Exhibit 99.2
Merus Labs International Inc.
First Quarter Report 2016
For the Three Months Ended December 31, 2015 and 2014
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MERUS LABS INTERNATIONAL INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
For the three months ended December 31, 2015 and 2014
The following section of our report sets forth Management’s Discussion and Analysis of the financial performance and condition of Merus Labs International Inc. (“the Company” or “Merus”) for the three months ended December 31, 2015 compared to the three months ended December 31, 2014. The analysis should be read in conjunction with the accompanying condensed consolidated interim financial statements (the “Financial Statements”) for the three months ended December 31, 2015 and 2014 and the related notes thereto.
The date of this MD&A is February 11, 2016.
FORWARD-LOOKING STATEMENTS
This MD&A contains certain statements or disclosures that may constitute forward-looking information or statements (collectively, “forward-looking information”) under applicable securities laws. All statements and disclosures, other than those of historical fact, which address activities, events, outcomes, results or developments that management of the Company, anticipates or expects may or will occur in the future (in whole or in part) should be considered forward-looking information. In some cases, forward-looking information can be identified by terms such as “forecast”, “future”, “may”, “will”, “expect”, “anticipate”, “believe”, “could”, “potential”, “enable”, “plan, “continue”, “contemplate”, “pro forma” or other comparable terminology. Forward-looking information presented in such statements or disclosures may, among other things include:
• | the Company’s expectations regarding sales from its existing products, including its sales forecasts; |
• | the Company’s ability to acquire new products; |
• | the Company’s expectations regarding it ability to raise capital, including its ability to secure the financing necessary to enable us to acquire new products; |
• | the Company’s expectations regarding sales from products that we acquire or license; |
• | the Company’s forecasts regarding its operating expenditures, including general and administrative expenses, |
• | the Company’s expectations regarding the development of its target markets; |
• | the Company’s expectations regarding government regulations of its products and any new products that we acquire; |
• | the Company’s expectations regarding currency exchange rates; |
• | the Company’s expectations regarding income taxes; |
• | the Company’s plans, objectives and targets for future revenue growth and operating performance; |
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• | the Company’s plans and objectives regarding new products that it may acquire; and |
• | the Company’s forecast business results and anticipated financial performance. |
The forward-looking information in statements or disclosures in this MD&A is based (in whole or in part) upon factors which may cause actual results, performance or achievements of the Company to differ materially from those contemplated (whether expressly or by implication) in the forward-looking information. Those factors are based on information currently available to the Company, including information obtained from third-party industry analysts and other third party sources. Actual results or outcomes may differ materially from those predicted by such statements or disclosures. While the Company does not know what impact any of those differences may have, their business, results of operations, financial condition and credit stability may be materially adversely affected. Factors that could cause actual results or outcomes to differ materially from the results expressed or implied by forward-looking information include, among other things:
• | our ability to successfully market and sell our products; |
• | our ability to service existing debt; |
• | our ability to increase sales of our existing products; |
• | our ability to acquire new products and, upon acquisition, to successfully market and sell new products that we acquire; |
• | our ability to achieve the financing necessary to complete the acquisitions to new products; |
• | market conditions in the capital markets and the biopharmaceutical industry that make raising capital or consummating acquisitions difficult, expensive or both; |
• | unanticipated cash requirements to support current operations, to expand our business or for capital expenditures; |
• | the acceptance of our products by regulatory and reimbursement agencies in various territories including Canada and Europe and inclusion on drug benefit formularies, hospital formularies and acceptance by pharmacies, physicians and patients in the marketplace; |
• | determinations by regulatory and reimbursement agencies in various countries including Canada and Europe regarding the maximum reimbursement price payable for the products that we sell; |
• | core patent protection for our product portfolio has expired or will expire in the future, which could result in significant competition from generic products resulting in a significant reduction in sales; |
• | delays or setbacks with respect to governmental approvals, or manufacturing or commercial activities; |
• | the patient health, legal, and commercial risks associated with patient adverse events or side effects resulting from the use of our products; |
• | the inability to adequately protect our key intellectual property rights; |
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• | the loss of key management or scientific personnel; |
• | the activities of our competitors and specifically the commercialization of innovative or generic products that compete in the same category as our products; |
• | the risk that the Company is not able to arrange sufficient, cost-effective financing to repay maturing debt and to fund expenditures, future operational activities and acquisitions, and other obligations; and |
• | the risks associated with legislative and regulatory developments that may affect costs, revenues, the speed and degree of competition entering the market, global capital markets activity and general economic conditions in geographic areas where we operate. |
Investors should review the full discussions as to material risks and uncertainties, and factors and assumptions used to develop forward-looking statements, included in the Company’s annual report on Form 40-F.
Various assumptions or factors are typically applied in drawing conclusions or making the forecasts or projections set out in forward-looking information. Those assumptions and factors are based on information currently available to the Company, including information obtained from third-party industry analysts and other third party sources. In some instances, material assumptions and factors are presented or discussed elsewhere in this MD&A in connection with the statements or disclosure containing the forward-looking information. You are cautioned that the following list of material factors and assumptions is not exhaustive. The factors and assumptions include, but are not limited to:
• | no unforeseen changes in the legislative and operating framework for the business of the Company; |
• | a stable competitive environment; and |
• | no significant event occurring outside the ordinary course of business such as a natural disaster or other calamity. |
The Company is not obligated to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable laws. Because of the risks, uncertainties and assumptions contained herein, security holders should not place undue reliance on forward-looking statements or disclosures. The foregoing statements expressly qualify any forward-looking information contained herein.
The Company cautions you that the above list of risk factors is not exhaustive. Other factors which could cause actual results, performance or achievements of the Company to differ materially from those contemplated (whether expressly or by implication) in the forward-looking statements or other forward-looking information are disclosed in the Company’s publicly filed disclosure documents.
All historical financial information is prepared in accordance with IFRS and is expressed in Canadian dollars.
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Corporate History
The Company was originally formed on December 19, 2011 by the amalgamation of Merus Labs International Inc. (“Old Merus”) and Envoy Capital Group Inc. (“Envoy”) pursuant to an arrangement agreement dated November 10, 2011 pursuant to theBusiness Corporations Act(British Columbia). Envoy was originally incorporated under the laws of the Province of British Columbia as “Potential Mines Ltd.” in December 1973 and was continued under the laws of the Province of Ontario in December 1997. the shareholders voted to amend Envoy’s articles of incorporation by changing its name to Envoy Capital Group Inc. In connection with the amalgamation of Envoy and Old At Envoy’s annual general meeting held on March 30, 2007Merus, Envoy continued from the jurisdiction of the Province of Ontario to the Province of British Columbia on December 16, 2011.
Old Merus was incorporated under the laws of the Province of British Columbia on November 9, 2009 under the name 0865346 B.C. Ltd. On January 22, 2010, Old Merus changed its name to Merus Labs International Inc. in connection with a plan of arrangement with Range Gold Corp. and Merus Labs Inc. (“Merus Labs”).
On October 1, 2012, the Company amalgamated with Merus Labs, a wholly owned subsidiary of the Corporation continuing under the name “Merus Labs International Inc.”
The Company’s head office is located at Suite 2110, 100 Wellington St. West, P.O. Box 151, Toronto, Ontario M5K 1H1; and its telephone number is 416-593-3725.
The common shares in the capital of the Company (the “Common Shares”) are publicly traded on the Toronto Stock Exchange (“TSX”) under the symbol “MSL” and on NASDAQ under the symbol “MSLI”.
CORPORATE STRATEGY
Merus is a specialty pharmaceutical company that acquires prescription medicines in the following categories:
• | On patent but at maturity stage of product life cycle |
• | Branded generics |
• | Under promoted products |
• | Niche market pharmaceuticals |
• | Products with annual sales below the critical threshold for large pharma |
The Merus corporate growth strategy is driven by a product acquisition plan which employs an opportunistic approach to source product acquisition candidates. This approach allows Merus to source pharmaceutical products across broad therapeutic classes which provides access to acquisition targets not available to other players and creates a diversified strategy. Although Merus has a broad therapeutic focus, opportunities will be pursued if the application of a dedicated small scale sales force can deliver incremental product sales growth. The geographic focus is primarily Europe and Canada.
The Merus corporate strategy results in a diversified product portfolio approach. To manage such a product portfolio, a low cost operating model has been implemented in which there is a light infrastructure footprint. Merus has partnered with third party contract manufacturing and regulatory service providers to leverage their expertise but still maintain maximum flexibility for Merus.
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Business Model for Acquisition of Diversified Legacy Products
Merus believes that it has a unique strategy in seeking to acquire legacy products primarily for the purpose of generating a stream of stable revenues and cash flow. Merus believes that this strategy will provide it with the flexibility to consider a broad range of acquisition targets from a variety of therapeutic areas. Therefore, the potential number of product acquisition candidates may be much larger for Merus than for its competitors. Management believes that its approach to product acquisition and its return objectives provide Merus with a competitive advantage in acquiring products as Merus can purchase diversified bundles of products from a single vendor. In contrast, Merus’ competitors, such as niche pharmaceutical companies, are more likely to focus on individual product acquisition within the same therapeutic area. As a result, certain vendors may view Merus as a preferred purchasing candidate.
Predictable Cost Structure
Merus’ plan is to establish a predictable cost structure by relying on a small employee base and outsourcing more of the operational functions associated with its business, including warehousing, distribution, customer service, invoicing, collections, regulatory affairs, medical and drug information, human resources and informational technology. Wherever possible, Merus achieves cost controls by entering into contractual supply and/or service agreements that dictate fixed or percentage fixed costs with annual adjustments for inflation. In the case of its manufacturing supply agreements, its cost of goods will be based on a fixed, per unit cost with annual inflationary adjustments. Management believes the predictability, flexibility and efficiency gained by contracting with established, experienced service organizations will assist Merus in maintaining its margins and maximizing distributable cash.
Partnership with Leading Service Providers
Related to the above, Merus will enter into outsourcing relationships with leading providers of pharmaceutical contract services for many of the operational functions associated with its business and intend to pursue this strategy in the future.
Competitors of Merus
Competitors in the pharmaceutical market range from large multinational pharmaceutical development corporations to small, single product companies that may limit their activities to a particular therapeutic area, region or territory. Competition also comes from generic companies, which develop and commercialize formulations that are identical to marketed brands. Merus expects to compete with a variety of drug companies. With respect to its acquisition strategy, Merus expects to compete principally with other pharmaceutical companies who seek to acquire mature pharmaceutical products as part of their growth strategy. These companies, however, typically focus on under-promoted products in specific therapeutic niches that offer growth potential through synergistic sales and marketing efforts. In addition, since Merus is not focused on specific therapeutic classes, it will have the ability to purchase diversified products and product bundles.
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OVERVIEW
During the last twelve months ended December 31, 2015 and up to the date of this MD&A, the Company announced the following:
• | February 1, 2016 - Merus Reaches Agreement to Acquire Three Cardiovascular Products |
• | July 10, 2015 - Merus Announces Filing of Preliminary Base Shelf Prospectus |
• | June 3, 2015 - Merus Provides Update on German Reimbursement Review |
• | June 1, 2015 - Merus Announces Closing of Over-Allotment Option |
• | May 28, 2015 - Merus Labs to Present at Jefferies 2015 Healthcare Conference in New York |
• | May 26, 2015 - Merus Appoints Frank Rotmann VP & Head of European Operations |
• | May 22, 2015 - Merus Acquires Specialty Product Rights in Multiple Countries |
• | April 30, 2015 - Merus Announces Closing of $60.0 Million Bought Deal Financing |
• | March 27, 2015 - Merus Appoints New Director and Provides European Update |
• | March 2, 2015 - Merus Announces Settlement of Canadian Patent Litigation |
• | February 4, 2015 - Merus Appoints Geoff Morrow as Vice President, Business Development |
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OVERALL PERFORMANCE
For the three months ended December 31, 2015, the Company incurred a net loss of $915,020 compared to a net loss of $216,044 for the three months ended December 31, 2014. For the three months ended December 31, 2015, EBITDA1 was $7,524,725, compared to $7,458,767 for the prior year comparative period. Adjusted EBITDA, which adds back non-cash share based compensation expense, foreign exchange, derivative losses and (gains), investment expenses and acquisition costs, was $8,535,275, compared to $7,559,286 for the prior year comparative period.As at December 31, 2015, the Company had an accumulated deficit of $62,186,634.
