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August 9, 2006
Neurochem reports results for second quarter and fiscal 2006
Announces Equity Line of Credit Facility
Neurochem will host a conference call today, August 9, 2006, at 5:00 P.M. ET.
- Neurochem Inc. (NASDAQ: NRMX; TSX: NRM) reported results for the second quarter ended June 30, 2006. The Company
reported a net loss of $20,374,000 ($0.53 per share), compared to $18,694,000 ($0.54 per share) for the corresponding
period last year. For the six-month period ended June 30, 2006, the net loss amounted to $37,508,000 ($0.97 per share),
compared to $35,664,000 ($1.08 per share) for the same period last year. The increase is mainly due to research and
development (R&D) expenses which amounted to $14,342,000 this quarter compared to $12,897,000 for the same period
last year. For the six-month period, R&D expenses were $28,068,000 compared to $24,862,000 for the corresponding period
of the previous year. The increase in R&D expenses is primarily due to expenses incurred in relation to the
development of tramiprosate (Alzhemed™) for the ongoing Phase III clinical trials in North America and Europe.
Tramiprosate (Alzhemed™) is the Company's investigational product candidate for the treatment of Alzheimer's disease
(AD).
As at June 30, 2006 the Company reported cash, cash equivalents and marketable securities of $41,931,000, compared to
$71,091,000 on December 31, 2005. The decrease is primarily due to funds used in operations and is partially offset by
proceeds received from the exercise of a warrant in February of 2006 by Picchio Pharma.
Neurochem also announced that it has entered into a securities purchase agreement in respect of an equity line of credit
facility, with a 24 month term, that provides the Company up to US $60 million of funds in return for the issuance of
common shares at a discount of 3.0% to market price at the time of draw downs over the term. Rodman & Renshaw acted
as placement agent for this transaction. The agreement provides for an obligation for Neurochem to drawdown at least US
$25 million over the two-year term of the facility. The agreement is conditional on the registration of the underlying
securities and approval from the appropriate securities regulators.
"With a pending decision from the U.S. Food and Drug Administration on the potential approval of Fibrillex™ and
the advancement of the two Phase III clinical trials for Alzhemed™, we stand on the threshold of important
developments in the near future," said Dr. Francesco Bellini, Chairman, President and CEO of Neurochem Inc. "Given
the cash on hand and the key activities in progress, we believe this facility gives our Company the flexibility required
to raise funds at an appropriate time," he concluded.
Conference Call
Neurochem will host a conference call on August 9, 2006, at 5:00 P.M ET. The telephone numbers to access the conference
call are 1-416-644-3416 or 1-866-250-4877. A replay of the call will be available until Thursday, August 17, 2006. The
telephone numbers to access the replay of the call are 1-416-640-1917 or 1-877-289-8525. The access code for the replay
is 21199732#
Consolidated Financial Results Highlights
The following discussion and analysis should be read in conjunction with the Company's unaudited consolidated financial
statements for the six-month period ended June 30, 2006, as well as the Company's audited consolidated financial statements
for the year ended December 31, 2005, which have been prepared in accordance with Canadian generally accepted accounting
principles. For discussion regarding related-party transactions, contractual obligations, disclosure controls and
procedures, critical accounting policies, recent accounting pronouncements, and risks and uncertainties, refer to the
Annual Report and the Annual Information Form for the year ended December 31, 2005. All dollar figures are Canadian
dollars, unless specified otherwise.
Results of operations
For the three-month period ended June 30, 2006, the net loss amounted to $20,374,000 ($0.53 per share), compared to
$18,694,000 ($0.54 per share) for the corresponding period last year. For the six-month period ended June 30, 2006, the
net loss amounted to $37,508,000 ($0.97 per share), compared to $35,664,000 ($1.08 per share) for the same period last
year. The 2006 second quarter results include the International Chamber of Commerce Court of Arbitration final award of
$2,089,000 (approximately U.S. $1.9 million) in respect of the Immtech Pharmaceuticals, Inc. dispute.
