UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT
TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934
For the month of: April, 2005
Commission File Number: 000-50393
NEUROCHEM INC.
275 Armand-Frappier Boulevard
Laval, Quebec
H7V 4A7
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40 F. Form 20-F [ ] Form 40-F [X]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1):
Yes [ ] No [X]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7):
Yes [ ] No [X]
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g-3 under the Securities Exchange Act of 1934.
Yes [ ] No [X]
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b):
SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NEUROCHEM INC.
April 1, 2005
By: (signed) David Skinner
---------------------------------------
David Skinner
General Counsel and Corporate Secretary
NEUROCHEM INC.
NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
NOTICE is hereby given that the annual and special meeting (the
"Meeting") of shareholders of Neurochem Inc. (the "Corporation") will be held at
the Montreal Museum of Fine Arts, Michal and Renata Hornstein Pavilion, Maxwell
Cummings Auditorium, 1379 Sherbrooke Street West, Montreal, Quebec, H3G 2T9, on
May 12, 2005, at 10:00 AM, Montreal time, for the following purposes:
(i) to receive and consider the annual report of the directors to the
shareholders and the financial statements of the Corporation for the
financial year ended December 31, 2004, and the report of the auditors
thereon;
(ii) to elect directors for the ensuing year;
(iii) to ratify and confirm the approval and entering into of the agreement
made as of December 1, 2004, with Dr. Francesco Bellini, Chairman of
the Board of Directors of the Corporation, President and Chief
Executive Officer to issue (and/or deliver, as described in the
accompanying proxy circular) common shares of the Corporation (the
"Common Shares") to Dr. Bellini;
(iv) to ratify and confirm the resolution adopting the amendment to the
Amended and Restated Stock Option Plan of the Corporation (the "Plan"),
in order to change the maximum number of Common Shares issuable from
time to time under the Plan from the current fixed maximum number of
4,438,767 Common Shares to a fixed maximum percentage of 12.5% of the
Common Shares issued and outstanding from time to time, pursuant to
recent amendments to The Toronto Stock Exchange (the "TSX") Company
Manual, with such amendments, deletions and additions as any officer or
director may deem expedient to approve, such approval to be
conclusively evidenced by the filing of the final version of the Plan
with the Agence nationale d'encadrement du secteur financier and the
TSX;
(v) to appoint KPMG LLP, Chartered Accountants, as auditors of the
Corporation and to authorize the Audit Committee to fix the auditors'
remuneration; and
(vi) to transact such further and other business as may properly be brought
before the Meeting or any adjournment thereof.
DATED at Montreal, Quebec, March 14, 2005.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ David Skinner
----------------------------------
David Skinner
Corporate Secretary
SHAREHOLDERS MAY EXERCISE THEIR VOTING RIGHTS BY ATTENDING THE MEETING OR BY
COMPLETING A FORM OF PROXY. SHAREHOLDERS WHO ARE UNABLE TO BE PRESENT IN PERSON
AT THE MEETING ARE REQUESTED TO COMPLETE, DATE AND SIGN THE ENCLOSED FORM OF
PROXY AND MAIL IT TO THE CORPORATION, C/O COMPUTERSHARE TRUST COMPANY OF CANADA,
IN THE ENVELOPE PROVIDED FOR THAT PURPOSE. PLEASE REFER TO THE ACCOMPANYING
PROXY CIRCULAR FOR ADDITIONAL PARTICULARS.
[NEUROCHEM LOGO]
MANAGEMENT PROXY CIRCULAR
This proxy circular is furnished in connection with the solicitation by
the management of Neurochem Inc. (the "Corporation") of proxies to be voted at
the annual and special meeting of shareholders of the Corporation (the
"Meeting"), to be held at the Montreal Museum of Fine Arts, Michal and Renata
Hornstein Pavilion, Maxwell Cummings Auditorium, 1379 Sherbrooke Street West,
Montreal, Quebec, H3G 2T9, on May 12, 2005, at 10:00 AM, Montreal time, for the
purposes set forth in the accompanying notice of the Meeting, and at any
adjournment thereof. Except as otherwise stated, the information contained
herein is given as at March 1, 2005, and all dollar amounts and references to $
are to Canadian dollars.
SOLICITATION OF PROXIES
THE ENCLOSED PROXY IS BEING SOLICITED BY THE MANAGEMENT OF THE
CORPORATION and the expenses of solicitation of proxies will be borne by the
Corporation. The solicitation will be made primarily by mail; however, officers
and regular employees of the Corporation may also solicit proxies by telephone,
telecopier or in person.
APPOINTMENT AND REVOCATION OF PROXIES
THE PERSONS NAMED IN THE ENCLOSED FORM OF PROXY ARE DIRECTORS OR
OFFICERS OF THE CORPORATION. EACH SHAREHOLDER IS ENTITLED TO APPOINT ANY OTHER
PERSON TO REPRESENT HIM AT THE MEETING, AND AT ANY ADJOURNMENT THEREOF.
A shareholder desiring to appoint another person (who need not be a
shareholder) to represent him at the Meeting, and at any adjournment thereof,
may do so either by striking out the names of the management nominees set forth
in the form of proxy and by inserting such person's name therein or by
completing another proper form of proxy and, in either case, sending the
completed proxy in the enclosed reply envelope for delivery before the Meeting,
or any adjournment thereof, or by depositing such proxy with the Chairman on the
day of the Meeting, at the Meeting or any adjournment thereof.
A shareholder giving a proxy pursuant to this solicitation may revoke
any such proxy by instrument in writing executed by the shareholder or by his
attorney duly authorized in writing, or if the shareholder is a corporation,
executed under its corporate seal or by an officer or attorney duly authorized
in writing, and deposited with the Corporation, c/o Computershare Trust Company
of Canada, Attention: Proxy Department, 1500 University Street, Suite 700,
Montreal, Quebec, H3A 3S8, at any time up to and including the last business day
preceding the day of the Meeting, or any
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adjournment thereof, or with the Chairman on the day of the Meeting, at the
Meeting or any adjournment thereof, before any vote is cast under the proxy's
authority.
REGISTERED SHAREHOLDERS
Holders of common shares of the capital of the Corporation (the "Common
Shares") listed as shareholders at the close of business on March 24, 2005, will
be entitled to vote at the Meeting, or any adjournment thereof, either in person
or by proxy, in respect of all matters which may properly come before the
Meeting, or any adjournment thereof.
NON-REGISTERED SHAREHOLDERS
The names of the shareholders whose shares are held in the name of a
broker or another intermediary will not appear on the list of shareholders of
the Corporation. If you are not a registered shareholder of the Corporation, in
order to vote you must obtain the material relating to the Meeting from your
broker or other intermediary, complete the request for voting instructions sent
by the broker or other intermediary and follow the directions of the broker or
other intermediary with respect to voting procedures.
In accordance with National Instrument 54-101 adopted by the Canadian
Securities Administrators entitled "Communication with Beneficial Owners of
Securities of a Reporting Issuer", the Corporation is distributing copies of the
material related to the Meeting to clearing agencies and intermediaries for
distribution to non-registered holders. Such agencies and intermediaries must
forward the material related to the Meeting to non-registered holders and often
use a service company (such as ADP Investor Communications in Canada) to permit
you, if you are not a registered shareholder, to direct the voting of the Common
Shares which you beneficially own. If you are a non-registered shareholder of
the Corporation, you may revoke voting instructions which have been given to an
intermediary at any time by written notice to the intermediary. If you are a
non-registered shareholder of the Corporation, you should submit your voting
instructions to your intermediary or broker in sufficient time to ensure that
your votes are received, from your intermediary or broker, by the Corporation.
VOTING OF PROXIES
The persons named in the enclosed form of proxy will vote or withhold
from voting the shares in respect of which they are appointed in accordance with
the directions of the shareholders appointing them.
IN THE ABSENCE OF SUCH DIRECTIONS, SUCH SHARES WILL BE VOTED:
A. FOR THE ELECTION AS DIRECTORS OF THOSE PERSONS HEREINAFTER NAMED AS
MANAGEMENT'S NOMINEES;
B. FOR THE RATIFICATION AND CONFIRMATION OF THE APPROVAL AND ENTERING INTO
OF THE AGREEMENT MADE AS OF DECEMBER 1, 2004, WITH DR. FRANCESCO
BELLINI, CHAIRMAN OF THE BOARD OF DIRECTORS OF THE CORPORATION,
PRESIDENT AND CHIEF EXECUTIVE OFFICER TO ISSUE (AND/OR DELIVER, AS
DESCRIBED BELOW) COMMON SHARES TO DR. BELLINI;
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C. FOR THE RATIFICATION AND CONFIRMATION OF THE RESOLUTION ADOPTING THE
AMENDMENT TO THE AMENDED AND RESTATED STOCK OPTION PLAN OF THE
CORPORATION (THE "PLAN"), IN ORDER TO CHANGE THE MAXIMUM NUMBER OF
COMMON SHARES ISSUABLE FROM TIME TO TIME UNDER THE PLAN FROM THE
CURRENT FIXED MAXIMUM NUMBER OF 4,438,767 COMMON SHARES TO A FIXED
MAXIMUM PERCENTAGE OF 12.5% OF THE COMMON SHARES ISSUED AND OUTSTANDING
FROM TIME TO TIME, PURSUANT TO RECENT AMENDMENTS TO THE TORONTO STOCK
EXCHANGE (THE "TSX") COMPANY MANUAL, WITH SUCH AMENDMENTS, DELETIONS
AND ADDITIONS AS ANY OFFICER OR DIRECTOR MAY DEEM EXPEDIENT TO APPROVE,
SUCH APPROVAL TO BE CONCLUSIVELY EVIDENCED BY THE FILING OF THE FINAL
VERSION OF THE PLAN WITH THE AGENCE NATIONALE D'ENCADREMENT DU SECTEUR
FINANCIER AND THE TSX; AND
D. FOR THE APPOINTMENT OF KPMG LLP, CHARTERED ACCOUNTANTS, AS AUDITORS OF
THE CORPORATION AND THE AUTHORIZATION OF THE AUDIT COMMITTEE TO FIX THE
AUDITORS' REMUNERATION.
All matters to be voted upon at the Meeting will be decided by a
majority of the votes cast by the shareholders entitled to vote thereon.
The enclosed form of proxy confers discretionary authority upon the
persons named therein with respect to amendments or variations to matters
identified in the accompanying notice of the Meeting or with respect to such
other matters as may properly come before the Meeting, or any adjournment
thereof. At the date hereof, the management of the Corporation knows of no such
amendments, variations or other matters to be presented for action at the
Meeting, or any adjournment thereof. However, if any other matters which are not
now known to management should properly come before the Meeting, or any
adjournment thereof, the persons named in the enclosed form of proxy will vote
on such matters in accordance with their best judgment.
VOTING SHARES AND PRINCIPAL HOLDERS THEREOF
As at March 9, 2005, 34,412,136 Common Shares were issued and
outstanding, each such share entitling the holder thereof to one vote.
To the knowledge of the directors and officers of the Corporation, as
at March 9, 2005, no person beneficially owned, directly or indirectly, or
exercised control or direction over, shares of the Corporation carrying 10% or
more of the voting rights attached to all outstanding voting shares of the
Corporation, except as follows:
NUMBER OF COMMON
NAME SHARES PERCENTAGE OF CLASS
- --------------------------------- ---------------- -------------------
P.P. Luxco Holdings II S.A.R.L.(1) 7,068,368 20.54%
</Table>
<FN>
NOTE:
(1) P.P. Luxco Holdings II S.A.R.L. is a wholly-owned subsidiary of Picchio
Pharma Inc. ("Picchio Pharma"). The holdings and purchases of Common
Shares by Picchio Pharma through P.P. Luxco Holdings II S.A.R.L. are
referred to in and for the purposes of this management proxy circular
as being holdings and purchases of Picchio Pharma.
</FN>
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ELECTION OF DIRECTORS
Ten directors are to be elected at the Meeting. The Board recommends
that shareholders vote for the election of the nominees whose names are set
forth below. THE PERSONS NAMED IN THE ENCLOSED FORM OF PROXY INTEND TO CAST THE
VOTES TO WHICH THE SHARES REPRESENTED BY SUCH PROXY ARE ENTITLED FOR THE
ELECTION OF THE NOMINEES WHOSE NAMES ARE SET FORTH BELOW UNLESS OTHERWISE
DIRECTED BY THE SHAREHOLDERS APPOINTING THEM.
