest rate annual (-0.24%), Reference Period Days (303), No of iterations (10,000), Annual Volatility
(48.976%), Conversion price Reset, Early Redemption, Average Conversion Price (0.8982) and No of anticipated redemptions (1,472).



Introducing into the model an additional
random variable to factor in the possibility of a change of control (“CoC”) event was not appropriate as it would assume
that such random variable can reasonably be modelled on the basis of any factual information.



The value of the warrant in the event of
a change of control was determined using the same Monte Carlo model but with a deterministic and pre-defined change of control
date estimated by us.



The final value of the warrant was then
calculated as the probability-weighted values derived from the valuation of the warrant in (i) the non-change of control and
(ii) in the change of control scenarios. The probabilities assigned to the non-change of control and change of control scenarios
were 0% and 100%, respectively. A sensibility analysis, changing probabilities to non-change of control and change of control scenarios,
has been performed by the Company. There is no significant impact in the valuation of the Warrant when changing these scenarios.



Share-Based Payment Arrangements



We used the Black-Scholes model to estimate
the fair value of the share-based payment transactions. Using this model requires our management to make assumptions with regard
to volatility and expected life of the equity instruments. The assumptions used for estimating fair value for share-based payment
transactions are estimated as follows:



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| | · | Volatility is estimated based on the average annualized volatility of our share price.
| | - | --------------------------------------------------------------------------------------



| | · | The estimated life of the warrant is until the first exercise period.
| | - | ---------------------------------------------------------------------



| | · | The dividend return is estimated by reference to our historical dividend payment. Currently, this is estimated to be zero,
because no dividend has been paid since our inception.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Recent Accounting Pronouncements



The standards and interpretations that are issued, but not yet
effective, up to the date of issuance of the Company’s financial statements are disclosed in Note 2 to our financial statements
included elsewhere in this Annual Report. We believe the following standards may have an effect on our results of operations or
financial position:



IFRS 9 Financial Instruments



In July 2014, the IASB issued the final version of IFRS 9 Financial
Instrumentsthat replaces IAS 39 Financial Instruments: Recognition and Measurementand all previous versions of IFRS
9. IFRS 9 brings together all three aspects of the accounting for financial instruments project: classification and measurement,
impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early application
permitted. Except for hedge accounting, retrospective application is required but providing comparative information is not compulsory.
For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions.



IFRS 9 requires the Company to record expected credit losses
on all of its debt securities, loans and trade receivables, either on a 12-month or lifetime basis. The Company expects to apply
the simplified approach and record lifetime expected losses on all trade receivables.



The Company plans to adopt the new standard on the required
effective date. The Company expects no significant impact on its balance sheet and equity as a result of the classification and
measurement requirements of IFRS 9.



IFRS 15 Revenue from Contracts with
Customers



IFRS 15 was issued in May 2014 and establishes a five-step model
to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognized at an amount that reflects the
consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer.



The new revenue standard will supersede all current revenue
recognition requirements under IFRS. Either a full retrospective application or a modified retrospective application is required
for annual periods beginning on or after January 1, 2018. The Company plans to adopt the new standard on the required effective
date. The Company has performed a preliminary assessment of IFRS 15, which is subject to changes arising from a more detailed ongoing
analysis. Once the analysis is performed the transition method will be chosen. Based on the current sales contracts, both methods
are feasible from an implementation perspective and we do not expect a significant impact in their implementation. Furthermore,
the Company is considering the clarifications issued by the IASB in April 2016 and will monitor any further developments.



The Company is in the business of providing licenses to produce
stem cell programs and their relating manufacturing process, when applicable.



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Licenses
sales



License is expected to be sold when developed, so it will be
a right to use the entity’s intellectual property as it exists at the point in time in which the license is granted, which
results in revenue that is recognized at a point in time. This accounting treatment will not differ from current accounting practices.



Contracts with customers are expected to have royalties-based
sales. IFRS 15 requires that royalties received in exchange for licenses of intellectual property are recognized at the later of
when the subsequent sale or usage occurs and the performance obligation to which some or all of the sales-based or usage-based
royalty has been allocated is satisfied (or partially satisfied). We do not expect that this accounting treatment will differ from
current practices.



Performance
obligations



In some circumstances we sell the license and the related manufacturing
process. Based on our analysis, license and manufacturing process are separate performance obligations as the manufacturing process
of the product is sold separately at customer requests, and for a determined period of time until the customer is self-sufficient
in the production.



Variable consideration



Some contracts with customers provide variable considerations
depending on some country’s approvals for the sale of the product. As revenue cannot be reliably measured, the Company defers
revenue recognition until the uncertainty is resolved.



IFRS 15 requires the estimated variable consideration to be
constrained to prevent over-recognition of revenue. Even though variable consideration is subject to be estimated, under IFRS 15
it will be constrained as it does not depend on TiGenix to obtain such approval and there is no past experience based on the fact
that products are being commercialized in such countries for the first time.



The Company continues to assess individual contracts to determine
the estimated variable consideration and related constraint. The Company does not expect that application of the constraint may
result in more revenue being recognized than is under current IFRS.



Presentation and disclosure requirements



IFRS 15 provides presentation and disclosure requirements, which
are more detailed than under current IFRS.



The presentation requirements represent a significant change
from current practice and significantly increase the volume of disclosures required in Company’s financial statements. Many
of the disclosure requirements in IFRS 15 are completely new. In 2016 the Company developed and started testing appropriate systems,
internal controls, policies and procedures necessary to collect and disclose the required information.



IFRS 16 Leases



IFRS 16 was issued in January 2016 and it replaces IAS 17 Leases,
IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentivesand SIC-27 Evaluating
the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement,
presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar
to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for lessees – leases
of ’low-value’ assets (e.g., personal computers) and short-term leases (i.e., leases with a lease term of 12 months
or less). At the commencement date of a lease, a lessee will recognize a liability to make lease payments (i.e., the lease liability)
and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will
be required to separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use
asset.



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Lessees will be also required to recalculate the lease liability
upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change
in an index or rate used to determine those payments). The lessee will generally recognize the amount of the revision of the lease
liability as an adjustment to the right-of-use asset.



IFRS 16 is effective for annual periods beginning on or after
1 January 2019, subject to endorsement by the European Union. Early application is permitted, but not before an entity applies
IFRS 15. A lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. The
standard’s transition provisions permit certain reliefs.



During 2017 the Company plans to assess the potential effect
of IFRS 16 on its consolidated financial statements. For more details on the volume of operating leases please refer to note 28
of the consolidated financial statements included elsewhere in this Annual Report.



Result of Operations



Comparison of the Years Ended December
31, 2016 and 2015



The following table summarizes our results
of operations for the years ended December 31, 2016 and 2015:



|                                                                   |  | Year ended December 31, |         |            
|------------------------------------------------------------------ |  | ----------------------- | ------- | -----------
|                                                                   |  | 2016                    |         | 2015       
|                                                                   |  | Thousands of euros      |         | (unaudited)
|Revenues                                                           |  |                         |         |            
|Royalties                                                          |  |                         | 395     |            
|License revenues                                                   |  |                         | 25,000  |            
|Grants and other operating income                                  |  |                         | 1,395   |            
|Total revenues                                                     |  |                         | 26,790  |            
|Research and development expenses                                  |  |                         | (21,454 | )          
|General and administrative expenses                                |  |                         | (8,363  | )          
|Total operating charges                                            |  |                         | (29,817 | )          
|Operating Loss                                                     |  |                         | (3,027  | )          
|Financial income                                                   |  |                         | 156     |            
|Interest on borrowings and other finance costs                     |  |                         | (7,288  | )          
|Impairment and gains/(losses) on disposal of financial instruments |  |                         | —       |            
|Fair value gains                                                   |  |                         | 11,593  |            
|Fair value losses                                                  |  |                         | —       |            
|Foreign exchange differences                                       |  |                         | 232     |            
|Income (Loss) before taxes                                         |  |                         | 1,666   |            
|Income taxes                                                       |  |                         | 2,136   |            
|Income (Loss) for the year                                         |  |                         | 3,802   |            

_________________

*	Not meaningful



Royalties. Royalties decreased by
26% to 0.4 million euros for the year ended December 31, 2016, from 0.5 million euros for the year ended December 31,
2015. In both periods, we received these royalties in connection with the sales of ChondroCelect by Sobi under the license agreement
that we entered into in June 2014. The decrease in royalties was due to the decision of TiGenix to fully focus on its allogenic
stem cell platforms. As a result, in July 2016 we decided to terminate our distribution agreements with Sobi and Finnish Red Cross
Blood Service and our manufacturing agreement with our former subsidiary purchased by Pharmacell, and we requested the withdrawal
of marketing authorization for ChondroCelect, which became effective as of November 30, 2016. We have received no royalties on
sales of ChondroCelect since November 2016. Going forward, we expect to receive ongoing royalty payments from Takeda and other partners
with whom we may enter into distribution agreements or license agreements.



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License revenues.On July 4,
2016, we entered into a licensing agreement with Takeda, a large pharmaceutical company active in gastroenterology, under which
Takeda acquired the exclusive right to commercialize and develop Cx601 for complex perianal fistulas outside the United States,
Japan and Canada. The licensing agreement included an option for Takeda to expand the scope of the license to Japan and Canada,
which Takeda exercised on December 20, 2016. As a result, Takeda now has the exclusive right to commercialize and develop Cx601
for complex perianal fistulas in all countries outside the United States.



In July 2016, we received an upfront non-refundable
payment of 25 million euros from Takeda in connection with this licensing agreement. We recognized this amount as license
revenue in our income statement. We had no license revenue in 2015.



Grants and Other Operating Income.
Grants and other operating income decreased by 18% to 1.4 million euros for the year ended December 31, 2016, from 1.7 million
euros for the year ended December 31, 2015. Grant income decreased by 15% to 0.7 million euros, from 0.9 million euros.
During the year ended December 31, 2016, we recognized grant income under the Horizon 2020 program, the EU’s framework program
for research and innovation, to conduct a clinical Phase II trial for Cx611 in patients with severe sepsis as a result of
severe community-acquired pneumonia. In addition, we recognized as grant income the benefits we received from government loans
at below-market rates granted by the Ministry of Science and the Ministry of Economy to our subsidiaries Tigenix SAU and Coretherapix
SLU, respectively. During the year ended December 31, 2015, we received grants under the EU’s Seventh Framework Program for
Research and Technological Development, a transnational research funding initiative. Other operating income decreased by 21% to
0.7 million euros for the year ended December 31, 2016, from 0.8 million euros for the year ended December 31, 2015.
In both years, other operating income mainly represented reimbursement for certain regulatory and pharmacovigilance activities
that we performed on behalf of Sobi under the license agreement.



|                                        |  | Years ended December 31,
|--------------------------------------- |  | ------------------------
|                                        |  | 2016                    
|                                        |  | Thousands of euros      
|Grant revenues                          |  |                         
|Other operating income                  |  |                         
|Total Grants and other operating income |  |                         



For 2016, grant revenue had the following
components:



| | · | 0.3 million euros due to the recognition of grant income under the Horizon 2020 program, the EU’s framework program for
research and innovation, to conduct a clinical Phase II trial for Cx611 in patients with severe sepsis as a result of severe
community-acquired pneumonia.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | 0.2 million euros related to the recognition as grant income of the benefit obtained from a government loan at a below-market
rate (a 0.4 million “soft” loan received by Tigenix SAU in 2013 from the Ministry of Science with a maturity date in
February 2023).
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | 0.2 million euros related to the recognition as grant income of the benefit obtained from a government loan at a below market
rate (two “soft” loans received by Coretherapix in 2016 granted by the Ministry of Economy of 0.3 million euros and
0.6 million euros with maturity dates in February 2025 and 2026).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



For 2015, grant revenue had the following
components:



| | · | Income of 0.5 million euros from a grant from the EU Seventh Framework Program for research in connection with Cx611,
a decrease of 55% from 1.1 million euros in 2014. The project lasted from January 2012 to December 2014, and all related activities
and expenses were recognized in two reporting periods in June 30, 2013 and December 31, 2014, when we received the bulk
of the grant. As our justified costs in relation to the project were higher than our initial grant allowance, in 2015, we received
an additional part of the grant that was initially allocated to our partner institutions in the project that did not spend the
entire amount of their respective authorized grants to recoup some of our costs.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | · | Income of 0.3 million euros related to a so-called “soft” loan of 0.7 million euros from the Spanish
Ministry of Science. At December 31, 2015, we completed all the activities related to this loan, and, therefore, fully recognized
as grant income the benefit received by borrowing these sums at a below-market rate of interest (measured as the difference between
the proceeds received and the fair value of the loan based on prevailing market interest rates), in an amount of 0.3 million
euros.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Research and Development Expenses.
Our research and development expenses increased by 9% to 21.5 million euros for the year ended December 31, 2016, from 19.6 million
euros for the year ended December 31, 2015. The increase was mainly driven by the following activities, which we undertook in 2016:



| | · | Filing for marketing authorization for Cx601 in Europe.
| | - | -------------------------------------------------------



| | · | Preparation for the Phase III clinical trial for Cx601 in the United States.
| | - | ----------------------------------------------------------------------------



| | · | Preparation for the Phase II clinical trial for Cx611 in severe sepsis.
| | - | -----------------------------------------------------------------------



| | · | Activities in connection with the ongoing Phase I/II clinical trial for AlloCSC-01 in acute myocardial infarction, which
were not reflected in our expenses during the same period in 2015, since the acquisition of Coretherapix was completed in July
2015.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our research and development expenses in
the year ended December 31, 2015 mainly related to costs in connection with the European Phase III trial for Cx601 and other
related preparations to file for marketing authorization for Cx601 in Europe. In addition, we concluded the Phase I trial
for Cx611 in severe sepsis and launched Phase II activities during this period. The following table provides a breakdown of
our research and development expenses for Cx601, Cx611 and AlloCSC-01, the three product candidates we have in clinical development,
as well as our non-allocated research and development expenses, which primarily include personnel and facility costs that are not
related to specific projects:



|                                                |  | Years ended December 31,
|----------------------------------------------- |  | ------------------------
|                                                |  | 2016                    
|                                                |  | Thousands of euros      
|Non-allocated research and development expenses |  |                         
|ChondroCelect impairment                        |  |                         
|Cx601                                           |  |                         
|Cx611                                           |  |                         
|AlloCSC-01                                      |  |                         
|Total                                           |  |                         



General and Administrative Expenses.
General and administrative costs increased by 25% to 8.4 million euros for the year ended December 31, 2016, from 6.7 million
euros for the year ended December 31, 2015. The increase was mainly attributable to non-recurrent expenses including certain costs
in connection with our U.S. initial public offering and the Takeda licensing transaction and general and administrative expenses
in connection with Coretherapix, which we acquired in 2015. General and administrative expenses for the year ended December 31,
2016 included 12 months of expenses for Coretherapix, whereas general and administrative expenses for the year ended December 31,
2015 included such expenses only for the five months between the acquisition (completed in July 2015) and the end of the year.



Financial Income. Financial income
increased to 0.2 million euros for the year ended December 31, 2016, from 0.1 million euros for the year ended December
31, 2015. Financial income mainly consists of interest income on the cash balances in our bank deposits.



Interest on Borrowings and Other Finance
Costs. Interest on borrowings and other finance costs increased by 10% to 7.3 million euros for the year ended December
31, 2016, from 6.7 million euros for the year ended December 31, 2015. This financial expense had three primary components
for the year ended December 31, 2016:



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| | · | Interest of 1.1 million euros under the loan facility with Kreos.
| | - | -----------------------------------------------------------------



| | · | Interest of 0.9 million euros on government loans.
| | - | --------------------------------------------------



| | · | Interest of 5.0 million euros in connection with the issuance of senior unsecured convertible bonds on March 6, 2015,
which constituted the majority of the increase.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



Interest was due for the entire year ended
December 31, 2016, and only part of the year ended December 31, 2015 since the bonds were issued in March 2015.



Fair Value Gains. Fair value gains
significantly increased to 11.6 million euros for the year ended December 31, 2016, from 0 million euros for the year
ended December 31, 2015. This increase was mainly driven by the evolution of the fair value of the embedded derivative related
to our senior, unsecured convertible bonds and the Kreos loan, from December 31, 2015 to December 31, 2016. The fair value
gain related to the derivative of the convertible bonds and the Kreos loan amounted to 11.0 and 0.6 million euros, respectively.
The variable with the most significant effect on the fair value calculation of the warrants linked to the convertible bonds and
the Kreos loan was our share price, which dropped to 0.71 euros at December 31, 2016, from 1.19 euros at December 31,
2015.



Fair Value Losses. Fair value losses
significantly decreased to 0 million euros for the year ended December 31, 2016, from 6.7 million euros for the year
ended December 31, 2015. This decrease was mainly driven by the evolution of the fair value of the embedded derivative related
to our senior, unsecured convertible bonds and the Kreos loan from December 31, 2015 to December 31, 2016. During 2015 these
derivatives resulted in an increase of liabilities generating 6.1 million euros of fair value losses. This was mainly caused by
the increase of TiGenix’s share price during that year, which rose to 1.19 euros at December 31, 2015, from 0.56 euros at
December 31, 2014.



Foreign Exchange Differences. Foreign
exchange differences decreased to 0.2 million euros for the year ended December 31, 2016, from 1.0 million euros for
the year ended December 31, 2015. The decrease was mainly due to the translation into euros of the U.S. dollar denominated intercompany
balance existing between us and our subsidiary, TiGenix Inc. The decrease was due to the appreciation of the U.S. dollar against
the euro during the twelve month-period ended December 31, 2016 to an average of 1,054 €/USD at December 31, 2016, from 1,086
€/USD at December 31, 2015.



Income Taxes.Our income tax benefit
increased to 2.1 million euros for the year ended December 31, 2016 from 1.3 million euros for the year ended December 31,
2015. These benefits resulted from the enactment in September 2013 of a new law to promote tech start-ups in Spain under which
our subsidiary TiGenix SAU recognized a cash tax credit as a result of research and development activities performed during 2014
and 2015.



As of December 31, 2016 we had a tax
loss carried forward of 200.3 million euros compared to 180.7 million euros as of December 31, 2015. In 2016 we
applied the patent box legislation in relation to revenues obtained through the license deal with Takeda. Under this regime, qualified
incomes are exempt from income taxes. This is the reason why our tax losses increased in 2016 even though we recorded a profit
for the year. These tax losses generated a potential deferred tax asset of 61.8 million euros, and do not have an expiration
date. Because we are uncertain whether we will be able to realize taxable profits in the near future, we did not recognize any
deferred tax assets in our balance sheet. In addition to these tax losses, we have unused tax credits amounting to 20.8 million
euros as of December 31, 2016 compared to 20.1 million euros as of December 31, 2015.



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Comparison of the Years Ended December 31,
2015 and 2014



The following table summarizes our results
of operations for the years ended December 31, 2015 and 2014:



|                                                                   |  | Years ended December 31, |         |     
|------------------------------------------------------------------ |  | ------------------------ | ------- | ----
|                                                                   |  | 2015                     |         | 2014
|                                                                   |  | Thousands of euros       |         |     
|CONTINUING OPERATIONS                                              |  |                          |         |     
|Revenues                                                           |  |                          |         |     
|Royalties                                                          |  |                          | 537     |     
|Grants and other operating income                                  |  |                          | 1,703   |     
|Total revenues                                                     |  |                          | 2,240   |     
|Research and development expenses                                  |  |                          | (19,633 | )   
|General and administrative expenses                                |  |                          | (6,683  | )   
|Total operating charges                                            |  |                          | (26,316 | )   
|Operating loss                                                     |  |                          | (24,076 | )   
|Financial income                                                   |  |                          | 148     |     
|Interest on borrowings and other finance costs                     |  |                          | (6,651  | )   
|Fair value gains and losses                                        |  |                          | (6,654  | )   
|Impairment and gains/(losses) on disposal of financial instruments |  |                          | (161    | )   
|Foreign exchange differences net                                   |  |                          | 1,000   |     
|Loss before taxes                                                  |  |                          | (36,394 | )   
|Income taxes benefit                                               |  |                          | 1,325   |     
|Loss for the year from continuing operations                       |  |                          | (35,069 | )   
|DISCONTINUED OPERATIONS                                            |  |                          |         |     
|Loss for the year from discontinued operations                     |  |                          | —       |     
|Loss for the year                                                  |  |                          | (35,069 | )   

____________________

*	Not meaningful



Royalties. In the year ended December 31,
2015, we earned 0.5 million euros in royalties on net sales of ChondroCelect by Sobi, compared to 0.3 million euros in
royalties in the year ended December 31, 2014, which were earned after we entered into the license agreement with Sobi in
June 2014. Income generated from sales of ChondroCelect prior to June 2014 is reflected under loss for the period from discontinued
operations. Units of ChondroCelect sold dropped by 54% in the second half of 2015 compared to the same period in 2014, after the
authorities in Belgium decided to reverse their decision to reimburse ChondroCelect in April 2015.



Grants and Other Operating Income.
Revenue from grants and other operating income decreased to 1.7 million euros in the year ended December 31, 2015, from
6.0 million euros in the year ended December 31, 2014. The following table provides a breakdown between grant revenues
and other operating income:



|                                        |  | Years ended December 31,
|--------------------------------------- |  | ------------------------
|                                        |  | 2015                    
|                                        |  | Thousands of euros      
|Grant revenues                          |  |                         
|Other operating income                  |  |                         
|Total Grants and other operating income |  |                         



For 2015, grant revenue had the following
components:



| | · | Income of 0.5 million euros from a grant from the EU Seventh Framework Program for research in connection with Cx611,
a decrease of 55% from 1.1 million euros in 2014. The project lasted from January 2012 to December 2014, and all related activities
and expenses were recognized in two reporting periods in June 30, 2013 and December 31, 2014, when we received the bulk
of the grant. As our justified costs in relation to the project were higher than our initial grant allowance, in 2015, we received
an additional part of the grant that was initially allocated to our partner institutions in the project that did not spend the
entire amount of their respective authorized grants to recoup some of our costs.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Income of 0.3 million euros related to a so-called “soft” loan of 0.7 million euros from the Spanish
Ministry of Science. At December 31, 2015, we completed all the activities related to this loan, and, therefore, fully recognized
as grant income the benefit received by borrowing these sums at a below-market rate of interest (measured as the difference between
the proceeds received and the fair value of the loan based on prevailing market interest rates), in an amount of 0.3 million
euros.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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For 2014, grant revenue had the following
components:



| | · | Income of 3.4 million euros related to two so-called “soft” loans from Madrid Network, of 5.0 million
euros and 1.0 million euros respectively. At December 31, 2014, we completed all the activities related to these loans,
and, therefore, fully recognized as grant income the benefit received by borrowing these sums at a below-market rate of interest
(measured as the difference between the proceeds received and the fair value of the loan based on prevailing market interest rates),
in an amount of 2.8 million euros for the first loan and 0.6 million euros for the second loan.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Income of 1.1 million euros from a grant from the EU Seventh Framework Program for research in connection with Cx611 in
2014.
| | - | -----------------------------------------------------------------------------------------------------------------------------



| | · | Income of 1.0 million euros related to six different “soft” loans for various projects from the Spanish Ministry
of Science. At December 31, 2014, we completed all the activities related to these loans and the period for inspection for
compliance with the terms of the loans had elapsed for all of these loans. We believed that there was sufficient assurance of the
grant of the loans and recognized as grant income the benefit received by being able to borrow at a below-market rate of interest.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Other operating income increased by 0.4 million
euros in 2015. In 2014, this income was related to reimbursement for certain regulatory and pharmacovigilance activities that we
performed on behalf of Sobi under the license agreement of ChondroCelect. In 2015, in addition to the reimbursement from Sobi,
we received 0.2 million euros from the sale of a database of information related to our research in connection with ChondroCelect.



Research and Development Expenses. Our
research and development expenses increased by 72% to 19.6 million euros for the year ended December 31, 2015, from 11.4 million
euros for the year ended December 31, 2014. The increased expenses were in connection with the conclusion of the Phase III
clinical trial for Cx601 and the Phase I sepsis challenge trial for Cx611, other activities in connection with the filing
for marketing authorization for Cx601 in Europe, as well as 0.9 million euros in research and development expenses in connection
with AlloCSC-01, the product candidate we acquired through the acquisition of Coretherapix in July 2015. As a result of an impairment
test in the fourth quarter of 2015, we also recognized an impairment charge of 1.1 million euros in connection with the capitalized
development costs related to ChondroCelect in 2010 and 2011. The following table provides a breakdown of our research and development
expenses for Cx601, Cx611 and AlloCSC-01 (the three product candidates we currently have in clinical development) as well as the
impairment charge for ChondroCelect and our non-allocated research and development expenses, which primarily include personnel
and facility costs that are not related to specific projects:



|                                                |  | Years ended December 31,
|----------------------------------------------- |  | ------------------------
|                                                |  | 2015                    
|                                                |  | Thousands of euros      
|Non-allocated research and development expenses |  |                         
|ChondroCelect impairment                        |  |                         
|Cx601                                           |  |                         
|Cx611                                           |  |                         
|AlloCSC-01                                      |  |                         
|Total                                           |  |                         



General and Administrative Expenses.
General and administrative costs decreased by 10% to 6.7 million euros for the year ended December 31, 2015, from 7.4 million
euros for the year ended December 31, 2014. The decrease was related to lower expenses to obtain additional funding during
2015 as compared to 2014 as well as lower employee benefits costs, due to a reduction in the number of our staff in Belgium by
approximately 60%, which was partially offset by additional staff joining as a result of the Coretherapix acquisition.



Financial Income. Financial income
remained broadly stable at 0.1 million euros for the years ended December 31, 2015 and 2014. Financial income consists
of interest income and varies based on the cash balances in our bank deposits.



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Interest on Borrowings and Other Finance
Costs. Interest on borrowings increased to 6.7 million euros for the year ended December 31, 2015, from 1.0 million
euros for the year ended December 31, 2014. This significant increase was primarily driven by interest expense in connection
with our borrowings, of 3.9 million euros (with respect to the convertible bonds issued on March 6, 2015), 1.6 million
euros (with respect to the Kreos loans) and 0.9 million euros (with respect to various government loans). Financial expenses
in 2014 related mainly to the interest expense under the Kreos loans of 1.0 million euros.



Fair Value Gains and Losses. Fair
value gains and losses changed to a loss of 6.7 million euros for the year ended December 31, 2015, from a gain of 60,000 euros
for the year ended December 31, 2014. This was due to the evolution of the fair value of the embedded derivatives in connection
with our borrowings, of which 5.5 million euros related to the fair value of our 9% senior unsecured convertible bonds due
2018 and 0.6 million euros related to the fair value of the Kreos loans, as well as a change in the value of the contingent
deferred elements of the purchase price for the Coretherapix acquisition, amounting to 0.7 million euros.



Impairment and Gains/(Losses) on Disposal
of Financial Instruments. In the year ended December 31, 2015, we recognized an impairment loss of 0.2 million euros
in connection with our investment in Arcarios, our Dutch spin-off, due to continuing losses, representing a total impairment of
our investment.



Foreign Exchange Differences. Foreign
exchange differences remained stable at approximately 1 million euros during the years ended December 31, 2015 and 2014.
The differences are related to the intercompany loan (expressed in U.S. dollars) incurred by our subsidiary. We have an intercompany
receivable in U.S. dollars against TiGenix Inc. As of December 31, 2015 and due to the appreciation of the U.S. dollar against
the euro in 2015, the balance of the receivable in euros has been updated with the new closing exchange rate, generating a foreign
exchange difference in TiGenix NV.



Income Taxes. Income taxes changed
to a benefit of 1.3 million euros for the year ended December 31, 2015, from a benefit of 0.9 million euros for
the year ended December 31, 2014. These benefits resulted from the enactment in September 2013 of a new law for entrepreneurial
enterprises in Spain under which our subsidiary TiGenix SAU recognized a cash tax credit as a result of research and development
activities performed during 2013 and 2014.



As of December 31, 2015, we had a
tax loss carried forward of 180.7 million euros compared to 143.4 million euros as of December 31, 2014. These tax
losses generated a potential deferred tax asset of 55.7 million euros, and do not have an expiration date. Because we are
uncertain whether we will be able to realize taxable profits in the near future, we did not recognize any deferred tax assets in
our balance sheet. In addition to these tax losses, we had unused tax credits amounting to 20.1 million euros as of December 31,
2015, consisting of approximately 3 million euros in tax credits resulting from the Coretherapix acquisition, as well as additional
tax credits generated during 2015 compared to 15.0 million euros as of December 31, 2014.



Loss for the Period from Discontinued
Operations. During 2015, we had no gain or loss from discontinued operations. Our loss from discontinued operations for the
year ended December 31, 2014 was 1.6 million euros.



The following table provides a breakdown
of the loss from discontinued operations during 2014:



|                                                                         |  | Year ended December 31,
|------------------------------------------------------------------------ |  | -----------------------
|                                                                         |  | 2014                   
|                                                                         |  |                        
|Revenue                                                                  |  |                        
|Expenses                                                                 |  |                        
|Operating expenses                                                       |  |                        
|Impairment losses                                                        |  |                        
|Loss on disposal                                                         |  |                        
|Other income and expenses                                                |  |                        
|Loss before taxes                                                        |  |                        
|Attributable income tax expense                                          |  |                        
|Total                                                                    |  |                        
|Basic and diluted loss per share from discontinued operations (in euros) |  |                        

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The loss on disposal included in the discontinued
operations at December 31, 2014 of 1.1 million euros is composed of the following (thousands of euros):



|                               |  | Year endedDecember 31,
|------------------------------ |  | ----------------------
|                               |  | 2014                  
|                               |  |                       
|Consideration received in cash |  |                       
|Deferred consideration         |  |                       
|Net assets disposed of         |  |                       
|Loss on disposal               |  |                       



These costs were incurred in connection
with the discontinuation during the first six months of 2014 of our operations in connection with ChondroCelect, our commercialized
product, through the combination of the sale of TiGenix B.V., our Dutch subsidiary that held our production facility for ChondroCelect,
to PharmaCell for a total consideration of 4.3 million euros and the entry into an agreement with Sobi for the exclusive marketing
and distribution rights for ChondroCelect. Under the terms of the share purchase agreement with PharmaCell, we received an upfront
payment of 3.5 million euros when the sale became effective on May 30, 2014 and a final payment of 0.8 million euros
in December 2016. At the end of 2013, we conducted an impairment test with respect to the disposal of our Dutch subsidiary and
recognized a loss of 0.7 million euros. After the completion of the disposal of the Dutch subsidiary and as a result of entering
into the distribution agreement with Sobi, we recognized an additional loss on disposal of 1.1 million euros at June 30,
2014.



On June 1, 2014, we entered into an
agreement with Sobi for the exclusive marketing and distribution rights with respect to ChondroCelect. Sobi will market and distribute
the product within the European Union (excluding Finland), Switzerland, Norway, Russia, Turkey and the Middle East and North Africa
region. We received royalties on the net sales of ChondroCelect, and Sobi reimbursed nearly all of our costs in connection with
the product. The agreements with our former subsidiary, now owned by PharmaCell, and Sobi both included commitments for minimum
quantities of ChondroCelect that were required to be purchased by us and from us under the respective contracts. If Sobi’s
actual purchases were to be lower than the required minimum, we were nevertheless entitled to receive payment from Sobi up to a
maximum undiscounted amount of 8.8 million euros and were required to pass on such payment to PharmaCell over a three-year
period from June 2014.



The sale of our Dutch subsidiary also included
cost relief of up to 1.5 million euros on future purchases of ChondroCelect under the conditions of the long-term manufacturing
agreement with our former subsidiary, which is now owned by PharmaCell. We passed on this cost relief on a like-for-like basis
to Sobi, which purchased ChondroCelect from us at cost.



As a result of these transactions, for
the year ended December 31, 2014, all ChondroCelect operations, including revenues, production costs, sale and marketing expenses,
have been presented as discontinued operations in the consolidated financial statements.



B. Liquidity and Capital Resources



We have historically funded our operations
principally from equity financing, including an initial public offering in the United States in December 2016, borrowings, grants
and subsidies and cash generated from operations. As we continue to grow our business, we expect to fund our operations through
multiple sources, including short and long term investments; loans or collaborative agreements with corporate partners, such as
our licensing agreement with Takeda; revenues from potential licensing arrangements future earnings and cash flow from operations
and borrowings. This expectation could change depending on how much we spend on our development programs, potential licenses or
acquisitions of complementary technologies, products or companies. We may in the future supplement our funding with further debt
or equity offerings or commercial borrowings.



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On December 15, 2016 we completed our initial
public offering in the United States, totaling US$35.7 million gross proceeds from the sale of 2,300,000 American Depositary Shares
(“ADSs”) representing 46,000,000 ordinary shares. On December 29, 2016, Takeda made a 10 million euro equity investment
in us by subscribing for 11,651,778 new ordinary shares, pursuant to the terms of the licensing agreement.



In July 2016, we received an upfront non-refundable
payment of 25.0 million euros from Takeda in connection with our licensing agreement for the right to commercialize and develop
Cx601 outside of the United States.



On March 14, 2016, we raised 23.8
million euros in gross proceeds through a private placement of 25 million new shares.



On November 27 and December 3, 2015, we
raised a total of 8.7 million euros through a private placement of 9.1 million new shares.



During 2015 we were awarded a 1.3 million
euros grant from the European Commission under Horizon 2020, the European Union’s framework program for research and innovation
to conduct a clinical Phase I/II trial of Cx611 in patients with severe sepsis secondary to severe community-acquired pneumonia.
In October 2015 we received 0.6 million euros in advance of the activities needed to initiate the trial.



On March 6, 2015, we issued 9% senior
unsecured bonds due 2018 for 25.0 million euros in total principal amount, convertible into our ordinary shares. On March 14,
2016, as a result of the private placement, the conversion price for the 9% senior unsecured convertible bonds due 2018 was adjusted
from its previous level of 0.9414 euros to the new level of 0.9263 euros per share. On December 20, 2016 the conversion price was
adjusted from its previous level of 0.9263 euros per share to a new level of 0.8983 euros per share as a consequence of the initial
public offering in the United States.



The bonds are guaranteed by our subsidiary
TiGenix SAU. We account for the bonds as two instruments: the host contract and the embedded derivative. As at December 31, 2016,
the fair value of the embedded derivative amounted to 2.4 million euros and the amortized cost of the host contract amounted to
21.5 million euros. The financial income due to the changes in the fair value of the derivative during the year ended December
31, 2016 of 11.0 million euros has been recorded under “fair value gains” in our consolidated financial statements.
The host contract is amortized using the effective interest rate method on a discounted rate of 28.06%.



On December 20, 2013, we entered into
a loan facility agreement of up to 10.0 million euros with Kreos, under which we borrowed 7.5 million euros during the
first half of 2014. On September 30, 2014, we borrowed the final installment of 2.5 million euros under the facility.



The terms of the loan facility agreement
are as follows:



| | · | Term: four years from the date of each drawdown.
| | - | ------------------------------------------------



| | · | Repayment schedule: repayment of principal amount started at first anniversary.
| | - | -------------------------------------------------------------------------------



| | · | Interest: 12.5% fixed annual interest rate.
| | - | -------------------------------------------



| | · | Structure: security over certain of our assets (including a pledge over certain intellectual property and bank accounts and
a pledge of all of the outstanding capital stock of TiGenix S.A.U.); no financial covenants.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, pursuant to the terms of the
loan facility agreement, on April 22, 2014, an extraordinary meeting of shareholders issued and granted 1,994,302 new warrants
to Kreos Capital IV (Expert Fund). Kreos exercised its put option with respect to one-third of these warrants on May 5, 2015.
The put options with respect to the remaining two-thirds of the warrants lapsed in January 2016 due to the increase in our share
price above the strike price of the warrants.



Our borrowings also include government
loans from public and semipublic entities, such as Madrid Network. These loans have an extended repayment period of ten to fifteen
years, and are interest free or have very low interest rates, if all the terms and conditions are met. In addition, there is a
grace period of three to five years before any repayment is required under such loans.



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On September 30, 2011, our subsidiary
TiGenix SAU entered into a loan facility for a total value of 5.0 million euros with Madrid Network, the terms of which were
as follows:



| | · | Term: until December 31, 2026.
| | - | ------------------------------



| | · | Repayment schedule: repayment of interest and principal amount started at June 30, 2015.
| | - | ----------------------------------------------------------------------------------------



| | · | Effective interest: 1.46% fixed annual interest rate.
| | - | -----------------------------------------------------



| | · | Structure: joint and several guarantee from us.
| | - | -----------------------------------------------



The loan was granted to finance in part
our ongoing Phase III trial for Cx601 and also to cover some research and development expenses related to Cx601 from 2012
until the end of 2014. The specific activities covered for this period were agreed with Madrid Network at the time of the grant
of the loan, and any change to this plan requires approval from Madrid Network on a semi-annual basis.



On July 30, 2013, our subsidiary TiGenix
SAU entered into a second loan facility for a total value of 1.0 million euros with Madrid Network, the terms of which were
as follows:



| | · | Term: until December 31, 2025.
| | - | ------------------------------



| | · | Repayment schedule: repayment of interest and principal amount started at June 30, 2016.
| | - | ----------------------------------------------------------------------------------------



| | · | Effective interest: 1.46% fixed annual interest rate.
| | - | -----------------------------------------------------



| | · | Structure: first demand bank guarantee for the full amount of the loan provided by Bankinter, where we maintain our primary
bank accounts in Spain.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------



This loan was granted to finance our preparatory
work to determine which new indications we should pursue with respect to Cx611, our second product candidate, the development of
the clinical protocol for such new indications and the initial expenses of the clinical trials for such indications from July 2013
until the end of 2014. The specific activities covered for this period were agreed with Madrid Network at the time of the grant
of the loan and any change to this plan requires approval from Madrid Network on a semi-annual basis. We completed the activities
agreed with Madrid Network under both loans by December 31, 2014, and therefore fully recognized as grant income on our income
statement the benefit received by being able to borrow these sums at a below-market rate of interest (measured as the difference
between the proceeds received and the fair value of the loan based on prevailing market interest rates), in an amount of 2.8 million
euros for the first loan and 0.6 million euros for the second loan.



We have experienced net losses and significant
cash used in operating activities in most periods since inception. As of December 31, 2016, we had an accumulated deficit of 116.2 million
euros, a net income of 3.8 million euros and net cash from operating activities of 3.5 million euros. We currently have
several product candidates in clinical development but we have no commercial product that generates revenues through royalties.
We, therefore, expect to incur net losses and have significant cash outflows for at least the next year.



These conditions, among others, raise substantial
doubt about our ability to continue as a going concern. The accompanying consolidated financial statements have been prepared assuming
that we will continue as a going concern. This basis of accounting contemplates the recovery of our assets and the satisfaction
of our liabilities in the normal course of business.



As at December 31, 2016, we had cash and
cash equivalents of 78.0 million euros. In December 2016, we completed an initial public offering in the United States, totaling
US$35.7 million gross proceeds from the sale of 2,300,000 American Depositary Shares (“ADSs”) representing 46,000,000
ordinary shares. On December 29, Takeda made a 10 million euro equity investment in us by subscribing 11,651,778 new ordinary shares
pursuant to its agreement to do so within a year of the signing of the licensing agreement. In July 2016, we received an upfront
non-refundable payment of 25 million euros from Takeda in connection with the licensing agreement. Our board of directors
is of the opinion that this cash position is sufficient to continue operating for at least twelve months after December 31, 2016
but that we will require significant additional cash resources to launch new development phases of existing or new projects in
our pipeline.



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In order to be able to launch such new
development phases, we intend to obtain on a timely basis either or both of additional non-dilutive, funding such as from establishing
commercial relationships, and dilutive funding. In addition a successful transition to attaining profitable operations is dependent
upon achieving a level of positive cash flows adequate to support our cost structure.



Our future viability is dependent on the
following:



| | · | Our ability to generate cash from operating activities.
| | - | -------------------------------------------------------



| | · | Our ability to raise additional capital to finance our operations.
| | - | ------------------------------------------------------------------



| | · | Our ability successfully to obtain regulatory approval to allow marketing of our products.
| | - | ------------------------------------------------------------------------------------------



| | · | Our ability to enter into licensing arrangements to distribute our products or product candidates.
| | - | --------------------------------------------------------------------------------------------------



Our failure to raise capital as and when
needed could have a negative impact on our financial condition and ability to pursue our business strategies.



