FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REPORT OF FOREIGN ISSUER
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the third quarter of 2004
AETERNA ZENTARIS INC.
(Formerly named AEterna Laboratories Inc.)
1405, boul. du Parc-Technologique
Quebec, Quebec
Canada, G1P 4P5
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
Form 20-F Form 40-F X
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Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes No X
----- -----
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82- ______
DOCUMENTS INDEX
DOCUMENTS DESCRIPTION
1. AEterna Zentaris' Interim Report 2004 - Third Quarter (Q3)
AEterna Zentaris
November 4, 2004
To our stockholders,
Our solid results for the third quarter of 2004 have enabled us to reach both
our financial and our strategic goals.
In the biopharmaceutical sector, we continued to move products through the
pipeline as we successfully completed our extensive seven Phase II-trial program
of cetrorelix in urology and gynaecology. Now that our partner Solvay has
publicly stated its decision to pursue development of cetrorelix, we are
currently planning the last phase of this development for cetrorelix to
potentially support its marketing application. In gynaecology, endometriosis has
an estimated market of US$800 million while in urology, the estimated market for
benign prostate hyperplasia represents about US$1.8 billion.
Last September, in collaboration with our North American partner, Keryx
Biopharmaceuticals, we also disclosed encouraging results of a Phase II trial
with perifosine as a single agent for patients suffering from soft tissue
sarcoma. We look forward to continue the development of perifosine in
monotherapy and in combination with chemotherapy and/or radiotherapy as a
treatment for different forms of cancer.
Thanks to its strategic growth plan, our subsidiary Atrium has once again
delivered an excellent performance across all parameters with a 37% increase in
revenue, a 66.7% increase in its operating income and a 38.4% increase in net
earnings. Atrium is well on its way to reach its objective of registering
revenues of between CA$170 million and CA$190 million and an operating income of
about CA$20 million in 2004.
We believe that with the results we achieved at the financial and strategic
levels, we are well positioned to reach our near and long-term goals.
THIRD QUARTER 2004 HIGHLIGHTS
>> POSITIVE PHASE II RESULTS FOR CETRORELIX OUR LHRH ANTAGONIST - Data from
this placebo controlled study involving 250 patients, demonstrated a
dose-dependent, durable, and statistically significant (p less than 0.001)
improvement of clinical symptoms characteristic of Benign Prostatic
Hyperplasia (BPH), as well as an excellent safety and tolerability profile.
This study successfully completed the
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extensive seven Phase II-trial program in urology and gynaecology sponsored
by our partner Solvay Pharmaceuticals.
>> ENCOURAGING DATA FROM PERIFOSINE, OUR FIRST-IN-CLASS ORAL AKT INHIBITOR, in
a Phase II single-agent study on patients suffering from soft tissue
sarcoma.
>> LICENSE AND COLLABORATION AGREEMENT WITH SPECTRUM PHARMACEUTICALS on fourth
generation LHRH antagonist D-63153 which has some potential in cancer, as
well as in benign proliferative disorders.
>> ATRIUM REVENUES OF $41 MILLION, an increase of 37%, operating income of
$6.5 million, an increase of 66.7% and $2.8 million in net earnings, an
increase of 38.4%.
OUTLOOK 2004
Some of the Company's specific goals include:
>> Initiate additional Phase II trials with perifosine in combination with
chemo/radiotherapy
>> Advance clinical development of cetrorelix with Solvay
>> Advance one preclinical compound into Phase I
On behalf of my colleagues and our Board of Directors, I thank you for your
continued interest and support.
Sincerely,
/s/ Gilles Gagnon
-------------------------------------
Gilles Gagnon, M.Sc., M.B.A.
President and Chief Executive Officer
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AEterna Zentaris
THIRD QUARTER 2004
QUARTERLY REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING ANALYSIS EXPLAINS THE VARIATIONS IN THE COMPANY'S RESULTS OF
OPERATIONS, FINANCIAL CONDITION AND CASH FLOW. THIS DISCUSSION SHOULD BE READ
IN CONJUNCTION WITH THE INFORMATION CONTAINED IN AETERNA ZENTARIS INC.'S
INTERIM CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES FOR THE NINE-MONTH
PERIOD ENDED ON SEPTEMBER 30, 2004 AND 2003.
ALL FIGURES ARE IN CANADIAN DOLLARS.
COMPANY OVERVIEW
AEterna Zentaris Inc. ("AEterna Zentaris" or "the Company"), formerly AEterna
Laboratories Inc., is A biopharmaceutical company focused in oncology and
endocrine therapy. Its extensive portfolio, from drug discovery to marketed
products, includes perifosine, an orally-active AKT inhibitor in several Phase
II trials for multiple cancers, and cetrorelix, an LHRH antagonist already
marketed for IN VITRO fertilization under the brand name Cetrotide(R), and also
in advanced clinical development for the treatment of uterine myoma,
endometriosis and benign prostatic hyperplasia prostate (BPH). The Company also
owns 60% (previously 62%) of its subsidiary Atrium Biotechnologies Inc.
("Atrium") which develops and markets active ingredients and nutritional
products for the health and personal care industry as well as distributes
speciality fine chemicals for the cosmetics, chemical, pharmaceutical and
nutritional industries. As of October 27, 2004, our participation in Atrium
decreased by 2% following the exercise of Atrium stock options.
The Company operates in three segments of operations: biopharmaceutical,
cosmetics-nutrition and distribution segments. AEterna Zentaris, along with its
wholly-owned subsidiary Zentaris GmbH, represent the biopharmaceutical segment.
The cosmetics and nutrition segment is dedicated to the development,
manufacturing and marketing of active ingredients and nutritional products. On
the other hand, the distribution segment specializes in importing and
distributing raw materials such as active ingredients and fine chemicals. These
two segments are operated by Atrium and its subsidiaries.
AEterna Zentaris seeks to ensure continued growth of its activities by improving
and leveraging its extensive product portfolio and being active in in-licensing
and in acquisition of strategic
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compounds. Its long-term growth strategy also includes establishment of a sales
force to become an integrated biopharmaceutical company.
THIRD QUARTER HIGHLIGHTS
Consolidated results-at-a-glance
(expressed in thousands of Canadian dollars)
QUARTERS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
UNAUDITED 2004 2003 2004 2003
------------------------------------------------------------------------------------------------
REVENUES $ 55,418 $ 37,829 $ 179,707 $ 117,517
OPERATING INCOME (LOSS) 5,545 (5,401) 16,306 (7,849)
NET LOSS (1,996) (9,336) (3,216) (18,893)
In the biopharmaceutical segment, we entered on August 12, 2004 into a licensing
and collaboration agreement for D-63153 with Spectrum Pharmaceuticals, Inc.
(NASDAQ: SPPI), an oncology-focused pharmaceutical company based in the United
States. This product is a fourth generation LHRH antagonist that has the
potential to treat hormone-dependent cancers as well as benign, proliferative
disorders. The agreement came as we regained worldwide rights to D-63153 from
Baxter Healthcare as a result of recent organizational changes and restructuring
at Baxter, and following a mutual understanding between the two companies aimed
at maximizing the value of D-63153.
In return of the grant of this exclusive license to develop and commercialize
D-63153 for all potential indications in North America (including Canada and
Mexico) and India, we received an upfront payment which included cash and
equity, at signature. We are also eligible to receive payments upon achievement
of certain development and regulatory milestones, in addition to royalties on
potential net sales. We retained exclusive rights to the rest of world and will
share with Spectrum upfront and milestone payments, royalties or profits from
potential sales in Japan.
We announced on September 30, 2004 through our North American partner, Keryx
Biopharmaceuticals, Inc. (Nasdaq: KERX), that Phase II data presented at the
16th Annual EORTC-NCI-AACR symposium on "Molecular Targets and Cancer
Therapeutics" demonstrated the tolerability and potential efficacy of perifosine
in the treatment of patients with advanced soft tissue sarcoma. This study was
conducted by the National Cancer Institute (NCI) pursuant to a Collaborative
Research and Development Agreement (CRADA) between Keryx and the NCI.
