================================================================================
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: August, 2006
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.
August 15, 2006
By: /s/ David Skinner
---------------------------------------
David Skinner, Vice President,
General Counsel and Corporate Secretary
[picture]
We are
Neurochem
SECOND QUARTER
ENDED JUNE 30, 2006
Neurochem Second Quarter ended June 30, 2006
Message to Shareholders 2
MESSAGE TO SHAREHOLDERS
As we prepare this report on our Second Quarter results, Neurochem is within
less than one week of receiving the US Food and Drug Administration's (FDA's)
response to our New Drug Application (NDA) for eprodisate (Fibrillex(TM)), one
of Neurochem's product candidates. The FDA filed and granted Priority Review to
this NDA in April, 2006.
We have been in ongoing discussions with the agency since the filing of the
NDA, and we now await an action letter from the FDA on this application. Until
such time as we have received and reviewed this letter, nothing more can be said
on the topic.
In addition to our regulatory filings in the United States, we are
expecting to file our Marketing Authorization Application this September for
eprodisate (Fibrillex(TM)) for the treatment of AA amyloidosis with the European
Medicines Agency. The "rapporteur" and "co-rapporteur" countries have been
confirmed, namely France and the UK, respectively. Preliminary meetings have
already taken place with representatives of both of these national authorities.
Another core product candidate, tramiprosate (Alzhemed(TM)), is for
Alzheimer's disease (AD), a very serious condition which remains today in need
of a new treatment paradigm. Tramiprosate's (Alzhemed(TM)'s) development is
continuing to advance and the North American Phase III clinical trial is
expected to be completed in January 2007. It is designed to assess the safety,
efficacy and disease-modifying potential of tramiprosate (Alzhemed(TM)) in
mild-to-moderate AD patients. Today, there are more than 350 patients who have
completed the trial and more than 820 who have reached the one-year time point.
We have experienced a drop-out rate of about 22%, which is much lower than
anticipated and is very encouraging. The data is expected to be released at the
end of Spring 2007.
For patients who have completed the North American Phase III trial, we have
also initiated an ongoing extension study in which 300 patients are already
participating and receiving this medication. This represents more than 85% of
the patients who have completed the Phase III clinical trial. We believe this is
promising and we are looking forward to receiving the results of the North
American Phase III clinical trial next year. We also find it encouraging that
the journal, Neurology, has accepted for publication the Phase II clinical trial
results of tramiprosate (Alzhemed(TM)). The journal's publication will be
available on-line shortly and we will inform the public of its availability in a
timely manner.
Neurochem is also actively pursuing the advancement of tramiprosate's
(Alzhemed(TM)'s) Phase III clinical trial in Europe, which was initiated in
September 2005 and which will involve approximately the same number of
mild-to-moderate AD patients as in the North American trial. The trial is taking
place in ten countries, with close to 70 clinical centers overall participating.
At the present time, more than 500 patients have been randomized in the European
trial and we expect patient recruitment to be completed in the next few months.
With a late-stage product candidate such as tramiprosate (Alzhemed(TM)) and
its blockbuster potential, we continue to receive strong interest from various
companies that are interested in partnering with us for this program. Our goal
is not only to conclude a partnership under the best possible terms and
conditions, but also to conclude one with the right partner - a partner that
will collaborate with us and enable us to grow as a company.
APPOINTMENTS
During the second quarter, Neurochem was very pleased to announce the
appointment of Messrs. Andre Desmarais, Neil Flanzraich and Calin Rovinescu to
its Board of Directors. Mr. Desmarais is President and Co-Chief Executive
Officer of Power Corporation of Canada and Deputy Chairman of Power Financial
Corporation. Mr. Flanzraich was, until recently, Vice Chairman and President of
IVAX Corporation, until its sale to TEVA Pharmaceuticals and Mr. Rovinescu, a
lawyer, is co-founder and Principal of Genuity Capital Markets, and former
Executive Vice President of Air Canada. These gentlemen bring experience and
expertise to Neurochem that will be invaluable as we move forward.
Neurochem Second Quarter ended June 30, 2006
Message to Shareholders 3
RECENT DEVELOPMENTS
We also announced, following the close of the quarter, that Neurochem has
entered into a securities purchase agreement in respect of an equity line of
credit facility, with a 24-month term, that provides the Company up to US $60
million of funds in return for the issuance of common shares at a discount of
3.0% to market price at the time of draw downs over the term. Rodman & Renshaw
acted as placement agent for this transaction. The agreement provides for an
obligation for Neurochem to drawdown at least US $25 million over the two-year
term of the facility. The agreement is conditional on the registration of the
underlying securities and approval from the appropriate securities regulators.
With a pending decision from the FDA on the potential approval of
eprodisate (Fibrillex(TM)) and the advancement of the two Phase III clinical
trials for tramiprosate (Alzhemed(TM)), we stand on the threshold of important
developments in the near future. Given the cash on hand and the key activities
in progress, we believe this facility gives our Company the flexibility required
to raise funds at an appropriate time.
CONCLUSION
To conclude, I would like to reiterate that I believe this Company is poised to
be an exciting leader within the global biopharmaceutical industry. The
Company's key drug-development programs moved ahead as planned during the
quarter, led by a management team with both the strength and depth required to
take Neurochem to the next level of product development and commercialization.
