Table of
Contents
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 20-F
o
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Registration Statement Pursuant to
Section 12(b) or 12(g) of The Securities Exchange Act of 1934
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OR
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x
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Annual Report Pursuant to Section 13 or
15(d) of The Securities Exchange Act of 1934 for the fiscal year ended
December 31, 2008
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OR
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o
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Transition Report Pursuant to Section 13 or
15(d) of The Securities Exchange Act of 1934
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OR
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o
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Shell Company Report Pursuant to Section 13
or 15(d) of The Securities Exchange Act of 1934
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Commission
file number 0-30752
ÆTERNA ZENTARIS INC.
(Exact Name of Registrant as Specified in its Charter)
Not Applicable
(Translation of
Registrants Name into English)
Canada
(Jurisdiction of Incorporation)
1405 du Parc-Technologique Blvd.
Québec, Quebec
Canada, G1P 4P5
Dennis Turpin
Telephone: (418)-652-8525
E-mail: dturpin@aezsinc.com
Securities registered or to be registered pursuant to
Section 12(b) of the Act:
Title of Each Class
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Name of Each Exchange on Which Registered
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Common
Shares
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NASDAQ
Global Market
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Toronto
Stock Exchange
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Securities registered or to be registered pursuant to
Section 12(g) of the Act:
NONE
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the ACT:
NONE
Indicate the number of outstanding shares of each of
the issuers classes of capital or common stock as of the close of the period
covered by the annual report: 53,187,470
common shares as of December 31, 2008.
Indicate by check mark whether the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes
o
No
x
If this report is an annual or transition report, indicate
by check mark if the registrant is not required to file reports pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934.
Yes
o
No
x
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes
x
No
o
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of the registrants knowledge, in a definitive
proxy or information statements incorporated by reference in Part III of
this Form 20-F or any amendment to this Form 20-F.
o
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer or, or a non-accelerated
filer. See definitions of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated
filer
o
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Accelerated filer
x
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Non-accelerated filer
o
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Indicate by checkmark which basis of accounting the
registrant has used to prepare the financial statements included in this
filing:
U.S.
GAAP
o
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International
Financial Reporting Standards as issued by the International Accounting
Standards Board
o
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Other
x
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If Other has been checked in response to the previous
question, indicate by check mark which financial statement item the registrant
has elected to follow. Item 17
o
Item 18
x
If this is an annual report, indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
o
No
x
Table of Contents
Basis of Presentation
General
Except where the context otherwise requires, all
references in this annual report on Form 20-F (Form 20-F) to the Company,
Æterna Zentaris Inc., we, us, our or similar words or phrases are to
Æterna Zentaris Inc. and its subsidiaries, taken together. In this annual report, references to $ and US$
are to United States dollars and references to CAN$ are to Canadian
dollars. Unless otherwise indicated, the
statistical and financial data contained in this annual report are presented as
at December 31, 2008.
Forward-Looking Statements
This annual report contains forward-looking statements made pursuant to the safe harbor provisions of the U.S. Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which could cause the Companys actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, among others, the availability of funds and resources to pursue R&D projects, the successful and timely completion of clinical studies, the ability of the Company to take advantage of business opportunities in the pharmaceutical industry, uncertainties related to the regulatory process and general changes in economic conditions. Investors should consult the Companys quarterly and annual filings with the Canadian and U.S. securities commissions for additional information on risks and uncertainties relating to the forward-looking statements. Investors are cautioned not to rely on these forward-looking statements. The Company does not undertake to update these forward-looking statements and we disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future results, events or developments except if we are requested to do so by a governmental authority or applicable law.
Table of Contents
PART I
Item 1. Identity of Directors, Senior Management and
Advisers
A. Directors and senior management
Not applicable.
B. Advisers
Not applicable.
C. Auditors
Not applicable.
Item 2. Offer Statistics and Expected Timetable
A. Offer statistics
Not applicable.
B. Method and expected timetable
Not applicable.
Item 3. Key Information
A. Selected financial data
The selected financial data should be read in
conjunction with our audited consolidated financial statements and the related
notes included elsewhere in this annual report, and Item 5. Operating and
Financial Review and Prospects of this annual report.
1
Table of
Contents
Consolidated Statements of Earnings
Data:
Amounts under Canadian
GAAP
(in
thousands of US dollars, except share and per share data)
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Years Ended December 31,
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2008
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2007
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2006
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2005
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2004
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$
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$
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$
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$
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$
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Revenues
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38,478
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42,068
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38,799
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44,813
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42,972
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Operating
expenses
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Cost of sales
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19,278
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12,930
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11,270
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8,250
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7,992
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Selling, general and administrative
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17,325
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20,403
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16,478
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14,403
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13,137
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Research and development costs
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57,448
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39,248
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27,422
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25,544
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23,431
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Research and development tax credits and grants
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(343
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)
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(2,060
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)
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(1,564
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)
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(317
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)
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(845
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)
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Depreciation and amortization
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Property, plant and equipment
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1,515
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1,562
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2,816
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1,665
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1,958
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Intangible assets
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5,639
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4,004
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6,148
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4,279
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4,178
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Impairment of long-lived asset held for sale
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735
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100,862
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76,822
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62,570
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53,824
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49,851
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Loss
from operations
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(62,384
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)
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(34,754
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)
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(23,771
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)
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(9,011
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)
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(6,879
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)
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Other
income (expenses)
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Interest income
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868
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1,904
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1,441
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1,235
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1,286
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Interest expense
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Long-term debt and convertible term loans
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(85
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)
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(1,270
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)
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(6,979
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)
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(4,150
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)
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Other
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(118
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)
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(163
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)
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(31
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)
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(69
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)
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Foreign exchange (loss) gain
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3,071
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(1,035
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)
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319
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(87
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)
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(491
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)
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Loss on disposal of long-lived assets held for sale
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(35
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)
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|
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Loss on disposal of equipment
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(44
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)
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(28
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)
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Gain on disposal of a long-term investment
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409
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|
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|
|
|
|
|
|
|
|
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3,742
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|
756
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|
736
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|
(5,862
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)
|
(3,424
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)
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|
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|
|
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|
|
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Share
in the results of an affiliated company
|
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1,575
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Loss
before income taxes from continuing operations
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(58,642
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)
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(33,998
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)
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(21,460
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)
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(14,873
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)
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(10,303
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)
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Income
tax (expense) recovery
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(1,175
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)
|
1,961
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29,037
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(609
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)
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(273
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)
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|
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|
|
|
|
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Net
(loss) earnings from continuing operations
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|
(59,817
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)
|
(32,037
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)
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7,577
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(15,482
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)
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(10,576
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)
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|
|
|
|
|
|
|
|
|
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Net
(loss) earnings from discontinued operations
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|
(259
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)
|
25,813
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26,053
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6,151
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|
|
|
|
|
|
|
|
|
|
|
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Net
(loss) earnings for the year
|
|
(59,817
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)
|
(32,296
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)
|
33,390
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|
10,571
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|
(4,425
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)
|
|
|
|
|
|
|
|
|
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Net
(loss) earnings per share from continuing operations
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|
|
|
|
|
|
|
|
|
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Basic
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|
(1.12
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)
|
(0.61
|
)
|
0.14
|
|
(0.34
|
)
|
(0.23
|
)
|
Diluted
|
|
(1.12
|
)
|
(0.61
|
)
|
0.14
|
|
(0.34
|
)
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) earnings per share from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
0.50
|
|
0.57
|
|
0.13
|
|
Diluted
|
|
|
|
|
|
0.48
|
|
0.57
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
(1.12
|
)
|
(0.61
|
)
|
0.64
|
|
0.23
|
|
(0.10
|
)
|
Diluted
|
|
(1.12
|
)
|
(0.61
|
)
|
0.62
|
|
0.23
|
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
53,187,470
|
|
53,182,803
|
|
52,099,290
|
|
46,139,814
|
|
45,569,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
53,187,470
|
|
53,182,803
|
|
52,549,260
|
|
46,139,814
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|
45,569,176
|
|
2
Table of Contents
Amounts under U.S. GAAP
|
|
Years ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) earnings for the year
|
|
(56,070
|
)
|
(37,428
|
)
|
34,262
|
|
15,970
|
|
(2,082
|
)
|
Out
of which:
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) earnings from:
|
|
|
|
|
|
|
|
|
|
|
|
continuing
operations
|
|
(56,070
|
)
|
(36,415
|
)
|
8,449
|
|
(10,083
|
)
|
(8,158
|
)
|
discontinued
operations
|
|
|
|
(1,013
|
)
|
25,813
|
|
26,053
|
|
6,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) earnings per share from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
(1.05
|
)
|
(0.68
|
)
|
0.16
|
|
(0.22
|
)
|
(0.18
|
)
|
Diluted
|
|
(1.05
|
)
|
(0.68
|
)
|
0.16
|
|
(0.22
|
)
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) earnings per share from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
(0.02
|
)
|
0.50
|
|
0.56
|
|
0.13
|
|
Diluted
|
|
|
|
(0.02
|
)
|
0.49
|
|
0.56
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
(1.05
|
)
|
(0.70
|
)
|
0.66
|
|
0.34
|
|
(0.05
|
)
|
Diluted
|
|
(1.05
|
)
|
(0.70
|
)
|
0.65
|
|
0.34
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
53,187,470
|
|
53,182,803
|
|
52,099,290
|
|
46,139,814
|
|
45,569,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
53,187,470
|
|
53,182,803
|
|
52,549,260
|
|
46,139,814
|
|
45,569,176
|
|
Consolidated Balance Sheet Data:
Amounts under Canadian GAAP
|
|
As at December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
49,226
|
|
10,272
|
|
8,939
|
|
12,234
|
|
13,568
|
|
Short-term investments
|
|
493
|
|
31,115
|
|
51,550
|
|
22,370
|
|
22,477
|
|
Working capital
|
|
39,554
|
|
37,325
|
|
85,413
|
|
99,502
|
|
60,291
|
|
Total assets
|
|
108,342
|
|
123,363
|
|
223,491
|
|
419,785
|
|
290,539
|
|
Long-term debt and payable
|
|
172
|
|
|
|
687
|
|
29,866
|
|
17,398
|
|
Share capital
|
|
30,566
|
|
30,566
|
|
168,466
|
|
130,344
|
|
127,585
|
|
Shareholders equity
|
|
21,475
|
|
88,591
|
|
178,879
|
|
109,531
|
|
100,076
|
|
Amounts under U.S. GAAP
|
|
As at December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
49,226
|
|
10,272
|
|
8,939
|
|
12,234
|
|
13,568
|
|
Short-term investments
|
|
493
|
|
31,115
|
|
51,550
|
|
22,370
|
|
22,477
|
|
Working capital
|
|
39,554
|
|
37,325
|
|
85,413
|
|
99,502
|
|
60,291
|
|
Total assets
|
|
100,001
|
|
109,182
|
|
209,143
|
|
404,587
|
|
271,440
|
|
Long-term debt and payable
|
|
172
|
|
|
|
687
|
|
30,858
|
|
19,986
|
|
Share capital
|
|
22,589
|
|
22,589
|
|
160,489
|
|
129,750
|
|
126,991
|
|
Shareholders equity
|
|
13,134
|
|
74,410
|
|
169,704
|
|
99,797
|
|
86,659
|
|
3
B. Capitalization and indebtedness
Not applicable.
C. Reasons for the offer and use of
proceeds
Not applicable.
D. Risk factors
Risks
related to us and our business
Investments in biopharmaceutical companies are generally
considered to be
speculative.
The prospects for companies
operating in the biopharmaceutical industry may generally be considered to be
uncertain, given the very nature of the industry and, accordingly, investments
in biopharmaceutical companies should be considered to be speculative.
We have a history of operating losses and we may never
achieve or maintain operating
profitability.
Our product candidates remain
at the development stage and we have incurred substantial expenses in our
efforts to develop products. Consequently, we have incurred recurrent operating
losses and, as of December 31, 2008, we had an accumulated deficit of
$102.8 million. Our operating losses have adversely impacted, and will
continue to adversely impact, our working capital, total assets and shareholders
equity. We do not expect to reach operating profitability in the immediate
future, and our expenses are likely to increase as we continue to expand our
research and development (R&D) and clinical study programs and our sales
and marketing activities and seek regulatory approval for our product
candidates. Even if we succeed in developing new commercial products, we expect
to incur additional operating losses for at least the next several years. If we
do not ultimately generate sufficient revenue from commercialized products and
achieve or maintain operating profitability, an investment in our securities
could result in a significant or total loss.
We do not have the required regulatory approvals to market
certain of our product
candidates, and we do not know if we will ever receive
such approvals.
With the exception of
Cetrotide
®
(cetrorelix) for the treatment of infertility,
none of our product candidates has to date received regulatory approval for its
intended commercial sale. We cannot market a pharmaceutical product in any
jurisdiction until it has completed rigorous preclinical testing and clinical
trials and passed such jurisdictions extensive regulatory approval process. In
general, significant research and development and clinical studies are required
to demonstrate the safety and efficacy of our product candidates before we can
submit regulatory applications. Preparing, submitting and advancing
applications for regulatory approval is complex, expensive and time-consuming
and entails significant uncertainty. Even if a product candidate is approved by
the Food and Drug Administration (FDA), the Canadian Therapeutic Products
Directorate or any other regulatory authority, we may not obtain approval for
an indication whose market is large enough to recoup our investment in that
product candidate. In addition, there can be no assurance that we will ever
obtain all or any required regulatory approvals for any of our product
candidates.
We are currently developing
our product candidates based on R&D activities, preclinical testing and
clinical trials conducted to date, and we may not be successful in developing
or introducing to the market these or any other new products or technology. If
we fail to develop and deploy new products successfully and on a timely basis,
we may become non-competitive and unable to recoup the R&D and other
expenses we incur to develop and test new products.
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Our clinical trials may not yield results which will enable
us to obtain regulatory
approval for our products, and a setback in any of our
clinical trials would likely
cause a drop in our share price.
We will only receive regulatory
approval for a product candidate if we can demonstrate in carefully designed
and conducted clinical trials that the product candidate is both safe and
effective. We do not know whether our pending or any future clinical trials
will demonstrate sufficient safety and efficacy to obtain the requisite
regulatory approvals or will result in marketable products. Unfavorable data
from those studies could result in the withdrawal of marketing approval for
approved products or an extension of the review period for developmental
products. Clinical trials are inherently lengthy, complex, expensive and
uncertain processes. It typically takes many years to complete testing, and
failure can occur at any stage of testing. Results attained in preclinical
testing and early clinical studies, or trials, may not be indicative of results
that are obtained in later studies.
We may suffer significant
setbacks in advanced clinical trials, even after promising results in earlier
studies. Based on results at any stage of clinical trials, we may decide to
repeat or redesign a trial or discontinue development of one or more of our
product candidates. Further, actual results may vary once the final and
quality-controlled verification of data and analyses has been completed. If we
fail to adequately demonstrate the safety and efficacy of our products under
development, we will not be able to obtain the required regulatory approvals to
commercialize our product candidates.
Clinical trials are subject to
continuing oversight by governmental regulatory authorities and institutional
review boards and:
·
must
meet the requirements of these authorities;
·
must
meet requirements for informed consent; and
·
must
meet requirements for good clinical practices.
We may not be able to comply
with these requirements in respect of one or more of our product candidates.
In addition, we rely on third
parties, including Contract Research Organizations (CROs) and outside
consultants, to assist us in managing and monitoring clinical trials. Our
reliance on these third parties may result in delays in completing, or in
failing to complete, these trials if one or more third parties fails to perform
with the speed and level of competence we expect.
A failure in the development
of any one of our programs or product candidates could have a negative impact
on the development of the others. Setbacks in any phase of the clinical
development of our product candidates would have an adverse financial impact
(including with respect to any agreements and partnerships that may exist
between us and other entities), could jeopardize regulatory approval and would
likely cause a drop in our share price.
If we encounter difficulties enrolling patients in our
clinical trials, our trials
could be delayed or otherwise adversely affected.
Clinical trials for our
product candidates require that we or third parties identify and enroll a
specific number of patients. We or such third parties may not be able to enroll
a sufficient number of patients to complete our clinical trials in a timely
manner. Patient enrollment is a function of many factors including:
·
design
of the protocol;
·
the
size of the patient population;
·
eligibility
criteria for the study in question;
·
perceived
risks and benefits of the drug under study and of the control drug, if any;
·
availability
of competing therapies already approved;
·
number
of competing clinical trials ongoing in the same indication;
·
efforts
to facilitate timely enrollment in clinical trials;
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·
patient
referral practices of physicians; and
·
availability
of clinical trial sites.
If we or any third party have
difficulty enrolling a sufficient number of patients to conduct our clinical
trials as planned, we may need to delay or terminate ongoing clinical trials.
Even if we obtain regulatory approvals for our product
candidates, we will be subject
to stringent ongoing government
regulation.
Even if regulatory authorities
approve any of our product candidates, the manufacture, marketing and sale of
such products will be subject to strict and ongoing regulation. Compliance with
such regulation will be expensive and consume substantial financial and
management resources. For example, an approval for a product may be conditioned
on our agreement to conduct costly post-marketing follow-up studies to monitor
the safety or efficacy of the products. In addition, as a clinical experience
with a drug expands after approval because the drug is used by a greater number
and more diverse group of patients than during clinical trials, side effects or
other problems may be observed after approval that were not observed or
anticipated during pre-approval clinical trials. In such a case, a regulatory authority could
restrict the indications for which the product may be sold or revoke the
products regulatory approval.
We and our contract
manufacturers will be required to comply with applicable current Good
Manufacturing Practice (cGMP) regulations for the manufacture of our
products. These regulations include requirements relating to quality assurance,
as well as the corresponding maintenance of rigorous records and documentation.
Manufacturing facilities must be approved before we can use them in the
commercial manufacturing of our products and are subject to subsequent periodic
inspection by regulatory authorities. In addition, material changes in the
methods of manufacturing or changes in the suppliers of raw materials are
subject to further regulatory review and approval.
If we, or any future marketing
collaborators or contract manufacturers, fail to comply with applicable
regulatory requirements, we may be subject to sanctions including fines,
product recalls or seizures and related publicity requirements, injunctions,
total or partial suspension of production, civil penalties, suspension or
withdrawals of previously granted regulatory approvals, warning or untitled
letters, refusal to approve pending applications for marketing approval of new
products or of supplements to approved applications, import or export bans or
restrictions, and criminal prosecution and penalties. Any of these penalties
could delay or prevent the promotion, marketing or sale of our products.
If our products do not gain market acceptance, we may be
unable to generate
significant revenues.
Even if our products are
approved for commercialization, they may not be successful in the marketplace.
Market acceptance of any of our products will depend on a number of factors
including, but not limited to:
·
demonstration
of clinical efficacy and safety;
·
the
prevalence and severity of any adverse side effects;
·
limitations
or warnings contained in the products approved labeling;
·
availability
of alternative treatments for the indications we target;
·
the
advantages and disadvantages of our products relative to current or alternative
treatments;
·
the
availability of acceptable pricing and adequate third-party reimbursement; and
·
the
effectiveness of marketing and distribution methods for the products.
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If our products do not gain
market acceptance among physicians, patients, healthcare payers and others in
the medical community, which may not accept or utilize our products, our
ability to generate significant revenues from our products would be limited and
our financial conditions will be materially adversely affected. In addition, if
we 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 is subject to numerous factors, many of which are beyond our
control. Our products, if successfully developed, may compete with a number of
drugs and therapies currently manufactured and marketed by major pharmaceutical
and other biotechnology companies. Our products may also compete with new
products currently under development by others or with products which may be
less expensive than our products. We cannot assure you 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 and would likely cause a drop in our share price.
We may not achieve our projected development goals in the
time-frames we announce and
expect.
We set goals and make public
statements regarding the timing of the accomplishment of objectives material to
our success, such as the commencement, enrollment and completion of clinical
trials, anticipated regulatory submission and approval dates and time of
product launch. The actual timing of these events can vary dramatically due to
factors such as delays or failures in our clinical trials, the uncertainties inherent
in the regulatory approval process and delays in achieving manufacturing or
marketing arrangements sufficient to commercialize our products. There can be
no assurance that our clinical trials will be completed, that we will make
regulatory submissions or receive regulatory approvals as planned or that we
will be able to adhere to our current schedule for the launch of any of our
products. If we fail to achieve one or more of these milestones as planned, our
share price would likely decline.
If we fail to obtain acceptable prices or adequate
reimbursement for our products,
our ability to generate revenues
will be diminished.
The ability for us and/or our
partners to successfully commercialize our products will depend significantly
on our ability to obtain acceptable prices and the availability of
reimbursement to the patient from third-party payers, such as governmental and
private insurance plans. These third-party payers frequently require companies
to provide predetermined discounts from list prices, and they are increasingly
challenging the prices charged for pharmaceuticals and other medical products.
Our products may not be considered cost-effective, and reimbursement to the
patient may not be available or sufficient to allow us or our partners to sell
our products on a competitive basis. It may not be possible to negotiate
favorable reimbursement rates for our products.
In addition, the continuing
efforts of third-party payers to contain or reduce the costs of healthcare
through various means may limit our commercial opportunity and reduce any
associated revenue and profits. We expect proposals to implement similar
government control to continue. In addition, increasing emphasis on managed
care will continue to put pressure on the pricing of pharmaceutical and
biopharmaceutical products. Cost control initiatives could decrease the price
that we or any current or potential collaborators could receive for any of our
products and could adversely affect our profitability. In addition, in the
United States, in Canada and in many other countries, pricing and/or
profitability of some or all prescription pharmaceuticals and
biopharmaceuticals are subject to government control.
If we fail to obtain
acceptable prices or an adequate level of reimbursement for our products, the
sales of our products would be adversely affected or there may be no
commercially viable market for our products.
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Competition in our targeted markets is intense, and
development by other companies
could render our products or
technologies non-competitive.
The biomedical field is highly
competitive. New products developed by other companies in the industry could
render our products or technologies non-competitive. Competitors are developing
and testing products and technologies that would compete with the products that
we are developing. Some of these products may be more effective or have an entirely
different approach or means of accomplishing the desired effect than our
products. We expect competition from biopharmaceutical and pharmaceutical
companies and academic research institutions to increase over time. Many of our
competitors and potential competitors have substantially greater product
development capabilities and financial, scientific, marketing and human
resources than we do. Our competitors may succeed in developing products
earlier and in obtaining regulatory approvals and patent protection for such
products more rapidly than we can or at a lower price.
We may not obtain adequate protection for our products
through our intellectual
property.
We rely heavily on our
proprietary information in developing and manufacturing our product candidates.
Our success depends, in large part, on our ability to protect our competitive
position through patents, trade secrets, trademarks and other intellectual
property rights. The patent positions of pharmaceutical and biopharmaceutical
firms, including Æterna Zentaris, are uncertain and involve complex questions
of law and fact for which important legal issues remain unresolved.
Applications for patents and trademarks in Canada, the United States and in
other foreign territories have been filed and are being actively pursued by us.
Pending patent applications may not result in the issuance of patents and we
may not be able to obtain additional issued patents relating to our technology
or products. Even if issued, patents to us or our licensors may be challenged,
narrowed, invalidated, held to be unenforceable or circumvented, which could
limit our ability to stop competitors from marketing similar products or limit
the length of term of patent protection we may have for our products. Changes
in either patent laws or in interpretations of patent laws in the United States
and other countries may diminish the value of our intellectual property or
narrow the scope of our patent protection. The patents issued or to be issued
to us may not provide us with any competitive advantage or protect us against
competitors with similar technology. In addition, it is possible that third
parties with products that are very similar to ours will circumvent our patents
by means of alternate designs or processes. We may have to rely on method of
use and new formulation protection for our compounds in development, and any
resulting products, which may not confer the same protection as claims to
compounds
per se.
In addition, our patents may
be challenged by third parties in patent litigation, which is becoming
widespread in the biopharmaceutical industry. There may be prior art of which
we are not aware that may affect the validity or enforceability of a patent
claim. There also may be prior art of which we are aware, but which we do not
believe affects the validity or enforceability of a claim, which may,
nonetheless, ultimately be found to affect the validity or enforceability of a
claim. No assurance can be given that our patents would, if challenged, be held
by a court to be valid or enforceable or that a competitors technology or
product would be found by a court to infringe our patents. Our granted patents could also be challenged
and revoked in opposition or nullity proceedings in certain countries outside
the United States. In addition, we may be required to disclaim part of the term
of certain patents.
Patent applications relating
to or affecting our business have been filed by a number of pharmaceutical and
biopharmaceutical companies and academic institutions. A number of the
technologies in these applications or patents may conflict with our
technologies, patents or patent applications, and any such conflict could
reduce the scope of patent protection which we could otherwise obtain. Because
patent applications in the United States and many other jurisdictions are
typically not published until eighteen months after their first effective
filing date, or in some cases not at all, and because publications of
discoveries in the scientific literature often lag behind actual discoveries,
neither we nor our licensors can be certain that we or they were the first to
make the inventions claimed in our or their issued patents or pending patent
applications, or that we or they were the first to file for protection of the
inventions set forth in these patent applications. If a third party has also
filed a patent application in the United States covering our product candidates
or a similar invention, we may have to participate in an adversarial
proceeding, known as an interference, declared by the United States Patent and
Trademark Office (the USPTO) to determine priority of invention in the United
States. The costs of these proceedings could be substantial and it is possible
that our efforts could be unsuccessful, resulting in a loss of our U.S. patent
position.
In addition to patents, we
rely on trade secrets and proprietary know-how to protect our intellectual
property. If we are unable to protect the confidentiality of our proprietary
information and know-how, the value of our technology and products could be
adversely affected. We seek to protect our unpatented proprietary information
in part by requiring our employees, consultants, outside scientific
collaborators and sponsored researchers and other advisors to enter into confidentiality
agreements. These agreements provide that all confidential information
developed or made known to the individual during the course of the individuals
relationship with us is to be kept confidential and not disclosed to third
parties except in specific circumstances. In the case of our employees, the
agreements provide that all of the technology which is conceived by
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the individual during the
course of employment is our exclusive property. These agreements may not
provide meaningful protection or adequate remedies in the event of unauthorized
use or disclosure of our proprietary information. In addition, it is possible
that third parties could independently develop proprietary information and
techniques substantially similar to ours or otherwise gain access to our trade
secrets. If we are unable to protect the confidentiality of our proprietary
information and know-how, competitors may be able to use this information to
develop products that compete with our products and technologies, which could
adversely impact our business.
We currently have the right to
use certain technology under license agreements with third parties. Our failure
to comply with the requirements of material license agreements could result in
the termination of such agreements, which could cause us to terminate the
related development program and cause a complete loss of our investment in that
program.
As a result of the foregoing
factors, we may not be able to rely on our intellectual property to protect our
products in the marketplace.
We may infringe the intellectual property rights of others.
Our commercial success depends
significantly on our ability to operate without infringing the patents and
other intellectual property rights of third parties. There could be issued
patents of which we are not aware that our products or methods may be found to
infringe, or patents of which we are aware and believe we do not infringe but
which we may ultimately be found to infringe. Moreover, patent applications and
their underlying discoveries are in some cases maintained in secrecy until
patents are issued. Because patents can take many years to issue, there may be
currently pending applications of which we are unaware that may later result in
issued patents that our products or methods are found to infringe. Moreover,
there may be published pending applications that do not currently include a
claim covering our products or methods but which nonetheless provide support
for a later drafted claim that, if issued, our products or methods could be
found to infringe.
If we infringe or are alleged
to infringe intellectual property rights of third parties, it will adversely
affect our business. Our research, development and commercialization
activities, as well as any product candidates or products resulting from these
activities, may infringe or be accused of infringing one or more claims of an
issued patent or may fall within the scope of one or more claims in a published
patent application that may subsequently issue and to which we do not hold a
license or other rights. Third parties may own or control these patents or
patent applications in the United States and abroad. These third parties could
bring claims against us or our collaborators that would cause us to incur
substantial expenses and, if successful against us, could cause us to pay
substantial damages. Further, if a patent infringement suit were brought
against us or our collaborators, we or they could be forced to stop or delay
research, development, manufacturing or sales of the product or product
candidate that is the subject of the suit.
The biopharmaceutical industry
has produced a proliferation of patents, and it is not always clear to industry
participants, including us, which patents cover various types of products. The
coverage of patents is subject to interpretation by the courts, and the
interpretation is not always uniform. In the event of infringement or violation
of another partys patent or other intellectual property rights, we may not be
able to enter into licensing arrangements or make other arrangements at a
reasonable cost. Any inability to secure licenses or alternative technology
could result in delays in the introduction of our products or lead to
prohibition of the manufacture or sale of products by us or our partners and
collaborators.
Patent litigation is costly and time consuming and may
subject us to liabilities.
Our involvement in any patent
litigation, interference, opposition or other administrative proceedings will
likely cause us to incur substantial expenses, and the efforts of our technical
and management personnel will be significantly diverted. In addition, an
adverse determination in litigation could subject us to significant
liabilities.
We may not obtain trademark registrations.
We have filed applications for
trademark registrations in connection with our product candidates in various
jurisdictions, including the United States. We intend to file further
applications for other possible trademarks for our product candidates. No
assurance can be given that any of our trademark applications will be
registered in the United States or elsewhere, or that the use of any registered
or unregistered trademarks will confer a competitive advantage in the
marketplace. Furthermore, even if we are successful in our trademark
registrations, the FDA and regulatory authorities in other countries have their
own process for drug nomenclature and their own views concerning appropriate
proprietary names. The FDA and other regulatory authorities also have the
power, even after granting market approval, to request a company to reconsider
the name for a product because of evidence of confusion in the marketplace. No
assurance can be given that the FDA or any other regulatory authority will
approve of any of our trademarks or will not request reconsideration of one of
our trademarks at some time in
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the future. The loss,
abandonment, or cancellation of any of our trademarks or trademark applications
could negatively affect the success of the product candidates to which they
relate.
We may require significant additional financing, and we may
not have access to
sufficient capital.
We may require additional
capital to pursue planned clinical trials, regulatory approvals, as well as
further R&D and marketing efforts for our product candidates and potential
products. Except as expressly described in this annual report, we do not
anticipate generating significant revenues from operations in the near future,
and we have no other committed sources of capital.
We may attempt to raise
additional funds through public or private financings, collaborations with
other pharmaceutical companies or financing from other sources. Additional
funding may not be available on terms which are acceptable to us. If adequate
funding is not available to us on reasonable terms, we may need to delay,
reduce or eliminate one or more of our product development programs or obtain
funds on terms less favorable than we would otherwise accept. To the extent
that additional capital is raised through the sale of equity securities or
securities convertible into or exchangeable for equity securities, the issuance
of those securities could result in dilution to our shareholders. Moreover, the
incurrence of debt financing could result in a substantial portion of our
future operating cash flow, if any, being dedicated to the payment of principal
and interest on such indebtedness and could impose restrictions on our
operations. This could render us more vulnerable to competitive pressures and
economic downturns.
We anticipate that our
existing working capital, including anticipated revenues, will be sufficient to
fund our development programs, clinical trials and other operating expenses for
the foreseeable future. However, our future capital requirements are
substantial and may increase beyond our current expectations depending on many
factors including:
·
the
duration and results of our clinical trials for cetrorelix, ozarelix and
perifosine, as well as other product candidates going forward;
·
unexpected
delays or developments in seeking regulatory approvals;
·
the
time and cost in preparing, filing, prosecuting, maintaining and enforcing
patent claims;
·
other
unexpected developments encountered in implementing our business development
and commercialization strategies;
·
the
outcome of litigation, if any; and
·
further
arrangements, if any, with collaborators.
In addition, the current
recessionary global market and economic conditions as well as the continuing
difficulties in the credit and capital markets may make it even more difficult
for us to raise additional financing in the future.
Our revenues and expenses may fluctuate significantly, and
any failure to meet
financial expectations may disappoint securities
analysts or investors and result in
a decline in our share price.
We have a history of operating
losses. Our revenues and expenses have fluctuated in the past and are likely to
do so in the future. These fluctuations could cause our share price to decline.
Some of the factors that could cause our revenues and expenses to fluctuate
include but are not limited to:
·
the
inability to complete product development in a timely manner that results in a
failure or delay in receiving the required regulatory approvals to
commercialize our product candidates;
·
the
timing of regulatory submissions and approvals;
·
the
timing and willingness of any current or future collaborators to invest the
resources necessary to commercialize our product candidates;
·
the
revenue available from royalties derived from our strategic partners;
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·
licensing
fees revenues;
·
tax
credits and grants (R&D);
·
the
outcome of litigation, if any;
·
changes
in foreign currency fluctuations;
·
the
timing of achievement and the receipt of milestone payments from current or
future collaborators; and
·
failure
to enter into new or the expiration or termination of current agreements with
collaborators.
Due to fluctuations in our
revenues and expenses, we believe that period-to-period comparisons of our
results of operations are not necessarily indicative of our future performance.
It is possible that in some future quarter or quarters, our revenues and
expenses will be above or below the expectations of securities analysts or
investors. In this case, our share price could fluctuate significantly or
decline.
We will not be able to successfully commercialize our
product candidates if we are
unable to make adequate arrangements
with third parties for such purposes.
We currently have a lean sales
and marketing staff. In order to commercialize our product candidates
successfully, we need to make arrangements with third parties to perform some
or all of these services in certain territories.
We contract with third parties
for the sales and marketing of our products. Our revenues will depend upon the
efforts of these third parties, whose efforts may not be successful. If we fail
to establish successful marketing and sales capabilities or to make
arrangements with third parties for such purposes, our business, financial
condition and results of operations will be materially adversely affected.
If we had to resort to
developing a sales force internally, the cost of establishing and maintaining a
sales force would be substantial and may exceed its cost effectiveness. In
addition, in marketing our products, we would likely compete with many
companies that currently have extensive and well-funded marketing and sales
operations. Despite our marketing and sales efforts, we may be unable to compete
successfully against these companies.
We are currently dependent on strategic partners and may
enter into future
collaborations for the research, development and
commercialization of our product
candidates. Our arrangements with these strategic
partners may not provide us with
the benefits we expect and may expose us to a number of
risks.
We are dependent on, and rely
upon, strategic partners to perform various functions related to our business,
including, but not limited to, the research, development and commercialization
of some of our product candidates. Our reliance on these relationships poses a
number of risks.
We may not realize the
contemplated benefits of such agreements nor can we be certain that any of
these parties will fulfill their obligations in a manner which maximizes our
revenue. These arrangements may also require us to transfer certain material
rights or issue our equity or voting securities to corporate partners,
licensees and others. Any license or sublicense of our commercial rights may
reduce our product revenue.
These agreements also create
certain risks. The occurrence of any of the following or other events may delay
product development or impair commercialization of our products:
·
not
all of our strategic partners are contractually prohibited from developing or
commercializing, either alone or with others, products and services that are
similar to or competitive with our product candidates, and, with respect to our
strategic partnership agreements that do contain such contractual prohibitions
or restrictions, prohibitions or restrictions do not always apply to our
partners affiliates and they may elect to pursue the development of any
additional product candidates and pursue technologies or products either on
their own or in collaboration with other parties, including our competitors,
whose technologies or products may be competitive with ours;
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·
our
strategic partners may under-fund or fail to commit sufficient resources to
marketing, distribution or other development of our products;
·
we may
not be able to renew such agreements;
·
our
strategic partners may not properly maintain or defend certain intellectual
property rights that may be important to the commercialization of our products;
·
our
strategic partners may encounter conflicts of interest, changes in business
strategy or other issues which could adversely affect their willingness or
ability to fulfill their obligations to us (for example, pharmaceutical
companies historically have re-evaluated their priorities following mergers and
consolidations, which have been common in recent years in this industry);
·
delays
in, or failures to achieve, scale-up to commercial quantities, or changes to
current raw material suppliers or product manufacturers (whether the change is
attributable to us or the supplier or manufacturer) could delay clinical
studies, regulatory submissions and commercialization of our product
candidates; and
·
disputes
may arise between us and our strategic partners that could result in the delay
or termination of the development or commercialization of our product
candidates, resulting in litigation or arbitration that could be time-consuming
and expensive, or causing our strategic partners to act in their own
self-interest and not in our interest or those of our shareholders or other
stakeholders.
