U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 40-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004 Commission File Number 000-50393
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NEUROCHEM INC.
(Exact name of Registrant as specified in its charter)
Canada 2834 Not Applicable
(Province or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
275 ARMAND-FRAPPIER BOULEVARD
LAVAL, QUEBEC H7V 4A7, CANADA
(450) 680-4500
(Address and telephone number of Registrant's principal executive offices)
CT Corporation System
111 Eighth Avenue, 13th Floor
New York, New York 10011
(212) 894-8400
(Name, address (including zip code) and telephone number
(including area code) of agent for service in the United States)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Shares, no par value
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
For annual reports, indicate by check mark the information filed with this
Form:
[X] Annual information form [X] Audited annual financial statements
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period
covered by the annual report:
The Registrant had 30,320,419 Common Shares
Outstanding as at December 31, 2004
Indicate by check mark whether the Registrant by filing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
(the "Exchange Act"). If "Yes" is marked, indicate the filing number assigned to
the Registrant in connection with such Rule.
Yes . 82- . No X .
____ ____ ____
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days.
Yes X . No .
___ ___
PRINCIPAL DOCUMENTS
The following documents have been filed as part of this Annual Report on Form
40-F:
A. ANNUAL INFORMATION FORM
Annual Information Form of the Registrant for the fiscal year ended December 31,
2004.
B. CONSOLIDATED AUDITED ANNUAL FINANCIAL STATEMENTS
The audited consolidated balance sheets of the Registrant as at December 31,
2004 and 2003 and the consolidated statements of operations, deficit and cash
flows for the year ended December 31, 2004, the six-month period ended December
31, 2003, the year ended June 30, 2003 and for the period from inception (June
17, 1993) to December 31, 2004, together with the auditors' report thereon,
including a reconciliation to United States generally accepted accounting
principles.
C. MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's Discussion of Consolidated Financial Condition and Results of
Operations of the Registrant for the year ended December 31, 2004 compared to
the unaudited twelve-month period ended December 31, 2003, and for the six-month
period ended December 31, 2003 compared to the unaudited six-month period ended
December 31, 2002.
DISCLOSURE CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Based on their evaluation as of the end of the period covered by this report,
the Registrant's Chief Executive Officer and Chief Financial Officer have
concluded that the Registrant's disclosure controls and procedures as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act are effective to ensure
that information required to be disclosed by the Registrant in reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As of the end of the period covered by this report, there were no changes in the
Registrant's internal control over financial reporting that occurred during the
period covered by this report that have materially affected or are reasonably
likely to materially affect the Registrant's internal control over financial
reporting.
NOTICES PURSUANT TO REGULATION BTR
None.
AUDIT COMMITTEE
A. IDENTIFICATION OF AUDIT COMMITTEE
The following persons comprise the Audit Committee: Mr. Graeme K. Rutledge
(Chair), Dr. Colin Bier and Mr. John Molloy.
B. AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors of the Company has determined that Mr. Graeme K. Rutledge
is an audit committee financial expert (as defined in paragraph 8(b) of General
Instruction B to Form 40-F).
CODE OF ETHICS
The Registrant has adopted a code of ethics (as that term is defined in Form
40-F) that applies to its employees (including its principal executive officer,
principal financial officer and controller). The code of ethics is attached as
an exhibit and filed with this Form 40-F. Since the adoption of the code of
ethics, there have not been any amendments to the code of ethics or waivers,
including implicit waivers, from any provision of the code of ethics.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Company has paid KPMG LLP ("KPMG"), its external auditors, the following
fees in each of the last three fiscal periods.
AUDIT FEES
The following sets forth the aggregate fees paid for each of the last three
fiscal periods for professional fees to KPMG for the audit of the annual
financial statements or for services normally provided by KPMG in connection
with statutory and regulatory filings or engagements for those fiscal periods.
Fiscal year ended December 31, 2004 Cdn $75,000
Six-month period ended December 31, 2003 Cdn $64,040
Fiscal year ended June 30, 2003 Cdn $53,700
AUDIT-RELATED FEES
The following sets forth additional aggregate fees to those reported under
"Audit Fees" in each of the last three fiscal periods for assurance and related
services by KPMG that are reasonably related to the performance of the audit or
review of the financial statements:
Fiscal year ended December 31, 2004
Review of interim financial statements Cdn $50,525
Translation services Cdn $8,240
Sundry accounting consultations Cdn $29,250
Six-month period ended December 31, 2003
Review of interim financial statements Cdn $10,500
Public offering Cdn $206,000
Sundry accounting consultations Cdn $43,870
Translation services Cdn $31,400
Fiscal year ended June 30, 2003
Review of interim financial statements Cdn $23,200
Translation services Cdn $16,200
TAX FEES
The following sets forth the aggregate fees billed in each of the last three
fiscal periods for professional services rendered by KPMG for tax compliance,
tax advice and tax planning:
Fiscal year ended December 31, 2004
Preparation of corporate tax returns, review of tax implications
of various transactions and other matters, sales tax issues,
and various taxation consultations Cdn $221,354
Six-month period ended December 31, 2003
Review of various business opportunities,
sales tax and US tax issues Cdn $38,300
Fiscal year ended June 30, 2003
Assistance with corporate reorganization
and tax compliance work Cdn $119,700
ALL OTHER FEES
The following sets forth the aggregate fees billed in each of the last three
fiscal periods for products and services provided by the principal accountant
not described above:
Fiscal year ended December 31, 2004 None
Six-month period ended December 31, 2003 None
Fiscal year ended June 30, 2003 None
AUDIT COMMITTEE APPROVAL
The Registrant's audit committee pre-approves every engagement by KPMG to render
audit or non-audit services. All of the services described above were approved
by the audit committee.
Prior to the beginning of each fiscal period, the Registrant seeks audit
committee approval for all services expected to be rendered by KPMG during the
coming year. If during the course of the year, the Registrant requires a service
to be performed that is not contemplated in the list of pre-approved services
the Registrant seeks approval from the Chairman of the audit committee for KPMG
to proceed with such service, which approval requires subsequent ratification at
the next meeting of the audit committee.
OFF-BALANCE SHEET ARRANGEMENTS
The Registrant has no off-balance sheet arrangements required to be disclosed in
this annual report on Form 40-F other than those described at Note 13(d) of the
audited consolidated balance sheets of the Registrant as at December 31, 2004.
CONTRACTUAL OBLIGATIONS
Payments Due by Period
(in thousand Canadian $)
------------------------------------------------------------------------------
Less than 1 More than 5
Contractual Obligations Total year 1-3 years 3-5 years years
- ------------------------- ------ ----------- --------- --------- -----------
Obligations under capital
leases 416 416 Nil Nil Nil
Long-term debt 10,136 686 1,400 8,050 Nil
Operating leases 1,094 303 327 296 168
Clinical Trials 6,152 2,222 3,930 Nil Nil
Management fees 7,000 2,400 4,600 Nil Nil
Total 24,798 6,027 10,257 8,346 168
On December 1, 2004, the Company entered into an agreement with its Chief
Executive Officer, Dr. Francesco Bellini, to issue to him up to 220,000 common
shares upon the execution of the agreement and upon achievement of specified
performance targets. The agreement is subject to regulatory and shareholder
approval in 2005.
DISCLOSURE PURSUANT TO THE REQUIREMENTS OF THE NASDAQ NATIONAL MARKET ("NASDAQ")
The Registrant was granted an exemption from Marketplace Rule 4350(f) requiring
each issuer to provide for a quorum at any meeting of the holders of common
stock of no less than 33 1/3% of the outstanding shares of the issuer's common
voting stock. This exemption was granted because Nasdaq's requirements regarding
Marketplace Rule 4350(f) are contrary to generally accepted business practices
in Canada.
DOCUMENTS FILED PURSUANT TO GENERAL INSTRUCTIONS:
Number Document
- ------ --------
1. Annual Information Form of the Registrant for the fiscal year ended
December 31, 2004.
2. The audited consolidated balance sheets of the Registrant as at
December 31, 2004 and 2003 and the consolidated statements of
operations, deficit and cash flows for the year ended December 31,
2004, the six-month period ended December 31, 2003, the year ended June
30, 2003 and for the period from inception (June 17, 1993) to December
31, 2004, including a reconciliation to United States generally
accepted accounting principles.
3. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations of the Registrant for the year
ended December 31, 2004 compared to the unaudited twelve-month period
ended December 31, 2003, and for the six-month period ended December
31, 2003 compared to the unaudited six-month period ended December 31,
2002.
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
A. UNDERTAKING
The Registrant undertakes to make available, in person or by telephone,
representatives to respond to inquiries made by the Commission staff, and to
furnish promptly, when required to do so by the Commission staff, information
relating to: the securities registered pursuant to Form 40-F; the securities in
relation to which the obligation to file an annual report on Form 40-F arises;
or transactions in said securities.
B. CONSENT TO SERVICE OF PROCESS
The Registrant has previously filed with the Commission a Form F-X.
[NEUROCHEM INC. LOGO]
NEUROCHEM INC.
ANNUAL INFORMATION FORM
FISCAL YEAR ENDED DECEMBER 31, 2004
MARCH 31, 2005
TABLE OF CONTENTS
ITEM 1 - COVER PAGE...............................................................................................I
ITEM 2 - TABLE OF CONTENTS.......................................................................................II
ITEM 3 - CORPORATE STRUCTURE......................................................................................1
NAME, ADDRESS AND INCORPORATION................................................................................1
INTERCORPORATE RELATIONSHIPS AND REORGANIZATION................................................................1
ITEM 4 - OUR BUSINESS.............................................................................................1
OUR PRODUCT CANDIDATES.........................................................................................2
RESEARCH AND DEVELOPMENT PROGRAMS..............................................................................5
RECENT DEVELOPMENTS............................................................................................5
SALES AND MARKETING............................................................................................7
OTHER PRODUCT CANDIDATES.......................................................................................8
OUR PRODUCT TECHNOLOGY PLATFORM................................................................................8
IMPORTANCE OF IDENTIFIABLE INTANGIBLE PROPERTIES...............................................................9
INTELLECTUAL PROPERTY..........................................................................................9
HUMAN RESOURCES...............................................................................................10
FACILITIES....................................................................................................10
RISK FACTORS..................................................................................................10
ITEM 5 - DIVIDENDS...............................................................................................19
ITEM 6 - DESCRIPTION OF CAPITAL STRUCTURE........................................................................19
ITEM 7 - MARKET FOR SECURITIES...................................................................................20
ITEM 8 - DIRECTORS AND OFFICERS..................................................................................20
ITEM 9 - LEGAL PROCEEDINGS.......................................................................................23
ITEM 10 - INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS.............................................24
ITEM 11 - AUDIT COMMITTEE FINANCIAL EXPERT.......................................................................24
ITEM 12 - AUDIT COMMITTEE AND PRINCIPAL ACCOUNTANTS FEES AND SERVICES............................................24
ITEM 13 - TRANSFER AGENT AND REGISTRAR...........................................................................26
ITEM 14 - INTEREST OF EXPERTS....................................................................................26
ITEM 15 - ADDITIONAL INFORMATION.................................................................................27
ii
As used in this annual information form, unless the context otherwise requires,
the terms "we", "us", "our", "Neurochem" or the "Corporation", mean or refer to
Neurochem Inc. and, unless the context otherwise requires, its subsidiaries and
its Affiliates (as such term is defined in this annual information form). Except
as otherwise stated, all dollar amounts and references to $ are to Canadian
dollars and US$ refers to United States dollars.
This annual information form contains forward-looking statements concerning the
business, operations, financial performance and condition of Neurochem. When
used in this annual information form the words "believe", "anticipate",
"intend", "estimate" and "expect" and similar expressions are intended to
identify forward-looking statements, although not all forward-looking statements
contain such words. These forward-looking statements are based on current
expectations and are naturally subject to uncertainty and changes in
circumstances that may cause actual results to differ materially from those
expressed or implied by such forward-looking statements. Factors that may cause
such differences include but are not limited to technological change, regulatory
change, the general state of the economy and competitive factors. More detailed
information about these and other factors is included in this annual information
form under the section entitled "Risk factors". Many of these factors are beyond
our control; therefore, future events may vary substantially from what we
currently foresee. You should not place undue reliance on such forward-looking
statements. Neurochem is under no obligation to update or alter such
forward-looking statements whether as a result of new information, future events
or otherwise.
Unless otherwise noted, in this annual information form, all information is
presented as at December 31, 2004.
ITEM 3 - CORPORATE STRUCTURE
NAME, ADDRESS AND INCORPORATION
Neurochem was incorporated on June 17, 1993 under the Canada Business
Corporations Act in association with Parteq Research and Development
Innovations, the technology transfer office at Queen's University of Kingston,
Ontario. On June 20, 2000, the Corporation amended its share capital (i) to
change all of the then issued and outstanding Class "A" Shares into Common
Shares and cancel the Class "A" Shares as an authorized class and (ii) to create
a class of Preferred Shares, issuable in series.
Our head office is located at 275 Armand-Frappier Boulevard, Laval, Quebec H7V
4A7.
INTERCORPORATE RELATIONSHIPS AND REORGANIZATION
Neurochem Inc. has an indirect wholly-owned subsidiary, Neurochem
(International) Limited, a Swiss corporation. Neurochem (International) Limited
is wholly-owned by Neurochem Holdings Limited, a Swiss corporation which is, in
turn, wholly-owned by Neurochem Luxco II S.A.R.L., a Luxembourg corporation.
Neurochem Luxco II S.A.R.L. is wholly-owned by Neurochem Luxco I S.C.S., a
Luxembourg limited partnership whose sole limited partner is Neurochem Inc. and
whose sole general partner is Neurochem Luxco I S.A.R.L., a Luxembourg
corporation wholly-owned by Neurochem Inc. Neurochem Inc. is also the sole
shareholder of Neurochem U.S. LLC, a Delaware limited liability company. All of
such entities, other than Neurochem Inc., are sometimes collectively referred to
in this annual information form as our "Affiliates".
ITEM 4 - OUR BUSINESS
We are a biopharmaceutical company focused on the development and
commercialization of innovative therapeutics for a variety of neurological
disorders.
1
OUR PRODUCT CANDIDATES
We currently have one program which has completed a Phase II/III clinical trial,
one program in a Phase III clinical trial and another program which has
completed a Phase IIa clinical trial, each targeting disorders for which there
are currently no known cures and limited therapies. Because our drugs target
what are known or believed to be the underlying causes of disorders and
potentially inhibit their progression, they are known as "disease modifiers".
Our investigational product candidates consist of a new class of small molecules
that mimic a type of naturally occurring component of proteoglycans known as
glycosaminoglycans ("GAGs"). We call these molecules "GAG mimetics". By
interacting with the amyloid protein, our molecules mimic GAGs and inhibit both
the formation of fibrils and the resulting toxic effects. 1,3-propanedisulfonate
(Fibrillex(TM)) and 3-amino-1-propanesulfonic acid (Alzhemed(TM) and
Cerebril(TM)), our most advanced product candidates, are based on our GAG
mimetics technology.
Fibrillex(TM), our most advanced product candidate, has completed a Phase II/III
clinical trial. We expect to announce the results in the second quarter of 2005.
Fibrillex(TM) is specifically targeted to treat Amyloid A Amyloidosis ("AA
Amyloidosis"). In December 2004, through our wholly-owned subsidiary Neurochem
(International) Limited, we entered into a definitive collaboration and
distribution agreement with Centocor Inc., a wholly-owned subsidiary of Johnson
& Johnson ("Centocor"), for the exclusive distribution rights for Fibrillex(TM)
for the prevention and treatment of AA Amyloidosis. See "Recent developments".
Alzhemed(TM), our next most advanced product candidate, is our product for the
treatment of Alzheimer's disease ("AD"). Alzhemed(TM) is currently in a Phase
III clinical trial, designed to assess the efficacy and safety in
mild-to-moderate AD patients. This trial began in North America in June 2004. We
expect to complete the randomization of this North American trial by the end of
the second quarter of 2005 or early in the third quarter of 2005. We are in
discussions with various potential partners for collaboration and
commercialization with respect to Alzhemed(TM). We have received several
proposals to date from various parties, and these proposals are currently under
consideration and discussion.
Cerebril(TM), our third product candidate, is designed to treat Hemorrhagic
Stroke due to Cerebral Amyloid Angiopathy ("CAA"). Cerebril(TM) completed a
Phase IIa clinical trial in January 2004. We expect to commence a Phase IIb
trial to test the safety and efficacy of Cerebril(TM) for the prevention of the
recurrence of Hemorrhagic Stroke due to CAA near year-end 2005.
Our focus in neurology has also led to the development of compounds to prevent
epileptic seizures induced by Traumatic Brain Injury ("TBI"). We are conducting
pre-clinical testing on a compound, NC-1461, for the prevention of epileptic
seizures induced by TBI.
In addition to these clinical and developmental stage drug candidates, we have
ongoing discovery programs that are focused on the development of next
generation compounds for the treatment of AD and of a vaccine for AD, as well as
researching various other aspects of neuroprotection and other amyloid-related
disorders. Our vaccine program consists of a modified A(beta) peptide to induce
an immune response.
We also have a minority investment in Innodia Inc., a company focused on
developing therapeutic treatments for diabetes.
FIBRILLEX(TM) FOR AA AMYLOIDOSIS
Fibrillex(TM) is our product candidate for the treatment of AA Amyloidosis, a
chronic, systemic disorder. AA Amyloidosis is characterized by the
over-expression of Serum Amyloid A ("SAA"), a protein found in the blood that is
produced in response to inflammation. SAA is a precursor to an amyloid protein
known as the AA protein (Amyloid A). In AA Amyloidosis, the AA protein forms
fibrils that accumulate in the kidney, gastrointestinal tract, spleen, liver and
other internal organs, compromising their function. As AA Amyloidosis
progresses, it results in serious illness, organ failure and potentially death.
There is at present no known cure for the disorder, and patients with AA
Amyloidosis normally have a life expectancy of five to 15 years. It is estimated
that approximately 40,000 patients are diagnosed with AA Amyloidosis in the
United States and Europe.
2
Fibrillex(TM) has received Fast-Track Designation from the US Food and Drug
Administration (FDA). It has also been selected by the Cardio-Renal Drug Product
Division of the FDA to be part of the Continuous Marketing Applications Pilot 2
program, which is aimed at expediting the development and availability to
patients of investigational drugs. Fibrillex(TM) has also received Orphan Drug
Status designation in the United States and Orphan Medicinal Product designation
in Europe, which normally provide a drug seven and ten years of market
exclusivity, respectively, upon regulatory approval.
The Phase II/III trial was a two-year, international, multi-center, randomized,
double-blind, placebo-controlled, and parallel-designed trial conducted to
investigate the safety and efficacy of Fibrillex(TM) in 183 patients suffering
from AA Amyloidosis at 27 sites across the United States, Europe, Turkey and
Israel. The most frequent underlying diseases in patients enrolled in the trial
were rheumatoid arthritis and Familial Mediterranean Fever (49% and 19%,
respectively).
Eighty-five percent of patients who completed the Phase II/III clinical trial
joined an open-label extension study and are to receive Fibrillex(TM) for an
additional two year period. Fibrillex(TM) has been well tolerated in these
studies, and no major safety issues have been reported by the independent Data
Safety Monitoring Board established to monitor the safety of patients during the
trial.
ALZHEMED(TM) FOR ALZHEIMER'S DISEASE
Alzhemed(TM) is our product candidate for Alzheimer's Disease, a degenerative
neurological disorder that progressively impairs a person's cognitive functions
and gradually destroys the brain. According to the American Alzheimer's
Association, it is estimated that over four and a half million North Americans
are currently afflicted with AD. There is no cure currently available for AD,
and existing drugs only treat symptoms such as cognitive function deficit. In
its early stages, AD may cause only minor incidences of memory loss or
forgetfulness. However, as it progresses, the symptoms multiply and intensify
and the patient experiences the deterioration of both cognitive and motor
functions, leading ultimately to death within an average of seven to 10 years.
Although there is an increased prevalence with aging, AD is increasingly being
diagnosed in individuals in their 50s and 60s.
The pathogenesis of AD is still somewhat ill-defined. It is now well recognized
in published scientific material that, although there is an early onset form of
the disease that is genetically inherited, the vast majority of cases have no
known genetic cause and occur later in life. Common to all cases of AD is the
deposition of amyloid fibrils in the brain. These fibrils result when the
Amyloid (beta) protein (A(beta)), interacts with naturally occurring GAGs. We
are pursuing an amyloid-based approach in developing a treatment for AD.
Alzhemed(TM) is a small molecule that binds to soluble non-fibrillar A(beta) and
inhibits it from interacting with naturally occurring GAGs. By inhibiting the
binding of GAGs to A(beta), Alzhemed(TM) can prevent the A(beta) protein from
assuming its fibrillar structure, thus inhibiting amyloid deposition in brain
tissue and the associated toxicity and neuronal damage. Alzhemed(TM) is designed
to stop the progression of the disease in symptomatic patients and has been
shown to decrease amyloid deposition and to favor A(beta) clearance from the
brain in an animal model of AD.
In June 2004, we initiated a North American Phase III clinical trial for
Alzhemed(TM). The trial is a large multi-center, international, randomized,
double-blind, placebo-controlled and parallel group study that will include
approximately 950 patients with mild-to-moderate AD who will be treated for 18
months. The trial is being conducted at approximately 50 US and 20 Canadian
clinical centers. As of March 22, 2005, 943 patients had been screened and of
these 612 are now randomized and have been receiving study medication, either
placebo or one of two doses of Alzhemed(TM). We expect to complete the
randomization of this North American trial by the end of the second quarter of
2005 or early in the third quarter of 2005. The primary objective of the study
is to evaluate the efficacy and safety of Alzhemed(TM). The primary efficacy
endpoints of this study include the evaluation of cognitive abilities and a
global measure of performance utilizing the Alzheimer's Disease Assessment
Scale-cognitive subpart (ADAS-cog), and the Clinical Dementia Rating Scale-Sum
of Boxes (CDR-SB). If treatment efficacy is established, disease modification
will be assessed by measuring changes in brain volume by Magnetic Resonance
Imaging (MRI). The Alzhemed(TM) European Phase III clinical trial is expected to
be initiated in the second half of 2005. Alzhemed(TM) is Neurochem's first
generation product candidate for AD.
Our Alzhemed(TM) Phase II clinical study, which concluded in March, 2003 and the
results of which were released in June 2003, primarily investigated the safety,
tolerability and pharmacokinetic profile of Alzhemed(TM) over a 12-week
3
period in patients with mild-to-moderate AD. There were no safety findings of
concern in the Phase II clinical trial. An open-label Phase II extension study
was initiated in January of 2003, with patients invited to join the extension
study as they completed the Phase II trial and all received Alzhemed(TM). On
February 22, 2005, we announced that after 28 months on study medication and in
line with previously released interim data, the majority of the mild patients
showed a stabilized or improved cognitive function on the ADAS-cog test while
the moderate AD patients had cognitive scores similar to comparable historical
controls.
CEREBRIL(TM) FOR HEMORRHAGIC STROKE DUE TO CEREBRAL AMYLOID ANGIOPATHY
Cerebril(TM) is our product candidate to treat Hemorrhagic Stroke due to
Cerebral Amyloid Angipathy, a fatal neurological disorder that is characterized
by recurrent brain hemorrhage. Hemorrhagic Stroke due to CAA is a syndrome of
recurrent strokes caused by amyloid deposits that cause blood vessels in the
brain to rupture or otherwise malfunction. This type of stroke represents
approximately seven percent of all strokes, with the incidence increasing as the
population ages. It is typically diagnosed in patients aged 55 years or older
with multiple hemorrhages confined to lobar brain regions and no other cause of
hemorrhage. Hemorrhagic Stroke due to CAA can appear alone in some patients and
is also a common pathology found in 50% or more of patients with AD. CAA is
responsible for approximately 20% to 30% of bleeding strokes in the elderly.
Hemorrhagic Stroke due to CAA remains a largely untreated disorder which is
often undiagnosed unless it is confirmed by an autopsy. No effective therapy has
yet been developed. Cerebril(TM) is designed to prevent the recurrence of
Hemorrhagic Stroke due to CAA by reducing the deposit of amyloid fibrils within
the microvasculature of the brain. The active ingredient in Cerebril(TM) is the
same compound as Alzhemed(TM) and therefore has the same chemical properties as
Alzhemed(TM). Cerebril(TM) has been found to markedly reduce CAA in an animal
model of brain amyloidosis.
In March 2004, Cerebril(TM) completed a Phase IIa clinical trial. The trial was
a multi-center, randomized, double-blind and parallel-designed study, conducted
in five centers in the United States. Twenty-four CAA patients with lobar
cerebral hemorrhage were randomized to receive 3 different daily doses of
Cerebril(TM) (100, 200 and 300 mg) for a period of twelve weeks. The data showed
no safety findings of concern based on patients' clinical laboratory tests,
vital signs and electrocardiograms during follow-up physical exams. An
independent Data Safety Monitoring Board was put in place to monitor the safety
of patients throughout the duration of the study. The Data Safety Monitoring
Board for Cerebril(TM) did not report to us any safety findings of concern.
We expect to commence a Phase IIb clinical trial protocol in collaboration with
the principal investigator and Clinical Advisory Board member for this product
candidate, Steven M. Greenberg, M.D., Co-Director of the Neurology Clinical Unit
of the Massachusetts General Hospital. The trial is expected to test the safety
and efficacy of Cerebril(TM) for the prevention or recurrence of Hemorrhagic
Stroke due to CAA.
