QUARTERLY REPORT SECOND QUARTER. ended June 30

Transcription

1 2014 QUARTERLY REPORT 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 drug development company focused on rare diseases. It has a portfolio of rare disease assets including lead program KIACTA in Phase III for AA amyloidosis, KIACTA for sarcoidosis, clinical stage Shigamab for Hemolytic Uremic Syndrome related to Shiga toxin-producing E. coli (STEC) bacterial infections (shus) and a research-stage project for AL amyloidosis. The Company's shares trade on the Toronto Stock Exchange (TSX) under the symbol BLU. The 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, 2014, 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, 2013, 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 condensed consolidated financial statements and MD&A for the three and six-month periods ended June 30, 2014 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 12, 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 2014 KIACTA During the second quarter of 2014, the KIACTA Phase III Confirmatory Study completed its targeted enrollment of 230 patients from more than 70 sites in 30 countries. Total enrollment will be increased beyond 230 patients as eligible patients who were in pre-screening and screening at the time the target was reached are also being given the opportunity to enroll in the study. 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 leads to dialysis and death. KIACTA s safety and efficacy were demonstrated in a previous Phase II/III study. The Phase III Confirmatory Study is the last key step before applications for regulatory approval for KIACTA can be filed. 1

4 The Phase III Confirmatory Study is an event-driven trial that will conclude when 120 patients have experienced an event linked to deterioration of kidney function. An event is counted when a patient's kidney function has deteriorated as measured by a persistent 80 per cent increase in serum creatinine, a persistent 40 per cent decrease in creatinine clearance or reaching end stage renal disease. To date, more than 50% of the required events have been reached, and based on the current event rate, the KIACTA Phase III Confirmatory Study is expected to conclude in Patients completing the KIACTA Phase III Confirmatory Study will be offered to continue in an extended program, for which the first patients were enrolled during the second quarter of On April 28, 2014, Auven Therapeutics and BELLUS Health presented an update on the study s progress at the XIV th International Symposium on Amyloidosis (ISA) in Indianapolis. The ISA is the largest international conference focused on amyloid diseases. As part of the Phase III Confirmatory Study, there are periodic meetings of the Data Safety Monitoring Board (DSMB), which independently assesses the safety of KIACTA throughout the study. Based on its last review on April 15, 2014, the DSMB recommended that the study continue as per protocol. KIACTA is partnered with global private equity firm Auven Therapeutics. Auven Therapeutics is conducting the KIACTA study and funding 100% of the development costs of KIACTA, including the Phase III Confirmatory Study and other related activities, which total costs are currently estimated to be in excess of US$60 million. Overall proceeds from potential future revenue of KIACTA will be shared between Auven Therapeutics and BELLUS Health based on a pre-agreed formula included in the asset sale and license agreement, and assuming that total divestiture transaction proceeds reach a pre-determined threshold, the parties will share aggregate proceeds equally. In May 2014, Auven Therapeutics and BELLUS Health agreed upon modified terms to the KIACTA asset sale and license agreement in relation to the share of proceeds from a potential divestiture of KIACTA, particularly in the envisaged scenario of a KIACTA sale before the completion of its Phase III study. Assuming that total divestiture transaction proceeds reach a pre-determined threshold, the parties will share aggregate proceeds equally. Auven Therapeutics retains certain preference rights on exit proceeds related to Auven Therapeutics aggregate investment in KIACTA up to the date of the sale. The amendment to the agreement provides more flexibility to divest KIACTA at the most opportune moment for stakeholders, whether that proves to be in the short term or after the conclusion of the KIACTA Phase III Confirmatory Study. In May 2014, Auven Therapeutics and BELLUS Health announced that Auven Therapeutics had engaged Lazard as financial advisor to explore the sale of KIACTA. As the Phase III KIACTA study in AA amyloidosis neared completion of its enrollment, it was determined that a potential sale prior to the completion of the study would provide the acquirer with the opportunity to have input into the regulatory process for approval of KIACTA worldwide, and would facilitate the manufacturing, marketing and sales preparations for a global launch of the drug. KIACTA has been granted Orphan Drug Designation or its equivalent in the United States, Europe, Japan and Switzerland, which provides for market exclusivity for a period of seven to ten years once the drug is approved, as well as a reduction in application and review fees. 2

