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 March 2009
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
Exhibit 1
|
|
2008 Audited Consolidated Financial Statements
|
|
|
|
Exhibit 2
|
|
Managements Discussion and Analysis of Financial Condition and Results
of Operations for the financial year ended December 31, 2008
|
Æterna
Zentaris Inc.
Consolidated
Financial Statements
December 31,
2008, 2007 and 2006
(expressed in
thousands of US dollars)
March 10, 2009
Independent Auditors Report
To
the Shareholders of of
Æterna
Zentaris Inc.
We have completed integrated audits of Æterna Zentaris Inc.s 2008 and
2007 consolidated financial statements and of its internal control over
financial reporting as at December 31, 2008 and an audit of its 2006
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, 2008 and December 31, 2007, and the
related consolidated statements of earnings (loss), comprehensive income
(loss), changes in shareholders equity and cash flows for each of the years in
the three year period ended December 31, 2008. 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 audits of the Companys financial statements in
accordance with Canadian generally accepted auditing standards and the
standards of the Public Company Accounting Oversight Board (United States).
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, 2008 and December 31, 2007 and the results of its
operations and its cash flows for each of the years in the three year period
ended December 31, 2008 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, 2008, 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 accompanying 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.
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 includes obtaining an understanding
of internal control over financial reporting, assessing the risk that a
material weakness exists, 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.
2
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,
2008 based on criteria established in Internal Control Integrated Framework
issued by the COSO.
|
(1)
|
Quebec City, Quebec, Canada
(1) Chartered accountant auditor permit No.
11070
3
Æterna Zentaris Inc.
Consolidated Balance
Sheets
(expressed in thousands of US dollars)
|
|
As at December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
$
|
|
$
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
Cash and cash equivalents
|
|
49,226
|
|
10,272
|
|
Short-term investments (note 24)
|
|
493
|
|
31,115
|
|
Accounts receivable
|
|
|
|
|
|
Trade
|
|
3,425
|
|
6,170
|
|
Other (note 8)
|
|
1,100
|
|
3,044
|
|
Income taxes
|
|
48
|
|
|
|
Inventory (note 9)
|
|
3,385
|
|
5,406
|
|
Prepaid expenses and other current assets
|
|
4,047
|
|
3,573
|
|
|
|
61,724
|
|
59,580
|
|
|
|
|
|
|
|
Property, plant and equipment
(note 11)
|
|
6,682
|
|
7,460
|
|
Long-lived assets held for sale
(note 6)
|
|
|
|
13,999
|
|
Deferred charges and other long-term assets
(note 10)
|
|
5,959
|
|
1,441
|
|
Intangible assets
(note 12)
|
|
23,894
|
|
30,391
|
|
Goodwill
(note 13)
|
|
10,083
|
|
10,492
|
|
|
|
|
|
|
|
|
|
108,342
|
|
123,363
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
Accounts payable and accrued liabilities
(note 14)
|
|
13,690
|
|
16,084
|
|
Income taxes
|
|
800
|
|
23
|
|
Deferred revenues (note 7)
|
|
7,631
|
|
5,373
|
|
Current portion of long-term debt and
payable
|
|
49
|
|
775
|
|
|
|
22,170
|
|
22,255
|
|
|
|
|
|
|
|
Deferred revenues
(note 7)
|
|
54,433
|
|
3,333
|
|
Long-term debt and payable
(notes 6 and 15)
|
|
172
|
|
|
|
Employee future benefits
(note 16)
|
|
10,092
|
|
9,184
|
|
|
|
86,867
|
|
34,772
|
|
Commitments and contingencies
(note 25)
|
|
|
|
|
|
Subsequent event
(note 26)
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
Share capital
(note 17)
|
|
30,566
|
|
30,566
|
|
Other capital
|
|
79,669
|
|
79,306
|
|
Deficit
|
|
(102,814
|
)
|
(42,997
|
)
|
Accumulated other comprehensive income
|
|
14,054
|
|
21,716
|
|
|
|
21,475
|
|
88,591
|
|
|
|
108,342
|
|
123,363
|
|
Evaluation of going concern (note 2)
Approved by the Board of Directors
|
|
|
Juergen Ernst, MBA
Director
|
|
Gérard Limoges, FCA
Director
|
The accompanying notes are an integral part of these
consolidated financial statements.
4
Æterna
Zentaris Inc.
Consolidated
Statements of Changes in Shareholders Equity
For the years ended December 31, 2008, 2007 and
2006
(tabular amounts in thousands of US dollars,
except common share data)
|
|
Common
shares
|
|
Share
capital
|
|
Other
capital
|
|
Deficit
|
|
Accumulated
other
comprehensive
income
|
|
Total
|
|
|
|
(number of)
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
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 (note
17b)
|
|
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 (note 17d)
|
|
22,000
|
|
81
|
|
|
|
|
|
|
|
81
|
|
Ascribed value from Other capital
|
|
|
|
29
|
|
(29
|
)
|
|
|
|
|
|
|
Issued pursuant to acquisition of Echelon
(note 5)
|
|
23,789
|
|
163
|
|
|
|
|
|
|
|
163
|
|
Issued pursuant to acquisition of a patent
from a senior officer (note 22)
|
|
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
|
|
Effect of the application of new accounting
standards
|
|
|
|
|
|
|
|
(587
|
)
|
(41
|
)
|
(628
|
)
|
Distribution of Atrium (note 4)
|
|
|
|
(137,959
|
)
|
71,122
|
|
|
|
(5,624
|
)
|
(72,461
|
)
|
Net loss for the year
|
|
|
|
|
|
|
|
(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 (note 17d)
|
|
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.
5
Æterna Zentaris Inc.
Consolidated
Statements of Changes in Shareholders Equity
For the
years ended December 31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars, except common share data)
|
|
Common
shares
|
|
Share
capital
|
|
Other
capital
|
|
Deficit
|
|
Accumulated
other
comprehensive
income
|
|
Total
|
|
|
|
(number of)
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Balance
December 31, 2007
|
|
53,187,470
|
|
30,566
|
|
79,306
|
|
(42,997
|
)
|
21,716
|
|
88,591
|
|
Net loss for the year
|
|
|
|
|
|
|
|
(59,817
|
)
|
|
|
(59,817
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
(7,655
|
)
|
(7,655
|
)
|
Variation in the fair value of short-term
investments, net of income taxes
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
(7
|
)
|
Stock based compensation costs
|
|
|
|
|
|
363
|
|
|
|
|
|
363
|
|
Balance December 31,
2008
|
|
53,187,470
|
|
30,566
|
|
79,669
|
|
(102,814
|
)
|
14,054
|
|
21,475
|
|
|
|
As at December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Accumulated Other
Comprehensive Income
|
|
|
|
|
|
|
|
Consisting of the following:
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
14,051
|
|
21,706
|
|
14,301
|
|
Variation in fair market value of
short-term investments, net of income taxes
|
|
3
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive income
|
|
14,054
|
|
21,716
|
|
14,301
|
|
Deficit
|
|
(102,814
|
)
|
(42,997
|
)
|
(10,114
|
)
|
|
|
|
|
|
|
|
|
Total Accumulated Other Comprehensive
Income and Deficit
|
|
(88,760
|
)
|
(21,281
|
)
|
4,187
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
6
Æterna
Zentaris Inc.
Consolidated
Statements of Earnings (Loss)
For the years ended December 31,
(expressed in thousands of US dollars, except
share and per share data)
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
38,478
|
|
42,068
|
|
38,799
|
|
Operating expenses
|
|
|
|
|
|
|
|
Cost of sales (note 9)
|
|
19,278
|
|
12,930
|
|
11,270
|
|
Selling, general and administrative
expenses
|
|
17,325
|
|
20,403
|
|
16,478
|
|
Research and development costs
|
|
57,448
|
|
39,248
|
|
27,422
|
|
Research and development tax credits and
grants
|
|
(343
|
)
|
(2,060
|
)
|
(1,564
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
1,515
|
|
1,562
|
|
2,816
|
|
Intangible assets (note 12)
|
|
5,639
|
|
4,004
|
|
6,148
|
|
Impairment of long-lived asset held for
sale (note 6)
|
|
|
|
735
|
|
|
|
|
|
100,862
|
|
76,822
|
|
62,570
|
|
Loss from operations
|
|
(62,384
|
)
|
(34,754
|
)
|
(23,771
|
)
|
Other income (expenses)
|
|
|
|
|
|
|
|
Interest income
|
|
868
|
|
1,904
|
|
1,441
|
|
Interest expense
|
|
|
|
|
|
|
|
Long-term debt and convertible term loans
|
|
|
|
(85
|
)
|
(1,270
|
)
|
Other
|
|
(118
|
)
|
|
|
(163
|
)
|
Foreign exchange (loss) gain
|
|
3,071
|
|
(1,035
|
)
|
319
|
|
Loss on disposal of long-lived assets held
for sale (note 6)
|
|
(35
|
)
|
|
|
|
|
Loss on disposal of equipment
|
|
(44
|
)
|
(28
|
)
|
|
|
Gain on disposal of a long-term investment
|
|
|
|
|
|
409
|
|
|
|
3,742
|
|
756
|
|
736
|
|
Share in the results of an
affiliated company
|
|
|
|
|
|
1,575
|
|
Loss before income taxes from
continuing operations
|
|
(58,642
|
)
|
(33,998
|
)
|
(21,460
|
)
|
Income tax (expense) recovery
(note
19)
|
|
(1,175
|
)
|
1,961
|
|
29,037
|
|
Net (loss) earnings from
continuing operations
|
|
(59,817
|
)
|
(32,037
|
)
|
7,577
|
|
Net (loss) earnings from
discontinued operations
(notes 4 and 5)
|
|
|
|
(259
|
)
|
25,813
|
|
Net (loss) earnings for the
year
|
|
(59,817
|
)
|
(32,296
|
)
|
33,390
|
|
Net (loss) earnings per share
from continuing operations
|
|
|
|
|
|
|
|
Basic
|
|
(1.12
|
)
|
(0.61
|
)
|
0.14
|
|
Diluted
|
|
(1.12
|
)
|
(0.61
|
)
|
0.14
|
|
Net (loss) earnings per share
from discontinued operations
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
0.50
|
|
Diluted
|
|
|
|
|
|
0.48
|
|
Net (loss) earnings per share
|
|
|
|
|
|
|
|
Basic
|
|
(1.12
|
)
|
(0.61
|
)
|
0.64
|
|
Diluted
|
|
(1.12
|
)
|
(0.61
|
)
|
0.62
|
|
Weighted average number of
shares
(note 21)
|
|
|
|
|
|
|
|
Basic
|
|
53,187,470
|
|
53,182,803
|
|
52,099,290
|
|
Diluted
|
|
53,187,470
|
|
53,182,803
|
|
52,549,260
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
7
Æterna
Zentaris Inc.
Consolidated
Statements of Comprehensive Income (Loss)
For the years ended December 31,
(expressed in thousands of US dollars)
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) for the year
|
|
(59,817
|
)
|
(32,296
|
)
|
33,390
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
(7,655
|
)
|
13,783
|
|
4,007
|
|
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
|
|
(7
|
)
|
51
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
(67,479
|
)
|
(19,216
|
)
|
35,754
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
8
Æterna
Zentaris Inc.
Consolidated
Statements of Cash Flows
For the years
ended December 31,
(expressed in
thousands of US dollars)
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
$
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
|
Net earnings (loss) for the year
|
|
(59,817
|
)
|
(32,296
|
)
|
33,390
|
|
Net (earnings) loss from discontinued
operations
|
|
|
|
259
|
|
(25,813
|
)
|
Net earnings (loss) from continuing
operations
|
|
(59,817
|
)
|
(32,037
|
)
|
7,577
|
|
Items not affecting cash and cash
equivalents
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
7,154
|
|
5,566
|
|
8,964
|
|
Stock-based compensation costs
|
|
363
|
|
1,984
|
|
2,120
|
|
Future income taxes
|
|
|
|
(1,868
|
)
|
(29,160
|
)
|
Gain on disposal of a long-term investment
|
|
|
|
|
|
(409
|
)
|
Share in the results of an affiliated
company
|
|
|
|
|
|
(1,575
|
)
|
Inventory write-down (note 9)
|
|
726
|
|
|
|
|
|
Employee future benefits
|
|
984
|
|
164
|
|
(115
|
)
|
Amortization of deferred charges and other
long term assets
|
|
729
|
|
510
|
|
150
|
|
Amortization of deferred revenues
|
|
(6,213
|
)
|
(7,012
|
)
|
(5,141
|
)
|
Accretion on long term borrowings
|
|
|
|
82
|
|
1,227
|
|
Loss on disposal of long-lived assets held
for sale
|
|
35
|
|
|
|
|
|
Loss on disposal of equipment
|
|
44
|
|
28
|
|
|
|
Impairment of long-lived asset held for
sale
|
|
|
|
735
|
|
|
|
Foreign exchange loss (gain) on items
denominated in foreign currency
|
|
(3,801
|
)
|
641
|
|
(587
|
)
|
Changes in operating assets and liabilities
(note 18)
|
|
58,524
|
|
5,545
|
|
1,079
|
|
Net cash used in continuing operating
activities
|
|
(1,272
|
)
|
(25,662
|
)
|
(15,870
|
)
|
Net cash provided by discontinued operating
activities
|
|
|
|
132
|
|
23,827
|
|
Net cash provided by (used in) operating
activities
|
|
(1,272
|
)
|
(25,530
|
)
|
7,957
|
|
Cash flows from financing
activities
|
|
|
|
|
|
|
|
Repayment of long-term debt and long-term
payable
|
|
(784
|
)
|
(751
|
)
|
(718
|
)
|
Issuance of shares pursuant to the exercise
of stock options
|
|
|
|
33
|
|
81
|
|
Share issue expenses
|
|
(408
|
)
|
(366
|
)
|
(112
|
)
|
Net cash used in continuing financing
activities
|
|
(1,192
|
)
|
(1,084
|
)
|
(749
|
)
|
Net cash used in discontinued financing
activities
|
|
|
|
(230
|
)
|
(7,825
|
)
|
Net cash used in financing activities
|
|
(1,192
|
)
|
(1,314
|
)
|
(8,574
|
)
|
Cash flows from investing
activities
|
|
|
|
|
|
|
|
Purchase of short-term investments
|
|
(1,664
|
)
|
(6,180
|
)
|
(79,300
|
)
|
Proceeds from sale and maturity of
short-term investments
|
|
30,027
|
|
33,405
|
|
49,267
|
|
Proceeds from sale of a long-term
investment
|
|
|
|
|
|
1,387
|
|
Business acquisitions, net of cash and cash
equivalents acquired
|
|
|
|
|
|
(32
|
)
|
Purchase of property, plant and equipment
|
|
(1,147
|
)
|
(3,702
|
)
|
(1,845
|
)
|
Net proceeds from sale of long-lived assets
held for sale
|
|
14,854
|
|
|
|
|
|
Proceeds from sale of property, plant and
equipment
|
|
|
|
729
|
|
|
|
Acquisition of amortizable intangible assets
|
|
(67
|
)
|
(67
|
)
|
(5
|
)
|
Net cash provided by (used in) continuing
investing activities
|
|
42,003
|
|
24,185
|
|
(30,528
|
)
|
Net cash provided by discontinued investing
activities
|
|
|
|
2,238
|
|
11,878
|
|
Net cash provided by (used in) in investing
activities
|
|
42,003
|
|
26,423
|
|
(18,650
|
)
|
Effect of exchange rate
changes on cash and cash equivalents
|
|
(585
|
)
|
1,337
|
|
1,356
|
|
Net change in cash and cash
equivalents
|
|
38,954
|
|
916
|
|
(17,911
|
)
|
Cash and cash equivalents
Beginning of year
|
|
10,272
|
|
9,356
|
|
27,267
|
|
Cash and cash equivalents
End of year
|
|
49,226
|
|
10,272
|
|
9,356
|
|
Cash and cash equivalents
related to:
|
|
|
|
|
|
|
|
Continuing operations
|
|
49,226
|
|
10,272
|
|
8,939
|
|
Discontinued operations
|
|
|
|
|
|
417
|
|
|
|
49,226
|
|
10,272
|
|
9,356
|
|
Cash and
cash equivalents components:
|
|
|
|
|
|
|
|
Cash
|
|
13,256
|
|
10,195
|
|
9,174
|
|
Cash equivalents
|
|
35,970
|
|
77
|
|
182
|
|
|
|
49,226
|
|
10,272
|
|
9,356
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
9
Æterna
Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31,
2008, 2007 and 2006
(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
|
|
|
|
|
|
The accompanying consolidated financial
statements have been prepared in accordance with Canadian generally accepted
accounting principles (Canadian GAAP). These consolidated financial
statements differ in certain respects from those prepared in accordance with
United States generally accepted principles (US GAAP). The recognition,
measurement and disclosure differences as they relate to the Company are
described in note 27 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:
|
|
|
|
|
|
In May 2007, the Accounting Standards
Board amended CICA Handbook 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 is not limited to, 12 months from the balance sheet dates.
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 Company adopted these amendments, which were
effective for years beginning on or after January 1, 2008. Managements
assessment took into account the sale of rights to future royalties described
in note 7, the signing of the development, commercialization and license
agreement with sanofi-aventis on March 5, 2009, which is disclosed in
note 26, as well as the Companys strategic plan and corresponding budgets
for 2009, 2010 and 2011. As a result of this assessment, management
believes that the Company has sufficient financial resources to fund planned
expenditures and other working capital needs for at least the next 12-month
period from the balance sheet date.
|
|
|
|
|
|
Basis of consolidation
|
|
|
|
|
|
These consolidated financial statements
include all companies in which the Company, directly or indirectly holds 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
|
10
Æterna
Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31,
2008, 2007 and 2006
(tabular amounts in thousands of US dollars,
except share/option and per share/option data and as
otherwise noted)
|
|
accounting is used to account for
acquisitions. All intercompany balances and transactions are eliminated on
consolidation.
|
|
|
|
|
|
Investments in affiliated companies
|
|
|
|
|
|
Where applicable, investments in companies
over which the Company exercises significant influence (generally where the
Company holds 20% to 50% of the investees voting rights) but over which it
does not exercise control are accounted for using the equity method. The
Companys share of its affiliated results of operations is recognized in the
statement of earnings (loss). Also where applicable, investments where the
Company holds less than 20% of the investees voting rights and does not have
the ability to exercise significant influence are accounted for using the
cost method.
|
|
|
|
|
|
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 reported
in the financial statements. Those estimates and assumptions also affect the
disclosure of contingencies at the date of the financial statements as well
as the reported amounts of revenues and expenses during the reported years.
