FORM 6-K
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
REPORT OF FOREIGN ISSUER
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of April 2008
ÆTERNA ZENTARIS INC.
1405, boul. du
Parc-Technologique
Québec, Québec
Canada, G1P 4P5
(Address of principal executive offices)
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
x
Form 40-F
o
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 12g3-2(b) under
the Securities Exchange Act of 1934
Yes
o
No
x
If Yes is
marked, indicate below the file number assigned to the registrant in connection
with Rule 12g3-2(b): 82-
DOCUMENTS INDEX
Documents
Description
1.
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Æterna Zentaris Annual
Report for the year ended December 31, 2007
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SIGNATURE
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.
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ÆTERNA ZENTARIS
INC.
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Date:
April 2, 2008
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By:
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/s/Mario Paradis
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Mario Paradis
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Senior Vice
President, Administrative and
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Legal Affairs
and Corporate Secretary
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3
ANNUAL REPORT 2007
ÆTERNA
ZENTARIS IS A
GLOBAL
BIOPHARMACEUTICAL
COMPANY
FOCUSED ON
ENDOCRINE
THERAPY AND
ONCOLOGY,
WITH PROVEN
EXPERTISE
IN DRUG
DISCOVERY,
DEVELOPMENT
AND
COMMERCIALIZATION
ÆTERNA
ZENTARIS INC.
(NASDAQ:
AEZS, TSX: AEZ)
Please note that all
amounts are in US dollars
Corporate
JANUARY
·
AEZS emerged as a pure-play biopharmaceutical
company following the completion of the spin-off of our subsidiary, Atrium Biotechnologies
(now known as Atrium Innovations)
MARCH
·
Appointment of David J. Mazzo, PhD as
President and CEO
MAY-AUGUST
·
Appointment of three key executive management members:
·
Ellen McDonald, MBA, SVP and Chief
Business Officer
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Nicholas Pellicione, PhD, SVP,
Regulatory Affairs and Quality Assurance
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Paul Blake, MD, SVP and Chief Medical
Officer
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Appointment of Juergen Ernst as Chairman of the Board
OCTOBER
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Announcement of managements new corporate strategy
DECEMBER
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Opening of new office in Warren, New Jersey
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Divestiture of our subsidiary Echelon Biosciences
2007
HIGHLIGHTS
Drug Development
CETRORELIX
·
Initiation of North American Phase 3 clinical program in BPH
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Positive Phase 2a trial results in BPH (by partner Shionogi in Japan)
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Initiation of a Phase 2b trial in BPH (by partner Shionogi in Japan)
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Regained exclusive worldwide rights (ex-Japan) from Solvay for
endometriosis indication
AEZS-108
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Initiation of Phase 2 trial in endometrial and ovarian
cancer
OZARELIX
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Initiation of Phase 2b trial in BPH by partner
Spectrum
PERIFOSINE
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Positive interim data for ongoing Phase 2 trial in
advanced renal cell carcinoma by partner Keryx
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Positive Phase 1 and Phase 2 trial results for
multiple cancers by partner Keryx
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Completion of patient recruitment for AEZS-sponsored
European Phase 2 trial in NSCLC
MESSAGE
TO
SHAREHOLDERS
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David J. Mazzo, PhD
President and CEO
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In the
Spring of 2007, I accepted the honor to lead the team at Æterna Zentaris as
President and Chief Executive Officer. I have since come to regard the opportunity
as a remarkable privilege. Very few companies our size offer such a rich,
balanced and self-sustaining pipeline of innovative treatments. Innovation is
what drives us and will continue to be the foundation on which we build benefit
for patients and for you our shareholders. Furthermore, we represent a vibrant
harmony of Canadian, European, and American cultures, and by virtue of
wide-ranging yet profoundly focused competencies, we have charted a unique
business path.
Company
Evolution
In 2007, with the
completion of the spin-off of our subsidiary Atrium Innovations, we fully
realized our evolution into a research and development based, pure-play
biopharmaceutical company. With a pipeline concentrated on urological and
gynaecological benign and malignant diseases, we moved forward on the strength
of promising late-stage products, increasingly valuable prospects for
earlier-stage compounds, and a quickening sense of purpose in regard to the
Companys expectations. 2007 was a challenging year, a year marked by an
important metamorphosis of both our corporate structure and business plan,
readying us for the execution of the programs so key to our near- term success.
One of the key
transformative steps we took in 2007 involved the engagement of three highly
experienced executives to complement the skills that already exist at Æterna
Zentaris. Ellen McDonald, MBA, was appointed Senior Vice President, Business
Operations and Chief Business Officer. Nicholas J. Pelliccione, PhD,
accepted the post of Senior Vice President, Regulatory Affairs and Quality
Assurance, while Paul Blake, MD, assumed the position of Senior Vice President
and Chief Medical Officer.
With combined experience
of over fifty years in the industry, and having been actively involved in the
launch and marketing of some fifty pharmaceutical products, these three
executives bring proven leadership credentials and compelling track records to
Æterna Zentaris. Our Company now possesses enviable international expertise of
the highest level in clinical research, regulatory affairs, business
development, pharmaceutical discovery, development and commercialization
vital assets for successful pre-launch activities for our lead compound,
cetrorelix, as well as for the thrust of our entire pipeline.
A Year of Firsts
Our progress in 2007
involved a great deal of groundbreaking. For the first time, our team launched
an international Phase 3 program for cetrorelix in BPH in the U.S. The first of
our three planned trials in the program was launched early in the year. In
addition, we conducted a rigorous review of our business operations, along with
a market analysis of our pipeline portfolio and assigned the appropriate value
and prioritization to each project. The result has given our stakeholders,
partners, and the investment community a sharper image of our objectives as
well as a clear understanding of our near-term priorities.
Another first for our
company was the opening of an operations office in Warren, New Jersey. Since
most major pharmaceutical companies have headquarters in the area, Æterna
Zentaris is now a resident of what is known as Pharma Alley. As part of our
strategy aimed at gaining more exposure in the United States, this step served
to highlight the magnitude of benefits to be derived from alliances, business
opportunities and potential new partnerships with leading pharmaceutical
companies in the U.S. Our operations office in New Jersey also underlines the
advantages of proximity to the worlds financial center. Wall Street will play
an increasingly significant role in the future of Æterna Zentaris.
A year of firsts can
exert widely varying effects upon an organization and its people. In our case,
it has created a winning environment and a sense of a shared emergent destiny
that, in due time, will prove fundamental to our success going forward.
Priority: Cetrorelix
The decision in 2007 to
invest heavily in our lead compounds resulted most significantly in the launch
of the Phase 3 clinical program for our flagship product candidate and lead
value driver, cetrorelix. Targeting benign prostatic hyperplasia, cetrorelix is
our number one priority in the short term as it has the potential to provide
patients with a novel, more convenient treatment with less sexual side-effects
as seen with current drugs on the market.
With patient recruitment ongoing, we are working hard to complete enrollment in
two efficacy and one safety trials, involving approximately 1,500 patients, by
mid-2008 in both North America and Europe. We are on track to disclose our
Phase 3 results in the second half of 2009, as stated last fall.
Cetrorelix represents a
huge market opportunity as BPH affects more than a third of men over 50. The
market is currently $1.4 billion in the U.S. alone and is expected to increase
significantly over the next few decades with the aging baby-boomer population.
Moving Other Drugs through the
Pipeline
We also have several
additional promising compounds moving through the pipeline to later-stage
development and eventual registration. Each of them carries the potential to
contribute substantially to the success of our Company. For example, AEZS-108,
targeting ovarian and endometrial cancers, advanced into Phase 2 clinical
trials in Europe. This innovative compound is our highest earlier-stage
priority; we consider its market opportunity comparable to one of the premier
chemotherapy agents, doxorubicin. Furthermore, we initiated a Phase 1 trial
with AEZS-112, a treatment for solid tumors and lymphoma, delivering on our
promise of taking at least one pre-clinical compound into the clinical stage
every year.
In addition to our own in-house
development programs mentioned above, other compounds are being developed
through established alliances with other biopharmaceutical companies. These
form part of our strategy to minimize risk as well as have the potential to
generate revenue through upfront and future milestone payments.
Ozarelix, partnered with
Spectrum Pharmaceuticals, is currently in Phase 2b trials targeting BPH and
prostate cancer. Perifosine and AEZS-127, compounds to treat multiple cancers,
are partnered with Keryx Biopharmaceuticals and are in Phase 2 and the
pre-clinical stage, respectively. AEZS-130, targeting growth hormone deficiency
disorders, is in Phase 1 and partnered with Ardana.
Moving Forward
Clearly, our drug
development programs made important progress in the last year as we launched no
less than four clinical trials and disclosed positive Phase 1 and Phase 2
results for four compounds. In 2008, we will further advance our products
through the pipeline and we expect to have three products cetrorelix,
ozarelix and perifosine in Phase 3 trials.
On the financial side, we
are mindful that the decline of our stock price in 2007 was obviously
disappointing. Additionally, the structural changes that occurred at Æterna
Zentaris in the early part of this year with the divestiture of Atrium
Innovations and the resulting new business model for our Company, along with
the arrival of a new management team, contributed to the uncertainty
surrounding the Company and formed a basis for the explanation for this
decline. Perhaps the most telling factor however, was that life sciences
companies in general experienced a difficult year. Exacerbating the situation,
investors markedly withdrew from small cap companies in the biopharmaceutical
sector. As a result and at this point, I feel our Company is significantly
undervalued and that our 2007 performance on the Exchanges did not reflect the
successes we attained, nor our potential. We have on our side what all
indications show to be unimpeachable science, and therefore a high probability
of achieving optimal outcomes.
Accordingly, for the
benefit of patients, our shareholders, and our employees, 2008 will be a year
of perseverance and staying the course a year when I am hopeful the external
markets will finally begin to ascribe a value to our projects that truly
reflects their intrinsic worth.
The foundation of our
Company has always been the outstandingly skilled and dedicated people who have
made Æterna Zentaris their home. I wish to thank them here for their
contributions to our progress and immense potential.
We are daily mindful too
of our reliance upon the shareholders of Æterna Zentaris, without whose trust
none of our dreams could become reality. The timelines in biopharmaceutical
research and development are long, the stakes high, the risks familiar. Our
anticipated outcomes however, hold promise of generous and far-reaching reward.
Thank you for your continued confidence. I ask you to remain patient as we
weather the storm provided by the extremely turbulent and unpredictable recent
markets. My promises to you as we embark on a new year are that we will deliver
on our milestones, we will continue our excellence in science and we will
continue to focus our efforts on getting to the finish line first with
cetrorelix in BPH. I look forward to reporting on our progress in the year
ahead.
David J. Mazzo, Ph.D.
President and CEO
ÆTERNA
ZENTARIS PIPELINE ENCOMPASSES COMPOUNDS AT ALL STAGES OF DEVELOPMENT, FROM
DRUG DISCOVERY THROUGH MARKETED PRODUCTS
THE TWO
HIGHEST PRIORITY CLINICAL PROGRAMS ARE OUR LEAD VALUE DRIVER, CETRORELIX, FOR
BENIGN PROSTATIC HYPERPLASIA AND OUR LEAD ONCOLOGY PROGRAM, AEZS-108, FOR
ENDOMETRIAL AND OVARIAN CANCER.
Preclinical
AEZS-115
(endometriosis
& urology)
AEZS-120
(oncology
vaccine)
Erk/PI3K
INHIBITORS
(oncology)
GHRELIN
RECEPTOR
LIGANDS
(endocrinology)
AEZS-127
(oncology)
Partners:
AEZS-127:
Keryx
Discovery Unit: 120,000
compound library
Status
as of December 31, 2007
Phase 1
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Phase 2
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Phase 3
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Commercial
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AEZS-112
(oncology)
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AEZS-108
(endometrial
and
ovarian cancer)
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CETRORELIX
(benign
prostatic
hyperplasia)
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CETROTIDE
®
(
in vitro
fertilization)
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AEZS-130
(endocrinology)
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Initiated
in the second half of 2007 with a study period of approximately 24 months
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Initiated in the first half
of 2007 with results expected in the second half of 2009
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IMPAVIDO
®
(leishmaniasis,
better known
as black fever)
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CETRORELIX
(endometriosis)
(BPH in Japan)
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OZARELIX
(BPH,
prostate cancer)
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PERIFOSINE
(multiple
cancers)
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AEZS-130:
Ardana
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CETRORELIX
Shionogi in
Japan
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CETROTIDE
®
Merck Serono,
World ex-Japan
Shionogi & Nippon Kayaku
in Japan
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OZARELIX
Spectrum in North America and India, Nippon Kayaku
in Japan
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PERIFOSINE
Keryx in North America
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PARTNERED
CLINICAL PROGRAMS
OZARELIX
Next
generation LHRH antagonist with potential to treat both benign and malignant
conditions
Ongoing
Phase 2b trials in BPH and prostate cancer
PARTNER
FOR BPH
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Spectrum
- North America, India
PARTNERS
FOR PROSTATE CANCER
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Spectrum - North America, India
Nippon Kayaku - Japan
PERIFOSINE
10+
ongoing Phase 1 and Phase 2 trials as monotherapy and in combination therapy
for multiple types of cancer including prostate and lung cancer
Novel,
first-in-class, oral anti-cancer agent
PARTNER
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Keryx - U.S., Canada,
Mexico
2008
MILESTONES
LOOKING
FORWARD
Our drug development
programs made important progress in the last year as we initiated four clinical
trials and disclosed positive Phase 1 and Phase 2 results for four compounds.
In 2008, we will further advance our products through the pipeline, continuing
to prioritize our Phase 3 program in BPH with cetrorelix and our Phase 2
program with AEZS-108 in endometrial and ovarian cancer.
2008
Q1
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Q2
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Q3
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Q4
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Initiate European efficacy
trial for cetrorelix Phase 3 program in BPH
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Full recruitment for
U.S. efficacy trial for cetrorelix
Phase 3 program in BPH
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Full recruitment for
EU efficacy trial for cetrorelix
Phase 3 program in BPH
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QTc results for cetrorelix
in BPH
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Initiate safety trial for
cetrorelix Phase 3
program in BPH
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Initiate QTc study for cetrorelix in
BPH
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Full recruitment for safety trial for
cetrorelix Phase 3 program in BPH
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Initiate proof-of-concept
trial for ghrelin antagonist
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Preclinical results
at AACR for Erk/PI3K
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IMPD* filing for AEZS-120
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Top-line results for perifosine +
radiotherapy Phase 2 program
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Initiate Phase 2 trial for AEZS-112
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* Investigational Medicinal
Product Dossier
2009
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Phase
2 trial results for AEZS-108
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Results
from North American Phase 3 program for cetrorelix in BPH
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Results
from EU Phase 3 program for cetrorelix in BPH
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Results
from safety study from Phase 3 program for cetrorelix in BPH
EXPERIENCED
MANAGEMENT
TEAM
Over the last year, we
have assembled a management team with proven leadership credentials and
successful track records. All together, they have been actively involved in the
launch and marketing of over 75 pharmaceutical products globally. Our Company now
possesses enviable international expertise of the highest level in clinical
development, regulatory affairs, quality assurance, business development and
product commercialization vital assets for a successful and sustained launch
of our lead compound, cetrorelix, as well as for the thrust of our entire
pipeline.
David J.
Mazzo, PhD
President and CEO
25 years experience: Chugai
Pharma USA,
Schering-Plough, Hoechst
Marion Roussel, Rhône-
Poulenc Rorer, Baxter, Merck
Paul
Blake, MD
Senior VP and CMO
25+ years experience:
Avigenics, Cephalon,
SmithKline Beecham
(now GSK)
Jürgen
Engel, PhD
Executive VP and CSO
30+ years experience:
ASTA Medica
Ellen
McDonald, MBA
Senior VP, Business
Operations and CBO
18+ years experience:
Chugai Pharma USA,
Bristol Myers Squibb,
Johnson and Johnson
Mario
Paradis, CA
Senior VP, Administrative &
Legal
Affairs and Corporate Secretary
20 years experience:
Æterna Zentaris,
Coopers & Lybrand (now PwC)
Nicholas
J. Pelliccione, PhD
Senior VP, Regulatory
Affairs
and Quality Assurance
20+ years experience:
Chugai Pharma USA,
Schering-Plough
Dennis
Turpin, CA
Senior VP and CFO
20 years experience:
Æterna Zentaris,
Coopers & Lybrand (now PwC)
COMPANY OVERVIEW
EXCHANGE/SYMBOL
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NASDAQ: AEZS
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TSX: AEZ
EMPLOYEES
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130
OFFICES
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Warren, New Jersey, USA
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Québec City, Canada
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Frankfurt, Germany
CASH (12/31/07)
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$41.4 million
1405 Parc-Technologique
Blvd.
Québec (Québec)
Canada G1P 4P5
20 Independence Blvd.
4th Floor
Warren, New Jersey
USA 07059
www.aezsinc.com
Printed
in Canada
Managements Discussion and Analysis
of Financial Condition and Results of
Operations
The following analysis provides a review of the Companys results of
operations, financial condition and cash flows for the three-month period and
full year ended December 31, 2007.
In this Managements
Discussion and Analysis (MD&A), the Company, we, us, and our mean
Æterna Zentaris Inc. and its subsidiaries.
This discussion should be read in conjunction
with the information contained in Æterna Zentaris Inc.s annual consolidated
financial statements and related notes for the years ended on December 31,
2007, 2006 and 2005.
Our consolidated financial statements are reported in United States
dollars and have been prepared in accordance with generally accepted accounting
principles in Canada, or Canadian Generally Accepted Accounting Principles
(Canadian GAAP).
All amounts are in US dollars
unless otherwise indicated.
Company Overview
Æterna
Zentaris Inc. (TSX: AEZ, NASDAQ: AEZS) is a global biopharmaceutical company
focused on endocrine therapy and oncology.
Our pipeline
encompasses compounds at all stages of development, from drug discovery through
marketed products. The two highest priority clinical programs are our lead
value driver, cetrorelix for benign prostatic hyperplasia (BPH) and our lead
oncology program, AEZS-108 for endometrial and ovarian cancers.
Key Developments for the Year Ended December 31, 2007
CORPORATE
In January 2007, we
completed the spin-off of Atrium Biotechnologies Inc., now known as Atrium
Innovations (Atrium) by distributing to our shareholders our remaining interest
in Atrium.
In March 2007, the board of
directors appointed David J. Mazzo, Ph.D. as new President and CEO of the
Company.
Between May and August 2007,
the Company appointed three key members to the executive management team:
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Ellen McDonald, M.B.A. SVP and Chief
Business Officer
1
Annual MD&A 2007
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Nicholas Pelliccione, Ph. D., SVP,
Regulatory Affairs and Quality Assurance
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Paul Blake, M.D., SVP and Chief
Medical Officer
On August the 14, 2007, the
Board of Directors appointed Jürgen Ernst as Chairman of the Board, replacing
the founder and former Executive Chairman, Éric Dupont, Ph.D.
In the autumn of 2007, the new
management team completed a rigorous analysis of the drug development pipeline
and business operations and disclosed the key priorities of the corporate drug
development and the partnering strategy.
In November 2007, we
completed the sale of our Utah-based subsidiary, Echelon Biosciences Inc.
(Echelon), to Frontier Scientific Inc. for $3.2 million, including
$2.6 million upfront payable upon signing and $0.6 million in contingent
consideration based on specific sales levels to be reached in 2008 and 2009.
In December 2007, we opened our operational headquarters in
Warren, New Jersey where the majority of the executive management team resides.
Subsequent to year-end, we
entered into an agreement, on March 1, 2008, for the sale of our
intangible property held for sale Impavido® (miltefosine) for approximately
$9.2 million, subject to customary closing conditions.
2
DRUG DEVELOPMENT
Status of our Drug Pipeline as of
December 31, 2007
Discovery
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Preclinical
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Phase 1
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Phase 2
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Phase 3
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Commercial
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120,000
compound
library
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AEZS-115 (endometriosis
& urology)
AEZS-120 (oncology
vaccine)
Erk & PI3K
Inhibitors
(oncology)
Ghrelin
receptor
ligands
(endocrinology)
AEZS-127 (oncology)
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AEZS-112
(oncology)
AEZS-130
(endocrinology)
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AEZS-108
(endometrial
and ovarian cancers)
Cetrorelix
(endometriosis)
(BPH in Japan)
Ozarelix
(BPH, prostate cancer)
Perifosine
(multiple
cancers)
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Cetrorelix
(BPH)
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Cetrotide
®
(
In vitro
fertilization)
Impavido
®
(leishmaniasis)
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Partners
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AEZS-127:
Keryx
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AEZS-130:
Ardana
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Cetrorelix:
Shionogi
in Japan
Ozarelix:
Spectrum
in North-America and India,
Nippon Kayaku
in Japan
Perifosine:
Keryx
in North-America
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Cetrotide
®
:
Merck Serono
(World ex-
Japan)
Shionogi
and Nippon Kayaku
(Japan)
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3
CETRORELIX
In March 2007, our Japanese partner
Shionogi & Co. (Shionogi) presented encouraging Phase 2a trial
(performed in Japan) results with cetrorelix in BPH.
Results
showed that cetrorelix, the Companys lead luteinizing hormone-releasing
hormone (LHRH) antagonist, was safe and well tolerated at all dosage regimens.
Furthermore, Japanese patients responded to cetrorelix with a transient
reduction of testosterone concentration in blood, which did not reach or remain
at castration level. Additionally, none of the dosage regimens tested caused a
suppression of prostate specific antigen (PSA) levels. Finally, data generated
with Japanese patients showed that the bioavailability of cetrorelix was
similar to that observed in non-Japanese patients. Following these results, our
partner, Shionogi, initiated a 300-patient Phase 2b study with cetrorelix in
BPH in Japanese patients. Shionogi is conducting and sponsoring this study.
In April 2007, we commenced dosing of cetrorelix in the first
study of our sponsored Phase 3 program in BPH. This first study, a one-year
placebo-controlled efficacy study, is assessing an intermittent dosage regimen
of cetrorelix as a potential safe and tolerable treatment providing prolonged
improvement in BPH-related signs and symptoms. This 600-patient Phase 3 study
is being conducted in North America and Europe.
In May 2007, we regained
exclusive worldwide rights (ex-Japan) for cetrorelix from Solvay for the
endometriosis indication. The Company now owns worldwide ex-Japan rights for
cetrorelix in BPH and endometriosis.
In the first quarter of 2008, we expect to initiate additional trials
related to our Phase 3 program in BPH, including a second European
efficacy trial as well as a long-term safety trial.
AEZS-108
In June 2007, we presented
encouraging detailed Phase 1 results for AEZS-108, our cytotoxic conjugate
(LHRH agonist linked to doxorubicin) in female patients with cancers expressing
LHRH receptors.
The study conclusion was:
·
AEZS-108 was well tolerated by
patients with gynecological tumors;
·
AEZS-108 is the first drug in a
clinical study that targets the cytotoxic activity of doxorubicin specifically
to LHRH-receptor expressing tumors;
·
Signs of anti-tumor activity were
observed in seven out of 13 patients treated with 160 or 267 mg/m(2) of
AEZS-108, including three patients with complete or partial response; and
4
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Recommended dose for further
clinical studies will be 267 mg/m(2) given once every three weeks.
At the end of December 2007,
we commenced patient enrollment for our European open-label, non-comparative
multi-center Phase 2 trial that will treat up to 82 women with LHRH-receptor
positive ovarian and endometrial cancerous tumors.
AEZS-112
In January 2007, we announced the initiation of a Phase 1 trial
for AEZS-112 in patients with solid tumors and lymphoma. This open-label,
dose-escalation, multi-center, intermittent treatment Phase 1 trial is being
conducted and sponsored by the Company in the United States. The trial will
include up to 50 patients who have either failed standard therapy or for whom
no alternative therapy exists. We expect progression of this trial in 2008 to
identify maximum tolerated dose of AEZS-112.
OZARELIX
During 2007, our partner Spectrum Pharmaceuticals, Inc. (Spectrum)
continued the development of ozarelix, a fourth generation LHRH antagonist, by
conducting and sponsoring a North American Phase 2b trial in BPH. Spectrum is
also conducting and sponsoring a program with ozarelix in prostate cancer.
Additional results are expected in 2008.
PERIFOSINE
In November 2007, we completed patient recruitment for our
Company-sponsored European multi-center Phase 2 trial with perifosine, an oral
signal transduction inhibitor, combined with radiotherapy, in 160 patients with
inoperable Stage III non-small cell lung cancer (NSCLC). We expect to
announce results in the first quarter of 2009.
During 2007, our partner Keryx
Biopharmaceuticals, Inc. (Keryx) continued the development of perifosine
with multiple Phase 1 and Phase 2 studies in North America in multiple cancers.
We expect Keryx to move perifosine into Phase 3 in at least one indication in
North America in 2008.
5
Consolidated
Results of Operations
On January 2,
2007, we completed the special distribution to all shareholders of our
remaining position in Atrium. Since we disposed of our entire position in
Atrium in January 2007, we had no access to liquidity or cash flows from
Atrium in 2007 and we do not expect to access to cash flows from operations of
Atrium in ensuing years. Since Atrium is renting space in our facility in
Quebec City, we receive rent from Atrium and share administrative costs, which
amount are not significant.
For the years
ended December 31, 2006 and 2005, the previously consolidated revenues and
expenses of Atrium, representing the former Active Ingredients &
Specialty Chemicals Segment as well as the Health & Nutrition Segment,
have been reclassified as discontinued operations.
On November 30,
2007, we disposed of our former subsidiary Echelon which was involved in the
business of selling reagents. As a consequence, we have no access to liquidity
or cash flows from Echelon since the end of November 2007 and we do not
expect to access to cash flows from operations of Echelon in ensuing years,
beyond possible contigent considerations payments based on Echelons
performance in 2008 and 2009.
