-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WG4ze+IdFKvkkYtt1cKy5OtW5K7oA/iqVnjZZFi7EW4zjRinOLIBWdKtRI07g3S6 vmX9ySBvTO2abF25ihNncQ== 0001206212-04-000104.txt : 20040513 0001206212-04-000104.hdr.sgml : 20040513 20040513141100 ACCESSION NUMBER: 0001206212-04-000104 CONFORMED SUBMISSION TYPE: 40-F PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20040513 FILED AS OF DATE: 20040513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEUROCHEM INC CENTRAL INDEX KEY: 0001259942 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 000000000 FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 40-F SEC ACT: 1934 Act SEC FILE NUMBER: 000-50393 FILM NUMBER: 04802341 BUSINESS ADDRESS: STREET 1: 7220 FREDERICK BUNTING ST STREET 2: STE 100 CITY: MONTREAL STATE: E6 ZIP: H4S 2A1 BUSINESS PHONE: 5143374646 40-F 1 m12968ore40vf.txt FORM 40-F U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 - -------------------------------------------------------------------------------- FORM 40-F [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 000-50393 For the six-month period ended December 31, 2003 - -------------------------------------------------------------------------------- NEUROCHEM INC. (Exact name of Registrant as specified in its charter) Canada 2834 Not Applicable (Province or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
275 ARMAND FRAPPIER BOULEVARD LAVAL, QUEBEC H7V 4A7, CANADA (450) 680-4500 (Address and telephone number of Registrant's principal executive offices) CT Corporation System 111 Eighth Avenue, 13th Floor New York, New York 10011 (212) 894-8400 (Name, address (including zip code) and telephone number (including area code) of agent for service in the United States) Securities registered or to be registered pursuant to Section 12(b) of the Act: None Securities registered or to be registered pursuant to Section 12(g) of the Act: Common Shares, no par value Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None For annual reports, indicate by check mark the information filed with this Form: [X] Annual information form [X] Audited annual financial statements Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: The Registrant had 29,775,127 Common Shares Outstanding as at December 31, 2003 Indicate by check mark whether the Registrant by filing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934 (the "Exchange Act"). If "Yes" is marked, indicate the filing number assigned to the Registrant in connection with such Rule. Yes [ ] 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 Exchange Act 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 [ ] PRINCIPAL DOCUMENTS The following documents have been filed as part of this Annual Report on Form 40-F: A. ANNUAL INFORMATION FORM Annual Information Form of the Registrant for the six-month period ended December 31, 2003. B. CONSOLIDATED AUDITED ANNUAL FINANCIAL STATEMENTS Consolidated Audited Financial Statements of the Registrant for the six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 together with the auditors' report thereon, including a reconciliation to United States generally accepted accounting principles. C. MANAGEMENT'S DISCUSSION AND ANALYSIS Management's Discussion of Financial Conditions and Results of Operations of the Registrant for the fiscal years referred to above. DISCLOSURE CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES Based on their evaluation as of the end of the period covered by this report, the Registrant's Chief Executive Officer and Chief Financial Officer have concluded that the Registrant's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act are effective to ensure that information required to be disclosed by the Registrant in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING As of the end of the period covered by this report, there were no changes in the Registrant's internal control over financial reporting that occurred during the period covered by this report that have materially affected or are reasonably likely to materially affect the Registrant's internal control over financial reporting. NOTICES PURSUANT TO REGULATION BTR None. AUDIT COMMITTEE A. IDENTIFICATION OF AUDIT COMMITTEE The following persons comprise the Audit Committee: Mr. Graeme K. Rutledge (Chair), Dr. Colin Bier and Mr. John Molloy. B. AUDIT COMMITTEE FINANCIAL EXPERT The Board of Directors of the Company has determined that Mr. Graeme K. Rutledge is an audit committee financial expert (as defined in paragraph 8(b) of General Instruction B to Form 40-F). CODE OF ETHICS The Registrant has adopted a code of ethics (as that term is defined in Form 40-F) that applies to its employees (including its principal executive officer, principal financial officer and controller). The code of ethics is attached as an exhibit and filed with this Form 40-F. Since the adoption of the code of ethics, there have not been any amendments to the code of ethics or waivers, including implicit waivers, from any provision of the code of ethics. PRINCIPAL ACCOUNTANT FEES AND SERVICES The Company has paid KPMG LLP ("KPMG"), its external auditors, the following fees in each of the last two fiscal periods. AUDIT FEES The following sets forth the aggregate fees paid for each of the two past fiscal periods for professional fees to KPMG for the audit of the annual financial statements or for services normally provided by KPMG in connection with statutory and regulatory filings or engagements for those fiscal periods. Fiscal year ended June 30, 2003 Cdn $53,700 Audit of consolidated financial statements for the six-month period ended December 31, 2003 Cdn $64,040 AUDIT-RELATED FEES The following sets forth additional aggregate fees to those reported under "Audit Fees" in each of the last two fiscal periods for assurance and related services by KPMG that are reasonably related to the performance of the audit or review of the financial statements: Fiscal year ended June 30, 2003 Review of interim financial statements Cdn $23,200 Translation services Cdn $16,200 Six-month period ended December 31, 2003 Review of interim financial statements Cdn $10,500 Public offering Cdn $206,000 Comments on accounting treatment or requirements of various transactions Cdn $43,870 Translation services Cdn $31,400 NON-AUDIT AND TAX FEES The following sets forth the aggregate fees billed in each of the last two fiscal periods for professional services rendered by KPMG for tax compliance, tax advice and tax planning: Fiscal year ended June 30, 2003 Assistance with corporate reorganization and tax compliance work $119,700 Six-month period ended December 31, 2003 Review of various business opportunities, sales tax and US tax issues $38,300 ALL OTHER FEES The following sets forth the aggregate fees billed in each of the last two fiscal periods for products and services provided by the principal accountant not described above: Fiscal year ended June 30, 2003 None Six-month period ended December 31, 2003 None AUDIT COMMITTEE APPROVAL The Registrant's audit committee pre-approves every engagement by KPMG to render audit or non-audit services. All of the services described above were approved by the audit committee. Prior to the beginning of each fiscal period, the Registrant seeks audit committee approval for all services expected to be rendered by KPMG during the coming year. If during the course of the year, the Registrant requires a service to be performed that is not contemplated in the list of pre-approved services the Registrant seeks approval from the Chairman of the audit committee for KPMG to proceed with such service, which approval requires subsequent ratification at the next meeting of the audit committee. OFF-BALANCE SHEET ARRANGEMENTS The Registrant has no off-balance sheet arrangements required to be disclosed in this annual report on Form 40-F. CONTRACTUAL OBLIGATIONS
Payments Due by Period (in thousand Canadian $) ---------------------------------------------------------------- Contractual Obligations Total Less than 1 year 1-3 years 3-5 years More than 5 years ----------------------- ----- ---------------- --------- --------- ----------------- Obligations under capital leases 901 470 431 Nil Nil Operating leases 2,184 508 1,052 392 232 Management fees 1,120 960 160 Nil Nil
DISCLOSURE PURSUANT TO THE REQUIREMENTS OF THE NASDAQ NATIONAL MARKET ("NASDAQ") The Registrant was granted an exemption from Marketplace Rule 4350(f) requiring each issuer to provide for a quorum at any meeting of the holders of common stock of no less than 33 1/3% of the outstanding shares of the issuer's common voting stock. This exemption was granted because Nasdaq's requirements regarding Marketplace Rule 4350(f) are contrary to generally accepted business practices in Canada. DOCUMENTS FILED PURSUANT TO GENERAL INSTRUCTIONS: Number Document - ------ -------- 1. Annual Information Form of the Registrant for the fiscal year ended December 31, 2003. 2. Consolidated Audited Financial Statements of the Registrant for the six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 together with the auditors' report thereon, including a reconciliation to United States generally accepted accounting principles. 3. Management's Discussion and Analysis of Financial Condition and Results of Operations of the Registrant for the fiscal years referred to above. UNDERTAKING AND CONSENT TO SERVICE OF PROCESS A. UNDERTAKING The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when required to do so by the Commission staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities. B. CONSENT TO SERVICE OF PROCESS The Registrant has previously filed with the Commission a Form F-X. SIGNATURE Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereto duly authorized. May 13, 2004 NEUROCHEM INC. By: /s/ Francesco Bellini ------------------------------------------------- Dr. Francesco Bellini Chairman of the Board and Chief Executive Officer EXHIBIT INDEX NUMBER DOCUMENT - ------ -------- 1. Annual Information Form of the Registrant for the fiscal year ended December 31, 2003. 2. Consolidated Audited Financial Statements of the Registrant for the six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 together with the auditors' report thereon, including a reconciliation to United States generally accepted accounting principles. 3. Management's Discussion and Analysis of Financial Condition and Results of Operations of the Registrant for the fiscal years referred to above. 4. Consent of KPMG LLP 5. Certification pursuant to Rule 13a-14 or 15d-14 of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Dr. Francesco Bellini) 6. Certification pursuant to Rule 13a-14 or 15d-14 of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Claude Michaud) 7. Certification pursuant to Title 18, United States Code, Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Dr. Francesco Bellini) 8. Certification pursuant to Title 18, United States Code, Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Claude Michaud) 9. Code of Ethics EX-1 2 m12968orexv1.txt ANNUAL INFORMATION FORM Exhibit 1 ANNUAL INFORMATION FORM OF THE REGISTRANT FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 2003 [LOGO (NEUROCHEM)] NEUROCHEM INC. ANNUAL INFORMATION FORM SIX-MONTH PERIOD ENDED DECEMBER 31, 2003 MAY 12, 2004 TABLE OF CONTENTS ITEM 1 - COVER PAGE...........................................................i ITEM 2 - CORPORATE STRUCTURE..................................................1 2.1 NAME AND INCORPORATION...............................................1 2.2 INTERCORPORATE RELATIONSHIPS AND REORGANIZATION......................1 ITEM 3 - GENERAL DEVELOPMENT OF THE BUSINESS..................................1 3.1 THREE-YEAR HISTORY...................................................1 ITEM 4 - NARRATIVE DESCRIPTION OF THE BUSINESS................................7 4.1 GENERAL: OUR BUSINESS................................................7 ITEM 5 - SELECTED CONSOLIDATED FINANCIAL INFORMATION.........................19 5.1 ANNUAL INFORMATION..................................................19 5.2 DIVIDENDS...........................................................19 ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS................................19 6.1 QUARTERLY INFORMATION...............................................19 ITEM 7 - MARKET FOR SECURITIES...............................................19 ITEM 8 - DIRECTORS AND OFFICERS..............................................20 ITEM 9 - AUDIT COMMITTEE FINANCIAL EXPERT....................................23 ITEM 10 - PRINCIPAL ACCOUNTANT FEES AND SERVICES..............................23 ITEM 11 - ADDITIONAL INFORMATION..............................................24 ii As used in this Annual Information Form, unless the context otherwise requires, the terms "we", "us", "our", "Neurochem" or the "Corporation", mean or refer to Neurochem Inc. and, unless the context otherwise requires, its subsidiaries and its Affiliates (as such term is defined in this Annual Information Form). Except as otherwise stated, all dollar amounts and references to $ are to Canadian dollars and US$ refers to United States dollars. ITEM 2 - CORPORATE STRUCTURE 2.1 NAME AND INCORPORATION Neurochem was incorporated on June 17, 1993 under the Canada Business Corporations Act in association with Parteq Research and Development Innovations, the technology transfer office at Queen's University of Kingston, Ontario. On June 20, 2000, the Corporation amended its share capital (i) to change all of the then issued and outstanding Class "A" Shares into Common Shares and cancel the Class "A" Shares as an authorized class and (ii) to create a class of Preferred Shares, issuable in series. 2.2 INTERCORPORATE RELATIONSHIPS AND REORGANIZATION As of May 2003, the corporate structure of the Neurochem group of companies was changed. Currently, Neurochem Inc. has an indirect wholly-owned subsidiary, Neurochem (International) Limited, a Swiss corporation. Neurochem (International) Limited is wholly-owned by Neurochem Holdings Limited, a Swiss corporation which is, in turn, wholly-owned by Neurochem Luxco II S.A.R.L., a Luxembourg corporation. Neurochem Luxco II S.A.R.L. is wholly-owned by Neurochem Luxco I S.C.S., a Luxembourg limited partnership whose sole limited partner is Neurochem Inc. and whose sole general partner is Neurochem Luxco I S.A.R.L., a Luxembourg corporation wholly-owned by Neurochem Inc. Neurochem Inc. is also the sole shareholder of Neurochem U.S. LLC, a Delaware limited liability company. All of such entities, other than Neurochem Inc., are sometimes collectively referred to in this annual information form as our "Affiliates". ITEM 3 - GENERAL DEVELOPMENT OF THE BUSINESS 3.1 THREE-YEAR HISTORY We are a biopharmaceutical company focused on the development and commercialization of innovative therapeutics for neurological disorders. Our pipeline of proprietary, disease-modifying, oral products addresses unmet medical needs. We have three programs in clinical trials and one lead compound in pre-clinical development, each targeting disorders for which there are currently no known cures. Over the past three years, the Corporation has successfully advanced three programs from pre-clinical to clinical trials namely, Alzhemed(TM), for the treatment of Alzheimer's Disease; Fibrillex(TM), for the treatment of Amyloid A Amyloidosis; and Cerebril(TM), for the prevention of Hemorrhagic Stroke caused by Cerebral Amyloid Angiopathy. We changed our year end during 2003 from June 30 to December 31. As a result, our fiscal year ended December 31, 2003 is represented by the six-month period then ended. 1 SIX-MONTH PERIOD ENDED DECEMBER 31, 2003 For the six-month period ended December 31, 2003, we expanded our management and scientific team, and raised significant funds in a cross-border offering, as our lead product candidates continue to advance to the marketplace. CLINICAL ADVANCES: o On December 9, 2003, we issued a press release reporting the positive interim results on cognitive function as measured by ADAS-cog of patients suffering from mild-to-moderate Alzheimer's Disease in an open-label Phase II extension study of Alzhemed(TM). The report is based on results of patients in the ongoing study who had completed nine and also 12 months of treatment on the highest dose (300mg daily) of Alzhemed(TM). COLLABORATIVE AGREEMENTS, GRANTS AND FINANCINGS: o On September 23, 2003, we completed the initial public offering of our Common Shares in the United States and a new issue of Common Shares in Canada. In connection with this offering, the Common Shares were approved for quotation on the Nasdaq National Market ("NASDAQ") under the "NRMX" trading symbol. We issued 5.75 million Common Shares at a price of US$10.87 per share. The aggregate net proceeds from the offering, including the proceeds from the over-allotment option granted to the underwriters of the offering, were approximately $78.1 million (US$59 million), net of underwriting fees and commissions and issue expenses. We intend to use these proceeds to fund clinical trials of our lead product candidates, as well as to further complete pre-clinical and research and development programs. We also intend to use the proceeds for capital expenditures and the balance for working capital and general corporate purposes. INTELLECTUAL PROPERTY PORTFOLIO: o U.S. Patent no. 6,670,399 entitled "Compounds and Methods for Modulating Cerebral Amyloid Angiopathy" was issued to us on December 30, 2003. o As of December 31, 2003, our portfolio contained over 200 patents and pending patent applications. LITIGATION: o Neurochem executed an agreement (the "CTA") with Immtech International Inc. ("Immtech") of Vernon Hills, Illinois in 2002 pursuant to which Immtech provided Neurochem with certain compounds for testing and granted Neurochem an option to license such compounds. On August 12, 2003 Immtech filed certain legal proceedings with the federal district court for the Southern District of New York, U.S.A., with respect to the agreement. Neurochem has and will continue to vigorously defend against the claims brought by Immtech. RECENT ANNOUNCEMENTS: o On November 13, 2003, we announced that we had been selected for addition to the NASDAQ Biotechnology Index pursuant to our listing which took effect in September 2003. 2 o At our annual and special meeting of shareholders held on December 9, 2003, Dr. Frederick H. Lowy, Rector and Vice-Chancellor of Concordia and Graeme K. Rutledge, Consultant, Chartered Accountant and former senior partner of Deloitte & Touche LLP, Canada, an accounting firm, were elected to our Board of Directors. o On December 19, 2003, we announced that we were added to the S&P/TSX Composite Index, the Capped Health Care Index, as well as to the Global Industry Classification Standard Index. o Effective December 31, 2003, we changed our fiscal year-end from June 30 to December 31. Our year-end will now be consistent with that of most other companies in our industry. FISCAL YEAR ENDED JUNE 30, 2003 During the fiscal year ended June 30, 2003, we transitioned our business from a research and development focused company to a product-driven company and concentrated our activities on neurological disorders. In a strategic move aimed at focusing on our core expertise, we completed a technology transfer pertaining to our Diabetes program to Innodia Inc. ("Innodia"), a company focused exclusively on the development of therapeutic treatments for Diabetes, in exchange for an equity interest in Innodia. We also invested $500,000 in a private placement concluded by Innodia. As at June 30, 2003, we indirectly owned a 31% equity interest in Innodia. This strategy will eliminate funding requirements associated with our Diabetes program while allowing us to share in the program's economic potential as an indirect shareholder of Innodia. CLINICAL ADVANCES: o Our product pipeline made significant progress during the fiscal year. We completed patient recruitment for the Phase II/III clinical trial of Fibrillex(TM), our most advanced product candidate to treat Amyloid A Amyloidosis ("AA Amyloidosis"). We completed a Phase II clinical trial in respect of Alzhemed(TM), our next most advanced product candidate for the treatment of Alzheimer's Disease. We initiated a Phase II clinical trial during the year in respect of Cerebril(TM), our product candidate to treat Hemorrhagic Stroke due to Cerebral Amyloid Angiopathy ("CAA"). We continued to advance a compound for the treatment of epileptic seizures following Traumatic Brain Injury ("TBI") through pre-clinical testing. o In June 2003, we reported the successful results of the Phase II clinical trial for Alzhemed(TM). Positive findings from the 12-week trial involving patients with mild-to-moderate Alzheimer's Disease showed Alzhemed(TM) to be safe and well tolerated. Alzhemed(TM) was able to change the level of amyloid in the cerebrospinal fluid ("CSF") in Alzheimer's Disease patients in a dose-related fashion. Alzhemed(TM) also demonstrated its ability to overcome the major challenge of crossing from the bloodstream to the brain through the protective blood-brain-barrier ("BBB"). Interim results also revealed that patients treated for six months on the highest dose of Alzhemed(TM) showed stable or improved cognitive function. GRANTS AND FINANCINGS: o In January 2003, the lead investigator for Cerebril(TM) was awarded approximately US$1 million from the National Institutes of Health. 