Revenues from collaboration agreement amounted to $608,000 for the current quarter ($1,215,000 for the six-month
period), compared to $822,000 for the same period last year ($2,027,000 for the six-month period). This revenue is
earned under the agreement with Centocor, Inc. (Centocor) in respect of eprodisate (Fibrillex™), an oral
investigational product candidate for the treatment of Amyloid A (AA) amyloidosis. Revenue recognized is in respect of
the non-refundable upfront payment received from Centocor, which is being amortized over the estimated period through to
the anticipated regulatory approval date of the investigational product candidate. The estimated period is subject to
change based on additional information that the Company may receive periodically. The other portion of the upfront payment
received from Centocor (U.S. $6,000,000) has been classified as deferred revenue and is not being amortized as earned
revenue given that it is potentially refundable. In the event that the Company receives an approval letter issued by the
U.S. Food and Drug Administration (FDA), the amount would no longer be refundable and would be amortized as earned
revenue. In February 2006, the Company completed the submission of a New Drug Application (NDA) with the FDA for
eprodisate (Fibrillex™). In April 2006, the Company received notification from the FDA that it had filed and
designated the eprodisate (Fibrillex™) NDA for priority review, with a goal date of August 13, 2006, when the
FDA is expected to render a decision.
Reimbursable costs revenue amounted to $205,000 for the current quarter ($435,000 for the six-month period), compared
to $213,000 for the same period last year ($657,000 for the six-month period) and consists of costs reimbursable by
Centocor in respect of eprodisate (Fibrillex™)-related activities. The Company earns no margin on these reimbursable
costs.
Research and development expenses, before research tax credits and grants, amounted to $14,342,000 for the
current quarter ($28,068,000 for the six-month period), compared to $12,897,000 for the same period last year
($24,862,000 for the six-month period). The increase is primarily due to expenses incurred in relation to the
development of tramiprosate (Alzhemed™) for the ongoing Phase III clinical trials in North America and Europe.
Tramiprosate (Alzhemed™) is the Company's investigational product candidate for the treatment of Alzheimer's disease
(AD). The 18-month North American Phase III clinical trial is expected to be completed in January 2007. This trial is
being conducted in close to 70 clinical centers in the U.S. and in Canada, with 1,052 mild-to-moderate AD patients
enrolled. In September 2005, the Company launched its Phase III clinical trial in Europe, with 930 mild-to-moderate AD
patients expected to participate. The study duration is also 18 months and the trial will be conducted in approximately 70
centers in ten European countries. As of June 30, 2006, 491 patients had been successfully screened in the European
clinical trial, of which 428 were randomized; the remaining 63 patients are expected to be randomized and included in
the clinical trial. Enrollment for the European clinical trial is expected to be completed during the fall of 2006. The
Phase III clinical trials on tramiprosate (Alzhemed™) are designed to demonstrate the safety, efficacy and
disease-modifying potential of the product candidate in the treatment of AD. In May 2006, the Company started an
18-month open-label extension study for patients who have completed the ongoing North American Phase III clinical trial
for tramiprosate (Alzhemed™). For the quarter and six-month period ended June 30, 2006, research and development
expenses also included costs incurred to support the ongoing eprodisate (Fibrillex™) Phase II/III open-label
extension study, as well as ongoing drug discovery programs. The Company expects research and development expenses to
increase in the future as product candidates progress through the stages of clinical development and as the Company
continues to invest in product research and development.
Research tax credits and grants amounted to $494,000 this quarter ($1,029,000 for the six-month period), compared to
$542,000 for the corresponding period last year ($960,000 for the six-month period). Research tax credits represent
refundable tax credits earned under the Quebec Scientific Research and Experimental Development Program for expenditures
incurred in Quebec. The decrease is mainly attributable to lower research and development expenses incurred in Quebec,
eligible for refundable tax credits.
