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: November, 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.
November 15, 2005
By: /s/ David Skinner
------------------------------------
Mr. David Skinner
General Counsel and Corporate
Secretary
[PICTURE]
THIRD QUARTER ENDED SEPTEMBER 30, 2005
[logo] Driven to enhance peoples lives_
Message to Shareholders_
This quarter has been very active both on the corporate and clinical fronts.
Let me first describe for you our clinical progress, beginning with
Fibrillex(TM), our investigational product candidate for the treatment of
Amyloid A (AA) Amyloidosis.
As you will recall, we met in June with the U.S. Food and Drug Administration
(FDA) after submitting the results of our Phase II/III clinical trial. FDA
representatives reviewed the data and after discussing the situation with us,
agreed to both file and review a New Drug Application (NDA) for Fibrillex(TM).
Their decision was taken in full knowledge of the fact that we had not met the
pre-specified p-value on the primary endpoint. Furthermore, they also suggested
that we include follow-up data collected from our open-label extension study as
part of our NDA submission. By year-end, we should have a total of 12 months of
additional data.
Following that visit, the FDA accepted Fibrillex(TM) into the Continuous
Marketing Application (CMA) Pilot 1 program, allowing for the filing of an NDA
on a "rolling" basis over time. The preclinical portion of this NDA has already
been filed, the clinical portion is expected to be submitted soon and we plan to
complete this process early in 2006.
The data is encouraging especially on kidney function. The results indicate that
Fibrillex(TM) decreased the risk of patients experiencing renal decline and
all-cause death by 42% and that Fibrillex(TM) has a benign safety and good
tolerability profile.
The data also shows that Fibrillex(TM) can save about 5ml per minute per year of
kidney function as measured by creatinine clearance which could potentially save
years of kidney life and significantly delay time to dialysis.
Data like this has been well received especially by physicians and to that
effect the results of the Phase II/III clinical trial will be presented in
November 2005 by several of the trial's investigators at many upcoming medical
conferences, including the annual conferences of the American Society of
Nephrology and the American College of Rheumatology.
We now have just over 100 patients in the open-label study who are all receiving
Fibrillex(TM), and have followed the FDA's suggestion that we include the data
in our NDA. The interim results after eight months on the open-label study
indicate that patients who were previously on placebo and who are now receiving
Fibrillex(TM) have seen their kidney function respond favourably as their slope
of creatinine clearance improved. As well, the patients who continued
Fibrillex(TM) treatment for the whole 32-month period appear to continue to
benefit from Fibrillex(TM).
I do not want to speculate on what the regulatory outcome will be; however, I
can say today that we appear to have a product candidate that exerts a
clinically meaningful effect on kidney function. The data indicates that
Fibrillex(TM) reduces by 42% the risk of renal decline and all-cause death and
delays progression to dialysis. There is no specific treatment for this orphan
disease and AA Amyloidosis is a lethal condition.
Last, I want to emphasize that Fibrillex(TM) appears to be safe. We will
continue to cooperate fully with regulatory authorities to ensure the best
outcome and hopefully make Fibrillex(TM) available to those patients suffering
from AA Amyloidosis.
As you probably know, Neurochem enjoys a collaboration and distribution
agreement for Fibrillex(TM) with Centocor, Inc. Our two companies remain
committed to the development of Fibrillex(TM).
NEUROCHEM THIRD QUARTER ENDED SEPTEMBER 30, 2005 1
ALZHEMED(TM)
Now for a look at our progress on Alzhemed(TM), our investigational product
candidate for the treatment of Alzheimer's disease (AD). We believe today that
Alzhemed(TM) could be not only the most advanced product candidate in
development to stop this disease, but also the product candidate with the
largest market potential within the industry.
We are, at present, at about the halfway point in our fully enrolled 18-month
North American Phase III clinical trial. There are close to 400 patients who
have completed nine months of the trial and more than 100 who have reached the
one-year time point. The trial is expected to be completed by the end of 2006.
In this trial, the majority of the AD patients are mild with an average rating
of 21 at study entry on the Mini Mental State Exam or MMSE, a standard measure
of cognitive function.
Furthermore, our patients on average have been on a stable dose of background
therapies for 20 months before entering our Phase III clinical trial.
Accordingly, most of them should be in the declining phase of their disease, and
we hope that Alzhemed(TM) will bring about stabilization of their illness.