Subsequent to the end of this quarter, we announced on October 7 statistically
significant positive results from a randomized, double-blind, placebo-controlled
Phase II trial designed to evaluate different dosage regimens of a depot
formulation of cetrorelix, a luteinizing hormone-releasing hormone (LHRH)
antagonist, in 250 patients with symptomatic benign prostatic hyperplasia (BPH).
These new data demonstrate a dose-dependent, durable and statistically
significant (p less than 0.001) improvement of clinical symptoms characteristic
of BPH, including IPSS (International Prostate Symptom Score), at all dosages
except the lowest, as well as an excellent
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safety and tolerability profile. These positive results are consistent with data
from earlier studies and provide the basis for further development of cetrorelix
in BPH through collaboration with Solvay Pharmaceuticals and Shionogi/Nippon
Kayaku.
In the cosmetics and nutrition segment, the ongoing integration of acquired Pure
Encapsulations, Inc. ("Pure") in March 2004 is going very well. Pure is a
company based in Sudbury, Massachusetts, in the United States, which focuses
mainly on the development, manufacturing and marketing of nutritional
supplements geared toward physicians and other healthcare professionals. Pure
acquisition complements Atrium's actual products in the nutrition segment. Pure
revenues reached over $25 million in 2003. This acquisition , combined with
Atrium's internal growth has enabled our subsidiary to increase its net earnings
by 38.4% to $2.8 million for the third quarter in comparison with $2 million
with the same quarter last year.
CRITICAL ACCOUNTING POLICIES
Our financial statements are prepared in accordance with the Canadian Generally
Accepted Accounting Principles ("GAAP"), and access to a summary of differences
between Canadian and US GAAP is possible by consulting note 23 of our annual
2003 financial statements. These accounting principles require that management
make estimates that could have an impact on assets and liabilities in the
financial statements. The significant accounting policies which the Company
believes are the most critical to aid in fully understanding and evaluating its
reported financial results include the following:
REVENUE RECOGNITION AND DEFERRED REVENUES
In the biopharmaceutical segment, in which there are existing agreements with
strategic partners, revenues increased significantly in 2003. The existing
cooperation and royalty agreements usually provide for upfront, codevelopment
and milestone payments, as well as royalties on sales made by the partners.
Finally, with regard to certain agreements, the Company has to provide
manufacturing of the products and, therefore, generate product sales.
Payments received at the beginning of research cooperation agreements (upfront
payments) are not recorded as revenue when received, but are amortized based on
the progress of the research and development work concerned. Milestone payments
are recognized when appropriate development results are achieved and agreed by
the customer. Royalty receipts for marketing products are only to be paid by
commercial partners when product revenues are actually achieved and are
accordingly first recorded as revenues by the Company at such time.
Revenue from product sales is recognized net of sales discounts, allowances,
returns, rebates and chargebacks. Amounts received from customers as prepayments
for products to be shipped in the future are reported as deferred revenues.
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RESEARCH AND DEVELOPMENT COSTS
All research and development ("R&D") costs, which do not meet generally accepted
criteria for deferral, are expensed as incurred. Development costs, which meet
generally accepted criteria for deferral, are capitalized and amortized against
earnings over the estimated period of benefit. To date, no costs have been
deferred. Acquired in-process R&D having no alternative future uses is written
off at the time of acquisition.
VALUATION OF GOODWILL AND INTANGIBLE ASSETS
We account for our business acquisitions under the purchase method of
accounting. The total cost of an acquisition is allocated to the underlying net
assets based on their respective estimated fair values. As part of this
allocation process, we must identify and attribute values and estimated lives to
the intangible assets acquired. While we may employ experts to assists us with
these matters, such determination involve considerable judgment, and often
involve the use of significant estimates and assumptions, including those
respect to future cash inflows and outflows, discount rates and asset lives.
These determinations will affect the amount of amortization expense recognized
in future periods.
On January 1, 2002, we adopted the new recommendations of the Canadian Institute
of Chartered Accountants ("CICA") and discontinued the amortization of goodwill
accordingly. Prior to this date, goodwill was amortized on a straight-line basis
over its expected useful life of fifteen and twenty years. We review the
carrying values of goodwill and intangible assets when conditions arise that
indicate that any impairment may have occurred. Examples of these conditions
include significant underperformance relative to historical or expected future
results, significant changes in the manner of our use of the acquired assets or
our strategy, significant negative industry or economic trends, or significant
decline in our share price or market capitalization.
Goodwill is tested annually for impairment in relation to the fair value of each
reporting unit to which goodwill applies.
Intangible assets consist mainly of patents, trademarks, licenses, and
distribution agreements. Intangible assets with definite lives are amortized on
a straight-line basis over their estimated useful lives of eight to fifteen
years and are reviewed for impairment when events or circumstances indicate that
costs may not be recoverable. Intangible assets with indefinite lives are not
amortized but are subject to an annual impairment test. As at September 30,
2004, there were no events or circumstances indicating that the carrying value
may not be recoverable.
ACCOUNTING FOR INCOME TAXES
We operate in multiple jurisdictions, and our profits are taxed pursuant to the
tax laws of these jurisdictions. Our effective tax rate may be affected by the
changes in, or interpretations of, tax laws in any given jurisdiction,
utilization of net operating losses and tax credit carry forwards, changes in
geographical mix of income and expense, and changes in management's assessment
of matters, such as the ability to realize future tax assets. As a result of
these considerations, we
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must estimate our income taxes in each of the jurisdictions in which we operate.
This process involves estimating our actual current tax exposure, together with
assessing temporary differences resulting from differing treatment of items for
tax and accounting purposes. These differences result in future tax assets and
liabilities, which are included in our consolidated balance sheet. We must then
assess the likelihood that our future tax assets will be recovered from future
taxable income and establish a valuation allowance for any amounts we believe it
will be more likely than not that it will not be recoverable. Establishing or
increasing a valuation allowance increases our income tax expense.
Significant management judgment is required in determining our provision for
income taxes, our income tax assets and liabilities, and any valuation allowance
recorded against our net income tax assets. We recorded a valuation allowance as
at September 30, 2004, due to uncertainties related to our ability to utilize
some of our income tax assets. The valuation allowance was based on our
estimates of taxable income by jurisdiction in which we operate and the period
over which our income tax assets will be recoverable. In the event that actual
results differ from these estimates or we adjust these estimates in future
periods, we may need to amend our valuation allowance, which could materially
impact our financial position and results of operations.
STOCK-BASED COMPENSATION PLANS
On January 1, 2002, AEterna Zentaris adopted the recommendations issued by the
CICA and, at that time, we had chosen not to use the fair value method to
account for the stock-based compensation costs arising from awards to employees.
The fair value method was only used for stock-based payments made in exchange
for goods and services. Starting on January 1, 2004, we have to use the fair
value method to account for stock-based compensation costs. We decided to use
the prospective method as transitional method, as permitted under the amendments
made to the recommendations during 2003. According to this method, all
stock-based compensations granted during 2003 and beyond will be recorded in the
corresponding period without restatement of prior years. However, AEterna
Zentaris is still required to provide pro forma disclosures relating to net loss
and net loss per share as if stock-based compensation costs had been recognized
in the financial statements using the fair value method for options granted to
employees in 2002.
The following points detail the changes in critical accounting policies that
have occurred since our most recent annual report:
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
In July 2003, the CICA issued new Handbook Section 1100 "Generally Accepted
Accounting Principles" ("GAAP"), which is effective for fiscal years beginning
on or after October 1, 2003. This new section defines GAAP, establishes the
relative authority of various types of CICA Accounting Standards Board
pronouncements, says what to do when the Handbook does not cover a particular
situation and clarifies the role of "industry practice" in setting GAAP. The
Company adopted this new standard on January 1, 2004 without having any
significant effect on the Company's financial statements.