In addition, our strategic
partners can terminate our agreements with them for a number of reasons based
on the terms of the individual agreements that we have entered into with them.
If one or more of these agreements were to be terminated, we would be required
to devote additional resources to developing and commercializing our product
candidates, seek a new partner or abandon this product candidate which would
likely cause a drop in our share price.
We have entered into important
strategic partnership agreements relating to cetrorelix, ozarelix and
perifosine for various indications. Detailed information on our research and
collaboration agreements is available in Notes 26 and 27 to our annual audited
consolidated financial statements as of and for the year ended December 31,
2008 included elsewhere in this annual report.
We have also entered into a
variety of collaborative licensing agreements with various universities and
institutes under which we are obligated to support some of the research
expenses incurred by the university laboratories and pay royalties on future
sales of the products. In turn, we have retained exclusive rights for the
worldwide exploitation of results generated during the collaborations.
In particular, we have entered
into an agreement with Tulane University (Tulane), which provides for the
payment by us of single-digit royalties on future worldwide net sales for all
indications, except in the BPH indication, where it provides the payment of low
single-digit royalties. Tulane is also entitled to receive a low double-digit
royalty on any lump sum, periodic or other cash payments received by us from
sub-licensees (see Note 27 to our annual audited consolidated financial
statements as of and for year ended December 31, 2008 included elsewhere
in this annual report).
We rely on third parties to conduct, supervise and monitor
our clinical trials, and
those third parties may not perform satisfactorily.
We rely on third parties such
as CROs, medical institutions and clinical investigators to enroll qualified
patients and conduct, supervise and monitor our clinical trials. Our reliance
on these third parties for clinical development activities reduces our control
over these activities. Our reliance on these third parties, however, does not
relieve us of our regulatory responsibilities, including ensuring that our
clinical trials are conducted in accordance with cGCP guidelines and the
investigational plan and protocols contained in an Investigational New Drug
application (IND), or comparable foreign regulatory submission. Furthermore,
these third parties may also have relationships with other entities, some of
which may be our competitors. In addition, they may not complete activities on
schedule, or may not conduct our preclinical studies or clinical trials in
accordance with regulatory requirements or our trial design. If these third
parties do not successfully carry out their contractual duties or meet expected
deadlines, our efforts to obtain regulatory approvals for, and commercialize,
our product candidates may be delayed or prevented.
12
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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, our contract manufacturers or our partners, 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.
We are subject to intense competition for our skilled
personnel, and the loss of key
personnel or the inability to
attract additional personnel could impair our ability
to conduct our operations.
We are highly dependent on our
management and our clinical, regulatory and scientific staff, the loss of whose
services might adversely impact our ability to achieve our objectives.
Recruiting and retaining qualified management and clinical, scientific and
regulatory personnel is critical to our success. Competition for skilled
personnel is intense, and our ability to attract and retain qualified personnel
may be affected by such competition.
Our strategic partners manufacturing capabilities may not
be adequate to effectively
commercialize our product candidates.
Our manufacturing experience
to date with respect to our product candidates consists of producing drug
substance for clinical studies. To be successful, these product candidates have
to be manufactured in commercial quantities in compliance with regulatory
requirements and at acceptable costs. Our strategic partners current manufacturing
facilities have the capacity to produce projected product requirements for the
foreseeable future, but we will need to increase capacity if sales continue to
grow. Our strategic partners may not be able to expand capacity or to produce
additional product requirements on favorable terms. Moreover, delays associated
with securing additional manufacturing capacity may reduce our revenues and
adversely affect our business and financial position. There can be no assurance
that we will be able to meet increased demand over time.
We are subject to the risk of product liability claims, for
which we may not have or
be able to obtain adequate insurance coverage.
The sale and use of our
products, in particular our biopharmaceutical products, involve the risk of
product liability claims and associated adverse publicity. Our risks relate to
human participants in our clinical trials, who may suffer unintended
consequences, as well as products on the market whereby claims might be made
directly by patients, healthcare providers or pharmaceutical companies or
others selling, buying or using our products. We manage our liability risks by
means of insurance. We maintain liability insurance covering our liability for
our preclinical and clinical studies and for our pharmaceutical products
already marketed. However, we may not have or be able to obtain or maintain
sufficient and affordable insurance coverage, including coverage for
potentially very significant legal expenses, and without sufficient coverage
any claim brought against us could have a materially adverse effect on our
business, financial condition or results of operations.
Our business involves the use of hazardous materials which
requires us to comply with
environmental and occupational safety laws regulating
the use of such materials. If we violate
these laws, we could be subject to significant fines, liabilities or other
adverse consequences.
Our discovery and development
processes involve the controlled use of hazardous and radioactive materials. We
are subject to federal, provincial and local laws and regulations governing the
use, manufacture, storage, handling and disposal of such materials and certain
waste products. The risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of an accident or a
failure to comply with environmental or occupational safety laws, we could be
held liable for any damages that result, and any such liability could exceed
our resources. We may not be adequately insured against this type of liability.
We may be required to incur significant costs to comply with environmental laws
and regulations in the future, and our operations, business or assets may be
materially adversely affected by current or future environmental laws or
regulations.
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Legislative actions, new accounting pronouncements and
higher insurance costs are
likely to impact our future financial position or
results of operations.
Changes in financial
accounting standards or implementation of accounting standards may cause
adverse, unexpected revenue or expense fluctuations and affect our financial
position or results of operations. New pronouncements and varying
interpretations of pronouncements have occurred with greater frequency and are
expected to occur in the future, and we may make or be required to make changes
in our accounting policies in the future. Compliance with changing regulations
of corporate governance and public disclosure, notably with respect to internal
controls over financial reporting, may result in additional expenses. Changing
laws, regulations and standards relating to corporate governance and public
disclosure are creating uncertainty for companies such as ours, and insurance
costs are increasing as a result of this uncertainty.
We may incur losses associated with foreign currency
fluctuations.
Our operations are in many
instances conducted in currencies other than the U.S. dollar (principally
Euros), and fluctuations in the value of foreign currencies could cause us to
incur currency exchange losses. We do not currently employ a hedging
strategy against exchange rate risk. We cannot say with any assurance that we
will not suffer losses as a result of unfavorable fluctuations in the exchange
rates between the United States dollar, the euro, the Canadian dollar and other
currencies.
We may not be able to successfully integrate acquired
businesses.
Future acquisitions may not be
successfully integrated. 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.
Risks
related to our shares
Our share price is
volatile, which may result from factors outside of our control. If we experience low trading volume or if our
securities are delisted from the TSX or NASDAQ, you may have difficulty selling
your shares.
During 2008, the closing
price of our shares ranged from CAN$0.44 to CAN$1.85 per share on the Toronto
Stock Exchange (TSX), and from $0.40 to $1.80 on the NASDAQ Global Market (NASDAQ). Our share price may be affected by
developments directly affecting our business and by developments out of our
control or unrelated to us. The
biopharmaceutical sector in particular, and the stock market generally, are
vulnerable to abrupt changes in investor sentiment. Prices of shares and trading volume of
companies in the biopharmaceutical industry can swing dramatically in ways
unrelated to, or that bear a disproportionate relationship to, operating
performance. Our share price and trading
volume may fluctuate based on a number of factors including, but not limited
to:
·
clinical
and regulatory developments regarding our product candidates;
·
delays
in our anticipated development or commercialization timelines;
·
developments
regarding current or future third-party collaborators;
·
other
announcements by us regarding technological, product development or other
matters;
·
arrivals
or departures of key personnel;
·
governmental
or regulatory action affecting our product candidates and our competitors
products in the United States, Canada and other countries;
·
developments
or disputes concerning patent or proprietary rights;
·
actual
or anticipated fluctuations in our revenues or expenses;
·
general
market conditions and fluctuations for the emerging growth and
biopharmaceutical market sectors; and
·
economic
conditions in the United States, Canada or abroad.
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Our listing on both the TSX
and NASDAQ may increase price volatility due to various factors including:
different ability to buy or sell our shares; different market conditions in
different capital markets; and different trading volumes. In addition, low trading volume may increase
the price volatility of our shares. A
thin trading market could cause the price of our shares to fluctuate
significantly more than the stock market as a whole.
In the past, following periods
of large price declines in the public market price of a companys securities,
securities class action litigation has often been initiated against that
company. Litigation of this type could result in substantial costs and
diversion of managements attention and resources, which would adversely affect
our business. Any adverse determination in litigation could also subject us to
significant liabilities.
We must meet continuing
listing requirements to maintain the listing of our shares on the TSX and
NASDAQ. For continued listing, NASDAQ
requires, among other things, that listed securities maintain a minimum closing
bid price of not less than $1.00 per share.
During the latter half of 2008 and for part of 2009, our shares have
closed below the $1.00 per share minimum for several consecutive days on the
NASDAQ. If the closing bid price falls
below the $1.00 minimum for more than 30 consecutive trading days, we would
have 180 days to satisfy the $1.00 minimum bid price, which must be maintained
for a period of at least ten trading days in order to regain compliance. If our shares continue to close below $1.00
per share during the initial 180 day period following a notice of noncompliance
from NASDAQ, we could transfer from the NASDAQ Global Market to the NASDAQ
Capital Market. Transferring from the
NASDAQ Global Market to the NASDAQ Capital Market would provide us with an
additional 180-day calendar day compliance period to regain compliance with the
NASDAQ minimum bid price rule.
On October 24, 2008, we announced that we had received a
notification from NASDAQ regarding the failure by us 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 on April 19, 2009, or pending approval by the Securities and
Exchange Commission of NASDAQs proposed rule change, July 19, 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. If our
shares were delisted from TSX or NASDAQ, you may have difficulty in disposing
of your shares.
Our largest shareholders have influence over our business
and corporate matters,
including those requiring shareholder approval. This
could delay or prevent a change
in control. Sales of common shares by such shareholders
could have an impact on our share price.
Our two largest shareholders,
which held 18.33% and 16.57% of our outstanding shares as of December 31,
2008, have influence over our business and corporate matters, including those
requiring shareholder approval. This could delay or prevent a change in
control. Sales of common shares by such shareholders could have an impact on
our share price.
We do not intend to pay dividends in the near future.
To date, we have not declared
or paid any dividends on our common shares. We currently intend to retain our
future earnings, if any, to finance further research and the expansion of our
business. As a result, the return on an investment in our shares will, for the
foreseeable future, depend upon any future appreciation in value. There is no
guarantee that our shares will appreciate in value or even maintain the price
at which shareholders have purchased their shares.
Item 4. Information on the Company
A. History and development of the
Company
Æterna Zentaris Inc. is a
global biopharmaceutical company focused on endocrine therapy and oncology with
expertise in drug discovery, development and commercialization.
We were incorporated on September 12,
1990 under the laws of Canada. Our registered office is located at 1405 du
Parc-Technologique Blvd., Québec, Quebec, Canada G1P 4P5, our telephone
number is (418) 652-8525 and our website is www.aezsinc.com. None of the
documents or information found on our website shall be deemed to be included in
or incorporated into this annual report.
On December 30, 2002, we acquired Zentaris AG, a biopharmaceutical
company based in Frankfurt, Germany. Zentaris was a spin-off of Degussa AG and
Asta Medica GmbH, a former pharmaceutical company. With this acquisition, the
Company changed its risk profile and inherited an extensive and robust product
pipeline with capabilities from drug discovery to commercialization with a
particular focus on endocrine therapy and oncology. As part of the acquisition,
we also inherited a very experienced pharmaceutical team along with a network
of strategic pharmaceutical partners. The total consideration paid
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for the acquisition of Zentaris was $51.9 million, net of cash and cash
equivalents acquired of $2.3 million, of which an amount of $26.7 million was
paid cash and the remaining amount of $25.2 million as balance of purchase
price.
In May 2004, we changed our name to Æterna Zentaris Inc and on May 11,
2007, Zentaris GmbH was renamed Æterna Zentaris GmbH. Æterna Zentaris GmbH is
our principal operating subsidiary.
On April 6, 2005, our former subsidiary Atrium Biotechnologies Inc.
(now Atrium Innovations Inc.) (Atrium), completed its initial public offering
in Canada and began trading on the TSX under the ticker symbol ATB.
Throughout 2006, as part of a
thorough, strategic planning process, our management and Board of Directors
(the Board) made the decision to spin off Atrium in two phases. On September 19,
2006, we initiated the first phase, a secondary offering to sell 3,485,000
Subordinate Voting Shares of Atrium at a price of CAN$15.80 per share. This
secondary offering closed on October 18, 2006, generating net proceeds of
nearly $45 million to Æterna Zentaris. With this transaction closed, our
remaining interest in Atrium was 11,052,996 Subordinate Voting Shares
representing 36.1% of its issued and outstanding shares. Therefore, we no
longer had a controlling interest in Atrium as of October 18, 2006.
The second phase was to
distribute our remaining interest in Atrium to our Shareholders concurrently
with a reduction of the stated capital of our common shares.
On December 15, 2006, our
shareholders approved a reduction of the stated capital of our common shares in
an amount equal to the fair market value of our remaining interest in Atrium by
way of a special distribution in kind to all our shareholders. This special
distribution was completed on January 2, 2007. For each common share held
as of the record date of December 29, 2006, our shareholders received
0.2078824 Subordinate Voting Shares of Atrium. In May 2007, we opened an
office in the United States, located at 20 Independence Boulevard, Warren,
New Jersey 07059-2731.
We currently have three
wholly-owned direct and indirect subsidiaries, Æterna Zentaris GmbH (AEZS
Germany), based in Frankfurt, Germany, Æterna Zentaris, Inc., based
in Warren, New Jersey in the United States, and Zentaris IVF GmbH, a
direct wholly-owned subsidiary of AEZS Germany based in Frankfurt, Germany.
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From
the formation of Atrium as our subsidiary in 1999 until the distribution of our
remaining interest in Atrium on January 2, 2007, Atrium did not declare or
pay any dividends to its shareholders. Since the disposition of our entire
interest in Atrium, we have not had access to the liquidity or cash flows
generated by Atrium, nor will we in ensuing years. During the last three years,
we have advanced our product development pipeline with a specific focus on our
lead product candidates cetrorelix and AEZS-108 along with our partnered
late-stage programs, ozarelix and perifosine, as well as our targeted
earlier-stage programs, as depicted in the chart reproduced under the
heading, Our Product Pipeline on page 21.
Our
common shares are listed for trading on the TSX under the trading symbol AEZ
and on the NASDAQ under the trading symbol AEZS.
B. Business overview
Recent Developments
Corporate Transactions
Sale of Impavido
®
On March 1, 2008, we
entered into a definitive purchase and sales agreement with respect to all
rights related to the manufacturing, production, distribution, marketing, sale
and/or use of Impavido
®
(miltefosine) with Paladin Labs Inc. for an
aggregate cash purchase price of approximately $9.2 million. The
transaction closed on March 31, 2008.
Sale of building and land
On June 26, 2008, we
sold our Québec building and land for a gross amount of $7.1 million that
was paid entirely 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.
Sale of Cetrotide
®
royalty stream
In November 2008, we
entered into a purchase and sales agreement (the Monetization Agreement) with
Cowen Healthcare Royalty Partners L.P. (CHRP) relating to our rights to
royalties on future sales of Cetrotide
®
covered by our license agreement with
Merck-Serono.
In connection with the
transactions contemplated by the Monetization Agreement, which was effective on
October 1, 2008 and closed in December 2008, we received
$52.5 million from CHRP, less transaction costs of $1.0 million that
had been advanced by CHRP to certain third-party firms and institutions on our
behalf, resulting in net proceeds of $51.5 million. Under the terms of the
Monetization Agreement, we are entitled to receive an additional payment of
$2.5 million contingent on 2010 net sales of Cetrotide
®
reaching a specified level.
Under the terms of the
Monetization Agreement, if cetrorelix, the active substance in Cetrotide
®
, is
approved for sale by the European regulatory authorities in an indication other
than
in vitro
fertilization, we have agreed
to make a one-time cash payment to CHRP in an amount ranging from
$5.0 million up to a maximum of $15.0 million. The amount which may
be due to CHRP 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 CHRP will be.
Partnership for cetrorelix
in BPH
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 made an initial
upfront payment to us of $30.0 million, and 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.
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Changes to our Management Team and
Board of Directors
On April 11,
2008, Juergen Ernst, Chairman of the Board of Æterna Zentaris at the time, was,
appointed our interim President and Chief Executive Officer following the
resignation of the former President and Chief Executive Officer.
On September 1,
2008, Prof. Juergen Engel, Ph.D., who was Executive Vice President and Chief
Scientific Officer of Æterna Zentaris at the time, was appointed our President
and Chief Executive Officer. He succeeded Juergen Ernst, who became Executive
Chairman of the Board, also as of September 1, 2008.
In December 2008,
Matthias Seeber was appointed our Senior Vice President, Administration and
Legal Affairs.
Pipeline developments
Cetrorelix:
On March 22, 2007, our partner Shionogi announced positive results
for a Phase 2a Japanese trial that was initiated in 2005. This trial was
designed to evaluate primarily pharmacokinetics and safety (systemic and local
tolerability) in Japanese subjects, whereas evaluation of efficacy was only
exploratory. A total of 50 patients were included in five dosing groups
corresponding to single administration of 30 mg, 60 mg or 90 mg of cetrorelix
and multiple administration of 60 mg and 90 mg, three times eight weeks apart.
The observation period was up to 32 weeks in the multiple administration dosing
groups. The Japanese patients responded to cetrorelix with a transient
reduction of testosterone concentration in blood, which did not reach or remain
at the castration level. Intramuscular (IM) injection of cetrorelix pamoate
was safe and well tolerated at all dosages tested. None of the dosage regimens
tested caused a suppression of prostate specific antigen (PSA) levels.
Results also showed that the bioavailability of cetrorelix in Japanese patients
is similar to what is observed in non-Japanese patients. The sizes per dosage
group were too small to evaluate efficacy trends for statistical significance.
On the basis of this study, Shionogi initiated a 300-patient Phase 2b study to
assess primarily the efficacy of cetrorelix in BPH in Japanese patients with a
different treatment regimen than the one used in Europe and North America. Phase 2b results were subsequently announced
by Shionogi in November 2008. Results indicated an improvement of the
International Prostate Symptom Score (IPSS) in the treatment group in a
dose-dependent manner, although it was not statistically significant compared
to the placebo group due to a high placebo response. A statistically
significant reduction of prostate volume was observed between treatment and placebo
groups. Shionogi also announced that a new Japanese study including higher dose
divided into two doses with a two-week interval, according to the regimen used
in our Phase 3 program, was in preparation.
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.
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 made an initial
upfront payment to us of $30.0 million, and 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. Sanofi-aventis may perform future Phase 3b and 4
clinical trials, while we will have access to all corresponding data for other
territories.
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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 positive ovarian and
endometrial cancerous tumors. The trial is being conducted in 15 centers in
Europe. We expect to disclose Phase 2 results in the fourth quarter of 2009.
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:
Perifosine, the first-in-class AKT inhibitor in multiple Phase 2
studies, is being developed as an orally active radio-enhancer and anti-cancer
agent.
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 to prove its activity as
radio-enhancer. 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 has announced that it intends to move
perifosine into Phase 3 in at least one indication in North America in 2009.
AEZS-112:
AEZS-112 is currently in a
Phase 1 trial in patients with solid tumors and lymphoma. We are 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. We also
expect to report first results
at the Annual meeting of the American Association for Cancer Research (AACR) in
Denver in late April 2009.
AEZS-112
is the first anti-cancer drug in development involving three mechanisms of
action such as tubulin and topoisomerase II inhibition. AEZS-112 expresses
different actions, such as pro-apoptotic and antiangiogenic properties.
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. We are
currently evaluating future development options for the use of this compound in
growth hormone deficiencies.
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Our business strategy
Our
strategy is to advance our product development pipeline with a clear focus on
our flagship product candidate, cetrorelix for the BPH indication, and
AEZS-108, our lead program in oncology for the treatment of endometrial and
ovarian cancer.
Our foremost
priority is cetrorelix for the BPH indication. Based on various third-party
sources, BPH affects more than 20 million men in the United States alone and
represents a market of approximately $3 billion in the 7 major markets.
Additionally, it is estimated that approximately 5.6 million men will be
treated in the United States for Lower Urinary Tract Symptoms (LUTS)
associated with BPH. The prevalence of BPH in the United States is expected to
increase to 26.8 million in 2020, and the LUTS treated population to
approximately 8 million men in 2020.
The potential for
base case peak annual sales of cetrorelix is over $500 million in the United
States market alone. We
intend to continue to diligently advance the cetrorelix Phase 3 program with
the objective of filing a New Drug Application (NDA). We also have the intent
to file in Europe a Marketing Authorization Application (MAA).
Our
lead oncology product candidate, AEZS-108, currently in Phase 2 clinical
trials, is our second priority. AEZS-108
is currently dosing patients with advanced endometrial and ovarian cancer in a
multi-center trial in Europe with the expectation of reporting results from
this trial in the fourth quarter of 2009.
We intend to continue developing our
earlier-stage high-potential product candidate, AEZS-112, currently in Phase 1
clinical trial in patients with solid tumors and lymphoma.
Additionally,
we are advancing several preclinical programs with targeted potential
development candidates. Among the targets for which we expect to propose
clinical development candidates in the coming years are: ghrelin receptor
ligands, PI3K/Erk inhibitors, LHRH peptidomimetics and erucylphosphocholine
derivatives.
We
also continue to perform targeted drug discovery activities from which we are
able to derive pre-clinical candidates. This drug discovery includes high
throughput screening systems and a library of more than 120,000 compounds.
We
are currently in a phase in which our products and product candidates are being
further developed or marketed jointly with strategic partners. We expect we
will continue to engage strategic partnerships in the future as we move to
realize our vision of becoming a fully integrated specialty biopharmaceutical
company.
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Our product pipeline
Pipeline table
Status of our drug pipeline as at
March 20, 2009
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cetrorelix:
Shionogi
in
Japan
Ozarelix:
Spectrum
in North America and India,
Nippon Kayaku
in Japan (oncology)
Ozarelix (BPH):
Handok
in
Korea, Indonesia, Malaysia, the Philippines and Singapore
Perifosine:
Keryx
in
North America
|
|
Cetrorelix (BPH):
sanofi-aventis
in the
United States
Handok
in Korea
|
|
Cetrotide
®
:
Merck Serono
(World ex-Japan)
Shionogi
and Nippon Kayaku
(Japan)
|
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LHRH ANTAGONISTS
Cetrorelix
Cetrorelix is a peptide-based active
substance which was developed in cooperation with Nobel Laureate Professor
Andrew Schally presently of the United States Veterans Administration-Miami,
University of Miami, and formerly of Tulane University in New Orleans. This
compound is a luteinising hormone releasing hormone (LHRH, also known as GnRH)
antagonist that blocks the pituitary LHRH receptors resulting in a rapid
decrease of sexual hormone levels. Moreover, cetrorelix allows the LHRH
receptors on the pituitary gland to be blocked gradually. Conversely, the side
effects usually associated with the use of agonists and resulting from total
hormone withdrawal can be avoided in conditions that do not require a
castrating degree of hormone withdrawal. Therefore, in contrast to treatment with
agonists, LHRH antagonists permit dose-dependent hormone suppression which is
of critical importance for the tolerability of hormonal therapy.
The mode of action of cetrorelix and the
distinction between LHRH antagonists and LHRH agonists
LHRH is released by the hypothalamus in the
brain and controls the production of sex hormones (i.e. testosterone in the
testes and estrogen and progesterone in ovaries) via the activation of LHRH
receptors located on the pituitary gland (hypophysis).
When using LHRH agonists, the LHRH receptors
on the pituitary gland are stimulated leading to an initial increased secretion
of the hormones luteinizing hormone (LH) and follicle stimulating hormone (FSH),
which in turn regulates the formation of testosterone and estrogen. The
increase or surge of hormonal levels induces a
flare-up effect that can last up
to three weeks until the pituitary markedly decreases the release of LH and FSH
by desensitization and depletion of LHRH receptors (i.e. down-regulation)
resulting in a considerable drop in testosterone and estrogen levels. Though
the initial flare-up effect is limited in time, it can sometimes cause,
depending on the nature and stage of the particular disorder, considerable
additional symptoms or even life-threatening complications, which in turn
require additional therapeutic intervention. By simultaneous administration of
anti-androgens, the flare-up effect can be attenuated. However, this additional
treatment also bears the risk of certain side effects, e.g. disturbances of the
function of the stomach, intestines and liver.
During full hormone suppression, LHRH
agonists reduce the male sex hormones to ranges below castration level. In
women, the hormone levels are far below the ranges observed after the end of
the climacteric. Treatment with an LHRH agonist, therefore, is regularly
associated with side effects such as hot flashes, depression, muscle weakness,
loss of libido and, particularly in women, osteoporosis and ovarian cysts. At
the end of treatment, it takes several weeks for the hormone function to return
to normal ranges. At the same time, an excessive rebound effect can lead to
renewed deterioration of the symptoms.
We believe that cetrorelix, an LHRH antagonist, because of its different
mode of action, can avoid the side effects associated with the administration
of LHRH agonists. Since LHRH antagonists have a rapid onset of action, the
treatment time to response with cetrorelix can be much shorter than with
agonists. Moreover, in various clinical studies, the effect of cetrorelix
therapy lasted much longer than that of hormone suppression, which consequently
confirms the new therapeutic principle of intermittent treatment. Periods with
moderate and well-tolerated hormonal suppression can be followed by intervals
without treatment during which side effects are avoided and quality of life is
restored. Since there is no necessity for long-term
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therapy and the overall treatment time is much shorter, the risk of side
effects is also reduced. In particular, we also believe that the risk of
developing osteoporosis in patients taking the cetrorelix therapy regimen is diminished.
Cetrorelix might therefore be useful in a variety of malignant and
non-malignant indications in which a suppression of the pituitary-gonadal axis
is desired. The degree of suppression of gonadotrophins and sex steroids
required is dependent on the clinical circumstances and disease treated. For
example, in patients undergoing controlled ovarian stimulation for assisted
reproductive techniques, endogenous gonadotrophin secretion has to be
controlled, whereas development of the follicle must not be adversely affected.
Cetrorelix in in vitro
fertilization (COS/ART)
Cetrorelix is the first LHRH antagonist which was approved for
therapeutic use as part of fertilization programs in Europe and was launched on
the market under the trade name Cetrotide
®
(cetrorelix acetate) in 1999. In women who
undergo controlled ovarian stimulation for recovery of ovocytes for subsequent
fertilization, Cetrotide
®
helps prevent premature
ovulation. LHRH is a naturally occurring hormone produced by the brain to
control the secretion of LH and, therefore, final egg maturation and ovulation.
Cetrotide
®
is designed to prevent LH production by the
pituitary gland and to delay the hormonal event, known as the LH surge which
could cause eggs to be released too early in the cycle, thereby reducing the
opportunity to retrieve the eggs for the assisted reproductive techniques
procedure.
In comparison with LHRH agonists that require a much longer
pre-treatment, the use of our LHRH antagonist, Cetrotide
®
, permits the physician to interfere
in the hormone regulation of the women undergoing treatment much more
selectively and within a shorter time.
The effectiveness of Cetrotide
®
has been
examined in five clinical trials (two Phase 2 and three Phase 3 trials). Two
dose regimens were investigated in these trials: either a single dose per
treatment cycle or multiple dosing. In the Phase 2 studies, a single dose of 3
mg was established as the minimal effective dose for the inhibition of
premature LH surges with a protection period of at least four days. When
Cetrotide
®
is administered in a multi-dose regimen, 0.25
mg was established as the minimal effective dose. The extent and duration of LH
suppression was found to be dose dependent. In the Phase 3 program, efficacy of
the single 3 mg dose regimen and the multiple 0.25 mg dose regimen was
established separately in two controlled studies utilizing active comparators.
A third non-comparative study evaluated only the multiple 0.25 mg dose regimen
of Cetrotide
®
.
In the five Phase 2 and Phase 3 trials, 184 pregnancies were reported out of a
total of 732 patients (including 21 pregnancies following the replacement of
frozen-thawed embryos). In these studies, drug-related side effects were
limited to a low incidence of injected site reactions; however, none of them
was serious such as an allergic type of reaction or required withdrawal from treatment. In
addition, no drug-related allergic reactions were reported from these clinical
studies.
Cetrotide
®
is the only LHRH antagonist that is available
in two dosing regimens. With an immediate onset of action, Cetrotide
®
permits precise control a single dose (3
mg), which controls the LH surge for up to four days, or a daily dose (0.25 mg)
given over a short period of time (usually five to seven days). The treatment
with Cetrotide
®
can be accomplished during a one-month cycle
with a simplified, more convenient and shorter treatment requiring fewer
injections than LHRH agonists.
Cetrotide
®
is marketed in a 3 mg and a 0.25 mg
subcutaneous injection as cetrorelix acetate by Merck Serono in the United
States and Europe. Approval for Cetrotide
®
in Japan was gained in April 2006. In September 2006,
we announced the launch of Cetrotide
®
in Japan
for
in vitro
fertilization. Cetrotide
®
is marketed in Japan by our partner Shionogi.
We receive revenue from the supply of Cetrotide
®
to our Japanese partners. The market
competitor is ganirelix (Antagon/Orgalutran
®
) from Schering-Plough (Organon)
indicated for the inhibition of premature LH surges in women undergoing
controlled ovarian hyperstimulation.
Partners for Cetrotide
®
In August 2000,
we entered into a commercialization agreement with Merck Serono for Cetrotide
®
. Under the
terms of this agreement, we granted an exclusive license to Merck Serono to
commercialize Cetrotide
®
for IVF/COS/ART worldwide
ex-Japan and we are entitled to receive fixed and sales royalties from Merck
Serono. The Japanese rights for this indication are held by Shionogi whereby,
according to a commercialization agreement, we received transfer pricing from
Shionogi.
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In December 2008,
we sold our royalties on future sales of Cetrotide
â
covered by our license agreement with Merck
Serono for $52.5 million to CHRP less transaction costs of $1.0 million
resulting in initial net proceeds to us of $51.5 million. In addition,
contingent on 2010 net sales of Cetrotide
â
reaching a specified level, we may receive an
additional payment of $2.5 million from CHRP. Under the terms of the agreement,
we agreed to make a one-time cash payment to CHRP in an amount ranging from $5
million up to a maximum of $15 million in the event cetrorelix is approved for
sale by the European regulatory authorities in an indication other than
in vitro
fertilization. The amount which would be due to
CHRP will be higher the earlier the product receives European regulatory
approval.
Clinical development overview
of cetrorelix in BPH, endometriosis and uterine myoma
Cetrorelix in BPH
BPH is a hormone-driven enlargement of the male prostate gland. The
prostate is located directly at the vesicle outlet in the male surrounding the
first part of the urethra. The enlargement puts pressure on the urethra,
causing difficulty in urinating. BPH is classified into three stages according
to symptoms: 1) the irritant phase, where the patient suffers dysuria (pain
when urinating) and nocturia (the urge to urinate during the night); 2) residual
urine occurring in the bladder thus increasing problems during urinating; and
3) overflow of the bladder. These can result in formation of bladder stones,
congestion of urine and engorged kidneys which can in turn lead to
life-threatening kidney damage.
Because LHRH agonists decrease testosterone to castration levels,
treatment of BPH with LHRH agonists is not convenient and therefore not the
best approach. Drug therapy with plant-based drugs, alpha-blockers or
alpha-reductase inhibitors (5-ARIs) is possible but the plant-based drugs and
alpha-blockers cannot delay further prostate growth, they merely improve the
symptoms in 50% of patients. Treatment with alpha-reductase inhibitors
decreases the size of the prostate; however, this form of therapy is successful
only in patients with a greatly increased prostate volume and only after a
treatment period of at least six months. In contrast, clinical studies suggest
that cetrorelix improves the symptoms of BPH and reduces the size of the
prostate after a short treatment period without chemical castration. The
effects are independent of the prostate volume and are maintained for a long
period following treatment withdrawal.
BPH clinical trials
In October 2004, cetrorelix completed an extensive program of seven
Phase 2 trials in urology, a significant part of which was sponsored by our
partner at the time, Solvay.
All
Phase 2 studies performed so far in patients with symptomatic BPH revealed that
cetrorelix is therapeutically active in this indication as demonstrated by an
improvement in symptoms as assessed primarily by the IPSS as well as an
increase in urinary peak flow rate and a reduction in prostate volume.
On January 30, 2006, we announced that we had regained our
worldwide rights (ex-Japan) from our partner Solvay to develop and potentially
market cetrorelix in BPH. The ongoing development of cetrorelix in
endometriosis was pursued by Solvay until we regained the rights for that
indication in May 2007.
Our Phase 3 program began in January 2007.
The Phase 3 program consists of two placebo-controlled efficacy studies, an
open label safety study and a Thorough QT/QTc Study consistent with the ICH
E14 Guideline.
The two placebo-controlled studies each compare
two intermittently administered dose regimes with placebo in patients with BPH
who are then assessed one year after beginning therapy. The primary end-point
in each trial is the change in IPSS between the beginning of treatment to the
end of follow-up after 52 weeks. The IPSS has been used successfully as the
primary endpoint in a number of other drug development programs for BPH. Some
of the other measures that are evaluated in these studies include urine flow,
general aspects of safety and quality of life issues, which are particularly
relevant to males aged 50 and over who suffer from BPH.
On April 15, 2008, we announced
completion of recruitment of 670 patients for the first efficacy trial
conducted mainly in North America.
Recruitment for the second study conducted in Europe was opened in March 2008
and was closed with 420 patients enrolled on October 1, 2008.
The third study in the Phase 3 program is an
open-label study of the dose regime we are planning to market and includes
approximately 500 patients. It is more focused on aspects of general safety,
quality of life and tolerability of cetrorelix, although the effects of
cetrorelix on the patients symptoms are also being evaluated. First patient
dosing was announced on May 14, 2008 and we announced completion of
recruitment of 527 patients on December 11, 2008. The final component of
the Phase 3 program, the Thorough QT/QTc Study, is being designed with input
from the FDA in order to ensure that we meet the regulatory guidance on this
topic for novel drugs under development.
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On March 22, 2007, our partner Shionogi announced positive results
for a Phase 2a Japanese trial that was initiated in 2005. This trial was
designed to evaluate primarily pharmacokinetics and safety (systemic and local
tolerability) in Japanese subjects, whereas evaluation of efficacy was only
exploratory. A total of 50 patients were included in five dosing groups
corresponding to single administration of 30 mg, 60 mg or 90 mg cetrorelix and
multiple administration of 60 mg and 90 mg, three times eight weeks apart. The
observation period was up to 32 weeks in the multiple administration dosing
groups. The Japanese patients responded to cetrorelix with a transient
reduction of testosterone concentration in blood, which did not reach or remain
at the castration level. IM injection of cetrorelix pamoate was safe and well
tolerated at all dosages tested. None of the dosage regimens tested caused a
suppression of PSA levels. Results also showed that the bioavailability of
cetrorelix in Japanese patients is similar to what is observed in non-Japanese
patients. The sizes per dosage group were too small to evaluate efficacy trends
for statistical significance. On the basis of this study, Shionogi initiated a
300-patient Phase 2b study to assess primarily the efficacy of cetrorelix in
BPH in Japanese patients with a different treatment regimen than the one used
in Europe and North America. Phase 2b
results were announced by Shionogi in November 2008. Results indicated an
improvement of IPSS in the treatment group in a dose-dependent manner, although
it was not statistically significant compared to the placebo group due to a
high placebo response. A statistically significant reduction of prostate volume
was observed between treatment and placebo groups. Shionogi also announced that
a new Japanese study including higher dose divided into two doses with two-week
interval, according to the regimen used in our Phase 3 program, was in
preparation.
In May 2008,
we presented results for the cetrorelix mode of action in BPH. In this study,
we investigated the presence and characteristics of LHRH receptors in 35
specimens of human BPH tissues. Results showed that the expression of mRNA for
LHRH receptors was detected in 33 of 35 (94%) BPH specimens. LHRH antagonist
cetrorelix showed high affinity binding to LHRH receptors expressed in BPH
tissues. The LHRH receptor epitope identified by the monoclonal antibody was
present in the basal cell layer of normal and hyperplasic prostate glands in
all cases. The expression of specific receptor proteins for LHRH in human BPH
provides a rationale for improvement in methods of therapy for clinical BPH.