It is important to understand that we have designed this Phase III clinical
trial to demonstrate disease modification because it includes volumetric
measures by magnetic resonance of specific regions of the brain based on a
recommendation by the FDA.
It was also encouraging that, during the quarter, we received our third
recommendation from our Independent Safety Review Board to continue the North
American Phase III clinical trial for Alzhemed(TM). These recommendations
reinforce our previous findings that the product candidate appears to be well
tolerated.
At approximately halfway through the trial, the drop-out rate is 14%, slightly
below the estimated range. The patients are monitored every three months on all
measures included in the trial.
Following on the North American Phase III clinical trial, and with a similar
design, we initiated the Phase III clinical trial in Europe in mid-September. We
believe patient recruitment there will be fast, as it was in North America.
SALE AND LEASEBACK AGREEMENT
We are pleased to report that Neurochem has leveraged its assets and entered
into a sale and leaseback agreement with Alexandria Real Estate Equities, Inc.
This agreement strengthens our balance sheet and our cash position in a
non-dilutive fashion, permits repayment of debt and provides a total of $32
million in proceeds for Neurochem, bringing our total cash on hand at the end of
the quarter, on a pro forma basis to approximately $87 million. The closing of
this transaction is expected during this month of November.
Although this quarter had specific expenses associated with it, we expect next
year's expenses to be similar to 2005, even with the initiation of the European
Phase III clinical trial. We believe, therefore, that we have enough cash to
complete the North American Phase III clinical trial.
CONCLUSION
As we had forecast, the company's activities are proceeding well and we are
looking forward to what we believe will be a very exciting 12 months to come. We
remain committed to hopefully bringing these products to the market and, on
behalf of the Board, I thank you for your support.
[SIGNED]
Dr. Francesco Bellini
Chairman, President and Chief Executive Officer
NEUROCHEM THIRD QUARTER ENDED SEPTEMBER 30, 2005 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations for the
Three and Nine-Month Periods Ended September 30, 2005_
The following information should be read in conjunction with the unaudited
consolidated financial statements for the three and nine-month periods ended
September 30, 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, as well as the Annual Information
Form 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 September 30, 2005, the net loss amounted to
$21,074,000 ($0.58 per share), compared to $13,775,000 ($0.45 per share) for the
corresponding period last year. For the nine-month period ended September 30,
2005, the net loss amounted to $56,738,000 ($1.65 per share), compared to
$37,011,000 ($1.23 per share) for the same period last year.
Revenues from collaboration agreement amounted to $750,000 for the current
quarter ($2,777,000 for the nine-month period) and consist of the revenue earned
under the agreement with Centocor, Inc. (Centocor) in respect of Fibrillex(TM).
Revenue recognized is in respect of the non-refundable upfront payment received
from Centocor, which is being amortized over the remaining estimated period to
the date the regulatory approvals of the investigational product candidate are
anticipated. The estimated period is subject to change based on additional
information that the Company may receive periodically. The other portion of the
upfront payment received from Centocor has been classified as long term deferred
revenues and is not being amortized as earned revenues given that it is
refundable in the event that the Company receives a non-approvable letter issued
by the U.S. Food and Drug Administration (FDA). The Company does not expect to
receive a non-approvable letter from the FDA in the near term.
Reimbursable costs revenue amounted to $170,000 for the current quarter
($827,000 for the nine-month period) 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 $13,945,000 for the current quarter ($38,807,000 for the nine-month
period), compared to $7,760,000 for the same period last year ($20,345,000 for
the nine-month period). The increase is due primarily to expenses incurred in
relation to the development of Alzhemed(TM) for the ongoing Phase III clinical
trials in North America and Europe. Alzhemed(TM) is the Company's
investigational product candidate for the treatment of Alzheimer's disease (AD).
During the quarter, the Company completed the enrolment of 1,052 patients with
mild-to-moderate AD for its North American Phase III clinical trial for
Alzhemed(TM). The trial is being conducted in 51 U.S. and 17 Canadian clinical
centers across North America, over a period of 18 months. The Company also
launched its Phase III clinical trial in Europe in September 2005. Furthermore,
the Company initiated, under the Continuous Marketing Application (CMA) Pilot 1
program, the submission of a "rolling" New Drug Application (NDA) to the FDA
seeking marketing approval for its investigational product candidate,
Fibrillex(TM), for the treatment of AA Amyloidosis. The Company plans to
complete the submission of the NDA early in 2006. The FDA has previously agreed
to review this NDA. The Company expects research and development expenses to
increase in the future as product candidates progress through clinical
development and as the Company continues to invest in product research and
development.
