UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 20-F
☐ Registration Statement Pursuant to Section 12(b) or 12(g) of The Securities Exchange Act of 1934
OR
☒ Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the fiscal year ended December 31, 2013
☐ Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
OR
☐ Shell Company Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
OR
Commission file number 0-30752
AETERNA ZENTARIS INC.
(Exact Name of Registrant as Specified in its Charter)
Not Applicable
(Translation of Registrant's Name into English)
Canada
(Jurisdiction of Incorporation)
1405 du Parc-Technologique Blvd.
Quebec City, Quebec
Canada, G1P 4P5
(Address of Principal Executive Offices)
Dennis Turpin
Telephone: 418-652-8525
E-mail: dturpin@aezsinc.com
1405 du Parc-Technologique Blvd.
Quebec City, Quebec
Canada, G1P 4P5
(Name, Telephone, E-mail and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Shares
Name of Each Exchange on Which Registered
NASDAQ Capital Market
Toronto Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act: NONE
Securities for which there is a reporting obligation pursuant to Section 15(d) of the ACT: NONE
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as at the close of the period covered by the annual report: 45,312,009
Common Shares as at December 31, 2013.
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes ☐ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or, or a non-accelerated filer. See definitions of "accelerated filer" and "large
accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
US GAAP ☐ International Financial Reporting Standards as issued by the Other ☐
International Accounting Standards Board ☒
If "other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Basis of Presentation
General
Except where the context otherwise requires, all references in this annual report on Form 20-F to the "Company", "Aeterna Zentaris Inc.", "we", "us", "our" or
similar words or phrases are to Aeterna Zentaris Inc. and its subsidiaries, taken together. In this annual report on Form 20-F, references to "$" and "US$" are
to United States dollars, references to "CAN$" are to Canadian dollars and references to "EUR" are to euros. Unless otherwise indicated, the statistical and
financial data contained in this annual report on Form 20-F are presented as at December 31, 2013.
This annual report on Form 20-F also contains certain information regarding products or product candidates that may potentially compete with our products
and product candidates, and such information has been primarily derived from information made publicly available by the companies developing such
potentially competing products and product candidates and has not been independently verified by Aeterna Zentaris Inc.
Forward-Looking Statements
This annual report on Form 20-F contains forward-looking statements made pursuant to the safe harbor provisions of the U.S. Securities Litigation Reform
Act of 1995. Forward-looking statements can be identified by words such as: "intend," "believe," "designed to," "vision," "aimed at," "expect," "may,"
"should," "would," "will" and similar references. Such statements include, but are not limited to, statements about the progress of our research, development
and clinical trials and the timing of, and prospects for, regulatory approval and commercialization of our product candidates, the timing of expected results of
our studies and anticipated results of these studies, and estimates regarding our capital requirements and our needs for, and our ability to obtain, additional
financing. Forward-looking statements involve known and unknown risks and uncertainties, which could cause the Company's actual results to differ
materially from those in the forward-looking statements. Such risks and uncertainties include, among others, the availability of funds and resources to pursue
our research and development ("R&D") projects, the successful and timely completion of clinical studies, the degree of market acceptance once our products
are approved for commercialization, the ability of the Company to take advantage of business opportunities in the pharmaceutical industry, the ability of the
Company to protect its intellectual property, uncertainties related to the regulatory process and general changes in economic conditions. Investors should
consult the Company's quarterly and annual filings with the Canadian and United States ("U.S.") securities commissions for additional information on risks
and uncertainties relating to the forward-looking statements. Investors are cautioned not to rely on these forward-looking statements. The Company does not
undertake to update these forward-looking statements and disclaims any obligation to update any such factors or to publicly announce the result of any
revisions to any of the forward-looking statements contained herein to reflect future results, events or developments except if required to do so by a
governmental authority or applicable law.
TABLE OF CONTENTS
GENERAL INFORMATION
Page
PART I
Item 1.
Identity of Directors, Senior Management and Advisers
A. Directors and senior management
B. Advisors
C. Auditors
Item 2.
Offer Statistics and Expected Timetable
A. Offer statistics
B. Method and expected timetable
Item 3.
Key Information
A. Selected financial data
B. Capitalization and indebtedness
C. Reasons for the offer and use of proceeds
D. Risk factors
Item 4.
Information on the Company
A. History and development of the Company
B. Business overview
C. Organizational structure
D. Property, plants and equipment
Item 4A.
Unresolved Staff Comments
Item 5.
Item 6.
Operating and Financial Review and Prospects
Directors, Senior Management and Employees
A. Directors and senior management
B. Compensation
C. Board Practices
D. Employees
E. Share ownership
Item 7.
Major Shareholders and Related Party Transactions
A. Major shareholders
B. Related party transactions
C. Interests of experts and counsel
Item 8.
Financial Information
A. Consolidated statements and other financial information
B. Significant changes
Item 9.
The Offering and Listing
A. Offer and listing details
B. Plan of distribution
C. Markets
D. Selling shareholders
E. Dilution
F. Expenses of the issuer
Item 10.
Additional Information
A. Share capital
B. Memorandum and articles of association
1
1
1
1
1
1
1
1
1
3
3
3
18
18
19
42
42
42
42
62
62
65
81
82
82
82
82
83
83
83
83
83
83
83
84
84
84
84
84
85
85
85
C. Material contracts
D. Exchange controls
E. Taxation
F. Dividends and paying agents
G. Statement by experts
H. Documents on display
I. Subsidiary information
Item 11.
Item 12.
Quantitative and Qualitative Disclosures About Market Risk
Description of Securities Other than Equity Securities
A. Debt securities
B. Warrants and rights
C. Other securities
D. American depositary shares
PART II
Item 13.
Item 14.
Item 15.
Item 16A.
Item 16B.
Item 16C.
Item 16D.
Item 16E.
Item 16F.
Item 16G.
Item 16H.
PART III
Item 17.
Item 18.
Item 19.
Defaults, Dividend Arrearages and Delinquencies
Material Modification to the Rights of Security Holders and Use of Proceeds
Controls and Procedures
Audit Committee Financial Expert
Code of Ethics
Principal Accountant Fees and Services
A. Audit Fees
B. Audit-related Fees
C. Tax Fees
D. All Other Fees
E. Audit Committee Pre-Approval Policies and Procedures
F. Work performed by Full-time, Permanent Employees of Principal Accountant
Exemptions from the Listing Standards for Audit Committees
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Changes in Registrant's Certifying Accountant
Corporate Governance
Mine Safety Disclosure
Financial Statements
Financial Statements
Exhibits
93
95
95
102
102
102
102
102
104
104
104
104
104
105
105
105
106
106
106
106
106
106
106
107
107
107
107
107
107
107
108
108
160
PART I
Item 1.