5 License Agreement with Mount Sinai for KIACTA in Sarcoidosis In May 2014, Auven Therapeutics and BELLUS Health announced that Auven Therapeutics had entered into a license agreement with Icahn School of Medicine at Mount Sinai Hospital, New York, under which Auven Therapeutics obtained rights to develop KIACTA (eprodisate) as a treatment for chronic sarcoidosis. Auven Therapeutics intends to conduct a Phase II (proof-of-concept) clinical trial to evaluate KIACTA s effectiveness and safety to treat certain medical manifestations of sarcoidosis. The Phase II trial is expected to begin in All costs in relation to the development of KIACTA in sarcoidosis will be borne by Auven Therapeutics. Proceeds from potential future revenue of KIACTA, including the rights to KIACTA for sarcoidosis, are subject to the proceeds sharing agreement between Auven Therapeutics and BELLUS Health mentioned above. Sarcoidosis is a rare condition that causes small patches of red and swollen tissue - called granulomas - that can develop in multiple organs in the body, but mostly in the lungs and skin. The disease affects approximately 120,000 patients in the U.S. alone and identification of an effective treatment is a major unmet medical need. Most patients with sarcoidosis recover, but approximately 30% develop chronic, debilitating disease. Mortality occurs in 1-5% of patients. There is no cure for sarcoidosis, and treatment options are limited and can have serious adverse effects. Obtaining the rights to move KIACTA into a second indication further expands its commercial potential and may help patients with this sometimes debilitating chronic disease. Shigamab Shigamab is a monoclonal antibody therapy being developed for the treatment of shus, which principally affects the kidneys and often leads to acute dialysis, and in certain cases chronic kidney disease and death, primarily in children. Shigamab s proof of concept testing for treatment of shus in mouse models is currently underway. Shigamab has been granted Orphan Drug designation or its equivalent in the United States and Europe, which provide for market exclusivity for a period of seven and ten years, respectively, once the drug is approved, as well as a reduction in application and review fees. 3

6 RESULTS OF OPERATIONS For the three-month period ended June 30, 2014, net loss attributable to shareholders amounted to $737,000 ($0.02 per share), compared to $867,000 ($0.02 per share) for the corresponding period the previous year. For the six-month period ended June 30, 2014, net loss attributable to shareholders amounted to $1,417,000 ($0.03 per share), compared to $1,404,000 ($0.03 per share) for the corresponding period the previous year. Revenues amounted to $420,000 for the three-month period ended June 30, 2014 ($895,000 for the six-month period), compared to $383,000 for the corresponding period the previous year ($982,000 for the six-month period). Revenues mainly consist of revenue recognized for accounting purposes from the asset sale and license agreement and the service agreement entered into with Auven Therapeutics in 2010 in relation to KIACTA. The decrease in the six-month period is mainly attributable to lower revenue recorded in relation to VIVIMIND, following VIVIMIND s divestiture in October At that time, BELLUS Health licensed the VIVIMIND worldwide rights to FB Health S.p.A (FB Health) for cash consideration of more than $2 million to be received until Future amounts receivable will only be recognized as revenue at the time amounts will be received by the Company since collectibility remains uncertain, as mentioned in note 8 b) to the condensed consolidated financial statements for the three and six-month periods ended June 30, Research and development expenses amounted to $369,000 for the three-month period ended June 30, 2014 ($833,000 for the six-month period), compared to $245,000 for the corresponding period the previous year ($640,000 for the six-month period). The increase is mainly attributable to expenses incurred in relation to the development of Shigamab, which drug candidate was acquired through the acquisition of Thallion Pharmaceuticals Inc. (Thallion) in August General and administrative expenses amounted to $847,000 for the three-month period ended June 30, 2014 ($1,737,000 for the six-month period), compared to $1,136,000 for the corresponding period the previous year ($2,102,000 for the six-month period). The decrease is mainly attributable to transaction costs recorded in the comparative period in relation to the acquisition of Thallion in August 2013 as well as an expense reduction in relation to VIVIMIND s operations following its divestiture in October Net finance income amounted to $28,000 for the three-month period ended June 30, 2014 ($199,000 for the six-month period), compared to $104,000 for the corresponding period the previous year ($312,000 for the six-month period). The decrease is mainly attributable to the depreciation of the Canadian dollar vs. the US dollar in the current quarter, compared to an appreciation of the Canadian dollar vs. the US dollar in the corresponding quarter the previous year. In addition, the decrease in the six-month period is attributable to a lower increase in the fair value of the ABCP Notes compared to the corresponding period the previous year. 4