We have based this estimate on assumptions
that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Because of the numerous
risks and uncertainties associated with the development and commercialization of our product candidates, and the extent to which
we may enter into collaborations with third parties for development and commercialization of our product candidates, we are unable
to estimate the amounts of increased capital outlays and operating expenses associated with completing the development of our current
product candidates. Our future capital requirements will depend on many factors, including the following:



| | · | The progress of our application for marketing authorization for Cx601, our lead product candidate, in Europe and the progress
and results of the clinical trials for Cx601 in the United States and for Cx611 in Europe and the United States.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The expenditure in connection with bringing our CSC-based product candidates derived from the technology platform we acquired
as part of our acquisition of Coretherapix to market.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The scope, progress, results and costs of pre-clinical development, laboratory testing and clinical trials for our other product
candidates.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------



| | · | The extent to which we acquire or in-license other products and technologies.
| | - | -----------------------------------------------------------------------------



| | · | Our ability successfully to out-license our products or product candidates in certain markets.
| | - | ----------------------------------------------------------------------------------------------



| | · | The cost, timing and outcome of regulatory review of our product candidates in the United States, Europe or elsewhere.
| | - | ----------------------------------------------------------------------------------------------------------------------



| | · | The cost and timing of completing the technology transfer to contract manufacturing organizations in the United States and
other international markets.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The costs of future commercialization activities, including product sales, marketing, manufacturing and distribution, for any
of our product candidates for which we receive marketing authorization.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Any additional revenue received from commercial sales of our products, should any of our product candidates receive marketing
approval.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



| | · | The cost of preparing, filing, prosecuting, defending and enforcing patent applications, maintaining and enforcing our intellectual
property rights and defending intellectual property-related claims.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The cost of obtaining favorable reimbursement terms from public and private insurers for our products.
| | - | ------------------------------------------------------------------------------------------------------



| | · | Our ability to establish any future collaboration arrangements on favorable terms, if at all.
| | - | ---------------------------------------------------------------------------------------------



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We have also incurred costs as a U.S.-listed
public company that we did not previously incur, including, but not limited to, costs and expenses for increased personnel costs,
audit and legal fees, expenses related to compliance with the Sarbanes-Oxley Act of 2002 and the rules implemented by the SEC and
NASDAQ and various other costs.



These factors raise uncertainty about our
ability to continue as a going concern. The consolidated financial statements included elsewhere in this Annual Report have been
prepared assuming that we will continue as a going concern. This basis of accounting contemplates the recovery of our assets and
the satisfaction of liabilities in the normal course of business and no adjustments are made for the uncertainty relating to the
recoverability and classification of recorded asset amounts and classification of liabilities. A successful transition to attaining
profitable operations is dependent upon achieving a level of positive cash flows adequate to support our cost structure. To improve
our financial performance, we discontinued our ChondroCelect operations through two initiatives:



| | · | The sale of our subsidiary TiGenix B.V. to PharmaCell, for which we received an upfront payment of 3.5 million euros
when the sale became effective on May 30, 2014 and a final payment of 0.8 million euros in December 2016.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Our entry into a distribution agreement with Sobi for the marketing and distribution rights with respect to ChondroCelect,
effective June 1, 2014, to allow us to focus on our eASC-based platform of product candidates in inflammatory and autoimmune
diseases and our CSC-based platform of product candidates in cardiac indications.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In July 2016, we decided to terminate our
distribution agreements with Sobi and Finnish Red Cross Blood Service and our manufacturing agreement with our former subsidiary
purchased by Pharmacell, and we requested the withdrawal of marketing authorization for ChondroCelect, which became effective as
of November 30, 2016. We no longer generate revenues from ChondroCelect.



Our liquidity plans are subject to a number
of risks and uncertainties, including those described in the section of this Annual Report entitled “Risk Factors,”
some of which are outside of our control.



Cash Flows



The following table shows the Company’s
cash flows for the years ended December 31, 2016 and 2015 and 2014:



|                                                      |  | As at December 31,   
|----------------------------------------------------- |  | ---------------------
|                                                      |  | 2016                 
|                                                      |  | In thousands of euros
|Net cash (used in) /provided by operating activities  |  |                      
|Net cash (used in) / provided by investing activities |  |                      
|Net cash provided by financing activities             |  |                      
|Cash and cash equivalents at end of year              |  |                      



Comparison of the Years Ended December 31,
2016 and 2015



Net cash generated from operating activities
was 3.5 million euros for the year ended December 31, 2016 compared to cash used in operating activities of 19.6 million
euros for the year ended December 31, 2015. This variation was mainly due to the Cx601 license deal with Takeda, which increased
operating income by 25.0 million euros. This higher income was partially offset by higher operating expenses incurred during the
year ended December 31, 2016 due to the research and development activities related to the filing for market authorization for
Cx601 in Europe, preparation for the Phase III trial of Cx601 in the United States, activities in connection with the Phase I/II
for AlloCSC01 for acute myocardial infarction and other general and administrative expenses including certain expenses related
to the U.S. initial public offering process and the license agreement with Takeda.



Net cash generated from investing activities
was 0.5 million euros for the year ended December 31, 2016 compared to an outflow of 4.4 million euros for the year ended
December 31, 2015. This cash is derived from the use in 2016 of an escrow account to pay 2.2 million euros interest in connection
with the 9% senior unsecured convertible bonds due 2018, and a last payment from Pharmacell of 0.8 million euros for the sale in
2014 of our Dutch manufacturing facility. These inflows were partially offset by investment in property, plant and equipment for



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our facility in Madrid, with the goal of increasing
our manufacturing capacity. The principal outflows during 2015 related to the acquisition of Coretherapix. Part of the payment
was in cash for a total amount of 1.2 million. In addition we transferred 3.4 million euros received from our issuance of
9% senior unsecured convertible bonds due 2018 into an escrow account partly classified as “other non-current assets”
and partly as “other current financial assets” for the purposes of the interest payment on the convertible bonds.



Net cash generated from financing activities
was 55.9 million euros for the year ended December 31, 2016 compared to 28.5 million euros for the year ended December
31, 2015, an increase of 96%. During the year ended December 31, 2016, we raised net proceeds of 22.1 million euros from a
private placement in March 2016, 31.7 million euros from our initial public offering in the United States in December 2016, 10.0
million euros from the equity investment from Takeda during December 2016 and 1.1 million euros in government loans and grants.
The costs of issuance of the equity instruments were 5.7 million euros and we repaid 7.3 million euros in principal and interest
on financial loans. Inflows from financing activities in 2015 were derived from the issuance of convertible bonds in March 2015,
for an amount of 25.0 million euros, and the private placements in November and December 2015, which raised 8.7 million
euros in gross proceeds. These inflows were partially offset by costs of 1.6 million euros relating to the issuance of the
convertible bonds and the private placements, interest expense of 2.2 million euros and 2.7 million euros used to repay
principal on outstanding loans.



Comparison of Years Ended December 31,
2015 and 2014



Net cash outflow from operating activities
was 19.6 million euros for the year ended December 31, 2015 compared to net cash outflow of 13.4 million euros for
the year ended December 31, 2014. This increase is mainly due to an increase in research and development activities and the
consolidation of Coretherapix in the consolidation scope.



Net cash outflow from investing activities
amounted to 4.4 million euros for the year ended December 31, 2015 compared to net cash inflow of 3.3 million euros
for the year ended December 31, 2014. The principal outflows during 2015 related to the acquisition of Coretherapix, for which
we paid 1.2 million euros in cash, and the allocation of future interest payments in connection with the 9% senior unsecured
convertible bonds due 2018 into an escrow account in the amount of 3.4 million euros. In 2014, we sold our Dutch manufacturing
facility for 3.5 million euros.



Net cash inflow from financing activities
was 28.5 million euros for the year ended December 31, 2015 compared to net cash inflow of 8.0 million euros for
the year ended December 31, 2014. Inflows from financing activities in 2015 were derived from the issuance of convertible
bonds in March 2015, for an amount of 25.0 million euros, and the private placements in November and December 2015, which
raised 8.7 million euros in gross proceeds. These inflows were partially offset by costs of 1.6 million euros relating
to the issuance of the convertible bonds and the private placements, interest expense of 2.2 million euros and 2.7 million
euros used to repay principal on outstanding loans. In 2014, the cash inflow of 8.0 million euros mainly corresponded to the
drawdown of the Kreos loan.



C. Research and Development, Patents and Licenses, etc.



See “Item 4. Information on the Company—A.
History and Development of the Company” and “Item 4. Information on the Company—B. Business Overview.”



D. Trend Information



See “Item 5. Operating and Financial
Review and Prospects.”



E. Off-Balance Sheet Arrangements



TiGenix Inc. guarantees the operating
lease payments of Cognate for the building leased in the United States. Total remaining operating lease commitments at December 31,
2016 for which TiGenix Inc. was a guarantor were 0.3 million euros (0.3 million euros in 2015). Cognate was the party with
whom TiGenix had a joint venture, TC CEF LLC, in the past.



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We do not have any special purpose or limited
purpose entity that provides off-balance sheet financing, liquidity or market or credit risk support, and we have not engaged in
hedging or other relationships that expose us to liability that is not reflected in our consolidated financial statements.



F. Tabular Disclosure of Contractual Obligations



The following table details the remaining
contractual maturity for our financial liabilities with agreed repayment periods, including both interest and principal cash flows
as at December 31, 2016:



|                                      |  | Within one year    |       | 1 - 3 years |  | 4 - 5 years |        | After 5 years |  | Total
|------------------------------------- |  | ------------------ | ----- | ----------- |  | ----------- | ------ | ------------- |  | -----
|                                      |  | Thousands of euros
|Financial loans and other payables(1) |  |                    | 7,452 |             |  |             | 29,865 |               |  |      
|Operating lease commitments           |  |                    | 474   |             |  |             | 654    |               |  |      
|Total                                 |  |                    | 7,926 |             |  |             | 30,519 |               |  |      



| | (1) | Includes the interest payable on financial loans and other payables.
| | --- | --------------------------------------------------------------------



On July 31, 2015, we acquired Coretherapix
from Genetrix for an upfront payment of 7.3 million euros, of which 1.2 million euros was paid in cash and 6.1 million
euros was paid in the form of 7.7 million of our ordinary shares. In addition, we may be obligated to issue to Genetrix up
to 5 million euros (down from 15 million because of the result of the clinical trial in March 2017) in new ordinary shares
depending on the results of the ongoing clinical trial of the Coretherapix lead product candidate. Genetrix may also receive up
to 245 million euros plus certain percentages of net sales or royalties for the first product sold. Finally, Genetrix may
receive a 25 million euro milestone payment for each additional product based on any of the acquired Coretherapix product
candidates reaching the market. These future contingent payments are not reflected in the table above.



As part of the licensing agreement entered
into with Takeda on July 4, 2016, we will expand our production facility in Madrid to produce up to 1,200 doses of Cx601 per
year (at December 31, 2016, 0.6 million euros were under construction). We estimate that this expansion will require a capital
investment of between 3.0 million and 3.5 million euros, which we have agreed to share equally with Takeda. At December
31, 2016 there were commitments with corresponding suppliers for a total amount of 0.4 million euros.



TiGenix Inc., our wholly owned subsidiary,
guarantees the operating lease payments of Cognate BioServices for the building leased in the United States. Cognate BioServices
was the party with whom we entered into a joint venture in 2007.



Item 6. Directors, Senior Management and Employees



A. Directors and Senior Management



Our Board of Directors



The following table sets forth certain
information with respect to the current members of our board of directors as of December 31, 2016:



|Name                                                                            | Position                            | Age | Term(1)
|------------------------------------------------------------------------------- | ----------------------------------- | --- | -------
|Innosté SA, represented by Jean Stéphenne(2)(3)                                 | Chairman / Independent director     | 67  | 2020   
|Eduardo Bravo Fernández de Araoz                                                | Managing Director (executive) / CEO | 51  | 2019   
|Willy Duron(2)                                                                  | Independent director                | 71  | 2019   
|Greig Biotechnology Global Consulting, Inc., represented by Russell Greig(2)(3) | Independent director                | 64  | 2020   
|June Almenoff(3)(4)                                                             | Independent director                | 60  | 2019   

____________________

| | Notes: | 
| | ------ | 



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| | (1) | The term of the mandates of the directors will expire immediately after the annual meeting of shareholders held in the year
set forth next to the director’s name.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Member of the audit committee.
| | --- | ------------------------------



| | (3) | Member of the nomination and remuneration committee.
| | --- | ----------------------------------------------------



| | (4) | First appointed on a provisional basis at a meeting of the Board of Directors on September 21, 2016 subject to confirmation
by the shareholders at the next shareholders’ meeting and replacing R&S Consulting BVBA, represented by Dirk Reyn, who
resigned as director effective September 21, 2016. Her confirmation will be presented to the shareholders’ meeting scheduled
for May 9, 2017.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The business address of the members of
the board of directors is the same as our business address: Romeinse straat 12, box 2, 3001 Leuven, Belgium.



Our board of directors has determined that
four out of five of the members of the board are independent under Belgian law and the NASDAQ Stock Market listing requirements.
There are no family relationships between the members of the board.



The following is the biographical information
of the members of our board of directors or in case of legal entities being director, their permanent representatives:



Jean Stéphenne, permanent representative of Innosté SA:
Chairman and Independent Director



Jean Stéphenne was, until April
2012, a member of the corporate executive team of GlaxoSmithKline and Chairman and President of GSK Biologicals in Wavre, Belgium,
which he built into a world leader in vaccines. He currently serves as Chairman of Besix, Vesalius Biocapital, Nanocyl, Bepharbel
and OncoDNA; as board member of NSide, Curevac, Vaxxilon, Merieux Development, Ronveaux and the Belgian Foundation against Cancer;
and as president of Welbio and Foundation University Louvain. Previously, Mr. Stéphenne served as Chairman of BioWin
and as a board member of Auguria Residential Real Estate Fund, which is currently in liquidation, BNP Paribas Fortis, Groupe Bruxelles
Lambert, VBO/FEB and Theravectys.



Eduardo Bravo: Chief Executive Officer and Managing Director
(executive)



Mr. Eduardo Bravo has more than twenty-five years’
experience in the biopharmaceutical industry. He has been Chief Executive Officer of TiGenix since May 2011. Prior to joining TiGenix
in 2005, he held several senior management positions at Sanofi-Aventis, including Vice President for Latin America. Prior to his
tenure at Sanofi-Aventis, Mr. Bravo spent seven years at SmithKline Beecham in commercial positions. Mr. Bravo holds
a degree in Business Administration and an MBA (INSEAD). He is President of EBE (European Biopharmaceutical Enterprises) and member
of the Executive Committee of ARM (Alliance for Regenerative Medicine).



Willy Duron: Independent Director



Mr. Willy Duron has been an
independent member of our board of directors since February 2007. He served as Chairman from September 2007 to September
2012. He started his career at ABB Verzekeringen in 1970, becoming a member of the executive committee in 1984.
Mr. Duron holds a MSc degree in mathematics from the University of Ghent and a MSc degree in actuarial sciences from the
Katholieke Universiteit Leuven. Currently, he is a member of the board of directors of Agfa-Gevaert and Ethias. In addition,
he serves as Chairman of the board of Van Lanschot
Bankiers and Windvision. Previously, Mr. Duron was Chief Executive Officer of KBC Groep and KBC
Bankverzekeringsholding, Chairman of the board of Argosz, Secura, ADD and W&K, as well as member of the board of
directors of KBC Asset Management, Synes, CSOB, Warta, FBD, Amonis, Universitair Centrum St Jozef Kortenberg,
Vanbreda Risk & Benefits, Ravago NV, Universitaire Ziekenhuizen Leuven and Zorg KU Leuven.



Russell Greig, permanent representative of Greig Biotechnology
Global Consulting, Inc.: Independent Director



Dr. Russell Greig worked at GlaxoSmithKline
for three decades, most recently as President of SR One, GlaxoSmithKline’s corporate venture group. Prior to joining SR One,
he served as President of GlaxoSmithKline’s Pharmaceuticals International from 2003 to 2008 as well as on the GlaxoSmithKline
corporate executive team. Currently, Dr. Greig currently serves as Chairman of: AM Pharma and Mint Solutions in the Netherlands,
eTheRNA



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in Belgium and Sanifit in Spain. He also serves
as a board member of Ablynx in Belgium, and Onxeo Pharma (previously BioAlliance Pharma) in France. He also serves as a venture
partner at Kurma Life Sciences (Paris, France). Dr. Russell Greig was previously Chairman of Isconova in Sweden (acquired
by Novavax, USA), Novagali in France (acquired by Santen, Japan), Syntaxin in the United Kingdom (acquired by Ipsen, France) and
Bionor in Norway, as well as board member of Oryzon in Spain.



June Almenoff: Independent Director



Dr. June S. Almenoff is an accomplished
executive with twenty years of experience in the pharmaceutical industry. Dr. Almenoff is executive chair of RDD Pharma and independent
director of BrainStorm Cell Therapeutics and Ohr Pharmaceuticals. She is also in the scientific advisory board of Redhill Biopharma
and in the advisory boards of several private life-sciences companies. She has extensive expertise in clinical development, translational
medicine and business development. Dr. Almenoff recently served as President and CMO of Furiex Pharmaceuticals and prior to
that she held positions of increasing responsibility at GlaxoSmithKline from 1997 to 2010. Dr. Almenoff received her B.A. from
Smith College and graduated from the M.D.-Ph.D. program at the Icahn (Mt. Sinai) school of Medicine. She completed post-graduate
medical training at Stanford University Medical Center and served on the faculty of Duke University School of Medicine. Dr. June
Almenoff is currently a Consulting Professor at Duke and a Fellow of the American College of Physicians.



Our Executive Management



The following table sets forth certain
information with respect to the current members of our executive management as of December 31, 2016:



|Name                             | Position                                      | Age
|-------------------------------- | --------------------------------------------- | ---
|Eduardo Bravo Fernández de Araoz | Managing Director and Chief Executive Officer | 51 
|Claudia D’Augusta                | Chief Financial Officer                       | 47 
|Wilfried Dalemans                | Chief Technical Officer                       | 59 
|Marie Paule Richard              | Chief Medical Officer                         | 62 



The business address of the members of
the executive management is the same as our business address: Romeinse straat 12, box 2, 3001 Leuven, Belgium.



There is no potential conflict of interest
between the private interests or other duties of the members of the executive management listed above and their duties to us. There
is no family relationship between any of our directors and members of our executive management.



Below are the biographies of those members
of our executive management who do not also serve on our board of directors:



Claudia D’Augusta: Chief Financial Officer



Dr. Claudia D’Augusta has more
than eighteen years of experience in the field of corporate finance. After completing her degree in Economics and a Ph.D. in Business
Administration at the University of Bocconi, Italy, she joined the corporate finance department of Deloitte & Touche in
Milan. She later joined Apax Partners in Madrid, where she participated in the origination and execution of M&A transactions.
She was subsequently finance director of Aquanima (Santander Group). Dr. D’Augusta was a member of the board of directors
of Sensia S.L. from April 2005 until April 2008.



Wilfried Dalemans: Chief Technical Officer



Dr. Wilfried Dalemans holds a Ph.D.
in molecular biology from the Universities of Hasselt and Leuven. Before joining TiGenix, Dr. Dalemans held several senior
management positions at GlaxoSmithKline Biologicals, Belgium. As director of regulatory strategy and development, he was responsible
for the worldwide registration of GlaxoSmithKline’s flu franchise. With this firm, he also served as director of molecular
biology and research, responsible for the development of nucleic acid and tuberculosis vaccines, as well as immunology research
activities. Prior to joining GlaxoSmithKline, Dr. Dalemans worked at Transgène, France, where he was responsible for
the cystic fibrosis research program. Dr. Dalemans also served as a supervisory director of Arcarios B.V. and a director
of Arcarios NV.



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Marie Paule Richard: Chief Medical Officer



Dr. Marie Paule Richard has spent
more than twenty-five years in senior executive positions in pharmaceutical and biotechnology companies. She has held international
management positions at Bristol-Myers Squibb, Sanofi, GlaxoSmithKline, Sanofi Pasteur and Crucell. Prior to joining TiGenix, Dr. Richard
was Chief Medical Officer at AiCuris GmbH, Germany. She has gained global and extensive experience of clinical development
strategy and operations across all phases of development, regulatory affairs and pharmacovigilance, involving numerous anti-infective
and immunomodulatory drugs and biologicals, as well as the life-cycle management of marketed products. She has obtained several
drug approvals and international license renewals in both Europe and the United States. Dr. Richard holds a medical degree
from the University of Nancy, France, and, among other qualifications, a certification in Clinical Immunology.



General Information About Our Directors and Our Executive
Management



As of the date of this Annual Report and
except as set out below, none of the directors or members of our executive management or, in case of corporate entities being director,
none of their permanent representatives, for at least the previous five years, meet the following criteria:



| | · | Holds any convictions in relation to fraudulent offenses.
| | - | ---------------------------------------------------------



| | · | Held an executive function in the form of a senior manager or a member of the administrative, management or supervisory bodies
of any company at the time of or preceding any bankruptcy, receivership or liquidation (except for Jean Stéphenne, who was
a member of the board of directors of Auguria Residential Real Estate Fund, which is currently in liquidation and except for Wilfried
Dalemans who was a supervisory director of Arcarios B.V., which was liquidated in 2016 and ceased to exist as of December 30, 2016,
and a director of Arcarios NV, which was dissolved and liquidated as of December 28, 2015.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Has been subject to any official public incrimination and/or sanction by any statutory or regulatory authority (including any
designated professional body).
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Has ever been disqualified by a court from acting as member of the administrative, management or supervisory bodies of any
company or from acting in the management or conduct of affairs of any company.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



B. Compensation



Compensation of our Board of Directors



The nomination and remuneration committee
recommends the level of remuneration for independent directors, including the chairman of the board, subject to approval by our
board of directors and, subsequently, by our shareholders at their annual general meeting.



The directors’ remuneration was last
determined by the meeting of shareholders of June 2, 2016. Currently, each independent director receives a fixed annual fee
of 25,000 euros. The chairman receives 40,000 euros. Each independent director that is also a member of a committee receives
an additional fixed annual fee of 5,000 euros, or 7,500 euros for each independent director that is also the chairman
of a committee. The fixed annual fees are based on the assumption that we will have six board meetings and two committee meetings
per committee each year. Directors receive an additional 2,000 euros for each board meeting exceeding six meetings per year
and for each committee meeting exceeding two meetings per year, provided that the board of directors determines that such additional
meetings qualify for this additional fee. Directors are also entitled to a reimbursement of out-of-pocket expenses actually incurred
to participate in our board meetings. The level of reimbursement is expected to remain fixed through 2017 and 2018.



On February 26, 2013, the meeting
of shareholders approved the principle that our independent directors may receive performance related remuneration and approved
the issue and grant of 54,600 warrants (which were effectively issued by the meeting of shareholders on March 20, 2013) to
each of the independent directors. On June 2, 2016, the meeting of shareholders approved the grant of 49,863 warrants to the
chairman of our board of directors and 48,000 warrants to each of the other independent directors as of that date. Our board of
directors will propose to the meeting of shareholders of May 9, 2017 to approve the grant of 48,000 warrants to June Almenoff,
independent director since September 21, 2016.



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The nomination and remuneration committee
benchmarks the compensation of our independent directors against peer companies to ensure that it is competitive. Remuneration
is linked to the time committed to the board of directors and its various committees.



The following table sets forth the fees
received by our independent directors for the performance of their mandate as a board member, not as a member of a board committee,
during the year ended December 31, 2016:



|Name                                                                      |  | Fee (in euros)
|------------------------------------------------------------------------- |  | --------------
|Willy Duron                                                               |  |               
|Greig Biotechnology Global Consulting, Inc., represented by Russell Greig |  |               
|R&S Consulting BVBA, represented by Dirk Reyn(2)                          |  |               
|Innosté SA, represented by Jean Stéphenne                                 |  |               
|June Almenoff                                                             |  |               
|TOTAL                                                                     |  |               

____________________

| | (1) | R&S Consulting BVBA, represented by Dirk Reyn, was an Independent Director and member of the nomination and remuneration
committee until September 21, 2016.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------



The following table sets forth the fees
received by our independent directors as members of the audit committee for the performance of their mandate during the year ended
December 31, 2016:



|Name                                                                         |  | Position                                                                                |  | Fee (in euros)
|---------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | --------------
|Willy Duron                                                                  |  | Chairman of the audit committee; Independent Director                                   |  |               
|Innosté SA, represented by Jean Stéphenne                                    |  | Member of the audit committee; Chairman of the Board of Directors; Independent Director |  |               
|Greig Biotechnology Global Consulting, Inc., represented by Russell G. Greig |  | Member of the audit committee; Independent Director                                     |  |               
|TOTAL                                                                        |  |                                                                                         |  |               



The following table sets forth the fees
received by our independent directors as members of the nomination and remuneration committee for the performance of their mandate
during the year ended December 31, 2016:



|Name                                                                         |  | Position                                                                    |  | Fee (in euros)
|---------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- |  | --------------
|R&S Consulting BVBA, represented by Dirk Reyn(1)                             |  | Chairman of the nomination and remuneration committee; Independent Director |  |               
|Greig Biotechnology Global Consulting, Inc., represented by Russell Greig(2) |  | Member of the nomination and remuneration committee; Independent Director   |  |               
|Willy Duron(3)                                                               |  | Member of the nomination and remuneration committee; Independent Director   |  |               
|Innosté SA, represented by Jean Stéphenne(4)                                 |  | Member of the nomination and remuneration committee; Independent Director   |  |               
|June Almenoff(4)                                                             |  | Member of the nomination and remuneration committee; Independent Director   |  |               
|TOTAL                                                                        |  |                                                                             |  |               

____________________

| | Notes: | 
| | ------ | 



| | (1) | R&S Consulting BVBA, represented by Dirk Reyn, was an Independent Director and member of the nomination and remuneration
committee until September 21, 2016.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Greig Biotechnology Global Consulting, Inc., represented by Russell Greig, has been Chairman of the nomination and remuneration
committee since September 21, 2016
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Willy Duron was a member of the nomination and remuneration committee from September 23, 2015 until September 21,
2016.
| | --- | -----------------------------------------------------------------------------------------------------------------------



| | (4) | Innosté SA, represented by Jean Stéphenne, and June Almenoff have been members of the nomination and remuneration
committee since September 21, 2016.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------



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The table below provides an overview as
at December 31, 2016 of the shares, options on shares issued under the equity based incentive plans, or EBIPs, of our subsidiary
TiGenix SAU, or EBIP Options, and warrants held by the independent and other non-executive directors:



|                                                                          |  | Shares |        | Warrants |  | Total shares, options on existing shares under EBIPs and warrants
|------------------------------------------------------------------------- |  | ------ | ------ | -------- |  | -----------------------------------------------------------------
|                                                                          |  |        | Number |          |  |                                                                  
|Willy Duron                                                               |  |        | 6,000  |          |  |                                                                  
|Greig Biotechnology Global Consulting, Inc., represented by Russell Greig |  |        | 0      |          |  |                                                                  
|Innosté SA, represented by Jean Stéphenne                                 |  |        | 0      |          |  |                                                                  
|Total                                                                     |  |        | 6,000  |          |  |                                                                  

____________________







| | Notes: | 
| | ------ | 



| | (1) | Calculated on the basis of the total number of issued voting financial instruments on December 31, 2016.
| | --- | --------------------------------------------------------------------------------------------------------



| | (2) | Calculated on the basis of the total number of outstanding warrants that can be converted into voting financial instruments
on December 31, 2016.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Calculated on the basis of the sum of (i) the total number of issued voting financial instruments on December 31,
2016 and (ii) the total number of outstanding warrants that can be converted into voting financial instruments on December 31,
2016.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Compensation of our Executive Management



The remuneration of our executive management
is determined by the board of directors based on the recommendation by the nomination and remuneration committee, who receive a
recommendation from our Chief Executive Officer.



The remuneration of the members of the
executive management currently consists of different components:



| | · | Fixed remuneration:A basic fixed fee designed to fit responsibilities, relevant experience and competences, in line
with market rates for equivalent positions. The amount of fixed remuneration is evaluated and determined by the board of directors
every year.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Short-term variable remuneration:A variable fee in cash dependent on the individual, team or company performances in
a certain year. The maximum short-term variable remuneration, or maximum bonus, is set at a percentage of the fixed annual remuneration,
and is not spread in time. The maximum bonus of the Chief Executive Officer is set at 104% of his yearly fixed remuneration. The
maximum bonus of the Chief Financial Officer and the Chief Medical Officer is set at 52% of their fixed annual remuneration. The
maximum bonus of the Chief Technical Officer is set at 45.5% of his fixed annual remuneration. The individual, team or company
objectives that determine the amount of the bonus are determined at the beginning of each year and are set on measurable parameters
that can include sales, corporate development transactions and clinical trials (e.g., numbers of patients included in a
trial, timing of interim or final results). Each member of our executive management has a number of objectives and each objective
represents a pre-identified percentage of the overall potential bonus (with all objectives together representing 100% of the potential
bonus).
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Long-term incentive plan:Warrants have been granted and may be granted in the future, to the members of the executive
management team.
| | - | --------------------------------------------------------------------------------------------------------------------------------------



| | · | Other benefits:Members of the executive management who are salaried employees may be entitled to a number of perquisites,
which may include participating in a defined contribution pension or retirement scheme, disability insurance, a company car, a
mobile telephone, a laptop computer or a lump-sum expense allowance according to general company policy, and other collective benefits
(such as hospitalization insurance and meal vouchers).
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The members of the executive management
do not receive any remuneration based on our overall financial results or any long-term variable remuneration in cash.



In the next two years, 2017 and 2018, it
is expected that the remuneration of the members of the executive management will be broadly on the same basis as in 2016. Adjustments
to the salaries are possible in view of Company events.



Eduardo Bravo, our Chief Executive Officer,
has been appointed chief executive officer of our subsidiary, TiGenix SAU, on the basis of his corporate responsibility as a member
of the board of directors of TiGenix SAU and as managing director (consejero delegado) governed by applicable Spanish Law on capital
companies (Ley de Sociedades de Capital). His relationship with TiGenix SAU can be terminated at any time without notice, subject
to the payment, in case TiGenix SAU terminates the relationship, of a termination fee equal to his annual remuneration at such
time. An additional termination fee of a maximum of two years’ annual remuneration is payable in case the relationship is
terminated by TiGenix SAU within one year of a corporate transaction involving the company (such as a merger, sale of shares, sale
of assets, etc).



Claudia D’Augusta, our Chief Financial
Officer, has an employment contract with our subsidiary, TiGenix SAU. Her employment contract is for an indefinite term and may
be terminated at any time, subject to a three month notice period and, in case TiGenix SAU terminates the agreement, she is entitled
to a severance payment of a minimum of nine months’ remuneration. An additional severance payment of a maximum of a year’s
annual remuneration is payable in certain cases, including unfair or collective dismissal by TiGenix SAU, and termination of the
employment agreement by Claudia D’Augusta following certain geographical transfer or substantial modifications to the working
conditions made by TiGenix SAU.



Wilfried Dalemans, our Chief Technical
Officer, has an employment contract with the company. His employment contract is for an indefinite term and may be terminated at
any time by us, subject to a notice period and a severance payment in accordance with applicable law.



Marie Paule Richard, our Chief Medical
Officer, has an employment contract with our subsidiary, TiGenix SAU. Her employment contract is for an indefinite term and may
be terminated at any time by us, subject to either a three month notice period, or compensation equal to three months fixed salary,
or a combination of both.



The following table sets forth information
concerning the compensation received during the year ended December 31, 2016, by Eduardo Bravo as our Chief Executive Officer:



|                                   |  | Compensation (in euros)
|---------------------------------- |  | -----------------------
|Fixed remuneration (gross)         |  |                        
|Variable remuneration (short term) |  |                        
|Pension/Life                       |  |                        
|Other benefits                     |  |                        
|TOTAL                              |  |                        



We pre-pay the Belgian salary taxes payable
by our Chief Executive Officer, Eduardo Bravo, on the part of his remuneration that is taxable under Belgian law, until such amounts
are refunded (on an annual basis) by the Spanish tax authorities, at which time he repays the relevant amounts.



In addition, in 2016 Eduardo Bravo (in
his capacity as CEO) also exercised 126,260 EBIP 2010 options in return for which he received 374,546 TiGenix NV shares. No warrants,
shares, options on shares or rights to acquire shares were granted to Eduardo Bravo in 2016. Except for the exercise of EBIP 2010
options, Eduardo Bravo did not exercise any warrants, options on shares or rights to acquire shares in 2016, and none of his warrants
expired in 2016.



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The following table sets forth information
concerning the compensation received during the year ended December 31, 2016 by the other members of the executive management:



|                                   |  | Compensation (in euros)
|---------------------------------- |  | -----------------------
|Fixed remuneration (gross)         |  |                        
|Variable remuneration (short term) |  |                        
|Pension/Life                       |  |                        
|Other benefits                     |  |                        
|TOTAL                              |  |                        



In addition, in 2016, Claudia D’Augusta
exercised 42,087 EBIP 2010 options in return for which she received 124,849 TiGenix NV shares. No warrants, shares, options on
shares or rights to acquire shares were granted to the other members of the executive management in 2016. Except for the exercise
of EBIP 2010 options by Claudia D’Augusta, the other members of the executive management did not exercise any warrants, options
on shares or rights to acquire shares in 2016, and none of their warrants expired in 2016.



The table below provides an overview, as
at December 31, 2016, of the shares, EBIP Options and warrants held by the executive management:



|                         |  | Shares |         | Warrants |  | Total shares, options on existing shares under EBIPs and warrants
|------------------------ |  | ------ | ------- | -------- |  | -----------------------------------------------------------------
|                         |  |        | Number  |          |  |                                                                  
|Eduardo Bravo, CEO       |  |        | 535,093 |          |  |                                                                  
|Claudia D’Augusta, CFO   |  |        | 252,531 |          |  |                                                                  
|Wilfried Dalemans, CTO   |  |        | —       |          |  |                                                                  
|Marie Paule Richard, CMO |  |        | —       |          |  |                                                                  
|Total                    |  |        | 787,624 |          |  |                                                                  

____________________



| | Notes: | 
| | ------ | 



| | (1) | Calculated on the basis of the total number of issued voting financial instruments on December 31, 2016.
| | --- | --------------------------------------------------------------------------------------------------------



| | (2) | Calculated on the basis of the total number of granted and outstanding warrants that can be converted into voting financial
instruments on December 31, 2016.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Calculated on the basis of the sum of (i) the total number of issued voting financial instruments on December 31,
2015 and (ii) the total number of granted and outstanding warrants that can be converted into voting financial instruments
on December 31, 2016.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Stock Options, Warrants and Other Incentive Plans



We created several warrants within the
context of stock option plans as well as equity incentive plans for our directors, managers, employees as well as other external
consultants and collaborators such as scientific advisory board members and clinical advisors.



Our Warrant Plans



We have established a number of warrants
plans, under which we have granted warrants free of charge to the recipients. Each warrant entitles its holder to subscribe to
one of our ordinary shares at a subscription price determined by the board of directors, within the limits decided upon at the
occasion of their issuance.



Generally, unless the board of directors
at the time of the grant of the warrant determines a higher exercise price, the exercise price of a warrant will be equal to the
lower of the following prices:



| | · | The last closing price of our shares on Euronext Brussels prior to the date on which the warrant is offered.
| | - | ------------------------------------------------------------------------------------------------------------



| | · | The average closing price of our shares on Euronext Brussels over the thirty-day period preceding the date on which the warrant
is offered.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



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For beneficiaries of the warrant plan that
are not employees of our group, the exercise price cannot be lower than the average closing price of our shares on Euronext Brussels
over the thirty-day period preceding the date of issuance of the warrants.



For our warrants issued in July 2012 and
in March 2013, however, our board determined a higher exercise price of 1.00 euro per warrant.



For our December 2013 warrant plan, under
which warrants were issued and granted on December 16, 2013, the exercise price was determined as follows:



| | · | For all employees, the exercise price was set at 0.46 euro, the closing price of our ordinary shares on December 13,
2013, the last closing price prior to the grant of the warrants on December 16, 2013, which was lower than the 30-day average
price.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | For our CEO, Eduardo Bravo, who is not an employee of TiGenix SAU, the exercise price was set at 0.50 euro, the average
closing price of our ordinary shares during 30 calendar days prior to the issuance of the warrants on December 16, 2013.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



For our December 2015 warrant plan, under
which warrants were issued and granted on December 7, 2015, May 4, 2016, June 2, 2016 and September 6, 2016,
the exercise price was determined as follows:



| | · | For all employees who were granted warrants on December 7, 2015, the exercise price was set at 0.95 euro, the closing
price of our ordinary shares on December 4, 2015, the last closing price prior to the grant of the warrants on December 7,
2015, which was lower than the thirty-day average price.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | For our CEO, Eduardo Bravo, who is not an employee but was granted warrants on December 7, 2015, the exercise price was
set at 0.97 euro, the average closing price of our ordinary shares during thirty calendar days prior to the issuance of the
warrants on December 7, 2015.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | For all employees who were granted warrants on May 4, 2016, the exercise price was set at 0.95 euro, the closing
price of our ordinary shares on May 3, 2016, the last closing price prior to the grant of the warrants on May 4, 2016.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | For the independent directors who were granted warrants on June 2, 2016 and who are not employees, the exercise price
was set at 0.97 euro, the average closing price of our ordinary shares during the thirty calendar days prior to the issuance
of the warrants on December 7, 2015.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | For all employees who were granted warrants on September 6, 2016, the exercise price was set at 0.97 euro, the closing
price of our ordinary shares on September 5, 2016, the last closing price prior to the grant of the warrants on September 6,
2016, which was lower than the thirty-day average price.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



For our February 2017 warrant plan, under
which warrants were issued and granted on February 20, 2017, the exercise price was determined as follows:



| | · | For all employees, the exercise price was set at 0.70 euro, the closing price of our ordinary shares on February 17, 2017,
the last closing price prior to the grant of the warrants on February 20, 2017, which was lower than the 30-day average price.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | For our CEO, Eduardo Bravo, who is not an employee, the exercise price was set at 0.71 euro, the average closing price of our
ordinary shares during 30 calendar days prior to the issuance of the warrants on February 20, 2017.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Since 2007, we have issued 18,532,779 warrants
in aggregate (subject to the warrants being granted to and accepted by the beneficiaries) of which 800,000 warrants were issued
on February 26, 2007; 400,000 warrants on March 20, 2008; 500,000 warrants on June 19, 2009; 500,000 warrants on
March 12, 2010; 4,000,000 warrants on July 6, 2012; 777,000 warrants on March 20, 2013; 1,806,000 warrants on December 16,
2013; 1,994,302 warrants on April 22, 2014; 2,250,000 warrants on December 7, 2015; and 5,505,477 warrants on February
20, 2017.



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Of these 18,532,779 warrants, the situation
as of December 31, 2016 was as follows:



| | · | 764,621 warrants expired because they were never granted.
| | - | ---------------------------------------------------------



| | · | 440,933 warrants expired because they were never accepted by their beneficiaries.
| | - | ---------------------------------------------------------------------------------



| | · | 1,197,286 warrants lapsed due to their beneficiaries no longer being employed by the Company.
| | - | ---------------------------------------------------------------------------------------------



| | · | 11,530 warrants have been exercised.
| | - | ------------------------------------



| | · | 664,767 warrants have been cancelled following the exercise by Kreos Capital IV (Expert Fund) of its put option with regard
to these warrants.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------



| | · | 5,505,477 warrants had not yet been issued of December 31, 2016, but were issued on February 20, 2017.
| | - | ------------------------------------------------------------------------------------------------------



As a result, as of December 31, 2016,
there were 9,948,165 warrants granted and outstanding, which represents approximately 3.34% of the total number of all our issued
and outstanding voting financial instruments.



The warrants issued on February 26,
2007, March 20, 2008, June 19, 2009, March 12, 2010, July 6, 2012, December 16, 2013, December 7,
2015 and February 20, 2017 have a term of ten years. The warrants issued on March 20, 2013 and April 22, 2014 have a
term of five years. Upon expiration of the ten or five year term, the warrants become null and void.



The table below gives an overview (as of
December 31, 2016) of the 9,948,165 granted and outstanding warrants:



|Issue
        date | Term                                        | Number
        of
        warrants
        issued | Number
        of
        warrants
        granted | Exercise
        price
        (in euros)                                                                                                                                                    | Number
        of
        warrants
        no
        longer
        exercisable | Number
        of
        warrants
        granted
        and
        outstanding | Exercise
        periods
        vested
        warrants
|------------------ | ------------------------------------------- | ------------------------------------------------- | -------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | --------------------------------------------------------
|February 26, 2007  | From February 26, 2007 to February 25, 2017 | 800,000                                           | 681,500                                            | 6.75 (March 24, 2007 grant)
    5.23 (September 17, 2007 grant)                                                                                                                              | 290,187                                                                          | 509,813*                                                                           | From
    May 1 to 31,
    and from
    November 1 to 30.
|March 20, 2008     | From March 20, 2008 to March 19, 2018       | 400,000                                           | 400,000                                            | 4.05 for employees and 4.41 for other individuals (March 20,
    2008 grant)
    4.84 (June 27, 2008 grant)
    3.45 for employees and 3.83 for other individuals (September 15, 2008 grant) | 113,500                                                                          | 286,500                                                                            | From
    May 1 to 31,
    and from
    November 1 to 30.
|June 19, 2009      | From June 19, 2009 to June 18, 2019         | 500,000                                           | 232,200                                            | 3.95                                                                                                                                                                                         | 360,200                                                                          | 139,800                                                                            | From
    May 1 to 31,
    and from
    November 1 to 30.