The demonstration of the high incidence of LHRH receptors in human BPH tissues
suggests the possibility of rapid and long lasting improvement of symptoms in
BPH patients treated with cetrorelix.
In connection with our strategic review, we announced on October 2,
2007 that we had decided to seek a commercialization partner for cetrorelix in
the BPH indication and, subject to favorable Phase 3 clinical results and
regulatory approval, we expect to launch cetrorelix in this indication in the
second half of 2011.
Regarding the potential market of cetrorelix in BPH, based on various
third-party sources, such as BPH, Urologic Diseases in America 2004; NIH
Publication 04-5512:43-67; The American Journal of Managed Care, the prevalence
of BPH in 2007 in the United States is estimated to be 20 million individuals
as defined by International Prostate Symptom Score (IPSS) >7. Additionally,
it is estimated that approximately 12.2 million men have been diagnosed and 5.6
million men treated for BPH. As population demographics shift toward an elderly
population, BPH treated population in the United States is expected to grow by
41% between 2007 and 2025, exceeding 8 million.
The potential for base case peak annual sales of cetrorelix is over $500
million in the United States market alone.
Cetrorelix in endometriosis
Endometriosis is the estrogen-driven displacement of endometrium-like
tissue (tissue from the mucous membranes of the uterus) to other organs outside
the womb. In the abdomen, the tissue can spread to the fallopian tubes, the
ovaries, the bladder, the small and large intestines, the stomach, the lungs or
the legs. Estrogen-dependent diseases often regress when estrogen production is
reduced (endometriosis, and the pelvic pain associated with it, improves when
estrogen production is reduced). Excessive and prolonged reduction of estrogen
production, however, is typically associated with adverse side effects, such as
vasomotor symptoms and bone loss.
A similar, very low estrogen level can be induced by oophorectomy
(surgical removal of the ovaries) and by chronic LHRH agonist treatment. In
both cases, estrogen replacement treatment is necessary to reduce the
hypo-estrogenic effects (e.g. bone loss, climacteric symptoms) associated with
these therapeutic approaches. Administration of LHRH agonists can initially
lead to a deterioration of symptoms due initially to the flare-up effect, then,
due to the complete suppression of estrogen below castration level values for
many months. These symptoms can further deteriorate upon withdrawal of hormonal
replacement. The longer the treatment period with traditional LHRH agonists is,
the higher the risk of developing osteoporosis. Its use is therefore restricted
to six months and can be extended only if estrogens and progesterones are
administered concomitantly.
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We believe that the side effects could be avoided with our LHRH
antagonist cetrorelix due to the absence of flare-up effects and to the
possibility of controlling estrogen levels at values comparable to the ones
observed at the beginning of the regular monthly cycle. Since the controlled
hormone withdrawal is achieved in a very short period of time, complaints from
monthly bleeding are reduced while inflammatory
foci
of endometriosis are depleted of their basis. Therefore, we believe that
treatment time can be reduced. Initial experiences show that the effect of
therapy persists for many months. Since the effect of cetrorelix starts within
a short period of time and the risk of developing osteoporosis is low, we
believe that cetrorelix therapy can be repeated in several cycles.
Endometriosis clinical trials
In earlier Phase 2 clinical trials, cetrorelix was given at a rate of 3
mg per week over a period of eight weeks. All patients were free of pain during
the course of treatment. A second laparoscopy (
direct visualization of the peritoneal
cavity, ovaries, outside of the tubes and uterus) was performed
after eight weeks and an improvement of the disease was shown in 60% of the
cases. The efficacy was comparable to agonists but with the benefit of an
almost complete absence of side effects. Cetrorelix allowed targeted control of
the hormone level to show rapid effects, while avoiding the problems of
menopause and risks (e.g. osteoporosis) associated with an otherwise complete
and long-term withdrawal of hormones. We believe that the rapid onset of action
would be ideal for intermittent therapies, allowing for treatment-free
intervals with re-dosing at the time when the therapeutic effect starts to
fade.
On April 29, 2004, we announced the results of Phase 2
placebo-controlled studies demonstrating that cetrorelix use was associated
with a rapid and durable therapeutic response, namely improvement of
endometriosis-related symptoms, such as pelvic pain, extending up to several
months following only two IM injections of cetrorelix with a one-month
interval.
On March 16, 2005, we announced that our worldwide (ex-Japan)
exclusive development and marketing partner, Solvay, initiated a full
development program for the potential treatment of endometriosis with
cetrorelix. On May 8, 2007, we and Solvay announced the termination of the
license and cooperation agreement for cetrorelix for all remaining indications,
including endometriosis, effective on that date, as a result of which we
regained exclusive worldwide (ex-Japan) rights for cetrorelix in all
indications without any financial compensation payable to Solvay. The move
by Solvay out of the womens
health field resulted from a change in their strategic focus to newly defined
therapeutic areas following the acquisition of the Fournier group in France.
In connection with our strategic review, we announced on October 2,
2007 that, after optimization of formulation and trial design, we planned to
move into Phase 2b with cetrorelix in the endometriosis indication. The
decision to proceed with development was made based on the proven safety and
efficacy of Cetrotide
®
, the overall database from preclinical and clinical studies in
endometriosis and the large unmet medical needs and commercial opportunity in
the area of endometriosis. In 2008, we performed a technical review of
cetrorelix in endometriosis with the support of medical experts in this field.
On that basis, we are now evaluating different options to resume the
development of the program.
Cetrorelix in uterine myoma
As part of the seven Phase 2 programs, cetrorelix was also evaluated for
the indication of uterine myoma. A uterus myoma is a benign tumor of the
uterine muscles. If the entire uterine wall is penetrated by myoma, one refers
to uterus myomatosus. Depending upon the length and the direction, it is either
referred to as a subserous myoma, which is located below the peritoneal
covering of the uterus and grows towards the intestinal cavity, or a submucous
myoma, which is located below the mucous membrane and grows into the uterine
cavity. The most frequent form, however, is the intramural myoma bound in the
muscular layer of the uterus. Intramural myoma leads to pain in the lower
abdomen and in some cases to prolonged or severe monthly bleeding outside the
normal cycle. This can cause severe blood loss leading to anemia. Infertility
and pregnancy problems such as miscarriage or premature delivery are also
frequent consequences. When the myoma puts pressure on the intestine or the
bladder, the result can be constipation, bladder pain or a desire to urinate.
If the myoma exerts pressure on nerves leaving the spinal cord, the result can
be back and neuralgic pain in the legs.
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Uterine myoma clinical trials
On April 29, 2004, we disclosed positive Phase 2 results from a
double-blind, placebo-controlled, multi-center trial evaluating the
subcutaneous formulation of cetrorelix, administered weekly for four weeks, as
a pre-surgical treatment to 109 women with uterine myomas. In addition to
evaluating the safety and tolerability of different doses of the new
formulation, the trial also evaluated whether cetrorelix use could lead to the
reduction of myoma and uterine volumes within a shorter treatment period than
that normally required for LHRH agonists. Data from this trial demonstrated
that cetrorelix use led to a reduction of myoma and uterine volumes after a
one-month treatment period, which is significantly shorter than the two- to
six-month treatment period typically required for LHRH agonists. The best
response rate was obtained at a dose of 10 mg of cetrorelix per week.
Cetrorelix use did not lead to castration-like symptoms. We have not yet
pursued the development of cetrorelix for this indication.
Partners for cetrorelix
We previously licensed cetrorelix to Solvay worldwide (ex-Japan) for all
indications with the exception of IVF/COS/ART, which rights belong to Merck
Serono and Japanese rights are held by Shionogi. In the BPH indication, for
which we regained exclusive worldwide (ex-Japan) rights, Japanese rights are
held by Shionogi. On May 8, 2007, we and Solvay announced the termination
of the license and cooperation agreement for cetrorelix for all remaining
indications, including endometriosis, effective on that date, as a result of
which we regained exclusive worldwide (ex-Japan) rights for cetrorelix in all
indications without any financial compensation payable to Solvay.
On March 22, 2007, we announced that Nippon Kayaku had terminated
its development agreement pertaining to cetrorelix pamoate to focus solely in
oncology.
We signed a license and cooperation agreement for the commercialization
of cetrorelix (BPH indication) with Handok for the Korean market during the
third quarter of 2008.
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 made an initial
upfront payment to us of $30.0 million, and 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. Sanofi-aventis may perform
future Phase 3b and Phase 4 clinical trials, while we will have access to all
corresponding data for other territories.
Competition for cetrorelix
The market leaders in the indication of BPH are
Pfizer, Astellas/Boehringer Ingelheim, sanofi-aventis and Abbott with
alpha
-blockers and Merck and GlaxoSmithKline with
alpha
-reductase
inhibitors.
Rapaflo
TM
(Silodosin), a selective alpha-blocker
developed by Watson Pharmaceutical (North America), Recordati S.p.A. (Europe
and the Middle East), Kissei Pharmaceutical (Japan) and Daiichi Pharmaceutical
(China) for the treatment of BPH was approved by the FDA in October 2008,
while Recordati announced in November 2008 the filing of a MAA in Europe. Silodosin was launched in 2006 in Japan
for the treatment of dysuria associated with BPH as Urief
â
2mg and 4mg capsules by Kissei Pharmaceutical
and Daiichi Pharmaceutical.
Worldwide, there are four LHRH agonists for the treatment of
endometriosis, including those of TAP Pharmaceutical Products (Abbott and
Takeda), Astra Zeneca, Pfizer and sanofi-aventis.
Concerning the class of LHRH antagonists, the compound degarelix from
Ferring Pharmaceuticals obtained, in December 2008, a marketing approval
from the regulatory agencies in the United States and the European Union for
the treatment of advanced prostate cancer. Although the indication is different
from the one targeted by cetrorelix, this is an important recognition of the
class of LHRH antagonists with a third approved class member after cetrorelix
and ganirelix. In particular, all studies of degarelix have found the drug to
be well tolerated with no evidence of systemic allergic reactions.
Ozarelix
Ozarelix is a modified LHRH antagonist which is a linear decapeptide
sequence.
Ozarelix
is a fourth-generation LHRH antagonist aiming at extended suppression of
testosterone levels that does not require a sophisticated depot formulation for
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long-lasting
activity.
The aim of this project is to identify an active
substance with superior properties for the development of longer-acting
formulations that we believe are particularly suitable for tumor therapy.
Single doses of ozarelix depot were tested in healthy male volunteers.
Ozarelix was well tolerated and produced a dose-dependent suppression of
testosterone. An immediate decrease in testosterone plasma levels was observed
in all dose groups reaching levels below 1 ng/ml within the first 12 hours
after application. Duration of suppression was dose-dependent and at the
highest dose of 60 mg caused testosterone suppression for one month.
On August 12, 2004, we entered into a licensing and collaboration
agreement with Spectrum for ozarelix and its potential to treat
hormone-dependent cancers as well as benign proliferative disorders, such as
BPH and endometriosis. Under the terms of the agreement, we granted an
exclusive license to Spectrum to develop and commercialize ozarelix for all
potential indications in North America (including Canada and Mexico) and India
while keeping the rights for the rest of the world. In addition, Spectrum is
entitled to receive 50% of upfront and milestone payments and royalties
received from our Japanese partner, Nippon Kayaku,
that
are generated in the Japanese market for oncological indications.
During the third quarter of 2008, we entered into a commercialization
agreement with Handok for ozarelix (BPH indication) for the Korean market.
BPH clinical trials
In October 2006, we announced positive and highly statistically
significant Phase 2 results for ozarelix in BPH. The multi-center double-blind,
randomized, placebo-controlled dose-ranging Phase 2 trial included 144 patients
who received different IM dosage regimens of ozarelix, or a placebo, to assess
its safety and efficacy. Ozarelix was administered on day 1 or days 1 and 15.
The primary efficacy endpoint of improving clinical symptoms of BPH at week 12,
as measured by significant changes in IPSS, was achieved at all dosage
regimens. However, the best results in terms of the most important decrease of
the IPSS score were obtained with a dose of 15 mg administered on days 1 and
15. The observed mean decrease of the IPSS score at week 12 was minus 8.6
(-8.6), it peaked at minus 9.4 (-9.4) at week 20 and was still at minus 8.7
(-8.7) as of week 28. Testosterone suppression levels were maintained above
castration levels at all times. Secondary efficacy parameters such as uroflow,
residual urinary volume, quality of life and circulating testosterone levels
were also measured and showed good results. The outcome of the trial
demonstrated an excellent safety profile with ozarelix as patients had no
serious side effects. The erectile function was also not affected at any dose
regimens.
On January 3, 2007, Spectrum announced the FDAs acceptance of an
IND for ozarelix in BPH. Spectrum initiated a Phase 2b study in January 2007.
Dr. Claus Roehrborn from the UT Southwestern Medical Center in Dallas,
Department of Urology, served as the lead investigator. The Phase 2b study was
a randomized placebo-controlled trial of ozarelix and involved approximately 70
patients. Patients were dosed with 15 mg of ozarelix (administered IM) or
placebo on days 1 and 15 and were followed for nine months. The primary
endpoint for the study was the improvement in lower urinary tract symptoms (LUTS)
secondary to BPH as measured by the IPSS score for ozarelix 15 mg compared to
placebo at 12 weeks. Secondary endpoints included measurements in peak urine
flow (Qmax), erectile function, quality of life measures as well as safety and
tolerability. The study further assessed the safety and efficacy of this dosing
regimen at time points up to 24 weeks and the durability of the IPSS response
up to 36 weeks.
On
May 23, 2007 and September 5, 2007, Spectrum disclosed detailed Phase
2 results for ozarelix in BPH at two medical conferences. Results indicate that
ozarelix was well tolerated and demonstrated statistically significant as well
as clinically meaningful efficacy in the treatment of LUTS secondary to BPH.
The effect developed rapidly, with noticeable activity at four weeks from
starting treatment, were maximal at 12-16 weeks, and persisted for the
six-month observation period. At week 12, all ozarelix-treated groups showed
improvement with the greatest improvement in the 15mg + 15mg group. Change from
baseline in IPSS score was 8.6 (p<0.001); change from baseline in urine flow
was 4.7 (p=0.002); testosterone levels declined transiently and returned to
baseline in most patients by four weeks and in all patients by six weeks
following dosing. Results also showed no statistically significant impact on
quality
of life or erectile function. Serious adverse events were reported in four
patients on ozarelix (myocardial infarction, pneumonitis, hypotension, renal
colic) but were not considered treatment-related. No systemic allergic
reactions were seen and the injections were well tolerated.
Complete
results of the 9-month
Phase 2b trial were released by Spectrum on April 22, 2008.
A total of 76
patients were enrolled in the trial to meet the target of 68 evaluable
patients. Two patients withdrew consent prior to randomization, resulting in an
Intent-to-Treat population (ITT) of 74 patients, of which 57 completed all
study visits. Spectrums monitoring of the conduct of the study revealed major
protocol violations at four of the 15 sites. Violations included: inaccurate
diagnosis, concomitant use of other drugs effective in BPH, and patient
participation in multiple trials at the same time. One of these sites was
closed early due to irregularities in data collection and was reported to the
FDA. Because of these major
28
Table of Contents
protocol violations, an analysis excluding
these four sites was performed. All 44 patients at the other 11 sites met
protocol inclusion criteria and were included in a per-protocol population
analysis. Because randomization was within site, balance between treatment
groups was maintained. In the ITT population, ozarelix demonstrated a numerical
improvement in peak urine flow (2.5mL/sec) compared to placebo (1.3mL/sec) at
12 weeks, but did not reach statistical significance (p=0.41). The improvement
in IPSS at 12 weeks was 4.4 in placebo group and 2.9 in the ozarelix group and
did not reach statistical significance (p=0.37). In the per-protocol analysis,
ozarelix demonstrated a clinically meaningful improvement in IPSS of 6.0
compared to 3.0 for placebo. This improvement in IPSS was observed as early as
8 weeks, approached statistical significance (p=0.09) and the effect was
observed out to 36 weeks. Ozarelix demonstrated a numerical improvement in peak
urine flow (1.6mL/sec) as early as four weeks, compared to no change in placebo
(0.0mL/sec), (p=0.14), although this difference was not consistently seen at
later time points. In both the ITT and the per-protocol populations, ozarelix
was well tolerated, allergic reactions were not seen, and there was no reported
adverse effect on erectile function as measured by the International Index of
Erectile Function (IIEF-EF). Based on these results, Spectrum initiated in September 2008
the recruitment of 860 patients for a new BPH study, as mentioned on the
www.clinicaltrials.gov website.
Prostate cancer clinical trials
In August 2006,
we announced positive Phase 2 result for ozarelix in hormone-dependent inoperable
prostate cancer. This open-label, randomized-controlled dose-finding trial
enrolled 64 patients receiving different IM dosage regimens of ozarelix to
assess its safety and efficacy. The study achieved its primary endpoint of
defining a tolerable dosage regimen of ozarelix that would ensure continuous
suppression of testosterone at castration level for a three-month test period.
A secondary efficacy endpoint aimed at assessing tumor response as determined
by a 50% or greater reduction of serum PSA level, compared to baseline, was
also achieved. The best results regarding the primary endpoint of continuous
suppression were obtained with a dose of 130 mg per cycle where all patients
remained suppressed to castration until at least day 85. In patients with continuous
testosterone suppression below castration level, tumor response as measured by
PSA levels was 97%. Following these results, we, in collaboration with
Spectrum, initiated an additional Phase 2 study in European centers to verify
and optimize the findings derived from the cohort of patients having received
130 mg of ozarelix per cycle.
On August 3,
2006, we announced a licensing and collaboration agreement with Nippon Kayaku
for ozarelix. Under the terms of the agreement, we granted Nippon Kayaku an
exclusive license to develop and market ozarelix for all potential oncological
indications in Japan. In return, we received an upfront payment upon signature
and are eligible to receive payments upon achievement of certain development
and regulatory milestones, in addition to low double-digit royalties on
potential net sales. Spectrum is entitled to receive 50% of the upfront,
milestone payments and royalties received from Nippon Kayaku.
Non-peptide LHRH antagonists
As outlined above, the LHRH receptor plays an important role in a number
of benign and malignant tumors. Our drug discovery unit searches for small,
non-peptide molecules which have the same effect on the receptor. Their
advantage lies in the potential for oral administration.
AEZS-115 is a new orally bioavailable LHRH antagonist with LHRH-receptor
binding affinity in the nanomolar range which is developed for hormone therapy
of endocrinological disorder and of benign and malignant tumors. The compound
demonstrates excellent selectivity to LHRH-receptor and has advanced to a
preclinical stage where the
in vivo
activity has been confirmed. Major advantages are the dose-dependent reduction
of sexual hormones without flare-up effect whereas no decrease down to
castration level is necessary and therefore side effects are reduced.
In January 2006, we regained the exclusive worldwide rights to
develop and commercialize AEZS-115 from Solvay. Attractive
in vivo
activity of this orally available
peptidomimetic LHRH-antagonist was demonstrated with a single, oral
administration (20mg/kg) in rats which led to efficient and revocable
suppression of plasma testosterone levels for up to 12 hours. Furthermore, a
repeat of the dosing of AEZS-115 increased the suppression time without
accumulation in the plasma.
In 2007, an oral formulation was selected and pharmacokinetic data were
obtained.
First preclinical results were presented at the 2008 San Antonio Breast
Cancer Symposium on December 12, 2008 and showed
substantial anti-tumor activity of
AEZS-115 in human ovarian and breast cancer cell lines, as evidenced by
exposure of human cell lines SKOV3, Ovcar 3 (human ovarian cancer cell lines)
and MDA-MB 468 (human breast cancer cell line) to increasing concentrations of
AEZS-115, peptidic
GnRH-antagonist cetrorelix and GnRH-agonist Triptorelin (1, 10, and 100 µM)
for 48 days. The
number of viable cells was determined by crystal violet staining as well as by
ATP-dependent luminometric assays. Results showed that both GnRH-antagonists
dose-dependently inhibited growth of all three cell lines,
29
Table of Contents
while
GnRH-agonist Triptorelin showed marginal growth inhibition.
Cell growth was inhibited by
40-60% following exposure to a concentration of 10 µM of AEZS-115 and by 60-80% when cells
were exposed to 100 µM. Inhibition with cetrorelix at 100 µM ranged from 20-40%, while only
minor effects on cell growth were seen at 10µM.
Optimization is ongoing.
SIGNAL TRANSDUCTION INHIBITORS
Perifosine
Perifosine is an alkylphosphocholine compound with structural similarity
to phospholipids, which are the main constituents of cellular membranes, and it
is an active ingredient with anti-tumor capacities. In tumor cells, perifosine
has demonstrated interactions with vital signal transduction mechanisms and
induction of programmed cell death (apoptosis).
Perifosine exerts a marked cytotoxic effect in animal and human tumor
cell lines. The most sensitive cancer cell lines were larynx carcinoma, breast,
small cell lung, prostate and colon. Based on the
in vitro
trials, the mode of action of perifosine appears to be fundamentally different
from that of currently available cytotoxics. Pharmacodynamic data have
demonstrated that perifosine possesses anti-tumor activity, including tumor
models that are resistant to currently available agents for cancer therapy.
This activity is based on a direct and relatively specific action on tumors.
In preclinical and clinical Phase 1 trials (solid tumors), this orally
administered agent has been found to have good tolerability. Five Phase 1
trials have been conducted on perifosine, including one trial of perifosine in
combination with radiotherapy.
Based on findings in various tumor models, the U.S. National Cancer
Institute, along with our North American partner, Keryx, investigated
additional dosage regimens of perifosine in oncology patients. A number of
screening Phase 2 studies examined perifosine as a single agent or in
combination in several tumor types. Encouraging results lead to further
development in specific indications.
Perifosine, the first-in-class AKT inhibitor in multiple Phase 2
studies, is being developed as an orally active radio-enhancer and anti-cancer
agent.
30
Table of Contents
Perifosine
Radio-enhancer
A proof-of-concept Phase 1 study of perifosine in combination with
radiotherapy conducted by the National Cancer Institute of the Netherlands was
completed in 2004. Results from this trial were presented at ASCO 2004. A total
of 21 radiotherapy-naïve patients, of whom 17 had advanced non-small cell lung
cancer (NSCLC) and 14 had become refractory to prior chemotherapy, received
oral perifosine doses ranging from 50 mg to 200 mg/day concurrently with
standard doses of radiotherapy. The trial data demonstrated an acceptable
safety and tolerability profile, with 150 mg/day established as the dose
recommended for use in subsequent clinical trials. Also demonstrated was
preliminary evidence of anti-tumor activity at all dosage levels, including
complete or partial responses (complete disappearance and decreased tumor size,
respectively), or stable disease, with a median follow-
up for responders of eight
months. Importantly, in the cohort of 10 patients who were treated with 150
mg/day, the established dose recommended for use in subsequent clinical trials,
there were three complete responses, three partial responses and four patients
with stable disease.
On September 22,
2005, we announced the initiation of a multi-center Phase 2 randomized,
double-blind, placebo-controlled trial with perifosine in combination with
radiotherapy for NSCLC. Patients
received perifosine 150 mg daily for five to six weeks and are followed for at
least 12 months. The primary endpoint of this trial is the extent and duration
of local control, i.e. the absence of tumor recurrence or progression in the
area that has been irradiated. The trial is being conducted in collaboration
with the Netherlands Cancer Institute. The lead investigator is Marcel Verheij,
M.D., Ph.D., of the Department of Radiation Oncology / Division of Cellular
Biochemistry, at the Netherlands Cancer Institute in Amsterdam. We announced completion of recruitment of 160
patients with inoperable Stage III NSCLC on November 14, 2007. As the
patients are followed for a one-year period after receiving treatment, we
expect to announce top-line results in early 2009.
Perifosine
Anti-cancer agent
Perifosine
Multiple myoloma (MM)
In June and December 2007,
Keryx announced preliminary positive Phase 1 and Phase 2 data on perifosine in
patients with relapsed/refractory MM. Data demonstrated clinical activity of
perifosine in combination with bortezomib and dexamethasone, and with
lenalidomide plus dexamethasone.
In
December 2008, Keryx presented final results of the Phase 1 clinical trial
in which patients with relapsed or refractory MM were administered a
combination of perifosine + lenalidomide and dexamethasone.
Four
cohorts of
>
6 patients each were
enrolled and perifosine dose was 50 or 100 mg (daily), lenalidomide dose was 15
or 25 mg for days 1 to 21 and dexamethasone dose was 20 mg (for days 1-4; 9-12;
and 17-20 for 4 cycles, followed by 20 mg for days 1-4) in 28-day cycles. To
limit dexamethasone-related toxicities, the protocol was amended to use weekly
dexamethasone (40 mg), applying to cohorts 3, 4, and the Maximal Tolerated Dose
(MTD) cohort. Dose Limiting Toxicity (DLT) was defined as grade (G) 3
non-hematologic toxicity, G4 neutropenia for 5 days and/or neutropenic fever,
or platelets <25,000/mm
3
on >1
occasion despite transfusion. Response was assessed by modified EBMT criteria.
To be enrolled, patients had to have received at least one but no more than
four prior therapies. Patients refractory to lenalidomide/dexamethasone were
excluded. 32 patients (17 men and 15 women, median age 61 years old,
range 37-80) were enrolled; 6 patients in cohort 1 (Perifosine 50 mg,
lenalidomide 15 mg, Dexamethasone 20 mg); 6 patients in cohort 2 (Perifosine 50
mg, lenalidomide 25 mg, Dexamethasone 20 mg); 8 patients in cohort 3
(Perifosine 100 mg, lenalidomide 15 mg, Dexamethasone 40mg/week); 6 patients in
cohort 4 (Perifosine 100 mg, lenalidomide 25 mg, Dexamethasone 40 mg/week) and
6 patients at MTD (Cohort 4). Median prior lines of treatment was 2 (range
1-4). Prior therapy included dexamethasone (94%), thalidomide (83%),
bortezomib (47%), and stem cell transplant (47%). 37% of patients had
progressed on prior Thalidomide/Dexamethasone. Two patients did not
complete one full cycle (non-compliance and adverse event not related to study
drugs both in cohort 3) and were not included in the safety and efficacy
analysis. Of the 30 patients evaluable for safety, the most common (
>
10%) grade 1 / 2
events included nausea (13%); diarrhea (17%); weight loss (17%); upper
respiratory infection (23%); fatigue (30%); thrombocytopenia (20%); neutropenia
(20%); hypophosphatemia (23%); increased creatinine (23%); anemia (36%);
hypercalcemia (47%). Grade 3 / 4 adverse events
>
5% included
neutropenia (20%); hypophosphatemia (17%); thrombocytopenia (13%); anemia
(10%), fatigue (7%). There was one reported DLT in cohort 3
(nausea). Lenalidomide was reduced in 8 patients, Perifosine reduced in 8
patients and Dexamethasone reduced in 6 patients. All 30 patients in the
analysis were evaluable for response, with best response as follows:
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Table of Contents
Response: N = 30
|
|
N (%)
|
|
Duration (wks)
|
|
ORR (
>
PR)
|
|
Near
Complete Response (nCR)
|
|
2 (7%)
|
|
79+, 15+
|
|
|
|
Very Good Partial Response (VGPR)
|
|
3 (10%)
|
|
62+, 34, 17
|
|
15 (50%)
|
|
Partial
Response (PR)
|
|
10 (33%)
|
|
26+ (range 11 54+)
|
|
|
|
Minimal
Response (MR)
|
|
6 (20%)
|
|
17+ (range 9 - 30+)
|
|
|
|
Stable
Disease (SD)
|
|
7 (23%)
|
|
14+ (range 8 19)
|
|
|
|
Progression (PD)
|
|
2 (7%)
|
|
8, 4
|
|
|
|
stable disease: < 25% reduction in M-protein
|
|
Patients have tolerated the treatment regimen
of Perifosine + Lenalidomide + Dexamethasone well with manageable toxicity, and
with encouraging clinical activity demonstrated by an overall response rate (ORR)
(
> PR) of
50%.
Also in December 2008 during the meeting of the American Society
of Hematology, Keryx presented results of a Phase 1/2 multicenter trial of
perifosine + bortezomib in patients with relapsed or relapsed/refractory MM who
were previously relapsed from or refractory to bortezomib ± dexamethasone.
The Phase
I stage of the study enrolled a total of 18 patients in 4 cohorts of
3 pts each
with dosing of Perifosine 50 mg or 100 mg (daily) and bortezomib 1.0 or 1.3
mg/m
2
(on day 1, 4, 8, 11) in 21-day cycles. The
selected dose for Phase 2 was perifosine 50 mg once daily + bortezomib 1.3 mg/m
2
(on
day 1, 4, 8, 11) in 21-day cycles, with a planned enrollment of 64 patients.
Dexamethasone 20 mg (on day of and after each bortezomib dose) could be added
in patients with progressive disease (PD). For the Phase 1 portion, Dose
limiting toxicity (DLT) was defined as any grade (G) 3 non-hematologic
toxicity, G4 neutropenia for 5 day and/or neutropenic fever, or platelets
<10,000/mm
3
on more than one occasion despite
transfusion. Response was assessed by modified EBMT and Uniform criteria. A
total of 76 patients have been enrolled (18 patients in Phase 1 and 58 patients
in Phase 2) comprised of 45 men and 31 women, median age 63 years old, (range
41-89). 84% of patients had relapsed/refractory MM, with a median of 6 lines of
prior treatment (range 2-13). Prior therapy included bortezomib (100%),
dexamethasone (95%), thalidomide (79%), lenalidomide (71%) and stem cell
transplant (57%). 63 patients have completed at least one cycle and were
evaluable for safety (13 patients are currently not evaluable; 3 were removed
in cycle 1 and 10 are too early in their treatment). Most common (>10%) grade 1 / 2 events were nausea, diarrhea,
fatigue and myelosuppression, which were manageable with supportive care and
growth factors. Grade 3 / 4 adverse events >5% included thrombocytopenia (40%); lymphopenia (36%);
neutropenia (21%); anemia (14%); hyponatremia (13%); leukopenia (11%);
proteinuria (8%), and upper respiratory infection (6%). No deep vein thrombosis (DVT) has been
seen, and only one worsening peripheral neuropathy from grade 1 to 3 has been
reported to date. Two patients had perifosine reduced to 50 mg (nausea,
fatigue) in the Phase 1 cohort, and 7 patients had bortezomib dose reductions
primarily due to hematologic toxicity. 57 patients have completed at
least 2 cycles and are evaluable for response, with best response to perifosine
+ bortezomib (+/- dexamethasone) as follows:
|
|
|
|
CR
|
|
PR
|
|
MR
|
|
ORR
|
|
SD
|
|
All Patients: Best Response
|
|
N=57
|
|
2
|
|
4
%
|
|
7
|
|
12
%
|
|
14
|
|
25%
|
|
23
|
|
40
%
|
|
23
|
|
40%
|
|
perifosine + bortezomib
|
|
57
|
|
1
|
|
2%
|
|
5
|
|
9%
|
|
8
|
|
14%
|
|
14
|
|
24%
|
|
17
|
|
30%
|
|
With dexamethasone added*
|
|
31
|
|
1
|
|
2%
|
|
2
|
|
3%
|
|
6
|
|
11%
|
|
9
|
|
16%
|
|
6
|
|
11%
|
|
(* as a subset
of the evaluable population)
9 of 76 patients (12%) rapidly progressed
without response or stable disease, including 6 patients in whom dexamethasone
was also added. As of August 2008, the median time to progression
(TTP) for patients achieving
>
PR is 34 weeks, and for all patients achieving
>
MR is 33 weeks.
Perifosine in combination with bortezomib (+/- dexamethasone) was generally
well tolerated and is remarkably active in a heavily pre-treated
Bortezomib-exposed patient population, with an ORR of 40%, including an ORR of
37% and a median TTP of 9.25 months in responding but previously
bortezomib-refractory patients. Further trials, including randomized studies in
relapsed disease, are planned.
Perifosine
Waldenstroms Macroglubulinemia
Results of a
Phase 2 study on perifosine in patients with Waldenstroms Macroglubulinemia (WM)
were presented by Keryx in June 2008 at ASCO and in December 2008
during the ASH meeting. Perifosine showed clinical activity as a single
32
Table of Contents
agent in patients
with relapsed/refractory WM, with an ORR (partial response [PR] + minimal
response [MR]) of 36%. PR occurred in 2 (6%) patients, with a median duration
of response of 9+ and 18+ months, MR occurred in 11 (30%) patients, with a
median duration of response of 7 months (2-21+ months). Stable disease [SD]
occurred in 21 (58%) patients and progressive disease [PD] in 2 (6%) patients
at 2 and 4 months. The most common adverse events were GI toxicities (nausea,
vomiting and diarrhea) with grade 1 and 2 in 36% of the patients. Grade 3 and 4
events included anemia (9%) and leucopenia (9%). Grade 3 arthritis occurred in
9% of the patients; was considered likely related to therapy, (especially in
rapidly responding patients), and reversed with symptomatic treatment as well
as dose reduction. Dose reductions to 100 mg occurred in a total of 36% of the
patients and were otherwise due to GI toxicity or cytopenias. Perifosine
monotherapy induces a prolonged time to progression in relapsed or refractory
WM, with a promising response rate of 36%, stabilization of disease in 58% of
patients, and manageable toxicity, as well as the convenience of oral
administration. Future clinical trials in combination with rituximab are
planned.
Perifosine
Renal Cell Carcinoma
In June 2006, we announced positive data
of perifosine in patients with advanced renal cell carcinoma (RCC). Keryx
disclosed results from an interim analysis performed at the end of the first
year of accrual, from a Phase 2, multi-center trial of perifosine that included
multiple types of tumor and the results of the RCC group met protocol
requirements for expansion of this cohort. Of the 13 patients with RCC, seven
were evaluable for response. Three of them (43%) had a partial response and an
additional two patients (29%) achieved long-term stable disease. Two patients
(29%) had progressive disease. Results of a Phase 1 multicenter trial of
perifosine in combination with sorafenib or in combination with sunitinib for
patients with advanced cancers including RCC were disclosed by Keryx in June 2007
during the ASCO meeting and in November 2007.
The trial was designed to
accrue 3-6 patients in each of four cohorts. Response by RECIST criteria was a
secondary endpoint. Perifosine was escalated from 50 mg once per day to 50 mg
three times per day; sorafenib dose was escalated from 400 mg once per day to
400 mg twice per day; and sunitinib dose was escalated from 25 mg to 50 mg once
per day for 4 weeks of treatment out of 6. Dose limiting toxicity (DLT) was
defined as grade (G) 3 non-hematologic or G4 hematologic toxicity. Maximal
tolerated dose (MTD) was the dose below that at which 2 out of 6 patients
experienced a DLT.
For the
combination perifosine + sorafenib, twenty (20) patients were enrolled (12
males / 8 females, median age 64 (range 44-87)) with a median number of 2 prior
therapies (range 1-4). Three patients were inevaluable due to rapid disease
progression. Diagnosis was as follows; RCC (11 pts), sarcoma (5), colorectal
(2), hepatocellular (1) and neuroendocrine (1). 17 patients were evaluable
for toxicity: no drug related Grade 4 adverse events (AE) were seen. Suspected
DLT of hand-foot syndrome was seen in cohort 4 and additional patients were
enrolled. There was no increase in hand-foot syndrome compared to sorafenib
alone. Of interest, 6/9 evaluable RCC patients (67%) had stable disease (SD)
>12 weeks (median 26 weeks, range 12-62+). One hepatocellular patient had SD
for 36 weeks. The combination of perifosine + sorafenib was well tolerated with
no increased hand-foot syndrome compared to sorafenib alone. Six out of 9 RCC
patients (67%) achieved SD up to 62+ weeks. Future studies are currently in
development.
For the
combination perifosine + sunitinib, fourteen patients (8 males / 6 females;
media range 62 years old, range 28-81) were enrolled.
Disease type was as follows: RCC (3), Sarcoma
(3), Other (8). Six patients were
evaluable for response. After 2 treatment cycles, one patient had a partial
response (PR), 3 patients showed a SD and 2 patients had disease progression
(PD). In the sub-group RCC, three out of three patients were evaluable for
response: one patient had a PR, 1 patient showed a SD and 1 patient had a PD.