7 Quarterly results (unaudited) (in thousands of dollars, except per share data) Quarter Revenues Net (loss) income attributable to shareholders Year ended December 31, 2014 Second First Basic (loss) earnings per share Diluted (loss) earnings per share $ $ $ $ (737) (680) (0.02) (0.01) (0.02) (0.01) Year ended December 31, 2013 Fourth 746 (507) (0.01) (0.01) Third 528 1, 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) The following explains the variation of the net (loss) income attributable to shareholders of a quarter compared to the corresponding quarter of the previous year. The decrease in net loss for the second quarter ended June 30, 2014 is mainly due to transaction costs recorded in the comparative period in relation to the acquisition of Thallion in August The increase in net loss for the first quarter ended March 31, 2014 is primarily due to lower revenue, mainly in relation to VIVIMIND. The increase in net loss for the fourth quarter ended December 31, 2013 is primarily due to higher research and development expenses and lower finance income, partially offset by an increase in revenues. The increase in net income for the third quarter ended September 30, 2013 is primarily due to a gain recognized in relation to the acquisition of Thallion. 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 of $95,000 under the consulting and services agreement for the three-month periods ended June 30, 2014 and 2013 ($190,000 for the six-month periods ended June 30, 2014 and 2013). 5

8 In October 2013, BELLUS Health entered into an agreement to license the worldwide rights to VIVIMIND to FB Health, a company controlled by Dr. Francesco Bellini. BELLUS Health also entered into a worldwide license agreement with FB Health for BLU8499 and a family of analogs, along with an associated platform of chemotypes and clinical datasets, in exchange for an equity stake in FB Health. In turn, FB Health sublicensed all its rights to Alzheon Inc. (Alzheon), a company controlled by Dr. Martin Tolar, a member of the Board of Directors of BELLUS Health, as part of an exclusive worldwide license, excluding Italy. Previously, the Company had entered into a license and supply agreement relating to the distribution of VIVIMIND in Italy with FB Health. The supply agreement was terminated upon the conclusion of the VIVIMIND worldwide rights license agreement in October The Company recorded revenues of $5,000 under the supply agreement for the three-month period ended June 30, 2013 ($159,000 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 FINANCIAL CONDITION Liquidity and capital resources As at June 30, 2014, the Company had available cash, cash equivalents and short-term investments totalling $13,088,000, compared to $15,297,000 as at December 31, For the six-month period ended June 30, 2014, net decrease in cash, cash equivalents and short-term investments amounted to $2,209,000, compared to $2,910,000 for the corresponding period the previous year. The net decrease for the six-month period ended June 30, 2013 included $1,282,000 paid to settle one of the Company s credit facilities. Excluding this item, the increase in cash use in 2014 is mainly due to funds used to finance the Company s operating activities. Based on management s estimate, the current cash position should enable the Company to finance its operations beyond the end of KIACTA Phase III Confirmatory Study, expected in The Company continues to explore opportunities in order to expand its pipeline. As at August 12, 2014, 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. 6

9 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, 2013 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 New accounting standards not yet adopted: IFRS 9, Financial Instruments, and IFRS 15, Revenue from Contracts with Customers, new accounting standards issued by the IASB, are not yet effective for the six-month period ended June 30, 2014, and have not been applied in preparing the condensed consolidated financial statements. Further information on these new accounting standards can be found in note 4 of the June 30, 2014 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, 2014 that have materially affected, or are reasonably likely to materially affect its ICFR. 7

10 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 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, potential payments in relation to indemnity agreements, 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 the KIACTA Phase III Confirmatory Study is dependent upon many factors, including patient drop-out rate and occurrence of clinical endpoint events, and the sharing of proceeds between Auven Therapeutics and the Company from potential future revenue of KIACTA is dependent upon a number of factors, including the quantum of proceeds. 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. 8