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|Issue
        date | Term                                        | Number
        of
        warrants
        issued | Number
        of
        warrants
        granted | Exercise
        price
        (in euros)                                                                                               | Number
        of
        warrants
        no
        longer
        exercisable | Number
        of
        warrants
        granted
        and
        outstanding | Exercise
        periods
        vested
        warrants
|------------------ | ------------------------------------------- | ------------------------------------------------- | -------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | --------------------------------------------------------
|March 12, 2010     | From March 12, 2010 to March 11, 2020       | 500,000                                           | 495,500                                            | 3.62 (March 12, 2010 grant)
    1.65 for employees and 1.83 for other individuals (July 7, 2010 grant)
    1.93 (August 24, 2010 grant) | 342,000                                                                          | 158,000                                                                            | From
    May 1 to 31,
    and from
    November 1 to 30.
|July 6, 2012       | From July 6, 2012 to July 5, 2022           | 4,000,000                                         | 4,000,000                                          | 1.00                                                                                                                                    | 664,945                                                                          | 3,335,055                                                                          | From
    May 1 to 31,
    and from
    November 1 to 30.
|March 20, 2013     | From March 20, 2013 to March 19, 2018       | 777,000                                           | 433,000                                            | 1.00                                                                                                                                    | 363,717                                                                          | 413,283                                                                            | From
    May 1 to 31,
    and from
    November 1 to 30.
|December 16, 2013  | From December 16, 2013 to December 15, 2023 | 1,806,000                                         | 1,806,000                                          | 0.46 for employees and 0.50 for other individuals                                                                                       | 107,419                                                                          | 1,698,581                                                                          | From
    May 1 to 31,
    and from
    November 1 to 30.
|April 22, 2014     | From April 22, 2014 to April 21, 2019       | 1,994,302                                         | 1,994,302                                          | 0.75                                                                                                                                    | 664,767                                                                          | 1,329,535                                                                          | Any time                                                
|December 7, 2015   | From December 7, 2015 to December 6, 2025   | 2,250,000                                         | 2,220,179                                          | 0.95 for employees and 0.97 for other individuals                                                                                       | 172,402                                                                          | 2,077,598                                                                          | From
    May 1 to 31,
    and from
    November 1 to 30.
|TOTAL              |                                             | 13,027,302                                        |                                                    |                                                                                                                                         |                                                                                  | 9,948,165                                                                          |                                                         



*
As the term of these warrants has expired, they are no longer exercisable as of the date of this Annual Report.



TiGenix SAU Equity Based Incentive Plans



Summary



On May 3, 2011, we acquired all the
shares of Cellerix, a Spanish biotechnology company, which we renamed TiGenix SAU. Cellerix had two Equity Based Incentive Plans,
or EBIPs, in place. The contribution in kind, or the Contribution, by the former Cellerix shareholders of all their Cellerix shares
into our Company triggered certain consequences which affected both EBIPs.



In May 2008, Cellerix had entered into
a management agreement with CX EBIP Agreement, a Spanish limited liability company, which we refer to as the EBIP Agreement. The
EBIP Agreement was amended and restated in November 2009 and was further amended on May 3, 2011 simultaneously with the completion
of the Contribution to establish the procedure for exercise of the EBIP Options. In the framework of the Contribution and in accordance
with the terms of the EBIP Agreement, CX EBIP Agreement contributed its 642,226 shares of our subsidiary, TiGenix SAU, into TiGenix
and received 1,905,144 of our shares in return, which it can only transfer to the beneficiaries of the EBIPs who exercise their
options. Pursuant to the agreements reached in relation to the Contribution, the underlying securities of the options are no longer
the shares of our subsidiary, TiGenix SAU, but the shares of TiGenix. Therefore, upon the exercise of its options under the EBIPs,
a beneficiary will be entitled to receive a number of our shares corresponding to approximately 2.96 shares per option, rounded
down to the nearest integer, under any of the EBIPs. On the date of this report, all EBIP options have been expired or exercised.
The EBIP 2008 options had to be exercised prior to August 6, 2015. As no beneficiary exercised its options, they have now expired
and all remaining options under the EBIP 2010 were exercised in October 2016.



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An overview of the EBIPs is provided below.



EBIP 2008



An EBIP for the directors, managers and
employees of Cellerix was approved at Cellerix’s annual general meeting of shareholders held on November 22, 2007, the
conditions of which were definitively approved on May 20, 2008, which we refer to as the EBIP 2008, which was subsequently
modified on October 15, 2010.



Options under the EBIP 2008 were granted
to employees, executives and independent members of the board of directors of Cellerix prior to the Contribution.



The EBIP 2008 options had to be exercised
prior to August 6, 2015. As no beneficiary exercised its options, they have now expired. We are exploring our options with
respect to a new plan that would be based on the existing shares underlying the expired options.



EBIP 2010



On October 15, 2010, Cellerix’s
annual general meeting of shareholders approved an EBIP for the senior management of Cellerix, which we refer to as the EBIP 2010.



The EBIP set the normal exercise price
of the options at 5.291 euros per share. However, as a result of the Contribution, the exercise price for all EBIP 2010 options
was reduced to 0.013 euros.



Cellerix granted 221,508 options under
the EBIP 2010. All EBIP 2010 options vested as a result of the Contribution.



Beneficiaries of the plan exercised all
their options under the plan on October 4, 2016. Pursuant to the terms of the EBIP 2010, the board of directors of our subsidiary,
TiGenix SAU, opted to exchange all existing options for new options over existing TiGenix shares. As the options retain the same
exchange ratio as the Contribution (i.e., 2.96 TiGenix NV shares per TiGenix SAU share contributed to TiGenix), beneficiaries
of the EBIP 2010 have the right to receive 2.96 TiGenix shares for each EBIP 2010 option at the time of exercise. Beneficiaries
of the plan exercised 190,497 options (corresponding to 565,102 TiGenix shares under the EBIP 2010) on October 4, 2016. The
other 31,011 EBIP 2010 options were exercised in 2013.



Common Characteristics of the TiGenix SAU
EBIPs



All options were granted free of charge.



Both EBIPs provide that any options may
be ordinarily exercised after each quarterly, half-yearly or annual results announcement.



Under both EBIPs, prior to the Contribution,
the options related to existing shares in Cellerix that were held by CX EBIP Agreement. To this effect:



All Cellerix shares held by CX EBIP Agreement
have been exchanged for TiGenix shares as described above.



EBIP Options outstanding as of December 31,
2016



As of December 31, 2016, no more options
were outstanding under the EBIPs.



In 2013, 31,011 EBIP Options were exercised.



In 2014 and 2015, no EBIP Options were
exercised.



C. Board Practices



The board of directors can set up specialized
committees to analyze specific issues and advise the board of directors on those issues.



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The committees are advisory bodies only
and the decision-making remains within the collegial responsibility of the board of directors. The board of directors determines
the terms of reference of each committee with respect to the organization, procedures, policies and activities of the committee.



Our board of directors has set up and appointed
an audit committee and a nomination and remuneration committee.



Committees



Audit Committee



The audit committee consists of three members:
Willy Duron (Chairman), Innosté SA, represented by Jean Stéphenne, and Greig Biotechnology Global Consulting, Inc.,
represented by Russell Greig.



Our board of directors has determined that
Willy Duron, Jean Stéphenne, the permanent representative of Innosté SA, and Russell Greig, the permanent representative
of Greig Biotechnology Global Consulting, Inc, are independent under Rule 10A-3 of the Exchange Act and the applicable rules
of the NASDAQ Stock Market and that each of Willy Duron, Jean Stéphenne and Russell Greig qualifies as an “audit committee
financial expert” as defined under the Exchange Act.



The role of the audit committee is to monitor
the financial reporting process, the effectiveness of our internal control and risk management systems, the internal audit (if
any) and its effectiveness and the statutory audit of the annual and consolidated accounts, and to review and monitor the independence
of the external auditor, in particular regarding the provision of additional services to the company. The committee reports regularly
to the board of directors on the exercise of its functions. It informs the board of directors about all areas in which action or
improvement is necessary in its opinion and produces recommendations concerning the necessary steps that need to be taken. The
audit review and the reporting on that review cover us and our subsidiaries as a whole. The members of the committee shall at all
times have full and free access to the Chief Financial Officer and to any other employee to whom they may require access in order
to carry out their responsibilities.



The audit committee’s duties and
responsibilities to carry out its purposes include, among others: our financial reporting, internal controls and risk management,
and our internal and external audit process. These tasks are further described in the audit committee’s terms of reference,
as set out in our corporate governance charter and in Article 526bis of the Belgian Company Code.



Nomination and Remuneration Committee



Our nomination and remuneration committee
consists of three members: Greig Biotechnology Global Consulting, represented by Russell G. Greig (Chairman), Innosté
SA, represented by Jean Stéphenne, and June Almenoff.



Our board of directors has determined that
Greig Biotechnology Global Consulting, represented by Russell G. Greig, Innosté SA, represented by Jean Stéphenne,
and June Almenoff are independent under the applicable rules of the NASDAQ Stock Market.



The role of the nomination and remuneration
committee is to make recommendations to the board of directors with regard to the election and re-election of directors and the
appointment of the Chief Executive Officer and the executive managers, and to make proposals to the board on the remuneration policy
for directors, the Chief Executive Officer and the members of the executive management.



The committee’s tasks are further
described in the nomination and remuneration committee’s terms of reference as set out in the company’s corporate governance
charter and Article 526quater of the Belgian Company Code.



Corporate Governance Practices



Along with our articles of association,
we adopted a corporate governance charter in accordance with the recommendations set out in the Belgian Corporate Governance Code
issued on March 12, 2009 by the Belgian Corporate Governance Committee. The Belgian Corporate Governance Code is based on
a “comply or explain” system: Belgian listed companies are expected to follow the Code, but can deviate from specific
provisions and guidelines (though not the principles) provided they disclose the justification for such deviations.



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Our board of directors complies with the
Belgian Corporate Governance Code, but believes that certain deviations from its provisions are justified in view of our particular
situation. These deviations include the following:



| | · | As we have only one executive director (the Chief Executive Officer) and there is no executive committee (directiecomité/comité
de direction), in accordance with Article 524bis of the Belgian Company Code, we have not drafted specific terms of reference
for the executive management, except for the terms of reference for the Chief Executive Officer (and for a Chief Business Officer,
although at present we have not appointed a Chief Business Officer).
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Only our independent directors receive a fixed remuneration in consideration of their membership of our board of directors
and their attendance at the meetings of committees of which they are members. In principle, under the Belgian Corporate Governance
Code, such directors should not receive any performance-related remuneration in their capacity as director. However, upon the advice
of the nomination and remuneration committee, our board of directors is permitted to propose at the meeting of our shareholders
a deviation from this principle if, in the board’s reasonable judgment, performance-related remuneration would be necessary
to attract independent directors with the most relevant experience and expertise. On February 26, 2013, our shareholders’
meeting approved such a deviation proposed by the board of directors and authorized the grant of warrants to our independent directors.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our board of directors reviews its corporate
governance charter from time to time and makes such changes as it deems necessary and appropriate.



Additionally, the board of directors adopted
written terms of reference for each of the audit committee and the nomination and remuneration committee, which are part of the
corporate governance charter.



D. Employees



We rely on a team of experienced professionals
in all areas required to meet our strategic objectives including research and development, medical and regulatory, manufacturing,
business development, product development, infrastructure, intellectual property and finance.



On December 31, 2016, we had a total of
eighty employees on a full-time equivalent basis. Approximately 70% of these employees were engaged in research and development
activities, including clinical development and manufacturing, and the remainder were engaged in corporate functions, including
finance, human resources, legal, information technology, business development, investor relations and intellectual property.



At year-end, the number of employees (full-time
equivalents) from continuing operations was as follows:



|                                            |  | As at December 31,
|------------------------------------------- |  | ------------------
|Number of employees and mandate contractors |  | 2016              
|Research and development staff              |  |                   
|General and administrative staff            |  |                   
|Total                                       |  |                   



E. Share Ownership



See “Item 7.—Major Shareholders
and Related Party Transactions”



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Item 7. Major Shareholders and Related Party Transactions



A. Major Shareholders



The following table sets forth
information relating to beneficial ownership of our ordinary shares, as of March 31, 2017, for each person who is known by us
to hold beneficially more than 3% of our outstanding ordinary shares.



For purposes of the table below, the percentage
ownership calculations for beneficial ownership are based on 259,956,365 ordinary shares outstanding as of March 31, 2017.



Beneficial ownership is determined in accordance
with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage
ownership of that person, shares that the person has the right to acquire within sixty days of March 31, 2017, including through
the exercise of any warrant, have been included. Shares that can be acquired through the exercise of any warrant, however, are
not included in the computation of the percentage ownership of any other person.





Note that as a result of transactions
that do not need to be disclosed to TiGenix, the numbers of shares and the percentages mentioned might not be the actual numbers
of shares or the actual percentages held by the relevant shareholder at the date of this annual report. Any such disclosure, however,
will be required each time the threshold of 3%, 5% or a multiple of 5% of the total number of outstanding voting rights is crossed
(upwards of downwards).





|                                            |  |  | Ordinary shares beneficially owned | 
|------------------------------------------- |  |  | ---------------------------------- | 
|Name of beneficial owner                    |  |  | Number                             | 
|3% or greater shareholders                  |  |  |                                    | 
|Gri-Cel SA(1)                               |  |  | 41,929,934                         | 
|Cormorant Asset Management LLC(2)           |  |  | 14,472,631                         | 
|Takeda Pharmaceuticals International AG (3) |  |  | 11,651,778                         | 
|BNP Paribas Investment Partners SA (3)      |  |  | 6,650,503                          | 

____________________



| | (1) | Number
of shares as disclosed in most recent Belgian transparency notification, increased by 7,741,920 shares purchased in the form of
ADSs in the US IPO.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Based
on Schedule 13G filed with the SEC on February 14, 2017.
| | --- | --------------------------------------------------------------



| | (3) | Number
of shares as disclosed in most recent Belgian transparency notification.
| | --- | -------------------------------------------------------------------------------







B. Related Party Transactions



Article 524 of the Belgian Company
Code provides for a special procedure that applies to intra-group or related party transactions with affiliates. The procedure
applies to decisions or transactions between us and our affiliates that are not one of our subsidiaries. Prior to any such decision
or transaction, our board of directors must appoint a special committee consisting of three independent directors, assisted by
one or more independent experts. This committee must assess the business advantages and disadvantages of the decision or transaction,
quantify its financial consequences and determine whether the decision or transaction causes a disadvantage to us that is manifestly
illegitimate in view of our policy. If the committee determines that the decision or transaction is not illegitimate but will prejudice
us, it must analyze the advantages and disadvantages of such decision or transaction and set out such considerations as part of
its advice. Our board of directors must then make a decision, taking into account the opinion of the committee. Any deviation from
the committee’s advice must be justified. Directors who have a conflict of interest are not entitled to participate in the
deliberation and vote. The committee’s advice and the decision of the board of directors must be notified to our statutory
auditor, who must render a separate opinion. The conclusion of the committee, an excerpt from the minutes of the board of directors
and the opinion by the statutory auditor must be included in our annual report. This procedure does not apply to decisions or transactions
in the ordinary course of business under customary market conditions and security documents, or to transactions or decisions with
a value of less than 1% of our net assets as shown in our consolidated annual accounts.



Since January 1, 2012, there has not
been, nor is there currently proposed, any material transaction or series of similar material transactions to which we were or
are a party in which any of the members of our board of directors or executive management team, holders of more than 5% of any
class of our voting securities, or any member of the immediate family of any of the foregoing persons, had or will have a direct
or indirect material interest, other than the compensation and shareholding arrangements we describe in “Item 6.—Directors,
Senior Management and Employees” and in this Item 7. and the transactions we describe below.



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Transactions with Related Companies



Issuance of Convertible Bonds



On March 6, 2015, we issued 9% senior
unsecured bonds due 2018 for 25.0 million euros in total principal amount, convertible into our ordinary shares, all of which
were subscribed to by an affiliate of Gri-Cel S.A., one of our principal shareholders. For more information about the terms
of the convertible bonds, please see “Item 5.—Operating and Financial Review and Prospectus—B. Liquidity and
Capital Resources” elsewhere in this Annual Report.



Subscription of new shares by Takeda



Under the terms of the licensing agreement
with Takeda described elsewhere in this Annual Report, Takeda agreed to make a 10.0 million euro equity contribution in the Company
within 12 months of the date of the licensing agreement. Pursuant to that commitment, on December 29, 2016 Takeda subscribed 11,651,778
new ordinary shares of TiGenix at an issue price of €0.858 per share. Pursuant to the terms of the licensing agreement, the
issue price was equal to the average closing price of TiGenix’s shares on Euronext Brussels over the 30 day period preceding
the date on which the issuance of the new shares commenced (December 20, 2016) and represented a 23% premium over the closing price
on Euronext Brussels on that date. Following the acquisition of the new shares, Takeda held 4.48% of the voting rights in TiGenix.



Other



From time to time in the ordinary course
of our business we may contract for services from companies in which certain of our executive officers or directors may serve as
director or advisor. The cost of these services is negotiated on an arm’s length basis and none of these arrangements is
material to us.



Item 8. Financial Information



Financial Statements



See Item 18.



Legal Proceedings



From time to time, we may be party to litigation
that arises in the ordinary course of our business. As of the date of this Annual Report, we and our subsidiaries are not involved
in any material litigation or legal proceedings, except as disclosed below:



Invalidation of U.S. Patent US6777231



On April 1, 2011, Cellerix (the predecessor
entity of our subsidiary TiGenix SAU) filed an inter partes re-examination request with the Patent and Trademark Office regarding
the patent US6777231, owned by the University of Pittsburgh. The Patent and Trademark Office examiner issued a decision concluding
that all ten originally issued and all eighteen newly submitted claims of the patent granted to the University of Pittsburgh were
invalid. The University of Pittsburgh then appealed the examiner’s decision, but only with respect to two of the newly submitted
claims. We cross-appealed the examiner’s refusal to reject those two newly submitted claims as anticipated by the prior art.
The Patent Trial and Appeal Board issued a decision simultaneously granting both appeals, thus confirming that all claims of the
patent were invalid, but with respect to the newly submitted claims, on different grounds than those cited in the decision by the
initial examiner. On this basis, the University of Pittsburgh filed a request to reopen prosecution and submitted claim amendments
to those newly submitted claims to the Patent and Trademark Office for further consideration in an attempt to overcome the Patent
Trial and Appeal Board’s institution of a new ground for rejection as anticipated by the prior art. We submitted comments
to the Patent and Trademark Office arguing that these claim amendments did not overcome the anticipated rejection. On March 16,
2015, the examiner issued her determination that the claim amendments did not overcome the anticipated rejection and further adopted
our proposed anticipated rejections over two additional prior art references and two



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proposed indefiniteness rejections. We and
the University of Pittsburgh have submitted comments on the examiner’s determination and replied to each other’s comments.
The comments and replies have been entered into the record and the proceedings were forwarded to the Patent Trial and Appeal Board
on December 18, 2015. The proceedings were docketed at the PTAB as of September 13, 2016; accordingly a decision could
be rendered by the PTAB at any time. We do not know exactly when a final decision will be rendered, and at this stage, we are not
in a position to assess the probable outcome of these proceedings.



If the re-examination is not successful,
the Company may be required to obtain a license on unfavorable terms, or may not be able to obtain a license at all in order to
commercialize its adipose-derived stem cell products in the United States. The Company would potentially be susceptible to patent
infringement or litigation regarding patent infringement while commercializing its eASC products in the United States. The Company
may, therefore, choose to delay the launch of its adipose-derived stem cell products in the U.S. market until the expiration of
the patent US6777231 on March 10, 2020.



Repayment of Subsidies



On January 5, 2012, our subsidiary
TiGenix SAU lodged an ordinary appeal before the Contentious-Administrative Chamber of the National Appellate Court of Spain (Audiencia
Nacional) challenging two decisions taken by the Director General of Technology Transfer and Business Development at the Spanish
Ministry of Science and Innovation (the “Administration”) on November 16, 2011, which partially revoked and claimed
the repayment of two subsidies, granted in 2006 and 2007, respectively.



Both contested subsidies were granted to
a consortium of beneficiaries, one of which was TiGenix SAU. TiGenix SAU also acted as representative of the beneficiaries in the
consortium.



The Administration claimed that (i) the
contested subsidies, together with other subsidies granted to TiGenix SAU during the same time period (i.e., 2006 and 2007), exceeded
the maximum permitted by law, and therefore, requested the reimbursement of the excess amount granted, and that (ii) some
of the expenses attributed to the project financed by the contested subsidies had already been financed by other subsidies.



TiGenix SAU contended, among other arguments,
that the Administration is not entitled to aggregate all of the subsidies granted to TiGenix SAU (i.e., the contested subsidies
and other subsidies granted) for purposes of applying the maximum (i.e., in the particular case of TiGenix SAU, 60% of the eligible
cost of the project), because the various subsidies were granted for financing different projects with different purposes and scopes.



The total claim of the Administration,
with respect to the full consortium and both contested subsidies, including late payment interest, amounted to 0.9 million euros,
and the Administration claimed the full amount from TiGenix SAU, as the representative of the consortium.



As an intermediate measure, TiGenix SAU
obtained an injunctive decision that the amounts claimed by the Administration do not have to be repaid until a final judgment
is received. Instead, TiGenix SAU requested two financial institutions to issue separate guarantees in favor of the Administration
guaranteeing the full amount claimed.



On May 20, 2014, TiGenix SAU received
the judgment of the Chamber for Contentious Administrative Proceedings of the National High Court of April, 30, 2014. In this judgment,
the court partially upheld the claims made by TiGenix SAU throughout the administrative appeal, and declared null the two resolutions
on the partial repayment of the two subsidies that were granted in 2006 and 2007, respectively. However, the court also found that
there were grounds for a partial repayment of the contested subsidies but ordered the Administration to recalculate the amount
of such repayment. It concluded that some of the items included in the Administration’s calculations are either wrong or
duplicative.



On September 22, 2015 TiGenix SAU
received a notification of the decision of the Administration of September 15, 2015, whereby a new assessment was issued in
respect of the amounts to be repaid under the contested subsidies. According to the new assessment, the total amount to be reimbursed
by TiGenix SAU with respect to the full consortium and both contested subsidies, including late payment interest, was reduced to
0.6 million euros. The claim against TiGenix SAU remained at 0.3 million euros.



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TiGenix SAU has decided not to make any
further appeal against the new assessment, and has paid the total amount of 0.6 million euros that had to be reimbursed according
to the new assessment. Because TiGenix SAU obtained reimbursement from its main consortium partner for an amount of 0.3 million
euros, TiGenix SAU effectively reimbursed 0.3 million euros.



Dividend policy



We do not currently pay dividends, and
we do not anticipate declaring or paying any dividends for the foreseeable future.



All of the ordinary shares represented
by ADSs have the same dividend rights as all of our other outstanding ordinary shares. In general, distributions of dividends proposed
by our board of directors require the approval of our shareholders at a meeting of shareholders with a simple majority vote, although
our board of directors may declare interim dividends without shareholder approval, subject to the terms and conditions of the Belgian
Company Code. See “Item 10. Additional Information—B. Memorandum and Articles of Association.”



Pursuant to Belgian law, the calculation
of amounts available for distribution to shareholders, as dividends or otherwise, must be determined on the basis of our non-consolidated
statutory financial accounts. In addition, under the Belgian Company Code, we may declare or pay dividends only if, following the
declaration and issuance of the dividends, the amount of our net assets on the date of the closing of the last financial year according
to our statutory annual accounts (i.e., the amount of the assets as shown in the balance sheet, decreased with provisions and liabilities,
all as prepared in accordance with Belgian accounting rules), decreased with the non-amortized costs of incorporation and expansion
and the non-amortized costs for research and development, does not fall below the amount of the paid-up capital (or, if higher,
the called capital), increased with the amount of non-distributable reserves. Finally, prior to distributing dividends, we must
allocate at least 5% of our annual net profits (under our non-consolidated statutory accounts prepared in accordance with Belgian
accounting rules) to a legal reserve, until the reserve amounts to 10% of our share capital.



For information regarding the Belgian withholding
tax applicable to dividends and related U.S. reimbursement procedures, see “Item 10. Additional Information—E. Taxation—Belgian
Taxation.”



Item 9. The Offering and Listing



A. Listing Details



Our ordinary shares began trading on Euronext
Brussels in 2007. The current trading symbol on Euronext Brussels is “TIG.”



Our ADSs trade on the NASDAQ Global Select
Market since December 15, 2016, and are traded under the symbol “TIG”.



The following table lists the high and
low sales prices on Euronext Brussels for our ordinary shares on a monthly basis for the last six full months, a quarterly basis
for the last two full fiscal years and the subsequent period and an annual basis for the last five full fiscal years. Prices indicated
below with respect to our ordinary share price include interdealer prices, without retail mark up, mark down or commission and
may not necessarily represent actual transactions.



|                  |  | Euros
|----------------- |  | -----
|Period            |  | High 
|Monthly           |  |      
|March 31, 2017    |  |      
|February 28, 2017 |  |      
|January 31, 2017  |  |      
|December 31, 2016 |  |      
|November 30, 2016 |  |      
|October 31, 2016  |  |      
|Quarterly         |  |      
|March 31, 2017    |  |      

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|                   |  | Euros
|------------------ |  | -----
|Period             |  | High 
|December 31, 2016  |  |      
|September 30, 2016 |  |      
|June 30, 2016      |  |      
|March 31, 2016     |  |      
|December 31, 2015  |  |      
|September 30, 2015 |  |      
|June 30, 2015      |  |      
|March 31, 2015     |  |      
|December 31, 2014  |  |      
|September 30, 2014 |  |      
|June 30, 2014      |  |      
|March 31, 2014     |  |      
|Yearly             |  |      
|December 31, 2016  |  |      
|December 31, 2015  |  |      
|December 31, 2014  |  |      
|December 31, 2013  |  |      
|December 31, 2012  |  |      



The table below sets forth the reported
high and low sales closing prices for our ADSs on the NASDAQ Global Select Market:



|                                          |  | Euros
|----------------------------------------- |  | -----
|Period                                    |  | High 
|Monthly                                   |  |      
|March 31, 2017                            |  |      
|February 28, 2017                         |  |      
|January 31, 2017                          |  |      
|December 31, 2016 (beginning December 15) |  |      
|Quarterly                                 |  |      
|March 31, 2017                            |  |      
|December 31, 2016 (beginning December 15) |  |      
|Yearly                                    |  |      
|December 31, 2016 (beginning December 15) |  |      



On April 5, 2017, the last reported sale
price of our ordinary shares on Euronext Brussels was 0.73 euros per share, or $0.78 per share based on the rate of
exchange on that day, and the last reported sale price of the ADSs on the NASDAQ Global Select market was 14.72 euros, or
$15.69 per share based on the rate of exchange on that day.



B. Plan of Distribution



Not applicable.



C. Markets



See “Item 9. The
Offering and Listing—A. Listing Details”.



D. Selling Shareholders



Not applicable.



E. Dilution



Not applicable.



F. Expenses of the Issue



Not applicable.



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Item 10. Additional Information



A. Share Capital



Not applicable.



B. Memorandum and Articles of Association



A summary of our articles of association,
which is similar in nature to the bylaws of a U.S. corporation, was included in our final prospectus that was filed with the SEC
on December 14, 2016 (registration number 333-208693). We incorporate by reference into this Annual Report on Form 20-F the description
of our articles of association contained therein. Since December 14, 2016, our articles of association have been amended on December
29, 2016, to reflect the increased amount of our registered capital following the Takeda equity investment.



C. Material Contracts



Except as otherwise disclosed in this Annual
Report on Form 20-F (including the Exhibits), we are not currently, and have not been in the last two years, party to any material
contract, other than contracts entered into in the ordinary course of business.



D. Exchange Controls



There are no Belgian exchange control regulations
that impose limitations on our ability to make, or the amount of, cash payments to residents of the United States.



We are in principle under an obligation
to report to the National Bank of Belgium certain cross-border payments, transfers of funds, investments and other transactions
in accordance with applicable balance-of-payments statistical reporting obligations. Where a cross-border transaction is carried
out by a Belgian credit institution on our behalf, the credit institution will in certain circumstances be responsible for the
reporting obligations.



E. Taxation



U.S. Taxation



This section describes material U.S. federal
income tax consequences to U.S. Holders (as defined below) of owning and disposing of our shares or ADSs. It applies to you only
if you hold your shares or ADSs as capital assets for U.S. federal income tax purposes. This section does not describe all of the
tax consequences that could be relevant to you in light of your particular circumstances, including any alternative minimum tax
consequences, the potential application of the provisions of the Internal Revenue Code of 1986, as amended (the “Code”)
known as the Medicare contribution tax on “net investment income,” or the tax consequences that may apply to you if
you are a member of a class of holders subject to special rules, including the following:



| | · | a dealer in securities;
| | - | -----------------------



| | · | a real estate investment trust or regulated investment company;
| | - | ---------------------------------------------------------------



| | · | a trader in securities that elects to use a mark-to-market method of accounting for securities holdings;
| | - | --------------------------------------------------------------------------------------------------------



| | · | a tax-exempt organization, an “individual retirement account” or a “Roth IRA”;
| | - | ------------------------------------------------------------------------------



| | · | a bank or other financial institution, or life insurance company;
| | - | -----------------------------------------------------------------



| | · | a person that actually or constructively owns 10% or more of our voting stock (including ADSs);
| | - | -----------------------------------------------------------------------------------------------



| | · | a person that holds shares or ADSs as part of a straddle or a hedging, integrated or conversion transaction;
| | - | ------------------------------------------------------------------------------------------------------------



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| | · | a former citizen or long-term resident of the United States;
| | - | ------------------------------------------------------------



| | · | a person whose functional currency is not the U.S. dollar; or
| | - | -------------------------------------------------------------



| | · | a person holding our shares or ADSs in connection with a trade or business conducted outside the United States.
| | - | ---------------------------------------------------------------------------------------------------------------



This section is based on the Code, its
legislative history, existing and proposed regulations, published rulings and court decisions, as well as on the Convention Between
the Government of the United States of America and the Government of the Kingdom of Belgium for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion With Respect to Taxes on Income (together with the Protocol thereto, the “Treaty”).
These laws are subject to differing interpretations or change, possibly on a retroactive basis. In addition, this section is based
in part upon the representations of the depositary and the assumption that each obligation in the deposit agreement and any related
agreement will be performed in accordance with its terms.



You are a “U.S. Holder” if
for U.S. federal income tax purposes you are a beneficial owner of shares or ADSs, you are eligible for the benefits of the Treaty
and you are one of the following:



| | · | an individual who is a citizen or resident of the United States;
| | - | ----------------------------------------------------------------



| | · | a corporation (or other entity that is treated as a corporation for U.S. federal income tax purposes) created or organized
in or under the laws of the United States, any state thereof, or the District of Columbia;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | an estate whose income is subject to U.S. federal income tax regardless of its source; or
| | - | -----------------------------------------------------------------------------------------



| | · | a trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S.
persons are authorized to control all substantial decisions of the trust or (ii) such trust has a valid election in effect
under applicable U.S. Treasury Regulations to be treated as a U.S. person.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



If a partnership (including any entity
treated as a partnership for U.S. federal income tax purposes) is a beneficial owner of shares or ADSs, the tax treatment of a
partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. A beneficial
owner of shares or ADSs that is a partnership, and partners in such partnership, should consult their own tax advisors regarding
the tax consequences of owning and disposing of the shares or ADSs.



You should consult your own tax advisors
regarding the U.S. federal, state and local and other tax consequences of owning and disposing of shares or ADSs in your particular
circumstances.



This discussion addresses only U.S. federal
income taxation. Holders should consult their own tax advisors as to potential application of U.S. state and local tax laws, as
well as any other U.S. tax laws (such as the gift, alternative minimum or estate tax) and other U.S. laws, and foreign laws, including
the laws of Belgium.



Treatment of Holders of ADSs. In
general, and taking into account the representations and assumptions described above, for U.S. federal income tax purposes, if
you hold ADRs evidencing ADSs, you will be treated as the beneficial owner of the shares represented by those ADSs. Exchanges of
ADSs for ordinary shares generally will not be subject to U.S. federal income tax.



Taxation of Distributions. Subject
to the PFIC rules discussed below, the gross amount of any distribution we pay out of our current or accumulated earnings and profits
(as determined for U.S. federal income tax purposes) will be treated as a dividend for U.S. federal income tax purposes. Distributions
in excess of our current and accumulated earnings and profits, if any, as determined for U.S. federal income tax purposes, will
be treated as a non-taxable return of capital to the extent of your basis in the shares or ADSs and thereafter as capital gain;
however, since we do not maintain books and records in accordance with U.S. tax principles, a U.S. Holder will effectively be required
to treat all amounts we distribute as dividends for U.S. federal income tax purposes. If you are a non-corporate U.S. Holder, dividends
paid to you that constitute “qualified dividend income” may qualify for the preferential rates of taxation applicable
to long-term capital gains provided that you hold such shares or ADSs for more than 60 days during the 121-day period beginning
60 days before the ex-dividend date and meet certain other requirements. In order for the dividends paid by us to be treated
as qualified dividend income, we must either be eligible for the benefits of the Treaty, or such dividends must be paid with respect
to securities which are readily tradable on an established securities market in the United States, such as the NASDAQ Global Select
Market where our ADSs are listed. U.S. Holders should consult their own tax advisors as to the qualification of dividends paid
by us as qualified dividend income.



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With respect to any dividend we pay, you
must include any Belgian tax withheld from the dividend payment in the gross amount of such dividend for U.S. federal income tax
purposes even though you do not in fact receive it. Dividends received with respect to ADSs are taxable to you when the depositary
receives such dividends, actually or constructively. Such dividends will not be eligible for the dividends-received deduction generally
allowed to United States corporations in respect of dividends received from other United States corporations. If you receive a
dividend that is paid in euros, the amount you must include in your income as a U.S. Holder will be the U.S. dollar value of the
euro payments made, determined at the spot euro/U.S. dollar rate on the date the dividend is includible in your income, regardless
of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations
during the period from the date you include a dividend payment in income to the date you convert the payment into U.S. dollars
will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income.
This gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes.



Subject to certain limitations, the Belgian
tax withheld at a rate not exceeding the rate applicable under the Treaty and paid over to Belgium will be creditable against your
U.S. federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends
that are subject to preferential rates of taxation. Any amount of tax withheld that is refundable under the Treaty will not be
eligible for credit against your U.S. federal income tax liability. Each U.S. holder should consult its own tax advisors regarding
the foreign tax credit rules.



Dividends will be treated as income from
sources outside the United States and, depending on your circumstances, will be “passive” or “general”
income which, in either case, is treated separately from other types of income for purposes of computing the foreign tax credit
allowable to you.



The rules governing foreign tax credits
are complex and, therefore, U.S. Holders are strongly encouraged to consult their own tax advisors to determine whether they are
subject to any special rules that may limit their ability to make effective use of foreign tax credits and whether or not an election
would be appropriate based on their particular circumstances.



A U.S. Holder may make an election to treat
all foreign taxes paid as deductible expenses in computing taxable income, rather than as a credit against tax, subject to generally
applicable limitations. Such an election, once made, applies to all foreign taxes paid for the taxable year subject to the election.



Taxation of Sale or Other Taxable Disposition.
Subject to the PFIC rules discussed below, if you sell or otherwise dispose of your shares or ADSs, you will recognize capital
gain or loss for U.S. federal income tax purposes equal to the difference between the U.S. dollar value of the amount that you
realize and your tax basis (generally, the amount you pay for your shares or ADSs), determined in U.S. dollars, in your shares
or ADSs. Capital gain of a non-corporate U.S. Holder is generally taxed at a preferential rate of taxation where the holder has
a holding period greater than one year. Such gain or loss will generally be income or loss from sources within the United States
for foreign tax credit limitation purposes. The deductibility of capital losses is subject to limitations.



Passive Foreign Investment Company Considerations.Based on the composition of our income and assets and the market value of our shares and ADSs for 2016, we believe that we
were not a PFIC for U.S. federal income tax purposes for the 2016 taxable year, but this conclusion is a factual determination
that is made annually and thus may be subject to change. Because PFIC status must be determined annually based on factual tests,
our PFIC status for any taxable year will depend on the composition of our income and assets and our activities in those years—for
example, the timing of receipt of, or entitlement to, certain royalty or milestone payments. Furthermore, because we hold a substantial
amount of cash and cash equivalents, our PFIC status for any taxable year may depend on the value of our goodwill, which may be
determined by reference to our market capitalization (which may be especially volatile given the nature of our business). Therefore,
a decline in the value of our shares or ADSs could result in us being a PFIC. In general, we will be a PFIC for any taxable year
in which either of the following is true:



| | · | At least 75% of our gross income (looking through certain corporate subsidiaries) for the taxable year is “passive income.”
| | - | ---------------------------------------------------------------------------------------------------------------------------



| | · | At least 50% of the value, determined on the basis of a quarterly average, of our gross assets (looking through certain corporate
subsidiaries) is attributable to assets that produce or are held for the production of “passive income.”
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Passive income generally includes dividends,
interest, royalties, rents (other than certain rents and royalties derived in the active conduct of a trade or business), annuities
and gains from assets that produce passive income. Cash is a passive asset for PFIC purposes, even if held as working capital.
If a foreign corporation owns at least 25% by value of the stock of another corporation, the foreign corporation is treated for
purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation, and as receiving directly
its proportionate share of the other corporation’s income.



If we are treated as a PFIC for any taxable
year during which you own our ADSs or shares, and you are a U.S. Holder that does not make a mark-to-market election, as described
below, you will be subject to special tax rules with respect to:



| | · | any gain you realize on the sale or other disposition (including, in certain circumstances, a pledge) of your shares or ADSs;
and
| | - | ---------------------------------------------------------------------------------------------------------------------------------



| | · | any excess distribution that we make to you (generally, any distributions to you during a single taxable year that are greater
than 125% of the average annual distributions received by you in respect of the shares or ADSs during the three preceding taxable
years or, if shorter, your holding period for the shares or ADSs).
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Under these rules:



| | · | the gain or excess distribution will be allocated ratably over your holding period for the shares or ADSs;
| | - | ----------------------------------------------------------------------------------------------------------



| | · | the amount allocated to the taxable year in which you realized the gain or excess distribution will be taxed as ordinary income;
| | - | --------------------------------------------------------------------------------------------------------------------------------



| | · | the amount allocated to each prior year, with certain exceptions, will be taxed at the highest tax rate in effect for that
year; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------



| | · | the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each
such year.
| | - | --------------------------------------------------------------------------------------------------------------------------------------



Special rules apply for calculating the
amount of the foreign tax credit with respect to excess distributions by a PFIC.



Your shares or ADSs generally will be treated
as stock in a PFIC if we were a PFIC at any time during your holding period in your shares or ADSs, even if we cease to be a PFIC
for subsequent taxable years.



If you own shares or ADSs in a PFIC that
are treated as marketable stock, you may make a mark-to-market election. If we are treated as a PFIC and you make this election,
you will not be subject to the general PFIC rules described above. Instead, in general, you will include as ordinary income each
year the excess, if any, of the fair market value of your shares or ADSs at the end of the taxable year over your adjusted basis
in your shares or ADSs. These amounts of ordinary income will not be eligible for the favorable tax rates applicable to qualified
dividend income or long-term capital gains. You will also be allowed to take an ordinary loss in respect of the excess, if any,
of the adjusted basis of your shares or ADSs over their fair market value at the end of the taxable year (but only to the extent
of the net amount of previously included income as a result of the mark-to-market election). Your basis in the shares or ADSs will
be adjusted to reflect any such income or loss amounts. For purposes of this rule, if you make a mark-to-market election with respect
to your shares or ADSs, you will be treated as having a new holding period in your shares or ADSs beginning on the first day of
the first taxable year beginning after the last taxable year for which the mark-to-market election applies.



Notwithstanding any election you make with
regard to your shares or ADSs, dividends that you receive from us will not constitute qualified dividend income to you if we are
a PFIC either in the taxable year of the distribution or the preceding taxable year.



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In addition, we may, directly or indirectly,
hold equity interests in other PFICs (collectively with subsidiaries which are PFICs, “Lower-tier PFICs”). Under attribution
rules, if we are a PFIC, U.S. Holders will be deemed to own their proportionate shares of Lower-tier PFICs and will be subject
to U.S. federal income tax according to the rules described above on (i) certain distributions by a Lower-tier PFIC and (ii) a
disposition of shares of a lower-tier PFIC, in each case as if the U.S. Holder held such shares directly, even though the U.S.
Holder has not received the proceeds of those distributions or dispositions directly.



If you are a U.S. Holder, you must generally
file an IRS Form 8621 with your U.S. federal income tax return for any taxable year in which we are a PFIC with respect to
you.



You are urged to consult your own tax advisor
concerning the U.S. federal income tax consequences to you if we are a PFIC for any taxable year.



