corporate profile bellus HeAlTH inc. QuArTerlY report second QuArTer bellushealth June 30

Transcription

1 QUARTERLY REPORT SECOND QUARTER Ended June 30

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3 MANAGEMENT S DISCUSSION AND ANALYSIS BELLUS Health Inc. and its subsidiaries (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. References herein to BELLUS Health s business and operations include activities prior to May 25, 2012, date of the strategic partnership, financing and capital reorganization described below, on the basis that such historical business and operations have been continued by the Company. 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, 2012, 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 related-party 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, 2011, as well as other public filings, which are available on SEDAR at This document contains forward-looking 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 consolidated financial statements and MD&A 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 7, All currency figures reported in the consolidated financial statements and in this document, including comparative figures, are in Canadian dollars, unless otherwise specified. BUSINESS OVERVIEW SECOND QUARTER 2012 Strategic Partnership, Financing and Capital Reorganization On May 25, 2012, BELLUS Health Inc., a company incorporated in June 1993 under the Canada Business Corporations Act and now named Canada Inc. (Old BELLUS), entered into a strategic partnership and financing agreement with Pharmascience Inc. (Pharmascience). Pharmascience paid a total of $17.25 million, including $8.15 million in non-dilutive capital for 100% of Old BELLUS outstanding common shares and $9.1 million for a 10.4% ownership stake in a newlycreated partnership (BHI LP) operated by a new public company (New BELLUS), owned by Old BELLUS's former securityholders. The transaction was put in place through a plan of arrangement (Plan of Arrangement). 1

4 Under the terms of the Plan of Arrangement, Old BELLUS transferred its business and operations, including substantially all of its assets and liabilities, to BHI LP, which is owned at 89.6% by New BELLUS and at 10.4% by Pharmascience. Immediately before the transaction with Pharmascience, all outstanding convertible securities of Old BELLUS were settled through the issuance of Old BELLUS common shares and by the issuance of an amended note ranking equally with Old BELLUS common shares (and convertible into New BELLUS common shares in 2016) (the Amended Note). In addition, the former securityholders of Old BELLUS exchanged their common shares on a one-for-one basis for New BELLUS common shares. New BELLUS, through BHI LP, has substantially the same assets that Old BELLUS had but with additional cash of $17.25 million. New BELLUS also has substantially less liabilities resulting from the conversion of the majority of Old BELLUS's liabilities into common shares. The Company's securityholders voted in favour of the transaction at its Annual and Special Meeting of securityholders held on May 15, 2012, and the transaction was sanctioned by a judge of the Superior Court of Quebec on May 16, New BELLUS, the reporting entity following May 25, 2012, in replacement to Old BELLUS, is carrying on its business operations under the name "BELLUS Health Inc.", and its common shares are listed with the same "BLU" symbol on the TSX. The senior management of Old BELLUS continued with New BELLUS. Further to the Plan of Arrangement, unrecognized tax attributes of Old BELLUS in relation to its research and development expenses, federal research and development investment tax credits and tax losses carried forward generated from its business through May 25, 2012, are no longer available to New BELLUS. In addition, the Plan of Arrangement resulted in the vesting of all outstanding nonvested stock options of Old BELLUS immediately before closing date; the stock option plan was cancelled and a new plan has been approved, under which new stock options will be granted in the near future. On May 29, 2012, New BELLUS common shares were consolidated on the basis of one new postconsolidation common share for every 30 pre-consolidation common shares. The securityholders of BELLUS Health voted in favour of the share consolidation at the May 15, 2012 Annual and Special Meeting. As a result, all issued and outstanding common shares, stock options, deferred share units, preferred share conversion ratio and per share amounts contained in this MD&A as well as in the condensed consolidated financial statements for the three and six-month periods ended June 30, 2012, have been retrospectively adjusted to reflect the share consolidation for all periods presented. Refer to the Management Information Circular dated April 18, 2012, available on SEDAR at for more details on the strategic partnership, financing and capital reorganization described above. As of August 7, 2012, the Company had 47,426,358 common shares outstanding and 61,071,159 common shares on a fully-diluted basis. 2