NC-1461 - OUR SOLUTION TO EPILEPTIC SEIZURES DUE TO TBI
We have identified a series of compounds, of which NC-1461 is the lead
candidate, to prevent epileptic seizures due to TBI.
In the United States, approximately 1.5 million people sustain a TBI each year.
TBI causes severe damage to the brain with internal bleeding, inflammation and
neuronal cell death. TBI can lead to an imbalance between the activities of two
specialized types of neuronal cells. This imbalance is due to the uncontrolled
up-regulation of excitatory neurons, coupled with a strong down-regulation of
inhibitory neurons. The imbalance leads to an uncontrolled electrical discharge
which manifests itself as an epileptic seizure. Approximately 13% of patients
who have had a TBI will start experiencing epileptic seizures 12 to 18 months
following their injury. Since it is impossible to identify patients with a TBI
who will develop epileptic seizures, all patients who have suffered a TBI would
benefit from treatment early on following the injury to prevent the later
development of seizures.
PRODUCT PIPELINE
The following table illustrates the stage of development and the estimated date
of filing with the FDA of a New Drug Application (NDA) and the filing of the
European Medicines Evaluation Agency (EMEA) equivalent:
4
ESTIMATED
ESTIMATED US EUROPEAN EMEA
PRODUCT CANDIDATE TARGET DISORDER STAGE OF DEVELOPMENT NDA FILING* FILING*
- ----------------- ------------------ --------------------------------------- ------------ -------------
Fibrillex(TM) AA Amyloidosis Phase II/III clinical trial completed, Q2 2005(1) Q1 2006
results expected Q2 2005
Alzhemed(TM) Alzheimer's Disease North American Phase III clinical trial 2007(2) 2007(2)
on-going
European Phase III clinical trial 2008(2) 2008(2)
expected to commence in the second half
of 2005
Cerebril(TM) Hemorrhagic Stroke Phase IIa clinical trial completed (3) (3)
due to CAA
* The actual date of filing, if any, can vary widely depending on a variety
of factors. See "Risk Factors".
(1) Rolling NDA and filing of pre-clinical data to be initiated in Q2 2005. We
estimate that we will complete our submission in Q3 2005.
(2) 2007 filing for Alzhemed(TM) is based on a single Phase III North American
clinical trial satisfying regulatory (FDA and/or EMEA) requirements. If the
European Phase III clinical trial is also required by the FDA, NDA filing
expected in 2008.
(3) Program currently being designed: scope and length, as well as results will
influence timing.
RESEARCH AND DEVELOPMENT PROGRAMS
In addition to our clinical and developmental stage drug candidates, we have an
ongoing discovery effort that is focused on the development of next generation
compounds for the treatment of AD and of a vaccine for AD.
Our approach to AD has been to focus on targeting a particular amyloid protein
called A(beta) protein before it organizes into fibrils and causes neuronal
damage. One approach to block the development of AD is to intervene early using
a vaccine strategy. Our vaccine approach consists of a modified A(beta) peptide
to induce an immune response which targets soluble A(beta) (prior to any
structural change which leads to fibril formation).
Preliminary in vivo studies have shown promising results where immune
recognition of soluble A(beta) reduces brain amyloid protein levels but does not
attack fibrillar deposits, thereby minimizing the risk of brain inflammation. To
advance our efforts to prevent and treat AD, in January 2004 we signed a
strategic alliance with the National Research Council of Canada's Institute for
Biological Sciences (NRC-IBS) and, more specifically, with Dr. Harold J.
Jennings, a world leader in the development of innovative conjugated vaccines.
We also entered into an in-licensing agreement with PRAECIS PHARMACEUTICALS
INCORPORATED, a biopharmaceutical company, relating to certain A(beta)-amyloid
peptides for use in the development of a novel synthetic vaccine to prevent and
treat AD.
In addition, we are actively researching various other aspects of disease
modification, neuroprotection, as well as other Amyloid-related disorders.
RECENT DEVELOPMENTS
FIBRILLEX(TM) - AGREEMENT WITH CENTOCOR
On December 21, 2004, we entered into a collaboration and distribution
agreement, granting Centocor, exclusive distribution rights for Fibrillex(TM).
The agreement includes up-front, regulatory and sales-based milestone payments
valued at up to US$54 million. A tiered distribution fee will also be paid to
Neurochem, the percentage of which will be based upon annual net sales of
Fibrillex(TM) in the applicable territories over the life of the agreement. Upon
execution of the agreement, we became entitled to a payment of $14,443,000.
One-half of this payment is potentially refundable, based in part on the results
of our Phase II/III clinical trial for Fibrillex(TM). Distribution rights
granted to Centocor are worldwide, with the exception of Canada, Switzerland,
China, Japan, Taiwan and South Korea, which remain with Neurochem. Under the
agreement, Neurochem will be responsible for product approval activities in the
United States and in Europe, as well as for global manufacturing activities.
Centocor and other affiliates will manage the marketing and sales of
Fibrillex(TM) in the applicable territories. Centocor will also be responsible
for worldwide
5
safety surveillance. The financial terms of the agreement, including payment of
milestones and distribution fees, depend upon the results of the Phase II/III
clinical trials, the approval for the commercial sale of Fibrillex(TM) by the
FDA, the EMEA and other similar regulatory authorities and upon the volume of
sales of Fibrillex(TM) over the life of the agreement. We anticipate filing for
regulatory approval in 2005.
AGREEMENTS WITH OUR CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
On December 1, 2004, the management services agreement between Picchio
International Inc. ("Picchio International") and Neurochem, pursuant to which
Picchio International provides the services of Dr. Francesco Bellini as Chief
Executive Officer and other management services and which is more fully
described in the Management Proxy Circular of Neurochem dated April 6, 2004, was
extended by amendment as of the 1st day of December, 2004, until November 30,
2007. The agreement provides for the payment of a monthly fee of $200,000 to
Picchio International. The agreement also provides for performance based fees
determined at the discretion of our Board of Directors. The agreement may not be
terminated by Picchio International prior to May 31, 2006.
Pursuant to an agreement made as of December 1, 2004 between us and our
Chairman, President and Chief Executive Officer, Dr. Francesco Bellini, we
agreed to issue up to 220,000 Common Shares to Dr. Bellini in consideration of
his services and subject to the accomplishment of certain performance targets.
In particular, we agreed to issue 60,000 Common Shares to Dr. Bellini upon
execution of the agreement, 55,000 Common Shares upon the execution of a
collaboration agreement in respect of Alzhemed(TM), 55,000 Common Shares upon
the execution of a collaboration agreement in respect of Fibrillex(TM), 25,000
Common Shares upon the completion of a third-party equity and/or debt financing
and 25,000 Common Shares upon the restructuring of our management structure,
including formalizing a succession plan. The issuance of the shares pursuant to
the agreement is subject to regulatory and shareholder approval (which we will
seek at the next annual general meeting of shareholders) and provides that we
may, at our option, purchase Common Shares in the open market to satisfy our
obligations under the agreement. Dr. Bellini has met the performance target in
respect of the Fibrillex(TM) transaction and in respect of the financing. See
"Recent Developments - Completion of an offering of our Common Shares".
If Dr. Bellini ceases to be an officer and director of the Corporation and no
longer provides management services to the Corporation directly or through a
formal agreement such as the management services agreement described herein for
any reason other than termination without cause or death or incapacity, all
rights granted under the agreement shall be immediately forfeited as of the
first date on which Dr. Bellini is no longer an officer, director or management
service provider and Dr. Bellini shall not be entitled to receive any Common
Shares pursuant to the agreement. In the event of the death or incapacity of Dr.
Bellini or termination of such management services without cause, Dr. Bellini or
his heirs or other legal representatives, as the case may be, shall be entitled
to receive, within 90 days of the death, determination of incapacity or
termination, the Common Shares which are issuable or deliverable, as the case
may be, by the Corporation upon the execution of the agreement and in respect of
which the relevant performance target has been achieved.
All rights, and the payment obligations relating thereto, are for the benefit of
Dr. Bellini or, in the event of his death, his heirs or other legal
representatives. Dr. Bellini shall not be entitled to transfer, assign, charge,
pledge or hypothecate, or otherwise alienate, whether by operation of law or
otherwise, any such rights and they shall not be subject to execution,
attachment or similar process.
ADDITIONS TO OUR MANAGEMENT TEAM
We have recently made the following additions and changes to our management
team:
+ On January 16, 2004, we announced that Judith Paquin, B.B.A., had joined us
as Vice President, Human Resources and Christine Lennon, MBA, had joined us
as Vice President, Business Development.
+ On October 5, 2004, we announced that Dr. Andreas Orfanos, M.B.B. Ch., MBA,
was appointed to the position of Executive Vice President, Strategic
Planning and Scientific Affairs. Dr. Orfanos has overall responsibility for
many of our activities, including research as well as drug development and
global strategic planning.
6
+ On December 10, 2004, we announced the appointment of Mariano Rodriguez,
C.A., CPA, to the position of Vice President, Finance, and Chief Financial
Officer, replacing Mr. Claude Michaud who left Neurochem the same day to
pursue other interests.
+ On January 20, 2005, we announced that Shona McDiarmid, PhD., LL.B. joined
us as Vice President, Intellectual Property, and Daniel Delorme, PhD.,
joined us as Vice President, Research. Philippe Calais, Pharm. D.,
President at the time, was appointed President, Global Business, with Dr.
Bellini assuming the office of President of Neurochem, and Denis Garceau,
PhD, Vice President, Drug Development, became Senior Vice President, Drug
Development. Francine Gervais, PhD., Vice President, Research and
Development, left her employment with us but remains as a consultant to
Neurochem.
COMPLETION OF AN OFFERING OF OUR COMMON SHARES
On March 9, 2005, we completed a public offering of 4 million Common Shares. The
Common Shares were sold in the United States and Canada at US$15.30 per share.
The offering resulted in total gross proceeds to us of approximately US$61.2
million.
UBS Investment Bank acted as the sole book running manager in this offering, and
CIBC World Markets Corp., Piper Jaffray & Co., Desjardins Securities Inc., Wells
Fargo Securities LLC, BMO Nesbitt Burns Inc. and Fortis Securities LLC acted as
co-managers.
We intend to use the net proceeds from the offering to fund clinical trials of
our investigational product candidates, primarily Alzhemed(TM), as well as to
further complete pre-clinical and research and development programs and the
balance for the marketing of Fibrillex(TM), working capital and general
corporate purposes.
SALES AND MARKETING
We intend to pursue different commercialization strategies for our products in
different parts of the world. We intend to retain full commercialization rights
for products in markets that we can adequately exploit on our own. In other
markets, we intend to partner with third parties through collaborative
arrangements, including distribution and co-marketing agreements. In addition,
in various designated markets, we intend to enter into out-licensing
arrangements.
FIBRILLEX(TM): In December 2004, we signed a definitive collaboration and
distribution agreement, granting Centocor exclusive distribution rights for
Fibrillex(TM). See "Recent Developments".
The agreement includes up-front, regulatory and sales-based milestone payments
valued at up to US$54 million. An escalating distribution fee will also be paid
to us, the percentage of which will be based upon annual sales of Fibrillex(TM)
over the life of the agreement. Distribution rights granted to Centocor are
worldwide, with the exception of Canada, Switzerland, China, Japan, Taiwan and
South Korea which remain with us. Under the agreement, we will be responsible
for product approval activities in the United States and the European Union, as
well as for global manufacturing activities. Centocor and other affiliates will
manage the marketing and sales of Fibrillex(TM) in the applicable territories.
Centocor will also be responsible for worldwide safety surveillance.
ALZHEMED(TM): AD is characterized by a large and growing patient population and
a broad prescriber base composed of general practitioners, internists and
specialists. We therefore intend to partner with a leading pharmaceutical
company possessing a global marketing and commercial network for the
commercialization, marketing and sale of Alzhemed(TM).
CEREBRIL(TM): Cerebril(TM) targets a small and well-defined population primarily
treated by specialists. Since Cerebril(TM) and Alzhemed(TM) are made up of the
same compound, potential commercialization synergies between the two products
will be evaluated as we explore partnership arrangements for Alzhemed(TM).
7
OTHER PRODUCT CANDIDATES
In addition to our ongoing clinical work, we have an active research and
development program aimed at feeding our product pipeline.
NEXT GENERATION ANTI-AMYLOID COMPOUNDS
Know-how acquired through the development of Alzhemed(TM) has led to the design
and synthesis of a next generation of anti-amyloid compounds based on our GAG
mimetics technology. The compounds present, both in vitro and in vivo, a
promising anti-amyloid activity profile. We have already conducted preliminary
studies on approximately 200 of these compounds.
VACCINE
Our approach has been to focus on targeting the A(beta) protein before it
organizes into fibrils and causes neuronal damage. One approach to block the
development of AD is to prevent the damage caused by A(beta) by intervening
early using a vaccine strategy. Our vaccine approach consists of a modified
fragment of A(beta) peptide to induce an immune response which targets soluble
A(beta) (prior to any structural change which leads to fibril formation).
Preliminary in vivo studies have shown promising results where immune
recognition of soluble A(beta) reduces brain amyloid protein levels but does not
attack fibrillar deposits, thereby minimizing the risk of brain inflammation.
LIBRARY OF PRODUCT CANDIDATES
To date, we have produced a library of potential product candidates of over
2,000 molecules through traditional organic chemistry. The library comprises
several different classes of potential pharmacophores, sulfates, sulphonates,
phosphonates, carboxylates and a number of other functional groups, all of which
address amyloid proteins. In addition, we have access to compound libraries
through alliances, collaborations and commercial arrangements.
Through our portfolio of in vitro and in vivo screening assays, we have
identified lead drug molecules with potent anti-amyloid activity, the most
promising of which are undergoing further research and development.
OUR PRODUCT TECHNOLOGY PLATFORM
GAG MIMETICS FOR AMYLOID-RELATED DISORDERS
Our therapeutic approach to amyloid-related disorders aims at preventing the
onset and arresting the progression of the targeted disorders. We have
identified small molecules which can inhibit the formation of amyloid deposits
and thereby prevent amyloid-induced toxicity.
A variety of neurological as well as systemic disorders are mediated by a class
of proteins known as amyloids. Amyloids are naturally occurring proteins found
in the central nervous system, the blood and elsewhere in the body. To date, at
least 21 different unrelated proteins have been found to be capable of changing
structure, depositing in different tissues and causing different types of
amyloid diseases. During amyloid fibril formation, the amyloid protein
associates with other proteins, such as GAGs, which bind to the amyloid protein,
promote fibril formation and protect the fibrils from being degraded by enzymes.
Our molecules, designed to mimic specific properties of the GAGs and therefore
called "GAG mimetics", attach to the amyloid protein and inhibit the development
of amyloid deposits and associated toxicity.
8
DUAL ACTION ANTI-EPILEPTOGENICS
Our drug design aims at correcting the neurotransmitter imbalance created early
on following a TBI using compounds capable of dual action: (i) bringing down the
activity of the excitatory neurons and (ii) up-regulating the activity of the
inhibitory neurons, thereby restoring the natural balance.
We have developed and synthesized a library of approximately 300 (beta)-alanine
analogs which demonstrate this dual activity. In addition, we are evaluating the
anti-epileptogenic and anti-convulsion activities of a small library of uracil
and dihydrouracil compounds. In in vivo and in vitro experiments, we have found
that these compounds (which may get metabolized into (beta)-alanine analogs in
vivo) are capable of (i) preventing the development of epileptogenesis following
a TBI or (ii) blocking the onset of epileptic seizures. We believe that such an
activity profile is unique to our compounds and may lead to the development of
therapeutics addressing both epileptogenesis and the control of epileptic
seizures.
IMPORTANCE OF IDENTIFIABLE INTANGIBLE PROPERTIES
RESEARCH ALLIANCES, LICENSE AGREEMENTS AND GOVERNMENT FUNDING AGREEMENTS
We have entered into research alliances, licensing agreements and services
agreements with Queen's University (Kingston, Ontario, Canada); University of
Montreal - Ste. Justine Hospital (Montreal, Quebec, Canada) and the National
Research Council of Canada with respect to amyloid and Epilepsy research,
testing in animal models for epileptic seizures due to TBI and developing
techniques to permit measurement of A(beta) protein, respectively. Further, to
advance its efforts to prevent and treat AD, the Company has forged a strategic
alliance with the National Research Council of Canada's Institute for Biological
Sciences (NRC-IBS) and more specifically with Dr. Harold J. Jennings, a world
leader in the development of innovative conjugated vaccines and has entered into
a licensing agreement with PRAECIS PHARMACEUTICALS INCORPORATED, a leading
biopharmaceutical company, relating to certain A(beta) amyloid peptides for use
in the development of a novel synthetic vaccine to prevent and treat AD.
In addition, in 1999, we entered into an agreement with Technology Partnerships
Canada ("TPC") regarding financial assistance to be provided by the Government
of Canada for the development of one or more oral therapeutic products for the
treatment of Alzheimer's Disease. To date, we have received approximately $6.7
million under this agreement and we will pay to TPC a royalty equal to 7.24% of
gross revenues from the commercialization of effective orally-administered
therapeutics for the treatment of Alzheimer's Disease until June 30, 2010. After
June 30, 2010, we may have to continue to pay royalties to TPC until such time
as the aggregate amount of royalties paid pursuant to the agreement reaches
$20.5 million.
INTELLECTUAL PROPERTY
It is an important part of our business to obtain intellectual property
protection for our technology, products and processes. Our success will depend,
in part, on our ability to obtain, license and enforce patents, protect our
proprietary information and maintain trade secret protection without infringing
the proprietary rights of third parties. Our strategic approach is to file
and/or license patent applications whenever possible to obtain patent protection
in at least the major pharmaceutical markets, including the United States, major
European countries, Japan and Canada. We also rely on trade secrets, proprietary
unpatented information, trade marks and contractual arrangements to protect our
technology and enhance our competitive position.
We currently have, or have licensed, rights under 20 issued patents, including
13 issued US patents and over 200 pending applications. The patent portfolio
includes numerous patents and patent applications claiming compounds,
pharmaceutical compositions, peptides, vaccines, processes and methods of
treating diseases, including amyloid- related disorders. A number of these
patents and patent applications are owned by Queen's University and licensed to
us. Other patents and patent applications are co-owned by us and Queen's
University or the University of British Columbia.
9
We have rights in four issued US patents for our product candidates Alzhemed(TM)
and Cerebril(TM) and we have rights in a fifth issued US patent for our product
candidate Cerebril(TM). We also have, or have licensed, an issued patent in
Japan and several patents or pending patent applications for Alzhemed(TM) and
Cerebril(TM) in selected countries, including the United States and Europe.
We have rights in three issued US patents for our product candidate
Fibrillex(TM). We also have, or have licensed, several patents or pending patent
applications for Fibrillex(TM) in selected countries, including the United
States, Europe and Japan.
We are a party to license agreements under which we have obtained rights to use
certain technologies to develop our product candidates. The licenses to which we
are a party impose various milestones, commercialization, sublicensing, royalty
and other payment, insurance, indemnification and other obligations on us and
are subject to certain reservations of rights.
We have trademarks and pending trademark applications for our product candidates
and we are currently in discussion with Alza Corporation of California regarding
an opposition it has filed to our registration of the trademark Alzhemed(TM) in
the United States.
All of our intellectual property, with the exception of the commercialization
rights of our products in Canada and the applications for our Canadian
trademarks (which are owned by Neurochem Inc.), is owned by Neurochem
(International) Limited, a Swiss corporation and an indirect wholly-owned
subsidiary of Neurochem Inc. See "Corporate Structure -- Intercorporate
Relationships".
HUMAN RESOURCES
As at December 31, 2004, we employed 165 people, the majority of which are
involved in R&D and drug development. Of these 165 people, 25 are scientists
with Ph.D degrees and 31 are scientists with M.Sc. degrees.
FACILITIES
On May 11, 2004, we completed the acquisition of facilities located in the Parc
Scientifique de la Haute Technologie in Laval, Quebec, for a purchase price of
approximately $10.5 million. The acquisition was financed by entering into a
$10.5 million five-year revolving decreasing term credit. Following such
acquisition, our headquarters and corporate and scientific employees were
transferred to this site.
RISK FACTORS
Investing in our securities involves a significant amount of risk. You should
carefully consider the risks described below, together with all of the other
information in our publicly filed documents, before making an investment
decision. If any of the following risks actually occurs, our business, financial
condition or results of operations could be adversely affected. In such an
event, the trading price of our Common Shares could decline and you may lose
part or all of your investment in our securities.
WE HAVE A HISTORY OF LOSSES, AND WE HAVE NOT GENERATED ANY PRODUCT REVENUES. WE
MAY NEVER ACHIEVE OR MAINTAIN PROFITABILITY.
All of our potential product candidates are in development, and as a result we
have not to date generated any revenues from product sales. We have incurred
substantial expenses in our efforts to develop products. Consequently, we have
generated operating losses each year since our inception, and as of December 31,
2004, we had an accumulated deficit of approximately $140.9 million (US$117.1
million). Our losses have adversely impacted, and will continue to adversely
impact our working capital, total assets and shareholders' equity. We do not
expect to generate any revenues from product sales for several years, and our
expenses are likely to increase as we expand our research and development and
clinical study programs and our sales and marketing activities and seek
regulatory approval for our product candidates. We may never commercialize any
of our products. Even if we succeed in developing commercial products, we expect
to incur additional operating losses for at least the next
10
We have rights in four issued US patents for our product candidates Alzhemed(TM)
and Cerebril(TM) and we have rights in a fifth issued US patent for our product
candidate Cerebril(TM). We also have, or have licensed, an issued patent in
Japan and several patents or pending patent applications for Alzhemed(TM) and
Cerebril(TM) in selected countries, including the United States and Europe.
We have rights in three issued US patents for our product candidate
Fibrillex(TM). We also have, or have licensed, several patents or pending patent
applications for Fibrillex(TM) in selected countries, including the United
States, Europe and Japan.
We are a party to license agreements under which we have obtained rights to use
certain technologies to develop our product candidates. The licenses to which we
are a party impose various milestones, commercialization, sublicensing, royalty
and other payment, insurance, indemnification and other obligations on us and
are subject to certain reservations of rights.
We have trademarks and pending trademark applications for our product candidates
and we are currently in discussion with Alza Corporation of California regarding
an opposition it has filed to our registration of the trademark Alzhemed(TM) in
the United States.
All of our intellectual property, with the exception of the commercialization
rights of our products in Canada and the applications for our Canadian
trademarks (which are owned by Neurochem Inc.), is owned by Neurochem
(International) Limited, a Swiss corporation and an indirect wholly-owned
subsidiary of Neurochem Inc. See "Corporate Structure -- Intercorporate
Relationships".
HUMAN RESOURCES
As at December 31, 2004, we employed 165 people, the majority of which are
involved in R&D and drug development. Of these 165 people, 25 are scientists
with Ph.D degrees and 31 are scientists with M.Sc. degrees.
FACILITIES
On May 11, 2004, we completed the acquisition of facilities located in the Parc
Scientifique de la Haute Technologie in Laval, Quebec, for a purchase price of
approximately $10.5 million. The acquisition was financed by entering into a
$10.5 million five-year revolving decreasing term credit. Following such
acquisition, our headquarters and corporate and scientific employees were
transferred to this site.
RISK FACTORS
Investing in our securities involves a significant amount of risk. You should
carefully consider the risks described below, together with all of the other
information in our publicly filed documents, before making an investment
decision. If any of the following risks actually occurs, our business, financial
condition or results of operations could be adversely affected. In such an
event, the trading price of our Common Shares could decline and you may lose
part or all of your investment in our securities.
WE HAVE A HISTORY OF LOSSES, AND WE HAVE NOT GENERATED ANY PRODUCT REVENUES. WE
MAY NEVER ACHIEVE OR MAINTAIN PROFITABILITY.
All of our potential product candidates are in development, and as a result we
have not to date generated any revenues from product sales. We have incurred
substantial expenses in our efforts to develop products. Consequently, we have
generated operating losses each year since our inception, and as of December 31,
2004, we had an accumulated deficit of approximately $140.9 million (US$117.1
million). Our losses have adversely impacted, and will continue to adversely
impact our working capital, total assets and shareholders' equity. We do not
expect to generate any revenues from product sales for several years, and our
expenses are likely to increase as we expand our research and development and
clinical study programs and our sales and marketing activities and seek
regulatory approval for our product candidates. We may never commercialize any
of our products. Even if we succeed in developing commercial products, we expect
to incur additional operating losses for at least the next
10
several years. If we do not ultimately commercialize products and achieve or
maintain profitability, your investment in our shares could result in a
significant or total loss.
WE DO NOT HAVE THE REQUIRED APPROVALS TO MARKET ANY OF OUR PRODUCT CANDIDATES,
AND WE DO NOT KNOW IF WE WILL EVER RECEIVE SUCH APPROVALS.
None of our product candidates has received regulatory approval for commercial
sale. We cannot market a pharmaceutical product in any jurisdiction until it has
completed rigorous pre-clinical testing and clinical trials and such
jurisdiction's extensive regulatory approval process. In general, significant
research and development and clinical studies are required to demonstrate the
safety and efficacy of our product candidates before we can submit regulatory
applications. Preparing, submitting and advancing applications for regulatory
approval is complex, expensive and time consuming and entails significant
uncertainty. We have not completed this process for any product candidates. Even
if a product candidate is approved by the FDA or any other regulatory authority,
we may not obtain approval for an indication whose market is large enough to
recoup our investment in that product candidate. We may never obtain the
required regulatory approvals for any of our product candidates.
OUR CLINICAL TRIALS MAY NOT YIELD RESULTS WHICH WILL ENABLE US TO OBTAIN
REGULATORY APPROVAL FOR OUR PRODUCTS.