Significant estimates are generally made in connection with the calculation
of revenues, research and development expenses, stock-based compensation
cost, as well as in determining the allowance for doubtful accounts,
inventory and provisions for obsolete inventory, future income tax assets and
liabilities, the useful lives of property, plant and equipment and intangible
assets with finite lives, the valuation of intangible assets and goodwill,
the fair value of stock options granted, employee future benefits and certain
accrued liabilities. The Company bases its estimates on historical
experience, where relevant, and on various other assumptions that management
believes to be reasonable under the circumstances. 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 of 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 subsidiary
|
|
|
|
|
|
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 to their 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 remeasured using the exchange rate in effect
on the date of the balance sheet. Revenues and expenses are
|
11
Æterna
Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31,
2008, 2007 and 2006
(tabular amounts in thousands of US dollars,
except share/option and per share/option data and as
otherwise noted)
|
|
re-measured at the monthly average exchange
rate. Transaction gains and losses resulting from such re-measurement are
reflected in the statements of earnings (loss).
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
Cash and cash equivalents consist of cash
on hand and balances with banks, excluding bank advances, as well as
short-term, interest-bearing deposits with a term of less than three months
at the acquisition date.
|
|
|
|
|
|
Short-term investments
|
|
|
|
|
|
Short-term investments consist mainly of
notes and bonds which do not meet the Companys definition of cash and cash
equivalents.
|
|
|
|
|
|
In accordance with the new requirements of
the Canadian Institute Chartered Accountants (CICA) Handbook
Section 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 (loss). See also 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 net realizable value, which is defined as the estimated selling price in
the ordinary course of business less the estimated costs of completion and
the estimated costs necessary to make the sale. Cost is determined on a
first-in, first-out basis. The cost of finished goods and work in progress
includes raw materials, labour and manufacturing overhead under the
absorption costing method.
|
|
|
|
|
|
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
|
12
Æterna
Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31,
2008, 2007 and 2006
(tabular amounts in thousands of US dollars,
except share/option and per share/option data and as
otherwise noted)
|
|
Royalty sale transaction
expenses and other deferred charges
|
|
|
|
|
|
The Company has deferred direct and
incremental costs associated with its transaction to sell its future rights
to a royalty stream and are accounted for as discussed in note 7.
|
|
|
|
|
|
Other deferred charges relate to deferred
upfront payments made related to research and development collaborations.
These charges are included in deferred charges and other long-term assets and
are amortized in the consolidated statement of earnings (loss) over the
duration of the research and development work related to the contracts. Also
included in deferred charges and other long-term assets are transaction costs
that have been incurred in connection with a shelf prospectus, which was
filed in 2007. These costs are not amortized but instead will be included in
share capital once proceeds are raised in a related transaction. If no
transaction is consummated by the expiry date of the shelf prospectus, which
will occur at the end of 2009 or earlier, should management determine that no
transaction will be pursued, these transaction costs will be recorded as an
expense in the consolidated statement of earnings (loss) (see also note 10).
|
|
|
|
|
|
Intangible assets
|
|
|
|
|
|
Intangible assets with finite useful lives
consist of in-process research and development, acquired in business
combinations, patents and trademarks, technology and other. Patents and
trademarks comprise costs, including professional fees incurred in connection
with 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 but is tested
for impairment annually 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
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 of a reporting unit exceeds
its fair value, an impairment loss is recognized in an amount equal to the
excess. 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 carrying values 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,
|
13
Æterna
Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31,
2008, 2007 and 2006
(tabular amounts in thousands of US dollars,
except share/option and per share/option data and as
otherwise noted)
|
|
which in turn 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 (loss) as it arises.
|
|
|
|
|
|
|
|
For defined contribution plans, the pension expenses recorded in the
statement of earnings (loss) is the amount of contribution the Company is
required to pay for services rendered by employees.
|
|
|
|
|
|
Deferred revenues
|
|
|
|
|
|
Deferred revenues relate to the unamortized
portion of the cash proceeds received in connection with the Companys sale
of future rights to a royalty stream. Those proceeds are recognized as
royalty revenue based on the units-of-revenue method, as discussed in note
7. Also included in deferred revenues are upfront payments received primarily
in connection with license cooperation agreements. Those payments are
recognized as revenues, as discussed below.
|
|
|
|
|
|
Revenue recognition
|
|
|
|
|
|
The Company is currently in a phase in
which potential products are being further developed or marketed jointly with
strategic partners. 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 collectibility 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
|
14
Æterna
Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31,
2008, 2007 and 2006
(tabular amounts in thousands of US dollars,
except share/option and per share/option data and as
otherwise noted)
|
|
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, collectibility 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.
|
|
|
|
|
|
As discussed in note 7, the Company has
sold its rights to certain future royalties. The Company defers recognition
of the proceeds it receives for the royalty stream and recognizes these
deferred revenues over the life of the license agreement, pursuant to the
units-of-revenue method.
|
|
|
|
|
|
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.
|
|
|
|
|
|
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 on the date of grant using the Black-Scholes option pricing model
and stock-based compensation costs are 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.
|
|
|
|
|
|
Income taxes
|
|
|
|
|
|
The Company follows the liability method of
accounting for income taxes. Under this method, future income tax assets and
liabilities are determined based on the temporary 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.
|
15
Æterna
Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31,
2008, 2007 and 2006
(tabular amounts in thousands of US dollars,
except share/option and per share/option data and as
otherwise noted)
|
|
The Company establishes a valuation
allowance against future income tax assets if, based on available
information, it is more likely than not that some or all of the future income
tax assets will not 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, in which case, the costs are
capitalized and amortized to earnings 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 Quebec (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
Quebec, at a rate of 35% of eligible base amounts.
|
|
|
|
|
|
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.
|
|
|
|
|
|
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 and
pronouncements
|
|
|
|
|
|
a)
|
|
Accounting changes adopted in 2008
|
|
|
|
|
|
|
|
|
|
On January 1, 2008, the Company adopted CICA Handbook Section 1535,
Capital Disclosures
; Section 3862,
Financial Instruments Disclosures;
Section 3863,
Financial Instruments
Presentation;
and Section 3031,
Inventories
, which replaces Section 3030.
|
16
Æterna
Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31,
2008, 2007 and 2006
(tabular amounts in thousands of US dollars,
except share/option and per share/option data and as
otherwise noted)
|
|
|
|
Section 1535,
Capital
Disclosures
,
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 (see note 23).
|
|
|
|
|
|
|
|
|
|
Section 3862 and Section 3863, which replace Section 3861,
Financial Instruments Disclosure and
Presentation
, require the disclosure of additional details 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 (see note 24).
|
|
|
|
|
|
|
|
|
|
The CICA issued Section 3031,
Inventories
, which replaced Section 3030
with the same title. This standard requires that inventories 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. Section 3031
also requires the reversal of previous write-downs to net realizable value
when there is a subsequent increase in the value of inventories. The Company
has adopted this standard effective January 1, 2008, and there has been
no impact on the consolidated financial statements.
|
|
|
|
|
|
|
|
b)
|
|
Future Accounting Changes
|
|
|
|
|
|
|
|
|
|
In February 2008, the CICA issued
Handbook Section 3064,
Goodwill and Intangible
Assets
. This standard provides guidance on the recognition of
intangible assets and the criteria for asset recognition, clarifying the
applications of the concept of matching revenues and expenses, whether these
assets are separately acquired or are developed internally. The standard will
apply to the Companys interim and annual financial statements for periods
beginning on January 1, 2009. The Company does not expect that adoption
of this standard will have a significant impact on the consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
In January 2009, the CICA issued
Handbook Section 1582, Business Combinations, which replaces the
existing standards. This section establishes the standards for the accounting
of business combinations and states that all assets and liabilities of an
acquired business will be recorded at fair value. Obligations for contingent
considerations and contingencies will also be recorded at fair value at the
acquisition date. The standard also states that acquisition-related costs
will be expensed as incurred and that restructuring charges will be expensed
in the periods after the acquisition date. This standard is applied
prospectively to business combinations with acquisition dates on or after
January 1, 2011. Earlier adoption is permitted. The Company is currently
evaluating the impact, if any, that adoption of this standard will have on
its consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
In January 2009, the CICA issued
Handbook Section 1601,
Consolidated Financial
Statements
, which replaces the existing standards and establishes
the standards for preparing consolidated financial statements and is
effective for 2011. Earlier adoption is permitted. The Company is currently
evaluating the impact, if any, that adoption of this standard will have on
its consolidated financial statements.
|
17
Æterna
Zentaris Inc.
Notes to
Consolidated Financial Statements
December 31,
2008, 2007 and 2006
(tabular amounts in thousands of US dollars,
except share/option and per share/option data and as
otherwise noted)
|
|
|
|
In January 2009, the CICA issued
Handbook Section 1602,
Non-controlling
Interests
, which establishes standards for the accounting of
non-controlling interests of a subsidiary in the preparation of consolidated
financial statements subsequent to a business combination. This standard is
effective for 2011. Earlier adoption is permitted. The Company is currently
evaluating the impact, if any, that adoption of this standard will have on
its consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
In January 2009, the CICAs Emerging
Issue Committee (EIC) issued Abstract EIC-173,
Credit Risk and the Fair Value of Financial
Assets and
Liabilities
, which requires entities to take both counterparty
credit risk and their own credit risk into account when measuring the fair
value of financial assets and liabilities, including derivatives. EIC-173
will be effective for interim and annual periods beginning on or after January 1,
2009. The Company does not expect that adoption of this guidance will have a
significant impact on its consolidated financial statements.
|
|
|
|
|
|
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 approximately $45,000,000. 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 (loss) 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.
|
18
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
This special distribution was 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 was reduced by the fair value of the Atrium shares distributed of
$137,959,000, the long-term investment in Atrium of $57,128,000 was 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, was recorded as Other Capital in the amount of $71,122,000.
For the year ended December 31, 2006,
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:
|
|
$
|
|
|
|
|
|
Revenues
|
|
239,535
|
|
Earnings before the following
items
|
|
28,360
|
|
Gain on disposal of Atrium shares
|
|
29,248
|
|
Income tax expense (a)
|
|
(19,923
|
)
|
Loss on dilution of investments (b)
|
|
(628
|
)
|
Earnings before
non-controlling interest
|
|
37,057
|
|
Non-controlling interest
|
|
(10,967
|
)
|
Net earnings from
discontinued operations
|
|
26,090
|
|
(a)
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)
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.
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
19
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
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 has been
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 $600,000 of 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 contingent
consideration is based on the Echelon reaching specific sales levels in 2008
and 2009, and no contingent consideration is payable relative to 2008.
For the years ended December 31, 2007 and
2006, consolidated revenues and expenses of Echelon have been reclassified from
continuing operations to discontinued operations, as follows:
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Revenues
|
|
2,358
|
|
2,593
|
|
Loss before the following
items
|
|
(206
|
)
|
(369
|
)
|
|
|
|
|
|
|
Goodwill impairment
|
|
(500
|
)
|
|
|
Loss on disposal of Echelon shares, net of
cumulative translation adjustment
|
|
(44
|
)
|
|
|
Income tax recovery
|
|
491
|
|
92
|
|
Net loss from discontinued
operations
|
|
(259
|
)
|
(277
|
)
|
20
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(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
In
September 2007, 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 can be
summarized 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
|
|
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 realizable value.
Accordingly, during 2006, an amount of $1,060,856 was recorded as an impairment
loss included in depreciation of property, plant and equipment.
In
December 2007, management evaluated the net realizable value of the Quebec
City building and land based on certain preliminary offers received from third
parties. That evaluation resulted in the determination that the assets held for
sale were impaired, and, accordingly, the Company recorded an impairment charge
of $735,000 against the assets held for sale.
On March 1, 2008, the Company entered into
a definitive 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, payable in cash, subject
to certain post-closing purchase price adjustments. The transaction, which
closed on March 31, 2008, generated net cash proceeds of $8,309,000,
resulting in a gain of $775,000.
On June 26, 2008, the Company sold the
Quebec City building and land for a gross amount of $7,061,000, payable in
cash. The net proceeds received amounted to $6,545,000, resulting in an
additional loss on sale of $810,000.
21
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
In connection with the sale of the Quebec
City building and land, the Company entered into a long-term lease agreement
with the principal tenant of the building.
As part of the agreement, the Company agreed to pay the principal tenant
CAN$300,000 (approximately $246,305) as an incentive and service fee. This fee is included in the additional loss
on sale, and the resulting payable is non interest-bearing and is due in
bi-annual instalments of CAN$30,000 (approximately $24,630) over the next five
years (see also note 15).
7
Sale of Cetrotide
®
royalty stream
In June 2003, the Company had amended
certain sections of a license and supply agreement with ARES Trading S.A. (Merck
Serono) in which the latter was granted
worldwide marketing, distribution and selling
rights, except in Japan, for Cetrotide
®
, a compound used for
in vitro
fertilization (referred to as the License Agreement). Under the License Agreement,
Merck Serono had agreed to pay certain lump sum
payments to the Company each calendar year up to and including December 31,
2010 as well as certain variable royalties through the expiry date of Companys
underlying patent rights.
In November 2008, the
Company entered into a purchase and sale agreement (
PSA) with
Cowen Healthcare Royalty Partners L.P. (Cowen) relating to the Companys
rights to royalties on future sales of Cetrotide
®
covered by the License Agreement.
In connection with the PSA,
which was effective for royalty determination purposes on October 1, 2008
and finalized in December 2008, the Company received $52,500,000 from
Cowen, less certain transaction costs of $1,000,000 that had been advanced by
Cowen to certain third-party firms and institutions on the Companys behalf,
resulting in net proceeds of $51,500,000.
Under the terms of the PSA, the Company is entitled to an additional
payment of $2,500,000 contingent on 2010 net sales of Cetrotide
®
reaching a specified level.
Per the PSA, if cetrorelix, the
active substance in Cetrotide
®
, is approved for sale by
European regulatory authorities in an indication other than
in vitro
fertilization, the Company has agreed to make a
one-time cash payment to Cowen in an amount ranging from $5,000,000 up to a
maximum of $15,000,000. The amount which
may be due to Cowen will be higher in proportion to the timing of the products
receiving European regulatory approval; that is, the earlier the product
receives regulatory approval, the higher the amount payable to Cowen will be.
Also per the PSA, for each
calendar quarter in which a royalty rate reductiondefined as the actual
reduction by Merck Serono, for any calendar quarter(s), of the rate applied in
calculating variable royalties under the License Agreement, to amounts less
than pre-established percentageshas occurred or is continuing, the Company
will pay Cowen a quarterly make-whole payment in an amount equal to the lesser
of (i) the variable royalties in respect of such quarter that would have
been received by Cowen if the aforementioned royalty rate reduction had not
occurred or been continuing, and (ii) the difference of $15,000,000 less
Cowens net reduction payments, as defined.
Pursuant to the aforementioned
transactions, the Company has certain obligations in the royalty arrangement,
including the supply of Cetrotide
®
to Merck Serono, the payment of royalties to a
third party under the License Agreement, overseeing Merck-Seronos compliance
with the License Agreement,
22
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
cooperation in handling any
adverse claims or litigation involving the License Agreement and monitoring and
defending any patent or trademark infringement.
The Company has recorded the
proceeds, as per the provisions of Issue No. 88-18, Sales of Future
Revenues, as promulgated by the Financial Accounting Standards Boards (FASB)
Emerging Issues Task Force (EITF) in the United States, as deferred revenues,
which are recognizable as royalty revenues over the life of the License
Agreement under the
units-of-revenue method.
Under that method, periodic royalty revenues are calculated by multiplying the
ratio of the remaining deferred revenue amount to the total estimated remaining
royalties that Merck Serono is expected to pay to Cowen over the term of the
underlying arrangement by the royalty payments due to Cowen for the period.
The Company has and will
continue to recognize royalty expenses in each period based on the transaction
costs, which have been capitalized as deferred charges in the accompanying
balance sheet as of December 31, 2008 (see note 10), in the same manner
and over the same period in which the related deferred revenues are recognized
as royalty revenues.
During the quarter ended December 31,
2008, the Company has recorded approximately $1,355,000 as royalty revenues and
$124,000 as royalty expense, which is included in selling, general and
administrative expenses in the accompanying consolidated statement of earnings
(loss).
8
Other receivables
|
|
As at December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
$
|
|
$
|
|
Interest
|
|
|
|
272
|
|
Grants
|
|
|
|
1,060
|
|
Research and development tax credits
recoverable
|
|
82
|
|
252
|
|
Commodity taxes
|
|
870
|
|
453
|
|
Other
|
|
148
|
|
1,007
|
|
|
|
1,100
|
|
3,044
|
|
9
Inventory
|
|
As at December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Raw materials
|
|
2,367
|
|
3,399
|
|
Work in progress
|
|
682
|
|
1,602
|
|
Finished goods
|
|
336
|
|
405
|
|
|
|
3,385
|
|
5,406
|
|
23
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(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, 2008,
2007 and 2006, cost of sales, as presented in the accompanying consolidated
statements of earnings (loss), almost exclusively represents the amount of
inventory recognized as an expense during the year.
In December 2008, the Company wrote down
certain inventory items, consisting predominantly of raw materials, to their
estimated net realizable values. The adjustment, which amounted to
approximately $726,000 (nil in 2007), has been recorded as an additional cost
of sales in the accompanying consolidated statement of earnings (loss).
10
Deferred charges and other
long-term assets
|
|
As at December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Royalty sale transaction expenses (notes 2
and 7)
|
|
4,655
|
|
|
|
Deferred charges
|
|
929
|
|
1,051
|
|
Other
|
|
375
|
|
390
|
|
|
|
5,959
|
|
1,441
|
|
Included in the above deferred charges as at December 31,
2008 is $680,111 of cost related to the filing of a shelf prospectus ($392,000
as at December 31, 2007).