5 KIACTA (eprodisate) During the second quarter of 2012, BELLUS Health and Celtic Therapeutics Inc. (Celtic Therapeutics) continued the recruitment for the Phase III Confirmatory Study for KIACTA. 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. It will involve approximately 230 patients enrolled from approximately 79 sites in 28 countries worldwide, including those in Japan, as discussed below. Thus far, a total 70 clinical centers in 26 countries are actively recruiting patients. The Phase III Confirmatory Study is an event-driven trial which will conclude when 120 patients have reached worsening events linked to deterioration of kidney function. During the second quarter of 2012, the Company presented an update on the ongoing Phase III Confirmatory Study at the XIII International Symposium on Amyloidosis. Preliminary, blinded data demonstrate that demographics and baseline characteristics of the patients profiled are similar to BELLUS Health s previous Phase II/III study for KIACTA and also confirm an effective trial design based on the strong results of that first Phase II/III study. In January 2012, the Company announced that Japan s Pharmaceutical and Medical Device Agency (PMDA) formally accepted the request to expand the on-going KIACTA Phase III Confirmatory Study to Japan. The Japanese part of the study is scheduled to enrol between 10 and 15 patients in approximately 5 clinical centers in the country. These sites are expected to be activated in the second half of 2012 and will recruit patients for at least one year. There will be periodic data safety monitoring review boards that will independently assess the safety of KIACTA throughout the study, of which the first occurred on May 4, The recommendation of the data safety monitoring board following the first review meeting was to continue the study as per protocol. Patient recruitment is expected to be completed in the second half of The Phase III Confirmatory Study is the last key step before applications for regulatory approval for KIACTA can be filed. Further to the expansion of the study to Japan and the extension of the recruitment period, the completion of the study is now expected in second half of Receipt of milestone payment During the second quarter of 2012, the Company received a $650,000 payment from Advanced Orthomolecular Research Inc. (AOR) 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 whollyowned Canadian subsidiary, OVOS Natural Health Inc., in December At that time, BELLUS Health and AOR also entered into a license and supply agreement relating to BELLUS Health's product VIVIMIND, pursuant to which BELLUS Health granted AOR exclusive distribution rights for VIVIMIND in Canada. VIVIMIND During the second quarter of 2012, the Company entered into a licence and distribution agreement with LevPharm Ltd. (LevPharm), pursuant to which BELLUS Health granted LevPharm exclusive distribution rights for VIVIMIND in Israel. LevPharm expects to launch the product in VIVIMIND is a natural health product designed to protect memory function. 3

6 NRM8499 The Company is currently seeking a potential partnership to pursue the development process of NRM8499, a prodrug of tramiprosate for the treatment of Alzheimer s disease, for which a phase I clinical trial was completed in January Results of the trial showed a potential for pursuing NRM8499 for the treatment of Alzheimer s disease and demonstrated that NRM8499 was safe and well tolerated at the intended therapeutic dose. In addition, the Company is currently exploring opportunities in order to expand its pipeline, including through acquisitions and/or in-licensing. RESULTS OF OPERATIONS For the three-month period ended June 30, 2012, net loss amounted to $9,422,000 ($0.39 per share), compared to net income of $2,103,000 ($0.23 per share) for the corresponding period the previous year. For the six-month period ended June 30, 2012, net loss amounted to $12,615,000 ($0.74 per share), compared to net income of $5,402,000 ($0.64 per share) for the corresponding period the previous year. The increase in net loss is primarily due to items recorded in the current quarter in relation to the strategic partnership, financing and capital reorganization, as discussed above, 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 the 2009 Notes) for the threemonth 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. In addition, results for the three-month period ended June 30, 2011, included income in relation to the decrease in the fair value of the embedded conversion option liability on the 2009 Notes in the amount of $4,247,000 ($10,314,000 for the six-month period). Revenues amounted to $706,000 for the three-month period ended June 30, 2012 ($1,274,000 for the six-month period), compared to $719,000 for the corresponding period the previous year ($1,465,000 for the six-month period). Revenues mainly consist of revenue from the asset sale and license agreement as well as the service agreement entered into with Celtic Therapeutics in 2010 for KIACTA. Revenues also include revenue from distribution agreements in relation to VIVIMIND, which provide for minimum expected revenue from the supply of the product by BELLUS Health, royalties, as well as sales-based and regulatory milestones. Research and development expenses, before research tax credits and grants, amounted to $355,000 for the three-month period ended June 30, 2012 ($684,000 for the six-month period), compared to $341,000 for the corresponding period the previous year ($1,246,000 for the six-month period). The decrease in the six-month period is mainly attributable to a reduction in expenses incurred in relation to the NRM8499 Phase I clinical trial for the treatment of Alzheimer s disease, which ended in the first quarter of 2011, and a reduction in the workforce and other cost reduction initiatives implemented by the Company during the past year. General and administrative expenses amounted to $1,880,000 for the three-month period ended June 30, 2012 ($3,158,000 for the six-month period), compared to $789,000 for the corresponding period the previous year ($1,885,000 for the six-month period). The increase is due to transaction costs incurred in relation to the strategic partnership, financing and capital reorganization, described above. 4