Backup Withholding and Information Reporting. Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial
intermediaries generally are subject to information reporting, and may be subject to backup withholding, unless (i) the U.S. Holder
is a corporation or other exempt recipient or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer
identification number and certifies that it is not subject to backup withholding. The amount of any backup withholding from a payment
to a U.S. Holder will be allowed as a credit against the holder’s U.S. federal income tax liability and may entitle it to
a refund, provided that the required information is timely furnished to the IRS.



Certain U.S. Holders who are individuals
(and certain specified entities closely-held by individuals) may be required to report information relating to their ownership
of securities of a non-U.S. person, subject to certain exceptions (including an exception for securities held in certain accounts
maintained by U.S. financial institutions). U.S. holders should consult their tax advisors regarding the effect, if any, of these
rules on their ownership and disposition of ADSs or shares.



The above discussion is not intended to
constitute a complete analysis of all the tax consequences relating to the ownership and disposition of our shares or ADSs.



Belgian Taxation



The following paragraphs are a summary
of material Belgian tax consequences of the ownership of ADSs by an investor. The summary is based on laws, treaties and regulatory
interpretations in effect in Belgium on the date of this document, all of which are subject to change, including changes that could
have retroactive effect.



The summary only discusses Belgian tax
aspects which are relevant to U.S. holders of ADSs, or “Holders.” This summary does not address Belgian tax aspects
which are relevant to persons who are fiscally resident in Belgium or who maintain a permanent establishment or a fixed base in
Belgium to which the ADSs are effectively connected.



This summary does not purport to be a description
of all of the tax consequences of the ownership of ADSs, and does not take into account the specific circumstances of any particular
investor, some of which may be subject to special rules, or the tax laws of any country other than Belgium. This summary does not
describe the tax treatment of investors that are subject to special rules, such as banks, insurance companies, collective investment
undertakings, dealers in securities or currencies, persons that hold, or will hold, ADSs in a position in a straddle, share-repurchase
transaction, conversion transactions, synthetic security or other integrated financial transactions. Investors should consult their
own advisors regarding the tax consequences of an investment in ADSs in the light of their particular circumstances, including
the effect of any state, local or other national laws, treaties and regulatory interpretations thereof.



In addition to the assumptions mentioned
above, it is also assumed in this discussion that for purposes of the domestic Belgian tax legislation, the owners of ADSs will
be treated as the owners of the ordinary shares represented by such ADSs. However, the assumption has not been confirmed by or
verified with the Belgian Tax Authorities.



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Dividend Withholding Tax



For Belgian income tax purposes, a withholding
tax of 30% (effective as of January 1, 2017, increased from a 27% rate effective for 2016) is levied on the gross amount of dividends
paid on or attributed to the ordinary shares represented by the ADSs, subject to such relief as may be available under applicable
domestic or tax treaty provisions.



Dividends subject to the dividend withholding
tax include all benefits attributed to the ordinary shares represented by the ADSs, irrespective of their form, as well as reimbursements
of statutory share capital by us, except reimbursements of fiscal capital made in accordance with the Belgian Company Code. In
principle, fiscal capital includes the actual paid-up statutory share capital, and subject to certain conditions, the paid-up issue
premiums and the cash amounts subscribed to at the time of the issue of profit sharing certificates.



In case of a redemption by us of our own
shares represented by ADSs, the redemption distribution (after deduction of the portion of fiscal capital represented by the redeemed
shares) will be treated as a dividend subject to the withholding tax (at a rate of 30%), subject to such relief as may be available
under applicable domestic or tax treaty provisions. No withholding tax will be triggered if this redemption is carried out on a
stock exchange and meets certain conditions. In case of a liquidation of our Company, any amounts distributed in excess of the
fiscal capital will also be treated as a dividend that will in principle be subject to a 30% withholding tax, subject to such relief
as may be available under applicable domestic or tax treaty provisions.



For non-resident individuals and companies,
the dividend withholding tax, if any, will be the only Belgian tax imposed on dividends paid with respect to the ADSs, unless the
non-resident maintains a fixed base in Belgium or a Belgian permanent establishment to which the ADSs are effectively connected.



Belgian Dividend Withholding Tax Relief





Under
the Belgium-United States Tax Treaty, or the Treaty, under which we are entitled to benefit according to our Belgian tax residence,
there is a reduced Belgian withholding tax rate of 15% on dividends paid by us to a U.S. resident who is the beneficial owner
of the ADSs and is entitled to claim the benefits of the Treaty under the limitation of benefits article included in the Treaty,
or Qualifying Holders.



If such Qualifying Holder is a company
that owns directly at least 10% of our voting stock, the Belgian withholding tax rate is further reduced to 5%. No withholding
tax is applicable if the Qualifying Holder is either of the following:



| | · | a company that is a resident of the United States that has directly owned ADSs representing at least 10% of our capital for
a twelve-month period ending on the date the dividend is declared; or
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a pension fund that is a resident of the United States, provided that such dividends are not derived from the carrying on of
a business by the pension fund or through an associated enterprise (as described below).
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





Under the normal procedure, we or our
paying agent must withhold the full Belgian withholding tax, without taking into account the reduced Treaty rate. Qualifying Holders
may make a claim, if conditions are met, for reimbursement for amounts withheld in excess of the rate defined by the Treaty. The
reimbursement form (Form 276 Div-Aut.) may be obtained from the Centre Etrangers-Gestion Team 6, Boulevard du Jardin
Botanique 50 boîte 3429, 1000 Brussels, Belgium or at foreigners.team6@minfin.fed.be or at https://eservices.minfin.fgov.be/mym-api-rest/finform/pdf/2600.
Reimbursement request should be filed as soon as possible and in any case within a term of 5 years starting from 1st of January
of the year the withholding tax was withheld. Qualifying Holders may also, subject to certain conditions, obtain the reduced Treaty
rate at source.





Belgian domestic law provides a withholding tax reduction or
exemption on dividends to certain corporate shareholders provided they meet certain conditions (among others holding a 10% participation
or ADSs with an acquisition value of at least EUR 2,500,000). Belgian domestic law also provides a withholding tax exemption to
pension funds subject to certain conditions.





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Holders should consult their own tax advisors
as to whether they qualify for reduction in withholding tax upon payment or attribution of dividends, and as to the procedural
requirements for obtaining a reduced withholding tax upon the payment of dividends or for making claims for reimbursement.



Capital Gains and Losses



Pursuant to the Treaty, capital gains and/or
losses realized by a Qualifying Holder from the sale, exchange or other disposition of ADSs are exempt from tax in Belgium.



Capital gains realized on ADSs by a corporate
Holder who is not a Qualifying Holder are generally not subject to taxation in Belgium unless such Holder is acting through a Belgian
permanent establishment or a fixed place in Belgium to which the ADSs are effectively connected (in which case a 33.99%, 25.75%,
0.412% or 0% tax on the capital gain may apply, depending on the particular circumstances). Capital losses are generally not tax
deductible.



Private individual Holders which are not
Qualifying Holders and which are holding ADSs as a private investment will, in principle, not be subject to tax in Belgium on any
capital gains arising out of a disposition of ADSs.



If a capital gain is realized by such private
individual Holder on his ADSs and is deemed to be realized outside the scope of the normal management of such individual’s
private estate and the capital gain is obtained or received in Belgium, the gain will be subject to a final tax of 33% (plus local
surcharges of 7%).



Moreover, capital gains realized by such
private individual Holders on the disposition of ADSs for consideration, outside the exercise of a professional activity, to a
non-resident corporation (or an entity constituted in a similar legal form), to a foreign state (or one of its political subdivisions
or local authorities) or to a non-resident legal entity that is established outside the European Economic Area, are in principle
taxable at a rate of 16.5% (plus local surcharges) if, at any time during the five years preceding the realization event, such
individual Holders own or have owned directly or indirectly, alone or with his/her spouse or with certain other relatives, a substantial
shareholding in us (that is, a shareholding of more than 25% of our shares).



Capital gains realized by a Holder upon
the redemption of ADSs or upon our liquidation will generally be taxable as a dividend. See “Dividend Withholding Tax.”



Estate and Gift Tax



There is no Belgian estate tax on the transfer
of ADSs on the death of a person who is not a Belgian resident for tax purposes. Donations of ADSs made in Belgium may or may not
be subject to gift tax depending on the modalities under which the donation is carried out.



Belgian Tax on Stock Exchange Transactions



A tax on stock exchange transactions is
normally levied on the purchase and the sale and on any other acquisition and transfer for consideration of ADSs in Belgium through
a professional intermediary established in Belgium on the secondary market, the so-called “secondary market transactions.”
The tax is due from the transferor and the transferee separately. The applicable rate amounts to 0.27% of the consideration paid
but with a cap of 800 euros per transaction per party. According to a declaration of the Belgian Government of October 16,
2016, this cap of 800 euros will be doubled (to 1,600 euros).



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Investors who are not Belgian residents
for tax purposes that purchase or otherwise acquire or transfer, for consideration, ADSs in Belgium for their own account through
a professional intermediary may be exempt from the tax on stock exchange transactions if they deliver a sworn affidavit to the
intermediary in Belgium confirming their non-resident status.



No stock exchange tax will thus be due
by Holders on the subscription, purchase or sale of ADSs, if the Holders are acting for their own account. In order to benefit
from this exemption, the Holders must file with the professional intermediary in Belgium a sworn affidavit evidencing that they
are non-residents for Belgian tax purposes.



In addition to the above, no stock exchange
tax is payable by the following parties, acting on their own account: (i) professional intermediaries described in Article 2,
9° and 10° of the Belgian Law of August 2, 2002, (ii) insurance companies described in Article 2, §1
of the Law of July 9, 1975, (iii) professional retirement institutions referred to in Article 2, 1° of the Law
of October 27, 2006 relating to the control of professional retirement institutions, or (iv) collective investment institutions.



F. Dividends and Paying Agents



Not applicable.



G. Statements by Experts



Not applicable.



H. Documents on Display



We are required to file or furnish reports
and other information with the SEC under the Securities Exchange Act of 1934 and regulations under that Act. As a foreign private
issuer, we are exempt from the rules under the Exchange Act prescribing the form and content of proxy statements and our officers,
directors and principal shareholders are exempt from the reporting and short swing profit recovery provisions contained in Section
16 of the Exchange Act.



You
may review a copy of our filings with the SEC, as well as other information furnished to the SEC, including exhibits and schedules
filed with it, at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the
SEC at 1-800-SEC-0330 for further information. In addition, the SEC maintains a website at http://www.sec.gov that contains reports
and other information regarding issuers that file electronically with the SEC. These SEC filings are also available to the public
from commercial document retrieval services.



We have filed our amended and restated
articles of association and all other deeds that are to be published in the annexes to the Belgian State Gazette with the clerk’s
office of the Commercial Court of Leuven (Belgium), where they are available to the public. A copy of our amended and restated
articles of association is also be publicly available as an exhibit to the registration statement we filed with the SEC in connection
with our initial public offering in the United States. In accordance with Belgian law, we must prepare audited annual statutory
and consolidated financial statements. The audited annual statutory and consolidated financial statements and the reports of our
board and statutory auditor relating thereto are filed with the Belgian National Bank, where they are available to the public,
and are also available on our website.



I. Subsidiary Information



Not applicable.



Item 11. Quantitative and Qualitative Disclosures About
Market Risk



For more information about our exposure
to market risk and how we manage this risk, see “Item 18. Financial Statements—Note 5”.



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Item 12. Description of Securities Other Than Equity Securities



A.  Debt Securities



Not applicable.



B. Warrants and Rights



Not applicable.



C. Other Securities



Not applicable.



D. American Depositary Shares



Fees and Expenses



As an ADS holder, you may be required to
pay the following service fees to the depositary bank and certain taxes and governmental charges (in addition to any applicable
fees, expenses, taxes and other governmental charges payable on the deposited securities represented by any of your ADSs):



|Service                                                                                                                                                                                                                                                                                | Fees                                                                                          
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------
|•	 To any person to which ADSs are issued or to any person to which a distribution is made in respect of ADS distributions pursuant to stock dividends or other free distributions of stock, bonus distributions, stock splits or other distributions (except where converted to cash) | Up to US$0.05 per ADS issued                                                                  
|•	 Cancellation of ADSs, including in the case of termination of the deposit agreement                                                                                                                                                                                                 | Up to US$0.05 per ADS cancelled                                                               
|•	 Distribution of cash dividends                                                                                                                                                                                                                                                      | Up to US$0.05 per ADS held                                                                    
|•	 Distribution of cash entitlements (other than cash dividends) and/or cash proceeds, including proceeds from the sale of rights, securities and other entitlements                                                                                                                   | Up to US$0.05 per ADS held                                                                    
|•	 Distribution of ADSs pursuant to exercise of rights.                                                                                                                                                                                                                                | Up to US$0.05 per ADS held                                                                    
|•	 Distribution of securities other than ADSs or rights to purchase additional ADSs                                                                                                                                                                                                    | Up to US$0.05 per ADS held                                                                    
|•	 Depositary services                                                                                                                                                                                                                                                                 | Up to US$0.05 per ADS held on the applicable record date(s) established by the depositary bank



As an ADS holder, you may also be responsible
to pay certain fees and expenses incurred by the depositary bank and certain taxes and governmental charges (in addition to any
applicable fees, expenses, taxes and other governmental charges payable on the deposited securities represented by any of your
ADSs) such as the following:



| | · | Fees for the transfer and registration of ordinary shares charged by the registrar and transfer agent for the ordinary shares
in Belgium (i.e., upon deposit and withdrawal of ordinary shares).
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Expenses incurred for converting foreign currency into U.S. dollars.
| | - | --------------------------------------------------------------------



| | · | Expenses for cable, telex, fax and electronic transmissions and for delivery of securities.
| | - | -------------------------------------------------------------------------------------------



| | · | Taxes and duties upon the transfer of securities, including any applicable stamp duties, any stock transfer charges or withholding
taxes (i.e., when ordinary shares are deposited or withdrawn from deposit).
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Fees and expenses incurred in connection with the delivery or servicing of ordinary shares on deposit.
| | - | ------------------------------------------------------------------------------------------------------



| | · | Fees and expenses incurred in connection with complying with exchange control regulations and other regulatory requirements
applicable to ordinary shares, deposited securities, ADSs and ADRs.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Any applicable fees and penalties thereon.
| | - | ------------------------------------------



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The depositary fees payable upon the issuance
and cancellation of ADSs are typically paid to the depositary bank by the brokers (on behalf of their clients) receiving the newly
issued ADSs from the depositary bank and by the brokers (on behalf of their clients) delivering the ADSs to the depositary bank
for cancellation. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions
of cash or securities to ADS holders and the depositary services fee are charged by the depositary bank to the holders of record
of ADSs as of the applicable ADS record date.



The depositary fees payable for cash distributions
are generally deducted from the cash being distributed or by selling a portion of distributable property to pay the fees. In the
case of distributions other than cash (i.e., share dividends, rights), the depositary bank charges the applicable fee to the ADS
record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated
or uncertificated in direct registration), the depositary bank sends invoices to be paid to the applicable record date ADS holders.
In the case of ADSs held in brokerage and custodian accounts (via DTC), the depositary bank generally collects its fees through
the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding
ADSs in their DTC accounts. The brokers and custodians that hold their clients’ ADSs in DTC accounts in turn charge their
clients’ accounts the amount of the fees paid to the depositary bank.



In the event of refusal to pay the depositary
fees, the depositary may, under the terms of the deposit agreement, refuse the requested service until payment is received or may
set off the amount of the depositary fees from any distribution to be made to the ADS holder.



The depositary agreed to pay certain amounts
to us in exchange for its appointment as depositary. We may use these funds towards our expenses relating to the establishment
and maintenance of the ADR program, including investor relations expenses, or otherwise as we see fit. The depositary may pay us
a fixed amount, it may pay us a portion of the fees collected by the depositary from holders of ADSs, and it may pay specific expenses
incurred by us in connection with the ADR program. Neither the depositary nor we may be able to determine the aggregate amount
to be paid to us because (i) the number of ADSs that will be issued and outstanding and the level of dividend and/or servicing
fees to be charged may vary, and (ii) our expenses related to the program may not be known at this time.



Part II



Item 13. Defaults, Dividend Arrearages and Delinquencies



A.       Defaults



Not applicable



B. Arrears and delinquencies



Not applicable



Item 14. Material Modifications to the Rights of Security
Holders and Use of Proceeds



Not applicable



Item 15. Controls and Procedures



A.       Disclosure
controls and procedures.



As of the end of the period covered by
this Annual Report, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Exchange Act) was performed under the supervision and with the participation of our managing
board, including our Chief Executive Officer and Chief Financial Officer, our principal executive officer and principal financial
officer, respectively. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures,
including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.



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Based on the evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, as of the end of the
period covered by this Annual Report, in providing a reasonable level of assurance that information we are required to disclose
in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods
in SEC rules and forms, including providing a reasonable level of assurance that information required to be disclosed by us in
such reports is accumulated and communicated to our management, including our principal executive officer and our principal financial
officer, as appropriate to allow timely decisions regarding required disclosure.



B. Management’s annual report on internal control
over financial reporting



This Annual Report does not include a report
of management’s assessment regarding internal control over financial reporting due to a transition period established by
rules of the Securities and Exchange Commission (“SEC”) for newly public companies.



C. Attestation report of the registered public accounting
firm



This Annual Report does not include an
attestation report of the company’s registered public accounting firm due to a transition period established by rules of
the Securities and Exchange Commission for newly public companies.



D. Changes in internal control over financial reporting



This Annual Report does not disclose any
changes in internal control over financial reports given there has been no assessment by management regarding internal control
over financial reporting for the reasons disclosed above.



Item 16. [Reserved]



Item 16A. Audit Committee Financial Expert



Our board of directors has determined that
Willy Duron, Jean Stéphenne, the permanent representative of Innosté SA, and Russell Greig, the permanent representative
of Greig Biotechnology Global Consulting, Inc, are independent under Rule 10A-3 of the Exchange Act and the applicable rules
of the NASDAQ Stock Market and that each of Willy Duron, Jean Stéphenne and Russell Greig qualifies as an “audit committee
financial expert” as defined under the Exchange Act.



Item 16B. Code of Ethics



We have adopted a corporate governance
charter based on the Belgian Code of Corporate Governance published by the Belgian Corporate Governance Committee. The Board of
Directors has approved a Dealing Code on private investment transactions to prevent insider trading offenses and market abuse,
particularly during the periods preceding the publication of results or information which could considerably influence the TiGenix
share price. The Dealing Code establishes rules for all employees (directors, management and other employees) and contractors prohibiting
dealing in the Company’s shares or other financial instruments of the Company during certain periods, including a designated
period preceding the announcement of its financial results (closed periods). It also establishes rules to set limitations in transactions
by certain persons, including employees. We are currently working on a more comprehensive code of ethics, which we expect to have
in place before the end of 2017.



Item 16C. Principal Accountant Fees and Services



BDO Bedrijfsrevisoren Burg. CVBA (“BDO”)
has served as our independent registered public accounting firm for 2016 and 2015. Audit fees in 2016 and 2015 amounted to 776,916
euros and 637,882 euros, respectively. Audit fees are the aggregate fees billed for the audit of our annual financial statements.
This category also includes services that generally the independent accountant provides, such as consents, comfort letters and
assistance with and review of documents filed with the SEC.



There were no audit-related fees, tax fees
or other fees paid to BDO during 2016 or 2015.



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Audit Committee’s Pre-Approval Policies and Procedures



The Audit Committee is responsible for
the appointment, replacement, compensation, evaluation and oversight of the work of the independent auditors. As part of this responsibility,
the Audit Committee pre-approves all audit and non-audit services performed by the independent auditors in order to assure that
they do not impair the auditor’s independence from the Company.



Item 16D. Exemptions from the Listing Standards for Audit
Committees



None.



Item 16E. Purchases of Equity Securities by the Issuer
and Affiliated Purchasers



Not applicable.



Item 16F. Change in Registrant’s Certifying Accountant



Not applicable.



Item 16G. Corporate Governance



Differences between Our Corporate Governance Practices
and the Listing Rules of the NASDAQ Stock Market



The Listing Rules of the NASDAQ Stock Market
include certain accommodations in the corporate governance requirements that allow foreign private issuers to follow “home
country” corporate governance practices in lieu of the otherwise applicable corporate governance standards of the NASDAQ
Stock Market. The application of such exceptions requires that we disclose each instance of noncompliance with the NASDAQ Stock
Market Listing Rules and describe the Belgian corporate governance practices we do follow in lieu of the relevant NASDAQ Stock
Market corporate governance standard.



Even though our ADSs are listed on the
NASDAQ Global Select Market, we intend to continue to follow Belgian corporate governance practices in lieu of the corporate governance
requirements of the NASDAQ Stock Market in respect of the following:



| | · | Quorum at Shareholder Meetings.NASDAQ Stock Market Listing Rule 5620(c) requires that for any meeting of shareholders,
the quorum must be no less than 331/3% of the outstanding ordinary shares. There is no quorum requirement
under Belgian law for our meetings of shareholders, except as provided for by law in relation to decisions regarding certain matters.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Code of Conduct.NASDAQ Stock Market Listing Rule 5610 requires listed companies to adopt a code of conduct applicable
to all directors, officers and employees, which must be publicly available. There is no such requirement under Belgian law. We
have adopted a number of internal corporate user policies for employees and management; however, we do not believe that these policies
amount to a code of conduct satisfying the requirements of Rule 5610.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Audit Committee Charter.NASDAQ Stock Market Listing Rule 5605(c)(1) provides that a company must certify that
it has adopted a formal written audit committee charter and that the audit committee will review and reassess the adequacy of the
formal written charter on an annual basis. There is no corresponding requirement under Belgian law. We have adopted a corporate
governance charter that includes a chapter on the regulation of the audit committee; however, the audit committee does not review
the charter annually and, therefore, we do believe that we satisfy the requirements of Rule 5605(c)(1).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Compensation Committee Charter.NASDAQ Stock Market Listing Rule 5605(d)(1) provides that a company must certify
that it has adopted a formal written compensation committee charter and that the compensation committee will review and reassess
the adequacy of the formal written charter on an annual basis. There is no corresponding requirement under Belgian law. Our corporate
governance charter includes a chapter on the regulation of our nomination and remuneration committee; however, the committee does
not review the charter annually and, therefore, we do not believe that we satisfy the requirements of Rule 5605(d)(1).
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | · | Executive Sessions.NASDAQ Stock Market Listing Rule 5605(b)(2) requires companies to have regularly scheduled
meetings at which only independent directors of the company are present. There is no corresponding requirement under Belgian law.
Our corporate governance charter requires our non-executive directors to meet without the presence of any executive directors at
least once a year; however, these meetings do not exclude our other non-independent directors and, therefore, we do not believe
that we satisfy the requirements of Rule 5605(b)(2).
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Solicitation of Proxies.NASDAQ Stock Market Listing Rule 5620(b) mandates that a company, which is not a
limited partnership, shall solicit proxies and provide proxy statements for all meetings of shareholders and shall provide copies
of such proxy solicitation to Nasdaq. In compliance with Belgian corporate law, we provide proxy forms for all meetings of shareholders
on our website thirty or seventeen days in advance of the meetings; the convening notice provides information on how shareholders
can vote and where they can find the proxy form. These proxy forms are for shareholders and not for holders of ADSs. The voting
rights of the holders of the ADSs will be governed by the terms of the deposit agreement, pursuant to which holders of ADSs may
instruct the depositary to vote the ordinary shares underlying their ADSs as long as we request the depositary to ask for their
instructions. Otherwise, holders of ADSs could exercise their right to vote by withdrawing ordinary shares underlying their ADSs
to vote them in person or by proxy in accordance with Belgian corporate law and our articles of association. However, holders of
ADSs may not know about a meeting far enough in advance to withdraw the ordinary shares.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Shareholder Approval.Under NASDAQ Stock Market Listing Rule 5635, a company requires shareholder approval prior
to an issuance of securities in connection with any of the following: (i) the acquisition of the stock or assets of another
company; (ii) equity-based compensation of officers, directors, employees or consultants; (iii) a change of control;
and (iv) a private placement. We follow Belgian law with respect to the issuance of securities, which has different rules
with respect to shareholder approval. Changes to our share capital are in principle decided by our shareholders. However, our meeting
of shareholders may authorize our board of directors, within certain limits, to increase our share capital without any further
approval of our shareholders, including for purposes of acquiring the shares or assets of other companies or for issuing shares,
options or warrants to certain persons, including non-employees. This authorization can only be granted for a renewable period
of a maximum of five years and may not exceed the amount of the registered share capital at the time of the authorization. Additionally,
the Belgian Company Code includes specific provisions requiring shareholder approval for certain change of control situations.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Part III



Item 17. Financial Statements



We have elected to include financial statements
pursuant to Item 18.



Item 18. Financial Statements



Our annual financial statements are included
at the end of this Annual Report.



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Item 19. Exhibits



(a)The
following documents are filed as part of this Annual Report:



|Exhibit No. | Exhibit                                                                                                                                                                                                                                                                                                                             
|----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1*        | Articles of Association of TiGenix, as amended and currently in effect (English translation)                                                                                                                                                                                                                                        
|            |                                                                                                                                                                                                                                                                                                                                     
|2.1         | Form of Deposit Agreement (incorporated by reference to exhibit (A) of the Amendment No. 1 to
    the     Registration     Statement on Form F-6 (333-208703) filed with the SEC on December 5, 2016)                                                                                                                               
|            |                                                                                                                                                                                                                                                                                                                                     
|2.2         | Form of American Depositary Receipt (included in Exhibit 2.1)                                                                                                                                                                                                                                                                       
|            |                                                                                                                                                                                                                                                                                                                                     
|4.1 †       | Distribution
    Agreement dated April 2, 2014 between TiGenix and Swedish Orphan Biovitrium AB as restated on April 23 and on
    May 28, 2014 (incorporated by reference to exhibit 10.1 of the Amendment No. 3 to the TiGenix Registration Statement on
    Form     F-1     (333-208693)     filed with the SEC on July 6, 2016)
|            |                                                                                                                                                                                                                                                                                                                                     
|4.2†        | Loan Facility Agreement dated December 20, 2013 between TiGenix and Kreos Capital IV (UK) Limited (incorporated by reference to exhibit 10.2 of the TiGenix Registration Statement on Form F-1 (333-208693) filed with the SEC on December 22, 2015)                                                                                
|            |                                                                                                                                                                                                                                                                                                                                     
|4.3†        | Share
    Purchase     Agreement dated January 23, 2014 between TiGenix and PharmaCell B.V. (incorporated by reference to
    exhibit 10.3 of     the Amendment No. 3 to the TiGenix Registration Statement on Form F-1 (333-208693) filed with the SEC on
    July 6, 2016)                                                        
|            |                                                                                                                                                                                                                                                                                                                                     
|4.4         | Warrants Plan 2012 (English translation) (incorporated by reference to exhibit 10.4 of the TiGenix Registration Statement on Form F-1 (333-208693) filed with the SEC on December 22, 2015)                                                                                                                                         
|            |                                                                                                                                                                                                                                                                                                                                     
|4.5         | Warrants Plan 2013 (English translation) (incorporated by reference to exhibit 10.5 of the TiGenix Registration Statement on Form F-1 (333-208693) filed with the SEC on December 22, 2015)                                                                                                                                         
|            |                                                                                                                                                                                                                                                                                                                                     
|4.6         | Second Warrants Plan 2013 (English translation) (incorporated by reference to exhibit 10.6 of the TiGenix Registration Statement on Form F-1 (333-208693) filed with the SEC on December 22, 2015)                                                                                                                                  
|            |                                                                                                                                                                                                                                                                                                                                     
|4.7         | Kreos Warrants Plan (English transaltion) (incorporated by reference to exhibit 10.7 of the TiGenix Registration Statement on Form F-1 (333-208693) filed with the SEC on December 22, 2015)                                                                                                                                        
|            |                                                                                                                                                                                                                                                                                                                                     
|4.8†        | Agreement for the Manufacturing of ChondroCelect between TiGenix NV, TiGenix B.V. and PharmaCell B.V. dated May 30, 2014 (incorporated by reference to exhibit 10.8 of the TiGenix Registration Statement on Form F-1 (333-208693) filed with the SEC on December 22, 2015)                                                         
|            |                                                                                                                                                                                                                                                                                                                                     
|4.9         | Assignment of Exploitation Rights dated November 3, 2014 between Cellerix, S.L. and the Universidad Autonóma de Madrid (English translation (incorporated by reference to exhibit 10.9 of the TiGenix Registration Statement on Form F-1 (333-208693) filed with the SEC on December 22, 2015)                                      

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|4.10 | Amendment to the Agreement for the Assignment of Rights to Exploit IP between the Universidad Autonóma De Madrid and Cellerix, S.L., of November 3, 2004 (English translation) (incorporated by reference to exhibit 10.10 of the TiGenix Registration Statement on Form F-1 (333-208693) filed with the SEC on December 22, 2015)                                                
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                                                   
|4.11 | Agreement for the Joint Ownership and Licensing of Exploitation Rights dated June 1, 2009 between Cellerix S.A. and the Consejo Superior de Investigaciones Científicas (incorporated by reference to exhibit 10.11 of the TiGenix Registration Statement on Form F-1 (333-208693) filed with the SEC on December 22, 2015)                                                       
|     |                                                                                                                                                                                                                                                                                                                                                                                   
|4.12 | Agreement for the Joint Ownership and Licensing of Exploitation Rights dated January 17, 2011 between Cellerix S.A., the Consejo Superior de Investigaciones Científicas and the University of Seville (incorporated by reference to exhibit 10.12 of the TiGenix Registration Statement on Form F-1 (333-208693) filed with the SEC on December 22, 2015)                        
|     |                                                                                                                                                                                                                                                                                                                                                                                   
|4.13 | Lease Agreement for Offices and Parking Spaces in Calle Marconi 1, Tres Cantos (Madrid) dated July 1, 2013 between TiGenix SAU and Mr. José Luis Gómez Ruiz and Mr. Álvaro García De La Rasilla Gortázar (English translation) (incorporated by reference to exhibit 10.13 of the TiGenix Registration Statement on Form F-1 (333-208693) filed with the SEC on December 22, 2015)
|     |                                                                                                                                                                                                                                                                                                                                                                                   
|4.14 | English summary of Loan Agreement between TiGenix SAU and Madrid Network dated September 30, 2011(incorporated by reference to exhibit 10.14 of the TiGenix Registration Statement on Form F-1 (333-208693) filed with the SEC on December 22, 2015)                                                                                                                              
|     |                                                                                                                                                                                                                                                                                                                                                                                   
|4.15 | English summary of Loan Agreement between TiGenix SAU and Madrid Network dated July 30, 2013 (incorporated by reference to exhibit 10.15 of the TiGenix Registration Statement on Form F-1 (333-208693) filed with the SEC on December 22, 2015)                                                                                                                                  
|4.16 | Terms and conditions of the senior unsecured convertible bonds due 2018 dated June 25, 2015 (incorporated by reference to exhibit 10.16 of the TiGenix Registration Statement on Form F-1 (333-208693) filed with the SEC on December 22, 2015)                                                                                                                                   
|     |                                                                                                                                                                                                                                                                                                                                                                                   

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|4.17  | Trust Deed dated March 6, 2015 between TiGenix, TiGenix S.A.U. and BNP Paribas Trust Corporation UK Limited constituting 25 million euros in 9% senior unsecured convertible bonds due 2018 guaranteed by TiGenix S.A.U. convertible into fully paid ordinary shares in the issuer (incorporated by reference to exhibit 10.17 of the TiGenix Registration Statement on Form F-1 (333-208693) filed with the SEC on December 22, 2015)
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.18† | Contribution agreement regarding the contribution of shares in, and the contribution and the transfer and assignment of receivables on, Coretherapix S.L. between Genetrix S.L. and TiGenix NV dated July 29, 2015 (incorporated by reference to exhibit 10.18 of the TiGenix Registration Statement on Form F-1 (333-208693) filed with the SEC on December 22, 2015)                                                                
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.19  | English summary of Service Agreement between Science to Business Technology Park and Coretherapix dated October 30, 2014 (Lease agreement) (incorporated by reference to exhibit 10.19 of the TiGenix Registration Statement on Form F-1 (333-208693) filed with the SEC on December 22, 2015)                                                                                                                                        
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.20  | Manufacturing
    Services Agreement between TiGenix S.A.U. and Lonza Walkersville, Inc. dated February 9, 2015 (Lease agreement) (incorporated
    by reference to exhibit 10.20 of the TiGenix Registration Statement on Form F-1 (333-208693) filed with the SEC on December
    22, 2015)                                                                                                                                         
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.21  | Warrants Plan
    2015 (English translation) (incorporated by reference to exhibit 10.21 of the Amendment No. 1 to the TiGenix Registration
    Statement     on     Form F-1 (333-208693) filed with the SEC on February 3, 2016)                                                                                                                                                                                                    
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.22  | License
    Agreement between TiGenix S.A.U. and Takeda Pharmaceuticals International AG dated July 4, 2016 (incorporated by reference
    to     exhibit 10.22 of the Amendment No. 3 to the TiGenix Registration Statement on Form F-1 (333-208693) filed with the SEC
    on     July 6,     2016)                                                                                                                                 
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|8.1*  | List of subsidiaries                                                                                                                                                                                                                                                                                                                                                                                                                  
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|12.1* | Certification of Eduardo Bravo pursuant to 17 CFR 240.13a-14(a)                                                                                                                                                                                                                                                                                                                                                                       
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|12.2* | Certification of Claudia D’Augusta pursuant to 17 CFR 240.13a-14(a)                                                                                                                                                                                                                                                                                                                                                                   
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|13.1* | Certification of Eduardo Bravo pursuant to 17 CFR 240.13a-14(b) and 18 U.S.C.1350                                                                                                                                                                                                                                                                                                                                                     
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|13.2* | Certification of Claudia D’Augusta pursuant to 17 CFR 240.13a-14(b) and 18 U.S.C.1350                                                                                                                                                                                                                                                                                                                                                 



|* | Submitted herewith.                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                
|† | Confidential treatment has been sought with respect to portions of the exhibit, which has been separately submitted to the SEC.



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Signatures



The registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form 20-F and has duly caused this   Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Madrid, Spain on April 6, 2017.



TIGENIX



|By: | /s/ Eduardo Bravo
|--- | -----------------
|    | Name:            
|    | Title:           









|By: | /s/ Claudia D’Augusta
|--- | ---------------------
|    | Name:                
|    | Title:               







148


Table of Contents
























TiGenix NV



































Annual Report 2016






Table of Contents




Index
to consolidated financial statements



|Report of independent registered public accounting firm | F-2
|------------------------------------------------------- | ---
|                                                        |    
|Consolidated income statements                          | F-3
|                                                        |    
|Consolidated statements of comprehensive income         | F-4
|                                                        |    
|Consolidated statements of financial position           | F-5
|                                                        |    
|Consolidated statements of cash flows                   | F-6
|                                                        |    
|Consolidated statements of changes in equity            | F-7
|                                                        |    
|Notes to the consolidated financial statements          | F-8










Table of Contents






REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board
of Directors and Shareholders



TiGenix
NV



Leuven,
Belgium



We
have audited the accompanying consolidated statements of financial position of TiGenix NV as of December 31, 2016, 2015 and 2014
and the related consolidated income statements and statements of comprehensive income, changes in equity, and cash flows for each
of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our audits.



We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.



In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of TiGenix NV at December 31, 2016, 2015 and 2014, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2016, in conformity with International Financial Reporting Standards as issued by
the International Accounting Standards Board.





Zaventem,
Belgium

April 6, 2017



/s/ Veerle Catry



BDO Bedrijfsrevisoren
Burg. Ven. CVBA



Auditor



Represented by Veerle
Catry





F-2


Table of Contents




| | consolidated financial statements
| | ---------------------------------



| | Consolidated income statements
| | ------------------------------



|                                                                         |  |       |    | Years ended December 31,
|------------------------------------------------------------------------ |  | ----- | -- | ------------------------
|Thousands of euros except per share data                                 |  | Notes |    | 2016                    
|CONTINUING OPERATIONS                                                    |  |       |    |                         
|Revenues                                                                 |  |       |    |                         
|Royalties                                                                |  |       | 6  |                         
|License revenues                                                         |  |       | 6  |                         
|Grants and other operating income                                        |  |       | 6  |                         
|Total revenues                                                           |  |       |    |                         
|Research and development expenses                                        |  |       | 7  |                         
|General and administrative expenses                                      |  |       | 7  |                         
|Total operating charges                                                  |  |       |    |                         
|Operating Loss                                                           |  |       |    |                         
|Financial income                                                         |  |       | 8  |                         
|Interest on borrowings and other finance costs                           |  |       | 8  |                         
|Fair value gains                                                         |  |       | 8  |                         
|Fair value losses                                                        |  |       | 8  |                         
|Impairment and gains/(losses) on disposal of financial instruments       |  |       | 8  |                         
|Foreign exchange differences, net                                        |  |       | 8  |                         
|Profit (Loss) before taxes                                               |  |       |    |                         
|Income tax benefits                                                      |  |       | 9  |                         
|Profit (Loss) for the year from continuing operations                    |  |       |    |                         
|DISCONTINUED OPERATIONS                                                  |  |       |    |                         
|Loss for the year from discontinued operations                           |  |       | 10 |                         
|Profit (Loss) for the year                                               |  |       |    |                         
|Attributable to equity holders of TiGenix                                |  |       |    |                         
|Basic income (loss) per share (euro) from continuing operations          |  |       | 11 |                         
|Diluted income (loss) per share (euro) from continuing operations	  from |  |       | 11 |                         
|Basic and diluted loss per share from discontinued operations (euro)     |  |       | 11 |                         



The accompanying notes form an integral
part of these consolidated financial statements.





F-3


Table of Contents




| | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | -----------------------------------------------





|                                                                                                  |  | Years ended December 31,
|------------------------------------------------------------------------------------------------- |  | ------------------------
|Thousands of euros                                                                                |  | 2016                    
|                                                                                                  |  |                         
|Profit (Loss) for the year                                                                        |  |                         
|Items of other comprehensive income that may be reclassified subsequently to the income statement |  |                         
|Currency translation differences                                                                  |  |                         
|Other comprehensive Loss                                                                          |  |                         
|Total comprehensive Income (Loss)                                                                 |  |                         
|Attributable to equity holders of TiGenix                                                         |  |                         





The accompanying notes form an integral
part of these consolidated financial statements.



F-4


Table of Contents


| | Consolidated statements of financial position
| | ---------------------------------------------



|                                                         |  |       |    | As at December 31,
|-------------------------------------------------------- |  | ----- | -- | ------------------
|Thousands of euros                                       |  | Notes |    | 2016              
|ASSETS                                                   |  |       |    |                   
|Intangible assets                                        |  |       | 12 |                   
|Property, plant and equipment                            |  |       | 13 |                   
|Available-for-sale investments                           |  |       | 14 |                   
|Other non-current assets                                 |  |       | 15 |                   
|Non-current assets                                       |  |       |    |                   
|Inventories                                              |  |       | 16 |                   
|Trade and other receivables                              |  |       | 17 |                   
|Current tax assets                                       |  |       | 9  |                   
|Other current financial assets                           |  |       | 18 |                   
|Cash and cash equivalents                                |  |       |    |                   
|Current assets                                           |  |       |    |                   
|TOTAL ASSETS                                             |  |       |    |                   
|                                                         |  |       |    |                   
|EQUITY AND LIABILITIES                                   |  |       |    |                   
|Share capital                                            |  |       | 19 |                   
|Share premium                                            |  |       | 19 |                   
|Accumulated deficit                                      |  |       |    |                   
|Other reserves                                           |  |       |    |                   
|Equity attributable to equity holders                    |  |       |    |                   
|Total equity                                             |  |       | 19 |                   
|Financial loans and other payables                       |  |       | 20 |                   
|Deferred tax liability                                   |  |       | 21 |                   
|Other non-current liabilities – Contingent consideration |  |       | 22 |                   
|Non-current liabilities                                  |  |       |    |                   
|Current portion of financial loans                       |  |       | 20 |                   
|Other financial liabilities                              |  |       | 20 |                   
|Trade and other payables                                 |  |       | 23 |                   
|Other current liabilities                                |  |       | 24 |                   
|Other current liabilities – Contingent consideration     |  |       | 24 |                   
|Current liabilities                                      |  |       |    |                   
|TOTAL EQUITY AND LIABILITIES                             |  |       |    |                   



The accompanying notes form an integral
part of these consolidated financial statements.



