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February 21, 2007
Neurochem reports results for fourth quarter and fiscal year 2006
Neurochem will host a conference call Thursday, February 22, 2007, at 8:30 A.M. ET.
- Neurochem Inc. (NASDAQ: NRMX; TSX: NRM) reported results for the fourth quarter and fiscal year ended December 31,
2006. The Company reported a net loss of $19,359,000 ($0.50 per share), for the quarter, compared to the net loss of
$15,628,000 ($0.42 per share) recorded in the fourth quarter of 2005. For the year ended December 31, 2006, the net
loss amounted to $75,387,000 ($1.95 per share), compared to $72,366,000 ($2.06 per share) for the same period in the
previous year. Research and development (R&D) expenses increased during the fourth quarter of 2006 to $16,095,000
($58,624,000 for the year), compared to $11,688,000 for the same period the previous year ($50,495,000 for the year).
The increase in R&D expenses is due to expenses incurred in relation to the development of tramiprosate
(ALZHEMED™), primarily for the ongoing Phase III clinical trial in Europe, as well as for the open-label extension
of the North American Phase III study. Tramiprosate (ALZHEMED™) is the Company's investigational product candidate
for the treatment of Alzheimer's disease (AD). For the quarter and the year ended December 31, 2006, (R&D)
expenses also included costs incurred to support the North American Phase III clinical trial for tramiprosate
(ALZHEMED™), the ongoing open-label extension of the eprodisate (KIACTA™) Phase II/III study for amyloid A
(AA) amyloidosis, as well as ongoing drug discovery programs. The increase in the net loss for 2006 compared to 2005
is mainly due to higher net R&D expenses, after deducting research tax credits and grants, and is partially offset
by a decrease in general and administrative expenses.
As at December 31, 2006, the Company had available cash, cash equivalents and marketable securities of $56,821,000,
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 of $47,557,000 from the issue of convertible notes in November 2006, and proceeds of
$9,372,000 from the exercise of a warrant by Picchio Pharma in February 2006. Neurochem also has entered into an equity
line of credit facility that provides the Company up to US$60,000,000 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, subject to the terms
of the agreement.
"Our programs are on track. We are pleased to have completed the North American Phase III clinical trial for
ALZHEMED™ on schedule. The study progressed as planned and the top-line results are expected to be released in the
spring of 2007," said Dr. Francesco Bellini, Neurochem's Chairman, President and CEO. "Our KIACTA™ program
is also advancing well and we remain confident about the outcome as we await a decision on marketing approval from the
U.S. Food and Drug Administration," he concluded.
Conference Call
Neurochem will host a conference call Thursday, February 22, 2007, at 8:30 A.M. Eastern Time. The telephone numbers
to access the conference call are 1-416-644-3422 or 1-800-595-8550. A replay of the call will be available until
Thursday, March 1, 2007. The telephone numbers to access the replay of the call are 1-416-640-1917 or 1-877-289-8525,
for which the passcode is 21219097#.
Consolidated Financial Results Highlights
The following discussion and analysis should be read in conjunction with the Company's audited consolidated
financial statements for the year ended December 31, 2006, which have been prepared in accordance with Canadian
generally accepted accounting principles (GAAP). All dollar figures are Canadian dollars, unless specified otherwise.
Results of operations
For the three-month period ended December 31, 2006, the net loss amounted to $19,359,000 ($0.50 per share), compared
to $15,628,000 ($0.42 per share) for the corresponding period in the previous year. For the year ended December 31,
2006, the net loss amounted to $75,387,000 ($1.95 per share), compared to $72,366,000 ($2.06 per share) for the same
period in the previous year.