On behalf of our employees and Board of Directors, I thank you, our
shareholders, for your support.
[signed]
Dr. Francesco Bellini
Chairman, President and Chief Executive Officer
August 9, 2006
Neurochem Second Quarter ended June 30, 2006
Management's Discussion and Analysis 4
MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE
THREE AND SIX-MONTH PERIODS ENDED JUNE 30, 2006
The following discussion and analysis should be read in conjunction with the
Company's unaudited consolidated financial statements for the six-month period
ended June 30, 2006, as well as the Company's audited consolidated financial
statements for the year ended December 31, 2005, which have been prepared in
accordance with Canadian generally accepted accounting principles. For
discussion regarding related-party transactions, contractual obligations,
disclosure controls and procedures, critical accounting policies, recent
accounting pronouncements, and risks and uncertainties, refer to the Annual
Report and the Annual Information Form for the year ended December 31, 2005. All
dollar figures are Canadian dollars, unless specified otherwise.
RESULTS OF OPERATIONS
For the three-month period ended June 30, 2006, the net loss amounted to
$20,374,000 ($0.53 per share), compared to $18,694,000 ($0.54 per share) for the
corresponding period last year. For the six-month period ended June 30, 2006,
the net loss amounted to $37,508,000 ($0.97 per share), compared to $35,664,000
($1.08 per share) for the same period last year. The 2006 second quarter results
include the International Chamber of Commerce Court of Arbitration final award
of $2,089,000 (approximately U.S. $1.9 million) in respect of the Immtech
Pharmaceuticals, Inc. dispute.
Revenue from collaboration agreement amounted to $608,000 for the current
quarter ($1,215,000 for the six-month period), compared to $822,000 for the same
period last year ($2,027,000 for the six-month period). This revenue is earned
under the agreement with Centocor, Inc. (Centocor) in respect of eprodisate
(Fibrillex(TM)), an oral investigational product candidate for the treatment of
Amyloid A (AA) amyloidosis. Revenue recognized is in respect of the
non-refundable upfront payment received from Centocor, which is being amortized
over the estimated period through to the anticipated regulatory approval date of
the investigational product candidate. 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 (U.S. $6,000,000)
has been classified as deferred revenue and is not being amortized as earned
revenue given that it is potentially refundable. In the event that the Company
receives an approval letter issued by the U.S. Food and Drug Administration
(FDA), the amount would no longer be refundable and would be amortized as earned
revenue. In February 2006, the Company completed the submission of a New Drug
Application (NDA) with the FDA for eprodisate (Fibrillex(TM)). In April 2006,
the Company received notification from the FDA that it had filed and designated
the eprodisate (Fibrillex(TM)) NDA for priority review, with a goal date of
August 13, 2006, when the FDA is expected to render a decision.
Reimbursable costs revenue amounted to $205,000 for the current quarter
($435,000 for the six-month period), compared to $213,000 for the same period
last year ($657,000 for the six-month period) and consists of costs reimbursable
by Centocor in respect of eprodisate (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 $14,342,000 for the current quarter ($28,068,000 for the six-month
period), compared to $12,897,000 for the same period last year ($24,862,000 for
the six-month period). The increase is primarily due to expenses incurred in
relation to the development of tramiprosate (Alzhemed(TM)) for the ongoing Phase
III clinical trials in North America and Europe. Tramiprosate (Alzhemed(TM)) is
the Company's investigational product candidate for the treatment of Alzheimer's
disease (AD). The 18-month North American Phase III clinical trial is expected
to be completed in January 2007. This trial is being conducted in close to 70
clinical centers in the U.S. and in Canada, with 1,052 mild-to-moderate AD
patients enrolled. In September 2005, the Company launched its Phase III
clinical trial in Europe, with 930 mild-to-moderate AD patients expected to
participate. The study duration is also 18 months and the trial will be
conducted in approximately 70 centers in ten European countries. As of June 30,
2006, 491 patients had been successfully screened in the European clinical
trial, of which 428 were randomized; the remaining 63 patients are expected to
be randomized and included in the clinical trial. Enrollment for the European
clinical trial is expected to be completed during the fall of 2006. The Phase
III clinical trials on
Neurochem Second Quarter ended June 30, 2006
Management's Discussion and Analysis 5
tramiprosate (Alzhemed(TM)) are designed to demonstrate the safety, efficacy and
disease-modifying potential of the product candidate in the treatment of AD. In
May 2006, the Company started an 18-month open-label extension study for
patients who have completed the ongoing North American Phase III clinical trial
for tramiprosate (Alzhemed(TM)). For the quarter and six-month period ended June
30, 2006, research and development expenses also included costs incurred to
support the ongoing eprodisate (Fibrillex(TM)) Phase II/III open-label extension
study, as well as ongoing drug discovery programs. The Company expects research
and development expenses to increase in the future as product candidates
progress through the stages of clinical development and as the Company continues
to invest in product research and development.
Research tax credits and grants amounted to $494,000 this quarter
($1,029,000 for the six-month period), compared to $542,000 for the
corresponding period last year ($960,000 for the six-month period). Research tax
credits represent refundable tax credits earned under the Quebec Scientific
Research and Experimental Development Program for expenditures incurred in
Quebec. The decrease is mainly attributable to lower research and development
expenses incurred in Quebec, eligible for refundable tax credits.