11 Condensed Consolidated Balance Sheets June 30, 2014 and December 31, 2013 (in thousands of Canadian dollars) June 30, December 31, Assets Current assets: Cash and cash equivalents (note 5) $ 9,036 $ 11,279 Short-term investments (note 5) 4,052 4,018 Investments in ABCP Notes (note 6) Restricted cash Trade and other receivables Prepaid expenses and other assets Total current assets 14,735 16,972 Non-current assets: Investments in ABCP Notes (note 6) 4,712 4,605 Restricted cash Other assets 1,055 1,255 In-process research and development asset Investment in FB Health (note 7) Total non-current assets 6,740 6,658 Total Assets $ 21,475 $ 23,630 Liabilities and Shareholders' Equity Current liabilities: Trade and other payables $ 1,248 $ 1,581 Deferred revenue (note 8) 1,680 1,680 Total current liabilities 2,928 3,261 Non-current liabilities: Credit facilities (note 6) 5,188 5,188 Deferred revenue (note 8) 2,520 3,360 Financial liabilities - CVRs 1,086 1,003 Total non-current liabilities 8,794 9,551 Total Liabilities 11,722 12,812 Shareholders' equity: Share capital (note 9) 418, ,592 Other equity 33,582 33,346 Accumulated other comprehensive income Deficit (443,680) (442,263) Total shareholders equity attributable to shareholders 8,671 9,695 Non-controlling interest 1,082 1,123 Total Shareholder s equity 9,753 10,818 Total Liabilities and Shareholder s Equity $ 21,475 $ 23,630 See accompanying notes to unaudited condensed consolidated financial statements. 9

12 Condensed Consolidated Statements of Loss (in thousands of Canadian dollars, except per share data) Three-month periods ended Six-month periods ended June 30, June 30, Revenues (note 8) $ 420 $ 383 $ 895 $ 982 Expenses: Research and development General and administrative 847 1,136 1,737 2,102 Total operating expenses 1,216 1,381 2,570 2,742 Results from operating activities (796) (998) (1,675) (1,760) Finance income Finance costs (99) (35) (139) (83) Net finance income (note 11) Net loss for the period (768) (894) (1,476) (1,448) Net loss attributable to: Shareholders $ (737) $ (867) $ (1,417) $ (1,404) Non-controlling interest (31) (27) (59) (44) $ (768) $ (894) $ (1,476) $ (1,448) Loss per share (note 12) Basic and diluted $ (0.02) $ (0.02) $ (0.03) $ (0.03) See accompanying notes to unaudited condensed consolidated financial statements. 10

13 Condensed Consolidated Statements of Other Comprehensive Income (in thousands of Canadian dollars, except per share data) Three-month periods ended Six-month periods ended June 30, June 30, Net loss for the period $ (768) $ (894) $ (1,476) $ (1,448) Other comprehensive income (that may be reclassified subsequently to net loss): Unrealized gain on available-for-sale investment (note 7) Other comprehensive income for the period Total comprehensive loss for the period $ (637) $ (894) $ (1,301) $ (1,448) Total comprehensive loss attributable to: Shareholders $ (620) $ (867) $ (1,260) $ (1,404) Non-controlling interest (17) (27) (41) (44) $ (637) $ (894) $ (1,301) $ (1,448) See accompanying notes to unaudited condensed consolidated financial statements. 11

14 Condensed Consolidated Statements of Changes in Shareholders Equity (in thousands of Canadian dollars) Attributable to shareholders Accumulated other Non- Share Other comprehen- controlling capital equity sive income Deficit Total interest Total (note 9 (a)) Balance, December 31, 2013 $ 418,592 $ 33,346 $ 20 $ (442,263) $ 9,695 $ 1,123 $ 10,818 Total comprehensive loss for the period: Net loss (1,417) (1,417) (59) (1,476) Other comprehensive income Total comprehensive loss for the period 157 (1,417) (1,260) (41) (1,301) Transactions with shareholders, recorded directly in shareholders equity: Stock-based compensation (note 9 (b)) Balance, June 30, 2014 $ 418,592 $ 33,582 $ 177 $ (443,680) $ 8,671 $ 1,082 $ 9,753 Attributable to shareholders Non- Other controlling Share capital equity Deficit Total interest Total (note 9 (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 shareholders, recorded directly in shareholders equity: Stock-based compensation (note 9 (b)) Balance, June 30, 2013 $ 418,592 $ 33,050 $ (442,795) $ 8,847 $ 1,176 $ 10,023 See accompanying notes to unaudited condensed consolidated financial statements. 12