7 Finance income amounted to $95,000 for the three-month period ended June 30, 2012 ($668,000 for the six-month period), compared to $4,310,000 for the corresponding period the previous year ($10,666,000 for the six-month period). The decrease is mainly attributable to finance income in relation to the decrease in the fair value of the embedded conversion option liability on the 2009 Notes in the amount of $4,247,000 for the three-month period ended June 30, 2011 ($10,314,000 for the sixmonth period). Finance costs amounted to $16,800,000 for the three-month period ended June 30, 2012 ($19,527,000 for the six-month period), compared to $1,832,000 for the corresponding period the previous year ($3,728,000 for the six-month period). The increase 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, as discussed above. Gain on sale of unrecognized assets amounted to $8,150,000 for the three and six-month periods ended June 30, 2012 (nil for the comparative periods the previous year), in relation to the non-dilutive capital payment received from Pharmascience. Other income amounted to $650,000 for the three and six-month periods ended June 30, 2012 (nil for the corresponding periods the previous year), and represents a milestone payment received from AOR during the current quarter in relation to the achievement of a pre-established milestone, as discussed above. Quarterly results (unaudited) (in thousands of dollars, except per share data) Quarter Revenues Net (loss) income Basic (loss) earnings per share Diluted loss per share $ $ $ $ Year ended December 31, 2012 Second 706 (9,422) (0.39) (0.39) First 568 (3,193) (0.33) (0.33) Year ended December 31, 2011 Fourth 856 (2,223) (0.25) (0.25) Third (0.06) Second 719 2, (0.04) First 746 3, (0.07) Year ended December 31, 2010 Fourth 1,039 (12,739) (1.78) (1.78) Third 764 (4,378) (0.62) (0.62) 5

8 The following explains the variation of the net (loss) income of a quarter compared to the corresponding quarter of the previous year. The increase in net loss for the quarter ended June 30, 2012, is primarily due to items recorded 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 increase in net loss for the quarter ended March 31, 2012, is primarily due to finance income recorded in the first quarter of 2011 in relation to the decrease in the fair value of the embedded conversion option liability on the 2009 Notes. The decrease in net loss for the quarter ended December 31, 2011, is primarily due to finance costs recorded in the fourth quarter of 2010 in relation to the increase in the fair value of the embedded conversion option liability on the 2009 Notes. The increase in net income for the quarter ended September 30, 2011, is primarily due to finance income recorded during this quarter in relation to the decrease in the fair value of the embedded conversion option liability on the 2009 Notes, as well as a decrease in research and development expenses and general and administrative expenses. Related party transactions Three-month periods ended June 30 Six-month periods ended June Consulting and services expense - Picchio International Inc. (Picchio International) $95,000 $95,000 $190,000 $190,000 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. Picchio International is wholly-owned by Dr. Francesco Bellini and his spouse. In October 2010, the Company entered into a license and supply agreement with FB Health LLC, a company controlled by Dr. Francesco Bellini. The Company recorded revenues of $206,000 under this agreement for the three-month period ended June 30, 2012 ($256,000 for the six-month period), compared to nil for the corresponding period the previous year ($74,000 for the six-month period). FINANCIAL CONDITION Liquidity and capital resources As at June 30, 2012, the Company had available cash and cash equivalents of $21,182,000, compared to $5,105,000 as at December 31, For the six-month period ended June 30, 2012, net increase in cash and cash equivalents amounted to $16,077,000, compared to a net decrease of $4,966,000 for the corresponding period the previous year. The net increase in cash compared to last year is attributable to funds received from the strategic partnership and financing agreement with Pharmascience, whereby Pharmascience paid a total of $17.25 million to BELLUS Health. Management continues to pursue additional sources of funds including through further arrangements relating to the distribution of VIVIMIND, its natural health product, and a potential partnership for NRM

