QUARTERLYREPORT. SECOND QUARTER Ended June 30

Transcription

1 2013 QUARTERLYREPORT SECOND QUARTER Ended June 30

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3 MANAGEMENT S DISCUSSION AND ANALYSIS BELLUS Health Inc. (and its subsidiaries, including BHI Limited Partnership, together referred to as BELLUS Health or the Company) is a development-focused healthcare company concentrating on products that provide innovative health solutions and address critical unmet medical needs. The Company's shares trade on the Toronto Stock Exchange (TSX) under the symbol BLU. This Management s Discussion and Analysis (MD&A) provides a review of the Company s operations and financial performance for the three and six-month periods ended June 30, It should be read in conjunction with the Company s unaudited condensed consolidated financial statements for the three and six-month periods ended June 30, 2013, as well as the Company s audited consolidated financial statements for the year ended December 31, These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and International Accounting Standard (IAS) 34, Interim Financial Reporting, as issued by the International Accounting Standards Board (IASB). For discussion regarding relatedparty transactions, contractual obligations, financial risk management, disclosure controls and procedures, internal control over financial reporting, and risks and uncertainties, refer to the Annual Report and the Annual Information Form for the year ended December 31, 2012, as well as other public filings, which are available on SEDAR at This document contains forwardlooking statements, which are qualified by reference to, and should be read together with the Forward-Looking Statements cautionary notice, which can be found at the end of this MD&A. The condensed consolidated financial statements and MD&A for the three and six-month periods ended June 30, 2013 have been reviewed by the Company s Audit Committee and approved by the Board of Directors. This MD&A was prepared by management with information available as at August 6, References herein to BELLUS Health s business and operations include activities prior to May 25, 2012 (date of strategic partnership, financing and capital reorganization, described in the Annual Report for the year ended December 31, 2012), on the basis that such historical business and operations have been continued by the Company. All currency figures reported in the condensed consolidated financial statements and in this document, including comparative figures, are in Canadian dollars, unless otherwise specified. BUSINESS OVERVIEW SECOND QUARTER 2013 KIACTA During the second quarter of 2013, recruitment continued for the Phase III Confirmatory Study for KIACTA and the Data Safety Monitoring Board (DSMB) recommended to continue the study as per protocol. The study is designed to confirm the safety and efficacy of KIACTA in preventing renal function decline in patients diagnosed with AA amyloidosis, an orphan indication resulting in renal dysfunction that often rapidly leads to dialysis and death. The study will involve approximately 230 patients enrolled from more than 70 sites and 30 countries worldwide. 1

4 Based on the current recruitment rate, the Company continues to expect that patient recruitment will be completed in the first half of The Phase III Confirmatory Study is an event-driven clinical trial that will end when 120 events linked to deterioration of kidney function have occurred, which is currently expected to be reached in BELLUS Health s partner, Auven Therapeutics (previously Celtic Therapeutics), is funding 100% of the development costs of KIACTA, including the Phase III Confirmatory Study and other related activities, which are estimated to be in excess of US$50 million. Auven Therapeutics and BELLUS Health are expected to share the overall proceeds from potential future revenue of KIACTA approximately equally. Patients completing the Phase III Confirmatory Study will be offered to continue in an extended program. The first patients are expected to be enrolled in the extended program in the second half of As part of the Phase III Confirmatory Study, there are periodic meetings of the DSMB, which independently assesses the safety of KIACTA throughout the study. Based on its last review on April 16, 2013, the DSMB recommended that the study continue as per protocol. On July 23, 2013, the Company announced that KIACTA was granted Orphan Disease Drug Status in Japan. As a result, KIACTA will receive priority review from Japanese regulatory authorities as a New Drug Application, once it is submitted. In addition, the drug will be granted 10 years of market exclusivity as a treatment for patients with AA amyloidosis. The Company also announced that a Japanese government research organization had granted up to the equivalent of C$500,000 towards KIACTA clinical development expenses incurred in Japan. Five clinical sites in Japan are currently participating in the global Phase III Confirmatory Study for KIACTA. In July 2013, the U.S. Patent and Trademark Office (USPTO) granted a U.S. Patent offering strengthened intellectual property protection for KIACTA. The patent, which will expire in 2026 with a possible extension available up to 2031, covers the dosing regimen of daily administration of KIACTA relative to AA Amyloidosis patients kidney impairment. The patent has also been granted in Canada, Australia and certain countries in Eurasia. VIVIMIND The Company is commercializing VIVIMIND, a natural health product designed to protect memory function, through distribution agreements with partners in several countries, including Italy, Canada, Taiwan, Greece, certain countries in the Middle East, Israel and South Korea. VIVIMIND is based on homotaurine, a naturally occurring ingredient found in certain seaweed. VIVIMIND is currently commercialized in Canada, Italy and Greece. The Company expects commercial launches in each of Iran, Israel and Taiwan over the course of Other Management continues to pursue additional sources of funds including through asset sale and/or outlicensing, as well as further arrangements relating to the distribution of VIVIMIND. In addition, the Company is currently exploring opportunities in order to expand its pipeline, including through acquisitions and/or in-licensing. 2