For the years
ended December 31, 2007, 2006 and 2005, the previously consolidated
revenues and expenses of Echelon have been reclassified as discontinued
operations.
6
The following
table sets forth Canadian GAAP consolidated financial data in thousands of US
dollars, except per share data.
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
Consolidated
revenues
|
|
|
|
|
|
|
|
Sales and
royalties
|
|
28,825
|
|
25,123
|
|
21,252
|
|
License fees
|
|
12,843
|
|
13,652
|
|
23,530
|
|
Other
|
|
400
|
|
24
|
|
31
|
|
|
|
42,068
|
|
38,799
|
|
44,813
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
Cost of
sales, excluding depreciation and amortization
|
|
12,930
|
|
11,270
|
|
8,250
|
|
Selling,
general and administrative (SG&A)
|
|
20,403
|
|
16,478
|
|
14,403
|
|
Research and
development (R&D) costs
|
|
39,248
|
|
27,422
|
|
25,544
|
|
R&D tax
credits and grants
|
|
(2,060
|
)
|
(1,564
|
)
|
(317
|
)
|
Depreciation
and amortization (D&A)
|
|
5,566
|
|
8,964
|
|
5,944
|
|
Impairment
of long-lived asset held for sale
|
|
735
|
|
|
|
|
|
|
|
76,822
|
|
62,570
|
|
53,824
|
|
Loss
from operations
|
|
(34,754
|
)
|
(23,771
|
)
|
(9,011
|
)
|
|
|
|
|
|
|
|
|
Other
revenues (expenses)
|
|
|
|
|
|
|
|
Interest
Income
|
|
1,904
|
|
1,441
|
|
1,235
|
|
Interest
expense
|
|
(85
|
)
|
(1,433
|
)
|
(7,010
|
)
|
Foreign
exchange gain (loss)
|
|
(1,035
|
)
|
319
|
|
(87
|
)
|
Other
|
|
(28
|
)
|
409
|
|
|
|
|
|
756
|
|
736
|
|
(5,862
|
)
|
Share in
the results of an affiliated company
|
|
|
|
1,575
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
(33,998
|
)
|
(21,460
|
)
|
(14,873
|
)
|
Income
tax recovery (expense)
|
|
1,961
|
|
29,037
|
|
(609
|
)
|
Net
earnings (loss) from continuing operations
|
|
(32,037
|
)
|
7,577
|
|
(15,482
|
)
|
Net
earnings (loss) from discontinued operations
|
|
(259
|
)
|
25,813
|
|
26,053
|
|
Net
earnings (loss) for the year
|
|
(32,296
|
)
|
33,390
|
|
10,571
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per share from continuing operations
|
|
|
|
|
|
|
|
Basic
|
|
(0.61
|
)
|
0.14
|
|
(0.34
|
)
|
Diluted
|
|
(0.61
|
)
|
0.14
|
|
(0.34
|
)
|
Net
earnings (loss) per share from discontinued operations
|
|
|
|
|
|
|
|
Basic
|
|
(0.00
|
)
|
0.50
|
|
0.57
|
|
Diluted
|
|
(0.00
|
)
|
0.48
|
|
0.57
|
|
Net
earnings (loss) per share
|
|
|
|
|
|
|
|
Basic
|
|
(0.61
|
)
|
0.64
|
|
0.23
|
|
Diluted
|
|
(0.61
|
)
|
0.62
|
|
0.23
|
|
7
Consolidated Revenues
Consolidated revenues
are derived from sales and royalties as well
as license fees. Sales are derived from Cetrotide
®
(cetrorelix
acetate solution for injection) marketed for reproductive health assistance for
in vitro
fertilization, Impavido
®
(miltefosine) marketed for the treatment of leishmaniasis and active
pharmaceutical ingredients. Royalties are derived from Cetrotide
®
and paid by our partner Merck-Serono. Furthermore, license fees are derived
from non-periodic milestone payments, R&D contract fees and amortization of
upfront payments received from our different licensing partners.
Sales and royalties increased to $28.8 million for the year ended December 31,
2007 compared to $25.1 million and $21.3 million for the same periods in
2006 and 2005, respectively. The year-over-year increase in sales and royalties
is related to new sales of Cetrotide
®
, following the September 2006
launch in Japan and year-over-year increased sales of Impavido
®
.
Subsequent to year-end, the Company entered into an agreement, on March 1,
2008, with respect to the sale of its intangible property held for sale
Impavido® (miltefosine), for approximately $9.2 million. This transaction
is subject to customary closing conditions, including the parties receiving
certain third-party consents and approvals. In 2007, sales of Impavido
®
represented $3.3 million. As a result of the sale of the product, we
expect a corresponding decrease in sales and royalties for 2008.
License fees revenues decreased to $12.8 million for the year
ended December 31, 2007, compared to $13.7 million and
$23.5 million for the same periods in 2006 and 2005, respectively. The
year-over-year decrease is mainly attributable to a reduction in license fees
revenues related to services rendered through our collaboration with Solvay
Pharmaceuticals (Solvay). We regained from Solvay the worldwide ex-Japan rights
for cetrorelix in BPH during 2006 and for endometriosis in 2007. License fees
revenues are expected to slightly decrease in 2008.
Consolidated Operating Expenses
Consolidated cost of sales, excluding depreciation and amortization,
increased
to $12.9 million for the year ended December 31, 2007 compared to
$11.3 million and $8.2 million for the same periods in 2006 and 2005,
respectively. The
year-over-year increase in the cost of sales is directly related to additional
generated sales and royalties. The cost of sales as a
percentage of sales and royalties was 44.86% in 2007 compared to 44.86% in 2006
and 38.82% in 2005. The lower percentage of cost of sales in 2005 compared to
2006 and 2007 is due to favorable product mix sold in 2005 since we sold more
active ingredients with higher margins to our partners. The cost of sales as a
percentage of sales and royalties is expected to increase to nearly 50% in
2008, assuming the sale of the Impavido
®
intangible assets and
corresponding inventory during the first part of the year 2008.
8
Consolidated selling, general and administrative (SG&A) expenses
increased
to $20.4 million for the year ended December 31, 2007 compared to
$16.5 million and $14.4 million for the same periods in 2006 and 2005
respectively. The increase in SG&A expenses for the year 2007 compared to
2006 is primarily due to non-recurring corporate expenses of nearly
$2.7 million related to the appointment of David J. Mazzo, Ph.D., as the President
and CEO of the Company, as well as Jürgen Ernst as Chairman of the
Board, the departure of the former CEO, Gilles Gagnon, as well as the departure
of the founder and former Executive Chairman, Éric Dupont, Ph.D. The increase in SG&A is also related to the appointment of new key
executive management, combined with the opening of operational headquarters in
New Jersey and increased royalties and commissions expenses directly related to
sales and royalties of Cetrotide
®
.
The increase in
SG&A of 2006 compared to 2005 is in part related to $0.6 million of
non-recurrent SG&A expenses with regard to a thorough review of the Companys
strategic plan combined with nearly $0.3 million of increased royalties
and commission expenses directly related to sales and royalties of Cetrotide
®
as well as increased support of our R&D efforts.
We expect that
SG&A expenses for 2008 will remain consistent with 2007.
Consolidated R&D costs
were $39.2 million
for the year ended December 31, 2007 compared to $27.4 million and
$25.5 million for the same periods in 2006 and 2005 respectively.
Additional R&D expenses of $11.8 million spent in 2007 compared to
2006 are mainly related
to the advancement of our lead product cetrorelix, our LHRH antagonist in Phase
3 for BPH; as well as to further advancement of targeted, earlier-stage
development programs including AEZS-108, our cytotoxic conjugate and AEZS-112,
our tubulin inhibitor, both of which are in oncology.
9
The following table summarizes the 2007 R&D external costs
supported by the Company.
(in thousands of US dollars)
|
|
Year ended
December 31, 2007
|
|
Products
|
|
Status
|
|
Indication
|
|
Net R&D
costs (*)
|
|
|
|
|
|
|
|
|
|
$
|
|
%
|
|
Cetrorelix
|
|
Phase 3
Phase 2
|
|
BPH and endometriosis
|
|
11,589
|
|
54.47
|
|
|
|
|
|
|
|
|
|
|
|
AEZS-108
|
|
Phase 2
|
|
Endometrial and ovarian cancers
|
|
600
|
|
2.82
|
|
|
|
|
|
|
|
|
|
|
|
Perifosine*
|
|
Phase 2
|
|
Oncology
|
|
1,428
|
|
6.72
|
|
|
|
|
|
|
|
|
|
|
|
Ozarelix*
|
|
Phase 2
|
|
BPH and prostate cancer
|
|
428
|
|
2.01
|
|
|
|
|
|
|
|
|
|
|
|
AEZS-112
|
|
Phase 1
|
|
Cancer
|
|
1,800
|
|
8.46
|
|
|
|
|
|
|
|
|
|
|
|
Erk PI3K
|
|
Preclinical
|
|
Cancer
|
|
1,260
|
|
5.92
|
|
|
|
|
|
|
|
|
|
|
|
Ghrelin
receptor
|
|
Preclinical
|
|
Endocrinology and oncology
|
|
1,044
|
|
4.91
|
|
|
|
|
|
|
|
|
|
|
|
LHRH pept.
|
|
Preclinical
|
|
Endocrinology and oncology
|
|
1,274
|
|
5.99
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
Preclinical
|
|
Multiple
|
|
1,852
|
|
8.71
|
|
|
|
|
|
|
|
21,274
|
|
100.00
|
|
(*) Net of reimbursement by partners.
We expect R&D investments to increase by approximately 30% in 2008.
This increase will primarily be related to the advancement of our lead compound
cetrorelix in BPH. We expect to initiate additional clinical trials during the
year 2008, including a 400-patient efficacy study in Europe, a 500-patient
safety study in North America and Europe, plus a projected-100-patient thorough
QTc study. The cost of these additional studies will be combined with the costs
of the ongoing preclinical carcinogenicity study and the 600-patient North
American and European efficacy study. Additionally, costs will be incurred in
the manufacturing of cetrorelix drug supply to support our sponsored studies.
R&D investments in AEZS-108 are expected to increase in 2008, as we
initiated the dosing of patients in the Phase 2 study in early 2008.
10
Our other programs will represent a lower
portion of our investment in R&D for 2008, as our focus is on advancing our
later-stage lead compounds cetrorelix in BPH and AEZS-108 in endometrial and
ovarian cancers.
R&D tax credits and grants
were
$2.1 million for the year ended December 31, 2007 compared to
$1.6 million and $0.3 million for the same periods in 2006 and 2005,
respectively. The year-over-year increase is related to non-recurring R&D
tax credits which have been used in 2007 and 2006 to reduce estimated income
taxes that would otherwise have been payable on the gain on disposal of our
former subsidiary Atrium through a secondary transaction in October 2006
and the distribution of our remaining interest in 2007. In 2008, we expect the
R&D tax credits and grants utilized to be much lower, estimated to be
approximately $0.3 million.
Consolidated depreciation and amortization
(D&A)
decreased to $5.6 million for the year ended December 31, 2007
compared to $9.0 million and $5.9 million for the same periods in 2006 and
2005, respectively. The decrease in D&A in 2007 is primarily due to an
impairment loss of $2.9 million taken in 2006 on manufacturing equipment,
patents and trademarks related to the termination of non-core pharmaceutical
development projects.
Impairment of long-lived asset held for sale
amounted to $0.7 million for the year ended December 31,
2007. This impairment is related to the building and land held for sale for
which the estimated fair value is based on offers received by third parties. We
expect to sell the land and building during the first half of 2008.
Consolidated loss from operations
increased to $34.8 million for the year ended December 31,
2007 compared to $23.8 million and $9 million for the same periods in
2006 and 2005, respectively. The increase in loss from operations in 2007 as
compared to 2006 is attributable to a combination of lower license revenues,
increase in non-recurring G&A corporate expenses and additional R&D
expenses mainly related to the advancement of our Phase 3 program with
cetrorelix in BPH. This increase in loss from operations in 2007 was partly
offset by increased sales and royalties, as well as lower D&A expenses. The
loss from operations increased from $9 million in 2005 to $23.8 million in
2006. This increase in loss from operations in 2006 is mainly attributable to
nearly $10 million reduction of license fees revenues, as well as approximately
$5.8 million increased SG&A, R&D net of R&D tax credits and
grants and D&A expenses.
We expect our consolidated loss from operations
to increase in 2008 with lower sales of Impavido® and increased R&D
expenses anticipated for cetrorelix in BPH, partly compensated by a
corresponding expected gain on disposal of Impavido® intangible property.
11
Consolidated other revenues (expenses)
Interest income
reached $1.9 million for the year ended December 31, 2007
compared to $1.4 million and $1.2 million for the same periods in 2006 and
2005, respectively. Interest income is derived from our cash and short-term
investments which totalled $41.4 million as of December 31 2007 and $60.5
million as of December 31, 2006. The year-over-year increase is directly
related to additional cash and short-term investments with regard to the net
proceeds of nearly $45 million from the disposal of 3,485,000 shares of Atrium
in October 2006.
Interest expenses
decreased to $0.08 million for the year ended December 31, 2007
compared to $1.4 million and $7 million for the same periods in 2006 and 2005,
respectively. The significant year-over-year decrease is directly related to
the full conversion of term loans into common shares completed in February 2006.
Since that conversion, the Companys long-term debt is related to a non-interest
bearing loan from the Canadian and Quebec Governments, for which the balance
was $0.8 million as of December 31, 2007 and which will be paid in full in
July 2008.
Foreign exchange loss
amounted to $1 million for the year ended December 31,
2007 compared to a foreign exchange gain of $0.3 million for the same period in
2006 and a foreign exchange loss of $0.09 million in 2005. The increase in
foreign exchange loss in 2007 is mainly related to advances in Euro to our
subsidiary in Germany and the corresponding weakness of the Euro currency
compared to the Canadian dollar, the
functional currency of the Parent company. The year-end conversion rates
from the Euro to the Canadian dollar for December 31, 2007, 2006 and 2005
were 1.44, 1.54 and 1.38, respectively.
Share in the results of an affiliated company
of $1.6 million for the period ended December 31,
2006 relates to the investment in Atrium, recorded at equity method, for the
period from October 18 to December 31, 2006. As of January 2,
2007, the Company distributed its remaining interest in Atrium to our
shareholders as a return of capital.
C
onsolidated
income tax recovery
was
$2 million for the year ended December 31, 2007 compared to $29 million
for
the same period in 2006 and to an income
tax expense of $0.6 million for the same period in 2005. Most of the 2006
income tax recovery was related to the significant decrease in the valuation
allowance with respect to the utilization of some of our future income tax
assets against future tax liabilities related to the taxable capital gains that
were realized by the Company in connection with the sale of Atrium shares in
2006 and the special distribution of our remaining interest at the beginning of
2007. These projected transactions have been completed as expected in 2007. In
2008, we do not expect to record any significant income tax recovery from our
foreign and domestic entities.
Net loss from continuing operations
was $32 million for the year ended December 31,
2007 compared to net earnings from continuing operations of $7.6 million
12
for the same period in 2006 and to a net loss
from continuing operations of $15.5 million for the same period in 2005.
The increased net loss from continuing operations in 2007 is directly related
to increased loss from operations of nearly $10 million, a one-time share
in the results of an affiliated company, Atrium, of nearly $1.6 million
recorded in 2006 and a non-recurring future income tax recovery of nearly
$25 million recorded in 2006 related to the sale of Atrium shares in 2006,
and the special distribution of our remaining interest in January 2007.
We expect our consolidated net loss from
continuing operations to increase in 2008 mainly due to increased R&D
expenses for cetrorelix in BPH.
Net loss from discontinued operations
reached $0.3 million for the year ended December 31,
2007 compared to
Net earnings from discontinued operations
of $25.8 million and $26.1 million for the same periods in 2006 and 2005,
respectively. The year-over-year variations are substantially related to Atrium
discontinued operations, as described hereunder.
Net earnings from Atrium
discontinued operations
include
the following items:
|
|
Years ended December 31,
|
|
(in thousands of US dollars)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
Revenues
|
|
|
|
239,535
|
|
200,863
|
|
|
|
|
|
|
|
|
|
Earnings before the
following items
|
|
|
|
28,360
|
|
21,414
|
|
|
|
|
|
|
|
|
|
Gain on disposal of Atrium
shares
|
|
|
|
29,248
|
|
|
|
Income tax expense
|
|
|
|
(19,923
|
)
|
(6,838
|
)
|
Gain (loss) on dilution of
investments
|
|
|
|
(628
|
)
|
19,002
|
|
|
|
|
|
|
|
|
|
Earnings before
non-controlling interest
|
|
|
|
37,057
|
|
33,578
|
|
Non-controlling interest
|
|
|
|
(10,967
|
)
|
(7,064
|
)
|
|
|
|
|
|
|
|
|
Net earnings from
discontinued operations
|
|
|
|
26,090
|
|
26,514
|
|
The 2006 increase in
revenues from Atrium discontinued operations
are mainly
attributable to acquisitions by Atrium of MultiChem and Douglas Laboratories in
2005, combined with organic growth.
The
gain on
disposal of Atrium shares from Atrium discontinued operations
resulted from the sale of 3,485,000 subordinate voting shares of Atrium on October 18,
2006, as part of a secondary offering.
13
Income tax expense from Atrium discontinued
operations
was related to the
gain on disposal of Atriums shares for an amount of $7 million, future
tax liabilities related unremitted earnings of Atrium for an amount of
$5.7 million and Atriums operations for an amount of $7.2 million.
Net loss from Echelon discontinued
operations
include the following
items:
|
|
Years ended December 31,
|
|
(in thousands of US dollars)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
Revenues
|
|
2,358
|
|
2,593
|
|
2,391
|
|
|
|
|
|
|
|
|
|
Loss before the following
items
|
|
(206
|
)
|
(369
|
)
|
(577
|
)
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
(500
|
)
|
|
|
|
|
Loss on disposal of
Echelon shares, net of cumulative translation adjustment
|
|
(44
|
)
|
|
|
|
|
Income tax recovery
|
|
491
|
|
92
|
|
116
|
|
|
|
|
|
|
|
|
|
Net loss from
discontinued operations
|
|
(259
|
)
|
(277
|
)
|
(461
|
)
|
The year-over-year increase in
revenues from Echelon discontinued operations
for 2006
is
related to organic growth. In 2007, revenues represent eleven months compared
to twelve months for the year 2006.
At the end of September 30, 2007, the
Company performed a preliminary impairment test resulting in an impairment of
Echelon goodwill of $0.5 million.
The
Loss on
disposal of Echelon shares from discontinued operations
results from
the disposal of all of the outstanding shares of Echelon as of November 30,
2007.
Consolidated net loss
was $32.3 million or $0.61 per basic and diluted
share for the year ended December 31, 2007 compared to
consolidated
net earnings
of
$33.4 million or $0.64 per basic share and $0.62 per diluted share for the
same period in 2006. The increased net loss in 2007 is related to higher loss
from operations of nearly $10 million, lower income tax recovery of nearly
$27 million related to the recognition of future income tax assets mainly
attributable to the sale of Atrium shares in 2006 and the special distribution
of our remaining interest in January 2007, as well as lower net earnings
from discontinued operations of Atrium of nearly $26 million.
We expect that the consolidated net loss for
the year 2008 will increase mainly due to higher expected R&D expenses for
cetrorelix in BPH.
14
The
consolidated net earnings
were $10.6 million for the year ended December 31, 2005 or $0.23 per basic
and diluted share. The $22.8 million increase in the net earnings in 2006
compared to 2005 is attributable to the recording of increased income tax
recovery of $29 million, mostly related to recognition of future income
tax assets with regard to the sale of Atrium shares in 2006 and the special
distribution of our remaining interest in January 2007, lower interest
expense of $5.7 million due to the conversion of the term loans during the
first quarter of the year 2006; as well as $1.6 million of share in the
net earnings of an affiliated company partly offset by increased loss from
operations.
The weighted average number of shares
outstanding used to calculate the basic net earnings per share for the year
ended December 31, 2007 was 53.2 million shares compared to
52.1 million shares and 46.1 million shares for the same periods in
2006 and 2005, respectively. For the diluted net earnings per share, the
weighted average number of shares outstanding used for this calculation was
53.2 million shares in 2007 compared to 52.5 million shares and
46.1 million shares for the same periods in 2006 and 2005, respectively.
Total Consolidated Assets and
Long-Term Financial Liabilities
CONSOLIDATED BALANCE SHEET DATA
|
|
As at
December 31,
|
|
As at
December 31,
|
|
As at
December 31,
|
|
(in thousands of US dollars)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
123,363
|
|
223,491
|
|
419,785
|
|
Long-term financial liabilities
|
|
3,333
|
|
20,135
|
|
238,625
|
|
Total consolidated assets were
$123.4 million as of December 31, 2007 compared to
$223.5 million as of December 31, 2006. This decrease in consolidated
assets is mainly attributable to the elimination of our investment in an
affiliated company, Atrium, with a carrying book value of $57 million as
of December 31, 2006; upon the special distribution on January 2,
2007 to our shareholders of our remaining interest in Atrium. This transaction
was recorded as a reduction in Share capital of $138 million; the
corresponding difference between the fair value and the book value net of income taxes and cumulative
translation adjustment of $71.1 million has been recorded in the Other
capital, see Note 4 of our annual financial statements for more details.
Furthermore, the reduction of our consolidated assets is mainly related to the
elimination of nearly $22 million of future income tax assets utilized with
regard to the special distribution of Atrium and the use of cash and short-term
investments to fund the operating, investing and financing activities.
15
Total consolidated assets were $223.5 million
as of December 31, 2006 compared to $419.8 million as of December 31,
2005. Long-term financial liabilities were $20.1 million as of December 31,
2006 compared to $238. 6 million as of December 31, 2005. On October 18,
2006, through a Secondary Offering, the Company closed the selling of 3,485,000
shares of Atrium for net proceeds of $45 million. On the same date, Atriums
assets and liabilities were excluded from the consolidation since the Company
ceased control. Furthermore, all historical operations and cash flows recorded
through the consolidation of Atrium until that date have been reported as
discontinued operations. As of December 31, 2006, the remaining interest
in Atrium was presented as Investment in an affiliated company (see Note 4 of
our annual financial statements for more details). The decrease in consolidated
assets and liabilities as of December 31, 2006 compared to December 31,
2005 is mainly attributable to the elimination of the consolidation of assets
and liabilities related to Atrium, partly compensated by the recording of the
remaining interest in Atrium as an Investment in an affiliated company, using
the equity method.
16
Critical Accounting Policies and Estimates
Our financial statements are
prepared in accordance with Canadian GAAP. Access to a summary of measurement
and disclosure differences between Canadian and US GAAP is referenced in
Note 24 of our annual 2007 financial statements. The preparation of
financial statements in accordance with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosures of contingent assets and liabilities at the
date of the financial statements, as well as the reported amounts of revenues
and expenses during the reporting years. Significant estimates include the
allowance for doubtful accounts, provisions for obsolete inventory, future
income tax assets and liabilities, the useful lives of property, plant and
equipment and intangible assets, the valuation of intangible assets and
goodwill, the fair value of options granted and employee future benefits and
certain accrued liabilities. We base our estimates and assumptions on
historical experience and on other factors that we believe to be reasonable
under the circumstances, the result of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results could differ from these
estimates.
The following summarizes our
critical accounting policies and other policies that require the most
significant judgment and estimates in the preparation of our consolidated
financial statements.
Revenue Recognition and Deferred
revenues
The Company is currently in
a phase in which potential products are being further developed or marketed
jointly with strategic partners. The existing licensing agreements usually
foresee one-time payments (upfront payments), payments for research and
development services in the form of cost reimbursements, milestone payments and
royalty receipts for licensing and marketing product candidates. Revenues
associated with those multiple-element arrangements are allocated to the
various elements based on their relative fair value.
Agreements containing
multiple elements are divided into separate units of accounting if certain
criteria are met, including whether the delivered element has stand-alone value
to the customer and whether there is objective and reliable evidence of the
fair value of the undelivered obligation(s). The consideration received is
allocated among the separate units based on each units fair value or using the
residual method, and the applicable revenue recognition criteria are applied to
each of the separate units.
License fees representing
non-refundable payments received upon the execution of license agreements are
recognized as revenue upon execution of the license agreements when the Company
has no significant future performance obligations and collectability of the
fees is assured. Upfront payments received at the beginning of licensing
agreements are not recorded as revenue when received but are amortized
17
based on the progress to the
related research and development work. This progress is based on estimates of
total expected time or duration to complete the work which is compared to the
period of time incurred to date in order to arrive at an estimate of the
percentage of revenue earned to date.
Milestone payments, which
are generally based on developmental or regulatory events, are recognized as
revenue when the milestones are achieved, collectability is assured, and when
there are no significant future performance obligations in connection with the
milestones.
In those instances where the
Company has collected upfront or milestone payments but has ongoing future
obligations related to the development of the drug product, management
considers the milestone payments and the remaining obligations under the
contract as a single unit of accounting. In those circumstances where the
collaboration does not require specific deliverables at specific times or at
the end of the contract term, but rather the Companys obligations are
satisfied over a period of time, revenue recognition is deferred and amortized
over the period of its future obligations.
Royalty revenue, based on a
percentage of sales of certain declared products sold by third parties, is
recorded when the Company has fulfilled the terms in accordance with the
contractual agreement, has no future obligations, the amount of the royalty fee
is determinable and collection is reasonably assured.
Revenues from sales of
products are recognized, net of estimated sales allowances and rebates, when
title passes to customers, which is at the time goods are shipped, when there
are no future performance obligations, when the purchase price is fixed and
determinable, and collection is reasonably assured.
