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: May, 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.
May 16, 2005
By: /s/ David Skinner
------------------------------------
David Skinner
General Counsel and Corporate Secretary
[Picture]
FIRST QUARTER ENDED MARCH 31, 2005
[Neurochem logo]
Driven to enhance people's lives_
NEUROCHEM FIRST QUARTER ENDED MARCH 31, 2005 1
Message to Shareholders
The first quarter has been eventful for Neurochem. Not only have we advanced the
development of our investigational product candidates, but we have also
essentially completed the formation of an exceptionally strong management team
to bring the Company to the next level of product development and
commercialization. At the same time, we have completed an important financing
providing us with a solid financial base to move forward. During the quarter,
the Company's financial position was significantly strengthened, with $89.7
million of cash available at the end of the quarter.
I am very proud to be able to lead a Company of this calibre and, as CEO and a
significant shareholder, I will continue to support Neurochem and work towards
bringing our product candidates to market.
I would like now to highlight the recent advances of our investigational product
candidates Fibrillex(TM) and Alzhemed(TM) and emphasize that their further
development is the Company's main priority.
Fibrillex(TM) -- Results to be Presented to FDA
Neurochem completed the Fibrillex(TM) Phase II/III clinical trial in December
2004. Fibrillex(TM) is being developed for the treatment of Amyloid A (AA)
Amyloidosis, a serious consequence of chronic inflammatory and infectious
diseases, such as Rheumatoid Arthritis. It is estimated that there are
approximately 40,000 people in Europe and the U.S. diagnosed with the disease.
The objective of the Phase II/III trial was to determine the ability of
Fibrillex(TM) to delay or stop the progression of AA Amyloidosis and to assess
the safety of Fibrillex(TM) compared to a placebo. The trial was initiated in
2000 to demonstrate statistical significance through the composite primary
endpoint reaching an absolute difference of 20% in the number of patients
stabilized or improved between the Fibrillex(TM) and placebo groups (p value =
0.01).
The clinical trial for Fibrillex(TM) was the first Phase II/III clinical trial
and the largest randomized, placebo-controlled study ever undertaken to test for
the efficacy of a drug to treat AA Amyloidosis. We have broken new ground in
designing the study and defining endpoints that have never been assessed in a
study of that magnitude for this disease.
An assessment of preliminary findings made public on April 18, 2005, indicated
that Fibrillex(TM) is well tolerated. The preliminary results also indicated
that there were 13.4 percent more patients whose condition remained stable or
improved while on Fibrillex(TM) therapy, compared to placebo (p value = 0.06).
While the level of 13.4% is a positive sign, it did not reach the pre-specified
objective of the study of 20%. Preliminary findings on the secondary endpoints
also indicate that Fibrillex(TM) does have a consistent and clinically
meaningful effect on kidney function. These preliminary results suggest that
Fibrillex(TM) delays progression of renal disease in AA amyloidosis patients.
Recognizing the lack of existing specific treatments for the disease,
Fibrillex(TM) received "orphan drug" status in both the United States and
Europe. Fibrillex(TM) also has been accorded "Fast Track Product" designation by
the U.S. Food and Drug Administration (FDA) and was selected for the FDA's Pilot
2 program for accelerated review. In December 2004 and in advance of completion
of the trial, Neurochem (International) Limited, a wholly-owned subsidiary of
the Company, concluded a collaboration and distribution agreement for
Fibrillex(TM) with Centocor, Inc., a wholly-owned subsidiary of Johnson &
Johnson.
NEUROCHEM FIRST QUARTER ENDED MARCH 31, 2005 2
Data on the Fibrillex(TM) Phase II/III trial is expected to be presented at
selected international medical conferences in the coming months. Presentations
at international conferences are scheduled during the European Renal
Association-European Dialysis and Transplant Association (ERA-EDTA) conference
to be held in Istanbul, Turkey, from June 4-7, 2005 and the European League
Against Rheumatism (EULAR) conference to be held in Vienna, Austria, from June
8-12, 2005. The plan is also to publish the data in a peer-reviewed journal.