5 RESULTS OF OPERATIONS For the three-month period ended June 30, 2013, net loss attributable to owners of the Company amounted to $867,000 ($0.02 per share), compared to $9,479,000 ($0.39 per share) for the corresponding period the previous year. For the six-month period ended June 30, 2013, net loss amounted to $1,404,000 ($0.03 per share), compared to $12,672,000 ($0.74 per share) for the corresponding period the previous year. The decrease in net loss is primarily due to items recorded in the second quarter of 2012 in relation to the strategic partnership, financing and capital reorganization that occurred in May 2012, namely a non-cash loss on settlement of convertible securities in the amount of $15,084,000 (including the change in fair value of the embedded conversion option liability on convertible notes) for the three-month period ended June 30, 2012 ($15,751,000 for the six-month period), partially offset by a gain on sale of unrecognized assets in the amount of $8,150,000. The decrease is also due to a reduction in accretion expense and change in fair value of embedded derivative on convertible notes following the settlement of convertible securities, as part of the strategic partnership, financing and capital reorganization. Revenues amounted to $383,000 for the three-month period ended June 30, 2013 ($982,000 for the six-month period), compared to $706,000 for the corresponding period the previous year ($1,274,000 for the six-month period). Revenues mainly consist of revenue recognized for accounting purposes from the asset sale and license agreement as well as the service agreement entered into with Auven Therapeutics in 2010 for KIACTA. Revenues also include revenue recognized for accounting purposes from the agreement with Asclepios Bioresearch (UK) Limited, as well as revenue from distribution agreements in relation to VIVIMIND. The decrease is mainly due to lower revenue recognized for accounting purposes in relation to agreements entered into with Auven Therapeutics, following the review and extension of management s estimate of the KIACTA development phase period during the fourth quarter of 2012, as well as lower VIVIMIND revenue. General and administrative expenses amounted to $1,136,000 for the three-month period ended June 30, 2013 ($2,102,000 for the six-month period), compared to $1,880,000 for the corresponding period the previous year ($3,158,000 for the six-month period). The decrease is mainly due to transaction costs recorded in the comparative periods in relation to the strategic partnership, financing and capital reorganization that occurred in May Finance income amounted to $139,000 for the three-month period ended June 30, 2013 ($395,000 for the six-month period), compared to $95,000 for the corresponding period the previous year ($668,000 for the six-month period). The decrease for the six-month period ended June 30, 2013, is mainly attributable to lower increase in fair value of the New ABCP Notes. Finance costs amounted to $35,000 for the three-month period ended June 30, 2013 ($83,000 for the six-month period), compared to $16,800,000 for the corresponding period the previous year ($19,527,000 for the six-month period). The decrease is primarily due a non-cash loss on settlement of convertible securities in the amount of $15,084,000 (including the change in fair value of the embedded conversion option liability on the 2009 Notes) for the three-month period ended June 30, 2012 ($15,751,000 for the six-month period), recorded in relation to the strategic partnership, financing and capital reorganization that occurred in May The decrease is also due to a reduction in accretion expense and change in fair value of embedded derivative on convertible notes following the settlement of convertible securities, as part of the strategic partnership, financing and capital reorganization. 3

6 Gain on sale of unrecognized assets amounted nil for the three and six-month periods ended June 30, 2013, compared to $8,150,000 for the corresponding periods the previous year, and is in relation to the non-dilutive capital payment received from Pharmascience Inc. (Pharmascience) as part strategic partnership, financing and capital reorganization that occurred in May Other income amounted to nil for the three and six-month periods ended June 30, 2013, compared to $650,000 for the corresponding periods the previous year. This income represents a milestone payment received from Advanced Orthomolecular Research Inc. (AOR) in 2012 in relation to the achievement of a pre-established milestone set in the share purchase agreement entered into at the time AOR acquired BELLUS Health's wholly-owned Canadian subsidiary, OVOS Natural Health Inc., in December Quarterly results (unaudited) (in thousands of dollars, except per share data) Quarter Revenues Net (loss) income attributable to owners of the Company Basic (loss) earnings per share Diluted loss per share $ $ $ $ Year ended December 31, 2013 Second 383 (867) (0.02) (0.02) First 599 (537) (0.01) (0.01) Year ended December 31, 2012 Fourth 540 (327) (0.01) (0.01) Third 484 (256) (0.01) (0.01) Second 706 (9,479) (0.39) (0.39) First 568 (3,193) (0.33) (0.33) Year ended December 31, 2011 Fourth 856 (2,223) (0.24) (0.24) Third (0.06) The following explains the variation of the net (loss) income attributable to owners of the Company of a quarter compared to the corresponding quarter of the previous year. The decrease in net loss for the second quarter ended June 30, 2013, is primarily due to items recorded in the corresponding quarter the previous year in relation to the strategic partnership, financing and capital reorganization, namely a non-cash loss on settlement of convertible securities, partially offset by a gain on sale of unrecognized assets. The decrease in net loss for the first quarter ended March 31, 2013, is primarily due to a reduction in accretion expense and change in fair value of embedded derivative on convertible notes following the settlement of convertible securities, as part of the strategic partnership, financing and capital reorganization that occurred in May The decrease in net loss for the fourth quarter ended December 31, 2012, is primarily due to a reduction in accretion expense following the settlement of convertible securities, as part of the strategic partnership, financing and capital reorganization. The increase in net loss for the third quarter ended September 30, 2012, is primarily due to lower revenue recognized for accounting purposes in relation to the agreements entered into with Auven Therapeutics for the development of KIACTA, following the review and extension of management s estimate of the development phase period subsequent to December 31,