Research and Development Costs
Research costs are expensed as incurred. Development
costs are expensed as incurred except for those which meet generally accepted
criteria for deferral, which are capitalized and amortized against operations
over the estimated period of benefit. To date, no costs have been deferred.
Impairment of Long-Lived Assets
and Goodwill
Property, plant and equipment and intangible assets with
finite lives are reviewed when events or circumstances indicate that costs may
not be recoverable. Impairment exists when the carrying value of the asset is
greater than the undiscounted future cash flows expected to be provided by the
asset. The amount of impairment loss, if any, is the excess of its carrying
value over its fair value, which fair value being determined based upon
discounted cash flows or appraised values, depending of the nature of assets.
18
Finally, goodwill is tested annually, or more frequently
if impairment indicators arise, for impairment in relation to the fair value of
each reporting unit to which goodwill applies and the value of other assets in
that reporting unit. An impairment charge is recorded for any goodwill that is
considered impaired.
As of December 31, 2006,
following the decision to terminate the pharmaceutical development of certain
of our products, we decided to take an impairment on related manufacturing
equipment as well as on certain patents and trademarks in order to bring them
to their fair value. Consequently, an amount of $2.9 million was recorded as additional
depreciation and amortization.
Accounting
for Income Tax Expense
We
operate in multiple jurisdictions, and our earnings are taxed pursuant to the
tax laws of these jurisdictions. Our effective tax rate may be affected by the
changes in, or interpretations of, tax laws in any given jurisdiction,
utilization of net operating losses and tax credit carry-forwards, changes in
geographical mix of income and expense, and changes in managements assessment
of matters, such as the ability to realize future tax assets. As a result of
these considerations, we must estimate our income taxes in each of the
jurisdictions in which we operate. This process involves estimating our actual
current tax exposure, together with assessing temporary differences resulting
from differing treatment of items for tax and accounting purposes. These
differences result in future tax assets and liabilities, which are included in
our consolidated balance sheet. We must then assess the likelihood that our
future tax assets will be recovered from future taxable income and establish a
valuation allowance for any amounts we believe it will be more likely not
recoverable. Establishing or increasing a valuation allowance increases our
income tax expense.
Significant
management judgment is required in determining our provision for income taxes,
our income tax assets and liabilities, and any valuation allowance recorded
against our net income tax assets. Our valuation allowance was significantly
adjusted on December 31, 2006, mainly because we will be able to utilize
some of our income tax assets against the future taxable gain that will be
realized in connection with the sale of Atrium shares in 2006 and the special
distribution of our remaining interest in Atrium.
The
valuation allowance is based on our estimates of taxable income by jurisdiction
in which we operate and the period over which our income tax assets will be
recoverable. In the event that actual results differ from these estimates or we
adjust these estimates in future periods, we may need to amend our valuation
allowance, which could materially impact our financial position and results of
operations.
Stock-Based
Compensation Costs
Since January 1, 2003, we
account for all forms of employee stock-based compensation using the fair
value-based method. This method requires that we make estimates about
19
the risk-free interest rate, the
expected volatility of our shares and the expected life of the awards.
New
Accounting Standards
Effective January 1, 2007,
we adopted CICA Handbook Section 1506 Accounting Changes. This Section establishes
criteria for changes in accounting policies, accounting treatment and
disclosures regarding changes in accounting policies, estimates and corrections
of errors. In particular, this Section allows for voluntary changes in
accounting policy only when they result in the financial statements providing
reliable and more relevant information. Furthermore, this section requires
disclosure of when an entity has not applied a new source of GAAP that has been
issued but is not yet effective. Such disclosures are provided below.
Financial Instruments
In January 2005, the CICA
issued four new accounting standards in relation with financial instruments: section
3855 Financial Instruments Recognition and measurement, section 3865 Hedges,
section 1530 Comprehensive Income and section 3251 Equity.
Section 3855 expands on
section 3860 Financial Instrument - Disclosure and Presentation, by prescribing
when a financial instrument is to be recognized on the balance sheet and at
what amount. It also specifies how financial instrument gains and losses are to
be presented.
Section 3865 provides
alternative treatments to section 3855 for entities which choose to designate
qualifying transactions as hedges for accounting purposes. It replaces and
expands on Accounting Guideline AcG-13 Hedging Relationships, and the hedging
guidance in Section 1650 Foreign Currency Translation by specifying how
hedge accounting is applied and what disclosure is necessary when it is
applied.
Section 1530 Comprehensive
Income introduces a new requirement to temporarily present certain gains and
losses outside net income. Consequently, Section 3250 Surplus has been revised
as Section 3251 Equity.
Sections 1530, 3251, 3855 and
3865 were adopted by the Company on January 1, 2007.
Recognition of Financial Assets
and Liabilities
Short-term
Investments
The short-term investments are
classified as available-for-sale investments. We recognize transactions on the
settlement date. These investments are recognized at fair
20
value. Unrealized gains and
losses are recognized, net of income taxes, if any, in Comprehensive income.
Upon the disposal or impairment of these investments, these gains or losses are
reclassified in the consolidated statement of earnings.
As a result of the application
of CICA 3855, a difference of $41,000 between the carrying amount and the fair
value of investments classified as available-for-sale is recognized as an
adjustment to the opening balance of Accumulated other comprehensive income,
net of income taxes.
Effective
Interest Rate Method
Premiums and discounts on
short-term investments and long-term debt are accounted for using the effective
interest rate method. The impact of the use of the effective interest rate
method amounted to $587,000 and was recognized as an adjustment to the opening
balance of deficit, net of income taxes.
Transition
The recognition, derecognition
and measurement methods used other than the adjustment described above for the
short-term investments and the long-term debt, have not changed from the
methods of periods prior to the effective date of the new standards.
Consequently, there were no further adjustments to record on transition.
General
Standards of Financial Statement Presentation
In May of 2007, the CICA
amended Section 1400, General Standards of Financial Statement
Presentation to change the guidance related to managements responsibility to
assess the ability of the entity to continue as a going concern. Management is
required to make an assessment of an entitys ability to continue as a going
concern and should take into account all available information about the
future, which is at least but not limited to 12 months from the balance sheet
date. Disclosure is required of material uncertainties related to events or
conditions that may cast significant doubt upon the entitys ability to
continue as a going concern.
The amendments to Section 1400
apply to interim and annual financial statements relating to fiscal years
beginning on or after January 1, 2008. We elected to adopt this
requirement early on.
Evaluation of Going Concern,
Results of Operations, and Managements Plans:
After reviewing our strategic
plan and the corresponding budget and forecasts, we believe that the Company
currently has sufficient cash and cash equivalents to fund planned expenditures
and execute its focused strategy for at least the next 12 months.
21
We expect to derive additional
cash from potential sale of non-core assets and financing.
Impact of Accounting
Pronouncements Not Yet Adopted
Capital
Disclosure
The CICA issued Section 1535,
Capital Disclosures. This standard establishes guidelines for disclosure of
information regarding an entitys capital which will enable users of its
financial statements to evaluate an entitys objectives, policies and processes
for managing capital, including disclosures of any externally imposed capital
requirements and the consequences of non-compliance. The new requirements will
be effective starting January 1, 2008. Although the new standard provides
for additional disclosures only with no measurement impact, we are currently in
the process of evaluating the impact that these additional disclosures
standards will have on the Companys financial statements.
Financial
Instruments - Disclosures and Financial Instruments Presentation
The CICA issued Section 3862,
Financial Instruments Disclosures and Section 3863, Financial
Instruments Presentation which replace Section 3861, Financial
Instruments Disclosure and Presentation. The new disclosure standard
requires the disclosure of additional detail of financial asset and liability
categories as well as a detailed discussion on the risks associated with the
Companys financial instruments. This standard harmonizes disclosures with
International Financial Reporting Standards (IFRS). The presentation
requirements are carried forward unchanged. These new standards will be
effective starting January 1, 2008. We assessed that the impact of these
standards will not be significant as they relate to disclosure requirements and
require no change in the manner of accounting for financial instruments or
capital. We are currently in the process of evaluating the impact that these
additional disclosure standards will have on our financial statements..
Inventories
The CICA issued Section 3031,
Inventories which will replace existing Section 3030 with the same title
and will harmonize accounting for inventories under Canadian GAAP with IFRS.
This standard requires that inventories should be measured at the lower of cost
and net realizable value, and includes guidance on the determination of cost,
including allocation of overheads and other costs. The standard also requires
that similar inventories within a consolidated group be measured using the same
method. It also requires the reversal of previous write-downs to net realizable
value when there is a subsequent increase in the value of inventories. The new Section is
effective for interim and annual financial statements relating to fiscal years
beginning on or after January 1, 2008. We are currently evaluating the
impact of this new standard.
22
Goodwill and Intangible Assets
In February 2008, the
CICA issued Section 3064, Goodwill and intangible assets, replacing Section 3062,
Goodwill and other intangible assets and Section 3450, Research and
development costs. Various changes have been made to other sections of the
CICA Handbook for consistency purposes. The new Sections will be applicable to
financial statements relating to fiscal years beginning on or after October 1,
2008. Accordingly, we will adopt the new standards for the Companys fiscal
year beginning January 1, 2009. It establishes standards for the
recognition, measurement, presentation and disclosure of goodwill subsequent to
its initial recognition and of intangible assets by profit-oriented
enterprises. Standards concerning goodwill are unchanged from the standards
included in the previous Section 3062. We are currently evaluating the
impact of the adoption of this new Section on the Companys consolidated
financial statements.
Liquidity, Cash
Flows and Capital Resources
Our operations and capital
expenditures are mainly financed through cash flows from operating activities,
the use of our liquidity, as well as the issuance of debt and common shares.
Our cash and short-term
investments amounted to $41.4 million as of December 31, 2007
compared to $60.5 million as of December 31, 2006. Possible
additional operating losses and/or possible investments in the acquisition of
complementary businesses or products may require additional financing. As of December 31,
2007, cash and short-term investments of the Company included
$35.4 million in Canadian currency and 3.9 million in Euro.
The short-term investments do
not include asset-backed commercial papers which are affected by liquidity
issues.
The variation of our liquidity
by activities is explained below, not considering any cash flows used or
provided by discontinued operation activities.
Operating
Activities
Cash flows used by our
continuing operating activities were $25.7 million for the year ended December 31,
2007 compared to $15.9 million and $2.6 million for the same periods
in 2006 and 2005, respectively. The increase in net cash used in 2007 is
primarily attributable to lower license revenues, increased non-recurring
corporate expenses, additional investments in R&D related to the initiation
of a Phase 3 program in BPH for cetrorelix, as well as to further advancement
of targeted, earlier-stage development programs. Additional net cash used by
continuing activities in 2006, as compared to 2005, is attributable to non-periodic
upfront and milestone payments
23
received in 2004 from partners
related to our R&D collaboration agreements, combined with increased
SG&A and R&D expenses in 2006.
We expect net cash used in continuing
operating activities to increase in 2008, as we will continue our Phase 3
clinical program with cetrorelix in BPH and will further advance targeted,
earlier-stage development programs.
Financing
Activities
Net cash used in continuing financing activities
were $1.1 million for the year ended December 31, 2007 compared to
$0.7 million and $0.6 million for the same periods in 2006 and 2005,
respectively. These funds were mostly used for debt repayments. We expect to
pay the balance of our long-term debt of $0.8 million in July 2008.
Investing
Activities
Net cash used in continuing investing activities (excluding the change
in short-term investments) amounted to $3 million for the year ended December 31,
2007 compared to $0.5 million for the same period in 2006 and
$1.7 million in 2005. The increase in 2007 is mainly related to
acquisition of equipment to support clinical trials.
During
the first half of 2008, we expect to sell our building and land held for sale
in Quebec City, as well as our intangible assets held for sale related to
Impavido®. We believe this will yield over $15 million of cash inflow.
Contractual
Obligations
We have certain contractual
obligations and commercial commitments. Commercial commitments mainly include
R&D services and manufacturing agreements related to the execution of our
Phase 3 program with cetrorelix in BPH. The following table indicates our cash
requirements to respect these obligations:
Contractual
Obligations
|
|
Payments due by period
|
|
(in thousands of US dollars)
|
|
Total
|
|
2008
|
|
2009-2011
|
|
2012-2013
|
|
2014 and
beyond
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Long-term
debt
|
|
775
|
|
775
|
|
|
|
|
|
|
|
Operating
leases
|
|
10,526
|
|
2,092
|
|
6,362
|
|
640
|
|
1,432
|
|
Commercial
commitments
|
|
20,247
|
|
13,295
|
|
6,952
|
|
|
|
|
|
Total
contractual cash obligations
|
|
31,548
|
|
16,162
|
|
13,314
|
|
640
|
|
1,432
|
|
24
Outstanding
Share Data
As of March 4, 2008, there
were 53,187,470 common shares issued and outstanding and there were 5,006,092
stock options outstanding.
25
It is important to note that
historical patterns of expenditures cannot be taken as an indication of future
expenditures. The amount and timing of expenditures and availability of capital
resources vary substantially from period to period, depending on the level of
research and development activity being undertaken at any one time and the
availability of funding from investors and prospective commercial partners.
Quarterly Summary Financial Information
(in thousands of US dollars, except per share
data)
|
|
Quarters ended
|
|
Unaudited
|
|
December 31,
2007
|
|
September 30,
2007
|
|
June 30,
2007
|
|
March 31,
2007
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
10,240
|
|
11,044
|
|
11,551
|
|
9,233
|
|
Loss from
operations
|
|
(11,664
|
)
|
(9,461
|
)
|
(5,326
|
)
|
(8,303
|
)
|
Net loss
from continuing operations
|
|
(13,854
|
)
|
(8,112
|
)
|
(4,928
|
)
|
(5,143
|
)
|
Net loss
|
|
(13,636
|
)
|
(8,704
|
)
|
(4,846
|
)
|
(5,110
|
)
|
Net loss per
share from continuing operations
|
|
|
|
|
|
|
|
|
|
Basic and
diluted
|
|
(0.26
|
)
|
(0.16
|
)
|
(0.09
|
)
|
(0.10
|
)
|
Net loss per
share
|
|
|
|
|
|
|
|
|
|
Basic and
diluted
|
|
(0.26
|
)
|
(0.16
|
)
|
(0.09
|
)
|
(0.10
|
)
|
|
|
Quarters ended
|
|
|
|
December 31,
2006
|
|
September 30,
2006
|
|
June 30,
2006
|
|
March 31,
2006
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
11,937
|
|
9,928
|
|
8,673
|
|
8,261
|
|
Loss from
operations
|
|
(6,457
|
)
|
(5,833
|
)
|
(5,492
|
)
|
(5,988
|
)
|
Net earnings
(loss) from continuing operations
|
|
22,526
|
|
(4,741
|
)
|
(4,440
|
)
|
(5,768
|
)
|
Net earnings
(loss)
|
|
39,101
|
|
(1,569
|
)
|
(1,562
|
)
|
(2,580
|
)
|
Net earnings
(loss) per share from continuing operations
|
|
|
|
|
|
|
|
|
|
Basic and
diluted
|
|
0.42
|
|
(0.09
|
)
|
(0.08
|
)
|
(0.12
|
)
|
Net earnings
(loss) per share
|
|
|
|
|
|
|
|
|
|
Basic and
diluted
|
|
0.74
|
|
(0.03
|
)
|
(0.03
|
)
|
(0.05
|
)
|
Note:
Per share data is
calculated independently for each of the quarters presented. Therefore, the sum
of this quarterly information does not equal the corresponding annual
information.
26
Fourth Quarter Results
Consolidated revenues
were $10.2 million for the
fourth quarter ended December 31, 2007 compared to $11.9 million for
the same quarter in 2006. The decrease in revenues is attributable to lower
sales of Impavido®, as well as active pharmaceutical ingredients to our
partners, combined with lower license fees from our partners.
Selling, General and Administrative expenses
were $5.1 million for the
fourth quarter ended December 31, 2007 compared to $4.2 million for
the same quarter in 2006. The increase in SG&A is mainly related to the
support of the continuation of our Phase 3 program with cetrorelix in BPH and
the opening of our new operational headquarters in New Jersey.
Consolidated R&D expenses
were $13.6 million for the
fourth quarter ended December 31, 2007 compared to $7.9 million for
the same quarter in 2006. The increase in R&D expenses relates to the
continuation of our Phase 3 program with cetrorelix in BPH.
Consolidated net loss
was $13.6 million or $0.26 per
basic and diluted share for the fourth quarter ended December 31, 2007
compared to
consolidated net earnings
of
$39.1 million or $0.74 per basic and diluted share for the same quarter in
2006. The increased net loss in the fourth quarter 2007 is related to higher
loss from operations of nearly $5.2 million mainly related to increased R&D
expenses, as well as to lower income tax recovery of nearly $28.4 million
attributable to the recognition of future income tax assets mainly related to
the sale of Atrium shares in 2006 and the special distribution of our remaining
interest in January 2007, combined with the decrease in net earnings from
Atriums discontinued operations of approximately $16.3 million.
We expect that the consolidated
net loss for the first quarter of 2008 will increase compared to the last
quarter of 2007 with the anticipated increase in R&D expenses on our lead
Phase 3 program with cetrorelix in BPH.
Outlook for 2008
On March 1, 2008, we
entered into an agreement with respect to the sale of our intangible property
held for sale Impavido® (miltefosine), for approximately $9.2 million. This
transaction is subject to customary closing conditions, including the parties
receiving certain third-party consents and approvals.
During the first six months of
2008, we expect to sell our land and building held for sale in Quebec City
which should bring additional non-dilutive cash flow.
27
Our sales revenues should
decrease with the expected completion of the sale of Impavido® during the first
six months of 2008.
We expect R&D expenses to
increase in 2008, primarily due to the continuation of our Phase 3 clinical
development program with cetrorelix in BPH, as well as the emphasis on clinical
development of targeted earlier clinical-stage product candidates.
Net cash outflow for fiscal 2008 is projected to be ~$25 million. Our
expectations are that cash outflow from operations will not proceed linearly
throughout the year but will be higher in the first half due to start-up costs
associated with key clinical studies. The majority of these costs will be
related to the initiation of the second pivotal efficacy trial, the pivotal
long-term safety trial and the thorough QTc trial for our lead product,
cetrorelix in BPH. The rate of cash outflow from operations is expected to
return to a lower level in the second half of the year.
Financial and Other Instruments
Foreign
Currency Risk
Since the Company operates
on an international scale, it is exposed to currency risks as a result of
potential exchange rate fluctuations. For the year ended December 31, 2007,
there were no significant operations using forward-exchange contracts and no
significant forward-exchange contract is outstanding as of today.
Credit Risk
Financial instruments, which
potentially subject the Company to concentrations of credit risk, consist
primarily of cash and cash equivalents, short-term investments and accounts
receivable. Cash and cash equivalents are maintained with high-credit quality
financial institutions. Short-term investments consist primarily of bonds
issued by high-credit quality corporations and institutions. Consequently,
management considers the risk of non-performance related to cash and cash
equivalents and investments to be minimal.
Generally, we do not require
collateral or other security from customers for trade accounts receivable;
however, credit is extended following an evaluation of creditworthiness. In
addition, we perform ongoing credit reviews of all our customers and establish
an allowance for doubtful accounts when accounts are determined to be uncollectible.
Interest
Rate Risk
We are exposed to market risk relating to changes in interest rates
with regard to our short-term investments.
28
Related
Party Transactions and Off-Balance Sheet Arrangements
The Company was part of a tax
loss consolidation strategy with its former subsidiary Atrium. In respect to
that arrangement that terminated in October 2006 when the Company ceased
to be the controlling shareholder of Atrium, we received a tax ruling delivered
by Canada Revenue Agency. All transactions are eliminated during the
consolidation process and income tax savings resulting from the interest
expense deduction is presented as discontinued operations.
All other significant related
party transactions described in Note 21 of our annual consolidated financial
statements are associated with the lease of office and manufacturing space to
Atrium and the purchase of a patent from a senior officer (Jürgen Engel) of the
Company. All transactions are measured at the exchange amount which is the
amount of consideration established and agreed upon by the related parties.
As
of December 31, 2007, we did not have interest in any variable interest
entities.
Risk
Factors and Uncertainties
Risks Associated with Operations:
·
Many of our products are currently
at an early development stage. It is impossible to ensure that the R&D on
these products will result in the creation of profitable operations;
·
We are currently developing our
products based on R&D activities conducted to date, and we may not be
successful in developing or introducing to the market these or any other new
products or technology. If we fail to develop and deploy new products on a
successful and timely basis, we may become non-competitive and unable to recoup
the R&D and other expenses we incur to develop and test new products;
·
Even if successfully developed, our
products may not gain market acceptance among physicians, patients, healthcare
payers and the medical community which may not accept or utilize our products.
If they do not achieve significant market acceptance, our business and
financial conditions will be materially adversely affected. In addition, we may
fail to further penetrate our core markets and existing geographic markets or
successfully expand our business into new markets; the growth in sales of our
products, along with our operating results, could be negatively impacted. Our
ability to further penetrate our core markets and existing geographic markets
in which we compete or to successfully expand
29
our business
into additional countries in Europe, Asia or elsewhere, to the extent we
believe that we have identified attractive geographic expansion opportunities
in the future, is subject to numerous factors, many of which are beyond our
control. We cannot assure that our efforts to increase market penetration in
our core markets and existing geographic markets will be successful. Our
failure to do so could have an adverse effect on our operating results;
·
We rely heavily on our proprietary
information in developing and manufacturing our product candidates. Despite
efforts to protect our proprietary rights from unauthorized use or disclosure,
third parties may attempt to disclose, obtain, or use our proprietary
information or technologies;
·
We have to forge and maintain
strategic alliances to develop and market products in our current pipeline. If
we are unable to reach agreements with such collaborative partners, or if any
such agreements are terminated or substantially modified, we may be unable to
obtain sufficient licensing revenue for our products, which might have a
material adverse effect on their development and on us;
·
In carrying out our operations, we
are dependent on a stable and consistent supply of ingredients and raw
materials. There can be no assurance that we will be able, in the future, to
continue to purchase products from our current suppliers or any other supplier
on terms similar to current terms or at all. An interruption in the availability
of certain raw materials or ingredients, or significant increases in the prices
paid by us for them, could have a material adverse effect on our business,
financial condition, liquidity and operating results.
Cash Flows and Financial Resources
Based
on our current plans, we will need to raise additional funds for future
operating costs, research and development activities, preclinical studies, and
clinical trials necessary to bring our potential products to market,
particularly, for cetrorelix in BPH, or to potentially establish marketing,
sales and distribution capabilities. We may endeavor to secure additional
financing, as required, through strategic alliance arrangements, the issuance
of new share capital, as well as through other financing opportunities.
However,
there can be no assurance that these financing efforts will be successful or
that we will continue to be able to meet our ongoing cash requirements. It is
possible that financing may not be available or, if available, will not be on
acceptable terms. The availability of financing will be affected by the results
of our preclinical and clinical development, including the cetrorelix Phase 3
program, the AEZS-108 Phase 2 study, as well as other studies ongoing from our
pipeline. It can also be affected by our ability to obtain regulatory
approvals, the market acceptance of our products, the state of the
30
capital
markets generally, the status of our listing on the NASDAQ and TSX markets,
strategic alliance agreements, and other relevant commercial considerations.
We
believe that we would be able to obtain long-term capital, if necessary, to
support our corporate objectives, including the clinical development program of
our products. Our planned cash requirements may vary materially in response to
a number of factors, including: R&D on our products; clinical trial
results; increases in our manufacturing capabilities; changes in any aspect of
the regulatory process; and delays in obtaining regulatory approvals. Depending
on the overall structure of current and future strategic alliances, we may have
additional capital requirements related to the further development of existing
or future products.
We have
not entered into any significant forward currency contracts or other financial
derivatives to hedge foreign exchange risk and, therefore, we are subject to
foreign currency transaction and translation gains and losses. Foreign exchange
risk is managed primarily by satisfying foreign denominated expenditures with
cash flows or assets denominated in the same currency. However, with companies
operating in foreign countries, we are more exposed to foreign currency risk.
Key
Personnel
Our success is also dependent
upon our ability to attract and retain a highly qualified work force, and to
establish and maintain close relations with research centers. The competition
in that regard is very severe. Our success is dependent to a great degree on
our senior officers, scientific personnel and consultants. The failure to
recruit qualified staff and the loss of key employees could compromise the pace
and success of product development.
Acquisition Program
We
intend to continue to acquire new technologies and/or businesses. There is no
assurance that we will make certain acquisitions or that we will succeed in
integrating the newly-acquired technologies or businesses into its operations.
The failure to successfully integrate the personnel and operations of
businesses which we may acquire in the future with ours could have a material
adverse effect on our operations and results.
Volatility of Share Prices
Share prices are subject to
changes because of numerous different factors related to its activity including
reports of new information, changes in the Companys financial situation, the
sale of shares in the market, the Companys failure to obtain results in line
with the expectations of analysts, an announcement by the Company or any of its
competitors concerning technological innovation, etc. During the past few
years, shares of Æterna Zentaris, other biopharmaceutical companies, and the
investment market in
31
general have been subjected to
extreme fluctuations that were unrelated to the operational results of the
companies affected. There is no guarantee that the market price of the Companys
shares will be protected from any such fluctuations in the future.
The Company is a reporting issuer under the securities legislation of
all of the provinces of Canada and is registered in the United States and it
is, therefore, required to file continuous disclosure documents such as interim
and annual financial statements, a Proxy Circular, an Annual Information Form,
material change reports and press releases with such securities regulatory
authorities. Copies of these documents may be obtained free of charge on
request from the office of the Secretary of the Company or through the Internet
at the following addresses: www.aezsinc.com, www.sedar.com and www.sec.gov/edgar.shtml.