We will only receive regulatory approval for a product candidate if we can
demonstrate in carefully designed and conducted clinical trials that the product
candidate is safe and effective. We do not know whether our pending or any
future clinical trials will demonstrate sufficient safety and efficacy to obtain
the requisite regulatory approvals or will result in marketable products.
Clinical trials are lengthy, complex, expensive and uncertain processes. It will
take us several years to complete our testing, and failure can occur at any
stage of testing. Results attained in pre-clinical testing and early clinical
studies, or trials, may not be indicative of results that are obtained in later
studies. We may suffer significant setbacks in advanced clinical trials, even
after promising results in earlier studies. Based on results at any stage of
clinical trials, we may decide to repeat or redesign a trial or discontinue
development of one or more of our product candidates. If we fail to adequately
demonstrate the safety and efficacy of our products under development, we will
not be able to obtain the required regulatory approvals to commercialize our
product candidates.
Clinical trials are subject to continuing oversight by governmental regulatory
authorities and institutional review boards and:
+ must meet the requirements of these authorities;
+ must meet requirements for informed consent; and
+ must meet requirements for good clinical practices.
We may not be able to comply with these requirements.
We rely on third parties, including contract research organizations and outside
consultants, to assist us in managing and monitoring clinical trials. Our
reliance on these third parties may result in delays in completing, or in
failing to complete, these trials if they fail to perform with the speed and
level of competence we expect.
If clinical trials for a product candidate are unsuccessful, we will be unable
to commercialize such product candidate. If one or more of our clinical trials
are delayed, we will be unable to meet our anticipated development or
commercialization timelines. Either circumstance could cause the price of our
shares to decline.
IF WE ENCOUNTER DIFFICULTIES ENROLLING PATIENTS IN OUR CLINICAL TRIALS, OUR
TRIALS COULD BE DELAYED OR OTHERWISE ADVERSELY AFFECTED.
Clinical trials for our product candidates require that we identify and enroll a
large number of patients with the disorder under investigation. We may not be
able to enroll a sufficient number of patients to complete our clinical trials
in a timely manner. Patient enrollment is a function of many factors including:
11
+ design of the protocol;
+ the size of the patient population;
+ eligibility criteria for the study in question;
+ perceived risks and benefits of the drug under study;
+ availability of competing therapies;
+ efforts to facilitate timely enrollment in clinical trials;
+ patient referral practices of physicians; and
+ availability of clinical trial sites.
If we have difficulty enrolling a sufficient number of patients to conduct our
clinical trials as planned, we may need to delay or terminate ongoing clinical
trials.
A SETBACK IN ANY OF OUR CLINICAL TRIALS WOULD LIKELY CAUSE A DROP IN THE PRICE
OF OUR SHARES.
We have completed a Phase II/III clinical trial of Fibrillex(TM) and began
enrollment for Phase III clinical trial of Alzhemed(TM) in 2004. The Phase
II/III clinical trial of Fibrillex(TM) was recently completed and study data is
expected to be released in the second quarter of 2005, and, consequently, will
not be available prior to the closing of this Offering. Setbacks in any phase of
the clinical development of our product candidates would have a financial impact
(including with respect to our collaboration agreement and distribution
agreement with Centocor) and would likely cause a drop in the price of our
shares. Moreover, because Alzhemed(TM) and Cerebril(TM) are the same compound, a
failure in the development of either of these product candidates could have a
negative impact on the development of the other.
EVEN IF WE OBTAIN REGULATORY APPROVALS FOR OUR PRODUCT CANDIDATES, WE WILL BE
SUBJECT TO STRINGENT ONGOING GOVERNMENT REGULATION.
Even if regulatory authorities approve any of our product candidates, the
manufacture, marketing and sale of such products will be subject to strict and
ongoing regulation. Compliance with such regulation will be expensive and
consume substantial financial and management resources. For example, an approval
for a product may be conditioned on our conducting costly post-marketing
follow-up studies. In addition, if based on these studies, a regulatory
authority does not believe that the product demonstrates a benefit to patients,
such authority could limit the indications for which the product may be sold or
revoke the product's regulatory approval.
We and our contract manufacturers will be required to comply with applicable
current Good Manufacturing Practice ("GMP") regulations for the manufacture of
our products. These regulations include requirements relating to quality
assurance, as well as the corresponding maintenance of records and
documentation. Manufacturing facilities must be approved before we can use them
in commercial manufacturing of our products and are subject to subsequent
periodic inspection by regulatory authorities. In addition, material changes in
the methods of manufacturing or changes in the suppliers of raw materials are
subject to further regulatory review and approval.
If we or any future marketing collaborators or contract manufacturers fail to
comply with applicable regulatory requirements, we may be subject to sanctions
including fines, product recalls or seizures, injunctions, total or partial
suspension of production, civil penalties, withdrawals of previously granted
regulatory approvals and criminal prosecution. Any of these penalties could
delay or prevent the promotion, marketing or sale of our products.
12
IF OUR PRODUCTS DO NOT GAIN MARKET ACCEPTANCE, WE MAY BE UNABLE TO GENERATE
SIGNIFICANT REVENUES.
Even if our products are approved for sale, they may not be successful in the
marketplace. Market acceptance of any of our products will depend on a number of
factors including:
+ demonstration of clinical effectiveness and safety;
+ the potential advantages of our products over alternative treatments;
+ the availability of acceptable pricing and adequate third-party
reimbursement; and
+ the effectiveness of marketing and distribution methods for the
products.
If our products do not gain market acceptance among physicians, patients and
others in the medical community, our ability to generate significant revenues
from our products would be limited.
WE MAY NOT ACHIEVE OUR PROJECTED DEVELOPMENT GOALS IN THE TIME FRAMES WE
ANNOUNCE AND EXPECT.
We set goals for and make public statements regarding timing of the
accomplishment of objectives material to our success, such as the commencement
and completion of clinical trials, anticipated regulatory approval dates and
time of product launch. The actual timing of these events can vary dramatically
due to factors such as delays or failures in our clinical trials, the
uncertainties inherent in the regulatory approval process and delays in
achieving manufacturing or marketing arrangements sufficient to commercialize
our products. There can be no assurance that our clinical trials will be
completed, that we will make regulatory submissions or receive regulatory
approvals as planned or that we will be able to adhere to our current schedule
for the launch of any of our products. If we fail to achieve one or more of
these milestones as planned, the price of our shares could decline.
IF WE FAIL TO OBTAIN ACCEPTABLE PRICES OR ADEQUATE REIMBURSEMENT FOR OUR
PRODUCTS, OUR ABILITY TO GENERATE REVENUES WILL BE DIMINISHED.
Our ability to successfully commercialize our products will depend significantly
on our ability to obtain acceptable prices and the availability of reimbursement
to the patient from third-party payers, such as government and private insurance
plans. While we have not commenced discussions with any such parties, these
third-party payers frequently require companies to provide predetermined
discounts from list prices, and they are increasingly challenging the prices
charged for pharmaceuticals and other medical products. Our products may not be
considered cost-effective, and reimbursement to the patient may not be available
or sufficient to allow us to sell our products on a competitive basis. We may
not be able to negotiate favorable reimbursement rates for our products.
In addition, the continuing efforts of third-party payers to contain or reduce
the costs of healthcare through various means may limit our commercial
opportunity and reduce any associated revenue and profits. We expect proposals
to implement similar government control to continue. In addition, increasing
emphasis on managed care will continue to put pressure on the pricing of
pharmaceutical and biopharmaceutical products. Cost control initiatives could
decrease the price that we or any current or potential collaborators could
receive for any of our future products and could adversely affect our
profitability. In addition, in Canada and in many other countries, pricing
and/or profitability of some or all prescription pharmaceuticals and
biopharmaceuticals are subject to government control.
If we fail to obtain acceptable prices or an adequate level of reimbursement for
our products, the sales of our products would be adversely affected or there may
be no commercially viable market for our products.
COMPETITION IN OUR TARGETED MARKETS IS INTENSE, AND DEVELOPMENT BY OTHER
COMPANIES COULD RENDER OUR PRODUCTS OR TECHNOLOGIES NON-COMPETITIVE.
The biopharmaceutical industry is highly competitive. New products developed by
other companies in the industry could render our products or technologies
non-competitive. Competitors may have developed or may be developing
technologies that could form the basis for competitive products. Some of these
products may be more effective or
13
have an entirely different approach or means of accomplishing the desired effect
than our products. We expect competition from biopharmaceutical and
pharmaceutical companies and academic research institutions to increase over
time. Many of our competitors and potential competitors have substantially
greater product development capabilities and financial, scientific, marketing
and human resources than we do. Our competitors may succeed in developing
products earlier and in obtaining regulatory approvals and patent protection for
such products more rapidly than we can or at a lower price.
WE MAY NOT OBTAIN ADEQUATE PROTECTION FOR OUR PRODUCTS THROUGH OUR INTELLECTUAL
PROPERTY.
Our success depends, in large part, on our ability to protect our competitive
position through patents, trade secrets, trademarks and other intellectual
property rights. The patent positions of pharmaceutical and biopharmaceutical
firms including Neurochem are uncertain and involve complex questions of law and
fact for which important legal issues remain unresolved. The patents issued or
to be issued to us may not provide us with any competitive advantage. Our
patents may be challenged by third parties in patent litigation, which is
becoming widespread in the biopharmaceutical industry. In addition, it is
possible that third parties with products that are very similar to ours will
circumvent our patents by means of alternate designs or processes. We may have
to rely entirely on method of use protection for our products, which may not
confer the same protection as composition of matter patents. We cannot be
certain that we are the first creator of inventions covered by pending patent
applications or that we were the first to file patent applications for any such
inventions and, if we are not, we may be subject to inventorship claims. We may
be required to disclaim part of the term of certain patents or all of the term
of certain patent applications. There may be prior art of which we are not aware
that may affect the validity or enforceability of a patent claim. There also may
be prior art of which we are aware, but which we do not believe affects the
validity or enforceability of a claim, which may, nonetheless ultimately be
found to affect the validity or enforceability of a claim. No assurance can be
given that our patents would be declared by a court to be valid or enforceable
or that a competitor's technology or product would be found by a court to
infringe our patents. Applications for patents and trademarks in Canada, the
United States and in foreign markets have been filed and are being actively
pursued by us. Pending patent applications may not result in the issuance of
patents, and we may not develop additional proprietary products which are
patentable.
Patent applications relating to or affecting our business have been filed by a
number of pharmaceutical and biopharmaceutical companies and academic
institutions. A number of the technologies in these applications or patents may
conflict with our technologies, patents or patent applications, and such
conflict could reduce the scope of patent protection which we could otherwise
obtain. We could also become involved in interference proceedings in connection
with one or more of our patents or patent applications to determine priority of
invention.
In addition to patents, we rely on trade secrets and proprietary know-how to
protect our intellectual property. We generally require our employees,
consultants, outside scientific collaborators and sponsored researchers and
other advisors to enter into confidentiality agreements. These agreements
provide that all confidential information developed or made known to the
individual during the course of the individual's relationship with us is to be
kept confidential and not disclosed to third parties except in specific
circumstances. In the case of our employees, the agreements provide that all of
the technology which is conceived by the individual during the course of
employment is our exclusive property. These agreements may not provide
meaningful protection or adequate remedies in the event of unauthorized use or
disclosure of our proprietary information. In addition, it is possible that
third parties could independently develop proprietary information and techniques
substantially similar to ours or otherwise gain access to our trade secrets.
We currently have the right to use certain technology under license agreements
with third parties. Our failure to comply with the requirements of material
license agreements could result in the termination of such agreements, which
could cause us to terminate the related development program and cause a complete
loss of our investment in that program.
As a result of the foregoing factors, we cannot rely on our intellectual
property to protect our products in the marketplace.
14
WE MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
Our commercial success depends significantly on our ability to operate without
infringing the patents and other intellectual property rights of third parties.
There could be issued patents of which we are not aware that our products
infringe or patents, that we believe we do not infringe, but that we may
ultimately be found to infringe. Moreover, patent applications are in many cases
maintained in secrecy until patents are issued. The publication of discoveries
in the scientific or patent literature frequently occurs substantially later
than the date on which the underlying discoveries were made and patent
applications were filed. Because patents can take many years to issue, there may
be currently pending applications of which we are unaware that may later result
in issued patents that our products infringe. For example, pending applications
may exist that provide support or can be amended to provide support for a claim
that results in an issued patent that our product infringes.
In the event of infringement or violation of another party's patent, we may be
required to obtain a license from that party or redesign our products so as not
to infringe the patent. We may not be able to enter into licensing arrangements
at a reasonable cost or effectively redesign our products. Any inability to
secure licenses or alternative technology could result in delays in the
introduction of our products or lead to prohibition of the manufacture or sale
of products by us.
PATENT LITIGATION IS COSTLY AND TIME CONSUMING AND MAY SUBJECT US TO
LIABILITIES.
Our involvement in any patent litigation, interference or other administrative
proceedings will likely cause us to incur substantial expenses, and the efforts
of our technical and management personnel will be significantly diverted. In
addition, an adverse determination could subject us to significant liabilities.
WE MAY NOT OBTAIN TRADEMARK REGISTRATIONS.
The Company has filed trademark registrations in connection with Fibrillex(TM),
Alzhemed(TM) and Cerebril(TM) in various jurisdictions, including the United
States. Although we do not believe that any of these trade names is critical to
the success of the product candidate to which it relates, we intend to defend
any opposition to our trademark registrations. No assurance can be given that
any of our trademarks will be registered in the United States or elsewhere or
that the use of any trademark will confer a competitive advantage in the
marketplace. Furthermore, even if we are successful in our trademark
registrations, the FDA has its own process for drug nomenclature and its own
views concerning appropriate proprietary names. It also has the power, even
after granting market approval, to request a company to reconsider the name for
a product because of evidence of confusion in the market place. No assurance can
be given that the FDA or any other regulatory authority will approve of any of
our trademarks or will not request reconsideration of one of our trademarks at
some time in the future.
WE WILL REQUIRE SIGNIFICANT ADDITIONAL FINANCING, AND WE MAY NOT HAVE ACCESS TO
SUFFICIENT CAPITAL.
We will require additional capital to pursue planned clinical trials, regulatory
approvals, as well as further research and development and marketing efforts for
our product candidates. Except as expressly described in this annual information
form, we do not anticipate generating revenues from operations in the
foreseeable future, and we have no committed sources of capital. We intend to
raise additional funds through public or private financing, collaborations with
other pharmaceutical companies or financing from other sources. Additional
funding may not be available on terms which are acceptable to us. If adequate
funding is not available on reasonable terms, we may need to delay, reduce or
eliminate one or more of our product development programs or obtain funds on
terms less favorable than we would otherwise accept. To the extent that
additional capital is raised through the sale of equity or convertible debt
securities, the issuance of those securities could result in dilution to our
shareholders. Moreover, the incurrence of debt financing could result in a
substantial portion of our operating cash flow being dedicated to the payment of
principal and interest on such indebtedness and could impose restrictions on our
operations. This could render us more vulnerable to competitive pressures and
economic downturns. In November 1999, we entered into an agreement with the
Government of Canada pursuant to which we have received approximately $7 million
of funding for the development of oral therapeutics for AD. The agreement
contains a number of conditions and requirements with respect to such funding.
We are currently in discussions with the Government of Canada in order to make
the terms of the agreement, including such conditions and requirements, more
conducive to our current strategy and to our public reporting obligations in
Canada and the US. The Government of Canada has not enforced
15
strict adherence with the terms of the agreement and we are in on-going
discussions with respect to an amendment thereof. There can be no assurance that
the terms of the agreement will be amended in the manner expected by us and, in
the event that we are not able to agree on the amendments with the Government of
Canada, we could be required to repay the amounts provided to us thereunder
together with interest on such amount and other amounts payable under the
agreement that cannot be determined at this time. However, given our discussions
with the Government of Canada to date, we have no reason to believe that we will
not be able to agree on such amendments.
We anticipate that our existing working capital and anticipated revenues will be
sufficient to fund our development programs, clinical trials and other operating
expenses into fiscal 2006. However, our future capital requirements are
substantial and may increase beyond our current expectations depending on many
factors including:
+ the duration and results of our clinical trials for Fibrillex(TM),
Alzhemed(TM) and Cerebril(TM);
+ unexpected delays or developments in seeking regulatory approvals;
+ the time and cost in preparing, filing, prosecuting, maintaining and
enforcing patent claims;
+ other unexpected developments encountered in implementing our business
development and commercialization strategies; and
+ further arrangements, if any, with collaborators.
OUR REVENUES AND EXPENSES MAY FLUCTUATE SIGNIFICANTLY, AND ANY FAILURE TO MEET
FINANCIAL EXPECTATIONS MAY DISAPPOINT SECURITIES ANALYSTS OR INVESTORS AND
RESULT IN A DECLINE IN OUR SHARE PRICE.
Our revenues and expenses have fluctuated in the past and are likely to do so in
the future. These fluctuations could cause our share price to decline. Some of
the factors that could cause our revenues and expenses to fluctuate include:
+ the inability to complete product development in a timely manner that
results in a failure or delay in receiving the required regulatory
approvals to commercialize our product candidates;
+ the timing of regulatory submissions and approvals;
+ the timing and willingness of any current or future collaborators to
invest the resources necessary to commercialize our product candidates;
+ the timing of receipts of milestone payments from current or future
collaborators; and
+ failure to enter into new or the expiration or termination of current
agreements with collaborators.
Due to fluctuations in our revenues and expenses, we believe that
period-to-period comparisons of our results of operations are not a good
indication of our future performance. It is possible that in some future quarter
or quarters, our revenues and expenses will be below the expectations of
securities analysts or investors. In this case, the price of our shares could
fluctuate significantly or decline.
WE ARE DEPENDENT ON CENTOCOR FOR THE COMMERCIALIZATION OF FIBRILLEX(TM)
We are dependent on Centocor for the further development and commercialization
of Fibrillex(TM) in most jurisdictions. Risks that we face in connection with
this collaboration include the following:
+ while Centocor is contractually prohibited from developing or
commercializing, either alone or with others, products and services
that are similar to or competitive with Fibrillex(TM), this restriction
does not apply to its affiliates;
16
+ Centocor may underfund or not commit sufficient resources to marketing,
distribution or other development of Fibrillex(TM);
+ Centocor may not properly maintain or defend certain intellectual
property rights that may be important to the commercialization of
Fibrillex(TM);
+ Centocor may encounter conflicts of interest, changes in business
strategy or other issues which could adversely affect its willingness
or ability to fulfill its obligations to us (for example,
pharmaceutical companies historically have re-evaluated their
priorities following mergers and consolidations, which have been common
in recent years in this industry); and
+ disputes may arise between us and Centocor delaying or terminating the
development or commercialization of Fibrillex(TM), resulting in
litigation or arbitration that could be time-consuming and expensive,
or causing Centocor to act in its own self-interest and not in our
interest or those of our shareholders.
Centocor can terminate our collaboration with them for a variety of reasons,
including without cause upon one-year's notice, upon a change of control of
Neurochem and upon short notice if the results from the Fibrillex(TM) Phase
II/III clinical trial fail to satisfy certain criteria or if the FDA takes
certain adverse actions with respect to an NDA filing. If this collaboration
were to be terminated, we would be required to devote additional resources to
developing and commercializing Fibrillex(TM) or seek a new collaborator or
abandon this product.
We are seeking a collaboration with respect to Alzhemed(TM). Any such
collaboration would likely subject us to the same general types of risks as
those described above.
WE ARE CURRENTLY DEPENDENT ON THIRD PARTIES FOR A VARIETY OF FUNCTIONS AND MAY
ENTER INTO FUTURE COLLABORATIONS FOR THE MANUFACTURE OF OUR PRODUCTS. OUR
ARRANGEMENTS WITH THESE THIRD PARTIES MAY NOT PROVIDE US WITH THE BENEFITS WE
EXPECT.
We currently rely upon third parties to perform functions related to the
research, development and clinical trials of our product candidates. In
addition, because we do not have the resources, facilities or experience to
manufacture our product candidates on our own, we currently rely, and will
continue to rely, on contract manufacturers to produce our product candidates
for clinical trials, and, if our products are approved, in quantities for
commercial sales. We do not currently have long-term supply agreements with our
third-party manufacturers. Our reliance on these relationships poses a number of
risks, including the following:
+ disagreements with third parties could delay or terminate the research,
development or manufacturing of product candidates, or result in
litigation or arbitration;
+ we cannot effectively control the resources our third-party partners
will devote to our programs or products;
+ contracts with our third parties may fail to provide sufficient
protection or we may have difficulty enforcing the contracts if one of
these partners fails to perform;
+ the third parties with whom we contract may fail to comply with
regulatory requirements;
+ conflicts of interest may arise between their work for us and their
work for another entity, and we may lose their services;
+ with respect to our contract manufacturers:
+ we may not be able to locate acceptable manufacturers or enter
into favorable long-term agreements with them;
+ third parties may not be able to manufacture our product
candidates in a cost-effective or timely manner or in quantities
needed for clinical trials or commercial sales;
17
+ delays in, or failures to achieve, scale-up to commercial
quantities, or changes to current raw material suppliers or
product manufacturers (whether the change is attributable to us
or the supplier or manufacturer) could delay clinical studies,
regulatory submissions and commercialization of our product
candidates; and
+ we may not have all of the required intellectual property rights
to the manufacturing processes for our product candidates.
Given these risks, our current and future collaborative efforts with third
parties may not be successful. Failure of these efforts could require us to
devote additional internal resources to the activities currently performed, or
to be performed, by third parties, to seek alternative third-party
collaborators, or to delay our product development or commercialization.
WE WILL NOT BE ABLE TO SUCCESSFULLY COMMERCIALIZE OUR PRODUCT CANDIDATES IF WE
ARE UNABLE TO CREATE SALES, MARKETING AND DISTRIBUTION CAPABILITIES OR MAKE
ADEQUATE ARRANGEMENTS WITH THIRD PARTIES FOR SUCH PURPOSES.
In order to commercialize our product candidates successfully, we intend, on a
product-by-product basis, either to develop internal sales, marketing and
distribution capabilities or make arrangements with third parties to perform
some or all of these services. We currently have no marketing or sales force and
we have limited experience in developing, training or managing a marketing or
sales force. To the extent we internally develop a sales force, the cost of
establishing and maintaining a sales force would be substantial and may exceed
its cost effectiveness. In addition, in marketing our products, we would likely
compete with many companies that currently have extensive and well-funded
marketing and sales operations. Despite our marketing and sales efforts, we may
be unable to compete successfully against these companies. For example, we are
seeking a co-development and co-promotion partner to assist us in completing the
development and commercialization of Alzhemed(TM). We may not be able to do so
on favorable terms. We do not currently have any arrangements in place with
third parties for the sale, marketing or distribution of any of our products,
except for the distribution rights granted to Centocor. We may rely on
additional third parties to market and sell our products in certain territories,
rather than establish our own sales force. If we contract with third parties for
the sales and marketing of our products, our revenues will depend upon the
efforts of these third parties, whose efforts may not be successful. If we fail
to establish successful marketing and sales capabilities or to make arrangements
with third parties for such purposes, our business, financial condition and
results of operations will be materially adversely affected.
WE ARE SUBJECT TO INTENSE COMPETITION FOR OUR SKILLED PERSONNEL, AND THE LOSS OF
KEY PERSONNEL OR THE INABILITY TO ATTRACT ADDITIONAL PERSONNEL COULD IMPAIR OUR
ABILITY TO CONDUCT OUR OPERATIONS.
We are highly dependent on our management and our clinical, regulatory and
scientific staff, the loss of whose services might adversely impact the
achievement of our objectives. Recruiting and retaining qualified management and
clinical, scientific and regulatory personnel will be critical to our success.
Competition for skilled personnel is intense, and our ability to attract and
retain qualified personnel may be affected by such competition.
WE ARE SUBJECT TO THE RISK OF PRODUCT LIABILITY CLAIMS, FOR WHICH WE MAY NOT
HAVE OR BE ABLE TO OBTAIN ADEQUATE INSURANCE COVERAGE.
Human therapeutic products involve the risk of product liability claims and
associated adverse publicity. Currently, our principal risks relate to
participants in our clinical trials, who may suffer unintended consequences. If
we ultimately are successful in commercializing a product, claims might be made
directly by patients, healthcare providers or pharmaceutical companies or others
selling our products. We may not have or be able to obtain or maintain
sufficient and affordable insurance coverage, and without sufficient coverage
any claim brought against us could have a materially adverse effect on our
business, financial condition or results of operations.
18
OUR BUSINESS INVOLVES THE USE OF HAZARDOUS MATERIALS WHICH REQUIRES US TO COMPLY
WITH ENVIRONMENTAL REGULATION.
Our discovery and development processes involve the controlled use of hazardous
and radioactive materials. We are subject to federal, provincial and local laws
and regulations governing the use, manufacture, storage, handling and disposal
of such materials and certain waste products. The risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, we could be held liable for any damages that
result, and any such liability could exceed our resources. We may not be
adequately insured against this type of liability. We may be required to incur
significant costs to comply with environmental laws and regulations in the
future, and our operations, business or assets may be materially adversely
affected by current or future environmental laws or regulations.
LEGISLATIVE ACTIONS, POTENTIAL NEW ACCOUNTING PRONOUNCEMENTS AND HIGHER
INSURANCE COSTS ARE LIKELY TO IMPACT OUR FUTURE FINANCIAL POSITION OR RESULTS OF
OPERATIONS.
Future changes in financial accounting standards may cause adverse, unexpected
revenue fluctuations and affect our financial position or results of operations.