7 Related party transactions Dr. Francesco Bellini is the Chairman of the Board of Directors and provides ongoing advisory services to the Company under the terms of a consulting and services agreement between the Company and Picchio International Inc. (Picchio International), wholly-owned by Dr. Francesco Bellini and his spouse. Picchio International receives a monthly fee of $20,833, plus reimbursement of applicable expenses for services rendered under the agreement. The agreement has a one year term and shall renew for successive one year terms. The Company recorded fees and expenses under the consulting and services agreement of $95,000 for the three-month periods ended June 30, 2013 and 2012 ($190,000 for the six-month periods ended June 30, 2013 and 2012). In 2010, the Company entered into a license and supply agreement in relation to the distribution of VIVIMIND in Italy with FB Health LLC, a company controlled by Dr. Francesco Bellini. The Company recorded revenues of $5,000 under this agreement for the three-month period ended June 30, 2013 ($159,000 for the six-month period), compared to $206,000 for the corresponding period the previous year ($256,000 for the six-month period). An amended note convertible into common shares of the Company in 2016 (the Amended Note), was issued to a significant influence shareholder of the Company in May In May 2013, the agreement effective December 1, 2004 with Dr. Francesco Bellini, then Chief Executive Officer, to issue up to 7,333 common shares was cancelled. The Company did not pay any compensation to Dr. Bellini in regards to the cancellation of the agreement and did not record any expense or income in the condensed consolidated statement of loss and other comprehensive loss for the three and six-month periods ended June 30, 2013, in relation to the cancellation of common shares to be issued to Dr. Bellini. FINANCIAL CONDITION Liquidity and capital resources As at June 30, 2013, the Company had available cash, cash equivalents and short-term investments totalling $15,659,000, compared to $18,569,000 as at December 31, For the six-month period ended June 30, 2013, net decrease in cash, cash equivalents and short-term investments amounted to $2,910,000, compared to a net increase of $16,077,000 for the corresponding period the previous year. The net decrease for the six-month period ended June 30, 2013 includes $1,282,000 paid to settle one of the Company s credit facilities, as explained below. The net increase in the corresponding period the previous year is attributable to funds received from the strategic partnership and financing agreement with Pharmascience in May 2012, whereby Pharmascience paid a total of $17.25 million to BELLUS Health. Effective April 19, 2013, the Company exercised the put option on one of its credit facilities, which reduced both the aggregate credit facilities and nominal value of the related New ABCP Notes by $3,087,000 (US$3,009,000). Upon the exercise of the put option, the Company transferred to the bank ownership of the MAV3 IA Tracking Notes, and paid an amount of $1,282,000 (US$1,250,000) to settle the credit facility. The put option exercise will enable the Company to save more than $200,000 in future interest payments. 5

8 Based on management s estimate, the current cash position should enable the Company to finance its operations through the end of Phase III Confirmatory Study for KIACTA, expected in As at August 6, 2013, the Company had 47,426,358 common shares outstanding and 65,658,826 common shares on a fully diluted basis. Dilution items, subject to customary anti-dilution provisions, are as follows: 7,286,828 common shares that may be issuable upon the settlement of the Amended Note on January 1, 2016; 6,350,640 common shares issuable upon the exercise of Pharmascience exchange right of its 10.4% interest in BHI Limited Partnership (the Exchange Right). Pharmascience has the right to exercise the Exchange Right at any time. On or after September 30, 2016, BELLUS Health has the right to have Pharmascience exercise the Exchange Right; and 4,595,000 stock options granted under the stock option plan. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of the condensed consolidated financial statements in accordance with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. The reported amounts and note disclosures reflect management s best estimate of the most probable set of economic conditions and planned course of actions. Actual results may differ from these estimates. In preparing these condensed consolidated interim financial statements, the significant judgements made by management in applying the Company s accounting policies and key sources of estimation uncertainty were the same as those applied to the consolidated financial statements for the year ended December 31, Refer to the audited consolidated financial statements for the year ended December 31, 2012, for discussions on accounting policies and estimates that are the more important in assisting, understanding and evaluating the Company s consolidated financial statements. Change in these estimates and assumptions could have a significant impact on the Company s consolidated financial statements. CHANGES IN ACCOUNTING POLICIES Accounting changes in 2013 On January 1, 2013, the Company adopted the following new accounting standards issued by the IASB, for which the application did not have a material impact on the condensed consolidated financial statements for the three and six-month periods ended June 30, 2013: (a) (b) IFRS 10, Consolidated Financial Statements; and IFRS 13, Fair Value Measurement. 6