General and administrative expenses totaled $3,366,000 for the current quarter ($6,808,000 for the six-month
period), compared to $5,917,000 for the same quarter last year ($11,082,000 for the six-month period). The decrease
is primarily attributable to a reduction in legal fees incurred by the Company with regards to the dispute with Immtech
International, Inc. (now known as Immtech Pharmaceuticals, Inc. and referred to herein as Immtech). See Arbitral award
below.
Arbitral award amounted to $2,089,000 (approximately U.S. $1.9 million) for the current quarter and relates to the
dispute with Immtech. In connection with an agreement concluded in 2002, Immtech brought claims against the Company in
legal proceedings filed on August 12, 2003, with the Federal District Court for the Southern District of New York, U.S.A.
The dispute was presented to an arbitral tribunal (Tribunal) convened in accordance with the rules of the International
Chamber of Commerce Court of Arbitration (ICC). An evidentiary hearing before the Tribunal was held in mid-September
2005 and the Tribunal issued its Final Award in early June 2006. The Tribunal held that Neurochem did not misappropriate
any of Immtech's compounds, information or trade secrets and that Immtech was not entitled to any interest in, or
ownership or assignment of, Neurochem's patent applications. While the Tribunal found that Neurochem had breached certain
sections of the 2002 agreement, Immtech was awarded only U.S. $35,000 in damages, plus interest thereon, in connection
with a disputed milestone payment, and not the compensatory damages of up to U.S. $50 million or any of the punitive
damages that Immtech had been claiming. All of Immtech's tort claims were rejected, as were its claims for injunctive
relief and equitable relief; the Tribunal also denied Neurochem's counterclaims. Immtech was awarded only a portion of the
ICC's administrative charges and arbitral fees and costs incurred by the Tribunal which had been previously advanced by
Immtech, as well as a portion of Immtech's arbitration-related legal fees. Those charges, fees and costs amounted to
approximately U.S. $1.83 million. When added to the U.S. $35,000 in damages and interest thereon, Immtech was awarded, in
total, approximately U.S. $1.9 million. On July 10, 2006, Immtech issued a letter to the Tribunal and the ICC seeking a
further determination under the Final Award. On July 12, 2006, the Tribunal granted Neurochem 20 days to respond in
writing to Immtech's letter and Neurochem filed its response on July 28, 2006. The parties now await the decision of the
Tribunal in relation to Immtech's July 10 letter. In view of these developments, the status conference before the Federal
District Court for the Southern District of New York has again been adjourned, until late September 2006. See note 7 to the
unaudited Consolidated Financial Statements for the six-month period ended June 30, 2006.
Reimbursable costs amounted to $205,000 for the current quarter ($435,000 for the six-month period), compared to
$213,000 for the same period last year ($657,000 for the six-month period), and consist of costs incurred on behalf of
Centocor in respect of eprodisate (Fibrillex™) related activities and reimbursable by Centocor.
Stock-based compensation amounted to $1,016,000 for the current quarter ($1,932,000 for the six-month period),
compared to $2,292,000 for the corresponding quarter last year ($3,062,000 for the six-month period). This expense relates
to employee and director stock options, and stock-based incentives, whereby compensation cost is measured at fair value
at the date of grant and is expensed over the award's vesting period. The decrease is attributable to expenses of
$1,441,000 recorded in 2005 in relation to 140,000 common shares to be issued to the Chairman, President and Chief Executive
Officer, pursuant to an agreement signed in December 2004.
Depreciation, amortization and write-off of patents amounted to $409,000 for the current quarter ($902,000 for the
six-month period), compared to $575,000 for the same quarter last year ($1,145,000 for the six-month period). The decrease
results mainly from the sale-leaseback transaction entered into by the Company in November 2005 in respect of its
facilities and campus located in Laval, Quebec.