Identity of Directors, Senior Management and Advisers
A.
Directors and senior management
Not applicable.
B.
Advisers
Not applicable.
C.
Auditors
Not applicable.
Item 2.
Offer Statistics and Expected Timetable
A.
Offer statistics
Not applicable.
B.
Method and expected timetable
Not applicable.
Item 3.
Key Information
A.
Selected financial data
The consolidated statement of comprehensive income (loss) data set forth in this Item 3.A with respect to the years ended December 31, 2013, 2012 and 2011
and the consolidated statement of financial position data as at December 31, 2013 and 2012 have been derived from the audited consolidated financial
statements listed in Item 18, which have been prepared in accordance with International Financial Reporting Standards ("IFRS"), as issued by the
International Accounting Standards Board ("IASB"). The consolidated statement of financial position data as at December 31, 2011 set forth in this Item 3.A
have been derived from our previous consolidated financial statements not included herein, and have also been prepared in accordance with IFRS, as issued
by the IASB. The selected financial data should be read in conjunction with our audited consolidated financial statements and the related notes included
elsewhere in this annual report on Form 20-F, as well as "Item 5. – Operating and Financial Review and Prospects" of this annual report on Form 20-F.
1
Consolidated Statements of Comprehensive Income (Loss)
(in thousands of US dollars, except share and per share data)
Derived from consolidated financial statements prepared in accordance with IFRS
Revenues
Sales
License fees and other
Operating expenses
Cost of sales
Research and development costs, net of refundable tax credits and
grants
Selling, general and administrative expenses
Loss from operations
Finance income
Finance costs
Net finance income
Loss before income taxes
Income tax expense
Net loss from continuing operations
Net income (loss) from discontinued operations
Net income (loss)
Other comprehensive income (loss):
Items that may be reclassified subsequently to profit or loss:
Foreign currency translation adjustments
Items that will not be reclassified to profit or loss:
Actuarial gain (loss) on defined benefit plans
Comprehensive income (loss)
Net loss per share (basic and diluted) from continuing operations
Net income (loss) (basic and diluted) from discontinued operations
Net income (loss) (basic and diluted) per share
Weighted average number of shares outstanding:
Basic
Diluted
Years ended December 31,
2013
$
2012
$
2011
$
96
6,079
6,175
51
21,284
12,316
33,651
(27,476)
1,748
(1,512)
236
(27,240)
—
(27,240)
34,055
6,815
1,073
2,346
10,234
(0.92)
1.16
0.24
834
1,219
2,053
591
20,592
10,606
31,789
(29,736)
6,974
(382)
6,592
(23,144)
—
(23,144)
2,732
(20,412)
(504)
(3,705)
(24,621)
(1.17)
0.14
(1.03)
250
4,455
4,705
212
24,245
11,955
36,412
(31,707)
6,239
(8)
6,231
(25,476)
(1,104)
(26,580)
(487)
(27,067)
(789)
(1,335)
(29,191)
(1.69)
(0.03)
(1.72)
29,476,455
29,476,455
19,775,073
19,806,687
15,751,331
15,751,331
2
2013
$
As at December 31,
2012
$
2011
$
43,202
865
59,196
18,010
134,101
17,064
39,521
826
67,655
6,176
122,791
(6,695)
46,881
806
75,369
9,204
101,884
(4,546)
Consolidated Statement of Financial Position Information
(in thousands of US dollars)
Derived from consolidated financial statements prepared in accordance with IFRS
Cash and cash equivalents
Restricted cash equivalents
Total assets
Warrant liability (current and non-current)
Share capital
Shareholders' equity (deficiency)
B.
Capitalization and indebtedness
Not applicable.
C.
Reasons for the offer and use of proceeds
Not applicable.
D.
Risk factors
Risks Relating to Us and Our Business
Investments in biopharmaceutical companies are generally considered to be speculative.
The prospects for companies operating in the biopharmaceutical industry may generally be considered to be uncertain, given the very nature of the industry
and, accordingly, investments in biopharmaceutical companies should be considered to be speculative.
We have a history of operating losses and we may never achieve or maintain operating profitability.
Our product candidates remain at the development stage, and we have incurred substantial expenses in our efforts to develop products. Consequently, we have
incurred recurrent operating losses and, as disclosed in our audited consolidated financial statements as at December 31, 2013 and December 31, 2012 and for
the years ended December 31, 2013, 2012 and 2011, we had an accumulated deficit of $203.9 million as at December 31, 2013. Our operating losses have
adversely impacted, and will continue to adversely impact, our working capital, total assets and shareholders' equity (deficiency). We do not expect to reach
operating profitability in the immediate future, and our operating expenses are likely to continue to represent a significant component of our overall cost
profile as we continue our R&D and clinical study programs and seek regulatory approval for our product candidates. Even if we succeed in developing,
acquiring or in-licensing new commercial products, we could incur additional operating losses for at least the next several years. If we do not ultimately
generate sufficient revenue from commercialized products and achieve or maintain operating profitability, an investment in our Common Shares could result
in a significant or total loss.
Our clinical trials may not yield results which will enable us to obtain regulatory approval for our products, and a setback in any of our clinical trials
would likely cause a drop in the price of our Common Shares.
We will only receive regulatory approval for a product candidate if we can demonstrate in carefully designed and conducted clinical trials that the product
candidate is both safe and effective. We do not know whether our pending or any future clinical trials will demonstrate sufficient safety and efficacy to obtain
the requisite regulatory approvals or will result in marketable products. Unfavorable data from those studies could result in the withdrawal of marketing
approval for approved products or an extension of the review period for developmental products. Clinical trials are inherently lengthy, complex, expensive
and uncertain processes and have a high risk of failure. It typically takes many years to complete testing, and failure can occur at any stage of testing. Results
attained in preclinical testing and early clinical studies, or trials, may not be indicative of results that are obtained in later studies.
3
None of our current product candidates has to date received regulatory approval for its intended commercial sale. We cannot market a pharmaceutical product
in any jurisdiction until it has completed rigorous preclinical testing and clinical trials and passed such jurisdiction's extensive regulatory approval process. In
general, significant R&D and clinical studies are required to demonstrate the safety and efficacy of our product candidates before we can submit regulatory
applications. Preclinical testing and clinical development are long, expensive and uncertain processes. Preparing, submitting and advancing applications for
regulatory approval is complex, expensive and time-consuming and entails significant uncertainty. Data obtained from preclinical and clinical tests can be
interpreted in different ways, which could delay, limit or prevent regulatory approval. It may take us many years to complete the testing of our product
candidates and failure can occur at any stage of this process. In addition, we have limited experience in conducting and managing the clinical trials necessary
to obtain regulatory approval in the U.S., in Canada and abroad and, accordingly, may encounter unforeseen problems and delays in the approval process.