Meanwhile, Neurochem is continuing to honour its commitment to supply
Fibrillex(TM) to any patient receiving the drug, through the on-going open-label
extension study.
Neurochem, therefore, intends to continue with plans to seek regulatory approval
of Fibrillex(TM). As part of this process, the Company has confirmed a meeting
date with the FDA to pursue discussions about its data and to investigate the
various regulatory options to possibly make Fibrillex(TM) available to the AA
amyloidosis patients.
Alzhemed(TM) -- North American Phase III Clinical Trial on Track
Progress throughout 2004 and into the first quarter of 2005 on the development
of the investigational product candidate, Alzhemed(TM), for the treatment of
Alzheimer's Disease (AD) is on-track and encouraging. This first-in-class
product candidate has a unique mechanism of action, which may be capable of
stopping the disease in its early stages by interfering with the formation of
the toxic beta-amyloid complex and has been shown by many scientists to be
neurotoxic. Data from a Phase II clinical trial and interim results from a
follow-on open-label extension study over a 28-month period indicate that this
orally administered investigational product candidate is safe and appears to
stop the progression of the disease, particularly in milder AD patients.
During 2004, Alzhemed(TM) was highlighted at the 8th International
Montreal/Springfield Symposium on Advances in Alzheimer Therapy and at the U.S.
Alzheimer's Association at its annual international conference as a promising
new treatment in development for AD.
Neurochem initiated a large-scale Phase III clinical trial in North America in
June 2004. This double-blind, placebo-controlled study will include some 950
mild-to-moderate AD patients at 68 clinical centers across North America, who
will be receiving medication over the trial period of 18 months. Approximately
1,100 patients have been screened and close to 800 are already on study
medication. Recruitment in North America is therefore proceeding on schedule and
the study is on track for completion as planned.
The Company plans to initiate patient recruitment for a similar Phase III
clinical trial in Europe this fall.
Neurochem announced in April 2005 that its Independent Safety Review Board
(ISRB) has issued a recommendation to continue the Company's North American
Phase III clinical trial for Alzhemed(TM). The recommendation by the members of
the ISRB was based on their recent review of the safety data from 562 patients
who had been monitored in the trial for an average of 12 weeks to that point.
Cerebril(TM) - A Phase IIb Clinical Trial Under Preparation
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 to assess safety conducted at five centers
in the U.S. There were no concerns regarding safety, and the pharmacokinetic
profile of the product candidate was well characterized.
A Phase IIb trial is currently being designed to test the efficacy and safety of
Cerebril(TM) in preventing recurring strokes caused by amyloid. Currently, no
treatment exists for this disease.
NEUROCHEM FIRST QUARTER ENDED MARCH 31, 2005 3
Senior Management Team -- Additions and Reassignment of Responsibilities
Neurochem also announced senior management appointments and reassignment of
responsibilities during the quarter: Francesco Bellini, Chairman, President and
CEO, committed to remain with the Company in an executive capacity for at least
three more years. Andreas Orfanos, M.B.B.Ch, MBA, was named Executive Vice
President - Strategic Planning and Scientific Affairs, Shona McDiarmid, Ph.D.,
LLB, was appointed Vice President - Intellectual Property, Daniel Delorme,
Ph.D., was named Vice President - Research, Mariano Rodriguez was appointed Vice
President, Finance and Chief Financial Officer, Christine Lennon was named Vice
President, Business Development and Judith Paquin was appointed Vice President,
Human Resources. Philippe Calais, Pharm. D., became President - Global Business
and Denis Garceau, Ph.D., was appointed Senior Vice President - Drug
Development.