Revenues from collaboration agreement amounted to $567,000 for the current quarter ($2,389,000 for the year),
compared to $607,000 for the same period in the previous year ($3,384,000 for the year). This revenue is earned
under the agreement with Centocor, Inc. (Centocor) in respect of eprodisate (KIACTA™ - formerly FIBRILLEX™), an
oral investigational product candidate for the treatment of 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 August 2006, the Company received an approvable letter from the FDA for eprodisate (KIACTA™),
following the Company's New Drug Application submitted in February 2006. In this action letter, the FDA requested
additional efficacy information, as well as a safety update. The FDA asked for further manufacturing and pharmacokinetic
information, and acknowledged that a QT cardiac status clinical study should be submitted as part of a Phase IV
(post approval) commitment. The FDA stated that the efficacy information would probably need to be addressed by one
or more additional clinical trials. As an alternative, the FDA also stated that significant findings obtained from
a complete follow-up of patients in the existing study could be persuasive. A response was submitted to the FDA in
October, 2006. In November 2006, the FDA advised Neurochem that the response submitted in October was complete, as
it responded to all of the items raised in the August approvable letter. The NDA amendment in the U.S. is subject to
a six-month review (Class II amendment) as designated by the FDA, with a goal date for a decision on eprodisate
(KIACTA™) on or about April 16, 2007. Neurochem is also seeking marketing approval for eprodisate
(KIACTA™) for the treatment of AA amyloidosis in the European Union. The Company was advised by the European
Medicines Agency (EMEA) in September 2006 that its Marketing Authorization Application is valid and that the
regulatory review has started
Reimbursable costs revenue amounted to $203,000 for the current quarter ($808,000 for the year), compared
to $230,000 for the same period in the previous year ($1,057,000 for the year) and consists of costs reimbursable
by Centocor in respect of eprodisate (KIACTA™)-related activities. The Company earns no margin on these
reimbursable costs.
Research and development expenses, before research tax credits and grants, amounted to $16,095,000 for
the current quarter ($58,624,000 for the year), compared to $11,688,000 for the same period in the previous
year ($50,495,000 for the year). The increase is due to expenses incurred in relation to the development of
tramiprosate (ALZHEMED™) primarily in respect of the ongoing Phase III clinical trial in Europe and the North
American open-label extension of the Phase III study. Tramiprosate (ALZHEMED™) is the Company's investigational
product candidate for the treatment of Alzheimer's disease (AD). Tramiprosate (ALZHEMED™) has recently completed
its 18-month North American Phase III clinical trial. This clinical trial included 1,052 enrolled patients at 67
clinical centers across the U.S. and Canada. The top-line results of the North American Phase III clinical trial
are expected to be released during the spring of 2007. All patients who completed the North American Phase III
clinical trial were eligible to receive tramiprosate (ALZHEMED™) in an 18-month open-label extension of the
Phase III study. The European Phase III clinical trial on tramiprosate (ALZHEMED™) was launched in September
2005 with 930 mild-to-moderate AD patients being expected to participate in the trial. This study also has a duration
of 18 months and the trial is being conducted at approximately 70 clinical centers in ten European countries. As
of December 31, 2006, 770 patients had been successfully screened in the European clinical trial, of which 726 were
randomized; the remaining 44 patients are expected to be randomized and included in the clinical trial. Enrolment of
patients participating in the European clinical trial is expected to be completed in the first half of 2007. Both
Phase III clinical trials are multi-centre, randomized, double-blind, placebo-controlled, three-armed, parallel-designed
trials. For the quarter and year ended December 31, 2006, research and development expenses also included costs
incurred to support the North American Phase III clinical trial for tramiprosate (ALZHEMED™), the ongoing
open-label extension of the eprodisate (KIACTA™) Phase II/III 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 $690,000 this quarter ($2,153,000 for the year), compared to
$1,729,000 for the corresponding period in the previous year ($4,393,000 for the year). Research tax credits
represent refundable tax credits earned under the Quebec Scientific Research and Experimental Development Program
for expenditures incurred in Quebec. The decrease in the quarter is mainly due to grants of $1,149,000 received
by the Company in the fourth quarter of 2005, representing the final contribution received under the Technology
Partnerships Canada (TPC) Program for the development of tramiprosate (ALZHEMED™). The decrease in the year
is also attributable to additional tax credits recorded during the third quarter of 2005, claimed in respect of
research and development taxable benefits on stock options for 2005 and prior years.