A detailed list of the risks and
uncertainties affecting us can be found in our Shelf-Prospectus and public
documents filed on SEDAR and EDGAR.
Disclosure Controls and Procedures
Disclosure controls and procedures are designed to provide reasonable
assurance that all material information required to be publicly disclosed by a
public company is gathered and communicated to management, including the
certifying officers, on a timely basis so that the appropriate decisions can be
made regarding public disclosure.
The Companys management,
including the Companys Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of the Companys disclosure controls and
procedures as of December 31, 2007. Based on that evaluation, the Companys
Chief Executive Officer and Chief Financial Officer concluded that the Companys
disclosure controls and procedures are effective as of December 31, 2007.
Changes in Internal Controls over Financial
Reporting
There has been no change in the
Companys internal control over financial reporting that occurred during the
year ended December 31, 2007 that has materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting. Based on the results of our testing, these controls were
found to be operating effectively at December 31, 2007.
During 2007, in the course of
its evaluation, Management identified significant deficiencies in its internal
control over financial reporting which the Company does not believe, either
individually or in the aggregate, resulted in a material weakness to its
internal control over financial reporting.
32
The design of any system of
controls and procedures is based in part upon certain assumptions about the
likelihood of certain events. There can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions,
including conditions that are remote.
Forward-Looking Statements
This document contains
forward-looking statements, which reflect our current expectations regarding
future events. Forward-looking statements may include words such as anticipate,
believe, could, expect, goal, guidance, intend, may, objective, outlook, plan,
seek, should, strive, target and will.
The forward-looking statements
involve risks and uncertainties. Results or performances may differ
significantly from expectations. For example, the results of current clinical
trials cannot be foreseen, nor can changes in policy or actions taken by such
regulatory authorities as the US Food and Drug Administration and the
Therapeutic Products Directorate of Health Canada, or any other organization
responsible for enforcing regulations in the pharmaceutical industry.
Given these uncertainties and
risk factors, readers are cautioned not to place undue reliance on such
forward-looking statements. We disclaim any obligation to update any such
factors or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein to reflect future results, events
or developments except if we are requested by a governmental authority or
applicable law.
On
behalf of management,
/s/
Dennis Turpin, CA
|
|
Dennis Turpin, CA
|
Senior Vice President and Chief Financial Officer
|
March 4, 2008
|
33
Managements Report
Responsibility for Financial Information
The following
consolidated financial statements of Æterna Zentaris Inc. and all other
financial information contained in this annual report are the responsibility of
management.
Management has
prepared the consolidated financial statements in accordance with Canadian
generally accepted accounting principles. When it was possible to use different
accounting methods, management chose those that it felt were the most
appropriate in the circumstances. The financial statements include amounts
based on the use of estimates and best judgment. Management has determined
these amounts in a reasonable way in order to ensure that the financial
statements are presented accurately in all important regards. Management has
also prepared the financial information presented elsewhere in the annual
report, and has ensured that it is in accordance with the financial statements.
Management
maintains systems of internal accounting, administrative and disclosure controls.
The systems are used to provide a reasonable degree of certainty that the
financial information is relevant, reliable and accurate, and that the Companys
assets are correctly accounted for and effectively protected.
The Board of
Directors is responsible for ensuring that management assumes its
responsibilities with regard to the presentation of financial information and
has ultimate responsibility for examining and approving the financial
statements. The Board assumes this responsibility principally through its Audit
Committee which is comprised of outside and non-management directors. The Audit
Committee met with management as well as with external auditors to discuss the
internal monitoring system for presenting financial information, to address issues
related to the audit and the presentation of financial information, to ensure
that all parties carry out their duties correctly, and to examine the financial
statements as well as the report of the external auditors.
The consolidated
financial statements have been audited on behalf of shareholders by external
auditors PricewaterhouseCoopers LLP for each of the years ended December 31,
2007, 2006 and 2005, in accordance with Canadian generally accepted accounting
standards. The external auditors, having been appointed by the shareholders,
were given full and unrestricted access to the Audit Committee to discuss
matters related to their audit and the reporting of information.
The Board of
Directors has approved the Companys consolidated financial statements on the
recommendation of the Audit Committee.
Internal Control over Financial Reporting
The Companys
management is responsible for establishing and maintaining adequate internal
control over financial reporting. The Companys internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles in Canada.
Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
The Companys
management, with the participation of the Companys Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of the Companys
internal control over financial reporting based on the criteria established in
Internal Control-Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
on this evaluation, the Companys management has concluded that, as of December 31,
2007, the Companys internal control over financial reporting was effective.
The
effectiveness of the Companys internal control over financial reporting as of December 31,
2007 has been audited by PricewaterhouseCoopers LLP.
There
has been no change in the Companys internal control over financial reporting
that occurred during the year ended December 31, 2007 that have materially
affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting.
|
|
David J. Mazzo, Ph.D.
|
Dennis Turpin, CA
|
President and
Chief Executive Officer
|
Senior Vice
President and Chief Financial Officer
|
Quebec,
Quebec, Canada
|
|
March 4,
2008
|
|
34
Æterna
Zentaris Inc.
Consolidated
Financial Statements
December 31, 2007, 2006 and 2005
(expressed in thousands of US dollars)
35
Independent
Auditors Report
To
the Shareholders of Æterna Zentaris Inc.
We have
completed an integrated audit of the consolidated financial statements and
internal control over financial reporting of Æterna Zentaris Inc. as at December 31,
2007 and audits of its 2006 and 2005 consolidated financial statements. Our
opinions, based on our audits, are presented below.
Consolidated
financial statements
We have audited the accompanying consolidated balance sheets of Æterna
Zentaris Inc. as at December 31, 2007 and December 31, 2006, and the
related consolidated statements of earnings, comprehensive income, changes in
shareholders equity and cash flows for each of the years in the three-year
period ended December 31, 2007. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audit of Æterna Zentaris Inc.s financial statements as at December 31,
2007 and for the year then ended in accordance with Canadian generally accepted
auditing standards and the standards of the Public Company Accounting Oversight
Board (United States). We conducted our audits of Æterna Zentaris Inc.s
financial statements as at December 31, 2006 and for each of the years in
the two-year period then ended in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit of financial statements includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. A financial statement audit also includes assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as at December 31,
2007 and December 31, 2006 and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31,
2007 in accordance with Canadian generally accepted accounting principles.
Internal control over financial reporting
We have also audited Æterna Zentaris Inc.s
internal control over financial reporting as at December 31, 2007, based
on criteria established in
Internal Control -
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Companys management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the annual report under the title Managements Report
on Internal Control over Financial Reporting. Our responsibility is to express
an opinion on the Companys internal control over financial reporting based on
our audit.
36
We conducted our audit of internal control
over financial reporting in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. An audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes
those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the companys assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as
at December 31, 2007 based on criteria established in
Internal
Control Integrated Framework
issued by the COSO.
Chartered Accountants
Quebec, Quebec, Canada
March 4, 2008
37
Æterna Zentaris Inc.
Consolidated
Balance Sheets
(expressed in thousands of US dollars)
|
|
As at December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
Cash and cash equivalents
|
|
10,272
|
|
8,939
|
|
Short-term investments (note 22)
|
|
31,115
|
|
51,550
|
|
Accounts receivable
|
|
|
|
|
|
Trade
|
|
6,170
|
|
6,795
|
|
Other (note 7)
|
|
3,044
|
|
2,733
|
|
Income taxes
|
|
|
|
931
|
|
Inventory (note 8)
|
|
5,406
|
|
5,044
|
|
Prepaid expenses
|
|
3,573
|
|
2,631
|
|
Future income tax assets (note 18)
|
|
|
|
21,953
|
|
Current assets of discontinued operations
(note 5)
|
|
|
|
1,147
|
|
|
|
59,580
|
|
101,723
|
|
Investment in an affiliated company
(note 4)
|
|
|
|
57,128
|
|
|
|
|
|
|
|
Property, plant and equipment
(note 10)
|
|
7,460
|
|
13,001
|
|
|
|
|
|
|
|
Long-lived assets held for sale
(note 6)
|
|
13,999
|
|
|
|
|
|
|
|
|
|
Deferred charges and other long-term assets
(note 9)
|
|
1,441
|
|
1,354
|
|
|
|
|
|
|
|
Intangible assets
(note 11)
|
|
30,391
|
|
37,351
|
|
|
|
|
|
|
|
Goodwill
(note
12)
|
|
10,492
|
|
9,509
|
|
|
|
|
|
|
|
Non-current assets of
discontinued operations
(note 5)
|
|
|
|
3,425
|
|
|
|
|
|
|
|
|
|
123,363
|
|
223,491
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
Accounts payable and accrued liabilities (note
13)
|
|
16,084
|
|
9,735
|
|
Income taxes
|
|
23
|
|
|
|
Deferred revenues
|
|
5,373
|
|
5,570
|
|
Current portion of long-term debt
|
|
775
|
|
686
|
|
Current liabilities of discontinued
operations (note 5)
|
|
|
|
319
|
|
|
|
22,255
|
|
16,310
|
|
|
|
|
|
|
|
Deferred revenues
|
|
3,333
|
|
8,468
|
|
|
|
|
|
|
|
Long-term debt
(note 14)
|
|
|
|
687
|
|
|
|
|
|
|
|
Employee future benefits
(note 15)
|
|
9,184
|
|
8,167
|
|
|
|
|
|
|
|
Future income tax liabilities
(note 18)
|
|
|
|
10,365
|
|
|
|
|
|
|
|
Non-current liabilities of discontinued
operations
(note 5)
|
|
|
|
615
|
|
|
|
|
|
|
|
|
|
34,772
|
|
44,612
|
|
Commitments and contingencies
(note 23)
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
Share capital
(note 16)
|
|
30,566
|
|
168,466
|
|
|
|
|
|
|
|
Other capital
|
|
79,306
|
|
6,226
|
|
|
|
|
|
|
|
Deficit
|
|
(42,997
|
)
|
(10,114
|
)
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
21,716
|
|
14,301
|
|
|
|
|
|
|
|
|
|
88,591
|
|
178,879
|
|
|
|
|
|
|
|
|
|
123,363
|
|
223,491
|
|
Basis of presentation (note 2)
|
|
|
|
|
|
The accompanying notes are
an integral part of these consolidated financial statements.
Approved by the Board of Directors
|
Director
|
|
Director
|
Jürgen Ernst, MBA
|
Gérard Limoges, FCA
|
38
Æterna Zentaris Inc.
Consolidated
Statements of Changes in Shareholders Equity
For the years ended December 31,
(tabular amounts in thousands of US dollars,
except common shares data)
|
|
Common
shares
(number of)
|
|
Share
capital
|
|
Other
capital
|
|
Deficit
|
|
Accumulated
other
comprehensive
income
|
|
Total
|
|
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Balance
December 31, 2004
|
|
45,670,909
|
|
127,585
|
|
6,059
|
|
(53,795
|
)
|
20,227
|
|
100,076
|
|
Net earnings for the year
|
|
|
|
|
|
|
|
10,571
|
|
|
|
10,571
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
(8,290
|
)
|
(8,290
|
)
|
Issued pursuant to the stock option plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For cash
|
|
25,000
|
|
130
|
|
|
|
|
|
|
|
130
|
|
Conversion option related to convertible
term loans
|
|
|
|
|
|
2,129
|
|
|
|
|
|
2,129
|
|
Issued shares pursuant to acquisition of
Echelon
|
|
443,905
|
|
2,737
|
|
|
|
|
|
|
|
2,737
|
|
Share issue expenses
|
|
|
|
(108
|
)
|
|
|
|
|
|
|
(108
|
)
|
Stock based compensation costs
|
|
|
|
|
|
2,286
|
|
|
|
|
|
2,286
|
|
Balance
December 31, 2005
|
|
46,139,814
|
|
130,344
|
|
10,474
|
|
(43,224
|
)
|
11,937
|
|
109,531
|
|
Net earnings for the year
|
|
|
|
|
|
|
|
33,390
|
|
|
|
33,390
|
|
Conversion of convertible term loans
|
|
6,955,088
|
|
37,786
|
|
(6,339
|
)
|
(280
|
)
|
|
|
31,167
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
4,007
|
|
4,007
|
|
Foreign currency translation adjustment
related to disposal of Atrium
|
|
|
|
|
|
|
|
|
|
(1,643
|
)
|
(1,643
|
)
|
Issued pursuant to the stock option plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For cash
|
|
22,000
|
|
81
|
|
|
|
|
|
|
|
81
|
|
Ascribed value from Other capital
|
|
|
|
29
|
|
(29
|
)
|
|
|
|
|
|
|
Issued pursuant to acquisition of Echelon
|
|
23,789
|
|
163
|
|
|
|
|
|
|
|
163
|
|
Issued pursuant to acquisition of a patent
from a senior officer (note 21)
|
|
28,779
|
|
175
|
|
|
|
|
|
|
|
175
|
|
Share issue expenses
|
|
|
|
(112
|
)
|
|
|
|
|
|
|
(112
|
)
|
Stock based compensation costs
|
|
|
|
|
|
2,120
|
|
|
|
|
|
2,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31,
2006
|
|
53,169,470
|
|
168,466
|
|
6,226
|
|
(10,114
|
)
|
14,301
|
|
178,879
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
39
|
|
Common
shares
(number of)
|
|
Share
capital
|
|
Other
capital
|
|
Deficit
|
|
Accumulated
other
comprehensive
income
|
|
Total
|
|
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
Balance
December 31, 2006
|
|
53,169,470
|
|
168,466
|
|
6,226
|
|
(10,114
|
)
|
14,301
|
|
178,879
|
|
Effect of the application of new accounting
standards (note 3)
|
|
|
|
|
|
|
|
(587
|
)
|
(41
|
)
|
(628
|
)
|
Distribution of Atrium (note 4)
|
|
|
|
(137,959
|
)
|
71,122
|
|
|
|
(5,624
|
)
|
(72,461
|
)
|
Net (loss) for the period
|
|
|
|
|
|
|
|
(32,296
|
)
|
|
|
(32,296
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
13,783
|
|
13,783
|
|
Variation in the fair value of short-term
investments, net of income taxes
|
|
|
|
|
|
|
|
|
|
51
|
|
51
|
|
Issued pursuant to the stock option plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For cash
|
|
18,000
|
|
33
|
|
|
|
|
|
|
|
33
|
|
Ascribed value from Other capital
|
|
|
|
26
|
|
(26
|
)
|
|
|
|
|
|
|
Disposal of Shares of Echelon
(note 5)
|
|
|
|
|
|
|
|
|
|
(754
|
)
|
(754
|
)
|
Stock based compensation costs
|
|
|
|
|
|
1,984
|
|
|
|
|
|
1,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31,
2007
|
|
53,187,470
|
|
30,566
|
|
79,306
|
|
(42,997
|
)
|
21,716
|
|
88,591
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
40
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
Accumulated Other
Comprehensive Income,
|
|
|
|
|
|
|
|
Consisting of the following:
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
21,706
|
|
14,301
|
|
11,937
|
|
Variation in fair market value of
short-term investments, net of income taxes
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive income
|
|
21,716
|
|
14,301
|
|
11,937
|
|
Deficit
|
|
(42,997
|
)
|
(10,114
|
)
|
(43,224
|
)
|
|
|
|
|
|
|
|
|
Total Accumulated Other Comprehensive
Income and Deficit
|
|
(21,281
|
)
|
4,187
|
|
(31,287
|
)
|
The accompanying notes are an integral part of these
consolidated financial statements.
41
Æterna
Zentaris Inc.
Consolidated Statements of Earnings
For the years ended
December 31,
(expressed in thousands of US dollars, except shares and per share data)
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
42,068
|
|
38,799
|
|
44,813
|
|
Operating expenses
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation and
amortization
|
|
12,930
|
|
11,270
|
|
8,250
|
|
Selling, general and administrative
|
|
20,403
|
|
16,478
|
|
14,403
|
|
Research and development costs
|
|
39,248
|
|
27,422
|
|
25,544
|
|
Research and development tax credits and
grants
|
|
(2,060
|
)
|
(1,564
|
)
|
(317
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
1,562
|
|
2,816
|
|
1,665
|
|
Intangible assets
|
|
4,004
|
|
6,148
|
|
4,279
|
|
Impairment of long-lived asset held for
sale (note 6)
|
|
735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,822
|
|
62,570
|
|
53,824
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(34,754
|
)
|
(23,771
|
)
|
(9,011
|
)
|
|
|
|
|
|
|
|
|
Other revenues (expenses)
|
|
|
|
|
|
|
|
Interest income
|
|
1,904
|
|
1,441
|
|
1,235
|
|
Interest expense
|
|
|
|
|
|
|
|
Long-term debt and convertible term loans
|
|
(85
|
)
|
(1,270
|
)
|
(6,979
|
)
|
Other
|
|
|
|
(163
|
)
|
(31
|
)
|
Foreign exchange (loss) gain
|
|
(1,035
|
)
|
319
|
|
(87
|
)
|
Loss on disposal of equipment
|
|
(28
|
)
|
|
|
|
|
Gain on disposal of a long-term investment
|
|
|
|
409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
756
|
|
736
|
|
(5,862
|
)
|
|
|
|
|
|
|
|
|
Share in the results of an
affiliated company
|
|
|
|
1,575
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
(33,998
|
)
|
(21,460
|
)
|
(14,873
|
)
|
|
|
|
|
|
|
|
|
Income tax recovery (expense)
(note
18)
|
|
1,961
|
|
29,037
|
|
(609
|
)
|
|
|
|
|
|
|
|
|
Net (loss) earnings from
continuing operations
|
|
(32,037
|
)
|
7,577
|
|
(15,482
|
)
|
|
|
|
|
|
|
|
|
Net (loss) earnings from
discontinued operations
(notes 4 &5)
|
|
(259
|
)
|
25,813
|
|
26,053
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
(32,296
|
)
|
33,390
|
|
10,571
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings per share
from continuing operations
|
|
|
|
|
|
|
|
Basic
|
|
(0.61
|
)
|
0.14
|
|
(0.34
|
)
|
Diluted
|
|
(0.61
|
)
|
0.14
|
|
(0.34
|
)
|
|
|
|
|
|
|
|
|
Net (loss) earnings per share
from discontinued operations
|
|
|
|
|
|
|
|
Basic
|
|
(0.00
|
)
|
0.50
|
|
0.57
|
|
Diluted
|
|
(0.00
|
)
|
0.48
|
|
0.57
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings per share
|
|
|
|
|
|
|
|
Basic
|
|
(0.61
|
)
|
0.64
|
|
0.23
|
|
Diluted
|
|
(0.61
|
)
|
0.62
|
|
0.23
|
|
|
|
|
|
|
|
|
|
Weighted average number of
shares (note 20)
|
|
|
|
|
|
|
|
Basic
|
|
53,182,803
|
|
52,099,290
|
|
46,139,814
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
53,182,803
|
|
52,549,260
|
|
46,139,814
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
42
Æterna
Zentaris Inc.
Consolidated Statements of Comprehensive
Income
For the years ended December 31,
(expressed in thousands of US
dollars, except shares and per share data)
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) for the period
|
|
(32,296
|
)
|
33,390
|
|
10,571
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
13,783
|
|
4,007
|
|
(8,290
|
)
|
Reclassification adjustment related to
disposal of Atrium
|
|
|
|
(1,643
|
)
|
|
|
Reclassification adjustment related to
disposal of Echelon
|
|
(754
|
)
|
|
|
|
|
Variation in fair market value of
short-term investments, net of income taxes
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
(19,216
|
)
|
35,754
|
|
2,281
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
43
Æterna Zentaris Inc.
Consolidated Statements of
Cash Flows
(expressed in thousands of
US dollars, except shares and per share data)
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
|
Net earnings (loss) for the year
|
|
(32,296
|
)
|
33,390
|
|
10,571
|
|
Net (earnings) loss from discontinued
operations
|
|
259
|
|
(25,813
|
)
|
(26,053
|
)
|
Net earnings (loss) from continuing
operations
|
|
(32,037
|
)
|
7,577
|
|
(15,482
|
)
|
Items not affecting cash and cash
equivalents
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
5,566
|
|
8,964
|
|
5,944
|
|
Stock-based compensation costs
|
|
1,984
|
|
2,120
|
|
2,286
|
|
Future income taxes
|
|
(1,868
|
)
|
(29,160
|
)
|
520
|
|
Gain on disposal of a long-term investment
|
|
|
|
(409
|
)
|
|
|
Share in the results of an affiliated
company
|
|
|
|
(1,575
|
)
|
|
|
Employee future benefits
|
|
164
|
|
(115
|
)
|
2,338
|
|
Deferred charges and other long term assets
|
|
510
|
|
(841
|
)
|
2,707
|
|
Deferred revenues
|
|
(6,368
|
)
|
(3,258
|
)
|
(10,291
|
)
|
Accretion on long term borrowings
|
|
82
|
|
1,227
|
|
4,479
|
|
Loss on disposal of property, plant and
equipment
|
|
28
|
|
|
|
|
|
Impairment of long-lived asset held for
sale
|
|
735
|
|
|
|
|
|
Foreign exchange loss (gain) on long-term
items denominated in foreign currency
|
|
641
|
|
(587
|
)
|
381
|
|
Change in non-cash operating working
capital items (note 17)
|
|
4,901
|
|
187
|
|
4,488
|
|
Net cash used in continuing operating
activities
|
|
(25,662
|
)
|
(15,870
|
)
|
(2,630
|
)
|
Net cash provided by discontinued operating
activities
|
|
132
|
|
23,827
|
|
15,564
|
|
Net cash provided by (used in) operating
activities
|
|
(25,530
|
)
|
7,957
|
|
12,934
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities
|
|
|
|
|
|
|
|
Repayment of long-term debt
|
|
(751
|
)
|
(718
|
)
|
(655
|
)
|
Issuance of shares pursuant to the exercise
of stock options
|
|
33
|
|
81
|
|
130
|
|
Share issue expenses
|
|
(366
|
)
|
(112
|
)
|
(108
|
)
|
Net cash used in continuing financing
activities
|
|
(1,084
|
)
|
(749
|
)
|
(633
|
)
|
Net cash provided by (used in) discontinued
financing activities
|
|
(230
|
)
|
(7,825
|
)
|
89,558
|
|
Net cash provided by (used in) financing
activities
|
|
(1,314
|
)
|
(8,574
|
)
|
88,925
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
|
Purchase of short-term investments
|
|
(6,180
|
)
|
(79,300
|
)
|
(25,945
|
)
|
Proceeds from sale of short-term
investments
|
|
33,405
|
|
49,267
|
|
26,771
|
|
Proceeds from sale of a long-term
investment
|
|
|
|
1,387
|
|
|
|
Business acquisitions, net of cash and cash
equivalents acquired
|
|
|
|
(32
|
)
|
(37
|
)
|
Purchase of property, plant and equipment
|
|
(3,702
|
)
|
(1,845
|
)
|
(1,114
|
)
|
Proceeds from sale of property, plant and
equipment
|
|
729
|
|
|
|
|
|
Acquisition of amortizable intangible
assets
|
|
(67
|
)
|
(5
|
)
|
(558
|
)
|
Net cash provided by (used in) continuing
investing activities
|
|
24,185
|
|
(30,528
|
)
|
(883
|
)
|
Net cash provided by (used in) discontinued
investing activities
|
|
2,238
|
|
11,878
|
|
(94,699
|
)
|
Net cash provided by (used in) in investing
activities
|
|
26,423
|
|
(18,650
|
)
|
(95,582
|
)
|
|
|
|
|
|
|
|
|
Effect of exchange rate
changes on cash and cash equivalents
|
|
1,337
|
|
1,356
|
|
(2,748
|
)
|
|
|
|
|
|
|
|
|
Net change in cash and cash
equivalents
|
|
916
|
|
(17,911
|
)
|
3,529
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
Beginning of year
|
|
9,356
|
|
27,267
|
|
23,738
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
End of year
|
|
10,272
|
|
9,356
|
|
27,267
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
related to:
|
|
|
|
|
|
|
|
Continuing operations
|
|
10,272
|
|
8,939
|
|
12,234
|
|
Discontinued operations
|
|
|
|
417
|
|
15,033
|
|
|
|
|
|
|
|
|
|
|
|
10,272
|
|
9,356
|
|
27,267
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents components:
|
|
10,195
|
|
9,174
|
|
27,093
|
|
Cash
|
|
77
|
|
182
|
|
174
|
|
Cash equivalents
|
|
10,272
|
|
9,356
|
|
27,267
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
44
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option
data and as otherwise noted)
1
Incorporation
and nature of activities
Æterna
Zentaris Inc. (Æterna Zentaris or the Company), incorporated under the
Canada Business Corporations Act, is a global biopharmaceutical company focused
on endocrine therapy and oncology with expertise in drug discovery, development
and commercialization.
Our pipeline
encompasses compounds at all stages of development, from drug discovery through
marketed products. The two highest priority clinical programs are our lead
value driver, cetrorelix for benign prostatic hyperplasia (BPH) and our lead oncology
program, AEZS-108 for endometrial and ovarian cancers.
2
Summary
of significant accounting policies
Basis of presentation
These financial statements have been prepared
in accordance with Canadian generally accepted accounting principles. These financial
statements differ in certain respects from those prepared in accordance with
United States generally accepted principles (US GAAP) and do not provide
certain disclosures which would be found in US GAAP financial statements, as
permitted by the regulations of the Securities and Exchange Commission of the
United States. These recognition, measurement differences and disclosure
differences as it relates to the Company are described in note 24 Summary of
differences between generally accepted accounting principles in Canada and in
the United States.