Cash provided by operating activities of the Company was $6,879,141 for the three months ended December 31, 2015, compared to cash provided by continuing operations of $3,192,366, for the three months ended December 31, 2014.
Operating risks include but are not limited to: the Company’s ability to attract and retain key personnel, effectively manage growth, and smoothly integrate newly acquired pharmaceutical products and businesses; impact of new or existing generic and innovative competing products, regulatory issues and risk that the Company may not be able to adequately protect the intellectual property surrounding its products, conflicts of interest among the Company’s directors, officers, promoters and members of management; unanticipated expenses; changes in business strategy; impact of any negative publicity; general political and economic conditions; and acts of God and other unforeseeable events, natural or human-caused. Financial risks include but are not limited to the availability of capital to finance the Company’s activities.
The Company cannot anticipate or prevent all of the potential risks to its success, nor predict the impact of any such risk. To the extent possible, management implements strategies aimed at reducing or mitigating risks and uncertainties associated with its business.
1EBITDA - Non-IFRS Financial Measures
The term EBITDA does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other companies. The Company defines EBITDA as earnings before interest expense, taxes, depreciation and amortization (including impairment charges). Adjusted EBITDA is the same measure with additional adjustments for non-cash stock based compensation, foreign exchange and derivative gains or losses, investment income or expense, and acquisition costs. The Company believes EBITDA to be an important measurement that allows it to assess the operating performance of its ongoing business on a consistent basis without the impact of amortization and impairment expenses, debt service obligations and other non-operating items. The Company excludes amortization and impairment expenses because their level depends substantially on non-operating factors such as the historical cost of intangible assets. The Company's method for calculating EBITDA may differ from that used by other issuers and, accordingly, this measure may not be comparable to EBITDA used by other issuers.
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Three months ended December 31 | ||||
2015 | 2014 | |||
Net loss for the period | $ (915,020) | $ (216,044) | ||
Interest expense | 947,629 | 1,590,632 | ||
Income tax expense | 131,561 | 127,785 | ||
Depreciation | 3,854 | 3,911 | ||
Amortization | 7,356,701 | 5,952,483 | ||
EBITDA | $ 7,524,725 | $ 7,458,767 | ||
Add/(Deduct): | ||||
Acquisition costs | 352,319 | - | ||
Non-cash stock based compensation | 1,092,173 | 371,736 | ||
Investment income | (117) | (145) | ||
Foreign exchange gains | (570,697) | (236,818) | ||
Derivative losses (gains) | 136,872 | (34,254) | ||
Adjusted EBITDA | $ 8,535,275 | $ 7,559,286 | ||
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PRODUCT SUMMARY
The Company currently has products in the area of urology/women's health, anticoagulants, cholinergic agents, hormone replacement therapies, and anti-infectives.
Urology / Women's Health
Over Active Bladder
Overactive bladder occurs when a large muscle in the bladder known as the detrusor contracts more often than normal. This causes a person to feel a sudden and sometimes overwhelming urge to urinate even when the bladder isn’t full. Urgency, incontinence, and urinary frequency can also be caused by urinary-tract infections, kidney stones, prostate infection or enlargement, or medicine taken to treat other conditions such as high blood pressure. Though not life-threatening, overactive bladder is inconvenient, can be embarrassing, and can markedly reduce quality of life.
Decision Resources, an advisory firm for pharmaceutical and healthcare issues, finds that although more than 50 percent of people with overactive bladder in the world’s major pharmaceutical markets are undiagnosed, the sizeable prevalent population fuels significant sales for the indication. As a result, the overactive bladder drug market will increase from approximately $3 billion in 2009 to nearly $4 billion in 2019 in the United States, France, Germany, Italy, Spain, United Kingdom and Japan.
Emselex®/Enablex®
In 2003, Novartis Pharma AG (Novartis) acquired the Emselex®/Enablex® (darifenacin) product from Pfizer Inc. and the product was approved for sale in Europe and the United States in 2004. As the global sales of Emselex®/Enablex® were below the critical sales threshold for Novartis, the company decided to reduce its marketing and sales efforts in the majority of territories where the product was marketed. In 2010, Novartis divested the product rights for the United States to Warner Chilcott Plc. A key patent protecting Emselex®/Enablex® expires in August 2016, however, the Company also has a Supplementary Protection Certificate ("SPC") which is expected to provide an additional barrier to generic entrants until October 2019 in most European markets.
In July 2012, the Company acquired from Novartis, the Canadian and European rights (excluding France, Spain and Italy) to manufacture, market, and sell the branded prescription medicine product Emselex®/Enablex® (darifenacin) extended release tablets. Darifenacin is a muscarinic antagonist indicated for the treatment of overactive bladder with symptoms of urge urinary incontinence, urgency and frequency. The product’s specific mechanism of action is the blocking of the M3 muscarinic receptor, which is primarily responsible for bladder muscle contractions. As overactive bladder is a chronic condition, Emselex®/Enablex® is prescribed as a medication to be taken once daily and the extended release tablet format is produced in 7.5mg and 15mg dosage strengths.
As Merus has acquired the product rights in a number of European countries in which the product was not being actively marketed, we have entered into promotion and distribution agreements with local marketing and sales organizations with the goal of incrementally increasing sales in those regions.
Under the terms of the agreements, the partner companies have been granted exclusive rights to distribute, market, and sell Emselex®/Enablex® in their respective territories. Other than Switzerland and Canada, the territories covered by these distribution and promotion agreements did not have any substantial marketing and sales resources devoted to the product in recent years. Merus has entered into these promotion and distribution agreements with partner companies that have a wealth of knowledge and expertise in their local markets. Emselex®/Enablex® is a major growth driver for the Company and these collaborations will enable Merus to broaden its reach in countries which were previously underserved in terms of marketing and sales efforts.
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Cardiovascular Portfolio
Anticoagulents
Anticoagulants prevent stroke and systemic embolism in patients with Atrial Fibrillation. Atrial Fibrillation (AF) is the most common cardiac arrhythmia (heart rhythm disorder) and is associated with palpitations, chest pain, or congestive heart failure. Embolism refers to where a clot exists and breaks off and flows into the blood stream later clogging an artitery. Antigoagulants treat and prevent deep vein thrombosis (DVT) and pulmonary embolism (PE) and also prevent venous thromboembolic events (VTE) in patients who have undergone hip or knee replacement surgery.
• | Atrial Fibrillation: AF affects 1-2% of the population and likely to increase in the next 50 years. Prevalence of AF increases with age, from 0.5% at age 40-50, to 5-15% at age 80. Over 6 million Europeans suffer arrhythmia with prevalence estimated to double in the next 50 years |
• | VTE: Approximately 1.1 million venous thromboembolic events occur each year across the EU encompassing: DVT events - 61% of total and PE events - 39% of total |
Global Industry Analysts Inc., one of the world’s largest market research publishers, projected that the global anticoagulants market will soon surpass $11.2Bn, driven by an aging global population, rising incidence of cardiovascular diseases, cancers, and acute hip and knee complications, as well as emergence of innovative therapeutics targeting new and previously targeted clotting factors.
Anticoagulants are a rapidly evolving market for both legacy and emerging treatment regimes. Dominated by just two therapy classes - vitamin K antagonist and heparin injectables; the anticoagulants industry has come a long way since the 1990s, when advancements in thrombotic disease detection and increased physician awareness were major drivers for market growth. Market growth is currently led by the arrival of novel therapeutics as well as favorable demographic tailwinds. The United States and Europe dominate the global anticoagulants market, which is expected to grow dramatically as advanced therapeutics present brighter prospects for coagulation as well as patient management. While novel drugs are likely to impact the market sometime in near future, factors that already influence market prospects include increasing use of low molecular weight heparins, patient population (Baby Boomers reaching age of retirement), and additional indications for existing drugs. Future impact of anticoagulants is expected to mainly result from enormous patient potential. Among these, an aging population at growing risk of venous and arterial problems and patients on long-term anticoagulation would be the major influencers. Currently, the global anticoagulants market is led by vitamin K antagonist (VKA), unfractionated heparin and low molecular weight heparins (heparins). The injectable anticoagulants market has maintained a steady pace over the years with more number of patients receiving anticoagulation with one or more of the injectable therapies. From 2008 to Sept 2013 total European VKA sales have grown from $188MM to $225MM with Warfarin and Acenocoumarol as the only molecules representing annual growth in each respective year.
Sintrom®
In September 2014, the Company acquired from Novartis, in certain European countries, the rights to manufacture, market, and sell the branded prescription medicine product Sintrom® (acenocoumarol). Acenocoumarol is an anticoagulant indicated for the treatment and prevention of thromboembolic diseases. Sintrom® has been available in Europe for over 50 years and in calendar year 2013 the product had net sales of approximately US$28 million in the territories acquired.
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Sintrom was approved in Europe in the early 1950’s and its patent expired in 1964. As a result, the product has not only been on the European market for over five decades but also faced generic competition over the same period. It is important to note that the product is not subject to intense competition from generics given the legacy nature of the product (effective and well known), its low price and strong market share. These key competitive features make the product uneconomical for new generic entries.
VKA’s represent a fraction of the price of NOAC’s. Within the VKA European market, Sintrom is priced in the mid-tier with the generic version of the drug representing the lowest price at almost half of Sintrom. It is important to note that generic versions of Sintrom are only available in four European countries; Netherlands, Poland, Romania and Hungary. From a competition perspective, the threat of generics remains low for several reasons: 1) Sintrom along with other VKA’s are legacy drugs and are priced to compete with generics providing an economic barrier; 2) Europe is highly fragmented with multiple local registration requirements for generics providing a political barrier; and 3) Sintrom has an established brand in these market and has increased sales in some countries despite presence of a generic.
Sintrom’s key competition in the Vitamin K antagonist (VKA) segment of the anticoagulant business is Warfarin and Marcoumar. Warfarin holds the largest market share and is sold in several different countries under different brand names. Warfarin is the chemical name for Coumadin and is manufactured as a generic by several different manufactures including Barr, Sandoz, Merck, Taro, and others. Warfarin is a direct competitor of Sintrom, but not a generic substitute because although similar, it is not the same molecule. The major difference between the above noted products is biological half-life (T ½ or biological half-life is the time required for an organism to eliminate one-half of a substance which has been introduced into it). The key benefit of Sintrom is because it has a shorter biological half-life, doctors are able to adjust dosages in the short term and can more readily apply an antidote. Both Warfarin and Marcoumar have a longer life and thus provide more constant long term plasma levels.
New Oral Anti-Coagulants (NOAC’s) such as Pradaxa (Boehringer Ingelheim), Xarelto (Bayer) and Eliquis (Apixaban) obtained EMA approval in 2011/2012 with patent expiry in 2020/2023. These products are the “next generation” of anti-coagulants and have many benefits over legacy anti-coagulants such as VKA’s and as a result many international guidelines recommend NOAC as the preferred option. However, VKAs in some countries are still the preferred option due to local guidelines, broad physician experience, and low price (NOAC's can be up to 50 times more expensive). NOAC’s are superior to VKA’s in terms of safety, efficacy and therapeutic window and for this reason have received much attention since their introduction. However, these drugs exhibit one key issue - in emergency bleeds or surgery, physicians are unable to medically administer an antidote unlike VKA’s. Furthermore, given NOAC’s do not require the same level of monitoring, VKA’s provide physicians with greater oversight over patient progress prompting emergency avoidance. Lastly, doctors have been using VKA’s for decades and as a result are comfortable with dosing, monitoring procedures and reversals vs NOAC’s.
Sintrom is sold predominantly through distributors with whom Merus already has established relationships. Sintrom will be sold by the distributors to wholesalers and pharmacy networks.
Sintrom will continue to be manufactured by Novartis and its contract organizations for a period of time in order to allow Merus to transition the product manufacturing to a contract manufacturer and obtain the related approvals. The transition to a third party manufacturer is expected to provide additional cost savings. The Company has signed agreements with two contract manufacturers and is currently undergoing the technology transfer process.