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GENERAL STANDARDS OF FINANCIAL STATEMENT PRESENTATION
In July 2003, the CICA issued new Handbook Section 1400 "General Standards of
Financial Statement Presentation" which is effective for fiscal years beginning
on or after October 1, 2003. This new section confirms that the financial
statements of an entity must present fairly in accordance with Canadian
Generally Accepted Accounting Principles its financial position, results of
operations and cash flows. The Company adopted this new standard on January 1,
2004 without having any significant impact on the Company's financial
statements.
HEDGING RELATIONSHIPS
The CICA has issued Accounting Guideline 13 "Hedging Relationships", which
establishes certain conditions regarding when hedge accounting may be applied
and which is effective for fiscal years beginning on or after January 1, 2004.
AcG 13 addresses the identification, designation, documentation, and
effectiveness of hedging transactions for the purposes of applying hedge
accounting. It also establishes conditions for applying or discontinuing hedge
accounting. Under this new guideline, the Company is also required to document
its hedging transactions and explicitly demonstrate that the hedges are
sufficiently effective in order to continue hedge accounting for positions
hedged with derivatives. Any derivative instrument that does not qualify for
hedge accounting will be reported on a mark-to-market basis in earnings. The
Company adopted this guideline as at January 1, 2004 without having any
significant impact on the Company's financial statements.
REVENUE RELATED RECOGNITION
In December 2003, the CICA Emerging Issues Committee (EIC) issued Abstracts No.
141 "Revenue Recognition" and No. 142 "Revenue Arrangements with Multiple
Deliverables". The latter is based on Issue No. 00-21 entitled "Revenue
Arrangements with Multiple Deliverables" issued in May 2003 by the Emerging
Issues Task Force of the Financial Accounting Standards Board ("FASB") in the
United States. EIC's 141 and 142 provide clarification guidelines for
determining when revenue from the sale of goods must be recognized. The Company
prospectively adopted these guidelines for contracts signed after January 1,
2004 and do not believe EIC 141 and 142 will have any significant impact on the
Company.
RESULTS OF OPERATIONS
Consolidated
NET LOSS for the third quarter of 2004 was $2 million or $0.04 of basic and
diluted net loss per share, compared to a net loss of $9.3 million or $0.20 per
basic and diluted loss per share. This improvement in the results of operation
reflects higher net earnings from our cosmetics-nutrition and distribution
segments as well as the streamlining of the clinical development program
initiated in December 2003. For the nine-month period ended September 30, 2004,
the net loss decreased by $15.7 million, from $18.9 million to $3.2 million.
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The weighted average number of shares outstanding used to calculate the basic
and diluted net loss per share for the third quarter of 2004 was 45.6 million
shares as compared to 45.3 million shares for the same period in 2003. This
increase reflects the issuance of common shares following the exercise of stock
options.
Segment results-at-a-glance
(expressed in thousands of Canadian dollars)
QUARTERS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
UNAUDITED 2004 2003 2004 2003
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Biopharmaceutical $ (3,702) $ (10,568) $ (9,664) $ (22,127)
Cosmetics and nutrition 1,044 744 3,793 1,952
Distribution 581 505 2,575 1,352
Consolidation adjustments 81 (17) 80 (70)
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NET LOSS FOR THE PERIOD $ (1,996) $ (9,336) $ (3,216) $ (18,893)
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BASIC AND DILUTED NET LOSS PER SHARE $ (0.04) $ (0.20) $ (0.07) $ (0.43)
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Biopharmaceutical Segment
REVENUES
For the three-month period ended September 30, 2004, biopharmaceutical segment
revenue was $14.4 million, an increase of $6.5 million, compared to $7.9 million
for the same period last year. For the nine-month period ended September 30,
2004, the segment revenues totalized $45.9 million in comparison to $34.7
million last year. Revenue is derived from sales and royalties on Cetrotide(R)
(cetrorelix) and Impavido(R) (miltefosine), as well as milestone payments, R&D
contract fees and amortization of upfront payments received to date. Revenue
from R&D contract fees and from the amortization of upfront payments is derived
mainly from the ongoing development of cetrorelix and teverelix under existing
collaboration agreements with our licensing partners Solvay and Ardana
respectively. The revenue increase in the quarter is attributable to a
termination payment gained from Baxter Healthcare SA for D-63153 and to
amortization of additional deferred revenues. The revenue increase in the
nine-month period is attributable to the reasons mentioned aboved and to a
non-recurring $6.5 million milestone payment gained from our partner Solvay for
cetrorelix in the second quarter of 2004.
For the last quarter of 2004, we expect to see an increase in revenue from R&D
contract fees and amortization of upfront payments, since the Company has
received additional upfront payments from other partnerships which are amortized
based on the progress of the research and development concerned.
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OPERATING EXPENSES
For the quarter ended September 30, 2004, COST OF SALES was $2.4 million, an
increase of $1.2 million compared to $1.2 million for the same period last year.
For the nine-month period ended September 30, 2004, cost of sales was $8.5
million, an increase $3.9 million in comparison to $4.6 million for the same
period last year. Manufacturing costs for Cetrotide(R) (cetrorelix) have
increased, due to growing sales of this product generated by our partner Serono,
and are expected to continue to increase for the remainder 2004 and beyond.
Sales and royalties generated by Cetrotide(R) (cetrorelix) were $6.3 million in
the third quarter of 2004 compared to $5.9 million in the same period last year
and $19.8 million for the nine-month period ended September 30, 2004 compared to
$18.4 million for the same period last year. This leaves a gross margin of $3.9
million in the three-month period ended September 30, 2004 compared to $4.7
million for the same period last year and $11.3 million in comparison to $13.8
million for the nine-month periods ended September 30, 2004 and 2003. Decrease
in margin is due to the product mix in manufacturing costs. We do not expect any
significant changes in the cost of sales, as percentage of corresponding sales
and royalties, for the last quarter of 2004.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES for the three-month period
ended September 30, 2004 were $4.6 million, an increase of $1.4 million compared
to $3.2 million for the same period in 2003. For the nine-month period ended
September 30, 2004, SG&A expenses increased to $12.5 million from $10.3 million
for the same period last year. The increase in SG&A expenses in 2004 was
primarily due to increased insurance costs, stock-based compensation costs and
to non-recurring expenses related to the Company name change. We do not expect
any additional fluctuations in SG&A costs for the remainder of 2004.
R&D EXPENSES for the three-month period ended September 30, 2004 were $6.7
million, a decrease of $4.2 million compared to $10.9 million for the same
period in 2003, reflecting the realignment of the clinical development program
initiated in December 2003, including the focusing of the R&D on perifosine,
cetrorelix and the earlier stage products. For the nine-month period ended
September 30, 2004, R&D expenses decreased from $32.4 million to $23.2 million
for the same reasons mentioned above. We expect R&D expenses to remain steady
for the remainder of 2004.
INTEREST INCOME for the three-month period ended September 30, 2004 remained
steady at approximately $0.4 million, in comparison to the same period in 2003.
For the nine-month period ended September 30, 2004, interest income totalled
$1.3 million compared to $1.4 million for the same period in 2003. Cash and
short-term investment are comparable to the level of last year.
INTEREST AND FINANCIAL EXPENSES for the three-month period ended September 30,
2004 was $1.5 million in comparison to $1.2 million in the same period last year
and consisted mainly of financing costs on the convertible term loans. For the
nine-month period ended September 30, 2004, interest and financial expenses
increased by $0.9 million, mainly due to the expense related to the convertible
term loans that were issued at the end of the first quarter of 2003 only. In
addition, the Company decided during the second quarter of 2004 to capitalize
$3.0 million unpaid accrued interest on convertible term loans as permitted in
these agreements. Because of
8
this capitalization and since the debt portion of the convertible term loans are
accounted for as discounted loans and are increasing in accretion, we expect
that our interest expense will continue to increase for the last quarter of
2004.