3 o On July 25, 2002, we issued 2.8 million units at a price of $2.50 per unit to P.P. Luxco Holdings II S.A.R.L., a wholly-owned subsidiary of Picchio Pharma Inc. ("Picchio Pharma"). The holdings and purchases of Common Shares by Picchio Pharma through P.P. Luxco Holdings II S.A.R.L. are referred to in and for the purposes of this annual information form as being holdings and purchases of Picchio Pharma. Each unit was comprised of one Common Share and one warrant to purchase an additional Common Share at any time and from time to time within a three-year period from issuance at an exercise price of $3.13. In connection with this investment, we covenanted to cause a total of three nominees of Picchio Pharma to be included in the list of management nominees to be proposed for election to our Board of Directors at each meeting of our shareholders called therefor. The subscription agreement provides that this obligation shall terminate on the date Picchio Pharma ceases to beneficially hold at least 15% of the outstanding Common Shares (including shares issuable upon exercise of the warrants issued to Picchio Pharma on July 25, 2002). Dr. Bellini and Messrs. Kruyt and Nordmann are the current nominees of Picchio Pharma. o P.P. Luxco Holdings II S.A.R.L. made an additional investment in the Corporation on February 18, 2003 when the Corporation issued 1.2 million units. Each unit was comprised of one Common Share and one warrant to purchase an additional Common Share at any time and from time to time within a three-year period from issuance at an exercise price of $7.81. The disinterested shareholders of the Corporation approved, confirmed and ratified the issuance of the units at a shareholders meeting held on February 18, 2003. Shares held by Picchio Pharma and its associates were excluded from voting in respect of such issuance. INTELLECTUAL PROPERTY PORTFOLIO: o We were issued two additional patents covering (a) methods and compounds for inhibiting amyloid deposits and (b) phosphonocarboxylate compounds for treating amyloidosis, bringing the total to 16 patents granted worldwide. o We filed 38 new patent applications, including eight new cases. Overall, we have more than 150 patent applications pending in the United States, Canada and internationally. RECENT ANNOUNCEMENTS: o In November 2002, Dr. Francesco Bellini was appointed Chief Executive Officer, adding to his other responsibilities as Director and Chairman of the Board. o In January 2003, we announced the appointment of Dr. Phillipe Calais as our President. The Company also appointed Mr. David Skinner as Director of Legal Affairs, General Counsel and Corporate Secretary in April 2003. o Over the course of the year, we appointed Mr. Richard Cherney, co-managing partner of the law firm Davies Ward Phillips & Vineberg LLP and Dr. Emil Skamene, Scientific Director of the Research Institute of the McGill University Health Centre to our Board of Directors. FISCAL YEAR ENDED JUNE 30, 2002 In fiscal 2002, we achieved many advances and several important milestones in our clinical and drug development programs. The highlights of such advances and milestones were as follows: 4 CLINICAL ADVANCES: o Alzhemed(TM) - Alzheimer's Disease: We completed three Phase I clinical trials for Alzhemed(TM). In these trials, the drug candidate was shown to be safe and well tolerated at the anticipated therapeutic dose in both young and elderly volunteers. We also established an international Clinical Advisory Board ("CAB") for Alzhemed(TM) comprised of distinguished experts in the fields of Alzheimer's Disease and Neurology. o Cerebril(TM) - Hemorrhagic Stroke due to CAA: We put in place a CAB for Cerebril(TM), comprised of world-renowned researchers and clinicians. o Fibrillex(TM) - AA Amyloidosis: We received a prestigious $1.4 million grant from the Food and Drug Administration ("FDA") in the United States for the Phase II/III clinical trial for Fibrillex(TM). Orphan Medicinal Product status for the drug in Europe was also obtained, typically allowing for 10 years of market exclusivity upon commercialization. With a total of 13 submissions to regulatory authorities for Investigational New Drug ("IND") status and subsequent approvals in the U.S., Europe and Israel, we initiated the Phase II/III clinical trial and patient recruitment worldwide. EXTERNAL VALIDATION OF THE CORPORATION: o We were selected by the Montreal Business Magazine as one of the top 30 Montreal-based growth companies. COLLABORATIVE AGREEMENTS, GRANTS AND FINANCING: o We announced an important new collaboration with the United Kingdom-based Amersham Health (a division of Amersham PLC), for the creation of a diagnostic imaging tool for Alzheimer's Disease. o We announced an agreement with H. Lundbeck A/S ("Lundbeck") of Denmark pursuant to which the Corporation regained the full ownership and control of its anti-amyloid drug molecules program for Alzheimer's Disease at no cost to the Corporation. o We entered into a collaborative agreement with the University Medical Center-Utrecht in the Netherlands for the Corporation's Diabetes Type 2 program, focusing on islet amyloid formation using the Corporation's glycosaminoglycan ("GAG") mimetic technology. o We announced an agreement with Picchio Pharma for the acquisition of 2.8 million units of the Corporation at a cost of $2.50 per unit for a total of $7 million. The transaction closed in July 2002. The units were comprised of one Common Share of the Corporation and one warrant to purchase a Common Share exercisable any time within a three-year period with a 25% premium over the issue price. Assuming the exercise of warrants, the total possible investment by Picchio Pharma under the transaction is $15.75 million. We planned to use the proceeds of the investment for working capital to advance the Corporation's pipeline of products. Dr. Francesco Bellini, O.C., chairman of Picchio Pharma, assumed the position of chairman of the Corporation. INTELLECTUAL PROPERTY PORTFOLIO: o Four additional patents issued which enhanced the Corporation's commercial and scientific assets. The patents covered: anti-epileptogenic agents (U.S. patent), methods 5 and compositions to treat GAG-associated molecular interactions (U.S. patent), phosphonocarboxylate compounds (U.S. patent) and method for treating Amyloidosis (Mexico patent). RECENT ANNOUNCEMENTS: o Unanimous recommendation was received by Neurochem's independent Data Safety Monitoring Board to advance the Phase II/III clinical trial for Fibrillex(TM), in patients suffering from AA Amyloidosis. o Two IND applications for Phase II clinical trials took effect with the FDA in the United States, which allowed us to advance to Phase II clinical trials for Alzhemed(TM) and Cerebril(TM) in patients suffering from Alzheimer's Disease and Hemorrhagic Stroke due to CAA. o We recruited Mr. Claude Michaud to our management team as Senior Vice-President, Finance and Chief Financial Officer. o We appointed two new board members to our board of directors, Mr. Peter Kruyt, Vice-President, Power Corporation of Canada, and Mr. Ronald M. Nordmann, Co-President, Global Health Associates, LLC. RECENT AND EXPECTED DEVELOPMENTS JANUARY - DECEMBER 2004: o On January 14, 2004, we received our third unanimous recommendation to continue our pivotal Phase II/III clinical trial for Fibrillex(TM). The recommendation by the independent Data Safety Monitoring Board members was based on their recent review of the safety data from 183 patients, of whom 77 have completed at least 12 months of the Phase II/III clinical study. o On January 20, 2004, we issued a press release announcing that we are advancing our efforts to prevent and treat Alzheimer's Disease by forming a strategic alliance with the National Research Council of Canada's Institute for Biological Sciences, and more specifically, with Dr. Harold J. Jennings, in relation to the development of a novel synthetic vaccine to prevent and treat Alzheimer's Disease. We have also entered into a licensing agreement with PRAECIS PHARMACEUTICALS INCORPORATED, a leading biopharmaceutical company, relating to certain A(beta) amyloid peptides for use in the development of such a vaccine. o On January 22, 2004, we issued a press release reporting additional positive results on cognitive function, as measured by the ADAS-cog test, of patients suffering from mild-to-moderate Alzheimer's Disease in an open-label Phase II extension study of Alzhemed(TM). The report is based on the results of 30 patients in the ongoing study who have completed both the three-month randomized Phase II clinical trial and an additional nine months of treatment in the open-label Phase II extension study with Alzhemed(TM). o On February 11, 2004, the U.S. FDA designated Fibrillex(TM) as a fast track product ("FTP") for the treatment of Amyloid A Amyloidosis. The FTP designation expedites the development and review of new drugs. 6 o On April 8, 2004, we issued a press release announcing that we had signed a conditional agreement to purchase the former Shire BioChem facilities located in the Parc scientifique et de la haute technologie in Laval, Quebec, for a purchase price of $10.5 million. Upon completion of the transaction, we will relocate our headquarters and corporate and scientific employees to the same site. The transaction will be financed by asset-backed funding and cash on-hand. o On April 14, 2004, we issued a press release reporting additional positive results on cognitive function, as measured by the ADAS-cog test, of patients suffering from mild-to-moderate Alzheimer's Disease in an open-label Phase II extension study of Alzhemed(TM). The report is based on the results of 23 patients in the ongoing study who have completed both the three-month randomized Phase II clinical trial and an additional 13 months of treatment in the open-label Phase II extension study with Alzhemed(TM). It was also announced that the complete data on all patients who participated in the Phase II clinical trial and the open-label Phase II extension study for a period of up to 20 months will be presented at the 9th International Conference on Alzheimer's Disease and Related Disorders to be held in Philadelphia, Pennsylvania, U.S.A., from July 17 through July 22, 2004. o On April 26, 2004, we issued a press release reporting that we had received our fourth consecutive positive recommendation from Data Safety Monitoring Board to continue Phase II/III clinical trial for Fibrillex(TM). o We expect to initiate the first Phase III clinical trial for Alzhemed(TM). o On April 27, 2004, we issued a press release reporting promising Phase II results for Cerebril(TM)'s. 24 CAA patients with lobar cerebral hemorrhage were randomized to receive three different doses of Cerebril(TM) (100, 200 and 300 mg) for a period of 12 weeks. The data showed no safety findings of concern based on patient's clinical laboratory tests, vital signs and electrocardiograms during follow-up physical exams. The most frequent adverse events, namely nausea and vomiting, were mid-to-moderate at all doses tested and transient in the patients receiving 100 mg or 200 mg daily of Cerebril(TM). Five patients withdrew prematurely; three because of nausea and vomiting and two because of expected complications of CAA. ITEM 4 - NARRATIVE DESCRIPTION OF THE BUSINESS 4.1 GENERAL: OUR BUSINESS A. COMPANY OVERVIEW We are a biopharmaceutical company focused on the development and commercialization of innovative therapeutics for neurological disorders. Our strategy is to in-license early-stage products and to focus our resources on the management of clinical development and the commercialization of novel products. We design and manage the clinical trials for our product candidates which are carried out by recognized contract research organizations. We have three programs in clinical trials and one product candidate in pre-clinical development, each targeting disorders for which there are currently no known cures. Because our drugs target what are known or believed to be the causes of disorders and potentially inhibit their progression, they are known as "disease modifiers". As people age, specific types of normal proteins can change structure to become long strands called amyloid fibrils. There are at least 21 different proteins recognized as, or believed to be, causative agents 7 of severe amyloid-related disorders. All of these proteins can change structure by binding to components of proteins known as glycosaminoglycans or "GAGs", generate amyloid fibrils and accumulate as deposits in parts of the body, including various organs such as the brain and kidneys. See "4.1 General: Our Business -- F. Our Product Technology Platforms". These amyloid deposits can kill cells and lead to organ failure. When deposits of a certain type of amyloid protein appear in the brain, they may cause Alzheimer's Disease or Hemorrhagic Stroke due to CAA. When deposits of a different type of amyloid protein appear in several peripheral organs like the kidneys, they can induce systemic disorders such as AA Amyloidosis. Our product candidates consist of a new class of small molecules that mimic specific properties of the GAGs. We call these molecules "GAG mimetics". By binding to the amyloid protein, our molecules inhibit both the formation of fibrils and the resulting toxic deposits. Fibrillex(TM), Alzhemed(TM) and Cerebril(TM), our product candidates in clinical trials, are based on our GAG mimetics technology. In addition, our focus in neurology has led to the development of compound candidates to prevent the development of epileptic seizures following TBI. These compounds are designed to protect the brain from neuronal damage often associated with TBI. Fibrillex(TM), our most advanced product candidate, is in a Phase II/III clinical trial. Fibrillex(TM) is designed to treat AA Amyloidosis, a systemic disorder resulting in significant illness, organ failure (particularly of the kidney, spleen and liver), and ultimately death. Alzhemed(TM), our next most advanced product candidate, is our drug for the treatment of Alzheimer's Disease, a degenerative neurological disorder that progressively impairs a person's cognitive functions and gradually destroys the brain. We have completed a Phase II clinical trial for Alzhemed(TM) and are currently designing Phase III efficacy trials. Cerebril(TM), our third program, is designed to treat Hemorrhagic Stroke due to CAA, a fatal neurological disorder that is characterized by recurrent brain hemorrhage. We have completed a Phase II clinical trial for Cerebril(TM), and currently intend on designing a Phase IIb clinical trial to test efficacy. We are also conducting pre-clinical testing on a compound, NC-1461, to prevent the development of epileptic seizures following TBI. The following table illustrates the stage of development, the estimated date of FDA NDA filing and the patent expiration date for each of our product candidates:
PRODUCT TARGET STAGE OF ESTIMATED PATENT CANDIDATE DISORDER DEVELOPMENT US NDA EXPIRATION(2) FILING(1) ------- ------ -------- --------- ------ Fibrillex(TM) AA Amyloidosis Phase II/III clinical trial 2005 2014 Alzhemed(TM) Alzheimer's Disease Phase III clinical trials in 2007 2016 Cerebril(TM) Hemorrhagic Stroke Phase II clinical trial completed -- 2016 NC-1461 Epileptic seizures Pre-clinical testing -- 2018
- ---------- (1) The actual date of NDA filing, if any, can vary widely depending on a variety of factors. There is no assurance that FDA approval will be obtained following NDA filing and there is typically a period of many months from filing to approval of a product. In addition, we may not be able to successfully commercialize our products, even if they are approved. (2) See "4.1 General: Our Business -- H. Intellectual Property" for a more detailed discussion of our patent portfolio. 8 B. OUR BUSINESS STRATEGY Our goal is to become a leading biopharmaceutical company in the development and commercialization of innovative therapeutics for neurological disorders. To achieve this goal, we are pursuing the following strategies: TARGET UNMET MEDICAL NEEDS: Each of our product candidates addresses a disorder for which there is currently no known cure. To our knowledge, Fibrillex(TM) is the only amyloid-targeting product in advanced clinical development to treat AA Amyloidosis. Contrary to currently available Alzheimer's Disease therapies which treat only the symptoms of the disease, Alzhemed(TM) targets what is believed to be its main underlying cause. To our knowledge, Cerebril(TM) is the only product candidate targeting the underlying cause of Hemorrhagic Stroke due to CAA and NC-1461 is a compound candidate with a novel mechanism of action targeting the underlying cause of epileptic seizures induced by TBI. We intend to continue to target opportunities in related neurological areas where medical needs are unmet. EXPEDITE CLINICAL DEVELOPMENT: We leverage our scientific and clinical development expertise to optimize the time it takes for our product candidates to reach market. We have already successfully brought forward three programs to Phase II and Phase II/III clinical trials. In addition to the Phase II/III clinical trial for Fibrillex(TM), we expect to have Alzhemed(TM) and Cerebril(TM) in Phase III trials. MAXIMIZE OWNERSHIP AND CONTROL OF OUR PRODUCTS: We will continue to maximize ownership of our products throughout their development and commercialization phases by conducting clinical development and marketing activities on our own, or in partnership with others where appropriate. We intend to retain full commercialization rights for products and in markets that we can adequately exploit on our own. In cases where extensive clinical trials are required and a commercialization strategy with global reach is needed, we intend to enter into collaborative agreements with industry partners to develop and to co-market our products. The decision whether to partner with respect to the development and commercialization of our product candidates and the terms and conditions of such agreements will be product and market specific in order to maximize our economic benefits. MAINTAIN A PRODUCT PIPELINE AT VARIOUS STAGES OF DEVELOPMENT THROUGH INTERNAL DEVELOPMENT AND IN-LICENSING: We pursue sustained development by maintaining a portfolio of products at different stages. We intend to continue feeding our product pipeline to leverage our drug development and commercialization infrastructure over time. In addition to developing products on our own, we intend to continue to in-license lead compounds at early stages of development. LEVERAGE MANAGEMENT'S SCIENTIFIC, PRODUCT DEVELOPMENT AND COMMERCIALIZATION EXPERTISE: We are led by an experienced group of individuals with significant industry expertise. Dr. Francesco Bellini, O.C., Chairman and Chief Executive Officer of the Corporation, was the co-founder and former Chairman and Chief Executive Officer of Biochem Pharma Inc., an innovative biopharmaceutical company which was merged with Shire Pharmaceuticals Plc in 2001 in a transaction worth approximately US$4 billion. Other members of our management team include scientists experienced in drug discovery and development, and pharmaceutical industry professionals having significant expertise in the areas of new product launches, sales and marketing and finance. C. OUR PRODUCTS FIBRILLEX(TM) -- OUR SOLUTION TO AA AMYLOIDOSIS Fibrillex(TM) is our product candidate for the treatment of AA Amyloidosis. AA Amyloidosis is a chronic, systemic disorder characterized by the over-expression of Serum Amyloid A ("SAA"), a protein found in the blood that is produced in response to inflammation. SAA is a precursor to an amyloid protein known as the AA protein. In AA Amyloidosis, the AA protein forms fibrils that accumulate in the kidney, spleen, liver and other internal organs, compromising their function. AA Amyloidosis results from certain chronic 9 inflammatory diseases, such as Rheumatoid Arthritis and Inflammatory Bowel Disease, certain chronic infections such as Tuberculosis, and from a genetic disease named Familial Mediterranean Fever. As AA Amyloidosis progresses, it results in serious illness, organ failure (particularly of the kidney, spleen and liver), and ultimately death. There is at present no known cure for the disorder, and patients with AA Amyloidosis normally have a life expectancy of five to 15 years. It is estimated that approximately 270,000 patients suffer from AA Amyloidosis in industrialized areas and countries, including North America, Europe and Japan. OUR PRODUCT Fibrillex(TM), our most advanced product candidate, is in a two-year Phase II/III clinical trial. We have received a grant from the FDA of approximately US$900,000 for this Phase II/III trial, which is designed to investigate the safety and efficacy of Fibrillex(TM) in 183 patients suffering from AA Amyloidosis at 27 sites across the United States, Europe and Israel. To our knowledge, Fibrillex(TM) is the first amyloid-targeting drug candidate to undergo advanced clinical testing for AA Amyloidosis. The Phase II/III clinical trial completed patient enrolment in January 2003 and is expected to be completed in January 2005. All patients who complete the Phase II/III clinical trial are invited to join an open-label extension study and receive Fibrillex(TM) for an additional two-year period. No safety issues have been reported to us by the independent Data Safety Monitoring Board we have established to monitor the safety of patients during the trial. Fibrillex(TM) is a small molecule that was selected to interact with the AA protein prior to its forming fibrils. Animal studies have shown that Fibrillex(TM) inhibits amyloid deposition in tissues by binding to the AA protein. To date, the safety, tolerability and pharmacokinetic profiles of Fibrillex(TM) have been investigated in four Phase I clinial studies in either healthy adult volunteers or volunteers with renal impairment due to non-amyloid-related diseases. Fibrillex(TM) was well tolerated in these studies, and no major adverse events were reported. Fibrillex(TM) exhibited a well-characterized pharmacokinetic profile in both subject groups. In pre-clinical trials, Fibrillex(TM) was shown to be an effective and potent inhibitor of amyloid fibril formation and amyloid deposition in the affected organs and to be specific for the AA protein. CURRENT THERAPEUTIC ALTERNATIVES There is, at the present time, no known specific treatment for AA Amyloidosis. Current therapies attempt to control the chronic infection or inflammatory disease which leads to the disorder. It is thought that treatment that suppresses the inflammation or infection will also decrease the production of SAA and will slow the progression of the disorders. Historically, efficient anti-inflammatory or immunosuppressor treatments have been shown to suppress or halt the development of AA Amyloidosis in some patients with Rheumatoid Arthritis. Patients with severe Rheumatoid Arthritis are currently being treated through a new anti-cytokine therapy (e.g. Remicade(TM) by Centocor, Inc., Enbrel(TM) by Wyeth and Amgen Inc.) to minimize the inflammatory response characteristic of Rheumatoid Arthritis. These new therapies might have an impact on the onset and progression of AA Amyloidosis by partly controlling the production of the precursor protein SAA. However, scientific and clinical reports on the benefits of such new therapies for the treatment of AA Amyloidosis are not yet available. Several studies have demonstrated improved renal function in patients with rheumatic conditions complicated by AA Amyloidosis following treatment with alkylating agents. Regression of amyloid deposits has been documented in patients with chronic infections following successful surgical excision (for example, excision of bone in osteomyelitis). In AA Amyloidosis associated with Familial Mediterranean Fever, treatment with colchinine has shown some beneficial effects. In addition, an injectable compound is being tested by the Centre for Amyloidosis and Acute Phase Proteins, Department of Medicine, Royal Free and University College Medical School, London. 10 Consequently, while there are a variety of therapeutic alternatives being investigated, none has been shown to be a safe and effective curative treatment for AA Amyloidosis. ALZHEMED(TM) -- OUR SOLUTION TO ALZHEIMER'S DISEASE Alzhemed(TM) is our product candidate for Alzheimer's Disease. According to the American Alzheimer's Association, it is estimated that over four million North Americans are currently afflicted with Alzheimer's Disease. Alzheimer's Disease is reported to be the third most expensive disease in terms of health care cost in the United States, behind heart disease and cancer. The patient population is expected to grow significantly over the next decade, primarily due to an increasing elderly population. In addition, the combination of awareness campaigns and the anticipated introduction of a number of diagnostic products is expected to markedly increase the total number of estimated cases, as previously undiagnosed patients are confirmed and the disease is detected at an earlier stage and age. Alzheimer's Disease is a degenerative neurological disease that progressively impairs a person's cognitive functions and gradually destroys the brain. There is no cure currently available for Alzheimer's Disease, and existing drugs only treat symptoms such as cognitive function deficit for a limited period of time. In its early stages, Alzheimer's Disease may cause only minor incidences of memory loss or forgetfulness. However, as it progresses, the symptoms multiply and intensify and the patient experiences the deterioration of both cognitive and motor functions, leading ultimately to death within an average of seven to 10 years. Although popularly perceived as a disease associated with old age, Alzheimer's Disease is increasingly being diagnosed in individuals in their 50s and 60s. The pathogenesis of Alzheimer's Disease is still somewhat ill-defined. It is now well recognized in published scientific material that, although there is an early onset form of the disease that is genetically inherited, the vast majority of cases have no known genetic cause and occur later in life. However, common to all cases of Alzheimer's Disease is the deposition of amyloid fibrils in the brain. These fibrils result when the Amyloid (beta) protein ("A(beta)"), interacts with naturally occurring GAGs. We have therefore chosen to pursue an amyloid-based approach in developing a treatment for Alzheimer's Disease. OUR PRODUCT Alzhemed(TM) is designed to stop the progression of Alzheimer's Disease in patients, whether the disease occurs sporatically or has a genetic basis. We are currently designing two Phase III efficacy trials for Alzhemed(TM) in North America and in Europe. The North American trial is scheduled to begin in the first half of 2004, while the European trial is anticipated for the first half of 2005. The trials will be large multi-center, international, randomized, double-blind, placebo-controlled and parallel group studies that will include, in total, approximately 1,900 patients with mild-to-moderate Alzheimer's Disease. It is anticipated that patients will be treated for 18 months. The effects of Alzhemed(TM) on disease progression will be measured through cognitive function and global performance tests. We will also be examining changes in brain volume using magnetic resonance imaging ("MRI") techniques. The clinical study protocols are being developed in collaboration with our Alzhemed(TM) Clinical Advisory Board and the regulatory authorities. Alzhemed(TM) is a small molecule that binds to soluble non-fibrillar A(beta) and prevents it from interacting with naturally occurring GAGs. By inhibiting the binding of GAGs to soluble A(beta), Alzhemed(TM) can prevent the A(beta) protein from assuming its fibrillar structure, thus preventing amyloid deposition in brain tissue and the associated toxicity and neuronal damage. Alzhemed(TM) has been shown to decrease amyloid deposition and to favor A(beta) clearance from the brain in an animal model of Alzheimer's Disease. In order to be effective, Alzhemed(TM) must overcome the challenge of crossing from the blood to the brain through the protective BBB . Alzhemed(TM) has been found to be present in both the brain of animals and in the CSF of humans participating in our trials, suggesting that Alzhemed(TM) has the ability to cross 11 the BBB. The in vivo brain pharmacokinetic profile obtained in two animal species showed brain uptake of the drug with a half-life in the brain which is markedly longer than that found in plasma. Our Alzhemed(TM) Phase II clinical study, which concluded in March 2003 and the results of