Results indicated that patients to date have well tolerated the treatment
combination of perifosine + sunitinib with no unexpected toxicities and
clinical activity has been noted within the first 3 cohorts with 4 of 6 (67%)
evaluable patients with advanced cancer achieving at least SD for more than 6
months.
Perifosine
Sarcoma
In
June 2007, our partner Keryx presented results of Phase 1 and 2 studies
for the treatment of patients with advanced sarcoma at the ASCO meeting. The
dose schedules in the Phase 1 trials were weekly 100-800mg or loading dose
300-1800mg on Day 1 followed by 50-150 mg daily for Days 2-21 every 28 days or
loading dose 400-900 mg and daily 50-100 mg continuously. In the Phase 2 trial,
doses were loading dose 900 mg on Day 1 and 150mg daily for days 2-21 every 28
days; loading dose 900 mg and 100 mg daily continuously; 50 mg daily
continuously without a loading dose; and 900-1500 mg weekly. 145 patients with
sarcoma were entered into studies and were assessed for clinical benefit rate (CBR).
Partial responses were seen, in one patient each, with chondrosarcoma,
extra-skeletal myxoid chondrosarcoma, leiomyosarcoma and a desmoid tumor. At
lower doses with 52 patients fully evaluable for CBR, the CBR was 52% with four
partial responses and 23 stable disease at
>
4 months. At higher
doses with 30 patients fully evaluable for CBR, CBR was 53% with 16 stable
disease at
>
4 months. Toxicities were mainly gastrointestinal and/or
fatigue. The percentage of patients with grade 0 nausea, vomiting, diarrhea and
fatigue for lower dose perifosine (76 patients) was 46%, 49%, 38% and 55%
respectively compared to 26%, 32%, 20%, and 58% for higher dose perifosine (69
patients). The proportion of patients with grade 2+ nausea,
33
Table
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vomiting,
diarrhea and fatigue was 20%, 13%, 15%, and 21% for lower dose
perifosine and 49%, 35%, 42%, and 25% for higher dose perifosine.
In November 2007,
Keryx announced positive preliminary Phase 2 data of perifosine in patients
with chemo-insensitive sarcoma. Data demonstrated the tolerability and clinical
activity of perifosine as a single agent with an overall clinical benefit of
40% (stable disease > 3 months) in patients with refractory rare sarcomas.
Perifosine was well tolerated with the most common grade 1 & 2 adverse
events reported as nausea, vomiting, diarrhea and fatigue.
Perifosine
Gliomas
In November 2007,
Keryx announced early results of a Phase 2 trial of perifosine as a single
agent for the treatment of recurrent malignant gliomas (malignant glioblastoma
and malignant anaplastic gliomas). Twenty-five patients with advanced malignant
gliomas were treated with a loading dose of 600 mg (150 mg x4) followed by a
100 mg daily dose of perifosine. The median progression free survival and
overall survival in the anaplastic glioma group was nine weeks (range 2-50
weeks) and 49 weeks respectively. Toxicity was minimal with the following
reported events: one grade 1 nausea, one grade 1 diarrhea, one grade 2 pain,
and one grade 4 gout exarcebation. The study was designed to enroll at least 12
evaluable malignant glioblastoma patients and at least 10 evaluable malignant
anaplastic gliomas patients. If at least one patient achieves six month
progression free survival, the study would continue to enrol an additional
subset of patients. Therefore, the malignant glioblastoma arm has been halted
and the malignant anaplastic gliomas arm will continue to enroll.
Perifosine
Other indications
On March 2,
2006, our North American partner, Keryx, announced the initiation of a
corporate-sponsored Phase 2 trial, multi-cancer, clinical program to evaluate
perifosine as a treatment for leukemia. Dr. Frank Giles, Professor,
Department of Leukemia, at the MD Anderson Cancer Center in Houston, TX, is the
principal investigator. This Phase 2 trial will assess the objective response
rate and evaluate the pharmacokinetics and safety and tolerability of
perifosine as a single agent in relapsed or refractory acute myeloid leukemia,
acute lymphocytic leukemia, chronic lymphocytic leukemia, high-risk
myelodysplastic syndrome and chronic myeloid leukemia in the blastic phase.
In November 2006, Keryx presented intermediary results of the
Phase 2 study of imatinib plus perifosine in patients with imatinib-resistant
gastrointestinal stromal tumor (GIST). The primary endpoint of this study is
to evaluate the efficacy and toxicity of the combination imatinib and
perifosine in patients with imatinib-resistant GIST. To date, 16 patients have
been enrolled in the current study. Of the 12 patients with evaluable disease,
there were two partial responses by Choi criteria (17% objective response rate
(ORR)) and one partial response by RECIST criteria (8% objective response
rate). Grade 3 and 4 adverse events were rare and included fatigue, myalgias,
ocular toxicity and nausea/emesis. The early data from the current study
suggest that the addition of perifosine to imatinib is well-tolerated and may
have efficacy in the treatment of patients with imatinib-resistant GIST.
Partners for perifosine
A Cooperative Research and Development Agreement (CRADA) was put in
place with the National Institute of Health/
the National Cancer
Institute in May 2000. A cooperation and license agreement was signed in September 2002
with Access Oncology, Inc. (AOI), for the use of perifosine as an
anti-cancer agent covering the United States, Canada and Mexico. In January 2004,
AOI was acquired by Keryx, which is pursuing the clinical development of
perifosine under the same conditions as AOI. The agreement, in particular,
provides us free access to all data from Keryx and its partners studies, as
well as milestone payments and scale-up royalties to be paid to us on future
net sales of perifosine in North America. We own rest of the world rights to
perifosine.
AEZS-127 erucylphosphocholine
On January 6, 2005, we announced the initiation of preclinical
development of erucylphosphocholine (AEZS-127), an analog of perifosine which
is suitable for intravenous administration. Like perifosine, AEZS-127 belongs
to a new class of compounds based on alkylphosphocholines. AEZS-127 possesses
distinctive reduced haemolytic activity thus allowing for intravenous
injection.
On January 6, 2005, we also licensed to Keryx certain rights to
develop and market AEZS-127 in North America, South Africa, Israel, Australia
and New Zealand while keeping rights for the rest of the world. According to
the agreement with Keryx, the preclinical development costs of AEZS-127 are
shared between Keryx (50%) and us (50%). In Q4 2008, we retrieved all rights
for AEZS-127 from Keryx.
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In 2006, studies for acute toxicity and dose range finding of
erucylphosphocholine were actively pursued. The 4-week toxicity studies in rats
and dogs as well as the safety pharmacology package was completed in 2007.
These preclinical data are a prerequisite for the performance of a Phase 1
clinical study.
Erk/PI3K inhibitors and dual kinase
inhibitors
In addition to our activities with alkylphosphocholines, we are
screening small molecules for activity as agonists and antagonists to
lipid-protein signaling interactions, which are seen as new and potentially
important therapeutic targets.
We are focusing our efforts on single and dual inhibitors of
Ras-Raf-Mek-Erk and PI3K-Akt pathways. The Ras-Raf-Mek-Erk and the PI3K-Akt
pathways are constitutively activated in many cancer types, and influence both
tumor development and progression.
Both signaling pathways represent promising
therapeutic targets for the treatment of tumors. We have now identified a new
compound class with inhibitory activity against both the Erk and PI3K kinases.
These small molecules inhibit the kinases at nanomolar concentrations in a
dose-dependent manner by competing directly at the ATP binding site. In a broad
kinase panel, the molecules are very selective against other kinases. In
cellular experiments the compounds inhibit the activation of downstream targets
Akt and Rsk1, and can stop the proliferation of various human cancer cell
lines. Moreover, a new generation of aniline-substituted pyridopyrazine-urea
derivative show highly selective PI3K inhibition. We are currently performing
in vivo
studies with front-runner compounds in four mouse xenograft models
(HCT116, U87, A549 and PC3) as well as pharmacokinetic studies in rodents using
an oral pre-formulation. On the basis of these studies, AEZS-126 was selected
as a preclinical development candidate for in vivo pharmacology and
pharmacokinetic studies.
Competitor for Erk/PI3K
inhibitor
Novartis PI3K inhibitor NVP-BEZ 235, which is currently being
investigated in a clinical Phase 1, was used as a reference compound for the
evaluation of our candidate compounds.
TUMOR TARGETING CYTOTOXIC CONJUGATES AND
CYTOTOXICS
Cytotoxic conjugates
In view of the non-specific toxicity of most chemotherapeutic agents
against normal cells, targeting such drugs to cancerous tissue offers a
potential benefit for patients with advanced or metastatic tumors. Targeted
cytotoxic peptide conjugates are hybrid molecules composed of a cytotoxic
moiety linked to a peptide carrier which binds to receptors on tumors.
Cytotoxic conjugates are designed to achieve differential delivery, or
targeting, of the cytotoxic agent to cancer vs. normal cells.
Our cytotoxic conjugates represent a novel oncological strategy to
control and reduce toxicity and improve the effectiveness of cytotoxic drugs.
The development strategy was to create targeted conjugates with high cytotoxic
activity based on doxorubicin, an approved and commercialized product or 2-pyrrolino-doxorubicin
which is 500 to 1,000 times more active than the parent compound. We are
exploring several candidates in which doxorubicin or 2-pyrrolino-doxorubicin
are coupled to the peptide carriers targeting LHRH (AEZS-108 &
AN-207), somatostatin (AN-238 & AN-162) or bombesin (AN-215)
receptors. These conjugates are less toxic and more effective
in vivo
than the respective radicals in
inhibiting tumor growth in LHRH receptor positive models of human ovarian,
mammary or prostatic cancer.
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In AEZS-108, the most advanced of the cytotoxic conjugates, doxorubicin
is chemically linked to an LHRH agonist, a modified natural hormone with
affinity for the LHRH receptor. This design allows for the specific binding and
selective uptake of the cytotoxic conjugate by LHRH receptor positive tumors.
Potential benefits of this targeted approach include a more favorable safety
profile with lower incidence and severity of side effects, as normal tissues
are spared from toxic effects of doxorubicin. In addition, the targeted
approach may enable treatment of LHRH receptor positive cancers that have
become refractory to doxorubicin which has been administered in its
non-targeted form.
In preclinical studies conducted to date in several animal models of
LHRH receptor positive human cancer cell lines, AEZS-108 anti-tumor activity
and tolerability were shown to be superior to that of doxorubicin. As would be
expected, AEZS-108 was not active or was significantly less active than
doxorubicin in LHRH receptor negative cancer cell lines. On January 18,
2005, we announced the initiation of a company-sponsored Phase 1 dose-ranging
study with this targeted anti-cancer agent AEZS-108.
In June 2006, we announced positive Phase 1 results for AEZS-108 in
patients with gynaecological and breast cancers which showed that the compound
has a good safety profile and no dose-limiting toxicities. Eight patients
received AEZS-108 by intravenous infusion. Infusion was well tolerated at all
dosages, without supportive treatment. Pharmacokinetic analyses showed
dose-dependent plasma levels of AEZS-108 and only minor (10-20%) release of
doxorubicin. Stabilization of disease was observed in one out of eight patients
in the ongoing Phase 1 study.
On November 27, 2006, we disclosed additional positive Phase 1
results regarding AEZS-108 in patients with gynaecological and breast cancers.
Further data showed the compounds good safety profile and established the
maximum tolerated dose at 267 mg/m
2
, which is equimolar to a doxorubicin dose of 77
mg/m
2
.
This dose will be the recommended dose for a Phase 2 trial. The Phase 1
open-label, multi-center, dose-escalation, safety and pharmacokinetic study
conducted in Europe included 17 patients suffering from breast, endometrial and
ovarian cancers with proven LHRH receptor status. Evidence of anti-tumor
activity was found at 160 mg/m
2
and 267 mg/m
2
doses of AEZS-108 where 7 out of
13 patients showed signs of tumor response, including 3 patients with complete
or partial responses. The Phase 2 trials will focus on advanced or recurrent
ovarian and endometrial cancers, two forms of cancer where LHRH receptors are
highly expressed. Recommended dose will be 267 mg/m
2
given once every three weeks.
In 2007, a Phase 2 open-label, non-comparative, multicenter two
indication trial stratified with two stage Simon Design was prepared, where 82
patients are planned for this trial with up to 41 patients with either a
diagnosis of platinum-resistant ovarian cancer (stratum A) or disseminated
endometrial cancer (stratum B). On February 12, 2008, we reported that the
treatment of first patients had commenced in this Phase 2 trial. In October 2008, we announced that we
have entered the second stage of patient recruitment for the Phase 2 trial in
platinum-resistant ovarian cancer indication. This decision was taken following
the report of two partial responses among patients with a diagnosis of
platinum-resistant ovarian cancer. The
second stage of patient recruitment for the endometrial cancer indication was
reached in November 2008 and was based on the report of one complete
response and two partial responses among 14 patients with a diagnosis of
disseminated endometrial cancer. Further results of this trial are expected in
the first half of 2009.
AEZS-105 - Lobaplatin
Lobaplatin is a platinum derivative that has demonstrated lower toxicity
in preclinical studies compared with cisplatinum, specifically renal toxicity,
and incomplete cross-resistance with other platinum derivatives suggesting
potential therapeutic use even in tumor indications not routinely treated with
platinum derivatives.
Clinically, lobaplatin was well tolerated at recommended dosages.
Treatment was not associated with typical side effects often seen with
cisplatinum, such as nephrotoxocity (impairment of kidney function), otoxicity
(loss of hearing capacity), and neurotoxicity (effects on sensory function). In
addition, vomiting was less severe than published data from both cisplatinum
and carboplatinum. Characteristic toxicity of lobaplatin is a short-lasting,
spontaneously reversible drop in thrombocyte count (blood platelets).
In a Phase 2 study conducted in China that included 284 patients with a
broad range of solid and non-solid tumors, safety and particularly good
therapeutic efficacy were demonstrated in patients with breast cancer, small
cell lung cancer (SCLC), and chronic myeloid leukemia (CML) (a cancer of
the hematopoietic system). The primary endpoint in solid tumor patients was the
remission rate according to WHO criteria, while response in CML was assessed
according to the disease-specific criteria of Talpaz. The favorable results of
this study were the basis for approval of Lobaplatin
by
the Chinese health authorities for the treatment of inoperable, advanced breast
cancer, SCLC and CML.
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In December 2002,
we signed a contract with Hainan Chang An Pharmaceuticals Ltd. for the
marketing in China of lobaplatin. The contract includes the worldwide manufacturing
rights of lobaplatin by Hainan Chang An Pharmaceuticals. The technology
transfer agreement provided us with a first payment upon signature and a later
manufacturing-related payment.
In 2007, lobaplatin was licensed to Atani for the territory of Japan.
Atani is performing preclinical studies and is planning to conduct a Phase I
clinical trial.
TUBULIN INHIBITORS / VASCULAR TARGETING
AGENTS
AEZS-112 - Development of a low molecular
weight tubulin inhibitor with anti-angiogenic properties
Tubulin is a protein found in all cells that plays an important role
during cell division, in that it helps to transmit genetic information to the
daughter cells. Inhibition of this process leads to the death of the affected
cell. The anti-tumor agents taxol and vincristine, which are widely used in
cancer therapy, are based on this principle. Both compounds are expensive
natural substances and cause severe side effects when used in humans.
We are currently identifying and developing novel tubulin inhibitors which,
compared with currently used products, exhibit in animal models improved
efficacy, have a more acceptable side effect profile, an incomplete or no
cross-resistance and are administered orally.
AEZS-112 is a drug development candidate with an excellent tolerability
profile showing excellent
in vivo
activity in various tumor models including mammary, colon, melanoma and
leukemia cancers after oral administration. This compound acts through three
mechanisms of action. Strong anti-cancer activity is combined with
pro-apoptotic and anti-angiogenic properties. AEZS-112 inhibits the
polymerization of cancer tubulin rather than bovine brain tubulin, it destroys
the mitotic spindel of the cancer cells and it inhibits topoisomerase II
activity. AEZS-112 arrests the cancer cells in the G
2
M phase
at a nanomolar concentration and induced apoptosis. AEZS-112 is not
cross-resistant to cisplatin, vincristine and doxorubicine in cell lines
resistant to these drugs. Given orally once weekly, AEZS-112 proved to be a
potent inhibitor of
in vivo
tumor
growth in melanoma, mammary, colon, lung, renal as well as in leukemia cancers
at acceptable and very well tolerated doses. Furthermore AEZS-112 showed
favorable safety and toxicity profiles. No findings with respect to cardiotoxicity
and neurotoxicology parameters could be observed during the toxicological
evaluation in mice, rats and dogs. With this profile of activity, AEZS-112 is a
promising candidate for further clinical development.
On January 8, 2007, we announced the initiation of a Phase 1 trial
for AEZS-112 in patients with solid tumors and lymphoma. This open-label,
dose-escalation, multi-center, intermittent treatment Phase 1 trial is being
conducted in the United States with Daniel D. Von Hoff, MD, Senior Investigator
at the Translational Genomics Research Institute in Phoenix, AZ, as the lead
investigator. The trial includes up to 50 patients who have either failed
standard therapy or for whom no standard therapy exists. Primary endpoint of
the Phase 1 trial focuses on determining the safety and tolerability of
AEZS-112 as well as establishing the recommended Phase 2 dose and regimen.
Secondary endpoints are aimed at establishing the pharmacokinetics and
determining the efficacy based on standard response criteria.
As of December 2008, 35 patients have
entered this Phase 1 dose escalating clinical trial. To date no Maximum Tolerated Dose (MTD) has
been achieved and no clinical relevant drug-related adverse events have been
encountered. We also expect to report
first results at the Annual Meeting of the American Association for
Cancer Research (AACR) in Denver in late April 2009.
Growth hormone secretagogue
Ghrelin ligand
AEZS-130 (ghrelin agonist)
Growth hormone secretagogues (GHS) represent a new class of pharmacological
agents that directly stimulate growth hormone (GH) secretion from the
pituitary gland without the involvement of growth hormone-releasing hormone
GH-RH or somatostatin. We believe that there is currently no GHS on the
pharmaceutical market. Since GH is a potent regulator of lipid, sugar and
protein metabolism, the potential clinical uses of GHS are
numerous. They include growth retardation in children and treatment
of cachexia in AIDS patients, which are currently the only approved uses of therapy
of GH. The administration of GH, which has to be injected every day, is
cumbersome. Therefore, we believe that there would be a demand for new orally
active drugs like GHS.
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As part of our university collaboration, we accessed new peptidomimetic
compounds with GH secretagogue properties. The lead development candidate,
AEZS-130 (EP-1572), is a novel peptidomimetic GHS with potent and selective
GH-releasing activity in humans. AEZS-130 underwent limited clinical
pharmacology tests that demonstrated a potent stimulation of the GH secretion
after oral administration in human volunteers. This product has been licensed
to Ardana Bioscience Ltd. (Ardana) (ARD-07), which initiated an open,
randomized, placebo-controlled Phase 1 dose-ranging study in April 2004.
Thirty-six healthy subjects were included in this study to receive either the
reference hormone GH-RH by intravenous route or one of the following dose
levels of AEZS-130: 0.005, 0.05 or 0.5 mg/kg by oral route. AEZS-130 at the
dose of 0.5 mg/kg orally caused an increase in growth hormone release
equivalent to that induced by GH-RH intravenously. The compound was well
tolerated and no other hormones showed a significant modification after any
dose of AEZS-130.
In June 2006, Ardana presented results regarding AEZS-130 at the
2006 Endo Convention. These results referred to the Phase 1 trial regarding the
stimulating effects of AEZS-130 on growth hormone following both oral and
intra-duodenal administration in healthy males. This study showed that AEZS-130
was well tolerated by the 36 volunteers enrolled and no adverse events were
reported. Administration of AEZS-130 either orally or via intra-duodenal
infusion results in increased levels of growth hormone in the blood. This
stimulation of growth hormone appears to be selective as no other
hormones/analytes that were measured (cortisol, ghrelin, prolactin, insulin,
glucose and ACTH (
adrenocorticotropic hormone)) were affected in a dose-dependent or
statistically significant way by administration of AEZS-130 either orally or via
intra-duodenal infusion.
In May 2007,
Ardana gained orphan drug status for AEZS-130, which it is developing as a
diagnostic for growth hormone deficiency in adults. The clinical development
and toxicology programs are ongoing and, subject to clinical outcome, Ardana
announced the commencement in the United States of the planned pivotal registration
study and the enrolment of the first patient in August 2007.
In June 2008,
Ardana announced that the company stopped its operations and entered into
voluntary administration. Consequently, the clinical study of AEZS-130 was
suspended.
We announced the
recovery of worldwide rights from Ardana for the compound AEZS-130 in the third
quarter of 2008. Future development options are currently being evaluated for
the use of this compound in growth hormone deficiencies.
Ghrelin receptor ligands
Ghrelin is a peptide predominantly produced by the
stomach. Apart from a potent
GH-releasing action, ghrelin has other activities including stimulation of
lactotroph and corticotroph function, influence on the pituitary gonadal axis,
stimulation of appetite, control of energy balance, influence on sleep and
behavior, control of gastric motility and acid secretion, and influence on
pancreatic exocrine and endocrine function as well as on glucose metabolism.
The recent discovery of ghrelin and its receptors opens up new opportunities
for the development of drugs that will treat metabolic disorders. There is
indeed a possibility that ghrelin analogs, acting as either agonists or
antagonists, might have clinical impact without affecting GH level. The use of ghrelin antagonists as appetite
suppressants or inhibitors of lipogenesis could open up new opportunities for
the treatment of obesity and associated diseases (e.g. diabetes, cardiovascular
diseases). The use of ghrelin agonists
could have therapeutic benefits which are expected to offer hope for cachexic
or anorexic patients.
In 2004, we established a research and license
collaboration agreement with Le Centre National de la Recherche Scientifique
and University Montpellier I and II, France, acting in their own names, as well
as in the name and on behalf of the Laboratoire des Aminoacides, Peptides et
Protéines (LAPP) (UMR 5810), directed by Dr. Jean Martinez, for the
synthesis and characterization of new chemical entities acting as ghrelin
receptor ligands. According to the
agreement, we have the worldwide rights to develop and exploit the new
compounds for any indication. Compounds with the most potent affinity for the
ghrelin receptors will be investigated further through an international network
of academic investigators with expertise in the field of endocrinology in order
to identify clinical development candidates.
Additionally, we also established a research
contract with the Department of Experimental and Environmental Medicine of the
University of Milan, Italy, under the direction of Prof. Vittorio Locatelli,
for the pharmacological characterization of potentially ghrelin receptor
ligands.
In August 2005, we filed a first patent
application to protect a series of new chemical entities characterized as
ghrelin receptor ligands.
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Table of Contents
In May 2006, we established a research project
agreement with the University of Montreal. This research project will focus on
the characterization of ghrelin receptor ligands on fat tissue. This project is
led by Huy Ong, Professor at the Faculty of Pharmacy, at the University of
Montreal.
In August 2006, we also initiated a research
collaboration with the Hôpital Laval (Québec) under the direction of Dr. Denis
Richard. This research collaboration will focus on the pharmacological
characterization of ghrelin receptor ligands
in vivo
(e.g.
the effects in diet-induced obesity models).
In October 2006, we presented for the first
time our
in vivo
data on the capacity of ghrelin
antagonists of selectively inhibiting food intake. This study, using a rat
model, outlined the capacity of ghrelin antagonists ability to inhibit
appetite without affecting growth hormone secretion and represents evidence
that ghrelin antagonist compounds can selectively inhibit food intake. It
further supports the hope that ghrelin antagonist compounds have the potential
to be useful for the treatment of obesity.
In 2007 and 2008, we presented at scientific
meetings preclinical candidates having the interesting property to decrease
body weight gain and fat accumulation in diet induced obesity models. The
ongoing work will focus on the improvement of oral bioavailability.
IMMUNOTHERAPY / VACCINES
Cellular proteins expressed by oncogenes have
been recognized as a major cause of tumor development. One of the central
oncoproteins involved in cancer formation are the Raf proteins. Based on these
proteins, new unique therapeutic strategies, new predictive animal models and
new development products have been generated to efficiently combat cancer.
These consist of virulence attenuated, genetically modified bacteria expressing
tumor antigens, including oncoproteins or enzymes. Such bacteria are used for
vaccination as well as tumor targeting and delivery of antitumoral compounds
towards the tumor tissues. Therefore, this new vaccine approach, exploits the
ability of bacteria to induce potent immune responses as well as direct these
responses against malignancies. The immunogenicity of the vaccine will be
further enhanced by the capacity of bacteria to colonize tumor tissues. This
property will be used to transport substances, e.g. proteins, into the tumor
tissue, which are capable of converting non-toxic pro-drugs into active drugs.
The use of bacterial carriers for therapeutic vaccination against tumors and
the concept of bacterial tumor targeting will be further developed with the
Julius-Maximilians-University of Würzburg, including the highly recognized
researchers Prof. Dr. Ulf R. Rapp, who is a member of our Scientific
Advisory Board, and Prof. Dr. Werner Goebel. Prof. Rapp is a known expert
in the field of cell and tumor biology and Prof. Goebel is a pioneer in the
field of vaccines based on recombinant bacteria.
The preclinical proof of principle has already
been shown in a transgenic animal model and is supported by several patent
applications that we have filed. The most advanced products are bacterial tumor
vaccines which are based on the approved human vaccine strain
Salmonella typhi
Ty21a. The principle of these recombinant
vaccine strains is the secretion of the tumor antigen using a so-called Type I
secretion machinery derived from
Escherichia coli
.
To date, two different vaccine strains have been generated up to GMP scale
production a melanoma vaccine encompassing a mutated form of the oncogene
B-Raf, which is present in more than 65% of melanomas, and a prostate cancer
vaccine strain expressing and secreting PSA. For both vaccines, the preclinical
proof of principle has been demonstrated in distinct animal models and the
immunogenicity could be further enhanced compared to our already published
strains (patent application filed in November 2006).
In 2007, the PSA vaccine (AEZS-120) was
selected as the first preclinical development candidate of an anti-tumor
vaccine. In September, scientific advice from the Paul Ehrlich Institute, the
German health authority for vaccines, was sought and the preclinical development
program presented by us was in principle accepted.
A grant application was filed in Germany and
was approved in 2008. In accordance with this grant, 50% of our preclinical
development costs and 100% of those of our university partner will be
reimbursed by the German Ministry of Science and Education. The preclinical
development and manufacture of material for clinical trial was initiated in
2008.
DRUG DISCOVERY
There is an increasing demand on the world market for active substances.
Our internal drug discovery unit provides an important prerequisite for the
provision of new patented active substances, which can then be developed
further or licensed to third parties.
39
Table of Contents
Our drug discovery unit concentrates on the search for active substances
for innovative targets which open the door to the introduction of new
therapeutic approaches. Further, this unit searches for new active substances
having improved properties for clinically validated targets for which drugs are
already being used in humans and which produce inadequate effects, cause severe
side effects, are not economical or are not available in a patient-friendly
form.
To this end, we possess an original substance library for the discovery
of active compounds with a comprehensive range of promising natural substances
which can serve as models for the construction of synthetic molecules. The
initial tests involve 120,000 samples from our internal substance library in
the form of high-throughput screening. The hits, i.e. the first active
compounds found in the library, are tested further and built up specifically
into potential lead structures. Based on two to three lead structures, they are
then optimized in a further step to potential development candidates.
INTELLECTUAL
PROPERTY PATENTS
We believe that we have a solid intellectual
property portfolio that covers compounds, manufacturing processes, compositions
and methods of medical use for our lead drugs and drug candidates. Our patent
portfolio consists of more than 60 own and in licensed patent families (issued,
granted or pending in the United States, Europe and other jurisdictions).
Of the issued or granted patents, the eight
described below form the core of our patent portfolio with regard to our lead
drugs and drug candidates.
Cetrorelix:
·
U.S. patent 5,198,533 provides protection in
the United States for the compound cetrorelix and other LHRH antagonists. This U.S.
patent will expire in October 2010 pursuant to a granted request for
patent term extension.
·
U.S. patent 6,828,415 protects a method for
preparing sterile lyophilizate formulations of cetrorelix. It specifically
protects the lyophilization process used to manufacture cetrorelix. This U.S.
patent will expire in December 2021.
·
U.S. patent 5,773,032 covers a long-acting
formulation of cetrorelix consisting of poorly soluble particles of 5 µm to 200
µm in size. The patent not only protects cetrorelix pamoate as a long-acting
formulation but also prevents the development of other LHRH antagonist drugs
that are based on this drug-delivery system. This U.S. patent will expire in
November 2014. A patent term extension of up to five years may be possible
and will be requested upon marketing approval of cetrorelix pamoate.
·
U.S. patent 6,054,432 is a method-of-use patent
covering a therapeutic regimen for treating BPH, where cetrorelix is
administered at a dosage of about 0.5 mg per day over time without effecting
testosterone castration. The U.S. patent will expire in August, 2017.
·
U.S. patent 7,005,418 is a method-of-use patent
covering the therapeutic management of extrauterine proliferation of
endometrial tissue (endometriosis), chronic pelvic pain and/or fallopian tube
obstruction by administering an LHRH antagonist in the form of a short-term
induction treatment for a period of about 4 to 12 weeks. The U.S. patent will
expire in August 2022.
Perifosine:
·
U.S. patent 6,172,050 provides protection in
the United States for the compound perifosine and other related alkyl
phospholipid derivatives, pharmaceutical compositions comprising the compounds
as well as their medical use for the treatment of tumors. This U.S. patent
expires in July 2013. A patent term extension of up to five years may be
possible and will be requested upon receiving marketing approval of perifosine.
Ozarelix:
·
U.S. patent 6,627,609 provides protection in
the United States for the compound ozarelix and related third-generation LHRH
antagonists and pharmaceutical compositions comprising them. This U.S. patent
will expire in March 2020. A patent term extension of up to five years may
be possible and will be requested upon marketing approval of ozarelix.
AEZS-108:
·
U.S.
patent 5,843,903 provides protection in the United States for the compound
AN-152 and other related targeted cytotoxic anthracycline analogs, pharmaceutical
compositions comprising the compounds as well as their medical use for the
treatment of tumors. This U.S. patent expires in November, 2015. A patent term extension of up to five years
may be possible and will be requested upon receiving marketing approval of
AEZS-108.
40
Table of Contents
The table below lists some of our issued or
granted patents in the United States and Europe:
Patent No
|
|
Title
|
|
Country
|
|
Expiry Date
|
|
|
|
|
|
|
|
Cetrorelix
|
|
|
|
|
|
|
EP 0 299 402
|
|
LHRH antagonists
|
|
Germany,
United Kingdom, France, Switzerland and others
|
|
2013-07-10
|
U.S.
5,198,533
|
|
LHRH antagonists
|
|
United States
|
|
2010-10-24
|
EP 0 611 572
|
|
Process
to prepare a cetrorelix lyophilised composition
|
|
Germany,
United Kingdom, France, Switzerland and others
|
|
2014-0
2-04
|
U.S.
6,828,415
|
|
Oliogopeptide
lyophilisate, their preparation and use
|
|
United States
|
|
2021-12-07
|
U.S.
6,716,817
|
|
Method
of treatment of female infertility
|
|
United States
|
|
2014-02-22
|
U.S.
6,863,891
|
|
Oligopeptide
lyophilisate, their preparation and use
|
|
United States
|
|
2014-02-22
|
U.S.
6,867,191
|
|
Preparation
and use of oligopeptide lyophilisate for gonad protection
|
|
United States
|
|
2014-02-22
|
EP 1 150 717
|
|
Sustained
release salts of pharmaceutically active peptides and their production
|
|
Germany,
United Kingdom, France, Switzerland and others
|
|
2020-01-29
|
EP 1 309 607
|
|
Method
for producing LHRH antagonists
|
|
Germany,
United Kingdom, France, Switzerland and others
|
|
2021-08-09
|
U.S.
6,780,972
|
|
Method
for the synthesis of peptide salts, their use and the pharmaceutical
preparations, containing peptide salts
|
|
United States
|
|
2021-08-24
|
U.S.
5,773,032
|
|
Long-acting
injection suspensions and a process for their preparation
|
|
United States
|
|
2014-11-25
|
C. Organizational structure
The following chart presents our corporate
structure, the jurisdiction of incorporation of our direct and indirect
subsidiaries and the percentage of shares that we held in those subsidiaries as
of March 20, 2009.
41
Table of Contents
D. Property, plants and equipment
Our corporate head office and facilities are located
in Québec, Province of Quebec, Canada The following table sets forth
information with respect to our main facilities as of March 20, 2009.
Location
|
|
Use of space
|
|
Square Footage
|
|
Type of interest
|
|
|
|
|
|
|
|
1405 Parc Technologique Blvd.
Québec (Quebec), Canada
|
|
Fully
occupied for management, R&D and administration
|
|
4,400
|
|
Leased
|
|
|
|
|
|
|
|
20
Independence Blvd
Warren, New Jersey, United States
|
|
Partially
occupied for management, R&D and business development
|
|
10,741
|
|
Leased
|
|
|
|
|
|
|
|
Weismüllerstr.
50
D-60314
Frankfurt am Main, Germany
|
|
Fully
occupied for management, R&D, business development and administration
|
|
46,465
|
|
Leased
|
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating
and Financial Review and Prospects
42
Table of Contents
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.
43
Table of Contents
·
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
44
Table of Contents
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.
45
Table of Contents
Key Developments for the Year Ended December 31, 2008
Drug Development
Status of our Drug Pipeline as at March 30, 2009
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 (oncology)
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.
Handok
in Korea
|
|
Cetrotide
®
:
Merck Serono
(World ex-Japan)
Shionogi
and Nippon Kayaku
(Japan)
|
46
Table of Contents
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
47
Table of Contents
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.
48
Table
of Contents
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.
49
Table of Contents
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.
50
Table of Contents
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 made an initial
upfront payment to us of $30.0 million on March 18, 2009. 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
|
)
|
51
Table of Contents
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.
52
Table of Contents
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
|
|
53
Table of Contents
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.
54
Table of Contents
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.
55
Table of Contents
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.
56
Table of Contents
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.
57
Table of Contents
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.
58
Table of Contents
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.
59
Table of Contents
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
|
|
60
Table of Contents
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.
61
Table of Contents
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.
62
Table of Contents
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.
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Table of Contents
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.
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Table of Contents
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.
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Table of Contents
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.
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Table of Contents
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
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Table of Contents
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
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Table of Contents
capitalized and amortized against operations over the
estimated period of benefit. To date, no costs have been deferred.
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Table of Contents
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.
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Table of Contents
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.
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Table of Contents
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.
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Table of Contents
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.
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Table of Contents
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.
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Table of Contents
Item 6. Directors,
Senior Management and Employees
A. Directors
and senior management
The following table sets
forth information about our directors and senior officers as at March 20,
2009.
Name and Place of Residence
|
|
Position
with Aeterna Zentaris
|
|
|
|
Marcel Aubut
|
|
Director
|
Quebec, Canada
|
|
|
|
|
|
Paul Blake
|
|
Senior Vice President and
Chief Medical Officer
|
Pennsylvania, United
States
|
|
|
|
|
|
Martha Byorum
|
|
Director
|
New York, United States
|
|
|
|
|
|
José
P. Dorais
|
|
Director
|
Quebec,
Canada
|
|
|
|
|
|
Juergen Engel
|
|
President and Chief
Executive Officer and Board Director
|
Alzenau
, Germany
|
|
|
|
|
|
Juergen Ernst
|
|
Executive Chairman of the
Board and Director
|
Brussels,
Belgium
|
|
|
|
|
|
Pierre
Laurin
|
|
Director
|
Quebec,
Canada
|
|
|
|
|
|
Gérard Limoges
|
|
Director
|
Quebec, Canada
|
|
|
|
|
|
Pierre MacDonald
|
|
Director
|
Quebec, Canada
|
|
|
|
|
|
Gerald J. Martin
|
|
Director
|
California, United States
|
|
|
|
|
|
Nicholas Pelliccione
|
|
Senior Vice President,
Regulatory Affairs and
|
New York, United States
|
|
Quality Assurance
|
|
|
|
Matthias Seeber
|
|
Senior Vice
President, Administration and Legal Affairs
|
Frankfurt, Germany
|
|
|
|
|
|
Dennis Turpin
|
|
Senior Vice President and
Chief Financial Officer
|
Quebec, Canada
|
|
|
|
|
|
Claude Vadboncoeur
|
|
Corporate
Secretary
|
Quebec, Canada
|
|
|
The following is a brief biography of each of our
directors and senior officers.