FOREIGN EXCHANGE LOSS for the quarter ended September 30, 2004 was $0.7 million
in comparison to a foreign exchange gain of $0.1 million in the same period last
year. The variation is attributable to the impact of a stronger Canadian dollar
on our working capital denominated in Euros during the third quarter of 2004.
For the nine-month period ended September 30, 2004, the foreign exchange loss
was $0.3 million in comparison to $0.1 million for the same period last year.
INCOME TAXES for the three-month period ended September 30, 2004 was $0.9
million in comparison to $0.6 million for the same period last year. We recorded
an income tax expense related to earnings generated by Zentaris from our
operations in Germany. For our Canadian operations, we have to establish a
valuation allowance against future income tax assets as it is more likely than
not that some or all of the future income tax assets will not be realized.
Cosmetics and Nutrition Segment
REVENUE
Revenue in this segment for the third quarter ended September 30, 2004 were
$11.4 million compared to $4.0 million for the same period last year. For the
nine-month period ended September 30, 2004, the revenues reached $31.0 million
compared to $11.0 million in 2003. The increases for the quarter and for the
first nine months of the year come from the recent acquisition of Pure
Encapsulations in March 2004, the acquisition of Siricie at the end of 2003, as
well as the organic growth. We expect a similar year over year growth for the
remainder of the year.
OPERATING EXPENSES
COST OF SALES was $4.3 million for the three-month period ended September 30,
2004, compared to $0.8 million for the same quarter in 2003. For the nine-month
period ended September 30, 2004, the cost of sales has gone up from $2.1 million
to $10.3 million. These costs consist mainly of raw materials and manufacturing
costs related to and are proportional to sales of respective products. The
recent acquisitions of Pure Encapsulations and Siricie combined with a negative
currency fluctuation has led to an increase in the cost of sales, as a
percentage of sales, from 19.0% for the first nine months of 2003 to 33.3% for
the same period in 2004. We expect the cost of sales, as a percentage of sales,
to remain about the same as for the third quarter of 2004.
SG&A EXPENSES for the third quarter ended September 30, 2004 were $2.7 million
compared to $1.0 million for the same period of 2003. For the nine-month period
ended September 30, 2004, the SG&A expenses have gone up from $3.0 million to
$8.3 million primarily reflecting recent acquisitions of companies.
INTEREST AND FINANCIAL EXPENSES for the three-month period ended September 30,
2004 was $0.8 million. This expense consisted of financing costs on the new
debts contracted for the
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acquisition of Pure Encapsulations. For the nine-month period ended September
30, 2004, interest and financial expense reached $1.8 million. There was no
interest and financial expenses for the corresponding period and for the
nine-month period last year. For the last quarter of 2004, we expect that our
interest expense will remain as it was in this third quarter.
FOREIGN EXCHANGE LOSS was $0.3 million in the three-month period ended September
30, 2004, compared with a $0.1 million loss in the same period last year. For
the first nine months of 2004, we had no foreign exchange loss or gain compared
to a loss of $0.8 million for the same period last year. The foreign exchange
loss in 2003 was attributable to the impact of a stronger Canadian dollar on our
US short-term investments and working capital denominated in US dollars. We did
not have significant gain or loss in 2004 due to no significant fluctuations in
the US dollar during the first nine months of 2004.
Distribution Segment
REVENUE
Revenue in this segment is derived from the distribution of raw materials and
brand-name active ingredients to multinational companies in the cosmetics,
industrial chemicals, fine chemicals, pharmaceutical and nutrition sectors. In
the third quarter of 2004, revenues were $29.7 million, an increase of $3.7
million or 14%, compared with $26.0 million for the same period in 2003. For the
period of nine months ended September 30, 2004, revenues were $103.1 million
compared to 72.3 million for the same period last year. These increases
primarily reflect the acquisition of Chimiray/Interchemical in August 2003. In
the next quarter, we do not expect a major increase since operations from the
acquisition of Chimiray/Interchemical will be included for a complete quarter in
2003 and 2004.
OPERATING EXPENSES
COST OF SALES was $24.3 million in the three-month period ended September 30,
2004, an increase of $2.6 million compared with $21.7 million for the same
period in 2003. For the first nine months of 2004, cost of sales was $84.5
million compared to $60.8 million for the same period in 2003. Cost of sales is
directly proportional and related to sales of respective products. In 2004, the
gross margin, as a percentage of revenues, was 18.0%, compared to 16.0% for the
same period in 2003, reflecting the contribution of high-margin products from
ADF Chimie S.A. and Chimiray/ Interchemical, as well as improved margins for
existing products from Unipex. We expect gross margin to remain stable for the
last quarter of 2004.
SG&A EXPENSES were $3.1 million in the third quarter of 2004, an increase of
$0.8 million compared to $2.3 million in the same period in 2003. For the period
of nine months ended September 30, 2004, SG&A were $9.8 million compared to $6.0
million in 2003. Again, these increases primarily reflect the acquisition of
Chimiray/Interchemical in August 2003.
FOREIGN EXCHANGE LOSS for the nine months period of 2004 was $0.1 million
compared to $0.3 million in 2003 for the same period reflecting the impact of
foreign currency fluctuations on
10
working capital denominated in foreign currency. This impact is mostly related
to the significant fluctuation on the US dollars in comparison to Euro.
CONSOLIDATED
Total Assets
Total assets, which were $295.8 million as at December 31, 2003, reached $358.4
million as at September 30, 2004. This $62.6 million increase is mainly
attributable to the acquisition of Pure Encapsulations in March 2004. Detail of
segment assets is provided in note 8 of the interim consolidated financial
statements.
Liquidity, Cash Flows and Capital Resources
Our operations and our capital expenditures are mainly financed through cash
flows from operating activities, the use of our liquidity, as well as the
issuance of debt and common shares.
As of September 30, 2004, the Company had cash, cash equivalents and short-term
investments of approximately $63 million, a $1.4 million decrease compared to
December 31, 2003. During the quarter, we did not renew a E1 million line
of credit which has never been used. The Company believes these liquidities,
combined with our unused line of credit now totalling $5 million, and the funds
provided by operations will be adequate to meet operating cash requirements for
the foreseeable future. However, possible additional operating losses and/or
possible investment in or acquisition of complementary businesses or products
may require additional financing.
The variation of our liquidity by activities is explained below, on a
consolidated basis.
OPERATING ACTIVITIES
Cash flow generated by our operations was $5.5 million during the third quarter
of 2004. This cash inflow is mainly attributable to operating income from our
cosmetics-nutrition and distribution segments as well as to our efforts to
contain the variation in the working capital accounts. For the nine-month period
ended September 30, 2004, cash flow generated by our operations was $13.9
million, mainly attributable to continued growth of both cosmetics-nutrition as
well as distribution segments in our subsidiary Atrium and to up-front and
milestone payments received from our partners in the biopharmaceutical segment.
For the remainder of 2004, we expect to generate increased operating income from
our cosmetics-nutrition and distribution segments as well as to continue to
contain the variation in the working capital accounts.
FINANCING ACTIVITIES
For the three-month period ended September 30, 2004, cash flow used in financing
activities was $3.4 million, in which $3.3 million were for the repayment of
long-term debts and balance of purchase price. Following the exercise of stock
options in one of our subsidiaries, we also
11
received $0.3 million and as a consequence, incurred a loss on dilution of $0.5
million. In the corresponding period in 2003, we had cash inflows of $7.9
million regarding the issuance of a new long-term debt and $34.1 million related
to the issuance of 4.5 million common shares. For the nine-month period ended
September 30, 2004, an amount of $39.9 million in long-term debt was contracted
and $1.4 million was generated by the issuance of common shares. In addition,
$5.9 million was used as repayment of long-term debt and balance of purchase
price. In the corresponding period last year, proceeds of $24.4 million
convertible term loans, of $34 million related to the issuance of 4.5 million
common shares and of a $7.9 million long-term debt, offset by the repayment of
the interim financing for the acquisition of Zentaris and the payment of a
balance of purchase price totalling $45.4 million mainly explain the inflow of
$20.9 million.