which were released in June 2003, primarily investigated the safety, tolerability, pharmacokinetic and pharmacodynamic profiles of Alzhemed(TM) over a 12-week period in patients with mild-to-moderate Alzheimer's Disease. There were no safety findings of concern in the Phase II clinical trial. Alzhemed(TM) was detected in CSF, indicating an ability to cross the BBB. As secondary objectives, the trial evaluated, on an exploratory basis, the effect of Alzhemed(TM) on amyloid protein levels in CSF and on the cognitive function of the Alzheimer's Disease patients participating in the study. Alzhemed(TM) was found, after 12 weeks of use, to decrease the level of A(beta)42 (the more fibrillogenic form of the two A(beta) proteins) in CSF in a dose-related fashion. A 21-month open-label extension study was initiated in January of 2003, with patients invited to join the extension study as they completed the Phase II trial. Patients enrolling in this open-label extension study are given the highest dose of Alzhemed(TM). The results in standard cognitive tests at 16 months were consistent with a stabilizing effect of Alzhemed(TM) on cognitive function tests. We have completed four Phase I clinical studies to assess the safety, tolerability and pharmacokinetic profiles of Alzhemed(TM) (and Cerebril(TM), being the same compound as Alzhemed(TM)) in 117 healthy volunteers (including 37 elderly persons). Alzhemed(TM) has also undergone extensive toxicology and pharmacokinetic investigations in two animal species. In these studies, no safety findings of concern were found and Alzhemed(TM)'s pharmacokinetic profile was well characterized. CURRENT THERAPEUTIC ALTERNATIVES None of the existing treatments for Alzheimer's Disease is curative. Patients with the disease are treated with drugs which target only its symptoms. These drugs enhance patients' cognitive functions and general behaviour for a certain period of time but do not stop the progression of the disease. Patients with Alzheimer's Disease are usually treated with drugs designed to improve their cognitive function using compounds which maintain a higher concentration of neurotransmitters which results in improved cognitive function and behavior. The most prescribed drugs in this category are Aricept(TM) (Pfizer Inc./Eisai Company, Ltd.), Exelon(TM) (Novartis AG), Reminyl(TM) (Shire Pharmaceuticals Group Plc and Janssen Pharmaceutica Products, L.P.), Ebixa(TM) (Merz Pharma GmbH & Co. KgaA) and Namenda(TM) (Forest Laboratories Inc.), which is the trade name used in the U.S. for Ebixa(TM). Several pharmaceutical companies have drug development efforts aimed at the development of drugs to stop the progression of Alzheimer's Disease. The majority of these programs target different aspects of the amyloid protein. The different strategies consist in stopping the production of A(beta), blocking the fibril formation or clearing the deposits from the brain. The major companies working on an amyloid-based therapeutic approach are Merck & Co., Bristol-Myers Squibb Company, Prana Biotechnology Limited, Axonyx Inc., PRAECIS PHARMACEUTICALS INCORPORATED, Eunoe Incorporated, GlaxoSmithKline plc and Elan Corporation, plc. However, to our knowledge, Alzhemed(TM) is the only orally-administered disease modifying product candidate with preliminary pharmacological proof-of-concept in humans scheduled to enter Phase III clinical trials. CEREBRIL(TM) -- OUR SOLUTION TO HEMORRHAGIC STROKE DUE TO CAA Cerebril(TM) is our product candidate to treat Hemorrhagic Stroke due to CAA. Hemorrhagic Stroke due to CAA is a syndrome of recurrent strokes caused by amyloid deposits that cause blood vessels in the brain to rupture or otherwise malfunction. This type of stroke represents approximately seven percent of all strokes, with the incidence increasing as the population ages. It is typically diagnosed in patients aged 55 years or older with multiple hemorrhages confined to lobar brain regions and no other cause of hemorrhage. CAA can appear alone in some patients and is also a common pathology found in 50% or 12 more of patients with Alzheimer's Disease. Approximately five percent of patients with Alzheimer's Disease experience Hemorrhagic Stroke due to CAA. It is estimated that approximately 135,000 patients suffer from Hemorrhagic Stroke due to CAA each year (either alone or in association with Alzheimer's Disease). Hemorrhagic Stroke due to CAA remains a largely untreated disorder which is often undiagnosed unless it is confirmed by an autopsy. It ranges in severity from asymptomatic amyloid deposition in otherwise normal cerebral vessels to lobar hemorrhages resulting from progressive invasion of the vascular wall by amyloid fibrils. 70% to 80% of lobar hemorrhages are not fatal in their first occurrence, providing the opportunity for therapeutic intervention. However, recurrent lobar hemorrhages are frequent and are often fatal within just a few years. OUR PRODUCT Cerebril(TM) is designed to prevent the recurrence of Hemorrhagic Stroke due to CAA by reducing the deposit of amyloid fibrils within the microvasculature of the brain. The active ingredient in Cerebril(TM) is the same compound, and Cerebril(TM) has the same properties, as Alzhemed(TM). Cerebril(TM) has completed a Phase II clinical trial for which our lead investigator, Dr. Steven M. Greenberg of Massachusetts General Hospital in Boston has been awarded a grant of approximately US$1 million from the National Institute of Health. Enrollment was completed in October 2003 and the trial was being conducted in five centers in the United States. The study involved a 12-week treatment and was primarily investigating the safety, tolerability, pharmacokinetic and pharmacodynamic profiles of the product candidate in 24 patients who have suffered a lobar hemorrhage. The Phase II study also aimed to determine the optimal dosing regimens for subsequent testing of efficacy. Secondary objectives included assessing the effect of Cerebril(TM) on neurological function and the occurrence of new lesions detectable by MRI. An independent Data Safety Monitoring Board was established to monitor the safety of patients throughout the duration of the study. The first meeting of our Data Safety Monitoring Board for Cerebril(TM) was held after the first eight patients had completed two weeks of treatment, and no safety findings of concern were reported to us. Cerebril(TM) has been found to markedly reduce CAA in an animal model. Cerebril(TM), being the same compound as Alzhemed(TM), has undergone comprehensive pre-clinical and clinical trials. See "Alzhemed(TM) -- Our solution to Alzheimer's Disease". CURRENT THERAPEUTIC ALTERNATIVES No effective therapy has yet been developed for Hemorrhagic Stroke due to CAA. Patients experiencing Hemorrhagic Stroke due to CAA are currently offered palliative therapies which are not directed at treating the disorder. To our knowledge, no specific treatment aimed at preventing the recurrence of Hemorrhagic Stroke due to CAA through the inhibition of amyloid fibril formation and deposition is available. Novartis AG, Aventis and Pfizer Inc. have reported work done in research in CAA, mostly using animal models where CAA has been observed, but to our knowledge none has identified a specific treatment approach to the disorder or advanced to a pre-clinical stage of development. NC-1461 -- OUR SOLUTION TO THE DEVELOPMENT OF EPILEPTIC SEIZURES FOLLOWING TBI We have identified a series of compounds, of which NC-1461 is the lead candidate, to prevent the development of epileptic seizures following TBI. In the United States, approximately 1.5 million people sustain a TBI each year. TBI causes severe damage to the brain with internal bleeding, inflammation and neuronal cell death. TBI can lead very early 13 on to an imbalance between the activities of two specialized types of neuronal cells. This imbalance is due to the uncontrolled up-regulation of excitatory neurons, coupled with a strong down-regulation of inhibitory neurons. The imbalance leads to an uncontrolled electrical discharge which manifests itself as an epileptic seizure. Approximately 13% of patients who have had a TBI will start experiencing epileptic seizures 12 to 18 months following their injury. The brain tissue which is damaged as a result of TBI and which exhibits the neurological imbalance is called an "epileptic focus" and the process is referred to as "epileptogenesis". Since it is impossible to identify patients with a TBI who will develop epileptic seizures, all patients who have suffered a TBI would benefit from treatment early on following the injury to prevent the later development of seizures. OUR PRODUCTS In collaboration with Dr. Don Weaver, formerly of Queen's University of Kingston, Ontario, and now at Dalhousie University of Dalhousie, Nova Scotia, we have identified a series of compounds, of which the lead candidate is NC-1461, that we are developing as a treatment for patients at risk of developing epileptic seizures following a TBI. NC-1461 has been shown to cross the BBB and to have anti-epileptogenic activity in an animal model of spontaneous recurrent seizures following chemically-induced brain injury. Our compounds are designed to have dual action to: (i) bring down the activity of the excitatory neurons while (ii) increasing the activity of the inhibitory neurons. To achieve such an activity profile, the molecules need to act at the level of both the excitatory and inhibitory responses. This type of activity profile (although weak) has already been observed with (beta)-alanines. A series of (beta)-alanine analogs was therefore developed to identify compounds which would possess this activity profile and be able to maintain normal neuronal electrical activities early-on following a TBI, therefore preventing the establishment of epileptic foci. In pre-clinical studies, NC-1461 has indicated a potential for a dual mechanism of action. Promising results have also been achieved in animal models of epileptogenesis. CURRENT THERAPEUTIC ALTERNATIVES Presently, no treatment is available to TBI patients to prevent the establishment of the epileptic foci and the resulting onset of epileptic seizures. Drugs currently on the market aim only at preventing the onset epileptic seizures. None of these anti-convulsant drugs has been shown to prevent or treat the neurological damage resulting from TBI which leads to the development of epileptic foci and the resulting seizures. Although several pharmaceutical companies are focusing on developing more effective therapeutics to treat epileptic seizures, we are not aware of any other company developing a therapy based on compounds with dual activity or with the same mechanism of action as our compounds. NeuroSearch A/S of Denmark has reported anti-epileptogenic activity with a compound which is presently in a Phase II trial for the treatment of seizures in patients already suffering from Epilepsy. UCB Pharma SA of Belgium has also reported anti-epileptogenic activity with a compound presently in Phase I trials which is being developed as an anti-convulsant drug. D. SALES AND MARKETING We intend to pursue different commercialization strategies for our products in different parts of the world. We intend to retain full commercialization rights for products in markets that we can adequately exploit on our own. In other markets, we intend to partner with third parties through collaborative arrangements, including co-marketing agreements. In addition, in various designated markets, we intend to enter into out-licensing arrangements. 14 FIBRILLEX(TM): Because AA Amyloidosis is a disorder affecting a specific patient population and treated by a well-defined pool of specialists, we intend to develop and deploy our own sales and marketing force for the commercialization of Fibrillex(TM) in North America and in Europe in order to take advantage of local commercialization expertise while maximizing ownership for our products, and to out-license in the Japanese market due to specific clinical development and regulatory requirements there. We intend to capitalize on any benefits which result from Fibrillex(TM) having been granted Orphan Drug status in the United States and Europe and the Fast Track Product Designation in the United States. ALZHEMED(TM): Alzheimer's Disease is characterized by a large and growing patient population and a broad prescriber base composed of general practitioners, internists and specialists. We therefore intend to partner with a leading pharmaceutical company possessing a global marketing and commercial network for the commercialization, marketing and sale of Alzhemed(TM). CEREBRIL(TM): Cerebril(TM) targets a small and well-defined population primarily treated by a relatively small group of specialists. Therefore, our commercialization strategy for Cerebril(TM) is similar to our strategy for Fibrillex(TM). Cerebril(TM) will require targeted sales efforts and will provide us with the opportunity to expand our anticipated Fibrillex(TM) sales force in North America, while seeking a distribution partner in Europe and an out-license arrangement in Japan. Since Cerebril(TM) and Alzhemed(TM) are made up of the same compound, potential commercialization synergies between the two products will be evaluated as we explore partnership arrangements for Alzhemed(TM). E. OTHER PRODUCT CANDIDATES In addition to our ongoing clinical work, we have an active research and development program aimed at feeding our product pipeline. SECOND GENERATION ANTI-AMYLOID COMPOUNDS Know-how acquired through the development of Alzhemed(TM) has led to the design and synthesis of a second generation of anti-amyloid compounds based on our GAG mimetics technology. The compounds present, both in vitro and in vivo, a promising anti-amyloid activity profile. We have already conducted preliminary studies on approximately 200 of these compounds. VACCINE Our approach to Alzheimer's Disease has been to focus on targeting the A(beta) protein before it organizes into fibrils and causes neuronal damage. One approach to block the development of Alzheimer's Disease is to prevent the damage caused by A(beta) by intervening early using a vaccine strategy. Our vaccine approach consists of a modified fragment of A(beta) peptide to induce an immune response which targets soluble A(beta) (prior to any structural change which leads to fibril formation). Preliminary in vivo studies have shown promising results where immune recognition of soluble A(beta) reduces brain amyloid protein levels but does not attack fibrillar deposits, thereby minimizing the risk of brain inflammation. LIBRARY OF PRODUCT CANDIDATES To date, we have produced a library of potential product candidates of over 2,000 molecules through traditional organic chemistry. The library comprises several different classes of potential pharmacophores, sulfates, sulphonates, phosphonates, carboxylates and a number of other functional groups, all of which address amyloid proteins. In addition, we have access to compound libraries through alliances, collaborations and commercial arrangements. 15 Through our portfolio of in vitro and in vivo screening assays, we have identified lead drug molecules with potent anti-amyloid activity, the most promising of which are undergoing further research and development. F. OUR PRODUCT TECHNOLOGY PLATFORMS GAG MIMETICS FOR AMYLOID-RELATED DISORDERS Our therapeutic approach to amyloid-related disorders aims at preventing the onset and arresting the progression of the targeted disorders. We have identified small molecules which can inhibit the formation of amyloid deposits and thereby prevent amyloid-induced toxicity. A variety of neurological as well as systemic disorders are mediated by a class of proteins known as amyloids. Amyloids are naturally occurring proteins found in the central nervous system, the blood and elsewhere in the body. To date, at least 21 different unrelated proteins have been found to be capable of changing structure, depositing in different tissues and causing different types of amyloid diseases. During amyloid fibril formation, the amyloid protein associates with other proteins, such as GAGs, which bind to the amyloid protein, promote fibril formation and protect the fibrils from being degraded by enzymes. Our molecules, designed to mimic specific properties of the GAGs and therefore called "GAG mimetics", attach to the amyloid protein and inhibit the development of amyloid deposits and associated toxicity. The first of the following diagrams illustrates the interaction between GAGs and an amyloid protein during the process of fibril formation. The next diagram shows how our GAG mimetics can block the amyloid fibril formation process. By binding to the amyloid protein, our molecules can prevent the natural GAGs from binding to the amyloid protein, preventing the promotion of amyloid fibril formation. We believe that our GAG mimetic approach presents an effective therapeutic intervention which may ultimately either be combined with or replace other approaches which treat only the symptoms of the disorders we are targeting. [PICTURE] The amyloid fibril formation and associated elongation of the fibrils is modulated by the presence of GAGs. The GAGs are involved in promoting amyloid fibril formation and its interaction with cells. [PICTURE] Our compounds act as mimetics and target GAG binding sites on the amyloid protein. In this capacity, they compete with natural GAGs which results in interference with amyloid fibril formation and prevention of cellular toxicity which damages the surrounding cells. 16 DUAL ACTION ANTI-EPILEPTOGENICS Our drug design aims at correcting the neurotransmitter imbalance created early on following a TBI using compounds capable of dual action: (i) bringing down the activity of the excitatory neurons and (ii) up-regulating the activity of the inhibitory neurons, thereby restoring the natural balance. We have developed and synthesized a library of approximately 300 (beta)-alanine analogs which demonstrate this dual activity. In addition, we are evaluating the anti-epileptogenic and anti-convulsion activities of a small library of uracil and dihydrouracil compounds. In in vivo and in vitro experiments, we have found that these compounds (which may get metabolized into (beta)-alanine analogs in vivo) are capable of (i) preventing the development of epileptogenesis following a TBI or (ii) blocking the onset of epileptic seizures. We believe that such an activity profile is unique to our compounds and may lead to the development of therapeutics addressing both epileptogenesis and the control of epileptic seizures. G. IMPORTANCE OF IDENTIFIABLE INTANGIBLE PROPERTIES RESEARCH ALLIANCES, LICENSE AGREEMENTS AND GOVERNMENT FUNDING AGREEMENTS We have entered into licensing agreements with Queen's University (Kingston, Ontario, Canada) with respect to amyloid and Epilepsy research; research alliances with University of Montreal -- Ste. Justine Hospital (Montreal, Quebec, Canada) to test animal models relating to our development of compounds to prevent epileptic seizures following TBI; and service agreements with the National Research Council of Canada (Montreal, Quebec, Canada) to develop techniques to measure A(beta) protein. Neurochem has also concluded a strategic alliance with the National Research Council of Canada and Dr. Harold J. Jennings (Ottawa, Ontario, Canada) to collaborate on the discovery and assessment of certain vaccine approaches in animal models, and work towards the development of a specific vaccine using amyloid protein fragment conjugates. This collaboration also includes the possibility of preclinical and clinical development, as well as future commercialization in the field of A(beta)-peptide-protein conjugates. Through a licensing agreement with PRAECIS PHARMACEUTICALS INCORPORATED (Waltham, Massachusetts, U.S.A.), Neurochem is expanding its pool of intellectual property relating to specific A(beta)-derived peptide sequences for use in the development of a novel synthetic vaccine to prevent and treat Alzheimer's Disease. In addition, we have entered into an agreement with Technology Partnerships Canada ("TPC") regarding financial assistance to be provided by the Government of Canada for the development of one or more oral therapeutic products for the treatment of Alzheimer's Disease. To date, we have received approximately $6.7 million under this agreement and we will pay to TPC a royalty equal to 7.24% of gross revenues from the commercialization of effective orally-administered therapeutics for the treatment of Alzheimer's Disease until June 30, 2010. After June 30, 2010, we may have to continue to pay royalties to TPC until such time as the aggregate amount of royalties paid pursuant to the agreement reaches $20.5 million. H. INTELLECTUAL PROPERTY We, and the pharmaceutical industry in general, attach significant importance to patents and the protection of industrial secrets for new technologies, products and processes. Accordingly, our success depends, in part, on our ability to obtain patents or rights thereto, protect our commercial secrets and carry on our activities without infringing the rights of third parties. Our strategic approach is to build a portfolio which provides broad protection of our technology, as well as a tiered patent claim structure to provide back-up patent positions in commercially significant areas. We have established internal mechanisms for developing strategy and identifying patentable technology, including a patent committee and frequent status reports from our scientific personnel. We have filed for patent protection on our novel compositions, methods of therapy, screening assays for identifying new lead drug candidates, and diagnostic procedures. We generally seek to protect our proprietary treatment methods and drug discovery techniques by filing patent applications unless we believe that keeping an invention as a trade 17 secret is preferable. In addition, it is our policy to require our employees, consultants, members of the scientific and clinical advisory boards and parties to collaborative agreements to enter into agreements which typically provide (among other things) that specified information obtained or developed during the relationship remain confidential and that work product belongs to us. We currently hold rights to a number of patents and patent applications in the United States and Canada relating to our technology, as well as foreign counterparts for many of these patents and patent applications. A number of these patents and patent applications were filed by Queen's University and licensed to us. Other patents and patent applications are co-owned by Queen's University and us or by us and the University of British Columbia. A number of other patents and patent applications were filed by us. With respect to our product candidates and product pipeline, our patent portfolio is continually expanding, focusing on our commercialization and clinical efforts. We are a party to license agreements under which we have obtained rights to use certain technologies to develop our product candidates. The licenses to which we are a party impose various milestones, commercialization, sublicensing, royalty and other payment, insurance, indemnification and other obligations on us and are subject to certain reservations of rights. The following sets forth the status of our trademarks and trademark applications for our product candidates:
TRADEMARK COUNTRY STATUS ------------------------ ------- ------ Fibrillex(TM)........... Canada Allowed Fibrillex(TM)........... United States Allowed Fibrillex(TM)........... Germany Allowed Fibrillex(TM)........... Spain Allowed Fibrillex(TM)........... Japan Allowed Alzhemed(TM)............ Canada Allowed Alzhemed(TM)............ United States Pending Cerebril(TM)............ Canada Pending Cerebril(TM)............ United States Pending Neuroxil(TM)............ Canada Allowed
We are currently in discussion with Alza Corporation of California regarding an opposition it has filed to our registration of the trademark Alzhemed(TM) in the United States. All of our intellectual property, with the exception of the commercialization rights of our products in Canada and the applications for our Canadian trademarks (which are owned by Neurochem Inc.), is owned by Neurochem (International) Limited, a Swiss corporation and an indirect wholly-owned subsidiary of Neurochem Inc. See "2.2 Corporate Structure -- Intercorporate Relationships". I. HUMAN RESOURCES We currently employ 128 people, the majority of which are involved in R&D and drug development. Of these 128 people, 27 are scientists with Ph.D degrees and 21 are scientists with M.Sc. degrees. 18 ITEM 5 - SELECTED CONSOLIDATED FINANCIAL INFORMATION 5.1 ANNUAL INFORMATION The following table sets forth selected consolidated financial data for the last three fiscal years of the Corporation and should be read in conjunction with the audited financial statements of the Corporation for the six-month period ended December 31, 2003 and years ended June 30, 2003 and June 30, 2002.