General and administrative expenses totaled $3,366,000 for the current
quarter ($6,808,000 for the six-month period), compared to $5,917,000 for the
same quarter last year ($11,082,000 for the six-month period). The decrease is
primarily attributable to a reduction in legal fees incurred by the Company with
regards to the dispute with Immtech International, Inc. (now known as Immtech
Pharmaceuticals, Inc. and referred to herein as Immtech). See Arbitral award
below.
Arbitral award amounted to $2,089,000 (approximately U.S. $1.9 million) for
the current quarter and relates to the dispute with Immtech. 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 was presented to an
arbitral tribunal (Tribunal) convened in accordance with the rules of the
International Chamber of Commerce Court of Arbitration (ICC). An evidentiary
hearing before the Tribunal was held in mid-September 2005 and the Tribunal
issued its Final Award in early June 2006. The Tribunal held that Neurochem did
not misappropriate any of Immtech's compounds, information or trade secrets and
that Immtech was not entitled to any interest in, or ownership or assignment of,
Neurochem's patent applications. While the Tribunal found that Neurochem had
breached certain sections of the 2002 agreement, Immtech was awarded only U.S.
$35,000 in damages, plus interest thereon, in connection with a disputed
milestone payment, and not the compensatory damages of up to U.S. $50 million or
any of the punitive damages that Immtech had been claiming. All of Immtech's
tort claims were rejected, as were its claims for injunctive relief and
equitable relief; the Tribunal also denied Neurochem's counterclaims. Immtech
was awarded only a portion of the ICC's administrative charges and arbitral fees
and costs incurred by the Tribunal which had been previously advanced by
Immtech, as well as a portion of Immtech's arbitration-related legal fees. Those
charges, fees and costs amounted to approximately U.S. $1.83 million. When added
to the U.S. $35,000 in damages and interest thereon, Immtech was awarded, in
total, approximately U.S. $1.9 million. On July 10, 2006, Immtech issued a
letter to the Tribunal and the ICC seeking a further determination under the
Final Award. On July 12, 2006, the Tribunal granted Neurochem 20 days to respond
in writing to Immtech's letter and Neurochem filed its response on July 28,
2006. The parties now await the decision of the Tribunal in relation to
Immtech's July 10 letter. In view of these developments, the status conference
before the Federal District Court for the Southern District of New York has
again been adjourned, until late September 2006. See note 7 to the unaudited
Consolidated Financial Statements for the six-month period ended June 30, 2006.
Reimbursable costs amounted to $205,000 for the current quarter ($435,000
for the six-month period), compared to $213,000 for the same period last year
($657,000 for the six-month period), and consist of costs incurred on behalf of
Centocor in respect of eprodisate (Fibrillex(TM)) related activities and
reimbursable by Centocor.
Stock-based compensation amounted to $1,016,000 for the current quarter
($1,932,000 for the six-month period), compared to $2,292,000 for the
corresponding quarter last year ($3,062,000 for the six-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. The decrease is
attributable to expenses of $1,441,000 recorded in 2005 in relation to 140,000
common shares to be issued to the Chairman, President and Chief Executive
Officer, pursuant to an agreement signed in December 2004.
Neurochem Second Quarter ended June 30, 2006
Management's Discussion and Analysis 6
Depreciation, amortization and write-off of patents amounted to $409,000
for the current quarter ($902,000 for the six-month period), compared to
$575,000 for the same quarter last year ($1,145,000 for the six-month period).
The decrease results mainly from the sale-leaseback transaction entered into by
the Company in November 2005 in respect of its facilities and campus located in
Laval, Quebec.
Interest and bank charges amounted to $23,000 for the current quarter
($50,000 for the six-month period), compared to $133,000 for the same quarter
last year ($254,000 for the six-month period). The decrease is attributable to
the reimbursement in November 2005, in connection with the sale-leaseback
transaction, of the long-term debt previously contracted to finance the
acquisition of facilities in 2004.
Interest income amounted to $580,000 for the current quarter ($1,223,000
for the six-month period), compared to $633,000 for the same quarter last year
($884,000 for the six-month period). The increase in the six-month period is
mainly attributable to higher interest rates during the current period, compared
to the same period last year.
Foreign exchange loss amounted to $524,000 for the current quarter (loss of
$570,000 for the six-month period), compared to a gain of $1,406,000 for the
same quarter last year (gain of $1,632,000 for the six-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 U.S.
dollars. Foreign exchange losses recognized during 2006 are mainly attributable
to the strengthening of the Canadian dollar compared to the U.S. dollar during
the periods.
Other income amounted to $308,000 for the current quarter ($593,000 for the
six-month period), compared to $296,000 for the same quarter last year ($347,000
for the six-month period). Other income consists of non-operating revenue,
primarily sub-lease revenue.
Share of loss in a company subject to significant influence amounted to
$891,000 for the current quarter ($1,707,000 for the six-month period), compared
to $824,000 for the corresponding quarter last year ($1,579,000 for the
six-month period). Non-controlling interest amounted to $296,000 for the current
quarter ($558,000 for the six-month period), compared to $245,000 for the
corresponding quarter last year ($470,000 for the six-month period). These items
result from the consolidation of the Company's interest in a holding company
that owns shares of Innodia Inc., for which Neurochem is the primary
beneficiary. In March 2006, the Company invested an additional amount of
$1,660,000 in that holding company in connection with a financing by Innodia
Inc. As a result of the transaction, the Company's indirect equity investment in
Innodia Inc. is approximately 23% of the issued and outstanding shares. Innodia
Inc. is a private development stage company engaged in developing novel drugs
for the treatment of type 2 diabetes and underlying diseases.