Management does not contemplate that any of the nominees will be unable
to serve as a director, but, if that should occur for any reason at or prior to
the Meeting, the persons named in the enclosed form of proxy reserve the right
to vote for another nominee at their discretion, unless instructions have been
received from a particular shareholder to withhold its shares from voting with
respect to the election of directors. Each director elected will hold office
until the next annual meeting of shareholders or until his successor is duly
elected, unless his office is earlier vacated in accordance with the by-laws of
the Corporation. All of the persons named in the table below are now members of
the Board of Directors of the Corporation (the "Board") and have been during the
period indicated.
The following table states the names of all the persons proposed by
management to be nominated for election as directors, their municipality,
province or state and country of residence, their principal occupation, their
position in the Corporation (if any), the period during which each proposed
nominee served as a director and the number of Common Shares beneficially owned,
directly or indirectly, by each of them or over which they exercise control or
direction.
NUMBER OF
COMMON
SHARES
PERIOD BENEFICIALLY
DURING OWNED,
WHICH CONTROLLED
NAME AND MUNICIPALITY SERVED AS OR
OF RESIDENCE PRINCIPAL OCCUPATION OFFICE A DIRECTOR DIRECTED(1)
- -------------------------------- ------------------------------ --------------------- ---------- ------------
Dr. Francesco Bellini, O.C.(2)....... Chairman, President and Chief Chairman of the Board, 2002-2005 -- (3)
Montreal, Quebec, Canada Executive Officer President, Chief
of the Corporation Executive Officer and
Director
Dr. Colin Bier(4),(5)................ Consultant Director 1996-2005 900
Montreal, Quebec, Canada
Jean-Guy Desjardins(5)............... President and Chief Executive Director 2004-2005 387,550
Montreal, Quebec, Canada Officer, Centria Inc. (a holding
company)(6)
Peter Kruyt(2),(7)................... Vice President, Power Corporation Director 2002-2005 25,200
Montreal, Quebec, Canada of Canada (a diversified
management and holding company)
Francois Legault(7).................. President and Chief Operating Director 2004-2005 10,000
Montreal, Quebec, Canada Officer, ViroChem Pharma Inc. (a
biopharmaceutical company)(8)
Dr. Frederick H. Lowy, O.C.(5)....... President and Vice-Chancellor of Director 2003-2005 Nil
Montreal, Quebec, Canada Concordia University (a university)
John Molloy(4)...................... President and Chief Executive Director 1994-2005 20,000
Kingston, Ontario, Canada Officer, Parteq Research and
Development Innovations, Queen's
University (a university
technology transfer organization)
Ronald M. Nordmann(2),(5),(7),(9).... Co-President, Global Health Director 2002-2005 Nil
Loveladies, New Jersey, United States Associates, LLC (a consulting
company to the healthcare and
financial services industries)
</Table>
-5-
NUMBER OF
COMMON
SHARES
PERIOD BENEFICIALLY
DURING OWNED,
WHICH CONTROLLED
NAME AND MUNICIPALITY SERVED AS OR
OF RESIDENCE PRINCIPAL OCCUPATION OFFICE A DIRECTOR DIRECTED(1)
- -------------------------------- ------------------------------ --------------------- ---------- ------------
Graeme K. Rutledge(4)........... Consultant Director 2003-2005 Nil
Perth, Ontario, Canada
Dr. Emil Skamene(7)............. Scientific Director, Research Director 2002-2005 Nil
Montreal, Quebec, Canada Institute of the McGill University
Health Centre (an academic health
centre)
NOTES:
(1) The information as to the Common Shares beneficially owned, controlled or
directed, not being within the knowledge of the Corporation, has been
furnished by the respective candidates individually.
(2) 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 it concurrently). Dr. Bellini and Messrs. Kruyt and Nordmann are
the current nominees of Picchio Pharma.
(3) Dr. Bellini holds directly, 166,666 Common Shares. Dr. Bellini is a
beneficiary of the FMRC Family Trust ("FMRC") which holds indirectly,
through its 50% ownership of Picchio Pharma, 6,718,368 Common Shares and
warrants to subscribe for 4,000,000 Common Shares. On March 9, 2005, FMRC
purchased, directly, an additional 250,000 Common Shares as part of a
public offering of the Corporation's Common Shares in Canada and the United
States.
(4) Member of the Audit Committee.
(5) Member of the Compensation Committee.
(6) 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.
(7) Member of the Nominating and Corporate Governance Committee.
(8) 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 ViroChem Pharma Inc.), also a biopharmaceutical
company.
(9) Mr. Nordmann is the Lead Director of the Corporation.
CORPORATE CEASE TRADE ORDERS OR BANKRUPTCIES
To the knowledge of the directors and officers of the Corporation, no
proposed director of the Corporation:
(a) is, as at the date of this information circular or has been, within the
10 years before the date of this information circular, a director or
executive officer of any company, that, while that person was acting in
that capacity:
(i) the subject of a cease trade or similar order or an order that
denied the relevant company access to any exemption under
securities legislation, for a period of more than 30
consecutive days;
(ii) subject to an event that resulted, after the director or
executive officer ceased to be a director or executive
officer, in the company being the subject of a cease trade or
similar order or an order that denied the relevant company
access to any exemption under securities legislation, for a
period of more than 30 consecutive days; or
(iii) within a year of that person ceasing to act in that capacity,
became bankrupt, made a proposal under any legislation
relating to bankruptcy or insolvency or was subject to
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or instituted any proceedings, arrangement or compromise with
creditors or had a receiver, receiver manager or trustee
appointed to hold its assets; or
(b) has, within the 10 years before the date of this information circular,
become bankrupt, made a proposal under any legislation relating to
bankruptcy or insolvency, or become subject to or instituted any
proceedings, arrangement or compromise with creditors, or had a
receiver, receiver manager or trustee appointed to hold its assets.
COMPENSATION OF DIRECTORS AND EXECUTIVES
COMPENSATION OF DIRECTORS
Directors are remunerated for services in that capacity with cash
compensation and options to acquire Common Shares. Members of the Board are paid
an annual fee of $12,000, an attendance fee of $1,000 per meeting and an annual
grant of 5,000 options to acquire Common Shares. Additionally, directors who
serve on committees of the Board are entitled to an annual fee of $2,000 ($3,000
for the chairman of the committee), an attendance fee of $750 per committee
meeting and an annual grant of 1,000 options to acquire Common Shares. Upon
joining the Board, a director is entitled to a one-time option grant of 25,000
options to acquire Common Shares.
COMPENSATION OF EXECUTIVES
Summary Compensation Table
The following table provides a summary of compensation earned during
the fiscal years ended December 31, 2004, 2003 and June 30, 2003 by the current
Chief Executive Officer, Chief Financial Officer and each of the three other
most highly compensated current senior executives of the Corporation
(collectively, the "Named Executive Officers").
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------- --------------
SECURITIES
OTHER UNDER
ANNUAL OPTIONS
SALARY BONUS COMPENSATION GRANTED ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR ($) ($) ($) (#) COMPENSATION
- --------------------------- ----------- ---------- ----------- ------------ ------------- ------------
Dr. Francesco Bellini,O.C.... 2004 --(1) --(1) --(1) 450,000(1) Nil
Chairman, President, Chief 2003* --(1) --(1) --(1) --(1) Nil
Executive Officer and 2003 --(1) --(1) --(1) 200,000 Nil
Director
Mr. Mariano Rodriguez........ 2004 Nil(2) Nil Nil Nil Nil
Vice President, Finance and
Chief Financial Officer
Dr. Andreas Orfanos.......... 2004 153,561(3) Nil 7,000 100,000 Nil
Executive Vice President,
Strategic Planning and
Scientific Affaires
Dr. Denis Garceau............ 2004 265,200 23,400 10,800 Nil Nil
Vice President, 2003* 130,000 50,000 4,800 Nil Nil
Drug Development 2003 250,000 38,500 9,600 Nil Nil
</Table>
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LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------- --------------
SECURITIES
OTHER UNDER
ANNUAL OPTIONS
SALARY BONUS COMPENSATION GRANTED ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR ($) ($) ($) (#) COMPENSATION
- --------------------------- ----------- ---------- ----------- ------------ ------------- ------------
Dr. Philippe Calais......... 2004 237,510 11,700 12,000 Nil Nil
President, Global Business 2003* 117,000 15,775 6,000 Nil Nil
2003 112,500(4) Nil 6,000 200,000 Nil
NOTES:
* For 6 months ended December 31, 2003. Effective as of December 31, 2003,
the fiscal year of the Corporation changed from June 30 to December 31.
(1) Dr. Bellini was appointed Chief Executive Officer of the Corporation on
December 11, 2002. Dr. Bellini is compensated for acting as Chief Executive
Officer of the Corporation through a management services agreement
originally dated March 1, 2003, as amended and renewed as of December 1,
2004, by and between Picchio International Inc. ("Picchio International")
and the Corporation (see "Interest of Informed Persons in Material
Transactions and Management Contracts").
(2) Mr. Rodriguez's employment with the Corporation began on December 10, 2004.
His annual salary is $170,000, but no salary was paid to him in 2004.
(3) Dr. Orfanos' employment with the Corporation began on May 31, 2004. Dr.
Orfanos annual salary is $275,000.
(4) Dr. Calais' employment with the Corporation began on January 6, 2003. On
January 20, 2005, the Corporation announced that Dr. Calais had assumed the
position of President, Global Affairs, while Dr. Bellini would henceforth
act as President of the Corporation.
The following table provides a summary of compensation earned during
the fiscal years ended December 31, 2004, 2003 and June 30, 2003 by Mr. Claude
Michaud and Dr. Francine Gervais who were officers of the Corporation during the
fiscal year ended December 31, 2004 but were no longer serving as such, in the
case of Mr. Michaud at the end of that fiscal year and, in the case of Dr.
Gervais, on January 20, 2005. Mr. Michaud and Dr. Gervais are also considered to
be, for the purposes of this management proxy circular "Named Executive
Officers".
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------- --------------
SECURITIES
OTHER UNDER
ANNUAL OPTIONS
SALARY BONUS COMPENSATION GRANTED ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR ($) ($) ($) (#) COMPENSATION
- --------------------------- ----------- ---------- ----------- ------------ ------------- ------------
Mr. Claude Michaud(1)....... 2004 229,255 14,560 5,500 Nil Nil
Former Senior Vice 2003* 104,000 25,500 Nil Nil Nil
President, Finance and 2003 150,000(2) Nil Nil 250,000 Nil
Chief Financial Officer
Dr. Francine Gervais(3)..... 2004 237,510 14,040 6,000 Nil Nil
Former Vice President, 2003* 117,000 36,900 Nil Nil Nil
Research and Development 2003 225,000 36,900 Nil Nil Nil
NOTES:
* For 6 months ended December 31, 2003. Effective as of December 31, 2003,
the fiscal year of the Corporation changed from June 30 to December 31.
(1) Mr. Michaud resigned from the Corporation effective December 10, 2004.
(2) Mr. Michaud's employment with the Corporation began on October 1, 2002.
(3) On January 20, 2005, the Corporation announced that Dr. Gervais had
resigned from the Corporation, but will remain a consultant to the
Corporation.
-8-
Option Grants during Fiscal Year ended December 31, 2004
--------------------------------------------------------
The following table provides details as to the stock options granted to
the Named Executive Officers to whom options were granted by the Corporation
during the fiscal year ended December 31, 2004.
MARKET VALUE OF
COMMON % OF TOTAL COMMON SHARES
SHARES OPTIONS UNDERLYING
UNDER GRANTED TO EXERCISE OPTIONS ON THE
OPTIONS EMPLOYEES PRICE DATE OF GRANT
GRANTED(1) IN FISCAL ($/COMMON ($/COMMON
NAME (#) YEAR SHARE) SHARE) EXPIRATION DATE
------------------------------- ----------- ------------- ---------- ------------- ----------------
Dr. Francesco Bellini, O.C..... 450,000 56.5% 26.10 26.10 March 11, 2014
Mr. Mariano Rodriguez.......... Nil Nil Nil Nil Nil
Dr. Andreas Orfanos............ 100,000 12.5% 17.81 17.81 August 12, 2014
Dr. Denis Garceau.............. Nil Nil Nil Nil Nil
Dr. Philippe Calais............ Nil Nil Nil Nil Nil
Mr. Claude Michaud............. Nil Nil Nil Nil Nil
Dr. Francine Gervais........... Nil Nil Nil Nil Nil
NOTES:
(1) Options are exercisable prior to their expiration date or the date of
earlier termination of the options, on a cumulative basis, in 60 equal
monthly installments beginning one month from the date of grant.