F-5


Table of Contents


| | Consolidated STATEMENTS OF cash flowS
| | -------------------------------------



|                                                                  |  |       |    | Years ended December 31,
|----------------------------------------------------------------- |  | ----- | -- | ------------------------
|Thousands of euros                                                |  | Notes |    | 2016                    
|CASH FLOWS FROM OPERATING ACTIVITIES                              |  |       |    |                         
|Operating loss                                                    |  |       |    |                         
|Adjustments for:                                                  |  |       |    |                         
|Depreciation, amortisation and impairment expenses                |  |       |    |                         
|Share-based compensation                                          |  |       |    |                         
|Grants revenues                                                   |  |       | 6  |                         
|Contingent consideration                                          |  |       | 22 |                         
|Other                                                             |  |       |    |                         
|                                                                  |  |       |    |                         
|Movements in working capital:                                     |  |       |    |                         
|(Increase)/decrease in inventories                                |  |       |    |                         
|(Increase)/decrease in trade and other receivables                |  |       |    |                         
|(Increase)/decrease in other financial assets                     |  |       |    |                         
|Increase in trade and other payables                              |  |       |    |                         
|Increase/(decrease) in other current liabilities                  |  |       |    |                         
|Cash (used in)/provided by operations                             |  |       |    |                         
|Income taxes received                                             |  |       |    |                         
|Cash flow from discontinued operations                            |  |       | 10 |                         
|Net cash (used in) / provided by operating activities             |  |       |    |                         
|CASH FLOWS FROM INVESTING ACTIVITIES                              |  |       |    |                         
|Interests received                                                |  |       |    |                         
|Acquisition of property, plant and equipment                      |  |       | 13 |                         
|Acquisition of intangible assets                                  |  |       | 12 |                         
|Proceeds from disposal of property, plant and equipment           |  |       |    |                         
|(Increase)/decrease of other non-current assets                   |  |       |    |                         
|(Increase)/decrease of other current financial assets             |  |       |    |                         
|Acquisition of subsidiaries, net of cash acquired                 |  |       | 4  |                         
|Cash flow from discontinued operations                            |  |       | 10 |                         
|Net cash (used in) / provided by investing activities             |  |       |    |                         
|CASH FLOWS FROM FINANCING ACTIVITIES                              |  |       |    |                         
|Gross proceeds from issuance of equity instruments of the Company |  |       | 19 |                         
|Issuance costs equity increase                                    |  |       | 19 |                         
|Net proceeds from financial loans                                 |  |       |    |                         
|Repayments of financial loans                                     |  |       |    |                         
|Repayments of other financial liabilities                         |  |       |    |                         
|Proceeds from government grants                                   |  |       |    |                         
|Proceeds from issuance of convertible notes                       |  |       | 20 |                         
|Issuance costs convertible notes                                  |  |       | 20 |                         
|Interests paid                                                    |  |       |    |                         
|Net cash provided by financing activities                         |  |       |    |                         
|Net increase/(decrease) in cash and cash equivalents              |  |       |    |                         
|Cash and cash equivalents at beginning of the year                |  |       |    |                         
|Effect of currency translation on cash and cash equivalents       |  |       |    |                         
|Cash and cash equivalents at end of year                          |  |       |    |                         



The accompanying notes form an integral
part of these consolidated financial statements.



F-6


Table of Contents


| | Consolidated statementS of changes in equity
| | --------------------------------------------



|                                          |  |                   |             |               |  |               |        |                      |  | Other reserves                           |         |                     
|----------------------------------------- |  | ----------------- | ----------- | ------------- |  | ------------- | ------ | -------------------- |  | ---------------------------------------- | ------- | --------------------
|Thousands of euros except share data      |  | Numbers of shares |             | Share capital |  | Share premium |        | Accumulated deficits |  | Equity-settled employee benefits reserve |         | Translation reserves
|At January 1, 2014                        |  |                   | 160,476,620 |               |  |               | 16,048 |                      |  |                                          | 100,125 |                     
|Loss for the year                         |  |                   | –           |               |  |               | –      |                      |  |                                          | –       |                     
|Other comprehensive loss                  |  |                   | –           |               |  |               | –      |                      |  |                                          | –       |                     
|Total comprehensive loss                  |  |                   | –           |               |  |               | –      |                      |  |                                          | –       |                     
|Other                                     |  |                   | –           |               |  |               | –      |                      |  |                                          | 11      |                     
|Transaction costs                         |  |                   | –           |               |  |               | –      |                      |  |                                          | (19     | )                   
|Share-based compensation                  |  |                   | –           |               |  |               | –      |                      |  |                                          | –       |                     
|At December 31, 2014                      |  |                   | 160,476,620 |               |  |               | 16,048 |                      |  |                                          | 100,118 |                     
|Loss for the year                         |  |                   | –           |               |  |               | –      |                      |  |                                          | –       |                     
|Other comprehensive loss                  |  |                   | –           |               |  |               | –      |                      |  |                                          | –       |                     
|Total comprehensive loss                  |  |                   | –           |               |  |               | –      |                      |  |                                          | –       |                     
|Issuance of shares                        |  |                   | 16,827,967  |               |  |               | 1,682  |                      |  |                                          | 13,073  |                     
|Transaction costs                         |  |                   | –           |               |  |               | –      |                      |  |                                          | (441    | )                   
|Share-based compensation                  |  |                   | –           |               |  |               | –      |                      |  |                                          | –       |                     
|Other                                     |  |                   | –           |               |  |               | –      |                      |  |                                          | –       |                     
|At December 31, 2015                      |  |                   | 177,304,587 |               |  |               | 17,730 |                      |  |                                          | 112,750 |                     
|Profit for the year                       |  |                   | –           |               |  |               | –      |                      |  |                                          | –       |                     
|Other comprehensive loss (Note 19.3)      |  |                   | –           |               |  |               | –      |                      |  |                                          | –       |                     
|Total comprehensive income                |  |                   | –           |               |  |               | –      |                      |  |                                          | –       |                     
|Issuance of shares (Note 19.1)            |  |                   | 82,651,778  |               |  |               | 8,265  |                      |  |                                          | 59,596  |                     
|Transaction costs (Note 19.1)             |  |                   | –           |               |  |               | –      |                      |  |                                          | (5,716  | )                   
|Share-based compensation (Notes 19.2, 25) |  |                   | –           |               |  |               | –      |                      |  |                                          | –       |                     
|At December 31, 2016                      |  |                   | 259,956,365 |               |  |               | 25,996 |                      |  |                                          | 166,630 |                     



The accompanying
notes form an integral part of these consolidated financial statements.



F-7


Table of Contents


| | NOTES TO THE CONSOLIDATED Financial STATEMENTS
| | ----------------------------------------------



1. General information



TiGenix (the “Company”, and
together with its subsidiaries, the “Group”, “we” or “us”) is a leading European cell therapy
company with an advanced clinical stage pipeline of adult stem cell programs. The stem cell programs are based on proprietary validated
platforms of allogeneic expanded stem cells targeting autoimmune, inflammatory and heart diseases. Built on solid pre-clinical
and CMC packages, they are being developed in close consultation with the European Medicines Agency.



As a result of this activity, the Group
has developed some different products which are in different stages of approval and/or potential sale.



TiGenix most advanced product is Cx601 which
finalized its Phase III. This product has been developed to treat complex perianal fistulas in patients with Crohn’s disease.
The product has met the primary endpoint of this trial at Week 24 of treatment which has allowed TiGenix to file for European marketing
authorization in 2016.



On July 4, 2016 TiGenix entered into a licensing
agreement with Takeda, a pharmaceutical company leader in gastroenterology, whereby Takeda acquired an exclusive right to commercialize
Cx601 for complex perianal fistulas in Crohn’s patients outside of the U.S.



Another developed product is Cx611 which
has successfully concluded a Phase IIa trial in rheumatoid arthritis, and is now in development for a Phase Ib/IIa study in severe
sepsis secondary to severe community-acquired pneumonia.



Effective as of July 31, 2015, TiGenix acquired
Coretherapix, whose lead cellular product, AlloCSC-01, is currently in a Phase II clinical trial in acute myocardial infarction
(AMI). In addition, the second product candidate from the cardiac stem cell-based platform acquired from Coretherapix, AlloCSC-02,
is being developed in a chronic indication.



ChondroCelect®, for cartilage repair
in the knee, was the first cell-based product approved in Europe. Due to the regulatory environment TiGenix has withdrawn the Marketing
authorization for ChondroCelect and came to an agreement with Sobi, Finnish Red Cross and Pharmacell for the early termination
of their existing commercial relationships.



As explained in notes 3 and 10, the Company
has accounted the ChondroCelect activities as discontinued operations in accordance with IFRS 5 Non-current Assets Held for
Sales and Discounted Operations.



TiGenix is a limited liability company incorporated
and domiciled in Belgium. The registered office is located at Romeinse straat 12, bus 2, 3001 Leuven, Belgium.



The consolidated financial
statements of the Group for the three years ended December 31, 2016, 2015, 2014 were approved and authorized for issue on
April 5, 2017 in accordance with a resolution of the Company’s board of directors.



2. Summary of significant accounting
policies



Basis of preparation



The Group’s consolidated
financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by
the International Accounting Standards Board (IASB) and as endorsed by the European Union.



F-8


Table of Contents


The principal accounting policies applied
in the preparation of the consolidated financial statements are set out below. These policies have been consistently applied to
all of the years presented, unless otherwise stated.



These consolidated financial statements
do not include any information or disclosures that, not requiring presentation due to their qualitative significance, have been
determined as immaterial or of no relevance pursuant to the concepts of materialityor relevancedefined in the IFRS
conceptual framework, insofar as the Group’s consolidated financial statements, taken as a whole, are concerned. All amounts
are presented in thousands of euros, unless otherwise indicated, rounded to the nearest 1,000 euro.



The financial statements have been prepared
on the basis of the historical cost method. Any exceptions to the historical cost method are disclosed in the valuation rules described
hereafter.



The preparation of financial statements
in compliance with IFRS requires the use of certain critical accounting estimates. It also requires the Group’s management
to exercise judgment in applying the Group’s accounting policies. The areas where significant judgments and estimates have
been made in preparing the financial statements and their effect are disclosed in note 3.



Alternative measures not defined in IFRS



TiGenix uses the operating loss measure
in its decision-making, because it provides information useful to assess the Group’s performance, solvency and liquidity.
This measure should not be viewed in isolation or as an alternative to the measures presented according to the IFRS.



Operating loss is calculated by excluding
from the profit/loss for the year before taxes exclusively the financial results, that is, all results derived from interest income
and expenses, impairment and reversal of impairment of financial instruments, foreign exchange differences, changes in fair values
and variation of the contingent consideration of the business combinations.



Liquidity



The Group is subject to a number of risks
similar to those of other pre-commercial stage companies, including uncertainty of product development and generation of revenues,
dependence on outside sources of capital, risks associated with research, development, testing, and obtaining related regulatory
approvals of its pipeline products, dependence on price reimbursement decisions from national authorities or insurance providers,
dependence on third party manufacturers, suppliers and collaborators, successful protection of intellectual property, competition
with larger, better-capitalized companies, successful completion of the Group’s development programs. Ultimately, the attainment
of profitable operations is dependent on future events, including obtaining adequate financing to fulfill its development activities
and generating a level of revenues adequate to support the Group’s cost structure.



The Group has experienced net losses and
significant cash outflows from cash used in operating activities over the past, and as at December 31, 2016 had an accumulated
deficit of 116.2 million euros, a profit for the year of 3.8 million euros and net cash provided by operating activities
of 3.5 million euros.



The Group has sufficient funds to continue
operating for the next 12 months, but will require significant additional cash resources to initiate new clinical trials related
to its pipeline and to continue seeking regulatory approval of its pipeline. The accompanying consolidated financial statements
have been prepared assuming that the Group will continue as a going concern. This basis of accounting contemplates the recovery
of the Group’s assets and the satisfaction of liabilities in the normal course of business. A successful transition to attaining
profitable operations is dependent upon achieving a level of positive cash flows adequate to support the Group’s cost structure.



To support the Group’s financial performance,
management has undertaken several initiatives.



F-9


Table of Contents


On March 14, 2016, the Company raised 23.8
million euros in gross proceeds through a private placement of 25,000,000 new shares at a subscription price of 0.95 euros per
share. The New Shares were placed through an accelerated book building with institutional investors in Belgium and abroad at a
price of EUR 0.95 per share. (See note 19).



On July 4, 2016, Takeda and TiGenix entered
into an exclusive worldwide ex-U.S. license, development and commercialization agreement for Cx601, a suspension of allogeneic
adipose-derived stem cells (eASC) injected intra-lesionally for the treatment of complex perianal fistulas in patients with Crohn’s
disease.



Following Marketing Authorization in the
European Union, Takeda will become the marketing authorization holder and will be responsible for all commercialization and regulatory
activities. Takeda will also be responsible for additional development activities of Cx601 for the indication of complex perianal
fistulas in Crohn’s disease. TiGenix will retain the rights to develop Cx601 in new indications.



During July 2016, TiGenix received a non-refundable
upfront cash payment of 25.0 million euros in execution of this agreement as consideration for a license of the intellectual property,
which amount has been recognized as License revenue in the Income Statement as per December 31, 2016. In addition, the Company
is eligible to receive regulatory and sales milestone payments for up to a potential total of 355 million euros and double digit
royalties on net sales by Takeda.



On December 15, 2016, TiGenix raised 34.1
million euros gross proceeds from its initial public offering in the United States from the sale of 2,300,000 American Depositary
Shares (“ADSs”), representing 46,000,000 ordinary shares, at a price to the public of USD 15.5 per ADS. (See note 19).



In addition, on December 20, 2016, TiGenix
exercised the option under the License Agreement enabling it to require Takeda to make a 10.0 million euros equity investment.
Takeda subscribed 11,651,778 new ordinary shares at an issuance price of 0.86 euros per share.



The Group will continue to consider additional
business opportunities to allow us to develop our pipeline and generate additional revenues. We expect to use any capital obtained
from such fund raisings or other arrangements to further develop our product candidates.



As at December 31, 2016, the Group
had cash and cash equivalents of 78.0 million euros.



The future viability of the Group is dependent
on its ability to generate cash from operating activities, to raise additional capital to finance its operations or to successfully
obtain regulatory approval to allow marketing of the Group’s products. The Group’s failure to raise capital as and
when needed could have a negative impact on its financial condition and ability to pursue its business strategies.



The consolidated financial statements do
not include any adjustments due to this uncertainty relating to the recoverability and classification of recorded asset amounts
and classification of liabilities.



| | a) | Changes to IFRS during the period
| | -- | ---------------------------------



The standards and interpretations listed
below have become effective for annual periods beginning on 1 January 2016. While the list of new standards
is provided as follows, not of all them are applicable to the Company and those applicable have had no significant impact on TiGenix
financial statements as at 31 December 2016:



| | - | Annual Improvements to IFRSs 2012-2014 Cycle
| | - | --------------------------------------------



| | - | Amendments to IAS 1 – Disclosure Initiative
| | - | -------------------------------------------



| | - | Amendments to IAS 16 and IAS 38 – Clarification of Acceptable Methods of Depreciation and
Amortization
| | - | ------------------------------------------------------------------------------------------------------



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Table of Contents


| | - | Amendments to IAS 16 and IAS 41- Agriculture: Bearer Plants
| | - | -----------------------------------------------------------



| | - | Amendments to IAS 27- Equity Method in Separate Financial Statements
| | - | --------------------------------------------------------------------



| | - | Amendments to IFRS 10, IFRS 12 and IAS 28 – Investment Entities : Applying the Consolidation
Exception
| | - | ------------------------------------------------------------------------------------------------------



| | - | Amendments to IFRS 11- Accounting for Acquisition of Interests in Joint Operations
| | - | ----------------------------------------------------------------------------------



| | b) | Standards issued by the IASB but not yet effective
| | -- | --------------------------------------------------



The standards and interpretations that are
issued, but not yet effective, up to the date of issuance of the Group’s financial statements are disclosed below. The Group
intends to adopt these standards, if applicable, when they become effective.



| | - | IFRS 9 Financial Instruments
| | - | ----------------------------



| | - | IFRS 14 Regulatory Deferral Accounts
| | - | ------------------------------------



| | - | IFRS 15 Revenue from Contracts with Customers (including its clarifications)
| | - | ----------------------------------------------------------------------------



| | - | IFRS 16 Leases
| | - | --------------



| | - | IFRIC 22 – Foreign Currency Transactions and Advance Consideration
| | - | ------------------------------------------------------------------



| | - | Annual Improvements to IFRSs 2012-2014 Cycle
| | - | --------------------------------------------



| | - | Amendments to IAS 7 - Disclosure Initiative
| | - | -------------------------------------------



| | - | Amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses –
| | - | -------------------------------------------------------------------------------



| | - | Amendments to IAS 40 – Transfers of investments properties
| | - | ----------------------------------------------------------



| | - | IFRS 2 Classification and Measurement of Share-based Payment Transactions – Amendments to
IFRS 2
| | - | ------------------------------------------------------------------------------------------------



| | - | Amendments to IFRS 4: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts
| | - | -------------------------------------------------------------------------------------------



| | - | Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate
or Joint Venture
| | - | -----------------------------------------------------------------------------------------------------------------------



For relevant standards listed above we expect
the following impacts:



| | · | IFRS 9 Financial Instruments
| | - | ----------------------------





In July 2014, the IASB issued the final
version of IFRS 9 Financial Instrumentsthat replaces IAS 39 Financial Instruments: Recognition and Measurementand
all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for financial instruments project:
classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1
January 2018, with early application permitted. Except for hedge accounting, retrospective application is required but providing
comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some
limited exceptions.



IFRS 9 requires the Company to record expected
credit losses on all of its debt securities, loans and trade receivables, either on a 12-month or lifetime basis. The Company expects
to apply the simplified approach and record lifetime expected losses on all trade receivables.



The Company plans to adopt the new standard
on the required effective date. The Company expects no significant impact on its balance sheet and equity.



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Table of Contents


The Company does not expect a significant
impact on its balance sheet or equity on applying the classification and measurement requirements of IFRS 9.



| | · | IFRS 15 Revenue from Contracts with Customers
| | - | ---------------------------------------------



IFRS 15 was issued in May 2014 and establishes
a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognized at an amount
that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer.



The new revenue standard will supersede
all current revenue recognition requirements under IFRS. Either a full retrospective application or a modified retrospective application
is required for annual periods beginning on or after 1 January 2018. The Company plans to adopt the new standard on the required
effective date. The Company has performed a preliminary assessment of IFRS 15, which is subject to changes arising from a more
detailed ongoing analysis. Once the analysis is performed the transition method will be chosen. Based on the current sales contracts,
both methods are feasible from implementation perspective and we do not expect a significant impact in the implementation. Furthermore,
the Company is considering the clarifications issued by the IASB in April 2016 and will monitor any further developments.



The Company is in the business of providing
licenses to produce stem cell programs and their relating manufacturing process, when applicable.



| | (a) | Licenses sales
| | --- | --------------



License is expected to be sold when developed,
so it will be a right to use the entity’s intellectual property as it exists at the point in time in which the license is
granted, which results in revenue that is recognized at a point in time. This accounting treatment will not differ from current
accounting practices.



Contracts with customers are expected to
have royalties-based sales. IFRS 15 requires that royalties received in exchange for licenses of intellectual property are recognized
at the later of when the subsequent sale or usage occurs and the performance obligation to which some or all of the sales-based
or usage-based royalty has been allocated is satisfied (or partially satisfied). We do not expect that this accounting treatment
will differ from current practices.



| | (b) | Performance obligations
| | --- | -----------------------



In some circumstances the Group sells the
license and the related manufacturing process. Based on the analysis performed by the entity both, license and manufacturing process
are separate performance obligations as the manufacturing process of the product is sold separately at customer requests, and for
a determined period of time until the customer is self-sufficient in the production.



| | (c) | Variable consideration
| | --- | ----------------------



Some contracts with customers provide variable
considerations depending on some country’s approvals for the sale of the product. As revenue cannot be reliably measured,
the Company defers revenue recognition until the uncertainty is resolved.



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IFRS 15 requires the estimated variable
consideration to be constrained to prevent over-recognition of revenue. Even though variable consideration is subject to be estimated,
under IFRS 15 it will be constrained as it does not depend on TiGenix to obtain such approval and there are no past experience
based on the fact that products are being commercialized in such countries for the first time.



The Company continues to assess individual
contracts to determine the estimated variable consideration and related constraint. The Group does not expect that application
of the constraint may result in more revenue being recognized than is under current IFRS.



| | (d) | Presentation and disclosure requirements
| | --- | ----------------------------------------



IFRS 15 provides presentation and disclosure
requirements, which are more detailed than under current IFRS.



The presentation requirements represent
a significant change from current practice and significantly increases the volume of disclosures required in Company’s financial
statements. Many of the disclosure requirements in IFRS 15 are completely new. In 2016 the Company developed and started testing
appropriate systems, internal controls, policies and procedures necessary to collect and disclose the required information.



| | · | IFRS
                                         16 Leases
| | - | -------------------------------------------------------



IFRS 16 was issued in January 2016 and
it replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentivesand SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles
for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a
single on-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognition
exemptions for lessees – leases of ’low-value’ assets (e.g., personal computers) and short-term leases (i.e.,
leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognize a liability to make
lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term
(i.e., the right-of-use asset). Lessees will be required to separately recognize the interest expense on the lease liability and
the depreciation expense on the right-of-use asset.



Lessees will be also required to remeasure
the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments
resulting from a change in an index or rate used to determine those payments). The lessee will generally recognize the amount of
the remeasurement of the lease liability as an adjustment to the right-of-use asset.



IFRS 16 is effective for annual
periods beginning on or after 1 January 2019 (subject to endorsement by the European Union). Early application is permitted,
but not before an entity applies IFRS 15. A lessee can choose to apply the standard using either a full retrospective or a
modified retrospective approach. The standard’s transition provisions permit certain reliefs.



During 2017 the Company plans to assess
the potential effect of IFRS 16 on its consolidated financial statements. To see the volume of operating leases please refer to
note 28.



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Table of Contents


Basis of consolidation



The consolidated financial statements incorporate
the financial statements of the Company and entities controlled by the Company. Control is achieved when the Company:



| | • | has power over the investee;
| | - | ----------------------------



| | • | is exposed, or has rights, to variable returns from its involvement with the investee; and
| | - | ------------------------------------------------------------------------------------------



| | • | has the ability to use its power to affect its returns.
| | - | -------------------------------------------------------



The Company reassesses whether or not it
controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control
listed above.



Consolidation of a subsidiary begins when
the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, income
and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss
and other comprehensive income from the date the Company gains control until the date when the Company ceases to control the subsidiary.



Profit or loss and each component of other
comprehensive income are attributed to the owners of the Company and to the non-controlling interests. Total comprehensive income
of subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling
interests having a deficit balance.



When necessary, adjustments are made to
the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies.



All intragroup assets and liabilities, equity,
income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.



Changes in the Group’s ownership interests
in subsidiaries that do not result in the Group losing control over the subsidiaries are accounted for as equity transactions.
The carrying amounts of the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their
relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and
the fair value of the consideration paid or received is recognized directly in equity and attributed to owners of the Company.



When the Company loses control of a subsidiary,
a gain or loss is recognized in profit or loss and is calculated as the difference between (i) the aggregate of the fair value
of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets
(including goodwill), and liabilities of the subsidiary and any non-controlling interests. All amounts previously recognized in
other comprehensive income in relation to that subsidiary are accounted for as if the Company had directly disposed of the related
assets or liabilities of the subsidiary (i.e. reclassified to profit or loss or transferred to another category of equity
as specified/permitted by applicable IFRSs). The fair value of any investment retained in the former subsidiary at the date when
control is lost is regarded as the fair value on initial recognition for subsequent accounting under IAS 39, when applicable,
the cost on initial recognition of an investment in an associate or a joint venture.



Foreign currency translation



In preparing the financial statements of
each group entity, transactions in currencies other than the entity’s functional currency (foreign currencies) are recognized
at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated
in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value



F-14


Table of Contents


that are
denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary
items that are measured in terms of historical cost in a foreign currency are not retranslated.



Exchange differences arising on the settlement
of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition
during the period or in previous financial statements are recognized in profit or loss in the period in which they arise.



IAS 21.15 states that an entity may have
a monetary item that is receivable from or payable to a foreign operation. An item for which settlement is neither planned nor
likely to occur in the foreseeable future is, in substance, a part of the entity's net investment in that foreign operation. Such
monetary items may include long-term receivables or loans. Financial statements that include the foreign operation and the reporting
entity, such exchange differences shall be recognized initially in other comprehensive income instead of profit or loss in financial
results.



For the purposes of presenting consolidated
financial statements, the assets and liabilities of the Group’s foreign operations are translated into euros using exchange
rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for
the period. Exchange differences arising, if any, are recognized in other comprehensive income and accumulated in equity (translation
reserves).



On the disposal of a foreign operation (i.e., a
disposal of the Group’s entire interest in a foreign operation), or a disposal involving loss of control over a subsidiary
that includes a foreign operation, all of the exchange differences accumulated in equity in respect of that operation attributable
to the owners of the Company are reclassified to profit or loss.



Segment information



The Group’s activities are in one
segment: biopharmaceuticals. The Group is managed and operated as one business unit, which is reflected in the organizational structure
and internal reporting. No separate line of business or separate business entity has been identified with respect to any of the
product candidates or geographical markets.



Geographical information is further disclosed
in note 27.



Business combinations



Acquisitions of businesses are accounted
for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated
as the sum of the acquisition-date fair values of the assets transferred by the Group, liabilities incurred by the Group to the
former owners of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. Acquisition-related
costs are recognized in profit or loss as incurred, except for costs to issue debt or equity securities, which are recognized in
accordance with IAS 32 and IAS 39.



At the acquisition date, the identifiable
assets acquired and the liabilities assumed are recognized at their fair value, except for deferred tax assets and liabilities
arising from the assets acquired and liabilities assumed (which are recognized and measured in accordance with IAS 12), assets
and liabilities relating to employee benefit arrangements (which are recognized and measured in accordance with IAS 19), liabilities
or equity-instruments related to the replacement of the acquiree’s share-based payment arrangements (which are recognized
and measured in accordance with IFRS 2) and assets that are classified as held for sale (which are recognized and measured
in accordance with IFRS 5).



Goodwill is measured as the excess of the
sum of the consideration transferred (including the fair value of the contingent consideration), the amount of any non-controlling
interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any)
over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment,
the net of the

F-15


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acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration
transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously
held interest in the acquiree (if any), the excess is recognized immediately in profit or loss as a bargain purchase gain.



Any contingent consideration included in
the consideration payable for a business combination is recorded at fair value at the date of acquisition. These fair values are
generally based on risk-adjusted future cash flows discounted using appropriate interest rates. The fair values are reviewed on
a regular basis, at least annually, and any changes are reflected in the income statement.



Revenue and other income recognition



Revenue from sale of products is recognized
when:



| | • | the ownership of the products is transferred to the buyer;
| | - | ----------------------------------------------------------



| | • | the amount of revenue can be measured reliably;
| | - | -----------------------------------------------



| | • | it is probable that the economic benefits associated with the transaction will flow to the entity;
and
| | - | ------------------------------------------------------------------------------------------------------



| | • | the costs incurred or to be incurred in respect of the transaction can be measured reliably.
| | - | --------------------------------------------------------------------------------------------



Revenue from the royalties related to the
sale of the ChondroCelect is recognized when implantation has occurred. Provisions for rebates, product returns and discounts to
customers are provided for as reductions to revenue in the same period as the related royalties are recorded.



Government grants and government loans



Government grants are not recognized until
there is reasonable assurance that the Group will comply with the conditions attached to them and that the grants will be received.



| | • | Government grants are recognized in profit or loss on a systematic basis over the periods in which
the Group recognizes as expenses the related costs for which the grants are intended to compensate. Specifically, government grants
whose primary condition is that the Group should purchase, construct or otherwise acquire non-current assets are recognized as
deferred revenue in the consolidated statement of financial position and transferred to profit or loss (under “other operating
income”) on a systematic and rational basis over the useful lives of the related assets.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Government grants that are receivable as compensation for expenses or losses already incurred or
for the purpose of giving immediate financial support to the Group with no future related costs are recognized in profit or loss
(under “grants and other operating income”) in the period in which they become receivable.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The benefit of a government loan at a below-market
rate of interest is treated as a government grant, (measured as the difference between proceeds received and the fair value of
the loan based on prevailing market interest rates). Only when there is sufficient assurance that the Group will comply with the
conditions attached to it, the grants will be recognized in profit or loss (under “other operating income”). Determination
of the appropriate amount of grant income to recognize involves judgments and estimates that the Company believes are reasonable,
but it is possible that actual results may differ from the Company’s estimates. When the Company receives the final written
reports, identifying satisfaction of the requirements of the grantor, to the extent not received within a reasonable time frame
following the end of the period, the Company records any differences between estimated grant income and actual



F-16


Table of Contents


grant income in
the next reporting period once the Company determines the final amounts. During the period that these benefits cannot be considered
as grants due to the insufficient assurance that all the conditions have been met, these grants will be included in the liabilities
as financial loans and other payables.



Revenue recognition in respect of license
arrangements



The Company recognizes revenue from licensing
arrangements which may include multiple elements. Revenue arrangements with multiple elements are reviewed in order to determine
whether the multiple elements can be divided into separate units of accounting, if certain criteria are met. If separable, the
consideration receivable is allocated amongst the separate units of accounting based on their respective fair values and the applicable
revenue recognition criteria are applied to each of the separate units. If not separable, the applicable revenue recognition criteria
are applied to combined elements as a single unit of accounting.



The Company may enter into licensing and
collaboration agreements for supply and distribution for its product. The terms of the agreements may include non-refundable signing
and licensing fees, milestone payments and royalties on any product sales derived from licensing arrangements. These multiple element
arrangements are analyzed to determine whether the deliverables can be separated or whether they must be accounted for as a single
unit of accounting. License fees are recognized as revenue when persuasive evidence of an arrangement exists, the Company has transferred
to the licensee the risks and rewards of the product, the Company retains neither continuing managerial involvement nor effective
control over the product sold, the fee is fixed or determinable, delivery or performance has substantially completed and collection
is reasonably assured. The delivery of a license is to be deemed substantially completed when the licensee can use, license, exploit,
develop and obtain a profit from it without further licensor's involvement.



The Company analyses and separates the different
performance obligations and how they will be remunerated. If substantive contractual obligations are satisfied over time or over
the life of the contract, revenue will be recognized over their performance. Milestone payments are immediately recognized as revenue
when the condition is met, when performance obligations related to that milestone are fulfilled and if the milestone is not a condition
to future deliverables and collectability is reasonably assured. Otherwise, they are recognized over the remaining term of the
agreement or the performance period.



Property, plant and equipment



Property, plant and equipment are stated
at historical cost less accumulated depreciation and impairment. Repair and maintenance costs are charged to the income statement
as incurred. Gains and losses on the disposal of property, plant and equipment are included in other income or expense. Depreciation
is charged so as to write off the cost or valuation of assets over their useful lives, using the straight-line method pro rata
in the year of purchase, on the following basis:



| | • | (laboratory) equipment: five years
| | - | ----------------------------------



| | • | IT hardware: three years
| | - | ------------------------



| | • | furniture: five years
| | - | ---------------------



| | • | leasehold improvements: lower of lease term and useful life
| | - | -----------------------------------------------------------



| | • | leases: lower of lease term and useful life.
| | - | --------------------------------------------



Assets in the course of construction for
production, supply or administrative purposes are carried at cost, less any recognized impairment loss. Cost includes professional
fees and, for qualifying assets, capitalized borrowing costs. Such assets are classified to the appropriate categories of property,
plant and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property
assets, commences when the assets are ready for their intended use.



F-17


Table of Contents


Intangible assets



Internally-generated intangible assets–research &
development expenditure



Expenditure on research activities is recognized
as an expense in the period in which it is incurred.



An internally-generated intangible asset
arising from development is recognized to the extent that all of the factors for capitalization have been satisfied as specified
in IAS 38:



| | • | The technical feasibility of completing the intangible asset so that it will be available for use
or sale.
| | - | ----------------------------------------------------------------------------------------------------------



| | • | The intention to complete the intangible asset and use or sell it.
| | - | ------------------------------------------------------------------



| | • | The ability to use or sell the intangible asset.
| | - | ------------------------------------------------



| | • | How the intangible asset will generate probable future economic benefits.
| | - | -------------------------------------------------------------------------



| | • | The availability of adequate technical, financial and other resources to complete the development
and to use or sell the intangible asset.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------



| | • | The ability to measure reliably the expenditure attributable to the intangible asset during its
development.
| | - | ------------------------------------------------------------------------------------------------------------



The amount initially recognized for internally-generated
intangible assets is the sum of the various expenses needed to generate the related intangible assets. Amortization starts from
the date when the intangible asset first meets the recognition criteria listed above. These intangible assets are amortized on
a straight-line basis over their estimated useful life (ten years). Where no internally-generated intangible asset can be recognized,
development expenditure is recognized in profit or loss in the period in which it is incurred.



Subsequent to initial recognition, internally-generated
intangible assets are reported at cost less accumulated amortization and accumulated impairment losses, on the same basis as intangible
assets that are acquired separately.



Intangible assets acquired through a
business combination



Intangible assets, including in-process
research & development projects, acquired in a business combination and recognized separately from goodwill are initially
recognized at their fair value at the acquisition date (which is regarded as their cost).



Subsequent to initial recognition, intangible
assets (except for in-process research & development projects) acquired in a business combination are reported at cost
less accumulated amortization and impairment losses. Such intangible assets are amortized over their useful economic lives, which
will depend on their related patent life (up to fifteen years). Goodwill arising from business combinations is not amortized but
reviewed annually for impairment.



Subsequent to initial recognition, in-process
research & development projects acquired in a business combination are reported at cost and are subject to annual impairment
tests until the date the projects are available for use, at this moment the in-process research & development projects
will be amortized over their remaining useful economic lives, which will depend on their related remaining patent life.



F-18


Table of Contents


Patents, licenses and other similar intangible
assets acquired separately



Costs related to the register of internally-generated
intangible assets (patents) are recognized as intangible assets.



These patents and licenses are amortized
over their useful lives on a straight-line basis as from the moment they are available for use. Estimated useful life is based
on the lower of the contract life or the economic useful life (five years).



Computer software



Software licenses and software development
costs are measured at purchase cost and are amortized on a straight-line basis over the economic useful life (three years).



Impairment of tangible and definite-lived intangible assets (other than goodwill)



At each balance sheet date and at each interim
reporting date, the Group analyses whether there is any indication that any of its assets may be impaired. If any such indication
exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where
the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the
cash-generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually
and also whenever there is an indication that the asset might be impaired. The recoverable amount is the higher of fair value less
costs to sell and value in use. The estimated future cash flows are discounted to their present value using a pre-tax discount
rate that reflects current market assessments of the time value of money and the risks specific to the asset.



If the recoverable amount of an asset or
cash generating unit is estimated to be less than the carrying amount, the carrying amount of the asset is reduced to its recoverable
amount. An impairment loss is immediately recognized as an expense. Where an impairment loss subsequently reverses, the carrying
amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does
not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior periods.
A reversal of an impairment loss is recognized as income. (See note 12)



Leases



Leases are considered finance leases whenever
the terms of the lease transfer substantially all the risks and rewards of ownership of the asset to the lessee. All other leases
are classified as operating leases.



Assets held under finance leases are recognized
at the start of the lease term as assets of the Group at their fair value or, if lower, at the present value of the minimum lease
payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet
as a finance lease obligation. The financial costs need to be allocated to each term of the lease period so as to achieve a constant
rate of interest on the remaining balance of the liability. Finance charges are expensed.



Rentals payable under operating leases are
charged to income on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive
to enter into an operating lease are also charged to income on a straight-line basis over the lease term.



Financial assets



Financial assets are classified into the
following specified categories: financial assets ‘at fair value through profit or loss’ (FVTPL), ‘held-to-maturity’
investments, ‘available-for-sale’ (AFS) financial assets



F-19


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and ‘loans and receivables.’ The classification
depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.



The Company currently has receivables and
AFS financial assets.



Available-for-sale financial assets are
non-derivatives that are either designated as AFS or are not classified as (a) loans and receivables, (b) held-to-maturity
investments or (c) financial assets at fair value through profit or loss. AFS equity investments that do not have a quoted
market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be
settled by delivery of such unquoted equity investments are measured at cost less any identified impairment losses at the end of
each reporting period.



Loans and receivables are non-derivative
financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables (including
trade and other receivables, receivables from reverse repurchase agreements, bank balances and cash) are measured at amortized
cost using the effective interest method, less any impairment. For the purposes of the cash flow statements, cash and cash equivalents
comprise cash on hand and deposits held on call with banks. In the balance sheet, bank overdrafts, if any, are included in other
current financial liabilities.



The effective interest method is a method
of calculating the amortized cost of a debt instrument and of allocating interest income over the relevant period. The effective
interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received
that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected
life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.



Financial assets are assessed for indicators
of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence
that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future
cash flows of the investment have been affected.



Objective evidence of impairment could include:



| | • | significant financial difficulty of the issuer or counterparty; or
| | - | ------------------------------------------------------------------



| | • | breach of contract, such as a default or delinquency in interest or principal payments; or
| | - | ------------------------------------------------------------------------------------------



| | • | it becoming probable that the borrower will enter bankruptcy or financial re-organization; or
| | - | ---------------------------------------------------------------------------------------------



| | • | the disappearance of an active market for that financial asset because of financial difficulties.
| | - | -------------------------------------------------------------------------------------------------



For certain categories of financial assets,
such as trade receivables, assets are assessed for impairment on a collective basis even if they were assessed not to be impaired
individually. Objective evidence of impairment for a portfolio of receivables could include the Group’s past experience of
collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period, as well as
observable changes in national or local economic conditions that correlate with default on receivables.



For financial assets carried at amortized
cost, the amount of the impairment loss recognized is the difference between the asset’s carrying amount and the present
value of estimated future cash flows, discounted at the financial asset’s original effective interest rate.



The carrying amount of the financial asset
is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying
amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off
against the



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allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account.
Changes in the carrying amount of the allowance account are recognized in profit or loss.



For financial assets measured at amortized
cost, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an
event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss
to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized
cost would have been had the impairment not been recognized.



The Group derecognizes a financial asset
when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially
all the risks and rewards of ownership of the asset to another party. If the Group neither transfers nor retains substantially
all the risks and rewards of ownership and continues to control the transferred asset, the Group recognizes its retained interest
in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards
of ownership of a transferred financial asset, the Group continues to recognize the financial asset and also recognizes a collateralized
borrowing for the proceeds received.



Inventories



Raw materials, consumables and goods purchased
for resale are valued at the lower of their cost determined according to the FIFO-method (first-in-first-out) or their net realizable
value.



The cost of finished goods comprises all
costs of purchase, costs of conversion and other costs incurred in bringing the inventories to the present location and condition.



Non-current assets (disposal groups) held for sale and discontinued operations



Non-current assets and disposal groups are
classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through
continuing use. This condition is regarded as met only when the sale is highly probable and the non-current asset (or disposal
group) is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected
to qualify for recognition as a completed sale within one year from the date of classification.



When the Group is committed to a sale plan
involving loss of control of a subsidiary, all of the assets and liabilities of that subsidiary are classified as held for sale
when the criteria described above are met, regardless of whether the Group will retain a non-controlling interest in its former
subsidiary after the sale.



Non-current assets (and disposal groups)
classified as held for sale are measured at the lower of their previous carrying amount and fair value less costs to sell.



The results of operations disposed during
the period are included in the consolidated statement of comprehensive income up to the date of disposal.



A discontinued operation is a component
of the Group’s business that represents a separate major line of business or geographical area of operations or is a subsidiary
acquired exclusively with a view to resale, that has been disposed of, has been abandoned or that meets the criteria to be classified
as held for sale.



Discontinued operations are presented in
the consolidated statement of comprehensive income as a single line which comprises the post-tax profit or loss of the discontinued
operation along with the post-tax gain or loss recognized on the re-measurement to fair value less costs to sell or on disposal
of the assets or disposal groups constituting discontinued operations.



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Income taxes



Income tax expense represents the sum of
the tax currently payable and deferred tax.



The tax currently payable is based on taxable
profit for the year. Taxable result differs from “profit/(loss) before tax” as reported in the consolidated income
statement because of items of income or expense that are taxable or deductible in other periods and items that are never taxable
or deductible. The Group’s current tax is calculated using tax rates that have been enacted or substantively enacted by the
end of the reporting period. In 2016 TiGenix SAU applied the Patent box legislation in relation to revenues obtained through the
license deal with Takeda. Under this regime, qualified incomes are exempt of Income taxes.



Deferred taxes are recognized using the
“balance sheet liability method” for temporary differences between the carrying amount of assets and liabilities in
the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit.



Deferred tax liabilities are recognized
for all taxable temporary differences. Deferred tax assets are recognized for all deductible temporary differences to the extent
that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized.
Such deferred tax assets and liabilities are not recognized if the temporary difference arises from the initial recognition (other
than in a business combination) of assets and liabilities in a transaction that affects neither the taxable profit nor the accounting
profit.



Deferred tax assets and liabilities are
measured based on the expected manner of realization or settlement of assets and liabilities, using tax rates that have been enacted
or substantively enacted at the balance sheet date.