15 Condensed Consolidated Statements of Cash Flows (in thousands of Canadian dollars) Six-month periods ended June 30, Cash flows from operating activities: Net loss for the period $ (1,476) $ (1,448) Adjustments for: Stock-based compensation Net finance income (199) (312) Other items 2 9 Changes in operating assets and liabilities: Trade and other receivables (64) 13 Prepaid expenses and other assets Trade and other payables (333) 55 Deferred revenue (840) (727) (2,277) (1,711) Cash flows from financing activities: Credit facilities (59) Exercise of put option on a credit facility (note 6) (1,282) Interest and bank charges paid (56) (83) (56) (1,424) Cash flows from investing activities: Sale of short-term investments 1,616 Proceeds from ABCP Notes Interest received ,792 Net decrease in cash and cash equivalents (2,243) (1,343) Cash and cash equivalents, beginning of period 11,279 10,745 Effect of foreign exchange on cash and cash equivalents 49 Cash and cash equivalents, end of period $ 9,036 $ 9,451 See accompanying notes to unaudited condensed consolidated financial statements. 13

16 Notes to Condensed Consolidated Financial Statements (in thousands of Canadian dollars, except per share data, unless otherwise noted) 1. Reporting entity: BELLUS Health Inc. (BELLUS Health or Company) is a drug development company focused on rare diseases. It has a portfolio of rare disease assets including lead program KIACTA in Phase III for AA amyloidosis, KIACTA for sarcoidosis, clinical stage Shigamab for Hemolytic Uremic Syndrome related to Shiga toxin-producing E. coli (STEC) bacterial infections (shus) and a research-stage project for AL amyloidosis. 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 (BHI LP). 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, 2013, are available at or at Non-controlling interest: The strategic partnership and financing agreement with Pharmascience Inc. (Pharmascience) in May 2012, described in the annual consolidated financial statements as at and for the year ended December 31, 2013, resulted in Pharmascience having a non-controlling interest of 10.4% in BHI LP. BHI LP is a limited partnership held by BELLUS Health at 89.6%. It is based at the same address as BELLUS Health. BELLUS Health s main business and operations are carried in BHI LP. Pharmascience has the right to exchange its interest in BHI LP for 6,350,640 common shares of the Company at any time (the Exchange Right). On or after September 30, 2016, BELLUS Health has the right to have Pharmascience exercise the Exchange Right. 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, 2014 were approved by the Board of Directors on August 12,

17 Notes to Condensed Consolidated Financial Statements, Continued (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, New accounting standards not yet adopted: Financial Instruments: IFRS 9, Financial Instruments, was issued in November It addresses classification and measurement of financial assets and liabilities. In November 2013, the International Accounting Standards Board (IASB) issued a new general hedge accounting standard, which forms part of IFRS 9, Financial Instruments (2013). On July 24, 2014, the IASB issued the final version of IFRS 9, bringing together the classification and measurement, impairment and hedge accounting phases of the IASB s project to replace IAS 39, Financial Instruments: Recognition and Measurement. The final version of IFRS 9 supersedes all previous versions of IFRS 9 and is effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The Company has not yet assessed the impact of adoption of IFRS 9, and does not intend to early adopt IFRS 9 in its consolidated financial statements. 15