Aggregated Option Exercises During Most Recently Completed Fiscal Year
and Fiscal Year-End Option Values
----------------------------------------------------------------------
The following table indicates, for each of the Named Executive
Officers, the details as to the stock options exercised during the fiscal year
ended December 31, 2004, the total number of unexercised share purchase options
held at December 31, 2004 and the value of such unexercised options at that
date.
VALUE OF
OPTIONS IN-THE-MONEY
COMMON HELD AS AT OPTIONS HELD AS AT
SHARES AGGREGATE DECEMBER 31, 2004 DECEMBER 31, 2004
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
NAME (#) ($) (#) ($)(1)
- -------------------------------------- ------------ ---------- ----------------- -------------------
Dr. Francesco Bellini, O.C............ Nil Nil 144,167/505,833 1,005,867/1,618,133
Mr. Mariano Rodriguez................. Nil Nil Nil/Nil Nil/Nil
Dr. Andreas Orfanos................... Nil Nil 6,667/93,333 22,800/319,200
Dr. Denis Garceau..................... 132,500 4,393,725 121,875/22,625 2,183,625/412,455
Dr. Philippe Calais................... Nil Nil 76,667/123,333 1,005,867/1,618,133
Mr. Claude Michaud.................... 38,361 602,268 87,264/Nil 1,390,116/Nil
Dr. Francine Gervais.................. 115,000 3,824,450 131,875/22,625 2,366,025/412,455
NOTES:
(1) The value of unexercised in-the-money options at financial year-end is the
difference between the exercise price and the closing sale price of the
Common Shares on the Toronto Stock Exchange (the "TSX") on December 31,
2004. This gain has not been, and may never be, realized. The options have
not been, and may never be, exercised and actual gains, if any, on exercise
will depend on the value of the Common Shares on the date of exercise. The
closing sale price of the Common Shares on the TSX, on December 31, 2004
was $21.23.
EQUITY COMPENSATION PLAN
The Corporation currently has a Plan under which it may grant up to
4,438,767 Common Shares. As at March 1, 2005, the total number of Common Shares
issued under the Plan and
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issuable under outstanding options granted under the Plan and the percentage of
the Corporation's issued and outstanding Common Shares represented by such
shares, was as follows:
COMMON SHARES ISSUED COMMON SHARES ISSUABLE UNDER
OUTSTANDING OPTIONS
-------------------- ----------------------------
1,768,801 (5.8%) 2,497,067 (8.2%)
As at March 1, 2005, 172,899 options were available for grants under
the Plan.
Pursuant to the Plan, options may be granted to directors, officers,
key employees, consultants and members of the Scientific Advisory Board (if any)
of the Corporation or any affiliate thereof, and the number of Common Shares
subject to each option, the expiration date of each option, the extent to which
each option is exercisable from time to time during its term and other terms and
conditions relating to each such option shall be determined by the Compensation
Committee and be subject to approval by the Board, provided, however, that if no
specific determination is made by the Compensation Committee with respect to any
of the following matters, each option shall, subject to any other specific
provisions of the Plan, contain the following terms and conditions:
(a) the period during which an option shall be exercisable shall be 10
years from the date of the grant; and
(b) the optionee may take up and pay for not more than 20% of the Common
Shares covered by the option after the expiration of each one-year
period in arrears from the date of the grant; provided, however, that
if the number of Common Shares taken up under the option after the
expiration of each one-year period is less than 20% of the Common
Shares covered by the option, the optionee shall have the right, on a
cumulative basis, at any time or from time to time during the remainder
of the term of the option, to purchase such number of Common Shares
subject to the option that were purchasable, but not purchased by such
optionnee, after the expiration of each such one-year period.
Currently, the exercise price of any option granted under the Plan must
be the reported closing sale price for the Common Shares on the TSX on the last
trading day before the day on which the option is granted. Options are not
transferable and may be exercised by an optionee while such optionee remains a
director, full-time employee, consultant or member of the Scientific Advisory
Board of the Corporation and its affiliates.
The Plan provides for the following limitations on the number of Common
Shares issuable thereunder:
(a) the aggregate number of Common Shares reserved for issuance at any time
to any one optionee shall not exceed 5% of the number of Common Shares
of the Corporation outstanding on a non-diluted basis at such time,
less the total of all shares reserved for issuance to such optionee
pursuant to any other share compensation arrangement of the Corporation
and its affiliates;
-10-
(b) the aggregate number of Common Shares issuable (or, reserved for
issuance) to insiders of the Corporation and its affiliates under the
Plan or any other share compensation arrangement of the Corporation and
its affiliates, cannot at any time exceed 10% of the issued and
outstanding Common Shares; and
(c) the aggregate number of Common Shares issued to insiders under the Plan
or any other share compensation arrangement of the Corporation and its
affiliates, within a one-year period, cannot exceed 10% of the issued
and outstanding Common Shares.
Subject to any express resolution passed by the Board or the
Compensation Committee with respect to an option, an option, and all rights to
purchase Common Shares pursuant thereto, shall expire and terminate immediately
upon an optionee ceasing to be a director, full-time employee, consultant or
member of the scientific advisory board of the Corporation and its affiliates.
For greater certainty, the optionee shall not lose any rights to any options
granted pursuant to the Plan if he changes positions within the Corporation and
its affiliates so long as he remains eligible. If before the expiry of an
option, in accordance with the terms thereof, the employment of the optionee by
the Corporation and its affiliates terminates for any reason whatsoever other
than termination by the Corporation and its affiliates for cause, but including
termination by reason of the death of the optionee, such option may, subject to
the terms thereof and any other terms of the Plan, be exercised, if the optionee
is deceased, by the legal personal representative(s) of the estate of the
optionee during the first three months following the death of the optionee, or
if he is alive, by the optionee, at any time within three months of the date of
termination of the employment of the optionee (but in either case prior to the
expiry of the option in accordance with the terms thereof), but only to the
extent that the optionee was entitled to exercise such option at the date of the
termination of his employment.
The Board may, subject to regulatory approval, amend or discontinue the
Plan at any time; provided, however, that no such amendment may increase the
maximum number of Common Shares that may be optioned under the Plan, change the
manner of determining the minimum option price or, without the consent of the
optionee, alter or impair any option previously granted to an optionee under the
Plan.
On March 14, 2005, the Board adopted a resolution in order to update
and restate the Plan in light of recent amendments that were made to the rules
and policies of the TSX governing security based compensation arrangements, by
changing the maximum number of Common Shares issuable from time to time under
the Plan from a fixed maximum number to a fixed maximum percentage, the whole as
more fully described in this proxy circular under "Proposed Amendment to the
Amended and Restated Stock Option Plan". The ratification and confirmation of
this amendment by the shareholders of the Corporation is solicited by this proxy
circular.
On March 14, 2005, the Board also adopted a resolution determining that
the purchase price for Common Shares granted under options should be the
weighted average trading price for such Common Shares for the five days
preceding the date of grant during which the Common Shares were traded on the
TSX and bringing certain other provisions of the Plan in line with the TSX
Amendments (as defined below). These amendments are not subject to shareholder
approval.
-11-
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table indicates the number of Common Shares to be issued
upon the exercise of outstanding options, warrants and rights, the weighted
average exercise price of such outstanding options, warrants and rights and the
number of Common Shares remaining for future issuance under the Plan. The
information presented in this table does not include up to 220,000 Common Shares
issuable to Dr. Francesco Bellini, of which 160,000 are subject to the
achievement of certain performance targets, pursuant to an agreement dated
December 1, 2004. See "Ratification and Confirmation of the Agreement to Issue
Common Shares to Dr. Francesco Bellini".
NUMBER OF COMMON SHARES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF COMMON SHARES TO EQUITY COMPENSATION PLANS
BE ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE (EXCLUDING SECURITIES
OUTSTANDING OPTIONS, PRICE OF OUTSTANDING REFLECTED IN THE
PLAN CATEGORY WARRANTS AND RIGHTS OPTIONS, WARRANTS AND RIGHTS FIRST COLUMN)
- ------------- --------------------------- ---------------------------- -------------------------
Equity compensation plans
approved by securityholders 2,497,067 15.82 172,899
Equity compensation plans not
approved by securityholders 0 N/A 0
--------- ----- -------
Total 2,497,067 15.82 172,899
========= ===== =======
INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS
No officers, directors, employees or former officers, directors and
employees of the Corporation were indebted to the Corporation as at March 1,
2005.
DIRECTORS' AND OFFICERS' INSURANCE
The Corporation provides insurance for the benefit of its directors and
officers against liability incurred by them in these capacities. The current
aggregate policy limit is US$15,000,000, the first US$500,000 of certain claims
being deductible and payable by the Corporation. The annual premium is
US$536,000 for a one year term ending September 16, 2005. This annual premium,
which has not been specifically allocated between directors as a group and
officers as a group, was paid entirely by the Corporation.
TERMINATION OF EMPLOYMENT, CHANGE IN CONTROL AND EMPLOYMENT AGREEMENTS
In case of termination of the employment of each of the Named Executive
Officers for reason other than for just cause or for good reason, and other than
termination following a change of control of the Corporation, Drs. Andreas
Orfanos, Philippe Calais and Denis Garceau and Mr. Mariano Rodriguez are
entitled, under their employment agreements, to lump sum payments of $275,000,
$234,000, $260,000 and $170,000, respectively.
In case of termination of the employment of each of the Named Executive
Officers following a change of control of the Corporation, Drs. Andreas Orfanos,
Philippe Calais, Denis Garceau and Mr.
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Mariano Rodriguez are entitled, under their employment agreements, to lump sum
payments of $550,000, $468,000, $520,000 and $340,000, respectively. Following a
change of control of the Corporation, if Drs. Andreas Orfanos, Philippe Calais,
Denis Garceau and Mr. Mariano Rodriguez elect to remain in their function for at
least six months following such change of control and, prior to the expiry of
two years following such change of control, decide to leave the employment of
the Corporation for any reason whatsoever, they are entitled, under their
employment agreements, to lump sum payments of $275,000, $234,000, $260,000 and
$170,000, respectively.
COMPOSITION OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board currently consists of Dr. Colin
Bier (Chair), Mr. Jean-Guy Desjardins, Dr. Frederick H. Lowy and Mr. Ronald
M. Nordmann.
REPORT ON EXECUTIVE COMPENSATION
The Corporation's current compensation policy for its executive
officers, including the Named Executive Officers, emphasizes incentive-based
compensation over base salary. Through the granting of options to purchase
Common Shares, the executive officers of the Corporation, including the Named
Executive Officers, are provided with incentive to (a) advance the drug
development programs of the Corporation towards commercialization and
(b) enhance the market value of the Corporation's Common Shares. In order to
establish base salary and bonus compensation levels, the Corporation studies,
among other things, the competitive market environment.
The members of the Compensation Committee, whose names are set out
above, have approved the issue of the foregoing report and its inclusion in this
proxy circular.
PERFORMANCE GRAPH
The outstanding Common Shares began trading at the opening of business
on June 22, 2000, on the TSX (NRM).
The following graph compares, as at the end of each quarter up to
December 31, 2004, the cumulative total shareholder return on $100 invested in
Common Shares on June 30, 2000, with the cumulative total shareholder return on
the S&P/TSX Composite Index, assuming reinvestment of all dividends.
-13-
[PERFORMANCE GRAPH]
REPORT ON CORPORATE GOVERNANCE
In 1995, the Toronto Stock Exchange Committee on Corporate Governance
in Canada issued its final report, establishing guidelines for corporate
governance for Canadian corporations (the "Guidelines"). The Guidelines relate
to a number of significant governance issues, including the proper role of the
board of directors, its structure and composition and its relationship with
shareholders and management. The TSX has adopted as a listing requirement that
disclosure be made by a listed corporation of its corporate governance practices
with reference to the Guidelines. A complete description of the Corporation's
corporate governance practices, with specific references to each of the
Guidelines is attached hereto as Schedule A. The Nominating and Corporate
Governance Committee, currently composed of Mr. Ronald M. Nordmann (chair), Mr.