Related party transactions
(In thousand of Canadian dollars, except per share data)
Three months ended Six months ended
June 30, June 30,
- --------------------------------------------------------------------------------
2006 2005 2006 2005
- --------------------------------------------------------------------------------
Management services expense 614 600 1,227 1,200
Sub-lease revenue 239 221 479 221
Please refer to note 6 of the unaudited Consolidated Financial Statements for
the six-month period ended June 30, 2006 for details and additional related
party transactions.
Neurochem Second Quarter ended June 30, 2006
Management's Discussion and Analysis 7
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, 2006
Second 813 (20,374) (0.53)
First 837 (17,134) (0.45)
Year ended December 31, 2005
Fourth 837 (15,628) (0.42)
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 327 (15,388) (0.51)
Third -- (13,775) (0.45)
The increase in quarterly losses year over year is primarily due to
additional investments in research and development as the Company advances its
product candidates through clinical trials.
LIQUIDITY AND CAPITAL RESOURCES
As at June 30, 2006, the Company had available cash, cash equivalents and
marketable securities of $41,931,000, compared to $71,091,000 at December 31,
2005. The decrease is primarily due to funds used in operations and is partially
offset by proceeds received from the exercise of a warrant in February of 2006
by Picchio Pharma.
On February 16, 2006, Picchio Pharma, the Company's largest shareholder,
exercised the warrant previously issued pursuant to a February 2003 private
placement which was otherwise scheduled to expire on February 18, 2006,
generating total proceeds to the Company of $9,372,000 and resulting in the
issuance of 1,200,000 common shares from treasury.
As at July 31, 2006, the Company had 38,662,170 common shares outstanding,
220,000 common shares issuable to the Chief Executive Officer upon the
achievement of specified performance targets and 2,663,607 options granted under
the stock option plan.
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, and access
to capital markets should be sufficient to finance the Company's operations and
capital needs for the coming year. However, in light of the uncertainties
associated with the regulatory approval process and the Company's ability to
secure additional licensing, partnership and/or other agreements, further
financing may be required to support the Company's operations in the future.
On August 9, 2006, the Company entered into a securities purchase agreement
in respect of an equity line of credit facility, with a 24 month term, that
provides the Company up to U.S. $60 million of funds in return for the issuance
of common shares at a discount of 3.0% to market price at the time of draw downs
over term. The agreement provides for an obligation for Neurochem to drawdown at
least U.S. $25 million over the two-year term of the facility. The agreement is
conditional on the registration of the underlying securities and the required
regulatory approvals.
Neurochem Second Quarter ended June 30, 2006
Consolidated Financial Statements 8
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, 2006 and December 31, 2005 (in thousands of Canadian dollars) (in
accordance with Canadian GAAP)
JUNE 30, JUNE 30, December 31,
2006 2006 2005
- -------------------------------------------------------------------------------------------------------
(U.S.$ - (CDN$) (Cdn$)
NOTE 1)
ASSETS
Current assets:
Cash and cash equivalents 37,608 41,931 7,382
Marketable securities -- -- 63,709
Restricted cash (note 3) 6,000 6,690 6,995
Sales taxes and other receivables 1,173 1,308 728
Research tax credits receivable 3,063 3,415 2,404
Prepaid expenses and deposits 3,433 3,828 3,171
- -------------------------------------------------------------------------------------------------------
51,277 57,172 84,389
Restricted cash 574 640 640
Long-term prepaid expenses and deposits 873 973 1,355
Long-term investment (note 2) 1,285 1,433 235
Property and equipment 4,363 4,865 4,911
Patents 5,000 5,575 5,416
- -------------------------------------------------------------------------------------------------------
63,372 70,658 96,946
=======================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 2,555 2,849 5,016
Accrued liabilities 10,297 11,481 8,551
Deferred revenue 8,208 9,151 2,429
Deferred gain on sale of property 1,277 1,424 1,424
- -------------------------------------------------------------------------------------------------------
22,337 24,905 17,420
Deferred revenue 755 842 8,779
Deferred gain on sale of property 17,082 19,046 19,759
Long-term accrued liabilities 427 476 207
- -------------------------------------------------------------------------------------------------------
40,601 45,269 46,165
- -------------------------------------------------------------------------------------------------------
Non-controlling interest (note 2) 1,073 1,196 509
Shareholders' equity:
Share capital (note 4) 242,580 270,465 260,968
Additional paid-in capital (note 4) 10,748 11,984 10,052
Deficit (231,630) (258,256) (220,748)
- -------------------------------------------------------------------------------------------------------
21,698 24,193 50,272
Arbitral award (note 7)
Subsequent event (note 9)
- -------------------------------------------------------------------------------------------------------
63,372 70,658 96,946
=======================================================================================================
See accompanying notes to unaudited consolidated financial statements.