Marcel Aubut
has served as a director on our Board since
1996. A key figure in Canadian business and an icon in
the world of sports, Marcel Aubut, O.C., O.Q., Q.C. ADE, has been a corporate and
litigation lawyer for more than thirty years. A partner with Heenan Blaikie
Aubut, he is a member of the firms National Management Committee and its
Executive Committee. In 1983, Mr. Aubut founded the firm of Aubut Chabot.
He was President and Chief Executive Officer of
Le Club de
Hockey Les Nordiques de Qu
ébec
,
as well as founding president and chief executive officer of
Parc technologique du Québec métropolitain
.
Many companies have called on Mr. Aubut to be a director, including such
high-profile ones as Boralex Power Income Fund, Boralex Inc., Atomic Energy
Canada, Cinar, Hydro-Québec, The Laurentian Group, Investors Group of Mutual
Funds, Sodic
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Table of Contents
Québec Inc., International Continental Insurers
Ltd, the National Hockey League Pension Society, Olybro Inc. (previously known
as Olymel), TransForce Inc., La Fondation Nordiques and Purolator.
Paul Blake
was
appointed our Senior Vice President and Chief Medical Officer on August 5,
2007. Prior to joining us, Dr. Blake was Chief Medical Officer of
Avigenics, Inc. since January 2007. In 2005, he was Senior Vice
President, Clinical Research and Regulatory Affairs at Cephalon, Inc.
before being promoted to Executive Vice President, Worldwide Medical &
Regulatory Operations. From 1992 to 1998, he held the position of Senior Vice
President and Medical Director, Clinical Research and Development at SmithKline
Beecham Pharmaceuticals (now GSK). Dr. Blake earned a medical degree from
the London University, Royal Free Hospital. He was elected Fellow of the
American College of Clinical Pharmacology, Fellow of the Faculty of
Pharmaceutical Medicine, Royal College of Physicians in the UK, and he is a
Fellow of the Royal College of Physicians in the UK.
Martha Byorum
has
served as a director on our Board since 2001. Ms. Byorum is currently
Senior Managing Director of Stephens Cori Capital Advisors, a division of
Stephens, Inc., a U.S.-based investment bank and financial services
company. Before 1996, Ms. Byorum held various positions at Citicorp. Ms. Byorum
is a member of the board of director of Northwest Natural Gas Company and
M&F Worldwide Corp. Ms. Byorum holds a Masters of Business
Administration (MBA) degree from the University of Pennsylvania.
José P. Dorais
has served as a
director on our Board since 2006. Mr. Dorais is a partner of Miller
Thomson Pouliot LLP where he mainly practices administrative, corporate,
business and international trade law. Over his 35-year career, he has worked in
both the private and public sectors; in the latter he acted as Secretary to the
Minister of Justice and as Secretary of the consulting committee on the Free
Trade Agreement for the Quebec Provincial Government. Mr. Dorais has been
a member of numerous boards of directors, including the Société des Alcools du
Québec, Biochem Pharma and St-Luc Hospital in Montreal. He is now a member of
the Board of Alliance Films, the Société Générale de Financement and Chairman
of the Board of Recyc-Québec. He holds a law degree from the University of
Ottawa and is a member of the Quebec Bar.
Juergen Engel
was appointed
President and Chief Executive Officer, effective September 1, 2008, after
having up to such time served as our Executive Vice President and Chief
Scientific Officer. He became a director on our Board in 2003. Dr. Engel has been managing Director of
AEZS Germany, the Corporations principal subsidiary, since the beginning of
2001. Before that, he was in charge of all research and development activities
of ASTA Medica AG.
Juergen Ernst
was
appointed Executive Chairman of the Board, effective September 1, 2008,
after having served as Chairman of the Board from August 13, 2007 until April 10,
2008 and as Interim President and Chief Executive Officer from April 11,
2008 until August 31, 2008. He has served as a director on our Board since
2005. A seasoned executive with more than 20 years of pharmaceutical industry
expertise mainly in the field of corporate development and pharmaceutical
product marketing, Mr. Ernst was worldwide General Manager, Pharmaceutical
Sector of Solvay S.A., before retiring in 2004. He is now a member of the Board
of Directors of Solvay S.A.
Pierre
Laurin
has served as a director on our Board
since 1998, Mr. Laurin has
been Director of the Hautes Études Commerciales Business School in Montreal (HEC Montréal) since January 1999.
He was elected Chairman of the Board of Directors of our former subsidiary,
Atrium, in February 2001. From 1969 to 1982, Mr. Laurin held
successively the positions of teacher and Dean with the Hautes Études
Commerciales. Since then, he has acted as Vice President, General
Manager, Planning and Administration for Alcan. During this term, he was the
founding President and CEO of Soccrent, a venture capital firm in
Saguenay-Lac-St-Jean. He has also spent 13 years as Vice Chairman of the
Board and President for Quebec of Merrill Lynch. Mr. Laurin is a
member of several boards of directors of corporations including Quebecor Inc.,
Microcell Telecommunications Inc., Æterna Zentaris and the Fondation J.-Armand
Bombardier. Mr. Laurin holds a Ph.D. degree in business from Harvard
University, a Licence ès Sciences Commerciales from the Hautes Études
Commerciales Business School, and Bachelors degree ès Art from the Séminaire
de Philosophie de Montréal. He also holds a Doctorate Honoris Causa from
Concordia University. He is an officer of the Order of Canada, and holds Lordre
du Mérite of the Republic of France.
Gérard Limoges
has
served as a director on our Board since 2004. Mr. Limoges served as the
Deputy Chairman of Ernst & Young LLP Canada until his retirement in September 1999.
After a career of 37 years with Ernst & Young, Mr. Limoges has
been devoting his time as a director of a number of companies. Mr. Limoges
began his career with Ernst & Young in Montreal in 1962. After
graduating from the Management Faculty of Université de Montréal (HEC Montréal)
in 1966, he became a chartered accountant and partner of Ernst & Young
in 1971. Mr. Limoges is a board member and chairman of the audit
committees of the following public companies: Æterna Zentaris Inc. (Nasdaq and
TSX), Atrium Innovations Inc. (TSX), Hart Stores Inc. (TSX), Hartco Income
Trust (TSX) and he is a board member, chairman of the governance committee and
member of the audit committee of Noranda Income Fund (TSX). He is also a board
member of various private companies and charities.
76
Table of Contents
Pierre MacDonald
Mr. MacDonald
is President and CEO of MacD
Consult Inc., a management consulting firm in international finance and
marketing, based in Montreal. He is also Chairman of the Board of Eurocopter
Canada Ltd. and a director of Invesco Trimark (Canada), a funds management
firm. He served as the Senior Vice President for Eastern Canada for Bank of
Montreal, a position which involved the review and evaluation of the financial
statements and creditworthiness of borrowers in a wide variety of industries.
In December 1995, he was elected to the National Assembly of Quebec and
became Minister of International Trade and Technology. He was also named Vice
Chairman of the Treasury Board of the Government of Quebec. He also served as
the Chairman of the Audit Committee of Teleglobe Inc. for six years. Mr. MacDonald
received Bachelor of Arts, Bachelor of Commerce and Master of Commerce degrees
from Laval University in Québec.
Gerald J. Martin
has served as a director on our Board since
2006. Former Vice President, Corporate Licensing and
Technology Alliances at Abbott Laboratories, Mr. Martin is currently Board
Member of Life Sciences Information Technology Global Institute, a
not-for-profit public benefit corporation chartered to identify and develop
Good Informatics Practices (GIP) with a focus on the establishment of GIP in drug
development. Until recently, he was Chairman of the Board of Milkahaus
Laboratory based in Providence, Rhode Island, a biotechnology company
specialized mainly in male health. During his career in the biopharmaceutical
and pharmaceutical sectors, Mr. Martin, in addition to his general
management functions, developed a strong expertise in sales and marketing,
business development, as well as in clinical development.
Nicholas J. Pelliccione
was appointed our Senior Vice President, Regulatory Affairs and Quality
Assurance on May 7, 2007. Dr. Pelliccione has demonstrated the
ability to be a multi-faceted leader in the areas of global Regulatory Affairs,
Quality Assurance and Pharmaceutical Development for more than 20 years. In
previous roles, Dr. Pelliccione has been responsible for the
clinical/preclinical and CMC regulatory aspects of new drugs in the oncology,
anti-infectives, cytokines and cardiovascular therapy areas, leading to several
approvals. He also served as Senior Vice President, Regulatory and Pharmaceutical
Sciences at Chugai Pharma United States Prior to his experience at Chugai, Dr. Pelliccione
spent more than 15 years at Schering Plough Corporation holding positions with
increasing responsibility from Manager of Regulatory Affairs, Oncology to,
prior to his departure, Vice President, Global Regulatory Affairs, Chemistry,
Manufacturing and Controls. Dr. Pelliccione holds a Ph.D. in Biochemistry
from Mount Sinai School of Medicine, New York and a BS in Chemistry from
Polytechnic University.
Matthias Seeber
was appointed our Senior Vice President, Administration and Legal Affairs on December 9,
2008. Mr. Seeber has served as Managing Director of AEZS Germany since July 2003
up to his most recent appointment. Prior to that, he had assumed the position
of Investor Relations Manager of Altana AG, following several years in the
banking industry with Deka Investment Management and Dresdner Bank AG. Mr. Seeber is a member of the Deutsche
Vereinigung für Finanzanalyse und Asset Management (DVFA/CEFA). He obtained his
M.B.A. from George Mason University Graduate School of Business Administration
in the United States.
Dennis Turpin
was
appointed our Senior Vice President and Chief Financial Officer on August 16,
2007. Prior to that, he served as our Vice President and Chief Financial
Officer since June 1999. Mr. Turpin joined Æterna Zentaris in August 1996
as Director of Finance. Prior to that, he was Director in the tax department at
Coopers Lybrand, now PricewaterhouseCoopers, from 1988 to 1996 and worked as an
auditor from 1985 to 1988. Mr. Turpin earned his Bachelors degree in
Accounting from Laval University in Québec. He obtained his license in
accounting in 1985 and became a chartered accountant in 1987.
Claude Vadboncoeur
was appointed our Corporate Secretary on May 6, 2008. In the past
5 years, Mr. Vadboncoeur has acted as consultant mainly for public
companies. Prior to that, he was Vice President Legal and Corporate Secretary
of Æterna Zentaris to which he brought a broad experience in commercial and
business law, having served as Vice President Legal and Corporate Secretary of
various large Canadian companies. Mr. Vadboncoeur earned his law degree
from Université de Montréal and has been a member of the Quebec Bar since 1973.
77
Table of Contents
B. Compensation
A. Compensation of
Outside Directors
The compensation paid to the
Corporations directors is designed to (i) attract and retain the most
qualified people to serve on the Board and its committees, (ii) align the
interests of the Corporations directors with those of its shareholders, and (iii) provide
appropriate compensation for the risks and responsibilities related to being an
effective director. This compensation is recommended to the Board by the
Governance Committee. During the most recently completed financial year, the
Governance Committee was composed of four (4) directors, all of whom are
independent directors, namely Messrs. Pierre MacDonald, José P. Dorais,
Juergen Ernst and Pierre Laurin. One of the members of the Governance
Committee, namely Juergen Ernst, is an executive officer of the Corporation.
The Board has adopted a
formal mandate for the Governance Committee, which is available on our website
at www.aezsinc.com. The mandate of the Governance Committee provides that it is
responsible for
(i)
assisting
the Board in developing our approach to corporate governance issues, (ii) proposing
new Board nominees, (iii) assessing the effectiveness of the Board and its
committees, their respective chairs and individual directors and (iv) making
recommendations to the Board with respect to directors compensation.
In
2007, the Governance Committee retained Aon Consulting and Radford Surveys and
Consulting (AON) as consultants. AON was retained to assist the Governance
Committee with our compensation programs, particularly our executive short-term
and long-term incentive programs and the remuneration of members of the Board.
AON analyzed our past practices and defined a peer group of companies in order
to understand the competitive compensation practices and to propose a program
designed to deliver both cash and equity compensation components of our
directors and officers.
Our
director compensation structure was benchmarked against market compensation
data gathered from U.S. biopharmaceutical organizations of comparable size.
Based on the results of the
benchmarking study, and taking into consideration that the structure of
directors compensation in the market has undergone considerable change amid
the growing demands and risks of serving as a corporate steward in todays
complex business and governance environment, the Governance Committee
recommended, and the Board approved, an adjustment to the compensation of both
the Executive Chairman and the Vice Chairman of the Board corresponding to a
redefinition of the functions associated with such positions.
We
did not employ the services of any external compensation consultant during the
financial year ended December 31, 2008.
78
Table of Contents
Annual Retainers and Attendance Fees
Annual retainers and
attendance fees are paid on a quarterly basis to the members of the Board who
are not employees of the Company or its subsidiaries (Outside Directors) as described in the table below. Directors are
paid in their home countrys currency. Amounts have been converted from certain
directors home country currency to US dollars based on the following average
exchange rates for the financial year ended December 31, 2008: 1.00 =
US$1.464; and CAN$1.00 = US$0.937.
Type of compensation
|
|
Annual compensation
for the year 2008
($)
|
|
Annual compensation
starting January 1, 2009
($)
|
|
Executive
Chairmans Retainer(1)
|
|
|
|
|
|
- European
resident member
|
|
109,800
|
|
109,800
|
|
Vice
Chairman Retainer(2)
|
|
|
|
|
|
- Canadian
resident member
|
|
23,425
|
|
23,425
|
|
Board
Retainer
|
|
|
|
|
|
- US
resident members
|
|
25,000
|
|
25,000
|
|
- Canadian
resident members
|
|
23,425
|
|
23,425
|
|
- European
resident member
|
|
36,600
|
|
36,600
|
|
Committee
Chair Retainer
|
|
|
|
|
|
- Audit
Committee
|
|
|
|
|
|
- Canadian resident member
|
|
18,740
|
|
18,740
|
|
- Governance
Committee
|
|
|
|
|
|
- Canadian
resident member
|
|
14,055
|
|
14,055
|
|
Committee
Member Retainer
|
|
|
|
|
|
- Audit
Committee
|
|
|
|
|
|
- US
resident member
|
|
5,000
|
|
5,000
|
|
- Canadian
resident members
|
|
4,685
|
|
4,685
|
|
- Governance
Committee
|
|
|
|
|
|
- Canadian
resident members
|
|
2,343
|
|
2,343
|
|
- European
resident member
|
|
3,660
|
|
3,660
|
|
Meeting
Attendance Fees(3)
|
|
|
|
|
|
- Board
meeting
|
|
|
|
|
|
- US
resident members
|
|
2,000
|
|
2,000
|
|
- Canadian
resident members
|
|
1,874
|
|
1,874
|
|
- European
resident member
|
|
2,928
|
|
2,928
|
|
- Committee
meeting
|
|
|
|
|
|
- US
resident member
|
|
2,000
|
|
2,000
|
|
- Canadian
resident members
|
|
1,874
|
|
1,874
|
|
- European
resident member
|
|
2,928
|
|
2,928
|
|
(1)
|
The Executive Chairmans
retainer was increased from $73,200 to $109,800 effective September 1, 2008
as a result of the incumbents appointment as Executive Chairman of the
Board.
|
(2)
|
The Vice Chairmans
retainer was increased from $14,055 to $23,425 as of August 12, 2008 due
to increased responsibilities.
|
(3)
|
Attendance fees are reduced
by 50% per meeting attended telephonically.
|
The President and Chief
Executive Officer is the only member of the Board who is not an Outside
Director. Therefore, he is not compensated in his capacity as a director. The
Executive Chairman is an Outside Director and is compensated as such. Outside
Directors are reimbursed for travel and other out-of-pocket expenses incurred
in attending Board or committee meetings.
79
Table
of Contents
Outstanding
Option-Based Awards and Share-Based Awards
The following table shows
all awards outstanding to each Outside Director up to the end of the financial
year ending December 31, 2008:
|
|
Option-based Awards
|
|
Share-based Awards
|
|
Name
|
|
Issuance
Date
|
|
Number of
Securities
Underlying
Unexercised
Options(1)
(#)
|
|
Option
Exercise
Price
(CAN$)
|
|
Option
Expiration
Date
|
|
Value of
Unexercised
In-the-
money
Options(2)
(CAN$)
|
|
Issuance
Date
|
|
Number of
Shares or
Units of shares
that have Not
Vested
(#)
|
|
Market or Payout
Value of Share-
based
Awards that have
Not Vested
($)
|
|
Marcel Aubut
|
|
Dec. 4, 01
|
|
5,000
|
|
6.18
|
|
Dec. 31, 11
|
|
|
|
|
|
|
|
|
|
|
Dec. 16,
02
|
|
15,000
|
|
3.68
|
|
Dec. 15, 12
|
|
|
|
|
|
|
|
|
|
|
Dec. 11,
03
|
|
30,000
|
|
1.74
|
|
Dec. 10, 13
|
|
|
|
|
|
|
|
|
|
|
Dec. 14,
04
|
|
15,000
|
|
5.83
|
|
Dec. 13, 14
|
|
|
|
|
|
|
|
|
|
|
Dec. 13,
05
|
|
15,000
|
|
3.53
|
|
Dec. 12, 15
|
|
|
|
|
|
|
|
|
|
|
Jan. 4,
07
|
|
5,000
|
|
4.65
|
|
Jan. 3, 17
|
|
|
|
|
|
|
|
|
|
|
Dec. 11,
07
|
|
25,000
|
|
1.82
|
|
Dec. 10, 17
|
|
|
|
|
|
|
|
|
|
|
Dec. 8,
08
|
|
15,000
|
|
0.55
|
|
Dec. 8, 18
|
|
450.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Martha Byorum
|
|
Dec. 4, 01
|
|
5,000
|
|
6.18
|
|
Dec. 31, 11
|
|
|
|
|
|
|
|
|
|
|
Dec. 16,
02
|
|
15,000
|
|
3.68
|
|
Dec. 15, 12
|
|
|
|
|
|
|
|
|
|
|
Dec. 11,
03
|
|
30,000
|
|
1.74
|
|
Dec. 10, 13
|
|
|
|
|
|
|
|
|
|
|
Dec. 14,
04
|
|
15,000
|
|
5.83
|
|
Dec. 13, 14
|
|
|
|
|
|
|
|
|
|
|
Dec. 13,
05
|
|
15,000
|
|
3.53
|
|
Dec. 12, 15
|
|
|
|
|
|
|
|
|
|
|
Jan. 4,
07
|
|
5,000
|
|
4.65
|
|
Jan. 3, 17
|
|
|
|
|
|
|
|
|
|
|
Dec. 11,
07
|
|
25,000
|
|
1.82
|
|
Dec. 10, 17
|
|
|
|
|
|
|
|
|
|
|
Dec. 8,
08
|
|
15,000
|
|
0.55
|
|
Dec. 8, 18
|
|
450.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
José P. Dorais
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Juergen Ernst
|
|
Feb. 25, 05
|
|
15,000
|
|
5.09
|
|
Feb. 24, 15
|
|
|
|
|
|
|
|
|
|
|
Dec. 13,
05
|
|
15,000
|
|
3.53
|
|
Dec. 12, 15
|
|
|
|
|
|
|
|
|
|
|
Jan. 4,
07
|
|
5,000
|
|
4.65
|
|
Jan. 3, 17
|
|
|
|
|
|
|
|
|
|
|
Dec. 11,
07
|
|
25,000
|
|
1.82
|
|
Dec. 10, 17
|
|
|
|
|
|
|
|
|
|
|
Nov. 14,
08
|
|
100,000
|
|
0.65
|
|
Nov. 13, 18
|
|
|
|
|
|
|
|
|
|
|
Dec. 8,
08
|
|
15,000
|
|
0.55
|
|
Dec. 8, 18
|
|
450.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pierre Laurin
|
|
Dec. 4, 01
|
|
5,000
|
|
6.18
|
|
Dec. 31, 11
|
|
|
|
|
|
|
|
|
|
|
Dec. 16,
02
|
|
24,000
|
|
3.68
|
|
Dec. 15, 12
|
|
|
|
|
|
|
|
|
|
|
Dec. 11,
03
|
|
30,000
|
|
1.74
|
|
Dec. 10, 13
|
|
|
|
|
|
|
|
|
|
|
March 29,
04
|
|
3,000
|
|
6.26
|
|
March 28, 14
|
|
|
|
|
|
|
|
|
|
|
Dec. 14,
04
|
|
15,000
|
|
5.83
|
|
Dec. 13, 14
|
|
|
|
|
|
|
|
|
|
|
Dec. 13,
05
|
|
15,000
|
|
3.53
|
|
Dec. 12, 15
|
|
|
|
|
|
|
|
|
|
|
Jan. 4,
07
|
|
5,000
|
|
4.65
|
|
Jan. 3, 17
|
|
|
|
|
|
|
|
|
|
|
Dec. 11,
07
|
|
25,000
|
|
1.82
|
|
Dec. 10, 17
|
|
|
|
|
|
|
|
|
|
|
Dec. 8,
08
|
|
15,000
|
|
0.55
|
|
Dec. 8, 18
|
|
450.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gérard Limoges
|
|
Dec. 14, 04
|
|
15,000
|
|
5.83
|
|
Dec. 13, 14
|
|
|
|
|
|
|
|
|
|
|
Dec. 13,
05
|
|
15,000
|
|
3.53
|
|
Dec. 12, 15
|
|
|
|
|
|
|
|
|
|
|
Jan. 4,
07
|
|
5,000
|
|
4.65
|
|
Jan. 3, 17
|
|
|
|
|
|
|
|
|
|
|
Dec. 11,
07
|
|
25,000
|
|
1.82
|
|
Dec. 10, 17
|
|
|
|
|
|
|
|
|
|
|
Dec. 8,
08
|
|
15,000
|
|
0.55
|
|
Dec. 8, 18
|
|
450.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pierre MacDonald
|
|
Dec. 4, 01
|
|
5,000
|
|
6.18
|
|
Dec. 31, 11
|
|
|
|
|
|
|
|
|
|
|
Dec. 16,
02
|
|
24,000
|
|
3.68
|
|
Dec. 15, 12
|
|
|
|
|
|
|
|
|
|
|
Dec. 11,
03
|
|
30,000
|
|
1.74
|
|
Dec. 10, 13
|
|
|
|
|
|
|
|
|
|
|
Dec. 14,
04
|
|
15,000
|
|
5.83
|
|
Dec. 13, 14
|
|
|
|
|
|
|
|
|
|
|
Dec. 13,
05
|
|
15,000
|
|
3.53
|
|
Dec. 12, 15
|
|
|
|
|
|
|
|
|
|
|
Jan. 4,
07
|
|
5,000
|
|
4.65
|
|
Jan. 3, 17
|
|
|
|
|
|
|
|
|
|
|
Dec. 11,
07
|
|
25,000
|
|
1.82
|
|
Dec. 10, 17
|
|
|
|
|
|
|
|
|
|
|
Dec. 8,
08
|
|
15,000
|
|
0.55
|
|
Dec. 8, 18
|
|
450.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gérald J. Martin
|
|
Jan. 25, 06
|
|
15,000
|
|
5.04
|
|
Dec. 12, 15
|
|
|
|
|
|
|
|
|
|
|
Jan. 4,
07
|
|
5,000
|
|
4.65
|
|
Jan. 3, 17
|
|
|
|
|
|
|
|
|
|
|
Dec. 11,
07
|
|
25,000
|
|
1.82
|
|
Dec. 10, 17
|
|
|
|
|
|
|
|
|
|
|
Dec. 8,
08
|
|
15,000
|
|
0.55
|
|
Dec. 8, 18
|
|
450.00
|
|
|
|
|
|
|
|
(1)
The number of securities underlying
unexercised options that have not vested represent all awards outstanding as at
December 31, 2008, including awards granted before the first day of the
most recently completed financial year.
80
Table
of Contents
(2)
Value of unexercised in-the-money options at
financial year-end is calculated based on the difference between the closing
price of our common chares on the TSX on the last trading day prior to fiscal
year-end (December 31, 2008) of CAN$0.58 and the exercise price of the
options, multiplied by the number of unexercised options.
Total Compensation of Outside Directors
The table below summarizes
the total compensation earned by the Outside Directors during the financial
year ended December 31, 2008 (all amounts are in US dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-
|
|
Option-
|
|
Non-Equity
|
|
|
|
|
|
|
|
|
|
Fees earned
|
|
based
|
|
based
|
|
Incentive Plan
|
|
Pension
|
|
All Other
|
|
|
|
|
|
($)
|
|
Awards
|
|
Awards
|
|
Compensation
|
|
Value
|
|
Compensation(2)
|
|
Total
|
|
Name
|
|
Retainer(1)
|
|
Attendance(1)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
Marcel Aubut
|
|
23,427
|
|
12,182
|
|
|
|
|
|
|
|
|
|
1,406
|
|
37,015
|
|
Martha Byorum, MBA
|
|
30,000
|
|
21,000
|
|
|
|
|
|
|
|
|
|
|
|
51,000
|
|
José P. Dorais
|
|
24,599
|
|
19,679
|
|
|
|
|
|
|
|
|
|
2,811
|
|
47,089
|
|
Juergen Ernst, MBA
|
|
115,083
|
|
30,705
|
|
|
|
|
|
|
|
|
|
4,387
|
|
150,175
|
|
Pierre Laurin, PhD
|
|
25,770
|
|
19,679
|
|
|
|
|
|
|
|
|
|
2,811
|
|
48,260
|
|
Gérard Limoges, FCA
|
|
42,170
|
|
22,490
|
|
|
|
|
|
|
|
|
|
2,811
|
|
67,471
|
|
Pierre MacDonald
|
|
50,942
|
|
26,239
|
|
|
|
|
|
|
|
|
|
9,839
|
|
87,020
|
|
Gerald J. Martin
|
|
25,000
|
|
16,000
|
|
|
|
|
|
|
|
|
|
|
|
41,000
|
|
(1)
|
These amounts represent the
portion paid in cash to the Outside Directors and are paid in each directors
home countrys currency.
|
(2)
|
These amounts represent
fees paid in cash for special tasks and are also paid in each directors home
countrys currency.
|
During
the financial year ended December 31, 2008, the Corporation paid an
aggregate amount of $529,030 to all of its Outside Directors for services
rendered, excluding reimbursement of out-of-pocket expenses. Outside Directors
are paid in their home countrys currency and are reimbursed for travel and
other out-of-pocket expenses incurred while attending Board or committee
meetings.
B. Compensation of
Executive Officers
The
mandate of the Governance Committee provides that it is responsible for taking
all reasonable measures to ensure that appropriate human resources systems and
procedures, such as hiring policies, competency profiles, training policies and
compensation structures are in place so that we can attract, motivate and
retain the quality of personnel required to meet our business objectives.
The Governance Committee
also assists the Board in discharging its responsibilities relating to
executive and other human resources hiring, assessment, compensation and
succession planning matters.
Thus,
the Governance Committee recommends the appointment of senior officers,
including the terms and conditions of their appointment and termination, and
reviews the evaluation of the performance of our senior officers, including
recommending their compensation. The Board, which includes the members of the
Governance Committee, reviews the Chief Executive Officers corporate goals and
objectives and evaluates his or her performance and compensation in light of
such goals and objectives.
Compensation
Consultant
The Governance Committee
engages its own independent consultant to advise it with respect to executive
compensation matters. During the financial year ended December 31, 2007,
the Corporation retained the services of AON to provide advice on the
competitiveness and appropriateness of compensation programs for the Chief
Executive Officer and our other senior executive officers.
The fees paid to AON for
compensation consulting services provided to the Governance Committee and to
the Corporation with respect to services provided for the financial year ended December 31,
2007 were $81,550. The Governance Committee did not employ the services of any
external compensation consultant with respect to the financial year ended December 31,
2008.
81
Table of Contents
While the Governance
Committee may rely on external information and advice, all of the decisions
with respect to executive compensation are made by the Board upon the
recommendations of the Governance Committee and may reflect factors and
considerations other than, or that may differ from, the information and
recommendations provided by any external compensation consultants that may be
retained.
Compensation Discussion & Analysis
Compensation
Philosophy and Objectives
The Corporations executive
compensation program is designed to attract, motivate and retain high
performing senior executives, encourage and reward superior performance and
align the executives interests with those of our shareholders by:
·
providing the opportunity for an executive to
earn compensation that is competitive with the compensation received by
executives employed by a group of comparable North American companies;
·
providing executives with an equity-based
incentive plan, namely a stock option plan;
·
aligning employee compensation with company
corporate objectives; and
·
attracting and retaining highly qualified
individuals in key positions.
Benchmarking
In order to meet our
objectives of providing market competitive compensation opportunities, our
executive compensation plan, based on a study provided by AON, is benchmarked
against market compensation data gathered from organizations of comparable size
and other companies with which we compete for executive talent (the Reference Group). The composition of
the Reference Group is reviewed by the Governance Committee for its ongoing
business relevance to the Company. An overview of the characteristics of the
Reference Group is provided in the following table:
(In
millions)
|
|
Æterna Zentaris
($)
|
|
Survey Reference Group
($)
|
|
Location
|
|
Canada
|
|
North America
|
|
Industries
|
|
Biopharmaceutical
|
|
Biopharmaceutical
|
|
Revenues
Last fiscal year
|
|
38.80(2)
|
|
64.10(1)
|
|
Market Capitalization
As at October 16, 2007
|
|
99.46
|
|
442.00
|
|
Net (Loss) earning
Last fiscal year
|
|
33.40(2)
|
|
(39.50)(1)
|
|
(1)
|
|
The Reference Group for the
financial year ended December 31, 2008 was selected in October 2007
and these data are based on their last fiscal year at that time.
|
(2)
|
|
As of December 31,
2006.
|
The Reference Group used in
respect of the financial year ended December 31, 2008 was composed of the
following companies: Acadia Pharmaceuticals Inc.; Acorda Therapeutics Inc.;
Array Biopharma Inc.; Bradley Pharmaceutical; Caraco Pharmaceutical Labs; Cell
Genesys Inc.; Cell Therapeutics Inc.; Enzon Pharmaceuticals Inc.; Genomic
Health Inc.; Indevus Pharmaceuticals Inc.; Ista Pharmaceuticals Inc.; Ligand
Pharmaceutical, Monogram Biosciences Inc.; Nastech Pharmaceutical; Neurocrine
Biosciences Inc.; Nps Pharmaceuticals Inc.; Omrix Biopharmaceuticals; Salix
Pharmaceuticals Ltd; Savient Pharmaceuticals Inc.; Viacell Inc.; and Xoma Ltd.
Positioning
The Corporations
compensation policy is for executive compensation to be generally aligned with
the 50
th
percentile of the Reference Group. The
Governance Committee uses discretion and judgment when determining compensation
levels as they apply to a specific executive officer. Individual compensation
may be positioned above or below median, based on individual experience and
performance or other criteria deemed important by the Governance Committee. The
total cash target payment for our executive officers generally falls within the
market 50
th
percentile competitive range.
82
Table of Contents
Compensation
Elements
An
executive compensation policy has been established to acknowledge and reward
the contributions of the executive officers to our success and to ensure
competitive compensation, in order that we may benefit from the expertise
required to pursue our objectives.
Our executive compensation
policy is comprised of both fixed and variable components. The variable
components include equity and non-equity incentive plans. Each compensation
component has a different function, but all elements are intended to work in
concert to maximize company and individual performance by establishing
specific, competitive operational and financial goals and by providing
financial incentives to employees based on their level of attainment of these
goals.
Our current executive
compensation program is comprised of the following four basic components:
(i)
base salary;
(ii)
non-equity incentives
consisting of a cash bonus linked to both
individual and corporate performance;
(iii)
long-term compensation consisting of our
stock option plan established for the benefit of our directors, executive
officers and employees (the Stock Option Plan); and
(iv)
other elements of compensation
consisting of benefits, perquisites and
retirement benefits.
Base
Salary
Salaries
of our executive officers are established based on a comparison with
competitive benchmark positions. The starting point to determine executive base
salaries is the median of executive salaries in the Reference Group. They are
reviewed annually by the Governance Committee.
In determining individual
base salaries, the Governance Committee takes into consideration individual
circumstances that may include the scope of an executives position, the
executives relevant competencies or experience and retention risk. The
Governance Committee also takes into consideration the fulfillment of our
corporate objectives as well as the individual performance of the executive.
Short-Term
Non-Equity Incentive Compensation
The
short-term non-equity incentive compensation plan sets out the allocation of
incentive awards based on the financial results and the advancement of our
product development and strategic objectives. These objectives are set at the
beginning of each financial year as part of the annual review of corporate
strategies.
In
the case of executive officers, a program is designed to maximize corporate and
individual performance by establishing specific operational and financial goals
and to provide financial incentives to executive officers based on their level
of attainment of these goals. The granting of cash incentives require the
approval of both the Governance Committee and the Board and are based upon an
assessment of each individuals performance, as well as the performance of the
Company.
For
the financial year ended December 31, 2008, cash bonuses paid to all of
our executive officers under our short-term non-equity incentive compensation
plan represented 96.93% of the target payout established by the Governance
Committee under such plan. The bonus payout level for 2008 was relatively high
since it included non-budgeted bonus payments made to two of our executive
officers, namely Juergen Engel and Matthias Seeber, our President and Chief
Executive Officer and Senior Vice President, Administration and Legal Affairs,
respectively, for special work performed by such officers in connection with
the negotiation, management and successful completion of two important
transactions in 2008. See notes 5 and 8 to the Summary Compensation Table set
forth below. Excluding the aforementioned special bonuses that amounted to an
aggregate of $
117,094
, the ratio of cash bonuses
paid to the target payout would have been
81.73
%. In addition, the 96.93% ratio of cash
bonuses paid to the target payout excludes an aggregate amount of $
50,000
paid to our executive officers in March 2008 as a
special bonus to have been applied exclusively for the purchase of our common
shares on the market in order to encourage greater share ownership by senior
management.
83
Table of Contents
Long-term
Equity Compensation Plan of Executive Officers
The
long-term component of the compensation of our executive officers is based
exclusively on the Stock Option Plan, which permits the award of a number of
options that varies in accordance with the contribution of the officers and
their responsibilities. To encourage retention and focus management on
developing and successfully implementing the continuing growth strategy of the
Company, stock options generally vest over a period of three years. Stock
options are usually granted to executive officers in December of
each year.
Summary
of the Stock Option Plan
We established the Stock
Option Plan in order to attract and retain directors, executive officers and
employees, who will be motivated to work towards ensuring the success of the
Company. The Board has full and complete authority to interpret the Stock
Option Plan, to establish applicable rules and regulations applying to it
and to make all other determinations it deems necessary or useful for the
administration of the Stock Option Plan, provided that such interpretations,
rules, regulations and determinations are consistent with the rules of all
stock exchanges and quotation systems on which our securities are then traded
and with all relevant securities legislation. Individuals eligible to
participate under the Stock Option Plan will be determined by either the Board
or the Governance Committee.
Options granted under the
Stock Option Plan may be exercised at any time within a maximum period of ten
years following the date of their grant (the Outside Expiry Date). The Board
or the Governance Committee, as the case may be, designates, at its discretion,
the individuals to whom stock options are granted under the Stock Option Plan
and determines the number of common shares covered by each of such options, the
grant date, the exercise price of each option, the expiry date, the vesting
schedule and any other matter relating thereto, in each case in accordance with
the applicable rules and regulations of the regulatory authorities. The
price at which the common shares may be purchased may not be lower than the
greater of the closing prices of the common shares on the TSX and the NASDAQ on
the last trading day preceding the date of grant of the option. Options granted
under the Stock Option Plan generally vest in equal tranches over a three-year
period (one-third each year, starting on the first anniversary of the grant
date) or as otherwise determined by the Board or the Governance Committee, as
the case may be.