Peter Kruyt, Mr. Francois Legault and Dr. Emil Skamene, has reviewed the
disclosure set out in Schedule A.
The Board continues to periodically review corporate governance
proposals made by the Canadian securities administrators and NASDAQ. As new
standards become effective, the Board will review and amend, where necessary and
appropriate, its corporate governance practices and the eligibility of the
members of the Board on each committee and shall, if necessary, make appropriate
changes.
The following is a description of the current committees of the Board:
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
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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.
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 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.
Additional information regarding the Audit Committee can be found under
the heading "Audit Committee" in the Corporation's Annual Information Form for
the year ended December 31, 2004.
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.
-15-
COMMUNICATIONS, INSIDER TRADING, CONFIDENTIAL INFORMATION AND
DISCLOSURE POLICIES
The Board is committed to an effective communications policy with all
stakeholders including shareholders, suppliers, advertisers, employees, agents
and members of the investment community. The Corporation is committed to
complying with all laws, regulations and policies which are applicable to it as
well as to best practices in the field. This commitment is evidenced, notably,
by the adoption by the Corporation of a Disclosure and Trading Policy.
The Board or the Audit Committee reviews in advance all press releases
which disclose financial results. Other statutory documents or documents
required to be prepared, filed and delivered including, without limitation, the
annual report, proxy materials and annual information form are reviewed by
members of the Board and, where required, these documents are approved by the
Board.
INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS AND MANAGEMENT CONTRACTS
On March 1, 2003, the Corporation entered into a management services
agreement (the "MANAGEMENT SERVICES AGREEMENT") with Picchio International Inc.
("PICCHIO INTERNATIONAL") into which Picchio Pharma intervened (Picchio Pharma
and Picchio International are sometimes referred to collectively in this
management proxy circular 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 the 30th day of October, 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.
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 Management Services
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 Management
Services 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
Management Services Agreement at any time upon sending a written prior notice of
180 days. The Management Services 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 Management Services Agreement may not be
terminated by Picchio International prior to May 31, 2006.
-16-
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 Management
Services 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
such 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 Management
Services Agreement and for the twelve months following its expiration.
RATIFICATION AND CONFIRMATION OF THE AGREEMENT TO ISSUE COMMON SHARES TO
DR. FRANCESCO BELLINI
Pursuant to an agreement (the "Agreement") made as of December 1, 2004,
between the Corporation and Dr. Francesco Bellini, its Chairman, President and
Chief Executive Officer, the Corporation agreed to issue up to 220,000 Common
Shares (the "Subject Shares") to Dr. Bellini in consideration of his services
and subject to the accomplishment of certain performance targets. As at March 9,
2005, the Subject Shares represented approximately 0.6% of the issued and
outstanding Common Shares.
In particular, the Corporation 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 the
Corporation's management structure, including formalizing a succession plan. The
issuance of the shares pursuant to the Agreement is subject to regulatory and
shareholder approval and the Corporation may, at its option, purchase Common
Shares in the open market to satisfy its obligations under the Agreement.
Dr. Bellini has met the performance target in respect of the Fibrillex(TM)
and in respect of the financing.
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 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 Subject 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 Subject 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.
-17-
Shareholders are asked to consider and, if deemed advisable, to ratify
and confirm the approval and entering into of the Agreement. Such ratification
and confirmation requires approval by resolution passed by a majority of the
votes cast by the holders of Common Shares, present or represented by proxy, and
entitled to vote at the Meeting. The Board recommends that shareholders vote for
the ratification and confirmation of the approval and entering into of the
Agreement. THE PERSONS NAMED IN THE ENCLOSED FORM OF PROXY INTEND TO CAST THE
VOTES TO WHICH THE SHARES REPRESENTED BY SUCH PROXY ARE ENTITLED FOR THE
RATIFICATION AND CONFIRMATION OF THE APPROVAL AND ENTERING INTO OF THE AGREEMENT
UNLESS OTHERWISE DIRECTED BY THE SHAREHOLDERS APPOINTING THEM. If the approval
and entering into of the Agreement are not ratified and confirmed by ordinary
resolution of the shareholders or if the approval and entering into of the
Agreement do not receive regulatory approval, the Agreement will not become
effective and none of the Subject Shares will be issued (and/or delivered, as
the case may be).
PROPOSED AMENDMENT TO THE AMENDED AND RESTATED STOCK OPTION PLAN
The TSX recently adopted a number of amendments to the TSX Company
Manual (the "TSX Amendments"), including with respect to the TSX's policies and
requirements regarding security-based compensation arrangements. The TSX
Amendments became effective on January 1, 2005. Among other things, the TSX
Amendments permit "rolling maximum" or "evergreen" plans which fix a maximum
number of shares issuable under an arrangement as a percentage of the issued and
outstanding securities of an issuer.
In order to update and restate the Plan in light of the TSX Amendments,
on March 14, 2005, the Board approved an amendment (the "Amendment") to the
Plan, subject to shareholder and regulatory approval.
The proposed Amendment changes the maximum number of Common Shares
issuable from time to time under the Plan from the current fixed maximum number
of 4,438,767 Common Shares to a fixed maximum percentage of 12.5% of the Common
Shares issued and outstanding from time to time. The strategic use of incentive
stock options is a cornerstone of the Corporation's compensation plan. It
applies to employees at all levels and continues to be one of the Corporation's
primary tools for attracting, motivating and retaining qualified employees,
which is critical to the Corporation's success. In making the decision to
recommend the Amendment, the Board considered a number of factors, including the
number of options currently outstanding under the Plan, the Corporation's
existing and future human resource requirements and competitive benchmarks. In
the past, the Corporation's practice has been to have a fixed maximum number of
Common Shares available for the grant of options, which was fixed at 4,438,767
by the Board and ratified and confirmed by the shareholders of the Corporation
at the annual and special meeting of the Corporation held on December 9, 2003.
Based on a review of these factors, the Board has determined that the proposed
Amendment is both reasonable and in the best interests of the Corporation.
This proposed maximum percentage represents a reduction in the
percentage of Common Shares that has been generally reserved for issuance under
the Plan according to the Corporation's past practice of reserving a fixed
maximum number of Common Shares equivalent to 15% of the then issued and
outstanding Common Shares. Furthermore, the use of a maximum percentage of the
issued and outstanding Common Shares (rather than a fixed maximum number) will
ensure that a
-18-
reasonable percentage of Common Shares remains available for the grant of
options in the future, while taking account of future issuances of Common
Shares. While shareholder approval will no longer be required in order to
maintain the 12.5% maximum percentage, the TSX Amendments will require that all
unallocated options under the Plan be approved by the shareholders of the
Corporation every three years after the institution of the Amendment. The
Corporation will request the conditional listing of additional Common Shares on
the TSX to be listed as reserved for issuance under the Plan.
The Amendment is subject to the prior approval of the TSX. The TSX has
been asked to conditionally approve the Amendment, subject to ratification by
the shareholders at the Meeting as herein set forth. Accordingly, shareholders
will be asked to consider and, if deemed advisable, to ratify and confirm the
resolution set out in Schedule B hereto along with the revised text of the Plan.
Such ratification and confirmation requires approval by resolution
passed by a majority of the votes cast by the holders of Common Shares, present
or represented by proxy, and entitled to vote at the Meeting. The Board
recommends that shareholders vote for the ratification and confirmation of the
resolutions adopting the Amendment. THE PERSONS NAMED IN THE ENCLOSED FORM OF
PROXY INTEND TO CAST THE VOTES TO WHICH THE SHARES REPRESENTED BY SUCH PROXY ARE
ENTITLED FOR THE RATIFICATION AND CONFIRMATION OF THESE RESOLUTIONS UNLESS
OTHERWISE DIRECTED BY THE SHAREHOLDERS APPOINTING THEM. If the Amendment is not
ratified and confirmed by ordinary resolution of the shareholders, or if such
Amendment does not receive regulatory approval, such Amendment will not become
effective.
The Plan is more fully described in this proxy circular under "Equity
Compensation Plan".
AUDITORS OF THE CORPORATION
KPMG LLP, Chartered Accountants, have been the auditors of the
Corporation since September 1995. The Board recommends that shareholders vote
for the appointment of KPMG LLP, Chartered Accountants, as auditors of the
Corporation and the authorization of the Audit Committee to fix the auditors'
remuneration. THE PERSONS NAMED IN THE ENCLOSED FORM OF PROXY INTEND TO CAST THE
VOTES TO WHICH THE SHARES REPRESENTED BY SUCH PROXY ARE ENTITLED FOR THE
REAPPOINTMENT OF KPMG LLP, CHARTERED ACCOUNTANTS, AS AUDITORS OF THE CORPORATION
FOR THE TERM EXPIRING WITH THE NEXT ANNUAL MEETING OF SHAREHOLDERS, AND TO
AUTHORIZE THE AUDIT COMMITTEE TO FIX THEIR REMUNERATION, UNLESS OTHERWISE
DIRECTED BY THE SHAREHOLDERS APPOINTING THEM.
2005 SHAREHOLDER PROPOSALS
Shareholder proposals must be submitted no later than December 15, 2005
to be considered for inclusion in the Management Proxy Circular for the purposes
of the Corporation's 2006 annual meeting of shareholders.
ADDITIONAL INFORMATION
Financial information is provided in the Corporation audited financial
statements and MD&A for its most recently completed financial year. Copies of
these documents and additional information relating to the Corporation are
available on SEDAR at www.sedar.com.
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APPROVAL BY DIRECTORS
The contents of this proxy circular and the sending thereof have been
approved by resolution of the Board.
DATED at Laval, Quebec, March 14, 2005.
/s/ David Skinner
-------------------------------
David Skinner
Corporate Secretary
SCHEDULE A
CORPORATE GOVERNANCE PRACTICES
TSX GUIDELINE CORPORATION'S PRACTICE
------------- ----------------------
1. The Board should explicitly assume The Board has explicitly assumed responsibility for the stewardship of
responsibility for stewardship of the the Corporation in a formal Mandate of the Board of Directors, which
corporation, and specifically: was adopted on August 18, 2003. Specifically, the Board has assumed
responsibility for (i) the adoption of a strategic planning process, (ii) the
(i) adopt a strategic planning process, identification of the principal risks for the Corporation and the implementation of
appropriate risk management systems, (iii) succession planning, including
(ii) identify principal risks of the appointing, training and monitoring senior management; (iv) ensuring that the
business and implement systems of Corporation has in place a communications policy to enable the Corporation to
risk management, communicate effectively with shareholders, other stakeholders and the public
generally by, notably, enacting a Disclosure and Trading Policy and (v) the
(iii) provide for succession planning, integrity of internal controls and management information systems.
including appointing, training and
monitoring senior management,
(iv) a communications policy,
(v) assume responsibility for the
integrity of the Company's internal
control and management information
systems.
2. The Board should be constituted with The Board currently consists of a majority of unrelated directors as,
a majority of individuals who qualify as of the ten directors currently serving on the Board, seven are
unrelated directors. considered unrelated, namely Dr. Colin Bier, Mr. Jean-Guy Desjardins,
Mr. Peter Kruyt, Dr. Frederick H. Lowy, Mr. Ronald M. Nordmann, Mr.
Graeme K. Rutledge and Dr. Emil Skamene. Dr. Francesco Bellini, O.C.,
Mr. Francois Legault and Mr. John Molloy are related directors.
The Corporation does not have a majority shareholder and therefore no shareholder
can exercise a majority of voting rights for the election of directors, but
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
meeting of shareholders 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-
TSX GUIDELINE CORPORATION'S PRACTICE
------------- ----------------------
3. The Board should disclose, for each Dr. Francesco Bellini, O.C., Chairman, President and Chief Executive
director, whether he or she is related and how Officer ("CEO") of the Corporation, is a related director as he is a
that conclusion was reached. member of the management of the Corporation. Mr. Francois Legault is
related, as he is the Chief Operating Officer of ViroChem Pharma Inc., a
corporation which received, for the year ended December 31, 2004, approximately
$500,000 from the Corporation as consideration for the sale of laboraroty equipment
and of which Dr. Bellini is Chairman of the Board of Directors. Mr. John Molloy is
also a related director, as he is President and Chief Executive Officer of Parteq,
an organization with whom the Corporation has entered into research alliances,
licensing agreements and service agreements.