Neurochem Second Quarter ended June 30, 2006
Consolidated Financial Statements 9
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Periods ended June 30, 2006 and 2005 (in thousands of Canadian dollars, except
per share data) (in accordance with Canadian GAAP)
Three months ended Six months ended
June 30, June 30,
- -------------------------------------------------------------------------------------------------------------
2006 2006 2005 2006 2006 2005
- -------------------------------------------------------------------------------------------------------------
(U.S.$ - (CDN$) (Cdn$) (U.S.$ - (CDN$) (Cdn$)
NOTE 1) NOTE 1)
Revenues:
Collaboration agreement (note 3) 545 608 822 1,090 1,215 2,027
Reimbursable costs 184 205 213 390 435 657
- -------------------------------------------------------------------------------------------------------------
729 813 1,035 1,480 1,650 2,684
- -------------------------------------------------------------------------------------------------------------
Expenses (income):
Research and development 12,863 14,342 12,897 25,174 28,068 24,862
Research tax credits and grants (443) (494) (542) (923) (1,029) (960)
- -------------------------------------------------------------------------------------------------------------
12,420 13,848 12,355 24,251 27,039 23,902
General and administrative 3,019 3,366 5,917 6,106 6,808 11,082
Arbitral award (note 7) 1,874 2,089 -- 1,874 2,089 --
Reimbursable costs 184 205 213 390 435 657
Stock-based compensation (note 5) 911 1,016 2,292 1,733 1,932 3,062
Depreciation of property and equipment 284 317 498 556 620 996
Amortization and write-off
of patent costs 82 92 77 253 282 149
Interest and bank charges 21 23 133 45 50 254
- -------------------------------------------------------------------------------------------------------------
18,795 20,956 21,485 35,208 39,255 40,102
- -------------------------------------------------------------------------------------------------------------
Net loss before undernoted items (18,066) (20,143) (20,450) (33,728) (37,605) (37,418)
- -------------------------------------------------------------------------------------------------------------
Investment income and other:
Interest income 520 580 633 1,097 1,223 884
Foreign exchange (loss) gain (470) (524) 1,406 (511) (570) 1,632
Other income 276 308 296 532 593 347
Share of loss in a company
subject to significant influence (799) (891) (824) (1,531) (1,707) (1,579)
Non-controlling interest 265 296 245 500 558 470
- -------------------------------------------------------------------------------------------------------------
(208) (231) 1,756 87 97 1,754
- -------------------------------------------------------------------------------------------------------------
Net loss (18,274) (20,374) (18,694) (33,641) (37,508) (35,664)
=============================================================================================================
Net loss per share:
Basic (0.47) (0.53) (0.54) (0.87) (0.97) (1.08)
Diluted (0.47) (0.53) (0.54) (0.87) (0.97) (1.08)
=============================================================================================================
Weighted average number of
shares outstanding:
Basic 38,792,486 34,646,842 38,475,059 33,056,654
Effect of dilutive options
and warrants -- 1,700,683 -- 2,433,878
- -------------------------------------------------------------------------------------------------------------
Diluted 38,792,486 36,347,525 38,475,059 35,490,532
=============================================================================================================
See accompanying notes to unaudited consolidated financial statements.
Neurochem Second Quarter ended June 30, 2006
Consolidated Financial Statements 10
CONSOLIDATED STATEMENTS OF DEFICIT
(Unaudited)
Periods ended June 30, 2006 and 2005 (in thousands of Canadian dollars) (in
accordance with Canadian GAAP)
Three months ended Six months ended
June 30, June 30,
- -------------------------------------------------------------------------------------------------------
2006 2006 2005 2006 2006 2005
- -------------------------------------------------------------------------------------------------------
(U.S.$ - (CDN$) (Cdn$) (U.S.$ - (CDN$) (Cdn$)
NOTE 1) NOTE 1)
Deficit, beginning of period:
As previously reported (213,356) (237,882) (165,352) (197,989) (220,748) (140,926)
Adjustment to reflect change
in accounting policy for
long-term investment (note 2) -- -- -- -- -- (2,501)
- -------------------------------------------------------------------------------------------------------
Deficit, beginning of period,
as restated (213,356) (237,882) (165,352) (197,989) (220,748) (143,427)
Net loss (18,274) (20,374) (18,694) (33,641) (37,508) (35,664)
Share issue costs -- -- -- -- -- (4,955)
- -------------------------------------------------------------------------------------------------------
Deficit, end of period (231,630) (258,256) (184,046) (231,630) (258,256) (184,046)
=======================================================================================================
See accompanying notes to unaudited consolidated financial statements.