Unless the Board or the Governance Committee decides otherwise, option
holders cease to be entitled to exercise their options under the Stock Option
Plan: (i) immediately, in the event an option holder who is an officer or
employee resigns or voluntarily leaves his or her employment with the Company
or one of its subsidiaries or the employment with the Company or one of its
subsidiaries is terminated with cause and, in the case of an optionee who is a
non-employee director of the Company or one of
its subsidiaries, the date on which such optionee
ceases to be a member of the relevant board of directors; (ii) six months
following the date on which employment is terminated as a result of the death
of an option holder who is an officer or employee and, in the case of an optionee
who is a non-employee director of the Company or one of its subsidiaries, six
months following the date on which such optionee ceases to be a member of the
relevant board of directors by reason of death; (iii) 30 days following
the date on which an option holders employment with the Company or any of its subsidiaries is
terminated for a reason other than those mentioned in (i) or (ii) above
including, without limitation, upon the disability, long-term illness,
retirement or early retirement of the option holder; and (iv) where the
option holder is a service supplier, 30 days following the date on which such
option holder ceases to act as such, for any cause or reason; (each, an Early
Expiry Date).
The Stock Option Plan also provides that, if the expiry date of an option(s) (whether
an Early Expiry Date or an Outside Expiry Date) occurs during a blackout
period or within the seven business days immediately after a blackout period
imposed by the Company, the expiry date will be automatically extended to the
date that is seven business days after the last day of the blackout period. For
the purposes of the foregoing, blackout period means the period during which
trading in the Companys securities is restricted in accordance with its
corporate policies.
Option holders
may not assign their options (nor any interest therein) other than by will or
in accordance with the applicable laws of estates and succession.
In the event
that, at any time, an offer to purchase is made to holders of all our common
shares, notice of such offer shall be given by the Company to each optionee and
all unexercised options will become exercisable immediately at their respective
exercise prices, but only to the extent necessary to enable optionees to tender
their common shares in response to such offer.
84
Table of Contents
The Stock Option
Plan currently provides that the following amendments may be made to the Stock
Option Plan upon approval of each of the Board our shareholders as well as
receipt of all required regulatory approvals:
·
any amendment to Section 3.2 of the Stock
Option Plan (which sets forth the limit on the number of options that may be
granted to insiders) that would have the effect of permitting, without having
to obtain shareholder approval on a disinterested vote at a duly convened
shareholders meeting, the grant of any option(s) under the Stock Option
Plan otherwise prohibited by Section 3.2;
·
any amendment to the number of securities
issuable under the Stock Option Plan (except for certain permitted adjustments,
such as in the case of stock splits, consolidations or reclassifications);
·
any amendment which would permit any option
granted under the Stock Option Plan to be transferable or assignable other than
by will or in accordance with the applicable laws of estates and succession;
·
the
addition of a cashless exercise feature, payable in cash or securities, which
does not provide for a full deduction of the number of underlying securities
from the Stock Option Plan reserve;
·
the
addition of a deferred or restricted share unit or any other provision which
results in employees receiving securities while no cash consideration is
received by the Company;
·
with
respect to any option holder whether or not such option holder is an insider:
·
any reduction in the exercise price of any
option after the option has been granted, or
·
any cancellation of an option and the re-grant
of that option under different terms;
·
except in
respect of certain permitted adjustments, such as in the case of stock splits,
consolidations or reclassifications:
·
any extension to the term of an option beyond
its Outside Expiry Date to an option holder who is an insider (except for
extensions made in the context of a blackout period);
·
any amendment to the method of determining the
exercise price of an option granted pursuant to the Stock Option Plan;
·
the addition of any form of financial
assistance or any amendment to a financial assistance provision which is more
favourable to employees; and
·
any amendment to the foregoing amending
provisions requiring Board, shareholder and regulatory approvals.
The Stock Option Plan further currently
provides that the following amendments may be made to the Stock Option Plan
upon approval of the Board and upon receipt of all required regulatory
approvals, but without shareholder approval:
·
amendments
of a housekeeping or clerical nature or to clarify the provisions of the Stock Option Plan;
·
amendments
regarding any vesting period of an option;
·
amendments
regarding the extension of an option beyond an Early Expiry Date in respect of
any option holder, or the extension of an option beyond the Outside Expiry Date
in respect of any option holder who is a non-insider of the Company;
·
adjustments
to the number of issuable common shares underlying, or the exercise price of,
outstanding options resulting from a split or a consolidation of the common
shares, a reclassification, the payment of a stock dividend, the payment of a
special cash or non-cash distribution to our shareholders on a
pro rata
basis provided such distribution is approved by our
shareholders in accordance with applicable law, a recapitalization, a
reorganization or any other event which necessitates an equitable adjustment to
the outstanding options in proportion with corresponding adjustments made to
all outstanding common shares;
·
discontinuing
or terminating the Stock Option Plan; and
85
Table of Contents
·
any other
amendment which does not require shareholder approval under the terms of the
Stock Option Plan.
The maximum
number of common shares issuable under the Stock Option Plan is fixed at 11.4%
of the issued and outstanding common shares at any given time, which, as at March 10,
2009, represented 6,063,372 common shares. There are currently 4,667,428
options outstanding under the Stock Option Plan representing 8.8% of all issued
and outstanding common shares. Under the Stock Option Plan, (i) the number
of securities issued to insiders, at any time, or issuable within any one-year
period, under all of our security-based compensation arrangements, cannot
exceed 10% of our issued and outstanding securities and (ii) no single
option holder may hold options to purchase, from time to time, more than 5% of
our issued and outstanding common shares.
86
Table of Contents
Outstanding Option-Based Awards and Share-Based Awards
The following table shows
all awards outstanding to each of our President and Chief Executive Officer,
Executive Chairman (and former Interim President and Chief Executive Officer),
former President and Chief Executive Officer, the Chief Financial Officer and
our three (3) other most highly compensated executive officers during the
most recently completed financial year (collectively, the Named Executive Officers) as of December 31,
2008:
|
|
Option-based Awards
|
|
Share-based Awards
|
|
Name
|
|
Issuance Date
|
|
Number of
Securities
Underlying
Unexercised
Options(1)
(#)
|
|
Option
Exercise
Price
(CAN$)
|
|
Option
Expiration
Date
|
|
Value of
Unexercised
In-the-money
Options(2)
(CAN$)
|
|
Issuance
Date
|
|
Number of
Shares or
Units of
shares
that have Not
Vested
(#)
|
|
Market or
Payout
Value of
Share-based
Awards that
have Not
Vested
($)
|
|
Juergen Engel (3)
|
|
Feb. 20, 03
|
|
60,000
|
|
2.43
|
|
Dec. 31, 12
|
|
|
|
|
|
|
|
|
|
|
Dec. 11,
03
|
|
60,000
|
|
1.74
|
|
Dec. 10, 13
|
|
|
|
|
|
|
|
|
|
|
Dec. 14,
04
|
|
100,000
|
|
5.83
|
|
Dec. 13, 14
|
|
|
|
|
|
|
|
|
|
|
Dec. 13,
05
|
|
50,000
|
|
3.53
|
|
Dec. 12, 15
|
|
|
|
|
|
|
|
|
|
|
Jan. 4,
07
|
|
50,000
|
|
4.65
|
|
Jan. 3, 17
|
|
|
|
|
|
|
|
|
|
|
Dec. 11,
07
|
|
50,000
|
|
1.82
|
|
Dec. 10, 17
|
|
|
|
|
|
|
|
|
|
|
Nov. 14,
08
|
|
200,000
|
|
0.65
|
|
Nov. 13, 18
|
|
|
|
|
|
|
|
|
|
|
Dec. 8,
08
|
|
75,000
|
|
0.55
|
|
Dec. 8, 18
|
|
2,250.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Juergen Ernst (3)
|
|
Feb. 25, 05
|
|
15,000
|
|
5.09
|
|
Feb. 24, 15
|
|
|
|
|
|
|
|
|
|
|
Dec. 13,
05
|
|
15,000
|
|
3.53
|
|
Dec. 12, 15
|
|
|
|
|
|
|
|
|
|
|
Jan. 4,
07
|
|
5,000
|
|
4.65
|
|
Jan. 3, 17
|
|
|
|
|
|
|
|
|
|
|
Dec. 11,
07
|
|
25,000
|
|
1.82
|
|
Dec. 10, 17
|
|
|
|
|
|
|
|
|
|
|
Nov. 14,
08
|
|
100,000
|
|
0.65
|
|
Nov. 13, 18
|
|
|
|
|
|
|
|
|
|
|
Dec. 8,
08
|
|
15,000
|
|
0.55
|
|
Dec. 8, 18
|
|
450.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David J. Mazzo (3)
|
|
March 23, 07
|
|
100,000
|
|
3.54
|
(4)
|
March 22, 17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dennis Turpin
|
|
Dec. 4, 01
|
|
30,000
|
|
6.18
|
|
Dec. 4, 11
|
|
|
|
|
|
|
|
|
|
|
Nov. 1,
02
|
|
90,000
|
|
3.94
|
|
Oct. 31, 12
|
|
|
|
|
|
|
|
|
|
|
Dec. 16,
02
|
|
50,000
|
|
3.68
|
|
Dec. 15, 12
|
|
|
|
|
|
|
|
|
|
|
Dec. 11,
03
|
|
60,000
|
|
1.74
|
|
Dec. 10, 13
|
|
|
|
|
|
|
|
|
|
|
Dec. 14,
04
|
|
90,000
|
|
5.83
|
|
Dec. 13, 14
|
|
|
|
|
|
|
|
|
|
|
Dec. 13,
05
|
|
50,000
|
|
3.53
|
|
Dec. 12, 15
|
|
|
|
|
|
|
|
|
|
|
Jan. 4,
07
|
|
50,000
|
|
4.65
|
|
Jav. 3, 17
|
|
|
|
|
|
|
|
|
|
|
Dec. 11,
07
|
|
50,000
|
|
1.82
|
|
Dec. 10, 17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul Blake
|
|
Jul. 27, 07
|
|
45,000
|
|
3.05
|
(4)
|
July 26, 17
|
|
|
|
|
|
|
|
|
|
|
Dec. 11,
07
|
|
50,000
|
|
1.82
|
(4)
|
Dec. 10,17
|
|
|
|
|
|
|
|
|
|
|
Dec. 8,
08
|
|
50,000
|
|
0.55
|
|
Dec. 8, 18
|
|
1,500.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matthias Seeber (5)
|
|
Feb. 20, 03
|
|
15,000
|
|
2.43
|
|
Dec. 31, 12
|
|
|
|
|
|
|
|
|
|
|
Dec. 11,
03
|
|
45,000
|
|
1.74
|
|
Dec. 10, 13
|
|
|
|
|
|
|
|
|
|
|
Dec. 14,
04
|
|
50,000
|
|
5.83
|
|
Dec. 13, 14
|
|
|
|
|
|
|
|
|
|
|
Dec. 13,
05
|
|
40,000
|
|
3.53
|
|
Dec. 12, 15
|
|
|
|
|
|
|
|
|
|
|
Jan. 4,
07
|
|
30,000
|
|
4.65
|
|
Jan. 3, 17
|
|
|
|
|
|
|
|
|
|
|
Dec. 11,
07
|
|
25,000
|
|
1.82
|
|
Dec. 10, 17
|
|
|
|
|
|
|
|
|
|
|
Dec. 8,
08
|
|
30,000
|
|
0.55
|
|
Dec. 8, 18
|
|
900.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nicholas J. Pelliccione
|
|
May 7, 07
|
|
25,000
|
|
3.96
|
(4)
|
May 6, 17
|
|
|
|
|
|
|
|
|
|
|
Dec. 11,
07
|
|
50,000
|
|
1.82
|
(4)
|
Dec. 10, 17
|
|
|
|
|
|
|
|
|
|
|
Dec. 8,
08
|
|
20,000
|
|
0.55
|
|
Dec. 8, 18
|
|
600.00
|
|
|
|
|
|
|
|
(1)
|
The number of securities
underlying unexercised options that have not vested represents all awards
outstanding at December 31, 2008, including awards granted before the
first day of the most recently completed financial year.
|
(2)
|
Value of unexercised
in-the-money options at financial year-end is calculated based on the
difference between the closing price of our common shares on the TSX on the
last trading day prior to year-end (December 31, 2008) of CAN$0.58 and
the exercise price of the options, multiplied by the number of unexercised
options.
|
(3)
|
David J. Mazzo served as
President and Chief Executive Officer up until April 11, 2008, on which
date Juergen Ernst was appointed Interim President and CEO. Juergen Engel was
appointed President and Chief Executive Officer effective September 1,
2008.
|
(4)
|
These amounts are expressed
in US dollars.
|
(5)
|
Mr. Seeber serves as
Managing Director of
AEZS Germany, our principal subsidiary. On December 9,
2008, he was also appointed Senior Vice President, Administration and Legal
Affairs of Æterna Zentaris.
|
87
Table
of Contents
Incentive plan awards - Value vested or earned during the year
The following table shows
the incentive plan awards value vested or earned for each Named Executive
Officer for the financial year ending December 31, 2008.
Name
|
|
Option-based awards -
Value
vested during the year(1)
($)
|
|
Share-based awards -
Value
vested during the year
($)
|
|
Non-equity incentive plan
compensation - Value
earned
during the year
($)
|
|
Juergen Engel
|
|
|
|
|
|
248,093
|
(2) (3) (4)
|
Juergen Ernst
|
|
|
|
|
|
182,962
|
(5)
|
David J. Mazzo
|
|
|
|
|
|
10,000
|
(3)
|
Dennis Turpin
|
|
|
|
|
|
30,000
|
(3)
|
Paul Blake
|
|
|
|
|
|
135,000
|
(3)
|
Matthias Seeber
|
|
|
|
|
|
120,755
|
(4)
|
Nicholas J. Pelliccione
|
|
|
|
|
|
70,000
|
(3)
|
(1)
|
The amount represents the
aggregate dollar value that would have been realized if the options had been
exercised on the vesting date, based on the difference between the closing
price of our common shares on the TSX and the exercise price on such vesting
date.
|
(2)
|
This amount paid to
Dr. Engel includes his annualized bonus as Executive Vice President and
Chief Scientific Officer for the first eight months and as President and
Chief Executive Officer for the last four months of 2008.
|
(3)
|
Includes a one-time cash
payment, which amounted to $10,000, that was awarded in March 2008 to
each of our Named Executive Officers with the exception of Messrs. Ernst
and Seeber. This award, to have been used solely to purchase our common
shares on the NASDAQ, was granted by the Board in order to encourage share
ownership of our common shares by senior management.
|
(4)
|
Amounts paid to
Messrs. Engel and Seeber include a special bonus awarded in connection
with the successful completion of two major commercial transactions in 2008
(Cetrotide
®
and
Impavido
®
).
|
(5)
|
This amount paid to
Mr. Juergen Ernst represents entirely a bonus awarded in connection with
the successful completion of the monetization of Cetrotide
®
as scheduled.
|
Other Forms of Compensation
Benefits
and Perquisites
Our executive employee
benefits program also includes life, medical, dental and disability insurance.
Perquisites consist of a car allowance and human resources counselling. These
benefits and perquisites are designed to be competitive overall with equivalent
positions in comparable North American organizations.
Pension
Plan
One
of our Named Executive Officers, namely Dr. Juergen Engel, the President
and Chief Executive Officer, participates in a non-contributory defined benefit
pension plan. Benefits payable under this plan correspond to 40% of the
executive officers average salary of the last twelve (12) months during the
first five working years after initial participation in this plan and increase
by 0.4% for each additional year of employment.
88
Table
of Contents
The
normal retirement age is 65 years, but early retirement in accordance with
Germanys social pension insurance is possible without reduction (or clawback)
of the benefit. The following table shows total annual pension benefits payable
to Dr. Engel pursuant to this plan. Upon the death of a participant, the
surviving spouse and/or children of the participant will be entitled to a
benefit equal to 60% of the benefits to which such participant was entitled.
All benefits payable under this plan are in addition to German governmental
social security benefits. Only base salary is taken into consideration in
calculating pension benefits.
Pension Plan Table
|
|
Years of Service
|
|
Average Remuneration ($)*
|
|
15
|
|
20
|
|
25
|
|
30
|
|
35
|
|
200,000
|
|
$
|
88,000
|
|
$
|
92,000
|
|
$
|
96,000
|
|
$
|
100,000
|
|
$
|
104,000
|
|
300,000
|
|
$
|
132,000
|
|
$
|
138,000
|
|
$
|
144,000
|
|
$
|
150,000
|
|
$
|
156,000
|
|
400,000
|
|
$
|
176,000
|
|
$
|
184,000
|
|
$
|
192,000
|
|
$
|
200,000
|
|
$
|
208,000
|
|
500,000
|
|
$
|
220,000
|
|
$
|
230,000
|
|
$
|
240,000
|
|
$
|
250,000
|
|
$
|
260,000
|
|
* Remuneration refers to annual base salary.
As
at December 31, 2008, Dr. Engel had 32 years and 4 months of credited
service in the aforementioned non-contributory defined benefit pension plan.
Defined benefit plans table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of years
|
|
|
|
|
|
Accrued
|
|
|
|
Non-
|
|
Accrued
|
|
|
|
credited
|
|
Annual benefits payable
|
|
obligation at
|
|
Compensatory
|
|
compensatory
|
|
obligation at
|
|
|
|
service
|
|
At year end
|
|
At age 65
|
|
start of year
|
|
change
|
|
change
|
|
year end
|
|
Name
|
|
(#)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
Juergen Engel
|
|
32.33
|
|
186,680
|
|
188,862
|
|
2,492,742
|
|
473,277
|
|
32,753
|
|
2,998,772
|
|
Employer
Contribution to Employees Retirement Plan
In 2008, the Board
approved a plan whereby we would contribute to our employees retirement plans
both in Canada (RRSP) and the United States (401(k)) to the extent of 50% of
the employees contribution up to a maximum of $7,750 annually for employees
under 50 years old and $10,250 for those over 50 years old. This plan was
implemented in 2008. Employees based in Frankfurt, Germany already benefit from
certain employer contributions into the employees pension funds (DUPK/RUK).
Our executive officers, including the Named
Executive Officers, are eligible to participate in the aforementioned
employer-contribution plans to the same extent and in the same manner as all of
our other employees.
Summary Compensation Table
The Summary Compensation
Table set forth below shows compensation information for the Named Executive
Officers for services rendered in all capacities during the financial year
ended December 31, 2008. Our executive officers are generally paid in
their home countrys currency. All amounts in the Summary Compensation Table
below are in US dollars and have been converted from the Named Executive Officers
home country currencies to US dollars based on the following average exchange
rates for the financial year ended December 31, 2008: 1.00 = US$1.464;
and CAN$1.00 = US$0.937.
For compensation related to
previous years, please refer to our management information circulars filed with
the Canadian securities regulatory authorities and available at www.sedar.com
and furnished to the U.S. Securities and Exchange Commission and available at
www.sec.gov.
89
Table of Contents
SUMMARY
COMPENSATION TABLE
|
|
|
|
|
|
|
|
|
|
Non-equity incentive
plan compensation
|
|
|
|
|
|
|
|
Name and principal
|
|
|
|
Salary
|
|
Share
based
awards
|
|
Option
based
awards(1)
|
|
Annual
incentive
plan(2)
|
|
Long-
term
incentive
plans
|
|
Pension
value
|
|
All other
compensation(3)
|
|
Total
compensation
|
|
position
|
|
Year
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
Juergen Engel
President and CEO
|
|
2008
|
|
405,925
|
(4
)
|
|
|
67,777
|
|
248,093
|
(5)
|
|
|
473,277
|
|
3,366
|
(6)
|
1,198,438
|
|
Juergen Ernst
Executive Chairman of the Board and former Interim President and CEO
|
|
2008
|
|
152,465
|
(7
)
|
|
|
29,034
|
|
182,962
|
(8)
|
|
|
|
|
150,175
|
(9
)
|
514,636
|
|
David J. Mazzo
Former President and CEO
|
|
2008
|
|
135,000
|
(10)
|
|
|
|
|
10,000
|
(11)
|
|
|
|
|
843,219
|
(12)
|
988,219
|
|
Dennis Turpin
Senior Vice President and CFO
|
|
2008
|
|
317,352
|
|
|
|
|
|
30,000
|
|
|
|
|
|
95,780
|
(13)
|
443,132
|
|
Paul Blake
Senior Vice President and Chief Medical Officer
|
|
2008
|
|
355,250
|
|
|
|
10,788
|
|
135,000
|
|
|
|
|
|
10,250
|
(14)
|
511,288
|
|
Matthias Seeber
Senior Vice President, Administration and Legal Affairs
|
|
2008
|
|
307,372
|
|
|
|
6,473
|
|
120,755
|
(5)
|
|
|
|
|
61,881
|
(6
)
|
496,481
|
|
Nicholas J. Pelliccione
Senior Vice President Regulatory Affairs and Quality Assurance
|
|
2008
|
|
317,300
|
|
|
|
4,315
|
|
70,000
|
|
|
|
|
|
10,250
|
(14)
|
401,865
|
|
(1)
|
The value of the
option-based awards reflects the closing price of our common shares on the
TSX at the date of grant (CAN$0.55 for options granted on December 8, 2008
and CAN$0.65 for options granted on November 14, 2008) multiplied by the
Black-Scholes factor as at such date (41.82% for options granted on
December 8, 2008 and 42.31% for options granted on November 14,
2008) and the number of stock options granted in 2008.
|
(2)
|
Includes a one-time cash
payment of $10,000 that was awarded in March 2008 to the Named Executive
Officers with the exception of Messrs. Ernst and Seeber. This award, to
have been used solely to purchase our common shares on the NASDAQ, was granted
by the Board in order to encourage share ownership of our common shares by
senior management.
|
(3)
|
All Other Compensation
represents perquisites and other personal benefits which, in the aggregate,
amount to $50,000 or more, or are equivalent to 10% or more of a Named
Executive Officers total salary for the financial year ended
December 31, 2008. The type and amount of each perquisite, the value of
which exceeds 25% of the total value of perquisites, is separately disclosed
for each Named Executive officer, if applicable.
|
(4)
|
Represents Dr. Engels
annual base salary as Executive Vice President and Chief Scientific Officer
that was paid to him up until September 1, 2008 plus an adjusted annual
base salary following his appointment as President and CEO between
September 1 and December 31, 2008.
|
(5)
|
Includes
special bonuses paid to Dr. Engel and Mr. Seeber in connection with
the negotiation, management and successful completion of two important
transactions in 2008, namely the monetization of Cetrotide
®
and the sale of all rights
related to Impavido
®
.
|
(6)
|
Represents DUPK/RUK
(Germany) employer contributions to Dr. Engels and Mr. Seebers
retirement savings plans.
|
(7)
|
Represents salary paid to
Mr. Ernst as Interim President and CEO from April 11 to September 1,
2008.
|
(8)
|
Represents
in its entirety a special bonus paid to Mr. Ernst in connection with the
negotiation, management and successful completion of an important transaction
in 2008, namely the monetization of Cetrotide
®
.
|
(9)
|
Represents amounts paid to
Mr. Ernst as an Outside Director.
|
(10)
|
Represents
the salary actually earned by and paid to Mr. Mazzo in his capacity as
President and Chief Executive Officer until his departure from the Company
effective April 11, 2008 based on an annual base salary in 2008 of
$468,000.
|
(11)
|
Represents
in its entirety a one-time bonus
paid to our executive officers in March 2008,
including Mr. Mazzo, to have been applied exclusively for the purchase
of our common shares on the NASDAQ in order to encourage greater share
ownership by senior management.
|
(12)
|
Under
the terms of a termination agreement, Mr. Mazzo received a severance
package of $840,219, which included an amount equivalent to twelve months of
his annual base salary, an amount equivalent to the annual bonus received for
fiscal year 2007, an amount equivalent to twelve months of the cost of the
benefits that were in force at the time of his departure, an amount
representing the employers contribution to the employees
401(k) retirement savings and an amount equivalent to his vacation
payout and car
|
90
Table
of Contents
|
allowance.
550,000 options granted to Mr. Mazzo in 2007 were cancelled as a
consequence of his departure from the Company. Mr. Mazzo was, however,
entitled to retain 100,000 options, all of which expire on or before
March 22, 2012.
|
(13)
|
Represents $91,765 of
relocation costs and $4,015 in employers contribution to Mr. Turpins
401(k) retirement savings plan.
|
(14)
|
Represents
401(k) employer contributions to Messrs. Blakes and Pellicciones
retirement savings plans.
|
Compensation
of the Chief Executive Officer
The compensation of the
President and Chief Executive Officer is governed by our executive compensation
policy described in Section 6.2, Compensation of Executive Officers, and
the President and Chief Executive Officer participates together with the other
Named Executive Officers in all of our incentive plans.
Dr. Engel has been our
President and Chief Executive Officer since September 1, 2008. Under Dr. Engels
leadership, we received an initial payment of $52.5 million (subject to certain
clawbacks and less $1.0 million in transaction costs) from CHRP upon completion
of a monetization transaction in which AEZS Germany assigned its rights to
royalties on future sales under its license agreement with Merck Serono.
While he was our Executive
Vice President and Chief Scientific Officer, Dr. Engel earned $253,703
during the first eight months of 2008 based on an annual base salary of $
380,555. Effective September 1, 2008, when he was
appointed President and Chief Executive Officer, Dr. Engels annual base
salary was increased to $456,667, thus representing a 20% increase over his former salary.
Consequently, Dr. Engels total earned salary for 2008 was $405,925. The President and Chief Executive Officers
salary for 2008 places him at approximately 18% below the 50
th
percentile in relation to the
companies in the Reference Group of Radfords Global Life Sciences Executive
Compensation Survey. He also received 100% of his target bonus of $164,910 for his performance in the context of our
corporate objectives. Such bonus reflected the advancement of our product pipeline
as well as our performance in relation to strategic objectives and business
development. He also received a $10,000 award which was used solely to purchase
our common shares on the market, which was granted by the Board to encourage
share ownership by senior management. Additionally, he received a special bonus
of $73,183 as a reward for managing the successful
completion of the Cetrotide
®
monetization transaction as scheduled.
Prior
to the appointment of Dr. Engel as President and Chief Executive Officer,
we had appointed our Chairman of the Board, Mr. Juergen Ernst, as interim
President and Chief Executive Officer, effective April 11, 2008 as a
consequence of the departure of David Mazzo. Mr. Ernsts annual base
salary as interim President and Chief Executive Officer was $365,919 and an
amount of $152,465 was actually paid to him during the interim period. Mr. Ernst
also received a special bonus of $182,962 for the successful completion of the
Cetrotide
®
monetization transaction as scheduled.
The Governance Committee
periodically considers the advice of an independent compensation consultant in
determining the grants to be awarded to the President and Chief Executive
Officer.
In conjunction with the Long
Term Equity Compensation Plan, the President and Chief Executive Officer was
awarded grants of 200,000 and 75,000 stock options on November 14 and December 8,
2008, respectively. The stock options granted on November 14, 2008 were
awarded at an exercise price of CAN$0.65 and those granted on December 8,
2008 were awarded at an exercise price of CAN$0.55. Those stock options will
vest in accordance with the provisions of the Stock Option Plan.
C. Board practices
Our
Articles provide that our Board shall be composed of a minimum of five and a
maximum of fifteen directors. Directors are elected annually by our
shareholders, but the directors may from time to time appoint one or more
directors, provided that the total number of directors so appointed does not
exceed one third of the number of directors elected at the last annual meeting
of shareholders. Each elected director will remain in office until termination
of the next annual meeting of the shareholders or until his or her successor is
duly elected or appointed, unless his or her post is vacated earlier.
Under
the terms of contractual agreements among the Company and SGF Santé Inc.
concerning, among other matters, the election of directors, provided that SGF
Santé Inc. holds at least 5% of our issued and outstanding voting shares, (a) we
will propose for election as a director, at each annual meeting of the
shareholders, one candidate designated by SGF Santé Inc., provided that the
candidate receives a favourable recommendation from the
Corporate Governance, Nominating and Human
Resources Committee (the Governance Committee).
91
Table of Contents
Committees of the Board of
Directors
Audit Committee
Our Board has
established an Audit Committee and the Governance Committee.
The
Audit Committee assists the Board in fulfilling its oversight responsibilities.
The Audit Committee reviews the financial reporting process, the system of
internal control, the audit process, and the Companys process for monitoring
compliance with laws and regulations and with our Code of Ethical Conduct. In
performing its duties, the Audit Committee will maintain effective working
relationships with the Board, management, and the external auditors. To effectively
perform his or her role, each committee member will obtain an understanding of
the detailed responsibilities of committee membership as well as the Companys
business, operations and risks.
The function of the Audit Committee is
oversight and while it has the responsibilities and powers set forth in its
charter, it is neither the duty of the committee to plan or to conduct audits
or to determine that the companys financial statements are complete, accurate
and in accordance with generally accepted accounting principles, nor to
maintain internal controls and procedures.
The current members of the Audit Committee are
Martha Byorum, Gérard Limoges and Pierre MacDonald.
Governance Committee
The
mandate of the Governance Committee provides that it is responsible for
taking
all reasonable measures to ensure that appropriate human resources systems and
procedures, such as hiring policies, competency profiles, training policies and
compensation structures are in place so that the Company can attract, motivate
and retain the quality of personnel required to meet its business objectives.
The Governance
Committee also assists the Board in discharging its responsibilities relating
to executive and other human resources hiring, assessment, compensation and
succession planning matters.
Thus,
the Governance Committee recommends the appointment of senior officers,
including the terms and conditions of their appointment and termination, and
reviews the evaluation of the performance of our senior officers, including
recommending their compensation. The Board, which includes the members of the
Governance Committee, reviews the Chief Executive Officers corporate goals and
objectives and evaluates his or her performance and compensation in light of
such goals and objectives.
The current members of the
Governance Committee are Juergen Ernst, José P. Dorais, Pierre Laurin and
Pierre MacDonald.
D. Employees
As of March 1, 2009, we had a total of 109
employees, of which 88 are based in Frankfurt, Germany, 9 in New Jersey, United
States, and 12 in Québec, Canada. 42 are involved in discovery, preclinical and
pharmaceutical development, 37 are involved in medical and regulatory affairs,
quality assurance and intellectual property, and 30 are involved in business
operations, communications, finances, information technology, human resources,
project management and legal affairs. We have agreements with all of our
employees covering confidentiality and loyalty, non-competition, and assignment
to the Company of all intellectual property rights developed during the
employment period. Some of our employees based in Frankfurt, Germany are
represented by the Chemical Union of Germany. As such, their compensation is
largely driven by the outcome of the negotiations between the Chemical Union
and the Association of Employers for the chemical industry which is then
binding for all German companies in the industry. The current collective
bargaining agreement (
Tarifvertrag
)
that applies to
all tariff-employees of AEZS Germany expires on March 31,
2010.
We have never experienced
a work stoppage and we believe that relations with our employees as well
as with the works council representing our German employees are generally good.
92
Table of Contents
E.
Share
ownership
The information in the table below is provided
as of March 20, 2009:
Name
|
|
No. of common shares
owned or held
|
|
Percent
|
|
No. of stock options
Held(1)
|
|
No. of currently
exercisable options
|
|
|
|
|
|
|
|
|
|
|
|
Marcel Aubut
|
|
57,500
|
|
*
|
|
125,000
|
|
95,001
|
|
Paul Blake
|
|
60,720
|
|
*
|
|
145,000
|
|
31,667
|
|
Martha Byorum
|
|
12,000
|
|
*
|
|
125,000
|
|
95,001
|
|
José P. Dorais
|
|
|
|
*
|
|
|
|
|
|
Juergen Engel
|
|
79,779
|
|
*
|
|
645,000
|
|
320,001
|
|
Juergen Ernst
|
|
58,850
|
|
*
|
|
175,000
|
|
45,001
|
|
Pierre Laurin
|
|
50,200
|
|
*
|
|
137,000
|
|
107,001
|
|
Gérard Limoges
|
|
9,000
|
|
*
|
|
75,000
|
|
45,001
|
|
Pierre
MacDonald
|
|
26,500
|
|
*
|
|
134,000
|
|
104,001
|
|
Gerald J.
Martin
|
|
14,000
|
|
*
|
|
60,000
|
|
30,001
|
|
|
|
|
|
|
|
|
|
|
|
Nicholas J.
Pelliccione
|
|
25,000
|
|
*
|
|
95,000
|
|
25,001
|
|
Matthias Seeber
|
|
|
|
*
|
|
235,000
|
|
178,334
|
|
Dennis Turpin
|
|
13,250
|
|
*
|
|
470,000
|
|
420,001
|
|
|
|
|
|
|
|
|
|
|
|
All of our
directors and senior
officers as a group
|
|
389,799
|
|
0.73
|
|
2,421,000
|
|
1,496,011
|
|
*: Less than 1%
(1)
For
information regarding option expiration dates and exercise price refer to the
tables set forth on pages 80 and 87 of this annual report.
Item 7.
Major Shareholders and
Related Party Transactions
A.
Major shareholders
We are not directly or
indirectly owned or controlled by another corporation or by any foreign
government.
Based on filings with the
Securities and Exchange Commission and the Canadian securities regulatory
authorities, as of February 17, 2009, set out below are the only
persons/entities who beneficially owned, directly or indirectly, or exercised
control or direction over our common shares carrying more than 5% of the voting
rights attached to all our common shares.
As used in the table below, beneficial ownership means sole or shared
power to vote or direct the voting of the security, or the sole or shared
investment power with respect to a security (i.e., the power to dispose, or
direct a disposition, of a security). A person is deemed at any date to have beneficial
ownership of any security that the person has a right to acquire within 60
days. More than one person may be deemed to have beneficial ownership of the
same group of securities.
Name of shareholder
|
|
Common Shares
|
|
Total Percentage
of Voting Rights
|
|
|
|
(#)
|
|
(%)
|
|
Solidarity
Fund (QFL)
|
|
9,752,069
|
|
18.33
|
|
|
|
|
|
|
|
SGF Santé
Inc.
|
|
8,810,878
|
|
16.57
|
|
|
|
|
|
|
|
Eric Dupont
|
|
3,767,413
|
|
7.08
|
|
None of the shareholders set out above has different
voting rights from the other shareholders.
93
Table
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United
States Shareholders
As of December 31,
2008, there were a total of 234
holders of record of our common shares, of which seven were registered
with addresses in the United States holding in the aggregate approximately
2.08% of our outstanding common shares. We believe that the number of
beneficial owners of our common shares is substantially greater than the number
of record holders, because a large portion of our common shares are held of
record in broker street names.
B.
Related party transactions
None
C.
Interests of experts and
counsel
Not applicable.
Item 8.
Financial Information
A.
Consolidated statements
and other financial information
The financial statements filed as part of this
annual report are presented under Item 18. Financial Statements.
Valuation and qualifying accounts are as follows (in thousands of US
dollars):
Valuation allowance on future income tax assets
|
|
Years ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Balance - Beginning of year
|
|
$
|
23,289
|
|
$
|
13,337
|
|
$
|
35,719
|
|
Change in valuation allowance
|
|
17,554
|
|
6,963
|
|
(22,644
|
)
|
Foreign currency transation adjustment
|
|
(4,262
|
)
|
2,989
|
|
262
|
|
|
|
|
|
|
|
|
|
Balance - End of year
|
|
$
|
36,581
|
|
$
|
23,289
|
|
$
|
13,337
|
|
Export Sales
Export and domestic sales in thousands of US
dollars and as percentage of total sales as follows:
|
|
Years ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Export Sales
|
|
$
|
38,145
|
|
99.13
|
%
|
$
|
41,668
|
|
99.05
|
%
|
$
|
38,774
|
|
99.93
|
%
|
Domestic Sales
|
|
$
|
333
|
|
0.87
|
%
|
$
|
400
|
|
0.95
|
%
|
$
|
25
|
|
0.07
|
%
|
|
|
$
|
38,478
|
|
100.00
|
%
|
$
|
42,068
|
|
100.00
|
%
|
$
|
38,799
|
|
100.00
|
%
|
Dividend Policy
Since our incorporation, we have not paid any
dividends and we do not anticipate paying any dividends in the foreseeable
future.
94
Table of Contents
B.
Significant changes
No significant changes occurred since the date of
our annual consolidated financial statements included elsewhere in this annual
report.
Item 9.
The Offering and Listing
A.