Though we may engage a contract research organization (a "CRO") with experience in conducting regulatory trials, errors in the conduct, monitoring and/or
auditing could invalidate the results from a regulatory perspective. Even if a product candidate is approved by the United States Food and Drug
Administration (the "FDA"), the Canadian Therapeutic Products Directorate or any other regulatory authority, we may not obtain approval for an indication
whose market is large enough to recover our investment in that product candidate. In addition, there can be no assurance that we will ever obtain all or any
required regulatory approvals for any of our product candidates.
We are currently developing our product candidates based on R&D activities, preclinical testing and clinical trials 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
successfully and on a timely basis, we may become non-competitive and unable to recover the R&D and other expenses we incur to develop and test new
products.
Interim results of preclinical or clinical studies do not necessarily predict their final results, and acceptable results in early studies might not be obtained in
later studies. Safety signals detected during clinical studies and preclinical animal studies may require us to perform additional studies, which could delay the
development of the drug or lead to a decision to discontinue development of the drug. Product candidates in the later stages of clinical development may fail
to show the desired safety and efficacy traits despite positive results in initial clinical testing. Results from earlier studies may not be indicative of results from
future clinical trials and the risk remains that a pivotal program may generate efficacy data that will be insufficient for the approval of the drug, or may raise
safety concerns that may prevent approval of the drug. Interpretation of the prior preclinical and clinical safety and efficacy data of our product candidates
may be flawed and there can be no assurance that safety and/or efficacy concerns from the prior data were overlooked or misinterpreted, which in subsequent,
larger studies appear and prevent approval of such product candidates.
Furthermore, we may suffer significant setbacks in advanced clinical trials, even after promising results in earlier studies. Based on results at any stage of
clinical trials, we may decide to repeat or redesign a trial or discontinue development of one or more of our product candidates. Further, actual results may
vary once the final and quality-controlled verification of data and analyses has been completed. If we fail to adequately demonstrate the safety and efficacy of
our products under development, we will not be able to obtain the required regulatory approvals to commercialize our product candidates.
Clinical trials are subject to continuing oversight by governmental regulatory authorities and institutional review boards and must:
• meet the requirements of these authorities;
• meet the requirements for informed consent; and
• meet the requirements for good clinical practices.
We may not be able to comply with these requirements in respect of one or more of our product candidates.
In addition, we rely on third parties, including CROs and outside consultants, to assist us in managing and monitoring clinical trials. Our reliance on these
third parties may result in delays in completing, or in failing to complete, these trials if one or more third parties fails to perform with the speed and level of
competence we expect.
A failure in the development of any one of our programs or product candidates could have a negative impact on the development of the others. Setbacks in
any phase of the clinical development of our product candidates would have an adverse financial impact (including with respect to any agreements and
partnerships that may exist between us and other entities), could jeopardize regulatory approval and would likely cause a drop in the price of our securities.
If we are unable to successfully complete our clinical trial programs, or if such clinical trials take longer to complete than we project, our ability to
execute our current business strategy will be adversely affected.
4
Whether or not and how quickly we complete clinical trials is dependent in part upon the rate at which we are able to engage clinical trial sites and, thereafter,
the rate of enrollment of patients, and the rate we collect, clean, lock and analyze the clinical trial database. Patient enrollment is a function of many factors,
including the design of the protocol, the size of the patient population, the proximity of patients to and availability of clinical sites, the eligibility criteria for
the study, the perceived risks and benefits of the drug under study and of the control drug, if any, the efforts to facilitate timely enrollment in clinical trials, the
patient referral practices of physicians, the existence of competitive clinical trials, and whether existing or new drugs are approved for the indication we are
studying. Certain clinical trials are designed to continue until a pre-determined number of events have occurred to the patients enrolled. Such trials are subject
to delays stemming from patient withdrawal and from lower than expected event rates and may also incur increased costs if enrollment is increased in order to
achieve the desired number of events. If we experience delays in identifying and contracting with sites and/or in patient enrollment in our clinical trial
programs, we may incur additional costs and delays in our development programs, and may not be able to complete our clinical trials on a cost-effective or
timely basis. In addition, conducting multi-national studies adds another level of complexity and risk as we are subject to events affecting countries outside
Canada. Moreover, negative or inconclusive results from the clinical trials we conduct or adverse medical events could cause us to have to repeat or terminate
the clinical trials. Accordingly, we may not be able to complete the clinical trials within an acceptable time frame, if at all. If we or any third party have
difficulty enrolling a sufficient number of patients to conduct our clinical trials as planned, we may need to delay or terminate ongoing clinical trials.
Additionally, we have limited experience in filing a New Drug Application ("NDA") or similar application for approval in the U.S. or in any country for our
current product candidates, which may result in a delay in, or the rejection of, our filing of an NDA or similar application. During the drug development
process, regulatory agencies will typically ask questions of drug sponsors. While we endeavor to answer all such questions in a timely fashion, or in the NDA
filing, some questions may not be answered by the time we file our NDA. Unless the FDA waives the requirement to answer any such unanswered questions,
submission of an NDA may be delayed and acceptance of an NDA may ultimately be rejected.
If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our product candidates, we
may not be successful in commercializing MACRILEN™ or any other product candidate if and when they are approved.
We currently have a lean sales and marketing staff and have limited recent experience in the sale or marketing of pharmaceutical or biopharmaceutical
products. To achieve commercial success for any approved product, including, in the near and medium term, MACRILEN™, we must either develop a sales
and marketing organization or outsource these functions to third parties. We currently plan to establish our own sales and marketing capabilities and promote
MACRILEN™ with a targeted sales force if and when it is ultimately approved. There are risks involved with establishing our own sales and marketing
capabilities and entering into arrangements with third parties to perform these services. For example, recruiting and training a sales force is expensive and
time-consuming and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish
marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses.
This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.
Factors that may inhibit our efforts to commercialize our products on our own include:
•
•
•
•
our inability to recruit, train and retain adequate numbers of effective sales and marketing personnel and representatives;
the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe any future products;
the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more
extensive product lines; and
unforeseen costs and expenses associated with creating an independent sales and marketing organization.