9 In accordance with the Plan of Arrangement and the choice made by the noteholders, all convertible securities were settled through the issuance of common shares of the Company, with the exception of a portion of the 2009 Notes, for which the option to amend the terms of the convertible notes was exercised. The following are the terms of the Amended Note: (i) the maturity date of the Amended Note was extended to January 1, 2016; (ii) the Amended Note has a notional amount of $10,930,000 and does not bear interest. The Amended Note is classified in Other Equity in the consolidated balance sheet; (iii) the Amended Note is payable at maturity in cash or into 7,286,828 common shares of the Company (on the basis of the fixed conversion price per the Plan of Arrangement, subject to customary anti-dilution provision); (iv) on maturity, any of BELLUS Health or the noteholder may require the Amended Note to be paid in common shares of the Company; and (v) the Amended Note will be automatically converted into BELLUS Health common shares upon a change of control or liquidity events, as defined in the Plan of Arrangement. As at August 7, 2012, the Company had 47,426,358 common shares outstanding and 61,071,159 common shares on a fully diluted basis. Dilution includes 6,350,640 common shares issuable upon the exercise of Pharmascience exchange right of its 10.4% interest in BHI LP (Exchange Right), and 7,286,828 common shares that may be issuable upon the settlement of the Amended Note on January 1, 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. 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, 2011, in addition to the judgments applied in allocating the consideration received from Pharmascience and the classification of the Amended Note as equity. Refer to the audited consolidated financial statements for the year ended December 31, 2011, 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. 7

10 FUTURE ACCOUNTING CHANGES The following new accounting standards and amendments to standards and interpretations issued by the IASB are not yet effective for the three and six-month periods ending June 30, 2012, and have not been applied in preparing the condensed consolidated interim financial statements: (a) (b) (c) (d) IFRS 9, Financial Instruments; IFRS 10, Consolidated Financial Statements; IFRS 13, Fair Value Measurement; IAS 19, Employee Benefits. Further information on these modifications can be found in note 4 of the June 30, 2012 condensed consolidated interim 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, 2012 that have materially affected, or are reasonably likely to materially affect its ICFR. 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 immediately in current markets, 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 BELLUS Health 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. 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, 2012 and December 31, 2011 (in thousands of CDN dollars) June 30, December 31, Assets Current assets: Cash and cash equivalents (note 5) $ 21,182 $ 5,105 Trade and other receivables Prepaid expenses and other assets Total current assets 22,110 6,043 Non-current assets: Investments in New ABCP Notes (note 6) 5,904 5,594 Restricted cash (note 6) Other assets Total non-current assets 6,568 6,275 Total Assets $ 28,678 $ 12,318 Liabilities and Shareholders' Equity (Deficiency) Current liabilities: Trade and other payables $ 2,765 $ 3,601 Deferred revenue (note 7) 1,999 2,771 Total current liabilities 4,764 6,372 Non-current liabilities: Credit facilities (note 6) 8,583 8,797 Deferred revenue (note 7) 3,997 4,169 Long-term liabilities (note 9 (c)) 1,409 Notes and warrant liability (notes 1 and 8) 30,393 Total non-current liabilities 12,580 44,768 Total Liabilities 17,344 51,140 Shareholders' equity (deficiency): Share capital (notes 1 and 9) 418, ,597 Other equity (notes 1 and 8) 32,358 23,262 Deficit (440,808) (451,681) Total shareholders equity (deficiency) attributable to owners of the Company 10,142 (38,822) Non-controlling interest (note 1) 1,192 Total Shareholder s equity (deficiency) 11,334 (38,822) Total Liabilities and Shareholder s equity (deficiency) $ 28,678 $ 12,318 See accompanying notes to unaudited condensed consolidated financial statements. 10