11
Property, plant and equipment
|
|
As at December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
Cost
|
|
Accumulated
depreciation
|
|
Cost
|
|
Accumulated
depreciation
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
9,384
|
|
4,737
|
|
9,379
|
|
3,923
|
|
Office furniture
|
|
1,394
|
|
410
|
|
1,261
|
|
648
|
|
Computer equipment
|
|
1,071
|
|
874
|
|
1,174
|
|
805
|
|
Automotive equipment
|
|
|
|
|
|
38
|
|
36
|
|
Leasehold improvements
|
|
1,139
|
|
285
|
|
1,170
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,988
|
|
6,306
|
|
13,022
|
|
5,562
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
6,306
|
|
|
|
5,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount
|
|
6,682
|
|
|
|
7,460
|
|
|
|
24
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
12
Intangible assets
|
|
As at December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
Cost
|
|
Accumulated
amortization
|
|
Cost
|
|
Accumulated
depreciation
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
In-process research and development,
patents and trademarks
|
|
42,146
|
|
18,391
|
|
47,758
|
|
17,514
|
|
Technology and other
|
|
767
|
|
628
|
|
740
|
|
593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,913
|
|
19,019
|
|
48,498
|
|
18,107
|
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated amortization
|
|
19,019
|
|
|
|
18,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount
|
|
23,894
|
|
|
|
30,391
|
|
|
|
In 2002, the Company granted an exclusive
license to Ardana Bioscience Ltd. (Ardana) for the development and
commercialization of 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 agreement with Ardana provides, among
other things, certain guaranteed payments and additional milestone payments
upon successful achievement of a certain level of sales and low single-digit
royalties on future worldwide net sales.
In June 2008,
Ardana communicated that it was entering into voluntary administration, and,
consequently, clinical studies and future development efforts were suspended.
Additional correspondence was received in January 2009 from Ardanas
appointed administrators, providing further evidence that future cash flows are
no longer likely to be received by the Company in connection with the
aforementioned license agreement, on which the recoverability of teverelix
exclusively depends.
Given
these facts,
the Company has determined that
teverelix was impaired, and consequently, an impairment charge to amortize the
full remaining carrying value of the intangible asset, or approximately
$2,362,000, was recorded in the accompanying consolidated statement of earnings
(loss), and the asset was written off. Additionally, the remaining balance of
deferred revenues, amounting to approximately $1,047,000, was fully recognized
in the accompanying consolidated statement of earnings (loss).
Amortization expense for intangible assets in
each of the next five fiscal years will amount to approximately $2,808,040 in
2009, and $2,780,430 in 2010, 2011, 2012 and 2013.
25
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
13
Goodwill
The change in the carrying value is as
follows:
|
|
Continuing
operations
|
|
Discontinued
operations
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Balance as at
December 31, 2006
|
|
9,509
|
|
1,239
|
|
|
|
|
|
|
|
Impact of foreign exchange rate changes
|
|
983
|
|
212
|
|
Reduction and impairment of goodwill
related to disposal of Echelon (note 5)
|
|
|
|
(1,451
|
)
|
|
|
|
|
|
|
Balance as at
December 31, 2007
|
|
10,492
|
|
|
|
|
|
|
|
|
|
Impact of foreign exchange rate changes
|
|
(409
|
)
|
|
|
|
|
|
|
|
|
Balance as at
December 31, 2008
|
|
10,083
|
|
|
|
14
Accounts payable and accrued
liabilities
|
|
As at December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Trade payables
|
|
10,256
|
|
11,404
|
|
Salaries and employee benefits
|
|
899
|
|
1,628
|
|
Other accrued liabilities
|
|
2,535
|
|
3,052
|
|
|
|
|
|
|
|
|
|
13,690
|
|
16,084
|
|
26
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
15
Long-term debt and payable
|
|
As at December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
$
|
|
$
|
|
Loan from the federal and provincial
governments, nominal value of CAN$800 discounted at an effective rate of 8.43%
(nil in 2008 and CAN$769 in 2007) non-interest bearing, payable in five
annual equal and consecutive instalments since July 2004.
|
|
|
|
775
|
|
Long-term payable (note 6)
|
|
221
|
|
|
|
|
|
221
|
|
775
|
|
Less: Current portion
|
|
49
|
|
775
|
|
|
|
|
|
|
|
|
|
172
|
|
|
|
16
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 dependent pensions.
The following table provides a reconciliation
of the changes in the plans accrued benefits obligations:
|
|
Pension benefit plans
|
|
Other benefit plans
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation Beginning of year
|
|
8,390
|
|
7,547
|
|
6,932
|
|
794
|
|
620
|
|
523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current service cost
|
|
216
|
|
352
|
|
293
|
|
47
|
|
29
|
|
39
|
|
Interest cost
|
|
473
|
|
269
|
|
293
|
|
44
|
|
52
|
|
22
|
|
Actuarial loss (gain)
|
|
544
|
|
(490
|
)
|
(674
|
)
|
230
|
|
104
|
|
53
|
|
Benefits paid
|
|
(89
|
)
|
(70
|
)
|
(64
|
)
|
(163
|
)
|
(81
|
)
|
(70
|
)
|
Effect of foreign currency exchange rate
changes
|
|
(357
|
)
|
782
|
|
767
|
|
(37
|
)
|
70
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation End of year
|
|
9,177
|
|
8,390
|
|
7,547
|
|
915
|
|
794
|
|
620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses (recovery) recognized
|
|
1,233
|
|
131
|
|
(88
|
)
|
321
|
|
185
|
|
114
|
|
27
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(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 benefit obligations are as follows:
|
|
Pension benefit plans
|
|
Other benefit plans
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate for expenses
|
|
5.60
|
|
4.50
|
|
4.00
|
|
5.60
|
|
4.50
|
|
4.00
|
|
Discount rate for liabilities
|
|
5.60
|
|
5.70
|
|
4.50
|
|
5.60
|
|
5.70
|
|
4.50
|
|
Pension benefits increase
|
|
2.00
|
|
2.00
|
|
1.25
|
|
2.00
|
|
2.00
|
|
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, 2008.
The next actuarial reports are planned for December 2009.
In accordance with the assumptions used as at
December 31, 2008, the benefits expected to be paid in each of the next
five fiscal years will amount to $278,391 in 2009, $283,490 in 2010, $322,858
in 2011, $453,659 in 2012 and $477,081 in 2013. Furthermore, total benefits
amounting to $2,724,020 are expected to be paid from 2014 to 2018.
Cash required in the next year to fund the
plans will approximate the amount of expected benefits.
Defined contribution plans
Total expenses for defined contribution
pension plans amounted to $344,237 in 2008 ($285,824 in 2007 and $263,810 in
2006).
The Company sponsors a matching defined
benefit plan in its Canadian headquarters. Under this plan, the Company may
contribute amounts equal to a percentage of employee contributions to the plan.
During the year ended December 31, 2008, matching contributions to the
plan totalled $67,184. For the years ended December 31, 2007 and 2006, the
Company did not record any contributions.
The Company also sponsors a 401K plan in its
US 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 contributions. During the year ended December 31,
2008, matching contributions to the plan amounted to $69,155. During the years
ended December 31, 2007 and 2006, the Company did not record any
contributions.
Total cash payments for employee future benefits
in 2008, consisting of cash contributed by the Company to its defined
contribution plans as well as direct payments to retired employees, amount to
$595,638 ($436,696 in 2007 and $398,340 in 2006).
28
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
17
Share capital
(a)
Authorized
Unlimited number of shares of the following
classes:
Common, voting and participating, one vote
per share, no par value Preferred, first and second ranking, issuable in
series, with rights and privileges specific to each class.
(b)
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. Consequently, stock-based compensation costs of $26,000 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), respectively,
exercised early their right to convert the entirety of their convertible term
loans in the principal amount of CAN$12,500,000 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 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.
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
(loss) and was included in the accretion on convertible term loans in the
statement of cash flows.
(c)
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 related parties, acquires or announces his/her or 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.
29
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
(d)
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 who provide
services to the Company. The total number of common shares that may be issued
under the Stock Option Plan, as per a resolution approved by the Companys
Board of Directors on March 4, 2008, cannot exceed eleven point four
percent (11.4%) of the total number of issued and outstanding common shares at
any given time.
On June 26, 2008, the Toronto Stock
Exchange accepted a stock option pool totalling 6,063,371. In 2008, 735,000
options were granted in Canadian dollars, and no options were granted in US
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:
Canadian dollar denominated awards
|
|
Years ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
Number
|
|
Weighted
average
exercise
price
(CAN$)
|
|
Number
|
|
Weighted
average
exercise
price
(CAN$)
|
|
Number
|
|
Weighted
average
exercise
price
(CAN$)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Beginning of year (*)
|
|
4,136,092
|
|
3.83
|
|
3,490,092
|
|
4.00
|
|
3,843,592
|
|
6.16
|
|
Granted
|
|
735,000
|
|
0.59
|
|
815,000
|
|
3.24
|
|
45,000
|
|
6.41
|
|
Exercised
|
|
|
|
|
|
(18,000
|
)
|
1.96
|
|
(22,000
|
)
|
3.98
|
|
Forfeited
|
|
(165,000
|
)
|
3.41
|
|
(151,000
|
)
|
4.93
|
|
(30,500
|
)
|
6.21
|
|
Expired
|
|
(215,333
|
)
|
4.51
|
|
|
|
|
|
(346,000
|
)
|
7.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance End of year
|
|
4,490,759
|
|
3.28
|
|
4,136,092
|
|
3.83
|
|
3,490,092
|
|
6.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable End of year
|
|
3,462,441
|
|
3.91
|
|
3,300,593
|
|
4.02
|
|
2,736,099
|
|
5.88
|
|
(*)
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 in 2006 and 2007 was CAN$68,959 and CAN$24,040,
respectively. There is no tax benefit realized by the Company, since the
compensation cost related to stock options is not deductible for income tax
purposes.
30
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
The
following tables summarize the stock options outstanding and exercisable as at December 31,
2008:
|
|
Options outstanding
|
|
Exercise price
(CAN$)
|
|
Number
|
|
Weighted average
remaining
contractual life
(years)
|
|
Weighted average
exercise price
(CAN$)
|
|
Global
intrinsic value
(CAN$)
|
|
|
|
|
|
|
|
|
|
|
|
0.55 to 1.70
|
|
735,000
|
|
9.91
|
|
0.59
|
|
12
|
|
1.71 to 2.40
|
|
1,018,093
|
|
6.03
|
|
1.77
|
|
|
|
2.41 to 3.60
|
|
863,500
|
|
5.25
|
|
3.22
|
|
|
|
3.61 to 5.00
|
|
790,333
|
|
5.04
|
|
4.09
|
|
|
|
5.01 to 8.88
|
|
1,083,333
|
|
4.77
|
|
5.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,490,759
|
|
6.04
|
|
3.28
|
|
12
|
|
|
|
Options currently exercisable
|
|
Exercise price
(CAN$)
|
|
Number
|
|
Weighted average
exercise price
(CAN$)
|
|
Global
intrinsic
value
(CAN$)
|
|
|
|
|
|
|
|
|
|
0.55 to 1.70
|
|
|
|
|
|
|
|
1.71 to 2.40
|
|
808,100
|
|
1.75
|
|
|
|
2.41 to 3.60
|
|
863,500
|
|
3.22
|
|
|
|
3.61 to 5.00
|
|
707,008
|
|
4.02
|
|
|
|
5.01 to 8.88
|
|
1,083,833
|
|
5.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,462,441
|
|
3.91
|
|
|
|
31
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
US dollar denominated
awards
|
|
Years ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
Number
|
|
Weighted
average
exercise
price
(US$)
|
|
Number
|
|
Weighted
average
exercise
price
(US$)
|
|
Number
|
|
Weighted
average
exercise
price
(US$)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Beginning of year
|
|
870,000
|
|
2.79
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
870,000
|
|
2.79
|
|
|
|
|
|
Forfeited
|
|
(556,666
|
)
|
2.80
|
|
|
|
|
|
|
|
|
|
Balance End of year
|
|
313,334
|
|
2.76
|
|
870,000
|
|
2.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable End of year
|
|
176,669
|
|
3.08
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
|
|
Exercise price
(US$)
|
|
Number
|
|
Weighted average
remaining contractual
life (years)
|
|
Weighted average
exercise price
(US$)
|
|
Global
intrinsic
value
|
|
|
|
|
|
|
|
|
|
|
|
1.68 to 1.87
|
|
135,000
|
|
8.93
|
|
1.82
|
|
|
|
1.88 to 3.96
|
|
178,334
|
|
8.34
|
|
3.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
313,334
|
|
8.59
|
|
2.76
|
|
|
|
|
|
Options currently exercisable
|
|
Exercise price
(US$)
|
|
Number
|
|
Weighted average
exercise price
(US$)
|
|
Global
intrinsic
value
|
|
|
|
|
|
|
|
|
|
1.68 to 1.87
|
|
45,001
|
|
1.82
|
|
|
|
1.88 to 3.96
|
|
131,668
|
|
3.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176,669
|
|
3.08
|
|
|
|
32
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
As at December 31, 2008, the total
compensation cost related to nonvested stock options not yet recognized
amounted to $347,390 ($1,366,409 in 2007). This amount is expected to be
recognized over a weighted average period of 1.56 years (1.88 years in 2007).
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,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
Nil
|
|
Nil
|
|
Nil
|
|
Expected volatility
|
|
60.0
|
%
|
57.2
|
%
|
58.1
|
%
|
Risk-free interest rate
|
|
1.98
|
%
|
3.88
|
%
|
4.06
|
%
|
Expected life (years)
|
|
3.04
|
|
4.62
|
|
5.77
|
|
Weighted average grant date fair value
|
|
CAN$0.25
|
|
US$1.93 and CAN$2.25
|
|
CAN$3.67
|
|
33
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
18
Statements of cash flows
|
|
Years ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
$
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
4,353
|
|
1,371
|
|
2,686
|
|
Inventory
|
|
1,171
|
|
148
|
|
650
|
|
Prepaid expenses and other current assets
|
|
(55
|
)
|
(708
|
)
|
263
|
|
Deferred charges and other long-term assets
|
|
(4,689
|
)
|
|
|
(991
|
)
|
Accounts payable and accrued liabilities
|
|
(1,089
|
)
|
5,340
|
|
1,848
|
|
Income taxes
|
|
775
|
|
(1,250
|
)
|
(5,260
|
)
|
Deferred revenues
|
|
58,058
|
|
644
|
|
1,883
|
|
|
|
|
|
|
|
|
|
|
|
58,524
|
|
5,545
|
|
1,079
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
$
|
|
Additional information
|
|
|
|
|
|
|
|
Interest paid
|
|
|
|
|
|
|
|
From continuing operations
|
|
29
|
|
|
|
4
|
|
From discontinued operations
|
|
|
|
9
|
|
7,784
|
|
Income taxes paid (recovered)
|
|
|
|
|
|
|
|
From continuing operations
|
|
293
|
|
(937
|
)
|
5,756
|
|
From discontinued operations
|
|
|
|
7
|
|
8,698
|
|
34
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
19
Income taxes
The
reconciliation of the combined Canadian federal and Quebec provincial income
tax rate to the income tax (expense) recovery from continuing operations is as
follows:
|
|
Years ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Combined federal and provincial statutory
income tax rate
|
|
30.90
|
%
|
32.02
|
%
|
32.02
|
%
|
|
|
|
|
|
|
|
|
|
|
$
|
|
$
|
|
$
|
|
Income tax recovery based on statutory
income tax rate
|
|
18,120
|
|
10,886
|
|
6,872
|
|
Change in valuation allowance
|
|
(17,554
|
)
|
(6,963
|
)
|
22,644
|
|
Minimum tax attributable to German
subsidiary
|
|
(1,175
|
)
|
|
|
|
|
Accretion on convertible term loans
|
|
|
|
|
|
(258
|
)
|
Stock-based compensation costs
|
|
(112
|
)
|
(635
|
)
|
(679
|
)
|
Difference in statutory income tax rate of
foreign subsidiaries
|
|
576
|
|
(16
|
)
|
994
|
|
Permanent difference attributable to
unrealized foreign exchange gain
|
|
494
|
|
|
|
|
|
Change in enacted rates used
|
|
(985
|
)
|
(1,345
|
)
|
2,428
|
|
Tax loss consolidation strategy
|
|
|
|
|
|
(2,376
|
)
|
Other
|
|
(539
|
)
|
34
|
|
(588
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,175
|
)
|
1,961
|
|
29,037
|
|
Loss before income taxes
The
loss before income taxes from continuing operations is allocated as follows:
|
|
Years ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Canada
|
|
(5,103
|
)
|
(10,556
|
)
|
(10,436
|
)
|
Germany
|
|
(52,730
|
)
|
(23,276
|
)
|
(11,024
|
)
|
United States
|
|
(809
|
)
|
(166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(58,642
|
)
|
(33,998
|
)
|
(21,460
|
)
|
35
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
|
|
Years ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Income tax recovery (expense) is
represented by:
|
|
|
|
|
|
|
|
Current
|
|
(1,175
|
)
|
93
|
|
(123
|
)
|
Future
|
|
|
|
1,868
|
|
29,160
|
|
|
|
|
|
|
|
|
|
|
|
(1,175
|
)
|
1,961
|
|
29,037
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
Foreign
|
|
(1,175
|
)
|
93
|
|
(123
|
)
|
|
|
|
|
|
|
|
|
Future:
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
(284
|
)
|
25,036
|
|
Foreign
|
|
|
|
2,152
|
|
4,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,868
|
|
29,160
|
|
|
|
|
|
|
|
|
|
|
|
(1,175
|
)
|
1,961
|
|
29,037
|
|
Foreign
operations are predominantly in Germany.
36
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(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,
|
|
|
|
2008
|
|
2007
|
|
|
|
$
|
|
$
|
|
Future income tax assets
|
|
|
|
|
|
Current
|
|
|
|
|
|
Deferred revenues
|
|
2,459
|
|
1,738
|
|
Inventory
|
|
526
|
|
658
|
|
|
|
|
|
|
|
|
|
2,985
|
|
2,396
|
|
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
Research and development costs
|
|
8,961
|
|
12,119
|
|
Share issue expenses
|
|
129
|
|
91
|
|
Operating losses carried forward
|
|
15,543
|
|
17,145
|
|
Property, plant and equipment
|
|
576
|
|
1,973
|
|
Intangible assets and goodwill
|
|
10,817
|
|
206
|
|
Employee future benefits
|
|
747
|
|
648
|
|
Deferred revenues
|
|
|
|
1,211
|
|
Other
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
36,773
|
|
33,537
|
|
|
|
|
|
|
|
Valuation allowance
|
|
(36,581
|
)
|
(23,289
|
)
|
|
|
|
|
|
|
|
|
192
|
|
10,248
|
|
|
|
|
|
|
|
|
|
3,177
|
|
12,644
|
|
|
|
|
|
|
|
Future income tax liabilities
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
Accounts receivable
|
|
65
|
|
48
|
|
Property, plant and equipment
|
|
330
|
|
190
|
|
Deferred charges and other long-term assets
|
|
1,566
|
|
2,434
|
|
Intangible assets
|
|
|
|
9,376
|
|
Deferred revenues
|
|
528
|
|
|
|
Investment tax credits
|
|
|
|
573
|
|
Other
|
|
688
|
|
23
|
|
|
|
|
|
|
|
|
|
3,177
|
|
12,644
|
|
|
|
|
|
|
|
Future income tax assets (liabilities),
net
|
|
|
|
|
|
37
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except share/option and per share/option data
and as otherwise noted)
As at December 31, 2008, the Company has
estimated non-refundable research and development tax credits of $5,741,778
which can be carried forward to reduce Canadian federal income taxes payable
and expire from 2011 to 2028. No tax benefit has been accounted for in
connection with those credits.