New pronouncements and varying interpretations of pronouncements have occurred
with greater frequency and are expected to occur in the future, and we may make
or be required to make changes in our accounting policies in the future.
Compliance with changing regulations of corporate governance and public
disclosure may result in additional expenses. Changing laws, regulations and
standards relating to corporate governance and public disclosure are creating
uncertainty for companies such as ours, and insurance costs are increasing as a
result of this uncertainty.
WE MAY INCUR LOSSES ASSOCIATED WITH FOREIGN CURRENCY FLUCTUATIONS.
Our operations are in some instances conducted in currencies other than the
Canadian dollar (principally in US dollars), and fluctuations in the value of
foreign currencies relative to the Canadian dollar could cause us to incur
currency exchange losses.
ITEM 5 -- DIVIDENDS
We have not declared any dividends since our incorporation. Any future
determination to pay dividends will remain at the discretion of our Board of
Directors and will depend on our financial condition, results of operations,
capital requirements and such other factors as our Board of Directors deems
relevant.
ITEM 6 -- DESCRIPTION OF CAPITAL STRUCTURE
Our authorized share capital consists of an unlimited number of Common Shares
and an unlimited number of preferred shares ("Preferred Shares"), all without
nominal or par value. Excluding the exercise of the outstanding warrants and of
the options issued under and outside of our Stock Option Plan, as at March 9,
2005, 34,412,136 Common Shares and no Preferred Shares were issued and
outstanding. We have no current intention to issue Preferred Shares.
Common Shares. Each Common Share entitles the holder thereof to one vote at any
meeting of the shareholders of the Company, except meetings at which only
holders of a specified class of shares are entitled to vote. Subject to the
rights of holders of the Preferred Shares, the Common Shares are entitled to
receive, as and when declared by our Board of Directors, dividends in such
amounts as shall be determined by our Board of Directors. The holders of Common
Shares have the right, subject to the rights of the holders of Preferred Shares,
to receive the remaining property of the Company in the event of liquidation,
dissolution or winding-up of the Company, whether voluntary or involuntary.
Preferred Shares. The Preferred Shares may be issued from time to time in one or
more series, the terms of each series including the number of shares, the
designation, rights, preferences, privileges, priorities, restrictions,
19
conditions and limitations to be determined at the time of creation of each such
series by our Board of Directors without shareholder approval, provided that all
Preferred Shares will rank, with respect to dividends and return of capital in
the event of liquidation, dissolution, winding-up or other distribution of our
assets for the purpose of winding-up its affairs, pari passu among themselves
and in priority to all Common Shares or shares of any class ranking junior to
the Preferred Shares. Except as provided for in our articles of incorporation
(as amended), the holders of Preferred Shares shall not be entitled to receive
notice of meetings of our shareholders nor to attend thereat and shall not be
entitled to vote at any such meeting.
Warrants. Warrants to purchase 4,000,000 Common Shares are currently
outstanding. All of the Warrants are held by Picchio Pharma Inc. ("Picchio
Pharma"). Warrants to purchase 2.8 million Common Shares are exercisable at a
price of $3.13 per share and expire on July 25, 2005, and Warrants to purchase
1.2 million Common Shares are exercisable at a price of $7.81 per share and
expire on February 17, 2006. On February 14, 2005, Picchio Pharma confirmed its
commitment to exercise the 2.8 million Warrants otherwise expiring on July 25,
2005, but did not specify the date of the anticipated exercise. While Picchio
Pharma had also committed, subject to certain conditions, to make an additional
investment in us, up to a maximum of $20 million, which amount includes the
total proceeds to us of $8,764,000 from the exercise of the 2.8 million Warrants
described above, such additional commitment is now of no effect given the funds
raised from our offering of Common Shares completed on March 9, 2005.
ITEM 7 -- MARKET FOR SECURITIES
Our Common Shares are quoted on NASDAQ and listed and posted for trading on the
TSX. The following table sets forth, for the periods indicated, the reported
high and low sales prices and the aggregate volume of trading of our Common
Shares on NASDAQ and the TSX.
NASDAQ (US$) TSX ($)
------------------------------------- ---------------------------------
PERIOD HIGH LOW VOLUME HIGH LOW VOLUME
- ------ ---------- ----------- -------------- ---------- ---------- -----------
Calendar 2003
First Quarter........................... N/A N/A N/A 9.59 7.61 5,390,381
Second Quarter.......................... N/A N/A N/A 15.00 8.00 7,925,365
Third Quarter........................... 17.98 11.25 5,152,501 19.96 10.80 9,053,511
Fourth Quarter.......................... 24.27 11.93 5,263,380 31.69 16.02 8,999,361
Calendar 2004
First Quarter........................... 26.04 18.05 3,853,387 33.24 22.05 6,806,084
Second Quarter.......................... 27.43 19.49 6,617,780 36.55 26.20 5,775,204
Third Quarter........................... 24.48 11.85 11,097,629 31.00 15.55 7,456,225
Fourth Quarter.......................... 20.97 15.33 6,008,670 25.09 19.50 4,009,027
Calendar 2005
First Quarter (through March 24)........ 20.80 13.2 11,593,820 25.50 16.10 7,572,144
ITEM 8 -- DIRECTORS AND OFFICERS
The following table lists our directors and executive officers. All members of
the Board of Directors will hold their positions until the next annual meeting
of shareholders of the Corporation.
PERIOD
DURING
WHICH
NAME AND MUNICIPALITY OF SERVED AS
RESIDENCE PRINCIPAL OCCUPATION OFFICE A DIRECTOR
- ------------------------------ ----------------------------- ----------------------------- ----------
Dr. Francesco Bellini, O.C.(1) Chairman, President and Chief Chairman, President and Chief 2002-2005
Montreal, Quebec, Canada Executive Officer(2) Executive Officer
Dr. Colin Bier(3), (4)........ Consultant Director 1996-2005
Montreal, Quebec, Canada
Jean-Guy Desjardins(4)........ President and Chief Executive Director 2004-2005
Montreal, Quebec, Canada Officer, Centria Inc. (a holding
company)(5)
20
PERIOD
DURING
WHICH
NAME AND MUNICIPALITY OF SERVED AS
RESIDENCE PRINCIPAL OCCUPATION OFFICE A DIRECTOR
- ------------------------------ ----------------------------- ----------------------------- ----------
Peter Kruyt(1), (6)........... Vice President, Director 2002-2005
Montreal, Quebec, Canada Power Corporation of Canada (a
diversified management
and holding company)
Francois Legault(6)........... President and Chief Operating Director 2004-2005
Montreal, Quebec, Canada Officer, ViroChem Pharma Inc. (a
biopharmaceutical company)(7)
Dr. Frederick H. Lowy(4)...... Rector and Vice-Chancelor Director 2003-2005
Montreal, Quebec, Canada of Concordia University
John Molloy(3)................ President and Chief Executive Director 1994-2005
Kingston, Ontario, Canada Officer, Parteq Research and
Development Innovations, Queen's
University
(a university technology transfer
organization)
Ronald M...................... Co-President, Director 2002-2005
Nordmann(1),(4),(6),(8) (9) Global Health Associates, LLC (a
Loveladies, New Jersey, consulting company to the healthcare
United States and financial services industries)(9)
Graeme K. Rutledge(3) ........ Consultant(10) Director 2003-2005
Perth, Ontario, Canada
Dr. Emil Skamene(6)........... Scientific Director, Director 2002-2005
Montreal, Quebec, Canada Research Institute of the McGill
University Health Centre
(an academic health centre)
Dr. Andreas Orfanos........... Executive Vice President, Strategic Executive Vice President, --
Montreal, Quebec, Canada Planning and Scientific Affairs (12) Strategic Planning and
Scientific Affairs
Mariano Rodriguez............. Vice President, Vice President, --
Montreal, Quebec, Canada Finance and Chief Financial Finance and Chief Financial
Officer(13) Officer
Dr. Denis Garceau............. Senior Vice President, Vice President, --
Montreal, Quebec, Canada Drug Development Drug Development
Dr. Philippe Calais........... President, Global Business(11) President, Global Business --
Hudson, Quebec, Canada
Dr. Daniel Delorme............ Vice President, Research(14) Vice President, --
Montreal, Quebec, Canada Research
Dr. Lise Hebert............... Vice President, Corporate Vice President, Corporate --
Montreal, Quebec, Canada Communications(15) Communications
Christine Lennon.............. Vice President, Vice President, Business --
Montreal, Quebec, Canada Business Development(16) Development
Dr. Shona McDiarmid........... Vice President, Vice President, --
Montreal, Quebec, Canada Intellectual Property(17) Intellectual Property
Judith Paquin................. Vice President, Vice President, --
Montreal, Quebec, Canada Human Resources(18) Human Resources
David Skinner................. General Counsel and Corporate General Counsel and Corporate --
Montreal, Quebec, Canada Secretary(19) Secretary
21
NOTES:
(1) Pursuant to a subscription agreement dated July 25, 2002, by and between
Picchio Pharma, P.P. Luxco Holdings II S.A.R.L. and the Corporation, the
Corporation covenanted to cause a total of three nominees of Picchio
Pharma to be included in the list of management nominees to be proposed
for election to the Board at each shareholders meeting occurring following
the date thereof. Picchio Pharma's right shall terminate on the date it
ceases to beneficially hold at least 15% of the issued and outstanding
Common Shares (including Common Shares issuable upon exercise of the
warrants issued to them concurrently). Dr. Bellini and Messrs. Kruyt and
Nordmann are the current nominees of Picchio Pharma.
(2) Prior to his appointment as Chief Executive Officer of the Corporation on
December 11, 2002, Dr. Bellini's principal occupation was Chairman of
Picchio Pharma, a biopharmaceutical investment company, a position he
continues to hold. Prior to 2001, Dr. Bellini was Chairman and Chief
Executive Officer of Biochem Pharma Inc. (now Shire Biochem Inc.), a
biopharmaceutical company which he co-founded in 1986.
(3) Member of the Audit Committee.
(4) Member of the Compensation Committee.
(5) Mr. Desjardins is also the President and Chief Executive Officer of Fiera
Corporation Inc., a holding company. Prior to October 2001, Mr. Desjardins
was President and Chief Executive Officer of TAL Global Asset Management
Inc., a holding and management company.
(6) Member of the Nominating and Corporate Governance Committee.
(7) Since April 2002, Mr. Legault also acts as Chairman of the Board of Ecopia
Biosciences Inc. and, since December 2001, Chairman of the Board of Avance
Pharma Inc., both of which are biopharmaceutical companies. Prior to May
2001, Mr. Legault was Executive Vice President Corporate Development of
Biochem Pharma Inc. (now Shire Biochem Inc.), also a biopharmaceutical
company.
(8) Mr. Nordmann is the Lead Director of the Corporation.
(9) From 1994 through 1999, Mr. Nordmann was a partner at Deerfield Management
Inc., a healthcare equity fund.
(10) Prior to June 2002, Mr. Rutledge was a Senior Partner at Deloitte & Touche
LLP, Canada, an accounting firm.
(11) Prior to January 2003, Dr. Calais was General Manager at Servier Canada
Inc., part of the French private pharmaceutical group.
(12) Prior to 2004, Dr. Orfanos was Vice President of Picchio Pharma. Prior to
this, Dr. Orfanos was Vice President of the Immunology Transplantation
Business Unit of Novartis Canada Inc.
(13) Prior to 2004, Mr. Rodriguez was Vice President, Finance and Chief
Financial Officer of Galileo Genomics Inc., a biopharmaceutical company.
(14) Prior to 2005, Dr. Delorme served between 2003 and 2005 as Vice President,
Research and Development, at the Canadian biopharmaceutical company
Phagetech Inc. and from 1998 to 2003, Dr. Delorme was Vice President
Medicinal Chemistry at Methylgene Inc.
(15) Dr. Hebert was promoted to Vice President, Corporate Communications on
December 12, 2002. Prior to that date, she was Director, Communications
and Investor Relations.
(16) Prior to January 2004, Ms. Lennon was Venture Advisor for the
Biotechnology and Life Sciences investment sector of CDP Capital Inc, a
division of a pension fund. Prior to this, Ms. Lennon was Vice President,
Global Commercial Development - Oncology of Biochem Pharma Inc. (now Shire
Biochem Inc.), a biopharmaceutical company.
(17) Prior to 2005, Dr. McDiarmid served as Vice President of Global
Intellectual Property for the Shire Pharmaceuticals Group.
(18) Prior to January 2004, Ms. Paquin was Vice President, Human Resources of
Schering Canada Inc., a biopharmaceutical company.
(19) Prior to April 2003, Mr. Skinner served as Commercial Counsel and Deputy
to the Director of Commercial and Legal Affairs in the London, England
office of Antfactory Limited, a global venture capital firm. Mr. Skinner
also served in the corporate commercial departments of the law firms
Freshfields Bruckhaus Deringer in London, England and Stikeman Elliott in
Montreal, Budapest and London.
In our management proxy circular dated March 14, 2005, all of the above listed
directors were nominated by management for election as directors.
As of March 1, 2005, the directors and executive officers, as a group,
beneficially owned or exercised control or direction over approximately
7,685,339 of the Common Shares outstanding.1
The following is a description of the current committees of the Board:
- --------------------
1 Included in this amount are 166,666 Common Shares owned directly by Dr.
Bellini, the 6,718,368 Common Shares owned indirectly by Picchio Pharma
of which the FMRC Family Trust ("FMRC") is a 50% owner as well as the
250,000 Common Shares purchased, directly, by FMRC as part of a public
offering of the Corporation's Common Shares in the United States and
Canada.
22
COMMITTEES OF THE BOARD
AUDIT COMMITTEE
The mandate of the Audit Committee includes assisting the Board in its oversight
of (i) the integrity of the Corporation's financial statements, financial
reporting process, system of internal controls over financial reporting, and
audit process, (ii) the Corporation's compliance with, and process for
monitoring compliance with, legal and regulatory requirements, (iii) the
independent auditors' qualifications and independence, and (iv) the performance
of the independent auditors. The current members of the Audit Committee are Mr.
Graeme K. Rutledge (chair), Dr. Colin Bier and Mr. John Molloy. See "Audit
Committee and Principal Accountants Fees and Services".
COMPENSATION COMMITTEE
The mandate of the Compensation Committee includes reviewing the compensation
arrangements for the Corporation's employees, including executive officers and
directors, and making recommendations to the Board with respect to such
compensation arrangements, as well as making recommendations to the Board with
respect to the Corporation's incentive compensation plans and equity-based plans
and to oversee succession planning. The Compensation Committee is also
responsible for preparing an annual report on executive compensation for
purposes of disclosure to shareholders. The current members of the Compensation
Committee are Dr. Colin Bier (chair), Mr. Jean-Guy Desjardins, Dr. Frederick H.
Lowy and Mr. Ronald M. Nordmann.
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
The mandate of the Nominating and Corporate Governance Committee is to develop
and recommend to the Board a set of corporate governance principles and to
prepare and review the disclosure with respect to, and the operation of, the
Corporation's system of corporate governance, before such disclosure is
submitted to the Board for its approval. The Nominating and Corporate Governance
Committee is responsible for the review and periodic update of the Corporation's
Code of Ethics which governs the conduct of the Corporation's directors,
officers and other employees. Moreover, the Nominating and Corporate Governance
Committee is mandated to examine, on an annual basis, the size and composition
of the Board and, if appropriate, recommend to the Board a program to establish
a Board comprised of members who facilitate effective decision-making. Finally,
the Nominating and Corporate Governance Committee shall identify individuals
qualified to become members of the Board, recommend to the Board nominees to be
put before shareholders at each annual meeting and recommend to the Board a
process for board, committee and director assessment. The current members of the
Nominating and Corporate Governance Committee are Mr. Ronald M. Nordmann
(chair), Mr. Peter Kruyt, Mr. Francois Legault and Dr. Emil Skamene.
ITEM 9 -- LEGAL PROCEEDINGS
Neurochem executed an agreement with Immtech International, Inc. ("Immtech") of
Vernon Hills, Illinois in 2002 pursuant to which Immtech provided Neurochem with
certain compounds for testing and granted to Neurochem an option to license such
compounds (the "Agreement"). On August 12, 2003, Immtech filed certain legal
proceedings with the federal district court for the Southern District of New
York, United States, with respect to the Agreement. The parties entered into
settlement discussions in September 2003 and, as settlement did not occur, in
January 2004, Neurochem brought a motion to compel arbitration under the terms
of the Agreement. The dispute has now been submitted to an arbitral tribunal
convened in accordance with the rules of the International Court of Arbitration.
Neurochem continues to vigorously defend against the claims brought by Immtech.
Immtech has claimed monetary damages which, to date, it has estimated at a total
of between US$18 million and US$42 million, which includes an estimated
valuation for equitable relief. The arbitral proceedings are at the early stages
and the outcome of this matter, or the likelihood and the amount of loss, if
any, is not determinable. No provision for possible loss has been made or
recorded by Neurochem in connection with this matter.
23
ITEM 10 -- INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
On March 1, 2003, the Corporation entered into a management services agreement
with Picchio International into which Picchio Pharma intervened (Picchio Pharma
and Picchio International are sometimes referred to collectively in this annual
information form as the "Picchio Group"). All of the shares of Picchio
International are owned by Dr. Francesco Bellini, O.C., and his spouse. The
management services agreement was amended as of October 30, 2003 to permit the
grant of performance based fees at the discretion of the Board and extended by
amendment as of the 1st day of December, 2004 until November 30, 2007. See "Our
Business - Recent Developments - Agreements with our Chairman, President and
Chief Executive Officer".
The management services agreement provides that Picchio International shall
provide the services of Dr. Bellini as Chief Executive Officer of the
Corporation and provide the services of other members of the Picchio Group,
including all senior managers of Picchio Pharma. Under the agreement, the
Picchio Group is currently providing, and will continue to provide, on-going
regular consulting and advisory services, including services related to
reviewing existing and potential research and development activities, and
existing potential clinical programs, financing activities, partnering and
licensing opportunities, commercialization plans and programs, and advising and
assisting in investor relations activities.
In consideration of all services rendered under the agreement, Picchio
International receives a monthly fee of $200,000. This amount includes all
direct and indirect costs and expenses, including travel and all other
out-of-pocket expenses, incurred by Dr. Bellini and the Picchio Group relating
to the services provided pursuant to such agreement. The agreement provides for
the payment, from time to time, to Picchio International of a discretionary
amount as a performance based fee for services rendered. The amount of such
performance based fee, if any, will be determined by the Board at its sole
discretion. Each party has the right to terminate the agreement at any time upon
sending a written prior notice of 180 days. The agreement provides that it shall
be automatically renewed for successive one year terms unless either party sends
a prior written notice of non-renewal to the other party at least 90 days prior
to the then current termination date. The agreement may not be terminated by
Picchio International prior to May 31, 2006.
The management services agreement provides that the Picchio Group shall not,
without the Corporation's written consent, during the term of such agreement and
for the 24 months following the termination of the agreement, carry on or be
engaged in any business which is the same or similar to or in competition in any
material way with any of the businesses which the Corporation now or which the
Corporation shall, during the term of the agreement, carry on anywhere in the
world. The Picchio Group also agreed not to hire any of the Corporation's
employees during the term of the agreement and for the twelve months following
its expiration.
ITEM 11 -- AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has determined that Mr. Graeme K. Rutledge is an audit
committee financial expert.
ITEM 12 -- AUDIT COMMITTEE AND PRINCIPAL ACCOUNTANTS FEES AND SERVICES
CHARTER OF THE AUDIT COMMITTEE
The Charter of the Audit Committee is attached hereto as Schedule A.
COMPOSITION OF THE AUDIT COMMITTEE
The Audit Committee is composed of Mr. Graeme K. Rutledge (Chair), Dr. Colin
Bier and Mr. John Molloy. Each of the members of the Audit Committee is
financially literate and Mr. Rutledge and Dr. Bier are independent.
Under the listing requirements of NASDAQ, no director who is not independent,
may be appointed to the audit committee of a company, except under limited
circumstances. Mr. Molloy is not independent under such requirements, as he is
the President and Chief Executive Officer of Parteq Research and Development
Innovations, Queen's University ("Parteq"), a licensor of the Corporation.
However, in accordance with such requirements, the
24
Board resolved, for the year ended December 31, 2004, that the continued
membership of Mr. Molloy on the Audit Committee was required in the best
interests of the Corporation and its shareholders because of his knowledge of
the Corporation and experience in such matters.
RELEVANT EDUCATION AND EXPERIENCE
Up to 2002, Mr. Rutledge was a senior partner at Deloitte & Touche, LLP, Canada,
an accounting firm. Mr. Rutledge is a chartered accountant. Dr. Colin Bier is a
consultant toxicologist as well as managing and scientific director of ABA
BioResearch, an independent bioregulatory consulting company, since 1990. Dr.
Bier has extensive management experience in the biomedical sector, having held
senior scientific and executive management positions in the contract research
industry. Mr. John Molloy is the President and Chief Executive Officer of Parteq
and holds a Masters in Business Administration degree.
As such, all members of the Corporation's Audit Committee understand the
accounting principles the Corporation uses to prepare its financial statements
and have the ability to assess the general application of such accounting
principles in connection with the accounting for estimates, accruals and
reserves. Mr. Rutledge, specifically, has experience in preparing, auditing,
analyzing and evaluating financial statements that present a breadth and level
of complexity of accounting issues that are generally comparable to the breadth
and complexity of issues that can reasonably be expected to be raised by the
Corporation's financial statements. Mr. Rutledge, formerly a senior partner in a
global accounting firm, has significant experience in preparing such audits and
supervising persons engaged in such activities.
Mr. Rutledge, Dr. Bier and Mr. Molloy have an understanding of internal controls
and procedures for financial reporting.
EXTERNAL AUDITOR SERVICES FEES
The Company has paid KPMG LLP ("KPMG"), its external auditors, the following
fees in each of the last three fiscal periods.
AUDIT FEES
The following sets forth the aggregate fees paid for each of the last three
fiscal periods for professional fees to KPMG for the audit of the annual
financial statements or for services normally provided by KPMG in connection
with statutory and regulatory filings or engagements for those fiscal periods.
Fiscal year ended December 31, 2004 $75,000
Six-month period ended December 31, 2003 $64,040
Fiscal year ended June 30, 2003 $53,700
AUDIT-RELATED FEES
The following sets forth additional aggregate fees to those reported under
"Audit Fees" in each of the last three fiscal periods for assurance and related
services by KPMG that are reasonably related to the performance of the audit or
review of the financial statements:
Fiscal year ended December 31, 2004
Review of interim financial statements $50,525
Translation services $ 8,240
Sundry accounting consultations $29,250
Six-month period ended December 31, 2003
25
Review of interim financial statements $ 10,500
Public offering $206,000
Sundry accounting consultations $ 43,870
Translation services $ 31,400
Fiscal year ended June 30, 2003
Review of interim financial statements $ 23,200
Translation services $ 16,200
TAX FEES
The following sets forth the aggregate fees billed in each of last three fiscal
periods for professional services rendered by KPMG for tax compliance, tax
advice and tax planning:
Fiscal year ended December 31, 2004
Preparation of corporate tax returns,
review of tax implications of various
transactions and other matters, sales tax
issues and various taxation consultation $221,354
Six-month period ended December 31, 2003
Review of various business opportunities,
sales tax and US tax issues $38,300
Fiscal year ended June 30, 2003
Assistance with corporate reorganization
and tax compliance work $119,700
ALL OTHER FEES
The following sets forth the aggregate fees billed in each of the last three
fiscal periods for products and services provided by the principal accountant
not described above:
Fiscal year ended December 31, 2004 None
Fiscal year ended June 30, 2003 None
Six-month period ended December 31, 2003 None
Our Audit Committee pre-approves every engagement by KPMG to render audit or
non-audit services. All of the services described above were approved by the
Audit Committee.
ITEM 13 -- TRANSFER AGENT AND REGISTRAR
Computershare Trust Company of Canada is the Canadian transfer agent and
registrar for our Common Shares and Computershare Trust Company, Inc. is the US
transfer agent and registrar for our Common Shares.
ITEM 14 -- INTEREST OF EXPERTS
KPMG has audited our consolidated balance sheets as at December 31, 2004 and
2003 and the consolidated statements of operations, deficit and cash flows for
the year ended December 31, 2004, the six-month period ended December 31, 2003,
the year ended June 30, 2003 and for the period from inception (June 17, 1993)
to December
26
31, 2004. The partners and associates of KPMG, as a group, do not own,
beneficially or of record, any of the outstanding Common Shares.
ITEM 15 -- ADDITIONAL INFORMATION
Additional information regarding us may be found on SEDAR at www.sedar.com.
Additional information, including directors' and officers' remuneration and
indebtedness, principal holders of our securities, options to purchase
securities and interests of informed persons in material transactions, if
applicable, is contained in our information circular for our most recent meeting
of shareholders that involved the election of directors. Additional financial
information is provided in our comparative financial statements for the most
recently completed financial year.
We shall provide to any person, upon request to the Secretary of the
Corporation:
(a) when our securities are in the course of a distribution under a
preliminary short form prospectus or a short form prospectus,
(i) one copy of our annual information form, together with one copy of
any document, or the pertinent pages of any document, incorporated
by reference in the annual information form,
(ii) one copy of our comparative financial statements for our most
recently completed financial year for which financial statements
have been filed together with the accompanying report of the auditor
and one copy of our most recent interim financial statements that
have been filed, if any, for any period after the end of our most
recently completed financial year,
(iii) one copy of our information circular in respect of our most recent
annual meeting of shareholders that involved the election of
directors or one copy of any annual filing prepared instead of that
information circular, as appropriate, and
(iv) one copy of any other documents that are incorporated by reference
into the preliminary short form prospectus or the short form
prospectus and are not required to be provided under clauses (i),
(ii) or (iii) above; or
(b) at any other time, one copy of any documents referred to in clauses
(a)(i), (ii) and (iii), provided that we may require the payment of a
reasonable charge if the request is made by a person or company who is not
one of our security holders.