18 Notes to Condensed Consolidated Financial Statements, Continued (in thousands of Canadian dollars, except per share data, unless otherwise noted) 4. New accounting standards not yet adopted (continued): Revenue: On May 28, 2014 the IASB issued IFRS 15, Revenue from Contracts with Customers. IFRS 15 will replace IAS 18, Revenue, among other standards.the standard contains a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. New estimates and judgmental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. The new standard applies to contracts with customers. The new standard is effective for fiscal years ending on or after December 31, 2017, and is available for early adoption. The Company has not yet assessed the impact of adoption of IFRS 15, and does not intend to early adopt IFRS 15 in its consolidated financial statements. 5. Cash, cash equivalents and short-term investments: Cash, cash equivalents and short-term investments consist of cash balances with banks and shortterm investments: June 30, December 31, Cash balances with banks $ 611 $ 919 Short-term investments with initial maturities of less than three months (yielding interest at 1.45% to 1.50% as at June 30, 2014) (December 31, % to 1.50%) 8,425 10,360 9,036 11,279 Short-term investments with initial maturities greater than three months and less than one year (yielding interest at 1.60% to 1.80% as at June 30, 2014) (December 31, % to 1.80%) 4,052 4,018 $ 13,088 $ 15,297 16

19 Notes to Condensed Consolidated Financial Statements, Continued (in thousands of Canadian dollars, except per share data, unless otherwise noted) 6. Investments in ABCP Notes: As at June 30, 2014, the Company held asset-backed commercial paper (ABCP) Notes having notional value of $5,747, consisting of $2,299 of MAV2 Class A-1 Notes, $2,772 of MAV2 Class A- 2 Notes, $503 of MAV2 Class B Notes, as well as $173 of MAV2 Class C Notes. During the three and six-month periods ended June 30, 2014, the Company received partial payments for capital of nil (nil and $59 respectively for the corresponding periods the previous year), and for interest of $10 and $19, respectively ($10 and $21 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 As of June 30, 2014, these credit facilities have a combined maximum aggregate available amount of $5,188, which was fully drawn ($5,188 as of December 31, 2013). The amount and availability of these credit facilities decrease as capital payments are received on the ABCP Notes. The investments in ABCP Notes are measured at fair value in the condensed consolidated financial statements. As at June 30, 2014, the Company estimated the fair value of the ABCP Notes at $5,308, of which $596 is presented as current assets in the condensed consolidated balance sheet, as the Company expects to dispose of these notes in the upcoming year ($5,187 as at December 31, 2013, of which $582 is presented as current assets). In connection with its fair value determination, the Company recorded an increase in fair value of $34 and $140 for the three and six-month periods ended June 30, 2014, respectively (increase of $35 and $220 for the corresponding periods the previous year), which is presented in Finance income in the condensed consolidated statement of loss. In April 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 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 credit 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 Company estimates the fair value of the ABCP Notes by considering broker/dealer quotes. Estimates of the fair value of the ABCP Notes are not supported by active market prices or rates, and therefore are subject to uncertainty. The resolution of this uncertainty 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 ABCP Notes at fair value each reporting period, such adjustments will directly impact income. 17

20 Notes to Condensed Consolidated Financial Statements, Continued (in thousands of Canadian dollars, except per share data, unless otherwise noted) 7. Investment in FB Health: The 5.5% investment in FB Health S.p.A (FB Health), acquired by the Company as part of the licence agreement with FB Health for BLU8499 in October 2013 (refer to note 8 (b)), is measured at fair value in the condensed consolidated financial statements. As at June 30, 2014, the Company estimated the fair value of the investment at $381 ($206 as at December 31, 2013). In connection with its fair value determination, the Company recorded an increase in fair value of $131 and $175 for the three and six-month periods ended June 30, 2014, respectively, recognized in other comprehensive income. The Company estimated the fair value of the investment in FB Health by using an enterprise valuation method based on a sales multiple. Estimates of the fair value of the investment are not supported by active market prices, and therefore are subject to uncertainty. The resolution of this uncertainty could be such that the ultimate fair value of the investment may vary significantly from the Company s current estimate. Changes in the near-term could require significant changes in the recognized amount of this asset. As the Company records the investment in FB Health at fair value each reporting period, such adjustments will directly impact other comprehensive income. 8. Revenues: Revenues mainly consist of the following: (a) Development services: Revenue from the asset sale and licensing agreement as well as the service agreement entered into with Auven Therapeutics in 2010 in relation to KIACTA amounted to $420 and $840 for the three and six-month periods ended June 30, 2014, respectively ($358 and $715 for the corresponding periods the previous year). Revenue in connection with these agreements is recognized on a straight-line basis over the KIACTA MC development phase conducted by Auven Therapeutics, estimated to be 80 months from 2010 to 2016, as that time period is considered to be management s best estimate as at June 30, 2014 of the pattern of performance of all its obligations under the agreements. As at June 30, 2014, the expected amount receivable over the life of the service agreement amounted to $2,689 (US$2,727). Revenue adjustments in relation to a change in expected amount to be received are recognized prospectively. As at June 30, 2014, the unbilled amount receivable in relation to the service agreement amounted to $492, and is presented as current Prepaid expenses and other assets in the condensed consolidated balance sheet ($854 as at December 31, 2013, of which $596 is presented as current Prepaid expenses and other assets and $258 as non-current Other assets). The deferred revenue balances in the condensed consolidated balance sheet consist of unrecognized revenue in relation to those agreements. 18