Dr. Colin Bier, Mr. Jean-Guy Desjardins, Mr. Peter Kruyt, Dr. Frederick
H. Lowy, Mr. Ronald M. Nordmann, Mr. Graeme K. Rutledge and Dr. Emil
Skamene are unrelated in that they are (i) independent of management;
and (ii) free from any interest and any business or other relationship
which could, or could reasonably be perceived to, materially interfere
with the director's ability to act with a view to the best interests of
the Corporation, other than interests and relationships arising from
shareholding.
4. Appoint a committee of directors The Corporation has created a Nominating and Corporate Governance
composed exclusively of outside, i.e. Committee, responsible for the appointment and assessment of directors.
non-management directors, a majority of whom All the members of this committee are unrelated and outside directors.
are unrelated directors, responsible for the
appointment and assessment of directors.
5. Implement a process for assessing the The Nominating and Corporate Governance Committee has the mandate,
effectiveness of the Board, its committees and explicitly documented in its Charter, to implement a process for
individual directors. assessing the effectiveness of the Board, its committees and individual
directors.
6. Provide an orientation and education The Nominating and Corporate Governance Committee has the mandate,
program for new directors. explicitly documented in its Charter, to consider the appropriateness
of implementing formal programs for the orientation and education of
new directors.
7. Examine the size of the Board, with The Board presently consists of ten directors with a variety of
specific reference to its effectiveness. backgrounds. Its size and composition are subject to periodic review of
the Nominating and Corporate Governance Committee, and the Board is of the opinion
that it will be most effective as currently composed.
8. Review compensation of directors in light The Compensation Committee has the mandate, explicitly documented in
of risks and responsibilities. its Charter, to review compensation of directors in light of risks and
responsibilities.
9. Committees should generally be composed The Board has three committees: the Audit Committee, the Compensation
of only outside directors, a majority of whom Committee, and the Nominating and Corporate Governance Committee. All
are unrelated directors. members of the Audit Committee, the Compensation Committee and the
Nominating and Corporate Governance Committee are outside directors. All committees
are composed of a majority of unrelated directors.
The current Composition of each of the committees is set out below.
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TSX GUIDELINE CORPORATION'S PRACTICE
------------- ----------------------
AUDIT COMMITTEE
Graeme K. Rutledge Unrelated Outside
Dr. Colin Bier Unrelated Outside
John Molloy Related Outside
COMPENSATION COMMITTEE
Dr. Colin Bier Unrelated Outside
Jean-Guy Desjardins Unrelated Outside
Dr. Frederick H. Lowy Unrelated Outside
Ronald M. Nordmann Unrelated Outside
NOMINATING AND CORPORATE GOVERNANCE
COMMITTEE
Ronald M. Nordmann Unrelated Outside
Dr. Frederick H. Lowy Unrelated Outside
Peter Kruyt Unrelated Outside
Francois Legault Related Outside
Dr. Emil Skamene Unrelated Outside
10. Assume or assign responsibility for The Nominating and Corporate Governance Committee has the mandate,
corporate governance issues. explicitly documented in its Charter, to assume responsibility for
corporate governance issues.
11. Define management's responsibilities and The Board has the responsibility, explicitly documented in the Mandate
approve corporate objectives to be met by of the Board of Directors, to approve a formal position description for
the CEO. the CEO. Moreover, the Nominating and Corporate Governance Committee of
the Board has the mandate, explicitly documented in its Charter, to submit to the
Board an assessment of the CEO against the corporate objectives, which are approved
by the Board and which the CEO is responsible for meeting.
On March 1, 2003, the Corporation entered into a management services agreement with
Picchio International into which Picchio Pharma intervened, which agreement was
amended as of the 30th day of October, 2003 and renewed as of the 1st day of
December, 2004, until November 30, 2007 (Picchio Pharma and Picchio International
are sometimes referred to collectively in this management proxy circular as the
"Picchio Group"). All of the shares of Picchio International are owned by Dr.
Bellini and his spouse. The management services agreement provides that Picchio
International shall provide the services of Dr. Francesco Bellini, O.C., as CEO 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.
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TSX GUIDELINE CORPORATION'S PRACTICE
------------- ----------------------
12. Establish structures and procedures The Board endeavors to ensure that it can function independently of
to enable the Board to function independently management. One measure taken to this end is the appointment of Mr.
of management. An appropriate structure would Ronald M. Nordmann as Lead Director of the Corporation by the outside
be to appoint a chairman who is not a member directors of the Corporation on December 9, 2003. However, given its
of management. current state of development and the controls in place, the Board is of
the opinion that it is in the best interests of the Corporation and its
shareholders to have Dr. Francesco Bellini, O.C., act as Chairman,
President and CEO of the Corporation.
13. The audit committee should be composed of The Audit Committee is exclusively composed of outside directors. Its
outside directors and its role specifically role is specifically defined in its Charter.
defined.
14. Implement a system to enable individual Individual directors are able to engage outside advisers at the expense
directors to engage outside advisors, at the of the Corporation, with the engagement of the adviser being subject to
Company's expense. the approval of the Nominating and Corporate Governance Committee, as
specifically documented in the mandate of the Board.
SCHEDULE B
RESOLUTION
RESOLVED:
1. THAT the Corporation amend its Amended and Restated Stock Option Plan
(the "Plan") as set forth in the draft of the Plan, attached hereto as
Schedule 1, which draft is hereby approved, in order to change the
maximum number of common shares of the Corporation issuable from time
to time under the Plan from the current fixed maximum number of
4,438,767 Common Shares to a fixed maximum percentage of 12.5% of the
Common Shares issued and outstanding from time to time, pursuant to
recent amendments to The Toronto Stock Exchange (the "TSX") Company
Manual which became effective as of January 1, 2005, with such
amendments, deletions and additions as any officer or director may deem
expedient to approve, such approval to be conclusively evidenced by the
filing of the final version of the Plan with the Agence nationale
d'encadrement du secteur financier and the TSX;
2. THAT any director or officer of the Corporation be and is hereby
authorized to do all other acts and things and to execute and deliver
all such other documents, instruments and writings as in his sole
discretion are necessary or desirable to give effect to the foregoing;
and
3. THAT notwithstanding that this resolution may be passed by the
shareholders of the Corporation, the directors of the Corporation are
hereby authorized and empowered without further notice to or approval
of the shareholders of the Corporation not to proceed with the
amendments to the Plan as contemplated above.
SCHEDULE 1 TO SCHEDULE B
NEUROCHEM INC.
AMENDED AND RESTATED STOCK OPTION PLAN
(approved by the Board of Directors on March 14, 2005)
1 PURPOSE OF PLAN
1.1 The purpose of the Plan is to assist directors, officers, key
employees, consultants and members of the Scientific Advisory Board (if
any) of the Corporate Group to participate in the growth and
development of the Corporate Group by providing such persons with the
opportunity, through share options, to acquire an increased proprietary
interest in the Corporation.
2 DEFINED TERMS
Where used herein, the following terms shall have the following
meanings, respectively:
2.1 "Affiliate" shall mean any Entity in an unbroken chain of Entities
beginning with the Corporation if, at the time of granting of the
option, each of the Entities other than the last Entity in the unbroken
chain own stock or other comparable equity interest to which are
attached more than 50% of the aggregate number of votes attached to the
outstanding shares of all classes of stock or other comparable equity
interest in the Entity directly below that Entity in such chain;
2.2 "Board" means the board of directors of the Corporation or, if
established and duly authorized to act, the Executive Committee of the
board of directors of the Corporation;
2.3 "Business Day" means any day, other than a Saturday or a Sunday;
2.4 "Committee" shall have the meaning attributed thereto in Section 3;
2.5 "Corporate Group" means the Corporation and its Affiliates, present and
future, so long as such Entity remains an Affiliate;
2.6 "Corporation" means Neurochem Inc. and includes any successor
corporation thereto;
2.7 "Designated Exchange" shall mean The Toronto Stock Exchange or such
other stock exchange as may be designated from time to time by the
Board;
2.8 "Eligible Person" means any director, officer, full-time employee,
consultant or member of the Scientific Advisory Board of the Corporate
Group;
2.9 "Entity" means any corporation, company, partnership, trust, limited
liability company, foundation, and/or firm;
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2.10 "Grant Date" means the date at which an Option is granted to an
Optionee;
2.11 "Market Price" means the weighted average trading price for the Shares
for the five days preceding the date of grant during which the Shares
were traded on the Designated Exchange;
2.12 "Option" means an option to purchase Shares granted under the Plan;
2.13 "Option Price" means the price per share at which Shares may be
purchased under the Option, as the same may be adjusted from time to
time in accordance with Section 8;
2.14 "Optionee" means a person to whom an Option has been granted;
2.15 "Plan" means the Amended and Restated Neurochem Stock Option Plan, as
amended herein, as the same may be amended or varied from time to time;
and
2.16 "Shares" means the Common Shares of the Corporation, or, in the event
of an adjustment contemplated by Section 8, such other shares or
securities to which an Optionee may be entitled upon the exercise of an
Option as a result of such adjustment.
3 ADMINISTRATION OF THE PLAN
3.1 The Plan shall be administered by a committee (the "Committee")
appointed by the Board and consisting of not less than three members of
the Board. The members of the Committee shall serve at the pleasure of
the Board and vacancies occurring in the Committee shall be filled by
the Board.
3.2 The Committee shall elect one of its members as its Chairman and shall
hold its meetings at such time and place, as it shall deem advisable. A
majority of the members of the Committee shall constitute a quorum and
all actions of the Committee shall be taken by a majority of the
members present at any meeting. Any action of the Committee may be
taken by an instrument or instruments in writing signed by all the
members of the Committee, and any action shall be as effective as if it
had been passed by a majority of the votes cast by the members of the
Committee present at a meeting of such members duly called and held.
3.3 The Committee shall have, where consistent with the general purpose and
intent of the Plan and subject to the specific provisions of the Plan
(including approval of the Board pursuant to Section 5 hereof), the
power to:
(a) establish policies and to adopt rules and regulations for
carrying out the purposes, provisions and administration of
the Plan;
(b) interpret and construe the Plan and to determine all questions
arising out of the Plan and any Option granted pursuant to the
Plan, and any such interpretation, construction or termination
made by the Committee shall be final, binding and conclusive
for all purposes;
(c) determine to which Eligible Persons Options are granted and to
grant Options;
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(d) determine the number of Shares covered by each Option;
(e) determine the time or times when Options will be granted and
exercisable;
(f) determine if the Shares that are subject to an Option will be
subject to any restrictions upon the exercise of such Option;
and
(g) prescribe the form of the instruments relating to the grant,
exercise and other terms of Options.
4 SHARES SUBJECT TO PLAN
4.1 Options may be granted in respect of authorized and unissued Shares,
provided that the aggregate number of Shares of all classes reserved
for issuance under this Plan, subject to adjustment or increase of such
number pursuant to the provisions of Section 8, together with any
Shares reserved for issuance under any options for services or employee
stock purchase or stock option plans or any other plans, shall not
exceed 12.5% of the total number of Shares issued and outstanding from
time to time and also provided that:
(a) the aggregate number of Shares reserved for issuance at any
time to any one optionee shall not exceed 5% of the number of
Shares of the Corporation outstanding on a non-diluted basis
at such time, less the total of all shares reserved for
issuance to such optionee pursuant to any other share
compensation arrangement of the Corporate Group;
(b) the aggregate number of Shares issuable (or, reserved for
issuance) to insiders of the Corporate Group under the Plan or
any other share compensation arrangement of the Corporate
Group, cannot at any time exceed 10% of the issued and
outstanding Shares of the Corporation; and
(c) the aggregate number of Shares issued to insiders under the
Plan or any other share compensation arrangement of the
Corporate Group, within a one-year period, cannot exceed 10%
of the issued and outstanding Shares of the Corporation.
No fractional shares may be purchased or issued under the Plan.
For the purposes of this paragraph 4.1: (i) the terms "insider" and
"associate" shall have the respective meanings ascribed thereto in
Sections 613 and following of the Toronto Stock Exchange Company
Manual; (ii) the "outstanding issue" means the aggregate number of
Shares outstanding on a non-diluted basis immediately prior to the
share issuance in question, excluding any Shares issued pursuant to the
Plan and any Shares issuable pursuant to any other share compensation
arrangements of the Corporate Group over the preceding one-year period;
and (iii) a "share compensation arrangement" means a stock option,
stock option plan, stock purchase plan or any other compensation or
incentive mechanism involving the issuance or potential issuance of
shares to one or more employees or directors, including a share
purchase from treasury which is financially assisted by the Corporate
Group by way of a loan, guarantee or otherwise.