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The Company funded the Sintrom® acquisition with cash on hand (from operations and equity financings), the issuance of preferred shares, and a debt facility provided to Merus by a syndicate of lenders which also refinanced the Company’s existing debt. Pursuant to the acquisition, Merus in-licensed the Sintrom® trademark, certain related intellectual property, and acquired other information and materials required to continue commercializing the brand in the territories acquired.
Recent Acquisition
On February 1, 2016, the Company announced that it had entered into an agreement with UCB to acquire rights to Elantan®, Isoket® and Deponit® in Europe and select other markets. These products belong to a category of pharmaceuticals called nitrates, and are used to treat both acute and chronic coronary artery disease. The portfolio consists of established prescription products with proven safety and efficacy, predictable future cash flows, and no patent cliff. Geographic coverage is similar to existing commercial platform, with over 80 percent of revenue in countries where Merus’ existing products are currently sold.
Products are currently sold in 20 European countries plus Mexico, Turkey and South Korea. A variety of formats are available, including tablet, spray, patch and injectable presentations.
Nitrates
Nitrates act by reducing cardiac work by reducing afterload, dilating the venous side of the circulation and having a direct dilator effect on coronary arteries.
Coronary artery disease, which accounts for almost half of cardiovascular mortality globally, has five major manifestations: the acute coronary syndromes (ACS) of (1) myocardial infarction, (2) unstable angina and (3) sudden death, and the chron1c syndromes of (-1) stable angina and (5) heart failure. Symptoms of acute coronary disease are often rnore severe than those for chronic artery disease, and the ep1sodes last longer. The incidence of ACS is 200-300/100,000 per year for women and 500-700/100,000 per year for men. The prevalence is approximately 5% for women over the age of 55 and approximately 10% for men, with a mean age of diagnosis of 62 years. Coronary artery disease prevalence has been increasing worldw1de, both in Western and develop1ng markets, owing to a variety of lifestyle and other factors such as ageing of the population and growth in diabetes. There are a number of treatments aimed at reducing the risk of coronary artery disease developing or it resulting in a catastrophic acute event. Nitrates belong to the category of direct symptomatic treatments, alongside beta blockers (BBs), angiotensin-converting enzyme (ACE) inhibitors and calcium channel blockers (CCBs).
Acute therapy w1th direct treatments is initiated to limit the amount of ischaemic damage by increasing coronary blood flow (i.e. oxygen supply) and/or reducing myocardial work and oxygen consumption. Nitrates in particular act by reducing cardiac work by reducing afterload, dilating the venous side of the circulation, and having a direct dilator effect on coronary arteries. Nitrates can be more easily titrated than CCBs, due to their short action and rapid clearance from the blood. Thus, short-acting nitrates are the vasodilators of choice for ACS. According to the European Society of Cardiology (ESC) guidelines, sub-lingual or IV nitrates are recommended for first-line treatment for the control of ischaemic symptoms and for patients with evidence of heart failure, in the case of unstable angina and in the acute phase of myocardial infarction. In practice, these nitrates are given to patients early on admission for suspected ACS.
Treatments for coronary artery disease including nitrates are prescribed mainly by cardiologists and emergency room physicians, many of whom are also cardiologists.
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Nitrates Market
The nitrate market is heavily commoditized and genericized with multiple delivery formats including immediate release tablets, prolonged release tablets, capsules, solution for infusion, transdermal patches and oromucosal spray. Nitrates are used for both acute and chronic treatment of coronary artery disease, congestive heart failure, pulmonary hypertension, chronic heart failure and acute left ventricular failure.
Coronary artery disease prevalence has been increasing worldwide due to a variety of lifestyle and other factors such as an aging population and growth in diabetes.
lantan®, Isoket® and Deponit®
European sales make up the majority of the revenue from this portfolio. Historically, UCB has relied on partners to sell its Nitrates in select regions. Each partnership involves a combination of license, promotion, co-marketing, supply and/or distribution. Each partnership must be managed independently and maximized to realize full product value. The Company has identified opportunities in optomizing the distribution network as well as additional select promotion in some territories. Opportunities also exist to launch the products in certain new markets and to expand formulations in existing markets.
South Korea is the 2nd largest market for the nitrates portfolio. The Company takes over a supply and distribution partnership in Korea with a partner that purchases product exclusively from UCB at a fixed price with minimum sales targets. They receive a distribution fee and service fee for promotional services. Exchange rates have been relatively stable over the past year, with an average appreciation of about 7% per year against the Canadian dollar.
The Company will take over multiple contracts including the contract manufacturing agreements with a third party manufacturer. There are currently no plans to change production facilities.
The Company has agreed to acquire product rights for a one-time payment of €92 million or 2.7 times last 12 months net revenue of approximately €34 million. The acquisition will be funded with cash-on-hand and a new Euro-denominated five year term debt facility.
Cholinergic Agents
Cholinergic agents work by increasing the secretion of saliva from the salivary glands, which helps to relieve dry mouth. Pilocarpine is considered to be the gold standard, however there are less effective alternative therapies (non-pilocarpine) that exist.
Salagen
In May 2015, Merus acquired the product rights to Salagen (pilocarpine hydrochloride) capsules from Novartis AG in 18 European territories. Salagen® is indicated for xerostomia following radiation therapy, in addition to Sjogren's syndrome. Salagen® had total sales of approximately $7.8 million in 2014. The first marketing authorization was received in 2001 (in EU) and the product has no patent life remaining.
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Hormone Replacement Therapies
Hormone replacement therapies (HRT’s) use estrogen to alleviate menopausal systems or osteoporosis.
Estraderm
In May 2015, Merus acquired the product rights to Estraderm MX (β-Estradiol) transdermal patches from Novartis AG in six markets, four of which are in Europe. Estraderm® is indicated to manage certain symptoms of post-menopause and to prevent osteoporosis related to menopause. Estraderm® sales were approximately $3.6 million in 2014. The first marketing authorization was received in 2001 (in EU) and the product has no patent life remaining.
Anti-infectives
The global market for anti-infective drugs, which mainly includes antibacterials, antivirals, antifungals, and vaccines, is projected to exceed $103 billion by the year 2015, according to a published report. Antibacterials represent the largest segment of the anti-infectives market globally. The competitive landscape remains highly fragmented, however Merck and GSK are market leaders in the category.
Vancocin
In May 2011, Old Merus acquired Vancocin (vancomycin hydrochloride) capsules from Iroko International LP. a subsidiary of Iroko Pharmaceuticals, LLC. According to IMS Canada, Vancocin® 125mg and 250mg capsules had combined total sales of approximately $7.8 million in 2010.
Vancomycin was first isolated by Eli Lilly. The original indication for vancomycin was for the treatment of penicillin-resistant staphylococcus aureus. One advantage that was quickly apparent is that staphylococci did not develop significant resistance despite serial passage in culture media containing vancomycin. The rapid development of penicillin resistance by staphylococci led to the compounds being fast-tracked for approval by the US Food and Drug Administration (“FDA”). Eli Lilly first marketed vancomycin hydrochloride under the trade name Vancocin. Vancocin is a powerful antibiotic used to treat a life-threatening disease resulting from the infection of Clostridium Difficile (“C. Difficile”).
C. Difficile is on the increase with higher mortality and severity. Due to the nature of the disease, intravenous (systemic) solutions are regarded as ineffective. To be effective against C. Difficile, drugs must act locally on the flora of the gastro intestinal track. Intravenous solutions by definition do not act locally.
Clinical Practice Guidelines (Clinical Practice Guidelines for Clostridium difficile Infection in Adults: 2010 Update by the Society for Healthcare Epidemiology of America (SHEA) and the Infectious Diseases Society of America (IDSA)) state that oral Vancocin should be used as first line therapy in severe cases of C. Difficile. The guidelines state that vancomycin is the drug of choice for an initial episode of severe C. Difficile. The dosage is 125 mg orally four times per day for 10-14 days. Vancomycin administered orally (and per rectum, if ileus is present) is the regimen of choice for the treatment of severe, complicated C. Difficile.
15 |
Changes in the Competitive Landscape
Enablex
In June 2014, Merus received notification from Apotex Inc. (“Apotex”) that it has filed with Health Canada an Abbreviated New Drug Submission (“ANDS”) seeking market approval for a generic version of Enablex® (darifenacin hydrobromide tablets) for the Canadian marketplace. In connection with this filing, we received Notices of Allegation (“NOAs”) from Apotex against our Enablex® patents listed on the Canadian patent register which expire in August of 2016 and beyond. The NOAs were issued under the Canada Patented Medicines (Notice of Compliance) Regulations (the “Regulations”). Enablex® is currently protected in Canada by three issued patents listed on the Canadian patent register. On March 2, 2015, Merus reached an out of court settlement with Apotex and litigation has ceased.
During 2014, the Company was informed by the German Federal Joint Committee (G-BA), responsible for directives on drug reimbursement policy, that in Germany there is a plan to introduce a single reimbursement class for all anticholinergic-based OAB products in the market. This new classification would effectively set a maximum reimbursable price for public payors. The Committee invited Merus to provide a rationale for Enablex (Darifenacin) being excluded from the class, which the Company has done. The process of assessing arguments for exclusion from the class, the determination of a reimbursement price for the class, and that price becoming effective could take up to a year or more. Most recently the Company attended an oral hearing on June 9, 2015 along with other affected pharmaceutical companies. The Company has been notified that Darifenacin will not be excluded from the class and thus will be subject to a maximum reimbursement price. On December 4, 2015, the proposed maximum reimbursement prices per product were published. Based on the proposed prices, the Company could expect to see a reduction of approximately 60% in prices in Germany. The final maximum reimbursable price and the effective date of the new regime has not yet been communicated. Management expects the maximum price to be effective sometime during fiscal 2016. Depending on the effective date and final pricing, there may be a material adverse effect on sales.
Arbitration Proceeding
The Company has received notice of a request for arbitration from the original owner of the Company’s former Factive® product. The request for arbitration is based on the original license agreement entered into by the original owner and Cornerstone Therapeutics, Inc. (now Chiesi USA, Inc.). The request for arbitration names the Company as a respondent together with Cornerstone and Vansen Pharma, Inc. The request for arbitration includes the allegation that Cornerstone did not have the legal right to transfer the Factive product to Merus. The original owner is seeking an award for damages relating to an alleged breach of contract, as well as disgorgement of revenues and other benefits derived by the Company from sales of Factive. The Company is defending the claim and has denied any liability to the original owner. The Company and Cornerstone have each asserted claims against the other, seeking indemnity and damages related to the original owner’s claim. In the first quarter of fiscal 2016, the Company's counsel presented its final arguments in the proceedings. A decision is expected in the next few months.
16 |
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2015 AND 2014
For the three months ended December 31, 2015, the Company incurred a net loss of $915,020 ($0.01 per share), compared to a net loss of $216,044 ($0.00 per share) for the prior year comparative period. EBITDA for the three months ended December 31, 2015 was $7,524,725, compared to EBITDA for the prior year of $7,458,767. Adjusted EBITDA, which adds back non-cash stock based compensation, foreign exchange, derivative losses and (gains), investment expenses and acquisition costs, was $8,535,275 for the three months ended December 31, 2015, compared to $,7559,286 for the prior year comparative period.
Revenues and Gross Margin
Three months ended December 31 | |||
2015 | 2014 | ||
Revenue: | |||
Enablex/Emselex | $ 7,794,298 | $ 5,964,568 | |
Sintrom | 5,258,262 | 3,842,108 | |
Salagen | 1,611,363 | - | |
Vancocin | 836,796 | 821,301 | |
Estraderm | 425,132 | - | |
Total Revenue | 15,925,851 | 10,627,977 | |
Cost of Goods Sold | 4,484,811 | 1,259,672 | |
Gross Margin | $ 11,441,040 | $ 9,368,305 |
Revenues were $15,925,851 for the three months ended December 31, 2015 compared to revenues of $10,627,977 for the three months ended December 31, 2014. Revenues in the prior year comparative period were attributable to sales of Vancocin, Enablex and Sintrom. Revenues during the three months ended December 31, 2015 also include sales of Salagen and Estraderm.