NEUROCHEM THIRD QUARTER ENDED SEPTEMBER 30, 2005 3
Research tax credits amounted to $1,684,000 this quarter ($2,625,000 for the
nine-month period), compared to $301,000 for the corresponding period last year
($922,000 for the nine-month period). Research tax credits represent refundable
tax credits earned under the Quebec Scientific Research and Experimental
Development Program. The increase is mainly due to tax credits of $1,277,000
recorded during the quarter and earned with respect to current and prior years'
eligible research and development taxable benefits on stock options. Management
determined that these credits were reasonably assured of realization in the
current quarter based on a recent court ruling.
General and administrative expenses totaled $6,737,000 for the current quarter
($17,819,000 for the nine-month period), compared to $4,913,000 for the same
quarter last year ($13,502,000 for the nine-month period). The increase during
the quarter is primarily attributable to higher legal fees in connection with
the dispute with Immtech International, Inc (Immtech). The increase in the
nine-month period is attributable to the expansion of the corporate
infrastructure to support growth and higher legal fees incurred in respect of
the dispute with Immtech. The expansion of corporate infrastructure includes an
increase in operating costs related to the facilities acquired during the second
quarter of 2004 and other corporate agreements and matters.
Reimbursable costs amounted to $170,000 for the current quarter ($827,000 for
the nine-month period) and consist of costs incurred on behalf of Centocor in
respect of Fibrillex(TM) related activities and reimbursable by Centocor.
Stock-based compensation amounted to $868,000 for the current quarter
($3,930,000 for the nine-month period), compared to $666,000 for the
corresponding quarter last year ($3,329,000 for the nine-month period). This
expense relates to employee and director stock options and stock-based
incentives, whereby compensation cost is measured at fair value at the date of
grant and is expensed over the award's vesting period. For the nine-month period
ended September 30, 2005, stock-based compensation includes expenses of
$1,441,000 relating to 140,000 common shares to be issued to the Chairman,
President and Chief Executive Officer, pursuant to an agreement signed in
December 2004.
Special charges amounted to $2,085,000 for the nine-month period ended September
30, 2004, and were related to the relocation to facilities acquired from Shire
Biochem Inc. in May 2004.
Depreciation and amortization amounted to $631,000 for the current quarter
($1,776,000 for the nine-month period), compared to $587,000 for the same
quarter last year ($1,454,000 for the nine-month period). 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 $126,000 for the current quarter ($380,000
for the nine-month period), compared to $103,000 for the same quarter last year
($151,000 for the nine-month period). The increase for the nine-month period 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 in 2004.
Interest income amounted to $591,000 for the current quarter ($1,475,000 for the
nine-month period), compared to $247,000 for the same quarter last year
($822,000 for the nine-month period). The increase results from higher average
cash balances in the current period compared to the same period last year, due
to proceeds received from the public offering and the exercise of a warrant as
well as higher interest rates during 2005. Refer to the Liquidity and Capital
Resources section for details on the public offering and the exercise of a
warrant.
Foreign exchange loss amounted to $1,700,000 for the current quarter ($68,000
for the nine-month period), compared to $392,000 for the same quarter last year
(gain of $1,699,000 for the nine-month period). Foreign exchange gains or losses
arise on the movement in foreign exchange rates related to the Company's net
monetary assets held in foreign currencies, primarily US dollars. The Company
maintains a significant US dollars position to serve as a natural hedge of
exchange rate fluctuations with respect to planned US dollar denominated
research and development expenditures primarily relating to its Phase III
clinical programs. The foreign exchange loss is primarily due to the significant
strengthening of the Canadian dollar versus the US dollar during the period.
NEUROCHEM THIRD QUARTER ENDED SEPTEMBER 30, 2005 4
Other income amounted to $291,000 for the current quarter ($638,000 for the
nine-month period), compared to nil for the same period last year ($85,000 for
the nine-month period). Other income consists of non-operating revenue,
primarily rental revenue.