Interest and bank charges amounted to $23,000 for the current quarter ($50,000 for the six-month period), compared
to $133,000 for the same quarter last year ($254,000 for the six-month period). The decrease is attributable to
the reimbursement in November 2005, in connection with the sale-leaseback transaction, of the long-term debt previously
contracted to finance the acquisition of facilities in 2004.
Interest income amounted to $580,000 for the current quarter ($1,223,000 for the six-month period), compared to
$633,000 for the same quarter last year ($884,000 for the six-month period). The increase in the six-month period
is mainly attributable to higher interest rates during the current period, compared to the same period last year.
Foreign exchange loss amounted to $524,000 for the current quarter (loss of $570,000 for the six-month period),
compared to a gain of $1,406,000 for the same quarter last year (gain of $1,632,000 for the six-month period). Foreign
exchange gains or losses arise on the movement in foreign exchange rates related to the Company's net monetary assets held
in foreign currencies, primarily U.S. dollars. Foreign exchange losses recognized during 2006 are mainly attributable to the
strengthening of the Canadian dollar compared to the U.S. dollar during the periods.
Other income amounted to $308,000 for the current quarter ($593,000 for the six-month period), compared to
$296,000 for the same quarter last year ($347,000 for the six-month period). Other income consists of non-operating
revenue, primarily sub-lease revenue.
Share of loss in a company subject to significant influence amounted to $891,000 for the current quarter
($1,707,000 for the six-month period), compared to $824,000 for the corresponding quarter last year ($1,579,000 for the
six-month period). Non-controlling interest amounted to $296,000 for the current quarter ($558,000 for the six-month
period), compared to $245,000 for the corresponding quarter last year ($470,000 for the six-month period). These items
result from the consolidation of the Company's interest in a holding company that owns shares of Innodia Inc., for which
Neurochem is the primary beneficiary. In March 2006, the Company invested an additional amount of $1,660,000 in that
holding company in connection with a financing by Innodia Inc. As a result of the transaction, the Company's indirect
equity investment in Innodia Inc. is approximately 23% of the issued and outstanding shares. Innodia Inc. is a private
development stage company engaged in developing novel drugs for the treatment of type 2 diabetes and underlying
diseases.
Liquidity and capital resources
As at June 30, 2006, the Company had available cash, cash equivalents and marketable securities of $41,931,000, compared
to $71,091,000 at December 31, 2005. The decrease is primarily due to funds used in operations and is partially offset
by proceeds received from the exercise of a warrant in February of 2006 by Picchio Pharma.
On February 16, 2006, Picchio Pharma, the Company's largest shareholder, exercised the warrant previously issued pursuant
to a February 2003 private placement which was otherwise scheduled to expire on February 18, 2006, generating total
proceeds to the Company of $9,372,000 and resulting in the issuance of 1,200,000 common shares from treasury.
As at July 31, 2006, the Company had 38,662,170 common shares outstanding, 220,000 common shares issuable to the Chief
Executive Officer upon the achievement of specified performance targets and 2,663,607 options granted under the stock
option plan.
The Company believes that its available cash and short-term investments, expected interest income, potential funding from
research, potential partnerships and licensing agreements, research tax credits, grants, and access to capital markets
should be sufficient to finance the Company's operations and capital needs for the coming year. However, in light of
the uncertainties associated with the regulatory approval process and the Company's ability to secure additional licensing,
partnership and/or other agreements, further financing may be required to support the Company's operations in the future.
On August 9, 2006, the Company entered into a securities purchase agreement in respect of an equity line of credit
facility, with a 24 month term, that provides the Company up to U.S. $60 million of funds in return for the issuance
of common shares at a discount of 3.0% to market price at the time of draw downs over term. The agreement provides for
an obligation for Neurochem to drawdown at least U.S. $25 million over the two-year term of the facility. The agreement
is conditional on the registration of the underlying securities and the required regulatory approvals.
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