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5 ELIGIBILITY, GRANT AND TERMS OF OPTIONS
5.1 Options may be granted by the Corporation to Eligible Persons pursuant
to recommendations of the Committee provided and to the extent that
such recommendations are approved by the Board.
5.2 Subject as herein and as otherwise specifically provided for in this
Section 5, the number of Shares subject to each Option, the expiration
date of each Option, the extent to which each Option is exercisable
from time to time during the term of the Option and other terms and
conditions relating to each such Option shall be determined by the
Committee and be subject to approval by the Board, provided, however,
that if no specific determination is made by the Committee with respect
to any of the following matters, each Option shall, subject to any
other specific provisions of the Plan, contain the following terms and
conditions:
(a) the period during which an Option shall be exercisable shall
be 10 years from the Grant Date; and
(b) the Optionee may take up and pay for not more than 20% of the
Shares covered by the Option after the expiration of each
one-year period in arrears from the Grant Date; provided,
however, that if the number of Shares taken up under the
Option after the expiration of each one-year period is less
than 20% of the Shares covered by the Option, the Optionee
shall have the right, on a cumulative basis, at any time or
from time to time during the remainder of the term of the
Option, to purchase such number of Shares subject to the
Option that were purchasable, but not purchased by him, after
the expiration of each such one-year period.
5.3 The Option Price on Shares that are the subject of any Option shall in
no circumstances be lower than the Market Price at the date of the
grant of the Option, less any discount permitted by any relevant
regulatory authority.
5.4 In no event may the term of any Option exceed 10 years from the date of
the grant of the Option.
5.5 An Option is personal to the Optionee and is non-assignable.
6 TERMINATION OF EMPLOYMENT; DEATH
6.1 Subject to Section 6.2 and to any express resolution passed by the
Committee with respect to an Option, an Option, and all rights to
purchase Shares pursuant thereto, shall expire and terminate
immediately upon the Optionee ceasing to be a director, full-time
employee, consultant or member of the Scientific Advisory Board of the
Corporate Group. For greater certainty, the Optionee shall not lose any
rights to any Options granted pursuant to the Plan if he changes
positions within the Corporate Group so long as he remains an Eligible
Person.
6.2 If, before the expiry of an Option in accordance with the terms
thereof, the employment of the Optionee by the Corporate Group shall
terminate for any reason whatsoever other than termination by the
Corporate Group for cause, but including termination by reason of the
death of the Optionee, such Option may, subject to the terms thereof
and any other terms of
-5-
the Plan, be exercised, if the Optionee is deceased, by the legal
personal representative(s) of the estate of the Optionee during the
first three months following the death of the Optionee, or if he is
alive, by the Optionee, at any time within three months of the date of
termination of the employment of the Optionee (but in either case prior
to the expiry of the Option in accordance with the terms thereof), but
only to the extent that the Optionee was entitled to exercise such
Option at the date of the termination of his employment.
6.3 Options shall not be affected by any change of employment of the
Optionee or by the Optionee ceasing to be a director where the Optionee
continues to be employed on a full-time basis by, or continues to be a
director of any Entity of the Corporate Group.
7 EXERCISE OF OPTIONS
7.1 Subject to the provisions of the Plan, an Option may be exercised from
time to time by delivery to the Corporation at its registered office of
a written notice of exercise addressed to the Secretary of the
Corporation specifying the number of Shares with respect to which the
option is being exercised and accompanied by payment in full of the
Option Price of the Shares to be purchased. Certificates for such
Shares shall be issued and delivered to the Optionee within a
reasonable time following the receipt of such notice and payment.
7.2 Notwithstanding any of the provisions contained in the Plan or in any
Option, the Corporation's obligations to issue Shares to an Optionee
pursuant to the exercise of an Option shall be subject to the receipt
from the Optionee of such representations, agreements and undertakings,
including (a) as to future dealings in such Shares, as the Corporation
or its counsel determines to be necessary or advisable in order to
safeguard against the violation of the securities laws of any
jurisdiction; and (b) completion of such registration or other
qualification of such Shares or obtaining approval of such government
authority as the Corporation shall determine to be necessary or
advisable in connection with the authorization, issuance or sale
thereof.
In this connection the Corporation shall, to the extent necessary, take
all reasonable steps to obtain such approvals, registrations and
qualifications as may be necessary for the issuance of such Shares in
compliance with applicable securities laws and for the listing of such
Shares on any stock exchange on which the Shares are then listed.
8 ACCELERATED VESTING UPON ACQUISITION EVENT
8.1 Notwithstanding any vesting period determined by the Board in respect
of any Option granted to an Optionee at any time, the Board may, upon
written notice to all the Optionees, provide that all or a portion of
the then vested or unvested Options held by such Optionees will become
exercisable in full as of a specified time prior to the consummation of
the Acquisition Event and that all or a portion of the Options (whether
or not vested) will terminate immediately prior to the consummation of
such Acquisition Event, except to the extent exercised by the Optionees
before the consummation of such Acquisition Event; provided, however,
that in the event of an Acquisition Event under the terms of which
holders of Shares will receive upon consummation thereof a cash payment
for each Share surrendered pursuant to such Acquisition Event (the
"Acquisition Price"), then the Board may instead provide in such notice
that all or a portion of the outstanding vested or unvested
-6-
(or both) Options shall terminate upon consummation of such Acquisition
Event and that each Optionee shall receive, in exchange therefore, a
cash payment equal to the amount (if any) by which (A) the Acquisition
Price multiplied by the number of Shares subject to such outstanding
Options (whether or not then vested), exceeds (B) the aggregate
exercise price of such Options. For the purposes hereof, "Acquisition
Event" shall mean any transaction or series of transactions after which
a Person (or a related group of Persons) owns at least 50.1% of the
common shares of the Corporation; and "Person" shall mean any
individual, corporation or company, partnership, joint venture,
syndicate, sole proprietorship, trust, trustee, executor, administrator
or other legal representative or an unincorporated organization,
government or governmental authority or entity.
9 CERTAIN ADJUSTMENTS
9.1 Appropriate adjustments in the number of Shares subject to the Plan,
and as regards Options granted or to be granted, in the number of
Shares optioned and in the Option Price, shall be made by the Board to
give effect to adjustments in the number of Shares resulting from
subdivisions, consolidations or reclassifications of the Shares, the
payment of share dividends by the Corporation (other than dividends in
the ordinary course) or other relevant changes in the shares of the
Corporation.
10 AMENDMENT OR DISCONTINUANCE OF PLAN
10.1 The Board may, subject to regulatory approval, amend or discontinue the
Plan at any time; provided, however, that no such amendment may
increase the maximum number of Shares that may be optioned under the
Plan, change the manner of determining the minimum Option Price or,
without the consent of the Optionee, alter or impair any Option
previously granted to an Optionee under the plan.
11 MISCELLANEOUS PROVISIONS
11.1 The holder of an Option shall not have any rights as a shareholder of
the Corporation with respect to any of the Shares covered by such
Option until such holder shall have exercised such Option in accordance
with the terms of the Plan (including tendering payment in full of the
Option Price in respect of which the Option is being exercised) and the
Corporation shall issue such Shares to the Optionee in accordance with
the terms of the Plan in those circumstances. Furthermore, the holder
of an Option shall not have any right to vote on any matter.
11.2 Nothing in the Plan or any Option shall confer upon any Optionee any
right to continue in the employ of the Corporate Group or affect in any
way the right of the Corporate Group to terminate his employment at any
time; nor shall anything in the Plan or any Option be deemed or
construed to constitute an agreement, or an expression of intent, on
the part of the Corporate Group to extend the employment of any
Optionee beyond the time that he would normally be retired pursuant to
the provisions of any present or future retirement plan of the
Corporation or any present or future retirement policy of the Corporate
Group, or beyond the time at which he would otherwise be retired
pursuant to the provisions of any contract of employment with the
Corporate Group.
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11.3 References herein to any gender include all genders.
12 GOVERNING LAW
12.1 The Plan and any Options granted under the terms of the Plan shall be
governed and interpreted in accordance with the laws of the Province of
Quebec and the federal laws of Canada applicable therein.
13 EFFECTIVE DATE
13.1 The effective date of this amended and restated Plan shall be the date
on which the Board approved the Plan.
NEUROCHEM INC.
PROXY FORM
THIS PROXY IS SOLICITED BY MANAGEMENT AND SHOULD BE READ IN CONJUNCTION WITH THE
ACCOMPANYING NOTICE OF MEETING AND PROXY CIRCULAR.
The undersigned shareholder of Neurochem Inc. (the "Corporation") hereby
appoints Dr. Francesco Bellini, O.C., or failing him, Dr. Andreas Orfanos, or
failing him, Mr. Mariano Rodriguez or (see *Note 1).............................
.................................................................................
as the proxy for the undersigned to attend, act and vote on behalf of the
undersigned at the ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS of the Corporation
(the "Meeting") to be held at the Montreal Museum of Fine Arts, Michal and
Renata Hornstein Pavilion, Maxwell Cummings Auditorium, 1379 Sherbrooke Street
West, Montreal, Quebec, H3G 2T9, on May 12, 2005, at 10:00 AM, Montreal time,
and at every adjournment thereof:
(1) (a) [ ] FOR the election as directors of all nominees specified in the
accompanying proxy circular; or
(b) [ ] FOR the election as directors of all nominees specified in the
accompanying proxy circular other than: (please specify)
................................................................; or
(c) CHECK HERE [ ] IF YOU WISH TO WITHHOLD AUTHORITY TO VOTE FOR THE
ELECTION OF DIRECTORS;
(2) [ ] FOR [ ] AGAINST the ratification and confirmation of the
approval and entering into of the agreement made as of December 1,
2004, with Dr. Francesco Bellini, Chairman of the Board of Directors
of the Corporation, President and Chief Executive Officer to issue
(and/or deliver, as described in the accompanying proxy circular)
common shares of the Corporation (the "Common Shares") to Dr.
Bellini;
(3) [ ] FOR [ ] AGAINST the ratification and confirmation of the
resolution adopting the amendment to the Amended and Restated Stock
Option Plan of the Corporation (the "Plan"), in order to change the
maximum number of Common Shares issuable from time to time under the
Plan from the current fixed maximum number of 4,438,767 Common
Shares to a fixed maximum percentage of 12.5% of the Common Shares
issued and outstanding from time to time, pursuant to recent
amendments to The Toronto Stock Exchange (the "TSX") Company Manual,
with such amendments, deletions and additions as any officer or
director may deem expedient to approve, such approval to be
conclusively evidenced by the filing of the final version of the
Plan with the Agence nationale d'encadrement du secteur financier
and the TSX;
(4) (a) [ ] FOR the appointment of KPMG LLP, Chartered Accountants, as
auditors of the Corporation and the authorization of the Audit
Committee to fix their remuneration; or
(b) CHECK HERE [ ] IF YOU WISH TO WITHHOLD AUTHORITY TO VOTE FOR THE
APPOINTMENT OF AUDITORS; and
(5) in his discretion with respect to amendments or variations to
matters identified above or upon such other matters as may properly
come before the Meeting or any adjournment thereof;
hereby revoking any proxy previously given.
DATED THIS ........DAY OF ........................
(See *Note 2)
SIGNATURE ........................................
(See *Note 3)
*NOTE 1: You have the right to appoint a person other
than the management nominees (who need not be a
shareholder) to represent you at the Meeting. If you
wish to designate as proxy a person other than the
management nominees, you should strike out their names
and insert in the space provided the name of the person
you wish to designate as proxy.
*NOTE 2: If this form of proxy is not dated in the space
provided, it is deemed to bear the date on which it was
mailed by the management of the Corporation.
*NOTE 3: This instrument of proxy must be signed exactly
as your name appears herein. When signing in a fiduciary
or representative capacity, please provide full title as
such. In the event of a joint shareholder, each should
sign. Corporations should sign by an officer or attorney
duly authorized in writing or under corporate seal.