As at December 31, 2008, the Company had
available operating losses in Canada. The following table summarizes the year
of expiry of these operating losses by tax jurisdiction:
|
|
Canada
|
|
|
|
Federal
|
|
Provincial
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
2010
|
|
6,337
|
|
|
|
2014
|
|
7,977
|
|
|
|
2015
|
|
5,645
|
|
26
|
|
2028
|
|
11,516
|
|
9,520
|
|
|
|
|
|
|
|
|
|
31,475
|
|
9,546
|
|
Furthermore, the Company has available
operating losses in Germany amounting to approximately $33,304,000, for which
there is no expiry date, as well as in the United States, totalling $791,163
and expiring as follows:
|
|
United States
|
|
|
|
$
|
|
|
|
|
|
2027
|
|
175
|
|
2028
|
|
616
|
|
|
|
|
|
|
|
791
|
|
The carryforwards and the tax credits claimed
could be subjected to a review and a possible adjustment by tax authorities.
38
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
20
Segment information for
continuing operations
Subsequent to the divestiture of
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,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Canada
|
|
333
|
|
400
|
|
25
|
|
United States
|
|
2,987
|
|
5,911
|
|
4,094
|
|
Europe
|
|
|
|
|
|
|
|
Switzerland
|
|
22,770
|
|
23,316
|
|
20,681
|
|
United Kingdom
|
|
3,823
|
|
5,343
|
|
5,257
|
|
Netherlands
|
|
2,158
|
|
2,031
|
|
1,748
|
|
Other
|
|
874
|
|
70
|
|
809
|
|
Japan
|
|
4,029
|
|
1,862
|
|
6,114
|
|
Other
|
|
1,504
|
|
3,135
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
38,478
|
|
42,068
|
|
38,799
|
|
Revenues have been allocated to geographic
regions based on the country of residence of the related customers.
Customers who represent more than 10% of
revenues are as follows:
|
|
Years ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
%
|
|
%
|
|
%
|
|
|
|
|
|
|
|
|
|
Customer 1
|
|
66
|
|
59
|
|
52
|
|
Customer 2
|
|
10
|
|
13
|
|
13
|
|
39
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
The following table presents revenues by
source:
|
|
Years ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
Sales and royalties
|
|
29,462
|
|
28,825
|
|
25,123
|
|
License fees
|
|
8,504
|
|
12,843
|
|
13,652
|
|
Other
|
|
512
|
|
400
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
38,478
|
|
42,068
|
|
38,799
|
|
Long-lived assets by geographic region are
detailed as follows:
|
|
As at December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Canada
|
|
110
|
|
7,643
|
|
United States
|
|
615
|
|
841
|
|
Germany
|
|
39,934
|
|
53,858
|
|
|
|
|
|
|
|
|
|
40,659
|
|
62,342
|
|
Long-lived assets consist of property, plant
and equipment, long-lived assets held for sale (2007 only), intangible assets
and goodwill.
40
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
21
Earnings (loss) per share
The information utilized in the computation
of net earnings (loss) per share, as presented in the accompanying consolidated
statements of earnings (loss), is as follows:
|
|
Years ended December 31,
|
|
|
|
2008
|
|
2006
|
|
2007
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from
continuing operations
|
|
(59,817
|
)
|
(32,037
|
)
|
7,577
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from
discontinued operations
|
|
|
|
(259
|
)
|
25,813
|
|
|
|
|
|
|
|
|
|
Impact of assumed conversion of dilutive
stock options of Atrium
|
|
|
|
|
|
(754
|
)
|
|
|
|
|
|
|
|
|
Net earnings (loss) from
discontinued operations, adjusted for dilution effects
|
|
|
|
(259
|
)
|
25,059
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) adjusted
for dilution effects
|
|
(59,817
|
)
|
(32,296
|
)
|
32,636
|
|
|
|
|
|
|
|
|
|
Basic weighted average number
of shares outstanding
|
|
53,187,470
|
|
53,182,803
|
|
52,099,290
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options
|
|
18,315
|
|
500,171
|
|
449,970
|
|
|
|
|
|
|
|
|
|
Diluted weighted average
number of shares outstanding
|
|
53,205,785
|
|
53,682,974
|
|
52,549,260
|
|
|
|
|
|
|
|
|
|
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
|
|
4,069,093
|
|
3,164,499
|
|
1,893,539
|
|
Common shares which would have been issued
following the conversion of the convertible term loans
|
|
|
|
|
|
776,237
|
|
For the years ended December 31, 2008
and 2007, 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.
41
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
22 Related party transactions
|
|
Years ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Administrative revenues
|
|
Nil
|
|
Nil
|
|
35
|
|
Lease revenues
|
|
Nil
|
|
Nil
|
|
304
|
|
Subcontracting revenues and sales of raw
materials
|
|
Nil
|
|
Nil
|
|
66
|
|
Subcontracting expenses
|
|
Nil
|
|
Nil
|
|
44
|
|
Patent acquired from a senior officer
|
|
Nil
|
|
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 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 continue to occur after the disposal.
23 Capital
disclosures
The
Companys objective in managing capital composed of shareholders equity is to
ensure a sufficient liquidity position to finance its research and development
activities, general and administrative expenses, working capital and overall
capital expenditures. The Company makes every effort to manage its liquidity to
minimize dilution to its shareholders.
Initially,
the Company had funded its activities through public offerings of common shares
and convertible term loans. More recently, however, the Company has tried to
optimize its liquidity needs by non-dilutive sources, including the sale of
non-core assets and future rights to royalties, investment tax credits and
grants, interest income, licensing, service and royalties.
During 2008,
the Company fulfilled its obligation on the loan from the federal and
provincial governments with a nominal value of CAN$800,000, as discussed in
note 15.
42
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
The
capital management objective of the Company remains the same as that of
previous years. The policy on dividends
is to retain cash to keep funds available to finance the activities required to
advance our product development pipeline, prioritizing our lead product
candidate, cetrorelix, in Phase 3 for BPH. The Statements of Changes in
Shareholders Equity describe the activity impacting the Companys capital.
The
Company is not subject to any capital requirements imposed by any regulators or
any other external source.
24 Financial
instruments and financial risk management
Short-term investments
The
Companys short-term investments as at December 31, 2008 and 2007 were
comprised of the following:
|
|
As at December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Discount notes bearing interest at an
annual rate of 2.06% in 2008 and at effective annual rates ranging from 3.94%
to 4.23% in 2007. The 2008 balances will mature in December 2009, and
the 2007 balances matured on different dates from May to
December 2008.
|
|
493
|
|
5,178
|
|
|
|
|
|
|
|
Bonds, bearing interest at effective annual
rates ranging from 2.81% to 4.43% in 2007, maturing on different dates from
January to November 2008.
|
|
|
|
25,937
|
|
|
|
|
|
|
|
|
|
493
|
|
31,115
|
|
Short-term investments totalled CAN$601,766
in 2008 and CAN$30,844,365 in 2007.
Fair
value
Cash and cash equivalents, short-term
investments, accounts receivable and accounts payable and accrued liabilities
are financial instruments whose fair value approximates their carrying value
due to their short-term maturity. While the Company had no long-term debt as at
December 31, 2008, the approximate fair value of long-term debt as at December 31,
2007 was $775,000. The fair value of long-term debt was established by
discounting the future cash flows at an interest rate corresponding to that
which the Company would currently be able to obtain for loans with similar
maturity dates and terms.
43
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Financial risk management
Disclosures relating to the nature and extent
of the Companys exposure to risks arising from financial instruments,
including credit risk, liquidity risk, foreign currency risk and interest rate
risk, and how the Company manages those risks, are presented below.
(a)
Credit risk
Credit risk is the risk of an unexpected loss
if a customer or third party to a financial instrument fails to meet its
contractual obligations. The Company regularly monitors its credit risk
exposure and takes steps to mitigate the likelihood of these exposures from resulting
in actual loss.
Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist primarily of cash
and cash equivalents, short-term investments and accounts receivable. Cash and cash equivalents are maintained with
high-credit quality financial institutions. Short-term investments consist
primarily of bonds and notes issued by high-credit quality corporations and
institutions. Consequently, management
considers the risk of non-performance related to cash and cash equivalents and
short-term investments to be minimal.
(b)
Foreign Currency Risk
Since the Company operates on an
international scale, it is exposed to currency risks as a result of potential
exchange rate fluctuations. Fluctuations
in the US dollar (US$), Canadian dollar (CAN$) and the Euro (EUR)
exchange rates could have a potentially significant impact on the Companys
results of operations. The following variations are reasonably possible
over a 12-month period:
·
Foreign exchange rate variation of -5% (depreciation of CAN$) and
+5%
(appreciation of CAN$) against the EUR, from a period-end rate of EUR1 =
CAN$1.7046.
·
Foreign exchange rate variation of -5% (depreciation of US$) and +5%
(appreciation of US$) against the EUR. From a period-end rate of EUR1 =
US$1.3995.
If these variations were to occur, the impact
on the Companys consolidated net loss for each category of financial
instruments held at December 31, 2008 would be as follows:
44
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Parent location using CAN$ as
functional currency
|
|
|
|
Transactions denominated
|
|
|
|
Carrying
|
|
in EUR
|
|
|
|
amount
|
|
-5%
|
|
+5%
|
|
|
|
$
|
|
$
|
|
$
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance to German subsidiary (1)
|
|
7,889
|
|
(394
|
)
|
394
|
|
Accounts receivable from German subsidiary
(2)
|
|
6,271
|
|
(314
|
)
|
314
|
|
Total impact on consolidated
net loss - (increase)/decrease
|
|
|
|
(708
|
)
|
708
|
|
(1)
Æterna Zentaris parent company, located in
Canada, has an advance due from its German subsidiary of EUR5,637,246
(CAN$9,609,250, using a period-end exchange rate 1 EUR = CAN$1.7046, and
US$7,889,326, using a period-end exchange rate 1 EUR = US$1.3995), which is
eliminated in the consolidated balance sheet.
A foreign exchange gain/loss is periodically recorded in the
consolidated statement of earnings (loss), since this advance has not been
considered to be part of a net investment in a self-sustaining subsidiary.
(2)
Accounts receivable, due in the ordinary
course of business, amount to EUR4,480,959 (or CAN$7,638,243, or US$6,271,102).
Subsidiary location
using EUR as functional currency
|
|
Carrying
|
|
Transactions denominated
in US$
|
|
|
|
amount
|
|
-5%
|
|
+5%
|
|
|
|
$
|
|
$
|
|
$
|
|
Liabilities
|
|
|
|
|
|
|
|
Accounts payable due to affiliate (1)
|
|
9,989
|
|
499
|
|
(499
|
)
|
Trade accounts payable
|
|
1,451
|
|
73
|
|
(73
|
)
|
Total impact on consolidated
net loss - (increase)/decrease
|
|
|
|
572
|
|
(572
|
)
|
(1)
Æterna Zentaris German subsidiary has
accounts payable, due in the ordinary course of business, to its US-based
affiliate of US$9,989,076 (EUR7,137,603). Effective on January 1, 2009,
due to a change in economic facts and circumstances arising in the first
quarter of 2009, the parent company, as well as its US subsidiary, will change
its functional currency from the Canadian dollar to the euro. Such change will
be reported prospectively.
(c) Liquidity risk
Liquidity risk is the risk that the Company
will not be able to meet its financial obligations as they fall due. The
Company manages liquidity risk through the management of its capital structure
and financial leverage, as outlined in note 23. The Company also manages
liquidity risk by continuously monitoring
45
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
actual and projected cash flow. The Board of
Directors reviews and approves the Companys operating and capital budgets, and
reviews any material transactions outside of the normal course of business.
The Companys investment policy ensures the
safety and preservation of its principal, as outlined in section (a) above,
to ensure the Companys liquidity needs are met.
(d)
Financial liabilities as at December 31, 2008
|
|
Carrying
Amount
|
|
2009
|
|
2010-2011
|
|
After 2011
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Accounts payable and accrued liabilities
|
|
13,690
|
|
13,690
|
|
|
|
|
|
Long-term payable
|
|
221
|
|
49
|
|
98
|
|
74
|
|
|
|
13,911
|
|
13,739
|
|
98
|
|
74
|
|
25
Commitments, contingencies and
guarantee
In addition to the long-term payable
discussed in notes 6 and 15, the Company is committed to various operating
leases for its premises plus service and manufacturing contracts, as follows:
Year
|
|
Minimum Lease
Commitments
|
|
Service &
Manufacturing
Commitments
|
|
Total
Commitments
|
|
|
|
$
|
|
$
|
|
$
|
|
2009
|
|
2,191
|
|
15,743
|
|
17,934
|
|
2010
|
|
2,117
|
|
3,129
|
|
5,246
|
|
2011
|
|
2,124
|
|
845
|
|
2,969
|
|
2012
|
|
2,131
|
|
811
|
|
2,942
|
|
2013
|
|
372
|
|
|
|
372
|
|
Thereafter
|
|
1,431
|
|
|
|
1,431
|
|
Total
|
|
10,366
|
|
20,528
|
|
30,894
|
|
As discussed in note 7, in connection with
the PSA entered into with Cowen, the Company has agreed to make a one-time cash
payment to Cowen in the event that cetrorelix is approved for sale by European
regulatory authorities in an indication other than
in vitro
fertilization. Such a payment, which is not probable or reasonably estimable as
at December 31, 2008, could range from $5,000,000 to a maximum of
$15,000,000. Also as discussed in note 7, the Company could also be required to
pay Cowen a quarterly make-whole payment.
46
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Rent expense 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 ended December 31, 2008, 2007 and 2006
was $1,700,647, $1,937,000 and $1,878,000, respectively.
In October 2004, the Company entered
into a $2,500,000 (1,750,000) bank guarantee in favour of one of its landlords
in Germany with respect to the Companys lease obligation. This guarantee will
expire in 2009 and is expected to be renewed at that time.
In October 2007, the Company entered
into a $100,000 letter of credit agreement in favour of its landlord in the
United States with respect to the Companys long-term lease obligation. This
letter of credit, which would be drawn down and payable by the Company in the
event the Company fails to perform any of its obligations under the lease
agreement, will expire in August 2009 and will be renewed at or before
that time.
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, 2008, there are no known or anticipated
contingencies or disputes pending against the company.
26
Subsequent event
On March 5, 2009, the Company entered
into a development, commercialization and license agreement with sanofi-aventis
for the development, registration and marketing of cetrorelix in BPH for the
United States market. Under the terms of the agreement, sanofi-aventis will
make an initial upfront payment to the Company of $30,000,000. Also per the
agreement, the Company will be entitled to receive a total of $135,000,000 in payments
upon achieving certain pre-established regulatory and commercial milestones.
Furthermore, the Company will be entitled to receive escalating double-digit
royalties on future net sales of cetrorelix for BPH in the United States, while
retaining the option to co-promote the product in that territory.
27
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 Canadian GAAP and US GAAP.
Furthermore, additional significant disclosures required under US 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 US GAAP, as well as other significant disclosures required under US GAAP
and Regulation S-X of the SEC not already provided in the accompanying
financial statements.
47
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
The following summary sets out the material
adjustments to the Companys reported net earnings (loss), net earnings (loss)
per share and shareholders equity that would be made to conform with US GAAP:
Consolidated Statements of Earnings (Loss)
|
|
|
|
Years ended December 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) for the year under
Canadian GAAP
|
|
|
|
(59,817
|
)
|
(32,296
|
)
|
33,390
|
|
Amortization of in-process research and
development
|
|
(a)
|
|
3,747
|
|
1,546
|
|
2,348
|
|
Accretion on convertible term loans
|
|
(b)
|
|
|
|
|
|
502
|
|
Loss on conversion of convertible term
loans
|
|
(b)
|
|
|
|
|
|
(280
|
)
|
Deferred taxes
|
|
(c)
|
|
|
|
(5,430
|
)
|
(959
|
)
|
Reclassification adjustment related to the
sale of Echelon
|
|
(d)
|
|
|
|
(754
|
)
|
|
|
Other
|
|
|
|
|
|
|
|
(10
|
)
|
Income tax effects of the above adjustments
|
|
|
|
|
|
(494
|
)
|
(729
|
)
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) for the year under US
GAAP
|
|
|
|
(56,070
|
)
|
(37,428
|
)
|
34,262
|
|
|
|
|
|
|
|
|
|
|
|
Out of which:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from continuing
operations
|
|
|
|
(56,070
|
)
|
(36,415
|
)
|
8,449
|
|
Net earnings (loss) from discontinued
operations
|
|
|
|
|
|
(1,013
|
)
|
25,813
|
|
|
|
|
|
|
|
|
|
|
|
Basic net earnings (loss) per share
|
|
|
|
(1.05
|
)
|
(0.70
|
)
|
0.66
|
|
From continuing operations
|
|
|
|
(1.05
|
)
|
(0.68
|
)
|
0.16
|
|
From discontinued operations
|
|
|
|
|
|
(0.02
|
)
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net earnings (loss) per share
|
|
|
|
(1.05
|
)
|
(0.70
|
)
|
0.65
|
|
From continuing operations
|
|
|
|
(1.05
|
)
|
(0.68
|
)
|
0.16
|
|
From discontinued operations
|
|
|
|
|
|
(0.02
|
)
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
shares (note 21)
under US GAAP
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
53,187,470
|
|
53,182,803
|
|
52,099,290
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
53,187,470
|
|
53,182,803
|
|
52,549,260
|
|
For the years ended December 31, 2008
and 2007, 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.