The foregoing documents may be obtained by contacting the office of the
Secretary at our head office, 275 Armand-Frappier Boulevard, Laval, Quebec H7V
4A7.
27
SCHEDULE A
NEUROCHEM INC.
AUDIT COMMITTEE CHARTER
ESTABLISHMENT OF COMMITTEE
The establishment of the Audit Committee of the Board of Directors of
the Neurochem Inc. (the "Corporation") is hereby confirmed with the purpose,
constitution and responsibilities described below.
THE PURPOSE OF THE AUDIT COMMITTEE
The purpose of the Audit Committee is to assist the Board of Directors
in its oversight of (i) the integrity of the Corporation's financial statements,
accounting and financial reporting processes, system of internal controls over
financial reporting and audit process, (ii) the Corporation's compliance with,
and process for monitoring compliance with, legal and regulatory requirements so
far as they relate to matters of financial reporting, (iii) the independent
auditor's qualifications, independence and performance and (iv) the performance
of the Corporation's internal audit function (if any). Management is responsible
for (a) the preparation, presentation and integrity of the Corporation's
financial statements, (b) accounting and financial reporting principles and (c)
the Corporation's internal controls and procedures designed to promote
compliance with accounting standards and applicable laws and regulations. The
Corporation's independent auditing firm is responsible for performing an
independent audit of the consolidated financial statements in accordance with
generally accepted auditing standards.
The Audit Committee members are not necessarily professional
accountants or auditors and their functions are not intended to duplicate or to
certify the activities of management and the independent auditor. The Audit
Committee is not expected to certify that the independent auditor is
"independent" under applicable rules. The Audit Committee serves a Board level
oversight role where it oversees the relationship with the independent auditor,
as set forth in this charter, and provides advice, counsel and general
direction, as it deems appropriate, to management and the independent auditor on
the basis of the information it receives, discussions with the auditor and the
experience of the Audit Committee's members in business, financial and
accounting matters.
MEMBERSHIP
The Committee shall consist of no fewer than three members of the Board
of Directors, all of whom shall be appointed by the Board. Except as otherwise
permitted by applicable law and the rules of the relevant regulatory authorities
and stock exchanges, the members of the Committee shall meet the independence
and financial literacy requirements of The NASDAQ Stock Market, Inc. ("NASDAQ")
and applicable law and no Committee member may have participated in the
preparation of the financial statements of the Corporation or any of its
subsidiaries at any time in the previous three years. Appointment to the
Committee, and the designation of any Committee members as "audit committee
financial experts", shall be made on an annual basis by the full Board upon
recommendation of the Nominating and Corporate Governance Committee.
COMPENSATION OF COMMITTEE MEMBERS
No member of the Committee may receive any compensation from the
Corporation other than (i) director's fees, which may be received in cash,
common stock, equity-based awards or other in-kind consideration ordinarily
available to directors, (ii) a pension or other deferred compensation for prior
service that is not contingent on future service, and (iii) any other regular
benefits that directors of peer companies may receive, all as determined from
time to time by the Compensation Committee and the Board of Directors.
COMMITTEE STRUCTURE AND OPERATIONS
28
The Board shall designate one member of the Committee as its
chairperson. The Committee shall meet at least once during each fiscal quarter,
with further meetings to occur, or actions to be taken by unanimous written
consent, when deemed necessary or desirable by the Committee or its chairperson.
The Audit Committee shall meet at such times and places as it shall
determine. The Committee may invite such members of management, the independent
auditor and other persons to its meetings as it may deem desirable or
appropriate. Periodically, the Audit Committee shall meet in executive session
with the independent auditor, the internal auditor, if any, and management. The
Chairman of the Audit Committee shall report on Audit Committee activities to
the full Board of Directors.
RESPONSIBILITIES
The Audit Committee:
o is directly responsible for the appointment (and recommends to the
Corporation's Board of Directors and shareholders the
appointment/ratification of the appointment of) and replacement,
compensation and oversight of the work of the Corporation's
independent auditor; the independent auditor shall report directly
to the Audit Committee.
o reviews and discusses the written statement from the independent
auditor concerning any relationship between the independent
auditor and the Corporation or any other relationships that may
adversely affect the independence of the auditor, and, based on
such review, assesses the independence of the auditor.
o reviews and evaluates the qualifications, performance and
independence of the independent auditor.
o establishes policies and procedures for the review and
pre-approval by the Committee of all auditing services and
permissible non-audit services (including the fees and terms
thereof) to be performed by the independent auditor, with
exceptions provided for de minimis amounts under certain
circumstances as described by law.
o reviews and discusses with the independent auditor: (a) its audit
plans and audit procedures, including the scope, fees and timing
of the audit, (b) the results of the annual audit examination and
accompanying management letters and (c) the results of the
independent auditor's procedures with respect to interim audit
periods.
o reviews and discusses reports from the independent auditor on (a)
all critical accounting policies and practices used by the
Corporation, (b) alternative accounting treatments within
generally accepted accounting principles related to material items
that have been discussed with management, including the
ramifications of the use of the alternative treatments and the
treatment preferred by the independent auditor and (c) other
material written communications between the independent auditor
and management.
o reviews with the independent auditor its judgment as to the
quality, not just the acceptability, of the Corporation's
accounting principles and such matters as are required to be
discussed with the Committee under generally accepted auditing
standards.
o discusses and reviews with management and the independent auditor
quarterly financial statements, the year-end audited financial
statements, the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and related press releases,
and recommends to the Board of Directors that the audited
financial statements be included in the annual report to
shareholders, the Annual Information Form (in Canada) and the
Annual Report on the US Securities and Exchange Commission ("SEC")
Form 40-F (or other relevant SEC Form) for the financial year.
29
o reviews and discusses with management the Corporation's principle
risks affecting financial reporting and the steps management has
taken to monitor and control such risks.
o reviews and has prior-approval authority for related-party
transactions (as defined in the relevant NASDAQ requirements).
o reviews and discusses with management, the independent auditor,
the Chief Financial Officer and the internal auditor, if any: (a)
the adequacy and effectiveness of the Corporation's internal
controls (including any significant deficiencies and significant
changes in internal controls reported to the Committee by the
independent auditor or management), (b) the Corporation's internal
audit procedures, where applicable, and (c) the adequacy and
effectiveness of the Corporation's disclosures controls and
procedures, and management reports thereon.
o reviews and concurs in the appointment, replacement, reassignment
or dismissal of the internal auditor, if any.
o establishes procedures for the receipt, retention and treatment of
complaints received by the Corporation regarding accounting,
internal accounting controls, or auditing matters, and the
confidential, anonymous submission by employees of concerns
regarding questionable accounting or auditing matters.
o establishes policies for the hiring of employees and former
employees of the independent auditor.
o when appropriate, designates one or more of its members to perform
certain of its duties on its behalf, subject to such reporting to
or ratification by the Committee as the Committee shall direct.
PERFORMANCE EVALUATION
The Audit Committee will engage in an annual self-assessment with the
goal of continuing improvement, and will annually review and reassess the
adequacy of its charter, and recommend any changes to the full Board of
Directors.
RESOURCES AVAILABLE TO THE COMMITTEE
The Audit Committee shall have the authority to engage independent
legal, accounting and other advisers, as it determines necessary to carry out
its duties. The Audit Committee shall have sole authority to approve related
fees and retention terms.
DIRECT COMMUNICATION WITH THE COMMITTEE
The Chairman of the Audit Committee is to be contacted directly by the
Chief Financial Officer, the internal auditor, if any, or the independent
auditor: (1) to review items of a sensitive nature that can impact the accuracy
of financial reporting, or (2) to discuss significant issues relative to the
overall Board of Directors' responsibility that have been communicated to
management but, in their judgment, may warrant follow-up by the Audit Committee.
30
Management's Responsibility for Financial Reporting
The consolidated financial statements have been prepared by management in
accordance with Canadian generally accepted accounting principles, and have been
approved by the Board of Directors. The integrity and objectivity of these
consolidated financial statements are the responsibility of management. In
addition, management is responsible for all other information in the annual
report and for ensuring that this information is consistent, where appropriate,
with the information contained in the consolidated financial statements.
In support of this responsibility, Neurochem's management maintains
systems of internal accounting and administrative controls to provide reasonable
assurance that the financial information is relevant, reliable and accurate and
that the Company's assets are appropriately accounted for and adequately
safeguarded. When alternative accounting methods exist, management has chosen
those it deems most appropriate in the circumstances. These consolidated
financial statements may include certain amounts based on estimates and
judgments. Management has determined such amounts on a reasonable basis to
ensure that the consolidated financial statements are presented fairly in all
material respects.
The Board of Directors is responsible for ensuring that management
fulfills its responsibilities for financial reporting and internal control. The
Board carries out this responsibility principally through its Audit Committee.
The Audit Committee is appointed by the Board, and none of its members are
involved in the daily operations of the Company. The Committee meets
periodically with management and the external auditors to discuss internal
controls over the financial reporting process, auditing matters and financial
reporting issues, to satisfy itself that each party is properly discharging its
responsibilities, and to review the consolidated financial statements.
The Committee reports its findings to the Board for consideration when
approving the consolidated financial statements for issuance to the
shareholders. The Committee also considers, for recommendation by the Board and
approval by the shareholders, the re-appointment of the external auditors.
The consolidated financial statements have been audited on behalf of
the shareholders by KPMG LLP, the external auditors, in accordance with Canadian
generally accepted auditing standards. The external auditors have full and free
access to the Audit Committee with respect to their findings concerning the
fairness of the financial reporting and the adequacy of internal controls.
Francesco Bellini, O.C. Mariano Rodriguez, C.A., C.P.A.
Chairman, President and Vice President, Finance and
Chief Executive Officer Chief Financial Officer
Laval, Canada
February 16, 2005
Auditors' Report To The Shareholders
We have audited the consolidated balance sheets of Neurochem Inc. as at December
31, 2004 and 2003 and the consolidated statements of operations, deficit and
cash flows for the year ended December 31, 2004, the six-month period ended
December 31, 2003, the year ended June 30, 2003 and for the period from
inception (June 17, 1993) to December 31, 2004. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Company as at December
31, 2004 and 2003 and the results of its operations and its cash flows for the
year ended December 31, 2004, the six-month period ended December 31, 2003, the
year ended June 30, 2003 and for the period from inception (June 17, 1993) to
December 31, 2004 in accordance with Canadian generally accepted accounting
principles.
KPMG LLP
Chartered Accountants
Montreal, Canada
February 11, 2005 (except as to note 22,
which is as of February 14, 2005)
Consolidated Balance Sheets
December 31, 2004 and 2003
(in thousands of Canadian dollars) (in accordance with Canadian GAAP)
December 31, December 31, December 31,
2004 2004 2003
------------ ------------ ------------
(US$ - (Cdn$) (Cdn$)
note 2 (l))
ASSETS
Current assets:
Cash and cash equivalents 5,988 7,207 14,869
Marketable securities 18,249 21,966 62,725
Amount receivable under collaboration agreement (note 4) 12,000 14,443 -
Sales taxes and other receivables 650 782 721
Research tax credits receivable 1,121 1,349 2,111
Prepaid expenses and deposits 3,187 3,836 1,671
-------- -------- -------
41,195 49,583 82,097
Long-term prepaid expenses and deposits 1,131 1,361 226
Long-term investment (note 5) 3,673 4,421 4,421
Property and equipment (note 6) 13,866 16,690 4,539
Patents (note 7) 3,650 4,393 2,942
-------- -------- -------
63,515 76,448 94,225
======== ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 3,373 4,060 2,070
Accrued liabilities 5,337 6,424 3,749
Deferred revenue (note 4) 4,005 4,820 -
Current portion of obligations under capital leases (note 8) 346 416 425
Current portion of long-term debt (note 9) 570 686 -
-------- -------- -------
13,631 16,406 6,244
Obligations under capital leases (note 8) - - 416
Deferred revenue (note 4) 8,119 9,772 -
Long-term accrued liabilities (note 12) 105 126 -
Long-term debt (note 9) 7,851 9,450 -
-------- -------- -------
29,706 35,754 6,660
-------- -------- -------
Shareholders' equity:
Share capital (note 10) 146,100 175,855 173,930
Additional paid-in capital (notes 3 and 11) 4,790 5,765 -
Deficit (117,081) (140,926) (86,365)
-------- -------- -------
33,809 40,694 87,565
Commitments and contingencies (note 13)
Subsequent event (note 22)
-------- -------- -------
63,515 76,448 94,225
======== ======== =======
See accompanying notes to consolidated financial statements.
On behalf of the Board of Directors by:
Graeme K. Rutledge John Molloy
Director Director
Consolidated Statements of Operations
Year ended December 31, 2004, six-month period ended December 31, 2003, year
ended June 30, 2003 and for the period from inception (June 17, 1993) to
December 31, 2004
(in thousands of Canadian dollars, except per share data)
(in accordance with Canadian GAAP)
Six-month
Year ended period ended Year ended Cumulative
December 31, December 31, June 30, since
----------------------- ------------ ----------- inception of
2004 2004 2003 2003 operations
---------- ------------ ------------ ----------- ------------
(US$ - (Cdn$) (Cdn$) (Cdn$) (Cdn$)
note 2 (l))
Revenues:
Collaboration agreement (note 4) 110 132 - - 132
Research contracts - - - - 9,216
License fees - - - - 1,106
------- ------- ------- ------- --------
110 132 - - 10,454
------- ------- ------- ------- --------
Expenses:
Research and development 25,881 31,152 8,661 18,782 107,921
Research tax credits (1,216) (1,463) (914) (1,410) (11,753)
Research grants (279) (336) (208) (1,895) (8,152)
------- ------- ------- ------- --------
24,386 29,353 7,539 15,477 88,016
General and administrative 14,915 17,953 7,454 7,184 47,628
Stock-based compensation (note 11) 3,355 4,038 - - 4,038
Special charges (note 12) 1,393 1,676 - - 1,676
Depreciation of property and equipment 1,496 1,801 557 1,019 5,393
Amortization of patent costs 204 245 89 178 875
Interest and bank charges 230 277 46 144 1,185
45,979 55,343 15,685 24,002 148,811
------- ------- ------- ------- --------
Net loss before undernoted items (45,869) (55,211) (15,685) (24,002) (138,357)
------- ------- ------- ------- --------
Investment and other income:
Interest income 856 1,030 520 800 6,514
Foreign exchange 1,078 1,298 (1,747) 100 (201)
Gain on disposal of intellectual
property (note 5) - - - 3,484 3,484
Other income 402 484 139 - 623
------- ------- ------- ------- --------
2,336 2,812 (1,088) 4,384 10,420
------- ------- ------- ------- --------
Net loss before income taxes (43,533) (52,399) (16,773) (19,618) (127,937)
Income taxes:
Quebec credit for losses - - - - 700
------- ------- ------- ------- --------
Net loss (43,533) (52,399) (16,773) (19,618) (127,237)
======= ======= ======= ======= ========
Net loss per share (note 16):
Basic and diluted (1.44) (1.74) (0.63) (0.90)
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
Consolidated Statements of Deficit
Year ended December 31, 2004, six-month period ended December 31, 2003, year
ended June 30, 2003 and for the period from inception (June 17, 1993) to
December 31, 2004
(in thousands of Canadian dollars)
(in accordance with Canadian GAAP)
Six-month
Year ended period ended Year ended Cumulative
December 31, December 31, June 30, since
----------------------- ------------ ----------- inception of
2004 2004 2003 2003 operations
---------- ------------ ------------ ----------- ------------
(US$ - (Cdn$) (Cdn$) (Cdn$) (Cdn$)
note 2 (l))
Deficit, beginning of period:
As previously reported (71,752) (86,365) (62,779) (42,624) -
Adjustment to reflect change in
accounting for employee stock
options (note 3) (1,796) (2,162) - - (2,162)
-------- -------- ------- ------- --------
Deficit, beginning of period, as restated (73,548) (88,527) (62,779) (42,624) (2,162)
Net loss (43,533) (52,399) (16,773) (19,618) (127,237)
Share issue costs - - (6,813) (537) (11,527)
-------- -------- ------- ------- --------
Deficit, end of period (117,081) (140,926) (86,365) (62,779) (140,926)
======== ======== ======= ======= ========
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
Year ended December 31, 2004, six-month period ended December 31, 2003, year
ended June 30, 2003 and for the period from inception (June 17, 1993) to
December 31, 2004
(in thousands of Canadian dollars)
(in accordance with Canadian GAAP)
Six-month
Year ended period ended Year ended Cumulative
December 31, December 31, June 30, since
----------------------- ------------ ----------- inception of
2004 2004 2003 2003 operations
---------- ------------ ------------ ----------- ------------
(US$ - (Cdn$) (Cdn$) (Cdn$) (Cdn$)
note 2 (l))
Cash flows from operating activities:
Net loss (43,533) (52,399) (16,773) (19,618) (127,237)
Adjustments for:
Depreciation and amortization 1,700 2,046 646 1,197 6,268
Stock-based compensation 3,355 4,038 - - 4,038
Write-off of leasehold improvements
and other property and equipment 988 1,189 - - 1,189
Provision for lease exit obligations 405 487 - - 487
Accretion expense 16 19 - - 19
Write-off of patents - - - - 119
Gain on disposal of intellectual property - - - (3,484) (3,484)
Shares issued for services - - - - 41
Changes in operating assets and liabilities:
Grants receivable - - 529 488 -
Amount receivable under collaboration
agreement (12,000) (14,443) - - (14,443)
Sales taxes and other receivables (51) (61) 161 (477) (782)
Research tax credits receivable 633 762 (937) (456) (1,349)
Prepaid expenses and deposits (1,799) (2,165) (733) (689) (4,061)
Long-term prepaid expenses and deposits (943) (1,135) - - (1,135)
Deferred revenue 12,123 14,592 - - 14,592
Accounts payable and accrued liabilities 3,133 3,771 590 1,086 9,809
------- ------- ------- ------- --------
(35,973) (43,299) (16,517) (21,953) (115,929)
------- ------- ------- ------- --------
Cash flows from financing activities:
Proceeds from issue of share capital 1,237 1,490 86,448 17,981 175,378
Share issue costs - - (6,813) (537) (11,527)
Proceeds from sale-leaseback - - - - 2,168
Repayment of obligations under capital lease (353) (425) (203) (552) (2,746)
Proceeds from long-term debt 8,723 10,500 - - 10,500
Repayment of long-term debt (302) (364) - - (364)
------- ------- ------- ------- --------
9,305 11,201 79,432 16,892 173,409
------- ------- ------- ------- --------
Cash flows from investing activities:
Additions to property and equipment (12,254) (14,750) (916) (1,638) (21,946)
Additions to patents (1,328) (1,599) (739) (538) (5,796)
Long-term investment - - - (591) (591)
Proceeds from (investment in)
marketable securities 33,863 40,759 (52,841) 13,129 (21,966)
Proceeds from disposal of property
and equipment 22 26 - - 26
------- ------- ------- ------- --------
20,303 24,436 (54,496) 10,362 (50,273)
------- ------- ------- ------- --------
Net (decrease) increase in cash and
cash equivalents (6,365) (7,662) 8,419 5,301 7,207
Cash and cash equivalents,
beginning of period 12,353 14,869 6,450 1,149 -
------- ------- ------- ------- --------
Cash and cash equivalents, end of period 5,988 7,207 14,869 6,450 7,207
======= ======= ======= ======= ========
Supplemental disclosures to cash flow statements (note 17)
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
Year ended December 31, 2004, six-month period ended December 31, 2003, year
ended June 30, 2003 and for the period from inception (June 17, 1993) to
December 31, 2004 (in thousands of Canadian dollars, except per share data)
1 ORGANIZATION AND BUSINESS ACTIVITIES:
Neurochem Inc. (the "Company" or "Neurochem"), incorporated under the Canada
Business Corporations Act in 1993, is a Canadian biopharmaceutical company
focused on the development and commercialization of innovative therapeutics for
neurological disorders. The Company's pipeline of proprietary, disease-modifying
oral product candidates addresses critical unmet medical needs.
Since inception, the business activities of the Company have been
devoted principally to the development of the Company's core technology
platform, amyloid inhibitors, which focuses on the design and synthesis of
chemical compounds that inhibit the formation, deposition and toxicity of
amyloid fibrils implicated as the underlying causes of certain diseases. The
diseases currently targeted by the Company include Alzheimer's Disease,
Hemorrhagic Stroke due to Cerebril Amyloid Angiopathy ("CAA"), and Amyloid A
Amyloidosis. In addition, the Company is also conducting research programs for
other neurological disorders principally Epileptic Seizures induced by Traumatic
Brain Injury. In the fiscal period ended June 30, 2003, the Company disposed of
its intellectual property rights for Diabetes Type II (see note 5). The status
of the Company's principal product candidates are as follows:
Disease indication Product candidates Stage of development
- ------------------ ------------------ --------------------
Amyloid A (AA) Amyloidosis Fibrillex(TM) Phase II/III clinical trial completed
Alzheimer's Disease Alzhemed(TM) Phase III clinical trial
Hemorrhagic Stroke due to CAA Cerebril(TM) Phase II clinical trial
Epileptic Seizures induced by
Traumatic Brain Injury Lead compound NC-1461 Pre-clinical testing
Neurochem is considered to be in the development stage, with a
significant emphasis on clinical trials for three of its product candidates.
Since inception, substantially all of the Company's research and development
expenditures, capital expenditures, including costs incurred to secure patents,
and all revenues from milestone payments and research contracts, relate to the
Company's core technology platform.
2 SIGNIFICANT ACCOUNTING POLICIES:
The consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles ("GAAP"). A reconciliation of
the net loss and shareholders' equity to US GAAP is presented in note 20.
(a) Principles of consolidation:
The consolidated financial statements include the accounts of Neurochem Inc. and
its subsidiaries (the "Company"). All significant intercompany balances and
transactions have been eliminated on consolidation.
(b) Cash and cash equivalents:
The Company considers all investments with maturities of three months or less at
inception, that are highly liquid and readily convertible into cash, to be cash
equivalents.
(c) Marketable securities:
Marketable securities are investments with maturities greater than three months
and less than a year, and consist principally of commercial paper. Interest
bearing financial assets are intended to be held to maturity and are carried at
amortized cost. Interest is recognized on an effective yield basis. These
investments are written down to their estimated fair market value when this
amount is less than amortized cost, unless the Company has reason to believe it
will be able to recover the carrying amount. Estimated fair market value is
based on quoted market prices.
(d) Long-term investment:
The long-term investment is recorded at cost. When, in the opinion of
management, a permanent decline in value has occurred, the investment is written
down to its estimated realizable value. In determining the estimated realizable
value, management relies on its judgment and knowledge of the investment and of
general business and economic conditions that prevail and are expected to
prevail. These estimates are limited due to the uncertainty of predictions
concerning future events.
(e) Property and equipment:
Property and equipment are stated at cost. Equipment under capital leases is
stated at the present value of minimum lease payments. Depreciation and
amortization are provided at the following annual rates:
Asset Basis Rate/period
- ----- ----------------- -----------
Building Straight-line 20 years
Research equipment Declining balance 20%
Office equipment Declining balance 20%
Computer hardware Declining balance 30%
Computer software Straight-line 100%
Equipment under capital leases Declining balance 20-30%
Leasehold improvements Straight-line Over the term of the lease
(f) Patents:
The capitalized amount with respect to patents relates to direct costs incurred
in connection with securing the patents. Patents are stated at cost and are
amortized using the straight-line method over the remaining life of the patent.
(g) Impairment and disposal of long-lived assets:
Long-lived assets, including property and equipment and purchased intangibles
subject to amortization, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of would be separately presented
in the balance sheet and reported at the lower of the carrying amount or fair
value less costs to sell, and would no longer be depreciated. The assets and
liabilities of a disposed group classified as held-for-sale would be presented
separately in the appropriate asset and liability sections of the balance sheet.
(h) Revenue recognition:
Revenue from collaboration agreement that includes multiple elements is
considered to be a revenue arrangement with multiple deliverables. Under this
type of arrangement, the identification of separate units of accounting is
required and revenue is allocated among the separate units based on their
relative fair values. Payments received under the collaboration agreement may
include upfront payments, regulatory and sales-based milestone payments for
specific achievements as well as distribution fees. Upfront and regulatory
milestone payments, which require the Company's ongoing involvement, are
deferred and amortized into income on a straight-line basis over the estimated
period of service. Sales-based milestone payments, for which the Company has no
future involvement or obligations to perform related to that specified element
of the arrangement, are recognized into income upon the achievement of the
specified milestones. Distribution fees are recognized when the amount is
determinable and collection is reasonably assured.
License fees are recorded when conditions and events under the license
agreement have been met or occurred, and collectibility is reasonably assured.
Interest income is recognized as earned.
(i) Research and development:
Research expenditures are expensed as incurred and include a reasonable
allocation of overhead expenses. Development expenditures are deferred when they
meet the criteria for capitalization in accordance with Canadian GAAP, and the
future benefits could be regarded as being reasonably certain. At December 31,
2004 and 2003, no development costs were deferred.
(j) Government assistance:
Government assistance, consisting of grants and research tax credits, is
recorded as a reduction of the related expense or the cost of the asset
acquired. Grants are recorded when there is reasonable assurance that the
Company has complied with the terms and conditions of the approved grant
program. Research tax credits are recorded when there is reasonable assurance of
their recovery.