In the course of 2013, to be applied retrospectively
as from January 1, 2013, a new Spanish tax law became applicable resulting in the possibility that eligible companies could claim
certain research and development investment tax credits instead of deducting them from their taxable base and carrying them forward
until the expiration date. The same law provides that the applicant must obtain an audit report from an independent 3rd
party certifying that R&D activities were performed and were reported as eligible for this purpose and certifying to the accuracy
of the cost incurred and reported as elegible for this purpose. The Company recognizes this income at the time in which it receives
these reports in connection with this activity.



Financial liabilities



The Group classifies its financial liabilities
into one of two categories, depending on the purpose for which the liability was acquired. The Group’s accounting policy
for each category is as follows:



Fair value through profit or loss



This category comprises derivatives with
a negative fair value (see “Financial assets” for derivatives with a positive fair value) and financial liabilities
designated at fair value through profit or loss.



They are carried in the consolidated statement
of financial position at fair value with changes in fair value recognized in the consolidated income statement. Other than these
derivative financial instruments, the Group does not have any liabilities held for trading nor has it designated any financial
liabilities as being at fair value through profit or loss. The Group currently has no non-derivative financial liabilities that
are accounted for at fair value through profit or loss.



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On March 6, 2015 the Company issued senior,
unsecured convertible bonds.



As a result of the possible modifications
that may result from the application of the conversion features, the undetermined conversion price at launch (and thus
the undetermined value of the Ordinary Note at launch) fails to meet the fixed-for-fixed requirement for the recognition of the
conversion features as equity and thus the convertible bonds are recorded as a liability. At the issuance date it was not possible
to determine a fixed number of ordinary shares of TiGenix in case the bondholders convert their bonds into shares. This is due
to the fact that the conversion price is not fixed. As a consequence, the embedded derivative cannot be considered as equity. Therefore
the bonds meet the definition of a hybrid instrument under IAS 39, so the bonds are accounted for as two instruments, the host
contract (the “Ordinary Note”) and an embedded derivative (the “Warrant”).



The Ordinary Note is measured at amortized
cost in accordance with IAS 39 using its effective interest rate and the warrant is considered as a financial derivative liability
measured at fair value with changes in fair value recognized immediately in profit or loss. (See note 3 Derivative financial
instruments)



The Group issued in 2014 warrants related
to one of the Group loans which meet the definition of a derivative financial liability. These warrants were issued in connection
with the loan facility agreement with Kreos Capital IV (UK), and contain an option for the holders to put the warrants back to
the Company for cash. The warrants are options over the shares of the Company, but are derivatives that must be measured at fair
value through profit or loss, and not own equity instruments of the Company, because of the cash settlement alternative. The Group
determined the initial fair value of the warrants using a Black-Scholes valuation model. A portion of the issue amount of the loan
corresponding to this initial fair value of the warrants was allocated to the warrants and the remaining balance of the proceeds
received were allocated to the loan, which is then measured at amortized cost. The effective interest rate method was applied to
determine the effective interest rate on the loan on the basis of the initial carrying amount and the contractual cash flows of
the loan (interest payments and repayment of principal). This effective interest rate is 20% compared to the contractual interest
rate of 12.5%. The effective interest rate is used to accrue interest in the loan, and to amortize the difference between the initial
carrying amounts of the loan to its repayment amount.



Other financial liabilities



Financial liabilities measured at amortized
cost, including borrowings and ordinary notes, are initially measured at fair value, net of transaction costs. They are subsequently
measured at amortized cost using the effective interest method, with interest expense recognized on an effective yield basis.



The effective interest method is a method
of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective
interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability,
or, where appropriate, a shorter period, to the net carrying amount on initial recognition.



The Group’s financial liabilities
measured at amortized cost comprise financial loans, other current financial liabilities and trade payables.



Provisions



Provisions are recognized when the Group
has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to
settle the obligation, and a reliable estimate can be made of the amount of the obligation.



The amount recognized as a provision is
the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into
account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to
settle the



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present obligation, its carrying amount is the present value of those cash flows (when the effect of the time value
of money is material).



When some or all of the economic benefits
required to settle a provision are expected to be recovered from a third party, a receivable is recognized as an asset if it is
virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.



Share capital



Financial instruments issued by the Group
are classified as equity only to the extent that they do not meet the definition of a financial liability or financial asset. Ordinary
shares are classified as equity.



Incremental costs directly attributable
to the issue of new ordinary shares are presented in equity as a deduction, net of tax, from the proceeds.



Share-based payments



The Group has offered equity-settled share-based
payments to employees, directors and business associates. These share-based payments are measured at the fair value of the equity
instruments at the grant date.



The fair value determined at the grant date
of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s
estimate of equity instruments that will eventually vest, with a corresponding increase in equity.



The estimate of the number of compensation
plans which will be vested is revised at each reporting date. The change in estimates will be recorded as expense with a corresponding
correction in equity. At the moment of exercise of the compensation plans no adjustments will be made into the share-based compensation
reserve.



If a modification of a share-based payment
transaction occurs and this modification increases the fair value of the equity instruments granted, measured immediately before
and after the modification, the incremental fair value granted shall be included in the measurement of the amount recognized for
services received as consideration for the equity instruments granted. The incremental fair value granted is the difference between
the fair value of the modified equity instrument and that of the original equity instrument, both estimated as at the date of the
modification. If the modification occurs during the vesting period, the incremental fair value granted is included in the measurement
of the amount recognized for services received over the period from the modification date until the date when the modified equity
instruments vest, in addition to the amount based on the grant date fair value of the original equity instruments, which is recognized
over the remainder of the original vesting period. If the modification occurs after vesting date, the incremental fair value granted
is recognized immediately, or over the vesting period if the employee is required to complete an additional period of service before
becoming unconditionally entitled to those modified equity instruments.



If the terms or conditions of the equity
instruments granted are modified in a manner that reduces the total fair value of the share-based payment arrangement, or is not
otherwise beneficial to the employee, the services received shall continue to be accounted for as consideration for the equity
instruments granted as if that modification had not occurred.



3. Critical accounting judgments and
key sources of estimation uncertainty



In the application of the Group’s
accounting policies, the directors are required to use certain critical accounting estimates, assumptions and judgment about the
carrying amounts of certain assets and liabilities. The areas involving a high degree of judgment or complexity or areas where
assumptions and estimates are significant to the consolidated financial statements are the following:



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Going concern



The Group has experienced net losses and
significant cash used in operating activities since our inception in 2000 except for year 2016. As of December 31, 2016, the Group
had an accumulated deficit of 116.2 million euros, a profit for the year of 3.8 million euros and net cash provided by
operating activities of 3.5 million euros. As of December 31, 2015, the Group had an accumulated deficit of 120.0 million
euros, a loss for the year of 35.1 million euros and net cash used in operating activities of 19.6 million euros. Management
expects the Group to continue to incure net losses and have significant cash outflows for at least the next twelve months. These
conditions, among others, raise substantial doubt about our ability to continue as a going concern. These consolidated financial
statements have been prepared assuming that the Group will continue as a going concern. This basis of accounting contemplates the
recovery of our assets and the satisfaction of liabilities in the normal course of business. A successful transition to attaining
profitable operations is dependent upon achieving a level of positive cash flows adequate to support our cost structure.



As at December 31, 2016, the Group had cash
and cash equivalents of 78.0 million euros. Taking into account this liquidity position and the future milestone payments related
to the licensing deal with Takeda, our board of directors is of the opinion that our liquidity position is sufficient to continue
our current operations for at least 12 months.



For more information related to the expected
cash flows see Note 2. Liquidity.



Business combinations and goodwill



The Group accounts for business combinations
using the acquisition method of accounting, which requires that the assets acquired and liabilities assumed be recorded at the
date of acquisition at their respective fair values. Any excess of the fair value of consideration given over the fair values of
the identifiable assets and liabilities acquired is recorded as goodwill. The determination of estimated fair values of acquired
intangible assets and contingent considerations, as well as the useful economic life ascribed to finite lived intangible assets,
requires the use of significant judgment. The use of different estimates and assumptions to those used by the Group could result
in a materially different valuation of acquired intangible assets, which could have a material effect on the Group’s results
of operations.



Several methods may be used to determine
the estimated fair value of intangible assets acquired in a business combination, all of which require multiple assumptions.



The Group used the relief from royalty method,
which is a variant of the income valuation approach to determine the fair value of the intangibles related to the acquisition of
TiGenix SAU. It is based on the principle that ownership of the intangible asset relieves the owner of the need to pay a royalty
to another party in exchange for rights to use the asset.



The fair value of assets related to the
acquisition of Coretherapix, S.L.U. has been determined taking into account the sum of the survival probability discounted present
values of Coretherapix’s projected cash flows in each year of its key product’s development and commercialization life.
See Note 4.



Goodwill is capitalized. Any impairment
in carrying amount is charged to the consolidated income statement. Where the fair value of identifiable assets and liabilities
exceeds the fair value of consideration paid, the excess is credited in full to the consolidated income statement on acquisition
date.



The fair value of any contingent consideration
at the date of acquisition is computed as the sum of the probability weighted values of the fair values of the purchase prices
associated with each of the potential product development routes. The fair value of each route is in turn computed as the sum of
the survival probability discounted present values of the contingent payments in each such route including the Milestone and Commercialisation
Payments.



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The nine routes considered in the development
process of Coretherapix are the result of combining multiple variables. The structure of these routes and the probability assigned
to each route are reassesed by management at every reporting period and every time the development process reaches a milestone.



Any contingent consideration included in
the consideration payable for a business combination is recorded at fair value at the date of acquisition. The fair values are
reviewed on a regular basis, at each reporting date, and any changes are reflected in the income statement.



Acquisition costs incurred are expensed
and included in general and administrative expenses.



Recognition of government grants



Government grants are not recognized until
there is reasonable assurance that the Group will comply with the conditions attaching to them and that the grants will be received.



The benefit of a government loan at a below-market
rate of interest is treated as a government grant, (measured as the difference between proceeds received and the fair value of
the loan based on prevailing market interest rates). Only when there is sufficient assurance that the Group will comply with the
conditions attached to it, the grants will be recognized in profit or loss (under “other operating income”). Determination
of the appropriate amount of grant income to recognize involves judgments and estimates that the Company believes are reasonable,
but it is possible that actual results may differ from the Company’s estimates. When the Company receives the final written
reports, identifying satisfaction of the requirements of the grantor, to the extent not received within a reasonable time frame
following the end of the period, the Company records any differences between estimated grant income and actual grant income in
the next reporting period once the Company determines the final amounts. During the period that these benefits cannot be considered
as grants due to the insufficient assurance that all the conditions have been meet, these grants will be included in the liabilities
as financial loans and other payables.



Revenue recognition in respect of license
arrangements





Management’s assessment related to the recognition
of revenues for arrangements containing multiple elements are based on estimates and assumptions. Judgment is necessary to identify
separate units of accounting and to allocate related consideration to each separate unit of accounting. Where deferral of upfront
payments or license fee is deemed appropriate, subsequent revenue recognition is often determined based on certain assumptions
and estimates, the Company’s continuing involvement in the arrangement, the benefits expected to be derived by the customer
and expected patent lives. To the extent that any of the key assumptions or estimates change, future operating results could be
affected.



The Company analyses, at each Reporting date, any executory
contract that could be onerous to account for the corresponding provision. This estimation is based on the unavoidable expected
costs and expected incomes derived from the executory contract, its remaining duration and the potential exit compensation that
could be included in those contracts. The above mentioned calculation also considers past performance evidences and future expected
developments based on the most reliable information existing at each reporting period.





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Discontinued operations



The results of operations disposed during
the year are included in our consolidated statement of comprehensive income up to the date of disposal.



A discontinued operation is a component
of our business that represents a separate major line of business or geographical area of operations or is a subsidiary acquired
exclusively with a view to resale, that has been disposed of, has been abandoned or that meets the criteria to be classified as
held for sale.



Discontinued operations are presented in
our consolidated statement of comprehensive income as a single line item that is comprised of the post tax profit or loss of the
discontinued operation along with the post tax gain or loss recognized on the re measurement to fair value less costs to sell or
on disposal of the assets or disposal groups constituting discontinued operations.



At the end of 2013, the board of directors
of the Company decided to withdraw from the ChondroCelect business and to focus on the development of its platform and pipeline
of allogeneic treatments, using expanded adipose-derived stem cells (eASC ́s) for the benefit of patients suffering from a
range of inflammatory and immunological conditions.



Consequently, TiGenix developed a single,
co-ordinated plan under which discussions were entered into with one potential purchaser for the manufacturing facility and with
another for the sales and marketing activities. Both of these transactions were being discussed in parallel with Pharmacell (for
the manufacturing facility) and Sobi (for the sales and marketing activities). The arrangement with Pharmacell initially progressed
faster, but ultimately both transactions were completed at almost the same time (30 May and 1 June 2014).



The transaction with Pharmacell included
a supply contract for TiGenix to purchase the ChondroCelect product; a mirror image sales contract was entered into with Sobi.
The purchase agreement with Pharmacell included a discounted price for the first three years of supply, and exactly the same prices,
were included in the sales contract with Sobi.



Both the distribution agreement with Sobi
and the manufacturing agreement with Pharmacell included commitments for minimum binding quantities of ChondroCelect that are required
to be purchased by us and from us under the respective agreements.



The agreement with Sobi for the sales and
marketing activities had a term of ten years and included the European Union (excluding Finland, where we have a pre-existing distribution
agreement with Finnish Red Cross Blood Service), Switzerland, Norway, Russia, Turkey and the Middle East and North Africa region.
The agreement included the transfer of staff previously employed by TiGenix to carry out those activities to Sobi, involved the
payment of a licence fee (royalties) by Sobi which is calculated as a percentage of the net sales generated by Sobi of the ChondroCelect
product.



Consequently, during 2014, all activities
relating to the manufacture, marketing and sale of ChondroCelect were transferred to Pharmacell and Sobi through contractual arrangements
which were entered into at almost the same time and were made in contemplation of each other. The effect of the arrangements is
that TiGenix will received a licence fee from Sobi but, other than acting as a ‘pass through’ intermediary for the
ChondroCelect product (which is purchased from Pharmacell and sold to Sobi through back to back, identical contractual arrangements),
TiGenix had no involvement in activities relating to that product. From the moment the agreements came into force, the royalties
paid by Sobi were registered as revenue.



The ChondroCelect operations were presented
as discontinued in the income statement for 2014, the year when they were disposed of, and the preceding year.







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During 2016, TiGenix reconfirms its strategic
focus on its allogenic stem cell platforms.



Due to the regulatory environment around
autologous chondrocyte-based cell therapy products in Europe leading to a difficult competitive landscape for ChondroCelect, together
with the lack of reimbursement in key European countries, TiGenix has been prompted to initiate the withdrawal process of the Marketing
Authorization for ChondroCelect® for commercial reasons.



Consequently, on July 4, 2016, TiGenix came
to an agreement with Sobi for the early termination of their existing commercial relationship that was effective from June 1, 2014.



In addition to the Sobi termination, TiGenix
has also terminated the Pharmacell ́s manufacturing agreement of ChondroCelect. This agreement was in place since May 30,
2014 and its termination was effective on December 2016.



Impairment of assets



We review the carrying value of intangible
assets with indefinitive lives for potential impairment on a periodic basis and also whenever events or changes in circumstances
indicate the carrying value of an asset may not be recoverable. We review the carrying value of tangible assets and intangible
assets with definitive lives for potential impairment whenever events or changes in circumstances indicate the carrying value of
an asset may not be recoverable. We determine impairment by comparing the recoverable amount to its carrying value. If impairment
is identified, a loss is recorded equal to the excess of the asset’s carrying amount over its recoverable amount.



In the context of the business combination
with TiGenix SAU in 2011, development costs related to product Cx601 were capitalized in an amount of 1.7 million euros. These
costs were not amortized at December 31, 2015 because the product was not yet available for use and was, therefore, subject to
an annual test for impairment. In July 2016, the product Cx601 (1.7 million euros) was considered as available for use and consequently
subject to amortization. As a result of that, we have reclassified it from development to intellectual property. The estimated
useful economic life has been determined to be 10 years, which is the remaining period for the patents related to it.



On July 31, 2015 the Group acquired 100%
of the issued share capital of Coretherapix, SLU. The most significant part of the purchase price has been allocated to in-process
research & development (17.4 million euros) as well as certain other intangible assets (277 thousand euros). The difference
between the fair values of the assets acquired and liabilities assumed and the purchase price comprises the value of expected synergies
arising from the acquisition and has been recorded as goodwill (717 thousand euros). See notes 4 and 12.



For impaired assets, we recognize a loss
equal to the difference between the carrying value of the asset and its recoverable amount. The recoverable amount, being the higher
of the fair value less costs to sell and value in use, is based on discounted future cash flows of the asset using a discounted
rate commensurate with the risk. Estimates of future cost savings, based on what we believe to be reasonable and supportable assumptions
and projections, require management’s judgment. Actual results could vary from these estimates. When it is not possible to
estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit
to which the asset belongs. Results of tests conducted during 2016 are described in note 12.



Recognition and measurement of internally-generated
intangible assets



An internally-generated intangible asset
is recognized if sufficient certainty can be documented that the future benefits from the development project will exceed the aggregate
cost of production, development and the sale and administration of the product. A development project involves a single product
candidate undergoing a high number of tests to illustrate its safety profile and the effect on human beings prior to obtaining
the necessary final approval of the product from the appropriate authorities. The future



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economic benefits associated with the
individual development projects are dependent on obtaining such approval. Considering the significant risk and duration of the
development period related to the development of such products, management has concluded that the future economic benefits associated
with a particular project cannot be estimated with sufficient certainty until the project has been finalized and the necessary
regulatory final approval of the product has been obtained.



Accordingly, during 2010 and 2011, the Group
has capitalized such intangible assets for the development costs related to ChondroCelect with a useful life of ten years. The
Company subsequently impaired the asset for an amount of 1.1 million euros in 2015. (See note 12)



Research and Development Costs



Research and development costs are charged
to expense as incurred and are typically made up of salaries and benefits, clinical and preclinical activities, drug development
and manufacturing costs, and third-party service fees, including for clinical research organizations and investigative sites. Costs
for certain development activities, such as clinical trials, are periodically recognized based on an evaluation of the progress
to completion of specific tasks using data such as patient enrollment, clinical site activations, or information provided by vendors
on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may
differ from the pattern of costs incurred, and are reflected in the financial statements as prepaid or accrued expenses.



As an exception to this accounting treatment
the Company capitalized development costs for Chrondrocelect during 2010 and 2011. (See note 12)



Foreign Exchange Differences



Foreign exchange differences are related
to the intercompany loan (expressed in U.S. dollars) granted by TiGenix NV to its subsidiary, TiGenix Inc. The exchange difference
arises as a result of the translation of the intercompany loan in TiGenix NV. As the dollar appreciated during the year, the receivable
in TiGenix NV has increased recognizing an exchange difference.



Management is of the opinion that under
the strategy of Cx601 in the United States, where we currently expect TiGenix Inc. to play a role, TiGenix Inc. will be able to
settle the intercompany loan in the foreseeable future. As a consequence, the arisen exchange difference is recognized in financial
results in the consolidated income statements, instead of recognizing it in the consolidated statements of comprehensive income.
(See note 5.4)



Deferred taxes



Deferred tax assets are recognized for unused
tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant
management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing
and the level of future taxable profits together with future tax planning strategies.



Tax losses carried forward and other tax
credits relate to the parent and subsidiaries that all have a history of losses and do not expire, except for other tax credits
of 22.6 million euros related to TiGenix SAU, TiGenix NV and Coretherapix SLU (see note 21). These tax credits may not be used
to offset taxable income elsewhere in the Group.



With respect to the net operating losses
of the Group, no deferred tax assets have been recognized, given that there is uncertainty as to the extent to which these tax
losses will be used in future years.



As explained in note 9 the Company has made
application of certain research and development investment tax incentives and recognized a receivable of 3.8 million euros in consideration
of incentives applied for 2014 and 2015.





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Derivative financial instruments



Derivatives are initially recognized at
fair value at the date the derivative contracts are entered into and are subsequently re-measured to their fair value at the end
of each reporting period. The resulting gain or loss is recognized in profit or loss immediately.



Pursuant to the terms and conditions of
the loan facility agreement that we entered into with Kreos, on April 22, 2014, an extraordinary meeting of our shareholders
issued and granted 1,994,302 new cash settled warrants, including a put option to Kreos Capital IV (Export Fund). These warrants
have been designated at fair value through profit or loss. The Company recognizes the warrants, including the put option, as one
instrument, because the Company believes that the put option is unconditionally linked to the warrant. Because the issued warrants
can be settled in cash, the instrument is considered as a financial derivative liability measured at fair value with changes in
fair value recognized immediately in profit or loss.



In May 2015, Kreos Capital exercised the
above mentioned put option and executed one third of the warrants (EUR 163.333). As from January 2016, the remaining two thirds
of the warrants put option have lapsed due to the increase in the price of the share which makes this amount no longer exercisable
by Kreos Capital.



The measurement of the warrant at fair value
is based on the Black-Scholes option pricing model taking into account the following variables:



| | • | The share price.
| | - | ----------------



| | • | The strike price.
| | - | -----------------



| | • | The volatility of the share has been determined based on historical stock prices of our shares.
| | - | -----------------------------------------------------------------------------------------------



| | • | The dividend yield, which has been estimated as zero, as we have never paid a dividend due to the
past experience of losses.
| | - | ----------------------------------------------------------------------------------------------------------------------------



| | • | The duration, which has been estimated as the difference between the valuation date of the warrant
plans and final exercise date.
| | - | ---------------------------------------------------------------------------------------------------------------------------------



| | • | The risk free interest rate, which has been calculated based on the discount curve composed based
on liquid euro deposit rates (for periods shorter than one year) and futures (typically for maturities between one and six years).
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We will continue to use judgment in evaluating
the risk-free interest rate, dividend yield, duration and volatility related to our cash-settled warrant plan on a prospective
basis and incorporating these factors into the Black-Scholes option pricing model. If in the future we determine that other methods
are more reasonable and provide better results, or other methods for calculating these assumptions are prescribed by authoritative
guidance, we may change or refine our approach, and our share-based payment expense in future periods could change significantly.



Pursuant to the terms and conditions of
the convertible bonds issued on March 6, 2015, the warrant will be reflected at any reporting period at its fair value. Measurement
of the fair value will be determined using methodologies such as Black-Scholes, binominal lattices or Monte Carlo simulations.
In this particular case, the Conversion Features are complex and render Black-Scholes and binominal trees inapplicable. The measurement
of the warrant at fair value is based on a Monte Carlo valuation model.



The Resetting and the Early Redemption clauses
embedded in the Instrument result in the Conversion Price being dependent upon an unknown share price path.



| | - | The Conversion Price depends on the evolution of the share price through the Resetting period.
| | - | ----------------------------------------------------------------------------------------------





F-30


Table of Contents




| | - | The Early Redemption Clause will, for certain share price paths compel noteholders, to accelerate
conversion in order to avoid the loss on the Warrant value that would result from the Instrument being called by Issuer.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





Such Conversion Features cannot be factored
into a fixed Conversion Price continuous or discrete model, such as Black-Scholes or binomial lattices, respectively.



On the other hand, a Monte Carlo model can
indeed incorporate not only the market parameters such as volatility, risk-free interest rates and share price, but all the contractual
characteristics of the Warrant such as Present Date (31/12/2016), Conversion Date (06/03/18), Present Price (0.71), Conversion
Price (0.8983), Interest rate annual (-0.24%), Reference Period Days (303), No of iterations (10,000), Annual Volatility (48.976%),
Conversion price Reset, Early Redemption, Average Conversion Price (0.8982) and No of anticipated redemptions (1,472).



Introducing into the model an additional
random variable to factor in the possibility of a change of control (“CoC”) event was not appropriate as it would assume
that such random variable can reasonably be modelled on the basis of any factual information.



The value of the Warrant in the event of
CoC was determined using the same Monte Carlo model but with a deterministic and pre-defined CoC date estimated by Management.



The final value of the Warrant was then
calculated as the probability-weighted values derived from the valuation of the Warrant in (i) the non-change of control and (ii)
in the change of control scenarios. The probabilities assigned to the non-CoC and CoC scenarios as of December 31, 2016 were 0%
and 100%, respectively . A sensibility analysis, changing probabilities assigned to non-CoC and CoC scenarios, has been performed
by the Company. There is no significant impact in the valuation of the Warrant when changing these scenarios.



Share-based payment arrangements



The Group used the Black-Scholes model to
estimate the fair value of the share-based payment transactions. Using this model requires management to make assumptions with
regard to volatility and expected life of the equity instruments. The assumptions used for estimating fair value for share-based
payment transactions are further disclosed in note 25 and are estimated as follows:



| | • | Volatility is estimated based on the average annualized volatility of the TiGenix share price;
| | - | ----------------------------------------------------------------------------------------------



| | • | Estimated life of the warrant is estimated to be until the first exercise period;
| | - | ---------------------------------------------------------------------------------



| | • | The dividend return is estimated by reference to the historical dividend payment of the Group.
Currently, this is estimated to be zero, because no dividend has been paid since inception.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



4. Business Combination - Acquisition
of Coretherapix



On July, 31 2015 the Group acquired 100%
of the issued share capital of Coretherapix, SLU (“Coretherapix”) as well as certain Coretherapix receivables with
a nominal value of 3.3 million euros from its sole shareholder, Genetrix, S.L.



Coretherapix is a Spanish privately-owned
early-stage pharmaceutical company engaged in the development of myocardial regeneration therapies for the prevention of the effects
of cardiovascular disease during the acute and chronic stages of the acute myocardial infarction and congestive heart failure.







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The board of directors believes that the
acquisition of Coretherapix allows TiGenix to expand its clinical programs and broadens the potential of both platforms of allogeneic
cell therapy products, which significantly helps TiGenix towards its goal of leading the cell therapy space in the world. TiGenix
expands its pipeline of clinical stage assets, enters the cardiovascular indications and gets access to a new platform of allogeneic
stem cells of different origin, which significantly strengthens its competitive position in the cell therapy sector.



All of the shares of Coretherapix, SLU and
part of the receivables Genetrix had with Coretherapix on July 31, 2015 were contributed in return for the issuance of 7.7 million
of ordinary shares of TiGenix (6.1 million euros, being the market value of TiGenix shares as listed on Euronext on that date).
Part of the receivables Genetrix had with Coretherapix on July 31, 2015 (for a nominal value of 1.2 million euros) were transferred
and assigned by Genetrix to TiGenix. Pursuant to the terms of the Contribution Agreement, TiGenix made cash payment of 1.2 million
euros.



The following table summarizes the fair
values of the assets acquired and liabilities assumed on July 31, 2015 (in thousands of euros):



|In process research and development          |  |  | 17,374 |  
|-------------------------------------------- |  |  | ------ | -
|Accounts receivable (received from Genetrix) |  |  | 3,306  |  
|Other net asset acquired:                    |  |  |        |  
|Other intangible assets                      |  |  | 277    |  
|Property, plant and equipment                |  |  | 109    |  
|Other current assets                         |  |  | 1,310  |  
|Cash                                         |  |  | 3      |  
|Financial Loans                              |  |  | (3,870 | )
|Trade & other payables                       |  |  | (635   | )
|Total Net Asset Acquired                     |  |  | 17,874 |  
|Total Consideration                          |  |  | 18,591 |  
|Goodwill on acquisition                      |  |  | 717    |  



Total consideration of the business combination
is broken down as follows (in thousand of euros):





|Cash consideration payable                                                           |  |  | 1,154  | 
|------------------------------------------------------------------------------------ |  |  | ------ | 
|Issuance of ordinary shares of TiGenix, N.V. according to the Contribution Agreement |  |  | 6,093  | 
|Estimated fair value of contingent consideration                                     |  |  | 11,344 | 
|Total Purchase Price                                                                 |  |  | 18,591 | 





The value of the 7.7 million of ordinary
shares issued as part of the consideration paid for 100% of Coretherapix shares and certain receivables from Genetrix was based
on a share price of 0.79 euro, the Company's share price at the date of the acquisition.



Other current assets in the net asset acquired
(1.3 million euros) mainly consist of contribution to be received from the European Union and the National Cardiovascular Research
Centre Foundation (CNIC) to implement the ‘Cardio Repair European Multidisciplinary Initiative (CARE - MI)’ project
for million euros 0.6



F-32


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million and pending amounts to be received from Spanish Tax authorities amounting EUR 0.5 million in relation to investments
in R&D activities during 2013 and 2014.



Under the terms of the Contribution Agreement,
assuming successful development of the lead product AlloCSC01, as per the initial agreement Genetrix could receive up to 15 million
euros in new ordinary shares depending on the results of the ongoing clinical trial (after the results of the clinical trial in
March 2017, this amount has been reduced to 5 million euros in new ordinary shares). Based on and subject to future sales milestones,
Genetrix may receive in addition up to 245 million euros plus certain percentages of the direct net sales of the first product,
or certain percentages of any third party royalties and sales milestones for the first product.



Sales milestones start when annual net sales
reach 150 million euros and the last one will be payable once annual net sales are above 750 million euros. Also, Genetrix will
receive a 25 million euro milestone payment per additional product reaching the market.



At December 31, 2016 a range of future outcomes
based on net sales or third party royalties cannot be estimated due to the fact that the development process is still at a very
preliminary stage. (Product is in a Phase I/II).



Under the acquisition method, acquisition-related
transaction costs (e.g. advisory, legal, valuation and other professional fees) are not included as consideration transferred
but are accounted for as expenses in the periods in which the costs are incurred. Total acquisition-related transaction costs amounted
to 0.3 million euros.



The fair value of the contingent deferred
elements of the purchase price of EUR 11.3 million was computed as the sum of the probability weighted values of the fair values
of the purchase prices associated with each of the nine product development routes.



Management modelled these routes as a succession
of decision points at which the Company decides to pursue internal development or licensing at different times, and in different
circumstances such as whether the product enters into a pivotal trial or otherwise. In addition to the license/not to license decision,
the decision tree was subject to results of the ongoing phase I/IIa trial. Two different options were considered: i) a fast development
process under which the current Phase I/IIa phase ends at YE 2017 with a significant success and is followed by a three-year Phase
II Pivotal trial that ends at YE 2020 and a two-year market approval process that ends at YE 2022, with commercialisation commencing
in 2023 and ii) slow development process in which the current Phase I/IIa phase ends at YE 2017 and is followed by a three-year
Phase IIb trial that ends at YE 2020, a three-year Phase III trial that ends at YE 2023 and a two-year market approval process
that ends at YE 2025, commercialisation commences in 2026. In March 2017 TiGenix announced Top-Line Phase I/II results of AlloCSC-01
clinical trial.These preliminary results increase the possibilities of a slow development process and reduce the probabilities
of a fast development process option.



The fair value of each route was in turn
computed as the sum of the survival probability discounted present values of the contingent payments in each such route including
the Milestone and Commercialisation Payments.



Significant unobservable valuation inputs
considered in the model are the market penetration, the price of the product and the discount rate (15%). For the market penetration,
we have evaluated a range of 20%-40% of the reperfused AMI patients with large infarcts treatable with cell therapy and falling
within the indication. The price is yet unknown since there are no products out there, and based on our research we have used figures
in the range of 8 to 16 thousand euros. This range can only be a very rough estimation given the early stage of development of
the project.



Factors ultimately affecting the price will
include:



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| | - | the product’s final efficacy and safety profile;
| | - | ------------------------------------------------



| | - | the definition of the final clinical indication that is approved; and
| | - | ---------------------------------------------------------------------



| | - | the evolution of several factors that may influence the willingness to pay of the health systems.
| | - | -------------------------------------------------------------------------------------------------



The final efficacy and safety profile will
be a result of the clinical trial results in the chosen indication. Currently we have completed a Phase IIa focused on safety and
a better approximation will only be available after a subsequent efficacy trial.



The final indication itself will depend
on the ability to focus the clinical trials on populations representing a high-unmet clinical need for which clinical benefit is
demonstrable in the aforementioned efficacy trials.



Finally, the willingness to pay will be
affected first by budget impact considerations driven by the evolution of target population epidemiology (affected by factors such
as the impact of non-smoking regulations, diet habits, improved primary and secondary prevention and new standards of care) and
secondly by regulatory and economic drivers (e.g. different health technology assessment requirements, public funding availability
etc).



Significant increase (decrease) in the market
penetration and price of the product would result in higher (lower) fair value of the contingent consideration liability, while
significant increase (decrease) in the discount rate would result in lower (higher) fair value of the liability.



As at December 31, 2015 and 2016, a reconciliation
of fair value measurement of the contingent consideration liability is provided below (in thousand of euros):







|As at July 31, 2015                                                  | -     
|-------------------------------------------------------------------- | ------
|Liability arising on business combination                            | 11,344
|Fair value changes recognized in profit or loss (Financial expenses) | 685   
|As at December 31, 2015                                              | 12,029
|Fair value changes recognised in profit or loss (Operating expenses) | 829   
|As at December 31, 2016                                              | 12,858







At year-end 2016, management reassessed
the fair value of the contingent consideration by updating the underlying assumptions such as increasing the probabilities of the
slow track route and updating the milestone payments. Unlike the change in fair value as at December 31, 2015 which was solely
driven by the time value of money and therefore presented in the financial result, we consider that the main triggers for the change
in fair value of the contingent consideration for the year 2016 are due to the new information on the development process of AlloCSC001.
As a result these fair value changes have been presented as research and development expenses.



Significant unobservable valuation inputs
when updating fair value at year end are discount rate, market penetration and price of the product. These are those to which the
fair value of the liability is most sensitive. The potential effect of changes in this inputs are the following: i) discount
rate (10% increase/decrease would have an impact of -0.8/1.0 million euros); ii) market penetration (10% increase/decrease would
have an impact of 1.1/-0.4 million euros); iii) price of the product (10% increase/decrease would have an impact of 1.1/-0.4 million
euros).



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Table of Contents


In accordance with IFRS standards, TiGenix
has allocated the purchase price, and has calculated the fair values of the assets acquired and liabilities assumed, in accordance
with generally applied valuation rules in the sector.



The measurements of fair value attributed
to the underlying acquired intangible assets were 17.4 million euros. The fair value of the underlying acquired intangible assets
was computed as the sum of the probability weighted values of the fair values corresponding to nine possible product development
routes. The fair value of each such route was in turn computed as the sum of the survival probability discounted present values
of Coretherapix’s projected cash flows in each year of its key product’s development and commercialisation life.



The discount and probability of survival
rates used were the same for the valuation of the underlying intangible assets and contingent deferred elements of the purchase
price.



A deferred tax liability of 1.5 million
euro was recorded as per December 31, 2015 on the fair value of the in process research and development acquired. Coretherapix
had sufficient unused tax losses carried forward to absorb the impact of this deferred tax liability. (See note 21)



As per December 31, 2015, the contribution
of Coretherapix to the consolidated statement of income amounted to 1.4 million euros losses and 2 thousand euros of revenues.
If Coretherapix would have consolidated from January 1, 2015, the consolidated statement of income would have included revenues
of 0.7 million euros and losses of 2.5 million euros.



5. Financial instruments and financial
risk management



The principal financial instruments used
by the Group, from which financial risk arises, are as follows:



| | • | Available-for-sale financial assets
| | - | -----------------------------------



| | • | Other non-current assets
| | - | ------------------------



| | • | Trade receivables
| | - | -----------------



| | • | Other current financial assets
| | - | ------------------------------



| | • | Derivative financial instruments
| | - | --------------------------------



| | • | Cash and cash equivalents
| | - | -------------------------



| | • | Financial Loans and other payables. Other financial liabilities
| | - | ---------------------------------------------------------------



| | • | Trade payables
| | - | --------------



Capital risk management



The Group policy with respect to managing
capital is to safeguard the Group’s ability to continue as a going concern and to obtain an optimal capital structure over
time.



F-35


Table of Contents


Categories of financial instruments



|                                                                                    |  |       |    | As
at December 31,
|----------------------------------------------------------------------------------- |  | ----- | -- | ------------------
|Thousands
of euros                                                                  |  | Notes |    | 2016              
|Financial assets                                                                    |  |       |    |                   
|Loans, receivables and cash and cash equivalents                                    |  |       |    |                   
|Cash and cash equivalents (including cash balances in disposal group held for sale) |  |       |    |                   
|Other non-current assets                                                            |  |       | 16 |                   
|Trade receivables                                                                   |  |       | 18 |                   
|Other current financial assets                                                      |  |       | 19 |                   
|Available-for-sale financial assets                                                 |  |       | 15 |                   
|Financial liabilities                                                               |  |       |    |                   
|Amortized cost                                                                      |  |       |    |                   
|Financial loans                                                                     |  |       | 20 |                   
|Convertible notes (ordinary note)                                                   |  |       | 20 |                   
|Trade payables                                                                      |  |       | 23 |                   
|Fair value through profit or loss                                                   |  |       |    |                   
|Convertible notes (Warrant)                                                         |  |       | 20 |                   
|Other financial liabilities                                                         |  |       | 20 |                   
|Other liabilities contingent consideration                                          |  |       | 23 |                   



Fair value of financial instruments



|                                           |  |       |    | As at December 31, 2016
|------------------------------------------ |  | ----- | -- | -----------------------
|Thousands of euros                         |  | Notes |    | Carrying amount        
|Financial assets                           |  |       |    |                        
|Loans and receivables                      |  |       |    |                        
|Other non-current assets                   |  |       |    |                        
|Financial liabilities                      |  |       |    |                        
|Amortized cost                             |  |       |    |                        
|Financial loans                            |  |       | 21 |                        
|Convertible notes (ordinary note)          |  |       | 21 |                        
|Fair value through profit or loss          |  |       |    |                        
|Convertible notes (Warrant)                |  |       | 21 |                        
|Other financial liabilities                |  |       | 21 |                        
|Other liabilities contingent consideration |  |       | 23 |                        



F-36


Table of Contents


|                                           |  |       |    | As at December 31, 2015
|------------------------------------------ |  | ----- | -- | -----------------------
|Thousands of euros                         |  | Notes |    | Carrying amount        
|Financial assets                           |  |       |    |                        
|Loans and receivables                      |  |       |    |                        
|Other non-current assets                   |  |       |    |                        
|Financial liabilities                      |  |       |    |                        
|Amortized cost                             |  |       |    |                        
|Financial loans                            |  |       | 21 |                        
|Convertible notes (ordinary note)          |  |       | 21 |                        
|Fair value through profit or loss          |  |       |    |                        
|Convertible notes (Warrant)                |  |       | 21 |                        
|Other financial liabilities                |  |       | 21 |                        
|Other liabilities contingent consideration |  |       | 23 |                        



|                                    |  | As at December 31, 2014
|----------------------------------- |  | -----------------------
|Thousands of euros                  |  | Carrying amount        
|Financial assets                    |  |                        
|Loans and receivables               |  |                        
|Other non-current assets            |  |                        
|Available-for-sale financial assets |  |                        
|Financial liabilities               |  |                        
|Amortized cost                      |  |                        
|Financial loans                     |  |                        
|Fair value through profit or loss   |  |                        
|Other financial liabilities         |  |                        



The fair values of the financial assets
and financial liabilities measured at amortized cost in the statement of financial position have been determined in accordance
with generally accepted pricing models based on discounted cash flow analysis, with the most significant inputs being the discount
rate that reflects the credit risk.



At December 31, 2016 the market credit risk
for a company such as TiGenix has been determined at 3.03%. This discount rate has been used to determine the fair values of the
financial liabilities at amortized cost as per December 31, 2016.



At December 31, 2015 the market credit risk
for a company such as TiGenix was determined at 4.97%. This discount rate has been used to determine the fair values of the financial
liabilities at amortized cost as per December 31, 2015.



The fair value of the financial liabilities
at amortized cost was calculated based on a discount rate of 21%, for the year ending December 31, 2014, reflecting the market
credit risk for a company such as TiGenix in development stage at that time.



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Table of Contents


The evolution of the market credit risk
as from 2014 is the consequence of a significant improvement in TiGenix's rating in the market. At December 31, 2016, TiGenix ́s
rating was BB while at the end of 2014 the rating was CC which means an improvement of the rating with seven steps in the rating
scale.



The fair value of other liabilities contingent
consideration is explained in note 4.



The current financial assets and liabilities
are not included in the table above as their carrying amounts approximate their fair values.



Financial risk management objectives



The Group coordinates access to financial
markets, monitors and manages the financial risks relating to the operations through internal risk reports that analyze exposures
by degree and magnitude of risks. These risks include market risk (including currency risk, interest rate risk and other price
risk), credit risk and liquidity risk.



The Group does not use any derivative financial
instruments to hedge risk exposures.



Currency risk



The Group may be subject to limited currency
risk. The Group’s presentation currency is the euro, in addition to which we are exposed to the U.S. dollar. The Company
tries to match foreign currency cash inflows with foreign currency cash outflows. The Company has not engaged in hedging of the
foreign currency risk via derivative instruments.