If we enter into arrangements with third parties to perform sales and marketing services, our product revenues or the profitability of these product revenues to
us are likely to be lower than if we were to market and sell any products that we develop ourselves. In addition, we may not be successful in entering into
arrangements with third parties to sell and market our product candidates or may be unable to do so on terms that are favorable to us. We likely will have little
control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively. If we do
not establish sales and marketing capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in
commercializing our product candidates and our business, financial condition and results of operations will be materially adversely affected.
5
We may not be able to successfully integrate acquired businesses or in-licensed products.
Future acquisitions or in-licensed products may not be successfully integrated. The failure to successfully integrate the personnel and operations of businesses
that we may acquire or of products that we may in-license in the future with our operations, business and products could have a material adverse effect on our
operations and results.
We are and will be subject to stringent ongoing government regulation for our products and our product candidates, even if we obtain regulatory
approvals for the latter.
The manufacture, marketing and sale of our products and product candidates are and will be subject to strict and ongoing regulation, even if regulatory
authorities approve any of the latter. Compliance with such regulation will be expensive and consume substantial financial and management resources. For
example, an approval for a product may be conditioned on our agreement to conduct costly post-marketing follow-up studies to monitor the safety or efficacy
of the products. In addition, as a clinical experience with a drug expands after approval because the drug is used by a greater number and more diverse group
of patients than during clinical trials, side effects or other problems may be observed after approval that were not observed or anticipated during pre-approval
clinical trials. In such a case, a regulatory authority could restrict the indications for which the product may be sold or revoke the product's regulatory
approval.
We and our contract manufacturers will be required to comply with applicable current Good Manufacturing Practice ("cGMP") regulations for the
manufacture of our products. These regulations include requirements relating to quality assurance, as well as the corresponding maintenance of rigorous
records and documentation. Manufacturing facilities must be approved before we can use them in the commercial manufacturing of our products and are
subject to subsequent periodic inspection by regulatory authorities. In addition, material changes in the methods of manufacturing or changes in the suppliers
of raw materials are subject to further regulatory review and approval.
If we, or if any future marketing collaborators or contract manufacturers, fail to comply with applicable regulatory requirements, we may be subject to
sanctions including fines, product recalls or seizures and related publicity requirements, injunctions, total or partial suspension of production, civil penalties,
suspension or withdrawals of previously granted regulatory approvals, warning or untitled letters, refusal to approve pending applications for marketing
approval of new products or of supplements to approved applications, import or export bans or restrictions, and criminal prosecution and penalties. Any of
these penalties could delay or prevent the promotion, marketing or sale of our products and product candidates.
If our products do not gain market acceptance, we may be unable to generate significant revenues.
Even if our products are approved for commercialization, they may not be successful in the marketplace. Market acceptance of any of our products will
depend on a number of factors including, but not limited to:
•
•
•
•
•
•
•
demonstration of clinical efficacy and safety;
the prevalence and severity of any adverse side effects;
limitations or warnings contained in the product's approved labeling;
availability of alternative treatments for the indications we target;
the advantages and disadvantages of our products relative to current or alternative treatments;
the availability of acceptable pricing and adequate third-party reimbursement; and
the effectiveness of marketing and distribution methods for the products.
If our products do not gain market acceptance among physicians, patients, healthcare payers and others in the medical community, who may not accept or
utilize our products, our ability to generate significant revenues from our products would be limited and our financial condition could be materially adversely
affected. In addition, if we fail to further penetrate our core markets and existing geographic markets or successfully expand our business into new markets,
the growth in sales of our products, along with our operating results, could be negatively impacted.
Our ability to further penetrate our core markets and existing geographic markets in which we compete or to successfully expand our business into additional
countries in Europe, Asia or elsewhere is subject to numerous factors, many of which are beyond our control. Our products, if successfully developed, may
compete with a number of drugs, therapies, products and tests currently manufactured and marketed by major pharmaceutical and other biotechnology
companies. Our products may also compete with new products currently under development by others or with products which may be less expensive than our
products. There can be no assurance that our efforts to increase market penetration in our core markets and existing geographic markets will be successful.
Our failure to do so could have an adverse effect on our operating results and would likely cause a drop in the price of our securities.
6
We may require significant additional financing, and we may not have access to sufficient capital.
We may require additional capital to pursue planned clinical trials, regulatory approvals, as well as further R&D and marketing efforts for our product
candidates and potential products. Except as expressly described in this annual report on Form 20-F, we do not anticipate generating significant revenues from
operations in the near future and we currently have no committed sources of capital.
We may attempt to raise additional funds through public or private financings, collaborations with other pharmaceutical companies or from other sources,
including, without limitation, through at-the-market offerings and issuances of Common Shares. Additional funding may not be available on terms which are
acceptable to us. If adequate funding is not available to us on reasonable terms, we may need to delay, reduce or eliminate one or more of our product
development programs or obtain funds on terms less favorable than we would otherwise accept. To the extent that additional capital is raised through the sale
of equity securities or securities convertible into or exchangeable for equity securities (collectively, "Convertible Securities"), the issuance of those securities
could result in dilution to our shareholders. Moreover, the incurrence of debt financing could result in a substantial portion of our future operating cash flow,
if any, being dedicated to the payment of principal and interest on such indebtedness and could impose restrictions on our operations. This could render us
more vulnerable to competitive pressures and economic downturns.
We anticipate that our existing working capital, including the proceeds from any sale of Common Shares or other securities and anticipated revenues, will be
sufficient to fund our development programs, clinical trials and other operating expenses for the near future. However, our future capital requirements are
substantial and may increase beyond our current expectations depending on many factors including:
•
•
•
•
•
•
•
the duration and results of our clinical trials for our various product candidates going forward;
unexpected delays or developments in seeking regulatory approvals;
the time and cost involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;
other unexpected developments encountered in implementing our business development and commercialization strategies;
the potential addition of commercialized products to our pipeline;
the outcome of litigation, if any; and
further arrangements, if any, with collaborators.
In addition, global economic and market conditions as well as future developments in the credit and capital markets may make it even more difficult for us to
raise additional financing in the future.
If we are unsuccessful in increasing our revenues and/or raising additional funding, we may possibly cease to continue operating as we currently do.
We have had sustained losses, accumulated deficits and negative cash flows from operations since our inception and we expect that this will continue for the
foreseeable future.