9 New accounting standard and interpretation not yet adopted: IFRS 9, Financial Instruments, a new accounting standard issued by the IASB, is not yet effective for the three and six-month periods ended June 30, 2013, and has not been applied in preparing the condensed consolidated financial statements. Further information on these modifications can be found in notes 3 and 4 of the June 30, 2013, condensed consolidated financial statements. CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING (ICFR) In accordance with the Canadian Securities Administrators Multilateral Instrument , the Company has filed certificates signed by the Chief Executive Officer and the Chief Financial Officer, that among other things, report on the design of disclosure controls and procedures and the design of internal control over financial reporting. There have been no changes in the Company s ICFR during the three and six-month periods ended June 30, 2013, that have materially affected, or are reasonably likely to materially affect its ICFR. SUBSEQUENT EVENT On June 18, 2013, the Company announced that it had entered into an agreement with Thallion Pharmaceuticals Inc. (Thallion) to acquire all of its outstanding common shares of by way of a plan of arrangement (the Acquisition Agreement). Thallion is a biotechnology company developing pharmaceutical products in the areas of infectious disease and oncology. Thallion s lead clinical program Shigamabs is a dual antibody product for the treatment of Shiga toxin-producing E. coli bacterial infections and has recently completed a Phase II clinical trial. The transaction was approved by Thallion s shareholders on August 6, 2013, and is subject to court approval. The transaction is expected to close on or before August 20, The Company will pay a minimum of $ per common share (on a fully-diluted basis, including stock options) to Thallion s securities holders, subject to the adjustment below, based on a Thallion Net Cash equaled to a minimum of $7,500 including non-cash deemed proceeds of $510 in relation to cashless exercise for in-the-money stock options (Minimum Cash Component) in accordance with the terms of the Acquisition Agreement, as amended, and issue one contingent value right (CVR) per common share to Thallion s securities holders. Excluding non-cash deemed proceeds of $510 in relation to cashless exercise for in-the-money stock options referred to above, the Company will pay a minimum of $5,822 in cash (including net payment in relation to cashless exercise for in-the-money stock options of $140), based on a Thallion Net Cash equaled to a minimum of $6,990. 7

10 The cash component of the consideration payable by BELLUS Health is subject to a potential increase on the effective date of the plan of arrangement estimated to be of up to approximately $ per common share (on a fully-diluted basis) in addition to the Minimum Cash Component, as provided in the second amendment to the Acquisition Agreement announced on August 2, Pursuant to this second amendment, if Thallion delivers a notice to BELLUS Health on or before August 20, 2013, indicating that Thallion has negotiated a final and binding agreement with the landlord of its premises, releasing Thallion from its obligations under the lease of its premises, in exchange for an amount (the Landlord Payment) which is less than the provision for the termination of such lease (the Landlord Provision) included in the Minimum Cash Component, the cash component of the consideration payable on the effective date of the plan of arrangement shall be increased by an amount equaled to the Landlord Provision minus the Landlord Payment divided by the number of common shares outstanding (on a fully-diluted basis). CVRs entitle the holder thereof to: (A) its pro rata share of 100% of any additional purchase price consideration to be received from Premium Brands Holding Corp. (Premium Brands) in 2016 (total amount receivable expected to be up to approximately $1,450) (or $ per CVR), (B) its pro rata share of 100% of any residual revenues received by BELLUS Health pursuant to the licensing, selling or otherwise commercializing of assets developed by Caprion Proteomics Inc. and (C) its pro rata share of 5% of the Shigamabs revenue generated or received by BELLUS Health, capped at $6,500 (or $ per CVR). The amount to which the holders of CVRs may be entitled can be reduced for potential contingent liabilities owing by Thallion (including, but not limited to, in respect of the indemnity agreement with Premium Brands, accounts payable or litigation). 8

11 FORWARD-LOOKING STATEMENTS Certain statements included in this MD&A may constitute forward-looking statements within the meaning of Canadian securities legislation and regulations, and are subject to important risks, uncertainties and assumptions. This forward-looking information may include among other things, information with respect to the Company s objectives and the strategies to achieve these objectives, as well as information with respect to the Company s beliefs, plans, expectations, anticipations, estimates, and intentions. Forward-looking statements generally can be identified by the use of conditional or forward-looking terminology such as may, will, expect, intend, estimate, anticipate, plan, foresee, believe or continue or the negatives of these terms or variations of them or similar terminology. Refer to the Company s filings with the Canadian securities regulatory authorities for a discussion of the various factors that may affect the Company s future results. Such risks include, but are not limited to: the ability to obtain financing, the impact of general economic conditions, general conditions in the pharmaceutical and/or nutraceutical industry, changes in the regulatory environment in the jurisdictions in which the Company does business, stock market volatility, fluctuations in costs, changes to the competitive environment due to consolidation, achievement of the forecasted burn rate, achievement of forecasted clinical trial milestones, and that actual results may vary once the final and quality-controlled verification of data and analyses has been completed. In addition, the length of KIACTA TM Phase III Confirmatory Study is dependent upon many factors including clinical sites activation, patient enrolment rate, patient drop-out rate and occurrence of clinical endpoint events. The results or events predicted in forward-looking information may differ materially from actual results or events. The Company believes that expectations represented by forward-looking statements are reasonable, yet there can be no assurance that such expectations will prove to be correct. Unless otherwise stated, the forward-looking statements contained in this report are made as of the date of this report, and the Company does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable legislation or regulation. The forward-looking statements contained in this report are expressly qualified by this cautionary statement. 9