Evaluation of
Going Concern, Results of Operations, and Managements Plans:
After
reviewing its strategic plan and the corresponding budget and forecasts,
management believes that the Company currently has sufficient cash and cash
equivalents to fund planned expenditures and execute its focused strategy for
at least the next 12 months. Management expects to derive additional cash from
potential sale of non-core assets and financing.
Basis
of consolidation
These
consolidated financial statements include all companies in which the Company,
directly or indirectly has more than 50% of the voting rights or over which it
exercises control. Companies are included in the consolidation from the date
that control is transferred to the Company while companies sold are excluded
from the consolidation from the date that control ceases. The purchase method
of accounting is used to account for acquisitions. Intercompany transactions,
balances and unrealized gains and losses on transactions between the companies
included in the basis of consolidation are eliminated.
Investments
in affiliated companies
Investments in
companies over which the Company is to exercise significant influence,
generally participation of between 20% and 50% of the voting rights, but over
which it does not exercise control, are accounted for by using the equity
method. The Companys share of its affiliated results of operations is
recognized in the statement of earnings.
45
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Accounting
estimates
The
preparation of financial statements in conformity with Canadian generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets and liabilities reported in the
financial statements. Those estimates and assumptions also affect the
disclosure of contingencies at the date of the financial statements and the
reported amounts of revenues and expenses during the years. Significant
estimates include the allowance for doubtful accounts, provisions for obsolete
inventory, future income tax assets and liabilities, the useful lives of
property, plant and equipment and intangible assets, the valuation of
intangible assets and goodwill, the fair value of options granted and employee
future benefits and certain accrued liabilities. Actual results could differ
from those estimates.
Foreign
currency translation
Reporting
currency and self-sustaining subsidiaries
The Company
uses the US dollar as its reporting currency. Assets and liabilities of the
Company and its self-sustaining subsidiaries whose functional currency is other
than the US dollar are translated using the exchange rate in effect at the
balance sheet date. Revenues and expenses are translated at the average rate in
effect during the year. Translation gains and losses are included in the
statement of comprehensive income.
Foreign
currency transactions and integrated foreign subsidiaries
The financial
statements of integrated foreign operations and transactions denominated in
currencies other than the functional currency are re-measured into the
functional currency using the temporal method. Under this method, monetary
assets and liabilities are re-measured, in the functional currency, at the
exchange rate in effect on the date of the balance sheet. Non-monetary assets
and liabilities are re-measured at historical rates, unless such assets and
liabilities are carried at market, in which case, they are translated at the
exchange rate in effect on the date of the balance sheet. Revenues and expenses
are re-measured at the monthly average exchange rate. Transaction gains and
losses resulting from such re-measurement are reflected in the statements of
earnings.
Cash
and cash equivalents
Cash and cash
equivalents consist of cash on hand and balances with banks, exclusive of bank
advances, as well as all highly liquid short-term investments. The Company
considers all highly liquid short-term investments having a term of less than
three months at the acquisition date to be cash equivalents.
46
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Short-term
investments
Short-term
investments consist mainly of bonds which do not meet the Companys definition
of cash and cash equivalents.
In accordance
with the new requirements of Canadian Institute Chartered Accountants (CICA)
3855 Financial Instruments, adopted by the Company on January 1, 2007,
short-term investments are classified as available-for-sale investments. The
Company recognizes transactions on the settlement date. These investments are
recognized at fair value. Unrealized gains and losses are recognized, net of
income taxes, if any, in Comprehensive income. Upon the disposal or
impairment of these investments, these gains or losses are reclassified in the
consolidated statement of earnings. See note 3.
Prior to 2007,
short-term investments were valued at the lower of amortized cost and market
value.
Inventory
Inventory is
valued at the lower of cost and market value. Cost is determined using the
first in, first out basis. Cost of finished goods and work in progress includes
raw materials, labour and manufacturing overhead under the absorption costing
method. Market value is defined as replacement cost for raw materials and as
net realizable value for finished goods and work in progress.
Property,
plant and equipment and depreciation
Property,
plant and equipment are recorded at cost, net of related government grants and
accumulated depreciation. Depreciation is calculated using the following
methods and annual rates:
|
|
Methods
|
|
Annual rates
%
|
|
|
|
|
|
|
|
Building
|
|
Straight-line
|
|
5
|
|
Equipment
|
|
Declining
balance and straight-line
|
|
20
|
|
Office furniture
|
|
Declining
balance and straight-line
|
|
10 and 20
|
|
Computer equipment
|
|
Straight-line
|
|
25 and 33
1
/
3
|
|
Automotive equipment
|
|
Straight-line
|
|
20
|
|
Leasehold improvements
|
|
Straight-line
|
|
Remaining lease term
|
|
Deferred charges
Deferred charges relate to deferred upfront
payments made by a subsidiary in connection with research and development
collaborations, and to financing charges with regard to the filing of a shelf-prospectus
during 2007. These deferred charges are included in the statement of earnings
over the progress of the research and development work related to the contracts
and over the term of the convertible term loans, respectively. Financing
charges are included in the Share Capital as soon as the financing is
completed, at the latest in 2009.
47
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Intangible
assets
Intangible assets with finite useful lives
consist of in-process research and development, acquired in business
combinations, patents and trademarks, as well as technology and other. Patents
and trademarks represent costs, including professional fees, incurred for the
filing of patents and the registration of trademarks for product marketing and
manufacturing purposes, net of related government grants and accumulated
amortization. Intangible assets with finite useful lives are amortized on a
straight-line basis over their estimated useful lives of eight to fifteen years
for in-process research and development and patents, ten years for trademarks
and from three to ten years for technology and other.
Goodwill
Goodwill represents the excess of the
purchase price over the fair values of the net assets of entities acquired at
the respective dates of acquisition. Goodwill is not amortized and is subject
to an annual impairment test, or more frequently if events or changes in
circumstances indicate that it might be impaired. Testing for impairment is
accomplished mainly by determining whether the fair value of a reporting unit,
based upon discounted cash flows, exceeds the net carrying amount of that
reporting unit as of the assessment date. If the fair value is greater than the
carrying amount, no impairment is necessary. In the event that the carrying
amount exceeds the sum of the discounted cash flows, a second test must be
performed whereby the fair value of the segments goodwill must be estimated to
determine if it is less than its carrying amount. Fair value of goodwill is
estimated in the same way as goodwill is determined at the date of the
acquisition in a business combination, that is, the excess of the fair value of
the reporting unit over the fair value of the identifiable net assets of the
reporting unit.
Impairment of long-lived assets
Property, plant and equipment and intangible assets
with finite lives are reviewed for impairment when events or circumstances
indicate that costs may not be recoverable. Impairment exists when the carrying
value of the asset is greater than the undiscounted future cash flows expected
to be provided by the asset. The amount of impairment loss, if any, is the
excess of its carrying value over its fair value, which fair value is
determined based upon discounted cash flows or appraised values, depending on
the nature of assets.
Employee future benefits
The Companys subsidiary in Germany maintains
defined contribution and unfunded defined benefit plans as well as other
benefit plans for its employees. Its obligations are accrued under employee
benefit plans and the related costs. In this regard, the following policies
have been adopted:
The cost of pension and other benefits earned by employees is
actuarially determined using the projected unit credit method and benefit
method prorated on length of service and managements best estimate of salary
escalation, retirement ages of employees and employee turnover.
The net actuarial gain (loss) of the benefit obligation is recorded
in the statement of earnings as it arises.
For defined contribution plans,
the pension expenses recorded in the statement of earnings is the amount of
contribution the Company is required to pay for services rendered by employees.
48
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Deferred
revenues
Deferred revenues relate to upfront
payments received by a subsidiary in connection with research cooperation
agreements. These revenues are included in the statement of earnings based on
the progress of the research and development work related to the contracts.
Revenue recognition
The Company is
currently in a phase in which potential products are being further developed or
marketed jointly with strategic partners. The existing licensing agreements
usually foresee one-time payments (upfront payments), payments for research and
development services in the form of cost reimbursements, milestone payments and
royalty receipts for licensing and marketing product candidates. Revenues
associated with those multiple-element arrangements are allocated to the
various elements based on their relative fair value. Agreements containing
multiple elements are divided into separate units of accounting if certain
criteria are met, including whether the delivered element has stand-alone value
to the customer and whether there is objective and reliable evidence of the
fair value of the undelivered obligation(s). The consideration received is
allocated among the separate units based on each units fair value or using the
residual method, and the applicable revenue recognition criteria are applied to
each of the separate units.
License fees
representing non-refundable payments received upon the execution of license
agreements are recognized as revenue upon execution of the license agreements
when the Company has no significant future performance obligations and
collectability of the fees is assured. Upfront payments received at the
beginning of licensing agreements are not recorded as revenue when received but
are amortized based on the progress to the related research and development
work. This progress is based on estimates of total expected time or duration to
complete the work which is compared to the period of time incurred to date in
order to arrive at an estimate of the percentage of revenue earned to date.
Milestone
payments, which are generally based on developmental or regulatory events, are
recognized as revenue when the milestones are achieved, collectability is
assured, and when there are no significant future performance obligations in
connection with the milestones.
In those
instances where the Company has collected upfront or milestone payments but has
ongoing future obligations related to the development of the drug product,
management considers the milestone payments and the remaining obligations under
the contract as a single unit of accounting. In those circumstances where the
collaboration does not require specific deliverables at specific times or at
the end of the contract term, but rather the Companys obligations are
satisfied over a period of time, revenue recognition is deferred and amortized
over the period of its future obligations.
Royalty
revenue, based on a percentage of sales of certain declared products sold by
third parties, is recorded when the Company has fulfilled the terms in
accordance with the contractual agreement, has no future obligations, the
amount of the royalty fee is determinable and collection is reasonably assured.
Revenues from
sales of products are recognized, net of estimated sales allowances and
rebates, when title passes to customers, which is at the time goods are
shipped, when there are no future performance obligations, when the purchase price
is fixed and determinable, and collection is reasonably assured.
49
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Stock-based
compensation costs
Since January 1,
2003, the Company accounts for all forms of employee stock-based compensation
using the fair value-based method.
The fair value
of stock options is determined using the Black-Scholes option pricing model and
stock-based compensation expense is recognized over the vesting period of the
options and credited to Other Capital, and any consideration received by the
Company on the exercise of stock options is credited to Share Capital. Other
capital component of the stock-based compensation is transferred to Share
Capital upon the issuance of shares.
Prior to this
date, no stock-based compensation costs were recognized for grants of stock-based
awards to employees. However, the Company is required to disclose pro forma
information with respect to net earnings and net earnings per share as if
stock-based compensation costs were recognized in the financial statements for
all reporting years using the fair value-based method for outstanding stock
options granted during 2002 (note 16).
Income
taxes
The Company
follows the liability method of accounting for income taxes. Under this method,
future income tax assets and liabilities are determined according to
differences between the carrying amounts and tax bases of the assets and
liabilities. Future income tax assets and liabilities are measured using
substantively enacted and enacted tax rates expected to apply in the years in
which the differences are expected to reverse.
The Company
establishes a valuation allowance against future income tax assets if, based on
available information, it is not more likely than not that some or all of the
future income tax assets will be realized.
Research
and development costs
Research costs
are expensed as incurred. Development costs are expensed as incurred except for
those which meet generally accepted criteria for deferral, which are
capitalized and amortized against operations over the estimated period of
benefit. No costs have been deferred during any periods.
Research
and development tax credits and grants
The Company is
entitled to scientific research and experimental development (SR&ED) tax
credits granted by the Canadian federal government (Federal) and the
government of the Province of Québec (Provincial). Federal SR&ED tax
credits are earned on qualified Canadian SR&ED expenditures at a rate of
20% and can only be used to offset Federal income taxes otherwise payable.
Refundable Provincial SR&ED tax credits are generally earned on qualified
SR&ED salaries, subcontracting and university contract expenses incurred in
the Province of Québec, at a rate of 17.5%.
SR&ED tax
credits and grants are accounted for using the cost reduction method. Accordingly,
tax credits and grants are recorded as a reduction of the related expenses or
capital expenditures in the period the expenses are incurred. The refundable
portion of SR&ED tax credits is recorded in the year in which the related
expenses or capital expenditures are incurred and the non-refundable portion of
SR&ED tax credits and grants is recorded at such time, provided the Company
has reasonable assurance the credits or grants will be realized.
50
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Earnings
(loss) per share
Basic net earnings
(loss) per share is calculated using the weighted average number of common
shares outstanding during the year.
Diluted net earnings (loss) per share is
calculated based on the weighted average number of common shares outstanding
during the year, plus the effects of dilutive common share equivalents such as
options and convertible term loans. This method requires that diluted net
earnings (loss) per share be calculated using the treasury stock method, as if
all common share equivalents had been exercised at the beginning of the
reporting period, or period of issuance, as the case may be, and that the funds
obtained thereby were used to purchase common shares of the Company at the
average trading price of the common shares during the period.
3
New
accounting standards
Accounting
changes
Effective January 1,
2007, the Company adopted CICA Handbook Section 1506 Accounting Changes.
This Section establishes criteria for changes in accounting policies,
accounting treatment and disclosures regarding changes in accounting policies,
estimates and corrections of errors. In particular, this Section allows
for voluntary changes in accounting policy only when they result in the
financial statements providing reliable and more relevant information.
Furthermore, this section requires disclosure of when an entity has not applied
a new source of GAAP that has been issued but is not yet effective. Such
disclosures are provided below.
Financial
instruments
In January 2005,
the CICA issued four new accounting standards in relation with financial
instruments: section 3855 Financial Instruments Recognition and measurement,
section 3865 Hedges, section 1530 Comprehensive Income and section 3251 Equity.
Section 3855
expands on section 3860 Financial Instrument - Disclosure and Presentation,
by prescribing when a financial instrument is to be recognized on the balance
sheet and at what amount. It also specifies how financial instrument gains and
losses are to be presented.
Section 3865
provides alternative treatments to section 3855 for entities which choose to
designate qualifying transactions as hedges for accounting purposes. It
replaces and expands on Accounting Guideline AcG-13 Hedging Relationships,
and the hedging guidance in Section 1650 Foreign Currency Translation by
specifying how hedge accounting is applied and what disclosure is necessary
when it is applied.
Section 1530
Comprehensive Income introduces a new requirement to temporarily present
certain gains and losses outside net income.
Consequently, Section 3250
Surplus has been revised as Section 3251 Equity. Sections 1530, 3251,
3855 and 3865 were adopted by the Company on January 1, 2007.
51
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Recognition
of financial assets and liabilities
Following the
adoption of Section 3855, the Company classified its financial instruments
as follows:
Cash
|
|
Held for trading
|
Short-term investments
|
|
Available-for-sale securities
|
Accounts receivable
|
|
Loans and receivable
|
Accounts payable and accrued liabilities
|
|
Other financial liabilities
|
Long-term debt
|
|
Other financial liabilities
|
Short-term
investments
The short-term
investments are classified as available-for-sale investments. The Company
recognizes transactions on the settlement date.
These
investments are recognized at fair value. Unrealized gains and losses are
recognized, net of income taxes, if any, in Comprehensive income. Upon the
disposal or impairment of these investments, these gains or losses are
reclassified in the consolidated statement of earnings.
As a result of
the application of CICA 3855, a difference of $41,000 between the carrying
amount and the fair value of investments classified as available-for-sale is
recognized as an adjustment to the opening balance of Accumulated other
comprehensive income, net of income taxes.
Effective
interest rate method
Premiums and
discounts on short-term investments and long-term debt are accounted for using
the effective interest rate method.
52
Æterna Zentaris Inc.
Notes to Consolidated
Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
The impact of
the use of the effective interest rate method amounted to $587,000 and was
recognized as an adjustment to the opening balance of deficit, net of income
taxes.
Transition
The Company has elected to use January 1
2003, as the transition date for embedded derivatives
The
recognition, derecognition and measurement methods used other than the
adjustment described above for the short-term investments and the long-term
debt, have not changed from the methods of periods prior to the effective date
of the new standards. Consequently, there were no further adjustments to record
on transition.
General
standards of financial statement presentation
In May of
2007, the CICA amended Section 1400, General Standards of Financial
Statement Presentation to change the guidance related to managements
responsibility to assess the ability of the entity to continue as a going
concern. Management is required to make an assessment of an entitys ability to
continue as a going concern and should take into account all available
information about the future, which is at least, but not limited to, 12 months
from the balance sheet date. Disclosure is required of material uncertainties
related to events or conditions that may cast significant doubt upon the entitys
ability to continue as a going concern.
The amendments
to Section 1400 apply to interim and annual financial statements relating
to fiscal years beginning on or after January 1, 2008. The Companys
management has elected to early adopt this requirement; adoption was effective
on January 1, 2007 and the related disclosure is provided in Note 2.
Impact
of accounting pronouncements not yet adopted
Capital
Disclosure
The CICA
issued Section 1535, Capital Disclosures. This standard establishes
guidelines for disclosure of information regarding an entitys capital which
will enable users of its financial statements to evaluate an entitys
objectives, policies and processes for managing capital, including disclosures
of any externally imposed capital requirements and the consequences of
non-compliance. The new requirements will be effective starting January 1,
2008. Although the new standard provides for additional disclosure only, with
no measurement impact, the Company is currently in the process of evaluating
the impact that these additional disclosure standards will have on the Companys
financial statements.
53
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Financial
Instruments Disclosures and Financial Instruments - Presentation
The CICA
issued Section 3862, Financial Instruments Disclosures and Section 3863,
Financial Instruments Presentation which replace Section 3861, Financial
Instruments Disclosure and Presentation. The new disclosure standard
requires the disclosure of additional detail of financial asset and liability
categories as well as a detailed discussion on the risks associated with the
companys financial instruments. The presentation requirements are carried
forward unchanged. These new standards will be effective starting January 1,
2008. Although the new standard provides for additional disclosure only, with
no measurement impact, the Company is currently in the process of evaluating
the impact that these additional disclosure standards will have on the Companys
financial statements.
Inventories
The CICA
issued Section 3031, Inventories which will replace existing Section 3030
with the same title. This standard requires that inventories should be measured
at the lower of cost and net realizable value, and includes guidance on the
determination of cost, including allocation of overheads and other costs. The
standard also requires that similar inventories within a consolidated group be
measured using the same method. It also requires the reversal of previous
write-downs to net realizable value when there is a subsequent increase in the
value of inventories. The new Section is effective for interim and annual
financial statements relating to fiscal years beginning on or after January 1,
2008. The Company is currently evaluating the impact of this new standard.
Goodwill
and intangible assets
In February 2008,
the CICA issued Section 3064, Goodwill and intangible assets, replacing Section 3062,
Goodwill and other intangible assets and Section 3450, Research and
development costs. Various changes have been made to other sections of the CICA
Handbook for consistency purposes. The new Sections will be applicable to
financial statements relating to fiscal years beginning on or after October 1,
2008. Accordingly, the Company will adopt the new standards for its fiscal year
beginning January 1, 2009. It establishes standards for the recognition,
measurement, presentation and disclosure of goodwill subsequent to its initial
recognition and of intangible assets by profit-oriented enterprises. Standards
concerning goodwill are unchanged from the standards included in the previous Section 3062.
The Company is currently evaluating the impact of the adoption of this new Section on
its consolidated financial statements.
54
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
4
Distribution
of the remaining interest in Atrium Biotechnologies Inc.
During 2006,
the Company completed a lengthy and detailed review process whereby it examined
a number of strategic alternatives for how best to pursue and implement its
business plan of becoming a pure play biopharmaceutical company with a focus
on endocrine therapy and oncology. Among the alternatives considered was the
divestiture of Æterna Zentaris interest in Atrium Biotechnologies Inc., now
Atrium Innovation Inc. (Atrium) and the resulting focus on advancing its
development pipeline.
On September 19,
2006, the Company initiated a Secondary Offering to sell 3,485,000 Atrium
Subordinate Voting Shares at a price of CAN$15.80 per share.
On October 18,
2006, the Company closed this Secondary Offering for net proceeds of $45
million. The gain on the disposal of this investment amounted to $29,248,000
including $1,643,000 related to cumulative translation adjustments.
Concurrently
with the closing of the Secondary Offering and in accordance with the articles
of Atrium, the Companys remaining Atrium Multiple Voting Shares were
automatically converted into Atrium Subordinate Voting Shares on a one-for-one
basis such that the Company subsequently owned 11,052,996 Atrium Subordinate
Voting Shares representing approximately 36.1% of the issued and outstanding
shares of Atrium.
As of October 18,
2006, Atrium was excluded from the consolidation since the Companys control
ceased. Furthermore, given the distribution of the remaining Atrium shares
discussed below, all historical operations and cash flows recorded through the
consolidation of Atrium until that date have been reported as discontinued
operations and therefore, these operations and cash flows are presented as such
in the statement of earnings and in the statement of cash flows.
On December 15,
2006, the Companys shareholders approved a reduction in the stated capital of
the Company in an amount equal to the fair market value of its remaining
interest in Atrium for the purpose of effecting a special distribution in kind
of all 11,052,996 subordinate voting shares of Atrium held by the Company. On January 2,
2007, Æterna Zentaris shareholders received approximately 0.2079 of an Atrium
subordinate voting share for each one of their common shares.
This special distribution has been accounted
for as a nonreciprocal transfer to shareholders measured at the carrying value
of the investment in Atrium on January 2, 2007. As the special
distribution is considered as a taxable transaction for the Company and treated
as a reduction of the stated capital for tax purposes, the share capital of the
Company has been reduced by the fair value of the Atrium shares distributed of
$137,959,000, the long-term investment in Atrium $57,128,000 has been removed
from the balance sheet and the difference, taking into account the related
income taxes of $15,333,000 and cumulative translation adjustment of
$5,624,000, has been recorded as Other Capital for an amount of $71,122,000.
55
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
For the years ended December 31, 2007,
2006 and 2005, previously consolidated revenues and expenses of Atrium,
representing the former Active Ingredients & Specialty Chemicals
Segment as well as the Health & Nutrition Segment, have been
reclassified from continuing operations to discontinued operations, as follows:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
239,535
|
|
200,863
|
|
|
|
|
|
|
|
|
|
Earnings before the following
items
|
|
|
|
28,360
|
|
21,414
|
|
|
|
|
|
|
|
|
|
Gain on disposal of Atrium shares
|
|
|
|
29,248
|
|
|
|
Income tax expense (a)
|
|
|
|
(19,923
|
)
|
(6,838
|
)
|
Gain (loss) on dilution of investments (b)
|
|
|
|
(628
|
)
|
19,002
|
|
|
|
|
|
|
|
|
|
Earnings before
non-controlling interest
|
|
|
|
37,057
|
|
33,578
|
|
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
|
(10,967
|
)
|
(7,064
|
)
|
|
|
|
|
|
|
|
|
Net earnings from
discontinued operations
|
|
|
|
26,090
|
|
26,514
|
|
(a)
In 2006, an amount
of $7,006,000 is related to the gain on disposal of Atrium shares and an amount
of $5,692,000 is related to future income tax liabilities on unremitted
earnings of Atrium.
(b)
Gain (loss) on
dilution of investments
Following the exercise of Atriums stock
options, Atrium issued 627,500 subordinate voting shares between January 1
and October 18, 2006. As a consequence, a loss on dilution amounting to
$628,000 was recognized.
On April 6, 2005, Atrium completed its
Initial Public Offering through the issuance of 4,166,667 subordinate voting
shares at a price of CAN$12.00 per share for total gross proceeds of
$40,957,000 (CAN$50,000,000). Immediately prior to the closing of the
aforementioned offering, Atrium completed the acquisition of the non-controlling
interest in Unipex Finance S.A.S. for an amount of $7,289,000. This amount was
settled through the issuance of 741,584 subordinate voting shares of Atrium at
the offering price of CAN$12.00 per share. Moreover, pursuant to the
acquisition of Douglas Laboratories by Atrium in December 2005, Atrium
issued 917,532 subordinate voting shares at a price of CAN$10.95 per share.
Following the exercise of Atriums stock options during 2005, Atrium also
issued 387,000 subordinate voting shares at an average price of CAN$2.28 for
total proceeds of $884,000. As a consequence of these transactions, the Companys
economic interest in Atrium decreased from 61.1% to 48.46%, generating a gain
on dilution of investments amounting to $19,002,000.
56
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
5
Acquisition
and disposal of Echelon Biosciences Inc.
On January 1, 2005, the Company
completed the acquisition of 100% of the issued and outstanding common shares
of Echelon Biosciences Inc. (Echelon) for a total consideration of
$2,935,522, of which an amount of $36,718 including all acquisition-related
costs, was paid cash, net of cash and cash equivalents acquired of $161,734,
and the balance was paid through the issuance of 443,905 common shares of the
Company, the price per share corresponded to the weighted moving average
trading prices of the Company for the last fifteen consecutive trading days
ending on December 31, 2004. The acquisition was subject to contingent
payments specified in the agreement for an approximate amount of $3,500,000 of
which an amount of $2,900,000 was payable in shares and the balance of $600,000
payable in cash at the latest in January 2008, based on contractual
conditions being met. During 2005, an amount of $196,000 had been recorded as
contingent consideration payable, thus having the effect of increasing
goodwill. This amount has been settled through a cash payment of $32,000 and
the issuance of 23,789 common shares of the Company. As of January 1, 2008
the remaining conditions were not met, and as such, no additional consideration
will be paid.
During 2007,
the Company continued its review process whereby it examined a number of
strategic alternatives for how best continue the pursuit and implementation
of its business plan of becoming a pure
play biopharmaceutical company with a focus on endocrine therapy and oncology.
Among the alternatives considered was the divestiture of Æterna Zentaris
investment in Echelon and the resulting focus on advancing its development
pipeline.