13 Condensed Consolidated Statements of Comprehensive (Loss) Income (in thousands of CDN dollars, except per share data) Three-month periods ended Six-month periods ended June 30, June 30, Revenues (note 7) $ 706 $ 719 $ 1,274 $ 1,465 Expenses: Research and development ,246 Research tax credits and grants (12) (36) (12) (130) ,116 General and administrative 1, ,158 1,885 2,223 1,094 3,830 3,001 Results from operating activities (1,517) (375) (2,556) (1,536) Finance income 95 4, ,666 Finance costs (16,800) (1,832) (19,527) (3,728) Net finance (costs) income (note 11) (16,705) 2,478 (18,859) 6,938 Gain on sale of unrecognized assets (note 1) 8,150 8,150 Other income (note 12) Net (loss) income and total comprehensive (loss) income for the period $ (9,422) $ 2,103 $ (12,615) $ 5,402 Net (loss) income and total comprehensive (loss) income for the period attributable to: Owners of the Company $ (9,479) $ 2,103 $ (12,672) $ 5,402 Non-controlling interest (Loss) earnings per share (note 13) Basic $ (0.39) $ 0.23 $ (0.74) $ 0.64 Diluted (0.39) (0.04) (0.74) (0.11) See accompanying notes to unaudited condensed consolidated financial statements. 11

14 Condensed Consolidated Statements of Changes in Shareholders Equity (Deficiency) (in thousands of CDN dollars) Attributable to owners of the Company Non- Other controlling Share capital equity Deficit Total interest Total (note 9 (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 9 (d)) Issued on settlement of convertible securities (notes 1, 8 (a) and (b), and 9 (c)) 28,995 8,744 15,580 53,319 53,319 Change in ownership interest in subsidiary that does not result in loss of control (note 1) 7,965 7,965 1,135 9,100 Balance, June 30, 2012 $ 418,592 $ 32,358 $ (440,808) $ 10,142 $ 1,192 $ 11,334 Attributable to owners of the Company Non- Other controlling Share capital equity Deficit Total interest Total (note 9 (a)) Balance, December 31, 2010 $ 378,491 $ 22,960 $ (455,105) $ (53,654) $ $ (53,654) Net income and total comprehensive income for the period 5,402 5,402 5,402 Transactions with owners, recorded directly in shareholders deficiency: Stock-based compensation (note 9 (d)) Issued on exercise of Termination Option (note 9 (b)) 6,000 6,000 6,000 Issued on in connection with payment of Deferred Rent (note 9 (b)) 4,290 4,290 4,290 Issued on payment of interest on convertible notes (note 8 (b)) Conversion of preferred shares into common shares (note 9 (c)) Exercise of stock options for cash Balance, June 30, 2011 $ 389,182 $ 23,115 $ (449,703) $ (37,406) $ $ (37,406) See accompanying notes to unaudited condensed consolidated financial statements. 12

15 Condensed Consolidated Statements of Cash Flows (in thousands of CDN dollars) Six-month periods ended June 30, Cash flows from operating activities: Net (loss) income for the period $ (12,615) $ 5,402 Adjustments for: Stock-based compensation 232 (348) Financing and Corporate Reorganization transaction costs (note 1) 1,268 Gain on sale of unrecognized assets (8,150) Amortization of deferred rent liabilities 279 Amortization of deferred gain on sale of property (1,176) Net finance costs (income) 18,859 (6,938) Realized foreign exchange loss (gain) 2 (26) Deferral of lease payments by issuance of promissory notes 513 Settlement of deferred shares units (5) (14) Changes in operating assets and liabilities: Trade and other receivables (188) (180) Research tax credits receivable 1,105 Prepaid expenses and other assets Trade and other payables, provision and long-term liabilities 115 (3,318) Deferred revenue (944) (1,162) (1,149) (5,362) Cash flows from financing activities: Credit facilities (218) (254) Interest and bank charges paid (110) (131) Proceeds from issue of shares 1 (328) (384) Cash flows from investing activities: Sale of unrecognized assets (note 1) 8,150 Sale of ownership interest in subsidiary (note 1) 9,100 Restricted cash 180 Proceeds from New ABCP Notes Interest received Proceeds from assets held for sale , Net increase (decrease) in cash and cash equivalents 16,071 (4,783) Cash and cash equivalents, beginning of period 5,105 10,257 Effect of foreign exchange on cash and cash equivalents 6 (183) Cash and cash equivalents, end of period $ 21,182 $ 5,291 See accompanying notes to unaudited condensed consolidated financial statements. 13