The Group’s financial assets and financial
liabilities were denominated in the following currencies:









|                                                    |  | EUR         |        | USD         |  | GBP         |        | CHF         |  | Total      
|--------------------------------------------------- |  | ----------- | ------ | ----------- |  | ----------- | ------ | ----------- |  | -----------
|                                                    |  | As at       |        | As at       |  | As at       |        | As at       |  | As at      
|                                                    |  | December 31 |        | December 31 |  | December 31 |        | December 31 |  | December 31
|Thousands of euros                                  |  | 2016        |        | 2015        |  | 2014        |        | 2016        |  | 2015       
|Financial assets                                    |  |             |        |             |  |             |        |             |  |            
|Cash and cash equivalents (including held for sale) |  |             | 77,320 |             |  |             | 17,749 |             |  |            
|Trade receivables                                   |  |             | 1,728  |             |  |             | 1,687  |             |  |            
|Total Financial assets                              |  |             | 79,048 |             |  |             | 19,436 |             |  |            
|Financial liabilities                               |  |             |        |             |  |             |        |             |  |            
|Trade payables                                      |  |             | 2,184  |             |  |             | 1,731  |             |  |            
|Other liabilities contingent consideration          |  |             | 12,858 |             |  |             | 12,029 |             |  |            
|Borrowings                                          |  |             | 34,846 |             |  |             | 45,680 |             |  |            
|Total financial liabilities                         |  |             | 49,888 |             |  |             | 59,440 |             |  |            





The Group’s exposure is only limited
to pounds sterling, U.S. dollars and Swiss-francs.



Except for the currency effect, mentioned
below, in relation to the intercompany loan with TiGenix Inc, there is limited external currency exposure, and therefore no sensitivity
analysis has been performed.



Despite the limited external currency exposure,
the income statement presents an important amount of foreign exchange differences that is mainly related to the intercompany balance
in USD between TiGenix and its subsidiary in the United States, TiGenix Inc. As TiGenix Inc is required to repay this outstanding
loan within the foreseeable future such amounts are recorded in the income statement. For 2016 the exchange rate effect amounted
to 0.2 million euros.



Interest rate risk



The Group is exposed to very limited interest
rate risk, because the vast majority of the Group’s borrowings is at fixed interest rates and only a very limited part is
at floating interest rates. Therefore, the Group’s exposure to interest risk is not material.



The sensitivity analysis has been determined
based on the exposure to interest rates for borrowings at the end of the reporting period. For floating rate liabilities, the analysis
is prepared assuming the amount of the liability outstanding at the end of the reporting period was outstanding for the whole year.
A fifty



F-38


Table of Contents


basis point increase or decrease is used when reporting interest rate risk internally to key management personnel and represents
management’s assessment of the reasonably possible change in interest rates.



The Group has one debt with a floating rate.
It concerns one roll-over credit facilities (from 2007) for an original amount of 0.4 million euros used for the acquisition
of manufacturing equipment in the United States. The borrowing has a remaining maturity of 6 months and carries a floating interest
rate of three-month Euribor + 1.40%. The outstanding amount for this borrowing per December 31, 2016 was 20 thousand
euros (2015: 60 thousand euros; 2014: 0.1 million euros). (See note 20).



Liquidity risk



The Group manages liquidity risk by maintaining
adequate reserves, banking facilities and reserve borrowing facilities, by continuously monitoring forecasted and actual cash flows,
and by matching the maturity profiles of financial assets and liabilities.



The following table details the Group’s
remaining contractual maturity for its financial liabilities with agreed repayment periods. The table has been drawn up based on
the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The
table includes both interest and principal cash flows.









|Thousands of
    euros                 |  | Interest rate      |  | Within 1
                                         year |       | 2
    years |  | 3
    years |        | 4
    years |  | 5
    years |        | 6
    years |  | After 6
                                         years |       | Total
|-------------------------------------- |  | ------------------ |  | ------------------------------------------------------ | ----- | ----------- |  | ----------- | ------ | ----------- |  | ----------- | ------ | ----------- |  | ------------------------------------------------------ | ----- | -----
|                                       |  |                    |  |                                                        |       |             |  |             |        |             |  |             |        |             |  |                                                        |       |      
|                                       |  |                    |  |                                                        |       |             |  |             |        |             |  |             |        |             |  |                                                        |       |      
|As at December 31, 2016                |  |                    |  |                                                        |       |             |  |             |        |             |  |             |        |             |  |                                                        |       |      
|Non interest bearing                   |  | N/A                |  |                                                        | 471   |             |  |             | 471    |             |  |             | 471    |             |  |                                                        | 471   |      
|Fixed interest rate borrowings         |  | 1.46%              |  |                                                        | 675   |             |  |             | 675    |             |  |             | 675    |             |  |                                                        | 675   |      
|Fixed interest rate borrowings         |  | 0.33%              |  |                                                        | –     |             |  |             | –      |             |  |             | 49     |             |  |                                                        | 139   |      
|Floating interest rate borrowings      |  | Euribor 3M + 1.40% |  |                                                        | 20    |             |  |             | –      |             |  |             | –      |             |  |                                                        | –     |      
|Fixed interest rate borrowings (Kreos) |  | 12.5%              |  |                                                        | 3,973 |             |  |             | 1,324  |             |  |             | –      |             |  |                                                        | –     |      
|Fixed interest rate borrowings (Bonds) |  | 9.0%               |  |                                                        | 2,250 |             |  |             | 26,125 |             |  |             | –      |             |  |                                                        | –     |      
|Leasings                               |  | N/A                |  |                                                        | 63    |             |  |             | 74     |             |  |             | –      |             |  |                                                        | –     |      
|Other financial liabilities            |  | N/A                |  |                                                        | 350   |             |  |             | –      |             |  |             | –      |             |  |                                                        | –     |      
|Total                                  |  |                    |  |                                                        | 7,803 |             |  |             | 28,669 |             |  |             | 1,196  |             |  |                                                        | 1,285 |      
|As at December 31, 2015                |  |                    |  |                                                        |       |             |  |             |        |             |  |             |        |             |  |                                                        |       |      
|Non interest bearing                   |  | N/A                |  |                                                        | 468   |             |  |             | 471    |             |  |             | 471    |             |  |                                                        | 471   |      
|Fixed interest rate borrowings         |  | 1.46%              |  |                                                        | 563   |             |  |             | 675    |             |  |             | 675    |             |  |                                                        | 675   |      
|Floating interest rate borrowings      |  | Euribor 3M + 1.40% |  |                                                        | 40    |             |  |             | 20     |             |  |             | –      |             |  |                                                        | –     |      
|Fixed interest rate borrowings (Kreos) |  | 12.5%              |  |                                                        | 3,973 |             |  |             | 3,973  |             |  |             | 1,117  |             |  |                                                        | –     |      
|Fixed interest rate borrowings (Bonds) |  | 9.0%               |  |                                                        | 2,250 |             |  |             | 2,250  |             |  |             | 26,125 |             |  |                                                        | –     |      
|Other financial liabilities            |  | N/A                |  |                                                        | 985   |             |  |             | –      |             |  |             | –      |             |  |                                                        | –     |      
|Total                                  |  |                    |  |                                                        | 8,279 |             |  |             | 7,389  |             |  |             | 28,388 |             |  |                                                        | 1,146 |      
|As at December 31, 2014                |  |                    |  |                                                        |       |             |  |             |        |             |  |             |        |             |  |                                                        |       |      
|Non interest bearing                   |  | N/A                |  |                                                        | 225   |             |  |             | 342    |             |  |             | 328    |             |  |                                                        | 328   |      
|Floating interest rate borrowings      |  | Euribor 3M + 1.40% |  |                                                        | 40    |             |  |             | 40     |             |  |             | 20     |             |  |                                                        | –     |      
|Fixed interest rate borrowings         |  | 1.46%              |  |                                                        | 451   |             |  |             | 563    |             |  |             | 675    |             |  |                                                        | 675   |      
|Fixed interest rate borrowings         |  | 12.5%              |  |                                                        | 3,086 |             |  |             | 3,973  |             |  |             | 3,973  |             |  |                                                        | 1,117 |      
|Other financial liabilities            |  | N/A                |  |                                                        | 671   |             |  |             | –      |             |  |             | –      |             |  |                                                        | –     |      
|Total                                  |  |                    |  |                                                        | 4,473 |             |  |             | 4,918  |             |  |             | 4,996  |             |  |                                                        | 2,120 |      





On March 6, 2015, the Company issued senior,
unsecured convertible bonds due 2018 for a total principal amount of 25 million euros. The bonds are issued and will be redeemed
at 100% of their principal amount and have a coupon of 9% per annum, payable semi-annually in arrear in equal instalments on March
6 and September 6 of each year. The first interest payment date was on September 6, 2015. Final maturity date is March 6, 2018.
More information can be found in note 20.



Additionally, on December 20, 2013,
the Group entered into a loan facility agreement of up to 10.0 million euros with Kreos. The loan was drawn in three tranches
(5.0 million euros by February 3, 2014; 2.5 million euros by May 31, 2014; and 2.5 million euros by September 30,
2014).



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As part of the consideration for this debt
financing agreement, in April 2014 the Group issued a warrant plan to Kreos Capital IV (Expert Fund). The warrant plan consisted
of 1,994,302 warrants that were issued with an exercise price of 0.75 euros exercisable immediately and which expire in April
2019. The warrants also include a put option that authorizes Kreos Capital IV (Expert Fund) to return the warrants to the
Company and to settle the warrants in cash at any time during the repayment term of the Kreos loan, provided that (i) the put option
can only be exercised in three equal tranches of each one third of the total number of warrants; (ii) no more than one tranche
can be exercised in a twelve month period; (iii) the put option cannot be exercised if, at the time of the proposed exercise, the
price of a share of the Company is higher than 0.9957 euros; and (iv) the put option shall lapse and can no longer be exercised
if the average stock price per share in the Company on each trading day included in any period of thirty (30) consecutive calendar
days during the duration of the warrant plan exceeds 0.9957 euros. In May 2015, Kreos Capital IV (Expert Fund) exercised the first
tranche of the put option of the Kreos Warrant Plan, equivalent to 664,767 warrants. In the meantime, the put option has lapsed
in accordance with the afore-mentioned item (iv).



The loan is measured at amortized cost in
accordance with IAS 39. At initial recognition of the loan, the nominal amount of the loan is decreased with the transactions
costs related to the loan which also includes the amount of the warrants allocated to the tranches. The interest rate is the effective
interest rate (20.16%).



The warrants, including the put option,
are accounted for as one instrument (not separating the put option from the warrants) and at issuance had a fair value of 0.7 million
euros. Since Kreos Capital IV (Expert Fund) has the option to settle the warrants in cash, the instrument is considered as
a financial derivative liability measured at fair value with changes in fair value recognized immediately in profit or loss. The
measurement of the warrant at December 31, 2016 at fair value is based on a Black-Scholes valuation model taking into account following
inputs: share price (0.71 euros), strike price (0.7449 euros), volatility of the share (66.6%), duration (2.31 years)
and risk free interest rate (-0.16%). At December 31, 2016, the warrants (excluding the put option that elapsed) amount to 0.4
million euros.



The measurement of the warrant (including
the put option) at December 31, 2015 at fair value was based on a Black-Scholes valuation model taking into account following inputs:
share price (1.19 euros), strike price (0.74 euros), volatility of the share (66.7%), duration (3.31 years) and
risk free interest rate (0.10%).



Credit risk management



Credit risk refers to the risk that a counterparty
will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of only dealing
with creditworthy counterparties and obtaining sufficient collateral, where appropriate, as a means of mitigating the risk of financial
loss from defaults. The Group’s exposure is continuously monitored, and the aggregate value of transactions concluded is
spread among approved counterparties.



The maximum exposure to credit risk at the
reporting date is the carrying amount of each class of financial assets. The Group does not hold any collateral as security.



More information on the trade receivables
can be found in note 17 to the consolidated financial statements.



Market risk



The Group is exposed to market risk. Market
risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market
prices. Market risk comprises three types of risk: interest rate risk, currency risk and other price risk, such as equity price
risk and commodity risk. Financial instruments affected by market risk include the derivate instruments linked to the finance agreement
with Kreos and those embedded in the convertible bonds issued on March 6, 2015.



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The measurement of the Kreos warrants at
December 31, 2016 at fair value is based on a Black-Scholes valuation model taking into account following inputs: share price (0.71 euros),
strike price (0.7449 euros), volatility of the share (66.6%), duration (2.31 years) and risk free interest rate (-0.16%).



The inputs with the most significant effect
on the fair value calculation of the Kreos warrants are the value and volatility of TiGenix’s shares. The potential effect
of using reasonable assumptions (Black-Scholes formula) for changes in these inputs are the following: i) share price (10% increase/decrease
would have an impact of 65/-62 thousand of euros) ii) volatility of the shares (10% increase/decrease would have an impact of 34/-35
thousand of euros).



Pursuant to the terms and conditions of
the convertible bonds issued on March 6, 2015, the measurement of the warrant at fair value shall be reflected at any time at its
fair value as determined by direct observation.



The inputs with the most significant effect
on the fair value calculation are the value and volatility of TiGenix’s shares. The potential effect of using reasonable
assumptions (Black-Scholes formula) for changes in these inputs are the following: i) share price (10% increase/decrease would
have an impact of 238 thousand euros/-38 thousand euros) ii) volatility of the shares (10% increase/decrease would have an impact
of 238 thousand euros/ -238 thousand euros).



6. Revenues



|                   |  | Years ended December 31,
|------------------ |  | ------------------------
|Thousands of euros |  | 2016                    
|Royalties          |  |                         
|License revenues   |  |                         
|Grant revenues     |  |                         
|Other income       |  |                         
|Total revenues     |  |                         



License revenues



On July 4, 2016, Takeda and TiGenix entered
into an exclusive worldwide ex-us license, development and commercialization agreement for Cx601, a suspension of allogeneic adipose-derived
stem cells (eASC) injected intra-lesionally for the treatment of complex perianal fistulas in patients with Crohn’s disease.



The terms of the agreement includes the
transfer of the use of the license of the product in exchange of a non-refundable licensing fee of 25.0 million euros, milestone
payments for new authorizations in new territories for production and selling the product and royalties on any product sales derived
from the arrangement. These multiple element arrangements have been analyzed to determine whether the deliverables can be separated
or whether they must be accounted for as a single unit of accounting. License revenues are recognized when all significant risks
and rewards derived from the ownership and right of use of the license in its current state have been transferred to the customer,
for those other milestones not yet reached because there are some pending performance obligations to be satisfied or because there
are future approvals, which do not depend only in the Company performance, the revenues are not recognized. The Company has analyzed
and separated the different performance obligations and how will they be remunerated. If substantive contractual obligations are
satisfied over time or over the life of the contract, revenue will be recognized over their performance. Milestone payments are
immediately recognized as revenue when the condition is met, when performance obligations related to that milestone are fulfilled
and if the milestone is not a condition to future deliverables and collectability is reasonably assured. Otherwise, they are recognized
over the remaining term of the agreement or the performance period.



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7. Operating charges



The operating charges consist of the following
elements:



Research and development expenses



|                                                 |  | Years
ended December 31,
|------------------------------------------------ |  | ------------------------
|Thousands
of euros                               |  | 2016                    
|Employee benefits expenses                       |  |                         
|Depreciation, amortization and impairment losses |  |                         
|Lab fees and other operating expenses            |  |                         
|Other expenses                                   |  |                         
|Total                                            |  |                         



General and administrative expenses



|                                      |  | Years
ended December 31,
|------------------------------------- |  | ------------------------
|Thousands
of euros                    |  | 2016                    
|Employee benefits expenses            |  |                         
|Depreciation and amortization expense |  |                         
|Services and other sundry expenses    |  |                         
|Other expenses                        |  |                         
|Total                                 |  |                         



Employee benefits expenses and mandate
contractors



The employee benefits expenses included
in the Research and development expenses and the General and administrative expenses lines of the income statements can be detailed
as follows:



|                                             |  | Years
ended December 31,
|-------------------------------------------- |  | ------------------------
|Thousands
of euros                           |  | 2016                    
|Wages, salaries, fees and bonuses            |  |                         
|Social security cost                         |  |                         
|Group & Hospitalization insurance            |  |                         
|Share-based compensation                     |  |                         
|Other expenses                               |  |                         
|Total                                        |  |                         
|of which included in discontinued operations |  |                         



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Table of Contents


At year-end, the number of employees (full-time
equivalents) from continuing operations was as follows:



|                                            |  | As
atDecember 31,
|------------------------------------------- |  | -----------------
|Number
of employees and mandate contractors |  | 2016             
|Research and development staff              |  |                  
|General and administrative staff            |  |                  
|Total                                       |  |                  



For further details about the share-based
compensation plans, see note 25.



8. Financial result



|                                                           |  | Years
endedDecember 31,
|---------------------------------------------------------- |  | -----------------------
|Thousands
of euros                                         |  | 2016                   
|Interest income on bank deposits                           |  |                        
|Fair value gains                                           |  |                        
|Other interest income                                      |  |                        
|Total financial income                                     |  |                        
|Interest on borrowings                                     |  |                        
|Fair value losses                                          |  |                        
|Impairment and losses on disposal of financial instruments |  |                        
|Other finance costs                                        |  |                        
|Total financial expenses                                   |  |                        
|Net foreign exchange differences                           |  |                        
|Financial result                                           |  |                        



9. Income tax benefits



The income tax benefit in 2016 of 2.1 million
euros (1.3 million euros in 2015) corresponds to a tax incentive related to the tax Law 14/2013 of September 27, 2013 for entrepreneurs
in Spain that allows TiGenix SAU to receive in cash the tax deductions obtained from R&D activities. These incentives need
to be revised and approved by the tax authorities and TiGenix management do not recognize the profit until the revision process
is fully complied and approval obtained. As the Company has received the approval reports for 2014 and 2015, it has applied for
the reimbursement and recognized receivables (current and non-current) of 3.8 million euros of its tax credits reported in 2014
and 2015.



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The income tax expense for the year can
be reconciled to the accounting profit as follows:



|                                                                                  |  | Years
endedDecember 31,
|--------------------------------------------------------------------------------- |  | -----------------------
|Thousands
of euros                                                                |  | 2016                   
|Profit/(Loss) before taxes                                                        |  |                        
|Income tax expense calculated at 33.99%                                           |  |                        
|Effect of income that is exempt from taxation                                     |  |                        
|Effect of expenses that are not deductible                                        |  |                        
|Effect of unused tax losses and tax offsets not recognized as deferred tax assets |  |                        
|Effect of different tax rates in foreign jurisdictions                            |  |                        
|Effect of the incentives of Spanish Tax Law 14/2013                               |  |                        
|Total                                                                             |  |                        



The deferred taxes are further detailed
in note 21.



10. Discontinued operations



At the end of 2013, the board of directors
decided to discontinue the ChondroCelect operations. As such and as negotiations to sell the Dutch manufacturing facility were
significantly advanced, the Group recognized an impairment of 0.7 million euros at December 31, 2013, which was included
in Loss for the period from discontinued operations.



During the first half of 2014, the discontinuation
of the ChondroCelect operations was successfully completed through the combination of the sale of the Dutch manufacturing facility
and a licensing agreement on the marketing and distribution rights of the ChondroCelect operations.



On May 30, 2014, the Group completed
the sale of TiGenix B.V., our Dutch subsidiary, which held our manufacturing facility, to PharmaCell, a leading European contract
manufacturing organization active in the area of cell therapy, for a total consideration of 4.3 million euros. Under the terms
of the share purchase agreement with PharmaCell, we received an upfront payment of 3.5 million euros when the sale became
effective on May 30, 2014 and will receive a final payment of 0.8 million euros (recognized at its present value of 0.6 million
euros) after three years. At the end of 2013 an impairment test in respect of the Dutch manufacturing facility was conducted and
0.7 million euros were recognized as a loss. During the first half of 2014 and after the sale of the plant was completed,
the Company registered an additional loss on disposal of 1.1 million euros which was included in Loss for the period from
discontinued operations.



On June 1, 2014, TiGenix completed
the licensing of the marketing and distribution rights of ChondroCelect to Sobi, the international specialty healthcare company
dedicated to rare diseases. Sobi marketed and distributed the product within the European Union (excluding Finland, where we have
a pre-existing distribution agreement with Finnish Red Cross Blood Service), Switzerland, Norway, Russia, Turkey and the Middle
East and North Africa region. TiGenix received in return royalties on the net sales of ChondroCelect, and Sobi reimbursed nearly
all of TiGenix’s costs associated with the product.



Based on a contract manufacturing agreement
with our former subsidiary, now owned by PharmaCell, the Company was entitled to a cost relief amounting up to a maximum of 1.5 million
euros on purchases during the first three years since the effective date of the manufacturing agreement. Based on the distribution
contract with Sobi, this cost relief was transferred to Sobi on ChondroCelect sales with the same maximum of 1.5 million euros
during the same period. Both the manufacturing agreement with our former subsidiary now owned by PharmaCell and the distribution
agreement with Sobi included



F-44


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commitments for minimum binding quantities
of ChondroCelect that were required to be purchased by us and from us under the respective agreements. If Sobi’s actual purchases
were lower than the required minimum, we were entitled to receive payment from Sobi up to a maximum undiscounted amount of 8.8 million
euros spread over a period of 3.5 years and would had been required to pass on such payment to PharmaCell.



The effect of the Pharmacell and Sobi arrangements
is that TiGenix acted as a “pass through” intermediary for the ChondroCelect product (which is purchased from Pharmacell
and sold to Sobi through back-to-back, identical contractual arrangements). This means that following IAS 18.IE21, TiGenix was
acting as an agent and not as a principal as it relates to the reimbursement of cost for the manufacturing activities. The amounts
collected on behalf of the principal were offset against the amounts paid on behalf of the principal.



In the table below, a detail of the loss
for the period 2014 from discontinued operations (which mainly includes the sales & marketing operations of ChondroCelect and
the Dutch manufacturing facility) is set forth in previous years. Were the ChondroCelect sales and marketing operations to be presented
as continuing operations, the below line items related to revenues and those specific expenses should have to be added to the corresponding
line items from continuing operations on the consolidated income statement of 2014.



Analysis of loss for the period from
discontinued operations



|Thousands
of euros                                                      |  |  | 2014   | (*)
|----------------------------------------------------------------------- |  |  | ------ | ---
|Revenue                                                                 |  |  | 3,527  |    
|Expenses                                                                |  |  | (4,991 | )  
|Operating expenses related to the sales & marketing                     |  |  | (1,904 | )  
|Operating expenses related to the Dutch manufacturing facility          |  |  | (1,971 | )  
|Impairment losses related to the Dutch manufacturing facility           |  |  | –      |    
|Loss on disposal related to the Dutch manufacturing facility            |  |  | (1,116 | )  
|Other income and expenses                                               |  |  | (141   | )  
|Loss before taxes                                                       |  |  | (1,605 | )  
|Attributable income tax expense                                         |  |  | –      |    
|Total                                                                   |  |  | (1,605 | )  
|Basic and diluted loss per share from discontinued operations (in euro) |  |  | (0.01  | )  



(*) Figures for 2014 related only to 5
months of ChondroCelect



Cash flows from discontinued operations



|                                            |  |     
|------------------------------------------- |  | ----
|Thousands of euros                          |  | 2014
|Cash flows from operating activities        |  |     
|Cash flows from investing activities        |  |     
|Net cash flows from discontinued operations |  |     



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Table of Contents


11. Earnings per share



The calculation of the basic net earning
per share is based on the loss/profit attributable to the holders of ordinary shares and the weighted average number of ordinary
shares outstanding during the period.



The Group offers its employee’s share-based
compensation benefits (see note 25), which may have a dilutive effect on the basic earning per share. For the purpose of calculating
diluted earning per share, the number of ordinary shares shall be the weighted average number of ordinary shares plus the weighted
average number of ordinary shares that would be issued in case of conversion into ordinary shares of all instruments that can be
converted into ordinary shares.



On February 20, 2017, the Company issued
5,505,477 new warrants of which 4,802,477 have already been granted at the moment of issuing this registration document.



However, during 2014 and 2015 due to the
losses incurred by the Group, these instruments had an anti-dilutive effect on the loss per share. Instruments that can be converted
into ordinary shares shall only be treated as dilutive when their conversion into ordinary shares would decrease earnings per share
or increase loss per share from continuing operations.



|                                                                                       |  | Years
ended December 31,
|-------------------------------------------------------------------------------------- |  | ------------------------
|Thousands
of euros except share and per share data                                     |  | 2016                    
|CONTINUING AND DISCONTINUED OPERATIONS                                                 |  |                         
|Profit/(Loss) for the period for the purpose of basic earnings per share               |  |                         
|Weighted average number of shares for the purpose of basic earnings per share          |  |                         
|Basic income (loss) per share from continuing and discontinued operations (in euros)   |  |                         
|CONTINUING OPERATIONS                                                                  |  |                         
|Profit/(Loss) for the period for the purpose of basic earnings per share               |  |                         
|Weighted average number of shares for the purpose of basic earnings per share          |  |                         
|Basic income (loss) per share from continuing operations (in euros)                    |  |                         
|DISCONTINUED OPERATIONS                                                                |  |                         
|Loss for the period for the purpose of basic earnings per share                        |  |                         
|Weighted average number of shares for the purpose of basic earnings per share          |  |                         
|Basic loss per share from discontinued operations (in euros)                           |  |                         
|POTENTIAL DILUTIVE INSTRUMENTS                                                         |  |                         
|Number of share-based options (out-of-the-money)                                       |  |                         
|Number of shared-based options (in-the-money)                                          |  |                         
|Weighted average number of shares for the purpose of diluted earnings per share        |  |                         
|Diluted
income (loss) per share from continuing and discontinued operations (in euros) |  |                         



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Table of Contents


12. Intangible assets







|Thousands of euro                       |  | Development |        | Goodwill |  | Intellectual
                                              property |     | Patents and licences |  | Software |         | Total
|--------------------------------------- |  | ----------- | ------ | -------- |  | ------------------------------------------------------------------- | --- | -------------------- |  | -------- | ------- | -----
|COST                                    |  |             |        |          |  |                                                                     |     |                      |  |          |         |      
|Balance at January 1, 2014              |  |             | 2,507  |          |  |                                                                     | –   |                      |  |          | 41,117  |      
|Additions–separately acquired           |  |             | –      |          |  |                                                                     | –   |                      |  |          | –       |      
|Disposals                               |  |             | (49    | )        |  |                                                                     | –   |                      |  |          | –       |      
|Reclassification                        |  |             | 2,613  |          |  |                                                                     | –   |                      |  |          | (2,613  | )    
|Balance at December 31, 2014            |  |             | 5,071  |          |  |                                                                     | –   |                      |  |          | 38,504  |      
|Additions–separately acquired           |  |             | –      |          |  |                                                                     |     |                      |  |          | 13      |      
|Coretherapix acquisition                |  |             | 17,374 |          |  |                                                                     | 717 |                      |  |          | –       |      
|Balance at December 31, 2015            |  |             | 22,445 |          |  |                                                                     | 717 |                      |  |          | 38,517  |      
|Additions–separately acquired           |  |             | –      |          |  |                                                                     | –   |                      |  |          | –       |      
|Disposals                               |  |             | –      |          |  |                                                                     | –   |                      |  |          | –       |      
|Reclassification                        |  |             | (1,714 | )        |  |                                                                     | –   |                      |  |          | 1,714   |      
|Balance at December 31, 2016            |  |             | 20,731 |          |  |                                                                     | 717 |                      |  |          | 40,231  |      
|ACCUMULATED AMORTISATION AND IMPAIRMENT |  |             |        |          |  |                                                                     |     |                      |  |          |         |      
|Balance at January 1, 2014              |  |             | (837   | )        |  |                                                                     | –   |                      |  |          | (7,310  | )    
|Amortisation expense                    |  |             | (222   | )        |  |                                                                     | –   |                      |  |          | (2,102  | )    
|Effect of foreign exchange differences  |  |             | (87    | )        |  |                                                                     | –   |                      |  |          | –       |      
|Disposals                               |  |             | 49     |          |  |                                                                     | –   |                      |  |          | –       |      
|Balance at December 31, 2014            |  |             | (1,097 | )        |  |                                                                     | –   |                      |  |          | (9,412  | )    
|Amortisation expense                    |  |             | (240   | )        |  |                                                                     | –   |                      |  |          | (2,565  | )    
|Impairment loss                         |  |             | (1,121 | )        |  |                                                                     | –   |                      |  |          | –       |      
|Balance at December 31, 2015            |  |             | (2,458 | )        |  |                                                                     | –   |                      |  |          | (11,977 | )    
|Amortisation expense                    |  |             | –      |          |  |                                                                     | –   |                      |  |          | (2,653  | )    
|Eliminated on disposals                 |  |             | –      |          |  |                                                                     | –   |                      |  |          | –       |      
|Balance at December 31, 2016            |  |             | (2,458 | )        |  |                                                                     | –   |                      |  |          | (14,630 | )    
|Carrying amount at December 31, 2014    |  |             | 3,973  |          |  |                                                                     | –   |                      |  |          | 29,092  |      
|Carrying amount at December 31, 2015    |  |             | 19,987 |          |  |                                                                     | 717 |                      |  |          | 26,540  |      
|Carrying amount at December 31, 2016    |  |             | 18,273 |          |  |                                                                     | 717 |                      |  |          | 25,601  |      





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The Company recognized during 2011 and 2010
development costs for ChondroCelect. They were amortized over their useful life of 10 years. No additional development costs for
ChondroCelect were capitalized after 2011. The Company has registered in 2015 an impairment on this asset amounting to 1.1 million
euros (corresponding to its net carrying amount prior to its impairment).



On July 31, 2015 the Group acquired 100%
of the issued share capital of Coretherapix, SLU. The most significant part of the purchase price has been allocated to in-process
research & development (17.4 million euros) as well as certain other intangible assets (277 thousand euros). The difference
between the fair values of the assets acquired and liabilities assumed and the purchase price comprises the value of expected synergies
arising from the acquisition and has been recorded as goodwill (717 thousand euros). See note 4.



The asset recognized as a consequence of
this business combination is currently not amortized, because it is not yet available for use and is, therefore, subject to an
annual test for impairment. Group management has implemented an annual procedure to identify any possible impairment on net assets
and goodwill allocated by CGU with respect to the recoverable amount thereof. The fair value less cost to sell of the Coretherapix
unit was calculated as the present value of the cash flows resulting from the financial projections discounted at a rate that takes
into account the assets' specific risks, the average cost of the liabilities and the Group's target financial structure covering
a fifteen-year period. The period considered in the model exceeds five years because the first year of sales was estimated to be
2023 and the peak year of sales to be 2029. The estimate on the post discount rate has been updated at December 31, 2016. As a
result, a range between 13% and 15% has been obtained. The post tax, tax discount rate applied to cash flow projections when estimating
fair values was 15% (same as December 31, 2015)



The main variables affecting the calculation
of the aforementioned projections are as follows:



| | - | Discount rate (15%)
| | - | -------------------



| | - | Market Penetration
| | - | ------------------



| | - | Price of the product
| | - | --------------------



| | - | Development tree and possible scenarios (9 possible scenarios
depending on Licensing/no Licensing; Pivotal /Not into Pivotal)
| | - | -----------------------------------------------------------------------------------------------------------------------------



| | - | Licensing Milestone incomes
| | - | ---------------------------



| | - | Trial and running costs
| | - | -----------------------



| | - | Year of sales (Pick year sales)
| | - | -------------------------------



| | - | POS (Probability of success)
| | - | ----------------------------



The main assumptions are based on past experience
and are reviewed as part of management strategic planning cycle for changes in market conditions and sales erosion through competition.



As a result of the analyses performed, the
directors considered that it was not necessary to recognise any impairment losses on intangible asset related to the cash generating
unit Coretherapix.



However, significant unobservable valuation
inputs are discount rate, market penetration and price of the product. These are those to which the fair value of the asset is
most sensitive. The potential effect of changes in these inputs are the following: i) discount rate (10% increase/decrease would
have an impact of -2.4/3.0 million euros); ii) market penetration (10% increase/decrease would have an impact of 2.5/-1.2 million
euros); iii) price of the product (10% increase/decrease would have an impact of 3.4/-1.2 million euros).



In addition, intellectual property and development
relate to the acquisition of TiGenix SAU in May 2011 and consist of the technology platform, included in ‘Intellectual property’
and, in-process research & development, included in ‘Development’. These intangible assets were recognized
at fair value in accordance with IFRS 3–Business Combinations. The technology platform’s carrying value
of 24.0 million euros at December 31, 2016 (2015: 26.5 million euros; 2014: 29.1 million euros) is amortized
over its useful life of fifteen years. The remaining useful life is ten years at the end of 2016. In-process



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research & development at the end
of 2015 amounted to 2.6 million euros and was not amortized, because it was not yet available for use. In July 2016, the product
Cx601 (1.7 million euros) was considered as available for use and consequently subject to amortization. As a result of that, we
have reclassified it from development to intellectual property. The estimated useful economic life has been determined to be 10
years, which is the remaining period for the patents related to it.



Intangible assets have been pledged to secure
the Kreos credit facilities and the soft loans related to Madrid Network. The Group is not allowed to pledge these assets as security
for other borrowings or to sell them.



At December 31, 2016, 2015 and 2014
no commitments were signed to acquire intangible assets.



13. Property, plant and equipment









|Thousands of euros                          |  | IT
& machinery |        | Furniture |  | Laboratory equipment |      | Leasehold improvements |  | TOTAL
|------------------------------------------- |  | -------------- | ------ | --------- |  | -------------------- | ---- | ---------------------- |  | -----
|COST                                        |  |                |        |           |  |                      |      |                        |  |      
|Balance at January 1, 2014                  |  |                | 2,164  |           |  |                      | 451  |                        |  |      
|Additions                                   |  |                | 11     |           |  |                      | 1    |                        |  |      
|Disposals                                   |  |                | (413   | )         |  |                      | (50  | )                      |  |      
|Balance at December 31, 2014                |  |                | 1,763  |           |  |                      | 402  |                        |  |      
|Additions                                   |  |                | 9      |           |  |                      | 4    |                        |  |      
|Acquisition Coretherapix (Note 4)           |  |                | 5      |           |  |                      | 14   |                        |  |      
|Balance at December 31, 2015                |  |                | 1,777  |           |  |                      | 421  |                        |  |      
|Additions                                   |  |                | 46     |           |  |                      | 154  |                        |  |      
|Disposals                                   |  |                | (2     | )         |  |                      | -    |                        |  |      
|Balance at December 31, 2016                |  |                | 1,822  |           |  |                      | 574  |                        |  |      
|ACCUMULATED DEPRECIATION
    AND IMPAIRMENT |  |                |        |           |  |                      |      |                        |  |      
|Balance at January 1, 2014                  |  |                | (1,825 | )         |  |                      | (365 | )                      |  |      
|Depreciation expense                        |  |                | (9     | )         |  |                      | (79  | )                      |  |      
|Eliminated on disposals                     |  |                | 413    |           |  |                      | 50   |                        |  |      
|Balance at December 31, 2014                |  |                | (1,422 | )         |  |                      | (394 | )                      |  |      
|Depreciation expense                        |  |                | (12    | )         |  |                      | (24  | )                      |  |      
|Balance at December 31, 2015                |  |                | (1,434 | )         |  |                      | (419 | )                      |  |      
|Depreciation expense                        |  |                | (11    | )         |  |                      | (38  | )                      |  |      
|Eliminated on disposals                     |  |                | -      |           |  |                      | -    |                        |  |      
|Balance at December 31, 2016                |  |                | (1,446 | )         |  |                      | (456 | )                      |  |      
|Carrying amount at December 31, 2014        |  |                | 342    |           |  |                      | 10   |                        |  |      
|Carrying amount at December 31, 2015        |  |                | 343    |           |  |                      | 4    |                        |  |      
|Carrying amount at December 31, 2016        |  |                | 377    |           |  |                      | 118  |                        |  |      







During 2016, TiGenix SAU increased its leased
offices in Madrid and started working to increase the capacity of its manufacturing plant (at December 31, 2016, 0.6 million euros
were under construction). At December 31, 2016 there are commitments with corresponding suppliers for a total amount of 0.4 million
euros. The 50% of the costs incurred to increase the current manufacturing capacity, will be paid by Takeda as per the License
Agreement signed in July 2016.



On July 31, 2015 the Group acquired Coretherapix
as well as certain Coretherapix property, plant and equipment with a fair value of 109 thousand euros. (See note 4).



At December 31, 2015 and 2014 there
were no commitments signed to acquire property, plant and equipment.



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14. Available-for-sale investments



The available-for-sale investments in 2014,
consisted of the investment of TiGenix in Arcarios B.V., a spin-off established jointly with Therosteon in which the Company
held 3.53% of the shares. The investment was classified as a financial asset available for sale in accordance with IAS 39–Financial
Instruments: Recognition and Measurement. However, due to the fact that Arcarios B.V. is not traded on an active market
and the Group is not able to measure fair value in an alternative way, the investment is carried at cost less impairment.



During 2015 the Company recognized an impairment
loss for the remaining value of the Arcarios' investment (161 thousand euros) due to continuing losses incurred during recent years.
The impairment has been recorded under " Impairment and gains/(losses) on disposal of financial instruments" in the accompanying
consolidated income statements.



On November 30, 2016, the shareholders approved
the sale of the remaining assets and started the liquidation process. As of December 30, 2016, the liquidation of Arcarios B.V.
was closed and the company consequently ceased to exist.



15. Other non-current assets



The other non-current assets include guaranteed
deposits in relation to soft loans obtained from Madrid Network and other guarantees for the rental of the buildings in Madrid
and Leuven.



On March 6, 2015, the Company issued senior,
unsecured convertible bonds due 2018 for a total principal amount of 25 million euros and with a nominal value of 100,000 euros
per convertible bond. These convertible bonds must have a coupon escrow that is an amount sufficient to pay the aggregate amount
of interest due on the bonds on the first four interest payment dates up to and including March 6, 2017. The corresponding amount
has been transferred to an escrow account for the purpose of paying those four interest payments. This is a restricted account
(this amount cannot be used for any other purpose). As of year-end 2016 the remaining amount of 1.13 million euros of interest
payments has been classified as other current financial assets. More information in note 20.



In accordance with Law 14/2013 of September
27, 2013 on supporting entrepreneurs and their internationalisation (published in the Official State Gazette of September 28, 2013),
TiGenix SAU and Coretherapix SLU annually request the monetization of the tax incentives related to the R&D expenses already
approved by the tax authorities. The amount approved has been recognized as other non-current assets as it is not expected to be
collected before 2018.



16. Inventories



The carrying amounts of the different components
of the inventory are as follows:



|                              |  | As
at December 31,
|----------------------------- |  | ------------------
|Thousands
of euros            |  | 2016              
|Raw materials and consumables |  |                   
|Total                         |  |                   



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17. Trade and other receivables





|                   |  | As
at December 31,
|------------------ |  | ------------------
|Thousands
of euros |  | 2016              
|Trade receivables  |  |                   
|Other receivables  |  |                   
|Recoverable taxes  |  |                   
|Other              |  |                   
|Total              |  |                   







The trade receivables can be detailed as
follows:



|                             |  | As
at December 31,
|---------------------------- |  | ------------------
|Thousands
of euros           |  | 2016              
|Trade receivables            |  |                   
|Allowance for doubtful debts |  |                   
|Total                        |  |                   



The aging analysis of the Group’s
trade receivables at year-end is as follows:



|                     |  | As
at December 31,
|-------------------- |  | ------------------
|Thousands
of euros   |  | 2016              
|Not past due         |  |                   
|Up to three months   |  |                   
|Three to 6 months    |  |                   
|Six to twelve months |  |                   
|More than one year   |  |                   
|Total                |  |                   



The movement in the allowance for doubtful
debts is detailed below:



|                                  |  | As
at December 31,
|--------------------------------- |  | ------------------
|Thousands
of euros                |  | 2016              
|Balance at January 1              |  |                   
|Impairment losses recognized      |  |                   
|Amounts recovered during the year |  |                   
|Impairment losses reversed        |  |                   
|Balance at December 31            |  |                   



How credit risk is managed is described
in section 5 of the consolidated financial statements.



18. Other current financial assets



Other current financial assets mainly include
1.13 million euros of restricted cash in relation to interest payments to be executed in the short term with respect to the Convertible
Bonds issued on March 6th, 2015. (See note 15).



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19. Equity



Share Capital



The share capital of TiGenix amounts to
26.0 million euros at December 31, 2016 (2015: 17.7 million euros; 2014: 16.0 million euros), represented by
259,956,365 shares (2015: 177,304,587 shares; 2014: 160,476,620 shares). The Company’s shares have no par value. The holders
of TiGenix shares are entitled to receive dividends as declared and to one vote per share at the shareholders’ meeting of
the Company. All shares issued are fully paid.



The Company has never declared or paid any
dividend on its shares. In the future, the Company’s dividend policy will be determined by its board of directors and may
change from time to time. Any declaration of dividends will be based upon the Company’s earnings, financial condition, capital
requirements and other factors considered important by the board of directors. Belgian law and the Company’s articles of
association do not require the Company to declare dividends. Currently, the board of directors expects to retain all earnings,
if any, generated by the Company’s operations for the development and growth of its business and does not anticipate paying
any dividend in the near future.