(k) Foreign exchange:
Monetary assets and liabilities denominated in foreign currencies are translated
at year-end exchange rates. Non-monetary assets and liabilities denominated in
foreign currencies are translated at exchange rates in effect at the transaction
date. Income and expenses denominated in foreign currencies are translated at
exchange rates in effect at the transaction date. Translation gains and losses
are included in income.
The Company's foreign subsidiaries are considered to be integrated
foreign operations and their accounts have been translated using the temporal
method with translation gains and losses included in the consolidated statements
of operations.
(l) Translation of convenience:
The Company's functional currency is the Canadian dollar. The Company has also
presented the consolidated financial statements as at and for the period ended
December 31, 2004 in US dollars, using the convenience translation method
whereby all Canadian dollar amounts were converted into US dollars at the noon
exchange rate quoted by the Bank of Canada as at December 31, 2004, which was
$0.8308 US dollar per Canadian dollar. The information in US dollars is
presented only for the convenience of some readers and thus has limited
usefulness. This translation should not be viewed as a representation that such
Canadian dollar amounts actually represent such US dollar amounts or could be or
would have been converted into US dollars at the rate indicated.
(m) Income taxes:
Income taxes are provided for using the liability method. Under this method,
differences between the financial reporting bases and the income tax bases of
the Company's assets and liabilities are recorded using the substantively
enacted tax rates anticipated to be in effect when the tax differences are
expected to reverse. A valuation allowance is recorded against any future tax
asset, if it is more likely than not that the asset will not be realized.
(n) Guarantees:
In the normal course of business, the Company enters into various agreements
that may contain features that meet the definition of a guarantee. A guarantee
is defined to be a contract (including an indemnity) that contingently requires
the Company to make payments to a third party based on (i) changes in an
underlying interest rate, foreign exchange rate, equity or commodity instrument,
index or other variable that is related to an asset, a liability or an equity
security of the guaranteed party, (ii) failure or another party to perform under
an obligating agreement, or (iii) failure of another party to pay its
indebtedness when due.
A liability is recorded when the Company considers probable that a
payment relating to a guarantee has to be made to the other party of the
contract or agreement.
(o) Costs associated with lease exit activities:
Costs associated with lease obligations for leased premises that are no longer
being used by the Company are recognized and measured at fair value as of the
cease-use date. The face value of the liability at the cease-use date is
determined based on the remaining lease rentals, reduced by estimated sublease
rentals that could reasonably be obtained for the property, measured using the
credit-adjusted risk-free rate.
(p) Earnings per share:
Basic earnings per share are determined using the weighted average number of
common shares outstanding during the period. Diluted earnings per share are
computed in a manner consistent with basic earnings per share, except that the
weighted average shares outstanding are increased to include additional shares
from the assumed exercise of options and warrants, if dilutive. The number of
additional shares is calculated by assuming that outstanding options and
warrants were exercised, and that the proceeds from such exercises were used to
acquire shares of common stock at the average market price during the reporting
period.
(q) Use of estimates:
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Significant areas requiring the use of
management estimates include estimating the useful lives of long-lived assets,
including property and equipment and patent costs, estimating accruals for
clinical trial expenses and lease exit costs, estimating the timing of
regulatory approvals for revenue recognition purposes, as well as assessing the
recoverability of research tax credits and future tax assets. The reported
amounts and note disclosures are determined to reflect the most probable set of
economic conditions and planned course of actions. Actual results could differ
from these estimates.
3 CHANGE IN ACCOUNTING POLICY:
Stock-based compensation:
Effective January 1, 2004, the Company adopted the recommendations of the CICA
Handbook Section 3870, Stock-based Compensation and Other Stock-based Payments.
The new recommendations require entities to account for employee stock options
using the fair value based method, whereby compensation cost is measured at fair
value at the date of grant and is expensed over the award's vesting period. In
accordance with one of the transitional options permitted under amended Section
3870, the Company has retroactively applied the fair value based method to all
employee stock options granted on or after July 1, 2002 without restatement of
prior periods. The cumulative effect of the change in accounting policy of
$2,162 has been recorded as an increase in the opening deficit and additional
paid-in capital at January 1, 2004.
Prior to January 1, 2004, the Company applied the fair value based
method of accounting prescribed by the CICA to stock-based payments to
non-employees, employee awards that were direct awards of stock or called for
settlement in cash or other assets, and to employee stock appreciation rights;
the Company applied the settlement method of accounting to employee stock
options. Under the settlement method, any consideration paid by employees on the
exercise of stock options or purchase of stock was credited to share capital and
no compensation expense was recognized.
4 COLLABORATION AGREEMENT:
In December 2004, the Company concluded an exclusive collaboration agreement
with Centocor, Inc. ("Centocor") for Fibrillex(TM), the Company's most advanced
product candidate designed to treat Amyloid A (AA) Amyloidosis. Under this
agreement, Neurochem granted to Centocor, a wholly-owned subsidiary of Johnson &
Johnson, Inc., worldwide exclusive distribution rights for Fibrillex(TM), with
the exception of Canada, Switzerland, China, Japan, Taiwan and South Korea for
which the distribution rights remain with Neurochem. The agreement includes
up-front, regulatory and sales-based milestone payments valued up to $65 million
(US$54 million) as well as tiered distribution fees which will be based upon
annual sales of Fibrillex(TM) in the applicable territories over the life of the
agreement. Neurochem will be responsible for the product approval activities in
the United States and in Europe as well as for global manufacturing activities.
Centocor will manage the marketing and sales of Fibrillex(TM) in the applicable
territories.
At December 31, 2004, the Company recorded a receivable for the upfront
payment due from Centocor upon signing of the agreement in the amount of $14,443
(US$12,000). One half of the upfront payment to be received by the Company is
potentially refundable in specified circumstances. All of the deferred revenue
at December 31, 2004 relates to amounts to be received under this agreement.
The Company recognized $132 of revenue under the agreement in 2004,
representing the amortization of the non-refundable upfront payment for the
period from signing the agreement, December 21, 2004, over the remaining
estimated period to obtaining the regulatory approvals of the product.
5 LONG-TERM INVESTMENT:
In May 2003, the Company entered into the following transactions with respect to
its Diabetes Type II pre-clinical program:
(i) the Company disposed of its intellectual property rights relating to the
pre-clinical diabetes program, including an exclusive perpetual,
royalty-free, worldwide license to Innodia Inc. ("Innodia"), a privately
held Canadian biopharmaceutical company. The carrying value of these
rights, which amounted to $346, was exchanged for 1,904,464 Innodia common
shares having a fair market value of $5,400. The fair market value of the
Innodia common shares was determined based on the pricing of a $7,000
private placement financing completed by Innodia concurrently with this
transaction.
Since the Company transferred its ownership of a controlled productive
asset to Innodia in exchange for a non-controlling equity interest of 31%
in Innodia, the Company accounted for this transaction as a partial sale
and recognized a gain on the transaction only to the extent of the interest
of the other shareholders in Innodia. Accordingly, the gain on sale of
intellectual property rights of $3,484, included in the June 30, 2003
statement of operations, represents approximately 69% of the total gain of
$5,054 on the transaction;
(ii) the Company subscribed for 176,339 Class A1 preferred shares of Innodia as
part of a private placement for a cash consideration of $500, plus related
costs of $91.
In June 2003, the Company transferred its interest in Innodia to a
holding company which is controlled indirectly by a shareholder. As
consideration for this transfer, Neurochem received 176,339 non-voting Class A1
participating preferred shares, 1,904,464 non-voting, participating Class A
common shares and 352,537 voting, non-participating Class V preferred shares of
the holding company. The Class A1 preferred shares are convertible into common
shares on a one-for-one basis at any time at the option of the holder and
automatically convertible under specified circumstances. At December 31, 2004
and 2003, the Company's long-term investment represents voting rights of
approximately 12% and equity ownership of approximately 70% in the holding
company.
Effective January 1, 2005, the Company will adopt the new
recommendations of the CICA relating to the consolidation of variable interest
entities ("VIE"). The standard requires the Company to identify VIEs in which it
has an interest, determine whether it is a primary beneficiary of such entities
and, if so, to consolidate the VIE. The Company has determined that its
long-term investment in Innodia holding company meets the criteria for being a
VIE and that the Company is the primary beneficiary. Accordingly, the Company
will consolidate this investment as of January 1, 2005. The cumulative effect of
the change in policy of $2,501 will be recorded as an increase to the opening
deficit at January 1, 2005.
6 Property and equipment:
December 31,
2004
---------------------------------------
Accumulated
depreciation and Net book
Cost amortization value
------ ---------------- --------
$ $ $
Land 1,646 - 1,646
Building 9,486 307 9,179
Research equipment 5,641 1,901 3,740
Computer hardware and software 2,606 1,582 1,024
Office equipment 772 239 533
Equipment under capital leases 1,198 630 568
------ ----- ------
21,349 4,659 16,690
====== ===== ======
December 31,
2003
---------------------------------------
Accumulated
depreciation and Net book
Cost amortization value
------ ---------------- --------
$ $ $
Research equipment 2,900 1,383 1,517
Computer hardware and software 1,820 964 856
Office equipment 654 229 425
Equipment under capital leases 1,198 503 695
Leasehold improvements 1,559 513 1,046
------ ----- ------
8,131 3,592 4,539
====== ===== ======
Included in "depreciation of property and equipment" in the
consolidated statements of operations is depreciation of equipment under capital
leases of $127 (December 31, 2003 -- $74; June 30, 2003 -- $251).
In May 2004, the Company purchased property and equipment for a total
cash consideration of $10,500, plus $713 of acquisition-related costs. Assets
acquired, including acquisition costs, consisted of land in the amount of
$1,646, buildings in the amount of $9,476 and equipment of $91. As part of the
purchase, the Company acquired a previously negotiated in-place operating lease
that had a nominal value. The tenant is a company in which a shareholder has an
equity interest. This lease expires in April 2005.
All of the operations of the Company were moved into newly-acquired
premises on May 8, 2004. See notes 12 and 13.
7 PATENTS:
2004 2003
----- -----
$ $
Cost 5,088 3,391
Accumulated amortization 695 449
----- -----
4,393 2,942
===== =====
The remaining weighted average amortization period of patent costs at
December 31, 2004 is 15.4 years (December 31, 2003 -- 15.6 years; June 30, 2003
- -- 15.4 years). The estimated amortization expense for each of the next five
years is approximately $340 per annum or $1,700 in the aggregate.
8 OBLIGATIONS UNDER CAPITAL LEASES:
Minimum lease payments under capital leases expiring in November 2005 are as
follows:
2004 2003
----- -----
$ $
2004 - 470
2005 431 431
----- -----
431 901
Less amount representing interest at a rate of 6.88% 15 60
----- -----
416 841
Less current portion 416 425
----- -----
- 416
===== =====
Interest expense related to obligations under capital leases for the
year ended December 31, 2004 was $45 (six-month period ended December 31, 2003
- -- $33; year ended June 30, 2003 -- $92) and is included in "interest and bank
charges" in the consolidated statements of operations.
9 LONG-TERM DEBT:
In July 2004, the Company entered into a revolving decreasing term credit
agreement in the amount of $10,500 in order to finance the newly-acquired
premises (see note 6). The financing may be drawn in the form of either advances
or discounted bankers' acceptances. Advances bear interest at the bank's prime
rate plus 0.25%, and the bankers' acceptances bear interest at bankers'
acceptances rate plus stamping fees of 1.25%. Since the Company has a
contractual right, exercisable at its sole discretion, to continue to roll over
the short-term obligations for a period extending for more than a year from the
balance sheet date, the debt has been classified as long-term, except for the
annual reductions in the authorized credit. Under the terms of the agreement,
the maximum authorized credit is reduced by $175 per quarter. The agreement
requires certain ratios and covenants to be respected. As at December 31, 2004,
the Company was in compliance with these ratios and covenants. The loan is
guaranteed by a first ranking hypothec on the universality of the Company's
movable and immovable property. The agreement is for a term of five years and
expires on June 30, 2009.
As of December 31, 2004, the credit was drawn in the form of discounted
bankers' acceptances bearing interest at 2.59%, plus stamping fees. Principal
repayments for the next five years are as follows:
$
2005 686
2006 700
2007 700
2008 700
2009 7,350
------
10,136
======
Interest on long-term debt including stamping fees amounted to $174 for
the year ended December 31, 2004 (nil in 2003).
10 SHARE CAPITAL:
(a) The authorized share capital of the Company consists of:
o an unlimited number of voting common shares
o an unlimited number of non-voting preferred shares, issuable in one or
more series
(b) Issued and outstanding:
The issued and outstanding share capital consists of:
2004 2003
------- -------
$ $
30,320,419 common shares (December 31, 2003 -- 29,775,127 common shares) 175,855 173,930
======= =======
Changes in the issued and outstanding common shares for the year ended
June 30, 2003, the six-month period ended December 31, 2003 and the year ended
December 31, 2004 were as follows:
Number Dollars
---------- --------
$
Balance, June 30, 2002 18,028,344 69,501
Issued for cash from private placement (i) 4,000,000 15,148
Exercise of warrants 836,644 1,904
Exercise of stock options 618,036 929
---------- --------
Balance, June 30, 2003 23,483,024 87,482
Issued for cash from public offering (ii) 5,750,000 84,956
Exercise of warrants 106,785 192
Exercise of stock options 435,318 1,300
---------- --------
Balance, December 31, 2003 29,775,127 173,930
Exercise of stock options:
For cash 545,292 1,490
Ascribed value from additional paid-in capital - 435
---------- --------
Balance, December 31, 2004 30,320,419 175,855
========== ========
June 30, 2003:
(i) On July 25, 2002 and February 18, 2003, the Company completed equity
financing agreements with Picchio Pharma Inc. In July 2002, the Company
issued 2.8 million units at a cost of $2.50 per unit, and received
aggregate proceeds of $7,000. The units were comprised of one common share
and one warrant exercisable any time within a three-year period at the
exercise price of $3.13. The warrants expire on July 25, 2005.
In February 2003, the Company issued 1.2 million units at a cost of
$6.79 per unit and received aggregate proceeds of $8,148. The units were
comprised of one common share and one warrant exercisable any time within a
three-year period at an exercise price of $7.81. The warrants expire on
February 18, 2006.
Share issue costs related to these transactions were charged to the
deficit.
December 31, 2003:
(ii) In September 2003, the Company completed a public offering for the issuance
and sale of 5.75 million common shares at a price of $14.77 (US$10.87) per
share. The total proceeds of the offering to the Company was $84,956. Total
share issue expenses of $6,813 were charged to the deficit.
(c) Stock option plan:
Under its stock option plan, the Company may grant options to purchase common
shares to employees, directors, officers, consultants and members of the
Scientific and Clinical Advisory Boards of the Company. The terms, number of
common shares covered by each option, as well as the permitted frequency of the
exercise of such options are determined by the Board of Directors. In general,
options vest over periods of up to five years. In the period ended December 31,
2003, the shareholders approved an increase of 1,241,794 in the number of common
shares reserved for issuance under the plan, from 3,196,973 common shares to
4,438,767 common shares. The maximum number of common shares which may be
optioned in favor of any single individual shall not exceed 5% of the issued and
outstanding common shares of the Company. The option price per share will, in no
circumstances, be lower than the fair market value of the common shares at the
date of the grant of the option, less any discount permitted by any regulatory
authority. In no event may the term of any option exceed ten years from the date
of the grant of the option.
Changes in outstanding options issued under the stock option plan for
the year ended June 30, 2003, the six-month period ended December 31, 2003 and
the year ended December 31, 2004 were as follows:
Weighted
average
Number exercise price
--------- --------------
$
Options outstanding, June 30, 2002 1,963,500 2.32
Granted 909,000 7.22
Exercised (577,036) 1.59
Cancelled or expired (3,620) 3.25
--------- -----
Options outstanding, June 30, 2003 2,291,844 4.48
Granted 342,000 21.70
Exercised (335,318) 2.87
--------- -----
Options outstanding, December 31, 2003 2,298,526 7.23
Granted 797,000 25.65
Exercised (545,292) 2.73
Cancelled or expired (186,450) 6.90
--------- -----
Options outstanding, December 31, 2004 2,363,784 14.51
========= =====
The following table summarizes information about options outstanding
and exercisable at December 31, 2004:
Weighted average
remaining
Options Options contractual life
Exercise price/share outstanding exercisable (years)
- -------------------- ----------- ----------- ----------------
$ 0.36 - $ 0.65 25,500 25,500 2.7
$ 2.99 - $ 3.75 525,120 394,708 6.0
$ 5.30 - $ 6.79 201,264 79,889 7.9
$ 8.11 - $ 9.85 505,000 191,667 8.1
$ 17.81 - $ 23.35 494,900 143,017 9.4
$ 27.90 - $ 33.00 612,000 174,250 9.3
--------- --------- ---
2,363,784 1,009,031 8.1
========= ========= ===
(d) Other outstanding options at December 31, 2004:
The Company had previously issued 400,000 options to purchase common shares at
prices ranging from US$0.20 to US$2.50 per share which are not covered by the
stock option plan. These options were all exercised prior to January 1, 2004. In
the year ended December 31, 2003, 100,000 of these options were exercised for
gross proceeds of $337. In the six-month period ended June 30, 2003, 41,000 of
these options were exercised for gross proceeds of $12.
(e) Outstanding warrants at December 31, 2004:
Each warrant entitles the holder to purchase one common share. Changes in
outstanding warrants issued in connection with various private placements were
as follows:
Weighted
average
Number exercise price
--------- --------------
$
Warrants outstanding, June 30, 2002 943,429 2.22
Issued in connection with private placement (note 10 (b) (i)) 4,000,000 4.53
Exercised (836,644) 2.28
--------- ----
Warrants outstanding, June 30, 2003 4,106,785 4.46
Exercised (106,785) 1.80
--------- ----
Warrants outstanding, December 31, 2003 and 2004 4,000,000 4.53
========= ====
The following table summarizes information about outstanding warrants
at December 31, 2004:
Warrants Exercise price Expiry
--------------- ------
$
2,800,000 3.13 July 2005
1,200,000 7.81 February 2006
----
4,000,000 4.53
====
See subsequent event note 22.
(f) Agreement to issue shares:
On December 1, 2004, the Company entered into an agreement with its Chief
Executive Officer to issue to him up to 220,000 common shares upon the execution
of the agreement and upon achievement of specified performance targets. The
agreement is subject to regulatory and shareholders' approval in 2005. Upon
regulatory and shareholders' approval, shares will be issued and stock-based
compensation will be recorded in 2005 related to this agreement.
11 STOCK-BASED COMPENSATION:
For the year ended December 31, 2004, the Company recorded total stock-based
compensation of $4,038 related to stock options granted to employees after July
1, 2002 in accordance with the change in accounting policy detailed in note 3.
If the fair value-based accounting method had been used to account for
and measure stock-based compensation costs relating to options granted to
employees after July 1, 2002 but prior to January 1, 2004, date at which the
fair value method was applied to all stock-based compensation, the net loss and
related loss per share figures would be as follows:
December 31, June 30,
2003 2003
------------ --------
$ $
Reported net loss (16,773) (19,618)
Pro forma adjustments to compensation expense (1,444) (718)
------- -------
Pro forma net loss (18,217) (20,336)
======= =======
Pro forma loss per share:
Basic (0.68) (0.93)
Diluted (0.68) (0.93)
======= =======
The fair value of the options granted were determined using the
following method and assumptions.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes pricing model. The weighted average assumptions for the
fiscal periods ended December 31, 2004 and 2003 were as follows:
2004 2003
----- -----
Risk free interest rate 3.82% 4.30%
Expected volatility 43% 36%
Expected life in years 7 7
Expected dividend yield nil nil
===== =====
The following table summarizes the weighted average grant-date fair
value per share for options granted during the fiscal periods ended December 31,
2004 and 2003:
Weighted
average
Number of grant-date
options fair value
--------- ----------
$
Fiscal periods ended:
December 31, 2004 797,000 12.83
December 31, 2003 (6 months) 342,000 9.93
======= =====
Dividend yield was excluded from the calculation, since it is the
present policy of the Company to retain all earnings to finance operations and
future growth.
12 SPECIAL CHARGES:
Special charges consist of:
$
Provision for lease exit obligations 487
Write-off of leasehold improvements and other property and equipment 1,189
-----
1,676
=====
The Company had previously entered into lease obligation contracts for
space located in the City of Montreal, through February 28, 2011. As a result of
the Company's move to new premises during the second quarter ended June 30, 2004
referred to in note 6, a liability of $896 was recognized in the second quarter
for the future lease costs of the vacated premises, net of estimated sublease
rentals that could reasonably be obtained for the properties. In the fourth
quarter, the Company revised its estimate of the cost associated with the lease
exit activities as a result of entering into a sublease agreement for its former
premises. A reconciliation of the beginning and ending liability balances is
presented below:
$
Initial provision 896
Payments made (217)
Accretion expense 19
Adjustment to record change in estimate as a result of sublease agreement (409)
----
Ending provision at December 31, 2004 289
====
As at December 31, 2004, the remaining liability related to future
lease payments was $289, of which $126 is included in long-term accrued
liabilities and $163 is included in accrued liabilities.
In addition, the Company wrote off $965 of related leasehold
improvements, $211 of furniture and fixtures and $13 of lab equipment related to
the vacated premises.
13 COMMITMENTS AND CONTINGENCIES:
(a) Operating leases:
Minimum annual lease payments for the next five years and thereafter under
operating leases relating to vacated premises are as follows:
$
2005 303
2006 168
2007 159
2008 152
2009 144
Thereafter 168
-----
1,094
=====
In addition, the Company is also responsible for operating costs and
taxes under the operating leases.
(b) License agreements and research collaborations:
Effective January 1, 1994, the Company entered into a number of license
agreements (the "License Agreements") with Parteq Research and Development
Innovations ("Parteq"), the commercialization arm and exclusive worldwide
licensee of Queen's University. Pursuant to these agreements, the Company was
granted the worldwide exclusive license, with the right to sublicense, to
certain technologies, patents and patent applications developed and belonging to
Queen's University (the "Intellectual Property") and to develop, make, have
made, use, sell and have sold certain products using the Intellectual Property.
While Parteq and Queen's University retain the title to the Intellectual
Property, the Company, directly or through its subsidiaries, has the exclusive
right to exploit the Intellectual Property. All improvement to the Intellectual
Property developed or invented by the Company are owned by the Company, directly
or through its subsidiaries. Pursuant to the terms of the License Agreements,
the Company has agreed to pay certain fees (including milestone payments) and
royalties, and to assume all expenses related to the protection of the
intellectual property rights.
Each of the License Agreements will terminate upon the later of (i) the
expiry date of the last-to-expire of the licensed patents or (ii) ten years
after its first sales of products that use the license, should no patent be
issued.
Under the terms of an agreement with the federal Ministry of Industry
(Technology Partnerships Canada Program), the Company is committed to pay the
federal government royalties equal to 7.24% of gross revenues realized from the
commercialization of effective orally-administered therapeutics for the
treatment of Alzheimer's Disease until June, 30, 2010. After June 30, 2010, the
Company may have to continue to pay royalties until such time as the aggregate
amount of royalties paid pursuant to the agreement reaches $20,540.
The Company and its subsidiaries are party to research and license
agreements under which they have obtained rights to use certain technologies to
develop certain of its product candidates. These agreements impose various
milestones, commercialization, sublicensing, royalty and other payment,
insurance, indemnification and other obligations and are subject to certain
reservations of rights.
The Company outsources clinical trials in the normal course of
business. As at December 31, 2004, the Company's future obligations with respect
to these clinical trial agreements amount to $6,152.
(c) Management services agreement:
The payments under a management services agreement with a shareholder-affiliated
entity (see note 14 (a)) are as follows: 2005 -- $2,400; 2006 -- $2,400 and 2007
- -- $2,200.
(d) Guarantees:
At December 31, 2004, the Company is contingently liable for letters of
guarantee granted in favor of a landlord in the amount of $450. Security
deposits of $450 are pledged under the letters of guarantee. The Company has
also granted a movable hypothec in the amount of $100 under a lease agreement
covering the universality of movable property at a leased location.
In December 2004, the Company obtained a new credit facility in the
amount of $7,222 (US$6,000) to be used for the issuance of a letter of guarantee
in connection with the collaboration agreement with Centocor referred to in note
4. At December 31, 2004, no letter of guarantee was issued under this facility.
(e) Litigation:
In 2002, the Company executed an agreement with Immtech International, Inc.
("Immtech") of Vernon Hills, Illinois, pursuant to which Immtech provided the
Company with certain compounds for testing and granted the Company an option to
license such compounds (the "CTA"). In August 2003, Immtech filed certain legal
proceedings with the Federal District Court for the Southern District of New
York, U.S.A., with respect to the CTA. The parties entered into settlement
discussions in September 2003 and, as settlement did not occur, in January 2004,
the Company brought a motion to compel arbitration under the term of the CTA.
The dispute has now been submitted to an arbitral tribunal convened in
accordance with the rules of the International Court of Arbitration.
The Company continues to vigorously defend against the claims brought
by Immtech. The arbitral proceedings are at the early stages and the outcome of
this matter, or the likelihood and the amount of loss, if any, is not
determinable. No provision for possible loss has been recorded by the Company in
connection with this matter.
14 RELATED PARTY TRANSACTIONS:
(a) Under the terms of a management services agreement entered into in March
2003 and amended in December 2004 with Picchio International Inc.