48
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(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 US GAAP
The following summary sets out the
significant differences between the Companys reported shareholders equity
under Canadian GAAP as compared to US GAAP.
|
|
|
|
Years ended December 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Shareholders equity in accordance with
Canadian GAAP
|
|
|
|
21,475
|
|
88,591
|
|
In-process research and development
|
|
(a)
|
|
(8,341
|
)
|
(14,181
|
)
|
|
|
|
|
|
|
|
|
Shareholders equity in accordance with US
GAAP
|
|
|
|
13,134
|
|
74,410
|
|
Statements of cash flows
For the years ended December 31,
2008, 2007 and 2006, there are no significant differences between the
statements of cash flows under Canadian GAAP as compared to US GAAP.
(a)
Research
and development costs
Under US 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. The balances presented as at December 31, 2007 include
intangible assets held for sale.
(b)
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 US GAAP, those costs are all included in deferred
charges and amortized over the term of the loans, and convertible term loans
are considered as long-term debt. Furthermore, under US GAAP, the entire
incremental consideration to induce conversion is recorded in earnings.
(c)
Deferred income taxes
This adjustment reflects differences related
to the accounting for valuation allowance for US GAAP purposes that arise from
timing differences.
49
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
(d)
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 is recognized in income when there has been a
reduction of a net investment in a foreign operation. Under US 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.
(e)
New accounting standards
and pronouncements
i)
Adopted in 2008
FASB Statement of Financial Accounting
Standards (SFAS) No. 157,
Fair Value Measurements
(SFAS 157)
In September 2006, the FASB issued SFAS
157, which 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.
In February 2008, the FASB amended SFAS 157 to exclude leasing
transactions and to delay the effective date by one year for non-financial
assets and liabilities that are recognized or disclosed at fair value in the
financial statements on a non-recurring basis. The Company has adopted this
statement as of January 1, 2008, and there has been is no significant
impact on the Companys consolidated financial statements as a result of such
adoption.
SFAS 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, 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 has adopted this statement as of January 1, 2008 and has not
elected to use the fair value option. Accordingly, there has not been any
impact as a result of adopting SFAS 159.
50
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
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)
EITF 07-3, issued in June 2007, provides
clarification surrounding the accounting for non-refundable 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 adopted the provisions of EITF
07-3 on January 1, 2008, and there has been no impact on the Companys
consolidated financial statements as a result of adopting this guidance.
ii)
Future Accounting Changes
EITF Issue No. 07-1, Accounting for
Collaborative Agreements Related to the Development and Commercialization of
Intellectual Property (EITF 07-01)
The EITF has issued guidance for accounting
for arrangements under which companies participate in the development and
commercialization of intellectual property into commercially viable
products. The EITF defines a
collaborative arrangement as 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 that revenues earned and
costs incurred by a company should be presented gross or net depending on
whether the company is the principal participant in the arrangement. The EITF ratified EITF 07-1 in December 2007,
and it will 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 consolidated financial statements.
SFAS No. 161,
Disclosures
about Derivative Instruments and Hedging Activities Including an amendment of
FASB Statement No. 133
(SFAS 161)
In March 2008, the FASB issued SFAS No. 161,
which amends and expands the disclosure requirements in SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities
,
and other related literature. SFAS 161 is effective for financial statements
issued for periods beginning after November 15, 2008, with early application
encouraged. The Company believes that
the updated disclosures will not have a material impact on its consolidated
financial statements.
51
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
SFAS No. 141 (revised 2007),
Business Combinations
, (SFAS 141R)
In December 2007, the FASB issued SFAS No. 141R,
which is a revision of previously existing guidance on accounting for business
combinations. SFAS 141R retains the
fundamental concept of the purchase method of accounting and introduces new
requirements for the recognition and measurement of assets acquired,
liabilities assumed and non-controlling interests. SFAS 141R is effective for
fiscal years beginning after December 15, 2008. The Company will adopt
SFAS 141R for any business combinations entered into, where applicable, on
or after January 1, 2009.
SFAS No. 160,
Noncontrolling
Interests in Consolidated Financial Statements an amendment of ARB. No. 51
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated
Financial Statementsan amendment of ARB No. 51
(SFAS 160).
SFAS 160 changes the accounting and reporting for minority interests,
which will be recharacterized as noncontrolling interests and classified as a
component of equity. This new consolidation method significantly changes the
accounting for transactions with minority interest holders. SFAS 160 is
effective prospectively to business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. The Company will adopt SFAS 160 for any
business combinations entered into, where applicable, on or after January 1,
2009.
SFAS No. 162,
The
Hierarchy of Generally Accepted Accounting Principles
(SFAS 162)
In May 2008, the FASB issued SFAS 162,
which is intended to improve financial reporting by identifying a consistent
framework for selecting accounting principles to be used in preparing financial
statements that are presented in conformity with US GAAP for non-governmental
entities. The guidance in SFAS 162
replaces that which is prescribed by the American Institute of Certified Public
Accountants (AICPA) Statement on Auditing Standards (SAS) No. 69, The
Meaning of
Present Fairly in Conformity with Generally
Accepted Accounting Principles,
for Nongovernmental Entities. SFAS
162 will become effective 60 days following the SECs approval of the Public
Company Accounting Oversight Boards (PCAOB) amendment to the AICPAs
Professional Standards
, vol. 1, AU sec.
411, The Meaning of
Present Fairly in Conformity
with Generally Accepted Accounting Principles
. The Company is
currently evaluating the potential impact, if any, that the adoption of
SFAS 162 will have on its consolidated financial statements.
FASB Staff Position No. FAS 142-3, Determination
of the Useful Life of Intangible Assets (FSP FAS 142-3)
On April 25, 2008, the FASB issued
FSP FAS 142-3, which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset under SFAS No. 142,
Goodwill and
Other Intangible Assets
(SFAS 142). The intent of FSP FAS
142-3 is to improve the consistency between the useful life of a recognized
intangible asset under SFAS 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS 141R and as per other US GAAP
guidance. FSP FAS 142-3 is effective for
financial years beginning after December 15, 2008 and interim periods
within those
52
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
fiscal years, and early adoption is
prohibited. The guidance for determining
the useful life of a recognized intangible asset shall be applied prospectively
to intangible assets acquired after the effective date. The disclosure requirements shall be applied
prospectively to all intangible assets recognized as of, and subsequent to, the
effective date. The Company is currently evaluating the impact of adoption of
FSP FAS 142-3 will have on its consolidated financial statements.
(f)
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
consolidated statements of earnings (loss). Under US GAAP, tax credits that
reduce current income taxes payable are recorded in income taxes. These tax
credits amounted to $nil in 2008, $1,862,000 in 2007 and $1,684,000 in 2006.
This accounting difference has no impact on the net earnings (loss) and the net
earnings (loss) per share figures for the reporting years.
Furthermore, under US GAAP, the future income
tax assets related to the unrecognized tax credits totalled $5,742,000 in 2008
and $7,004,000 in 2007. However, a valuation allowance corresponding to the
same amounts has been accounted for in 2008 and 2007.
Long-lived assets
Under US GAAP, long-lived assets by
geographic region only consist of property, plant and equipment which are
detailed as follows:
|
|
As at December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
$
|
|
$
|
|
|
|
|
|
|
|
Canada
|
|
99
|
|
7,631
|
|
Germany
|
|
5,968
|
|
6,436
|
|
United States
|
|
615
|
|
838
|
|
|
|
|
|
|
|
|
|
6,682
|
|
14,905
|
|
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 (loss).
53
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(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 (loss), 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 (loss) are as follows:
|
|
For the years ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
3
|
|
|
|
410
|
|
Gross realized losses
|
|
10
|
|
67
|
|
21
|
|
Unrealized gains
|
|
|
|
|
|
126
|
|
Unrealized losses
|
|
|
|
42
|
|
67
|
|
Gains reclassified
|
|
|
|
53
|
|
390
|
|
Losses reclassified
|
|
|
|
30
|
|
78
|
|
As at December 31, 2008,
available-for-sale securities were composed of short-term notes totalling
approximately $493,000, as discussed in note 24. The fair value of short-term
notes is based on Level 1 information, as required by SFAS 157.
Research and collaboration agreements
As part of Æterna Zentaris strategy to
enhance its development capabilities and to partially fund capital
requirements, the Company has entered into research and development
collaboration agreements with several pharmaceutical companies. Pursuant to
these collaboration arrangements, the Company oftentimes receives upfront
payments, license fees and milestone payments and has the potential to receive
royalty payments in the future. Upfront payments are typically non-refundable,
received upon the signature of an agreement, or shortly thereafter, and are
amortized over the estimated corresponding research and development period.
License fees typically are contractually obligated payments that the Company
receives and uses to fund research and development activities over the term of
collaboration and include milestone payments, as well as contract services.
Milestone payments are contingent payments that are made upon the achievement
of specified milestones, such as at the time of selection of candidates for
drug development, the commencement or termination of clinical trials or the
receipt of regulatory approvals and achievement of a certain level of sales. If
drugs are successfully developed and commercialized as a result of
collaboration agreements, the Company will receive royalty payments based upon
net sales of those drugs developed under the collaboration. Finally, contract
service fees relate to research and development activities performed by the
Company on behalf of the counterparty to the related arrangement and for which
the Company has the right to receive compensation.
54
Æterna Zentaris Inc.
Notes to
Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Ardana
In 2002, the Company entered into a license
and collaboration agreement with Ardana, a subsidiary of Ardana plc. Ardana was
granted an exclusive worldwide license to develop and commercialize a growth
hormone secretagogue (EP-1572). Ardana has undertaken, at its own cost, all
activities necessary to obtain regulatory and marketing approvals for the
substance. In return, the Company had received approximately $1,700,000 as an
upfront payment upon signing of the agreement. The Company has been eligible to
receive payments of up to an aggregate of approximately $9,200,000 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 this agreement with
Ardana for the years ended December 31, 2008, 2007 and 2006 were
approximately $197,000, $3,000,000 and $1,500,000, respectively.
No corresponding research and development
costs were incurred by the Company under the agreement for any of the three
years ended December 31, 2008.
In 2002, the Company granted an exclusive
license to Ardana for the development and commercialization of teverelix, a
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 approximately $3,200,000
in 2002 and approximately $6,100,000 in 2004 as an upfront payment upon
signature of the agreement and upon the assignment of the substance,
respectively. The agreement provided, among other things, approximately
$9,200,000 of guaranteed payments through December 2006, approximately
$19,800,000 upon successful achievement of a certain level of sales and low
single-digit royalties on future worldwide net sales.
Revenues recognized under this agreement with
Ardana for the years ended December 31, 2008, 2007 and 2006 were
approximately $3,621,000, $3,500,000 and $3,600,000, respectively.
Corresponding research and development costs
incurred under the agreement for the years ended December 31, 2008, 2007
and 2006 were approximately $61,000, $100,000 and $300,000, respectively.
As discussed in note 12, in June 2008,
Ardana communicated that it was entering into voluntary administration, and,
consequently, clinical studies and future development efforts were
suspended. Additional correspondence was
received by the Company in January 2009 from Ardanas appointed
administrators, providing further evidence that future cash flows associated
with the aforementioned license and collaboration arrangements are no longer
likely to be received. As such,
management does not expect to generate any revenues in the foreseeable future
under either of the aforementioned agreements from Ardana.
55
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Keryx Biopharmaceuticals, Inc.
The Company is party to a license and
collaboration agreement with Keryx Biopharmaceuticals, Inc. (Keryx). Per
this agreement, 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. In September 2002, the company received an
upfront payment of approximately $500,000 and is eligible to receive payments
of up to an aggregate of $18,300,000 upon Keryxs successful achievement of
clinical development and regulatory milestones, in addition to 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 with
Keryx for the years ended December 31, 2008, 2007 and 2006 were
approximately $410,000, $1,700,000 and $700,000, respectively.
Corresponding research and development costs
incurred under the agreement for the years ended December 31, 2008, 2007
and 2006 were approximately $448,000, $900,000 and $900,000, respectively.
Nippon Kayaku Co. Ltd.
In 2006, the Company entered into a licensing
and collaboration agreement with Nippon Kayaku Co. Ltd. (Nippon Kayaku).
Under the terms of the agreement, Nippon Kayaku was granted an exclusive
license to develop and market ozarelix, a LHRH antagonist, for all potential
oncological indications in Japan. In return, the Company received approximately
$1,900,000 as an upfront payment upon signature. The agreement provides, among
other things, availability of data generated by both parties free of charge.
The Company is entitled to receive payments of up to an aggregate of
approximately $23,800,000 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. In turn, as
indicated below regarding the Spectrum Pharmaceuticals, Inc. (Spectrum)
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, 2008, 2007 and 2006 were approximately
$445,000, $500,000 and $200,000, respectively.
Corresponding research and development costs
incurred under the agreement for the years ended December 31, 2008, 2007
and 2006 were $nil, approximately $100,000 and $100,000, respectively.
56
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Shionogi and Co.
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, an 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
approximately $1,400,000 as an upfront payment and was eligible to receive
milestone payments of up to an aggregate of approximately $7,100,000 upon
Shionogis successful achievement of clinical development and regulatory
milestones. To date, the Company has received approximately $5,800,000 of these
milestone payments. Since the development of cetrorelix is completed in
in vitro
fertilization (IVF), Control Ovarian
Stimulation (COS) and Assisted Reproductive Technology (ART) in Japan, the
Company does not expect to receive any additional milestone payments.
In addition, upon commercialization of
cetrorelix in BPH, the Company will be entitled to a manufacturing margin.
Revenues recognized under the agreement with
Shionogi for the years ended December 31, 2008, 2007 and 2006 were
approximately $1,000, $nil and $3,800,000, respectively.
Corresponding research and development costs
incurred under the agreement for the years ended December 31, 2008, 2007
and 2006 were approximately $13,000, $nil and $1,000,000, respectively.
Solvay Pharmaceuticals BV
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 approximately $6,200,000 as an upfront payment and was eligible to
receive milestone payments of up to an aggregate of approximately $23,800,000
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 aforementioned agreement such that 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.
57
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Revenues recognized under the agreement with
Solvay for the years ended December 31, 2007 and 2006 were approximately
$2,000,000 and $1,200,000, respectively.
Corresponding research and development costs
incurred under the agreement for the years ended December 31, 2007 and
2006 were approximately $1,900,000 and $600,000, respectively.
Spectrum
In 2004, the Company entered into a licensing
and collaboration agreement with 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 in 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
approximately $2,400,000 as an upfront payment, of which approximately
$1,200,000 was paid in cash and the balance paid through the issuance of shares
of the capital of Spectrum. The Company is entitled to receive payments of up
to an aggregate of approximately $24,400,000 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 with
Spectrum for the years ended December 31, 2008, 20067 and 2006 were
approximately $678,000, $1,900,000 and $2,900,000, respectively.
Corresponding research and development costs
incurred under the agreement for the years ended December 31, 2008, 2007
and 2006 were approximately $255,000, $600,000 and $1,700,000, respectively.
Tulane Educational Fund
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 with
Tulane for the years ended December 31, 2008, 2007 and 2006 were
approximately $311,000 $100,000 and $300,000, respectively.
58
Managements Discussion and Analysis
of Financial Condition and Results of
Operations
Highlights
·
In February 2008, we reported
that a first group of patients had been treated with AEZS-108 for a Phase 2
trial in advanced ovarian and endometrial cancers.
·
In March 2008, we reported that
dosing had commenced with cetrorelix in the second efficacy study of our Phase
3 program in benign prostatic hyperplasia (BPH).
·
In March 2008, we completed the
sale to Paladin Labs Inc. (Paladin) of our marketed product, Impavido
®
(miltefosine), for approximately
$9.2 million.
·
In April 2008, appointment of
Juergen Ernst, the Companys Chairman of the Board at the time, as Interim
President and Chief Executive Officer, following the departure of our former President
and Chief Executive Officer.
·
In April 2008, we reported the
completion of patient recruitment with cetrorelix, for the first efficacy study
of our Phase 3 program in BPH.
·
In May 2008, we reported that a
first group of patients had been treated with cetrorelix for the safety trial
of our Phase 3 program in BPH.
·
In June 2008, we completed the
sale of our Quebec City property for a purchase price of $7.1 million.
·
In September 2008, Juergen
Engel, Ph.D., was appointed as the Companys President and Chief Executive
Officer, succeeding Juergen Ernst who, at the same time, was appointed as
Executive Chairman of the Company.
·
In October 2008, we reported
the completion of patient recruitment for the second efficacy trial of our
Phase 3 program with cetrorelix in BPH.
·
In October and November 2008,
we reported that we had entered the second stage of patient recruitment for our
AEZS-108 trials in advanced ovarian and endometrial cancers, respectively.
·
In December 2008, we sold our
rights to royalties on future sales of
Cetrotide
®
, covered by our license agreement with Merck Serono, to Cowen Healthcare Royalty Partners L.P. (Cowen)
for gross consideration of $52.5 million.
·
In December 2008, we reported
the completion of patient recruitment for the safety trial of our Phase 3
program in BPH with cetrorelix.
·
In December 2008, Matthias
Seeber, MBA, was nominated Company Senior Vice President, Administration and
Legal Affairs.
·
Subsequent to year-end, we entered
into a development, commercialization and license agreement with sanofi-aventis
for the development, registration and marketing of cetrorelix in BPH for the
United States market. The agreement includes an initial upfront payment of
$30.0 million and a total of $135.0 million in payments upon
achieving certain pre-established regulatory and commercial milestones, as well
as escalating double-digit royalties on future net sales of cetrorelix for BPH
in the United States.
Introduction
The following analysis provides a review of the consolidated results of operations, financial condition
and cash flows of Æterna Zentaris Inc. for the three-month period and full year
ended December 31, 2008. 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 the
Companys annual consolidated financial statements and related notes as at and
for the years ended December 31, 2008, 2007 and 2006. Our consolidated financial
statements, reported in United States dollars (US dollars), have been
prepared in accordance with Canadian Generally Accepted Accounting Principles (Canadian
GAAP), which differ in certain respects from United States Generally Accepted
Accounting Principles (US GAAP), as discussed below.
All amounts
presented in this MD&A are in US dollars, except where otherwise noted.
About 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.
Forward-looking statements involve risks and uncertainties, many of
which are discussed in this MD&A. 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
2
and Drug Administration, 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, unless requested to do so by a
governmental authority or applicable law.