Gross margin for the three months ended December 31, 2015 was $11,441,040 (72%) compared to gross margin of $9,368,305 (88%) for the three months ended December 31, 2014. The lower margin as a percentage of revenue in the current period is primarily a result of the transition from recording Sintrom on a net basis (as discussed below) to a gross basis.
Revenues attributable to Enablex for the three months ended December 31, 2015 were $7,794,298, compared to $5,964,568 for the three months ended December 31, 2014. Revenues for Enablex were higher in the current year compared to the prior year due primarily to the expiration of a legacy marketing agreement in December 2014 and an increase in sales volumes in the UK. Until the end of December 2014, the Company was bound to a legacy marketing and distribution agreement in Germany which provided the Company with a significantly lower share of revenue in the territory. During the three months ended December 31, 2014 the Company was in the process of transitioning sales to its new customer in Germany, which resulted in only one month of sales under the new agreement in the prior period.
Revenues from Sintrom during the three months ended December 31, 2015 were $5,258,262, compared to $3,842,108 for the three months ended December 31, 2014. The increase is primarily related to the transition from recording Sintrom on a net basis to a gross basis. On a gross basis, revenue would have been $6,888,426 and $7,882,443 in the current and prior period, respectively. Revenue was slightly lower than normal in the current quarter due to the impact of a one-time inventory loading in Spain in Q4 of fiscal 2015.
17 |
During the current period, the Company recorded approximately half of Sintrom revenues in the statements of operations on a net basis, whereby revenues were recorded net of cost of goods and selling expenses, subject to a transition arrangement whereby Novartis continues to provide certain sales and distribution functions while the parties work through the process of transferring the necessary marketing authorizations. As a result of this arrangement the Company is considered to be acting as an agent rather than principal and revenues are recorded on a net basis. Had the Company recorded Sintrom on a gross basis, revenues and cost of goods would have been higher by $1,630,164 in the current period and $4,040,325 in the prior year period.
During the three months ended December 31, 2015, the presentation of revenues from Sintrom in several territories switched from a net basis to a gross basis as a result of the marketing authorizations and commercial operations in being transferred from Novartis to Merus. As a result, the revenues and cost of goods related to any sales conducted directly by Merus were recorded separately on a gross basis as Merus was acting as the principal.
Revenues from Salagen during the three months ended December 31, 2015 were $1,611,363. Similar to Sintrom, during the current period, the Company recorded Salagen revenues in the statements of operations entirely on a net basis, whereby revenues were recorded net of cost of goods and selling expenses. Had the Company recorded Salagen on a gross basis, revenues and cost of goods would have been higher by $390,737.
Revenues attributable to Vancocin were $836,796 for the three months ended December 31, 2015, compared to $821,301 for the three months ended December 31, 2014. The somewhat flat revenue trend from this product on an year-over-year basis are indicative of a stabilization in the market subsequent to the entry of a second generic Vancomycin during the third quarter of fiscal 2014.
Revenues from Estraderm during the three months ended December 31, 2015 were $425,132. Similar to Sintrom, during the current period, the Company recorded Estraderm revenues in the statements of operations entirely on a net basis, whereby revenues were recorded net of cost of goods and selling expenses. Had the Company recorded Estraderm on a gross basis, revenues and cost of goods would have been higher by $317,044.
Selling and Marketing Expense
The Company incurred selling and marketing expenses of $1,392,556 for the three months ended December 31, 2015, compared to $605,606 for the three months ended December 31, 2014. Selling and marketing expenses include all costs related to marketing, promoting and selling the products. In prior periods, only true promotion costs were included. Certain amounts have been reclassified in order to better reflect true selling costs and improve comparability. Selling and marketing expenses were higher during the current year primarily due to the fact the Company was operating more products in the current quarter with the transfer of the majority of Sintrom marketing authorizations and ongoing activities for Salagen and Estraderm.
General and Administrative Expense
General and administrative expenses for the three months ended December 31, 2015 were $1,513,209, compared to $1,203,413 for the three months ended December 31, 2014. General and administrative expenses specifically exclude the impact of non-cash share based compensation, which had been previously included. General and administrative expenses in the current year increased by $309,796 compared to the previous year, primarily due to higher legal expenses relating to arbitration and litigation, increased headcount, increased investment in business development and due diligence with respect to potential acquisitions, and the scaling up of operations due to a larger product portfolio.
18 |
Share-based Compensation
Share-based compensation costs in the current period were higher primarily due to a grant of stock options to management and employees during the period. In prior periods, grants had typically been done during the first calendar quarter. In addition, there were certain amounts expensed related to the Company's PSU incentive plan which did not exist in the prior period.
Acquisition Costs
The Company incurred acquisition costs of $352,319 for the three months ended December 31, 2015, compared to $nil for the three months ended December 31, 2014. Acquisition costs relate to the acquisition of three cardiovascular products that was announced subsequent to the period end.
Amortization of Intangible Assets
The three months ended December 31, 2015 included amortization expense of $7,356,701, compared to $5,952,483 for the three months ended December 31, 2014. The increase in amortization is mainly due to the addition of Salagen and Estraderm to the portfolio.
Interest Expense and Foreign Exchange Gains and Losses
Interest expense of $947,629 was incurred during the three months ended December 31, 2015, compared to $1,590,632 for the three months ended December 31, 2014. The lower interest charges relate to the lower average outstanding debt balance during the current year period.
Foreign exchange gains of $570,697 were recorded in the three months ended December 31, 2015, primarily due to the appreciation in value of US dollar and Euro denominated balances. Foreign currency gains of $236,818 were recorded in the prior year due to the appreciation of the USD dollar relative to the Euro and Canadian dollar.
Derivative losses of $136,872 were recorded in the three months ended December 31, 2015, primarily related to the settlement and mark-to-market of unfavourable Euro foreign exchange hedges during the period as well as the ongoing settlement of an unfavourable interest rate swap in connection with the Company’s senior debt. Derivative gains of $34,254 were recorded in the prior year primarily due to the settlement and mark-to-market of favourable Euro foreign exchange hedges.
19 |
SUMMARY OF QUARTERLY RESULTS
Seasonality
Merus’ product lines are generally not susceptible to fluctuations as a result of seasonal variations. Historic revenues have not indicated that any of the Company's products will have seasonal variations which would materially impact revenue.
Q1 2016 | Q4 2015 | Q3 2015 | Q2 2015 | |
Revenues | $15.93 million | $16.14 million | $9.51 million | $12.68 million |
Gross margin | $11.44 million | $12.12 million | $8.69 million | $11.24 million |
Net income (loss) | ($0.92) million | $0.02 million | ($1.81) million | $1.76 million |
Earnings (loss) per share: | ||||
Basic | ($0.01) | $0.00 | ($0.02) | $0.03 |
Diluted | ($0.01) | $0.00 | ($0.02) | $0.03 |
EBITDA1 | $7.57 million | $7.15 million | $5.84 million | $9.42 million |
Q1 2015 | Q4 2014 | Q3 2014 | Q2 2014 | |
Revenues | $10.63 million | $6.02 million | $7.18 million | $6.69 million |
Gross margin | $9.37 million | $5.09 million | $5.82 million | $5.48 million |
Net income (loss) | ($0.22) million | ($4.55) million | ($0.17) million | ($1.45) million |
Earnings (loss) per share: | ||||
Basic | ($0.00) | ($0.06) | ($0.00) | ($0.04) |
Diluted | ($0.00) | ($0.06) | ($0.00) | ($0.04) |
EBITDA | $7.46 million | $4.78 million | $3.76 million | $2.52 million |
1EBITDA - Non-IFRS Financial Measures - see definition under "Overall Performance"
20 |
LIQUIDITY AND CAPITAL RESOURCES
The Company currently manages its capital structure and makes adjustments to it, based on cash resources expected to be available to the Company, in order to support its future business plans. As at December 31, 2015, excluding provisions and obligations related to long term debt, the Company had working capital of $55,880,883 compared to $51,966,350 at September 30, 2015. The increase in working capital was due primarily to cash generated from operations, offset by scheduled repayments and interest against the credit facility.
The Company’s plan of operations in the next twelve months is to satisfy short-term debt obligations, while strategically looking for new acquisitions. In April 2015, the Company completed its most recent bought deal financing for gross proceeds of $60 million and in May 2015, the Company used a portion of those proceeds to acquire the rights to Salagen and Estraderm for approximately $37 million. The balance of those proceeds along with debt financing from a new credit facility were used to finance the acquisition of three cardiovascular products in February 2016, subsequent to period ended December 31, 2015.
The Company generates significant positive cash flow from operations, however, the Company may raise additional financing, if required, to pursue the acquisition of other pharmaceutical products. Management reviews the capital management approach on an ongoing basis and believes that this approach is reasonable given the current state of financial markets. In the case of uncertainty over the ability to raise funds in current or future economic conditions, the Company would manage capital by minimizing ongoing expenses.
Cash provided by operations of the Company was $6,879,141 for the three months ended December 31, 2015 compared to $3,192,366 for the three months ended December 31, 2014. The increase in cash flows from operations in the current year period was primarily a result of increased revenues with respect to Enablex and the contribution of Salagen and Estraderm, which were acquired in May 2015.
Cash used in financing activities for both the three months ended December 31, 2015 and 2014was $4,000,000. Both years’ amounts represent scheduled debt repayments for the period.
Cash used by investing activities was $266,945 for the three months ended December 31, 2015 compared to cash used by investing activities of $271,802 for the three months ended December 31, 2014. Cash used during the current period related primarily to technology transfer costs for Enablex and Sintrom. Cash used during the prior year comparative period related primarily to technology transfer costs for Enablex.
21 |
COMMITMENTS
(a) Operating lease commitments
The Company has entered into operating lease agreements for office premises and equipment with minimum annual lease payments to expiry as follows:
December 31, 2015 | |
Less than 1 year | $ 105,576 |
1 to 2 years | 105,576 |
2 to 3 years | - |
Thereafter | - |
Total | $ 211,152 |
(b) Liability settlement
The table below analyzes the Company’s non-derivative financial liabilities into relevant maturity groupings based on the remaining period at the statement of financial position date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows and do not include capitalized transaction costs.
Fiscal three months ended September 30 | |||||
At December 31, 2015 | Total | 2016 | 2017 | 2018 | Thereafter |
Debt | $60,000,000 | $ 12,000,000 | $ 16,000,000 | $ 16,000,000 | $ 16,000,000 |
Accounts payable and accrued liabilities | 5,116,267 | 5,116,267 | - | - | - |
Income taxes payable | 1,288,950 | 1,288,950 | - | - | - |
Total | $66,405,217 | $ 18,405,217 | $ 16,000,000 | $ 16,000,000 | $ 16,000,000 |
OFF BALANCE SHEET ARRANGEMENTS
The Company has no off balance sheet arrangements.
RELATED PARTY TRANSACTIONS
At December 31, 2015, there were no amounts owing to or from related parties. The remuneration of directors and other members of key management personnel are as follows:
Three months ended December 31 | ||||
2015 | 2014 | |||
Salaries | $ | 501,147 | $ | 304,611 |
Share based compensation | 1,092,173 | 371,736 | ||
$ | 1,593,320 | $ | 676,347 |
22 |
CHANGES IN CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Accounting policies
There were no changes in the Company’s critical accounting policies during the period.
DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures form a framework designed to provide reasonable assurance that information disclosed publicly fairly presents in all material respects the financial condition, results of operations and cash flows of the Company for the periods presented in this MD&A. The Company's disclosure controls and procedures framework includes processes designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to management by others within those entities to allow timely decisions regarding required disclosure.
The Company’s management, with the participation of its CEO and CFO is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.
As at December 31, 2015, management evaluated the design and operating effectiveness of the Company’s internal controls over financial reporting and concluded as at December 31, 2015, the Company’s internal controls over financial reporting were operating effectively.
There were no material changes made to the Company’s internal controls over financial reporting during the three months ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. In addition, management assessed disclosure controls and procedures to be effective as of December 31, 2015.
23 |
DISCLOSURE OF OUTSTANDING SHARE DATA
Common Shares
The Company’s authorized share capital consists of an unlimited number of common shares without par value. As at February 11, 2016 the Company had 102,599,906 common shares issued and outstanding.