Other Recent Developments
We also announced in March 2005 that we had completed a public offering of 4
million common shares. The common shares issued from treasury were sold in the
United States and Canada and resulted in total gross proceeds to the Company of
approximately US$61.2 million. Neurochem Inc. and its subsidiaries intend to use
the net proceeds from the offering to fund the clinical trials of their
investigational product candidates, primarily Alzhemed(TM), to advance
Fibrillex(TM), to further complete pre-clinical and research and development
programs and for working capital and general corporate purposes.
Conclusion
We are pleased with the progress to date and, on behalf of the Board, I wish to
thank you for continuing to support the Company.
[signed]
Dr. Francesco Bellini
Chairman, President and Chief Executive Officer
NEUROCHEM FIRST QUARTER ENDED MARCH 31, 2005 4
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Three-Month Period Ended March 31, 2005
The following information should be read in conjunction with the unaudited
consolidated financial statements for the three-month period ended March 31,
2005, as well as the audited consolidated financial statements for the year
ended December 31, 2004. For discussion regarding related-party transactions,
contractual obligations and commercial commitments, critical accounting
policies, recent accounting pronouncements, and risks and uncertainties, refer
to the Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations for the year ended December 31, 2004. All dollar
figures are Canadian dollars, unless specified otherwise.
RESULTS OF OPERATIONS
For the three month-period ended March 31, 2005, the net loss amounted to
$16,970,000 ($0.54 per share), compared to $9,164,000 ($0.31 per share) for the
comparative period last year.
Revenues from collaboration agreement amounted to $1,205,000 for the current
quarter and consist of the revenue earned under the agreement with Centocor,
Inc. ("Centocor") in respect of Fibrillex(TM). Revenue recognized during the
quarter is in respect of the non-refundable upfront payment received from
Centocor, which is being amortized over the remaining estimated period to
obtaining the regulatory approvals of the investigational drug product. The
period to obtain the regulatory approvals is estimated and is subject to change
based on additional information that the Company may receive from time to time.
Reimbursable costs revenue amounted to $444,000 for the current quarter and
consists of costs reimbursable by Centocor in respect of Fibrillex(TM) related
activities. The Company earns no margin on these reimbursable costs.
Research and development expenses, before research tax credits and grants,
amounted to $11,965,000 for the current quarter, compared to $5,577,000 for the
same period last year. The increase is mainly due to expenses incurred in
relation to the development of Alzhemed(TM); more specifically for the Phase III
North American clinical trial and preparation for the Phase III European
clinical trial. In the quarter ended March 31, 2005, research and development
expenses also included costs incurred to support the on-going Fibrillex(TM)
open-label extension study, as well as on-going drug discovery programs.
Research tax credits amounted to $409,000 this quarter, compared to $312,000 for
the comparable quarter 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 during the current
period.
General and administrative expenses for the quarter totalled $5,165,000,
compared to $3,965,000 for the same quarter last year. The increase is
attributable to the expansion of the corporate infrastructure to support growth
and the overall activity levels at the Company. More specifically, the increase
is due to operating costs related to the facilities acquired during the second
quarter of 2004 and higher legal fees incurred in relation to the Immtech
litigation, and to other corporate agreements and matters.
Reimbursable costs amounted to $444,000 for the current quarter and consist of
costs incurred on behalf of Centocor in respect of Fibrillex(TM) related
activities and reimbursable by Centocor.
NEUROCHEM FIRST QUARTER ENDED MARCH 31, 2005 5
Stock-based compensation amounted to $770,000 for the current quarter, compared
to $424,000 for the comparable quarter last year. This expense relates to
employee stock options, whereby compensation cost is measured at fair value at
the date of grant and is expensed over the award's vesting period. The increase
is due to new stock options granted during the past year.
Depreciation and amortization for the current quarter increased to $570,000 from
$368,000 for the comparable quarter last year. The increase reflects the
depreciation and amortization associated with the acquisition during the past
year of additional property and equipment, including the facilities acquired in
the second quarter of 2004, and the increase in patent costs.
Interest and bank charges amounted to $121,000 for the current quarter, compared
to $24,000 for the comparable quarter last year. The increase is due to interest
expense on the $10,500,000 revolving decreasing term credit facility entered
into by the Company to finance the acquisition of the facilities last year.