Six-month period ended Fiscal year ended Fiscal year ended December 31,2003 June 30, 2003 June 30, 2002 ---------------------- ----------------- ----------------- $ $ (in thousand of dollars, except for earnings per share) Revenues(1) Nil Nil 2,271 Net earnings (loss) (16,773) (19,618) (13,475) per share (0.63) (0.90) (0.75) Total assets 94,225 31,160 32,733 Long-term debt 416 633 1,044
5.2 DIVIDENDS We have not declared any dividends since our incorporation. Any future determination to pay dividends will remain at the discretion of our Board of Directors and will depend on our financial condition, results of operation, capital requirements and such other factors as our Board of Directors deems relevant. ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS The "Management's Discussion and Analysis" on pages 9 through 20 of the Annual Report with respect to the six-month period ended December 31, 2003, is incorporated herein by reference. 6.1 QUARTERLY INFORMATION The following table sets forth selected consolidated financial data for the last eight quarters of the Corporation.
Six-month period ended Fiscal year ended Fiscal year ended December 31,2003 June 30, 2003 June 30, 2002 ---------------------- --------------------------------------- ------------------- Q1 Q2 Q1 Q2 Q3 Q4 Q3 Q4 $ $ $ $ $ $ $ $ (in thousands of dollars, except for earnings per share) Revenues Nil Nil Nil Nil Nil Nil Nil Nil Net earnings (loss) (6,787) (9,986) (3,962) (6,577) (5,609) (3,470) (4,277) (4,694) per share (0.28) (0.34) (0.20) (0.31) (0.25) (0.15) (0.24) (0.26) diluted (0.28) (0.34) (0.20) (0.31) (0.25) (0.15) (0.24) (0.26)
ITEM 7 - MARKET FOR SECURITIES Our Common Shares are listed on The Toronto Stock Exchange since June 21, 2000 under the symbol "NRM", and quoted on the NASDAQ since September 18, 2003 under the symbol "NRMX". 19 ITEM 8 - DIRECTORS AND OFFICERS The following table lists our directors and executive officers. All members of the Board of Directors will hold their positions until the next annual meeting of shareholders of the Corporation.
YEAR FIRST NAME AND MUNICIPALITY BECAME A OF RESIDENCE PRINCIPAL OCCUPATION OFFICE DIRECTOR - -------------------- -------------------- ------ ---------- Dr. Francesco Bellini, O.C.(1)..... Chairman and Chairman of the Board, 2002 Montreal, Quebec Chief Executive Officer(2) Chief Executive Officer and Director Dr. Colin Bier(3), (4)............. Consultant Director 1996 Montreal, Quebec Richard Cherney.................... Co-Managing Partner, Director 2003 Montreal, Quebec Davies Ward Phillips & Vineberg LLP (a law firm) Peter Kruyt(1),(4),(5)............. Vice President, Director 2002 Montreal, Quebec Power Corporation of Canada (a diversified management and holding company) Dr. Frederick H. Lowy(5)........... Rector and Vice-Chancelor Director 2003 Montreal, Quebec of Concordia University John Molloy(3)..................... President and Chief Executive Officer, Director 1994 Kingston, Ontario Parteq Research and Development Innovations, Queen's University (a university technology transfer organization) Ronald M. Nordmann(1),(4),(5),(6)... Co-President, Director 2002 Little Falls, New Jersey Global Health Associates, LLC (a consulting company to the healthcare and financial services industries)(7) Graeme K. Rutledge(3)............... Consultant(8) Director 2003 Perth, Ontario Dr. Emil Skamene(5)................. Scientific Director, Director 2002 Montreal, Quebec Research Institute of the McGill University Health Centre (an academic health centre) Dr. Philippe Calais................. President(9) President -- Hudson, Quebec Claude Michaud...................... Senior Vice-President, Senior Vice-President, -- Montreal, Quebec Finance and Chief Financial Officer(10) Finance and Chief Financial Officer Dr. Denis Garceau................... Vice-President, Vice-President, -- Montreal, Quebec Drug Development Drug Development Dr. Francine Gervais................ Vice-President, Vice-President, -- Montreal, Quebec Research and Development Research and Development Dr. Lise Hebert..................... Vice-President, Vice-President, -- Montreal, Quebec Corporate Communications(11) Corporate Communications
20
YEAR FIRST NAME AND MUNICIPALITY BECAME A OF RESIDENCE PRINCIPAL OCCUPATION OFFICE DIRECTOR - -------------------- -------------------- ------ ---------- Christine Lennon.................... Vice-President, Vice-President, -- Montreal, Quebec Business Development(12) Business Development Judith Paquin....................... Vice-President, Vice-President, -- Montreal, Quebec Human Resources(13) Human Resources David Skinner...................... Director of Legal Affairs, Director of Legal Affairs, -- Montreal, Quebec General Counsel and General Counsel and Corporate Secretary(14) Corporate Secretary
NOTES: (1) Pursuant to a subscription agreement dated July 25, 2002, by and between Picchio Pharma, P.P. Luxco Holdings II S.A.R.L. and the Corporation, the Corporation covenanted to cause a total of three nominees of Picchio Pharma Inc. to be included in the list of management nominees to be proposed for election to the Board at each shareholders meeting occurring following the date thereof. Picchio Pharma's right shall terminate on the date it ceases to beneficially hold at least 15% of the issued and outstanding Common Shares (including Common Shares issuable upon exercise of the warrants issued to them concurrently). Dr. Bellini and Messrs. Kruyt and Nordmann are the current nominees of Picchio Pharma. (2) Prior to his appointment as Chief Executive Officer of the Corporation on December 11, 2002, Dr. Bellini's principal occupation was Chairman of Picchio Pharma, a biopharmaceutical investment company, a position he continues to hold. Prior to 2001, Dr. Bellini was Chairman and Chief Executive Officer of Biochem Pharma Inc. (now Shire Biochem Inc.), a biopharmaceutical company which he co-founded in 1986. (3) Member of the Audit Committee. (4) Member of the Compensation Committee. (5) Member of the Nominating and Corporate Governance Committee. (6) Mr. Nordmann is the Lead Director of the Corporation. (7) From 1994 through 1999, Mr. Nordmann was a partner at Deerfield Management Inc., a healthcare equity fund. (8) Prior to June 2002, Mr. Rutledge was a Senior Partner at Deloitte & Touche, Canada, an accounting firm. (9) Prior to January 2003, Dr. Calais was General Manager at Servier Canada Inc., part of the French private pharmaceutical group. (10) Prior to 2002, Mr. Michaud was Vice-President and Chief Financial Officer of C-Mac Industries Inc., a global electronic manufacturing services company, and prior to 2001, was Managing Director, Investment Banking at Scotia Capital Inc., a Canadian investment bank. (11) Dr. Hebert was promoted to Vice-President, Corporate Communications on December 12, 2002. Prior to that date, she was Director, Communications and Investor Relations. (12) Prior to January 2004, Ms. Lennon was Venture Advisor for the Biotechnology and Life Sciences investment sector of CDP Capital Inc, a division of a pension fund. Prior to this, Ms. Lennon was Vice President, Global Commercial Development - Oncology of Biochem Pharma Inc. (now Shire Biochem Inc.), a biopharmaceutical company. (13) Prior to January 2004, Ms. Paquin was Vice President, Human Resources of Schering Canada Inc., a biopharmaceutical company. (14) Prior to April 2003, Mr. Skinner served as Commercial Counsel and Deputy to the Director of Commercial and Legal Affairs in the London, England office of Antfactory Limited, a global venture capital firm. Mr. Skinner also served in the corporate commercial departments of the law firms Freshfields Bruckhaus Deringer in London, England and Stikeman Elliott in Montreal, Budapest and London. In our management proxy circular dated April 6, 2004, all of the above listed directors were nominated by management for election as directors, except for Mr. Richard Cherney. Management also proposed the additional nomination of Messrs. Jean-Guy Desjardins and Francois Legault, both from Montreal, Quebec, as directors. 21 As of May 11, 2004, the directors and executive officers, as a group, beneficially owned or exercised control or direction over approximately 7,198,124 of the Common Shares outstanding.(1) The following is a description of the current committees of the Board: COMMITTEES OF THE BOARD AUDIT COMMITTEE The mandate of the Audit Committee includes assisting the Board in its oversight of (i) the integrity of the Corporation's financial statements, financial reporting process, system of internal controls over financial reporting, and audit process, (ii) the Corporation's compliance with, and process for monitoring compliance with, legal and regulatory requirements, (iii) the independent auditors' qualifications and independence, and (iv) the performance of the independent auditors. The current members of the Audit Committee are Mr. Graeme K. Rutledge (chair), Dr. Colin Bier and Mr. John Molloy. Under the listing requirements of NASDAQ to become effective July 31, 2005, no director who is not independent may be appointed to the audit committee of a company. Mr. Molloy would not be independent under these listing requirements when they become effective, as he is the President and Chief Executive Officer of Parteq Research and Development Innovations, Queen's University ("Parteq"). However, in accordance with those NASDAQ listing requirements, the Board has resolved that the continued membership of Mr. Molloy on the Audit Committee is required in the best interests of the Corporation and its shareholders because of his knowledge of the Corporation and experience in such matters. COMPENSATION COMMITTEE The mandate of the Compensation Committee includes reviewing the compensation arrangements for the Corporation's employees, including executive officers and directors and making recommendations to the Board with respect to such compensation arrangements, as well making recommendations to the Board with respect to the Corporation's incentive compensation plans and equity-based plans and to oversee succession planning. The Compensation Committee is also responsible for preparing an annual report on executive compensation for purposes of disclosure to shareholders. The current members of the Compensation Committee are Dr. Colin Bier (chair), Mr. Peter Kruyt and Mr. Ronald M. Nordmann. NOMINATING AND CORPORATE GOVERNANCE COMMITTEE The mandate of the Nominating and Corporate Governance Committee is to develop and recommend to the Board a set of corporate governance principles and to prepare and review the disclosure with respect to, and the operation of, the Corporation's system of corporate governance, before such disclosure is submitted to the Board for its approval. In addition, the Nominating and Corporate Governance Committee is responsible for the review and periodic update of the Corporation's Code of Ethics which governs the conduct of the Corporation's directors, officers and other employees. Moreover, the Nominating and Corporate Governance Committee is mandated to examine, on an annual basis, the size and composition of the Board and, if appropriate, recommend to the Board a program to establish a Board comprised of members who facilitate effective decision-making. Finally, the Nominating and Corporate Governance Committee shall identify individuals qualified to become members of the Board, recommend to the Board nominees to be put before shareholders at each annual meeting and recommend to the Board a process for board, committee and director assessment. The current members of the Nominating and Corporate Governance Committee are Mr. Ronald M. Nordmann (chair), Dr. Frederick H. Lowy, Mr. Peter Kruyt and Dr. Emil Skamene. - -------- (1) Included in this amount are 166,666 Common Shares owned directly by Dr. Bellini and the 6,718,368 Common Shares owned indirectly by Picchio Pharma of which the FMRC Family Trust is a 50% owner. Dr. Bellini is a beneficiary of the FMRC Family Trust. 22 ITEM 9 - AUDIT COMMITTEE FINANCIAL EXPERT Our Board of Directors has determined that Mr. Graeme K. Rutledge is an audit committee financial expert. ITEM 10 - PRINCIPAL ACCOUNTANT FEES AND SERVICES We have paid KPMG LLP ("KPMG"), our external auditors, the following fees in each of the last two fiscal periods: AUDIT FEES The following sets forth the aggregate fees paid for each of the two past fiscal periods for professional fees to KPMG for the audit of the annual financial statements or for services normally provided by KPMG in connection with statutory and regulatory filings or engagements for those fiscal periods. Fiscal year ended June 30, 2003 $ 53,700 Audit of consolidated financial statements for the six-month period ended December 31, 2003 $ 64,040 AUDIT-RELATED FEES The following sets forth additional aggregate fees to those reported under "Audit Fees" in each of the last two fiscal periods for assurance and related services by KPMG that are reasonably related to the performance of the audit or review of the financial statements: Fiscal year ended June 30, 2003 Review of interim financial statements $ 23,200 Translation services $ 16,200 Six-month period ended December 31, 2003 Review of interim financial statements $ 10,500 Public offering $206,000 Comments on accounting treatment or requirements of various transactions $ 43,870 Translation services $ 31,400 NON-AUDIT AND TAX FEES The following sets forth the aggregate fees billed in each of the last two fiscal periods for professional services rendered by KPMG for assistance with a corporate reorganization, tax compliance, tax advice, tax planning and review of business opportunities: Fiscal year ended June 30, 2003 Assistance with corporate reorganization and tax compliance work $119,700 Six-month period ended December 31, 2003 Review of various business opportunities, sales tax and US tax issues $ 38,300 23 ALL OTHER FEES The following sets forth the aggregate fees billed in each of the last two fiscal periods for products and services provided by the principal accountant not described above: Fiscal year ended June 30, 2003 None Six-month period ended December 31, 2003 None Our Audit Committee pre-approves every engagement by KPMG to render audit or non-audit services. All of the services described above were approved by the audit committee. Prior to the beginning of each fiscal period, we seek audit committee approval for all services expected to be rendered by KPMG during the coming year. If during the course of the year, we require a service to be performed that is not contemplated in the list of pre-approved services we seek approval from the Chairman of the audit committee for KPMG to proceed with such service, which approval requires subsequent ratification at the next meeting of the audit committee. ITEM 11 - ADDITIONAL INFORMATION We shall provide to any person, upon request to the Secretary of the Corporation: (a) when our securities are in the course of a distribution under a preliminary short form prospectus or a short form prospectus, (i) one copy of our annual information form, together with one copy of any document, or the pertinent pages of any document, incorporated by reference in the annual information form, (ii) one copy of our comparative financial statements for our most recently completed financial year for which financial statements have been filed together with the accompanying report of the auditor and one copy of our most recent interim financial statements that have been filed, if any, for any period after the end of our most recently completed financial year, (iii) one copy of our information circular in respect of our most recent annual meeting of shareholders that involved the election of directors or one copy of any annual filing prepared instead of that information circular, as appropriate, and (iv) one copy of any other documents that are incorporated by reference into the preliminary short form prospectus or the short form prospectus and are not required to be provided under clauses (i), (ii) or (iii) above; or (b) at any other time, one copy of any documents referred to in clauses (a)(i), (ii) and (iii), provided that we may require the payment of a reasonable charge if the request is made by a person or company who is not one of our security holders. 24 Additional information, including directors' and officers' remuneration and indebtedness, principal holders of the Corporation's securities, options to purchase securities and interests of insiders in material transactions, if applicable, is contained in our information circular dated April 6, 2004 which was prepared for the 2004 annual meeting of shareholders. Additional financial information is provided in the Corporation's comparative financial statements for the six-month period ended December 31, 2003. The foregoing documents may be obtained by contacting the office of the Secretary at the head office of the Corporation, 275 Armand Frappier Boulevard, Laval, Quebec H7V 4A7. 25 EX-2 3 m12968orexv2.txt CONSOLIDATED FINANCIAL STATEMENTS Exhibit 2 CONSOLIDATED AUDITED FINANCIAL STATEMENTS OF THE REGISTRANT FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 2003, THE YEARS ENDED JUNE 30, 2003 AND 2002 AND FOR THE PERIOD FROM INCEPTION (JUNE 17, 1993) TO DECEMBER 31, 2003 INCLUDING A RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES [KPMG LOGO] Consolidated Financial Statements of NEUROCHEM INC. (A DEVELOPMENT STAGE COMPANY) Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 AUDITORS' REPORT TO THE SHAREHOLDERS We have audited the consolidated balance sheets of Neurochem Inc. as at December 31, 2003 and June 30, 2003 and the consolidated statements of operations, deficit and cash flows for the six-month period ended December 31, 2003, each of the years in the two-year period ended June 30, 2003 and for the period from inception (June 17, 1993) to December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2003 and June 30, 2003 and the results of its operations and its cash flows for the six-month period ended December 31, 2003, each of the years in the two-year period ended June 30, 2003 and for the period from inception (June 17, 1993) to December 31, 2003 in accordance with Canadian generally accepted accounting principles. (signed) KPMG LLP Chartered Accountants Montreal, Canada February 13, 2004 NEUROCHEM INC. Consolidated Financial Statements Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 FINANCIAL STATEMENTS Consolidated Balance Sheets............................ 1 Consolidated Statements of Operations.................. 2 Consolidated Statements of Deficit..................... 3 Consolidated Statements of Cash Flows.................. 4 Notes to Consolidated Financial Statements............. 5
NEUROCHEM INC. Consolidated Balance Sheets December 31, 2003 and June 30, 2003 (in thousands of Canadian dollars) (in accordance with Canadian GAAP)
December 31, December 31, June 30, 2003 2003 2003 ------------- ------------- --------- (US$- (Cdn$) (Cdn$) note 2 (l)) ASSETS Current assets: Cash and cash equivalents.......................... $11,506 $14,869 $ 6,450 Marketable securities.............................. 48,537 62,725 9,884 Grants receivable (note 3)......................... - - 529 Sales taxes and other receivables.................. 558 721 882 Research tax credits receivable.................... 1,633 2,111 1,174 Prepaid expenses and deposits...................... 1,293 1,671 928 ------- ------- ------- 63,527 82,097 19,847 Long-term security deposits (note 9 (d))............. 175 226 236 Long-term investment (note 4)........................ 3,421 4,421 4,421 Property and equipment (note 5)...................... 3,512 4,539 4,070 Patent costs (note 6)................................ 2,277 2,942 2,586 ------- ------- ------- $72,912 $94,225 $31,160 ======= ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable................................... $ 1,602 $ 2,070 $ 3,054 Accrued liabilities................................ 2,901 3,749 2,359 Current portion of obligations under capital leases (note 7)......................... 329 425 411 ------- ------- ------- 4,832 6,244 5,824 Obligations under capital leases (note 7)............ 322 416 633 ------- ------- ------- 5,154 6,660 6,457 Shareholders' equity: Share capital (note 8)............................. 134,587 173,930 87,482 Deficit............................................ (66,829) (86,365) (62,779) ------- ------- ------- 67,758 87,565 24,703 Commitments and contingencies (notes 3 (a) and 9) ------- ------- ------- $72,912 $94,225 $31,160 ======= ======= =======
See accompanying notes to consolidated financial statements. On behalf of the Board of Directors by: (Signed) Graeme K. Rutledge (Signed) Colin Bier, Ph.D. Director Director
- 1 - NEUROCHEM INC. Consolidated Statements of Operations Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) (in accordance with Canadian GAAP)
Six-month period Cumulative ended December 31, Years ended June 30, since ----------------------- -------------------- inception of 2003 2003 2003 2002 operations ----------- -------- -------- -------- ------------ (US$- (Cdn$) (Cdn$) (Cdn$) (Cdn$) note 2 (l)) Revenues: Research contracts............. $ -- $ -- $ -- $ 2,271 $ 9,216 License fees................... -- -- -- -- 1,106 -------- -------- -------- -------- -------- -- -- -- 2,271 10,322 Expenses: Research and development....... 6,594 8,522 18,782 15,304 76,630 Research tax credits........... (707) (914) (1,410) (1,048) (10,290) Research grants and other...... (161) (208) (1,895) (2,071) (7,816) -------- -------- -------- -------- -------- 5,726 7,400 15,477 12,185 58,524 General and administrative..... 5,768 7,454 7,184 3,698 29,675 Depreciation of property and equipment................... 431 557 1,019 758 3,592 Amortization of patent costs... 69 89 178 130 630 Interest and bank charges...... 35 46 144 232 908 -------- -------- -------- -------- -------- 12,029 15,546 24,002 17,003 93,329 -------- -------- -------- -------- -------- Net loss before undernoted items.......................... (12,029) (15,546) (24,002) (14,732) (83,007) Investment and other income: Interest income................ 402 520 800 1,144 5,484 Foreign exchange............... (1,352) (1,747) 100 113 (1,499) Gain on disposal of intellectual property (note 4)........... -- -- 3,484 -- 3,484 -------- -------- -------- -------- -------- (950) (1,227) 4,384 1,257 7,469 -------- -------- -------- -------- -------- Net loss before income taxes..... (12,979) (16,773) (19,618) (13,475) (75,538) Income taxes: Quebec credit for losses....... -- -- -- -- 700 -------- -------- -------- -------- -------- Net loss......................... $(12,979) $(16,773) $(19,618) $(13,475) $(74,838) ======== ======== ======== ======== ======== Net loss per share (note 12): Basic and diluted.............. $ (0.49) $ (0.63) $ (0.90) $ (0.75) ======== ======== ======== ========
See accompanying notes to consolidated financial statements. - 2 - NEUROCHEM INC. Consolidated Statements of Deficit Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars) (in accordance with Canadian GAAP)
Six-month period Cumulative ended December 31, Years ended June 30, since ----------------------- -------------------- inception of 2003 2003 2003 2002 operations ----------- -------- -------- -------- ------------ (US$- (Cdn$) (Cdn$) (Cdn$) (Cdn$) note 2 (l)) Deficit, beginning of period..... $(48,578) $(62,779) $(42,624) $(29,149) $ - Net loss......................... (12,979) (16,773) (19,618) (13,475) (74,838) Share issue costs................ (5,272) (6,813) (537) - (11,527) -------- -------- -------- -------- -------- Deficit, end of period........... $(66,829) $(86,365) $(62,779) $(42,624) $(86,365) ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements. - 3 - NEUROCHEM INC. Consolidated Statements of Cash Flows Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars) (in accordance with Canadian GAAP)
Six-month period Cumulative ended December 31, Years ended June 30, since ----------------------- -------------------- inception of 2003 2003 2003 2002 operations ----------- -------- -------- -------- ------------ (US$- (Cdn$) (Cdn$) (Cdn$) (Cdn$) note 2 (l)) Cash flows from operating activities: Net loss.............................. $(12,979) $(16,773) $(19,618) $(13,475) $(74,838) Adjustments for: Gain on disposal of intellectual property.......... -- -- (3,484) -- (3,484) Depreciation and amortization................... 500 646 1,197 888 4,222 Write-off of patents............. -- -- -- 119 119 Shares issued for services....... -- -- -- -- 41 Changes in operating assets and liabilities: Grants receivable................ 409 529 488 (37) -- Sales taxes and other receivables.............. 125 161 (477) 12 (721) Research tax credits receivable..................... (725) (937) (456) 34 (2,111) Prepaid expenses and deposits................... (567) (733) (689) (31) (1,896) Accounts payable and accrued liabilities............ 457 590 1,086 1,565 6,038 -------- -------- -------- -------- -------- (12,780) (16,517) (21,953) (10,925) (72,630) Cash flows from financing activities: Proceeds from issue of share capital............................. 66,893 86,448 17,981 11 173,888 Share issue costs..................... (5,272) (6,813) (537) -- (11,527) Proceeds from sale-leaseback.......... -- -- -- 1,649 2,168 Repayment of obligations under capital lease....................... (157) (203) (552) (618) (2,321) -------- -------- -------- -------- -------- 61,464 79,432 16,892 1,042 162,208 Cash flows from investing activities: Additions to property and equipment... (709) (916) (1,638) (946) (7,196) Additions to patent costs............. (572) (739) (538) (1,156) (4,197) Long-term investment.................. -- -- (591) -- (591) Proceeds from (investment in) marketable securities............... (40,888) (52,841) 13,129 7,045 (62,725) -------- -------- -------- -------- -------- (42,169) (54,496) 10,362 4,943 (74,709) -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents........................ 6,515 8,419 5,301 (4,940) 14,869 Cash and cash equivalents, beginning of period..................... 4,991 6,450 1,149 6,089 -- -------- -------- -------- -------- -------- Cash and cash equivalents, end of period........................... $ 11,506 $ 14,869 $ 6,450 $ 1,149 $ 14,869 ======== ======== ======== ======== ========