PROXY
PLEASE COMPLETE AND RETURN IN THE
ENVELOPE PROVIDED
[photo]
[Neurochem logo]
DRIVEN TO ENHANCE PEOPLE'S LIVES_
ANNUAL REPORT 2004
[photo]
TABLE OF CONTENTS_
1 HIGHLIGHTS
2 PIPELINE
4 MESSAGE TO SHAREHOLDERS
6 REVIEW OF ACTIVITIES
8 FIBRILLEX(TM)
10 9 THINGS TO KNOW ABOUT
ALZHEIMER'S DISEASE
12 ALZHEMED(TM)
14 CEREBRIL(TM)
15 DEVELOPMENT PROGRAMS
16 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
16 CONSOLIDATED FINANCIAL STATEMENTS
55 EXECUTIVE MANAGEMENT
55 BOARD OF DIRECTORS
56 ADVISORY BOARDS
SHAREHOLDER INFORMATION
All dollar figures are Canadian dollars, unless specified otherwise.
Neurochem Inc. and subsidiaries are referred to as Neurochem or the Company.
[photo]
HIGHLIGHTS_ MAINTAINING OUR MOMENTUM
February 2004 Fibrillex(TM) granted Fast-Track Product Designation by the U.S.
Food and Drug Administration (FDA).
April 2004 Fourth consecutive unanimous recommendation from Data Safety
Monitoring Board to continue Phase II/III clinical trial for Fibrillex(TM).
Promising Phase IIa results for Cerebril(TM) made public at American Academy of
Neurology's 56th Annual Meeting.
May 2004 Neurochem consolidates its expanding operations at new headquarters in
Laval, Quebec, 40% of which is state-of-the-art R&D space.
July 2004 Fibrillex(TM) selected by the Cardio-Renal Drug Products Division of
the FDA to be part of the Continuous Marketing Applications Pilot 2 program.
On-going, open-label Phase II extension study for Alzhemed(TM) shows continued
positive interim results in Alzheimer's Disease patients after 20 months.
August 2004 First patient enrolled for the North American Phase III clinical
trial of Alzhemed(TM) for the treatment of Alzheimer's Disease.
December 2004 Neurochem announces completion of Phase II/III clinical trial for
Fibrillex(TM).
Exclusive collaboration and distribution agreement for Fibrillex(TM) signed with
Centocor, Inc., a wholly-owned subsidiary of Johnson & Johnson.
RECENT DEVELOPMENTS_
January 2005 Neurochem announces that Francesco Bellini renewed his mandate for
an additional three years in an executive capacity and becomes President as well
as Chairman and CEO of Neurochem.
March 2005 Neurochem issues 4 million common shares in the United States and
Canada for gross proceeds of US $61.2 million.
[photo]
PRODUCT PIPELINE
TARGETS IN SIGHT_
PIPELINE_
DISEASE TARGETS PRECLINICAL PHASE I PHASE II PHASE III
FIBRILLEX(TM) AA AMYLOIDOSIS o o o o
ALZHEMED(TM) ALZHEIMER'S DISEASE o o o (|
CEREBRIL(TM) HEMORRHAGIC STROKE o o (|
DUE TO CAA
[photo]
PROVIDING NEEDED THERAPIES
FOR MANKIND WHILE MAXIMIZING
SHAREHOLDER VALUE_
MESSAGE TO SHAREHOLDERS_
Neurochem's strategy to bring innovative and much needed therapeutic drugs to
the marketplace is proceeding according to plan. Fibrillex(TM), for the
treatment of AA (Amyloid A) Amyloidosis, for which no specific treatment exists
today, completed a Phase II/III clinical trial in December 2004. Alzhemed(TM),
which is being developed to stop the progression of Alzheimer's Disease (AD),
has begun the Phase III clinical trial development stage, with patient
recruitment for the North American segment well under way. Cerebril(TM), for the
treatment of Hemorrhagic Stroke due to Cerebral Amyloid Angiopathy (HS-CAA), is
expected to start a Phase IIb clinical trial in the near future.
Fibrillex(TM) (1,3-propanedisulfonate)
AA Amyloidosis, the devastating illness targeted by Fibrillex(TM), is a serious
consequence of chronic inflammatory and infectious diseases, including
Rheumatoid Arthritis. The disease mostly affects the kidneys, usually resulting
in a patient's death within a span of five to 15 years.
The Phase II/III clinical trial for Fibrillex(TM), which is poised to
potentially become our first investigational product candidate to reach the
marketplace, concluded in December 2004. Results are expected to be made public
during the second quarter of 2005, at which time we plan to begin submitting the
data to the U.S. Food and Drug Administration (FDA) as part of the New Drug
Application (NDA) filing process.
Also, in late December 2004, the Company announced a definitive
collaboration and distribution agreement with Centocor, Inc., a wholly-owned
subsidiary of Johnson & Johnson, in preparation for the anticipated commercial
launch of Fibrillex(TM). This agreement is designed to accelerate and maximize
market penetration, while maintaining Neurochem's participation in the potential
financial success of the drug over the long term, with a significant rate of
return on net sales. Our ultimate goal is to provide a safe and innovative drug
that potentially can save lives--and to have it reach patients as expeditiously
as possible.
Alzhemed(TM) (3-amino-1-propanesulfonic acid)
To date, in vitro, animal and early interim human data have shown that
Alzhemed(TM) is safe and that it could prove to be effective in the treatment of
AD by targeting the formation of the beta-amyloid fragment protein complex. We
now have promising evidence from data collected for over a 28-month period that
this compound may stabilize the disease--especially in mild AD patients. The
opportunity to deliver an effective treatment that would represent real hope for
people suffering from this debilitating disease, not to mention the countless
family members and friends of Alzheimer's patients, provides added incentive to
see this program through to a successful conclusion.
Ultimately, however, the efficacy of this product candidate can only be
proven by a large scale clinical trial. To that end, a North American Phase III
clinical trial of Alzhemed(TM) involving approximately 950 mild-to-moderate AD
patients commenced in the summer of 2004. Patient recruitment has been brisk and
we expect full enrollment by mid-2005. A similar European Phase III clinical
trial is expected to begin in the second half of 2005.
Neurochem is committed to developing Alzhemed(TM), either alone or in
partnership. The Company is in discussions with various potential partners for
collaboration and commercialization with respect to Alzhemed(TM). The Company
has received several proposals to date from various parties, and these proposals
are currently under consideration.
Cerebril(TM) (3-amino-1-propanesulfonic acid)
As noted above, we plan to initiate a Phase IIb clinical trial of Cerebril(TM),
our investigational product candidate for the treatment of HS-CAA, in the second
half of 2005.
BUILDING THE ORGANIZATION_
Successful execution of the Company's plan to bring innovative and much needed
therapeutic drugs to the patients in need requires the appropriate human
resources, financial resources as well as partnerships.
With regard to human resources, we have continued to strengthen the
organization by broadening and enhancing Neurochem's management and
product-development resources, as well as its marketing and sales
infrastructure.
In March 2005, we raised US $61.2 million through a public share issue to
secure a strong financial base for future development costs.
As regards additional partnerships, we intend to continue discussions with
current and future potential partners with a view to finding opportunities for
collaboration that meet our strategic needs and our criteria for value creation.
Rest assured that we shall keep the best interests of the Company and its
shareholders in mind, while striving to adhere to the shortest possible
timelines for the delivery of much needed new therapies that would ultimately
benefit patients.
ACKNOWLEDGEMENTS_
Taking Neurochem to the next level will require an all-out team effort, and I
wish to take this opportunity to thank our employees for their continuing
contribution to our growth and success. I also would like to express
appreciation to my fellow Board members for their support and formally welcome
two new directors who joined our Board in 2004: Jean-Guy Desjardins, Chairman
and CEO of Centria Inc; and Francois Legault, President and COO of Virochem
Pharma Inc. We are grateful as well for the contributions of Richard Cherney,
Managing Partner, Davies Ward Philips & Vineberg LLP, who left the Board during
the year but continues to advise our Company.
CONCLUDING REMARKS_
With Fibrillex(TM) which may soon enter the regulatory submission phase of its
development program, and Alzhemed(TM) in Phase III clinical trials, the short-
and medium-term outlook is promising. Indeed, the numerous exciting
opportunities that await us at this stage of Neurochem's development were a
major factor in my decision to remain with the Company for the next three years.
The year 2005 may well prove to be a breakthrough for Neurochem. We
anticipate continued progress as we strive to roll out our first products in the
global marketplace and begin generating our first sales product revenues. These
are crucial next steps in the realization of our longer-term goal to build an
innovative, dynamic, profitable and world-class biopharmaceutical company.
Dr. Francesco Bellini
Chairman, President and Chief Executive Officer
March 23, 2005
[photo]
REVIEW OF ACTIVITIES
PARTNERING UP_
Partnering in anticipation for the potential market launch of Neurochem's late
stage product candidates was a top priority as 2004 drew to a close. On December
22, Neurochem (International) Limited, a wholly-owned subsidiary of Neurochem
Inc., announced an agreement granting Centocor, Inc. distribution rights in most
major markets for Fibrillex(TM), Neurochem's investigational product candidate
for AA Amyloidosis. Discussions continue regarding an appropriate partner for
the global marketing and distribution of Alzhemed(TM), Neurochem's
investigational product candidate for the treatment of AD, currently in a Phase
III clinical trial.
TEAM BUILDING_
Neurochem now employs more than 180 people and has announced a number of
additions to its senior management and drug development teams, to build the
strong infrastructure and depth of expertise required to advance the Company to
the next level.
On October 5, 2004, Neurochem announced the appointment of Andreas Orfanos,
M.B.B.Ch, M.B.A., as Executive Vice President, Strategic Planning and Scientific
Affairs. Dr. Orfanos had held leadership positions with major pharmaceutical
companies in Canada and abroad. Mariano Rodriguez, C.A., C.P.A., was appointed
Vice President, Finance, and Chief Financial Officer, effective December 10,
2004. Mr. Rodriguez brings to Neurochem almost 15 years' experience in corporate
finance with private and public companies.
A number of other senior appointments were announced on January 20, 2005,
subsequent to the year-end: Philippe Calais, PharmD, President, Global Business;
Daniel Delorme, PhD., Vice President, Research; Denis Garceau, PhD., Senior Vice
President, Drug Development; and Shona McDiarmid, PhD., LLB, Vice President,
Intellectual Property.
In May of 2004, Neurochem completed the consolidation of its operations at the
Company's newly acquired headquarters in the Parc scientifique et de haute
technologie de Laval, near Montreal, Quebec, Canada.
In March 2005, subsequent to the fiscal year-end, Neurochem enhanced its
liquidity through a new issue of 4 million common shares in the United States
and Canada. Gross proceeds of US $61.2 million will be used to fund clinical
trials of the Company's investigational product candidates, primarily
Alzhemed(TM), as well as other preclinical and research and development
programs, with the balance earmarked for the marketing of Fibrillex(TM) in
select markets retained by the Company, working capital and general corporate
purposes.
As Neurochem gears up for the potential commercial launch of its first products
and puts in place the enhanced infrastructure required to support its continued
growth and development, the Company remains committed to careful scrutiny of
expenditures.
[photo]
FIBRILLEX(TM)_
NEARING COMPLETION_
Development of Neurochem's oral product candidate, Fibrillex(TM), a potential
first-in-class drug for the treatment of AA Amyloidosis, is nearing completion.
No specific treatment is currently approved for AA Amyloidosis, a disease caused
by the deposition of the AA amyloid protein complex in some of the body's
organs, most notably the kidneys.
Most patients progress to dialysis and the survival rate five years following
diagnosis is only 43%.
Data from the recently completed Phase II/III clinical trial of Fibrillex(TM)
are scheduled to be released during the second quarter of 2005, and the Company
plans to commence filing of an NDA with the FDA in the second quarter of 2005.
Following the signing of a collaboration and distribution agreement with
Centocor, Inc., a wholly-owned subsidiary of Johnson & Johnson, preparations for
the potential launch of the Company's first product to market are well advanced.
With its established international sales force calling directly on specialists
in rheumatology and nephrology, Centocor--in collaboration with other Johnson &
Johnson affiliates--represents the ideal partner in terms of facilitating
accelerated market penetration for Fibrillex(TM) in a cost effective manner,
while providing Neurochem with a large potential-based return on future net
sales. The agreement preserves Neurochem's access to select markets, including
Canada, Switzerland and China, and makes provision for other partnerships to be
formed covering Japan and certain other Asian countries. In addition to its own
territories, Neurochem will retain medical science liaison activities in Europe
and in the U.S.