Although our audited consolidated financial statements as at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012
and 2011 have been prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities during the normal course of
operations, our ability to continue as a going concern is dependent on the successful execution of our business plan, which will require an increase in revenue
and/or additional funding to be provided by potential investors as well as non-traditional sources of financing. Although we stated in our audited consolidated
financial statements as at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011 that management believed
that the Company had, as at December 31, 2013, sufficient financial resources to fund planned expenditures and other working capital needs for at least, but
not limited to, the 12-month period following such date, there can be no assurance that management will be able to reiterate such belief in the future,
particularly in the event that we do not or are unable to raise additional capital, as we do not expect our operations to generate sufficient cash flow to fund our
obligations.
Additional funding may be in the form of debt or equity or a hybrid instrument depending on our needs, those of investors and market conditions. Depending
on the prevailing global economic and credit market conditions, we may not be able to raise additional cash resources through these traditional sources of
financing. Although we may also pursue non-traditional sources of financing with third parties, the global credit markets may adversely affect the ability of
potential third parties to pursue such transactions with us. Accordingly, as a result of the foregoing, we continue to review traditional sources of financing,
such as private and public debt or various equity financing alternatives, as well as other alternatives to enhance shareholder value including, but not limited to,
non-traditional sources of financing, such as alliances with strategic partners, the sale of assets or licensing of our technology or intellectual property, a
combination of operating and related initiatives or a substantial reorganization of our business.
7
There can be no assurance that we will achieve profitability or positive cash flows or be able to obtain additional funding or that, if obtained, they will be
sufficient, or whether any other initiatives will be successful, such that we may continue as a going concern. There could also be material uncertainties related
to certain adverse conditions and events that could impact our ability to remain a going concern.
We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications for
which there may be a greater likelihood of success.
Because we have limited financial and managerial resources, we are currently focusing our efforts on our later-stage clinical research programs, zoptarelin
doxorubicin and macimorelin, and we are doing so for specific indications. As a result, we may forego or delay pursuit of opportunities with other product
candidates or for other indications for which there may be a greater likelihood of success or may prove to have greater commercial potential. Notwithstanding
our investment to date and anticipated future expenditures on zoptarelin doxorubicin, macimorelin and our earlier-stage programs, we have not yet developed,
and may never successfully develop, any marketed treatments using these products. Research programs to identify new product candidates or pursue
alternative indications for current product candidates require substantial technical, financial and human resources. These activities may initially show promise
in identifying potential product candidates or indications, yet fail to yield product candidates or indications for further clinical development.
We may not achieve our projected development goals in the time-frames we announce and expect.
We set goals and make public statements regarding the timing of the accomplishment of objectives material to our success, such as the commencement,
enrollment and anticipated completion of clinical trials, anticipated regulatory submission and approval dates and time of product launch. The actual timing of
these events can vary dramatically due to factors such as delays or failures in our clinical trials, the uncertainties inherent in the regulatory approval process
and delays in achieving manufacturing or marketing arrangements sufficient to commercialize our products. There can be no assurance that our clinical trials
will be completed, that we will make regulatory submissions or receive regulatory approvals as planned or that we will be able to adhere to our current
schedule for the launch of any of our products. If we fail to achieve one or more of these milestones as planned, the price of our securities would likely
decline.
If we fail to obtain acceptable prices or adequate reimbursement for our products, our ability to generate revenues will be diminished.
The ability for us and/or our partners to successfully commercialize our products will depend significantly on our ability to obtain acceptable prices and the
availability of reimbursement to the patient from third-party payers, such as governmental and private insurance plans. These third-party payers frequently
require companies to provide predetermined discounts from list prices, and they are increasingly challenging the prices charged for pharmaceuticals and other
medical products. Our products may not be considered cost-effective, and reimbursement to the patient may not be available or sufficient to allow us or our
partners to sell our products on a competitive basis. It may not be possible to negotiate favorable reimbursement rates for our products.
In addition, the continuing efforts of third-party payers to contain or reduce the costs of healthcare through various means may limit our commercial
opportunity and reduce any associated revenue and profits. We expect proposals to implement similar government control to continue. In addition, increasing
emphasis on managed care will continue to put pressure on the pricing of pharmaceutical and biopharmaceutical products. Cost control initiatives could
decrease the price that we or any current or potential collaborators could receive for any of our products and could adversely affect our profitability. In
addition, in the U.S., in Canada and in many other countries, pricing and/or profitability of some or all prescription pharmaceuticals and biopharmaceuticals
are subject to government control.
If we fail to obtain acceptable prices or an adequate level of reimbursement for our products, the sales of our products would be adversely affected or there
may be no commercially viable market for our products.
Competition in our targeted markets is intense, and development by other companies could render our products or technologies non-competitive.
The biopharmaceutical field is highly competitive. New products developed by other companies in the industry could render our products or technologies
non-competitive. Competitors are developing and testing products and technologies that would compete with the products that we are developing. Some of
these products may be more effective or have an entirely different approach or means of accomplishing the desired effect than our products. We expect
competition from pharmaceutical and biopharmaceutical companies and academic research institutions to continue to increase over time. Many of our
competitors and potential competitors have substantially greater product development capabilities and financial, scientific, marketing and
8
human resources than we do. Our competitors may succeed in developing products earlier and in obtaining regulatory approvals and patent protection for
such products more rapidly than we can or at a lower price.
We may not obtain adequate protection for our products through our intellectual property.
We rely heavily on our proprietary information in developing and manufacturing our product candidates. Our success depends, in large part, on our ability to
protect our competitive position through patents, trade secrets, trademarks and other intellectual property rights. The patent positions of pharmaceutical and
biopharmaceutical firms, including us, are uncertain and involve complex questions of law and fact for which important legal issues remain unresolved.
Applications for patents and trademarks in Canada, the U.S. and in other foreign territories have been filed and are being actively pursued by us. Pending
patent applications may not result in the issuance of patents and we may not be able to obtain additional issued patents relating to our technology or products.
Even if issued, patents to us or our licensing partners may be challenged, narrowed, invalidated, held to be unenforceable or circumvented, which could limit
our ability to stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products. Changes in
either patent laws or in interpretations of patent laws in the U.S. and other countries may diminish the value of our intellectual property or narrow the scope of
our patent protection. The patents issued or to be issued to us may not provide us with any competitive advantage or protect us against competitors with
similar technology. In addition, it is possible that third parties with products that are very similar to ours will circumvent our patents by means of alternate
designs or processes. We may have to rely on method of use and new formulation protection for our compounds in development, and any resulting products,
which may not confer the same protection as claims to compounds per se.