("Picchio"), a company related to a shareholder, director and officer, the
Company recorded a management fee of $1,080 (six-month period ended
December 31, 2003 -- $480; year ended June 2003 -- $320). In addition, the
Company paid nil in performance incentive fees for the year ended December
31, 2004 (December 31, 2003 -- $250; June 30, 2003 -- nil). As at December
31, 2004, accounts payable and accrued liabilities include $200 due to
Picchio (December 31, 2003 -- $20; June 30, 2003 -- $13).
(b) The Company paid Parteq Research and Development Innovations, a company
related to a director, the following amounts for patent fees in the normal
course of operations:
$
Period ended:
December 31, 2004 10
December 31, 2003 -
June 30, 2003 10
==
(c) Included in research and development are the following amounts paid to
Queen's University at Kingston, under various research agreements:
$
Period ended:
December 31, 2004 -
December 31, 2003 -
June 30, 2003 10
==
(d) Legal fees paid to a firm in which a former director is a partner were $332
during his period of service (December 31, 2003 -- $1,303; June 30, 2003 --
$1,208).
(e) The Company purchased equipment in the amount of $500 from a company in
which Picchio also has an equity interest. As at December 31, 2004, the
balance due to that company amounted to $414.
These transactions are measured at the exchange amount, which is the
amount of consideration established and agreed to by the related parties.
15 INCOME TAXES:
(a) Details of the components of income taxes are as follows:
Six-month
Year ended period ended Year ended
December 31, December 31, June 30,
2004 2003 2003
------------ ------------ ----------
$ $ $
Loss before income taxes:
Canadian operations (10,935) (4,120) (15,974)
Foreign operations (41,464) (12,653) (3,644)
------- ------- -------
(52,399) (16,773) (19,618)
Basic income tax rate 31% 33% 34%
------- ------- -------
Computed income tax recovery (16,254) (5,535) (6,670)
Adjustment in income taxes resulting from:
Non-recognition of losses and other deductions 7,379 2,936 6,582
Difference in tax rate of a foreign subsidiary 8,262 2,720 820
Non deductible stock option expenses 1,251 - -
Permanent differences (638) (121) (732)
------- ------- -------
- - -
======= ======= =======
(b) Future income taxes:
The temporary differences that give rise to future tax assets and liabilities at
December 31, 2004 and 2003 are as follows:
2004 2003
-------- ------
$ $
Future tax assets:
Patent costs 10,154 10,012
Unclaimed scientific research and experimental
development expenditures for tax purposes 10,990 7,533
Share issue costs 1,574 2,171
Net operating losses 6,653 1,874
Long-term investment 271 271
Other 131 74
-------- ------
29,773 21,935
Less: valuation allowance (28,701) (21,272)
-------- ------
1,072 663
Future tax liabilities:
Property and equipment (1,072) (663)
-------- ------
Net future tax assets - -
======== ======
In assessing the realizability of future tax assets, management
considers whether it is more likely than not that some portion or all of the
future income tax assets will be realized. The ultimate realization of future
tax assets is dependent upon the generation of future taxable income and/or tax
planning strategies. Since the Company is a development stage enterprise, the
generation of future taxable income is dependent on the successful
commercialization of its products and technologies.
(c) The Company has the following unclaimed deductions available to reduce
future taxable income in Canada:
Federal Quebec
------- ------
$ $
Research expenditure pool (no expiry) 43,019 15,338
======= ======
The Company also has approximately $9,514 in federal research
investment tax credits that can be used to reduce future federal taxes payable
and which expire as follows:
$
2011 637
2012 2,251
2013 1,799
2014 4,827
-----
9,514
=====
16 EARNINGS PER SHARE:
The reconciliation between basic and diluted earnings per share is as follows:
Six-month
Year ended period ended Year ended
December 31, December 31, June 30,
2004 2003 2003
------------ ------------ ----------
Basic weighted average number of common shares outstanding 30,156,194 26,813,836 21,770,541
========== ========== ==========
$ $ $
Basic net loss per share (1.74) (0.63) (0.90)
========== ========== ==========
Diluted:
Basic weighted average number of common shares outstanding 30,156,194 26,813,836 21,770,541
Plus impact of stock options and warrants (1) 4,389,005 4,476,940 2,858,010
---------- ---------- ----------
Diluted common shares 34,545,199 31,290,776 24,628,551
========== ========== ==========
Diluted net loss per share (1) (1.74) (0.63) (0.90)
========== ========== ==========
(1) The impact of stock options and warrants is anti-dilutive because the
Company incurred losses in 2004 and 2003.
All outstanding options and warrants included in this computation could
potentially be dilutive in the future. At December 31, 2004, 903,500 options
were not considered in the computation of the diluted weighted average number of
shares outstanding, since the exercise price of these options was higher than
the average market price.
17 STATEMENTS OF CASH FLOWS -- SUPPLEMENTARY DISCLOSURE:
(a) Cash and cash equivalents:
Cash and cash equivalents consist of cash balances with banks and short-term
investments:
2004 2003
----- ----
$ $
Cash balances with banks 1,215 1,079
Short-term investments (yielding interest between 2.51% to 2.56%
(December 31, 2003: 1.06% to 2.75%)) 5,992 13,790
----- ------
7,207 14,869
===== ======
(b) Interest and income taxes:
Six-month
Year ended period ended Year ended
December 31, December 31, June 30,
2004 2003 2003
------------ ------------ ----------
$ $ $
Cash paid in the year for:
Interest 151 35 92
Income taxes - - -
=== == ==
(c) Non-cash transactions:
Six-month
Year ended period ended Year ended
December 31, December 31, June 30,
2004 2003 2003
------------ ------------ ----------
$ $ $
Disposal of intellectual property to Innodia in exchange
for an equity interest (note 5) - - 3,830
Additions to property and equipment and patent costs included in
accounts payable and accrued liabilities at year-end 916 406 590
=== === =====
18 SEGMENT DISCLOSURES:
(a) Business segment:
The Company operates in one business segment, namely the development and
commercialization of innovative therapeutics for neurological disorders. The
Company's operations are conducted principally in Canada and Europe.
(b) Property and equipment and intangible assets (patent costs) by geographic
area are as follows:
2004 2003
------ -----
$ $
Canada 16,745 4,599
Europe 4,338 2,882
------ -----
21,083 7,481
====== =====
(c) Major customers:
All revenues recognized in 2004 and the amount receivable at December 31, 2004
were derived from one customer under the collaboration agreement referred to in
note 4.
19 FINANCIAL INSTRUMENTS:
(a) Fair value disclosure:
Fair value estimates are made as of a specific point in time, using available
information about the financial instrument. These estimates are subjective in
nature and often cannot be determined with precision.
The Company has determined that the carrying value of its short-term
financial assets and liabilities, including cash and cash equivalents, the
amount receivable under collaboration agreement, sales taxes and other
receivables, research tax credits receivable as well as accounts payable and
accrued liabilities, approximates their fair value because of the relatively
short periods to maturity of these instruments.
Marketable securities are comprised of fixed income instruments with a
high credit rating (not less than R1 mid rating). As at December 31, 2004, the
weighted average effective interest rate of the marketable securities is
approximately 2.15% (December 31, 2003 -- 1.71%). The fair market value of the
marketable securities amounts to $21,964 as at December 31, 2004 ($62,726 as at
December 31, 2003).
The fair value of the long-term debt approximates the carrying value
because interest is based on market-related variable rates. The fair values of
obligations under capital leases, calculated at the present value of future
contractual payments of principal and interest, discounted at the current market
rates of interest available to the Company for debt instruments with similar
terms and maturity, and the long-term accrued liabilities also approximate their
carrying values.
(b) Credit risk:
Credit risk results from the possibility that a loss may occur from the failure
of another party to perform according to the terms of the contract. The Company
regularly monitors the credit risk exposure and takes steps to mitigate the
likelihood of these exposures from resulting in actual loss.
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of marketable
securities and amount receivable under collaboration agreement. The Company has
investment policies that ensure the safety and preservation of principal, that
ensure the Company's liquidity needs are met and that optimize yields.
Authorized investments include bankers' acceptances, bearer deposit notes,
corporate and government bonds, certificates of deposit, commercial paper and
treasury bills, and shall not exceed 10% per issuer. All of the amount
receivable under collaboration agreement is due from one customer.
(c) Foreign currency risk management:
A substantial portion of the Company's revenues, as well as expenses, are
denominated in US dollars. This results in financial risk due to fluctuations in
the value of the Canadian dollar relative to the US dollar. The Company does not
use derivative financial instruments to reduce its foreign exchange exposure.
Fluctuations in foreign exchange rates could cause unanticipated fluctuations in
the Company's operating results.
(d) Interest rate risk:
The Company's exposure to interest rate risk is as follows:
Cash and cash equivalents Short-term fixed interest rate
Marketable securities Short-term fixed interest rate
Obligations under capital leases Fixed interest rate
Long-term debt Short-term fixed or variable interest rate
20 CANADIAN/US REPORTING DIFFERENCES:
(a) Consolidated statements of operations:
The reconciliation of earnings reported in accordance with Canadian GAAP with US
GAAP is as follows:
Six-month Cumulative
Year ended period ended Year ended since
December 31, December 31, June 30, inception of
2004 2003 2003 operations
------------ ------------ ---------- ------------
$ $ $ $
Net loss in accordance with Canadian GAAP (52,399) (16,773) (19,618) (127,237)
Adjustment for:
Stock-based compensation (1):
Canadian GAAP 4,038 - - 4,038
US GAAP (8) (8) (83) (1,983)
Long-term investment (2) (1,730) (771) - (2,501)
------- ------- ------- --------
Net loss in accordance with
US GAAP (50,099) (17,552) (19,701) (127,683)
======= ======= ======= ========
Loss per share under US GAAP:
Basic and diluted (1.66) (0.65) (0.90)
======= ======= =======
The weighted average number of common shares outstanding for purposes
of determining basic and diluted loss per share is the same amount as the one
used for Canadian GAAP purposes.
(b) Consolidated balance sheets:
A reconciliation of balance sheet items in accordance with Canadian GAAP with US
GAAP is as follows:
(i) Share capital:
December 31,
---------------------
2004 2003
-------- -------
$ $
Share capital, Canadian GAAP 175,855 173,930
Adjustment for:
Stock-based compensation (1) (435) -
Share issue costs (3) (11,527) (11,527)
-------- -------
Share capital, US GAAP 163,893 162,403
======== =======
(ii) Additional paid-in capital:
December 31,
---------------------
2004 2003
-------- -------
$ $
Additional paid-in capital, Canadian GAAP 5,765 -
Adjustment for:
Stock-based compensation (1):
Canadian GAAP - current reversed (5,765) -
US GAAP - current 8 8
Cumulative effect of prior years 1,701 1,693
------- -----
Additional paid-in capital, US GAAP 1,709 1,701
======= =====
(iii) Deficit:
December 31,
---------------------
2004 2003
-------- -------
$ $
Deficit, Canadian GAAP (140,926) (86,365)
Adjustment for:
Stock-based compensation (1):
Canadian GAAP - cumulative effect of prior years reversed 2,162 -
Canadian GAAP - current year reversed 4,038 -
US GAAP - current year (8) (8)
Cumulative effect of prior years (1,701) (1,693)
-------- -------
4,491 (1,701)
Long-term investment (2) (2,501) (771)
Share issue expenses (3) 11,527 11,527
-------- -------
Deficit, US GAAP (127,409) (77,310)
======== =======
(1) Stock-based compensation:
Employees
For US GAAP purposes, the Company has elected to follow the intrinsic value
method of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25") in accounting for stock options granted to
employees and directors. Under the intrinsic value method, compensation
cost is recognized for the difference, if any, between the quoted market
price of the stock as at the grant date and the amount the individual must
pay to acquire the stock. The Company recorded a compensation expense of $8
(December 31, 2003 -- $8; June 30, 2003 -- $83) in respect of options
granted to employees prior to the Company's initial public offering at
prices other than the quoted market price at date of grant.
For Canadian GAAP purposes, the Company adopted the fair value
method of accounting for stock options granted to employees effective
January 1, 2004 (see note 3).
(2) Long-term investment:
For US GAAP purposes, the Company's long-term investment would be
considered a variable interest entity (VIE) as defined in FIN 46R,
Consolidation of Variable Interest Entities. An enterprise consolidates a
VIE if that enterprise has a variable interest that will absorb a majority
of the VIE's expected losses if they occur, receive a majority of the VIE's
expected returns if they occur, or both. The Company's long-term investment
represents a holding, the sole purpose of which is to hold the investment
in Innodia Inc. The maximum amount at risk for the Company is the Company's
carrying value of the investment. For Canadian GAAP, similar guidance has
been issued, but is only effective for fiscal years beginning on or after
November 1, 2004.
(3) Share issue costs:
For US GAAP purposes, share issue costs are recorded as a reduction of the
proceeds raised from the issuance of share capital. For Canadian GAAP
purposes, share issue costs were charged to the deficit.
21 COMPARATIVE FIGURES:
Certain of the comparative figures have been reclassified to conform to the
presentation adopted in the current year.
22 SUBSEQUENT EVENT:
On February 14, 2005, a corporate shareholder confirmed its commitment to
exercise 2,800,000 warrants to purchase common shares due to expire on July 25,
2005. Total proceeds to the Company from this exercise will be $8,764.
Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations
The statements contained in the following Management's Discussion and Analysis
of Consolidated Financial Condition and Results of Operations of Neurochem Inc.
and subsidiaries ("Neurochem" or "the Company"), other than statements of fact
that are independently verifiable at the date hereof, may be forward-looking
statements regarding the industry in which Neurochem operates, Neurochem's
expectations as to its future performance, liquidity and capital resources. Such
statements, based as they are on the current expectations of management,
inherently involve numerous risks and uncertainties, known and unknown,
including but not limited to those set forth in the "Risks and Uncertainties"
section. Consequently, actual future results may differ materially from the
anticipated results expressed in the forward-looking statements.
In 2003, the Company changed its fiscal year-end to December 31 from
June 30 to be consistent with most companies in its industry. The following
analysis explains the material variations in the audited consolidated statements
of operations, financial position and cashflows of Neurochem for the year ended
December 31, 2004, compared to the unaudited twelve-month period ended December
31, 2003. The Company has also explained the variations between the six-month
period ended December 31, 2003, and the unaudited six-month period ended
December 31, 2002.
This analysis should be read in conjunction with the audited
consolidated financial statements of Neurochem and related notes, included
herein, which have been prepared in accordance with Canadian generally accepted
accounting principles ("GAAP"). A reconciliation to US GAAP of earnings and
balance sheet items is presented in note 20 of the audited consolidated
financial statements. Unless otherwise indicated, amounts are presented in
Canadian dollars.
OVERVIEW
Neurochem is a biopharmaceutical company focused on the development and
commercialization of innovative therapeutics for neurological disorders. The
Company's pipeline of proprietary, disease-modifying, oral products addresses
critical, unmet medical needs. The Company currently has three programs in
clinical trials: Fibrillex(TM), Alzhemed(TM) and Cerebril(TM).
In December 2004, the Company concluded an exclusive collaboration and
distribution agreement with Centocor, Inc. ("Centocor") for Fibrillex(TM)
(1,3-propanedisulfonate), the Company's most advanced product candidate designed
to treat Amyloid A (AA) Amyloidosis. Under this agreement, Neurochem
(International) Limited, a wholly-owned subsidiary of Neurochem Inc, granted to
Centocor, a wholly-owned subsidiary of Johnson & Johnson, Inc., worldwide
exclusive distribution rights for Fibrillex(TM), with the exception of Canada,
Switzerland, China, Japan, Taiwan and South Korea, for which the distribution
rights remain with Neurochem. The agreement includes up-front, regulatory and
sales-based milestone payments valued up to US$54 million, as well as tiered
distribution fees which will be based upon net annual sales of Fibrillex(TM) in
the applicable territories over the life of the agreement. Neurochem will be
responsible for the product approval activities in the United States and in
Europe, as well as for global manufacturing activities. Centocor will manage the
marketing and sales of Fibrillex(TM) in the applicable territories. The
Fibrillex(TM) Phase II/III clinical trial with a total of 183 patients enrolled
was completed in December 2004 and the results are expected to be issued during
the second quarter of 2005.
Fibrillex(TM) has been designated as an orphan drug in the US and
Europe, which designation usually provides for market exclusivity of seven years
and ten years, respectively, once the drug is approved. Fibrillex(TM) has also
received the Fast Track Product ("FTP") designation by the U.S. Food and Drug
Administration ("FDA") and was selected for the FDA Pilot 2 program by the
Cardio-Renal Drug Product Division of the FDA. As a result of the FTP
designation, Neurochem will submit a schedule for a rolling New Drug
Application, enabling the FDA to commence review of portions of the application
before the filing of the New Drug Application; under this designation, the
Company is also eligible for priority review by the FDA. The FDA Pilot 2 program
designation enables Fibrillex(TM) to be part of the Continuous Marketing
Applications Pilot 2 program aimed at further accelerating the development and
eventual marketing of the product candidate.
Alzhemed(TM) (3-amino-1-propanesulfonic acid), designed to stop the
progression of Alzheimer's Disease ("AD"), is the Company's next most advanced
product candidate. The Company launched, in June 2004, a North American Phase
III clinical trial to investigate the safety and efficacy of Alzhemed(TM) for
the treatment of AD. The trial will include approximately 950 mild-to-moderate
AD patients and will be conducted at 50 U.S. and 20 Canadian clinical centers
across North America over a period of 18 months. As of December 31, 2004, over
550 patients have been screened and of these approximately 430 were randomized
and are receiving study medication, either placebo or one of two doses of
Alzhemed(TM). The primary endpoint of this study includes the evaluation of
cognitive and functional abilities with the Alzheimer's Disease Assessment
Scale, cognitive subpart ("ADAS-cog"), the Clinical Dementia Rating Scale-Sum of
Boxes ("CDR-SB") and a measure of changes in brain volume by Magnetic Resonance
Imaging. The Alzhemed(TM) European Phase III clinical trial is expected to be
launched in 2005. Alzhemed(TM) is Neurochem's first generation product candidate
for AD.
Neurochem also reported that its two-year open-label Phase II extension
study for Alzhemed(TM) continued to produce promising interim results in AD
patients. The 20-month data showed that the large majority of the mild AD
patients responded well to treatment with Alzhemed(TM) and continued to
stabilize or improve as measured by well validated cognitive and functional
tests such as ADAS-cog, MMSE (Mini Mental State Exam) and CDR-SB.
Cerebril(TM) (3-amino-1-propanesulfonic acid), the Company's product
candidate for the treatment of Hemorrhagic Stroke due to Cerebral Amyloid
Angiopathy, completed a Phase IIa clinical trial to evaluate safety in January
2004. The Company continues to work towards the preparation of a Phase IIb trial
to test the safety and efficacy of Cerebril(TM) for the prevention of the
recurrence of Hemorrhagic Stroke due to Cerebral Amyloid Angiopathy.
Neurochem signed two important agreements in January 2004 related to
its vaccine programs. A strategic alliance was signed with National Research
Council of Canada's Institute for Biological Sciences, and more specifically Dr.
Harold J. Jennings, a world leader in the development of innovative conjugated
vaccines. Also, the Company entered into an in-license agreement with PRAECIS
PHARMACEUTICALS INCORPORATED, a biopharmaceutical company, relating to A(beta)
amyloid peptides for use in the development of a novel synthetic vaccine to
prevent and treat AD.
In May 2004, the Company acquired from Shire BioChem, Inc. (Shire
BioChem) facilities located in the Parc Scientifique et de haute technologie de
Laval for $10,500,000 and incurred $713,000 of acquisition related expenses.
This acquisition enabled the Company to regroup corporate and scientific
employees in the same location, and provided the infrastructure and support
required for current and future growth. The facilities consist of buildings with
approximately 160,000 square feet, 40% of which are state-of-the-art research
and development space to support Neurochem's advancing R&D programs. To finance
this capital expenditure, the Company entered into a revolving decreasing term
credit agreement in the amount of $10,500,000. The credit agreement expires in
June 2009.
In September 2003, Neurochem completed the initial public offering of
its common shares in the U.S. and a new issue of common shares in Canada for
total proceeds of $84,956,000 (US$62,502,500). The Company issued 5.75 million
common shares at a price of $14.77 (US$10.87) per share and incurred share issue
expenses in the amount of $6,813,000. The net proceeds from the offering are
being used to fund clinical trials of the Company's lead product candidates,
other research and development programs, capital expenditures, working capital
and general corporate activities. Picchio Pharma Inc. ("Picchio Pharma"), a
company established between a trust of which Dr. Francesco Bellini, O.C., is a
beneficiary and Power Technology Investment Corporation, a subsidiary of Power
Corporation of Canada, acquired 1,346,800 shares of the offering. As at December
31, 2004, Picchio Pharma is the principal shareholder of the Company with an
ownership of approximately 30% on a fully diluted basis, including four million
warrants expiring in 2005 and 2006.
In November 2003, Neurochem was added to the NASDAQ Biotechnology Index
("NBI"). All securities in the NBI are listed on the NASDAQ National Market and
meet minimum requirements, including market value, average daily share volume
and seasoning as a public company. In December 2003, the Company was also added
to the S&P/TSX Composite Index, the S&P/TSX Capped Health Care Index and the
Global Industry Classification Standard (GICS) Index. Inclusion in these indexes
offers the benefit of additional visibility on financial markets, as well as
potential increased trading volume.
In May 2003, in a strategic move aimed at focusing on core expertise,
the Company completed a technology transfer pertaining to its diabetes program
to Innodia Inc. ("Innodia"), a company focused exclusively on the development of
therapeutic treatments for Diabetes, in exchange for an equity interest in
Innodia. This strategy eliminates funding requirements associated with the
diabetes program, while allowing Neurochem to share in the program's economic
potential as an indirect shareholder of Innodia.
The Company places importance on obtaining and maintaining patent and
trade secret protection for significant discoveries. In 2002, Neurochem executed
an agreement with Immtech International, Inc. (Immtech) pursuant to which
Immtech provided the Company with certain compounds for testing and granted
Neurochem an option to license such compounds (the "CTA"). In August 2003,
Immtech filed certain legal proceedings with the Federal District Court for the
Southern District of New York, U.S.A. with respect to the CTA. The parties
entered into settlement discussions in September 2003 and, as settlement did not
occur, in January 2004, the Company brought a motion to compel arbitration under
the terms of the CTA. The dispute has now been submitted to an arbitral tribunal
convened in accordance with the rules of the International Court of Arbitration.
The Company continues to vigorously defend against the claims brought by
Immtech. The arbitral proceedings are in the early stages and the outcome of
this matter, or the likelihood and the amount of loss, if any, is not
determinable. No provision for possible loss has been recorded by the Company in
connection with this matter. As a result of this litigation, Neurochem has
incurred legal expenses associated with its defence in the fiscal year ended
December 31, 2004 and expects to continue to incur such expenses into its 2005
fiscal year.
As at December 31, 2004, Neurochem's workforce consisted of 165
employees.
SELECTED FINANCIAL INFORMATION
(in thousand of Canadian dollars, except per share data)
Twelve-month periods ended Six-month periods ended
December 31 December 31
--------------------------- ------------------------
2004 2003 2003 2002
(audited) (unaudited) (audited) (unaudited)
-------------- ----------- ---------- -----------
$ $ $ $
REVENUE:
Collaboration agreement 132 - - -
------- ------- ------- -------
EXPENSES:
Research and development 31,152 17,993 8,661 9,450
Research tax credits (1,463) (1,901) (914) (423)
Research grants and other (336) (953) (208) (1,150)
------- ------- ------- -------
29,353 15,139 7,539 7,877
General and administrative 17,953 12,169 7,454 2,469
Stock-based compensation 4,038 - - -
Special charges 1,676 - - -
Depreciation and amortization 2,046 1,287 646 556
Interest and bank charges 277 100 46 90
------- ------- ------- -------
55,343 28,695 15,685 10,992
------- ------- ------- -------
Loss before undernoted items (55,211) (28,695) (15,685) (10,992)
------- ------- ------- -------
INVESTMENT AND OTHER INCOME:
Interest income 1,030 838 520 482
Foreign exchange gain (loss) 1,298 (1,618) (1,747) (29)
Gain on disposal of intellectual property - 3,484 - -
Other income 484 139 139 -
2,812 2,843 (1,088) 453
Net loss (52,399) (25,852) (16,773) (10,539)
======= ======= ======= =======
Net loss per share: Basic and diluted (1.74) (1.04) (0.63) (0.52)
======= ======= ======= =======
December 31, December 31, December 31,
2004 2003 2002
(audited) (audited) (unaudited)
------------ ------------ ------------
$ $ $
Total assets 76,448 94,225 30,294
------ ------ ------
Total long-term financial liabilities 9,576 416 842
====== ====== ======
RESULTS OF OPERATIONS
Twelve-month period ended December 31, 2004 (audited) compared to twelve-month
period ended December 31, 2003 (unaudited)
Collaboration agreement revenue amounted to $132,000 for the year ended December
31, 2004, and consists of revenue earned under the agreement with Centocor in
respect of Fibrillex(TM), as described previously. Revenue recognized in 2004
represents the amortization of the non-refundable upfront payment due from
Centocor for the period from signing of the agreement December 21, 2004, over
the remaining estimated period to obtaining the regulatory approvals of the
product.