Interest income amounted to $251,000, compared to $322,000 for the comparable
quarter last year. The decrease results from lower average cash balances in the
current period, compared to the same period last year.
Foreign exchange gains amounted to $226,000 for the current quarter, compared to
$441,000 for the same quarter last year. The decrease is attributable to lower
monetary assets denominated in US dollars during the period, compared to the
comparable period in 2004. Gains were recorded as a result of an increase in the
value of the US dollar versus the Canadian dollar during the respective periods.
Variable interest entities
As previously reported, on January 1, 2005, the Company adopted the
recommendations of the CICA Accounting Guideline 15 - Consolidation of Variable
Interest Entities (AcG-15), which provides guidance for determining when an
enterprise consolidates 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, to determine whether it is
the primary beneficiary of such entities and, if so, to consolidate the VIEs. 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. It
was determined that the Company's investment in a holding company that owns
Innodia's shares ("Innodia Holding") meets the criteria for being a VIE and that
the Company is the primary beneficiary of Innodia Holding. The implementation of
AcG-15 resulted in the consolidation of the Company's interest in Innodia
Holding starting January 1, 2005. The effect of the implementation of this
accounting guideline was to adjust the net carrying value of the long-term
investment and the opening deficit by $2,501,000 at January 1, 2005. The revised
carrying amounts of the long-term investment and non-controlling interest at
January 1, 2005 were $3,359,000 and $1,439,000, respectively. The implementation
of this accounting guideline in the first quarter of 2005 resulted in the
consolidation of a share of loss in a company subject to significant influence
of $755,000 and non-controlling interest of $225,000, in the Consolidated
Statement of Operations.
Litigation
Regarding the ongoing dispute with Immtech International, Inc. (Immtech)
concerning a 2002 agreement, the Company continues to vigorously defend against
the claims brought by Immtech in its legal proceedings filed on August 12, 2003,
with the Federal District Court for the Southern District of New York, U.S.A.
The dispute is now before an arbitral tribunal convened in accordance with the
rules of the International Court of Arbitration.
NEUROCHEM FIRST QUARTER ENDED MARCH 31, 2005 6
A hearing has been scheduled by the arbitral tribunal for mid-September 2005.
Immtech has claimed monetary damages which, to date, it has estimated at between
a total of US$18 million and US$42 million, which includes an estimated
valuation for equitable relief. The Company counterclaims damages which, to
date, it has estimated at no less than US$3.5 million, which includes an
estimated valuation for equitable relief. 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.
QUARTERLY RESULTS (UNAUDITED)
(in thousands of Canadian dollars, except per share data)
Net loss per share
Quarter Revenue Net Loss Basic and diluted
- ------- ------- --------- -------------------
Year ended December 31, 2005
First 1,649 (16,970) (0.54)
Year ended December 31, 2004
Fourth 132 (15,388) (0.51)
Third -- (13,775) (0.45)
Second -- (14,072) (0.47)
First -- (9,164) (0.31)
Six-month period ended December 31, 2003
Second -- (9,986) (0.34)
First -- (6,787) (0.28)
Year ended June 30, 2003
Fourth -- (3,470) (0.15)
LIQUIDITY AND CAPITAL RESOURCES
As at March 31, 2005, the Company had cash, cash equivalents and marketable
securities of $89,703,000, compared to $29,173,000 at December 31, 2004. The
increase is primarily due to proceeds received from the issue of additional
share capital during the quarter (as described below), net of funds used in
operations and in investing activities.