At September 30,
2007, the Company performed a preliminary impairment test on the goodwill
related to Echelon. According to the preliminary test results, an estimated
impairment loss of $500,000 was recorded.
On November 30, 2007,
Æterna Zentaris sold all issued and outstanding shares of Echelon to Frontier Scientific, Inc.
for an upfront payment of $2,600,000 and a $600,000 contingent consideration.
From that date, Echelon was excluded from the consolidation, and all historical
operations and cash flows recorded through the consolidation of Echelon until
that date have been reported as discontinued operations. The contingency
consideration is based on the Echelon reaching specific sales levels in 2008
and 2009.
For the years ended December 31, 2007,
2006 and 2005, consolidated revenues and expenses of Echelon have been
reclassified from continuing operations to discontinued operations, as follows:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
2,358
|
|
2,593
|
|
2,391
|
|
|
|
|
|
|
|
|
|
Loss before the following
items
|
|
(206
|
)
|
(369
|
)
|
(577
|
)
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
(500
|
)
|
|
|
|
|
Loss on disposal of Echelon shares, net of
cumulative translation adjustment
|
|
(44
|
)
|
|
|
|
|
Income tax recovery
|
|
491
|
|
92
|
|
116
|
|
Net loss from discontinued
operations
|
|
(259
|
)
|
(277
|
)
|
(461
|
)
|
57
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
Major classes of assets and
liabilities as of December 31, 2006 have been reclassified and are
presented as discontinued operations as follows:
|
|
$
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
Cash
|
|
417
|
|
Other
current assets
|
|
730
|
|
|
|
|
|
Current
assets of discontinued operations
|
|
1,147
|
|
|
|
|
|
Intangible
assets
|
|
1,755
|
|
|
|
|
|
Goodwill
|
|
1,239
|
|
|
|
|
|
Property,
Plant & Equipment
|
|
431
|
|
|
|
|
|
Non-current
assets of discontinued operations
|
|
3,425
|
|
|
|
|
|
|
|
4,572
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Current
liabilities of discontinued operations
|
|
319
|
|
|
|
|
|
Long-term
debt
|
|
17
|
|
|
|
|
|
Future
Income Tax Liabilities
|
|
598
|
|
|
|
|
|
Non-current
liabilities of discontinued operations
|
|
615
|
|
|
|
|
|
|
|
934
|
|
58
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
6
Long-lived
assets held for sale
During 2007, the Company continued its review
process whereby it examined a number of strategic alternatives for how best
continue the pursuit and implementation
of its business plan of becoming a pure
play biopharmaceutical company with a focus on endocrine therapy and oncology.
As part of its strategy to finance with non-dilutive vehicles, using
non-core assets, the Company decided to dispose of its building and land
located in Quebec City, as well as its rights to intangible property, Impavido
(Miltefosine) and certain equipment. As at December 31, 2007, the assets
reclassified as long-lived assets held for sale, are as follows:
Asset
|
|
Cost
|
|
Accumulated
depreciation and
amortization
|
|
Net Book Value
|
|
|
|
$
|
|
$
|
|
$
|
|
Building
and Land
|
|
11,181
|
|
3,919
|
|
7,262
|
|
Equipment
|
|
1,347
|
|
1,164
|
|
183
|
|
Intangible
property
|
|
11,851
|
|
5,297
|
|
6,554
|
|
|
|
|
|
|
|
|
|
Total
assets held for sale
|
|
24,379
|
|
10,380
|
|
13,999
|
|
The Company estimates that the net realizable value
of all the assets exceeds their carrying value. Furthermore, at the time when
the assets were considered held for sale, all amortization or depreciation
ceased.
Following an estimation of the fair value by
Management after having received certain preliminary offers by third parties,
the Company recorded an impairment charge of $735,000 (CAN$729,000) against the
asset related to the building and land held for sale. The Company expects to
complete a sale transaction in the first six months of 2008.
In 2006, following the decision to terminate
the pharmaceutical development of one of its products, the Company recorded an
impairment on related manufacturing equipment in order to bring it down to its
fair value, which was based on the Companys best estimate of the realisable
value. Accordingly, during 2006, an amount of $1,060,856 has been recorded as
an impairment loss included in depreciation of property, plant and equipment.
The Company sold some of these assets in 2007 and is now actively in the
process of selling the remainder of this equipment and estimates that the
assets will be sold within the next year, at a net selling price which exceeds
their carrying value.
On March 1, 2008, the Company entered
into a definite purchase and sale agreement with respect to all rights related
to the manufacture, production, distribution, marketing, sale and/or use of
Impavido® (miltefosine) with Paladin Labs Inc., for an aggregate purchase price
of approximately $9,200,000 (CAN$9,125,000) payable in cash, subject to certain
post-closing purchase price adjustments.
Completion of the transactions contemplated
by the purchase agreement is subject to customary closing conditions, including
the parties having received certain third-party consents and approvals.
The sale is anticipated to be finalized early in the first
six months of 2008.
59
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
7
Other
receivables
|
|
As at December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Interest
|
|
272
|
|
592
|
|
Grants
*
|
|
1,060
|
|
857
|
|
Research
and development tax credits recoverable
|
|
252
|
|
103
|
|
Commodity
taxes
|
|
453
|
|
880
|
|
Other
|
|
1,007
|
|
301
|
|
|
|
|
|
|
|
|
|
3,044
|
|
2,733
|
|
*
These grants represent a holdback of a contribution from a federal
program called Technology Partnerships Canada (TPC). The Company received a
contribution equivalent to 30% of the eligible expenses incurred by the Company
in the development of an angiogenesis inhibitor in oncology, dermatology and
ophthalmology. Since the pharmaceutical development has been terminated, the
Company does not expect to make any reimbursements in connection with this
program.
8
Inventory
|
|
As at December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Raw
materials
|
|
3,399
|
|
3,233
|
|
Work
in progress
|
|
1,602
|
|
1,070
|
|
Finished
goods
|
|
405
|
|
741
|
|
|
|
|
|
|
|
|
|
5,406
|
|
5,
044
|
|
9
Deferred
charges and other long-term assets
|
|
As at December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Deferred
charges
|
|
1,051
|
|
1,151
|
|
Other
|
|
390
|
|
203
|
|
|
|
|
|
|
|
|
|
1,441
|
|
1,354
|
|
Included in the above deferred
charges is $392,000 of cost related to the filing of a shelf prospectus on September 19,
2007.
60
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
10
Property,
plant and equipment
|
|
As at December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
Cost
|
|
Accumulated
depreciation
|
|
Cost
|
|
Accumulated
depreciation
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
|
|
|
52
|
|
|
|
Building
(note 6)
|
|
|
|
|
|
11,031
|
|
3,280
|
|
Equipment
|
|
9,379
|
|
3,923
|
|
10,997
|
|
6,867
|
|
Office
furniture
|
|
1,261
|
|
648
|
|
641
|
|
492
|
|
Computer
equipment
|
|
1,174
|
|
805
|
|
1,047
|
|
840
|
|
Automotive
equipment
|
|
38
|
|
36
|
|
32
|
|
30
|
|
Leasehold
improvements
|
|
1,170
|
|
150
|
|
719
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,022
|
|
5,562
|
|
24,519
|
|
11,518
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Accumulated
depreciation
|
|
5,562
|
|
|
|
11,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
amount
|
|
7,460
|
|
|
|
13,001
|
|
|
|
11
Intangible
assets
|
|
As at December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
Cost
|
|
Accumulated
amortization
|
|
Cost
|
|
Accumulated
Amortization
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
In-process
research and development, patents and trademarks (note 6)
|
|
47,758
|
|
17,514
|
|
55,388
|
|
18,187
|
|
Technology
and other
|
|
740
|
|
593
|
|
619
|
|
469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,498
|
|
18,107
|
|
56,007
|
|
18,656
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated amortization
|
|
18,107
|
|
|
|
18,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
amount
|
|
30,391
|
|
|
|
37,351
|
|
|
|
In 2006, following the decision
to terminate the pharmaceutical development of certain products, the Company
recorded an impairment on certain patents and trademarks. Accordingly, an
amount of $1,815,172 has been recorded as an impairment loss included in
amortization of intangible assets.
The
amortization expense for intangible assets in each of the next five fiscal
years will amount to $3,191,000 in 2008, $3,181,000 in 2009, $3,153,000 in
2010, 2011 and 2012.
61
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
12
Goodwill
The change in the carrying value is as
follows:
|
|
Continuing
operations
|
|
Discontinued
operations
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Balance
as at December 31, 2005
|
|
8,559
|
|
110,610
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
|
6,623
|
|
Adjustments
|
|
|
|
(2,109
|
)
|
Impact
of foreign exchange rate
|
|
950
|
|
2,520
|
|
Reduction
of goodwill related to the sale of shares of Atrium (note 4)
|
|
|
|
(116,405
|
)
|
|
|
|
|
|
|
Balance
as at December 31, 2006
|
|
9,509
|
|
1,239
|
|
|
|
|
|
|
|
Impact
of foreign exchange rate
|
|
983
|
|
212
|
|
Reduction
and impairment of goodwill related to disposal of Echelon (note 5)
|
|
|
|
(1,451
|
)
|
|
|
|
|
|
|
Balance
as at December 31, 2007
|
|
10,492
|
|
|
|
13
Accounts
payable and accrued liabilities
|
|
As at December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Trade
payable
|
|
11,404
|
|
6,962
|
|
Salaries
and employee benefits
|
|
1,628
|
|
1,095
|
|
Other
accrued liabilities
|
|
3,052
|
|
1,678
|
|
|
|
|
|
|
|
|
|
16,084
|
|
9,735
|
|
62
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
14
Long-term
debt
|
|
As at December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
Loan
from the federal and provincial governments, nominal value of CAN$800
discounted at an effective rate of 8.43% (CAN $769 in 2007, and CAN$1,600 in
2006) non-interest bearing, payable in five annual equal and consecutive
instalments since July 2004.
|
|
775
|
|
1,373
|
|
|
|
|
|
|
|
Less:
Current portion
|
|
775
|
|
686
|
|
|
|
|
|
|
|
|
|
|
|
687
|
|
The principal instalment due on long-term
debt for the next year amounts to $775,000 in 2008.
15
Employee
future benefits
The Companys subsidiary in Germany provides
unfunded defined benefit pension plans and unfunded postemployment benefit
plans for some groups of employees. Provisions for pension obligations are
established for benefits payable in the form of retirement, disability and
surviving dependant pensions.
The following table provides a reconciliation
of the changes in the plans accrued benefits obligations:
|
|
Pension benefit plans
|
|
Other benefit plans
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Obligation
Beginning of year
|
|
7,547
|
|
6,932
|
|
5,634
|
|
620
|
|
523
|
|
398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
service cost
|
|
352
|
|
293
|
|
200
|
|
29
|
|
39
|
|
23
|
|
Interest
cost
|
|
269
|
|
293
|
|
269
|
|
52
|
|
22
|
|
19
|
|
Actuarial
loss (gain)
|
|
(490
|
)
|
(674
|
)
|
1,748
|
|
104
|
|
53
|
|
182
|
|
Benefits
paid
|
|
(70
|
)
|
(64
|
)
|
(65
|
)
|
(81
|
)
|
(70
|
)
|
(43
|
)
|
Effect
of foreign currency exchange rate changes
|
|
782
|
|
767
|
|
(854
|
)
|
70
|
|
53
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation
End of year
|
|
8,390
|
|
7,547
|
|
6,932
|
|
794
|
|
620
|
|
523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
(recovery) recognized
|
|
131
|
|
(88
|
)
|
2,217
|
|
185
|
|
114
|
|
224
|
|
63
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
The significant actuarial assumptions adopted
to determine the Companys accrued benefits obligations are as follows:
|
|
Pension benefit plans
|
|
Other benefit plans
|
|
Actuarial assumptions
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate for expenses
|
|
4.50
|
|
4.00
|
|
5.25
|
|
4.50
|
|
4.00
|
|
5.25
|
|
Discount
rate for liabilities
|
|
5.70
|
|
4.50
|
|
4.00
|
|
5.70
|
|
4.50
|
|
4.00
|
|
Pension
benefits increase
|
|
2.00
|
|
1.25
|
|
1.25
|
|
2.00
|
|
1.25
|
|
1.25
|
|
Rate
of compensation increase
|
|
2.75 to 3.75
|
|
2.75 to 3.75
|
|
2.75 to 3.75
|
|
2.75
|
|
2.75
|
|
2.75
|
|
The last actuarial reports give effect to the
pension and postemployment benefit obligations as at December 31, 2007.
The next actuarial reports are planned for December 2008.
In accordance
with the assumptions used as at December 31, 2007, the benefits expected
to be paid in each of the next five fiscal years will amount to $135,114 in
2008, $303,725 in 2009, $307,736 in 2010, $349,426 in 2011 and $474,368 in
2012. Furthermore, total benefits amounting to $2,707,485 are expected to be
paid from 2013 to 2017.
Cash required
in the next year to fund the plans will approximate the amount of expected
benefits.
Defined contribution plans
Total expenses amount to $285,824 in 2007
($263,810 in 2006 and $215,788 in 2005) for defined contribution pension plans.
The Company also sponsors a 401K plan in its
U.S. subsidiary. Under this plan, the Company may contribute a
discretionary amount equal to a percentage of employee contributions to the plan
and may also make discretionary profit sharing contribution. During the
year ended December 31, 2007, the Company did not record any contribution.
Total cash payments for employee future
benefits in 2007, consisting of cash contributed by the Company to its defined
contribution plans as well as direct payments to retired employees, amount to
$436,696 ($398,340 in 2006 and $323,382 in 2005).
64
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
16
Share
capital
(a)
Authorized
Unlimited number of shares of
the following classes:
Common, voting and
participating, one vote per share
Preferred, first and second
ranking, issuable in series, with rights and privileges specific to each class.
As at December 31, 2007, there are no
preferred shares issued and outstanding.
(b)
Issued
|
|
As at December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Beginning of year
|
|
53,169,470
|
|
168,466
|
|
46,139,814
|
|
130,344
|
|
45,670,909
|
|
127,585
|
|
Conversion
of convertible term loans
|
|
|
|
|
|
6,955,088
|
|
37,786
|
|
|
|
|
|
Issued
pursuant to the stock option plan
|
|
18,000
|
|
33
|
|
22,000
|
|
81
|
|
25,000
|
|
130
|
|
Ascribed
value from Other Capital
|
|
|
|
26
|
|
|
|
29
|
|
|
|
|
|
Issued
pursuant to the acquisition of a patent from a senior officer (note 21)
|
|
|
|
|
|
28,779
|
|
175
|
|
|
|
|
|
Issuance
pursuant to acquisition of Echelon
|
|
|
|
|
|
23,789
|
|
163
|
|
443,905
|
|
2,737
|
|
Reduction
of the stated capital (note 4)
|
|
|
|
(137,959
|
)
|
|
|
|
|
|
|
|
|
Share
issue expenses
|
|
|
|
|
|
|
|
(112
|
)
|
|
|
(108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
End of year
|
|
53,187,470
|
|
30,566
|
|
53,169,470
|
|
168,466
|
|
46,139,814
|
|
130,344
|
|
(c)
Common share
issues
Pursuant to the exercise of stock options,
the Company issued, during fiscal 2007, 18,000 common shares for total proceeds
of $33,200. In the prior fiscal year 2006, 22,000 common shares were issued for
total proceeds of $81,000. Consequently, stock-based compensation costs of
$26,000 ($29,000 in 2006) relating to those exercised options have been reclassified
from other capital to share capital.
On February 14 and 17, 2006, the
Solidarity Fund QFL (the Fund) and SGF Santé inc. (SGF) have respectively
exercised their right to early convert the entirety of their convertible term
loans in the principal amount of CAN$12.5 million each that they had extended
to the Company in April 2003 and that were to mature on March 31,
2006. In accordance with the terms of the convertible term loans, and
additional arrangements between the Company, the Fund and SGF, Æterna Zentaris
has issued to each of the loan holders 3,477,544 of its common shares upon
conversion of their loans, representing the principal and interest due to the
stated maturity date under the loans, based on the conversion price that had
been agreed upon in the loan agreements.
65
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
For accounting purposes, the convertible term
loans are separated between debt and equity, the equity portion representing
the value of the holders conversion options. As a consequence of this
transaction, the Company recorded a loss on settlement of long-term debt
amounting to $599,190, representing an inducement to the original terms of the
loan agreements. An amount of $280,000 was recorded in the statement of
deficit, and the remainder was charged to expense in the statement of earnings
and was included in the accretion on convertible term loans in the statement of
cash flows.
(d)
Shareholder right
plan
On March 29, 2004, the Company adopted a
shareholder right plan (the Rights Plan). The continuation of the Rights Plan
and its amendments and restatement has been approved by the Board of Directors
on March 5, 2007. The rights issued to the shareholders under the Rights
Plan will be exercisable, under certain conditions, only when a person or
entity, including any related party(ies), acquires or announces his (its)
intention to acquire more than twenty (20) percent of the outstanding common
shares of the Company (as such, shares may be redesignated or
reclassified) without complying with the permitted bid provisions of the
Rights Plan or without approval of the Companys Board of Directors. Should
such an acquisition occur, each right would, upon exercise, entitle a holder,
other than the person pursuing the acquisition together with its related
party(ies), to purchase common shares of the Company at a fifty (50) percent
discount to the market price of the Companys shares at that time.
(e)
Companys stock
option plan
In December 1995, the Companys Board of
Directors adopted a stock option plan (the Stock Option Plan) for its
directors, senior executives, employees and other collaborators providing
services to the Company. The number of shares that are issuable under the Stock
Option Plan was amended by a resolution adopted by the shareholders on May 2,
2007. This resolution increased the Plans limit specifying the limit of
options from 4,543,744 to ten percent (10%) of the outstanding shares.
66
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
On May 23,
2007, the Toronto Stock Exchange accepted a stock option pool totalling
$5,317,947. In 2007, 870,000 options were granted in U.S. dollars and 815,000
options were granted in Canadian dollars. Options granted under the Stock
Option Plan expire after a maximum period of ten years following the date of
grant. Options granted under the Stock Option Plan generally vest over a
three-year period. The following table summarizes the stock option activity
under the Stock Option Plan:
|
|
2007
|
|
2006
|
|
2005
|
|
Canadian dollar denominated awards
|
|
Number
|
|
Weighted
average
exercise
price
(CAN$)
|
|
Number
|
|
Weighted
average
exercise
price
(CAN$)
|
|
Number
|
|
Weighted
average
exercise
price
(CAN$)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Beginning of year (*)
|
|
3,490,092
|
|
4.00
|
|
3,843,592
|
|
6.16
|
|
3,480,592
|
|
6.58
|
|
Granted
|
|
815,000
|
|
3.24
|
|
45,000
|
|
6.41
|
|
686,500
|
|
5.63
|
|
Exercised
|
|
(18,000
|
)
|
1.96
|
|
(22,000
|
)
|
3.98
|
|
(25,000
|
)
|
6.31
|
|
Expired
|
|
|
|
|
|
(346,000
|
)
|
7.68
|
|
(65,000
|
)
|
8.34
|
|
Forfeited
|
|
(151,000
|
)
|
4.93
|
|
(30,500
|
)
|
6.21
|
|
(233,500
|
)
|
10.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
End of year
|
|
4,136,092
|
|
3.83
|
|
3,490,092
|
|
6.02
|
|
3,843,592
|
|
6.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable End of year
|
|
3,300,593
|
|
4.02
|
|
2,736,099
|
|
5.88
|
|
2,260,930
|
|
6.17
|
|
(*)
Following
the one-time distribution of the Companys remaining interest in Atrium on January 2,
2007 and as contemplated under the Stock Option Plan (see note 4), the Board of
Directors of the Company approved an equitable adjustment to all unexercised
options outstanding pursuant to the Stock Option Plan. The adjustment was a
reduction in the exercise price of all outstanding stock options of CAN$2.02
per common share. Furthermore, in 2007 the Board of Directors approved the
extension of the option period from 1 month to 3 years on 875,000 options in
connection with the departure of executive members.
The total intrinsic value for
stock options exercised amounted to CAN$24,040 in 2007 (CAN$68,959 in 2006 and
CAN$28,750 in 2005) There is no tax benefit realized by the Company as the
compensation cost related to stock options is not deductible for income tax
purposes.
67
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
The following table summarizes the stock
options outstanding as at December 31, 2007:
|
|
Options outstanding
|
|
Exercise price
(CAN$ )
|
|
Number
|
|
Weighted
average
remaining
contractual
life
(years)
|
|
Weighted
average
exercise
price
(CAN$)
|
|
Global
intrinsic
value
|
|
|
|
|
|
|
|
|
|
|
|
1.68
to 2.50
|
|
1,311,593
|
|
6.74
|
|
1.88
|
|
Nil
|
|
2.51
to 3.75
|
|
1,062,500
|
|
6.13
|
|
3.56
|
|
Nil
|
|
3.76
to 5.50
|
|
669,666
|
|
7.12
|
|
4.47
|
|
Nil
|
|
5.51
to 6.00
|
|
798,000
|
|
6.27
|
|
5.83
|
|
Nil
|
|
6.01
to 8.88
|
|
294,333
|
|
4.41
|
|
6.59
|
|
Nil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,136,092
|
|
6.39
|
|
3.83
|
|
Nil
|
|
|
|
Options currently exercisable
|
|
Exercise price
(CAN$)
|
|
Number
|
|
Weighted
average
exercise
price
(CAN$)
|
|
Global
intrinsic
value
|
|
|
|
|
|
|
|
|
|
1.68
to 2.50
|
|
939,924
|
|
1.91
|
|
Nil
|
|
2.51
to 3.75
|
|
862,498
|
|
3.56
|
|
Nil
|
|
3.76
to 5.50
|
|
405,838
|
|
4.44
|
|
Nil
|
|
5.51
to 6.00
|
|
798,000
|
|
5.83
|
|
Nil
|
|
6.01
to 8.88
|
|
294,333
|
|
6.59
|
|
Nil
|
|
|
|
|
|
|
|
|
|
|
|
3,300,593
|
|
4.02
|
|
Nil
|
|
68
Æterna Zentaris Inc.
Notes to Consolidated
Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
|
|
2007
|
|
2006
|
|
2005
|
|
US dollar denominated awards
|
|
Number
|
|
Weighted
average
exercise
price
(US$)
|
|
Number
|
|
Weighted
average
exercise
price
(US$)
|
|
Number
|
|
Weighted
average
exercise
price
(US$)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Beginning of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
870,000
|
|
2.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
End of year
|
|
870,000
|
|
2.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable End of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
|
|
Exercise price
(US$ )
|
|
Number
|
|
Weighted
average
remaining
contractual
life
(years)
|
|
Weighted
average
exercise
price
(US$)
|
|
Global
intrinsic
value
|
|
|
|
|
|
|
|
|
|
|
|
1.68
to 2.50
|
|
375,000
|
|
9.95
|
|
1.82
|
|
Nil
|
|
2.51
to 3.75
|
|
470,000
|
|
9.27
|
|
3.50
|
|
Nil
|
|
3.76
to 5.50
|
|
25,000
|
|
9.35
|
|
3.96
|
|
Nil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
870,000
|
|
9.56
|
|
2.79
|
|
Nil
|
|
69
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
As at December 31, 2007,
the total compensation cost related to nonvested stock options not yet
recognized amounted to $1,366,409 ($1,071,651 in 2006). This amount is expected
to be recognized over a weighted average period of 1.88 years (1.34 years in
2006).
The Company settles stock
options exercised through the issuance of common shares from treasury.
The factors considered in
developing the assumptions used in the Black-Scholes option pricing model are
the following:
(a)
The risk-free interest rate is based on Canadian
Government Bond constant maturity interest rate whose term is consistent with
the expected life of the stock options.
(b)
The historical volatility of the Companys stock
price as well as future expectations are used to establish the expected stock
price volatility.
(c)
The Company estimates the expected life of stock
options based upon employees historical data related to the exercise of stock
options and post-vesting employment terminations.
Assumptions used in determining stock-based compensation costs
The table below shows the assumptions used in
determining stock-based compensation costs under the Black-Scholes option
pricing model:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Dividend
yield
|
|
Nil
|
|
Nil
|
|
Nil
|
|
Expected
volatility
|
|
57.2
|
%
|
58.1
|
%
|
62.1
|
%
|
Risk-free
interest rate
|
|
3.88
|
%
|
4.06
|
%
|
3.92
|
%
|
Expected
life (years)
|
|
4.62
|
|
5.77
|
|
5.80
|
|
Weighted
average grant date fair value
|
|
US$1.93 and
CAN$2.25
|
|
CAN$3.67
|
|
CAN$3.33
|
|
|
|
|
|
|
|
|
|
70
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Had compensation costs been determined using
the fair value method at the date of grant for awards granted in 2002 under
this stock option plan, the Companys pro forma net earnings, basic and diluted
net earnings per share after giving effect to the grant of these options in
2002 are:
|
|
Year ended
December 31,
|
|
|
|
2005
|
|
|
|
$
|
|
|
|
|
|
Pro
forma net earnings
|
|
10,429
|
|
Pro
forma net earnings per share
|
|
|
|
Basic
|
|
0.23
|
|
Diluted
|
|
0.23
|
|
17
Statements
of cash flows
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Change
in non-cash operating working capital items
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
1,371
|
|
2,686
|
|
1,474
|
|
Inventory
|
|
148
|
|
650
|
|
(534
|
)
|
Prepaid
expenses
|
|
(708
|
)
|
263
|
|
(802
|
)
|
Accounts
payable and accrued liabilities
|
|
5,340
|
|
1,848
|
|
4,977
|
|
Income
taxes
|
|
(1,250
|
)
|
(5,260
|
)
|
(627
|
)
|
|
|
|
|
|
|
|
|
|
|
4,901
|
|
187
|
|
4,488
|
|
See note 4 for details related to non-cash
transactions of the distribution of the remaining interest in Atrium.