12 Condensed Consolidated Balance Sheets June 30, 2013 and December 31, 2012 (in thousands of Canadian dollars) June 30, December 31, Assets Current assets: Cash and cash equivalents (note 5) $ 9,451 $ 10,745 Short-term investments (note 5) 6,208 7,824 Trade and other receivables Prepaid expenses and other assets Total current assets 16,748 19,657 Non-current assets: Investments in New ABCP Notes (note 6) 4,382 6,016 Restricted cash (note 6) Other assets Total non-current assets 5,576 7,441 Total Assets $ 22,324 $ 27,098 Liabilities and Shareholders' Equity Current liabilities: Trade and other payables $ 1,228 $ 1,173 Deferred revenue (note 7) 1,513 1,506 Total current liabilities 2,741 2,679 Non-current liabilities: Credit facilities (note 6) 5,196 8,245 Deferred revenue (note 7) 4,364 5,098 Total non-current liabilities 9,560 13,343 Total Liabilities 12,301 16,022 Shareholders' equity: Share capital (note 8) 418, ,592 Other equity 33,050 32,655 Deficit (442,795) (441,391) Total shareholders equity attributable to owners of the Company 8,847 9,856 Non-controlling interest 1,176 1,220 Total Shareholder s equity 10,023 11,076 Subsequent event (note 13) Total Liabilities and Shareholder s Equity $ 22,324 $ 27,098 See accompanying notes to unaudited condensed consolidated financial statements. 10

13 Condensed Consolidated Statements of Loss and Other Comprehensive Loss Periods ended June 30, 2013 and 2012 (in thousands of Canadian dollars, except per share data) Three-month periods ended Six-month periods ended June 30, June 30, Revenues (note 7) $ 383 $ 706 $ 982 $ 1,274 Expenses: Research and development General and administrative 1,136 1,880 2,102 3,158 Total operating expenses 1,381 2,223 2,742 3,830 Results from operating activities (998) (1,517) (1,760) (2,556) Finance income Finance costs (35) (16,800) (83) (19,527) Net finance income (costs) (note 10) 104 (16,705) 312 (18,859) Gain on sale of unrecognized assets 8,150 8,150 Other income Net loss and total comprehensive loss for the period (894) (9,422) (1,448) (12,615) Non-controlling interest (27) 57 (44) 57 Net loss and total comprehensive loss for the period attributable to owners of the Company $ (867) $ (9,479) $ (1,404) $ (12,672) Loss per share (note 11) Basic and diluted $ (0.02) $ (0.39) $ (0.03) $ (0.74) See accompanying notes to unaudited condensed consolidated financial statements. 11

14 Condensed Consolidated Statements of Changes in Shareholders Equity Periods ended June 30, 2013 and 2012 (in thousands of Canadian dollars) Attributable to owners of the Company Non- Other controlling Share capital equity Deficit Total interest Total (note 8 (a)) Balance, December 31, 2012 $ 418,592 $ 32,655 $ (441,391) $ 9,856 $ 1,220 $ 11,076 Net loss and total comprehensive loss for the period (1,404) (1,404) (44) (1,448) Transactions with owners, recorded directly in shareholders equity: Stock-based compensation (note 8 (b)) Balance, June 30, 2013 $ 418,592 $ 33,050 $ (442,795) $ 8,847 $ 1,176 $ 10,023 Attributable to owners of the Company Non- Other controlling Share capital equity Deficit Total interest Total (note 8 (a)) Balance, December 31, 2011 $ 389,597 $ 23,262 $ (451,681) $ (38,822) $ $ (38,822) Net loss and total comprehensive loss for the period (12,672) (12,672) 57 (12,615) Transactions with owners, recorded directly in shareholders equity: Stock-based compensation (note 8 (b)) Issued on settlement of convertible securities 28,995 8,744 15,580 53,319 53,319 Change in ownership interest in subsidiary that does not result in loss of control 7,965 7,965 1,135 9,100 Balance, June 30, 2012 $ 418,592 $ 32,358 $ (440,808) $ 10,142 $ 1,192 $ 11,334 See accompanying notes to unaudited condensed consolidated financial statements. 12

15 Condensed Consolidated Statements of Cash Flows Periods ended June 30, 2013 and 2012 (in thousands of Canadian dollars) Six-month periods ended June 30, Cash flows from operating activities: Net loss for the period $ (1,448) $ (12,615) Adjustments for: Stock-based compensation Other income (650) Gain on sale of unrecognized assets (8,150) Financing and Corporate Reorganization transaction costs 1,268 Net finance (income) costs (312) 18,859 Other items 9 (3) Changes in operating assets and liabilities: Trade and other receivables 13 (188) Prepaid expenses and other assets Trade and other payables and long-term liabilities 55 (5) Deferred revenue (727) (944) (1,711) (1,799) Cash flows from financing activities: Sale of ownership interest in subsidiary 9,100 Credit facilities (59) (218) Exercise of put option on a credit facility (note 6) (1,282) Interest and bank charges paid (83) (110) (1,424) 8,772 Cash flows from investing activities: Payment received from sale of subsidiary 650 Sale of unrecognized assets 8,150 Sale of short-term investments 1,616 Proceeds from New ABCP Notes Interest received ,792 9,098 Net (decrease) increase in cash and cash equivalents (1,343) 16,071 Cash and cash equivalents, beginning of period 10,745 5,105 Effect of foreign exchange on cash and cash equivalents 49 6 Cash and cash equivalents, end of period $ 9,451 $ 21,182 See accompanying notes to unaudited condensed consolidated financial statements. 13