Other research and development charges amounted to $1,277,000 for the year ended December 31, 2006. During
2006, the Quebec taxation authorities proposed retroactive changes in the application of the tax credit program
that would deny tax credits on eligible research and development taxable benefits relating to stock options for
2005 and prior years. Accordingly, management determined that the criteria for recognition of these credits was no
longer met and recorded a provision for these research tax credits.
General and administrative expenses totaled $3,200,000 for the current quarter ($13,050,000 for the year),
compared to $4,393,000 for the same quarter in the previous year ($22,212,000 for the year). The decrease is primarily
attributable to a reduction in legal fees incurred by the Company regarding the dispute with Immtech Pharmaceuticals,
Inc. formerly known as Immtech International, Inc. (Immtech). See Arbitral award below.
Arbitral award amounted to $2,089,000 (approximately U.S. $1.83 million) for the year ended December 31, 2006
and relates to the dispute with Immtech. In June 2006, the International Chamber of Commerce Court of Arbitration
(ICC) issued its Final Award (the Final Award) in the arbitration dispute involving Neurochem and Immtech. The dispute
concerned an agreement entered into between Immtech and Neurochem in April 2002 (the Agreement) under which Neurochem
had the right to apply its proprietary anti-amyloid technology to test certain compounds to be provided by Immtech.
The ICC denied the majority of Immtech's claims after an evidentiary hearing before the tribunal convened in
accordance with the rules of the ICC (the Tribunal) held in September 2005. In the Final Award, 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. The
Tribunal found that Neurochem had breached certain sections of the Agreement, and Immtech was awarded U.S.$35,000
in damages, plus interest thereon for a disputed progress payment under the Agreement. 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. Neurochem has made the payments required by the Final
Award. The Tribunal issued an Addendum to the Final Award dated September 21, 2006, in which it denied Immtech's
July 10, 2006, request to make a further determination with respect to ownership of the Neurochem inventions and
pending patent applications, leaving its earlier ruling intact. On January 25, 2007, Immtech, the University of North
Carolina at Chapel Hill (UNC), and Georgia State University Research Foundation, Inc. (together with UNC, the
Universities) filed with the Federal District Court for the Southern District of New York, USA (the Court) a Notice
of Voluntary Dismissal bringing to an end the litigation action described below. The litigation between the parties
had been stayed since 2004 when the Court ordered Immtech to submit its claims to arbitration as provided for in
the underlying agreement between Immtech and Neurochem, leaving the claims of the Universities to be decided after
the conclusion of the arbitration. In the litigation, the Universities asserted that they had claims against Neurochem
that were independent of the claims asserted by Immtech in the arbitration. Neurochem's position is that the Universities
had no claims. On January 25, 2007, the plaintiffs voluntarily dismissed their complaint against Neurochem without
any payment, license, business agreement, concession or compromise by Neurochem.
Reimbursable costs amounted to $203,000 for the current quarter ($808,000 for the year), compared to $230,000
for the same period in the previous year ($1,057,000 for the year), and consist of costs incurred on behalf of Centocor
in respect of eprodisate (KIACTA™)-related activities and reimbursable by Centocor.