In addition, our patents may be challenged by third parties in patent litigation, which is becoming widespread in the biopharmaceutical industry. There may be
prior art of which we are not aware that may affect the validity or enforceability of a patent claim. There may also be prior art of which we are aware, but
which we do not believe affects the validity or enforceability of a claim, which may, nonetheless, ultimately be found to affect the validity or enforceability of
a claim. No assurance can be given that our patents would, if challenged, be held by a court to be valid or enforceable or that a competitor's technology or
product would be found by a court to infringe our patents. Our granted patents could also be challenged and revoked in U.S. post-grant proceedings as well as
in opposition or nullity proceedings in certain countries outside the U.S. In addition, we may be required to disclaim part of the term of certain patents.
Patent applications relating to or affecting our business have been filed by a number of pharmaceutical and biopharmaceutical companies and academic
institutions. A number of the technologies in these applications or patents may conflict with our technologies, patents or patent applications, and any such
conflict could reduce the scope of patent protection which we could otherwise obtain. Because patent applications in the U.S. and many other jurisdictions are
typically not published until eighteen months after their first effective filing date, or in some cases not at all, and because publications of discoveries in the
scientific literature often lag behind actual discoveries, neither we nor our licensing partners can be certain that we or they were the first to make the
inventions claimed in our or their issued patents or pending patent applications, or that we or they were the first to file for protection of the inventions set
forth in these patent applications. If a third party has also filed a patent application in the U.S. covering our product candidates or a similar invention, we may
have to participate in adversarial proceedings, such as interferences and deviation proceedings, before the United States Patent and Trademark Office to
determine which party is entitled to a U.S. patent claiming the disputed invention. The costs of these proceedings could be substantial and it is possible that
our efforts could be unsuccessful, resulting in a loss of our U.S. patent position.
In addition to patent protection, we may utilize orphan drug regulations, pediatric exclusivity or other provisions of the United States Food, Drug and
Cosmetic Act of 1938, as amended, such as new chemical entity exclusivity or new formulation exclusivity, to provide market exclusivity for a drug
candidate. Orphan drug regulations provide incentives to pharmaceutical and biotechnology companies to develop and manufacture drugs for the treatment of
rare diseases, currently defined as diseases that exist in fewer than 200,000 individuals in the U.S., or, diseases that affect more than 200,000 individuals in
the U.S. but that the sponsor does not realistically anticipate will generate a net profit. Under these provisions, a manufacturer of a designated orphan drug can
seek tax benefits, and the holder of the first FDA approval of a designated orphan product will be granted a seven-year period of marketing exclusivity for
such FDA-approved orphan product. In the U.S., the FDA has the authority to grant additional data protection for approved drugs where the sponsor conducts
specified testing in pediatric or adolescent populations. If granted, this pediatric exclusivity provides an additional six months which are added to the term of
data protection as well as to the term of any relevant patents, to the extent these protections have not already expired. We may also seek to utilize market
exclusivities in other territories, such as in the European Union (the "EU"). We cannot assure that any of our drug candidates will obtain such orphan drug
designation, pediatric exclusivity, new chemical entity exclusivity or any other market exclusivity in the U.S., the EU or any other territory, or that we will be
the first to receive the respective regulatory approval for such drugs so as to be eligible for any market exclusivity protection.
9
We also rely on trade secrets and proprietary know-how to protect our intellectual property. If we are unable to protect the confidentiality of our proprietary
information and know-how, the value of our technology and products could be adversely affected. We seek to protect our unpatented proprietary information
in part by requiring our employees, consultants, outside scientific collaborators and sponsored researchers and other advisors to enter into confidentiality
agreements. These agreements provide that all confidential information developed or made known to the individual during the course of the individual's
relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of our employees, the agreements
provide that all of the technology which is conceived by the individual during the course of employment is our exclusive property. These agreements may not
provide meaningful protection or adequate remedies in the event of unauthorized use or disclosure of our proprietary information. In addition, it is possible
that third parties could independently develop proprietary information and techniques substantially similar to ours or otherwise gain access to our trade
secrets. If we are unable to protect the confidentiality of our proprietary information and know-how, competitors may be able to use this information to
develop products that compete with our products and technologies, which could adversely impact our business.
We currently have the right to use certain patents and technologies under license agreements with third parties. Our failure to comply with the requirements of
material license agreements could result in the termination of such agreements, which could cause us to terminate the related development program and cause
a complete loss of our investment in that program.
As a result of the foregoing factors, we may not be able to rely on our intellectual property to protect our products in the marketplace.
We may infringe the intellectual property rights of others.
Our commercial success depends significantly on our ability to operate without infringing the patents and other intellectual property rights of third parties.
There could be issued patents of which we are not aware that our products or methods may be found to infringe, or patents of which we are aware and believe
we do not infringe but which we may ultimately be found to infringe. Moreover, patent applications and their underlying discoveries are in some cases
maintained in secrecy until patents are issued. Because patents can take many years to issue, there may be currently pending applications of which we are
unaware that may later result in issued patents that our products or technologies are found to infringe. Moreover, there may be published pending applications
that do not currently include a claim covering our products or technologies but which nonetheless provide support for a later drafted claim that, if issued, our
products or technologies could be found to infringe.
If we infringe or are alleged to infringe intellectual property rights of third parties, it will adversely affect our business. Our research, development and
commercialization activities, as well as any product candidates or products resulting from these activities, may infringe or be accused of infringing one or
more claims of an issued patent or may fall within the scope of one or more claims in a published patent application that may subsequently be issued and to
which we do not hold a license or other rights. Third parties may own or control these patents or patent applications in the U.S. and abroad. These third
parties could bring claims against us or our collaborators that would cause us to incur substantial expenses and, if successful against us, could cause us to pay
substantial damages. Further, if a patent infringement suit were brought against us or our collaborators, we or they could be forced to stop or delay research,
development, manufacturing or sales of the product or product candidate that is the subject of the suit.
The biopharmaceutical industry has produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover
various types of products. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. In the event of
infringement or violation of another party's patent or other intellectual property rights, we may not be able to enter into licensing arrangements or make other
arrangements at a reasonable cost. Any inability to secure licenses or alternative technology could result in delays in the introduction of our products or lead
to prohibition of the manufacture or sale of products by us or our partners and collaborators.
Patent litigation is costly and time consuming and may subject us to liabilities.
Our involvement in any patent litigation, interference, opposition or other administrative proceedings will likely cause us to incur substantial expenses, and
the efforts of our technical and management personnel will be significantly diverted. In addition, an adverse determination in litigation could subject us to
significant liabilities.
10
We may not obtain trademark registrations for our product candidates.