INVESTING ACTIVITIES
Cash flow used in investing activities (excluding change in short-term
investments) was $3.1 million for this third quarter. For the nine-month period
ended September 30, 2004, an amount of $50.4 million was used in investing
activities mainly for acquiring companies. For the same period last year, cash
flow used in investing activities was $18.3 million (excluding change in
short-term investments), primarily due to the acquisition by Atrium and its
subsidiaries of Chimiray/Interchemical in August 2003.
We have certain contractual obligations and commercial commitments. The
following table indicates our cash requirements to respect these obligations:
(in thousands of Canadian dollars) PAYMENTS DUE BY PERIOD
-----------------------------------------------------------------------
Remainder of
Total 2004 2005-2007 2008-2009
-----------------------------------------------------------------------
$ $ $ $
LONG-TERM DEBT 54,264 3,205 37,694 13,365
CONVERTIBLE TERM LOANS 28,000 - 28,000 -
OPERATING LEASES 9,359 636 5,331 3,392
COMMERCIAL COMMITMENTS 2,533 1,178 1,355 -
-----------------------------------------------------------------------
TOTAL CONTRACTUAL CASH OBLIGATIONS 94,156 5,019 72,380 16,757
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Following the end of this quarter, we entered on October 18, 2004 into a $ 2,7
million (E1,75 million) bank guaranty in favour of one of our future landlord in
Germany. Liability under this guaranty will only come into effect upon transfer
in new rented premises which is expected to be in August 2005. This guaranty is
only applicable upon failure on certain financial criteria and will be in force
for an initial rental period of four years.
Outstanding Share Data
Effective May 26, 2004, the Company repealed the subordinate voting shares and
multiple voting shares to create a new class of common shares. All existing
subordinate voting shares at that time were converted into common shares.
12
As of November 4, 2004, there were 45,635,409 common shares issued and
outstanding for a total of $189 million and there were 2,690,592 stock options
outstanding. In addition, the convertible term loans can be converted into
common shares of the Company at a conversion price of $5.05 per common share up
to a maximum of 6,955,089 shares.
QUARTERLY SUMMARY FINANCIAL INFORMATION (Unaudited)
(expressed in thousands of Canadian dollars, except per share data)
Quarter ended Quarter ended
September 30, Quarter ended Quarter ended December 31,
2004 June 30, 2004 March 31, 2004 2003
$ $ $ $
-----------------------------------------------------------------
Revenues 55,418 65,840 58,449 48,896
Operating income (loss) 5,545 9,177 1,584 (6,433)
Net earnings (loss) (note 1) (1,996) 1,330 (2,550) (9,253)
Basic and diluted net earnings (loss)
per share (0.04) 0.03 (0.06) (0.22)
Quarter ended Quarter ended
September 30, Quarter ended Quarter ended December 31,
2003 June 30, 2003 March 31, 2003 2002
$ $ $ $
-----------------------------------------------------------------
Revenues 37,829 38,875 40,813 28,008
Operating loss (5,401) (1,128) (1,321) (6,602)
Net loss (note 1) (9,336) (4,668) (4,890) (8,009)
Basic and diluted net loss per share (0.20) (0.11) (0.12) (0.20)
Note 1: Quarterly information from Q1 2003 to Q4 2003 has been restated for the
effect of implementing the accounting policy for expensing stock-based
compensation for all awards granted after January 1, 2003. We recorded total
stock-based compensation expense for the twelve month period ending December 31,
2003 of $0.5 million.
FINANCIAL AND OTHER INSTRUMENTS
Foreign Currency Risk
Since the Company operates on an international scale, it is exposed to currency
risks as a result of potential exchange rate fluctuations. For the nine month
period ending September 30, 2004, there were no significant operation using
forward exchange contracts and no significant forward exchange contract is
outstanding as of today.
13
Credit Risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist primarily of cash and cash equivalents, short-term
investments and accounts receivable. Cash and cash equivalents are maintained
with high-credit quality financial institutions. Short-term investments consist
primarily of bonds issued by high-credit quality corporations and institutions.
Consequently, management considers the risk of non-performance related to cash
and cash equivalents and short-term investments to be minimal.
Interest Rate Risk
We are exposed to market risk relating to changes in interest rates relating to
our variable rate debts. We have, as at September 30, 2004, $36.7 million of
long-term debts which, in effect, bear interest at floating rates.
RELATED PARTY TRANSACTIONS AND OFF BALANCE SHEET ARRANGEMENTS
There were no related party transactions other than those eliminated during the
consolidation process and no off balance sheet arrangements.
OUTLOOK
Biopharmaceutical Segment
We expect that Cetrotide(R) (cetrorelix), which is sold by Serono, to continue
to generate significant revenue in the remainder of 2004. Furthermore,
Cetrotide(R) (cetrorelix) is pending approval in Japan and, should authorization
be successful, we would receive a milestone payment from our partner Shionogi.
We expect to continue to benefit from the support of existing partners for our
R&D activities and as part of our growth strategy, we intend to pursue
additional partnerships, as well as acquisition of additional technologies
and/or companies.
Cosmetic and Nutrition Segment and Distribution Segment
Integration of the newly-acquired companies will be ongoing and we expect to
continue to achieve organic and acquisition growth during the next quarter.
14
RISK FACTORS
Risks associated with operations
>> Most of our biopharmaceutical products are currently at an early
development stage. It is impossible to ensure that the R&D on these
products will result in the creation of profitable operations;
>> We are currently developing our products based on R&D activities conducted
to date, and we may not be successful in developing or introducing to the
market these or any other new products or technology. If we fail to develop
and deploy new products on a successful and timely basis, we may become
non-competitive and unable to recoup the R&D and other expenses we incur to
develop and test new products;
>> Even if successfully developed, our biopharmaceutical products may not gain
market acceptance among physicians, patients, healthcare payers and the
medical community which may not accept or utilize our products. If our
biopharmaceutical products do not achieve significant market acceptance,
our business and financial conditions will be materially adversely
affected;
>> We rely heavily on our proprietary information in developing and
manufacturing our product candidates. Despite efforts to protect our
proprietary rights from unauthorized use or disclosure, third parties may
attempt to disclose, obtain or use our proprietary information or
technologies;
>> We have to forge and maintain strategic alliances to develop and market
products in our current pipeline. If we are unable to reach agreements with
such collaborative partners, or if any such agreements are terminated or
substantially modified, we may be unable to obtain sufficient licensing
revenue for our products, which might have a material adverse effect on
their development and on us.
Cash flow and financial resources
We believe that we would be able to obtain long-term capital, if necessary, to
support our corporate objectives, including the clinical development program of
our products. Our planned cash requirements may vary materially in response to a
number of factors, including: R&D on our products; clinical trial results;
increases in our manufacturing capabilities; changes in any aspect of the
regulatory process; and delays in obtaining regulatory approvals. Depending on
the overall structure of current and future strategic alliances, we may have
additional capital requirements related to the further development of existing
or future products.
The development of our subsidiary Atrium may also require, in addition to the
cash generated by its operations, other sources of financing. However, it is
impossible to guarantee the availability of additional financial resources or
that it will be available under acceptable conditions.
15
We have not entered into any significant forward currency contracts or other
financial derivatives to hedge foreign exchange risk and, therefore, we are
subject to foreign currency transaction and translation gains and losses.
Foreign exchange risk is managed primarily by satisfying foreign denominated
expenditures with cash flows or assets denominated in the same currency.