About Material Information
This MD&A includes the information we believe to be material to
investors after considering all circumstances, including potential market
sensitivity. We consider information and disclosures to be material if they
result in, or would reasonably be expected to result in, a significant change
in the market price or value of our shares, or where it is quite likely that a
reasonable investor would consider the information and disclosures to be
important in making an investment decision.
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 is, therefore, required to
file continuous disclosure documents such as interim and annual financial
statements, an MD&A, a Proxy Circular, an Annual Report on Form 20-F,
material change reports and press releases with the appropriate 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 on the
Internet at the following addresses: www.aezsinc.com, www.sedar.com and
www.sec.gov/edgar.shtml.
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
priorities in drug development are our Phase 3 program in BPH with our lead
endocrinology compound, cetrorelix, and our Phase 2 program in advanced
endometrial and ovarian cancers with our lead oncology compound, AEZS-108.
3
Key Developments for the Year Ended December 31, 2008
Drug Development
Status of our Drug Pipeline as at December 31, 2008
Discovery
|
|
Preclinical
|
|
Phase 1
|
|
Phase 2
|
|
Phase 3
|
|
Commercial
|
120,000 compound library
|
|
AEZS-115
Non-peptide luteinizing
hormone-releasing hormone (LHRH) antagonists (endometriosis &
urology)
AEZS-120
(oncology vaccine)
AEZS-126
Erk & PI3K
Inhibitors (oncology)
AEZS-127
ErPC
(oncology)
Ghrelin receptor ligands
(endocrinology)
|
|
AEZS-112
(oncology)
AEZS-130
(endocrinology)
|
|
AEZS-108
(endometrial and ovarian cancers)
Cetrorelix
(endometriosis)
(BPH in
Japan)
Ozarelix
(BPH, prostate cancer)
Perifosine
(multiple cancers)
|
|
Cetrorelix
(BPH)
|
|
Cetrotide
®
(
in vitro
fertilization)
|
|
|
|
|
|
|
|
|
|
|
|
Partners (as defined in subsequent sections
of this MD&A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cetrorelix:
Shionogi
in
Japan
Ozarelix:
Spectrum
in North-America and India,
Nippon Kayaku
in Japan
Ozarelix (BPH):
Handok
in
Korea, Indonesia, Malaysia, the Philippines and Singapore
Perifosine:
Keryx
in
North America
|
|
Cetrorelix (BPH):
Sanofi-aventis
in the
U.S.A. (beginning on March 5,2009)
Handok
in Korea
|
|
Cetrotide
®
:
Merck Serono
(World ex-Japan)
Shionogi
and Nippon Kayaku
(Japan)
|
4
Cetrorelix
In April 2008, we reported completion of patient recruitment for
the first efficacy study of our Phase 3 program in BPH with cetrorelix. This
one year placebo-controlled study, involving 667 patients located mainly in
North America, is assessing an intermittent dosage regimen of cetrorelix as a
potential safe and tolerable treatment providing prolonged improvement in
BPH-related signs and symptoms. Results of this trial are expected in the third
quarter of 2009.
In July 2008, we signed a license and cooperation agreement for
the commercialization of cetrorelix in BPH with Handok Pharmaceuticals Co.,
Ltd., (Handok) for the Korean market.
In October 2008, we reported the completion of patient recruitment
for the second efficacy trial of the Phase 3 program with cetrorelix in BPH.
This trial, during which dosing had commenced in March 2008, has a similar
design to the first efficacy trial and involves 420 patients located in Europe.
Results of this trial are expected in the fourth quarter of 2009.
In December 2008, we reported completion of patient recruitment
for the safety trial of the Phase 3 program with cetrorelix in BPH.
Results
of this study, involving 529 patients located in North America, as well as
those of a QTc study, are expected by the end of 2009.
Cetrotide
®
In December 2008, as discussed below, we sold our rights to royalties on future
sales
of Cetrotide
®
, covered by our license agreement with Merck Serono, to Cowen for gross consideration of
$52.5 million. Under the terms of the agreement with Cowen, the
Company is entitled to an additional payment of $2.5 million from Cowen
contingent on 2010 net sales of Cetrotide
®
reaching
a specified level.
AEZS-108
In
February 2008,
we reported that a first group of patients had been treated with our cytotoxic
conjugate compound linked to doxorubicin, AEZS-108, for a European open-label,
non-comparative multi-center Phase 2 trial in advanced ovarian and endometrial
cancers.
In October 2008, we announced that we
had entered the second stage of patient recruitment for our Phase 2 trial in
ovarian cancer, after first stage data had shown two partial responses. In November 2008,
we reported that we had entered the second stage of patient recruitment for our
Phase 2 trial in endometrial cancer with AEZS-108. The decision to enter the
second stage of patient recruitment was made following recent first stage data
reporting one complete response and two partial responses among 14 patients
with a diagnosis of disseminated endometrial cancer. The open-label,
non-comparative multi-center Phase 2 program will treat up to 82 women with
LHRH-receptor
5
positive ovarian and endometrial cancerous
tumors, and results of the trial are expected in the fourth quarter of 2009.
AEZS-112
AEZS-112 is currently in a Phase 1 trial in
patients with solid tumors and lymphoma. The Company is sponsoring and conducting
this open-label, dose-escalation, multi-center, intermittent treatment trial 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. The primary
endpoints of the trial will focus on determining the safety and tolerability
of AEZS-112 as well as establishing the recommended Phase 2 dose and
regimen. We expect progression of this trial in 2009 to identify maximum
tolerated dose of AEZS-112.
AEZS-112 is the first anticancer drug in
development involving two mechanisms of action, tubulin and topoisomerase II
inhibition. AEZS-112 expresses different actions, such as pro-apoptotic and
antiangiogenic properties.
Ozarelix
Our partner, Spectrum Pharmaceuticals, Inc. (Spectrum) released
the results of a North American Phase 2 trial with ozarelix, a fourth
generation LHRH antagonist in BPH. Spectrum indicated that ozarelix
demonstrated sufficient clinical activity to justify its continued development.
In early 2009, Spectrum initiated a North American multi-center,
randomized, double-blind, placebo-controlled study in lower urinary tract
symptoms due to BPH that will involve over 800 patients.
During the third quarter of 2008, we signed an agreement with Handok
for the commercialization of ozarelix in BPH for the Korean and other Asian
markets.
Perifosine
We are currently conducting a
randomized, double-blind, placebo-controlled 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. We expect to disclose results related to this trial in the second
quarter of 2009.
During 2008, our partner, Keryx
Biopharmaceuticals, Inc. (Keryx), continued the development of
perifosine with multiple Phase 1 and Phase 2 studies in North America in
various cancers. Keryx expects to move perifosine into Phase 3 in at least one
indication in North America in 2009.
6
AEZS-130
During the
third quarter of 2008, we recovered worldwide rights from Ardana Bioscience
Ltd. (Ardana) for the Growth Hormone Secretagogue compound, AEZS-130. Future
development options are currently being evaluated for the use of this compound in
growth hormone deficiencies.
Corporate Developments
Sale of Impavido
®
On March 1,
2008, we entered into a definitive 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 for an aggregate
purchase price of approximately $9.2 million, payable in cash, subject to
certain post-closing purchase price adjustments. The transaction, which closed
on March 31, 2008, generated net cash proceeds of $8.3 million,
resulting in a gain of $0.8 million.
Sale of Building and Land
On June 26,
2008, we sold our Quebec City building and land for a gross amount of
$7.1 million, payable in cash. The net proceeds received amounted to
$6.5 million, resulting in an additional loss on sale of
$0.8 million. In connection with this sale, we entered into a long-term
lease agreement with the principal tenant of the building, agreeing to pay the
principal tenant CAN$300,000 (approximately $246,305) as an incentive and
service fee. This fee is included in the additional loss on sale, and the
resulting payable is non interest-bearing and is due in bi-annual instalments
of CAN$30,000 (approximately $24,630) over the next five years.
Sale of Cetrotide
®
Royalty Stream
In June 2003,
we amended certain sections of our license and supply agreement with ARES
Trading S.A. (Merck Serono) in which the latter was granted
worldwide
marketing, distribution and selling rights, except in Japan, for Cetrotide
®
, a compound used for
in vitro
fertilization (referred to as the License Agreement).
Under the License Agreement, Merck Serono agreed to pay to us certain lump sum payments each calendar year
up to and including December 31, 2010, as well as certain variable
royalties through the expiry date of the Companys underlying patent rights.
In November 2008,
we entered into a purchase and sales agreement (PSA) with Cowen relating to
our rights to royalties on future sales of Cetrotide
®
covered by the License Agreement.
7
In connection
with the PSA, which was effective on October 1, 2008 and finalized in December 2008,
we received $52.5 million from Cowen, less certain transaction costs of
$1.0 million that had been advanced by Cowen to certain third-party firms
and institutions on our behalf, resulting in net proceeds of
$51.5 million. Under the terms of the PSA, we are entitled to an
additional payment of $2.5 million contingent on 2010 net sales of
Cetrotide
®
reaching
a specified level.
Per the PSA,
if cetrorelix, the active substance in Cetrotide
®
, is approved for sale by European
regulatory authorities in an indication other than
in vitro
fertilization, we have agreed to make a one-time cash payment to Cowen in an
amount ranging from $5.0 million up to a maximum of $15.0 million.
The amount which may be due to Cowen will be higher in proportion to the timing
of the products receiving European regulatory approval; that is, the earlier
the product receives regulatory approval, the higher the amount payable to
Cowen will be.
Also per the
PSA, for each calendar quarter in which a royalty rate reductiondefined as the
actual reduction by Merck Serono, for any calendar quarter(s), of the rate
applied in calculating variable royalties under the License Agreement, to
amounts less than pre-established percentageshas occurred or is continuing, we
will pay Cowen a quarterly make-whole payment in an amount equal to the lesser
of (i) the variable royalties in respect of such quarter that would have
been received by Cowen if the aforementioned royalty rate reduction had not
occurred or been continuing, and (ii) the difference of $15.0 million
less Cowens net reduction payments, as defined.
Pursuant to
the aforementioned transactions, we have certain obligations in the royalty
agreement, including the supply of Cetrotide
®
to Merck Serono, the payment of royalties
under the License Agreement, overseeing Merck Seronos compliance with the
License Agreement, cooperation in handling any adverse claims or litigation
involving the License Agreement and monitoring and defending any patent or
trademark infringement.
We have
recorded the proceeds as deferred revenues, which are recognizable as royalty
revenues over the life of the License Agreement under the units-of-revenue
method. Under that method, periodic royalty revenues are calculated by
multiplying the ratio of the remaining deferred revenue amount to the total
estimated remaining royalties that Merck Serono is expected to pay to Cowen over
the term of the underlying arrangement by the royalty payments due to Cowen for
the period.
We incurred a total of
approximately $4.8 million in financial advisor, legal and other
transaction costs associated with the negotiation and finalization of the PSA.
These costs have been capitalized in our consolidated balance sheet and are
amortizable as part of selling, general and administrative (SG&A)
expenses in the same manner and over the same period in which the related
deferred revenues are recognized as royalty revenues.
8
In this
MD&A, the events and transactions associated with this sale are
collectively referred to as the Cowen Transaction.
Subsequent Event:
Cetrorelix Development, Commercialization and
Licensing Agreement
On March 5, 2009, we entered into a
development, commercialization and license agreement with sanofi-aventis for
the development, registration and marketing of cetrorelix in BPH for the US
market. Under the terms of the agreement, sanofi-aventis will make an initial
upfront payment to us of $30.0 million. Also per the agreement, we will be
entitled to receive a total of $135.0 million in payments upon achieving
certain pre-established regulatory and commercial milestones. Furthermore, we
will be entitled to receive escalating double-digit royalties on future net
sales of cetrorelix for BPH in the United States, while retaining the option to
co-promote the product in that territory.
Consolidated Results of Operations
Quarterly Summary Consolidated Results of Operations Information
(unaudited)
|
|
Quarters ended
|
|
(in thousands, except per
share data)
|
|
December 31,
2008
|
|
September 30,
2008
|
|
June 30,
2008
|
|
March 31,
2008
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
7,244
|
|
11,029
|
|
10,457
|
|
9,748
|
|
Loss from
operations
|
|
(16,315
|
)
|
(12,386
|
)
|
(19,525
|
)
|
(14,158
|
)
|
Net loss
|
|
(14,493
|
)
|
(13,879
|
)
|
(20,579
|
)
|
(10,866
|
)
|
Net loss per
share
|
|
|
|
|
|
|
|
|
|
Basic and
diluted
|
|
(0.27
|
)
|
(0.26
|
)
|
(0.39
|
)
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters ended
|
|
|
|
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
|
)
|
9
Fourth
Quarter 2008 Results
Consolidated revenues
were $7.2 million for the
quarter ended December 31, 2008, compared to $10.2 million for the
same quarter in 2007. The decrease in revenues is primarily due to lower
quarter-over-quarter royalties related to our license agreement with Merck
Serono. Subsequent to the Cowen Transaction, which was effective for royalty
determination purposes on October 1, 2008, our periodic amortization of
the gross proceeds received from Cowen, while still recognized as royalty
revenues, have been lower than the royalty revenues recognized in the past, as
receivable directly from Merck Serono. Additionally, quarter-over-quarter sales
and royalties decreased due to the absence of sales of Impavido
®
in the fourth quarter of 2008, while license
revenues witnessed a decrease due to the non-recurrence in 2008 of milestone
payments received from Keryx, related to the perifosine Phase 2 trials.
Consolidated SG&A expenses
were $3.0 million for the
quarter ended December 31, 2008, compared to $5.1 million for the
same quarter in 2007. The decrease in SG&A expenses is mainly related to
the continued results of cost-saving measures that were implemented beginning
in the second quarter of 2008.
Consolidated research and development (R&D) expenses
were $12.3 million for the
quarter ended December 31, 2008, compared to $13.6 million for the
same quarter in 2007. The decrease in R&D expenses primarily relates to the
comparative reduction in expenses incurred in connection with our
Phase 3 program with cetrorelix in BPH, which by the fourth quarter of
2008 was fully enrolled and less subject to larger front-end expenditures that
were necessary in the earlier, fourth quarter 2007 stage of the program.
Consolidated net loss
was $14.5 million or $0.27 per
basic and diluted share for the quarter ended December 31, 2008, compared
to $13.6 million, or $0.26 per basic and diluted share, for the same
quarter in 2007. The increase in the consolidated net loss is largely
attributable to a combination of lower sales and royalties, lower license fee
revenues, lower manufacturing margins on Cetrotide
®
due in part to a $0.7 million write-down
to net realizable value of certain components of inventory, as well as to
higher amortization expense due to the impairment of teverelix, as discussed
below, partly offset by lower quarter-over-quarter SG&A expenses, higher
net foreign exchange gains and lower income tax expense.
We expect that the consolidated
net loss for the first quarter of 2009, excluding any impact of foreign
exchange gains or losses, will be similar to the last quarter of 2008.
10
Annual Consolidated Statements of Earnings
|
|
Years ended December 31,
|
|
(in thousands, except per share data)
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
$
|
|
Revenues
|
|
|
|
|
|
|
|
Sales and
royalties
|
|
29,462
|
|
28,825
|
|
25,123
|
|
License fees
|
|
8,504
|
|
12,843
|
|
13,652
|
|
Other
|
|
512
|
|
400
|
|
24
|
|
|
|
38,478
|
|
42,068
|
|
38,799
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
Cost of
sales
|
|
19,278
|
|
12,930
|
|
11,270
|
|
Selling,
general and administrative expenses
|
|
17,325
|
|
20,403
|
|
16,478
|
|
Research and
development costs
|
|
57,448
|
|
39,248
|
|
27,422
|
|
R&D tax
credits and grants
|
|
(343
|
)
|
(2,060
|
)
|
(1,564
|
)
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
1,515
|
|
1,562
|
|
2,816
|
|
Intangible
assets
|
|
5,639
|
|
4,004
|
|
6,148
|
|
Impairment
of long-lived asset held for sale
|
|
|
|
735
|
|
|
|
|
|
100,862
|
|
76,822
|
|
62,570
|
|
Loss
from operations
|
|
(62,384
|
)
|
(34,754
|
)
|
(23,771
|
)
|
|
|
|
|
|
|
|
|
Other
income (expenses)
|
|
|
|
|
|
|
|
Interest
income
|
|
868
|
|
1,904
|
|
1,441
|
|
Interest
expense
|
|
(118
|
)
|
(85
|
)
|
(1,433
|
)
|
Foreign
exchange gain (loss)
|
|
3,071
|
|
(1,035
|
)
|
319
|
|
Other
|
|
(79
|
)
|
(28
|
)
|
409
|
|
|
|
3,742
|
|
756
|
|
736
|
|
Share in
the results of an affiliated company
|
|
|
|
|
|
1,575
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes from continuing operations
|
|
(58,642
|
)
|
(33,998
|
)
|
(21,460
|
)
|
Income
tax (expense) recovery
|
|
(1,175
|
)
|
1,961
|
|
29,037
|
|
Net
(loss) earnings from continuing operations
|
|
(59,817
|
)
|
(32,037
|
)
|
7,577
|
|
Net
(loss) earnings from discontinued operations
|
|
|
|
(259
|
)
|
25,813
|
|
Net
(loss) earnings for the year
|
|
(59,817
|
)
|
(32,296
|
)
|
33,390
|
|
|
|
|
|
|
|
|
|
Net
(loss) earnings per share from continuing operations
|
|
|
|
|
|
|
|
Basic
|
|
(1.12
|
)
|
(0.61
|
)
|
0.14
|
|
Diluted
|
|
(1.12
|
)
|
(0.61
|
)
|
0.14
|
|
Net
(loss) earnings per share from discontinued operations
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
0.50
|
|
Diluted
|
|
|
|
|
|
0.48
|
|
Net
(loss) earnings per share
|
|
|
|
|
|
|
|
Basic
|
|
(1.12
|
)
|
(0.61
|
)
|
0.64
|
|
Diluted
|
|
(1.12
|
)
|
(0.61
|
)
|
0.62
|
|
11
Consolidated Revenues
Consolidated revenues
are derived from sales and
royalties as well as from license fees. Sales are derived from Cetrotide
®
(cetrorelix acetate solution for injection),
marketed for reproductive health assistance for
in vitro
fertilization and, prior to March 2008, Impavido
®
(miltefosine), marketed for the treatment of
leishmaniasis, as well as from active pharmaceutical ingredients. Royalties are
derived from Cetrotide
®
and,
prior to the Cowen Transaction, payable by our partner, Merck Serono. Effective
October 1, 2008, royalty revenues have been and will continue to be
recognized as the deferred gross proceeds received from Cowen, and are
amortized under the units-of-revenue method, as discussed above.