Supplemental disclosures to cash flow statements (note 13) See accompanying notes to consolidated financial statements. - 4 - NEUROCHEM INC. Notes to Consolidated Financial Statements Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) 1. ORGANIZATION AND BUSINESS ACTIVITIES: Neurochem Inc. (the "Company" or "Neurochem"), incorporated under the Canada Business Corporations Act in 1993, is a Canadian biopharmaceutical company focused on the development and commercialization of innovative therapeutics for neurological disorders. Since inception, the business activities of the Company have been devoted principally to research and development of the Company's core technology platform, amyloid inhibitors, which focuses on the design and synthesis of chemical compounds that inhibit the formation, deposition and toxicity of amyloid fibrils implicated as the underlying causes of certain diseases. The Company's therapeutic focus is on developing innovative treatments for neurological disorders. The diseases currently targeted by the Company include Alzheimer's Disease, Hemorrhagic Stroke due to Cerebril Amyloid Angiopathy ("CAA"), and certain Systemic Amyloidosis disorders. In addition, the Company is also conducting development programs for other neurological disorders principally Epileptic Seizures induced by Traumatic Brain Injury. In the fiscal period ended June 30, 2003, the Company disposed of its intellectual property rights for Diabetes Type II (see note 4). The status of the Company's principal product candidates are as follows:
Disease indication Product candidates Stage of development ------------------ --------------------- ----------------------------------- Amyloid A (AA) Amyloidosis Fibrillex (TM) Phase II/III clinical trial Alzheimer's Disease Alzhemed (TM) Phase III clinical trials in design Hemorrhagic Stroke due to CAA Cerebril (TM) Phase II clinical trial Epileptic Seizures induced by Traumatic Brain Injury Lead compound NC-1461 Pre-clinical testing
Neurochem is considered to be in the development stage, with a significant emphasis on clinical trials for three of its product candidates. Since inception, substantially all of the Company's research and development expenditures, capital expenditures, including costs incurred to secure patents, and all revenues from milestone payments and research contracts, relate to the Company's core technology platform. 2. SIGNIFICANT ACCOUNTING POLICIES: The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). A reconciliation of the net loss and shareholders' equity to US GAAP is presented in note 16. - 5 - NEUROCHEM INC. Notes to Consolidated Financial Statements, Continued Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (a) Principles of consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated on consolidation. (b) Cash and cash equivalents: The Company considers all investments with maturities of three months or less that are highly liquid and readily convertible into cash to be cash equivalents. (c) Marketable securities: Marketable securities are investments with maturities greater than three months and less than a year, and consist principally of commercial paper. Interest bearing financial assets are intended to be held to maturity and are carried at amortized cost. Interest is recognized on an effective yield basis. These investments are written down to their estimated fair market value when this amount is less than amortized cost, unless the Company has reason to believe it will be able to recover the carrying amount. Estimated fair market value is based on quoted market prices. (d) Long-term investment: The long-term investment is recorded at cost. When, in the opinion of management, a permanent decline in value has occurred, the investment is written down to its estimated realizable value. In determining the estimated realizable value, management relies on its judgment and knowledge of the investment and of general business and economic conditions that prevail and are expected to prevail. These estimates are limited due to the uncertainty of predictions concerning future events. (e) Property and equipment: Property and equipment are stated at cost. Equipment under capital leases is stated at the present value of minimum lease payments. Depreciation and amortization are provided at the following annual rates:
Asset Basis Rate/period ----- ----------------- ------------- Research equipment Declining balance 20% Office equipment Declining balance 20% Computer hardware Declining balance 30% Computer software Straight-line 100% Equipment under capital leases Declining balance 20-30% Leasehold improvements Straight-line Over the term of the lease
- 6 - NEUROCHEM INC. Notes to Consolidated Financial Statements, Continued Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (f) Patent costs: The capitalized amount with respect to patents relates to direct costs incurred in connection with securing the patents. Patents are stated at cost and are amortized using the straight-line method over the life of the patent ranging from 17 to 20 years. The cost of the patents does not necessarily reflect their present or future value and the amount ultimately recoverable is dependent upon the continued development and successful commercialization of the related products. (g) Impairment and disposal of long-lived assets: Effective July 1, 2003, the Company adopted the new recommendations of the Canadian Institute of Chartered Accountants ("CICA"), Handbook Section 3063, Impairment or Disposal of Long-lived Assets and revised Section 3475, Disposal of Long-Lived Assets and Discontinued Operations. Together, these two Sections supersede the write-down and disposal provisions of Section 3061, Property, Plant and Equipment as well as Section 3475, Discontinued Operations. Section 3063 amends existing guidance on long-lived asset impairment measurement and establishes standards for the recognition, measurement and disclosure of the impairment of long-lived assets held for use by the Company. It requires that an impairment loss be recognized when the carrying amount of an asset to be held and used exceeds the sum of the undiscounted cash flows expected from its use and disposal; the impairment recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value. Section 3475 provides a single accounting model for long-lived assets to be disposed of by sale. Section 3475 provides specified criteria for classifying an asset as held-for-sale to be measured at the lower of their carrying amounts or fair value, less costs to sell. Section 3475 also broadens the scope of businesses that qualify for reporting as discontinued operations to include any disposals of a component of an entity, which comprises operations and cash flows that can be clearly distinguished from the rest of the Company, and changes the timing of recognizing losses on such operations. (h) Revenue recognition: Revenue from research contracts is recognized when services to be provided are rendered and all conditions under the terms of the underlying agreement are met. Revenue subject to the achievement of milestones is recorded only when the specified events have occurred and collectibility is reasonably assured. Up-front payments and initial technology access fees are deferred and recognized as revenue on a systematic basis over the period that the related products or services are delivered and all obligations are performed. License fees are recorded when conditions and events under the license agreement have occurred and collectibility is reasonably assured. - 7 - NEUROCHEM INC. Notes to Consolidated Financial Statements, Continued Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (i) Research and development: Research expenditures are expensed as incurred. Development expenditures are capitalized when they meet the criteria for capitalization in accordance with Canadian GAAP and the future benefits could be regarded as being reasonably certain. At December 31, 2003 and June 30, 2003, no development costs were deferred. (j) Government assistance: Government assistance, consisting of grants and research tax credits, is recorded as a reduction of the related expense or the cost of the asset acquired. Government assistance is recorded in the accounts when reasonable assurance exists that the Company has complied with the terms and conditions of the approved grant program or, for tax credits, when there is reasonable assurance that they will be realized. (k) Foreign exchange: Monetary assets and liabilities denominated in foreign currencies are translated at year-end exchange rates. Other balance sheet items denominated in foreign currencies are translated at rates of exchange in effect at the transaction date. Income and expenses denominated in foreign currencies are translated at rates of exchange in effect at the transaction date. Translation gains and losses are included in income. The Company's foreign subsidiaries are considered to be integrated foreign operations and their accounts have been translated using the temporal method with translation gains and losses included in the consolidated statements of operations. (l) Translation of convenience: The Company's functional currency is the Canadian dollar. The Company has also presented the consolidated financial statements as at and for the period ended December 31, 2003 in US dollars using the convenience translation method whereby all Canadian dollar amounts were converted into US dollars at the noon exchange rate quoted by the Bank of Canada at December 31, 2003, which was $0.7738 US dollar per Canadian dollar. The information in US dollars is presented only for the convenience of some readers and thus has limited usefulness. This translation should not be viewed as a representation that such Canadian dollar amounts actually represent such US dollar amounts or could be or would have been converted into US dollars at the rate indicated. - 8 - NEUROCHEM INC. Notes to Consolidated Financial Statements, Continued Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (m) Stock-based compensation plan: For stock-based employee compensation awards, the Company follows the settlement method of accounting. Under this method, no compensation expense is recognized in the consolidated statement of operations when stock options are issued to employees. Any consideration received from the plan participants upon exercise of stock options is credited to share capital. All stock-based payments to non-employees, and employee awards that are direct awards of stock, call for settlement in cash or other assets, or are stock appreciation rights that call for settlement by the issuance of equity instruments, granted on or after July 1, 2002, are accounted for using the fair value method. The Company discloses the pro forma effect of accounting for all stock-based awards granted after July 1, 2002 under the fair value-based method (refer to note 12). (n) Income taxes: The Company utilizes the asset and liability method for accounting for income taxes. Under this method, future income tax assets and liabilities are determined based on "temporary differences" (differences between the accounting basis and the tax basis of the assets and liabilities), and are measured using the currently enacted, or substantively enacted, tax rates and laws expected to apply when these differences reverse. A valuation allowance is recorded against any future tax asset if it is more likely than not that the asset will not be realized. (o) Earnings per share: Basic earnings per share are determined using the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed in a manner consistent with basic earnings per share except that the weighted average shares outstanding are increased to include additional shares from the assumed exercise of options and warrants, if dilutive. The number of additional shares is calculated by assuming that outstanding options and warrants were exercised and that the proceeds from such exercises were used to acquire shares of common stock at the average market price during the reporting period. (p) Use of estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant areas requiring the use of management estimates include estimating the useful lives of long-lived assets, including property and equipment and patent costs, estimating accruals for clinical trial expenses, as well as assessing the recoverability of the long-term investment, research tax credits and future tax assets. The reported amounts and note disclosures are determined to reflect the most probable set of economic conditions and planned course of actions. Actual results could differ from these estimates. - 9 - NEUROCHEM INC. Notes to Consolidated Financial Statements, Continued Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) 3. GRANTS RECEIVABLE: (a) Technology Partnerships Canada Program: During the year ended June 30, 2000, the Company signed an agreement with the federal Ministry of Industry under its Technology Partnerships Canada Program (the "Agreement"). Under the Agreement, the Company is entitled to a financial contribution based on eligible expenditures incurred by the Company with respect to a project for the development of effective oral therapeutics for Alzheimer's Disease. The Company submitted total claims under the Agreement in the amount of nil for the six-month period ended December 31, 2003, (year ended June 30, 2003 -- $1,498, June 30, 2002 -- $2,019, June 30, 2001 -- $1,777 and June 30, 2000 -- $1,443) for a cumulative amount of $6,737. The Company recorded nil for the six-month period ended December 31, 2003 (year ended June 30, 2003 -- $1,405, June 30, 2002 -- $1,657) in "research grants and other" in the consolidated statements of operations and nil at December 31, 2003 (year ended June 30, 2003 -- $93 and June 30, 2002 -- $362) against property and equipment. Under the Agreement, the Company is committed to pay the federal government royalties equal to 7.24% of gross revenues realized from the commercialization of effective orally-administered therapeutics for the treatment of Alzheimer's Disease until June 30, 2010. After June 30, 2010, the Company may have to continue to pay royalties until such time as the aggregate amount of royalties paid pursuant to the Agreement reaches $20,540. (b) Food and Drug Administration: During the year ended June 30, 2002, the Company was awarded a $1,400 grant from the US Food and Drug Administration for certain direct costs to be incurred by the Company for a Phase II/III trial of Fibrillex(TM). Funds under the grant are expected to be received by the Company in equal quarterly instalments over a period of three years. Included in "research grants and other" on the statement of operations for the six months ended December 31, 2003 is an amount of $199 (year ended June 30, 2003 -- $460; June 30, 2002 -- $356) received under this agreement. 4. LONG-TERM INVESTMENT: In May 2003, the Company entered into the following transactions with respect to its Diabetes Type II pre-clinical program: (i) the Company disposed of its intellectual property rights relating to the pre-clinical diabetes program, including an exclusive perpetual, royalty-free, worldwide license to Innodia Inc. ("Innodia"), a privately held Canadian biopharmaceutical company. The carrying value of these rights, which amounted to $346, was exchanged for 1,904,464 Innodia common shares having a fair market value of $5,400. The fair market value of the Innodia common shares was determined based on the pricing of a $7,000 private placement financing completed by Innodia concurrent with this transaction. - 10 - NEUROCHEM INC. Notes to Consolidated Financial Statements, Continued Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) 4. LONG-TERM INVESTMENT (CONTINUED): (i) (continued): Since the Company transferred its ownership of a controlled productive asset to Innodia in exchange for a non-controlling equity interest of 31% in Innodia, the Company accounted for this transaction as a partial sale and recognized a gain on the transaction only to the extent of the interest of the other shareholders in Innodia. Accordingly, the gain on sale of intellectual property rights of $3,484, included in the June 30, 2003 statement of operations, represents approximately 69% of the total gain of $5,054 on the transaction; (ii) the Company subscribed for 176,339 Class A1 preferred shares of Innodia as part of a private placement for a cash consideration of $500, plus related costs of $91. In June 2003, the Company transferred its 31% interest in Innodia to a holding company which is controlled indirectly by a shareholder. As consideration for this transfer, Neurochem received 176,339 non-voting Class A1 participating preferred shares, 1,904,464 non-voting, participating Class A common shares and 352,537 voting, non-participating Class V preferred shares. The Class A1 preferred shares are convertible into common shares on a one-for-one basis at any time at the option of the holder and automatically convertible under specified circumstances. As a result, this Company holds the same economic interest as that held directly in Innodia prior to the transfer. At December 31, 2003 and June 30, 2003, the Company's long-term investment represents voting rights of approximately 12% and equity ownership of approximately 70% in the holding company. 5. PROPERTY AND EQUIPMENT:
December 31, 2003 -------------------------------------- Accumulated depreciation Net book Cost and amortization value ------ ---------------- -------- Research equipment.................................. $2,900 $1,383 $1,517 Computer hardware and software...................... 1,820 964 856 Office equipment.................................... 654 229 425 Equipment under capital leases...................... 1,198 503 695 Leasehold improvements.............................. 1,559 513 1,046 ------ ------ ------ $8,131 $3,592 $4,539 ====== ====== ======
- 11 - NEUROCHEM INC. Notes to Consolidated Financial Statements, Continued Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) 5. PROPERTY AND EQUIPMENT (CONTINUED):
June 30, 2003 -------------------------------------- Accumulated depreciation Net book Cost and amortization value ------ ---------------- -------- Research equipment.................................. $2,484 $1,253 $1,231 Computer hardware and software...................... 1,331 750 581 Office equipment.................................... 560 187 373 Equipment under capital leases...................... 1,198 429 769 Leasehold improvements.............................. 1,532 416 1,116 ------ ------ ------ $7,105 $3,035 $4,070 ====== ====== ======
Included in "depreciation of property and equipment" in the consolidated statements of operations is depreciation of equipment under capital leases of $74 (June 30, 2003 -- $251; June 30, 2002 -- $245). 6. PATENT COSTS:
December 31, June 30, 2003 2003 ------------ -------- Cost........................................................ $3,391 $2,946 Accumulated amortization.................................... 449 360 ------ ------ $2,942 $2,586 ====== ======
The remaining weighted average amortization period of patent costs at December 31, 2003 is 15.6 years (June 30, 2003 -- 15.4 years; 2002 -- 16.2 years). The estimated amortization expense for each of the next five years is approximately $217 per annum or $1,085 in the aggregate. - 12 - NEUROCHEM INC. Notes to Consolidated Financial Statements, Continued Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) 7. OBLIGATIONS UNDER CAPITAL LEASES: Minimum lease payments under capital leases expiring in November 2005 are as follows:
December 31, June 30, 2003 2003 ------------- -------- 2004........................................................ $470 $ 470 2005........................................................ 431 470 2006........................................................ - 196 ---- ------ 901 1,136 Less amount representing interest at a rate of 6.88%........ 60 92 ---- ------ 841 1,044 Less current portion........................................ 425 411 ---- ------ $416 $ 633 ==== ======
Interest expense related to obligations under capital leases for the six-month period ended December 31, 2003 was $33 (year ended June 30, 2003 --$92; June 30, 2002 -- $80) and is included in "interest and bank charges" in the consolidated statements of operations. In December 2001, the Company entered into a sale-leaseback agreement with a Canadian chartered bank to sell previously acquired research equipment and concurrently leased the same property back over a four-year period. The Company received proceeds from the sale in the amount of $1,649. 8. SHARE CAPITAL: (a) The authorized share capital of the Company consists of: o an unlimited number of voting common shares o an unlimited number of non-voting preferred shares, issuable in one or more series (b) Issued and outstanding: The issued and outstanding share capital consists of:
December 31, June 30, 2003 2003 ------------- -------- 29,775,127 common shares (June 30, 2003 - 23,483,024 common shares)............................... $173,930 $87,482 ======== =======
- 13 - NEUROCHEM INC. Notes to Consolidated Financial Statements, Continued Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) 8. SHARE CAPITAL (CONTINUED): (b) Issued and outstanding (continued): Changes in the issued and outstanding common shares for the fiscal periods ended June 30, 2002 and 2003 and the six-month period ended December 31, 2003 were as follows:
Number Dollars ---------- -------- Balance, June 30, 2001.................................... 17,996,219 $ 69,490 Exercise of options....................................... 32,125 11 ---------- -------- Balance, June 30, 2002.................................... 18,028,344 69,501 Issued for cash from private placement (i)................ 4,000,000 15,148 Exercise of warrants...................................... 836,644 1,904 Exercise of options....................................... 618,036 929 ---------- -------- Balance, June 30, 2003.................................... 23,483,024 87,482 Issued for cash from public offering (ii)................. 5,750,000 84,956 Exercise of warrants...................................... 106,785 192 Exercise of options....................................... 435,318 1,300 ---------- -------- Balance, December 31, 2003................................ 29,775,127 $173,930 ========== ========
June 30, 2003: (i) On July 25, 2002 and February 18, 2003, the Company completed equity financing agreements with Picchio Pharma Inc. In July 2002, the Company issued 2.8 million units at a cost of $2.50 per unit, and received aggregate proceeds of $7,000. The units were comprised of one common share and one warrant exercisable any time within a three-year period at the exercise price of $3.13. The warrants expire on July 25, 2005. In February 2003, the Company issued 1.2 million units at a cost of $6.79 per unit and received aggregate proceeds of $8,148. The units were comprised of one common share and one warrant exercisable any time within a three-year period at an exercise price of $7.81. The warrants expire on February 18, 2006. Share issue costs related to these transactions were charged to the deficit. - 14 - NEUROCHEM INC. Notes to Consolidated Financial Statements, Continued Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) 8. SHARE CAPITAL (CONTINUED): (b) Issued and outstanding (continued): December 31, 2003: (ii) In September 2003, the Company completed a public offering for the issuance and sale of 5.75 million common shares at a price of $14.77 (US$10.87) per share. The total proceeds of the offering to the Company was $84,956. Total share issue expenses of $6,813 were charged to the deficit. (c) Stock option plan: Under its stock option plan, the Company may grant options to purchase common shares to employees, directors, officers, consultants and members of the Scientific and Clinical Advisory Boards of the Company. The terms, number of common shares covered by each option as well as the permitted frequency of the exercise of such options is determined by the Board of Directors. In general, options vest over periods to five years. In the period ended December 31, 2003, the shareholders approved an increase of 1,241,794 in the number of common shares reserved for issuance under the plan, from 3,196,973 common shares to 4,438,767 common shares. The maximum number of common shares which may be optioned in favor of any single individual shall not exceed 5% of the issued and outstanding common shares of the Company. The option price per share will, in no circumstances, be lower than the fair market value of the common shares at the date of the grant of the option, less any discount permitted by any regulatory authority. In no event may the term of any option exceed ten years from the date of the grant of the option. - 15 - NEUROCHEM INC. Notes to Consolidated Financial Statements, Continued Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) 8. SHARE CAPITAL (CONTINUED): (c) Stock option plan (continued): Changes in outstanding options issued under the stock option plan for the fiscal periods ended June 30, 2002 and 2003 and the six-month period ended December 31, 2003 were as follows:
Weighted average Number exercise price --------- -------------- Options outstanding, June 30, 2001....................... 1,300,725 $1.93 Granted.................................................. 704,400 3.00 Exercised................................................ (22,125) 0.36 Cancelled or expired..................................... (19,500) 3.13 --------- ----- Options outstanding, June 30, 2002....................... 1,963,500 2.32 Granted.................................................. 909,000 7.22 Exercised................................................ (577,036) 1.59 Cancelled or expired..................................... (3,620) 3.25 --------- ----- Options outstanding, June 30, 2003....................... 2,291,844 4.48 Granted.................................................. 342,000 21.70 Exercised................................................ (335,318) 2.87 --------- ----- Options outstanding, December 31, 2003................... 2,298,526 $7.23 ========= =====
The following table summarizes information about options outstanding and exercisable at December 31, 2003:
Weighted average remaining Options Options contractual life Exercise price/share outstanding exercisable (years) -------------------- ----------- ----------- ---------------- $0.36 -- $0.65............................. 220,000 220,000 3.3 $2.99 -- $3.75............................. 848,193 547,237 7.1 $5.30 -- $6.79............................. 362,333 172,458 8.9 $8.11 -- $9.85............................. 526,000 108,062 9.1 $18.75 -- $23.35........................... 342,000 93,600 9.9 --------- --------- --- 2,298,526 1,141,357 7.9 ========= ========= ===
- 16 - NEUROCHEM INC. Notes to Consolidated Financial Statements, Continued Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) 8. SHARE CAPITAL (CONTINUED): (d) Other outstanding options at December 31, 2003: The Company had previously issued 400,000 options to purchase common shares at prices ranging from US$0.20 to US$2.50 per share which are not covered by the stock option plan. In the six-month period ended December 31, 2003, 100,000 (41,000 and 10,000 in the fiscal periods ended June 30, 2003 and 2002, respectively) of these options were exercised for gross proceeds of $337 ($12 and $3 in the fiscal periods ended June 30, 2003 and 2002, respectively). There are no such options remaining at December 31, 2003. (e) Outstanding warrants at December 31, 2003: Each warrant entitles the holder to purchase one common share. Changes in outstanding warrants issued in connection with various private placements were as follows:
Weighted average Number exercise price --------- -------------- Warrants outstanding, June 30, 2001...................... 977,876 $2.22 Exercised................................................ (34,447) 2.31 --------- ----- Warrants outstanding, June 30, 2002...................... 943,429 2.22 Issued in connection with private placement (note 8 (b) (i))................................................... 4,000,000 4.53 Exercised................................................ (836,644) 2.28 --------- ----- Warrants outstanding, June 30, 2003...................... 4,106,785 $4.46 Exercised................................................ (106,785) 1.80 --------- ----- Warrants outstanding, December 31, 2003.................. 4,000,000 $4.53 ========= =====
The following table summarizes information about outstanding warrants at December 31, 2003:
Warrants Exercise price Expiry -------- -------------- ------------- 2,800,000............................................ $3.13 July 2005 1,200,000............................................ $7.81 February 2006 ----- ------------- 4,000,000............................................ $4.53 ===== =============
- 17 - NEUROCHEM INC. Notes to Consolidated Financial Statements, Continued Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) 9. COMMITMENTS: (a) Operating leases: Minimum annual lease payments for the next five years and thereafter under operating leases relating to premises are as follows: 2004........................................................ $ 508 2005........................................................ 428 2006........................................................ 400 2007........................................................ 224 2008........................................................ 196 Thereafter.................................................. 428 ------ $2,184 ======
In addition, the Company is also responsible for operating costs and taxes under the operating leases. (b) License agreements and research collaborations: Effective January 1, 1994, the Company entered into a number of license agreements (the "License Agreements") with Parteq Research and Development Innovations ("Parteq"), the commercialization arm and exclusive worldwide licensee of Queen's University. Pursuant to these agreements, the Company was granted the worldwide exclusive license, with the right to sublicense, to certain technologies, patents and patent applications developed and belonging to Queen's University (the "Intellectual Property") and to develop, make, have made, use, sell and have sold certain products using the Intellectual Property. While Parteq and Queen's University retain the title to the Intellectual Property, the Company, directly or through its subsidiaries, has the exclusive right to exploit the Intellectual Property. All improvement to the Intellectual Property developed or invented by the Company are owned by the Company, directly or through its subsidiaries. Pursuant to the terms of the License Agreements, the Company has agreed to pay certain fees (including milestone payments) and royalties, and to assume all expenses related to the protection of the intellectual property rights. Each of the License Agreements will terminate upon the later of (i) the expiry date of the last-to-expire of the licensed patents or (ii) ten years after its first sales of products that use the license, should no patent be issued. The Company and its subsidiaries are party to research and license agreements under which they have obtained rights to use certain technologies to develop certain of its product candidates. These agreements impose various milestones, commercialization, sublicensing, royalty and other payment, insurance, indemnification and other obligations and are subject to certain reservations of rights. - 18 - NEUROCHEM INC. Notes to Consolidated Financial Statements, Continued Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) 9. COMMITMENTS (CONTINUED): (c) Management services agreement: Payments under a management services agreement with a shareholder-affiliated entity (see note 10 (d)) are as follows: 2004 -$960; 2005 -- $160. (d) Guarantees: The Company follows the recommendations of the CICA, accounting Guideline 14, Disclosure of Guarantees, which clarifies disclosure requirements for certain guarantees. The guideline does not provide guidance on nor require the measurement and recognition of a guarantor's liability for obligations under guarantees. The guideline defines a guarantee to be a contract (including an indemnity) that contingently requires the Company to make payments to a third party based on (i) changes in an underlying interest rate, foreign exchange rate, equity or commodity instrument, index or other variable, that is related to an asset, a liability or an equity security of the counterparty, (ii) failure of another party to perform under an obligating agreement or (iii) failure of another party to pay its indebtedness when due. At December 31, 2003, the Company is contingently liable for a letter of guarantee granted in favor of a landlord in the amount of $200. A long-term security deposit of $200 is pledged under the letter of guarantee. In addition, the Company has granted a movable hypothec in the amount of $100 under a lease agreement covering the universality of movable property at a leased location. (e) Litigation: The Company executed an agreement (the "CTA") with Immtech International, Inc. ("Immtech") of Vernon Hills, Illinois in 2002 pursuant to which Immtech provided the Company with certain compounds for testing and granted the Company an option to license such compounds. On August 12, 2003, Immtech filed certain legal proceedings with the federal district court for the Southern District of New York, U.S.A., with respect to the agreement. The parties entered into settlement discussions in September 2003. As settlement did not occur, in January 2004 the Company brought a motion to compel arbitration under the terms of the CTA and stay the judicial proceedings. The Company continues to vigorously defend against the claims brought by the plaintiffs. The proceedings are at the early stages and the outcome of this matter, or the likelihood and the amount of loss, if any, is not determinable. No provision for possible loss has been recorded by the Company in connection with this matter. - 19 - NEUROCHEM INC. Notes to Consolidated Financial Statements, Continued Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) 10. RELATED PARTY TRANSACTIONS: (a) Included in revenues are amounts received under various agreements with a shareholder, of nil in 2003 (December 31 and June 30) and $2,271 in 2002. (b) Included in research and development are the following amounts paid to Queen's University at Kingston, under various research agreements: Period ended: December 31, 2003........................................ $ -- June 30, 2003............................................ 5 June 30, 2002............................................ 295 ====
(c) The Company paid Parteq Research and Development Innovations, the following amounts for patent fees in the normal course of operations: Period ended: December 31, 2003........................................ $ -- June 30, 2003............................................ 10 June 30, 2002............................................ 16 ====
(d) Under the terms of a management services agreement entered into in March 2003 with Picchio International Inc., a company related to a shareholder, director and officer, and the Company recorded a management fee of $480 (year ended June 2003 -- $320). In addition, the Company paid $250 in performance incentive fees for the six months ended December 31, 2003 (June 30, 2003 -- nil). (e) Legal fees paid to a firm in which a director is a partner were $1,303 (June 30, 2003 -- $1,208 and June 30, 2002 -- $298). (f) Accounts payable and accrued liabilities include balances due to shareholders of $20 (June 2003 -- $13, June 2002 -- $47). These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. - 20 - NEUROCHEM INC. Notes to Consolidated Financial Statements, Continued Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) 11. INCOME TAXES: (a) Details of the components of income taxes are as follows:
Six-month period ended December 31, Years ended June 30, ------------- -------------------- 2003 2003 2002 ------------- -------- -------- Loss before income taxes: Canadian operations........................ $(4,120) $(15,974) $(13,475) Foreign operations......................... (12,653) (3,644) -- ------- -------- -------- (16,773) (19,618) (13,475) Basic income tax rate........................ 33% 34% 36% ------- -------- -------- Computed income tax recovery................. (5,535) (6,670) (4,851) Adjustment in income taxes resulting from: Non-recognition of losses.................. 2,936 6,582 4,851 Difference in tax rate of a foreign subsidiary.............................. 2,720 820 -- Permanent differences...................... (121) (732) -- ------- -------- -------- $ -- $ -- -- ======= ======== ========
(b) Future income taxes: The temporary differences that give rise to future tax assets and liabilities at December 31, 2003 and June 30, 2003 are as follows:
December 31, June 30, 2003 2003 ------------- -------- Future tax assets: Patent costs............................................ $10,012 $10,053 Unclaimed scientific research and experimental development expenditures for tax purposes............ 7,533 5,750 Share issue costs....................................... 2,171 376 Net operating losses.................................... 1,874 419 Long-term investment.................................... 271 271 Other................................................... 74 6 ------- ------- 21,935 16,875 Less: valuation allowance................................. (21,272) (16,040) ------- ------- 663 835 Future tax liabilities: Property and equipment, and patent costs................ (663) (835) ------- ------- Net future tax assets..................................... $ -- $ -- ======= =======
- 21 - NEUROCHEM INC. Notes to Consolidated Financial Statements, Continued Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) 11. INCOME TAXES (CONTINUED): (b) Future income taxes (continued): In assessing the realizability of future tax assets, management considers whether it is more likely than not that some portion or all of the future income tax assets will be realized. The ultimate realization of future tax assets is dependent upon the generation of future taxable income and/or tax planning strategies. Since the Company is a development stage enterprise, the generation of future taxable income is dependent on the successful commercialization of its products and technologies. (c) The Company has the following unclaimed deductions available to reduce future taxable income in Canada:
Federal Quebec ------- ------ Research expenditure pool (no expiry)....................... $31,732 $6,202 ======= ======
The Company also has approximately $5,404 in federal research investment tax credits that can be used to reduce future federal taxes payable and which expire as follows: 2011........................................................ $1,339 2012........................................................ 2,251 2013........................................................ 1,814 ------ $5,404 ======
12. EARNINGS PER SHARE: (a) Basic and diluted earnings per share: The reconciliation between basic and diluted earnings per share is as follows:
Six-month period ended December 31, Years ended June 30, ------------- -------------------------- 2003 2003 2002 ------------- ----------- ----------- Basic: Basic weighted average number of common shares outstanding........................ 26,813,836 21,770,541 18,007,392 ----------- ----------- ----------- Basic net loss per share................ $ (0.63) $ (0.90) $ (0.75) =========== =========== ===========
- 22 - NEUROCHEM INC. Notes to Consolidated Financial Statements, Continued Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) 12. EARNINGS PER SHARE (CONTINUED): (a) Basic and diluted earnings per share (continued):
Six-month period ended December 31, Years ended June 30, ------------- -------------------------- 2003 2003 2002 ------------- ----------- ----------- Diluted: Basic weighted average number of common shares outstanding........................ 26,813,836 21,770,541 18,007,392 Plus impact of stock options and warrants (1)................... 4,476,940 2,858,010 1,239,910 ----------- ----------- ----------- Diluted common shares................... 31,290,776 24,628,551 19,247,302 =========== =========== =========== Diluted net loss per share (1).......... $ (0.63) $ (0.90) $ (0.75) =========== =========== ===========
----------------------- (1) The impact of stock options and warrants is anti-dilutive because the Company incurred losses in 2003 and 2002. All outstanding options and warrants included in this computation could potentially be dilutive in the future. (b) Stock-based compensation: Effective July 1, 2002, the Company adopted prospectively the recommendations with respect to the accounting for stock-based compensation and other stock-based payments (see note 2 (m)). If the fair value-based accounting method had been used to account for and measure stock-based compensation costs relating to exempt options granted to employees after July 1, 2002, the net earnings and related earnings per share figures would have been as follows:
Six-month period ended Year December 31, ended ------------- June 30, 2003 2003 ------------- ---------- Reported net loss....................................... $(16,773) $(19,618) Pro forma adjustments to compensation expense........... (1,646) (718) -------- -------- Pro forma net loss...................................... $(18,419) $(20,336) ======== ======== Pro forma loss per share: Basic................................................. $ (0.69) $ (0.93) Diluted............................................... (0.69) (0.93) ======== ========
- 23 - NEUROCHEM INC. Notes to Consolidated Financial Statements, Continued Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) 12. EARNINGS PER SHARE (CONTINUED): (b) Stock-based compensation (continued): The weighted average fair value of each option granted is estimated on the date of grant using the Black-Scholes pricing model with the following assumptions:
Six-month Year period ended ended December 31, June 30, ------------- ---------- 2003 2003 ------------- ---------- Risk free interest rate................................. 4.30% 4.68% Expected volatility..................................... 36% 61% Expected life in years.................................. 7 7 Expected dividend yield................................. nil nil ==== ====
The following table summarizes the weighted average grant-date fair value per share for options granted during the period ended December 31, 2003 and the year ended June 30, 2003:
Weighted average grant-date Number of fair value options per share ---------- ---------- Period ended December 31, 2003............................. 342,000 $9.93 Year ended June 30, 2003................................... 909,000 4.66 ======= =====
Dividend yield was excluded from the calculation since it is the present policy of the Company to retain all earnings to finance operations. 13. STATEMENT OF CASH FLOWS -- SUPPLEMENTARY DISCLOSURE: (a) Cash and cash equivalents: Cash and cash equivalents consist of cash balances with banks and short-term investments:
December 31, June 30, 2003 2003 -------------- -------- Cash balances with banks.................................. $ 1,079 $2,462 Short-term investments (yielding interest between 1.06% to 2.75% (June 30, 2003: 3.24% to 3.29%))......... 13,790 3,988 ------- ------ $14,869 $6,450 ======= ======
- 24 - NEUROCHEM INC. Notes to Consolidated Financial Statements, Continued Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) 13. STATEMENT OF CASH FLOWS -- SUPPLEMENTARY DISCLOSURE (CONTINUED): (b) Interest and income taxes:
Six-month period ended Years ended December 31, June 30, ------------- ------------ 2003 2003 2002 ------------- ---- ---- Cash paid in the year for: Interest........................................... $35 $92 $143 Income taxes....................................... -- -- -- === === ====
(c) Non-cash transactions:
Six-month period ended Years ended December 31, June 30, ------------- ---------------- 2003 2003 2002 ------------- ------- ----- Disposal of intellectual property to Innodia in exchange for an equity interest (note 4).................. $ -- $3,830 $ -- Additions to property and equipment and patent costs included in accounts payable and accrued liabilities at year-end.......................... 406 590 523 ==== ====== ====
14. SEGMENT DISCLOSURES: (a) Business segment: The Company operates in one business segment, namely the development and commercialization of innovative therapeutics for neurological disorders. The Company's operations are conducted principally in Canada. (b) Information about major customers: All of the Company's revenues in 2002 were derived from one customer (see note 10 (a)). - 25 - NEUROCHEM INC. Notes to Consolidated Financial Statements, Continued Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) 14. SEGMENT DISCLOSURES (CONTINUED): (c) Property and equipment and intangible assets (patent costs) by geographic area are as follows:
December 31, June 30, 2003 2003 ------------- -------- Canada..................................................... $4,599 $4,070 Europe..................................................... 2,882 2,586 ------ ------ $7,481 $6,656 ====== ======
15. FINANCIAL INSTRUMENTS: (a) Fair value disclosure: Fair value estimates are made as of a specific point in time, using available information about the financial instrument. These estimates are subjective in nature and often cannot be determined with precision. The Company has determined that the carrying value of its short-term financial assets and liabilities, including cash and cash equivalents, grants receivable, sales taxes receivable, interest and other receivables, research tax credits receivable as well as accounts payable and accrued liabilities, approximates their fair value because of the relatively short periods to maturity of these instruments. Marketable securities are comprised of fixed income instruments with a high credit rating (not less than R1 (mid) rating). As at December 31, 2003, the weighted average effective interest rate of the marketable securities is approximately 1.71% (June 30, 2003 -- 3.25%). The fair market value of the marketable securities amounts to $62,726 as at December 31, 2003 ($9,947 as at June 30, 2003). The fair value of obligations under capital leases, calculated at the present value of future contractual payments of principal and interest, discounted at the current market rates of interest available to the Company for debt instruments with similar terms and maturity, approximates their carrying value. (b) Credit risk: Credit risk results from the possibility that a loss may occur from the failure of another party to perform according to the terms of the contract. The Company regularly monitors the credit risk exposure and takes steps to mitigate the likelihood of these exposures from resulting in actual loss. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of marketable securities. The Company has investment policies that ensure the safety and preservation of principal, that ensure the Company's liquidity needs are met and that optimize yields. Authorized investments include bankers' acceptances, bearer deposit notes, corporate and government bonds, certificates of deposit, commercial paper and treasury bills, and shall not exceed 10% per issuer. - 26 - NEUROCHEM INC. Notes to Consolidated Financial Statements, Continued Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) 15. FINANCIAL INSTRUMENTS (CONTINUED): (c) Foreign currency risk management: A substantial portion of the Company's revenues from research contracts and milestone payments in prior years, as well as expenses, are denominated in US dollars. This results in financial risk due to fluctuations in the value of the Canadian dollar relative to the US dollar. The Company does not use derivative financial instruments to reduce its foreign exchange exposure. Fluctuations in foreign exchange rates could cause unanticipated fluctuations in the Company's operating results. (d) Interest rate risk: The Company's exposure to interest rate risk is as follows: Cash and cash equivalents Fixed interest rate Marketable securities Fixed interest rate Obligations under capital leases Fixed interest rate
16. CANADIAN/US REPORTING DIFFERENCES: (a) Consolidated statements of operations: The reconciliation of earnings reported in accordance with Canadian GAAP with US GAAP is as follows:
Six-month period ended Cumulative December 31, Years ended June 30, since ------------- -------------------- inception of 2003 2003 2002 operations ------------- -------- -------- ------------ Net loss in accordance with Canadian GAAP.................. $(16,773) $(19,618) $(13,475) $(74,838) Adjustment for: Stock-based compensation costs (1)................... (8) (83) (111) (1,975) Long-term investment (2)....... (771) -- -- (771) -------- -------- -------- -------- Net loss in accordance with US GAAP........................ (17,552) $(19,701) $(13,586) $(77,584) ======== ======== ======== ======== Loss per share under US GAAP: Basic and diluted.............. $ (0.65) $ (0.90) $ (0.75) ======== ======== ======== ========
- 27 - NEUROCHEM INC. Notes to Consolidated Financial Statements, Continued Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) 16. CANADIAN/US REPORTING DIFFERENCES (CONTINUED): (a) Consolidated statements of operations (continued): The weighted average number of common shares outstanding for purposes of determining basic and diluted loss per share is the same amount as the one used for Canadian GAAP purposes. (b) Consolidated balance sheets: A reconciliation of balance sheet items in accordance with Canadian GAAP with US GAAP is as follows: (i) Share capital:
June 30, December 31 ------------------ 2003 2003 2002 ------------ ------- ------- Share capital, Canadian GAAP............... 173,930 $87,482 $69,501 Adjustment for: Share issue costs (3).................... (11,527) (4,714) (4,177) -------- ------- ------- Share capital, US GAAP..................... $162,403 $82,768 $65,324 ======== ======= =======
(ii) Additional paid-in capital:
June 30, December 31 ---------------- 2003 2003 2002 ------------ ------ ------ Additional paid-in capital, Canadian GAAP.... $ -- $ -- $ -- Adjustment for: Stock-based compensation (1): Current year............................ 8 83 111 Cumulative effect of prior years........ 1,693 1,610 1,499 ------ ------ ------ Additional paid-in capital, US GAAP.......... $1,701 $1,693 $1,610 ====== ====== ======
- 28 - NEUROCHEM INC. Notes to Consolidated Financial Statements, Continued Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) 16. CANADIAN/US REPORTING DIFFERENCES (CONTINUED): (b) Consolidated balance sheets (continued): (iii) Deficit:
June 30, December 31 -------------------- 2003 2003 2002 ------------ -------- -------- Deficit, Canadian GAAP................... $(86,365) $(62,779) $(42,624) Adjustment for: Stock-based compensation (1): Current year........................ (8) (83) (111) Cumulative effect of prior years.... (1,693) (1,610) (1,499) -------- -------- -------- (1,701) (1,693) (1,610) Long-term investment (2)............... (771) -- -- Share issue expenses (3)............... 11,527 4,714 4,177 -------- -------- -------- Deficit, US GAAP......................... $(77,310) $(59,758) $(40,057) ======== ======== ========
(1) Stock-based compensation: Employees For US GAAP purposes, the Company has elected to follow the intrinsic value method of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") in accounting for stock options granted to employees and directors. Under the intrinsic value method, compensation cost is recognized for the difference, if any, between the quoted market price of the stock as at the grant date and the amount the individual must pay to acquire the stock. The Company recorded a compensation expense of $8 (June 30, 2003 -- $83; June 30, 2002 -- $111) in respect of options granted to employees prior to the Company's initial public offering at prices other than the quoted market price at date of grant. - 29 - NEUROCHEM INC. Notes to Consolidated Financial Statements, Continued Six-month period ended December 31, 2003, years ended June 30, 2003 and 2002 and for the period from inception (June 17, 1993) to December 31, 2003 (in thousands of Canadian dollars, except per share data) 16. CANADIAN/US REPORTING DIFFERENCES (CONTINUED): (b) Consolidated balance sheets (continued): (2) Long-term investment: For US GAAP purposes, the Company's long-term investment would be considered a variable interest entity (VIE) as defined in FIN46R, Consolidation of Variable Interest Entities. An enterprise consolidates a VIE if that enterprise has a variable interest that will absorb a majority of the VIE's expected losses if they occur, receive a majority of the VIE's expected returns if they occur, or both. The Company's long-term investment represents a holding, the sole purpose of which is to hold the investment in Innodia Inc. The maximum amount at risk for the Company is the Company's carrying value of the investment. For Canadian GAAP, similar guidance has been issued, but is only effective for fiscal years beginning on or after November 1, 2004. (3) Share issue costs: For US GAAP purposes, share issue costs are recorded as a reduction of the proceeds raised from the issuance of share capital. For Canadian GAAP purposes, share issue costs were charged to the deficit. - 30 - EX-3 4 m12968orexv3.txt MANAGEMENT'S DISCUSSION AND ANALYSIS Exhibit 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE REGISTRANT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements contained in the following Management's Discussion and Analysis of Financial Condition and Results of Operations of Neurochem Inc. (Neurochem or the Company), other than statements of fact that are independently verifiable at the date hereof, may be forward-looking statements regarding the industry in which Neurochem operates, Neurochem's expectations as to its future performance, liquidity and capital resources. Such statements, based as they are on the current expectations of management, inherently involve numerous risks and uncertainties, known and unknown, including those set forth in the "Risks and Uncertainties" section. Consequently, actual future results may differ materially from the anticipated results expressed in the forward-looking statements. The Company changed its fiscal year-end to December 31 from June 30 to be consistent with most companies in its industry. This analysis explains the material variations in the audited consolidated statements of operations, financial position and cashflows of Neurochem for the six-month period ended December 31, 2003, as well as for the audited twelve-month periods ended June 30, 2003 and 2002. For comparative reasons, the Company also has explained the variations between the six-month period ended December 31, 2003 and the unaudited six-month period ended December 31, 2002. This analysis should be read in conjunction with the audited consolidated financial statements of Neurochem and related notes, included herein, which have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). A reconciliation to US GAAP of earnings and balance sheet items is presented in note 16 of the audited consolidated financial statements. Unless otherwise indicated, amounts are presented in Canadian dollars. OVERVIEW Neurochem is a biopharmaceutical company focused on the development and commercialization of innovative therapeutics. The Company's staged pipeline of proprietary, disease-modifying, oral products addresses critical unmet medical needs. The Company currently has three orally administered product candidates in clinical trials: Fibrillex(TM), Alzhemed(TM) and Cerebril(TM). Product Candidates Fibrillex(TM), the Company's most advanced product candidate treating Amyloid A (AA) Amyloidosis, is currently in a Phase II/III clinical trial with a total of 183 patients enrolled. The clinical trial is currently expected to end in January 2005. To the extent the Company receives regulatory approval, it expects to commercialize Fibrillex(TM) by the end of 2005. Fibrillex(TM) has received the orphan drug designation in the US and Europe, which normally provides for market exclusivity of seven years and ten years, respectively, once the drug is approved. Fibrillex(TM) has also received the Fast Track Product ("FTP") designation by the U.S. Food and Drug Administration ("FDA"). As a result of the FTP designation, Neurochem will submit a schedule for a rolling New Drug Application, enabling the FDA to commence review of portions of the application before the end of the on-going two-year Phase II/III clinical trial. The Company is also eligible for priority review by the FDA. Alzhemed(TM), the Company's next most advanced product candidate treating Alzheimer's Disease ("AD"), showed continued positive results during the year. Following the completion of the Phase II clinical trial in June 2003, the Company is preparing to initiate Phase III clinical trials, which are 1 expected to commence in the second quarter of 2004. Alzhemed(TM) is Neurochem's first generation product candidate for AD. Cerebril(TM), the Company's product candidate to treat Hemorrhagic Stroke due to Cerebral Amyloid Angiopathy, has completed a Phase II clinical trial in January 2004. Results are expected to be released in the quarter ending June 30, 2004. Neurochem signed two agreements in January 2004. A strategic alliance was signed with National Research Council of Canada's Institute for Biological Sciences, and more specifically Dr. Harold J. Jennings, a world leader in the development of innovative conjugated vaccines. Also, the Company entered into an in-license agreement with Praecis Pharmaceuticals Inc., a biopharmaceutical company, relating to certain long trial a amyloid peptides for use in the development of a novel synthetic vaccine to prevent and treat AD. Funding Since inception in 1993, Neurochem has devoted its resources principally to funding research and development programs. As at December 31, 2003, the Company has incurred a cumulative deficit since inception of $86,365,000, of which research and development expenditures totaled $76,630,000 before research tax credits and grants of $18,106,000. The Company expects operating expenses to increase going forward as product candidates enter more advanced stages of clinical development, as the Company continues to invest in product research and development and as it prepares for commercialization. The Company has not generated any revenues from the sale of products and has not been profitable to date. Neurochem has funded its operations primarily through private and public offerings of common shares, payments received under research and development agreements as well as interest income, tax credits and grants. Until the Company is in its commercialization phase, it expects to fund operations with proceeds from equity or debt financing, interest income, revenues from collaborative research, license, product development and co-marketing agreements, research tax credits and grants. In September 2003, Neurochem completed the initial public offering of its common shares in the US and a new issue of common shares in Canada for total proceeds of $84,956,000 (see "Liquidity and Capital Resources"). The net proceeds from the offering are being used to fund clinical trials of the Company's lead product candidates, other research and development programs, capital expenditures, working capital and general corporate activities. Picchio Pharma Inc. ("Picchio Pharma"), a company established between a trust of which Dr. Francesco Bellini, O.C. is a beneficiary and Power Technology Investment Corporation, a subsidiary of Power Corporation of Canada, acquired 1,346,800 shares of the offering. This follows investments made by Picchio Pharma totaling $15,148,000 during the year ended June 30, 2003. As at December 31, 2003, Picchio Pharma is the largest shareholder of the Company with an ownership of approximately 30% on a fully diluted basis, including four million warrants expiring in 2005 and 2006. In November 2003, Neurochem was added to the NASDAQ Biotechnology Index ("NBI"). All securities in the NBI are listed on the NASDAQ National Market and meet minimum requirements, including market value, average daily share volume and seasoning as a public company. In December 2003, the Company was also added to the S&P/TSX Composite Index, the S&P/TSX Capped Health Care Index and the Global Industry Classification Standard (GICS) Index. Inclusion in these indexes offers the benefit of additional visibility on financial markets, as well as potential increased trading volume. In May 2003, in a strategic move aimed at focusing on core expertise, the Company completed a technology transfer pertaining to its diabetes program to Innodia Inc. ("Innodia"), a company focused exclusively on the development of therapeutic treatments for Diabetes, in exchange for an equity interest in Innodia. This strategy eliminates funding requirements associated with the 2 diabetes program, while allowing Neurochem to share in the program's economic potential as an indirect shareholder of Innodia. See note 4 of the Consolidated Financial Statements. The Company places importance on obtaining and maintaining patent and trade secret protection for significant discoveries. In 2002, Neurochem executed an agreement with Immtech International Inc. (Immtech) pursuant to which Immtech provided the Company with certain compounds for testing and granted Neurochem an option to license such compounds. In August 2003, Immtech filed certain legal proceedings with the United States District Court with respect to the agreement. The parties entered into settlement discussions in September 2003 and, as settlement did not occur, in January 2004, the Company brought a motion to compel arbitration under the terms of the agreement. The Company is vigorously defending against the claims brought by the plaintiff(s). As a result of this litigation, Neurochem has incurred legal expenses associated with its defense in the fiscal year ended December 31, 2003 and expects to continue to incur such expenses into its 2004 fiscal year. See note 9 (e) of the Consolidated Financial Statements. As at December 31, 2003, Neurochem's workforce consists of 116 employees. The Company expects to significantly increase its number of employees over the next twelve months, particularly in the fields of drug development, drug discovery and marketing. As a result, Neurochem is currently evaluating relocation options to accommodate its expansion. 3 SELECTED FINANCIAL INFORMATION (in thousand of Canadian dollars, except per share data)
Six-month periods ended Twelve-month periods ended December 31 June 30 ----------------------- -------------------------- 2003 2002 2003 2002 (audited) (unaudited) (audited) (audited) --------- ----------- --------- --------- REVENUE: Research contracts -- -- -- $ 2,271 -------- -------- -------- -------- -- -- -- 2,271 EXPENSES: Research and development $ 8,522 $ 9,450 $ 18,782 15,304 Research tax credits (914) (423) (1,410) (1,048) Research grants and other (208) (1,150) (1,895) (2,071) -------- -------- -------- -------- 7,400 7,877 15,477 12,185 General and administrative 7,454 2,469 7,184 3,698 Depreciation and amortization 646 556 1,197 888 Interest and bank charges 46 90 144 232 -------- -------- -------- -------- 15,546 10,992 24,002 17,003 Net loss before undernoted items (15,546) (10,992) (24,002) (14,732) -------- -------- -------- -------- INVESTMENT AND OTHER INCOME (EXPENSES): Interest income 520 482 800 1,144 Foreign exchange gain (loss) (1,747) (29) 100 113 Gain on disposal of intellectual property -- -- 3,484 -- -------- -------- -------- -------- (1,227) 453 4,384 1,257 -------- -------- -------- -------- Net loss $(16,773) $(10,539) $(19,618) $(13,475) ======== ======== ======== ======== Net loss per share $ (0.63) $ (0.52) $ (0.90) $ (0.75) ======== ======== ======== ========
4 RESULTS OF OPERATIONS SIX-MONTH PERIOD ENDED DECEMBER 31, 2003 (AUDITED) COMPARED TO SIX-MONTH PERIOD ENDED DECEMBER 31, 2002 (UNAUDITED) Research and development expenses, before research tax credits and grants, amounted to $8,522,000 for the six-month period ended December 31, 2003, compared to $9,450,000 for the prior year six-month period. The decrease is due to a reduction in clinical trial expenses related to Alzhemed(TM), following the completion of the Phase II clinical trial in June 2003. For the six month-period ended December 31, 2003, research and development expenses were incurred to support the on-going Fibrillex(TM) Phase II/III clinical trials and open-label study, Alzhemed(TM) open-label Phase II extension study and advancement towards it's Phase III clinical trials, Cerebril(TM) Phase II clinical trial as well as on-going research programs. As at December 31, 2003, Neurochem had 171 patients in its various clinical trials. The Company expects research and development expenditures to increase as product candidates enter more advanced stages of clinical development and as the Company invests in its pre-clinical, clinical development and regulatory affairs capabilities. The hiring of additional personnel to support the progress of our development programs will also be required. Research tax credits amounted to $914,000 for the six-month period ended December 31, 2003, compared to $423,000 for the corresponding period last year. Research tax credits represent refundable tax credits earned under the Quebec Scientific Research and Experimental Development program. The increase is due to higher eligible expenses during the current period, as well as prior years credit claims resolved during the current period. Research grants and other amounted to $208,000 for the six-month period ended December 31, 2003 compared to $1,150,000 for the corresponding period last year. In the prior year, research grants refer principally to investment contributions under the Technology Partnerships Canada ("TPC") Program received by the Company for the development of Alzhemed(TM)($919,000), as well as payments received from the FDA for the development of Fibrillex(TM)($231,000), whereas the current six-month period consists of only grants received from the FDA for Fibrillex(TM) General and administrative ("G&A") expenses amounted to $7,454,000 for the six-month period ended December 31, 2003, compared to $2,469,000 for the same period last year. The increase year-over-year is due to the expansion of the corporate infrastructure necessary to support the growth and the increase in the overall activity level at the Company, in particular, in the accounting, legal, administrative, marketing and senior management functions of the organization. G&A expenses in the six-month period ended December 31, 2003, include legal fees incurred in relation with the Immtech litigation, expenses associated with increased awareness and educational activities related to AA Amyloidosis, Fibrillex(TM)'s target indication, the setting-up of a marketing team and management and performance-based fees paid to Picchio International Inc. ("Picchio International"), a related party (see note 10(d) of the Consolidated Financial Statements, and "Picchio Management Services Agreement"), for the services of Dr. Francesco Bellini, O.C., as Chairman and Chief Executive Officer of the Company and services of other members of Picchio International and Picchio Pharma. The Company expects general and administrative expenses to increase as the overall activity level of the Company continues to increase and as commercialization is approaching. Depreciation and amortization expense for the six-month period ended December 31, 2003 increased to $646,000, compared to $556,000 for the same period in 2002. The increase reflects the depreciation and amortization associated with the acquisition of additional property and equipment, as well as additions to patent costs. Interest income for the six-month-period ended December 31, 2003 amounted to $520,000 compared to $482,000 for the same period the previous year. The increase results from higher average cash balances in the current period, compared to the same period last year offset by a larger portion of the investment portfolio denominated in US dollar earning lower yields. 5 Foreign exchange losses amounted to $1,747,000 for the six-month period ended December 31, 2003, compared to $29,000 for the comparable period the previous year. The increase is attributable to foreign exchange losses recognized on the US dollar denominated investments held by the Company, due to the strengthening of the Canadian dollar versus the US dollar during the period. Net loss for the six-month period ending December 31, 2003 amounted to $16,773,000 ($0.63 per share), compared to $10,539,000 for the same period last year ($0.52 per share). TWELVE MONTHS ENDED JUNE 30, 2003 COMPARED TO TWELVE MONTHS ENDED JUNE 30, 2002 Revenues for the year ended June 30, 2003 amounted to nil compared to $2,271,000 for the same period last year. The decrease is due to the termination in the second quarter of 2002 of the collaborative research and license agreement with H. Lundbeck A/S ("Lundbeck"). As a result of the termination of this agreement, the Company regained its ownership rights on drug molecules aimed at treating AD, including Alzhemed(TM). Research and development expenses, before research tax credits and grants, amounted to $18,782,000 for the year ended June 30, 2003, compared to $15,304,000 for the year ended June 30, 2002. The increase is a direct result of the Company's product candidates progression to more advanced stages of clinical development during the year. Alzhemed(TM) and Cerebril(TM) were in Phase II clinical trials during the current year, compared to Phase I last year, and Fibrillex(TM) completed patient recruitment for its Phase II/III clinical trial during fiscal year 2003. As at June 30, 2003, approximately 240 patients were enrolled in clinical trials compared to approximately 50 patients a year earlier. Research tax credits amounted to $1,410,000 for the year ended June 30, 2003, compared to $1,048,000 for the corresponding prior year period. The increase is in line with the corresponding increase in research and development expenses qualifying for such tax credits. Research grants and other amounted to $1,895,000 for the year ended June 30, 2003, compared to $2,071,000 for the corresponding prior year period. Research grants refer principally to investment contributions under the TPC Program received by the Company for the development of Alzhemed(TM) as well as payments received from the FDA for the development of Fibrillex(TM). General and administrative expenses amounted to $7,184,000 for the fiscal year 2003, compared to $3,698,000 for the fiscal year 2002. The increase is mainly due to the hiring of new employees, increased awareness and educational activities related to AA Amyloidosis, increased professional fees due to increased corporate development activities, as well as non-recurring expenses of $873,000 incurred in connection with the departure of two senior officers. Depreciation and amortization expense for the fiscal year 2003 increased to $1,197,000, compared to $888,000 for fiscal year 2002. The increase reflects the depreciation and amortization associated with the acquisition of additional property and equipment, as well as additions to patent costs, during the past year. Interest and bank charges for the fiscal year 2003 amounted to $144,000, compared to $232,000 for the fiscal year 2002. The decrease is primarily attributable to lower external fees associated with the management of the Company's cash resources. Interest income for the year ended June 30, 2003 amounted to $800,000, compared to $1,144,000 for the same period the previous year. The decrease results from lower average cash balances in the current year, compared to the same period last year. Gain on disposal of intellectual property amounted to $3,484,000 in fiscal 2003 and represents the gain realized on the technology transfer related to the Company's pre-clinical Diabetes program to Innodia, as described previously. Net loss for the year ended June 30, 2003 amounted to $19,618,000 ($0.90 per share), compared to $13,475,000 for the year ended June 30, 2002 ($0.75 per share). 6 QUARTERLY RESULTS (UNAUDITED) (in thousand of Canadian dollars, except per share data)
Net loss per share Quarter Revenue Net loss Basic and diluted - ------- ------- -------- ----------------- Six-month period ended December 31, 2003 First - (6,787) (0.28) Second - (9,986) (0.34) Year ended June 30, 2003 First - (3,962) (0.20) Second - (6,577) (0.31) Third - (5,609) (0.25) Fourth - (3,470) (0.15) Year ended June 30, 2002 First 1,117 (1,660) (0.09) Second 1,154 (2,844) (0.16) Third - (4,277) (0.24) Fourth - (4,694) (0.26)
PICCHIO MANAGEMENT SERVICES AGREEMENT On March 1, 2003, Neurochem entered into a management services agreement with Picchio International into which Picchio Pharma, the Company's largest shareholder, intervened. Picchio International is wholly-owned by Dr. Bellini and his spouse. The management services agreement stipulates that Picchio International provides the services of Dr. Bellini, O.C., as Chairman and Chief Executive Officer of the Company and services of other members of Picchio International and Picchio Pharma. Under the agreement, Picchio International and Picchio Pharma, provide regular consulting and advisory services, including services related to reviewing existing and potential research and development activities, and potential clinical programs, financing activities, partnering and licensing opportunities, commercialization plans and programs, and advising and assisting in investor relations activities. In consideration of all services rendered under the agreement, Picchio International receives a monthly fee of $80,000. This amount includes all direct and indirect costs and expenses, including travel and all other out-of-pocket expenses, incurred by Dr. Bellini, Picchio International and Picchio Pharma relating to the services provided pursuant to such agreement. The agreement also provides for performance-based fees 7 determined at the discretion of the Board of Directors. FINANCIAL CONDITION CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENT As at December 31, 2003, Neurochem's future contractual commitments are principally for obligations under capital leases related to research equipment acquisition, operating leases for facilities and office equipment, as well as management fees with Picchio International. Obligations by year of maturity, and future rental payments under operating lease agreements are presented below. The Company does not have any purchase obligations as of December 31, 2003. The Company has not engaged in off-balance sheet financing or commodity contract trading.