We have filed applications for trademark registrations in connection with our product candidates in various jurisdictions, including the U.S. We intend to file
further applications for other possible trademarks for our product candidates. No assurance can be given that any of our trademark applications will be
registered in the U.S. or elsewhere, or that the use of any registered or unregistered trademarks will confer a competitive advantage in the marketplace.
Furthermore, even if we are successful in our trademark registrations, the FDA and regulatory authorities in other countries have their own process for drug
nomenclature and their own views concerning appropriate proprietary names. The FDA and other regulatory authorities also have the power, even after
granting market approval, to request a company to reconsider the name for a product because of evidence of confusion in the marketplace. No assurance can
be given that the FDA or any other regulatory authority will approve of any of our trademarks or will not request reconsideration of one of our trademarks at
some time in the future. The loss, abandonment, or cancellation of any of our trademarks or trademark applications could negatively affect the success of the
product candidates to which they relate.
Our revenues and expenses may fluctuate significantly, and any failure to meet financial expectations may disappoint securities analysts or investors and
result in a decline in the price of our securities.
We have a history of operating losses. Our revenues and expenses have fluctuated in the past and may continue to do so in the future. These fluctuations could
cause our share price to decline. Some of the factors that could cause our revenues and expenses to fluctuate include but are not limited to:
•
•
•
•
•
•
•
•
•
•
the inability to complete product development in a timely manner that results in a failure or delay in receiving the required regulatory approvals to
commercialize our product candidates;
the timing of regulatory submissions and approvals;
the timing and willingness of any current or future collaborators to invest the resources necessary to commercialize our product candidates;
the revenue available from royalties derived from our strategic partners;
the nature and timing of licensing fees revenues;
the nature and timing of tax credits and grants (R&D);
the outcome of litigation, if any;
changes in foreign currency fluctuations;
the timing of achievement and the receipt of milestone payments from current or future collaborators; and
failure to enter into new or the expiration or termination of current agreements with collaborators.
Due to fluctuations in our revenues and expenses, we believe that period-to-period comparisons of our results of operations are not necessarily indicative of
our future performance. It is possible that in some future quarter or quarters, our revenues and expenses will be above or below the expectations of securities
analysts or investors. In this case, the price of our securities could fluctuate significantly or decline.
We are currently dependent on certain strategic partners and may enter into future collaborations for the R&D of our product candidates.
We are currently dependent on certain strategic partners and may enter into future collaborations for the R&D of our product candidates. Our arrangements
with these strategic partners may not provide us with the benefits we expect and may expose us to a number of risks.
We are dependent on, and rely upon, strategic partners to perform various functions related to our business, including, but not limited to, the R&D of some of
our product candidates. Our reliance on these relationships poses a number of risks.
We may not realize the contemplated benefits of such agreements nor can we be certain that any of these parties will fulfill their obligations in a manner
which maximizes our revenue. These arrangements may also require us to transfer certain material rights or issue our equity, voting or other securities to
corporate partners, licensees and others. Any license or sublicense of our commercial rights may reduce our product revenue.
These agreements also create certain risks. The occurrence of any of the following or other events may delay product development or impair
commercialization of our products:
•
not all of our strategic partners are contractually prohibited from developing or commercializing, either alone or with others, products and services that
are similar to or competitive with our product candidates and, with respect to our strategic partnership agreements that do contain such contractual
prohibitions or restrictions, prohibitions or restrictions do not always apply to our partners' affiliates and they may elect to pursue the development of any
additional product
11
candidates and pursue technologies or products either on their own or in collaboration with other parties, including our competitors, whose technologies
or products may be competitive with ours;
our strategic partners may under-fund or fail to commit sufficient resources to marketing, distribution or other development of our products;
we may not be able to renew such agreements;
our strategic partners may not properly maintain or defend certain intellectual property rights that may be important to the commercialization of our
products;
our strategic partners may encounter conflicts of interest, changes in business strategy or other issues which could adversely affect their willingness or
ability to fulfill their obligations to us (for example, pharmaceutical companies historically have re-evaluated their priorities following mergers and
consolidations, which have been common in recent years in this industry);
delays in, or failures to achieve, scale-up to commercial quantities, or changes to current raw material suppliers or product manufacturers (whether the
change is attributable to us or the supplier or manufacturer) could delay clinical studies, regulatory submissions and commercialization of our product
candidates; and
disputes may arise between us and our strategic partners that could result in the delay or termination of the development or commercialization of our
product candidates, resulting in litigation or arbitration that could be time-consuming and expensive, or causing our strategic partners to act in their own
self-interest and not in our interest or those of our shareholders or other stakeholders.
•
•
•
•
•
•
In addition, our strategic partners can terminate our agreements with them for a number of reasons based on the terms of the individual agreements that we
have entered into with them. If one or more of these agreements were to be terminated, we would be required to devote additional resources to developing and
commercializing our product candidates, seek a new partner or abandon this product candidate which would likely cause a drop in the price of our securities.
We have entered into important strategic partnership agreements relating to certain of our product candidates for various indications. Detailed information on
our research and collaboration agreements is available in our various reports and disclosure documents filed with the Canadian securities regulatory
authorities and filed with or furnished to the United States Securities and Exchange Commission ("SEC"), including the documents incorporated by reference
into this annual report on Form 20-F. For example, on April 10, 2013, we announced that we had entered into a co-development and profit-sharing agreement
with Ergomed Clinical Research Ltd. ("Ergomed") for zoptarelin doxorubicin in endometrial cancer. Ergomed was selected as the contract clinical
development organization to conduct the multicenter, multinational, randomized Phase 3 "ZoptEC" (Zoptarelin doxorubicin in Endometrial Cancer) trial with
zoptarelin doxorubicin in endometrial cancer. Under the terms of this agreement, Ergomed will assume 30% (up to $10 million) of the clinical and regulatory
costs for our Phase 3 ZoptEC trial of zoptarelin doxorubicin in endometrial cancer, which are currently estimated at approximately $30 million over the
course of the study, and Ergomed will receive its return on investment based on an agreed single digit percentage of any net income received by us for
zoptarelin doxorubicin in this indication, up to a specified maximum amount.
We have also entered into a variety of collaboration agreements with various universities and institutes under which we are obligated to support some of the
research expenses incurred by the university laboratories and pay royalties on future sales of the products. In turn, we have retained exclusive rights for the
worldwide exploitation of results generated during the collaborations.
We rely on third parties to conduct, supervise and monitor our clinical trials, and those third parties may not perform satisfactorily.