16 Notes to Condensed Consolidated Financial Statements Periods ended June 30, 2013 and 2012 (in thousands of Canadian dollars, except per share data, unless otherwise noted) 1. Reporting entity: BELLUS Health Inc. is a development-focused healthcare company concentrating on products that provide innovative health solutions and address critical unmet medical needs. The company is domiciled in Canada. The address of the company s registered office is 275 Armand-Frappier Blvd., Laval, Quebec, H7V 4A7. These condensed consolidated interim financial statements include the accounts of BELLUS Health Inc. and its subsidiaries, including BHI Limited Partnership (together referred to as BELLUS Health or the Company). The Company's shares trade on the Toronto Stock Exchange (TSX) under the symbol BLU. The annual consolidated financial statements of the Company as at and for the year ended December 31, 2012, are available at or at References herein to BELLUS Health s business and operations include activities prior to May 25, 2012 (Financing and Corporate Reorganization Date, described in the annual consolidated financial statements as at and for the year ended December 31, 2012), on the basis that such historical business and operations have been continued by the Company. 2. Basis of presentation: (a) Statement of compliance: These condensed consolidated interim financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and International Accounting Standard (IAS) 34, Interim Financial Reporting. The condensed consolidated interim financial statements do not include all of the information required for full annual consolidated financial statements and should be read in conjunction with the annual consolidated financial statements as at and for the year ended December 31, These condensed consolidated interim financial statements have not been reviewed by the Company s auditors. These condensed consolidated financial statements for the three and six-month periods ended June 30, 2013, were approved by the Board of Directors on August 6,

17 Notes to Condensed Consolidated Financial Statements, Continued Periods ended June 30, 2013 and 2012 (in thousands of Canadian dollars, except per share data, unless otherwise noted) 2. Basis of presentation (continued): (b) Use of estimates and judgements: The preparation of the condensed consolidated financial statements in accordance with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. The reported amounts and note disclosures reflect management s best estimate of the most probable set of economic conditions and planned course of actions. Actual results may differ from these estimates. In preparing these condensed consolidated interim financial statements, the significant judgements made by management in applying the Company s accounting policies and key sources of estimation uncertainty were the same as those applied to the consolidated financial statements for the year ended December 31, Significant accounting policies and basis of measurement: The accounting policies and basis of measurement applied in these condensed consolidated interim financial statements are the same as those applied by the Company in its consolidated financial statements for the year ended December 31, 2012, except as described below: Accounting changes in 2013: On January 1, 2013, the Company adopted the following new accounting standards issued by the International Accounting Standards Board (IASB): (a) Consolidation: IFRS 10, Consolidated Financial Statements, replaces the guidance in IAS 27, Consolidated and Separate Financial Statements and the interpretation of Standing Interpretations Committee (SIC) 12, Consolidation Special Purpose Entities (SPE). The consolidation procedures are carried forward substantially unmodified from IAS 27. The application of IFRS 10 did not have a material impact on the condensed consolidated financial statements. (b) Fair value measurement: IFRS 13, Fair Value Measurement, replaces the fair value measurement guidance contained in individual IFRS with a single source of fair value measurement guidance. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, i.e. an exit price. The application of IFRS 13 did not have a material impact on the condensed consolidated financial statements other than added disclosure requirements which have been presented in notes 6 and 12 to the condensed consolidated financial statements. 15

18 Notes to Condensed Consolidated Financial Statements, Continued Periods ended June 30, 2013 and 2012 (in thousands of Canadian dollars, except per share data, unless otherwise noted) 4. New accounting standard and interpretation not yet adopted: Financial Instruments: IFRS 9, Financial Instruments, was issued in November It addresses classification and measurement of financial assets. This standard is required to be applied for annual periods beginning on or after January 1, 2015, with earlier adoption permitted. The Company has not yet assessed the impact of IFRS 9 or determined whether it will adopt the standard early. 5. Cash and cash equivalents and short-term investments: Cash and cash equivalents and short-term investments consist of cash balances with banks and short-term investments: June 30, December 31, Cash balances with banks $ 2,051 $ 2,657 Short-term investments with initial maturities of less than three months (yielding interest at 1.03% to 1.50% as at June 30, 2013) (December 31, % to 1.16%) 7,400 8,088 9,451 10,745 Short-term investments with initial maturities greater than three months and less than one year (yielding interest at 1.26% to 1.42% as at June 30, 2013) (December 31, % to 1.42%) 6,208 7,824 $ 15,659 $ 18, Investments in New ABCP Notes: As at June 30, 2013, the Company held new asset-backed commercial paper notes (New ABCP Notes) having notional value of $5,755 and US$77, consisting of $2,299 of MAV2 Class A-1 Notes, $2,772 of MAV2 Class A-2 Notes, $503 of MAV2 Class B Notes, $173 of MAV2 Class C Notes, as well as $8 and US$77 of MAV3 TA Tracking Notes. During the three and six-month periods ended June 30, 2013, the Company received partial payments for capital of nil and $59, respectively ($113 and 218 for the corresponding periods the previous year), and for interest of $10 and $21, respectively ($19 and $39 for the corresponding periods the previous year). 16