Neurochem Second Quarter ended June 30, 2006
Consolidated Financial Statements 11
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Periods ended June 30, 2006 and 2005 (in thousands of Canadian dollars) (in
accordance with Canadian GAAP)
Three months ended Six months ended
June 30, June 30,
- -------------------------------------------------------------------------------------------------------
2006 2006 2005 2006 2006 2005
- -------------------------------------------------------------------------------------------------------
(U.S.$ - (CDN$) (Cdn$) (U.S.$ - (CDN$) (Cdn$)
NOTE 1) NOTE 1)
Cash flows from operating activities:
Net loss (18,274) (20,374) (18,694) (33,641) (37,508) (35,664)
Adjustments for:
Depreciation, amortization
and write-off of patents 366 409 575 809 902 1,145
Unrealized foreign exchange loss
(gain) 726 810 (540) 805 898 (644)
Stock-based compensation 911 1,016 2,292 1,733 1,932 3,062
Share of loss in a company
subject to significant influence 799 891 824 1,531 1,707 1,579
Non-controlling interest (265) (296) (245) (500) (558) (470)
Amortization of gain on sale
leaseback (319) (356) -- (640) (713) --
Changes in operating assets
and liabilities:
Restricted cash -- -- (96) -- -- (7,354)
Amounts receivable under
collaboration agreement -- -- -- -- -- 14,443
Sales taxes and other receivables (397) (443) 330 (520) (580) 261
Research tax credits receivable (440) (491) (533) (907) (1,011) (812)
Prepaid expenses and deposits (528) (589) (90) (589) (657) (138)
Long-term prepaid expenses
and deposits 204 227 261 343 382 (193)
Deferred revenue (545) (608) (823) (1,090) (1,215) (2,027)
Accounts payable and
accrued liabilities 2,933 3,270 3,048 1,801 2,008 4,005
- -------------------------------------------------------------------------------------------------------
(14,829) (16,534) (13,691) (30,865) (34,413) (22,807)
- -------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issue of common shares 49 55 103 8,518 9,497 75,511
Share issue costs -- -- -- -- -- (4,955)
Repayment of obligations under
capital lease -- -- (112) -- -- (223)
Repayment of long-term debt -- -- (64) -- -- (290)
- -------------------------------------------------------------------------------------------------------
49 55 (73) 8,518 9,497 70,043
- -------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment (389) (434) (449) (450) (502) (903)
Additions to patent costs (227) (253) (340) (1,336) (1,489) (488)
Proceeds from marketable securities 15,592 17,384 2,997 57,141 63,709 21,966
Proceeds from disposal of property
and equipment -- -- 37 -- -- 65
Long-term investment -- -- -- (1,489) (1,660) --
- -------------------------------------------------------------------------------------------------------
14,976 16,697 2,245 53,866 60,058 20,640
- -------------------------------------------------------------------------------------------------------
Neurochem Second Quarter ended June 30, 2006
Consolidated Financial Statements 12
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D.)
(Unaudited)
Periods ended June 30, 2006 and 2005 (in thousands of Canadian dollars) (in
accordance with Canadian GAAP)
Three months ended Six months ended
June 30, June 30,
- -------------------------------------------------------------------------------------------------------
2006 2006 2005 2006 2006 2005
- -------------------------------------------------------------------------------------------------------
(U.S.$ - (CDN$) (Cdn$) (U.S.$ - (CDN$) (Cdn$)
NOTE 1) NOTE 1)
Net increase (decrease) in cash and
cash equivalents 196 218 (11,519) 31,519 35,142 67,876
Cash and cash equivalents,
beginning of period 37,859 42,211 86,706 6,621 7,382 7,207
Effect of unrealized foreign exchange
on cash and cash equivalents (447) (498) 540 (532) (593) 644
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period 37,608 41,931 75,727 37,608 41,931 75,727
=======================================================================================================
Supplemental disclosure to cash flow (note 8).
See accompanying notes to unaudited consolidated financial statements.
Neurochem Second Quarter ended June 30, 2006
Consolidated Financial Statements 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Periods ended June 30, 2006 and 2005 (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 June 30, 2006, and the unaudited statements of operations, deficit and
cash flows for the periods ended June 30, 2006, and 2005, 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, 2005. The interim financial
statements do not include all disclosures required for annual financial
statements and should be read in conjunction with the annual financial
statements as at and for the year ended December 31, 2005.
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 U.S. dollars using the convenience translation method whereby all
Canadian dollar amounts are converted into U.S. dollars at the noon exchange
rate quoted by the Bank of Canada at June 30, 2006, which was 0.8969 U.S. dollar
per Canadian dollar. The information in U.S. 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
financial statements actually represent such U.S. dollar amounts or could be or
would have been converted into U.S. dollars at the rate indicated.
2. CHANGES IN ACCOUNTING POLICIES:
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.
In March 2006, the Company invested an additional amount of $1,660 in
Innodia holding in connection with a financing by Innodia Inc. Following the
additional investment by the Company and the other Innodia holding shareholders,
the carrying amounts of the long-term investment and non-controlling interest
were $2,905 and $1,245, respectively. As a result of the transaction, the
Company's indirect equity investment in Innodia Inc. is approximately 23% of the
issued and outstanding shares.
Neurochem Second Quarter ended June 30, 2006
Consolidated Financial Statements 14
3. COLLABORATION AGREEMENT:
The Company recognized $608 and $1,215 of revenue for the three-month and
six-month periods ended June 30, 2006, under a collaboration agreement entered
into in December 2004 (2005 -- $822 and $2,027, respectively). These amounts
represent the amortization of the non-refundable upfront payment over the
remaining estimated period through to the anticipated regulatory approval date
of the investigational product candidate.