However, with newly acquired companies operating in foreign countries, we are
more exposed to foreign currency risk. We are presently analysing the
possibility of using financial derivatives to mitigate this risk, especially for
transactions in US currency.
Key personnel
Our success is also dependent upon our ability to attract and retain a highly
qualified work force, and to establish and maintain close relations with
research centres. The competition in that regard is very severe. Our success is
dependent to a great degree on our senior officers, scientific personnel and
consultants. The failure to recruit qualified staff and the loss of key
employees could compromise the pace and success of product development.
Acquisition program
We intend to continue to acquire new technologies and/or corporations. There is
no assurance that the Company will make certain acquisitions or that it will
succeed in integrating the newly-acquired technologies or corporations into its
operations. The failure to successfully integrate the personnel and operations
of businesses which we may acquire in the future with ours could have a material
adverse effect on our operations and results.
Volatility of share prices
Share prices are subject to changes because of numerous different factors
related to its activity including reports of new information, changes in the
Company's financial situation, the sale of shares in the market, the Company's
failure to obtain results in line with the expectations of analysts, an
announcement by the Company or any of its competitors concerning technological
innovation, etc. During the past few years, shares of AEterna Zentaris, other
biopharmaceutical companies and the investment market in general have been
subjected to extreme fluctuations that were unrelated to the operational results
of the companies affected. There is no guarantee that the market price of the
Company's shares will be protected from any such fluctuations in the future.
Continuous disclosure
The Company is a reporting issuer under the securities legislation of all of the
provinces of Canada and is registered in the United States and it is therefore
required to file continuous disclosure documents such as interim and annual
financial statements, a proxy circular, an annual information form, material
change reports and press releases with such securities regulatory authorities.
Copies of these documents may be obtained free of charge on request from the
office
16
of the Secretary of the Company or through the Internet at the following
addresses: http://www.sedar.com, http://www.sec.gov/edgar.shtml and
www.aeternazentaris.com.
SAFE HARBOUR STATEMENT
Except for historical data, this report contains statements that, by their very
nature, are projections involving time periods, risks and other factors, known
or unknown, which are beyond the Company's control.
Each of these factors may produce results or performances that differ
significantly from expectations. For example, the results of current clinical
trials cannot be foreseen, nor can changes in policy or actions taken by such
regulatory authorities as the U.S. Food and Drug Administration and the
Therapeutic Products Directorate of Health Canada, or any other organization
responsible for enforcing regulations in the pharmaceutical industry.
On behalf of management,
/s/ Dennis Turpin
------------------------------------------
Dennis Turpin, CA
Vice President and Chief Financial Officer
November 4, 2004
17
AETERNA ZENTARIS INC.
(FORMERLY AETERNA LABORATORIES INC., note 1)
INTERIM CONSOLIDATED BALANCE SHEETS
(expressed in thousands of Canadian dollars)
AS AT AS AT
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 26,444 $ 22,414
Short-term investments 36,554 41,953
Accounts receivable 56,925 48,191
Inventory 22,644 16,169
Prepaid expenses and deferred charges 2,989 3,314
Future income tax assets 4,379 2,604
------------------------------------------------------------------------------------------------
149,935 134,645
PROPERTY, PLANT AND EQUIPMENT 19,962 19,599
DEFERRED CHARGES AND OTHER LONG-TERM ASSETS 10,906 1,322
INTANGIBLE ASSETS (note 3) 77,425 65,513
GOODWILL (note 3) 85,284 61,184
FUTURE INCOME TAX ASSETS 14,921 13,516
------------------------------------------------------------------------------------------------
$ 358,433 $ 295,779
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 54,485 $ 53,062
Income taxes 11,632 3,490
Balance of purchase price 2,873 1,113
Current portion of long-term debt 10,009 3,777
------------------------------------------------------------------------------------------------
78,999 61,442
DEFERRED REVENUES 26,010 10,563
CONVERTIBLE TERM LOANS 24,372 19,920
LONG-TERM DEBT 44,255 15,132
EMPLOYEE FUTURE BENEFITS (note 5) 6,774 6,658
FUTURE INCOME TAX LIABILITIES 24,050 25,991
NON-CONTROLLING INTEREST 31,688 29,952
------------------------------------------------------------------------------------------------
236,148 169,658
------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (note 6) 189,014 187,601
OTHER CAPITAL 8,410 7,486
DEFICIT (76,227) (73,011)
CUMULATIVE TRANSLATION ADJUSTMENT 1,088 4,045
------------------------------------------------------------------------------------------------
122,285 126,121
------------------------------------------------------------------------------------------------
$ 358,433 $ 295,779
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
1
AETERNA ZENTARIS INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(expressed in thousands of Canadian dollars, except share and per share data)
QUARTERS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
UNAUDITED 2004 2003 2004 2003
-------------------------------------------------------------------------------------------------------------------------------
REVENUES $ 55,418 $ 37,829 $ 179,707 $ 117,517
-------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales 30,806 23,543 102,856 67,156
Selling, general and administrative 10,166 7,507 30,499 19,540
Research and development costs 7,010 10,264 24,113 33,040
R&D tax credits and grants (415) (420) (834) (1,223)
Depreciation and amortization
Property, plant and equipment 842 889 2,419 2,611
Intangible assets 1,464 1,447 4,348 4,242
-------------------------------------------------------------------------------------------------------------------------------
49,873 43,230 163,401 125,366
-------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 5,545 (5,401) 16,306 (7,849)
Interest income 218 497 1,000 1,660
Interest and financial expenses (2,289) (1,399) (6,021) (3,487)
Foreign exchange gain (loss) (1,008) 94 (364) (1,264)
-------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE THE FOLLOWING 2,466 (6,209) 10,921 (10,940)
-------------------------------------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE
Current (2,835) (1,447) (13,743) (3,552)
Future 145 (647) 5,089 (1,701)
-------------------------------------------------------------------------------------------------------------------------------
(2,690) (2,094) (8,654) (5,253)
-------------------------------------------------------------------------------------------------------------------------------
(224) (8,303) 2,267 (16,193)
LOSS ON DILUTION (535) (64) (535) (64)
NON-CONTROLLING INTEREST (1,237) (969) (4,948) (2,636)
-------------------------------------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD $ (1,996) $ (9,336) $ (3,216) $ (18,893)
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED NET LOSS PER SHARE $ (0.04) $ (0.20) $ (0.07) $ (0.43)
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (note 7)
Basic 45,628,742 45,253,682 45,564,092 42,993,432
Diluted 46,019,777 45,635,793 46,119,755 43,151,893
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
INTERIM CONSOLIDATED STATEMENTS OF DEFICIT
FOR THE PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(expressed in thousands of Canadian dollars)
NINE MONTHS ENDED SEPTEMBER 30,
UNAUDITED 2004 2003
-------------------------------------------------------------------------------------------------------------------------------
BALANCE - BEGINNING OF PERIOD $ 73,011 $ 44,864
Net loss for the period 3,216 18,893
-------------------------------------------------------------------------------------------------------------------------------
BALANCE - END OF PERIOD $ 76,227 $ 63,757
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
2
AETERNA ZENTARIS INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(expressed in thousands of Canadian dollars)
QUARTERS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
UNAUDITED 2004 2003 2004 2003
-------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period $ (1,996) $ (9,336) $ (3,216) $ (18,893)
Items not affecting cash and cash equivalents
Depreciation and amortization 2,306 2,336 6,767 6,853
Future income taxes (145) 647 (5,089) 1,701
Deferred charges and long-term asset 28 108 (7,036) 334
Deferred revenues (477) (1,143) 19,635 426
Accretion on convertible term loans 519 415 1,452 830
Employee future benefits 91 123 181 305
Loss on dilution 535 64 535 64
Non-controlling interest 1,237 969 4,948 2,636
Stock-based compensation 352 153 997 305
Foreign exchange gain on long term item
denominated in foreign currency (10) - (59) -
Change in non-cash operating working capital items (note 5) 3,053 4,585 (5,242) (3,100)
-------------------------------------------------------------------------------------------------------------------------------
5,493 (1,079) 13,873 (8,539)
-------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of promissory note - - - (43,000)
Convertible term loans - - - 24,415
Payment of balance of purchase price (250) - (1,351) (2,357)
Increase in long-term debt (368) 7,904 39,883 7,904
Repayment of long-term debt (3,043) (28) (4,557) (87)
Issuance of share capital , net of related expenses 22 34,093 1,358 34,027
Issuance of share by a subsidiary 248 42 248 42
-------------------------------------------------------------------------------------------------------------------------------
(3,391) 42,011 35,581 20,944
-------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investments (9,283) (3,490) (16,387) (18,981)
Proceeds from short-term investments 3,314 7,613 21,788 73,518
Purchase of long-term investment - - (825) -
Business acquisition (note 3) (2,484) (14,453) (48,166) (17,042)
Purchase of a product line - - (10) -
Purchase of property, plant and equipment (566) (135) (1,286) (885)
Additions to intangible assets (32) (146) (114) (411)
-------------------------------------------------------------------------------------------------------------------------------
(9,051) (10,611) (45,000) 36,199
-------------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (6,949) 30,321 4,454 48,604
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (416) 13 (424) (235)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 33,809 30,529 22,414 12,494
-------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 26,444 $ 60,863 $ 26,444 $ 60,863
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL INFORMATION
Interest paid $ 1,835 $ 120 $ 2,020 $ 274
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
Income taxes paid $ 2,123 $ 2,082 $ 4,788 $ 4,024
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
3
AETERNA ZENTARIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(expressed in thousands of Canadian dollars, except share and per share data)
UNAUDITED
-------------------------------------------------------------------------------
1 BASIS OF PRESENTATION AND STATUTORY CHANGE
These interim financial statements as at September 30, 2004 and for the periods
ended September 30, 2004 and 2003, are unaudited. They have been prepared by the
Company in accordance with Canadian generally accepted accounting principles
(GAAP) for interim financial information. In the opinion of management, all
adjustments necessary to present fairly the financial position, results of
operations and cash flows for these periods have been included.