Stock-based compensation amounted to $1,052,000 for the current quarter ($4,048,000 for the year), compared
to $865,000 for the corresponding quarter in the previous year ($4,795,000 for the year). This expense relates to
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 increase in the quarter is due to new stock options granted
during the past year. The decrease in the year is primarily attributable to expenses of $1,441,000 recorded in
the second quarter of 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 $438,000 for the current quarter ($1,764,000
for the year), compared to $1,413,000 for the same quarter in the previous year ($3,189,000 for the year). The decrease
is mainly attributable to the write-off of patent costs of $853,000 recorded in the fourth quarter of 2005 in relation
to non-core technology patents, responsibility for which reverted to Parteq Research & Development Innovations,
the technology transfer office of Queen's University. The decrease in the year is also attributable to the
sale-leaseback transaction entered into by the Company in November 2005 in respect of its facilities located in Laval,
Quebec. As a result of the transaction, the Company had no depreciation expense for the buildings in 2006. In 2005,
depreciation expense on the buildings was recorded up to the date of the sale-leaseback transaction.
Interest and bank charges amounted to $77,000 for the current quarter ($151,000 for the year), compared to
$82,000 for the same quarter in the previous year ($462,000 for the year). The decrease in the year 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 $654,000 for the current quarter ($2,356,000 for the year), compared to $607,000
for the same quarter in the previous year ($2,082,000 for the year). The increase in the year is mainly attributable
to higher interest rates and is partially offset by lower average cash balances during the current year, compared
to the same period in the previous year.
Accretion expense amounted to $634,000 for the quarter and year ended December 31, 2006, and mainly represents
the imputed interest under GAAP on the U.S.$42,085,000 aggregate principal amount of 6% convertible senior notes
issued in November 2006. Please refer to the section Liquidity and Capital Resources for more details on the convertible
notes.
Foreign exchange gain amounted to $277,000 for the current quarter (loss of $318,000 for the year), compared
to a gain of $255,000 for the same quarter in the previous year (gain of $187,000 for the year). 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 in the year 2006 are
mainly attributable to the strengthening of the Canadian dollar compared to the U.S. dollar during the period.
Other income amounted to $322,000 for the current quarter ($1,529,000 for the year), compared to $297,000
for the same quarter in the previous year ($935,000 for the year). Other income consists of non-operating revenue,
primarily sub-lease revenue. The increase in the year is mainly attributable to recovery of prior years' property
taxes recorded in the third quarter of 2006, in the amount of $332,000.
Share of loss in a company subject to significant influence amounted to $558,000 for the current quarter
($2,768,000 for the year), compared to $971,000 for the corresponding quarter in the previous year ($3,124,000 for
the year). Non-controlling interest amounted to $185,000 for the current quarter ($909,000 for the year), compared
to $289,000 for the corresponding quarter in the previous year ($930,000 for the year). 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 December 31, 2006, the Company had available cash, cash equivalents and marketable securities of $56,821,000,
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 issue of convertible notes in November 2006 and from the exercise
of a warrant in February 2006 by a subsidiary of Picchio Pharma Inc. (Picchio Pharma).
Proceeds from convertible notes amounted to $47,557,000 for the year ended December 31, 2006 and are in respect of
a private placement entered into in November 2006 of U.S.$42,085,000 aggregate principal amount of 6% convertible
senior notes due in 2026, with a conversion premium of 20%. The Company will pay interest on the notes until
maturity on November 15, 2026, subject to earlier repurchase, redemption or conversion.
In addition, in August 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.$60,000,000 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 includes an obligation for Neurochem to drawdown at least U.S.$25,000,000 over the two-year term of the
facility. As at December 31, 2006, the Company had not drawn any funds under the equity line of credit.
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 January 31, 2007, the Company had 38,777,872 common shares outstanding, 220,000 common shares issuable to
the Chief Executive Officer upon the achievement of specified performance targets, 2,546,979 options granted under
the stock option plan and 2,134,471 shares potentially issuable under the convertible notes, for a maximum of
43,679,322 common shares, on a fully diluted basis.
The Company believes that its available cash and short-term investments, expected interest income, potential funding
from partnerships, research collaborations and licensing agreements, potential proceeds from the equity line of
credit facility, research tax credits, grants, and access to capital markets should be sufficient to finance the
Company's operations and capital needs during the ensuing year. However, in light of the uncertainties associated
with the regulatory approval process, clinical trial results, 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.
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