VARIABLE INTEREST ENTITIES
On January 1, 2005, the Company adopted the recommendations of the CICA
Accounting Guideline 15 - Consolidation of Variable Interest Entities (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. The implementation of AcG-15 resulted in
the consolidation of the Company's interest in a holding company that owns
Innodia Inc.'s shares, 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 resulted in the
consolidation in the current quarter of a share of loss in a company subject to
significant influence of $574,000 ($2,153,000 for the nine-month period) and
non-controlling interest of $171,000 ($641,000 for the nine-month period), in
the Consolidated Statement of Operations.
LITIGATION
In connection with an agreement concluded in 2002, Immtech brought claims
against the Company in 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. A hearing before the arbitral tribunal was
held in mid-September 2005. The parties are currently engaged in various
post-hearing activities as required by the tribunal, including preparing closing
and rebuttal briefs, and preparing for oral closing arguments, if any.
On August 5, 2005, Immtech filed SEC Form 10-Q in relation to its quarterly
report for the period ended June 30, 2005. In that form, Immtech stated having
filed expert reports which set forth a range of monetary damages based on
different scenarios of between US$14 million and US$50 million, without regard
to punitive damages. 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 and the amount of loss, if any,
cannot reasonably be estimated. Accordingly, no provision for possible loss has
been recorded by the Company in connection with this matter. The Company has,
and will continue to, vigorously defend itself against claims brought by
Immtech.
RELATED PARTY TRANSACTIONS
Refer to note 7 of the Consolidated Financial Statements.
NEUROCHEM THIRD QUARTER ENDED SEPTEMBER 30, 2005 5
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
Third 920 (21,074) (0.58)
Second 1,035 (18,694) (0.54)
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)
The increase in quarterly losses is primarily due to additional investments in
research and development as the Company's product candidates advance through
clinical trials.
LIQUIDITY AND CAPITAL RESOURCES_
As at September 30, 2005, the Company had available cash, cash equivalents and
marketable securities of $65,264,000, 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 first quarter of 2005, as well as from the
exercise of a warrant (as described below), net of funds used in operations and
in investing activities. The Company believes that its available cash resources
and other sources of funds should be sufficient to finance the Company's
operations for the next twelve months.
On March 9, 2005, the Company completed a public offering of its common shares
in the U.S. 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. Of the original net
amount raised, $29,473,000 has yet to be spent as of September 30, 2005; the use
of proceeds continues to conform in all material respects with the expectations
set forth in the prospectus. Certain funds raised from the share issuance were
denominated in US dollars. The Company maintains a significant US dollars
position to serve as a natural hedge of exchange rate fluctuations with respect
to planned US dollar denominated research and development expenditures primarily
relating to its Phase III clinical programs.
On July 25, 2005, Picchio Pharma Inc. exercised a warrant, issued pursuant to a
July 2002 private placement, that was otherwise scheduled to expire on that
date, generating total proceeds to the Company of $8,764,000 and the issuance of
2,800,000 common shares from treasury.
As at October 31, 2005, the Company had 37,381,079 common shares outstanding,
220,000 common shares issuable to the Chief Executive Officer upon the
achievement of specified performance targets, 2,346,466 options granted under
the stock option plan and a warrant outstanding to purchase 1,200,000 common
shares.
SUBSEQUENT EVENT_
On November 8, 2005, the Company announced a sale and leaseback transaction in
respect of its facilities and campus located in Laval for a sale price of $32
million. The transaction is expected to generate approximately $22 million in
net proceeds for the Company, after debt repayment of approximately $9.8 million
and transaction expenses.