Preference Shares
The Company is authorized to issue an unlimited number of preferred shares without par value. The preferred shares may be issued in series on such terms as determined by the directors of the Company in accordance with the special rights and restrictions as set out in the Articles of the Company. As of February 11, 2015, the Company had 10,000 Series A Preferred Shares issued and outstanding, each with a liquidation value of $1,000, for a total value of $10,000,000. The Series A Preferred Shares pay a dividend of 8% per annum, subject to adjustment if the Company does not redeem these Preferred Shares after October 31, 2019. At any time at the option of the holder, the Series A Preferred Shares may be converted into the Company’s common shares at a conversion price of $2.20 per share. The Series A Preferred Shares are redeemable at the option of the Company at any time after October 31, 2019. The Series A Preferred Shares are also redeemable by the Company at any time in the event of a change of control subject to payment of a change of control premium.
Stock Options
The Company has 5,573,500 stock options outstanding as at February 11, 2016.
Share Purchase Warrants
The Company has no share purchase warrants outstanding as at February 11, 2016.
ADDITIONAL INFORMATION
Additional information about the Company is available on SEDAR at http://www.sedar.com.
24 |
Merus Labs International Inc. | ||||
Condensed Consolidated Interim Statements of Financial Position | ||||
(Unaudited) | ||||
(Expressed in Canadian dollars) | ||||
As at: | December 31 | September 30 | ||
2015 | 2015 | |||
Assets | ||||
Current assets | ||||
Cash and cash equivalents | $ 43,599,373 | $ 40,987,177 | ||
Short-term investments | 3,350 | 3,234 | ||
Trade and other receivables | 12,102,058 | 14,202,624 | ||
Inventories | 6,716,515 | 6,799,805 | ||
Prepaid expenses | 492,162 | 332,274 | ||
62,913,458 | 62,325,114 | |||
Non-current assets | ||||
Property and equipment | note 4 | 115,932 | 119,205 | |
Intangible assets | note 2, 5 | 195,291,844 | 201,539,290 | |
Total assets | $ 258,321,234 | $ 263,983,609 | ||
Liabilities and Equity | ||||
Current liabilities | ||||
Accounts payable and accrued liabilities | 5,165,146 | 8,314,307 | ||
Income taxes payable | 1,288,950 | 1,150,791 | ||
Derivative liabilities | note 3 | 578,479 | 893,666 | |
Long term debt due within one year | note 7 | 15,494,049 | 15,463,595 | |
22,526,624 | 25,822,359 | |||
Non-current liabilities | ||||
Provisions | note 6 | 163,206 | 167,656 | |
Long term debt | note 7 | 43,363,060 | 47,248,414 | |
Preferred shares | note 9 | 9,947,730 | 9,947,730 | |
Total liabilities | 76,000,620 | 83,186,159 | ||
Equity | ||||
Share capital | note 8 | 185,070,086 | 184,534,553 | |
Equity reserve | note 8 | 37,772,419 | 37,215,779 | |
Accumulated deficit | (62,186,634) | (61,271,614) | ||
Accumulated other comprehensive income | 21,664,743 | 20,318,732 | ||
Total equity | 182,320,614 | 180,797,450 | ||
Total liabilities and equity | $ 258,321,234 | $ 263,983,609 |
Commitments and contingencies (note 14)
Approved on behalf of the Board:
(signed) | (signed) | |
Tim Sorensen, | Dave Guebert, | |
Director | Director |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements
25 |
Merus Labs International Inc. | ||||
Condensed Consolidated Interim Statements of Operations | ||||
(Unaudited) | ||||
(Expressed in Canadian dollars) |
Three months ended December 31 | ||||||||||||
2015 | 2014 | |||||||||||
(restated - note 16) | ||||||||||||
Revenues | $ | 15,925,851 | $ | 10,627,977 | ||||||||
Cost of goods sold | 4,484,811 | 1,259,672 | ||||||||||
Gross margin | 11,441,040 | 9,368,305 | ||||||||||
Operating expenses: | ||||||||||||
Selling and marketing | 1,392,556 | 605,606 | ||||||||||
General and administrative | note 10, 11 | 1,513,209 | 1,203,413 | |||||||||
Share-based compensation | note 8, 11 | 1,092,173 | 371,736 | |||||||||
Acquisition costs | 352,319 | — | ||||||||||
Amortization of intangible assets | note 5 | 7,356,701 | 5,952,483 | |||||||||
Depreciation | note 4 | 3,854 | 3,911 | |||||||||
Foreign exchange gains | (570,697 | ) | (236,818 | ) | ||||||||
11,140,115 | 7,900,331 | |||||||||||
Operating income | 300,925 | 1,467,974 | ||||||||||
Interest expense, net | 947,629 | 1,590,632 | ||||||||||
Derivative losses (gains) | note 3, 7 | 136,872 | (34,254 | ) | ||||||||
Investment income | (117 | ) | (145 | ) | ||||||||
Loss before income taxes | (783,459 | ) | (88,259 | ) | ||||||||
Income tax expense | note 12 | 131,561 | 127,785 | |||||||||
Net loss for the period | $ | (915,020 | ) | $ | (216,044 | ) | ||||||
Loss per share | ||||||||||||
Basic | $ | (0.01 | ) | $ | - | |||||||
Diluted | $ | (0.01 | ) | $ | - | |||||||
Weighted average number of common shares outstanding - basic | 102,372,965 | 81,235,579 | ||||||||||
Weighted average number of common shares outstanding - diluted | 102,372,965 | 81,235,579 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements
26 |
Merus Labs International Inc. | |||||||||||||
Condensed Consolidated Interim Statements of Comprehensive Income (Loss) | |||||||||||||
(Unaudited) | |||||||||||||
(Expressed in Canadian dollars) | |||||||||||||
Three months ended December 31 | |||||||||||||
2015 | 2014 | ||||||||||||
Net loss for the period | $ | (915,020 | ) | $ | (216,044 | ) | |||||||
Other comprehensive income | |||||||||||||
Items that may be reclassified to income: | |||||||||||||
Currency translation differences | 1,346,011 | (1,387,126 | ) | ||||||||||
Other comprehensive income for the period | 1,346,011 | (1,387,126 | ) | ||||||||||
Total comprehensive income (loss) | $ | 430,991 | $ | (1,603,170 | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements
27 |
Merus Labs International Inc. | ||||||||||||
Condensed Consolidated Interim Statements of Cash Flows | ||||||||||||
(Unaudited) | ||||||||||||
(Expressed in Canadian dollars) | ||||||||||||
Three months ended December 31 | ||||||||||||
2015 | 2014 | |||||||||||
Operating activities | ||||||||||||
Net loss for the period | $ | (915,020 | ) | $ | (216,044 | ) | ||||||
Adjustments for the following items: | ||||||||||||
Amortization of intangible assets | 7,356,701 | 5,952,483 | ||||||||||
Depreciation | 3,854 | 3,911 | ||||||||||
Interest expense | 947,629 | 1,590,632 | ||||||||||
Income tax expense | 131,561 | 127,785 | ||||||||||
Unrealized losses (gains) on foreign exchange | 491,675 | (52,573 | ) | |||||||||
Share-based compensation | 1,092,173 | 371,736 | ||||||||||
Change in fair value of derivative financial instruments | (315,187 | ) | 15,036 | |||||||||
Interest paid | (802,529 | ) | (1,415,136 | ) | ||||||||
Net change in non-cash working capital balances: | ||||||||||||
Provisions | (4,450 | ) | 23,282 | |||||||||
Trade and other receivables | 2,100,566 | (3,067,390 | ) | |||||||||
Prepaid expenses | (159,888 | ) | (29,005 | ) | ||||||||
Inventories | 83,290 | (511,483 | ) | |||||||||
Accounts payable and accrued liabilities | (3,149,161 | ) | 399,132 | |||||||||
Income taxes payable | 17,927 | — | ||||||||||
Net cash provided by operating activities | 6,879,141 | 3,192,366 | ||||||||||
Financing activities | ||||||||||||
Repayment of long-term debt | (4,000,000 | ) | (4,000,000 | ) | ||||||||
Net cash used in financing activities | (4,000,000 | ) | (4,000,000 | ) | ||||||||
Investing activities: | ||||||||||||
Capitalized development costs | (266,829 | ) | (271,657 | ) | ||||||||
Short-term investments | (116 | ) | (145 | ) | ||||||||
Net cash used in investing activities | (266,945 | ) | (271,802 | ) | ||||||||
Net change in cash and cash equivalents | 2,612,196 | (1,079,436 | ) | |||||||||
Cash and cash equivalents, beginning of period | 40,987,177 | 14,358,567 | ||||||||||
Cash and cash equivalents, end of period | $ | 43,599,373 | $ | 13,279,131 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements
28 |
Merus Labs International Inc. | ||||||||||||||||||||
Condsend Consolidated Interim Statements of Changes in Equity | ||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||
(Expressed in Canadian dollars) | ||||||||||||||||||||
Share capital | Equity reserve | Accumulated deficit | Accumulated other comprehensive income (AOCI) | Total equity | ||||||||||||||||
Balance, September 30, 2014 | $ | 123,808,971 | $ | 35,132,914 | $ | (61,033,735 | ) | $ | 6,780,105 | $ | 104,688,255 | |||||||||
Share-based compensation (note 8) | - | 371,736 | - | - | 371,736 | |||||||||||||||
Cancellation of shares in escrow (note 8) | (68,333 | ) | 68,333 | - | - | - | ||||||||||||||
Net loss for the period | - | - | (216,044 | ) | - | (216,044 | ) | |||||||||||||
Other comprehensive income | - | - | - | (1,387,126 | ) | (1,387,126 | ) | |||||||||||||
Balance, December 31, 2014 | $ | 123,740,638 | $ | 35,572,983 | $ | (61,249,779 | ) | $ | 5,392,979 | $ | 103,456,821 | |||||||||
Balance, September 30, 2015 | $ | 184,534,553 | $ | 37,215,779 | $ | (61,271,614 | ) | $ | 20,318,732 | $ | 180,797,450 | |||||||||
Share-based compensation (note 8) | 535,533 | 556,640 | - | - | 1,092,173 | |||||||||||||||
Net loss for the period | - | - | (915,020 | ) | - | (915,020 | ) | |||||||||||||
Other comprehensive income | - | - | - | 1,346,011 | 1,346,011 | |||||||||||||||
Balance, December 31, 2015 | $ | 185,070,086 | $ | 37,772,419 | $ | (62,186,634 | ) | $ | 21,664,743 | $ | 182,320,614 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements
29 |
Merus Labs International Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
For the three months ended December 31, 2015 and 2014
1. | Presentation of Financial Statements |
Nature of Business |
Merus Labs International Inc., incorporated under the Business Corporations Act (British Columbia), and its subsidiaries (the “Company”), operate in Canada and Europe. The head office of the Company is 100 Wellington St. West, Ste. 2110, Toronto, Ontario M5K 1H1. The Company is a specialty pharmaceutical company engaged in the acquisition and licensing of branded prescription pharmaceutical products. |
Basis of Preparation |
These unaudited condensed consolidated interim financial statements (“interim financial statements”) of the Company have been prepared on a historical cost basis, except for certain financial assets which are presented at fair value, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IASB”) (“IFRS”) for interim financial statements. The interim financial statements have been prepared on a basis consistent with the Company’s annual audited consolidated financial statements for the year ended September 30, 2015. The interim financial statements are in compliance with International Accounting Standard 34,Interim Financial Reporting(“IAS 34”). Accordingly, certain information and note disclosure normally included in annual financial statements prepared in accordance with IFRS, have been omitted or condensed. During the quarter ended December 31, 2015, there were no significant changes in accounting policies or their application.
The preparation of the Company’s interim financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the end of the reporting period. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements have been set out in note 2 of the Company’s annual audited consolidated financial statements for the year ended September 30, 2015. These interim financial statements should be read in conjunction with the Company’s annual audited consolidated financial statements for the year ended September 30, 2015.
These interim financial statements were authorized for issue by the Company’s Board of Directors on February 11, 2016.
30 |
Merus Labs International Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
For the three months ended December 31, 2015 and 2014
2. | Acquisitions |
Elantan, Isoket, and Deponit
On February 4, 2016, the Company acquired the rights to manufacture, market, and sell three established specialty pharmaceutical products in certain European and other markets. These products belong to a category of pharmaceuticals called nitrates, and are used to treat both acute and chronic coronary artery disease. Please refer to note 17 for further information on this transaction.