The change in the number of shares during
the year is as follows:



|Number
of shares                      |  | 2016 |             | 2015 |  | 2014
|------------------------------------- |  | ---- | ----------- | ---- |  | ----
|Balance at January 1,                 |  |      | 177,304,587 |      |  |     
|Capital increase–contribution in kind |  |      | –           |      |  |     
|Capital increase–contribution in cash |  |      | 82,651,778  |      |  |     
|Balance at December 31,               |  |      | 259,956,365 |      |  |     



During 2016, the share capital of the Company
has been increased three times:



|Share Capital                           |  | No
of shares |            | Nominal
value |  | Thousand
of euros
|--------------------------------------- |  | ------------ | ---------- | ------------- |  | -----------------
|                                        |  |              |            |               |  |                  
|Capital increase March 10, 2016         |  |              | 25,000,000 |               |  |                  
|Capital increase December 15, 2016      |  |              | 46,000,000 |               |  |                  
|Capital Increase December 29, 2016      |  |              | 11,651,778 |               |  |                  
|Total Increase of share capital in 2016 |  |              | 82,651,778 |               |  |                  
|                                        |  |              |            |               |  |                  
|Share premium                           |  | No of shares |            | Nominal value |  | Thousand of euros
|                                        |  |              |            |               |  |                  
|Capital increase March 10, 2016         |  |              | 25,000,000 |               |  |                  
|Capital increase December 15, 2016      |  |              | 46,000,000 |               |  |                  
|Capital Increase December 29, 2016      |  |              | 11,651,778 |               |  |                  
|Total Increase                          |  |              | 82,651,778 |               |  |                  
|Transaction costs                       |  |              |            |               |  |                  
|Total increase share premium in 2016    |  |              |            |               |  |                  



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| | • | 25,000,000 shares were issued pursuant to a capital increase on March 10, 2016 (23.75 million
euros gross proceeds)
| | - | -------------------------------------------------------------------------------------------------------------------



| | • | 46,000,000 shares were issued pursuant to a Nasdaq IPO on December 15, 2016 (34.1 million
euros gross proceeds).
| | - | ----------------------------------------------------------------------------------------------------------------



| | • | 11,651,778 shares were issued pursuant to the capital increase of 10.0 million euros from Takeda
on December 29, 2016.
| | - | ----------------------------------------------------------------------------------------------------------------------



Transaction costs related to these capital
increases amounted to 5.7 million euros.



During 2015, the share capital of the Company
had been increased four times:



| | • | 7,712,757 shares were issued pursuant to the acquisition of Coretherapix, SLU on July 31,
2015 (See note 4)
| | - | -----------------------------------------------------------------------------------------------------------



| | • | 4,149,286 shares were issued pursuant to a contribution in cash on November 27, 2015 (3.9 million
euros).
| | - | ---------------------------------------------------------------------------------------------------------



| | • | 4,956,894 shares were issued pursuant to a contribution in cash on December 3, 2015 (4.7 million
euros).
| | - | --------------------------------------------------------------------------------------------------------



| | • | The capital increase of 903 euros on December 14, 2015 following the exercise of 9,030 warrants.
| | - | ------------------------------------------------------------------------------------------------



Transaction costs related to these capital
increases amounted to 441 thousand euros.



Equity-settled employee benefits reserve



The equity-settled employee benefits reserve
relates to share options granted by the Group to its employees under its employee share option plan. Further information about
share-based payments to employees is set out in note 25.



Translation
reserves



Exchange differences relating to the translation
of the results and net assets of the Group’s foreign operations from their functional currencies to the Group’s presentation
currency (the euro) are recognized directly in other comprehensive income and accumulated in the foreign currency translation reserve.
Exchange differences previously accumulated in the foreign currency translation reserve (in respect of translating the net assets
of foreign operations) are reclassified to profit or loss on the disposal of the foreign operation (see note 8).



TiGenix Inc is the only group entity of
which the financial statements are not expressed in euros. At December 31, 2016 the negative equity (10.8 million dollars) of TiGenix
Inc is translated into euros at the historical exchange rate (Euro/Dollar) while the rest of the statement of financial position
is translated at the closing rate of December 31, 2016. TiGenix Inc has a significant intercompany liability in US dollars (10.8
million euros) with TiGenix NV. As the dollar appreciated during last years against the euro, liabilities in euro have been significantly
increased while past year results (equity) remain constant with the same value they had when consolidated in those years. The result
of applying this conversion procedure and the evolution of the exchange rates is the 2.4 million euros in translation reserves.



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20. Financial loans and other payables



|                                   |  | As
at December 31,
|---------------------------------- |  | ------------------
|Thousands
of euros                 |  | 2016              
|Non-current                        |  |                   
|Financial loans                    |  |                   
|Convertible notes (Ordinary note)  |  |                   
|Convertible notes (Warrant)        |  |                   
|Other payables                     |  |                   
|Non-current borrowings             |  |                   
|Current                            |  |                   
|Current portion of financial loans |  |                   
|Convertible notes (Ordinary note)  |  |                   
|Other financial liabilities        |  |                   
|Current borrowings                 |  |                   
|Total                              |  |                   



The Company’s current and non-current
borrowings can mainly be detailed as follows:



| | • | Roll-over credit facility (from 2007) as presented within financial loans for an original amount
0.4 million euros used for the acquisition of manufacturing equipment in the United States. The borrowing has a remaining
maturity of 6 months and carries a variable interest of three-month Euribor + 1.40%. Outstanding amount for this facility at December
31, 2016 was 20 thousand euros all of them short term.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Two loans received in different tranches over 2011 and 2013 from Madrid Network, presented within
financial loans, for an original amount of 5.9 million euros to finance the TiGenix SAU Phase III study for complex perianal
fistulas in Crohn’s disease patients and to develop the potential of stem cells in autoimmune inflammatory diseases. The
loans will be reimbursed over a period of ten years starting in 2015 with an annual fixed interest rate of 1.46%. Outstanding amount
for this facility at December 31, 2016 was 2.7 million euros of which 2.0 million euros are long term. These loans have been registered
at an amortized cost using an annual interest of 21%.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Interest-free loans, presented within financial loans, maturing in 2025 received from the Spanish
Government. These loans have an original amount of 3.2 million euros. Outstanding amount for this facility at December 31,
2016 was 1.3 million euros of which 1.0 million euros are long term. These loans have been registered at an amortized cost using
an annual interest of 21%.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Kreos loan, presented within financial loans, received in 3 tranches over 2014 of 5.0 million
euros, 2.5 million euros and 2.5 million euros respectively. The loan will be repaid as from the first anniversary over
a period of four years and has a fixed interest rate of 12.5%. Outstanding amount for this facility at December 31, 2016 was 4.7
million euros of which 1.2 million euros are long term.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Interest-free loan from the Innpacto Program, presented within financial loans as well. It has
a term of 10 years, with a grace period of three years. In January 2012, the Company received the first annual instalment of the
Innpacto loan amounting to 548 thousand euros. In 2013, the Company received two annual payments of the Innpacto loan, one of 457
thousand euros
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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and another of 142 thousand euros.
Outstanding amount for these facilities at December 31, 2016 was 0.6 million euros of which 0.4 million euros are long term. These
loans have been registered at an amortized cost using an annual effective interest of 20.35% and 19.91%.



| | • | Two loans received in January 2016 and December 2016 from the Ministry of Science, for an original
amount of 0.3 million euros and 0.6 million euros respectively to finance the Coretherapix chronic heart failure preclinical
investigations. The loans will be reimbursed over a period of ten years starting in 2019 and 2020 respectively with an annual fixed
interest rate of 0.329%. Outstanding amount for these facilities at December 31, 2016 was 0.8 million euros (all long term). These
loans have been registered at an amortized cost using an annual interest of 4.97% and 3.03% respectively.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Some of these borrowings, were granted subject
to the condition of maintaining specific covenants. As at December 31, 2016, 2015 and 2014 the Group was not in breach of
any of the covenants. As at the date of this Document, and to the Company's best estimates, the Group is not close to a breach
of the covenants.



On March 6, 2015, the Company issued senior,
unsecured convertible bonds due 2018 for a total principal amount of 25 million euros and with a nominal value of 100,000 euros
per convertible bond. The bonds are convertible into fully paid ordinary shares of the Company and are guaranteed by the Company’s
subsidiary, TiGenix SAU.



Unsecured. The bonds are unsecured,
meaning that the holders of the bonds will not benefit from any security interests to secure the performance of the Company’s
obligations under the bonds, except for the guarantee provided by TiGenix SAU, the coupon escrow and the negative pledge as further
described.



Senior. The bonds will constitute
senior obligations of the Company, meaning that the obligations of the Company will not be subordinated to the repayment of any
other unsecured financial indebtedness of the Company. The bonds will rank at all times pari passu and rateably, without any preference
among themselves, and equally with all other existing and future unsecured (subject to the coupon escrow and the negative pledge)
and unsubordinated obligations of the Company.



Coupon escrow. An amount sufficient
to pay the aggregate amount of interest to be paid on the bonds on the first four interest payment dates up to and including March
6, 2017 has been transferred to an escrow account for the purpose of paying those four interest payments. This is a restricted
account (this amount cannot be used for any other different purpose). 1.13 million euros payments to be executed in the short term
have been classified as other current financial assets.



Negative pledge. The Company and
its subsidiaries cannot issue debt instruments on the capital market.



Issue price / Redemption price / Coupon
/ Maturity. The bonds are issued and will be redeemed at 100% of their principal amount and have a coupon of 9% per annum,
payable semi-annually in arrear in equal instalments on March 6 and September 6 of each year. The first interest payment date was
on September 6, 2015. Final maturity date is March 6, 2018.



Initial conversion price. The initial
conversion price has been set at 0.9414 euros. At this initial conversion price, the bonds were convertible into 26,556,192 fully
paid ordinary shares of the Company. Following the private placement by the Company of 25,000,000 new shares at an issue price
of 0.95 euros per new share announced on March 10, 2016, the calculation agent appointed for the bonds has determined that the
conversion price had to be adjusted from its previous level of 0.9414 euros to the new level of 0.9263 euros per TiGenix share.
At this adjusted conversion price, the bonds were convertible into 26,989,096 fully paid ordinary shares of the Company. This conversion
price adjustment became effective on March 14, 2016.



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Following the announcement by the Company
on December 15, 2016 of the pricing of its initial public offering in the United States (the “Offering”), totalling
US$ 35.65 million from the sale of 2,300,000 American Depositary Shares (“ADSs”) representing 46,000,000 new Ordinary
Shares at an issue price of US$ 15.50 per ADS, and, in connection with the Offering, the granting by the Company to the underwriters
of a 30-day option to purchase up to an additional 345,000 ADSs representing 6,900,000 new Ordinary Shares, with cancellation of
the preferential subscription rights for the existing shareholders of the Company, the Calculation Agent determined that the Conversion
Price had to be adjusted from its previous level of € 0.9263 to the new level of € 0.8983 per Ordinary Share (after rounding
in accordance with Condition 6.6 of the Terms and Conditions of the Bonds). The Conversion Price adjustment became effective on
December 20, 2016. At their current (i.e. as from December 20, 2016) conversion price of EUR 0.8983, the bonds can be converted
into 27,830,346 new shares in the Company in case all convertible bonds are converted.



Conversion period. The bonds are
convertible into shares of the Company during the period from April 16, 2015 until approximately 10 dealing days prior to the final
maturity date or, in the case of an earlier redemption, the date falling 10 dealing days prior to the relevant redemption date.



Conversion price reset. As from March
7, 2016, the conversion price shall be adjusted so as to equal the greater of (i) the arithmetic average of the daily volume weighted
average price (“VWAP”) of the Company’s share on each dealing day in the “reset period”, and (ii)
80% of the arithmetic average of the conversion price in effect on each dealing day in the “reset period”, whereby
“reset period” means the 20 consecutive dealing days ending on the fifth dealing day prior to March 7, 2016, provided
that no adjustment will be made if such adjustment would result in an increase to the conversion price. At March 7, 2016 the conversion
price was maintained at its original value as an adjustment based on the conversion price reset formula would have resulted in
an increase of the conversion price. On March 14, 2016, as a result of the private placement, the conversion price for the
9% senior unsecured convertible bonds due 2018 was adjusted from its previous level of 0.9414 euros to the level of 0.9263 euros
per share. On December 20, 2016 the conversion price was adjusted from its previous level of 0.9263 euros per share to the new
level of 0.8983 euros per share as a consequence of the initial public offering of the Company in the United States.



Issuer call option. If at any time
after March 27, 2017, the share price on each of at least 20 dealing days within a period of 30 consecutive dealing days ending
not earlier than 7 dealing days prior to the giving of a notice of redemption shall have been at least 130% of the applicable conversion
price in effect on each such dealing day, by giving a notice, the Company may redeem all, but not some only, of the bonds at their
principal amount (plus accrued interest) within not less than 30 and not more than 60 days of the date of the notice of redemption.



Clean-up call. The Company may redeem
all, but not some only, of the outstanding bonds at their principal amount (plus accrued interest) at any time if less than 15%
of the aggregate principal amount of the bonds originally issued remains outstanding, by giving not less than 30 and not more than
60 days’ notice.



Anti-dilution protection. The bonds
are issued subject to standard anti-dilution protection dealing with, inter alia, share consolidations, share splits, rights issues,
capital distributions and bonus issues.



Dividend protection. The bonds benefit
from full dividend protection through adjustment of the conversion price for any distribution in cash or shares.



Change of control protection. Upon
the occurrence of a change of control (i.e. when one or several individuals or legal entities acting alone or in concert acquire,
directly or indirectly, more than 30% of the share capital or voting shares of the Company), bondholders may require the Company
to redeem their

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bonds at the principal amount, plus accrued interest. In addition, the conversion price of the bonds shall be temporarily
adjusted downwards in accordance with a market standard formula for a period of 60 days.



Transferability. The bonds are freely
transferable.



Lock-up. The Company agreed, subject
to certain customary exceptions, not to issue or dispose of ordinary shares, convertible bonds, warrants or related securities
during a period of 90 days after March 6, 2015.



Governing law. The bonds are governed
by English law, except for the provisions relating to meetings of bondholders and any matter relating to the dematerialized form
of the bonds, which are governed by Belgian law.



Issuance costs amounted to 1.1 million euros
and have been allocated to the Ordinary Note and the Warrant in proportion to their values (0.7 million euros and 0.4 million euros,
respectively). In the case of the warrant, issuance costs have been recognized in profit or loss on initial recognition, following
IAS 39.



At issuance, the Instrument had a nominal
value of 25 million euros, being the fair value of the Warrant 7.9 million euros and the amortized cost of the Ordinary Note 16.4
million euros. As at December 31, 2016 the fair value of the warrant amounts to 2.4 million euros (13.3 million euros at December
31, 2015) and the amortized cost (with an effective interest rate of 28.06%) of the Ordinary Note to 21.5 million euros.



The fair value of the government loans at
below market rate interest represented in the table above for the periods 2015-2014, has been calculated based on a discount rate
of 21% reflecting the market credit risk for a company such as TiGenix in a similar development stage. This market credit risk
was determined considering the effective interest from the Kreos loan, which was signed at the end of December 2013 but only into
force since February 2014, and the market yields of similar companies.



Other financial liabilities in 2016, 2015
and 2014 relate to the warrants issued as a consideration for the Kreos loan for an amount of 350 thousand euros in 2016. The warrant
plan consisted of 1,994,302 warrants that were issued with an exercise price of 0.75 euros exercisable immediately and which
expire in April 2019. The warrants also include a put option that authorizes Kreos Capital IV (Expert Fund) to return the
warrants to the Company and to settle the warrants in cash under certain circumstances. In May 2015, Kreos Capital exercised this
option and executed one third of the warrants (€163,333), the remaining put options lapsed in January 2016. The amount in
other financial liabilities at December 31, 2016 recognizes the fair value of remaining warrants at that date.



21. Deferred taxes



Deferred tax liabilities



|                         |  | As
at December 31,
|------------------------ |  | ------------------
|Thousands
of euros       |  | 2016              
|Deferred tax liabilities |  |                   
|Total                    |  |                   



The variation in the deferred tax balances
presented in the consolidated statement of financial position is as follows:



|Thousands
of euros                                   |  | Intangibleassets |         | Tax
losses |  | Other |         | Total
|---------------------------------------------------- |  | ---------------- | ------- | ---------- |  | ----- | ------- | -----
|Balance at January 1, 2014                           |  |                  | (10,143 | )          |  |       | 10,143  |      
|Recognized in income statement–continuing operations |  |                  | 631     |            |  |       | (631    | )    
|Balance at December 31, 2014                         |  |                  | (9,512  | )          |  |       | 9,512   |      
|Coretherapix acquisition                             |  |                  | (1,532  | )          |  |       | 1,532   |      
|Recognized in income statement–continuing operations |  |                  | 2,362   |            |  |       | (2,362  | )    
|Balance at December 31, 2015                         |  |                  | (8,682  | )          |  |       | 8,682   |      
|Recognized in income statement–continuing operations |  |                  | (2,283  | )          |  |       | 2,283   |      
|Balance at December 31, 2016                         |  |                  | (10,965 | )          |  |       | (10,965 | )    



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In the context of the business combination
with TiGenix SAU, the Group recognized a deferred tax liability of 12.3 million euros relating to the recognition of the intangible
assets of TiGenix SAU at the acquisition date. At the same time (i.e., the acquisition date), a deferred tax asset
was recognized for the tax losses carried forward of TiGenix SAU to the extent of the deferred tax liabilities recognized.



In the case of Coretherapix SLU acquisition,
the Group has recognized a deferred tax liability of 1.5 million euros relating to the recognition of the intangible assets of
Coretherapix SLU at the acquisition date. At the same time (i.e., the acquisition date), a deferred tax asset was recognized
for the tax losses carried forward of Coretherapix SLU to the extent of the deferred tax liabilities recognized. As a consequence
of a change in accounting policy at statutory level, there has been an increase in the amount of tax losses; in 2016, the mentioned
deferred tax liability raised to 4.3 million euros. This mainly explains the 2.3 million euros evolution of deferred tax assets
during the period to the extent of the deferred tax liabilities recognized.



Deductible temporary differences, unused
tax losses and unused tax credits for which no deferred tax assets have been recognized, are attributable to the following:



|                             |  | As
at December 31,
|---------------------------- |  | ------------------
|Thousands
of euros           |  | 2016              
|Unused tax losses            |  |                   
|Unused tax credits           |  |                   
|Notional interest deductions |  |                   
|Total                        |  |                   



The tax losses do not have an expiration
date. 18% of the unused tax credits will expire within a period of ten years. 79% of unused tax credits have an expiration date
between ten and eighteen years. The remaining 3% do not have an expiration date. The notional interest deductions will expire within
a period of three years.



Due to the losses of the Group, no income
taxes were payable. On December 31, 2016 the Group had losses carried forward amounting to 200.3 million euros (2015:
180.7 million euros; 2014: 143.4 million euros), including a potential deferred tax asset of 61.8 million euros. Due
to the uncertainty surrounding TiGenix’s ability to realize taxable profits in the near future, the Company did not recognize
any deferred tax assets, except for the ones used to offset the deferred tax liabilities recognized as part of a past business
combination, on its balance sheet.



In addition to tax losses, the Group has
unused tax credits (2016: 20.8 million euros; 2015: 20.1 million euros; 2014: 15.0 million euros) and notional interest
deductions (2016: 1.7 million euros; 2015: 3.0 million euros; 2014: 5.1 million euros) for which no deferred tax
assets have been recognized either.



22. Other non-current liabilities –
contingent consideration



Other non-current liabilities include the
fair value at December 31, 2016 of the contingent deferred elements of the purchase price of Coretherapix (7.3 million euros).



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The fair value upon acquisition
date of the contingent deferred elements of the purchase price of 11.3 million euros was computed as the sum of the probability-weighted
values of the fair values of the purchase prices associated with each of the nine product development routes. The fair value of
each route was in turn computed as the sum of the survival probability-discounted present values of the contingent payments in
each such route including the Milestone and Commercialization Payments. The discount rate used in the model was 15%. (See note
4).



The fair values are reviewed
on a regular basis, at least at each reporting period, and any changes are reflected in the income statement. The fair value of
contingent consideration increased from 12.0 million euros at the December 31, 2015 to 12.9 million euros at December 31, 2016
(of which, 7.3 million euros are presented as non-current liabilities and 5.5 million euros as current liabilities). The increase
was due to the reduction of the probability of fast track routes and resulted in an operating expense of 0.8 million euros in the
TiGenix' audited consolidated income statement for the year ended December 31, 2016.



23. Trade and other payables



|                               |  | As
at December 31,
|------------------------------ |  | ------------------
|Thousands
of euros             |  | 2016              
|Trade payables                 |  |                   
|Other payables                 |  |                   
|Payables relating to personnel |  |                   
|Other                          |  |                   
|Total                          |  |                   



24. Other current liabilities



The other current liabilities consist of
grant income and other accruals.



|                   |  | As
at December 31,
|------------------ |  | ------------------
|Thousands
of euros |  | 2016              
|Accrued charges    |  |                   
|Deferred income    |  |                   
|Total              |  |                   



25. Share-based payments



TiGenix–Stock options granted
to employees, consultants and directors



On February 26, 2007 (800,000), March 20,
2008 (400,000), June 19, 2009 (500,000), March 12, 2010 (500,000) July 6, 2012 (4,000,000), March 20, 2013
(777,000), December 16, 2013 (1,806,000) and December 7, 2015 (2,250,000) in the aggregate 11,033,000 warrants were issued
for the benefit of employees, consultants and directors, subject to the warrants being granted to and accepted by the beneficiaries.
Of these 11,033,000 warrants, (i) 764,621 warrants expired as they have not been granted, (ii) 440,933 warrants have
expired as they have not been accepted by their beneficiaries, (iii) 1,197,286 warrants have lapsed due to their beneficiaries
leaving the Company, and (iv) 11,530 warrants have been exercised. As a result, as at December 31, 2016, there are 8,618,630
warrants granted and outstanding (2015: 8,344,086; 2014: 6,594,676).



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The warrants are granted to employees, consultants
and directors of the Company and its subsidiaries, as well as to other persons who in the scope of their professional activity
have made themselves useful to the Group, including but not limited to the members of the scientific advisory board and the clinical
advisors. The warrants have been granted free of charge. Each warrant entitles its holder to subscribe to one common share of the
Company at a subscription price determined by the board of directors, within the limits decided upon at the occasion of their issuance.



The warrants issued on February 26,
2007, March 20, 2008, June 19, 2009, March 12, 2010, July 6, 2012, December 16, 2013 and December 7, 2015
have a term of ten years. The warrants issued on March 20, 2013 have a term of five years. Upon expiration of the ten or five
year term, the warrants become null and void.



The warrants issued on February 26,
2007, March 20, 2008, June 19, 2009, March 12, 2010 vest, in principle, in cumulative tranches of 25% per year,
i.e., 25% as of the first anniversary date of their granting, 50% as of the second anniversary date of their granting, 75%
as of the third anniversary date of their granting, 100% as of the fourth anniversary date of their granting provided that the
cooperation between the Company and the warrant holder has not yet ended, unless the board of directors approved a deviation from
this vesting schedule. As to the warrants issued on July 6, 2012, March 20, 2013 and December 7, 2015, in principle,
(i) one-third of the warrants granted will vest on the first anniversary of the granting of the warrants and (ii) one-twenty-fourth
of the remaining two-thirds of the warrants granted will vest on the last day of each of the twenty-four months following the month
of the first anniversary of the granting of the warrants. As to the warrants issued on December 16, 2013, in principle, (i) 10%
of the warrants granted will vest on the date of acceptance of the warrants, (ii) 25% of the warrants granted will vest on
the first anniversary of the granting of the warrants and (iii) 65% of the warrants granted will only vest (one-twenty-fourth
on the last day of each of the months included in the period January 2015 to December 2016) if the Company effectively enters into
certain business transactions. The warrants can only be exercised by the warrant holder if they have effectively vested.



In accordance with IFRS 2, the table below
provides an overview as at December 31, 2016 of all outstanding warrant pools offered to employees, consultants and directors
of the Company and its subsidiaries together with the activities under the different pools of warrants during 2016.









|Number of options                       |  | Weighted  average exercise  price |      | Total |  | December 07,
                                         2015 |           | December
                                         16, 2013 |  | March
                                         20, 2013 |            | March
                                         20, 2013 |  | July
                                         6, 2012 |            | March
                                         12, 2010 |  | June
                                         19, 2009 |            | March
                                         20, 2008 |  | February
                                         26, 2007
|--------------------------------------- |  | --------------------------------- | ---- | ----- |  | ---------------------------------------------------------- | --------- | ---------------------------------------------------------- |  | ------------------------------------------------------- | ---------- | ------------------------------------------------------- |  | ----------------------------------------------------- | ---------- | ------------------------------------------------------- |  | ------------------------------------------------------ | ---------- | ------------------------------------------------------- |  | ----------------------------------------------------------
|Number of options created               |  |                                   | -    |       |  |                                                            | -         |                                                            |  |                                                         | 2,250,000  |                                                         |  |                                                       | 1,806,000  |                                                         |  |                                                        | 160,000    |                                                         |  |                                                           
|Weighted average exercise price (euros) |  |                                   | -    |       |  |                                                            | -         |                                                            |  |                                                         | 0.95       |                                                         |  |                                                       | 0.47       |                                                         |  |                                                        | 1,00       |                                                         |  |                                                           
|Fair value at grant date (euros)        |  |                                   | -    |       |  |                                                            | -         |                                                            |  |                                                         | 0.68       |                                                         |  |                                                       | 0.35       |                                                         |  |                                                        | 0.2        |                                                         |  |                                                           
|Expiration date                         |  |                                   | -    |       |  |                                                            | -         |                                                            |  |                                                         | 11/30/2025 |                                                         |  |                                                       | 11/30/2024 |                                                         |  |                                                        | 11/30/2019 |                                                         |  |                                                           
|Balance at January 1, 2014              |  |                                   | 1.77 |       |  |                                                            | 6,570,285 |                                                            |  |                                                         | –          |                                                         |  |                                                       | 957,180    |                                                         |  |                                                        | 160,000    |                                                         |  |                                                           
|Granted                                 |  |                                   | 0.47 |       |  |                                                            | 848,820   |                                                            |  |                                                         | –          |                                                         |  |                                                       | 848,820    |                                                         |  |                                                        | –          |                                                         |  |                                                           
|Forfeited                               |  |                                   | 1.05 |       |  |                                                            | (380,734  | )                                                          |  |                                                         | –          |                                                         |  |                                                       | (81,270    | )                                                       |  |                                                        | –          |                                                         |  |                                                           
|Expired                                 |  |                                   | 3.50 |       |  |                                                            | (443,695  | )                                                          |  |                                                         | –          |                                                         |  |                                                       | –          |                                                         |  |                                                        | –          |                                                         |  |                                                           
|Balance at December 31, 2014            |  |                                   | 1.53 |       |  |                                                            | 6,594,676 |                                                            |  |                                                         | -          |                                                         |  |                                                       | 1,724,730  |                                                         |  |                                                        | 160,000    |                                                         |  |                                                           
|Granted                                 |  |                                   | 0.96 |       |  |                                                            | 1,766,218 |                                                            |  |                                                         | 1,766,218  |                                                         |  |                                                       | –          |                                                         |  |                                                        | –          |                                                         |  |                                                           
|Forfeited                               |  |                                   | 1.00 |       |  |                                                            | (7,778    | )                                                          |  |                                                         | –          |                                                         |  |                                                       | –          |                                                         |  |                                                        | –          |                                                         |  |                                                           
|Exercised                               |  |                                   | 0.46 |       |  |                                                            | (9,030    | )                                                          |  |                                                         | –          |                                                         |  |                                                       | (9,030     | )                                                       |  |                                                        | –          |                                                         |  |                                                           
|Balance at December 31, 2015            |  |                                   | 1.41 |       |  |                                                            | 8,344,086 |                                                            |  |                                                         | 1,766,218  |                                                         |  |                                                       | 1,715,700  |                                                         |  |                                                        | 160,000    |                                                         |  |                                                           
|Granted                                 |  |                                   | 0.97 |       |  |                                                            | 453,961   |                                                            |  |                                                         | 453,961    |                                                         |  |                                                       | –          |                                                         |  |                                                        | –          |                                                         |  |                                                           
|Forfeited                               |  |                                   | 0.83 |       |  |                                                            | (179,417  | )                                                          |  |                                                         | (142,581   | )                                                       |  |                                                       | (17,119    | )                                                       |  |                                                        | (19,717    | )                                                       |  |                                                           
|Balance at December 31, 2016            |  |                                   | 1.40 |       |  |                                                            | 8,618,630 |                                                            |  |                                                         | 2,077,598  |                                                         |  |                                                       | 1,698,581  |                                                         |  |                                                        | 140,283    |                                                         |  |                                                           



On December 7, 2015, 2,250,000 warrants
were issued of which 2,220,179 warrants were granted in total and 29,821 warrants expired because they were not granted.



On December 7, 2015, 1,766,218 warrants
were granted. The exercise price was determined as follows:



| | - | For all employees, the exercise price was set at 0.95 euro, the closing price of our ordinary shares
on December 4, 2015, the last closing price prior to the grant of the warrants on December 7, 2015, which was lower than the 30
day average price.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | - | For our CEO, Eduardo Bravo, who is not an employee of TiGenix SAU, the exercise price was set at
0.97 euro, the average closing price of our ordinary shares during 30 calendar days prior to the issuance of the warrants on December
7, 2015.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On May 4, 2016, 96,637 warrants were granted.
The exercise price was determined as follows:



| | - | For all employees, the exercise price was set at 0.95 euro, the closing price of our ordinary shares
on May 3, 2016, the last closing price prior to the grant of the warrants on May 4, 2016, which was higher than the 30 day average
price.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On June 2, 2016, 193,863 warrants were granted.
The exercise price was determined as follows:



| | - | For our independent directors, who are not employees of TiGenix, the exercise price was set at
0.97 euro, the average closing price of our ordinary shares during 30 calendar days prior to the issuance of the warrants on December
7, 2015.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On September 6, 2016, 163,461 warrants were
granted. The exercise price was determined as follows:



| | - | For all employees, the exercise price was set at 0.97 euro, the closing price of our ordinary shares
on September 5, 2016, the last closing price prior to the grant of the warrants on September 6, 2016, which was lower than the
30 day average price.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The warrants issued on December 7, 2015
have a term of ten years. Upon expiration of the ten year term, the warrants become null and void. The issuance of these warrants
has no impact on the accompanying consolidated financial statements.



The fair value of each warrant was estimated
on the date of grant using the Black-Scholes model with the following assumptions:



| | • | The historic volatility of the Company (ranged between 66.9% and 69.7% for the 2015 warrant plan
granted in four different tranches, 67% for the 2013 warrant plans, 52.8% for the 2012 warrant plan and 60% for the previous plans),
which was determined based on past (three years) volatility of the TiGenix share;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | The expected dividends are assumed to be zero in the model;
| | - | -----------------------------------------------------------



| | • | Weighted average risk-free interest rates based on Belgian Sovereign Strips at the date of grant
with a term equal to the expected life of the warrants, ranging between 0% and 4.6%;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Weighted average share price (determined at 0.96 euros for the latest warrant plan); and
| | - | ----------------------------------------------------------------------------------------



| | • | The expected lifetime of the warrants, which on average is about five years for the warrants with
a maximum duration of ten years.
| | - | ----------------------------------------------------------------------------------------------------------------------------------



The remaining weighted average life of these
options was 5.86 years at December 31, 2016 (2015: 6.8 years; 2014: 6.9 years).



The total expense recognized for the year
arising from share-based payment transactions amounts to 0.9 million euro at December 31, 2016 (2015: 0.1 million euro).



TiGenix SAU–Stock options granted
to employees, executives and independent board members



Prior to the business combination, TiGenix
SAU (formerly Cellerix) had created two equity based incentive plans, or EBIPs. The completion of the business combination triggered
certain consequences



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outlined below which affect both EBIPs. A summary overview of some of the conditions of both EBIPs is given
below.



Options under the EBIP 2008 were granted
to employees, executives and independent members of the board of directors of TiGenix SAU prior to the business combination. Options
under the EBIP 2008 were granted to each beneficiary through individual letters. As a result of the business combination, all EBIP
2008 options vested except for 32,832 options of employees who terminated their employment with TiGenix SAU before the business
combination and that were not re-allocated. The exercise prices of the EBIP 2008 were set at 11.0 euros, 7.0 euros and
5.291 euros depending on the date of grant and beneficiary. TiGenix SAU granted 453,550 options under the EBIP 2008 of which
420,718 were vested. As a result of the business combination, all TiGenix SAU options were exchanged into TiGenix stock options.



The options under the EBIP 2008 had to be
exercised prior to August 6, 2015. As no beneficiary exercised its options, they have now expired. This resulted in a movement
of 2,108 euro in accumulated deficits during year 2015. The Company is exploring its options with respect to a new plan that would
be based on the existing shares underlying the expired options.



Options under the EBIP 2010 were only granted
to senior management of TiGenix SAU. The EBIP provides that the normal exercise price of the options is set at 5.291 euros.
However, as a result of the business combination the exercise price for all EBIP 2010 options has been reduced to 0.013 euros.
TiGenix SAU has granted 221,508 options under the EBIP 2010. As a result of the business combination, all EBIP 2010 options have
vested. Pursuant to the terms of the EBIP 2010 the board of directors of TiGenix SAU has opted to exchange all existing options
for new options over existing TiGenix shares. Pursuant to the initial terms of the EBIP 2010, beneficiaries had to exercise their
options before September 30, 2016. However, the exercise period of the EBIP 2010 was extended until December 31, 2016, and all
remaining options under the EBIP 2010 were exercised in October 2016.



As of December 31, 2016, no more options
were outstanding under the EBIPs.







|Number of options  Grant date           |  | Total |          | Options  issued in 2010
|--------------------------------------- |  | ----- | -------- | -----------------------
|Number of options created               |  |       | 221,508  |                        
|Weighted average exercise price (euros) |  |       |          |                        
|Fair value at grant date (euros)        |  |       |          |                        
|Expiration date                         |  |       |          |                        
|Balance at January 1, 2014              |  |       | 221,508  |                        
|Exercised                               |  |       | (31,011  | )                      
|Balance at December 31, 2014            |  |       | 190,497  |                        
|Balance at December 31, 2015            |  |       | 190,497  |                        
|Exercised                               |  |       | (190,497 | )                      
|Balance at December 31, 2016            |  |       | —        |                        





26. Related party transactions



Transactions between the Group and its employees,
consultants or directors are disclosed below.



Compensation of key management personnel



Key management personnel are identified
as being the CEO, CFO, CTO and CMO.



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The combined remuneration package of key
management was as follows:



|                                                            |  | Years
                                         ended December 31,
|----------------------------------------------------------- |  | -----------------------------------------------------------------
|Thousands
                                         of euros |  | 2016                                                             
|Short-term benefits                                         |  |                                                                  
|Post-employment benefits                                    |  |                                                                  
|Share-based payments                                        |  |                                                                  
|Total                                                       |  |                                                                  



No loan, quasi-loan or other guarantee is
outstanding with members of the management team.



Transactions with non-executive directors



Non-executive directors that represent shareholders
of the Company receive no compensation for their position as directors.



The independent directors receive a fee
for attending and preparing the meetings of the board of directors and they receive reimbursement for expenses directly related
to the board meetings. In 2016, an amount of 0.2 million euros (2015: 0.2 million euros; 2014: 0.1 million euros)
in total was paid as fees and expense reimbursement to independent members of the board of directors.



No advances or credits have been granted
to any member of the board of directors. None of the members of the board of directors has received any non-monetary remuneration
other than warrants.



27. Segment information



The Group’s activities are managed
and operated in one segment, biopharmaceuticals. There is no other significant class of business, either individual or in aggregate.
As such, the chief operating decision maker (i.e., the CEO) reviews the operating results and operating plans and makes
resource allocation decisions on a company-wide basis.



Geographical information



Revenue from continuing operations are mainly
related to royalties 0.4 million euros (Sweden), License revenues for a total amount of 25 million euros (Switzerland) and grants
and other operating income (0.8 million euros Spain and 0.6 million euros Belgium).



All sales related to the product ChondroCelect
have been disclosed as a discontinued operation in 2014. (See note 10).



The Group’s non-current assets (excluding
non-current assets held for sale) by location are presented below:



|                   |  | As
at December 31,
|------------------ |  | ------------------
|Thousands
of euros |  | 2016              
|Belgium            |  |                   
|Spain              |  |                   
|Total              |  |                   



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28. Commitments and contingencies



Operating lease commitments



The operating lease commitments of the Group
relate to leases of buildings between one and nine years and leases of cars and IT equipment for four years. The Group does not
have an option to purchase the leased assets.



In 2016, the Group made operating minimum
lease payments for a total amount of 0.3 million euros (2015: 0.5 million euros; 2014: 0.9 million euros).



The operating lease commitments for future
periods are presented in the table below:



|                            |  | As
at December 31,
|--------------------------- |  | ------------------
|Thousands
of euros          |  | 2016              
|Within one year             |  |                   
|In the second to fifth year |  |                   
|After five years            |  |                   
|Total                       |  |                   

Other commitments



TiGenix Inc. guarantees the operating
lease payments of Cognate for the building leased in the United States. Total remaining operating lease commitments at December 31,
2016 for which TiGenix Inc. was a guarantor were 0.3 million euros (0.3 million euros in 2015). Cognate was the party with
whom TiGenix had a joint venture, TC CEF LLC, in the past.



Legal proceedings



Tigenix SAU is involved in the following
legal proceedings.



Invalidation of U.S. patent US6777231



On April 1, 2011, Cellerix (the predecessor
entity of our subsidiary TiGenix SAU) filed an inter partes re-examination request with the US Patent and Trademark Office
regarding the patent US6777231, owned by the University of Pittsburgh. The US Patent and Trademark Office examiner issued a decision
concluding that all ten originally issued and all eighteen newly submitted claims of the patent granted to the University of Pittsburgh
were invalid. The University of Pittsburgh then appealed the examiner’s decision, but only with respect to two of the newly
submitted claims. We cross-appealed the examiner’s refusal to reject those two newly submitted claims as anticipated by
the prior art. The Patent Trial and Appeal Board issued a decision simultaneously granting both appeals, thus confirming that
all claims of the patent were invalid, but with respect to the newly submitted claims, on different grounds than those cited in
the decision by the initial examiner. On this basis, the University of Pittsburgh filed a request to reopen prosecution and submitted
claim amendments to those newly submitted claims to the US Patent and Trademark Office for further consideration in an attempt
to overcome the Patent Trial and Appeal Board’s institution of a new ground for rejection as anticipated by the prior art.
We submitted comments to the US Patent and Trademark Office arguing that these claim amendments did not overcome the anticipated
rejection. On March 16, 2015, the examiner issued her determination that the claim amendments did not overcome the anticipated
rejection and further adopted our proposed anticipated rejections over two additional prior art references and two proposed indefiniteness
rejections. We and the University of Pittsburgh have submitted comments on the examiner’s determination and replied to each
other’s comments. The comments and replies have been entered into the record and the proceedings were forwarded to the Patent
Trial and Appeal Board on December 18, 2015. The proceedings were docketed at the PTAB as of September 13, 2016; accordingly a
decision could be rendered by the PTAB

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at any time. We do not know exactly when a final decision will be rendered, and at this stage, we are not
in a position to assess the probable outcome of these proceedings.



If the re-examination is not successful,
the Company may be required to obtain a license on unfavorable terms, or may not be able to obtain a license at all in order to
commercialize its adipose-derived stem cell products in the United States. The Company would potentially be susceptible to patent
infringement or litigation regarding patent infringement while commercializing its eASC products in the United States. The Company
may, therefore, choose to delay the launch of its adipose-derived stem cell products in the U.S. market until the expiration of
the patent US6777231 on March 10, 2020.



29. Subsequent events



As from December 31, 2016 there are no subsequent
events that would require adjustment to, or disclosure in the financial statements.



30. Consolidation scope



|                                                                                                                                                                                                                             |  |                           |  |                        |         | Ownership interest
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ---------------------- | ------- | ------------------
|                                                                                                                                                                                                                             |  |                           |  |                        |         | As at December 31,
|Legal Entity                                                                                                                                                                                                                 |  | Principal activity        |  | Place of incorporation |         | 2016              
|TiGenixRomeinse straat 12,
                                                    Box 2
                                         3001 Leuven                                                                                    |  | Biopharmaceutical company |  |                        | Belgium |                   
|TiGenix
                                         SAUCalle Marconi 1, Parque
                                                    Tecnológico
                                         de Madrid Tres Cantos 28760 Madrid      |  | Biopharmaceutical company |  |                        | Spain   |                   
|Coretherapix
                                         SLUCalle Marconi 1, Parque
                                                    Tecnológico
                                         de Madrid Tres Cantos 28760 Madrid |  | Biopharmaceutical company |  |                        | Spain   |                   
|TiGenix Inc.1209 Orange Street Wilmington, Delaware                                                                                                                                                                          |  | Biopharmaceutical company |  |                        | U.S.A.  |                   





F-65