As required under the terms of the collaboration agreement, the Company has
secured, through a bank, a letter of credit in the amount of $6,690 (U.S.$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) 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:
JUNE 30, December 31,
2006 2005
- -------------------------------------------------------------------------------
$ $
38,662,170 common shares (December 31, 2005 --
37,421,079 common shares) 270,465 260,968
===============================================================================
Neurochem Second Quarter ended June 30, 2006
Consolidated Financial Statements 15
Changes in the issued and outstanding common shares and additional paid-in
capital for the year ended December 31, 2005 and for the six-month period ended
June 30, 2006 were as follows:
Additional
paid-in
Number Dollars capital
- -------------------------------------------------------------------------------------------------------
$ $
Balance, December 31, 2004 30,320,419 175,855 5,765
Issued for cash from public offering (i) 4,000,000 74,495 --
Exercise of a warrant (ii) 2,800,000 8,764 --
Exercise of stock options:
For cash 300,660 1,346 --
Ascribed value from additional paid-in capital -- 508 (508)
Stock-based compensation -- -- 4,795
- -------------------------------------------------------------------------------------------------------
Balance, December 31, 2005 37,421,079 260,968 10,052
Exercise of a warrant (iii) 1,200,000 9,372 --
Exercise of stock options:
For cash 41,091 125 --
Stock-based compensation -- -- 1,932
- -------------------------------------------------------------------------------------------------------
Balance, June 30, 2006 38,662,170 270,465 11,984
=======================================================================================================
December 31, 2005:
(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 $18.62 (U.S.$15.30) per
share. The total proceeds of the offering to the Company were $74,495
(U.S.$61,200). Total share issue costs of $4,955 were charged to the
deficit.
(ii) On July 25, 2005, a subsidiary of Picchio Pharma Inc. (Picchio Pharma)
exercised a warrant to purchase 2.8 million common shares at a price of
$3.13 per share. Total proceeds to the Company were $8,764.
June 30, 2006:
(iii) On February 16, 2006, Picchio Pharma exercised a warrant to purchase 1.2
million common shares at a price of $7.81. Total proceeds to the Company
were $9,372.
Neurochem Second Quarter ended June 30, 2006
Consolidated Financial Statements 16
(c) STOCK OPTION PLAN:
Changes in outstanding options issued under the stock option plan for the year
ended December 31, 2005 and the six-month period ended June 30, 2006 were as
follows:
Weighted
average
Number exercise price
- -------------------------------------------------------------------------------------------------------
$
Options outstanding, December 31, 2004 2,363,784 14.51
Granted 318,500 21.31
Exercised (300,660) 4.48
Cancelled or expired (71,666) 13.68
- -------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 2005 2,309,958 16.78
Granted 402,000 16.53
Exercised (41,091) 3.06
Cancelled or expired (7,260) 21.07
- -------------------------------------------------------------------------------------------------------
Options outstanding, June 30, 2006 2,663,607 16.94
=======================================================================================================
(d) OUTSTANDING WARRANTS AT JUNE 30, 2006:
Each warrant entitles the holder to purchase a specified number of common
shares. Changes in outstanding warrant shares issued in connection with various
private placements were as follows:
Number of Weighted
warrant average
shares exercise price
- -------------------------------------------------------------------------------------------------------
$
Warrant shares outstanding, December 31, 2004 4,000,000 4.53
Exercised (note 4 (b)) (2,800,000) 3.13
- -------------------------------------------------------------------------------------------------------
Warrant shares outstanding, December 31, 2005 1,200,000 7.81
Exercised (note 4 (b)) (1,200,000) 7.81
- -------------------------------------------------------------------------------------------------------
Warrant shares outstanding, June 30, 2006 -- --
=======================================================================================================
(e) EARNINGS PER SHARE:
At June 30, 2006, 1,688,941 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.
Included in the basic weighted average number of shares outstanding are
140,000 common shares to be issued to the Chief Executive Officer upon formal
notification. See note 4 (f).
Neurochem Second Quarter ended June 30, 2006
Consolidated Financial Statements 17
(f) AGREEMENT TO ISSUE SHARES:
On December 1, 2004, the Company entered into an agreement with the 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 was approved by regulatory authorities and shareholders in 2005.
During the quarter ended June 30, 2005, 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 the execution and achievement of
certain specified targets. The shares will be issued by the Company upon formal
notification by the Chief Executive Officer.
5. STOCK-BASED COMPENSATION:
In the three-month and six-month periods ended June 30, 2006, the Company
recorded total stock-based compensation of $1,016 and $1,932, respectively
related to stock options granted to employees after July 1, 2002 (2005 -- $851
and $1,621, respectively).
The fair value of the options granted was determined using the following
method and assumptions.
The weighted average fair value of each option is estimated on the
effective date of the grant using Black-Scholes pricing model with the following
assumptions:
JUNE 30, June 30,
2006 2005
- ------------------------------------------------------------------------------
Risk-free interest rate 4.18% 3.86%
Expected volatility 60% 57%
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 six-month periods ended June 30, 2006
and 2005:
Weighted average
Number of grant-date
options fair value
- -----------------------------------------------------------------------------
$
Six-month periods ended:
June 30, 2006 402,000 10.46
June 30, 2005 286,000 13.11
=============================================================================
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.
6. RELATED PARTY TRANSACTIONS:
In the three-month and six-month periods ended June 30, 2006, the Company
incurred fees of $614 and $1,227 under the terms of a management services
agreement entered into in March 2003, as amended in October 2003 and again in
December 2004, with Picchio International Inc., a company related to a
shareholder, director and officer (2005 -- $600 and $1,200, respectively).