On March 9, 2005, the Company completed a public offering of its common shares
in the United States and in Canada. The Company issued four million common
shares at a price of US$15.30 per share. Total proceeds from the offering were
$74,495,000 (US$61,200,000) and the issue costs totaled $4,955,000. Certain
funds raised from the share issuance were denominated in U.S. dollars. The
Company maintains a significant U.S. dollars position to serve as a natural
hedge of exchange rate fluctuations with respect to planned U.S. dollar
denominated R&D expenditures primarily relating to its phase III clinical
programs. Net proceeds will be used to fund the clinical trials of the Company's
product candidates (primarily Alzhemed(TM)), other research and development
programs, advancing Fibrillex(TM), working capital and general corporate
purposes.
As at April 30, 2005, the Company had 34,569,581 common shares outstanding,
2,287,614 options granted under the employee stock option plan and 4,000,000
warrants issued and outstanding.
NEUROCHEM FIRST QUARTER ENDED MARCH 31, 2005 7
Consolidated Balance Sheets
(Unaudited)
March 31, 2005 and December 31, 2004 (in thousands of Canadian dollars) (in
accordance with Canadian GAAP)
MARCH 31, MARCH 31, December 31,
2005 2005 2004
--------- --------- ------------
(US$ - (CDN$) (Cdn$)
NOTE 1) (Audited)
ASSETS
Current assets:
Cash and cash equivalents 71,680 86,706 7,207
Marketable securities 2,478 2,997 21,966
Amount receivable under collaboration agreement -- -- 14,443
Sales taxes and other receivables 703 851 782
Research tax credits receivable 1,346 1,628 1,349
Prepaid expenses and deposits 3,211 3,884 3,836
-------- -------- --------
79,418 96,066 49,583
Restricted cash (note 3) 6,000 7,258 --
Long-term prepaid expenses and deposits 1,500 1,815 1,361
Long-term investment 2,153 2,604 4,421
Property and equipment 13,552 16,393 16,690
Patents 3,570 4,318 4,393
-------- -------- --------
106,193 128,454 76,448
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 3,056 3,697 4,060
Accrued liabilities 6,095 7,373 6,424
Deferred revenue 2,717 3,287 4,820
Current portion of obligations under capital leases 252 305 416
Current portion of long-term debt 525 635 686
-------- -------- --------
12,645 15,297 16,406
Deferred revenue 8,350 10,101 9,772
Long-term accrued liabilities 100 121 126
Long-term debt 7,668 9,275 9,450
-------- -------- --------
28,763 34,794 35,754
Non-controlling interest 1,005 1,214 --
Shareholders' equity:
Share capital (note 4) 207,966 251,561 175,855
Additional paid-in capital 5,156 6,237 5,765
Deficit (136,697) (165,352) (140,926)
-------- -------- --------
76,425 92,446 40,694
Litigation (note 7)
-------- -------- --------
106,193 128,454 76,448
======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
NEUROCHEM FIRST QUARTER ENDED MARCH 31, 2005 8
Consolidated Statements of Operations_
(Unaudited)
Periods ended March 31, 2005 and 2004 (in thousands of Canadian dollars, except
per share data) (in accordance with Canadian GAAP)
Three months ended March 31,
-------------------------------------------
2005 2005 2004
------- ------- ------
(US$ - (CDN$) (Cdn$)
NOTE 1)
Revenues:
Collaboration agreement (note 3) 996 1,205 --
Reimbursable costs 367 444 --
---------- ---------- ----------
1,363 1,649 --
---------- ---------- ----------
Expenses:
Research and development 9,891 11,965 5,577
Research tax credits (338) (409) (312)
Research grants (7) (9) (119)
---------- ---------- ----------
9,546 11,547 5,146
General and administrative 4,270 5,165 3,965
Reimbursable costs 367 444 --
Stock-based compensation (note 5) 636 770 424
Depreciation of property and equipment 412 498 317
Amortization of patent costs 60 72 51
Interest and bank charges 100 121 24
---------- ---------- ----------
15,391 18,617 9,927
Net loss before undernoted items (14,028) (16,968) (9,927)
Investment income and other:
Interest income 208 251 322
Foreign exchange gain 187 226 441
Other income 42 51 --
Share of loss in a company subject to significant influence (624) (755) --
Non-controlling interest 186 225 --
---------- ---------- ----------
(1) (2) 763
---------- ---------- ----------
Net loss (14,029) (16,970) (9,164)
========== ========== ==========
Net loss per share:
Basic (0.45) (0.54) (0.31)
Diluted (0.45) (0.54) (0.31)
========== ========== ==========
Weighted average number of shares outstanding:
Basic 31,401,858 31,401,858 29,863,793
Effect of dilutive options and warrants 3,167,073 3,167,073 4,954,172
---------- ---------- ----------
Diluted 34,568,931 34,568,931 34,817,965
========== ========== ==========
See accompanying notes to unaudited consolidated financial statements.