NEUROCHEM THIRD QUARTER ENDED SEPTEMBER 30, 2005 6
Consolidated Balance Sheets_
(Unaudited)
September 30, 2005 and December 31, 2004 (in thousands of Canadian dollars) (in
accordance with Canadian GAAP)
SEPTEMBER 30, SEPTEMBER 30, December 31,
2005 2005 2004
------------- ------------- ------------
(US$ - (CDN$) (Cdn$)
NOTE 1) (Audited)
ASSETS
Current assets:
Cash and cash equivalents 38,001 44,120 7,207
Marketable securities 18,211 21,144 21,966
Amount receivable under collaboration agreement -- -- 14,443
Sales taxes and other receivables 709 823 782
Research tax credits receivable 3,311 3,844 1,349
Prepaid expenses and deposits 2,381 2,765 3,836
-------- -------- --------
62,613 72,696 49,583
Restricted cash (note 3) 6,000 6,967 --
Long-term prepaid expenses and deposits 1,246 1,447 1,361
Long-term investment 1,039 1,206 4,421
Property and equipment 13,577 15,763 16,690
Patents 4,298 4,990 4,393
-------- -------- --------
88,773 103,069 76,448
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 3,417 3,967 4,060
Accrued liabilities 10,207 11,851 6,424
Deferred revenue 2,091 2,428 4,820
Current portion of obligations under capital leases 67 78 416
Current portion of long-term debt (note 4) 314 365 686
-------- -------- --------
16,096 18,689 16,406
Deferred revenue 8,085 9,387 9,772
Long-term accrued liabilities 95 110 126
Long-term debt (note 4) 8,075 9,375 9,450
-------- -------- --------
32,351 37,561 35,754
-------- -------- --------
Non-controlling interest 687 798 --
Shareholders' equity:
Share capital (note 5) 224,311 260,433 175,855
Additional paid-in capital (note 5) 8,094 9,397 5,765
Deficit (176,670) (205,120) (140,926)
-------- -------- --------
55,735 64,710 40,694
Litigation (note 8)
Subsequent event (note 11)
-------- -------- --------
88,773 103,069 76,448
======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
NEUROCHEM THIRD QUARTER ENDED SEPTEMBER 30, 2005 7
Consolidated Statements of Operations_
(Unaudited)
Periods ended September 30, 2005 and 2004 (in thousands of Canadian dollars,
except per share data) (in accordance with Canadian GAAP)
Three months ended September 30, Nine months ended September 30,
--------------------------------- ---------------------------------
2005 2005 2004 2005 2005 2004
------- ---------- ---------- ------- ---------- ----------
(US$ - (CDN$) (Cdn$) (US$ - (CDN$) (Cdn$)
NOTE 1) NOTE 1)
Revenues:
Collaboration agreement (note 3) 646 750 -- 2,392 2,777 --
Reimbursable costs 146 170 -- 712 827 --
------- ---------- ---------- ------- ---------- ----------
792 920 -- 3,104 3,604 --
------- ---------- ---------- ------- ---------- ----------
Expenses (income):
Research and development 12,011 13,945 7,760 33,424 38,807 20,345
Research tax credits (1,450) (1,684) (301) (2,261) (2,625) (922)
Research grants (17) (20) (98) (34) (39) (327)
------- ---------- ---------- ------- ---------- ----------
10,544 12,241 7,361 31,129 36,143 19,096
General and administrative 5,802 6,737 4,913 15,348 17,819 13,502
Reimbursable costs 146 170 -- 712 827 --
Stock-based compensation
(notes 5 (b) and 6) 748 868 666 3,385 3,930 3,329
Special charges -- -- -- -- -- 2,085
Depreciation of property and equipment 475 552 525 1,333 1,548 1,284
Amortization of patent costs 68 79 62 196 228 170
Interest and bank charges 109 126 103 327 380 151
------- ---------- ---------- ------- ---------- ----------
17,892 20,773 13,630 52,430 60,875 39,617
------- ---------- ---------- ------- ---------- ----------
Net loss before undernoted items (17,100) (19,853) (13,630) (49,326) (57,271) (39,617)
------- ---------- ---------- ------- ---------- ----------
Investment and other:
Interest income 509 591 247 1,270 1,475 822
Foreign exchange (loss) gain (1,464) (1,700) (392) (59) (68) 1,699
Other income 251 291 -- 549 638 85
Share of loss in a company subject
to significant influence (494) (574) -- (1,854) (2,153) --
Non-controlling interest 147 171 -- 552 641 --
------- ---------- ---------- ------- ---------- ----------
(1,051) (1,221) (145) 458 533 2,606
------- ---------- ---------- ------- ---------- ----------
Net loss (18,151) (21,074) (13,775) (48,868) (56,738) (37,011)
======= ========== ========== ======= ========== ==========
Net loss per share:
Basic (0.50) (0.58) (0.45) (1.43) (1.65) (1.23)
Diluted (0.50) (0.58) (0.45) (1.43) (1.65) (1.23)
======= ========== ========== ======= ========== ==========
Weighted average number of shares
outstanding :
Basic 36,618,807 30,281,440 34,288,153 30,103,171
Effect of dilutive options and
warrants 139,817 3,764,364 1,669,024 4,247,615
---------- ---------- ---------- ----------
Diluted 36,758,624 34,045,804 35,957,177 34,350,786
========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements.