License fees are derived from
non-periodic milestone payments, R&D contract fees and amortization of
upfront payments received from our different licensing partners.
Consolidated sales and royalties increased to $29.5 million for
the year ended December 31, 2008, compared to $28.8 million and
$25.1 million for each of the years ended December 31, 2007 and 2006,
respectively. The increase in consolidated sales and royalties from 2007 to
2008 is mainly attributable to a large increase in sales of Cetrotide
®
, partly offset by lower sales
of Impavido
®
.
The increase in consolidated sales and royalties from 2006 to 2007 is
related to new sales of Cetrotide
®
, following the September 2006
product launch in the Japanese market, as well as year-over-year increased
sales of Impavido
®
.
Consolidated sales and royalties are expected to decrease in 2009, due
to lower royalty revenues expected to be recognized from the amortization of
the deferred revenues received in connection with the Cowen Transaction.
Consolidated license fee revenues decreased to $8.5 million for
the year ended December 31, 2008, compared to $12.8 million and
$13.7 million for each of the years ended December 31, 2007 and 2006,
respectively. The decrease in consolidated license fee revenues from 2007 to
2008 is mainly attributable to non-recurring milestone payments received in
2007 from Ardana and from Keryx. Also, the decrease is related to the
termination of our licensing agreement with Solvay Pharmaceuticals BV (Solvay)
in 2007. We regained the worldwide ex-Japan rights for endometriosis from
Solvay during 2007.
The decrease in consolidated license fee revenues from 2006 to 2007 is
mainly attributable to a reduction in revenues related to services rendered
through our collaboration with Solvay. We regained the worldwide ex-Japan
rights for cetrorelix in BPH from Solvay during 2006.
12
Consolidated license fee revenues are expected to increase in 2009, due
in part to the amortization of the upfront payment to be received in connection
with the cetrorelix development, commercialization and licensing agreement
entered into in March 2009 with sanofi-aventis, as discussed above.
Consolidated Operating Expenses
Consolidated cost of sales
increased
to $19.3 million for the year ended December 31, 2008, compared to
$12.9 million and $11.3 million for each of the years ended December 31,
2007 and 2006, respectively. The year-over-year increases in the cost of sales are directly related
to additional generated sales and royalties.
The higher percentage of cost of sales in 2008 compared to 2007 and
2006 is largely related to the product mix, which includes a high concentration
of sales related to Cetrotide
®
, a product that is more expensive to
produce. In addition, we wrote down certain elements of our inventory to their
net realizable value at the end of 2008, which contributed approximately
$0.7 million to the increase in consolidated cost of sales compared to
2007.
We expect cost of sales as a percentage of consolidated sales and
royalties to increase to approximately 75% in 2009, given the continued
increased sales expectations relating to Cetrotide
®
.
Consolidated SG&A expenses
decreased
to $17.3 million for the year ended December 31, 2008, compared to
$20.4 million and $16.5 million for each of the years ended December 31,
2007 and 2006, respectively. The decrease in SG&A expenses in 2008 compared to
2007 is primarily related to the organizational changes and cost-saving
measures that were implemented beginning in the second quarter of 2008.
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 Juergen 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 attributable to increased royalties and
commissions expenses directly related to sales and royalties of Cetrotide
®
.
We expect our SGA expenses to decrease in 2009 due to continuing
cost-saving measures and despite additional royalty expense, which is payable
related to proceeds received in connection with our recently signed
development, commercialization and license agreement with sanofi-aventis, as
discussed above.
Consolidated R&D costs
were
$57.4 million for the year ended December 31, 2008, compared to
$39.2 million and $27.4 million for each of the years ended December 31,
2007 and 2006, respectively. The increase in consolidated R&D costs for the
year 2008 compared to 2007 is mainly attributable to the advancement of our
Phase 3 program with our lead compound, cetrorelix, in BPH.
13
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.
The following table summarizes
third-party R&D costs, by product, incurred by the Company during the year
ended December 31, 2008.
(in thousands, except percentages)
Product
|
|
Status
|
|
Indication
|
|
Net R&D
costs
(unaudited)
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Cetrorelix
|
|
Phase 3
Phase 2
|
|
BPH and
endometriosis
|
|
25,697
|
|
71.1
|
|
|
|
|
|
|
|
|
|
|
|
AEZS-108
|
|
Phase 2
|
|
Endometrial
and ovarian cancers
|
|
1,259
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
Perifosine
|
|
Phase 2
|
|
Oncology
|
|
2,425
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
Ozarelix
|
|
Phase 2
|
|
BPH and
prostate cancer
|
|
253
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
AEZS-112
|
|
Phase 1
|
|
Cancer
|
|
981
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
AEZS-126/
Erk PI3K
|
|
Preclinical
|
|
Cancer
|
|
1,609
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
Ghrelin
receptor
|
|
Preclinical
|
|
Endocrinology
and oncology
|
|
1,154
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
AEZS-115/
LHRH
antagonist
|
|
Preclinical
|
|
Endocrinology
and oncology
|
|
843
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
Preclinical
|
|
Multiple
|
|
1,913
|
|
5.3
|
|
|
|
|
|
|
|
36,134
|
|
100.0
|
|
We expect R&D investments to
decrease by between $4.0 million and $6.0 million in 2009. This
decrease will be related to the finalization of our three studies in our
Phase 3 program for our lead compound, cetrorelix, in BPH, expected to
occur in the third and fourth quarters of 2009, despite the continuing
expenditures that will be required in connection with the filing of a New Drug
Admission with the U.S. Food and Drug Administration and corresponding European
agencies.
14
R&D investments in AEZS-108
are expected to increase slightly in 2009 in connection with our Phase 2
trials in advanced ovarian and endometrial cancers.
Our other programs will
represent a lower portion of our investment in R&D for 2009, as our focus
is on advancing our later-stage lead compounds cetrorelix in BPH and AEZS-108
in advanced ovarian and endometrial cancers.
R&D tax credits and grants
were $0.3 million for the year ended December 31, 2008, compared to
$2.1 million and $1.6 million for each of the years ended December 31,
2007 and 2006, respectively. The decrease of R&D tax credits and grants in 2008 compared to 2007
is attributable to our having utilized only Quebec provincial tax credits in
2008, while in 2007, we also reduced our income tax payable by more than
$1.6 million, following the elimination of income taxes related to the
distributions made to our shareholders in connection with our disposal of
Atrium.
The
increase from 2006 to 2007 is related to non-recurring R&D tax credits
which were 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.
We
expect the utilization of R&D tax credits and grants to decrease slightly
in 2009.
Consolidated depreciation and amortization
increased
to $7.2 million for the year ended December 31, 2008, compared to
5.6 million and $9.0 million for each of the years ended December 31,
2007 and 2006, respectively.
The increase from 2007 to 2008 was primarily
related to a non-recurring impairment charge of approximately
$2.4 million, recorded as amortization expense, taken in the fourth
quarter of 2008 and related to teverelix, which had been deemed impaired
following Ardanas entering into voluntary administration. Ardana is party to
an assignment agreement on which the cash recoverability of teverelix depends,
and, as such, this customers entering into voluntary administration has
triggered the likelihood that no future cash flows will be received by the
Company in connection with the aforementioned license agreement. This increase
in amortization expense was partially offset by reductions in depreciation and
amortization expenses related to long-lived assets held for sale, including the
Quebec City building and land, and Impavido
®
, on which depreciation and amortization
ceased during the final months of 2007. The underlying assets were sold in
2008, as discussed above.
The
decrease 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.
15
Impairment of long-lived asset held for sale
amounted to $0.7 million for the
year ended December 31, 2007. This impairment was related to the building
and land held for sale for which the estimated fair value had been based on
offers received by third parties.
Consolidated loss from operations
increased to $62.4 million for
the year ended December 31, 2008, compared to $34.8 million and
$23.8 million for each of the years ended December 31, 2007 and 2006,
respectively. The increase in
consolidated loss from operations in 2008 as compared to 2007 is largely
attributable to a combination of lower license fee revenues, lower
manufacturing margins, higher depreciation and amortization and higher R&D
costs, partly offset by lower SG&A expenses.
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 depreciation and amortization expenses.
We expect our consolidated loss
from operations to decrease in 2009, mainly due to an expected increase in
license fee revenues combined with continued decreasing SG&A and R&D
expenses.
Consolidated other income (expenses)
Consolidated interest income
amounted to
$0.9 million for the year ended December 31, 2008, compared to
$1.9 million and $1.4 million for each of the years ended December 31,
2007 and 2006, respectively. Interest income is derived from our cash, cash
equivalents and short-term investments, which totaled $49.7 million as at December 31,
2008, $41.4 million as at December 31, 2007 and $60.5 million as
at December 31, 2006. The decrease in consolidated interest income from
2007 to 2008 is due to the fact that less cash had been invested during 2008,
with the exception of a large portion of the proceeds received in connection
with the Cowen Transaction, though only in December 2008. The increase in
consolidated interest income from 2006 to 2007 is directly related to the
additional investment of net proceeds of $45.0 million received in
connection with the disposal of approximately 3.5 million shares of Atrium
Innovations Inc. (Atrium), a
former subsidiary of which we disposed in October 2006.
Consolidated interest expense
amounted to $0.1 million for
the year ended December 31, 2008, compared to $0.1 million and
$1.4 million for each of the years ended December 31, 2007 and 2006,
respectively. The decrease from 2006 to 2007 is directly related to the full
conversion of term loans into common shares completed in February 2006. Our
long-term debt related to a non-interest bearing loan from the Canadian and
Quebec Governments, for which the balance was paid in full in 2008.
16
Consolidated foreign exchange gain (loss)
amounted to $3.1 million for
the year ended December 31, 2008, compared to ($1.0 million) and $0.3
million for each of the years ended December 31, 2007 and 2006,
respectively. The increase in foreign exchange gains in 2008 is mainly
attributable to advances to our German subsidiary, denominated in Euro, and
with our US-based subsidiary, denominated in US dollars, and the corresponding
strengthening of the Euro and the US dollar compared to the Canadian dollar.
The decrease from 2006 to 2007
is mainly related to advances, made in Euro, to our German subsidiary and the
corresponding weakness of the Euro compared to the Canadian dollar.
The year-end conversion rates
from the Euro and Canadian dollar to the US dollar can be summarized as
follows:
|
|
As at December 31,
|
|
1 US dollar equivalent to:
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
$
|
|
Euro
|
|
0.7145
|
|
0.6870
|
|
0.7579
|
|
Canadian
dollar
|
|
1.2180
|
|
0.9913
|
|
1.1654
|
|
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
under the 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 (expense)
recovery
was
($1.2 million) for the year ended December 31, 2008, compared to $2.0 million and
$29.0 million for each of the years ended December 31, 2007 and 2006,
respectively. The increase in income tax expense from 2007 to 2008 is largely
attributable to a minimum tax that is payable in Germany due to the tax
accounting ramifications of transactions effected in connection with the Cowen
Transaction and to the utilization, in 2007, of some of our future income tax
assets following the non-recurring taxable capital gain realized in connection
with the spin-off of Atrium.
The
decrease in income tax recovery from 2006 to 2007 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.
17
In
2009, we do not expect to record any significant income tax recovery or expense
in our foreign or domestic entities.
Consolidated net (loss) earnings from
continuing operations
was ($59.8 million) for the year ended December 31,
2008, compared to ($32.0 million) and $7.6 million for each of the years
ended December 31, 2007 and 2006, respectively. The increase in net loss
from 2007 to 2008 is largely attributable to a combination of lower license fee
revenues, the increase in R&D costs related to the advancement of our Phase
3 program with cetrorelix in BPH, lower manufacturing margins, higher
depreciation and amortization and higher income tax expense in 2008, partly
offset by lower SG&A expenses and higher net foreign exchange gains.
The increased consolidated net
loss from continuing operations in 2007 is directly related to the increased
loss from operations of nearly $10.0 million, a one-time share in the
results of Atrium of nearly $1.6 million recorded in 2006 and a
non-recurring future income tax recovery of nearly $25.0 million recorded
in 2006 related to the sale of Atrium shares and the special distribution of
our remaining interest in January 2007.
Consolidated net (loss) earnings from
discontinued operations
amounted to ($0.3 million) for the year
ended December 31, 2007, compared to $25.8 million for the year ended December 31,
2006. The year-over-year variation relates almost exclusively to the divesture,
in October 2006, of our interest in Atrium, whose results of operations
were reported as discontinued operations for the year ended December 31,
2006 and detailed as follows:
(in thousands)
|
|
$
|
|
Revenues
|
|
239,535
|
|
|
|
|
|
Earnings
before the following items
|
|
28,360
|
|
|
|
|
|
Gain on
disposal of Atrium shares
|
|
29,248
|
|
Income tax
expense
|
|
(19,923
|
)
|
Loss on
dilution of investments
|
|
(628
|
)
|
|
|
|
|
Earnings
before non-controlling interest
|
|
37,057
|
|
Non-controlling
interest
|
|
(10,967
|
)
|
|
|
|
|
Net
earnings from discontinued operations
|
|
26,090
|
|
18
Also impacting consolidated net loss from
discontinued operations were the results of operations related to Echelon
Biosciences, Inc. (Echelon), which we disposed of in November 2007
and whose results were included in our consolidated statements of earnings
(loss) for the year ended December 31, 2007, as follows:
|
|
Years ended December 31,
|
|
(in thousands)
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
Revenues
|
|
2,358
|
|
2,593
|
|
|
|
|
|
|
|
Loss before the following
items
|
|
(206
|
)
|
(369
|
)
|
|
|
|
|
|
|
Goodwill impairment
|
|
(500
|
)
|
|
|
Loss on disposal of
Echelon shares, net of cumulative translation adjustment
|
|
(44
|
)
|
|
|
Income tax recovery
|
|
491
|
|
92
|
|
|
|
|
|
|
|
Net loss from
discontinued operations
|
|
(259
|
)
|
(277
|
)
|
The year-over-year decrease in revenues from discontinued operations
related to Echelon from 2006 to 2007 is
due to the fact that 2007 revenues represent eleven months compared to
twelve months for the year 2006.
Consolidated net loss
was $59.8 million, or $1.12 per basic and diluted
share, for the year ended December 31, 2008, compared to
$32.3 million, or $0.61 per basic and diluted share, for the year ended December 31,
2007.
The increase in consolidated net loss in 2008
as compared to 2007 is attributable to a combination of lower license fee
revenues, lower manufacturing margins, higher depreciation and amortization,
higher income tax expense and higher R&D costs, partly offset by lower
SG&A expenses and higher net foreign exchange gains.
The increased net loss in 2007 is related to a
higher loss from operations of nearly $10.0 million, lower income tax
recovery of nearly $27.0 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
$26.0 million.
We expect that the consolidated net loss for
the year 2009 will decrease, mainly due to increased license fee revenues, to
be recognized in connection with the cetrorelix development, commercialization
and licensing agreement entered into with sanofi-aventis, and with the expected
continued reduction of R&D and SG&A expenses.
19
The weighted average number of shares
outstanding used to calculate basic net earnings (loss) per share for both of
the years ended December 31, 2008 and 2007 was 53.2 million shares,
compared to 52.1 million shares for the year ended December 31, 2006.
For diluted net earnings (loss) per share, the weighted average number of
shares outstanding used for this calculation was 53.2 million shares for
both of the years ended December 31, 2008 and 2007, compared to
52.5 million shares for the year ended December 31, 2006.
Consolidated Balance Sheet
Information
(Unaudited)
|
|
As at December 31,
|
|
(in thousands)
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
49,226
|
|
10,272
|
|
8,939
|
|
Short-term investments
|
|
493
|
|
31,115
|
|
51,550
|
|
Accounts receivable and
other current assets
|
|
12,005
|
|
18,193
|
|
41,234
|
|
Property, plant and
equipment, net
|
|
6,682
|
|
7,460
|
|
13,001
|
|
Other long-term assets
|
|
39,936
|
|
56,323
|
|
108,767
|
|
Total assets
|
|
108,342
|
|
123,363
|
|
223,491
|
|
|
|
|
|
|
|
|
|
Accounts payable and other
current liabilities
|
|
22,121
|
|
21,480
|
|
15,624
|
|
Current portion of
long-term debt and payable
|
|
49
|
|
775
|
|
686
|
|
Long-term debt and payable
|
|
172
|
|
-
|
|
687
|
|
Non-financial long-term
liabilities
|
|
64,525
|
|
12,517
|
|
27,615
|
|
Total liabilities
|
|
86,867
|
|
34,772
|
|
44,612
|
|
Shareholders equity
|
|
21,475
|
|
88,591
|
|
178,879
|
|
Total liabilities and
shareholders equity
|
|
108,342
|
|
123,363
|
|
223,491
|
|
The increase in cash and cash equivalents and the
decrease in short-term investments from 2007 to 2008 are discussed in more
detail below. The decrease in accounts receivable and other current assets from
2007 to 2008 is largely attributable to lower customer billings in December 2008
compared to the same period in 2007, lower grants receivable at the end of 2008
and the write-down to net realizable value of certain components of inventory
in December 2008, as discussed above.
The decrease in other long-term assets is primarily
due to the disposal, in 2008, of the long-lived assets which had been reported
as held for sale as at December 31, 2007, as discussed above and the
impairment charge that was taken relative to teverelix in the fourth quarter of
2008, partially offset by a net increase in deferred charges, due mainly to the
capitalization of financial advisor, legal and other costs incurred in
connection with the Cowen Transaction. The increase in non-financial long-term
liabilities is primarily attributable to the increase in deferred revenues
following the receipt of proceeds from the Cowen Transaction, as well as an
increase in employee future benefits related mainly to employees in our German
subsidiary.
20
The decrease in shareholders equity from 2007 to
2008 is almost entirely attributable to the increase in consolidated deficit
due to the current year net loss and the decrease of accumulated other
comprehensive income, which in turn is largely made up of cumulative
translation adjustments.