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Additional information
|
|
|
|
|
|
|
|
Interest
paid
|
|
|
|
|
|
|
|
From
continuing operations
|
|
|
|
4
|
|
34
|
|
From
discontinued operations
|
|
9
|
|
7,784
|
|
1,908
|
|
Income
taxes paid (recovered)
|
|
|
|
|
|
|
|
From
continuing operations
|
|
(937
|
)
|
5,756
|
|
709
|
|
From
discontinued operations
|
|
7
|
|
8,698
|
|
6,084
|
|
71
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
18
Income
taxes
The
reconciliation of the combined Canadian federal and Québec provincial income
tax rate to the income tax (expense) recovery from continuing operations is as
follows:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Combined
federal and provincial statutory income tax rate
|
|
32.02
|
%
|
32.02
|
%
|
31.02
|
%
|
|
|
|
|
|
|
|
|
Income
tax recovery based on statutory income tax rate
|
|
$
|
10,886
|
|
$
|
6,872
|
|
$
|
4,613
|
|
Change
in valuation allowance
|
|
(6,963
|
)
|
22,644
|
|
(5,403
|
)
|
Accretion
on convertible term loans
|
|
|
|
(258
|
)
|
(1,448
|
)
|
Stock-based
compensation costs
|
|
(635
|
)
|
(679
|
)
|
(739
|
)
|
Difference
in statutory income tax rate of foreign subsidiaries
|
|
(16
|
)
|
994
|
|
(133
|
)
|
Change
in enacted rate used
|
|
(1,345
|
)
|
2,428
|
|
2,780
|
|
Tax
loss consolidation strategy (note 21)
|
|
|
|
(2,376
|
)
|
(827
|
)
|
Other
|
|
34
|
|
(588
|
)
|
548
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,961
|
|
$
|
29,037
|
|
$
|
(609
|
)
|
Loss
before income taxes
The loss
before income taxes from continuing operations is allocated as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Canada
|
|
(10,556
|
)
|
(10,436
|
)
|
(15,983
|
)
|
Germany
|
|
(23,276
|
)
|
(11,024
|
)
|
1,110
|
|
United
States
|
|
(166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,998
|
)
|
(21,460
|
)
|
(14,873
|
)
|
72
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Income
tax recovery (expense) is represented by:
|
|
|
|
|
|
|
|
Current
|
|
93
|
|
(123
|
)
|
(89
|
)
|
Future
|
|
1,868
|
|
29,160
|
|
(520
|
)
|
|
|
|
|
|
|
|
|
|
|
1,961
|
|
29,037
|
|
(609
|
)
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
Foreign
|
|
93
|
|
(123
|
)
|
(89
|
)
|
|
|
|
|
|
|
|
|
Future
|
|
|
|
|
|
|
|
Domestic
|
|
(284
|
)
|
25,036
|
|
|
|
Foreign
|
|
2,152
|
|
4,124
|
|
(520
|
)
|
|
|
|
|
|
|
|
|
|
|
1,868
|
|
29,160
|
|
(520
|
)
|
|
|
|
|
|
|
|
|
|
|
1,961
|
|
29,037
|
|
(609
|
)
|
Foreign operations are predominantly in
Germany.
73
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
Significant components of future income tax
assets and liabilities are as follows:
|
|
As at December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Future
income tax assets
|
|
|
|
|
|
Current
|
|
|
|
|
|
Deferred
revenues
|
|
1,738
|
|
2,303
|
|
Inventory
|
|
658
|
|
157
|
|
Operating
losses carried forward
|
|
|
|
17,996
|
|
Research
and development costs
|
|
|
|
1,497
|
|
|
|
|
|
|
|
|
|
2,396
|
|
21,953
|
|
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
Research
and development costs
|
|
12,119
|
|
11,425
|
|
Share
issue expenses
|
|
91
|
|
229
|
|
Operating
losses carried forward
|
|
17,145
|
|
7,101
|
|
Property,
plant and equipment
|
|
1,973
|
|
1,455
|
|
Intangible
assets and goodwill
|
|
206
|
|
206
|
|
Employee
future benefits
|
|
648
|
|
966
|
|
Deferred
revenues
|
|
1,211
|
|
3,658
|
|
Other
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
33,537
|
|
25,040
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
(23,289
|
)
|
(13,337
|
)
|
|
|
|
|
|
|
|
|
10,248
|
|
11,703
|
|
|
|
|
|
|
|
|
|
12,644
|
|
33,656
|
|
|
|
|
|
|
|
Future
income tax liabilities
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
Accounts
receivable
|
|
48
|
|
11
|
|
Investment
in an affiliated company
|
|
|
|
5,829
|
|
Property,
plant and equipment
|
|
190
|
|
121
|
|
Deferred
charges and other long-term assets
|
|
2,434
|
|
604
|
|
Intangible
assets
|
|
9,376
|
|
14,798
|
|
Investment
tax credits
|
|
573
|
|
629
|
|
Other
|
|
23
|
|
76
|
|
|
|
|
|
|
|
|
|
12,644
|
|
22,068
|
|
|
|
|
|
|
|
Future
income tax assets (liabilities), net
|
|
|
|
11,588
|
|
|
|
|
|
|
|
Classified
as follows:
|
|
|
|
|
|
Future
income tax assets
|
|
|
|
21,953
|
|
Future
income tax liabilities
|
|
|
|
(10,365
|
)
|
|
|
|
|
|
|
|
|
|
|
11,588
|
|
As at December 31, 2007, the Company has
estimated non-refundable research and development tax credits of $7,004,150
which can be carried forward to reduce Canadian federal income taxes payable
and expire from 2011 to 2027. No tax benefit has been accounted for in
connection with those credits.
74
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
As at December 31,
2007, the Company had available operating losses in Canada. The following table
summarizes the year of expiry of these operating losses by tax jurisdiction:
|
|
Canada
|
|
Year of expiry
|
|
Federal
|
|
Provincial
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
2010
|
|
3,275
|
|
Nil
|
|
2014
|
|
9,801
|
|
Nil
|
|
2015
|
|
6,936
|
|
Nil
|
|
|
|
|
|
|
|
|
|
20,012
|
|
Nil
|
|
Furthermore, the Company had available
operating losses in Germany amounting to $45M for which there is no expiry
date.
The carryforwards and the tax credits claimed
could be subjected to a review and a possible adjustment by tax authorities.
19
Segment
information for continuing operations
Subsequent to the divestiture in
Atrium in 2006, the Company operates in one single operating segment, being the
biopharmaceutical segment.
Information by geographic region
Revenues by
geographic region are detailed as follows:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Canada
|
|
400
|
|
25
|
|
103
|
|
United
States
|
|
5,911
|
|
4,094
|
|
4,553
|
|
Europe
|
|
|
|
|
|
|
|
Switzerland
|
|
23,316
|
|
20,681
|
|
19,567
|
|
United
Kingdom
|
|
5,343
|
|
5,257
|
|
6,707
|
|
Netherlands
|
|
2,031
|
|
1,748
|
|
11,720
|
|
Other
|
|
70
|
|
809
|
|
108
|
|
Japan
|
|
1,862
|
|
6,114
|
|
|
|
Other
|
|
3,135
|
|
71
|
|
2,055
|
|
|
|
|
|
|
|
|
|
|
|
42,068
|
|
38,799
|
|
44,813
|
|
Revenues have been allocated to geographic
regions based on the country of residence of the related customers.
75
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Customers who represent more than 10% of
revenues are as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
%
|
|
%
|
|
%
|
|
|
|
|
|
|
|
|
|
Customer
1
|
|
59
|
|
52
|
|
44
|
|
Customer
2
|
|
13
|
|
13
|
|
26
|
|
Customer
3
|
|
5
|
|
9
|
|
15
|
|
The following table presents revenues by source:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
Sales
and royalties
|
|
28,825
|
|
25,123
|
|
21,252
|
|
License
fees
|
|
12,843
|
|
13,652
|
|
23,530
|
|
Other
|
|
400
|
|
24
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
42,068
|
|
38,799
|
|
44,813
|
|
Long-lived assets by geographic region are
detailed as follows:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Canada
|
|
7,643
|
|
8,821
|
|
United
States
|
|
841
|
|
11
|
|
Germany
|
|
53,858
|
|
51,029
|
|
|
|
|
|
|
|
|
|
62,342
|
|
59,861
|
|
Long-lived assets consist of property, plant and
equipment, long-lived assets held for sale, intangible assets and goodwill.
76
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
20
Earnings
(loss) per share
The following table sets forth the
computation of basic and diluted net earnings (loss) per share:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) from continuing operations
|
|
(32,037
|
)
|
7,577
|
|
(15,482
|
)
|
|
|
|
|
|
|
|
|
Net
earnings (loss) from discontinued operations
|
|
(259
|
)
|
25,813
|
|
26,053
|
|
|
|
|
|
|
|
|
|
Impact
of assumed conversion of dilutive stock options of Atrium
|
|
|
|
(754
|
)
|
(552
|
)
|
|
|
|
|
|
|
|
|
Net
earnings (loss) from discontinued operations, adjusted for dilution effects
|
|
(259
|
)
|
25,059
|
|
25,501
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) adjusted for dilution effects
|
|
(32,296
|
)
|
32,636
|
|
10,019
|
|
|
|
|
|
|
|
|
|
Basic
weighted average number of shares outstanding
|
|
53,182,803
|
|
52,099,290
|
|
46,139,814
|
|
|
|
|
|
|
|
|
|
Dilutive
effect of stock options
|
|
500,171
|
|
449,970
|
|
286,868
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average number of shares outstanding
|
|
53,682,974
|
|
52,549,260
|
|
46,426,682
|
|
|
|
|
|
|
|
|
|
Items
excluded from the calculation of diluted net earnings (loss) per share
because the exercise price was greater than the average market price of the
common shares or due to their anti-dilutive effect
|
|
|
|
|
|
|
|
Stock
options
|
|
3,164,499
|
|
1,893,539
|
|
2,169,697
|
|
Common
shares which would have been issued following the conversion of the
convertible term loans
|
|
|
|
776,237
|
|
6,043,564
|
|
For the years ended December 31, 2007
and 2005, the diluted amounts per share were the same amounts as the basic
amounts per share since the dilutive effect of stock options and convertible
term loans was not included in the calculation; otherwise, the effect would
have been anti-dilutive. Accordingly, the diluted amounts per share for those
years were calculated using the basic weighted average number of shares
outstanding.
77
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
21
Related
party transactions
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Administrative
revenues
|
|
Nil
|
|
35
|
|
33
|
|
Lease
revenues
|
|
Nil
|
|
304
|
|
248
|
|
Subcontracting
revenues and sales of raw materials
|
|
Nil
|
|
66
|
|
92
|
|
Subcontracting
expenses
|
|
Nil
|
|
44
|
|
337
|
|
Patent
acquired from a senior officer
|
|
Nil
|
|
175
|
|
|
|
On December 15, 2006, the Companys
shareholders approved a reduction in the stated capital of the Company in an
amount equal to the fair market value of its remaining interest in Atrium for
the purpose of effecting a special distribution in kind of all 11,052,996
Subordinate Voting Shares of Atrium held by the Company. This transaction was
completed on January 2, 2007, thus eliminating the related party
relationship.
These above transactions in 2006 and 2005
with our former subsidiary Atrium and a senior officer were in the normal
course of operations. They were measured at the exchange amount, which is the
amount of consideration established and agreed upon by the related parties. The
price of the shares issued for the acquisition of the patent was based on the
closing trading price of the Companys shares on February 28, 2006, being
the day before the signing of the agreement.
The transactions with Atrium include amounts
that occurred before October 18, 2006 and that were previously eliminated
from the consolidated financial statements but which will continue to occur
after the disposal.
At the end of the year 2006, amounts due to
and (from) the former subsidiary were payable (redeemable) on demand and
resulted from the transactions mentioned above.
Tax loss consolidation strategy
On September 15, 2005, the Company
obtained a one-day loan of $129 million from a financial institution to advance
$129 million to its former subsidiary Atrium by way of a subordinate 7%
interest-bearing promissory note. This note was unsecured and payable on
demand.
On the same day, Atrium acquired $129 million
in preferred shares from 4296672 Canada Inc., a wholly-owned subsidiary of the
Company. The dividend rate on the preferred shares was 7.05%. 4296672 Canada
Inc. used the proceeds to advance $129 million to the Company through an
interest-free loan, payable on demand. Then, the funds were used by the Company
to repay the one-day loan to the financial institution.
With respect to that arrangement that terminated
in October 2006, when the Company ceased to be the controlling shareholder
of Atrium, we had received a tax ruling delivered by Canada Revenue Agency. All
transactions have been eliminated during the consolidation process and income
tax savings resulting from the interest expense deduction have been presented
as discontinued operations.
78
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
22
Financial
instruments
Short-term investments
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Discount
notes bearing interest at effective annual rates ranging from 3.94% to 4.23%
in 2007 and at an annual rate of 4.29% to 4.31% in 2006, maturing on
different dates from May to December 2008, in 2006 investments
matured from March to June 2007.
|
|
5,178
|
|
8,649
|
|
Bonds,
bearing interest at effective annual rates ranging from 2.81% to 4.43% in
2007 and from 2.81% to 4.43% in 2006, maturing on different dates from January
to November 2008; and in 2006 from March 2007 to November 2008
|
|
25,937
|
|
42,901
|
|
|
|
|
|
|
|
|
|
31,115
|
|
51,550
|
|
Short-term investments totalled
CAN$30,844,000 in 2007 and CAN$60,076,000 in 2006.
Fair
value
Cash and cash
equivalents, accounts receivable and accounts payable and accrued liabilities
are financial instruments whose fair value approximates their carrying value
due to their short-term maturity. The fair value of short-term investments is
$31,115,066 ($51,589,289 in 2006). The fair value of long-term debt has been
established by discounting the future cash flows at an interest rate
corresponding to that which the Company would currently be able to obtain for
loans with similar maturity dates and terms. The approximate fair value of
long-term debt is $775,000 ($1,342,000 in 2006).
Foreign
currency risk
Since the Company operates on an international scale, it is exposed to
currency risks as a result of potential exchange rate fluctuations. As at December 31,
2007 and 2006, there are no significant forward exchange contracts outstanding.
Credit
risk
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents, short-term investments and
accounts receivable. Cash and cash equivalents are maintained with high-credit
quality financial institutions. Short-term investments consist primarily of
bonds issued by high-credit quality institutions and corporations.
Consequently, management considers the risk of non-performance related to cash
and cash equivalents and short-term investments to be minimal.
79
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Generally, the
Company does not require collateral or other security from customers for trade
accounts receivable; however, credit is extended following an evaluation of
creditworthiness. In addition, the Company performs on-going credit reviews of
all its customers and establishes an allowance for doubtful accounts when
accounts are determined to be uncollectible. Allowance for doubtful accounts
amounted to $nil and $7,000 as at December 31, 2007 and 2006,
respectively.
Interest
rate risk
The Companys exposure to interest rate risk
is as follows:
Cash and
cash equivalents
|
|
Variable
interest rate
|
|
Short-term
investments
|
|
Fixed
interest rate
|
|
Accounts
receivable
|
|
Non-interest
bearing
|
|
Accounts
payable and accrued liabilities
|
|
Non-interest
bearing
|
|
Long-term
debt
|
|
Non-interest
bearing
|
|
23
Commitments,
contingencies and guarantee
The Company is committed to various operating
leases for its premises plus service and manufacturing contract as follows:
|
|
Minimum
|
|
Service &
|
|
|
|
|
|
Lease
|
|
Manufacturing
|
|
Total
|
|
Year
|
|
Commitments
|
|
Commitments
|
|
Commitments
|
|
|
|
|
$
|
|
$
|
|
$
|
|
2008
|
|
|
2,092
|
|
13,295
|
|
15,387
|
|
2009
|
|
|
2,172
|
|
6,652
|
|
8,824
|
|
2010
|
|
|
2,092
|
|
300
|
|
2,392
|
|
2011
|
|
|
2,098
|
|
|
|
2,098
|
|
2012 and
beyond
|
|
|
2,072
|
|
|
|
2,072
|
|
Total
|
|
|
10,526
|
|
20,247
|
|
30,773
|
|
Rent expenses for operating leases, which may have
escalating rentals over the term of the lease, are recorded on a straight-line
basis over the term of the lease. The rent expense under the operating leases
for the periods ending December 31, 2007, 2006 and 2005 was respectively
$1,937,000, $1,878,000 and $1,545,000.
In October 2004, the Company entered
into a $2.5 M (1.75 M) bank guarantee in favour of one of its landlords in
Germany with respect to the Companys lease obligation. This guarantee will
mature in 2009.
80
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Contingencies
In the normal course of operations, the
Company may become involved in various claims and legal proceedings mainly
related to contract terminations, employee lay-offs and other employee-related
matters. As at December 31, 2007 there are no known or anticipated
contingencies or disputes pending against the company.
24
Summary
of differences between generally accepted accounting principles in Canada and
in the United States
As a company listed on the NASDAQ Global
Market, the Company is required to reconcile its financial statements for
significant measurement differences between generally accepted accounting
principles as applied in Canada (Canadian GAAP) and those applied in the United
States (U.S. GAAP). Furthermore, additional significant disclosures required
under U.S. GAAP and Regulation S-X of the Securities and Exchange Commission in
the United States (SEC) are also provided in the accompanying financial
statements and notes. The following summarizes the significant quantitative
differences between Canadian and U.S. GAAP, as well as other significant
disclosures required under U.S. GAAP and Regulation S-X of the SEC not already
provided in the accompanying financial statements.
The following summary sets out the material
adjustments to the Companys reported net earnings (loss), net earnings (loss)
per share and shareholders equity which would be made to conform with
U.S. GAAP:
81
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
Statements
of Earnings
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
Net
earnings (loss) for the year under Canadian GAAP
|
|
(32,296
|
)
|
33,390
|
|
10,571
|
|
Accretion
on convertible term loans
|
(c)
|
|
|
502
|
|
4,479
|
|
Loss
on conversion of convertible term loans
|
(c)
|
|
|
(280
|
)
|
|
|
Amortization
of in-process R&D
|
(a)
|
1,546
|
|
2,348
|
|
1,610
|
|
Other
|
(b)
|
|
|
(10
|
)
|
(32
|
)
|
Reclassification
adjustment related to the sale of Echelon
|
(e)
|
(754
|
)
|
|
|
|
|
Deferred
taxes
|
(d)
|
(5,430
|
)
|
(959
|
)
|
|
|
Income
tax effects of the above adjustments
|
|
(494
|
)
|
(729
|
)
|
(658
|
)
|
|
|
|
|
|
|
|
|
Net
earnings (loss) for the year under U.S. GAAP
|
|
(37,428
|
)
|
34,262
|
|
15,970
|
|
|
|
|
|
|
|
|
|
Out
of which:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) from continuing operations
|
|
(36,415
|
)
|
8,449
|
|
(10,083
|
)
|
Net
earnings (loss) from discontinued operations
|
|
(1,013
|
)
|
25,813
|
|
26,053
|
|
|
|
|
|
|
|
|
|
Basic
net earnings (loss) per share
|
|
(0.70
|
)
|
0.66
|
|
0.34
|
|
From
continuing operations
|
|
(0.68
|
)
|
0.16
|
|
(0.22
|
)
|
From
discontinued operations
|
|
(0.02
|
)
|
0.50
|
|
0.56
|
|
|
|
|
|
|
|
|
|
Diluted
net earnings (loss) per share
|
|
(0.70
|
)
|
0.65
|
|
0.34
|
|
From
continuing operations
|
|
(0.68
|
)
|
0.16
|
|
(0.22
|
)
|
From
discontinued operations
|
|
(0.02
|
)
|
0.49
|
|
0.56
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares (note 20)
under U.S. GAAP
|
|
|
|
|
|
|
|
Basic
|
|
53,182,803
|
|
52,099,290
|
|
46,139,814
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
53,182,803
|
|
52,549,260
|
|
46,139,814
|
|
82
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
Reconciliation of shareholders equity to conform to U.S. GAAP
The following
summary sets out the significant differences between the Companys reported
shareholders equity under Canadian GAAP as compared to U.S. GAAP. Please see
corresponding explanatory notes for additional information.
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Shareholders
equity in accordance with Canadian GAAP
|
|
88,591
|
|
178,879
|
|
In-process
R&D
|
(a)
|
(14,181
|
)
|
(14,348
|
)
|
Other
|
(b)
|
|
|
39
|
|
Deferred
tax effect
|
(d)
|
|
|
5,134
|
|
|
|
|
|
|
|
|
|
74,410
|
|
169,704
|
|
Statement of comprehensive income
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) for the year under U.S. GAAP
|
|
(37,428
|
)
|
34,262
|
|
15,970
|
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
12,607
|
|
4,654
|
|
(7,660
|
)
|
Reclassification
adjustment related to the sale of shares of Atrium
|
|
|
|
(1,643
|
)
|
|
|
Change
in fair value of investments
|
(f)
|
(29
|
)
|
(274
|
)
|
(139
|
)
|
|
|
|
|
|
|
|
|
Change
in fair value of interest rate swap, net of income taxes
|
(g)
|
|
|
78
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
(24,850
|
)
|
37,077
|
|
8,093
|
|
Accumulated
other comprehensive income, net of related income taxes, consists of the
following:
|
|
As at December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
19,809
|
|
12,826
|
|
Unrealized
gains on investments
|
|
10
|
|
39
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income
|
|
19,819
|
|
12,865
|
|
83
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
The following table summarizes the
shareholders equity activity under U.S. GAAP since December 31, 2004:
|
|
Share
Capital
|
|
Deficit
|
|
Other
Capital
|
|
Accumulated
Other
Comprehensive
Income
|
|
Shareholders
Equity
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as at December 31, 2004
|
|
126,991
|
|
(64,084
|
)
|
5,825
|
|
17,927
|
|
86,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings as per U.S. GAAP
|
|
|
|
15,970
|
|
|
|
|
|
15,970
|
|
Stock-based
compensation costs
|
|
|
|
|
|
2,286
|
|
|
|
2,286
|
|
Variation
in fair value of investments
|
|
|
|
|
|
|
|
(139
|
)
|
(139
|
)
|
Variation
in fair value of interest rate swap
|
|
|
|
|
|
|
|
(78
|
)
|
(78
|
)
|
Exercise
of stock options
|
|
130
|
|
|
|
|
|
|
|
130
|
|
Issuance
of shares pursuant to a business acquisition
|
|
2,737
|
|
|
|
|
|
|
|
2,737
|
|
Share
issue expenses
|
|
(108
|
)
|
|
|
|
|
|
|
(108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
|
|
|
|
|
(7,660
|
)
|
(7,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as at December 31, 2005
|
|
129,750
|
|
(48,114
|
)
|
8,111
|
|
10,050
|
|
99,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings as per U.S. GAAP
|
|
|
|
34,262
|
|
|
|
|
|
34,262
|
|
Stock-based
compensation costs
|
|
|
|
|
|
2,120
|
|
|
|
2,120
|
|
Variation
in fair value of investments
|
|
|
|
|
|
|
|
(274
|
)
|
(274
|
)
|
Variation
in fair value of interest rate swap
|
|
|
|
|
|
|
|
78
|
|
78
|
|
Exercise
of stock options
|
|
110
|
|
|
|
(29
|
)
|
|
|
81
|
|
Conversion
of convertible term loans
|
|
30,403
|
|
|
|
|
|
|
|
30,403
|
|
Issuance
of shares pursuant to:
|
|
|
|
|
|
|
|
|
|
|
|
a
contingent consideration paid upon business acquisition
|
|
163
|
|
|
|
|
|
|
|
163
|
|
acquisition
of a patent from a senior officer
|
|
175
|
|
|
|
|
|
|
|
175
|
|
Share
issue expenses
|
|
(112
|
)
|
|
|
|
|
|
|
(112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
|
|
|
|
|
3,011
|
|
3,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as at December 31, 2006
|
|
160,489
|
|
(13,852
|
)
|
10,202
|
|
12,865
|
|
169,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss as per U.S. GAAP
|
|
|
|
(37,428
|
)
|
|
|
|
|
(37,428
|
)
|
Stock-based
compensation costs
|
|
|
|
|
|
1,984
|
|
|
|
1,984
|
|
Variation
in fair value of investments
|
|
|
|
|
|
|
|
(29
|
)
|
(29
|
)
|
Distribution
of Atrium (note 4)
|
|
(137,959
|
)
|
|
|
71,122
|
|
(5,624
|
)
|
(72,461
|
)
|
Issuance
of shares pursuant to stock option plan
|
|
33
|
|
|
|
|
|
|
|
33
|
|
Exercise
of Stock Options
|
|
26
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
|
|
|
|
|
12,607
|
|
12,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as at December 31, 2007
|
|
22,589
|
|
(51,280
|
)
|
83,282
|
|
19,819
|
|
74,410
|
|
84
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Balance Sheets
The following table summarizes
the significant differences between the balance sheet items under Canadian GAAP
as compared to U.S. GAAP as at December 31, 2007 and 2006:
|
|
As at December 31, 2007
|
|
As at December 31, 2006
|
|
|
|
As
reported
|
|
U.S.
GAAP
|
|
As
reported
|
|
U.S.
GAAP
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets
|
(a)
|
36,945
|
|
22,764
|
|
39,106
|
|
24,758
|
|
Future
income tax liabilities
|
(a)
|
|
|
|
|
10,963
|
|
5,829
|
|
Statements of cash flows
For the years ended December 31,
2007, 2006 and 2005, there are no significant differences between the
statements of cash flows under Canadian GAAP as compared to U.S. GAAP.