Offer and listing details
Not Applicable, except for Item 9A(4)
|
|
NASDAQ (US$)
|
|
TSX (CAN$)
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
1.85
|
|
0.26
|
|
1.92
|
|
0.44
|
|
2007
|
|
4.40
|
|
1.33
|
|
5.21
|
|
1.37
|
|
2006
|
|
7.55
|
|
3.93
|
|
8.79
|
|
4.51
|
|
2005
|
|
6.47
|
|
4.00
|
|
7.89
|
|
4.85
|
|
2004
|
|
8.42
|
|
3.17
|
|
11.5
|
|
4.12
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Fourth quarter
|
|
2.73
|
|
1.33
|
|
2.74
|
|
1.37
|
|
Third quarter
|
|
3.65
|
|
2.27
|
|
3.90
|
|
2.40
|
|
Second quarter
|
|
4.18
|
|
3.25
|
|
4.75
|
|
3.45
|
|
First quarter
|
|
4.40
|
|
2.90
|
|
5.21
|
|
3.41
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Fourth quarter
|
|
1.10
|
|
0.26
|
|
0.83
|
|
0.44
|
|
Third quarter
|
|
1.37
|
|
0.58
|
|
1.44
|
|
0.60
|
|
Second quarter
|
|
1.85
|
|
0.97
|
|
1.92
|
|
0.98
|
|
First quarter
|
|
1.80
|
|
0.76
|
|
1.80
|
|
0.75
|
|
|
|
|
|
|
|
|
|
|
|
Last six months
|
|
|
|
|
|
|
|
|
|
Feb-09
|
|
1.10
|
|
0.60
|
|
1.15
|
|
0.72
|
|
Jan-09
|
|
0.73
|
|
0.46
|
|
0.88
|
|
0.57
|
|
Dec-08
|
|
0.60
|
|
0.26
|
|
0.72
|
|
0.44
|
|
Nov-08
|
|
1.10
|
|
0.44
|
|
0.74
|
|
0.54
|
|
Oct-08
|
|
0.79
|
|
0.35
|
|
0.83
|
|
0.44
|
|
Sept-08
|
|
1.18
|
|
0.58
|
|
1.27
|
|
0.60
|
|
B.
Plan of distribution
Not applicable.
C.
Markets
Our common shares are listed and posted for trading
on the TSX under the symbol AEZ and are quoted on the NASDAQ under the symbol
AEZS.
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
on April 19,
2009, or pending approval by the Securities and Exchange Commission of NASDAQs
proposed rule change, July 19, 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. If our shares were delisted from TSX or
NASDAQ, investors may have difficulty in disposing of our common shares held by
them.
D.
Selling shareholders
Not applicable.
95
Table of Contents
E.
Dilution
Not applicable.
F.
Expenses of the issuer
Not applicable.
Item 10.
Additional Information
A.
Share capital
Not applicable.
B.
Memorandum and articles of
association
The
Company is governed by its restated articles of incorporation (the Restated
Articles of Incorporation) under the
Canada
Business Corporations Act
(the CBCA) and by its bylaws (the bylaws).
The Companys Restated Articles of Incorporation are on file with the
Corporations Directorate of Industry Canada under Corporation Number 264271-9.
The Restated Articles of Incorporation do not include a stated purpose and do
not place any restrictions on the business that the Company may carry on.
Inspection Rights of Shareholders
Under
the CBCA, shareholders are entitled to be provided with a copy of the list of
registered shareholders of the Company. In order to obtain the shareholder
list, the Company must be provided with an affidavit including, among other
things, a statement that the list will only be used for the purposes permitted
by the CBCA. These permitted purposes include an effort to influence the voting
of shareholders of the Company, an offer to acquire securities of the Company
and any other matter relating to the affairs of the Company. The Company is
entitled to charge a reasonable fee for the provision of the shareholder list
and must deliver that list no more than ten days after receipt of the affidavit
described above.
Under
the CBCA, shareholders of the Company have the right to inspect certain
corporate records, including its Restated Articles of Incorporation and bylaws
and minutes of meetings and resolutions of the shareholders. Shareholders have
no statutory right to inspect minutes of meetings and resolutions of directors
of the Company. Shareholders of the Company have the right to certain financial
information respecting the Company. In addition to the annual and quarterly
financial statements required to be filed under applicable securities laws,
under the CBCA the Company is required to place before every annual meeting of
shareholders its audited comparative annual financial statements. In addition,
shareholders have the right to examine the financial statements of each of our
subsidiaries and any other corporate entity whose accounts are consolidated in
the financial statements of the Company.
Directors
The
minimum number of directors of the Company is five and the maximum number is
fifteen. In accordance with the Companys bylaws and the CBCA, a majority of
its directors must be residents of Canada. In order to serve as a director, a
person must be a natural person at least 18 years of age, of sound mind, not
bankrupt, and must not be prohibited by any court from holding the office of
director. For as long as the Company is a company that publicly distributes its
securities, at least two-thirds of its directors must not be officers or
employees of the Company or its subsidiaries. None of the Restated Articles of
Incorporation, the bylaws and the CBCA impose any mandatory retirement
requirements for directors.
The
directors are elected by a majority of the votes cast at the annual meeting at
which an election of directors is required, to hold office until the election
of their successors except in the case of resignations or if their offices
become vacant by death or otherwise. Subject to the provisions of the Companys
bylaws, all directors may, if still qualified to serve as directors, stand for
re-election. The Board is not replaced at staggered intervals but is elected
annually.
Under
the Companys bylaws and the Restated Articles of Incorporation, a director of
the Company need not be a shareholder.
96
Table
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The
directors are entitled to remuneration as shall from time to time be determined
by the Board or by a committee to which the Board may delegate the power to do
so. Under the mandate of the Companys Governance Committee, such committee,
comprised of a majority of independent directors, is
tasked
with
making recommendations to the Board concerning director remuneration.
The
Companys bylaws provide that a director shall promptly disclose to the Company
any interest he or she has in any undertaking or association that is likely to
place him or her in a situation of conflict of interest, as well as the rights
he or she may assert against the Company, indicating, should such be the case,
the nature and value thereof. Likewise, the CBCA and the Companys bylaws
provide that a director who is a party to, or who is a director or officer of,
or has a material interest in, any person who is a party to a material contract
or transaction or proposed material contract or transaction with the Company
must disclose to the Company the nature and extent of his or her interest at
the time and in the manner provided by the CBCA, or request that same be
entered in the minutes of the meetings of the Board, even if such contract, in
connection with the normal business activity of the Company, does not require
the approval of either the directors or the shareholders. At the request of the
president or any director, the director placed in a situation of conflict of
interest must leave the meeting while the Board discusses the matter. The CBCA
and the Companys bylaws prohibit such a director from voting on any resolution
to approve the contract or transaction unless the contract or transaction:
·
relates primarily to his or her remuneration as
a director, officer, employee or agent of the Company or an affiliate;
·
is for indemnity or insurance for directors
liability as permitted by the CBCA; or
·
is with an affiliate of the Company.
The
CBCA provides that the Board may, on behalf of the Company and without
authorization of its shareholders:
·
borrow money upon the credit of the Company;
·
issue, reissue, sell or pledge debt obligations
of the Company;
·
give a guarantee on behalf of the Company to
secure performance of an obligation of any person; and
·
mortgage, hypothecate, pledge or otherwise
create a security interest in all or any property of the Company, owned or
subsequently acquired, to secure any obligation of the Company.
The
shareholders have the ability to restrict such powers through the Companys
Restated Articles of Incorporation or bylaws (or through a unanimous
shareholder agreement), but no such restrictions are in place.
In
addition, the Companys bylaws provide that the Board may:
·
subject to the provisions of the Companys
Restated Articles of Incorporation, accept subscriptions, allot, issue all or
part of the unissued shares of the Company, grant options in respect of such
shares or otherwise dispose thereof to such persons, on such terms and
conditions and for such consideration and in such manner not contrary to the
CBCA or the Restated Articles of Incorporation of the Company as the directors
think fit; and
·
from time to time as it may deem advisable and
to the extent permitted by the CBCA, declare and pay to the shareholders,
according to their rights, dividends in money or property or in the form of
shares of the Company.
The
CBCA prohibits the giving of a guarantee to any shareholder, director, officer
or employee of the Company or of an affiliated corporation or to an associate
of any such person for any purpose or to any person for the purpose of or in
connection with a purchase of a share issued or to be issued by the Company or
its affiliates, where there are reasonable grounds for believing that the
Company is or, after giving the guarantee, would be unable to pay its
liabilities as they become due, or the realizable value of the Companys assets
in the form of assets pledged or encumbered to secure a guarantee, after giving
the guarantee, would be less than the aggregate of the Companys liabilities
and stated capital of all classes. These borrowing powers may be varied by the
Companys bylaws or its Restated Articles of Incorporation. However, the
Companys bylaws and Restated Articles of Incorporation do not contain any
restrictions on or variations of these borrowing powers.
97
Table
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Pursuant
to the Companys bylaws, the directors of the Company manage and administer the
business and affairs of the Company and exercise all such powers and authority
as the Company is authorized to exercise pursuant to the Act, the Restated
Articles of Incorporation and the bylaws. The general duties of a director or
officer of the Company under the CBCA are to act honestly and in good faith
with a view to the best interests of the Company and to exercise the care,
diligence and skill that a reasonably prudent person would exercise in
comparable circumstances. Any breach of these duties may lead to liability to
the Company and its shareholders for breach of fiduciary duty. In addition, a
breach of certain provisions of the CBCA, including the improper payment of
dividends or the improper purchase or redemption of shares, will render the
directors who authorized such action liable to account to the Company for any
amounts improperly paid or distributed.
The
Companys bylaws provide that the Board may, from time to time, appoint from
amongst their number committees of the Board, and delegate to any such
committee any of the powers of the Board except those which pursuant to the
CBCA a committee of the Board has no authority to exercise. As such, the Board
has two standing committees: the Audit Committee and the Corporate Governance,
Nominating and Human Resources Committee.
Subject
to the limitations provided by the CBCA, the Company must indemnify a director
or an officer of the Company, a former director or officer of the Company or a
person who acts or acted at the Companys request as a director or officer of a
body corporate of which the Company is or was a shareholder or creditor, and
his or her heirs and legal representatives, against all costs, losses, charges
and expenses, including an amount paid to settle an action or satisfy a
judgment, reasonably incurred by him or her in respect of any civil, criminal
or administrative action or proceeding to which he or she is made a party by
reason of having been a director or officer of the Company or such body
corporate, provided:
(a)
he or she
acted in good faith in the best interests of the Company; and
(b)
in the
case of a criminal or an administrative action or proceeding that is enforced
by a monetary penalty, he or she had reasonable grounds to believe that his or
her conduct was lawful.
The directors of the Company are authorized to
indemnify from time to time any director or other person who has assumed or is
about to assume in the normal course of business any liability for the Company
or for any corporation controlled by the Company, and to secure such director
or other person against any loss by the pledge of all or part of the movable or
immovable property of the Company through the creation of a hypothec or any
other real right in all or part of such property or in any other manner.
Share Capitalization
The
Companys Restated Articles of Incorporation authorize the issuance of an
unlimited number of common shares and an unlimited number of Preferred Shares.
All classes are without nominal or par value. The Restated Articles of
Incorporation do not authorize the issuance of any other class of shares. On
March 20
,
2009, there were 53,187,470 common shares and no Preferred Shares issued and
outstanding.
Common Shares
: The holders of the
common shares are entitled to one vote for each common share held by them at
all meetings of shareholders, except meetings at which only shareholders of a
specified class of shares are entitled to vote. In addition, the holders are
entitled to receive dividends if, as and when declared by the Board on the
common shares. Finally, the holders of the common shares are entitled to
receive the remaining property of the Company upon any liquidation, dissolution
or winding-up of the affairs of the Company, whether voluntary or involuntary.
Shareholders have no liability to further capital calls as all shares issued
and outstanding are fully paid and non-assessable.
Preferred Shares
: The First and
Second Preferred Shares are issuable in series with rights and privileges
specific to each class. The holders of Preferred Shares are not entitled to
receive notice of or to attend or vote at meetings of shareholders. No
Preferred Shares of the Company have been issued to date.
The
holders of First Preferred Shares are entitled to preference and priority to
any participation of holders of Second Preferred Shares, common shares or
shares of any other class of shares of the share capital of the Company ranking
junior to the First Preferred Shares in regards to dividends and, in the event
of the liquidation of the Company, the distribution of its property upon its
dissolution or winding-up, or the distribution of all or part of its assets
among the shareholders, to an amount equal to the value of the consideration
paid in respect of such shares outstanding, as credited to the issued and
paid-up share capital of the Company, on an equal basis, in proportion to the
amount of their respective claims in regard to such shares held by them. The
holders of Second Preferred Shares are entitled to preference and priority to
any participation of holders of common shares or shares of any other class of
shares of the share capital of the Company ranking junior to the
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Second
Preferred Shares with respect to dividends and, in the event of the liquidation
of the Company, the distribution of its property upon its dissolution or
winding-up, or the distribution of all or part of its assets among the
shareholders, to an amount equal to the value of the consideration paid in
respect of such shares outstanding, as credited to the issued and paid-up share
capital of the Company, on an equal basis, in proportion to the amount of their
respective claims in regard to such shares held by them.
The
Board may, from time to time, provide for series of Preferred Shares to be
created and issued, but the issuance of any Preferred Share is subject to the
general duties of the directors under the CBCA to act honestly and in good
faith with a view to the best interests of the Company and to exercise the
care, diligence and skill that a reasonably prudent person would exercise in
comparable circumstances. The issuance of any Preferred Shares in the face of a
take-over bid for the Company would be examined in light of these duties of the
directors and other applicable case law.
Shareholder
Actions
The
CBCA provides that shareholders of the Company may, with leave of a court,
bring an action in the name of and on behalf of the Company for the purpose of
prosecuting, defending or discontinuing an action on behalf of the Company. In
order to grant leave to permit such an action, the CBCA provides that the court
must be satisfied that the directors of the Company were given adequate notice
of the application, the shareholder is acting in good faith and that it appears
to be in the Companys best interests that the action be brought.
Shareholder
Rights Plan
Objectives and Background of the
Shareholder Rights Plan
The
fundamental objectives of the Companys Shareholder Rights Plan (the Rights
Plan) are to provide adequate time for our Board and shareholders to assess an
unsolicited take-over bid for the Company, to provide the Board with sufficient
time to explore and develop alternatives for maximizing shareholder value if a
take-over bid is made, and to provide shareholders with an equal opportunity to
participate in a take-over bid.
The
Rights Plan encourages a potential acquiror who makes a take-over bid to
proceed either by way of a Permitted Bid, which requires a take-over bid to
satisfy certain minimum standards designed to promote fairness, or with the
concurrence of the Companys Board. If a take-over bid fails to meet these
minimum standards and the Rights Plan is not waived by the Board, the Rights
Plan provides that holders of common shares, other than the potential acquiror,
will be able to purchase additional common shares at a significant discount to
market, thus exposing the potential acquiror of common shares to substantial
dilution of its holdings.
Summary of the Rights Plan
The
following is a summary of the principal terms of the Rights Plan, which summary
is qualified in its entirety by reference to the terms thereof. The Rights Plan
is filed as an exhibit to this annual report on Form 20-F.
Operation of the Rights Plan
Pursuant
to the terms of the Rights Plan, one right was issued in respect of each common
share outstanding as at the close of business on March 29, 2004 (the Record
Time). In addition, one right will be issued for each additional common share
issued after the Record Time and prior to the earlier of the Expiration Time
and the Separation Time (as defined below). The rights have an initial exercise
price equal to the Market Price (as defined below) of the common shares as
determined at the Separation Time, multiplied by five, subject to certain
adjustments, and they are not exercisable until the Separation Time. Upon the
occurrence of a Flip-in Event (as defined below), each right will entitle the
holder thereof, other than an Acquiring Person (as defined below), to purchase
from the Company one common share upon payment to the Company of 50% of the
Market Price of the common shares on the TSX on the date of consummation or
occurrence of such Flip-in Event, subject to certain anti-dilution adjustments.
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Trading of Rights
Until
the Separation Time, the rights trade with the common shares and are
represented by the same share certificates as the common shares or an entry in
the Companys securities register in respect of any outstanding common shares.
From and after the Separation Time and prior to the Expiration Time, the rights
are evidenced by rights certificates and trade separately from the common
shares. The rights do not carry any of the rights attaching to the common
shares such as voting or dividend rights.
Separation Time
The
rights will separate from the common shares to which they are attached and
become exercisable at the time (the Separation Time) of the close of business
on the eighth business day after the earliest to occur of:
·
the first date (the Stock Acquisition Date)
of a public announcement of facts indicating that a person has become an
Acquiring Person (as defined below);
·
the date of the commencement of, or first
public announcement of the intention of any person (other than the Company or
any of its subsidiaries) to commence a take-over bid or a share exchange bid
for more than 20% of the outstanding common shares of the Company other than a
Permitted Bid or a Competing Permitted Bid (as defined below); and
·
the date upon which a Permitted Bid or a
Competing Permitted Bid ceases to be a Permitted Bid or a Competing Permitted
Bid, as the case may be.
The
Separation Time can also be such later time as may from time to time be
determined by the Board.
Flip-in Event
The
acquisition by a person (an Acquiring Person), including others acting
jointly or in concert with such person, of more than 20% of the outstanding
common shares, other than by way of a Permitted Bid, a Competing Permitted Bid
or in certain other limited circumstances described in the Rights Plan, is
referred to as a Flip-in Event.
Definition of Market Price
Market
Price is generally defined in the Rights Plan, on any given day on which a
determination must be made, as the average of the daily closing prices per
common share on each of the 20 consecutive Trading Days (as defined below)
through and including the Trading Day immediately preceding such date of
determination; subject to certain exceptions. Trading Day is generally defined
as the day on which the principal Canadian or United States stock exchange (as
determined by the Board acting in good faith) on which the common shares are
listed or admitted to trading is open for the transaction of business.
Exercise of Rights
Upon
the Separation Time or the effective date of the Flip-in Event, whichever
occurs first, each right (other than those held by the Acquiring Person) will
entitle the holder thereof to purchase from the Company one common share upon
payment to the Company of 50% of the Market Price of the common shares of the
Company on the Stock Acquisition Date subject to certain anti-dilution
adjustments.
Permitted Bid Requirements
The
requirements of a Permitted Bid include the following:
(1)
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the
take-over bid must be made by means of a take-over bid circular;
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(2)
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the
take-over bid must be made to all holders of common shares wherever resident,
on identical terms and conditions, other than the bidder;
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(3)
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the
take-over bid must not permit common shares tendered pursuant to the bid to
be taken up or paid for:
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a)
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prior
to the close of business on a date which is not less than 60 days following
the date of the bid, and
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b)
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then
only if at such date more than 50% of the then outstanding common shares held
by shareholders other than any other Acquiring Person, the bidder, the
bidders affiliates or associates, persons acting jointly or in concert with
the bidder and any employee benefit plan, deferred profit-sharing plan, stock
participation plan or trust for the benefit of employees of the Company or
any of its subsidiaries, unless the beneficiaries of such plan or trust
direct the manner in which the common shares are to be voted or direct
whether the common shares are to be tendered to a take-over bid (the
Independent Shareholders), have been deposited or tendered to the take-over
bid and not withdrawn.
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(4)
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the
take-over bid must allow common shares to be deposited, unless the take-over
bid is withdrawn, at any time up to the close of business on the date that
the common shares are to be first taken up and paid for;
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(5)
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the
take-over bid must allow common shares to be withdrawn until taken up and
paid for; and
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(6)
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if
more than 50% of the then outstanding common shares held by Independent
Shareholders are deposited or tendered to the take-over bid and not
withdrawn, the bidder must make a public announcement of that fact and the
take-over bid must remain open for deposits and tenders of common shares for
not less than 10 days from the date of such public announcement.
|
The
Rights Plan allows a competing Permitted Bid (a Competing Permitted Bid) to
be made while a Permitted Bid is in existence. A Competing Permitted Bid must
satisfy all the requirements of a Permitted Bid other than the requirements set
out in clauses (3) and (6) above and must not permit common shares
tendered or deposited pursuant to the bid to be taken up or paid for (a) prior
to the close of business on a date which is not earlier than the latter of the
last day on which the bid must be open for acceptance after the date of the bid
under applicable Canadian provincial securities legislation and the earliest
date on which common shares of the Company may be taken up and paid for under
any earlier Permitted Bid or Competing Permitted Bid that is then in existence,
and (b) then only if at such date more than 50% of the then outstanding
common shares held by the Independent Shareholders have been deposited or
tendered to the take-over bid and not withdrawn. In the event that the
requirement set forth in (b) of this paragraph is satisfied, the competing
bidder must make a public announcement of the fact and the take-over bid must
remain open for deposits and tenders of common shares for not less than 10 days
from the date of such public announcement.
Waiver and Redemption
The
Board may, prior to the occurrence of a Flip-in Event, waive the dilutive
effects of the Rights Plan in respect of, among other things, a particular
Flip-in Event resulting from a take-over bid made by way of a take-over bid
circular to all holders of common shares of the Company. In such an event, such
waiver shall also be deemed to be a waiver in respect of any other Flip-in
Event occurring under a take-over bid made by way of a take-over bid circular
to all holders of common shares prior to the expiry of the first mentioned
take-over bid. The Board may, at any time prior to the Separation Time, elect
to redeem all but not less than all of the outstanding rights at a price of
CAN$0.00001 each.
Amendment to the Rights Plan
The
Rights Plan may be amended to correct any clerical or typographical error or to
make such changes as are required to maintain the validity of the Rights Plan
as a result of any change in any applicable legislation, regulations or rules thereunder,
without the approval of the holders of the common shares or rights. Prior to
the Separation Time, the Company may, with the prior consent of the holders of
common shares, amend, vary or delete any of the provisions of the Rights Plan
in order to effect any changes which the Board, acting in good faith, considers
necessary or desirable. The Company may, with the prior consent of the holders
of rights, at any time after the Separation Time and before the Expiration
Time, amend, vary or delete any of the provisions of the Rights Plan. The
Rights Plan, including the amendments thereto and the restatement thereof, was approved
by the Board on March 2, 2007, was signed on March 5, 2007 and was
ratified and confirmed by the Companys shareholders on May 2, 2007.
Fiduciary Duty of Board
The
Rights Plan will not detract from or lessen the duty of the Board to act
honestly and in good faith with a view to the best interests of the Company and
its shareholders. The Board will continue to have the duty and power to take
such actions and make such recommendations to the Companys shareholders as are
considered appropriate.
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Exemptions for Investment Advisors
Fund
managers, investment advisors (for fully-managed accounts), trust companies
(acting in their capacities as trustees and administrators), statutory bodies
whose business includes the management of funds, and administrators of
registered pension plans are exempt under the Rights Plan from triggering a
Flip-in Event, provided that they are not making, or are not part of a group
making, a take-over bid.
Action Necessary to Change Rights of Shareholders
In
order to change the rights of its shareholders, the Company would need to amend
its Restated Articles of Incorporation to effect the change. Such an amendment
would require the approval of holders of two-thirds of the issued and
outstanding shares cast at a duly called special meeting. For certain
amendments such as those creating a class of Preferred Shares, a shareholder is
entitled under the CBCA to dissent in respect of such a resolution amending the
Restated Articles of Incorporation and, if the resolution is adopted and the
Company implements such changes, demand payment of the fair value of its
shares.
Disclosure of Share Ownership
In
general, under applicable securities regulation in Canada, a person or company
who beneficially owns, directly or indirectly, voting securities of a reporting
issuer or who exercises control or direction over voting securities of an
issuer or a combination of both, carrying more than ten percent of the voting
rights attached to all the issuers outstanding voting securities is an insider
and must, within ten days of becoming an insider, file a report in the required
form effective the date on which the person became an insider, disclosing any
direct or indirect beneficial ownership of, or control or direction over,
securities of the reporting issuer.
Additionally,
securities regulation in Canada provides for the filing of a report by an insider
of a reporting issuer whose holdings change, which report must be filed within
ten days from the day on which the change takes place.
Section 13
of the
United States
Securities Exchange Act of 1934
(the Exchange Act) imposes
reporting requirements on persons who acquire beneficial ownership (as such
term is defined in the Rule 13d-3 under the Exchange Act) of more than
five percent of a class of an equity security registered under Section 12
of the Exchange Act. The Companys common shares are so registered. In general,
such persons must file, within ten days after such acquisition, a report of
beneficial ownership with the SEC containing the information prescribed by the
regulations under Section 13 of the Exchange Act. This information is also
required to be sent to the issuer of the securities and to each exchange where
the securities are traded.
Meeting of Shareholders
An
annual meeting of shareholders is held each year for the purpose of considering
the financial statements and reports, electing directors, appointing auditors
and fixing or authorizing the Board to fix their remuneration and for the
transaction of other business as may properly come before a meeting of
shareholders. Any annual meeting may also constitute a special meeting to take
cognizance and dispose of any matter of which a special meeting may take
cognizance and dispose. Under the bylaws, the president of the Company has the
power to call a meeting of shareholders.
While
the bylaws provide that one or more shareholders who hold at least 20% of the
outstanding voting shares of the Company may requisition the directors of the
Company to call a meeting of shareholders for the purpose stated in the
requisition, the CBCA provides that the holders of not less than 5% of the outstanding
voting shares of the Company may so requisition the directors of the Company.
Except in limited circumstances, including where a meeting of shareholders has
already been called and a notice of meeting already given or where it is clear
that the primary purpose of the requisition is to redress a personal grievance
against the Company or its directors, officers or shareholders, the directors
of the Company, on receipt of such requisition, must call a meeting of
shareholders. If the directors fail to call a meeting of shareholders within
twenty-one days after receiving the requisition, any shareholder who signed the
requisition may call the meeting of shareholders and, unless the shareholders
resolve otherwise at the meeting, the Company shall reimburse the shareholders
for the expenses reasonably incurred by them in requisitioning, calling and
holding the meeting of shareholders.
The
CBCA also provides that, except in limited circumstances, a resolution in
writing signed by all of the shareholders entitled to vote on that resolution
at a meeting of shareholders is as valid as if it had been passed at a meeting
of shareholders.
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A
quorum of shareholders is present at an annual or special meeting of
shareholders, regardless of the number of persons present in person at the
meeting, if the holder or holders of shares representing at least 20% of the
outstanding voting shares at such meeting are present in person or represented
in accordance with the Companys bylaws. In the case where the CBCA, the
Restated Articles of Incorporation or the bylaws of the Company require or
permit the vote by class of holders of a given class of shares of the share
capital of the Company, the quorum at any meeting will be one or more persons
representing 20% of the outstanding shares of such class.
Notice
of the time and place of each annual or special meeting of shareholders must be
given not less than 21 days, nor more than 50 days, before the date of each
meeting to each director, to the auditor and to each shareholder entitled to
vote thereat. If the address of any shareholder, director or auditor does not
appear in the books of the Company, the notice may be sent to such address as
the person sending the notice may consider to be most likely to reach such
shareholder, director or auditor promptly. Every person who, by operation of
the CBCA, transfers or by any other means whatsoever, becomes entitled to any
share, shall be bound by every notice given in respect of such share which,
prior to the entry of his or her name and address on the register of the Company,
is given to the person whose name appears on the register at the time such
notice is sent. Notice of meeting of shareholders called for any other purpose
other than consideration of the financial statements and auditors report,
election of directors and reappointment of the incumbent auditor, must state
the nature of the business in sufficient detail to permit the shareholder to
form a reasoned judgment on and must state the text of any special resolution
or bylaw to be submitted to the meeting.
Limitations on Right to Own Securities
Neither
Canadian law nor the Companys Restated Articles of Incorporation or bylaws
limit the right of a non-resident to hold or vote common shares, other than as
provided in the
Investment Canada Act
(the Investment
Act). The Investment Act prohibits implementation of certain direct reviewable
investments by an individual, government or agency thereof, corporation,
partnership, trust or joint venture that is not a Canadian, as defined in the
Investment Act (a non-Canadian), unless, after review, the minister
responsible for the Investment Act is satisfied or is deemed to be satisfied
that the investment is likely to be of net benefit to Canada. An investment in
the common shares of the Company by a non-Canadian (other than a WTO Investor,
as defined below) would be reviewable under the Investment Act if it were an
investment to acquire direct control of the Company, and the book value of the
assets of the Company were CAN$5.0 million or more (provided that immediately
prior to the implementation of the investment the Company was not controlled by
WTO Investors). Subject to the Amendments (as defined below), an investment in
common shares of the Company by a WTO Investor would be reviewable under the
Investment Act if it were an investment to acquire direct control of the
Company and the value of the assets of the Company equalled or exceeded
CAN$312 million (for 2009). A non-Canadian, whether a WTO Investor or
otherwise, would be deemed to acquire control of the Company for purposes of
the Investment Act if he or she acquired a majority of the common shares of the
Company. The acquisition of less than a majority, but at least one-third of the
shares, would be presumed to be an acquisition of control of the Company, unless
it could be established that the Company was not controlled in fact by the
acquirer through the ownership of the shares. In general, an individual is a
WTO Investor if he or she is a national of a country (other than Canada) that
is a member of the World Trade Organization (WTO Member) or has a right
of permanent residence in a WTO Member. A corporation or other entity will be a
WTO Investor if it is a WTO Investor-controlled entity, pursuant to
detailed rules set out in the Investment Act. The United States is a
WTO Member. Certain transactions involving the common shares would be exempt
from the Investment Act, including: (a) an acquisition of the shares if
the acquisition were made in the ordinary course of that persons business as a
trader or dealer in securities; (b) an acquisition of control of the
Company in connection with the realization of a security interest granted for a
loan or other financial assistance and not for any purpose related to the
provisions of the Investment Act; and (c) an acquisition of control of the
Company by reason of an amalgamation, merger, consolidation or corporate
reorganization, following which the ultimate direct or indirect control in fact
of the Company, through the ownership of voting interests, remains unchanged.
The
Canadian Federal Government has recently adopted certain amendments (the Amendments)
to the Investment Act. Some of the Amendments, which came into force on February 6,
2009, introduce a national security test and review process, authorizing the
Canadian Minister of Industry to review investments that could be injurious to
national security, regardless of the size of the transaction. Some of the
other Amendments will come into force on a day to be fixed by order of the
Canadian Governor in Council, including the increase to the thresholds that
trigger governmental review for WTO Investors. Therefore, the thresholds for
the review of direct acquisitions of control by WTO Investors would increase
from the current CAN$312 million (based on book value) to
CAN$600 million (to be based on the enterprise value of the
Canadian business) for the two years after such Amendments come into force, to
CAN$800 million in the following two years and then to CAN$1 billion
for the next two years. Thereafter, the thresholds are to be adjusted to
account for inflation. A number of the Amendments still require additional
definition and details, which will be set forth in regulations promulgated
under the Investment Act.
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C. Material contracts
Other than as disclosed herein under Shareholder
Rights Plan and below, and except for contracts entered into in the ordinary
course of business, there are no material contracts to which the Company or any
of its subsidiaries is a party other than the employment agreements and change
of control agreements with our executive officers as described below.
Employment Agreements
The Company and/or its subsidiaries have entered into employment
agreements (the Employment Agreements) with each of the Named Executive
Officers. The Employment Agreements provide that we will pay the Named
Executive Officers a base salary and an annual bonus and that such executives
will be eligible to receive grants of stock options which will be reviewed
annually in accordance with our policies. The Employment Agreements have an
indefinite term. However, in addition to his Employment Agreement, Dr. Engel
had previously entered into a service contract in his prior capacity as
Managing Director with AEZS Germany, our principal subsidiary, which service
contract expires on August 31, 2010. Furthermore, each of the Employment
Agreements provides that, if we terminate the employment of a Named Executive
Officer without cause, then the executive will be entitled to receive, in the
case of Dr. Engel, a lump-sum payment, less statutory deductions, of the
equivalent of twelve months of his then applicable base salary, an amount
equivalent to the annual bonus received for the most recently completed year
and an amount equivalent to twelve months of the cost of the other benefits to
which he is entitled (such amounts increasing to the equivalent of 24 months of
his then applicable base salary and twice his annual bonus received for the
last completed year, commencing in March 2010). In the case of Mr. Turpin,
the lump sum will be equivalent to 18 months of his then applicable base
salary, 1.5 times the annual bonus of the preceding year and 18 months of the
value of the other benefits to which he is entitled. In the case of Dr. Blake
and Messrs. Pelliccione and Seeber, they are entitled to receive, upon
termination of employment without cause, a lump sum equivalent to twelve months
of their then applicable base salaries, an amount equivalent to the annual
bonus received for the preceding year and twelve months of the value of the
other benefits to which they are entitled.
Furthermore, each Named Executive Officer shall not, directly or
indirectly, solicit any of our customers for the purpose or intent of selling
them any products which are similar or otherwise competing with our products;
nor shall any Named Executive Officer induce, entice or otherwise attempt to
directly or indirectly hire or engage any of our employees, for a period equal
to one year following such executives termination of employment with the
Company.
Pursuant
to the Employment Agreements, each of the Named Executive Officers is also
entitled to certain payments (the Change of Control Payments) in the event (i) a
Change of Control occurs and (ii) during the twelve-month period
following the Change of Control, either the Company terminates the employment
of the executive without Cause or the executive terminates his or her
employment for Good Reason.
The
Change of Control Payments are as follows:
·
for Dr. Engel and Mr. Seeber, (i) the
equivalent of 24 months of their then prevailing annual base salaries, (ii) an
amount equivalent to twice the annual bonus, if any, which the executive would
have been entitled to receive in the year during which the Change of Control
occurred, and (iii) an amount equivalent to 24 months of the value of the
benefits which were in force at the time of termination of the executives
employment, calculated on a yearly basis, including car allowance, but
excluding operating costs; and
·
for Mr. Turpin, Dr. Blake and Mr. Pelliccione
(i) the equivalent of 18 months of their then prevailing annual base
salaries, (ii) an amount equivalent to 1.5 times the annual bonus, if any,
which the executive would have been entitled to receive in the year during
which the Change of Control occurred, and (iii) an amount equivalent to 18
months of the value of the benefits which were in force at the time of
termination of the executives employment, calculated on a yearly basis,
including car allowance, but excluding operating costs.
All Change of Control Payments described above
are
subject to applicable
statutory withholdings. In addition, any outstanding stock options held by a
Named Executive Officer are unaffected by the change of control provisions included
in the Employment Agreements and, in the event of a Change of Control followed
by termination of employment within twelve months, such stock options will be
treated in accordance with the applicable provisions of the Stock Option Plan
described elsewhere in this annual report.
For the purposes of the Employment Agreements
(including the annexes and schedules thereto):
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·
a Change of Control shall be deemed to have occurred in any of the
following circumstances: (i) subject to certain exceptions, upon the
acquisition by a person (or one or more persons who are affiliates of one
another or who are acting jointly or in concert) of a beneficial interest in
securities of the Company representing in any circumstance 50% or more of the
voting rights attaching to the then outstanding securities of the Company; (ii) upon
a sale or other disposition of all or substantially all of the Companys
assets; (iii) upon a plan of liquidation or dissolution of the Company; or
(iv) if, for any reason, including an amalgamation, merger or
consolidation of the Company with or into another company, the individuals who,
as at the date of the relevant Employment Agreement, constituted the Board (and
any new directors whose appointment by the Board or whose nomination for
election by the Companys shareholders was approved by a vote of at least
two-thirds of the directors then still in office who either were directors as
at the date of the relevant Employment Agreement or whose appointment or
nomination for election was previously so approved) cease to constitute a
majority of the members of the Board;
·
termination
of employment by the Company for Cause includes (but is not limited to) (i) if
the Executive commits any fraud, theft, embezzlement or other criminal act of a
similar nature, and (ii) if the Executive is guilty of serious misconduct
or willful negligence in the performance of his duties; and
·
termination
of employment by the executive officer for Good Reason means the occurrence, without the executives
express written consent, of any of the following acts: (i) a material
reduction of the executives total compensation (including annual base salary
plus annual bonus, benefits and number of stock options) as in effect on the
date of the relevant Employment Agreement or as same may be increased from time
to time; (ii) a material reduction or change in the executives duties,
authority, responsibilities, accountability or a change in the business or
corporate structure of the Company which materially affects his or her
authority, compensation or ability to perform duties or responsibilities (such
as shifting from a policy-making to a policy-implementation position); (iii) a
forced relocation; or (iv) a material change in the terms and conditions
of the change of control provisions included in the relevant Employment
Agreement.