The increase in cash and cash equivalents and the
decrease in short-term investments from 2006 to 2007 are discussed in more
detail below. The decrease in accounts receivable and other current assets from
2006 to 2007 is mainly attributable to the utilization of future tax assets
following the taxable capital gain realized in connection with the spin-off of
Atrium, as well as the reduction of current assets of discontinued operations
related to Echelon. The decrease in net property, plant and equipment from 2006
to 2007 is primarily the result of the reclassification of long-lived assets
held for sale to other long-term assets, which resulted in an increase in 2007
to the latter, offset by a significant decrease due to the disposal of Atrium,
which had been carried in the balance sheet as of December 31, 2006 under
the equity method at a value of $57.1 million.
Accounts payable and other current liabilities
increased from 2006 to 2007 largely as a result of an increased volume of
supplier invoices in December 2007 compared to the same period in 2006,
while the decrease in non-financial long-term liabilities was mainly
attributable to the decrease in long-term deferred tax liabilities and a
decrease in the long-term portion of deferred revenues not yet amortized at
year-end.
The overall decrease in shareholders equity from
2006 to 2007 relates to the reduction of share capital in the amount of
$137.9 million as a result of the distribution to our shareholders of our
remaining interest in Atrium. This decrease was offset by an increase in other
capital to adjust for the effects of the corresponding difference between the
fair value and the book value of Atrium, net of income taxes and cumulative
translation adjustment, of $71.1 million. Also contributing to the
reduction in shareholders equity from 2006 to 2007 was the contribution of the
annual net loss to the consolidated deficit as well as an increase in the
cumulative translation adjustment.
21
Financial Liabilities,
Obligations and Commitments
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 summarizes future cash requirements
with respect to these obligations.
|
|
Payments due in
|
|
(in thousands)
|
|
Carrying
amount
|
|
2009
|
|
2010-2011
|
|
2012-2013
|
|
After 2013
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
Long-term payable
|
|
221
|
|
49
|
|
98
|
|
74
|
|
|
|
Operating leases
|
|
10,366
|
|
2,191
|
|
4,241
|
|
2,503
|
|
1,431
|
|
Commercial commitments
|
|
20,528
|
|
15,743
|
|
3,974
|
|
811
|
|
|
|
Total
|
|
31,115
|
|
17,983
|
|
8,313
|
|
3,388
|
|
1,431
|
|
Outstanding
Share Data
As at March 9, 2009, there were 53,187,470
common shares issued and outstanding, and there were 4,667,428 stock options
outstanding.
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 on the
availability of funding from investors and prospective commercial partners.
Capital
disclosures
Our objective in managing capital composed of
shareholders equity is to ensure a sufficient liquidity position to finance
our R&D activities, SG&A expenses, working capital and overall capital
expenditures. We make every effort to manage our liquidity to minimize dilution
to our shareholders.
Initially, we had funded our activities through public offerings
of common shares and convertible term loans. More recently, however, we have
tried to optimize our liquidity needs by non-dilutive sources, including the
sale of non-core assets and future rights to royalties, investment tax credits
and grants, interest income, licensing, service and royalties.
During 2008, we fulfilled our obligation on the loan
from the federal and provincial governments with a nominal value of
CAN$800,000.
22
In connection with the sale of
the Quebec City building and land discussed above, we entered into a long-term
lease agreement with the principal tenant of the building. As part of the
agreement, we agreed to pay the principal tenant CAN$300,000 (approximately
$246,305) as an incentive and service fee.
The resulting payable is non-interest bearing and is due in bi-annual
installments of CAN$30,000 (approximately $24,630) over the next five years.
Our capital management objective remains the same as
that of previous years. The policy on dividends is to retain cash to keep funds
available to finance the activities required to advance our product development
pipeline, prioritizing our lead product candidate, cetrorelix, in Phase 3 for
BPH.
We are not subject to any capital requirements imposed
by any regulators or any other external source.
Liquidity, Cash Flows and
Capital Resources
Our operations and capital expenditures are
mainly financed through cash flows from operating activities, selling of
non-core assets and other non-dilutive activities.
Our cash, cash equivalents and short-term
investments amounted to $49.7 million as at December 31, 2008,
compared to $41.4 million as at December 31, 2007. Possible
additional operating losses and/or possible investments in the acquisition of
complementary businesses or products may require additional financing. As at December 31,
2008, cash, cash equivalents and short-term investments of the Company included
CAN$3.8 million and EUR32.8 million.
Short-term investments do not include
asset-backed commercial paper affected by liquidity issues.
Based
on our assessment, which takes into account the proceeds received in connection
with the Cowen Transaction, the signing of the development, commercialization
and license agreement with sanofi-aventis, as well as our strategic plan and
corresponding budgets and forecasts, we believe that we have sufficient
liquidity and financial resources to fund planned expenditures and other
working capital needs for at least the next 12-month period following the
balance sheet date of December 31, 2008.
We
may endeavour to secure additional financing, as required, through strategic
alliance arrangements, the issuance of new share capital, as well as through
other non-dilutive activities.
The variation of our liquidity by activity is
explained below, not considering any cash flows used in or provided by
discontinued operations.
23
Operating Activities
Cash flows used in our continuing operating
activities amounted to $1.3 million for the year ended December 31,
2008, compared to $25.7 million and $15.9 million for each of the
years ended December 31, 2007 and 2006, respectively. The significant
decrease in cash used in operating activities from 2007 to 2008 relates in
large proportion to the net cash proceeds received in connection with the Cowen
Transaction, in addition to higher upfront payments received from certain
customers and higher cash collections of trade accounts receivable. These cash
inflows were partially offset by increased cash expenditures that contributed
to the increase in our net loss, as well as by payments made, which were mainly
related to financial advisor, legal and other costs incurred in connection with
the Cowen Transaction, as well as to a higher volume of trade accounts payable
settlements.
The increase in net cash used in 2007 compared to
2006 is primarily attributable to lower license revenues, increased
non-recurring corporate expenses, additional investments in R&D related to
the initiation of our Phase 3 program in BPH for cetrorelix, as well as to the
further advancement of targeted, earlier-stage development programs.
We expect net cash used in continuing operating
activities to increase in 2009 due to the absence of cash royalty receipts that
were payable in connection with the License Agreement with Merck Serono prior
to the Cowen Transaction and as we continue our Phase 3 clinical program with cetrorelix
in BPH and further advance our targeted, earlier-stage development programs.
These cash outflows will be partially offset by the receipt of the upfront
payment from sanofi-aventis in connection with the cetrorelix development,
commercialization and licensing agreement, as discussed above.
Financing Activities
Net cash used in continuing financing activities was $1.2 million
for the year ended December 31, 2008, compared to $1.1 million and
$0.7 million for each of the years ended December 31, 2007 and 2006,
respectively. These funds were used mainly for the repayments of our long-term
debt and payable, as well as in connection with the filing of a shelf
prospectus.
Investing Activities
Cash provided by continuing investing activities
(excluding the changes in short-term investments) amounted to
$13.6 million for the year ended December 31, 2008, while cash flows
used in continuing investing activities (excluding the changes in short-term
investments) was $3.0 million for the year ended December 31, 2007,
compared to $0.5 million for the year ended December 31, 2006. The
increase in cash provided by investing activities from 2007 to 2008 relates
primarily to the disposals of the Quebec City building and land and of Impavido
®
, both of which had been reported as long-lived assets held for sale as
at December 31, 2007.
24
The increase in net cash used in continuing
investing activities in 2007 compared to 2006 is mainly related to the
acquisition of equipment that is necessary to support clinical trials.
We expect that cash provided by investing activities
(excluding the changes in short-term investments) will decrease in 2009, mainly
due to the expected non-recurrence of cash proceeds received in connection with
the disposal of long-lived assets held for sale.
Critical Accounting Policies and Estimates
Our financial statements are
prepared in accordance with Canadian GAAP. A summary of significant and
pertinent measurement and disclosure differences between Canadian and US GAAP
is provided in note 27 to our 2008 annual consolidated financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles 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 are generally made in connection with
the calculation of revenues, research and development expenses, stock-based
compensation expense, as well as in determining the allowance for doubtful
accounts, inventory and provisions for obsolete inventory, future income tax
assets and liabilities, the useful lives of property, plant and equipment and
intangible assets with finite lives, the valuation of intangible assets and
goodwill, the fair value of stock options granted, employee future benefits and
certain accrued liabilities. We base our estimates on historical experience,
where relevant, and on various other assumptions that we believe to be
reasonable under the circumstances. Actual results could differ from those
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. 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
25
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 we have no
significant future performance obligations and when collectibility 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, collectibility is assured, and when
there are no significant future performance obligations in connection with the
milestones.
In those instances where
we have collected upfront or milestone payments but have ongoing future
obligations related to the development of the drug product, we consider 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 our 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 we have fulfilled the terms in accordance with the contractual
agreement and have no future obligations, the amount of the royalty fee is
determinable and collection is reasonably assured.
Proceeds received in connection with the Cowen
Transaction are deferred and recognized over the life of the license agreement
pursuant to the units-of-revenue method, as discussed above.
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
26
capitalized and amortized against operations over the
estimated period of benefit. To date, no costs have been deferred.
27
Impairment of Long-Lived Assets
and Goodwill
Property, plant and equipment and intangible assets with
finite lives are reviewed for impairment when events or circumstances indicate
that carrying values 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 in turn is
determined based upon discounted cash flows or appraised values, depending of
the nature of assets.
Goodwill,
which represents the excess of the purchase price over the fair values of the
net assets of entities acquired at the respective dates of acquisition, is
tested for impairment annually 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
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 of a reporting unit exceeds
its fair value, an impairment loss is recognized in an amount equal to the excess.
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.
Income
Taxes
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 if, based on available information, it is more likely than
not that some or all of the future income tax assets will not be realized.
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. 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.
28
Stock-Based
Compensation Costs
We account for all forms of
employee stock-based compensation using the fair value-based method. This
method requires that we make estimates about the risk-free interest rate, the
expected volatility of our shares and the expected life of the awards.
New
Accounting Standards
Impact of accounting standards adopted in 2008
On January 1, 2008, we adopted the Canadian
Institute of Chartered Accountants, (CICA) Handbook Section 1535,
Capital Disclosures
(Section 1535); Section 3862,
Financial Instruments Disclosures
(Section 3862); Section 3863,
Financial Instruments Presentation
(Section 3863); and Section 3031,
Inventories
(Section 3031).
Section 1535
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.
Section 3862 and Section 3863, which replace Section 3861,
Financial Instruments Disclosure and
Presentation
, require the disclosure of additional details of
financial asset and liability categories as well as a detailed discussion on
the risks associated with our financial instruments. The presentation
requirements are carried forward unchanged
The CICA issued Section 3031, which replaced Section 3030 of the same title. This
standard requires that inventories 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. Section 3031 also
requires the reversal of previous write-downs to net realizable value when
there is a subsequent increase in the value of inventories. We have adopted
this standard effective January 1, 2008, and there has been no impact on
the consolidated financial statements.
Impact of accounting pronouncements not yet adopted
In February 2008, the CICA issued Handbook Section 3064,
Goodwill and Intangible Assets
.
This standard provides guidance on the recognition of intangible assets and the
criteria for asset recognition, clarifying the applications of the concept of
matching revenues and expenses, whether these assets are separately acquired or
are developed internally. The standard will apply to our interim and annual
financial statements for periods beginning on January 1, 2009. We do not
expect that adoption of this standard will have a significant impact on the
consolidated financial statements.
29
In January 2009, the CICA issued Handbook Section 1582,
Business Combinations, which replaces the existing standards. This section
establishes the standards for the accounting of business combinations and
states that all assets and liabilities of an acquired business will be recorded
at fair value. Obligations for contingent considerations and contingencies will
also be recorded at fair value at the acquisition date. The standard also
states that acquisition-related costs will be expensed as incurred and that
restructuring charges will be expensed in the periods after the acquisition
date. This standard is applied prospectively to business combinations with
acquisition dates on or after January 1, 2011. Earlier adoption is
permitted. We are currently evaluating the impact, if any, that adopting this
standard will have on our consolidated financial statements.
In January 2009, the CICA issued Handbook Section 1601,
Consolidated Financial Statements
, which
replaces the existing standards and establishes the standards for preparing
consolidated financial statements and is effective for 2011. Earlier adoption
is permitted. We are currently evaluating the impact, if any, that adopting
this standard will have on our consolidated financial statements.
In January 2009, the CICA issued Handbook Section 1602,
Non-controlling Interests
, which
establishes standards for the accounting of non-controlling interests of a
subsidiary in the preparation of consolidated financial statements subsequent
to a business combination. This standard is effective for 2011. Earlier
adoption is permitted. We are currently evaluating the impact, if any, that
adopting this standard will have on our consolidated financial statements.
In
January 2009, the CICAs Emerging Issue Committee (EIC) issued Abstract
EIC-173,
Credit
Risk and the Fair Value of Financial
Assets and Liabilities
, which requires
entities to take both counterparty credit risk and their own credit risk into
account when measuring the fair value of financial assets and liabilities,
including derivatives. EIC-173 will be effective for interim and annual periods
beginning on or after January 1, 2009. We do not expect that adoption of
this guidance will have a significant impact on our consolidated financial
statements.
International
Financial Reporting Standards (IFRS)
We are currently evaluating
the potential impact that could result from preparing our consolidated
financial statements in accordance with IFRS, given that the Canadian
Accounting Standards Board confirmed that IFRS will replace current Canadian
standards and interpretations as Canadian GAAP for publicly accountable
enterprises. The adoption of IFRS will have an impact on our consolidated
financial statements, as well as on a wide range of operational and performance
measures, beginning on January 1, 2011.
30
To date, we have performed a
high-level diagnostic that has identified pertinent differences between IFRS
and current accounting policies and procedures that conform to Canadian GAAP.
We have also developed a formal plan for IFRS conversion and the related
transition from current standards. Activities under that plan will include,
among other things, the identification and documentation of pertinent
accounting and reporting differences between IFRS and Canadian GAAP; the choice
of IFRS accounting policies, including consideration of elections available
under IFRS 1,
First-time Adoption of
International Financial Reporting Standards
; determination of the
impact of conversion on internal controls, accounting systems and other
business solutions and processes; and the development of training to assist
appropriate employees in the transition to and ongoing compliance with IFRS.
Activities in connection
with our IFRS implementation plan will continue throughout 2009, and we will
provide required disclosures regarding the status of our plan.
Outlook for 2009
We
expect to disclose first efficacy results of our Phase 3 program in BPH with
our lead endocrinology compound, cetrorelix, in the third quarter of 2009.
Results for the second efficacy trial of this same program are expected in the
fourth quarter of 2009. Results for the safety trial and the QTc trial are
expected by the end of 2009.
In
Q4 2009, we expect to disclose Phase 2 results with AEZS-108 in advanced
ovarian and endometrial cancers.
We
will continue to seek business development opportunities from our extensive
product pipeline.
As pertaining to liquidity, our expectation is
that cash flows from operations will not proceed linearly throughout the year,
but will instead be positively impacted in the first half of 2009 due to the
receipt of the $30.0 million upfront payment from sanofi-aventis, as
discussed above, partly offset by payments expected to be made in connection
with the pivotal long-term safety trial and the thorough QTc trial for
cetrorelix in BPH.
Financial and Other Instruments
Foreign
Currency Risk
Since we operate on an
international scale, we are exposed to currency risks as a result of potential
exchange rate fluctuations. For the year ended December 31, 2008, we were
not a party to any forward-exchange contracts, and no forward-exchange
contracts were outstanding as at March 9, 2009.
31
Beginning on January 1,
2009, due to changes in facts and circumstances, the Company and all its
subsidiaries will use the euro as their functional currency. As such, all
foreign currency exposure risk on inter-company transactions will be
eliminated.
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 and
notes 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.
Related
Party Transactions and Off-Balance Sheet Arrangements
We did not enter into transactions with any
related parties during the year ended December 31, 2008.
As
at December 31, 2008, we did not have any interest in variable interest
entities or any other off-balance sheet arrangements.
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 activities
related to 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
32
new products on a successful
and timely basis, we may become non-competitive and unable to recover the
R&D or 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 our
products do not achieve significant market acceptance, our business and
financial condition 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 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 endeavour
33
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 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 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. However, there is no assurance
that we will be able to 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.
34
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 general have been subject 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.
Delisting Risk
There can be no assurance that our common
shares will remain listed on the NASDAQ Market (NASDAQ). On October 24,
2008, we announced that we had received a notification from NASDAQ regarding
the failure by the Company to comply with NASDAQs minimum bid price
requirements. Although NASDAQ has temporarily suspended enforcement of its
minimum bid price requirements, such requirements will be reinstated in October 2009.
If we fail to meet any of NASDAQs continued listing requirements and NASDAQ
attempts to enforce compliance with its rules, our common shares may be
delisted from NASDAQ. Any delisting of our common shares may adversely affect a
shareholders ability to dispose, or obtain quotations as to the market value,
of such shares.
A more comprehensive list of the risks and
uncertainties affecting us can be found in our Annual Report or Form 20-F
for the financial year ended December 31, 2008 filed with the Canadian
Securities Regulatory Authorities at www.sedar.com and with the United States
Securities and Exchange Commission at www.sec.gov/edgar.shtml and investors are
urged to consult such risk factors.
Disclosure Controls and Procedures
Under
the supervision and with the participation of our management, including the
Chief Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of our disclosure controls and procedures as at December 31,
2008. Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that these disclosure controls and procedures are
effective as at December 31, 2008.
35
Managements Annual Report on Internal Control over Financial
Reporting
Æterna
Zentaris management is responsible for establishing and maintaining adequate
internal control over financial reporting. Our 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 Canadian GAAP, which differ in certain
respects from US GAAP, as discussed above.
Our
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 Æterna Zentaris; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with Canadian GAAP, and that receipts and expenditures
of the Company are being made only in accordance with authorizations of Company
management; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of Company
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.
Management
conducted an evaluation of the effectiveness of our 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, management concluded that our
internal control over financial reporting was effective as at December 31,
2008.
Changes in Internal Controls over Financial
Reporting
There
have been no changes in our internal control over financial reporting during
the year ended December 31, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
During 2008, in the course of our evaluation,
we identified significant deficiencies in our internal control over financial
reporting which we do not believe, either individually or in the aggregate,
resulted in a material weakness to our internal control over financial
reporting.
36
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.
On behalf of
management,
Dennis Turpin, CA
Senior Vice President
and Chief Financial Officer
March 9, 2009
37
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:
March 10, 2009
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By:
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/s/Dennis
Turpin
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Dennis
Turpin
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Senior
Vice President and Chief Financial Officer
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