Payments Due by Period (in thousand Canadian $) --------------------------------------------------------------------- Contractual Obligations Total Less than 1 year 1-3 years 3-5 years More than 5 years ----------------------- ----- ---------------- --------- --------- ----------------- Obligations under capital leases 901 470 431 Nil Nil Operating leases 2,184 508 1,052 392 232 Management fees 1,120 960 160 Nil Nil
LIQUIDITY AND CAPITAL RESOURCES As at December 31, 2003, Neurochem had cash, cash equivalents and marketable securities of $77,594,000, compared to $16,334,000 at June 30, 2003. The increase is due to funds received from the US and Canadian public offering, exercise of options and warrants, all being net of funds used in operations and for additions to property, equipment and patent costs. Proceeds from the issue of share capital for the six months ended December 31, 2003, amounted to $86,448,000 and are mainly related to the US and Canadian public offering. In September 2003, the Company issued 5.75 million common shares at a price of $14.77 (US$10.87) per share. Total proceeds from the offering were $84,956,000 (US$62,502,500) while share issue expenses were $6,813,000. Proceeds from the issue of share capital for the year ended June 30, 2003, amounted to $17,981,000 and are mainly related to two investments made by Picchio Pharma during the year, for total cash consideration of $15,148,000. Refer to note 8 of the Consolidated Financial Statements for more details. As at January 31, 2004, the Company had 29,860,565 common shares outstanding, as well as 2,213,088 options outstanding granted under the stock option plan. In addition, warrants to purchase four million common shares of the Company were outstanding. Additions to property and equipment for the six months ended December 31, 2003, amounted to $916,000, compared to $1,638,000 and $946,000 for the twelve-month periods ended June 30, 2003 and 2002. The main additions to property and equipment for the six-month period ended December 31, 2003, were research equipment ($354,000) and software ($223,000). For the year ended 8 June 30, 2003, additions to property and equipment amounted to $1,638,000, and consisted mainly of research equipment ($790,000) and software ($532,000). In the 2002 fiscal year, additions to property and equipment amounted to $946,000 and were mainly attributable to research equipment ($738,000). Additions to patent costs for the six-month period ended December 31, 2003, amounted to $739,000 compared to $538,000 and $1,156,000 for the twelve-month periods ended June 30, 2003 and 2002. The Company expects that capital expenditures should increase as research and development as well as intellectual property protection activities increase, and if the Company relocates its operations. The Company invests available cash resources, in a manner consistent with a goal of capital preservation, liquidity and with limited credit risk, in liquid securities with varying terms to maturity not exceeding twelve months, selected with regard to the expected timing of expenditures to be incurred from continuing operations and prevailing interest rates. The Company believes that its available cash and short-term investments, expected interest income, potential funding from research, potential partnerships and licensing agreements, research tax credits, grants, access to capital markets and support from its principal shareholder should be sufficient to finance the Company's operations and capital needs for the coming year. However, in light of the inherent uncertainties associated with the regulatory approval process and the Company's ability to secure additional research, partnerships and/or licensing agreements, further financing may be required to support the Company's operations in the future. CRITICAL ACCOUNTING POLICIES In preparing the Company's consolidated financial statements in conformity with GAAP, management is required to make certain estimates, judgements and assumptions that the Company believes are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The accounting policies which the Company considers to be critical are those that require the most difficult, subjective, or complex judgments and that are the most important to aid in fully understanding and evaluating its consolidated financial statements. These accounting policies are discussed in the following paragraphs. Long-term investment is recorded at cost. The Company records an investment impairment charge when management believes an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments thereby possibly requiring an impairment charge in the future. Property, equipment and patents costs are stated at cost and are amortized on a straight-line or declining balance basis. The Company regularly reviews property, equipment and patent costs for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets exceeds the sum of the expected cash flows from its uses and disposal. Management's judgment regarding the existence of impairment indicators are based on legal factors, market conditions and operating performances. Future events could cause management to conclude that impairment indicators exist and that the carrying values of the Company's property, equipment or patent costs are impaired. Any resulting impairment loss could have a material adverse impact on the Company's financial position and results of operations. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Future tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which 9 those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Management provides valuation allowances against the future tax asset for amounts which are not considered "more likely than not" to be realized. In assessing the realizability of tax assets, management considers whether it is more likely than not that some portion or all of the tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company has determined that a 100% tax valuation allowance is necessary. In the event the Company were to determine that it would be able to realize its tax asset, an adjustment to the tax asset would increase income in the period such determination is made. Research and development costs consist of direct and indirect expenditures, including a reasonable allocation of overhead expenses, associated with the Company's various research and development programs. Research and development costs are expensed as incurred. Overhead expenses comprise general and administrative support provided to the research and development programs and involve costs associated with support activities such as facility maintenance, utilities, office services, information technology and human resources. The Company reviews and accrues clinical trials expenses based on work performed, which relies on estimates of total costs incurred based on completion of patient studies and other events. The Company follows this method since reasonable dependable estimates of the costs applicable to various stages of a research agreement or clinical trial can be made. Accrued clinical costs are subject to revisions as trials progress to completion. Revisions are charged to expense in the period in which the facts that give rise to the revision become known. RECENT ACCOUNTING PRONOUNCEMENTS Impairment and disposal of long-lived assets Effective July 1, 2003, the Company adopted the new recommendations of the Canadian Institute of Chartered Accountants ("CICA") issued Handbook Section 3063, Impairment or Disposal of Long-lived Assets and revised Section 3475, Disposal of Long-Lived Assets and Discontinued Operations. These two Sections establish standards for the recognition, measurement and disclosure of the impairment of long-lived assets held for use by the Company. It requires that an impairment loss be recognized when the carrying amount of an asset to be held and used exceeds the sum of the undiscounted cash flows expected from its use and disposal; the impairment recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value. There was no impact on the Company's financial statements as a result of the adoption of these recommendations. RISKS AND UNCERTAINTIES Since inception, Neurochem has experienced operating losses and products have not yet been marketed commercially. The Company's product candidates are in development and have not yet been approved for commercialization by regulatory authorities in any jurisdiction. The Company's business entails significant risks, including the costs and time involved in obtaining the required regulatory approvals, the adequacy of patent protection, the uncertainties involved in clinical testing, the availability of capital to continue development and commercialization of the products, and competition from pharmaceutical and other biotechnology companies. Product research and development involves a high degree of risk and returns to investors are dependent upon successful development and commercialization of the Company's products. There can be no assurance that development of any product will be successfully completed or that regulatory approval of any of the Company's products under development will be obtained. 10 Furthermore, there can be no assurance that existing products or new products developed by competitors will not be more effective, or more effectively marketed and sold, than any that may be developed by the Company. Because of the length of time and expense associated with bringing new products through development, obtaining regulatory approval and bringing products to market, the Company places considerable importance on obtaining and maintaining patent and trade secret protection for significant discoveries. There can be no assurance that any pending patent application filed by the Company will mature into an issued patent. Furthermore, there can be no assurance that existing or pending patent claims will offer protection against competition, or will not be designed around or infringed upon by others. Commercial success will also depend in part on the Company not infringing patents or proprietary rights of others. The Company is currently dependent on third parties for a variety of functions and may enter into future collaborations for the development, manufacture and commercialization of products. There is no assurance that the arrangements with these third parties will provide benefits the Company expects. There can also be no assurance that the Company will be successful in marketing and distributing products, or that the Company will be able to make adequate arrangements with third parties for such purposes. There can be no assurance that the Company will generate revenue or achieve profitability. Significant funding is required for ongoing research and development, clinical trials, commercial manufacturing of products and the establishment of sales and marketing teams necessary for the launch and ongoing sales of new products. In addition, major financial resources are necessary until such time as the products are commercialized and sold successfully, and sales are sufficient to generate profits. The Company intends to raise additional financing, as required, through research, partnership and licensing agreements, the exercise of options and warrants, and through equity and/or debt financing. However, there can be no assurance that these financing efforts will be successful or that the Company will continue to be able to meet its ongoing cash requirements. It is possible that financing will not be available or, if available, may not be on favorable terms. The availability of financing will be affected by the results of scientific and clinical research, the Company's ability to attain regulatory approvals, the market acceptance of the Company's products, the state of the capital markets generally (with particular reference to pharmaceutical, biotechnology and medical companies), the status of strategic alliance agreements, and other relevant commercial considerations. On behalf of Management, CLAUDE MICHAUD Senior Vice-President, Finance & Chief Financial Officer St-Laurent , Quebec, Canada February 13, 2004 11 EX-4 5 m12968orexv4.txt CONSENT OF KPMG LLP Exhibit 4 CONSENT OF INDEPENDENT AUDITORS We consent to the use of our report dated February 13, 2004 on the Consolidated Balance Sheets of the Corporation as at December 31, 2003 and June 30, 2003 and the Consolidated Statements of Operations, Deficit and Cash Flows of Neurochem Inc. (the "Corporation") for the six-month period ended December 31, 2003, each of the years in the two-year period ended June 30, 2003 and for the period from inception (June 17, 2003) to December 31, 2003 which report appears in this annual report on Form 40-F of the Corporation. /s/ KMPG LLP - -------------------------- (signed) KMPG LLP Chartered Accountants Montreal, Quebec, Canada May 12, 2004 EX-5 6 m12968orexv5.txt CERTIFCATION (DR. FRANCESCA BELLINI) Exhibit 5 CERTIFICATION OF CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14 OR 15d-14 OF THE EXCHANGE ACT, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Dr. Francesco Bellini, certify that: 1. I have reviewed this annual report on Form 40-F of Neurochem Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this annual report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Dated: May 13, 2004. /s/ Francesco Bellini - -------------------------------------------------- Dr. Francesco Bellini Chairman of the Board and Chief Executive Officer EX-6 7 m12968orexv6.txt CERTIFICATION (CLAUDE MICHAUD) Exhibit 6 CERTIFICATION OF SENIOR VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14 OR 15d-14 OF THE EXCHANGE ACT, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Claude Michaud, certify that: 1. I have reviewed this annual report on Form 40-F of Neurochem Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this annual report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Dated: May 13, 2004. /s/ Claude Michaud - ---------------------------------------------------------- Claude Michaud Senior Vice President, Finance and Chief Financial Officer EX-7 8 m12968orexv7.txt CERTIFICATION (DR. FRANCESCA BELLINI) Exhibit 7 CERTIFICATION OF CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER PURSUANT TO TITLE 18, UNITED STATES CODE, SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Dr. Francesco Bellini, Chairman of the Board and Chief Executive Officer of Neurochem Inc., (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that, to the best of my knowledge: 1. The Annual Report on Form 40-F of the Company for the year ended December 31, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 13, 2004 /s/ Francesco Bellini ------------------------------------------------- Dr. Francesco Bellini Chairman of the Board and Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-8 9 m12968orexv8.txt CERTIFICATION (CLAUDE MICHAUD) Exhibit 8 CERTIFICATION OF SENIOR VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER PURSUANT TO TITLE 18, UNITED STATES CODE, SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Claude Michaud, Senior Vice President, Finance and Chief Financial Officer of Neurochem Inc., (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that, to the best of my knowledge: 1. The Annual Report on Form 40-F of the Company for the year ended December 31, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 13, 2004 /s/ Claude Michaud ------------------------------------------------------------- Claude Michaud Senior Vice President, Finance and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-9 10 m12968orexv9.txt CODE OF ETHICS Exhibit 9 CODE OF ETHICS NEUROCHEM INC. CODE OF ETHICS Neurochem Inc. (the "CORPORATION") expects all of its directors, officers and employees to comply with the laws and regulations governing its conduct and further is committed to promoting integrity and maintaining the highest standard of ethical conduct in all of its activities. The Corporation's business success is dependent on trusting relationships, which are built on this foundation of integrity. Our reputation is founded on the personal integrity of the Corporation's personnel and accordingly this Code of Ethics is applicable to all of the Corporation's directors, officers and employees. Each of us, as part of the Corporation, occupies a position of trust in our relations with fellow employees, customers, competitors, suppliers, government authorities, investors and the public. Whatever the area of activity, we should, of course, be honest and responsible in our relations with others. If there are any doubts as to whether a course of action is proper, or about the application or interpretation of any legal requirement, discuss it with your immediate supervisor. You may also discuss it with the Corporation's Chief Financial Officer who, if appropriate, will seek the advice of the Corporation's legal counsel. This is not a complete Code of Ethics. No statement can offer a complete guide to cover all possible situations that might be encountered. There are some areas, however, which because of their special importance, deserve particular attention and these are set out in what follows. CONFLICT OF INTEREST Each director, officer or employee, including in particular senior financial officers, (collectively the "EMPLOYEES") of the Corporation must avoid any conflict, or perception of conflict, between his or her personal interests and the interests of the Corporation in transacting the Corporation's business. All actions and decisions by Employees in the performance of work must be based on impartial and objective assessments of the Corporation's interests in the situation, totally without regard to any gifts, favours, or similar benefits from outside parties that could affect (or be seen by others to possibly affect) their judgment. Any gift, loan to or guarantee of obligation of, or benefit of any kind that has a value in excess of $100 must be approved by the Chief Financial Officer or, in his absence, the General Counsel. No Employee shall have any financial interest or position with any entity that transacts business with or competes with the Corporation other than the ownership of a minor percentage of shares in a public company without, immediately disclosing these interests and obtaining the approval of the Chief Financial Officer or, in the case of directors or officers, the board of directors of the Corporation (the "BOARD"). CORPORATE OPPORTUNITIES Employees are prohibited from (a) taking for themselves personally corporate opportunities that are discovered through the use of corporate property, information or position; (b) using corporate property, information or position for personal gain; and (c) competing with the Corporation. Employees owe a duty to the Corporation to advance its legitimate interests when the opportunity to do so arises. FAIR DEALING Each Employee should endeavour to deal fairly with the Corporation's customers, suppliers, competitors and employees. No one should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other unfair-dealing practice. PROTECTION AND PROPER USE OF CORPORATION ASSETS All Employees should protect the Corporation's assets and ensure their efficient use. Theft, carelessness and waste have a direct impact on the Corporation's profitability. All of the Corporation's assets should be used for legitimate business purposes. COMPLIANCE WITH LAWS, RULES AND REGULATIONS (INCLUDING INSIDER TRADING LAWS) The Corporation will proactively promote compliance with laws, rules and regulations, including insider trading laws. The Corporation views insider trading as both unethical and illegal and will deal with it decisively. In this regard, Employees are referred to the Corporation's Disclosure and Trading Policy CONFIDENTIALITY Employees will be required to maintain the confidentiality of information entrusted to them by the Corporation or its trading partners as required by the Corporation's Disclosure and Trading Policy. Confidential information includes all non-public information that might be of use to competitors, or harmful to the Corporation or its trading partners, if disclosed. FAIR FINANCIAL REPORTING AND PUBLIC COMMUNICATIONS Information in the Corporation's public communications, including periodic financial reports required to be filed by the Corporation and communications with shareholders, must be full, fair, accurate, timely and understandable. All Employees who are involved in the Corporation's disclosure process, including the senior financial officers (which include the Chief Executive Officer, the Chief Financial Officer and the Corporate Controller) are expected to act in furtherance of this Policy. In particular, these individuals are required to be familiar with the disclosure requirements for the Corporation and are prohibited from knowingly misrepresenting, omitting, or causing others to misrepresent or omit, material facts about the Corporation to others, whether within or outside the Corporation, including the Corporation's independent - 2 - auditors. Additionally, any Employee with a supervisory role in the Corporation's disclosure process is required to discharge his or her responsibilities diligently. SEXUAL HARASSMENT Sexual harassment by an individual, regardless of seniority, is regarded as unacceptable conduct, and all Employees must comply with applicable legislation. DISCLOSURE In the event that a breach of this Policy has occurred or if an Employee is concerned that a breach has or may occur, the Employee has an obligation to immediately disclose the situation and facts to his supervisor, the Chief Financial Officer or to the General Counsel for their counsel and direction. Potential conflicts of Board members shall be disclosed to the Board itself in accordance with Board guidelines and obligations. Every Employee has an obligation to provide full and complete disclosure. An undisclosed breach is a more serious violation of trust than an early and full disclosure of the situation. If any Employee believes that he or she may have a personal interest which could be construed or perceived by others to be in conflict with their position as an Employee they have an obligation to make full and complete disclosure as noted above. The Chief Executive Officer, the Chief Financial Officer or the Board may, if a conflict is disclosed fully and in advance, permit the conflict in certain instances, if deemed reasonable. WAIVER Any waiver of this Policy for executive officers or directors of the Corporation may be made only by the Board or a committee of the Board and must be promptly disclosed to the Corporation's shareholders. COMPLIANCE A violation of this Policy will result in disciplinary action and could result in dismissal for cause or removal from the Board of Directors, as the case may be. - 3 - -----END PRIVACY-ENHANCED MESSAGE-----