Salagen and Estraderm
On May 21, 2015, the Company acquired the rights to manufacture, market, and sell two established specialty pharmaceutical products in certain European and other markets.
Salagen ® (pilocarpine hydrochloride) is indicated for xerostomia following radiation therapy, in addition to Sjogren's syndrome. Estraderm MX® is a transdermal delivery format of estradiol used for symptomatic treatment of menopause.
Pursuant to the acquisition, the Company acquired the product rights, certain related intellectual property, and other information and materials required to continue marketing and selling the brands in the territories acquired. Total consideration for the product acquisition was US$29,500,000 funded from cash on hand. The transaction was accounted for as the acquisition of assets.
Costs incurred to complete the acquisition were approximately $73,000, which were capitalized to the cost of the assets acquired. The fair value of the acquired identifiable net assets was $36,439,154 (US$29,500,000 plus transaction costs) and was allocated as follows:
Product rights - Salagen | $ | 27,818,515 | ||
Product rights - Estraderm | 8,620,639 | |||
Net assets acquired | $ | 36,439,154 |
31 |
Merus Labs International Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
For the three months ended December 31, 2015 and 2014
3. | Derivative financial instruments |
December 31 | September 30 2015 | |||||||
Liabilities: | ||||||||
Forward foreign exchange contracts | $ | 367,627 | $ | 648,326 | ||||
Interest rate swap | 210,852 | 245,340 | ||||||
Total derivative liabilities | $ | 578,479 | $ | 893,666 |
In connection with its European operations, the Company uses foreign currency contracts in order to partially hedge the risk associated with its Euro currency source revenue. At December 31, 2015, the Company had forward foreign exchange contracts outstanding with a notional principal amount of $17,730,400 (September 30, 2015: $23,330,400). For the three months ended December 31, 2015, losses of $156,101 (December 31, 2014: gains of $34,254) were recognized in foreign exchange (gains) losses in the statements of operations in connection with these contracts.
In accordance with the terms of the Company’s long-term debt (note 7), during the second quarter of fiscal 2015 the Company entered into an interest rate swap for 50% of the outstanding balance, effectively fixing the rate on that portion of the loan at 5.72% until maturity. At December 31, 2015 the fair value of the interest rate swap contract represented a liability to the Company. Subsequent to period-end, on January 22, 2016, the Company terminated the interest rate swap contract resulting in a payment of $296,100, which represented the fair value of the liability on the settlement date (note 17).
32 |
Merus Labs International Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
For the three months ended December 31, 2015 and 2014
4. | Property and equipment |
Continuity of property and equipment as at December 31, 2015 was as follows:
Computer Equipment | Furniture and Fixtures | Manufacturing Equipment | Total | |||||||||||||
Cost at September 30, 2015 | $ | 2,762 | $ | 11,891 | $ | 127,566 | $ | 142,219 | ||||||||
Foreign exchange differences | 15 | 10 | 666 | 691 | ||||||||||||
Cost at December 31, 2015 | $ | 2,777 | $ | 11,901 | $ | 128,232 | $ | 142,910 | ||||||||
Accumulated Depreciation at September 30, 2015 | $ | 2,762 | $ | 7,496 | $ | 12,756 | $ | 23,014 | ||||||||
Depreciation charge | - | 672 | 3,182 | 3,854 | ||||||||||||
Foreign exchange differences | 15 | 4 | 90 | 110 | ||||||||||||
Accumulated Depreciation at December 31, 2015 | $ | 2,777 | $ | 8,172 | $ | 16,028 | $ | 26,978 | ||||||||
Carrying amount at September 30, 2015 | $ | - | $ | 4,395 | $ | 114,810 | $ | 119,205 | ||||||||
Carrying amount at December 31, 2015 | $ | - | $ | 3,729 | $ | 112,204 | $ | 115,932 |
33 |
Merus Labs International Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
For the three months ended December 31, 2015 and 2014
5. | Intangible assets |
Continuity of intangible assets as at December 31, 2015 was as follows:
Product Rights | Patents | Total | ||||||||||
Cost at September 30, 2015 | $ | 244,406,192 | $ | 23,200,220 | $ | 267,606,412 | ||||||
Product acquisitions (note 2) | - | - | - | |||||||||
Additions arising from internal development | 266,829 | - | 266,829 | |||||||||
Foreign exchange differences | 1,178,728 | 121,037 | 1,299,765 | |||||||||
Cost at December 31, 2015 | $ | 245,851,749 | $ | 23,321,257 | $ | 269,173,006 | ||||||
Accumulated Amortization at September 30, 2015 | $ | 49,479,172 | $ | 16,587,950 | $ | 66,067,122 | ||||||
Amortization charge | 6,086,550 | 1,270,151 | 7,356,701 | |||||||||
Foreign exchange differences | 334,629 | 122,710 | 457,338 | |||||||||
Accumulated amortization at December 31, 2015 | $ | 55,900,351 | $ | 17,980,811 | $ | 73,881,161 | ||||||
Carrying amount at September 30, 2015 | $ | 194,927,020 | $ | 6,612,270 | $ | 201,539,290 | ||||||
Carrying amount at December 31, 2015 | $ | 189,951,398 | $ | 5,340,446 | $ | 195,291,844 |
6. | Provisions |
Three months ended December 31, 2015 | Twelve months ended September 30, 2015 | |||||||
Balance at beginning of period | $ | 167,656 | $ | 330,789 | ||||
Charges | 49,213 | 189,227 | ||||||
Utilization | (53,797 | ) | (363,409 | ) | ||||
Foreign exchange | 134 | 11,049 | ||||||
Balance at end of period | $ | 163,206 | $ | 167,656 | ||||
Less: current portion of provisions | - | - | ||||||
Non-current portion of provisions | $ | 163,206 | $ | 167,656 |
The Company’s provisions are comprised of the following product-related liabilities:
Product Returns Liability:
The Company accepts all product returns relating to North American and certain European product sales. Management estimates the fair value of the product returns liability by taking into consideration the amount of units previously sold, returns experience to date, expiry of product currently in inventory, forecast sales volumes, and changes in the marketplace.
34 |
Merus Labs International Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
For the three months ended December 31, 2015 and 2014
7. | Long-term debt |
December 31 2015 | September 30 2015 | |||||||
Current | ||||||||
Secured facility, net of unamortized transaction costs of $505,951 | $ | 15,494,049 | $ | 15,463,595 | ||||
Total | $ | 15,494,049 | $ | 15,463,595 |
Non-Current | ||
Secured facility, net of unamortized transaction costs of | $ 43,363,060 | $ 47,248,414 |
Total | $ 43,363,060 | $ 47,248,414 |
On September 5, 2014, the Company entered into a new secured debt facility with a syndicate of Canadian lenders. The new facility provided additional funds for the purchase of Sintrom and refinanced the Company's existing senior secured debt at a lower rate and extended term. The new facility matures September 5, 2019 and provides for an $80 million term loan, currently at the Canadian BA rate plus 4.5%, or 5.3% effective rate, with principal repayments of $4,000,000 per quarter and monthly interest payments. Finance costs of $1,986,786 were capitalized to the loan balance and will be amortized over the term of the loan.
In accordance with the terms of the loan, during the second quarter the Company entered into an interest rate swap for 50% of the outstanding balance, effectively fixing the rate on that portion of the loan at 5.72% until maturity.
The facility is secured by all assets of the Company and contains affirmative and negative covenants including compliance with laws and restrictions on additional debt, as well as financial covenants such as debt to earnings and fixed charge coverage ratios. The Company was in compliance with all covenants of the senior secured facility during the year and at December 31, 2015.
On February 1, 2016, in connection with the acquisition of Isoket, Deponit and Elantan, the Company refinanced its existing senior secured debt facility with a new Euro-denominated facility. Please refer to note 17 for further information on this transaction.
35 |
Merus Labs International Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
For the three months ended December 31, 2015 and 2014
8. Share capital
(a) Authorized:
Unlimited common shares without par value.
Issued:
Three months ended December 31, 2015 | Year ended September 30, 2015 | |||||||||||||||
Number of shares | Amount | Number of shares | Amount | |||||||||||||
Balance, beginning of period | 102,301,341 | $ | 184,534,553 | 81,245,724 | $ | 123,808,971 | ||||||||||
Common shares cancelled pursuant to escrow agreement | - | - | (33,333 | ) | (68,333 | ) | ||||||||||
Common shares issued pursuant to prospectus offerings | - | - | 20,672,750 | 59,562,323 | ||||||||||||
Common shares issued pursuant performance share units | 298,265 | 535,533 | - | - | ||||||||||||
Common shares issued pursuant to options exercise | - | - | 416,500 | 1,231,592 | ||||||||||||
Balance, end of period | 102,599,906 | $ | 185,070,086 | 102,301,341 | $ | 184,534,553 |
(b) Escrow shares
On December 4, 2014, the Company cancelled 33,333 shares still held in escrow pursuant to the acquisition of Orbis Pharma, Inc. As per the terms of the agreement, any shares remaining in escrow were cancelled upon termination of employment of the Company's former Chief Executive Officer in October 2014.
(c) Prospectus offerings
On April 30, 2015, the Company completed a prospectus offering of 20,672,750 shares, including the underwriter over-allotment option, at a price of $3.05 per share for gross proceeds of $63,051,888. Proceeds were used for acquisitions and general corporate purposes. Costs of the offering were approximately $3,489,000.
(c) Performance share units
On December 10, 2015, the Company determined that performance conditions with respect to fiscal 2015 metrics had been met and, as such, authorized the issuance of a total of 298,265 shares pursuant to the grants in satisfaction of those amounts earned under the Performance Share Unit plan. |
36 |
Merus Labs International Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
For the three months ended December 31, 2015 and 2014
(f) Stock option plan
The Company has reserved 10,230,134 common shares under a 10% rolling reloading stock option plan. Under the plan, the options are exercisable for one common share and the exercise price of the option must equal the market price of the underlying share at the grant date. The options have vesting periods ranging from the date of grant up to three years. Once vested, options are exercisable at any time until expiry.
During the three months ended December 31, 2015, the Company granted 1,755,000 options (2014: 350,000 options) to management, staff and directors, with an exercise price of 1.71 per share (2014: $1.69 to $1.88 per share). The options have a term of five years and vest over a period of two years from the date of grant.
The estimated fair value of the options granted during the three months ended December 31, 2015, using the Black-Scholes option pricing model, was $1,703,754 (2014: $393,530). $903,845 was expensed in the financial statements during the three months ended December 31, 2015 (2014: $371,736) relating to current and prior period grants and has been included in share-based compensation in the statement of operations and in equity as equity reserves. The remaining expense will be recognized over the balance of the vesting periods.