NEURPCHEM THIRD QUARTER ENDED SEPTEMEBER 30, 2005 8
Consolidated Statements of Deficit_
(Unaudited)
Periods ended September 30, 2005 and 2004 (in thousands of Canadian dollars) (in
accordance with Canadian GAAP)
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2005 2005 2004 2005 2005 2004
--------- -------- -------- -------- -------- --------
(US$ - (CDN$) (Cdn$) (US$ - (CDN$) (Cdn$)
NOTE 1) NOTE 1)
Deficit, beginning of period:
As previously reported (158,519) (184,046) (111,763) (121,380) (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 policy for long-term
investment (note 2 (b)) -- -- -- (2,154) (2,501) --
-------- -------- -------- -------- -------- --------
Deficit, beginning of period, as restated (158,519) (184,046) (111,763) (123,534) (143,427) (88,527)
Net loss (18,151) (21,074) (13,775) (48,868) (56,738) (37,011)
Share issue costs -- -- -- (4,268) (4,955) --
-------- -------- -------- -------- -------- --------
Deficit, end of period (176,670) (205,120) (125,538) (176,670) (205,120) (125,538)
======== ======== ======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
NEURPCHEM THIRD QUARTER ENDED SEPTEMEBER 30, 2005 9
Consolidated Statements of Cash Flows_
(Unaudited)
Periods ended September 30, 2005 and 2004 (in thousands of Canadian dollars) (in
accordance with Canadian GAAP)
Three months Nine months
ended September 30, ended September 30,
--------------------------- ---------------------------
2005 2005 2004 2005 2005 2004
------- ------- ------- ------- ------- -------
(US$ - (CDN$) (Cdn$) (US$ - (CDN$) (Cdn$)
NOTE 1) NOTE 1)
Cash flows from operating activities:
Net loss (18,151) (21,074) (13,775) (48,868) (56,738) (37,011)
Adjustments for:
Depreciation and amortization 543 631 587 1,529 1,776 1,454
Unrealized foreign exchange loss 1,698 1,972 300 1,061 1,232 202
Stock-based compensation 748 868 666 3,385 3,930 3,329
Share of loss in a company subject
to significant influence 494 574 -- 1,854 2,153 --
Non-controlling interest (147) (171) -- (552) (641) --
Write-off of leasehold improvements
and other property and equipment -- -- -- -- -- 1,189
Provision for lease exit obligations -- -- -- -- -- 896
Changes in operating assets and liabilities:
Restricted cash -- -- -- (6,251) (7,258) --
Amounts receivable under
collaboration agreement -- -- -- 12,440 14,443 --
Sales taxes and other receivables (260) (302) (305) (35) (41) 217
Research tax credits receivable (1,449) (1,683) 463 (2,149) (2,495) 1,302
Prepaid expenses and deposits 1,041 1,209 (110) 922 1,071 (1,993)
Long-term prepaid expenses and deposits 92 107 (697) (74) (86) (946)
Deferred revenue (646) (750) -- (2,392) (2,777) --
Accounts payable and accrued liabilities 1,446 1,679 (36) 4,896 5,684 2,191
------- ------- ------- ------- ------- -------
(14,591) (16,940) (12,907) (34,234) (39,747) (29,170)
------- ------- ------- ------- ------- -------
Cash flows from financing activities:
Proceeds from issue of common shares 7,553 8,769 4 72,590 84,280 1,286
Share issue costs -- -- -- (4,268) (4,955) --
Repayment of obligations
under capital leases (99) (115) (106) (291) (338) (315)
Proceeds from long-term debt -- -- 10,469 -- -- 10,469
Repayment of long-term debt (91) (106) (175) (341) (396) (175)
------- ------- ------- ------- ------- -------
7,363 8,548 10,192 67,690 78,591 11,265
------- ------- ------- ------- ------- -------
Cash flows from investing activities:
Additions to property and equipment (243) (282) (1,952) (1,021) (1,185) (14,208)
Additions to patent costs (178) (207) (404) (598) (695) (1,086)
Maturity (purchase) of
marketable securities (18,211) (21,144) (18,886) 708 822 43,839
Proceeds from disposal of property
and equipment 2 3 16 59 68 26
------- ------- ------- ------- ------- -------
(18,630) (21,630) (21,226) (852) (990) 28,571
------- ------- ------- ------- ------- -------
Net (decrease) increase in cash
and cash equivalents (25,858) (30,022) (23,941) 32,604 37,854 10,666
Cash and cash equivalents,
beginning of period 65,224 75,727 49,574 6,207 7,207 14,869
Effect of unrealized foreign exchange loss
on cash and cash equivalents (1,365) (1,585) (300) (810) (941) (202)
------- ------- ------- ------- ------- -------
Cash and cash equivalents, end of period 38,001 44,120 25,333 38,001 44,120 25,333
======= ======= ======= ======= ======= =======
Supplemental cash flow information (note 9)
See accompanying notes to unaudited consolidated financial statements.