The accounting policies and methods of computation adopted in these financial
statements are the same as those used in the preparation of the Company's most
recent annual consolidated financial statements. All disclosures required for
annual financial statements have not been included in these financial
statements. These consolidated financial statements should be read in
conjunction with the Company's most recent annual consolidated financial
statements. These interim results of operations are not necessarily indicative
of the results for the full year.
On May 26, 2004, the Company changed its corporate name toAEterna Zentaris Inc.
fromAEterna Laboratories Inc.
2 NEW ACCOUNTING STANDARDS
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
In July 2003, the CICA issued new Handbook Section 1100 "Generally Accepted
Accounting Principles" ("GAAP"), which is effective for fiscal years beginning
on or after October 1, 2003. This new section defines GAAP, establishes the
relative authority of various types of CICA Accounting Standards Board
pronouncements, says what to do when the Handbook does not cover a particular
situation and clarifies the role of "industry practice" in setting GAAP. The
Company adopted this new standard on January 1, 2004 without having any
significant effect on the Company's financial statements.
GENERAL STANDARDS OF FINANCIAL STATEMENT PRESENTATION
In July 2003, the CICA issued new Handbook Section 1400 "General Standards of
Financial Statement Presentation" which is effective for fiscal years beginning
on or after October 1, 2003. This new section confirms that the financial
statements of an entity must present fairly in accordance with Canadian
generally accepted accounting principles its financial position, results of
operations and cash flows. The Company adopted this new standard on January 1,
2004 without having any significant impact on the Company's financial
statements.
HEDGING RELATIONSHIPS
The CICA has issued Accounting Guideline 13 "Hedging Relationships", which
establishes certain conditions regarding when hedge accounting may be applied
and which is effective for fiscal years beginning on or after January 1, 2004.
AcG 13 addresses the identification, designation, documentation, and
effectiveness of hedging transactions for the purposes of applying hedge
accounting. It also establishes conditions for applying or discontinuing hedge
accounting. Under this new guideline, the Company is also required to document
its hedging transactions and explicitly demonstrate that the hedges are
sufficiently effective in order to continue hedge accounting for positions
hedged with derivatives. Any derivative instrument that does not qualify for
hedge accounting will be reported on a mark-to-market basis in earnings. The
company adopted this guideline as at January 1, 2004 without having any
significant impact on the Company's financial statements.
3 BUSINESS ACQUISITION
PURE ENCAPSULATIONS, INC.
On March 3, 2004, our subsidiary Atrium completed through its new incorporated
subsidiary, Atrium Pureco, Inc, the acquisition of all operating assets of Pure
Encapsulations, Inc. for a total consideration of $ 50,212,447 of which an
amount of $45,481,747 was paid cash, net of cash and cash equivalent acquired of
$ 1,442,753 and $ 3,284,947 as a balance of purchase price. This company, based
in the United States is focused mainly on the development, manufacturing and
marketing of nutritional supplements geared towards physicians and other
healthcare professionals.
4
AETERNA ZENTARIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(expressed in thousands of Canadian dollars, except share and per share data)
UNAUDITED
-------------------------------------------------------------------------------
3 BUSINESS ACQUISITION
The financing of the transaction resulted from the issuance of a senior debt of
$ 27,000,000 and a subordinate debt in the amount of $ 13,407,000. The senior
debt, for which a moveable hypothec on all Atrium's North American moveable
assets as been given as security, is lended in the form of bankers' acceptances.
The debt bears interest at a rate based on the market rate plus an applicable
margin calculated quarterly on Atrium's North American operations. As at
September 30, 2004, the actual interest rate for this debt was 4%. The principal
is payable in quarterly instalments of $ 1,350,000. The subordinate debt,
without any security granted, bears interest at a rate of 9% for the first year
and 10% for the following years. Interest is payable in monthly instalments and
the principal is payable in accretion annually starting in March 2005.
The acquisition has been accounted for using the purchase method and the results
of operations have been included in the statement of operations from the date of
acquisition. The purchase price allocation was finalized upon receipt of an
independent valuation report, resulting in reallocation in the third quarter of
$ 17,160,960 from goodwill to intangible assets.
The allocated values of the net assets acquired are as follows:
$
----------
Assets
Current assets 6,355
Property, plant and equipment 1,632
Intangible assets 17,161
------------------------------------------------------------------------------
25,148
------------------------------------------------------------------------------
Liabilities
Current liabilities 1,725
Future income taxes 134
------------------------------------------------------------------------------
1,859
------------------------------------------------------------------------------
Net identifiable assets acquired 23,289
Goodwill 26,924
------------------------------------------------------------------------------
Purchase price 50,213
Consideration
Cash and cash equivalents acquired (1,443)
Balance of purchase price (3,288)
------------------------------------------------------------------------------
Net cash paid for the acquisition 45,482
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Goodwill and intangible assets are deductible for income tax purposes.
Intangible assets consist mainly of trademarks for an amount of $ 16,088,400
with indefinite life. Consequently, it is not amortized but will be subjet to an
annual impairment test.
SIRICIE S.A
The purchase price allocation was finalized during the second quarter of 2004
and did not result in any change from the original purchase price allocation
5
AETERNA ZENTARIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(expressed in thousands of Canadian dollars, except share and per share data)
UNAUDITED
-------------------------------------------------------------------------------
4 COMPANY'S STOCK OPTION PLAN
The Company has chosen to use the fair value method to account for stock-based
compensation costs arising from awards granted to employees after December 31,
2002. As part of the adoption of this standard, we had to restate 2003 quarters
to take into account the decision taken in the fourth quarter of 2003 to use the
prospective method of accounting. Consequently, additionnal charges of
approximately $ 98,000 and $ 250,000 are recorded respectively in the statement
of operation for the third quarter and nine-months period ended September 30,
2003, without having any effect on the basic and diluted net earnings (loss) per
share. We also have to disclose pro-forma information relating to net earnings
(loss) and earnings (loss) per share as if the fair value method of accounting
had been used for awards granted to employees before January 1, 2003.