(g) Stock option details
The fair value of each option granted was estimated on the date of the grant using the Black-Scholes fair value option pricing model with the following assumptions:
Three months ended December 31 | ||||||||
2015 | 2014 | |||||||
Weighted-average fair value of options | $ | 0.97 | $ | 1.12 | ||||
Risk-free interest rate | 0.80 | % | 2.00 | % | ||||
Volatility of the Company's common shares | 69 | % | 73 | % | ||||
Weighted average expected life of the options | 5 years | 5 years | ||||||
Forfeiture rate | 8.70 | % | 0 | % | ||||
Expected dividends | Nil | Nil |
37 |
Merus Labs International Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
For the three months ended December 31, 2015 and 2014
Details of the options are as follows:
Number of | Weighted average | |||||||
options | price per share | |||||||
Options outstanding, September 30, 2014 | 3,465,667 | $ | 1.82 | |||||
Options granted | 1,935,000 | 1.97 | ||||||
Options expired | (1,006,667 | ) | 2.01 | |||||
Options forfeited | (150,000 | ) | 1.73 | |||||
Options exercised | (416,500 | ) | 1.76 | |||||
Options outstanding, September 30, 2015 | 3,818,500 | $ | 1.86 | |||||
Options granted | 1,755,000 | 1.71 | ||||||
Options outstanding, December 31, 2015 | 5,573,500 | $ | 1.81 |
The range of exercise prices for outstanding and exercisable options at December 31, 2015 are as follows:
Exercise Price | Number Outstanding | Weighted Average Contractual Life | Number Exercisable | ||
$0.50 - $1.00 | 158,500 | 2.51 | 158,500 | ||
$1.01 - $1.50 | 125,000 | 2.61 | 75,000 | ||
$1.51 - $2.00 | 4,715,000 | 3.82 | 2,790,000 | ||
$2.01 - $2.50 | 200,000 | 1.05 | 200,000 | ||
$2.51 - $3.00 | 375,000 | 4.30 | 125,000 | ||
5,573,500 | 3.74 | 3,348,500 |
(h) Performance Share Unit Plan
In December 2014, the Company granted 800,000 Performance Share Units to an executive officer in connection with his employment agreement. The grant was subject to the Performance Share Unit Plan (the "Plan") being approved by the Board of Directors as well as regulatory and shareholder approval. In January 2015, the Board approved the Plan, subject to ratification by the shareholders, in addition to approving the grant of 150,000 Units to two other executive officers. The plan was approved by the Company's shareholders on March 26, 2015. During the prior fiscal year, 90,000 Units were forfeited in connection with a resignation, while 100,000 new Units were issued to a new executive. Share based compensation expense in the amount of $188,328 was recognized in the three months ended December 31, 2015 (2014: $nil) in connection with these grants. The purpose of the plan is to provide the Company with greater flexibility with respect to equity compensation arrangements.
38 |
Merus Labs International Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
For the three months ended December 31, 2015 and 2014
9. | Preferred shares |
On July 11, 2014, the Company completed a private placement subscription agreement to issue $10,000,000 of Series A convertible preferred shares (the “Series A Preferred Shares”) to a large Canadian institutional investor.
The Series A Preferred Shares pay a dividend of 8% per annum, subject to adjustment if the Company does not redeem after October 31, 2019. After October 31, 2019 the dividend rate is set to increase to LIBOR plus 10% for one year. Thereafter, the dividend rate will increase to LIBOR plus 12% into perpetuity. At any time at the option of the holder, the Series A Preferred Shares may be converted into the Company’s common shares at a conversion price of $2.20 per share. The Series A Preferred Shares are redeemable at the option of the Company at any time after October 31, 2019. The Series A Preferred Shares are also redeemable by the Company at any time in the event of a change of control subject to payment of a change of control premium. Costs associated with this transaction were approximately $52,000.
Based on management’s assessment of the various components of the Preferred Shares it was determined that the entire instrument should be recorded as a liability. Accordingly, dividends paid on the Preferred Shares are included in interest expense in the statement of operations.
10. | Commitments and contingencies |
(a) Operating lease commitments
The Company has entered into non-cancellable operating lease agreements for office premises and equipment with minimum annual lease payments to expiry as follows:
December 31 2015 | September 30 2015 | |
Less than 1 year | $ 105,576 | $ 105,576 |
1 to 2 years | 105,576 | 105,576 |
2 to 3 years | - | 26,394 |
3 to 4 years | - | - |
Thereafter | - | - |
Total | $ 211,152 | $ 237,546 |
Lease expense recognized during the three months ended December 31, 2015 was $50,037 (2014: $50,437), which has been included in general and administrative expenses in the statements of operations.
39 |
Merus Labs International Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
For the three months ended December 31, 2015 and 2014
(b) Legal proceedings
Notice of Allegation
In June 2015, Merus received notification from Apotex Inc. that it has filed with Health Canada an Abbreviated New Drug Submission seeking market approval for a generic version of Enablex for the Canadian marketplace. In connection with this filing, Merus received Notices of Allegation (“NOAs”) from Apotex against the Company’s Enablex patents listed on the Canadian patent register which expire in August of 2016 and beyond. The NOAs were issued under the Canada Patented Medicines (Notice of Compliance) Regulations. Enablex is currently protected in Canada by three issued patents listed on the Canadian patent register.
In March 2015, the Company entered into a settlement agreement with Apotex. The terms of the settlement agreement are confidential but are not financially material. The Company plans to continue with the marketing of Enablex® to urologists and other medical practitioners across Canada into the foreseeable future.
Arbitration Proceeding
In August 2014, Merus received notice of a request for arbitration from the original owner of Merus’ former Factive product. The request for arbitration is based on the original license agreement entered into by the original owner and Cornerstone Therapeutics, Inc. (now Chiesi USA, Inc.). The request for arbitration names Merus as a respondent together with Cornerstone and Vansen. The request for arbitration includes the allegation that Cornerstone did not have the legal right to transfer the Factive product to Merus. The original owner is seeking an award for damages relating to an alleged breach of contract, as well as disgorgement of revenues and other benefits derived by the Company from sales of Factive. The Company is defending the claim and has denied any liability to the original owner. The Company and Cornerstone have each asserted claims against the other, seeking indemnity and damages related to the original owner’s claim.
(c) Revenue based commitments
Pursuant to the Company’s exclusive license agreement with EISAI, the Company is subject to a royalty fee of 20% based on the net sales of Salagen.
(d) Purchase commitments
Pursuant to the Company’s raw materials supply agreement with a contract manufacturer, the Company is committed to purchasing approximately $485,000 of product per calendar year from 2016 to 2023.
40 |
Merus Labs International Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
For the three months ended December 31, 2015 and 2014
11. | Related party transactions |
At December 31, 2015, there were no amounts owing to or from related parties. The remuneration of directors and other members of key management personnel recorded in the general and administrative line of operating expenses are as follows:
Three months ended December 31 | ||||||||||
2015 | 2014 | |||||||||
Salaries | $ | 501,147 | $ | 304,611 | ||||||
Share based compensation | 1,092,173 | 371,736 | ||||||||
$ | 1,593,320 | $ | 676,347 |
12. | Income taxes |
The major components of income tax expense for the three and three months ended December 31, 2015 and 2014 are:
Three months ended December 31 | ||||||||
2015 | 2014 | |||||||
Income tax recognized in statements of operations | ||||||||
Current tax | $ | 131,561 | $ | 127,785 | ||||
Provision for income taxes | $ | 131,561 | $ | 127,785 |
The Company has recognized an estimated current tax expense based on an approximation of tax liabilities due with respect to its operations in Luxembourg.
41 |
Merus Labs International Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
For the three months ended December 31, 2015 and 2014
13. | Management of capital |
The Company includes the following in its definition of capital:
December 31 | September 30 | |||||||
2015 | 2015 | |||||||
Debt comprised of: | ||||||||
Secured facility | $ | 58,857,109 | $ | 62,712,009 | ||||
Preferred shares | 9,947,730 | 9,947,730 | ||||||
Equity comprised of: | ||||||||
Share capital | 185,070,086 | 184,534,553 | ||||||
Equity reserve | 37,772,419 | 37,215,779 | ||||||
Deficit and AOCI | (40,521,891 | ) | (40,952,882 | ) | ||||
$ | 251,125,453 | $ | 253,457,189 |
The Company’s objectives when managing capital are:
(a) | to allow the Company to respond to changes in economic and/or marketplace conditions; |
(b) | to give shareholders sustained growth in shareholder value by increasing shareholders’ equity; |
(c) | to ensure that the Company maintains the level of capital necessary to meet the requirements of its long-term debt; |
(d) | to comply with financial covenants required under its debt facilities; and |
(e) | to maintain a flexible capital structure which optimizes the cost of capital at acceptable levels of risk |
The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of its underlying assets. The Company maintains or adjusts its capital level to enable it to meet its objectives by:
(a) | raising capital through equity financings; |
(b) | utilizing leverage in the form of third party debt; and |
(c) | realizing proceeds from the disposition of its investments |
The Company is not subject to any capital requirements imposed by a regulator. The Company is subject to certain capital requirements and negative covenants with respect to its Secured Facility (refer to note 7). There were no changes in the Company’s approach to capital management during the year. To date, the Company has not declared any cash dividends to its common shareholders as part of its capital management program. The Company’s management is responsible for the management of capital and monitors the Company’s use of various forms of leverage on a regular basis.
42 |
Merus Labs International Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
For the three months ended December 31, 2015 and 2014
14. | Financial instruments and financial risk management |
a) Fair Value Estimation
The Company’s carrying value of cash and cash equivalents, short-term investments, trade and other receivables, and accounts payable and accrued liabilities approximate their fair values due to the immediate or short term maturity of these instruments. The fair value of long-term liabilities is not materially different than its carrying value due to the recent issuance of these liabilities.
Carrying value and fair value of financial assets and liabilities are summarized as follows:
December 31, 2015 | ||
Classification | Carrying value | Fair value |
Financial assets at FVTPL | $ | $ |
- Short-term investments | 3,350 | 3,350 |
Loans and receivables | ||
- Cash and cash equivalents | 43,599,373 | 43,599,373 |
- Trade and other receivables | 12,102,058 | 12,102,058 |
Other financial liabilities | ||
- Accounts payable and accrued liabilities | 5,165,146 | 5,165,146 |
- Long term debt | 58,857,109 | 60,000,000 |
Financial liabilities at FVTPL | ||
- Derivative liabilities | 578,479 | 578,479 |
September 30, 2015 | ||
Classification | Carrying value | Fair value |
Financial assets at FVTPL | $ | $ |
- Short-term investments | 3,234 | 3,234 |
Loans and receivables | ||
- Cash and cash equivalents | 40,987,177 | 40,987,177 |
- Trade and other receivables | 14,202,624 | 14,202,624 |
Other financial liabilities | ||
- Accounts payable and accrued liabilities | 8,314,307 | 8,314,307 |
- Long term debt | 62,712,009 | 64,000,000 |
Financial liabilities at FVTPL | ||
- Derivative liabilities | 893,666 | 893,666 |
43 |
Merus Labs International Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
For the three months ended December 31, 2015 and 2014
The Company is required to present information about its financial assets and liabilities with respect to the hierarchy of the valuation techniques the Company utilized to determine fair value. The different levels have been defined as follows:
- | Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities |
- | Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves |
- | Level 3 inputs are unobservable data points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability. |
At December 31, 2015, the Company’s financial assets and liabilities would be classified as follows:
Significant | Significant Other | Significant | ||||||||||||||
Observable | Observable | Unobservable | ||||||||||||||
Inputs | Inputs | Inputs | ||||||||||||||
December 31, 2015 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets: | ||||||||||||||||
Short-term investments | $ | 3,350 | $ | 3,350 | $ | - | $ | - | ||||||||
$ | 3,350 | $ | 3,350 | $ | - | $ | - | |||||||||
Liabilities: | ||||||||||||||||
Derivative liabilities | $ | 578,479 | $ | - | $ | 578,479 | $ | - | ||||||||
$ | 578,479 | $ | - | $ | 578,479 | $ | - |
At September 30, 2015, the Company’s financial assets and liabilities would be classified as follows:
Significant | Significant Other | Significant | ||||||||||||||
Observable | Observable | Unobservable | ||||||||||||||
Inputs | Inputs | Inputs | ||||||||||||||
September 30, 2015 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets: | ||||||||||||||||
Short-term investments | $ | 3,234 | $ | 3,234 | $ | - | $ | - | ||||||||
$ | 3,234 | $ | 3,234 | $ | - | $ | - | |||||||||
Liabilities: | ||||||||||||||||
Derivative liabilities | $ | 893,666 | $ | - | $ | 893,666 | $ | - | ||||||||
$ | 893,666 | $ | - | $ | 893,666 | $ | - |
The fair value of financial instruments traded in active markets is based on quoted market prices at the statement of financial position date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis.
44 |
Merus Labs International Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
For the three months ended December 31, 2015 and 2014
The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using valuation techniques. These valuation techniques maximize the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in Level 2.
If one or more significant inputs are not based on observable market data, the instrument is included in Level 3.
b) Financial Risk Factors
The use of financial instruments can expose the Company to several risks, including market, credit and liquidity risks. Apart from the risks listed below, management is of the opinion that they are not exposed to any other significant risks. A discussion of the Company’s use of financial instruments and its risk management is provided below.