19 Notes to Condensed Consolidated Financial Statements, Continued Periods ended June 30, 2013 and 2012 (in thousands of Canadian dollars, except per share data, unless otherwise noted) 6. Investments in New ABCP Notes (continued): In 2009, in connection with the restructuring of the ABCP market, the Company entered into secured revolving credit facilities with the chartered bank that sold the ABCP to the Company. These facilities mature in April 2015, with options to renew on an annual basis until April As of June 30, 2013, these credit facilities have a combined maximum aggregate available amount of approximately $5,196, which was fully drawn ($8,245 as of December 31, 2012). The amount and availability of these credit facilities decrease as capital payments are received on the New ABCP Notes. The revolving credit facilities also include a put option feature which may limit the Company s losses to between 25% and 55% of the New ABCP Notes, subject to certain conditions. Effective April 19, 2013, the Company exercised the put option on one of its credit facilities, which reduced both the aggregate credit facilities and nominal value of the related New ABCP Notes by $3,087 (US$3,009). Upon the exercise of the put option, the Company transferred to the bank the ownership of the MAV3 IA Tracking Notes, and paid an amount of $1,282 (US$1,250) to settle the credit facility. The settlement of the facility for $1,805 (US$1,759) by exercise of the put option is a non-cash transaction, therefore excluded from the condensed consolidated statement of cash flows. The investments in New ABCP Notes are measured at fair value in the consolidated financial statements. As at June 30, 2013, the Company estimated the fair value of the New ABCP Notes at approximately $4,936, of which $554 is presented as non-current Restricted cash in the condensed consolidated balance sheet ($6,547 as at December 31, 2012, of which $531 is presented as non-current Restricted cash), as it is pledged to a bank as collateral for a letter of credit issued in connection with a lease agreement. In connection with its fair value determination, the Company recorded an increase in fair value of $35 and $220 for the three and six-month periods ended June 30, 2013, respectively (increase of $63 and $627 for the corresponding periods the previous year), which is presented in Finance income in the condensed consolidated statement of loss and other comprehensive loss. The Company estimated the fair value of the remaining New ABCP Notes as at June 30, 2013, by considering broker/dealer quotes. Estimates of the fair value of the New ABCP Notes are not supported by active market prices or rates, and therefore are subject to uncertainty. The resolution of these uncertainties could be such that the ultimate fair value of these investments may vary significantly from the Company s current estimate. Changes in the near-term could require significant changes in the recognized amount of these assets. As the Company records the New ABCP Notes at fair value each reporting period, such adjustments would directly impact income. 17

20 Notes to Condensed Consolidated Financial Statements, Continued Periods ended June 30, 2013 and 2012 (in thousands of Canadian dollars, except per share data, unless otherwise noted) 7. Revenues: Revenues consist of the following: (a) Development services: (i) Revenue from the asset sale and licensing agreement as well as the service agreement entered into with Auven Therapeutics (previously Celtic Therapeutics) in 2010 in relation to KIACTA amounted to $358 and $715 for the three and six-month periods ended June 30, 2013, respectively ($500 and $968 for the corresponding periods the previous year). Revenue in connection with these agreements is recognized on a straight-line basis over the period of the KIACTA development phase conducted by Auven Therapeutics, estimated to be 86 months to 2017, as that time period is considered to be management s best estimate of the pattern of performance of all its obligations under the agreements as at June 30, As at June 30, 2013, the expected amount receivable over the life of the service agreement amounted to $2,672 (US$2,711). Revenue adjustments in relation to a change in expected amount to be received are recognized prospectively. As at June 30, 2013, the unbilled amount receivable in relation to the service agreement amounts to $1,138, of which $589 is presented as current Prepaid expenses and other assets and $549 as non-current Other assets in the condensed consolidated balance sheet ($1,356 as at December 31, 2012, of which $557 is presented as current Prepaid expenses and other assets and $799 as non-current Other assets). The deferred revenue balances in the condensed consolidated balance sheet mainly consist of unrecognized revenue in relation to these agreements. (ii) Revenue from the partnership entered into in 2012 with Asclepios Bioresearch (UK) Limited (Asclepios) for the development of BLU8499, BELLUS Health's drug candidate for the treatment of Alzheimer's disease, amounted to $20 and $39 for the three and sixmonth periods ended June 30, 2013, respectively. Revenue in connection with this agreement is recognized on a straight-line basis over the development phase conducted by Asclepios, estimated to be 31 months to the first half of 2015, as that time period is considered to be management s best estimate of the pattern of performance of all its obligations under the agreement as at June 30, The balance of the amount received in 2012 in relation to this agreement is recorded as Deferred revenue in the condensed consolidated balance sheet. (b) Supply of product: Revenue from distribution agreements entered into with partners in several countries in relation to VIVIMIND amounted to $5 and $228 for the three and six-month periods ended June 30, 2013, respectively ($206 and $306 for the corresponding periods the previous year). Sales of product are recorded at the time the product is delivered, no future performance obligations exist, and collection is reasonably assured. 18