16 Notes to Condensed Consolidated Financial Statements (in thousands of CDN dollars, except per share data, unless otherwise noted) 1. Reporting entity and corporate reorganization: BELLUS Health Inc., a company incorporated on April 12, 2012, under the Canada Business Corporations Act (New BELLUS), is domiciled in Canada. The address of the Company s registered office is 275 Armand-Frappier Blvd., Laval, Quebec, H7V 4A7. The Company's shares are listed on the Toronto Stock Exchange (TSX) under the symbol "BLU". BELLUS Health is a development-focused healthcare company concentrating on products that provide innovative health solutions and address critical unmet medical needs. The condensed consolidated interim financial statements include the accounts of BELLUS Health Inc. and its subsidiaries (together referred to as BELLUS Health or the Company). On May 25, 2012, BELLUS Health Inc., a company incorporated in June 1993 under the Canada Business Corporations Act and now named Canada Inc. (Old BELLUS), entered into a strategic partnership and financing agreement with Pharmascience Inc. (Pharmascience), an unrelated party to the Company. Pharmascience paid a total of $17,250, including $8,150 in nondilutive capital for 100% of Old BELLUS outstanding common shares and a $9,100 investment in exchange for a 10.4% ownership stake in a newly-created partnership (BHI LP). The transaction was put in place through a plan of arrangement (Plan of Arrangement). Under the terms of the Plan of Arrangement, Old BELLUS transferred its business and operations, including substantially all of its assets and liabilities, to BHI LP, which is owned at 89.6% by New BELLUS and at 10.4% by Pharmascience. Immediately before the transaction with Pharmascience, all outstanding convertible securities of Old BELLUS were settled through the issuance of Old BELLUS common shares and by the issuance of an amended convertible note ranking equally with Old BELLUS common shares (and convertible into New BELLUS common shares in 2016) (the Amended Note) (refer to notes 8 (a) and (b) and 9 (c)). In addition, the former securityholders of Old BELLUS exchanged their common shares on a one-for-one basis for New BELLUS common shares. The Company's securityholders voted in favour of the transaction at its Annual and Special Meeting of securityholders held on May 15, 2012, and the transaction was sanctioned by a judge of the Superior Court of Quebec on May 16, As there is no single controlling shareholder before or after the transaction, the transaction is accounted for as a restructuring at book value in these condensed consolidated interim financial statements. Pursuant to this method, the assets transferred and liabilities assumed are recorded at their carrying value as reported by Old BELLUS immediately prior to the transaction. References herein to BELLUS Health s business and operations include activities prior to May 25, 2012 (Financing and Corporate Reorganization Date), on the basis that such historical business and operations have been continued by the Company. 14

17 Notes to Condensed Consolidated Financial Statements, Continued (in thousands of CDN dollars, except per share data, unless otherwise noted) 1. Reporting entity and corporate reorganization (continued): New BELLUS, the reporting entity following the Financing and Corporate Reorganization Date, in replacement to Old BELLUS, is carrying on its business operations under the name "BELLUS Health Inc.", and its common shares are listed with the same "BLU" symbol on the TSX, as indicated above. The completion of the strategic partnership and financing agreement also resulted in the vesting of all outstanding non-vested stock options of Old BELLUS immediately before the Financing and Corporate Reorganization Date (refer to note 9 (d)); the actual stock option plan was cancelled, and a new plan has been approved, under which no stock options have been granted in the current period. For accounting purposes, the non-dilutive capital of $8,150 received by Pharmascience was allocated to the sale of unrecognized assets in the Company s consolidated balance sheet, and therefore resulted in a Gain on sale of unrecognized assets in the condensed consolidated statement of comprehensive (loss) income. As a result, unrecognized tax attributes of Old BELLUS in relation to its research and development expenses, federal research and development investment tax credits and tax losses carried forward generated from its business through May 25, 2012, are no longer available to New BELLUS. The $9,100 investment received for a 10.4% ownership stake (non-controlling interest) of Pharmascience in BHI LP was accounted for as follows: a Non-controlling interest of $1,135 in equity, which corresponds to 10.4% of the carrying value of the assets and liabilities of BHI LP on May 25, 2012, and the difference with the consideration received from the investment was credited to Deficit ($7,965). Pharmascience has the right to exchange its interest in BHI LP for 6,350,640 New BELLUS common shares (Exchange Right) at any time. On or after September 30, 2016, New BELLUS has the right to have Pharmascience exercise the Exchange Right. On May 29, 2012, New BELLUS common shares were consolidated on the basis of one new postconsolidation common share for every 30 pre-consolidation common shares. As a result, all issued and outstanding common shares, stock options, deferred share units, preferred share conversion ratio and per share amounts contained in these condensed consolidated financial statements for the three and six-month periods ended June 30, 2012, have been retrospectively adjusted to reflect the share consolidation for all periods presented. As at June 30, 2012, transactions costs in relation to the Financing and Corporate Reorganization approximately amount to $1,392 (including registration fees of $124 for the issuance of common shares, recorded in Deficit), and are presented in Trade and other payables in the condensed consolidated balance sheet. 15