(i) Liquidity risk
Liquidity risk is the risk that the Company will not have sufficient cash resources to meet its financial obligations as they come due. The Company’s liquidity and operating results may be adversely affected if the Company’s access to the capital markets is hindered, whether as a result of a downturn in stock market conditions generally or related to matters specific to the Company. In order to mitigate this risk, the Company maintains a sufficient cash balance in order to satisfy short-term liabilities as they come due and actively pursues raising capital through various public and private financing mechanisms to satisfy longer term needs.
The table below analyzes the Company’s non-derivative financial liabilities into relevant maturity groupings based on the remaining period at the statement of financial position date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows and do not include capitalized transaction costs.
Year ended September 30 | ||||||||||||||||
At December 31, 2015 | 2016 | 2017 | 2018 | Thereafter | ||||||||||||
Debt | $ | 12,000,000 | $ | 16,000,000 | $ | 16,000,000 | $ | 16,000,000 | ||||||||
Accounts payable and accrued liabilities | 5,116,267 | - | - | - | ||||||||||||
Income taxes payable | 1,288,950 | - | - | - | ||||||||||||
Total | $ | 18,405,217 | $ | 16,000,000 | $ | 16,000,000 | $ | 16,000,000 |
45 |
Merus Labs International Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
For the three months ended December 31, 2015 and 2014
Year ended September 30 | ||||||||||||||||
At September 30, 2015 | 2015 | 2016 | 2017 | Thereafter | ||||||||||||
Debt | $ | 16,000,000 | $ | 16,000,000 | $ | 16,000,000 | $ | 16,000,000 | ||||||||
Accounts payable and accrued liabilities | 8,314,308 | - | - | - | ||||||||||||
Income taxes payable | 1,460,249 | - | - | - | ||||||||||||
Total | $ | 25,774,557 | $ | 16,000,000 | $ | 16,000,000 | $ | 16,000,000 |
(ii) | Market risk: |
Market risk is the risk that the fair value of, or future cash flows from, the Company’s financial instruments will significantly fluctuate because of changes in market prices. The value of the financial instruments can be affected by changes in interest rates, foreign exchange rates, and equity and commodity prices. The Company is not exposed to significant market risk given the low value of its investments. |
(iii) | Currency risk: |
The Company is subject to currency risk through its sales of products denominated in foreign currencies, purchases of inventory in US dollars and product acquisitions denominated in foreign currencies. As such, changes in the exchange rate affect the operating results of the Company. Dependent on the nature, amount and timing of foreign currency receipts and payments, the Company may from time to time enter into foreign currency derivative contracts to reduce its exposure to foreign currency risk as discussed in note 3.
The following financial assets and liabilities were denominated in foreign currencies at December 31, 2015 (U.S. dollar 1.3840, Euro 1.5029) and September 30, 2015 (U.S. dollar 1.3345, Euro 1.4951:
December 31 2015 | September 30 2015 | |||||||
Denominated in U.S. dollars | ||||||||
Cash and cash equivalents | 17,362,682 | 13,206,260 | ||||||
Trade and other receivables | 4,960,861 | 6,685,246 | ||||||
Accounts payable and accrued liabilities | (1,422,327 | ) | (2,112,871 | ) | ||||
Net assets denominated in U.S. dollars | 20,901,216 | 17,778,635 | ||||||
Denominated in Euros | ||||||||
Cash and cash equivalents | 17,740,243 | 13,294,546 | ||||||
Trade and other receivables | 4,794,794 | 5,107,363 | ||||||
Accounts payable and accrued liabilities | (1,907,579 | ) | (4,148,804 | ) | ||||
Income taxes payable | (1,288,950 | ) | (1,150,791 | ) | ||||
Net assets denominated in Euros | 19,338,508 | 13,102,314 |
46 |
Merus Labs International Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
For the three months ended December 31, 2015 and 2014
The following table shows the estimated sensitivity of the Company’s total comprehensive loss for the three and three months ended December 31, 2015 from a change in foreign currencies with all other variables held constant as at December 31, 2015:
Change in net after-tax | Change in net after-tax | |
Percentage change in | loss from % increase | loss from % decrease |
foreign currencies | in foreign currencies | in foreign currencies |
2% | $ 444,098 | $ (444,098) |
4% | 888,197 | (888,197) |
6% | 1,332,295 | (1,332,295) |
8% | 1,776,394 | (1,776,394) |
10% | 2,220,492 | (2,220,492) |
(iv) | Credit risk: |
Certain of the Company’s financial assets, including cash and cash equivalents and short-term investments are exposed to the risk of financial loss occurring as a result of default of a counterparty on its obligations to the Company. The Company may, from time to time, invest in debt obligations. The Company is also exposed, in the normal course of business, to credit risk from customer receivables. These amounts are continually monitored by management for collectability, and, in general, are lower risk as they are typically due from large institutions or multinational distributors.
(v) | Interest rate risk: |
Interest risk is the impact that changes in interest rates could have on the Company’s earnings and liabilities. The Company is exposed to variable interest rates as a result of its senior secured debt, which currently bears interest at Prime plus 3.5%. The Company's exposure to interest rate movements is limited through facilities under its credit agreement, whereby 50% of the loan value has been fixed through an interest rate swap through maturity. It is management’s opinion that the Company is not exposed to significant interest rate risk. At December 31, 2015, the Company held no interest-bearing investments.
47 |
Merus Labs International Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
For the three months ended December 31, 2015 and 2014
15. | Segment information |
The Company operates in a single reportable segment focused on acquiring, in-licensing, marketing and distributing pharmaceutical products in Canada and internationally. The Company carries out business principally in Canada and Europe.
Revenues by geographic region are detailed as follows:
Three months ended December 31 | ||||||||||
2015 | 2014 | |||||||||
Canada | $ | 1,864,374 | $ | 1,852,768 | ||||||
International | 14,061,477 | 8,775,209 | ||||||||
$ | 15,925,851 | $ | 10,627,977 |
Other than Canada, the Company derived more than 10% of its revenues in the three months ended December 31, 2015 or three months ended December 31, 2014 period from Germany and Spain. Revenues in Germany of $3,806,346 (2014: $2,121,721) and Spain of $3,838,253 (2014: 1,983,015) are included in International in the table above.
Long-term assets by geographic region are comprised of product rights and patents and property and equipment, detailed as follows:
December 31 | September 30 | |||||||||
2015 | 2015 | |||||||||
Canada | $ | 2,626,223 | $ | 2,979,402 | ||||||
International | 192,781,553 | 198,679,093 | ||||||||
$ | 195,407,776 | $ | 201,658,495 |
16. | Prior period reclassification |
Preferred Shares
During the year ended September 30, 2014, the Company issued $10,000,000 of Series A convertible preferred shares (see note 12). The preferred shares pay a dividend of 8% per annum, subject to adjustments after October 31, 2019 as described in note 9. The preferred shares were originally treated as a component of equity. Due to the non-discretionary nature of the dividends, it was determined that the entire instrument should have been treated as a liability from inception. Accordingly, the fair value of the instrument at inception should be recorded as a liability. Any dividends declared should be recorded through profit and loss. The comparatives of the prior period have been adjusted to reflect this.
48 |
Merus Labs International Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
For the three months ended December 31, 2015 and 2014
Foreign Exchange Losses (Gains) and Derivative Losses (Gains)
The Company enters into forward foreign exchange contracts from time to time to hedge its foreign currency exposures. Historically, the Company has included any gains and losses with respect to the settlement and fair value mark-to-market adjustments of these contracts in the foreign exchange losses (gains) line on the statement of operations. To conform to the authoritative guidance and industry practise, certain amounts have been reclassified from foreign exchange gains to derivative losses (gains) in the prior year to conform to current year presentation.
Selling and Marketing and General and Administrative Expenses
The operating expense line item sales and marketing in the Company’s statement of operations has historically included any direct marketing activities related to the Company’s products (e.g. sales force, marketing materials, conferences, etc.). The operating expense line item general and administrative however has historically combined all other expenses related to the Company’s products (i.e. distribution, customs, regulatory, IP maintenance, third-party logistics/warehousing, etc.) as well as traditional general and administrative costs associated with the Company’s administrative operations (i.e. salaries and benefits, professional and consulting fees, public company costs, travel, leases, share-based-compensation, etc.).
Based on Management’s internal approach for analysing the Company’s financial performance as well as feedback from investors and analysts, Management has determined that the relevance, reliability, and comparability of the Company’s financial statements can be improved by reclassifying all costs directly related to the selling and marketing function for the Company’s products from general and administrative to selling and marketing expenses. Further, the addition of a separate line for share-based compensation in the statement of operations will further improve the relevance and reliability of the general and administrative expense line item.
Thus, certain amounts have been reclassified from general and administrative to selling and marketing and share-based compensation in the prior year to conform to current year presentation.
Impact of Reclassification
The impact of the above reclassification adjustments have been summarized below. These reclassification adjustment have no impact on comprehensive income (loss) and by extension equity, therefore no adjustments to the statement of equity has been disclosed.
49 |
Merus Labs International Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
For the three months ended December 31, 2015 and 2014
For the three months ended December 31, 2014 | As previously reported | Adjustment | As restated | |||||||||
Statement of Operations: | ||||||||||||
Revenues | $ | 10,627,977 | - | $ | 10,627,977 | |||||||
Cost of goods sold | 1,259,672 | - | 1,259,672 | |||||||||
Gross margin | 9,368,305 | - | 9,368,305 | |||||||||
Operating expenses: | ||||||||||||
Selling and marketing | 305,383 | 300,223 | 605,606 | |||||||||
General and administrative | 1,875,372 | (671,959 | ) | 1,203,413 | ||||||||
Share-based compensation | - | 371,736 | 371,736 | |||||||||
Amortization of intangible assets | 5,952,483 | - | 5,952,483 | |||||||||
Depreciation | 3,911 | - | 3,911 | |||||||||
Foreign exchange gains | (271,072 | ) | (34,254 | ) | (236,818 | ) | ||||||
7,866,077 | (34,254 | ) | 7,900,331 | |||||||||
Operating income | 1,502,228 | (34,254 | ) | 1,467,974 | ||||||||
Interest expense, net | 1,590,632 | - | 1,590,632 | |||||||||
Derivative losses (gains) | - | (34,254 | ) | (34,254 | ) | |||||||
Investment income | (145 | ) | - | (145 | ) | |||||||
Loss before income taxes | (88,259 | ) | - | (88,259 | ) | |||||||
Income tax expense | 127,785 | - | 127,785 | |||||||||
Net loss for the year | $ | (216,044 | ) | - | $ | (216,044 | ) |
17. | Subsequent events |
Acquisition
On February 4, 2016, the Company acquired the rights to manufacture, market, and sell three established specialty pharmaceutical products in certain European and other markets. These products belong to a category of pharmaceuticals called nitrates, and are used to treat both acute and chronic coronary artery disease.
The rights were acquired for a one-time cash payment of €92 million (approx. $140 million) at the date of the transaction closing. The acquisition was funded with cash-on-hand and a new Euro-denominated five year term debt facility (see below).
50 |
Merus Labs International Inc.
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
(Expressed in Canadian dollars)
For the three months ended December 31, 2015 and 2014
Debt Refinancing
On February 1, 2016, in conjunction with above noted acquisition the Company refinanced its existing senior secured debt facility with a new Euro-denominated facility (“Debt Facility”). The Debt Facility was advanced under an amendment and restatement to the Company's existing credit agreement. Pursuant to the terms of the amended credit agreement, the lenders agreed to provide senior secured credit facilities in the aggregate amount of $180 million, comprising of a senior secured revolving credit facility in the principal amount of $10 million and senior secured term facilities in the aggregate principal amount of $170 million. The Debt Facility has a five year term at an initial coupon rate of 4.5% per annum, decreasing as the Company de-leverages, and principal repayments of approximately $8.5 million per quarter and monthly interest payments.
All of the Company's obligations under the amended facility are guaranteed by all material subsidiaries of the Company and are secured by the material assets of the Company and the assets of, and all equity interests in its material subsidiaries. The Company converted the outstanding debt owing under the original credit agreement entered into in September 2014 into the Debt Facility at February 1, 2016.
Interest Rate Swap Settlement
On January 22, 2016, in connection with the above noted acquisition and refinancing transactions, the Company terminated its interest rate swap contract resulting in a payment of $296,100, which represented the fair value of the liability on the settlement date.
51