According to a 2004 market research report by Verispan(1) the overall projected
number of patients diagnosed with AA Amyloidosis who could stand to benefit from
Fibrillex(TM) is estimated to be in excess of 40,000 in the U.S. and Europe.
(1) Health information company based in the U.S.
[photo]
ALZHEIMER'S DISEASE:
9 THINGS TO KNOW_
1_ Alzheimer's Disease (AD) is a progressive form of dementia associated with
specific brain pathologies. It impairs a person's cognitive and motor functions
and gradually destroys the brain. There is a strong interest for an
investigational product candidate such as Alzhemed(TM) aimed at stopping the
progression of the disease.
2_ AD is the most common form of dementia in our aging population. Almost 4.5
million individuals in the United States alone currently suffer from the
condition. The U.S. Alzheimer's Association estimates that by 2025, over 22
million people worldwide will be afflicted.
3_ The early stages of AD are characterized by mild memory loss, impaired
judgment and other cognitive changes. As patients progress to the moderate phase
of the disease, they require help to perform everyday tasks such as cooking and
personal care. Behavioral changes such as agitation, aggression and sleep
disorders are often present.
4_ As the disease progresses, symptoms multiply and intensify, resulting in the
deterioration of both cognitive and motor functioning, leading ultimately to
death generally within eight to ten years from the onset of symptoms. Average
life expectancy is affected by age at diagnosis and the severity of other
medical conditions.
5_ Recent research by leading members of the international scientific community
has evidenced the role of amyloid fragments as a root problem of AD. The work in
animal models indicates that, by attacking amyloid in the early stages of the
disease, AD could be halted or reversed. This translates into new hope for
future generations.
6_ AD costs American business US$61 billion a year according to a report
commissioned by the U.S. Alzheimer's Association. That price tag includes
US$24.6 billion for direct health care of Alzheimer's patients and US$36.5
billion to cover costs related to caregivers of AD patients, including lost
productivity, absenteeism and worker replacement.
7_ To help family members and health-care professionals, the U.S. Alzheimer's
Association has developed a checklist of warning signs: difficulty performing
familiar tasks; problems with language; disorientation as to time and place;
decreased judgment; problems with abstract thinking; misplacing things; changes
in mood or behavior; changes in personality; and loss of initiative.
8_ Getting a diagnosis: A physician should be consulted about concerns with
memory, thinking skills, and changes in behavior. An early diagnosis has many
advantages: time to make choices that maximize quality of life; lessened
anxieties about unknown problems; and a better chance of benefiting from
treatment.
9_ Tips for enhancing communication with a person suffering from AD: show that
you are listening and trying to understand what is being said; maintain eye
contact; be careful not to interrupt; encourage the person to continue to
express thoughts even if he or she is having difficulty; speak slowly and
clearly; and use positive, friendly facial expressions.
[photo]
ALZHEMED(TM)_
HOPE FOR FUTURE GENERATIONS_
Neurochem's investigational product candidate, Alzhemed(TM) is in Phase III
clinical trial. Alzhemed(TM) was highlighted in April 2004 at the 8th
International Montreal/Springfield Symposium on Advances in Alzheimer Therapy
and in July 2004 by the U.S. Alzheimer's Association at its annual international
conference as a promising treatment for AD.
On track to possibly file for regulatory approval in 2007/2008, Alzhemed(TM) is
another of the Company's first-in-class candidate products with a unique
mechanism of action identified as possibly stopping the disease in its early
stages by targeting the toxic beta-amyloid complex shown by many scientific
experts to kill brain cells.
The product candidate has continued to produce encouraging interim results
during the open-label Phase II extension study, particularly among mild AD
patients. After 28 months in the study, preliminary data showed that a majority
of the mild AD patients responded well to treatment with Alzhemed(TM) and
continued to have their disease stabilized or improved, as measured by
well-validated cognitive and functional tests.
The recruitment of patients for the Company's on-going large-scale, 18-month
Phase III clinical trial of Alzhemed(TM), to include 950 mild-to-moderate AD
patients in North America, is going according to plan. Neurochem plans to launch
a similar Phase III clinical trial of Alzhemed(TM) in Europe during the second
half of 2005.
The design of the trials, their relatively long duration and the large numbers
of patients involved are intended to demonstrate clearly the disease-modifying
capability of Alzhemed(TM), while underscoring its first-in-class status as the
most advanced product candidate under development in this treatment category.
[photo]
CEREBRIL(TM)_
READY TO TAKE THE NEXT STEPS_
Cerebril(TM), Neurochem's lead product candidate for the treatment of
Hemorrhagic Stroke due to Cerebral Amyloid Angiopathy (HS-CAA), has successfully
completed a Phase IIa clinical trial. A Phase IIb trial is currently being
designed to test the efficacy and safety of Cerebril(TM) in preventing recurring
strokes caused by amyloid. No current treatment exists for this disease.
The Phase IIa clinical trial, designed to assess the safety of Cerebril(TM) in
HS-CAA patients who have suffered their first stroke, was conducted at five
centers in the United States. Results revealed no safety findings of concern and
the pharmacokinetic profile of the product candidate was well characterized.
Orally delivered, Cerebril(TM) was detected in the cerebrospinal fluid of the
patients, a crucial indicator suggesting its ability to cross the
blood-brain-barrier.
DEVELOPMENT PROGRAMS_
Neurochem's multi-disciplinary research team has discovered and advanced a group
of oral therapeutic compounds with the ability to prevent and inhibit the
formation of amyloid deposits.
Neurochem's innovative product pipeline includes promising lead candidates for
epileptic seizures induced by traumatic brain injury; a next generation of
compounds for the treatment of AD; as well as certain peptides identified to
develop a synthetic vaccine that may help protect against AD, which is being
developed in collaboration with the National Research Council of Canada's
Institute for Biological Sciences.
Going forward, Neurochem's business strategy entails in-licensing additional new
product candidates and further expanding its pipeline to become a major
international biopharmaceutical company.
[photo]
CONSOLIDATED FINANCIAL STATEMENTS
SOLID FINANCIAL BASE_
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)
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)
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.
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
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
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 Chief Vice President, Finance and Chief
Executive Officer 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,
2004
- --------------------------------------------------------------------------------------------------------------
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 FIN46R,
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.
EXECUTIVE MANAGEMENT _
Dr. Francesco Bellini
Chairman, President and Chief Executive Officer
Dr. Andreas Orfanos
Executive Vice President, Strategic Planning and
Scientific Affairs
Dr. Philippe Calais
President, Global Business
Dr. Denis Garceau
Senior Vice President, Drug Development
Mr. Mariano Rodriguez
Vice President, Finance and Chief Financial Officer
Dr. Daniel Delorme
Vice President, Research
Dr. Lise Hebert
Vice President, Corporate Communications
Ms. Christine Lennon
Vice President, Business Development
Dr. Shona McDiarmid
Vice President, Intellectual Property
Ms. Judith Paquin
Vice President, Human Resources
Mr. David Skinner
General Counsel and Corporate Secretary
BOARD OF DIRECTORS _
Dr. Francesco Bellini
Chairman, President and Chief Executive Officer
Dr. Colin Bier
Consultant
Mr. Jean-Guy Desjardins
Chairman and Chief Executive Officer, Centria Inc.
Mr. Peter Kruyt
Vice President, Power Corporation of Canada
Mr. Francois Legault
President and Chief Operating Officer, Virochem Pharma Inc.
Dr. Frederick H. Lowy
President and Vice-Chancellor, Concordia University
Mr. John P. Molloy
President and Chief Executive Officer, Parteq Research
and Development Innovations, Queen's University
Mr. Ronald M. Nordmann
Co-President, Global Health Associates, LLC
Mr. Graeme K. Rutledge
Consultant
Dr. Emil Skamene
Scientific Director, McGill University Health Center
SCIENTIFIC ADVISORY BOARD _
Activities of our research and development team are regularly reviewed by our
Scientific Advisory Board (SAB). Members include internationally recognized
scientists working in the fields of Alzheimer's Disease, amyloid and neurology:
Dr. Howard Fillit
Chairman of the SAB, The Institute for the Study of Aging, New York, United
States
Dr. Jack Gauldie
McMaster University Medical Centre, Hamilton, Canada
Dr. Alex Roher
Sun Health Research Institute, Sun City, United States
CLINICAL ADVISORY BOARDS _
Internationally renowned clinical experts are collaborating in the development
and implementation of clinical trials for Fibrillex(TM), Alzhemed(TM) and
Cerebril(TM). The following are members of Neurochem's Clinical Advisory Boards:
FIBRILLEX(TM)
Dr. Laura M. Dember
Boston Medical Center, Boston, United States
Dr. Philip N. Hawkins
Royal Free and University College Medical School, London, United Kingdom
Dr. Bouke P.C. Hazenberg
University Hospital Groningen, Groningen, Netherlands
Dr. Martha Skinner
Boston University School of Medicine, Boston, United States
CEREBRIL(TM)
Dr. Clive Ballard
Newcastle General Hospital, Newcastle-Upon-Tyne, United Kingdom
Dr. Franz Fazekas
Karl-Franzens University, Graz, Austria
Dr. Steven Greenberg
Massachusetts General Hospital, Boston, United States
Dr. Vladimir Hachinsky
University of Western Ontario, London, Canada
Dr. Ralph Sacco
Columbia University, New York, United States
ALZHEMED(TM)
Dr. Paul Aisen
Georgetown University Medical Center, Washington D.C., United States
Dr. Howard Chertkow
Lady Davis Institute for Medical Research, Montreal, Canada
Dr. Steven Ferris
New York University School of Medicine, New York, United States
Dr. Serge Gauthier
McGill University Center for Studies in Aging, Montreal, Canada
Dr. Simon Lovestone
Institute of Psychiatry, London, United Kingdom
Dr. John Morris
Washington University School of Medicine, St-Louis, United States
Dr. Bruno Vellas
Toulouse Geriatric Alzheimer's Center, Toulouse, France
SHAREHOLDER INFORMATION_
CORPORATE GOVERNANCE_
Neurochem is committed to sound corporate governance practices which ensure that
its affairs are managed in the best interest of all shareholders. The Board of
Directors undertakes a periodic review to verify that our governance practices
have kept pace with changing regulatory environments in the United States and
Canada, to which Neurochem is subject as a company listed on both the Nasdaq and
TSX. Please refer to the management proxy circular for more information on the
overall structure of the Board and its Committees and for details of Neurochem's
corporate governance practices.
AUDITORS_
KPMG LLP
2000 McGill College ave., Suite 1900
Montreal, Quebec, Canada H3A 3H8
TRANSFER AGENTS_
Computershare Trust Company of Canada
9th Floor, 100 University Avenue
Toronto, Ontario, Canada M5J 2Y1
STOCK LISTING_
Nasdaq National Market
Symbol: NRMX
Toronto Stock Exchange (TSX)
Symbol: NRM
ANNUAL GENERAL MEETING_
The Annual General Meeting will be held at 10:00 a.m. on May 12, 2005 at the
Montreal Museum of Fine Arts in the Maxwell Cummings Auditorium of the Michal
and Renata Hornstein Pavilion,
1379 Sherbrooke Street West, Montreal, Quebec, Canada.
Ce rapport est disponible en francais.
Graphic design:
Desjardins Design Marketing
(www.desjardins-design.com)
Printed in Canada
Certain statements contained in this document, other than statements of fact
that are independently verifiable at the date hereof, may constitute
forward-looking statements. Such statements, based as they are on the current
expectations of management, inherently involve numerous risks and uncertainties,
known and unknown, many of which are beyond Neurochem's control. The risks
include but are not limited to: the impact of general economic conditions,
general conditions in the pharmaceutical industry, changes in the regulatory
environment in the jurisdictions in which Neurochem does business, stock market
volatility, fluctuations in costs, and changes to the competitive environment
due to consolidation, as well as other risks disclosed in public filings of
Neurochem. Consequently, actual future results may differ materially from the
anticipated results expressed in the forward-looking statements. The reader
should not place undue reliance, if any, on the forward-looking statements
included in this document. These statements speak only as of the date made and
Neurochem is under no obligation and disavows any intention to update or revise
such statements as a result of any event, circumstances or otherwise.
NEUROCHEM INC.
275 Armand-Frappier Blvd.
Laval, Quebec, Canada H7V 4A7
Telephone: (450) 680-4500
Toll-Free: 1 877 680-4500
Fax: (450) 680-4501
E-mail: info@neurochem.com
Website: www.neurochem.com