18 Notes to Condensed Consolidated Financial Statements, Continued (in thousands of CDN dollars, except per share data, unless otherwise noted) 1. Reporting entity and corporate reorganization (continued): Refer to the Management Information Circular dated April 18, 2012, available on SEDAR at for more details on the transaction described above. The annual consolidated financial statements of the Company as at and for the year ended December 31, 2011, are available at or at 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, 2012, were approved by the Board of Directors on August 7, (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, 2011, in addition to the judgments applied in allocating the consideration received from Pharmascience and the classification of the Amended Note as equity. 16

19 Notes to Condensed Consolidated Financial Statements, Continued (in thousands of CDN dollars, except per share data, unless otherwise noted) 3. 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, Changes in accounting policies: Future accounting changes: (a) 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. (b) Consolidation: IFRS 10, Consolidated Financial Statements, was issued in May IFRS 10 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). IAS 27 (2008) survives as IAS 27 (2011), Separate Financial Statements, only to carry forward the existing accounting requirements for separate financial statements. IFRS 10 provides a single model to be applied in the control analysis for all investees, including entities that currently are SPE in the scope of SIC 12. In addition, the consolidation procedures are carried forward substantially unmodified from IAS 27 (2008). This standard is required to be applied for annual periods beginning on or after January 1, 2013, with earlier adoption permitted. The Company does not expect IFRS 10 to have a material impact on the consolidated financial statements. 17

20 Notes to Condensed Consolidated Financial Statements, Continued (in thousands of CDN dollars, except per share data, unless otherwise noted) 4. Changes in accounting policies (continued): Future accounting changes (continued): (c) Fair value measurement: IFRS 13, Fair Value Measurement, was issued in May IFRS 13 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 standard also establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements to provide information that enables financial statement users to assess the methods and inputs used to develop fair value measurements and, for recurring fair value measurements that use significant unobservable inputs (Level 3), the effect of the measurements on profit or loss or other comprehensive income. IFRS 13 explains how to measure fair value when it is required or permitted by other IFRS. IFRS 13 does not introduce new requirements to measure assets or liabilities at fair value, nor does it eliminate the practicability exceptions to fair value measurements that currently exist in certain standards. This standard is required to be applied prospectively for annual periods beginning on or after January 1, 2013, with earlier adoption permitted. The Company has not yet assessed the impact of IFRS 13 or determined whether it will adopt the standard early. (d) Employee benefits: In June 2011, the International Accounting Standards Board (IASB) published an amended version of IAS 19, Employee Benefits. The amendment impacts termination benefits, which would now be recognized at the earlier of when the entity recognizes costs for a restructuring within the scope of IAS 37, Provisions, and when the entity can no longer withdraw the offer of the termination benefits. This amendment is required to be applied for annual periods beginning on or after January 1, 2013, with early adoption permitted. The amendment is generally applied retrospectively with certain exceptions. The Company does not expect the amendment to IAS 19 to have a material impact on the consolidated financial statements. 18

21 Notes to Condensed Consolidated Financial Statements, Continued (in thousands of CDN dollars, except per share data, unless otherwise noted) 5. Cash and cash equivalents: Cash and cash equivalents consist of cash balances with banks and short-term investments: June 30, December 31, Cash balances with banks $ 3,268 $ 2,705 Short-term investments (yielding interest at 0.95% to 1.19% as at June 30, 2012) (December 31, % to 1.07%) 17,914 2,400 $ 21,182 $ 5, Investments in New ABCP Notes: As at June 30, 2012, the Company held new asset-backed commercial paper notes (New ABCP Notes) having notional value of $5,899 and US$3,263, consisting of $2,299 of MAV2 Class A-1 Notes, $2,773 of MAV2 Class A-2 Notes, $503 of MAV2 Class B Notes, $173 of MAV2 Class C Notes, US$3,186 of MAV3 IA Tracking Notes, as well as US$77 and $151 of MAV3 TA Tracking Notes. During the three and six-month periods ended June 30, 2012, the Company received partial payments for capital of $113 and $218, respectively ($143 et $254 for the corresponding periods the previous year), and for interest of $19 and $39, respectively ($15 and $33 for the corresponding periods the previous year). 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 2014, with options to renew on an annual basis until April As at June 30, 2012, these credit facilities have combined maximum aggregate available amounts of approximately $8,583, which are fully drawn ($8,797 as at December 31, 2011). 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. 19