NEUROCHEM FIRST QUARTER ENDED MARCH 31, 2005 9
Consolidated Statements of Deficit
(Unaudited)
Periods ended March 31, 2005 and 2004 (in thousands of Canadian dollars) (in
accordance with Canadian GAAP)
Three months ended March 31,
---------------------------------------------
2005 2005 2004
---------- ---------- --------
(US$ - (CDN$) (Cdn$)
NOTE 1)
Deficit, beginning of period:
As previously reported (116,504) (140,926) (86,365)
Adjustment to reflect change in accounting
for employee stock options (note 2 (a)) -- -- (2,162)
Adjustment to reflect change in accounting
for long-term investment (note 2 (b)) (2,068) (2,501) --
-------- -------- --------
Deficit, beginning of period (118,572) (143,427) (88,527)
Net loss (14,029) (16,970) (9,164)
Share issue costs (4,096) (4,955) --
-------- -------- --------
Deficit, end of period (136,697) (165,352) (97,691)
======== ======== =======
See accompanying notes to unaudited consolidated financial statements.
NEUROCHEM FIRST QUARTER ENDED MARCH 31, 2005 10
Consolidated Statements of Cash Flows_
(Unaudited)
Periods ended March 31, 2005 and 2004 (in thousands of Canadian dollars) (in
accordance with Canadian GAAP)
Three months ended March 31,
-------------------------------------------
2005 2005 2004
-------------------------------------------
(US$ - (CDN$) (Cdn$)
NOTE 1)
Cash flows from operating activities:
Net loss (14,029) (16,970) (9,164)
Adjustments for:
Depreciation and amortization 472 570 368
Stock-based compensation 636 770 424
Share of loss in a company subject to significant influence 624 755 --
Non-controlling interest (186) (225) --
Changes in operating assets and liabilities:
Restricted cash (6,000) (7,258) --
Amounts receivable under collaboration agreement 11,940 14,443 --
Sales taxes and other receivables (57) (69) (272)
Research tax credits receivable (231) (279) 31
Prepaid expenses and deposits (40) (48) (604)
Long-term prepaid expenses and deposits (375) (454) --
Deferred revenue (996) (1,204) --
Accounts payable and accrued liabilities 792 957 191
------- ------- -------
(7,450) (9,012) (9,026)
------- ------- -------
Cash flows from financing activities:
Proceeds from issue of common shares 62,340 75,408 524
Share issue costs (4,096) (4,955) --
Repayment of obligations under capital lease (92) (111) (104)
Repayment of long-term debt (187) (226) --
------- ------- -------
57,965 70,116 420
------- ------- -------
Cash flows from investing activities:
Additions to property and equipment (375) (454) (232)
Additions to patents (122) (148) (389)
Proceeds from marketable securities 15,681 18,969 60,727
Proceeds from disposal of property and equipment 23 28 --
------- ------- -------
15,207 18,395 60,106
------- ------- -------
Net increase in cash and cash equivalents 65,722 79,499 51,500
Cash and cash equivalents, beginning of period 5,958 7,207 14,869
------- ------- -------
Cash and cash equivalents, end of period 71,680 86,706 66,369
======= ======= =======
Cash and cash equivalents are comprised of:
Cash balances with banks 584 706 1,586
Short-term investments 71,096 86,000 64,783
------- ------- -------
71,680 86,706 66,369
======= ======= =======
See accompanying notes to unaudited consolidated financial statements.