NEUROCHEM THIRD QUARTER ENDED SEPTEMBER 30, 2005 10
Notes to Consolidated Financial Statements_
(Unaudited)
Periods ended September 30, 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 September 30, 2005 and the unaudited statements of operations and deficit
and cash flows for the periods ended September 30, 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 readers, 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 September 30, 2005, which was 0.8613 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 the Canadian dollar amounts in the
statements 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 and director stock options. Under the settlement method,
any consideration paid by employees and directors 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 and
director 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 and director 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 THIRD QUARTER ENDED SEPTEMBER 30, 2005 11
(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 operations 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 Inc.'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 $750 and $2,777 of revenue for the three and nine-month
periods ended September 30, 2005 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 $6,967 (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_ LONG-TERM DEBT:
In the second quarter, the Company renegotiated its revolving decreasing term
credit agreement signed in July 2004. Under the terms of the amended agreement,
the maximum authorized credit is reduced by $100 per quarter from June 2005 to
March 2007, by $200 per quarter from June 2007 to March 2008 and by $275 per
quarter thereafter until June 2009. Previously, the maximum authorized credit
was reduced by $175 per quarter throughout the term.
5_ SHARE CAPITAL AND ADDITIONAL PAID-IN CAPITAL:
(A) ISSUED AND OUTSTANDING SHARE CAPITAL:
The issued and outstanding share capital consists of:
SEPTEMBER 30, December 31,
2005 2004
------------- ------------
(Audited)
$ $
37,381,079 common shares (December 31, 2004 - 30,320,419) 260,433 175,855
NEUROCHEM THIRD QUARTER ENDED SEPTEMBER 30, 2005 12
Changes in the issued and outstanding common shares and additional paid-in
capital for the year ended December 31, 2004 and for the nine-month period ended
September 30, 2005 were as follows:
Additional
Common shares paid-in capital
Number Dollars Dollars
---------- ------------- ---------------
$ $
Balance, December 31, 2003 (audited) 29,775,127 173,930 --
Change in accounting for stock options (note 2 (a)) -- -- 2,162
Exercise of stock options:
For cash 545,292 1,490 --
Ascribed value from additional paid-in capital -- 435 (435)
Stock-based compensation -- -- 4,038
---------- ------- -----
Balance, December 31, 2004 (audited) 30,320,419 175,855 5,765
Issued for cash from public offering (i) 4,000,000 74,495 --
Exercise of warrants (ii) 2,800,000 8,764 --
Exercise of stock options:
For cash 260,660 1,021 --
Ascribed value from additional paid-in capital -- 298 (298)
Stock-based compensation -- -- 3,930
---------- ------- -----
Balance, September 30, 2005 (unaudited) 37,381,079 260,433 9,397
========== ======= =====
(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.
(ii) On July 25, 2005, a shareholder exercised a warrant to purchase 2.8 million
common shares at a price of $3.13 per share. The total proceeds to the
Company were $8,764.
(B) AGREEMENT TO ISSUE SHARES:
The agreement with the Chief Executive Officer to issue to him up to 220,000
common shares upon the execution and achievement of specified performance
targets was approved by shareholders and regulators in the second quarter. The
Company recorded $1,441 in stock-based compensation in relation to 140,000
common shares to be issued to the Chief Executive Officer in connection with his
execution and achievement of certain specified performance targets. The shares
will be issued by the Company upon formal notification by the Chief Executive
Officer.