22 Notes to Condensed Consolidated Financial Statements, Continued (in thousands of CDN dollars, except per share data, unless otherwise noted) 6. Investments in New ABCP Notes (continued): The investments in New ABCP Notes are measured at fair value in the consolidated financial statements. As at June 30, 2012, the Company estimated the fair value of the New ABCP Notes at approximately $6,379, of which $475 is presented as non-current Restricted cash in the condensed consolidated balance sheet ($6,006 as at December 31, 2011, of which $412 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 $63 and $627 for the three and six-month periods ended June 30, 2012, respectively (increase of nil and $203 for the corresponding periods the previous year), which is presented in Finance income in the condensed consolidated statement of comprehensive (loss) income. The Company estimated the fair value of the New ABCP Notes by discounting the expected cash flows at yields comparable to prevailing market yields and credit spreads available for securities with similar characteristics to the New ABCP Notes. The Company reviewed its assumptions to factor in new information available, as well as changes in market conditions. In determining the fair value of certain series of New ABCP Notes, the Company took into account the put option feature included in the credit facilities. The fair value of the put options and change in fair value thereof are presented with New ABCP Notes in the condensed consolidated balance sheet and related change in fair value in the condensed consolidated statement of comprehensive (loss) income. The Company did not take into consideration market trades entered into on certain series of New ABCP Notes, as they are not considered to be sufficient to represent an active market. Estimates of the fair value of the New ABCP Notes and related put option are not supported by observable market prices or rates, and therefore are subject to uncertainty, including, but not limited to, the estimated amounts to be recovered, the yield of the financial instruments, the timing of future cash flows, and the market for these types of instruments. 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 period, such adjustments would directly impact income. 20

23 Notes to Condensed Consolidated Financial Statements, Continued (in thousands of CDN dollars, except per share data, unless otherwise noted) 7. Revenues Revenues mainly consist of revenue from the asset sale and licensing agreement as well as the service agreement signed with Celtic Therapeutics Inc. (Celtic Therapeutics) during the second quarter of 2010 in relation to KIACTA, which amounted to $500 and $963 for the three and sixmonth periods ended June 30, 2012, respectively ($671 and $1,328 for the corresponding periods the previous year). Revenue in connection with these agreements is recognized on a straight-line basis over the development phase conducted by Celtic Therapeutics (estimated to be 62 months to June 30, 2015), as that time period is considered to be management s best estimate of the pattern of performance of all deliverables. As at June 30, 2012, the unbilled amount receivable in relation to the service agreement amounts to $361, of which $274 is presented as current Prepaid expenses and other assets and $87 as non-current Other assets in the condensed consolidated balance sheet ($638 as at December 31, 2011, of which $466 is presented as current Prepaid expenses and other assets and $172 as non-current Other assets). The deferred revenue balances in the condensed consolidated balance sheet represent unrecognized revenue in relation to those agreements. 8. Notes and warrant liability: In accordance with the Plan of Arrangement, the holders of BELLUS Health s 2009 Notes and 2006 and 2007 Amended Notes had the option to either immediately convert their notes into common shares at a fixed conversion ratio or have the terms of their notes amended to rank pari passu with the Company s common shares and to be convertible into a fixed number of common shares in Immediately prior to the closing of the transaction with Pharmascience, prior to the start of business on May 25, 2012, all of the Company s convertible notes were settled through the issuance of common shares, with the exception of a portion of the 2009 Notes, for which the option to amend the terms of the convertible notes was exercised (see note 8 (a)). (a) 2009 Notes and embedded conversion option: In accordance with the Plan of Arrangement and the choice made by the 2009 noteholders, the 2009 Notes were settled through the issuance of 21,026,376 common shares of the Company and the issuance of an amended note ranking pari passu with the common shares. 21