NEUROCHEM FIRST QUARTER ENDED MARCH 31, 2005 11
Notes to Consolidated Financial Statements
(Unaudited)
Periods ended March 31, 2005 and 2004 (Amounts in thousands of Canadian dollars,
except per share data)
1 BASIS OF PRESENTATION:
These financial statements have been prepared by management in accordance with
Canadian generally accepted accounting principles. The unaudited balance sheet
as at March 31, 2005 and the unaudited statements of operations and deficit and
cash flows for the periods ended March 31, 2005 and 2004 reflect all adjustments
which, in the opinion of management, are necessary for a fair statement of the
results of the interim periods presented. The results of operations for any
quarter are not necessarily indicative of the results for the full year. The
interim financial statements follow the same accounting policies and methods of
their application as described in note 2 of the annual financial statements for
the year ended December 31, 2004, except as disclosed in notes 2 (b) and (c)
below. The interim financial statements do not include all disclosures required
for annual financial statements and should be read in conjunction with the most
recent annual financial statements as at and for the year ended December 31,
2004.
Translation of convenience:
The Company's functional currency is the Canadian dollar. As a convenience to
certain users, the Company also presents the interim consolidated financial
statements in US dollars using the convenience translation method whereby all
Canadian dollar amounts are converted into US dollars at the noon exchange rate
quoted by the Bank of Canada at March 31, 2005, which was 0.8267 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.
2 CHANGES IN ACCOUNTING POLICIES:
(a) Stock-based compensation:
Prior to January 1, 2004, the Company applied the fair value based method of
accounting prescribed by the Canadian Institute of Chartered Accountants
("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.
The CICA has amended CICA Handbook Section 3870, Stock-based Compensation and
Other Stock-based Payments, to require entities to account for employee stock
options using the fair value based method, beginning January 1, 2004. Under the
fair value based method, 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.
NEUROCHEM FIRST QUARTER ENDED MARCH 31, 2005 12
(b) Variable Interest Entities:
On January 1, 2005, the Company adopted the recommendation of Accounting
Guideline 15, Consolidation of Variable Interest Entities (AcG 15), which
provides guidance for determining when an enterprise consolidates 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 returns, or both. It was determined that the Company's
investment in a holding company that owns Innodia's shares ("Innodia holding")
meets the criteria for being a VIE and that the Company is the primary
beneficiary of Innodia holding. Innodia holding's only activity is the
investment in Innodia Inc., which is accounted for using the equity method. The
implementation of AcG-15 resulted in the consolidation of the Company's interest
in Innodia holding starting January 1, 2005. The effect of the implementation of
this accounting guideline was to adjust the net carrying value of the long-term
investment and the deficit by $2,501 at January 1, 2005. The revised carrying
amounts of the long-term investment and non-controlling interest at January 1,
2005 were $3,359 and $1,439, respectively.
(c) Reimbursable costs:
Reimbursable costs incurred in connection with the Company's collaboration
agreement with Centocor Inc. are included in total revenues and expenses.
3 COLLABORATION AGREEMENT:
The Company recognized $1,205 of revenue under a collaboration agreement entered
into in December 2004, representing the amortization of the non-refundable
upfront payment over the remaining estimated period to obtaining the regulatory
approvals of the product.
As required under the terms of the collaboration agreement, the Company has
secured, through a bank, a letter of credit in the amount of $7,258 (US$6,000)
in connection with the potentially refundable upfront payment received under the
collaboration agreement. The Company has classified an equivalent amount of cash
as "restricted cash" on the consolidated balance sheet to reflect the
collateralization of the amount of the letter of credit.