Research and development expenses, before research tax credits and
grants, amounted to $31,152,000 for the year ended December 31, 2004, compared
to $17,993,000 for the same period last year. The increase is mainly due to
expenses incurred in relation to the Alzhemed(TM) Phase III clinical trials,
which began in North America in the second quarter of 2004 and the Fibrillex(TM)
Phase II/III clinical trials, as well as the hiring of additional employees
primarily in the clinical development group. For the year ended December 31,
2004, research and development expenses were incurred to support the
Fibrillex(TM) Phase II/III clinical trials and the open-label extension study,
the Alzhemed(TM) Phase III clinical trials and the on-going Phase II open-label
extension study, as well as on-going drug discovery programs.
The Company expects research and development expenditures to increase
as product candidates progress through more advanced stages of clinical
development.
Research tax credits amounted to $1,463,000 for the year ended December
31, 2004, compared to $1,901,000 for the same period last year. Research tax
credits represent refundable tax credits earned under the Quebec Scientific
Research and Experimental Development program. The decrease is primarily
attributable to the fact that during the year ended December 31, 2003, credit
claims from prior years were resolved and recorded during that year.
Research grants amounted to $336,000 for the year ended December 31,
2004, compared to $953,000 for the same period last year. Research grants
consist primarily of those grants received from the FDA for the development of
Fibrillex(TM) and from the Natural Sciences and Engineering Research Council
(NSERC). The decrease in 2004 is primarily due to the fact that during the year
ended December 31, 2003, research grants also included contributions under the
Technology Partnerships Canada (TPC) Program received by the Company for the
development of Alzhemed(TM).
General and administrative expenses amounted to $17,953,000 for the
year ended December 31, 2004, compared to $12,169,000 for the corresponding
period last year. The increase is attributable to the expansion of the corporate
infrastructure in order to support growth and the increase in overall activity
levels at the Company. More specifically, the increase is due to the hiring of
additional senior management team members, as well as operating costs related to
the facilities acquired during the second quarter of 2004, higher legal fees
incurred in relation to the Immtech litigation and other corporate matters,
higher Directors' and Officers' insurance costs resulting from the Company's US
financing and NASDAQ listing, and increased awareness, educational and medical
conference activities related to AA Amyloidosis, Fibrillex(TM)'s target
indication, as well as Alzheimer's Disease, Alzhemed(TM)'s target indication.
Stock-based compensation amounted to $4,038,000 for the year ended
December 31, 2004. Effective January 1, 2004, the Company adopted the
recommendations of the Canadian Institute of Chartered Accountants ("CICA")
Section 3870, Stock-based Compensation and Other Stock-based Payments. The new
recommendations require entities to account for employee stock options using the
fair value-based method, whereby compensation cost is measured at fair value at
the date of grant and is expensed over the award's vesting period. The Company
implemented the transitional alternative to retroactively apply the fair
value-based method to all employee stock options granted on or after July 1,
2002, without restatement of prior periods. As a result, an amount of $2,162,000
was recorded as an adjustment to the opening deficit and additional paid-in
capital on January 1, 2004.
Special charges of $1,676,000 were recorded during the year ended
December 31, 2004, and are related to the relocation to facilities acquired from
Shire BioChem in May 2004. These charges include $487,000 of future lease
payments due in connection with the former premises, net of estimated sublease
income that could reasonably be obtained. Special charges also include the
write-off of certain property and equipment, mainly leasehold improvements in
respect of the prior facilities, in the amount of $1,189,000.
Depreciation and amortization amounted to $2,046,000 for the year ended
December 31, 2004, compared to $1,287,000 for the same period last year. The
increase reflects the depreciation and amortization associated with the
acquisition of additional property and equipment during the year, including the
facilities acquired in the second quarter of 2004, and the increase in patent
costs.
Interest and bank charges amounted to $277,000 for the year ended
December 31, 2004, compared to $100,000 for the corresponding period last year.
The increase is due to interest expense on the $10,500,000 revolving decreasing
term credit entered into by the Company to finance the acquisition of the
facilities during the year.
Interest income amounted to $1,030,000 for the year ended December 31,
2004, compared to $838,000 for the comparable period last year. The increase
results from higher average cash balances in the current year, compared to the
same period last year.
Foreign exchange gains amounted to $1,298,000 for the year ended
December 31, 2004, compared to foreign exchange losses of $1,618,000 for the
comparable period last year. Foreign exchange gains recorded in 2004 are
primarily attributable to a gain realized during the year on the conversion of
US dollars into Canadian dollars.
Gain on disposal of intellectual property amounted to $3,484,000 in
year ended December 31, 2003, and represents the gain realized on the technology
transfer related to the Company's pre-clinical Diabetes program to Innodia.
Other income amounted to $484,000 for the year ended December 31, 2004,
compared to $139,000 for the corresponding period last year and consists of
non-operating revenue, such as leasing revenue and expenses recharged to third
parties.
Net loss for the year ended December 31, 2004 amounted to $52,399,000
($1.74 per share), compared to $25,852,000 for the same period last year ($1.04
per share).
Fourth quarter
For the fourth quarter ended December 31, 2004, the Company recorded a net loss
of $15,388,000 ($0.51 per share), compared to $9,986,000 for the same period
last year ($0.34 per share).
The increase in net loss is primarily attributable to higher research
and development expenses (before research tax credits and grants), which
amounted to $10,807,000 for the fourth quarter ended December 31, 2004, compared
to $4,821,000 for the same period last year. The increase is mainly due to
expenses incurred in relation to the Alzhemed(TM) Phase III clinical trial,
which began in North America during the second quarter of 2004.
Collaboration agreement revenue consist of revenue earned under the
agreement with Centocor in respect of Fibrillex(TM) and represents the
amortization of the non-refundable upfront payment due from Centocor for the
period from signing of the agreement December 21, 2004, over the remaining
estimated period to obtaining the regulatory approvals of the product.
Six-month period ended December 31, 2003 (audited) compared to six-month period
ended December 31, 2002 (unaudited)
Research and development expenses, before research tax credits and grants,
amounted to $8,661,000 for the six-month period ended December 31, 2003,
compared to $9,450,000 for the prior year six-month period. The decrease is due
to a reduction in clinical trial expenses related to Alzhemed(TM), following the
completion of the Phase II clinical trial in June 2003. For the six month-period
ended December 31, 2003, research and development expenses were incurred to
support the on-going Fibrillex(TM) Phase II/III clinical trials and open-label
study, Alzhemed(TM) open-label Phase II extension study and advancement towards
its Phase III clinical trials, Cerebril(TM) Phase II clinical trial as well as
on-going research programs. As at December 31, 2003, Neurochem had 171 patients
in its various clinical trials.
Research tax credits amounted to $914,000 for the six-month period
ended December 31, 2003, compared to $423,000 for the corresponding period last
year. Research tax credits represent refundable tax credits earned under the
Quebec Scientific Research and Experimental Development program. The increase is
due to higher eligible expenses, as well as prior years credit claims resolved
during the current six-month period.
Research grants and other amounted to $208,000 for the six-month period
ended December 31, 2003, compared to $1,150,000 for the corresponding period
last year. In the prior year, research grants refer principally to investment
contributions under the Technology Partnerships Canada ("TPC") Program received
by the Company for the development of Alzhemed(TM) ($919,000), as well as
payments received from the FDA for the development of Fibrillex(TM) ($231,000),
whereas the current six-month period consists of only grants received from the
FDA for Fibrillex(TM).
General and administrative ("G&A") expenses amounted to $7,454,000 for
the six-month period ended December 31, 2003, compared to $2,469,000 for the
same period last year. The increase year-over-year is due to the expansion of
the corporate infrastructure necessary to support the growth and the increase in
the overall activity level at the Company, in particular, in the accounting,
legal, administrative, marketing and senior management functions of the
organization. G&A expenses in the six-month period ended December 31, 2003,
include legal fees incurred in relation with the Immtech litigation, expenses
associated with increased awareness and educational activities related to AA
Amyloidosis, Fibrillex(TM)'s target indication, the setting-up of a marketing
team as well as management and performance-based fees paid to Picchio
International Inc. ("Picchio International"), a related party, for the services
of Dr. Francesco Bellini, O.C., as Chairman and Chief Executive Officer of the
Company and services of other members of Picchio International and Picchio
Pharma.
Depreciation and amortization expense for the six-month period ended
December 31, 2003, increased to $646,000, compared to $556,000 for the same
period in 2002. The increase reflects the depreciation and amortization
associated with the acquisition of additional property and equipment, as well as
additions to patent costs.
Interest income for the six-month-period ended December 31, 2003,
amounted to $520,000, compared to $482,000 for the same period the previous
year. The increase results from higher average cash balances in the current
period, compared to the same period last year offset by a larger portion of the
investment portfolio denominated in US dollar earning lower yields.
Foreign exchange losses amounted to $1,747,000 for the six-month period
ended December 31, 2003, compared to $29,000 for the comparable period the
previous year. The increase is attributable to foreign exchange losses
recognized on the US dollar denominated investments held by the Company, due to
the strengthening of the Canadian dollar versus the US dollar during the period.
Other income amounted to $139,000 for the six-month period ended
December 31, 2003, and consists of non operating revenue, such as expenses
recharged to third parties.
Net loss for the six-month period ended December 31, 2003 amounted to
$16,773,000 ($0.63 per share), compared to $10,539,000 for the same period last
year ($0.52 per share).
Quarterly results (unaudited)
(in thousand of Canadian dollars, except per share data)
<Table>
<Caption>
Net loss per share
Basic and
Quarter Revenue Net loss diluted
- ------- ------- --------- ---------
$ $ $
Year ended December 31, 2004
First -- (9,164) (0.31)
Second -- (14,072) (0.47)
Third -- (13,775) (0.45)
Fourth 132 (15,388) (0.51)
Six-month period ended December 31, 2003
First -- (6,787) (0.28)
Second -- (9,986) (0.34)
Year ended June 30, 2003
First -- (3,962) (0.20)
Second -- (6,577) (0.31)
Third -- (5,609) (0.25)
Fourth -- (3,470) (0.15)
</Table>
Picchio Management Services Agreement
On March 1, 2003, Neurochem entered into a management services agreement with
Picchio International into which Picchio Pharma, the Company's largest
shareholder, intervened. Picchio International is wholly-owned by Dr. Francesco
Bellini and his spouse. The management services agreement stipulates that
Picchio International provides the services of Dr. Bellini, O.C., as Chairman
and Chief Executive Officer of the Company and services of other members of
Picchio International and Picchio Pharma. Under the agreement, Picchio
International and Picchio Pharma, provide regular consulting and advisory
services, including services related to reviewing existing and potential
research and development activities, and potential clinical programs, financing
activities, partnering and licensing opportunities, commercialization plans and
programs, and advising and assisting in investor relations activities. In
consideration of all services rendered under the agreement, Picchio
International received a monthly fee of $80,000 up to November 30, 2004. The
management services agreement was amended as of December 1, 2004, and the
monthly fee was increased to $200,000. This amount includes all direct and
indirect costs and expenses, including travel and all other out-of-pocket
expenses, incurred by Dr. Bellini, Picchio International and Picchio Pharma
relating to the services provided pursuant to such agreement. The agreement also
provides for performance-based fees determined at the discretion of the Board of
Directors.
FINANCIAL CONDITION
Contractual Obligations and Commercial Commitment
As at December 31, 2004, Neurochem's future contractual commitments are
principally for obligations under capital leases related to research equipment
acquisition, the revolving decreasing term credit agreement, operating leases
for facilities and office equipment, clinical trial outsourcing agreements, as
well as management fees with Picchio International. Future contractual
commitments by year of maturity are presented below. The Company has not engaged
in off-balance sheet financing or commodity contract trading.
<Table>
<Caption>
Payments Due by Period
(in thousand Canadian dollars)
------------------------------
Less than More than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
- ----------------------- ------ --------- --------- --------- ---------
$ $ $ $ $
Obligations under capital leases 416 416 Nil Nil Nil
Long- term debt 10,136 686 1,400 8,050 Nil
Operating leases 1,094 303 327 296 168
Clinical trials agreements 6,152 2,222 3,930 Nil Nil
Management fees 7,000 2,400 4,600 Nil Nil
</Table>
On December 1, 2004, the Company entered into an agreement with its Chief
Executive Officer, Dr. Francesco Bellini, to issue to him up to 220,000 common
shares upon the execution of the agreement and upon achievement of specified
performance targets. The agreement is subject to regulatory and shareholder
approval in 2005.
Liquidity and capital resources
As at December 31, 2004, the Company had cash, cash equivalents and marketable
securities in the amount of $29,173,000 as well as a non-refundable amount
receivable from the collaboration agreement with Centocor, Inc. of $7,418,000,
compared to $77,594,000 and Nil at December 31, 2003. The decrease is due to
funds used for operating and investing activities, including the acquisition of
facilities as previously discussed, net of proceeds received from the revolving
decreasing term credit agreement and the issue of additional share capital
pursuant to the exercise of employee stock options.
Additions to property and equipment for the year ended December 31, 2004,
amounted to $14,750,000, compared to $916,000 for the six-month period ended
December 31, 2003 and $1,638,000 for the year ended June 30, 2003. The main
additions to property and equipment for the year ended December 31, 2004, were
facilities acquired from Shire BioChem as discussed previously ($11,213,000), as
well as research equipment ($2,254,000). For the six-month period ended December
31, 2003, the main additions were composed of research equipment ($354,000) and
software ($223,000). For the year ended June 30, 2003, additions to property and
equipment consisted mainly of research equipment ($790,000) and software
($532,000). Additions to patent costs for the year ended December 31, 2004,
amounted to $1,599,000, compared to $739,000 for the six-month period ended
December 31, 2003, and $538,000 for the year ended June 30, 2003. The Company
expects that patent costs should increase as intellectual property protection
activities increase.
Proceeds from the issue of share capital for the year ended December 31,
2004, amounted to $1,490,000 and are related to the issue of additional share
capital pursuant to the exercise of employee stock options. Proceeds from the
issue of share capital for the six-month period ended December 31, 2003,
amounted to $86,448,000 and are mainly related to the US and Canadian public
offering, as discussed previously.
Proceeds from long-term debt amounted to $10,500,000 for the year ended
December 31, 2004, and are related to the financing of the facilities
acquisition, as discussed previously.
On February 14, 2005, the Company received notice from a shareholder of a
commitment to exercise 2,800,000 warrants to purchase common shares due to
expire on July 25, 2005. Total proceeds to the Company from this exercise will
be $8,764,000.
As at January 31, 2005, the Company had 30,411,272 common shares
outstanding, as well as 2,272,931 options outstanding granted under the stock
option plan. In addition, warrants to purchase 4,000,000 common shares of the
Company were outstanding.
The Company invests available cash resources, in a manner consistent with a
goal of capital preservation, liquidity and with limited credit risk, in liquid
securities with varying terms to maturity not exceeding twelve months, selected
with regard to the expected timing of expenditures to be incurred from
continuing operations and prevailing interest rates.
Since inception in 1993, Neurochem has devoted its resources principally to
funding research and development programs and the related infrastructure and
support activities. As at December 31, 2004, the Company has incurred a
cumulative deficit since inception of $140,926,000 of which research and
development expenditures totaled $107,921,000 before research tax credits and
grants of $19,905,000. The Company expects operating expenses to increase going
forward as product candidates enter more advanced stages of clinical
development, as the Company continues to invest in product research and
development and as it prepares for commercialization.
The Company signed a collaboration and distribution agreement with Centocor
in respect of Fibrillex(TM) in December 2004. However, the Company has not yet
generated any revenues from the sale of products and has not been profitable to
date. Neurochem has funded its operations primarily through private and public
offerings of common shares, payments received under research and development
agreements as well as interest income, tax credits and grants. Until the Company
is in its commercialization phase, it expects to fund operations with proceeds
from equity or debt financing, interest income, revenues from collaborative
research, license, product development and co-marketing agreements, research tax
credits and grants.
The Company believes that its available cash and short-term investments,
expected interest income, potential funding from research, potential
partnerships and licensing agreements, research tax credits, grants, access to
capital markets and support from its principal shareholder should be sufficient
to finance the Company's operations and capital needs for the coming year.
However, in light of the inherent uncertainties associated with the regulatory
approval process and the Company's ability to secure additional research,
partnerships and/or licensing agreements, further financing may be required to
support the Company's operations in the future.
Supplementary information about the Company, including its Annual
Information Form, is available on SEDAR's website (www.sedar.com).
CRITICAL ACCOUNTING POLICIES
In preparing the Company's consolidated financial statements in conformity with
GAAP, management is required to make certain estimates, judgements and
assumptions that the Company believes are reasonable based upon the information
available. These estimates and assumptions affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the periods presented. The accounting policies
which the Company considers to be critical are those that require the most
difficult, subjective, or complex judgments and that are the most important to
aid in fully understanding and evaluating its consolidated financial statements.
These accounting policies are discussed in the following paragraphs.
Revenue recognition: Revenue from collaboration and distribution agreements
that includes multiple elements is considered to be a revenue arrangement with
multiple deliverables. Under this type of arrangement, identification of
separate units of accounting is required and revenue is allocated among the
separate units based on their relative fair value. Payments received under the
collaboration and distribution agreements may include upfront payments,
regulatory and sales-based milestone payments for specific achievements as well
as distribution fees. Upfront and regulatory milestone payments, which require
the Company's ongoing involvement are deferred and amortized into income on a
straight-line basis over the estimated period of service. Sales-based milestone
payments, for which the Company has no future involvement or obligations to
perform related to that specific element of the arrangement, are recognized into
income upon the achievement of the specified milestones. Distribution fee
revenue is recognized when the amount is determinable and collection is
reasonably assured.
Research and development costs consist of direct and indirect expenditures,
including a reasonable allocation of overhead expenses, associated with the
Company's various research and development programs. Research and development
costs are expensed as incurred. Overhead expenses comprise general and
administrative support provided to the research and development programs and
involve costs associated with support activities such as facility operating
costs, office services, information technology and human resources. The Company
accrues clinical trials expenses based on work performed, which relies on
estimates of total costs incurred based on completion of patient studies and
other events. The Company follows this method since reasonable dependable
estimates of the costs applicable to various stages of a research agreement or
clinical trial can be made. Accrued clinical costs are subject to revisions as
trials progress to completion.
Income taxes are accounted for under the asset and liability method. Future
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. Future tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on future tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Management provides valuation allowances against the future tax asset for
amounts which are not considered "more likely than not" to be realized. In
assessing the realizability of tax assets, management considers whether it is
more likely than not that some portion or all of the tax assets will not be
realized. The ultimate realization of future tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
tax liabilities, projected future taxable income, and tax planning strategies in
making this assessment. The Company has determined that a 100% tax valuation
allowance is necessary at December 31, 2004. In the event the Company were to
determine that it would be able to realize its tax asset, an adjustment to the
tax asset would increase income in the period such determination is made.
Property, equipment and patents costs are stated at cost and are amortized
on a straight-line or declining balance basis. The Company regularly reviews
property, equipment and patent costs for impairment as well as whenever events
or changes in business circumstances indicate that the carrying value of the
assets may not be recoverable. Impairment is assessed by comparing the carrying
amount of an asset with its expected future net undiscounted cash flows from use
together with its residual value (net recoverable value). If such assets are
considered impaired, the impairment to be recognized is measured by the amount
by which the carrying amount exceeds its recoverable value. Management's
judgment regarding the existence of impairment indicators are based on legal
factors, market conditions and operating performances. Future events could cause
management to conclude that impairment indicators exist and that the carrying
values of the Company's property, equipment or patent costs are impaired. Any
resulting impairment loss could have a material adverse impact on the Company's
financial position and results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
Stock-based compensation
Effective January 1, 2004, the Company adopted the recommendations of the
Canadian Institute of Chartered Accountants ("CICA") issued Handbook Section
3870, Stock-based Compensation and Other Stock-based Payments. The new
recommendations require entities to account for employee stock options using the
fair value based method, whereby compensation cost is measured at fair value at
the date of grant and is expensed over the award's vesting period. In accordance
with one of the transitional options permitted under amended Section 3870, the
Company has retroactively applied the fair value based method to all employee
stock options granted on or after July 1, 2002 without restatement of prior
periods. The cumulative effect of the change in accounting policy of $2,162,000
has been recorded as an increase in the opening deficit and additional paid-in
capital at January 1, 2004.
Prior to January 1, 2004, the Company applied the fair value based method
of accounting prescribed by the Canadian Institute of Chartered Accountants to
stock-based payments to non-employees, employee awards that were direct awards
of stock or called for settlement in cash or other assets, and to employee stock
appreciation rights; the Company applied the settlement method of accounting to
employee stock options. Under the settlement method, any consideration paid by
employees on the exercise of stock options or purchase of stock was credited to
share capital and no compensation expense was recognized.
Variable interest entities
The CICA has issued Accounting Guideline 15 - Consolidation of Variable Interest
Entities (AcG-15), which provides guidance for determining when an enterprise
consolidate the assets, liabilities and results of activities of entities that
are subject to control on a basis other than ownership of voting interests (a
"variable interest entity" ("VIE")). This guideline requires the Company to
identify VIEs in which it has an interest, determine whether it is the primary
beneficiary of such entities and, if so, to consolidate the VIE. A primary
beneficiary is an enterprise that will absorb a majority of the VIE's expected
losses, receive a majority of its expected residual return, or both. AcG-15 is
effective for fiscal periods beginning on or after November 1, 2004. The Company
has performed an analysis of the characteristics of its long-term investment. It
was determined that its investment in a holding company that owns Innodia's
shares meets the criteria for being a VIE and that the Company is the primary
beneficiary of Innodia. The implementation of AcG-15 will result in the
consolidation of the Company's interest in Innodia's holding company starting
January 1, 2005. The cumulative effect of the implementation of this accounting
guideline in the amount of $2,501,000 will be applied retroactively and recorded
as an increase in the opening deficit at January 1, 2005.
RISKS AND UNCERTAINTIES
Since inception, Neurochem has experienced operating losses and products have
not yet been marketed commercially. The Company's product candidates are in
development and have not yet been approved for commercialization by regulatory
authorities in any jurisdiction. The Company's business entails significant
risks, including the costs and time involved in obtaining the required
regulatory approvals, the adequacy of patent protection, the uncertainties
involved in clinical testing, the availability of capital to continue
development and commercialization of the products, and competition from
pharmaceutical and other biotechnology companies.
Product research and development involves a high degree of risk and returns
to investors are dependent upon successful development and commercialization of
the Company's products. There can be no assurance that development of any
product will be successfully completed or that regulatory approval of any of the
Company's products under development will be obtained. Furthermore, there can be
no assurance that existing products or new products developed by competitors
will not be more effective, or more effectively marketed and sold, than any that
may be developed by the Company. There can be no assurance that the Company's
future potential products will gain market acceptance among physicians,
patients, healthcare payers and the medical community.
Because of the length of time and expense associated with bringing new
products through development, obtaining regulatory approval and bringing
products to market, the Company places considerable importance on obtaining and
maintaining patent and trade secret protection for significant discoveries.
There can be no assurance that any pending patent application filed by the
Company will mature into an issued patent. Furthermore, there can be no
assurance that existing or pending patent claims will offer protection against
competition, or will not be designed around or infringed upon by others.
Commercial success will also depend in part on the Company not infringing
patents or proprietary rights of others.
The Company is currently dependent on third parties for a variety of
functions and may enter into future collaborations for the development,
manufacture and commercialization of products. There is no assurance that the
arrangements with these third parties will provide benefits the Company expects.
There can also be no assurance that the Company will be successful in
manufacturing, marketing and distributing products, or that the Company will be
able to make adequate arrangements with third parties for such purposes. There
can be no assurance that the Company will generate revenue or achieve
profitability.
Significant funding is required for ongoing research and development,
clinical trials, commercial manufacturing of products and the establishment of
sales and marketing teams necessary for the launch and ongoing sales of new
products. In addition, major financial resources are necessary until such time
as the products are commercialized and sold successfully, and sales are
sufficient to generate profits. The Company intends to raise additional
financing, as required, through research, partnership and licensing agreements,
the exercise of options and warrants, and through equity and/or debt financing.
However, there can be no assurance that these financing efforts will be
successful or that the Company will continue to be able to meet its ongoing cash
requirements. It is possible that financing will not be available or, if
available, may not be on favorable terms. The availability of financing will be
affected by the results of scientific and clinical research, the Company's
ability to attain regulatory approvals, the market acceptance of the Company's
products, the state of the capital markets generally (with particular reference
to pharmaceutical, biotechnology and medical companies), the status of strategic
alliance agreements, and other relevant commercial considerations.
On behalf of Management,
Mariano Rodriguez, C.A., C.P.A.
Vice President, Finance & Chief Financial Officer
Laval, Canada
February 16, 2005
SIGNATURE
Pursuant to the requirements of the Exchange Act, the Registrant
certifies that it meets all of the requirements for filing on Form 40-F and has
duly caused this annual report to be signed on its behalf by the undersigned,
thereto duly authorized.
March 31, 2005
NEUROCHEM INC.
By: /s/ Francesco Bellini
--------------------------------
Dr.Francesco Bellini
Chairman of the Board, President
and Chief Executive Officer
EXHIBIT INDEX
Number Document
- ------ --------
23. Consent of KPMG LLP.
31.1 Certification pursuant to Rule 13a-14 or 15d-14 of the Exchange Act, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Dr.
Francesco Bellini).
31.2 Certification pursuant to Rule 13a-14 or 15d-14 of the Exchange Act, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(Mariano Rodriguez).
32.1 Certification pursuant to Title 18, United States Code, Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Dr.
Francesco Bellini).
32.2 Certification pursuant to Title 18, United States Code, Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Mariano Rodriguez).
99. Code of Ethics (Incorporated by Reference to Exhibit 9 of the
Registrant's annual report on form 40-F for the fiscal year ended
December 31, 2003, filed with the Commission on May 13, 2004).