In 2005, the Company entered into a lease agreement with a company in which
Picchio Pharma has an equity interest. In the three and six months ended June
30, 2006, sub-lease revenue under the agreement amounted to $239 and $479,
respectively, and is included in "other income" on the consolidated statements
of operations (2005 -- $221 and $221, respectively).
Neurochem Second Quarter ended June 30, 2006
Consolidated Financial Statements 18
On February 1, 2006, the Company entered into an assignment agreement
(Assignment Agreement) with Parteq Research and Development Innovations (Parteq)
which terminated an amyloid license agreement. This amyloid license agreement
granted the Company an exclusive worldwide license under certain intellectual
property (Amyloid Intellectual Property). Pursuant to the Assignment Agreement,
Parteq agreed and assigned the Amyloid Intellectual Property to the Company for
consideration comprising an upfront payment of $200 and various deferred payment
amounts, which are approximately equal to the payments provided for in the
amyloid license agreement. The Assignment Agreement also provides for annual
technology payments, milestone payments and royalties based on gross revenues to
be generated from commercialized products, which approximate the payments
included in the amyloid license agreement.
In March 2006, as disclosed in note 2, the Company invested an additional
amount of $1,660 in Innodia holding, a company in which Picchio Pharma has an
equity interest. In addition, during 2006, the Company entered into an amendment
agreement with Innodia Inc. amending the May 2003 license agreement, which
granted Innodia Inc. an exclusive worldwide license under certain intellectual
property relating to diabetes.
The transactions were recorded at the exchange amount, which is the
consideration established by and agreed to by the parties.
7. ARBITRAL AWARD:
In 2002, the Company executed an agreement (the CTA) with Immtech International,
Inc. (which changed its name, on March 22, 2006, to Immtech Pharmaceuticals,
Inc. and which is referred to herein simply as "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. 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 (the Tribunal), convened in accordance with the rules of the
International Chamber of Commerce Court of Arbitration (the ICC), was held in
mid-September 2005. The Tribunal issued its Final Award in early June 2006.
The Tribunal held that the Company did not misappropriate any of Immtech's
compounds, information or trade secrets and that Immtech was not entitled to any
interest in, or ownership or assignment of, the Company's patent applications.
While the Tribunal found that the Company had breached certain sections of
the 2002 agreement, Immtech was awarded U.S.$35 in damages, plus interest
thereon, in connection with a disputed milestone payment. Immtech was also
awarded a portion of the ICC's administrative charges and arbitral fees and
costs incurred by the Tribunal which had been previously advanced by Immtech, as
well as a portion of Immtech's arbitration-related legal fees. Those charges,
fees and costs amounted to approximately U.S.$1.83 million. In total, Immtech
was awarded approximately U.S.$1.9 million.
On July 10, 2006, Immtech issued a letter to the Tribunal and the ICC,
seeking a further determination under the Final Award. On July 12, 2006, the
Tribunal granted the Company 20 days to respond in writing to Immtech's letter
and the Company filed its response on July 28, 2006. The parties now await the
decision of the Tribunal in relation to Immtech's July 10 letter. In view of
these developments, the status conference before the Federal District Court for
the Southern District of New York, has been adjourned until late September 2006.
Neurochem Second Quarter ended June 30, 2006
Consolidated Financial Statements 19
8. 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:
JUNE 30, December 31,
2006 2005
- -------------------------------------------------------------------------------------------------------
$ $
Cash balances with banks 1,739 1,919
Short-term investment yielding interest between
4.28% and 5.10% (December 31, 2005: 3.15% to 4.27%) 40,192 5,463
- -------------------------------------------------------------------------------------------------------
41,931 7,382
=======================================================================================================
(b) INTEREST:
Three months ended Six months ended
June 30, June 30,
- -------------------------------------------------------------------------------------------------------
2006 2005 2006 2005
- -------------------------------------------------------------------------------------------------------
Cash paid in the period for:
Interest -- 85 -- 220
=======================================================================================================
(c) NON-CASH TRANSACTIONS:
JUNE 30, December 31,
2006 2005
- -------------------------------------------------------------------------------------------------------
$ $
Additions to property and equipment and patent costs
included in accounts payable and accrued liabilities
at end of the period 349 1,325
=======================================================================================================
9. SUBSEQUENT EVENT:
On August 9, 2006, the Company entered into a securities purchase agreement in
respect of an equity line of credit facility. The facility has a 24 month term
and provides the Company with access to financing of up to U.S. $60 million in
return for the issuance of common shares at a discount of 3.0% to market price
at the time of draw down. Under the agreement, the Company is committed to
drawdown at least U.S. $25 million over the two-year term of the facility. The
agreement is conditional on the registration of the underlying securities and
obtaining the required regulatory approvals.
Neurochem Second Quarter ended June 30, 2006
20
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Driven to enhance people's lives.
CORPORATE PROFILE. Neurochem is a dynamic, highly energized biopharmaceutical
company focused on the development and commercialization of innovative
therapeutics to address critical unmet medical needs. Its pipeline of innovative
oral product candidates primarily targets neurological disorders. With promising
candidates for AA amyloidosis and Alzheimer's disease advancing towards
commercialization, Neurochem is coming of age--poised to take its place among
the leaders of the global biopharmaceutical industry.
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
www.neurochem.com
Neurochem Second Quarter ended June 30, 2006