NEUROCHEM THIRD QUARTER ENDED SEPTEMBER 30, 2005 13
(C) SHARE OPTION PLAN:
Changes in outstanding options granted under the Company's stock option plan for
the year ended December 31, 2004 and the nine-month period ended September 30,
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 311,000 21.38
Exercised (260,660) 3.92
Cancelled or expired (67,658) 13.54
--------- -----
Options outstanding, September 30, 2005 2,346,466 16.62
========= =====
In the second quarter, the shareholders 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.
(D) WARRANTS:
At September 30, 2005, the Company had a warrant outstanding to purchase
1,200,000 common shares at a price of $7.81 per share. The warrant expires in
February 2006.
6_ STOCK-BASED COMPENSATION:
In the three and nine-month periods ended September 30, 2005, the Company
recorded total stock-based compensation of $868 and $2,489, respectively,
related to stock options granted to employees and directors after July 1, 2002
(2004 - $666 and $3,329, respectively).
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:
SEPTEMBER 30, September 30,
2005 2004
------------- -------------
Risk-free interest rate 3.86% 3.78%
Expected volatility 58% 42%
Expected life in years 7 7
Expected dividend yield -- --
The following table summarizes the weighted average grant-date fair value per
share for options granted during the nine-month periods ended September 30, 2005
and 2004:
Weighted
average
Number of grant-date
options fair value
--------- ----------
$
September 30, 2005 311,000 12.78
September 30, 2004 712,000 12.81
NEUROCHEM THIRD QUARTER ENDED SEPTEMBER 30, 2005 14
Dividend yield was excluded from the calculation, since it is the present policy
of the Company to retain all earnings to finance operations.
7_ RELATED PARTY TRANSACTIONS:
In the three and nine months ended September 30, 2005, the Company incurred fees
of $600 and $1,800, respectively (2004 - $240 and $720, respectively) 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.
The Company entered into a lease agreement with a company in which a shareholder
has an equity interest. In the three and nine months ended September 30, 2005,
rental revenue under the agreement amounted to $240 and $461, respectively, and
is included in "other income" on the consolidated statements of operations.
The transactions were recorded at the exchange amount, which is the
consideration established by and agreed to by the parties.
8_ 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 terms of the CTA. A
hearing before the arbitral tribunal, convened in accordance with the rules of
the International Court of Arbitration, was held in mid-September 2005. The
parties are currently engaged in various post-hearing activities as required by
the tribunal, including preparing closing and rebuttal briefs and preparing for
oral closing arguments, if any.
On August 5, 2005, Immtech filed SEC Form 10-Q in relation to its quarterly
report for the period ended June 30, 2005. In that form, Immtech stated having
filed expert reports which set forth a range of monetary damages based on
different scenarios of between US$14 million and US$50 million, without regard
to punitive damages. The Company counterclaimed damages which, to date, it has
estimated at no less than US$3.5 million, which includes an estimated valuation
for equitable relief. The outcome of this matter and the amount of loss, if any,
cannot reasonably be estimated. No provision for possible loss has been recorded
by the Company in connection with this matter.
The Company has and will continue to vigorously defend itself against the claims
brought by Immtech.
9_ SUPPLEMENTAL CASH FLOW DISCLOSURE:
SEPTEMBER 30, SEPTEMBER 30, September 30,
2005 2005 2004
------------- ------------- -------------
(US$ - (CDN$) (Cdn$)
NOTE 1)
Cash and cash equivalents are comprised of:
Cash balances with banks 144 167 344
Short-term investments 37,857 43,953 24,989
------ ------ ------
38,001 44,120 25,333
====== ====== ======
NEUROCHEM THIRD QUARTER ENDED SEPTEMBER 30, 2005 15
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2005 2004 2005 2004
---- ---- ---- ----
$ $ $ $
Interest and stamping fees paid 99 104 311 132
== === === ===
Acquisition of property and equipment and intangibles included in accounts
payable and accrued liabilities amounted to $547 as at September 30, 2005
(December 31, 2004 - $916).
10_ COMPARATIVE FIGURES:
Certain of the comparative figures have been reclassified to conform to the
presentation adopted in the current year.
11_ SUBSEQUENT EVENT:
On November 8, 2005, the Company announced a sale and leaseback transaction in
respect of its facilities and campus located in Laval for a sale price of $32
million. The transaction is expected to generate $22 million in net proceeds for
the Company, after debt repayment of approximately $9.8 million and transaction
expenses.
NEUROCHEM THIRD QUARTER ENDED SEPTEMBER 30, 2005 16
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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