21 Notes to Condensed Consolidated Financial Statements, Continued Periods ended June 30, 2013 and 2012 (in thousands of Canadian dollars, except per share data, unless otherwise noted) 8. Share capital: (a) Issued and outstanding shares are as follows: Common shares Number Dollars Balance, December 31, ,426,358 $ 418,592 Balance, June 30, ,426,358 $ 418,592 Common shares Preferred shares Total Number Dollars Number Dollars Dollars Balance, December 31, ,908,435 $ 369,937 78,948,000 $ 19,660 $ 389,597 Issued on settlement of convertible securities 40,517,923 48,655 (78,948,000) (19,660) 28,995 Balance, June 30, ,426,358 $ 418,592 $ $ 418,592 (b) Stock option plan: Changes in outstanding options issued under the stock option plans for the six-month periods ended June 30, 2013 and 2012, were as follows: Number Weighted average exercise price Options outstanding, December 31, ,720,000 $ 0.50 Forfeited (200,000) 0.50 Options outstanding, June 30, ,520,000 $

22 Notes to Condensed Consolidated Financial Statements, Continued Periods ended June 30, 2013 and 2012 (in thousands of Canadian dollars, except per share data, unless otherwise noted) 8. Share capital (continued): (b) Stock option plan (continued): Number Weighted average exercise price Options outstanding, December 31, ,009 $ Forfeited (2,000) Cancelled (1) (305,009) Options outstanding, June 30, 2012 $ (1) All stock options from the prior stock option plan were cancelled in May 2012 immediately prior to the Financing and Corporate Reorganization Date (refer to note 1). Stock-based compensation For the three and six-month periods ended June 30, 2013, the Company recorded stockbased compensation expense (excluding compensation under the DSU plans) in the amount of $203 and $395, respectively, for stock options granted under the new stock option plan approved in May 2012; from those amounts, $24 and $39, respectively, is presented in Research and development expenses and $179 and $356, respectively, is presented in General and administrative expenses in the condensed consolidated statement of loss and other comprehensive loss ($291 and $352 for the corresponding periods the previous year, for stock options granted under the prior stock option plan cancelled in May 2012, $43 and $51 respectively presented in Research and development expenses, and $248 and $301 respectively presented in General and administrative expenses). 20

23 Notes to Condensed Consolidated Financial Statements, Continued Periods ended June 30, 2013 and 2012 (in thousands of Canadian dollars, except per share data, unless otherwise noted) 8. Share capital (continued): (c) Deferred share unit (DSU) plans: Changes in the number of units for the six-month periods ended June 30, 2013 and 2012 were as follows: June 30, June 30, Number of units Balance, beginning of year 191, ,867 Units paid (4,305) Balance, end of period 191, ,562 Balance of DSU liability, included in Trade and other payables $ 52 $ 145 (c) Deferred share unit (DSU) plans (continued): The net stock-based compensation expense (income) related to DSU plans recorded in the condensed consolidated statement of loss and other comprehensive loss for the three and six-month periods ended June 30, 2013, amounted to $(15) and $(24), respectively, of which $(1) and $(2), respectively, is presented in Research and development expenses and $(14) and $(22), respectively, is presented in General and administrative expenses ($(148) and $(120) for the corresponding periods the previous year, $(13) and $(11) respectively presented in Research and development expenses, and $(135) and $(109) respectively presented in General and administrative expenses). For the six-month period ended June 30, 2012, 4,305 units were redeemed for $5. 9. Related party transactions: (a) There is no single ultimate controlling party. (b) Dr. Francesco Bellini, Chairman of the Board of Directors, provides ongoing advisory services to the Company under the terms of a consulting and services agreement between the Company and Picchio International Inc., wholly-owned by Dr. Francesco Bellini and his spouse. The Company recorded fees and expenses of $95 and $190 respectively for the three and six-month periods ended June 30, 2013 ($95 and $190 for the corresponding periods the previous year). 21

24 Notes to Condensed Consolidated Financial Statements, Continued Periods ended June 30, 2013 and 2012 (in thousands of Canadian dollars, except per share data, unless otherwise noted) 9. Related party transactions (continued): (b) (continued) In 2010, the Company entered into a license and supply agreement in relation to the distribution of VIVIMIND in Italy with FB Health LLC, a company controlled by Dr. Francesco Bellini. Revenues of $5 and $159 have been recognized under this agreement for the three and six-month periods ended June 30, 2013, respectively (206$ and $256 for the corresponding periods the previous year). In May 2013, the agreement effective December 1, 2004 with Dr. Francesco Bellini, then Chief Executive Officer, to issue up to 7,333 common shares was cancelled. The Company did not pay any compensation to Dr. Bellini in regards to the cancellation of the agreement and did not record any expense or income in the condensed consolidated statement of loss and other comprehensive loss for the three and six-month periods ended June 30, 2013 in relation to common shares to be issued to Dr. Bellini. (c) An amended note convertible into common shares of the Company in 2016 (the Amended Note), was issued to a significant influence shareholder of the Company in May 2012, and is classified as Other equity in the condensed consolidated balance sheet. (d) Key management personnel: The Chief Executive Officer, Vice-Presidents and Directors of BELLUS Health are considered key management personnel of the Company. The aggregate compensation for the three and six-month periods ended June 30, 2013 and 2012, to key management personnel of the Company is set out below: Three-month periods ended Six-month periods ended June 30, June 30, Short term benefits $ 442 $ 470 $ 886 $ 906 DSU plans income (13) (130) (22) (105) Stock option plan expense $ 621 $ 622 $ 1,249 $ 1,142 22