4 SHARE CAPITAL:
(a) Issued and outstanding:
The issued and outstanding share capital consists of:
MARCH 31, December 31,
2005 2004
--------- ------------
(Audited)
$ $
34,544,962 common shares (December 31, 2004 -- 30,320,419) 251,561 175,855
--------- -------
NEUROCHEM FIRST QUARTER ENDED MARCH 31, 2005 13
Changes in the issued and outstanding common shares for the year ended December
31, 2004 and for the three-month period ended March 31, 2005 were as follows:
Common shares
---------------------------
Number Dollars
---------- -------
$
Balance, December 31, 2003 (audited) 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 (audited) 30,320,419 175,855
Issued for cash from public offering (i) 4,000,000 74,495
Exercise of stock options:
For cash 224,543 913
Ascribed value from additional paid-in capital -- 298
---------- -------
Balance, March 31, 2005 (unaudited) 34,544,962 251,561
========== =======
(i) On March 9, 2005, the Company completed a public offering for the issuance
and sale of 4 million common shares at a price of US$15.30 per share. The
total proceeds of the offering to the Company was $74,495 (US$61,200).
Total share issue costs of $4,955 were charged to the deficit.
(b) Share option plan:
Changes in outstanding options granted under the Company's stock option plan for
the year ended December 31, 2004 and the three-month period ended March 31, 2005
were as follows:
Weighted
average
Number exercise price
--------- --------------
$
Options outstanding, December 31, 2003 (audited) 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 (audited) 2,363,784 14.51
Granted 225,000 25.30
Exercised (224,543) 4.07
Cancelled or expired (52,008) 12.89
--------- -----
Options outstanding, March 31, 2005 2,312,233 16.61
========= =====
During the period ended March 31, 2005, the Board of Directors approved an
amendment to the Company's stock option plan to change the maximum number of
shares reserved for issuance from 4,438,767 common shares to 12.50% of the
issued and outstanding common shares. The amendment is subject to shareholder
approval.
NEUROCHEM FIRST QUARTER ENDED MARCH 31, 2005 14
(c) Warrants:
Outstanding warrants at March 31, 2005 are as follows:
Warrants Exercise price Expiry
-------------- -------------
$
2,800,000 3.13 July 2005
1,200,000 7.81 February 2006
----
4,000,000
5 STOCK-BASED COMPENSATION:
In the period ended March 31, 2005, the Company recorded total stock-based
compensation of $770 related to stock options granted to employees after July 1,
2002 (2004 -- $424).
The fair value of the options granted were determined using the following method
and assumptions:
The weighted average fair value of each option granted is estimated on the date
of grant using the Black-Scholes pricing model with the following assumptions:
MARCH 31, March 31,
2005 2004
--------- ---------
Risk-free interest rate 3.88% 3.54%
Expected volatility 53% 39%
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 periods ended March 31, 2005 and 2004:
Weighted
average
Number of grant-date
options fair value
--------- ----------
$
March 31, 2005 225,000 14.73
March 31, 2004 495,000 12.40
======= =====
Dividend yield was excluded from the calculation, since it is the present policy
of the Company to retain all earnings to finance operations.
6 RELATED PARTY TRANSACTIONS:
In the period ended March 31, 2005, the Company incurred fees of $600 (2004 --
$240) under the terms of a management services agreement entered into in March
2003, as amended in December 2004, with Picchio International Inc., a company
related to a shareholder, director and officer.
NEUROCHEM FIRST QUARTER ENDED MARCH 31, 2005 15
7 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.
A hearing has been scheduled for mid-September 2005 by the arbitral tribunal,
convened in accordance with the rules of the International Court of Arbitration.
Immtech has claimed monetary damages which, to date, it has estimated at between
US$18 million and US$42 million, which include an estimated valuation for
equitable relief. The Company counterclaims damages which, to date, it has
estimated at no less than US$3.5 million, which includes an estimated valuation
for equitable relief. 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.
NEUROCHEM FIRST QUARTER ENDED MARCH 31, 2005 16
[Picture]
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
NEUROCHEM FIRST QUARTER ENDED MARCH 31, 2005 17