21 Notes to Condensed Consolidated Financial Statements, Continued (in thousands of Canadian dollars, except per share data, unless otherwise noted) 8. Revenues (continued): (a) Development services (continued): In May 2014, Auven Therapeutics and BELLUS Health agreed upon modified terms to the KIACTA asset sale and license agreement in relation to the share of proceeds from a potential divestiture of KIACTA, particularly in the envisaged scenario of a KIACTA sale before the completion of its Phase III study. Overall proceeds from potential future revenue of KIACTA will be shared between Auven Therapeutics and BELLUS Health based on a preagreed formula included in the agreement, and assuming that total divestiture transaction proceeds reach a pre-determined threshold, the parties will share aggregate proceeds equally. Auven Therapeutics retains certain preference rights on exit proceeds related to Auven Therapeutics aggregate investment in KIACTA up to the date of the sale. The amendment to the agreement provides more flexibility to divest KIACTA at the most opportune moment for stakeholders, whether that proves to be in the short term or after the conclusion of the KIACTA Phase III Confirmatory Study. (b) Revenue under licensing agreements: BELLUS Health entered into an agreement in October 2013 to license the worldwide rights of VIVIMIND, a natural health product for memory protection, to FB Health. The agreement provides for cash consideration of more than $2,000 to be received until 2017, consisting of minimum expected revenue from fixed payments to be received as licensing fees of $1,500, to be received in five annual payments until 2017, sale-based royalty payments capped at, but no less than $500, receivable no later than December 31, 2017, as well as certain costs reimbursements. BELLUS Health also entered into a worldwide license agreement in October 2013 with FB Health for BLU8499, BELLUS Health's drug candidate for the treatment of central nervous system diseases including Alzheimer's disease, and a family of analogs, along with an associated platform of chemotypes and clinical datasets. In turn, FB Health sublicensed all its rights to Alzheon Inc. (Alzheon), as part of an exclusive worldwide license, excluding Italy. As part of the consideration, BELLUS Health received an equity stake in FB Health, and will receive a portion of all future payments related to BLU8499 and royalties on net sales of BLU

22 Notes to Condensed Consolidated Financial Statements, Continued (in thousands of Canadian dollars, except per share data, unless otherwise noted) 8. Revenues (continued): (b) Revenue under licensing agreements (continued): Consideration under these license agreements is recognized into income when conditions and events under the agreement have been met or occurred, and it is probable that the economic benefits associated with the transaction will flow to the Company. As at the date of the transaction, management of the Company determined that it had performed all of its obligations under the agreements and that revenue under the agreements should be recognized. However, since the date of the transaction, and including as at June 30, 2014, management assessed that uncertainty existed in relation to the collectibility of the amounts to be received until 2017 under the VIVIMIND agreement due to the start-up nature of FB Health s business, therefore only recognized revenues to the extent received. The Company recognized revenues of nil under the VIVIMIND agreement for the three and six-month periods ended June 30, 2014, as no amount was received during that period, in accordance to the payment schedule set forth in the agreement. While collectibility remains uncertain, future amounts receivable will only be recognized as revenue at the time amounts will be received by the Company. Furthermore, as revenues under the BLU8499 agreement are contingent upon future payments to be received in relation to BLU8499 and sales of BLU8499, revenues will only be recognized when economic benefits are probable and collectibility is assured. No amount was received and recognized as revenue under the BLU8499 agreement for the three and six-month periods ended June 30, (c) Supply of product: Previously, the Company had supply agreements relating to the distribution of VIVIMIND with partners in several countries. These agreements were terminated upon the conclusion of the VIVIMIND worldwide rights license agreement with FB Health in October 2013 (refer to note 8 (b)). Revenues under the supply agreements amounted to $5 and $228 for the three and six-month period ended June 30, 2013, respectively. 20