Other
Material Contracts
On March 5, 2009, we entered into a
development, commercialization and licensing agreement with sanofi-aventis for
the development, registration and marketing of cetrorelix in benign prostatic
hyperplasia (BPH) for the U.S. market. Under the terms of the agreement,
sanofi-aventis made an initial $30 million upfront payment to us, and we will
also be entitled to receive up to $135 million in additional payments upon
achieving certain pre-established regulatory and commercial milestones. We will
also be entitled to receive escalating double-digit royalties on future net
sales of cetrorelix for BPH in the United States.
In November 2008, we signed a definitive
agreement to sell to CHRP our rights to royalties on future sales of Cetrotide
®
covered by our license agreement with Merck
Serono. This license agreement was signed in 2000 and granted Merck Serono
exclusive rights to market, distribute and sell Cetrotide
®
worldwide, with the exception of Japan, in the
field of
in vitro
fertilization. On closing, we
received $52.5 million from CHRP (less transaction costs of $1.0 million) and,
contingent on 2010 net sales of Cetrotide
®
reaching a
specified level, we would receive an additional payment of $2.5 million from
CHRP. Under the terms of the agreement, if cetrorelix is approved for sale by
the European regulatory authorities in an indication other than
in vitro
fertilization, we have agreed to make a one-time
cash payment to CHRP in an amount ranging from $5 million up to $15 million.
D. Exchange controls
Canada
has no system of exchange controls. There are no exchange restrictions on
borrowing from foreign countries or on the remittance of dividends, interest,
royalties and similar payments, management fees, loan repayments, settlement of
trade debts or the repatriation of capital. There are no limits on the rights
of non-Canadians to exercise voting rights on their common shares of the
Company.
E. Taxation
THE FOLLOWING SUMMARY IS OF
A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED TO
BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER. CONSEQUENTLY, HOLDERS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS FOR ADVICE AS TO THE TAX CONSEQUENCES OF AN INVESTMENT
IN THE COMMON SHARES HAVING REGARD TO THEIR PARTICULAR CIRCUMSTANCES.
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The following summary
describes the principal Canadian federal income tax consequences to a purchaser
who acquires common shares (a holder) who, for the purposes of the Canadian
federal
Income Tax Act
, R.S.C. 1985, as amended
(The Tax Act), deals at arms length with, and is not affiliated with, the
Corporation and holds common shares as capital property. The common shares will generally be
considered to be capital property for this purpose unless either the holder
holds such common shares in the course of carrying on a business, or the holder
has held or acquired such common shares in a transaction or transactions
considered to be an adventure in the nature of trade.
This summary is not
applicable to a holder an interest in which is a tax shelter investment as
defined in the Tax Act, or to a holder which is a financial institution as
defined in the Tax Act subject to the mark-to-market rules set out
therein. Such holders should consult
their own tax advisors.
This summary is based upon
the current provisions of the Tax Act and the regulations thereunder and the
Companys understanding of the current published administrative practices and
policies of the Canada Revenue Agency (CRA).
It also takes into account all proposed amendments to the Tax Act and
the regulations publicly released by the Minister of Finance (Canada) (Tax
Proposals), and assumes that all such Tax Proposals will be enacted as
currently proposed. No assurance can be
given that the Tax Proposals will be enacted in the form proposed or at
all. This summary does not otherwise
take into account or anticipate any changes in law, whether by way of
legislative, judicial or administrative action or interpretation, nor does it
address any provincial, territorial or foreign tax considerations.
Holders Not
Resident in Canada
The following discussion
applies to a holder of common shares who, at all relevant times, for purposes
of the Tax Act and any applicable income tax treaty or convention, is neither
resident nor deemed to be resident in Canada and does not, and is not deemed
to, use or hold common shares, in carrying on a business or part of a business
in Canada (a Non-Resident holder). In
addition, this discussion does not apply to an insurer who carries on an
insurance business in Canada and elsewhere or to an authorized foreign bank (as
defined in the Tax Act).
Disposition of Common Shares
A Non-Resident holder will
not be subject to tax under the Tax Act in respect of any capital gain realized
by such Non-Resident holder on a disposition of common shares unless such
shares constitute taxable Canadian property (as defined in the Tax Act) of
the Non-Resident holder at the time of disposition and the holder is not
entitled to relief under the applicable income tax treaty or convention. As long as the common shares are then listed
on a designated stock exchange (which currently includes the NASDAQ and the
TSX), the common shares generally will not constitute taxable Canadian property
of a Non-Resident holder, unless at any time during the 60-month period
immediately preceding the disposition, the Non-Resident holder, persons with whom
the Non-Resident holder did not deal at arms length, or the Non-Resident
holder together with all such persons, owned 25% or more of the issued shares
of any class or series of shares of the capital stock of the Corporation. If the common shares were to cease being
listed on the NASDAQ, the TSX or another recognized stock exchange, a
Non-Resident holder who disposes of common shares that are taxable Canadian
property may be required to fulfill the requirements of section 116 of the Tax
Act. An exemption from such requirements is available on the disposition of treaty-protected
property, which is property any income or gain on the disposition of which is
exempt from tax under Part I of the Tax Act as a result of an applicable
income tax treaty or convention.
Taxation of Dividends on Common Shares
Dividends paid or credited
or deemed to be paid or credited on the common shares to a Non-Resident holder
will be subject to a Canadian withholding tax in the amount of 25%. Such withholding tax may be reduced by virtue
of the provisions of an income tax treaty or convention between Canada and the
country of which the Non-Resident holder is a resident. Under the Canada-United States Income Tax
Convention (the
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Convention), the rate of
withholding tax in respect of dividends or deemed dividends beneficially owned
by a resident of the United States entitled to the benefits of the Convention
is generally reduced to 15%.
Holders
Resident in Canada
The following discussion
applies to a holder of common shares who, at all relevant times, for purposes
of the Tax Act and any applicable income tax treaty or convention, is resident
in Canada (a Canadian holder). Certain
Canadian holders whose common shares might not otherwise qualify as capital
property may, in certain circumstances, treat the common shares and other Canadian
securities as defined in the Tax Act, as capital property by making an
irrevocable election provided by subsection 39(4) of the Tax Act.
Taxation of Dividends on Common Shares
Dividends received or deemed
to be received on the common shares will be included in a Canadian holders
income for purposes of the Tax Act. Such
dividends received or deemed to be received by a Canadian holder that is an
individual (other than certain trusts) will be subject to the gross-up and
dividend tax credit rules generally applicable under the Tax Act in
respect of dividends received on shares of taxable Canadian corporations. Generally, a dividend will be eligible to the
enhanced gross-up and dividend tax credit if the recipient receives written
notice from the corporation designating the dividend as an eligible dividend
(within the meaning of the Tax Act).
There may be limitations on the ability of the Corporation to designate
dividends as eligible dividends. A
Canadian holder that is a corporation will include such dividends in computing
its income and will generally be entitled to deduct the amount of such
dividends in computing its taxable income.
A Canadian holder that is a private corporation or a subject
corporation (as such terms are defined in the Tax Act), may be liable under Part IV
of the Tax Act to pay a refundable tax of 33
1
/
3
% on dividends received or deemed to be received on the common shares
to the extent such dividends are deductible in computing the holders taxable
income.
Disposition of Common Shares
A disposition, or a deemed
disposition, of a common share by a Canadian holder will generally give rise to
a capital gain (or a capital loss) equal to the amount by which the proceeds of
disposition of the share, net of any reasonable costs of disposition, exceed
(or are less than) the adjusted cost base of the share to the holder. Such capital gain (or capital loss) will be
subject to the treatment described below under Taxation of Capital Gains and
Capital Losses.
Additional Refundable Tax
A Canadian holder that is a Canadian-controlled
private corporation (as such term is defined in the Tax Act) may be liable to
pay an additional refundable tax of 6
2
/
3
% on certain investment income including amounts
in respect of Taxable Capital Gains, as defined below.
Taxation of Capital Gains and Capital Losses
In general, one half of any
capital gain (a Taxable Capital Gain) realized by a Canadian holder in a
taxation year will be included in the holders income in the year. Subject to and in accordance with the
provisions of the Tax Act, one half of any capital loss (an Allowable Capital
Loss) realized by a Canadian holder in a taxation year must be deducted from
Taxable Capital Gains realized by the holder in the year and Allowable Capital
Losses in excess of Taxable Capital Gains may be carried back and deducted in
any of the three preceding taxation years or carried forward and deducted in
any subsequent taxation year against net taxable capital gains realized in such
years. The amount of any capital loss
realized by a Canadian holder that is a corporation on the disposition of a
common share may be reduced by the amount of dividends received or deemed to be
received by it on such common share (or on a share for which the common share
has been substituted) to the extent and under the circumstances prescribed by
the Tax Act. Similar rules may
apply where a corporation is a member of a partnership or a beneficiary of a
trust that owns common shares, directly or indirectly, through a partnership or
a trust. A Taxable Capital Gain realized
by a Canadian holder who is an individual may give rise to liability for
alternative minimum tax.
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Certain
U.S. Federal Income Tax Considerations
The following
discussion is a summary of certain U.S. federal income tax consequences
applicable to the ownership and disposition of common shares (Shares) by a
U.S. Holder (as defined below), but does not purport to be a complete analysis
of all potential U.S. federal income tax effects. This summary is based on the
Internal Revenue Code of 1986, as amended (the Code), U.S. Treasury
regulations promulgated thereunder, Internal Revenue Service (IRS) rulings
and judicial decisions in effect on the date hereof. All of these are subject
to change, possibly with retroactive effect, or different interpretations.
This summary
does not address all aspects of U.S. federal income taxation that may be
relevant to particular U.S. Holders in light of their specific circumstances
(for example, U.S. Holders subject to the alternative minimum tax provisions of
the Code) or to holders that may be subject to special rules under U.S.
federal income tax law.
This summary
also does not discuss any aspect of state, local or foreign law, or U.S.
federal estate or gift tax law as applicable to U.S. Holders. In addition, this
discussion is limited to U.S. Holders holding Shares as capital assets. For
purposes of this summary, U.S. Holder means a beneficial holder of Shares who
or that for U.S. federal income tax purposes is:
·
an
individual citizen or resident of the United States;
·
a corporation or other entity
classified as a corporation for U.S. federal income tax purposes created or
organized in or under the laws of the United States, any state thereof or the
District of Columbia;
·
an
estate, the income of which is subject to U.S. federal income taxation
regardless of its source; or
·
a
trust, if a court within the United States is able to exercise primary
supervision over the administration of such trust and one or more U.S. persons
(within the meaning of the Code) have the authority to control all substantial
decisions of the trust, or if a valid election is in effect to be treated as a
U.S. person.
If a
partnership or other entity or arrangement classified as a partnership for U.S.
federal income tax purposes holds Shares, the U.S. federal income tax treatment
of a partner generally will depend on the status of the partner and the
activities of the partnership. Such a partner should consult its own tax
advisor as to the tax consequences of the partnership owning and disposing of
Shares.
Dividends
Subject
to the passive foreign investment company (PFIC) rules discussed below,
distributions paid by the Company out of current or accumulated earnings and
profits (as determined for U.S. federal income tax purposes), before reduction
for any Canadian withholding tax paid with respect thereto, will generally be
taxable to a U.S. Holder as foreign source dividend income, and will not be
eligible for the dividends received deduction generally allowed to
corporations. Distributions in excess of current and accumulated earnings and
profits will be treated as a non-taxable return of capital to the extent of the
U.S. Holders adjusted tax basis in the Shares and thereafter as capital gain.
U.S. Holders should consult their own tax advisors with respect to the
appropriate U.S. federal income tax treatment of any distribution received from
the Company.
For
taxable years beginning before January 1, 2011, dividends paid by the
Company should be taxable to a non-corporate U.S. Holder at the special reduced
rate normally applicable to long term capital gains, provided that certain
conditions are satisfied. A U.S. Holder will not be able to claim the reduced
rate for any year in which the Company is treated as a PFIC. See Passive
Foreign Investment Company Considerations below.
Under
current law payments of dividends by the Company to non-Canadian investors are
generally subject to a 25 percent Canadian withholding tax. The rate of
withholding tax applicable to U.S. Holders that are eligible for benefits under
the C
anada-United States Tax Convention
(1980) (the
Treaty)
is reduced to a maximum of 15 percent.
Dividends
paid in Canadian dollars will be included in income in a U.S. dollar amount
calculated by reference to the exchange rate in effect on the day the dividends
are received by the U.S. Holder, regardless of whether the Canadian dollars are
converted into U.S. dollars at that time. If dividends received in Canadian
dollars are converted into U.S. dollars
on the day they are received, the U.S. Holder generally will not be required to
recognise foreign currency gain or loss in respect of the dividend income.
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A U.S.
Holder will generally be entitled, subject to certain limitations, to a credit
against its U.S. federal income tax liability, or a deduction in computing its
U.S. federal taxable income, for Canadian income taxes withheld by the Company.
U.S. Holders should consult their tax advisors concerning the foreign tax
credit implications of the payment of Canadian taxes.
Sale or Other Taxable Disposition
Subject to the PFIC rules discussed below, upon a sale or other
taxable disposition of Shares, a U.S. Holder generally will recognize capital
gain or loss for U.S. federal income tax purposes equal to the difference, if
any, between the amount realized on the sale or other taxable disposition and
the U.S. Holders adjusted tax basis in the Shares.
This capital gain or loss will be long-term capital gain or loss if the
U.S. Holders holding period in the Shares exceeds one year. Long-term capital
gains of non-corporate U.S. Holders are currently eligible for reduced rates of
taxation. The deductibility of capital losses is subject to limitations. Any
gain or loss will generally be U.S. source for U.S. foreign tax credit
purposes.
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Passive Foreign Investment Company
Considerations
A
foreign corporation will be classified as a PFIC for any taxable year in which,
after taking into account the income and assets of the corporation and certain
subsidiaries pursuant to applicable look-through rules, either (i) at
least 75 percent of its gross income is passive income or (ii) at least
50 percent of the average value of its assets is attributable to assets which
produce passive income or are held for the production of passive income.
If the
Company is classified as a PFIC for any taxable year during which a U.S. Holder
owns Shares, the U.S. Holder, absent certain elections (including a mark-to-market
election), will generally be subject to adverse rules (regardless of
whether the Company continues to be classified as a PFIC) with respect to (i) any
excess distributions (generally, any distributions received by the U.S.
Holder on the Shares in a taxable year that are greater than 125 percent of the
average annual distributions received by the U.S. Holder in the three preceding
taxable years or, if shorter, the U.S. Holders holding period for the Shares)
and (ii) any gain realized on the sale or other disposition of Shares.
Under
these adverse rules (a) the excess distribution or gain will be
allocated rateably over the U.S. Holders holding period, (b) the amount
allocated to the current taxable year and any taxable year prior to the first
taxable year in which the Company is classified as a PFIC will be taxed as
ordinary income, and (c) the amount allocated to each of the other taxable
years during which the Company was classified as a PFIC will be subject to tax
at the highest rate of tax in effect for the applicable class of taxpayer for
that year and an interest charge will be imposed with respect to the resulting
tax attributable to each such other taxable year.
The
Company believes it was not a PFIC for the 2008 taxable year. However,
since the fair
market value of the Companys assets may be determined in large part by the
market price of the Shares, which is likely to fluctuate, and the composition
of the Companys income and assets will be affected by how, and how quickly,
the Company spends any cash that is raised in any financing transaction, no
assurance can be provided that the Company would not be classified as a PFIC
for the 2009 taxable year and for any future taxable year.
U.S.
Holders should consult their tax advisors regarding the potential application
of the PFIC regime.
Information Reporting and Backup Withholding
The
proceeds of a sale or other disposition, as well as dividends paid with respect
to Shares by a U.S. payor, generally will be reported to the IRS and to the
U.S. Holder as required under applicable regulations. Backup withholding tax
may apply to these payments if the U.S. Holder fails to timely provide an
accurate taxpayer identification number or otherwise fails to comply with, or
establish an exemption from, such backup withholding tax requirements. Certain
U.S. Holders (including, among others, corporations) are not subject to the
information reporting or backup withholding tax requirements described herein.
U.S. Holders should consult their tax advisors as to their qualification for
exemption from backup withholding tax and the procedure for obtaining an
exemption.
F. Dividends and paying agents.
Not applicable.
G. Statement by experts.
Not applicable.
H. Documents on display.
We are subject to the information
requirements of the Securities Exchange Act of 1934, as amended. In accordance
with these requirements, we file and furnish reports and other information with
the United States Securities and Exchange Commission. These materials,
including this annual report on Form 20-F and the exhibits thereto, may be
inspected and copied at the Commissions Public Reference Room at 100 F
Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain
information on the operation of the Commissions Public Reference Room by
calling the Commission in the United States at 1-800-SEC-0330. The Commission
also maintains a website at www.sec.gov that contains reports, proxy statements
and other information regarding registrants that file electronically with the
Commission. The Companys annual reports and some of the other information
submitted by the Company to the Commission may be accessed through this
website. In addition, material filed by the Company can be inspected on the
Canadian Securities Administrators electronic filing system, SEDAR, accessible
at the website www.sedar.com. This material includes the Companys Management
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Information Circular for its annual meeting
to be held on
May 6
,
2009 to be furnished to the SEC on Form 6-K, which provides information
including directors and officers, remuneration and indebtedness and principal
holders of securities. Additional financial information is provided in our
annual financial statements for the year ended December 31, 2008 and our
Managements Discussion and Analysis relating to these statements. These
documents are also accessible on SEDAR (www.sedar.com and on EDGAR
(www.sec.gov)).
I. Subsidiary information.
The subsidiaries of the Company are set forth under Item
4C. Organizational Structure.
Item 11. Quantitative and Qualitative
Disclosures About Market Risk
Foreign
Currency Risk
Since the Company
operates on an international scale, it is exposed to currency risks as a result
of potential exchange rate fluctuations. For the year ended December 31,
2008, there were no operations using forward-exchange contracts and no
forward-exchange contract is outstanding as of the date of this annual report.
Credit
Risk
Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents, short-term investments
and accounts receivable. Cash and cash equivalents are maintained with
high-credit quality financial institutions. Short-term investments consist
primarily of bonds issued by high-credit quality corporations and institutions.
Consequently, management considers the risk of non-performance related to cash
and cash equivalents and investments to be minimal.
Generally, we do not
require collateral or other security from customers for trade accounts
receivable; however, credit is extended following an evaluation of
creditworthiness. In addition, we perform ongoing credit reviews of all our
customers and establish an allowance for doubtful accounts when accounts are
determined to be uncollectible.
Interest
Rate Risk
We are exposed to market risk relating to changes in interest rates
with regard to our short-term investments.
Item 12. Description of Securities Other than
Equity Securities
A. Debt securities.
Not applicable.
B. Warrants and rights.
Not applicable.
C. Other securities.
Not applicable.
D. American depositary shares.
Not applicable.
PART II
Item 13. Defaults, Dividend Arrearages and
Delinquencies
None.
Item 14. Material Modification to the Rights of
Security Holders and Use of Proceeds
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None.
Item 15. 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.
Managements 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 generally accepted accounting principles. (1)
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 generally accepted accounting principles (1),
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.
(1)
|
Our consolidated financial
statements are prepared in accordance with generally accepted accounting
principles in Canada (Canadian GAAP) and significant differences in
measurement and disclosure from generally accepted principles in United
States (US GAAP) are set out in Note 27 to our consolidated financial
statements included elsewhere in this annual report
|
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Changes in Internal Control
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.
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.
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
The
Board of the Registrant has determined that the Registrant has at least one
audit committee financial expert (as defined in paragraph 16(b) of General
Instruction B to Form 20-F). The name of the audit committee financial
expert of the Registrant is Mr. Gérard Limoges, FCA, the Audit
Committees Chairman. The Commission has indicated that the designation of Mr. Limoges
as the audit committee financial expert of the Registrant does not: (i) make
Mr. Limoges an expert for any purpose, including without limitation for
purposes of Section 11 of the Securities Act of 1933, as amended, as a
result of this designation; (ii) impose any duties, obligations or
liability on Mr. Limoges that are greater than those imposed on him as a
member of the Audit Committee and the Board in the absence of such designation;
or (iii) affect the duties, obligations or liability of any other member
of the Audit Committee or the Board. The other members of the Audit committee
are Ms. Martha Byorum and Mr. Pierre MacDonald who are all
independent. For a description of their respective education and experience,
please refer to Item 6.
Directors, Senior Management and Employees.
Item 16B. Code of Ethics
On
March 29, 2004, the Board adopted a Code of Ethical Conduct, which has
been amended by the Board on November 3, 2004, December 13, 2005, March 2,
2007 and March 10, 2009. The December 13, 2005 amendment incorporates
changes to the duty to report violations consistent with applicable laws. The
Registrant has selected an independent third party supplier to provide a
confidential and anonymous communication channel for reporting concerns about
possible violations to the Registrants Code of Ethical Conduct as well as
financial and/or accounting irregularities or fraud. A copy of the Code of
Ethical Conduct, as amended, is attached as Exhibit 11.1
to this annual report and is also available on
the Registrants Web site at www.aezsinc.com under the Investors Governance tab. The
Code of Ethical Conduct is a code
of ethics as defined in paragraph (16)(b) of General Instruction B to Form 20-F.
The Code of Ethical Conduct applies to all of the Registrants employees,
directors and officers, including the Registrants principal executive officer,
principal financial officer, and principal accounting officer or controller, or
persons performing similar functions, and includes specific provisions dealing
with integrity in accounting matters, conflicts of interest and compliance with
applicable laws and regulations. The Registrant will provide this document
without charge to any person or company upon request to the Corporate Secretary
of the Registrant, at its head office at 1405 du Parc-Technologique Boulevard,
Québec, Quebec, G1P 4P5, Canada.
Item 16C. Principal Accountant Fees and Services
(All amounts are in US
dollars)
A. Audit Fees
During the financial years ended December 31,
2008 and 2007, our principal accountant, PricewaterhouseCoopers LLP, billed us
aggregate amounts of $332,495 and $284,973, respectively, for the audit of our
annual consolidated financial statements and services in connection with
statutory and regulatory filings.
113
B. Audit-related Fees
During the financial years ended December 31, 2008
and 2007, our principal accountant, PricewaterhouseCoopers LLP, billed us
aggregate amounts of $219,407 and $306,804, respectively, for audit or attest
services not required by statute or regulation, employee benefit plan audits,
due diligence services, and accounting consultations on proposed transactions,
including the review of prospectuses and the delivery of customary consent and
comfort letters in connection therewith.
C. Tax Fees
During the financial years ended December 31,
2008 and 2007, our principal accountant, PricewaterhouseCoopers LLP, billed us
aggregate amounts of $96,017 and $43,182, respectively, for services related to
tax compliance, tax planning and tax advice.
D. All Other Fees
During the financial years ended December 31,
2008 and 2007, our principal accountant, Pricewaterhouse Coopers LLP, billed us
aggregate amounts of $12,962 and $4,508, respectively, for services not
included in audit fees, audit-related fees and tax fees.
E. Audit Committee Pre-Approval
Policies and Procedures
Under applicable Canadian securities
regulations,
we are
required to disclose whether our Audit Committee has adopted specific policies
and procedures for the engagement of non-audit services and to prepare a
summary of these policies and procedures. The Audit Committee Charter (filed as
Exhibit 11.6 to this annual report) provides that it is such committees
responsibility to approve all audit engagement fees and terms as well as
reviewing policies for the provision of non-audit services by the external
auditors and, when required, the framework for pre-approval of such services.
The Audit Committee delegates to its Chairman the pre-approval of such
non-audit fees. The pre-approval by the Chairman is then presented to the Audit
Committee at its first scheduled meeting following such pre-approval.
For each of the years ended December 31,
2008 and 2007, none of the non-audit services
provided by our external auditor were
approved by the Audit Committee pursuant to the de minimis exception to the
pre-approval requirement for non-audit services.
During the financial year
ended on December 31, 2008, only full-time permanent employees of our
principal accountant, PricewaterhouseCoopers LLP, performed work to audit our
financial statements.
Item 16D. Exemptions from the Listing Standards for
Audit Committees
None.
Item 16E. Purchases of Equity Securities by the
Issuer and Affiliated Purchasers
None.
Item 16F. Changes in Registrants Certifying
Accountant
None.
Item 16G. Corporate Governance
The Registrant is in
compliance with the corporate governance requirements of the NASDAQ except as
described below. The Registrant is not in compliance with the NASDAQ
requirement that a quorum for a meeting of the holders of the common stock of
the Registrant be no less than 33 1/3% of such outstanding shares. The by-laws
of the Registrant provide that a quorum for purposes of any meeting of
shareholders of the Registrant consists of at least 20% of the outstanding
voting shares. The Registrant received an exemption from NASDAQ from this
quorum requirement because the quorum provided for in the by-laws of the
Registrant is consistent with generally accepted business practices in Canada,
the Registrants country of domicile, and with the TSX, the principal market on
which the Registrants voting shares are traded.
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In addition, the Registrant
follows certain of its home country practices in lieu of compliance with the
NASDAQ requirements that: (i) independent directors of the Registrant have
regularly scheduled meetings at which only independent directors are present (executive
sessions); (ii) the compensation of the chief executive officer and the
other executive officers of the Registrant be determined, or recommended to the
Registrants Board for determination, by a compensation committee comprised
solely of independent directors; and (iii) the director nominees be selected,
or recommended for selection by the Registrants Board, by a nominations
committee comprised solely of independent directors. The Chairman of the Board
of the Registrant from time to time ensures that directors hold meetings at
which senior management is not present, and the Registrants Corporate
Governance, Nominating and Human Resources Committee, which serves as the
Registrants compensation and nominations committee, is comprised of four
members, four of whom are independent directors. In accordance with applicable
current NASDAQ requirements, the Registrant has in the past provided to NASDAQ
letters from outside counsel certifying that these practices are not prohibited
by the Registrants home country law.
PART III
Item 17. Financial Statements
We have elected to provide
financial statements pursuant to Item 18.
Item 18. Financial Statements
The financial statements appear on pages 116
through 173.
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Æterna
Zentaris Inc.
Consolidated
Financial Statements
December 31,
2008, 2007 and 2006
(expressed in
thousands of US dollars)
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Report of the Independent Registered Public Accounting
Firm
To the Shareholders 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. We have also audited the financial
statement schedules, Valuation and Qualifying Accounts and Export Sales, in
Item 8.A. of this Annual Report on Form 20-F. These consolidated financial
statements and financial statement schedules are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules 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. Furthermore, in our opinion, the financial
statement schedules, Valuation and Qualifying Accounts and Export Sales, in
Item 8.A. of this Annual Report on Form 20-F present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
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 Managements
Report on Internal Control over Financial Reporting appearing on page 112 of
the Annual Report on Form 20-F. Our responsibility is to express an opinion on
the Companys internal control over financial reporting based on our audit.
117
Table of Contents
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 consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control
over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial
reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the companys assets that could have a material effect on the financial
statements.
Because of its inherent
limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as at December 31,
2008
based on criteria established
in Internal Control Integrated Framework issued by the COSO.
|
(1)
|
Chartered Accountants
Québec, Quebec, Canada
March 10, 2009
(1)
Chartered accountant auditor permit No. 11070
118
Table of Contents
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.
119
Table of Contents
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.
120
Table of Contents
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.
121
Table of Contents
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.
122
Table of Contents
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.
123
Table of Contents
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.
124
Table
of Contents
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
|
125
Table of Contents
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
|
126
Table
of Contents
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
|
|
127
Table
of Contents
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,
|
128
Table
of Contents
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
|
129
Table
of Contents
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.
|
130
Table
of Contents
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.
|
131
Table
of Contents
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.
|
132
Table
of Contents
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.
|
133
Table
of Contents
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
134
Table
of Contents
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
|
)
|
135
Table
of Contents
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.
136
Table
of Contents
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,
137
Table
of Contents
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
|
|
138
Table
of Contents
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
|
|
|
|
139
Table
of Contents
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.
140
Table of Contents
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
|
|
141
Table
of Contents
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
|
|
142
Table
of Contents
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).
143
Table
of Contents
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.
144
Table
of Contents
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$24,040, respectively. There
is no tax benefit realized by the Company, since the compensation cost related
to stock options is not deductible for income tax purposes.
145
Table
of Contents
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
The
following tables summarize the stock options outstanding and exercisable as at December 31,
2008:
|
|
Options outstanding
|
|
Exercise price
(CAN$)
|
|
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
|
|
1,083,833
|
|
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$)
|
|
|
|
|
|
|
|
|
|
0.55 to 1.70
|
|
|
|
|
|
|
|
1.71 to 2.40
|
|
808,100
|
|
1.75
|
|
|
|
2.41 to 3.60
|
|
863,500
|
|
3.22
|
|
|
|
3.61 to 5.00
|
|
707,008
|
|
4.02
|
|
|
|
5.01 to 8.88
|
|
1,083,833
|
|
5.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,462,441
|
|
3.91
|
|
|
|
146
Table
of Contents
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
US dollar denominated
awards
|
|
Years ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
Number
|
|
Weighted
average
exercise
price
(US$)
|
|
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
|
|
|
|
147
Table
of Contents
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
|
|
148
Table
of Contents
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
|
|
149
Table
of Contents
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
|
)
|
150
Table
of Contents
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.
151
Table of Contents
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
|
|
|
|
|
|
152
Table
of Contents
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.
153
Table
of Contents
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
|
|
154
Table
of Contents
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.
155
Table
of Contents
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.
156
Table of Contents
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.
157
Table of Contents
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 $775,000. The fair value of long-term debt was established by
discounting the future cash flows at an interest rate corresponding to that
which the Company would currently be able to obtain for loans with similar
maturity dates and terms.
158
Table of Contents
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Financial risk management
Disclosures relating to the nature and extent
of the Companys exposure to risks arising from financial instruments,
including credit risk, liquidity risk, foreign currency risk and interest rate
risk, and how the Company manages those risks, are presented below.
(a)
Credit risk
Credit risk is the risk of an unexpected loss
if a customer or third party to a financial instrument fails to meet its
contractual obligations. The Company regularly monitors its credit risk
exposure and takes steps to mitigate the likelihood of these exposures from
resulting in actual loss.
Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist primarily of cash
and cash equivalents, short-term investments and accounts receivable. Cash and cash equivalents are maintained with
high-credit quality financial institutions. Short-term investments consist
primarily of bonds and notes issued by high-credit quality corporations and
institutions. Consequently, management
considers the risk of non-performance related to cash and cash equivalents and
short-term investments to be minimal.
(b)
Foreign Currency Risk
Since the Company operates on an
international scale, it is exposed to currency risks as a result of potential
exchange rate fluctuations. Fluctuations
in the US dollar (US$), 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$1.3995.
If these variations were to occur, the impact
on the Companys consolidated net loss for each category of financial
instruments held at December 31, 2008 would be as follows:
159
Table
of Contents
Æterna Zentaris Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
(tabular
amounts in thousands of US dollars,
except
share/option and per share/option data and as otherwise noted)
Parent location using CAN$ 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
160
Table
of Contents
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.
161
Table of Contents
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.
162
Table of Contents
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.
163
Table of Contents
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.
164
Table of Contents
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.
165
Table
of Contents
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.
166
Table of Contents
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
167
Table of Contents
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).
168
Table of Contents
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.
169
Table of Contents
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.
170
Table of Contents
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.
171
Table of Contents
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.
172
Table of Contents
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.
173
Table of Contents
Item 19.
Exhibits
Exhibit Index
1.1
|
|
Restated
Certificate of Incorporation and Restated Articles of Incorporation of the
Registrant (incorporated by reference to Exhibit 1.1 of the Registrants
annual report on Form 20-F for the financial year ended December 31,
2007 filed with the Commission on March 28, 2008)
|
1.2
|
|
Code
of General By-Laws adopted by the Registrant on November 29, 1995
(incorporated by reference to Exhibit 1.2 of the Registrants annual
report on Form 20-F for the financial year ended December 31, 2007
filed with the Commission on March 28, 2008)
|
2
|
|
Amended
and Restated Shareholder Rights Plan Agreement between the Registrant and
Computershare Trust Company of Canada dated as of March 5, 2007
(incorporated by reference to Exhibit 2 of the Registrants annual
report on Form 20-F for the financial year ended December 31, 2008
filed with the Commission on March 28, 2008)
|
4.1
|
|
Stock
Option Plan of the Registrant
|
4.2
|
|
Employment
Agreement dated July 18, 2007 between Paul Blake, M.D. and the
Registrant (incorporated by reference to Exhibit 4.2 of the Registrants
annual report on Form 20-F for the financial year ended December 31,
2007 filed with the Commission on March 28, 2008)
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4.3
|
|
Service
Contract dated December 5, 2007 between Æterna Zentaris GmbH and Prof.
Juergen Engel, Ph.D. (incorporated by reference to Exhibit 4.3 of the
Registrants annual report on Form 20-F for the financial year ended December 31,
2007 filed with the Commission on March 28, 2008)
|
4.4
|
|
Amendment
#1 to Service Contract dated September 1, 2008 between Æterna Zentaris
GmbH and Prof. Juergen Engel, Ph.D.
|
4.5
|
|
Employment
Agreement dated September 1, 2008 between the Registrant and Prof.
Juergen Engel, Ph.D.
|
4.6
|
|
Employment
Agreement dated May 7, 2007 between the Registrant and Nicholas J.
Pelliccione (incorporated by reference to Exhibit 4.7 of the Registrants
annual report on Form 20-F for the financial year ended December 31,
2007 filed with the Commission on March 28, 2008)
|
4.7
|
|
Service
Contract dated May 18, 2006 among Æterna Zentaris GmbH, the Registrant
and Matthias Seeber
|
4.8
|
|
Amendment
#1 to Service Contract dated December 9, 2008 among Æterna Zentaris
GmbH, the Registrant and Matthias Seeber
|
4.9
|
|
Amendment
to Amended Employment Agreement dated as of June 20, 2007 amont the
Registrant, Æterna Zentaris, Inc. and Dennis Turpin (incorporated by
reference to Exhibit 4.8 of the Registrants annual report on Form 20-F
for the financial year ended December 31, 2007 filed with the Commission
on March 28, 2008)
|
4.10
|
|
Purchase
Agreement by and among Zentaris IVF GmbH, Æterna Zantaris GmbH, the
Registrant and Cowen Healthcare Royalty Partners L.P. dated November 11,
2008 (incorporated by reference to the Registrants report on Form 6-K
furnished to the Commission on November 24, 2008)
|
4.11
|
|
Development,
Commercialisation and License Agreement between Æterna Zentaris GmbH and
sanofi-aventis U.S. LLC dated March 5, 2009 (incorporated by reference
to Exhibit 99.2 to the Registrants report on Form 6-K furnished to
the Commission on March 17, 2009)
|
4.12
|
|
Guarantee
agreement between the Registrant and sanofi-aventis U.S. LLC dated March 5,
2009 (incorporated by reference to Exhibit 99.3 to the Registrants
report on Form 6-K furnished to the Commission on March 17, 2009)
|
8.1
|
|
Subsidiaries
of the Registrant
|
11.1
|
|
Code
of Ethical Conduct of the Registrant
|
11.2
|
|
Audit
Committee Charter of the Registrant
|
12.1
|
|
Certification
of the Principal Executive Officer pursuant to §302 of the Sarbanes-Oxley Act
of 2002
|
12.2
|
|
Certification
of the Principal Financial Officer pursuant to §302 of the Sarbanes-Oxley Act
of 2002
|
13.1
|
|
Certificate
of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
13.2
|
|
Certificate
of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
15.1
|
|
Consent
of the Registrants Independent Registered Public Accounting Firm
|
174
Table of Contents
SIGNATURES
The registrant hereby
certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual
report on its behalf.
|
ÆTERNA
ZENTARIS INC.
|
|
|
|
/s/ Dennis
Turpin
|
|
|
|
Dennis Turpin
|
|
Senior Vice President and
Chief Financial Officer
|
Date: March 30, 2009
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