QUARTERS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2004 2003 2004 2003
------------------------------- --------------------------------
Net loss for the period $ (1,996) $ (9,336) $ (3,216) $ (18,893)
Pro-forma adjustment for stock-based compensation costs (73) (185) (86) (1,102)
--------------------------------------------------------------------
Pro-forma net loss for the period $ (2,069) $ (9,521) $ (3,302) $ (19,995)
--------------------------------------------------------------------
--------------------------------------------------------------------
Basic and diluted net loss per share $ (0.04) $ (0.20) $ (0.07) $ (0.43)
--------------------------------------------------------------------
--------------------------------------------------------------------
Pro-forma basic and diluted net loss per share $ (0.04) $ (0.21) $ (0.07) $ (0.47)
--------------------------------------------------------------------
--------------------------------------------------------------------
The pro-forma amounts may not be representation of future disclosure as the
estimated fair value of stock options is amortized to expense over the vesting
period and additional options may be granted in future periods.
5 STATEMENTS OF CASH FLOWS AND ADDITIONAL INFORMATION
QUARTERS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2004 2003 2004 2003
------------------------------ ---------------------------------
CHANGE IN NON-CASH OPERATING WORKING CAPITAL ITEMS
Accounts receivable $ 2,651 $ 1,505 $ (9,124) $ (2,066)
Inventory (1,717) (1,320) (3,185) (668)
Prepaid expenses and deferred charges 544 564 525 (147)
Accounts payable and accrued liabilities 607 2,603 (1,642) (1,341)
Income taxes 968 1,233 8,184 1,122
--------------------------------------------------------------------
$ 3,053 $ 4,585 $ (5,242) $ (3,100)
--------------------------------------------------------------------
--------------------------------------------------------------------
EMPLOYEE FUTURE BENEFIT EXPENSE $ 133 $ 154 $ 315 $ 463
--------------------------------------------------------------------
--------------------------------------------------------------------
6
AETERNA ZENTARIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(expressed in thousands of Canadian dollars, except share and per share data)
UNAUDITED
-------------------------------------------------------------------------------
6 SHARE CAPITAL
Autorized
Unlimited number of shares of the following classes:
Common: Voting and participating, one vote per share
Preferred: First and second ranking, issuable in series, with rights and
privileges specific to each class.
Issued
AS AT AS AT
SEPTEMBER 30, DECEMBER 31,
2004 2003
-----------------------------------
(UNAUDITED)
45,630,409 common shares (45,330,992 as at December 31, 2003) $ 189,014 $ 187,601
-----------------------------------
-----------------------------------
Effective May 26, 2004, the Company repealed old classes of subordinate voting
shares and multiple voting shares to create a new class of common shares. All
existing subordinate voting shares at that time were converted into common
shares.
Pursuant to the exercice of stock options, the company issued 299,417 common
shares for a total proceed of $ 1,510,399
Instruments convertible into shares
As at September 30, 2004, the Company has 2,695,592 outstanding stock options.
In addition, the convertible term loans can be converted into common shares of
the Company at a conversion price of $5.05 per common shares up to a maximum of
6,955,089 shares.
Shareholder rights plan
On March 29, 2004, the Company has adopted a shareholder rights plan (the
"Rights Plan"). The rights issued to the shareholders under the Rights Plan will
be exercisable, under certain conditions, only when a person or entity,
including any related party(ies), acquires or announces its intention to acquire
more than twenty (20) percent of the outstanding common shares of AEterna
Zentaris (as such shares may be redesignated or reclassified) without complying
with the "permitted bid" provisions of the Rights Plan or without approval of
AEterna Zentaris's Board of Directors. Should such an acquisition occur, each
right would, upon exercise, entitle a holder, other than the person pursuing the
acquisition together with its related party(ies), to purchase common shares of
AEterna Zentaris at a fifty (50) percent discount to the market price of AEterna
Zentaris's shares at the time.
7 NET LOSS PER SHARE
The following table summarizes the reconciliation of the basic weighted average
number of shares outstanding and the diluted weighted average number for shares
outstanding used in the diluted earnings per share calculation
QUARTERS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2004 2003 2004 2003
------------------------------------------------------------------------
BASIC WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 45,628,742 45,253,682 45,564,092 42,993,432
Effect of dilutive stock options 391,035 382,111 555,663 158,461
------------------------------------------------------------------------
DILUTED WEIGHTED AVERAGE NUMBER OF SHARE OUTSTANDING 46,019,777 45,635,793 46,119,755 43,151,893
------------------------------------------------------------------------
------------------------------------------------------------------------
7
AETERNA ZENTARIS INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(expressed in thousands of Canadian dollars, except share and per share data)
UNAUDITED
-------------------------------------------------------------------------------
7 NET LOSS PER SHARE
ITEMS EXCLUDED FROM THE CALCULATION OF DILUTED NET LOSS PER SHARE BECAUSE THE
EXERCICE PRICE WAS GREATER THAN THE AVERAGE MARKET PRICE OF THE COMMON
SHARE OR THEIR ANTI-DILUTIVE EFFECT.
QUARTERS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2004 2003 2004 2003
---------------------------- -------------------------------
Stock options 1,012,333 1,010,785 740,333 1,315,230
Common shares which would be issued following
the conversion of the convertible term loans 5,544,554 4,950,495 5,544,554 2,475,248
For the quarters ended September 30, 2003 and 2004 and nine-month periods ended
September 30, 2003 and 2004, the diluted net loss per share were the same as the
basic net loss per share since the dilutive effect of stock options and
convertible term loans was not included in the calculation; otherwise, the
effect would have been anti-dilutive. Accordingly, the diluted net loss per
share for those periods were calculated using the basic weighted average number
of shares outstanding.
8 SEGMENT INFORMATION
The company manages its business and evaluates performance based on three
operating segments, which are the biopharmaceutical segment, the cosmetics and
nutrition segment and the distribution segment. The accounting principles used
for these three segments are consistent with those used in the preparation of
these consolidated financial statements.
QUARTERS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2004 2003 2004 2003
------------------------------------ ---------------------------------------
REVENUES
Biopharmaceutical $ 14,443 $ 7,932 $ 45,889 $ 34,662
Cosmetics and nutrition 11,354 4,040 31,020 10,990
Distribution 29,687 26,034 103,128 72,296
Consolidated adjustments (66) (177) (330) (431)
-----------------------------------------------------------------------------------------------------------------------
$ 55,418 $ 37,829 $ 179,707 $ 117,517
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) FOR THE PERIOD
Biopharmaceutical $ (3,702) $ (10,568) $ (9,664) $ (22,127)
Cosmetics and nutrition 1,044 744 3,793 1,952
Distribution 581 505 2,575 1,352
Consolidated adjustments 81 (17) 80 (70)
-----------------------------------------------------------------------------------------------------------------------
$ (1,996) $ (9,336) $ (3,216) $ (18,893)
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
AS AT As at
SEPTEMBER 30, December 31,
2004 2003
--------------- ------------------
(UNAUDITED)
SEGMENT ASSETS
Biopharmaceutical $ 191,436 $ 179,882
Cosmetics and nutrition 67,853 15,565
Distribution 99,653 100,434
Consolidated adjustments (509) (102)
-----------------------------------------------------------------------------------------------------------------------
$ 358,433 $ 295,779
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
9 COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform with the current
year presentation.
8
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AETERNA ZENTARIS INC.
Date: November 4, 2004 By: /s/ Mario Paradis
---------------------- ------------------------------------------
Mario Paradis
Senior Director, Finance and
Corporate Secretary