(a)
Research and development costs
Under U.S. GAAP, in-process research and
development acquired in a business combination is written off at the time of
acquisition. Under Canadian GAAP, in-process research and development acquired
in a business combination is capitalized and amortized over its estimated
useful life. Balance includes intangible assets held for sale, and assets and
liabilities from discontinued operations.
(b)
Other
Other adjustments required when
considering the significant differences between Canadian and U.S. GAAP include
individually minor amounts related to the following items:
financing costs arising from the
convertible notes (see (c) below) allocated to other capital under
Canadian GAAP that are amortized in earnings under U.S. GAAP;
organization costs deferred and
amortized under Canadian GAAP that are expensed as incurred under U.S. GAAP.
(c)
Convertible term loans
Under Canadian GAAP, proceeds from the
issuance of convertible term loans are allocated among long-term convertible
term loans and shareholders equity, resulting in a debt discount that is
amortized to expense over the term of the loans. The financing costs related to
those loans have been allocated on a pro-rata basis between deferred charges
and other capital. Under U.S. GAAP, those costs are all included in deferred
charges and amortized over the term of the loans, and convertible term loans
are totally considered as long-term debt. Furthermore, under U.S. GAAP, the
entire incremental consideration to induce conversion is recorded in earnings.
85
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
(d)
Deferred taxes
This adjustment reflects differences related
to the accounting for valuation allowance for U.S. GAAP purposes that arise
from timing differences.
(e)
Cumulative translation adjustment related to the sale of Echelon
Under Canadian GAAP, a gain or loss
equivalent to a proportionate amount of the exchange gain or loss accumulated
in the translation adjustment has to be
recognized in income when there has been a reduction of a net investment in a
foreign operation. Under U.S. GAAP, a gain or loss should only be recognized in
income in the case of a substantial or complete liquidation of a net investment
in a foreign operation being the substantial or complete liquidation of the
Company.
(f)
Investments
Investments, which are classified as
available-for-sale securities, include the Companys investment in discount
notes, commercial paper and bonds for which the Company does not have the
positive intent or ability to hold to maturity and an investment in shares of a
publicly traded company. Under U.S. GAAP, available-for-sale securities are
carried at fair value with unrealized gains and losses net of the related tax
effects as part of other comprehensive income.
Under Canadian GAAP, these investments were
valued at the lower of amortized cost and market value before January 1,
2007. Since this date, there is no difference in accounting under Canadian and
U.S. GAAP.
(g)
Interest rate swap
Under Canadian GAAP, prior to
2007, the Company accounted for Atriums interest rate swap using the accrual
method. U.S. GAAP requires all derivative instruments to be recognized at fair
value on the consolidated balance sheet. Under U.S. GAAP, this swap has been
designated as a cash flow hedge. Accordingly, the changes in fair value are recorded
in other comprehensive income until the related interest expense is recorded in
income.
(h)
Recently adopted and pending
accounting pronouncements
FASB Statement No. 123R Share-Based
Payment (SFAS 123R)
On December 16, 2004, the
Financial Accounting Standards Board (FASB) issued SFAS 123R which replaces
FASB Statement No. 123 (SFAS 123), Accounting for Stock-Based
Compensation, and eliminates the ability to account for share-based payment
transactions using APB Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS 123R covers the accounting requirements for a wide range of
share-based compensation arrangements. SFAS 123R requires that compensation
cost for employee stock-based compensation be measured based on the grant-date
fair value and recognized in the financial statements over the vesting period
(fair value method).
86
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
The Company adopted SFAS 123R on
January 1, 2006 using the modified prospective application method of
transition and its adoption had no significant impact on its consolidated
financial statements. On January 1, 2003, the Company had already adopted
the prospective application method of transition of SFAS 123, which required
that all new awards granted to employees on or after January 1, 2003 be
accounted for at fair value. The fair value of awards granted was estimated
using the Black-Scholes option pricing model.
FASB Statement No. 158 Employers
Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158)
In September 2006, the FASB
issued SFAS 158. This statement amends SFAS 87, Employers Accounting for
Pensions, and SFAS 106, Employers Accounting for Post-Retirement Benefits
Other than Pensions, to require recognition of the over funded or under funded
status of pension and other postretirement benefit plans on the balance sheet.
Under SFAS 158, gains and losses, prior service costs and credits, and any
remaining transition amounts under SFAS 87 and SFAS 106 that have not yet been
recognized through net periodic benefit cost will be recognized in OCI, net of
tax effects, until they are amortized as a component of net periodic cost.
SFAS 158 is effective for the
fiscal year ending after December 15, 2006, except for the measurement
date provisions, which are effective for fiscal years ending after December 15,
2008. The Company adopted this standard on December 31, 2006 and its
adoption had no impact on its consolidated financial statements.
FASB Interpretation No. 48 Accounting
for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
(FIN 48)
In June 2006, the FASB
issued FASB interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48), an interpretation of FASB Statement No. 109, Accounting
for Income Taxes. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 requires that
the Company recognize the impact of a tax position in the financial statements
if that position is more likely than not of being sustained on audit, based on
the technical merits of the position. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods and disclosure. The provisions of FIN 48 are effective beginning January 1,
2007 with the cumulative effect of the change in accounting principle recorded
as an adjustment to the opening balance of deficit. The Company adopted this
interpretation on January 1, 2007 and this adoption had no impact on the
Companys consolidated financial statements. Upon the adoption of FIN 48,
the Company elected to classify interest and penalties in interest expense.
87
Æterna
Zentaris Inc.
Notes to Consolidated Financial Statements
December 31,
2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
FASB Statement No. 157 Fair Value Measurements (SFAS 157)
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157). SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures
regarding fair value measurements. SFAS 157 does not require any new fair value
measurements but rather eliminates inconsistencies in guidance found in various
prior accounting pronouncements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. The Company will adopt this statement
on January 1, 2008, and has not yet assessed the impact its adoption will
have on its consolidated financial statements.
FASB
Statement No. 159 The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB Statement No. 115
(SFAS 159)
On February 15,
2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB Statement No. 115,
which permits entities to choose to measure many financial instruments and
certain other items at fair value. Most of the provisions of this statement
apply only to entities that elect the fair value option. However, the amendment
to SFAS 115, Accounting for Certain Investments in Debt and Equity Securities,
applies to all entities with available-for-sale and trading securities. This
statement is effective for fiscal years beginning after November 15, 2007.
The Company will adopt this statement on January 1, 2008 and has not yet
determined if it will elect to use the fair value option.
EITF
Issue No. 07-3 Accounting for Advance Payments for Goods or Services to
be Received for Use in Future Research and Development Activities (EITF 07-3)
In June 2007,
EITF 07-3 provides clarification surrounding the accounting for nonrefundable
research and development advance payments, whereby such payments should be
recorded as an asset when the advance payment is made and recognized as an
expense when the research and development activities are performed. EITF 07-3
is effective for interim and annual reporting periods beginning after December 15,
2007. The Company will adopt the provisions of EITF 07-3 on January 1,
2008. The Company is currently assessing the impact of EITF 07-3 on its results
of operations and financial condition.
EITF
Issue No. 07-1 - Accounting for Collaborative Agreements Related to the
Development and Commercialization of Intellectual Property (EITF)
The Emerging Issues Task Force has adopted the accounting for
arrangements under which companies participate in the development and
commercialization of intellectual property into commercially viable products.
The ETIF defines a collaborative arrangement is a contractual arrangement that
involves a joint operating activity. These arrangements involve two (or more)
parties who are both (a) active participants in the activity and (b) exposed
to significant risks and rewards dependent on the commercial success of the
activity. A company may receive revenues and incur costs under such
arrangements as well as make or received payments from the other participant in
the arrangement. The EITF concluded revenues earned and costs incurred by a
company should be presented gross or net depending on whether the company is
the principal in the arrangement. The EITF has approved this pronouncement in December 2007
and it will
88
Æterna
Zentaris Inc.
Notes to Consolidated Financial Statements
December 31,
2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
become effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. The Company is currently assessing the impact on the presentation of
revenues and costs within the Companys financial statements.
(i)
Other disclosures
Research and development tax credits
Under
Canadian GAAP, all research and development tax credits are recorded as a
reduction of costs in the statements of operations. Under U.S. GAAP, tax
credits that are refundable against taxable income are recorded in the income
taxes. These tax credits amounted to $1,862,000 in 2007, $1,684,000 in 2006 and
$nil in 2005. This difference has no impact on the net earnings (loss) and the
net earnings (loss) per share figures for the reporting years.
Furthermore,
under U.S. GAAP, the future income tax assets related to the unrecognized tax
credits totalled $7,004,000 in 2007 and $5,683,000 in 2006. However, a
valuation allowance corresponding to the same amounts has been accounted for in
2007 and 2006.
Long-lived
assets
Under
U.S. GAAP, long-lived assets by geographic region only consist of property,
plant and equipment which are detailed as follows:
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Canada
|
|
7,631
|
|
8,798
|
|
Germany
|
|
6,436
|
|
4,203
|
|
United States
|
|
838
|
|
|
|
|
|
|
|
|
|
|
|
14,905
|
|
13,001
|
|
Available-for-sale securities
The Company uses the specific identification
method in order to reclassify the gains or losses realized out of accumulated
other comprehensive income into the statement of earnings.
89
Æterna
Zentaris Inc.
Notes to Consolidated Financial Statements
December 31,
2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
The gross realized gains and gross realized
losses included in the statement of earnings, the unrealized holding gain or
loss on available-for-sale securities as well as the amount of gains and losses
reclassified out of accumulated other comprehensive income into the statement
of earnings are as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
|
|
410
|
|
17
|
|
Gross realized losses
|
|
67
|
|
21
|
|
|
|
Unrealized gains
|
|
|
|
126
|
|
197
|
|
Unrealized losses
|
|
42
|
|
67
|
|
67
|
|
Gains reclassified
|
|
53
|
|
390
|
|
269
|
|
Losses reclassified
|
|
30
|
|
78
|
|
|
|
Available-for-sale securities maturity dates:
|
|
$
|
|
|
|
|
|
Within one year
|
|
31,115
|
|
One to five years
|
|
|
|
|
|
31,115
|
|
As at December 31, 2007,
available-for-sale securities are composed of:
|
|
$
|
|
|
|
|
|
Government debt securities
|
|
5,778
|
|
Municipal debt securities
|
|
5,130
|
|
Corporate debt securities
|
|
20,207
|
|
|
|
31,115
|
|
Research and collaboration agreements
As part of our strategy to enhance our
development capabilities and to fund, in part, our capital requirements, we
have entered into collaboration agreements with several pharmaceutical
companies, which we refer to as our partners. Pursuant to our collaboration,
the Company received upfront payments, license fees, milestone payments and has
the potential to receive royalty payments in the future. Upfront payments are
typically non-refundable payments received upon the signature of an agreement
and are amortized over the estimated research and development (R&D)
period. License fees are typically contractually obligated payments to fund
R&D over the term of collaboration and include milestone payments, as well
as R&D contract services. Milestone payments are contingent payments made
only upon achievement of specified milestones, such as selection of candidates
for drug development, the commencement or termination of clinical trials or
receipt of regulatory approvals and achievement of a certain level of sales. If
drugs are successfully developed and commercialized as a result of our
collaboration agreements, we will receive royalty payments based upon net sales
of those drugs developed under the collaboration. Finally, R&D contract
services fees are research and development activities performed by the Company
on behalf of our partners and for which the Company has the right to receive
compensation.
90
Æterna
Zentaris Inc.
Notes to Consolidated Financial Statements
December 31,
2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
Ardana Bioscience
In 2002, the Company entered into a license
and collaboration agreement with Ardana Bioscience Ltd., a subsidiary of Ardana
plc (Ardana). Ardana was granted an exclusive worldwide license to develop
and commercialize the growth hormone secretagogue (EP-1572). Ardana
undertakes, at its own cost, all activities necessary to obtain regulatory and
marketing approvals for the substance. In return, the Company received 1.75
million (approximately $1.7 million) as upfront payment upon signing of the
agreement. The Company is also eligible to receive payments of up to an aggregate
of 7 million (approximately $9.2 million) upon Ardanas successful achievement
of clinical development and regulatory milestones, in addition to low
double-digit royalties on future net worldwide net sales of EP-1572.
Revenues recognized under the agreement for
the years ended December 31, 2007, 2006 and 2005 were $3.0 million, $1.5
million and $1.8 million, respectively.
Corresponding R&D costs incurred under
the agreement for the years ended December 31, 2007, 2006 and 2005 were
$nil, $nil and $nil, respectively.
In 2002, the Company granted an exclusive
license to Ardana to develop and commercialize teverelix, a luteinizing
hormone-releasing hormone (LHRH) antagonist, for all therapeutic uses
worldwide with the exception of Japan, Korea and Taiwan. On April 2, 2004,
Ardana acquired full worldwide rights and was assigned the intellectual
property rights relating to teverelix and the underlying microcrystalline
suspension technology for the use of teverelix and any other potential LHRH
antagonists. The Company received 3.25 million (approximately $3.2 million) in
2002 and 5 million (approximately $6.1 million) in 2004 as upfront
payments upon signature of the agreement in 2002 and upon the assignment of the
substance in 2004 respectively. The agreement also provides, among other
things, 7 million (approximately $9.2 million) of guaranteed payments
until December 2006, 15 million (approximately $19.8 million) upon
successful achievement of a certain level of sales and low single-digit
royalties on future worldwide net sales.
Revenues recognized under the agreement for
the years ended December 31, 2007, 2006 and 2005 were $3.5 million, $3.6
million and $5.1 million, respectively.
Corresponding R&D costs incurred under
the agreement for the years ended December 31, 2007, 2006 and 2005 were
less than $0.1 million, $0.3 million and $0.6 million, respectively.
Keryx Biopharmaceuticals
Following the acquisition of AOI Pharma, Inc.
in January 2004 by Keryx Biopharmaceuticals, Inc. (Keryx), Keryx
has taken over the license and collaboration agreement signed with AOI Pharma, Inc.
in September 2002. Upon signature of this agreement in 2002, the Company
received $0.5 million as upfront payment. Keryx undertakes, at its own cost,
all clinical activities necessary to obtain regulatory and marketing approvals
of perifosine, a signal transduction inhibitor, for all uses in the United
States, Canada and Mexico. The agreement provides, among other things,
availability of data generated by both parties free of charge. The Company is also
eligible to receive payments of up to an aggregate of $18.3 million upon Keryxs
successful achievement of clinical development and regulatory milestones, in
addition to
91
Æterna
Zentaris Inc.
Notes to Consolidated Financial Statements
December 31,
2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
scale-up royalties (from high single to low
double-digit) on future net sales in the United States, Canada and Mexico.
Revenues recognized under the agreement for
the years ended December 31, 2007, 2006 and 2005 were $1.7 million, $0.7
million and $0.9 million, respectively.
Corresponding R&D costs incurred under
the agreement for the years ended December 31, 2007, 2006 and 2005 were
$0.9 million, $0.9 million and $0.9 million, respectively.
Nippon Kayaku
In 2006, we entered into a licensing and
collaboration agreement with Nippon Kayaku Co. Ltd. (Nippon Kayaku). Under the
terms of the agreement, we granted Nippon Kayaku an exclusive license to
develop and market ozarelix, a LHRH antagonist, for all potential oncological
indications in Japan. In return, the Company received 1.5 million
(approximately $1.9 million) as upfront payment upon signature. The agreement
provides, among other things, availability of data generated by both parties
free of charge. The Company is eligible to receive payments of up to an
aggregate of 18 million (approximately $23.8 million) upon Nippon Kayakus
successful achievement of clinical development, regulatory milestones and a
certain level of sales, in addition to low double-digit royalties on potential
net sales. Furthermore, as indicated below regarding the Spectrum
Pharmaceuticals, Inc. (Spectrum) R&D agreement, Spectrum is entitled
to receive fifty percent of any upfront, milestone payments and royalties
received from any research and collaboration agreement signed by the Company
for the development and commercialization of ozarelix in Japan.
Revenues recognized under the agreement for
the years ended December 31, 2007 and 2006 were $0.5 million and
$0.2 million, respectively.
Corresponding R&D costs incurred under
the agreement for the years ended December 31, 2007and 2006 were
$0.1 million and $0.1 million, respectively.
Shionogi
In 1995, the Company entered into a research
and collaboration agreement with Shionogi and Co. (Shionogi). The Company
granted Shionogi a license to develop, use, commercialize and manufacture
cetrorelix, our LHRH antagonist, in Japan and for all human indications. Under
the agreement, Shionogi is responsible, at its own cost, for all activities
necessary to obtain regulatory and marketing approvals for cetrorelix. The
agreement provides, among other things, availability of data generated by both
parties free of charge. Upon signature of this agreement, the Company received
1.3 million (approximately $1.4 million) as upfront payment and was eligible
to receive milestone payments of up to an aggregate of 5.4 million
(approximately $7.1 million) upon Shionogis successful achievement of clinical
development and regulatory milestones. To date, the Company received
4.4 million (approximately $5.8 million) of these milestone payments.
Since the development of cetrorelix is completed in the
in vitro
fertilization (IVF), Control Ovarian Stimulation (COS) and Assisted
Reproductive Technology (ART) in Japan, the Company does not expect to
receive further development milestone payments.
92
Æterna
Zentaris Inc.
Notes to Consolidated Financial Statements
December 31,
2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
In addition, upon commercialization of
cetrorelix in benign prostatic hyperplasia (BPH), the Company will be
entitled to a manufacturing margin.
Revenues recognized under the agreement for
the years ended December 31, 2007, 2006 and 2005 were $nil, $3.8 million
and $nil, respectively.
Corresponding R&D costs incurred under
the agreement for the years ended December 31, 2007, 2006 and 2005 were
$nil, $1 million and $0.3 million, respectively.
Solvay Pharmaceuticals
In 2002, the Company entered into a research
and collaboration agreement with Solvay Pharmaceuticals Bv, a subsidiary of
Solvay SA (Solvay). The Company granted Solvay an exclusive license to
develop, use, commercialize and manufacture cetrorelix worldwide (ex-Japan) and
for all indications excluding IVF/COS/ART.
Under the agreement, Solvay was responsible, at its own cost, for all
activities necessary to obtain regulatory and marketing approvals for
cetrorelix in different indications including, uterine myoma, endometriosis and
BPH. The agreement provides, among other things, availability of data generated
by both parties free of charge. Upon signature of this agreement, the Company
received 6 million (approximately $6.2 million) as upfront payment and was
eligible to receive milestone payments of up to an aggregate of
18 million (approximately $23.8 million) upon Solvays successful
achievement of clinical development and regulatory milestones, in addition to
low double-digit royalties on future worldwide (ex-Japan) net sales of
cetrorelix.
In December, 2005, Æterna Zentaris and Solvay
amended the agreement whereas the Company regained exclusive worldwide
(ex-Japan) rights for cetrorelix for the BPH indication solely, without any
financial compensation payable to Solvay. In May 2007, the parties entered
into a termination agreement whereby the Company regained exclusive worldwide
(ex-Japan) rights for cetrorelix in all indications, including endometriosis
and uterine myoma, without any financial compensation payable to Solvay.
Revenues recognized under the agreement for
the years ended December 31, 2007, 2006 and 2005 were $2.0 million, $1.2
million and $4.5 million, respectively.
Corresponding R&D costs incurred under
the agreement for the years ended December 31, 2007, 2006 and 2005 were
$1.9 million, $0.6 million and $0.6 million, respectively.
93
Æterna
Zentaris Inc.
Notes to Consolidated Financial Statements
December 31,
2007, 2006 and 2005
(tabular amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
Spectrum Pharmaceuticals
In 2004, the Company entered into a licensing
and collaboration agreement with Spectrum Pharmaceuticals, Inc. (Spectrum)
for ozarelix, a LHRH antagonist. Under the terms of the agreement, the Company
granted Spectrum an exclusive license to develop and commercialize ozarelix for
all potential indications in North America (including Canada and Mexico) as
well as India. The agreement provides, among other things, availability of data
generated by both parties free of charge. Upon signature of this agreement, the
Company received 2 million as upfront payment (approximately $2.4
million) of which an amount of 1 million was paid cash and the balance paid
through the issuance of shares of the capital of Spectrum. The Company is
eligible to receive payments of up to an aggregate of 18.5 million
(approximately $24.4 million) upon Spectrums successful achievement of
clinical development and regulatory milestones, in addition to royalties
(scale-up royalties from high single to low double-digit) on potential net
sales. In consideration of the amounts paid by Spectrum under this agreement,
Spectrum is entitled to receive fifty percent of any upfront, milestone payments
and royalties received from any research and collaboration agreement signed by
the Company for the development and commercialization of ozarelix in Japan.
Revenues recognized under the agreement for
the years ended December 31, 2007, 2006 and 2005 were $1.9 million, $2.9
million and $2.6 million, respectively.
Corresponding R&D costs incurred under
the agreement for the years ended December 31, 2007, 2006 and 2005 were
$0.6 million, $1.7 million and $2.6 million, respectively.
Tulane University
In 2002, the Company signed license
agreements with the Tulane Educational Fund (Tulane) with regard to various
substances, including cetrorelix. Under the agreements, we obtained exclusive
worldwide licenses to use Tulanes patents to develop, manufacture, market and
distribute these substances.
The agreement provides the payment by the
Company of single-digit royalties on future worldwide net sales for all
indications, except BPH, where it provides the payment of low single-digit
royalties. Tulane is entitled to receive a low double-digit royalty on any lump
sum, periodic or other cash payments received by the Company from
sub-licensees.
Costs incurred under the agreement for the
years ended December 31, 2007, 2006 and 2005 were $0.1million, $0.3
million and $0.4 million, respectively.
25
Comparative figures
Certain comparative figures have been
reclassified to conform with the current year presentation.
94
DIRECTORS
Marcel
Aubut, O.C., O.Q., Q.C.
Quebec,
Canada
Managing
Partner
Heenan
Blaikie Aubut (law firm)
Martha Byorum, MBA
(1)
New
York, USA
Senior
Managing Director
Stephens
Cori Capital Advisors (a division of Stephens Inc.)
José P. Dorais
Quebec, Canada
Partner
Miller
Thomson Pouliot LLP (law firm)
Jürgen
Engel, Ph.D.
Frankfurt, Germany
Executive
Vice President and Chief Scientific Officer
Æterna Zentaris Inc.
Juergen
Ernst, MBA
(2)
Brussels, Belgium
Chairman
of the Board
Æterna
Zentaris Inc.
Corporate
Director
Former
General Manager
Pharmaceutical
Sector of Solvay S.A. (International
Chemical
and Pharmaceutical Group)
Pierre Laurin, Ph.D., O.C.
(2)
Quebec,
Canada
Executive
in Residence
HEC
Montreal
Gérard Limoges, CM, FCA
(1)
Quebec,
Canada
Corporate Director
Pierre MacDonald, MSc. Comm.
(1)
(2)
Quebec,
Canada
Chairman
of the Board
Eurocopter
Canada Ltd.
Gerald J. Martin
California,
USA
Corporate
Director
David
J. Mazzo, Ph.D.
New
Jersey, USA
President
and Chief Executive Officer
Æterna
Zentaris Inc.
(1)
Member of the Audit Committee
(2)
Member of the Corporate Governance, Nominating
and Human Resources Committee
95
SENIOR OFFICERS
Paul Blake, M.D.
New
Jersey, USA
Senior
Vice President and Chief Medical Officer
Jürgen Engel, Ph.D.
Frankfurt, Germany
Executive
Vice President and Chief Scientific Officer
David J.
Mazzo, Ph.D.
New
Jersey, USA
President
and Chief Executive Officer
Ellen McDonald, M.B.A.
New
Jersey, USA
Senior
Vice President, Business Operations and Chief Business Officer
Mario
Paradis, CA
Quebec,
Canada
Senior
Vice President, Administrative & Legal Affairs and Corporate Secretary
Nicholas J.
Pelliccione, Ph.D.
New
Jersey, USA
Senior
Vice President, Regulatory Affairs and Quality Assurance
Dennis
Turpin, CA
New
Jersey, USA
Senior
Vice President and Chief Financial Officer
96
CORPORATE INFORMATION
Head Office
|
|
US Office
|
|
|
|
Æterna
Zentaris Inc.
|
|
|
1405 Parc-Technologique Blvd.
|
|
20 Independence Blvd., 4
th
floor
|
Quebec, Quebec G1P 4P5
|
|
Warren, NJ 07059
|
CANADA
|
|
U.S.A.
|
|
|
|
Phone:
(418) 652-8525
|
|
Phone:
(908) 626-5500
|
Fax: (418) 652-0881
|
|
Fax: (908) 626-5426
|
Internet: www.aezsinc.com
|
|
|
Ticker
symbols
AEZ
The Toronto Stock Exchange (TSX)
AEZS
NASDAQ National Market
Transfer
Agent and Registrar
Computershare
Trust Company of Canada
1500
University Street, 7
th
Floor
Montreal,
Quebec H3A 3S8
CANADA
Auditors
PricewaterhouseCoopers LLP
Place de la Cité, Tour Cominar
2640 Laurier Blvd., Suite 1700
Quebec, Quebec
G1V 5C2
CANADA
Corporate
Solicitors
Ogilvy
Renault
1981
McGill College, Suite 1100
Montreal,
Quebec H3A 3C1
CANADA
Ropes & Gray LLP
1211 Avenue of the Americas
New
York, NY 10036
USA
Annual
Meeting
May 7,
2008, 10:30 a.m.
Hyatt
Regency Montreal Hotel
1255
Jeanne-Mance Street
Montreal, Quebec H5B 1E5
CANADA
97
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