23 Notes to Condensed Consolidated Financial Statements, Continued (in thousands of Canadian dollars, except per share data, unless otherwise noted) 9. Share capital: (a) The Company had 47,426,358 common shares for all periods presented in these condensed consolidated financial statements. (b) Stock option plan: Changes in outstanding options issued under the stock option plan for the six-month periods ended June 30, 2014 and 2013 were as follows: Number Weighted average exercise price Options outstanding, June 30, 2014 and December 31, ,595,000 $ 0.50 Number Weighted average exercise price Options outstanding, December 31, ,720,000 $ 0.50 Forfeited (200,000) 0.50 Options outstanding, June 30, ,520,000 $ 0.50 Stock-based compensation For the three and six-month periods ended June 30, 2014, the Company recorded stock-based compensation expense (excluding compensation under the DSU plans) in the amount of $118 and $236, respectively, in the condensed consolidated statement of loss; from those amounts, $16 and $32, respectively, is presented in Research and development expenses and $102 and $204, respectively, is presented in General and administrative expenses ($203 and $395 for the corresponding periods of the previous year, $24 and $39 respectively presented in Research and development expenses and $179 and $356 respectively presented in General and administrative expenses). 21

24 Notes to Condensed Consolidated Financial Statements, Continued (in thousands of Canadian dollars, except per share data, unless otherwise noted) 9. Share capital (continued): (c) Deferred share unit (DSU) plans: The number of units outstanding for the six-month periods ended June 30, 2014 and 2013 were as follows: June 30, June 30, Number of units Balance, at beginning and end of period 180, ,102 Balance of DSU liability, included in Trade and other payables 1) $ 215 $ 52 1) Balance of DSU liability as at December 31, 2013 amounted to $72. The net stock-based compensation expense (income) related to DSU plans recorded in the condensed consolidated statement of loss for the three and six-month periods ended June 30, 2014, amounted to $60 and $143, respectively, of which $2 and $3, respectively, is presented in Research and development expenses and $58 and $140, respectively, is presented in General and administrative expenses ($(15) and $(24) for the corresponding periods the previous year, $(1) and $(2) respectively presented in Research and development expenses and $(14) and $(22) respectively presented in General and administrative expenses). 10. Related party transactions: (a) There is no single ultimate controlling party. (b) Dr. Francesco Bellini, the 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 sixmonth periods ended June 30, 2014 ($95 and $190 for the corresponding periods the previous year). In October 2013, BELLUS Health entered into license agreements in relation to VIVIMIND and BLU8499 with related parties FB Health and Alzheon (refer to note 8 (b)). FB Health is controlled by Dr. Francesco Bellini, the Chairman of the Board of Directors of BELLUS Health. Alzheon is controlled by Dr. Martin Tolar, a member of the Board of Directors of BELLUS Health. 22

25 Notes to Condensed Consolidated Financial Statements, Continued (in thousands of Canadian dollars, except per share data, unless otherwise noted) 10. Related party transactions (continued): (b) (continued): Previously, the Company had entered into a license and supply agreement relating to the distribution of VIVIMIND in Italy with FB Health. The supply agreement was terminated upon the conclusion of the VIVIMIND worldwide rights license agreement in October The Company recorded revenues of $5 and $159 under the supply agreement for the three and sixmonth periods ended June 30, 2013, respectively. (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, 2014 and 2013 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 $ 445 $ 442 $ 894 $ 886 DSU plans expense (income) 56 (13) 135 (22) Stock option plan expense $ 611 $ 621 $ 1,249 $ 1,249 23