We rely on third parties such as CROs, medical institutions and clinical investigators to enroll qualified patients and conduct, supervise and monitor our
clinical trials. Our reliance on these third parties for clinical development activities reduces our control over these activities. Our reliance on these third
parties, however, does not relieve us of our regulatory responsibilities, including ensuring that our clinical trials are conducted in accordance with Good
Clinical Practice guidelines and the investigational plan and protocols contained in an Investigational New Drug ("IND") application, or a comparable foreign
regulatory submission. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. In addition,
they may not complete activities on schedule, or may not conduct our preclinical studies or clinical trials in accordance with regulatory requirements or our
trial design. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, our efforts to obtain regulatory approvals
for, and commercialize, our product candidates may be delayed or prevented.
12
In carrying out our operations, we are dependent on a stable and consistent supply of ingredients and raw materials.
There can be no assurance that we, our contract manufacturers or our partners, will be able, in the future, to continue to purchase products from our current
suppliers or any other supplier on terms similar to current terms or at all. An interruption in the availability of certain raw materials or ingredients, or
significant increases in the prices paid by us for them, could have a material adverse effect on our business, financial condition, liquidity and operating
results.
The failure to perform satisfactorily by third parties upon which we rely to manufacture and supply products may lead to supply shortfalls.
We will rely on third parties to manufacture and supply marketed products. We also have certain supply obligations vis à vis our licensing partners who are
responsible for the marketing of the products. To be successful, our products have to be manufactured in commercial quantities in compliance with quality
controls and regulatory requirements. Even though it is our objective to minimize such risk by introducing alternative suppliers to ensure a constant supply at
all times, we cannot guarantee that we will not experience supply shortfalls and, in such event, we may not be able to perform our obligations under contracts
with our partners.
We are subject to intense competition for our skilled personnel, and the loss of key personnel or the inability to attract additional personnel could impair
our ability to conduct our operations.
We are highly dependent on our management and our clinical, regulatory and scientific staff, the loss of whose services might adversely impact our ability to
achieve our objectives. Recruiting and retaining qualified management and clinical, scientific and regulatory personnel is critical to our success. Competition
for skilled personnel is intense, and our ability to attract and retain qualified personnel may be affected by such competition.
Our strategic partners' manufacturing capabilities may not be adequate to effectively commercialize our product candidates.
Our manufacturing experience to date with respect to our product candidates consists of producing drug substance for clinical studies. To be successful, these
product candidates have to be manufactured in commercial quantities in compliance with regulatory requirements and at acceptable costs. Our strategic
partners' current manufacturing facilities have the capacity to produce projected product requirements for the foreseeable future, but we will need to increase
capacity if expected sales grow more than originally forecasted. Our strategic partners may not be able to expand capacity or to produce additional product
requirements on favorable terms. Moreover, delays associated with securing additional manufacturing capacity may reduce our revenues and adversely affect
our business and financial position. There can be no assurance that we will be able to meet increased demand over time.
We are subject to the risk of product liability claims, for which we may not have or be able to obtain adequate insurance coverage.
The sale and use of our products, in particular our biopharmaceutical products, involve the risk of product liability claims and associated adverse publicity.
Our risks relate to human participants in our clinical trials, who may suffer unintended consequences, as well as products on the market whereby claims might
be made directly by patients, healthcare providers or pharmaceutical companies or others selling, buying or using our products. We manage our liability risks
by means of insurance. We maintain liability insurance covering our liability for our preclinical and clinical studies and for our pharmaceutical products
already marketed. However, we may not have or be able to obtain or maintain sufficient and affordable insurance coverage, including coverage for potentially
very significant legal expenses, and without sufficient coverage any claim brought against us could have a materially adverse effect on our business, financial
condition or results of operations.
Our business involves the use of hazardous materials which requires us to comply with environmental and occupational safety laws regulating the use of
such materials. If we violate these laws, we could be subject to significant fines, liabilities or other adverse consequences.
Our discovery and development processes involve the controlled use of hazardous and radioactive materials. We are subject to federal, provincial and local
laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. The risk of accidental
contamination or injury from these materials cannot be completely eliminated. In the event of an accident or a failure to comply with environmental or
occupational safety laws, we could be held liable for any damages that result, and any such liability could exceed our resources. We may not be adequately
insured against this type of liability. We may be required to incur significant costs to comply with environmental laws and regulations in the future, and our
operations, business or assets may be materially adversely affected by current or future environmental laws or regulations.
13
We are a holding company, and claims of creditors of our subsidiaries will generally have priority as to the assets of such subsidiaries over our claims and
those of our creditors and shareholders.
Aeterna Zentaris Inc. is a holding company and a substantial portion of our assets is the share capital of our subsidiaries. AEZS GmbH, our principal
operating subsidiary, based in Frankfurt, Germany, holds most of our intellectual property rights, which represent the principal assets of our business.
Because Aeterna Zentaris Inc. is a holding company, our obligations to our creditors are structurally subordinated to all existing and future liabilities of our
subsidiaries. Therefore, our rights and the rights of our creditors to participate in any distribution of the assets of any subsidiary in the event that such
subsidiary were to be liquidated or reorganized or in the event of any bankruptcy or insolvency proceeding relating to or involving such subsidiary, and
therefore the rights of the holders of our Common Shares to participate in those assets, are subject to the prior claims of such subsidiary's creditors. To the
extent that we may be a creditor with recognized claims against any such subsidiary, our claims would still be subject to the prior claims of our subsidiary's
creditors to the extent that they are secured or senior to those held by us.
Holders of our Common Shares are not creditors of our subsidiaries. Claims to the assets of our subsidiaries will derive from our own ownership interest in
those operating subsidiaries. Claims of our subsidiaries' creditors will generally have priority as to the assets of such subsidiaries over our own ownership
interest claims and will therefore have priority over the holders of our Common Shares. Our subsidiaries' creditors may from time to time include general
creditors, trade creditors, employees, secured creditors, taxing authorities, and creditors holding guarantees.
Accordingly, in the event of any foreclosure, dissolution, winding-up, liquidation or reorganization, or a bankruptcy or insolvency proceeding relating to us or
our property, or any subsidiary, there can be no assurance as to the value, if any, that would be available to holders of our Common Shares.
In addition, any distributions to us by our subsidiaries could be subject to monetary transfer restrictions in the jurisdictions in which our subsidiaries operate.
Our subsidiaries may incur additional indebtedness and other liabilities.
It may be difficult for U.S. investors to obtain and enforce judgments against us because of our Canadian incorporation and German presence.
We are a company existing under the laws of Canada. Many of our directors and officers, and certain of the experts named herein, are residents of Canada or
otherwise reside outside the U.S., and all or a substantial portion of their assets, and a substantial portion of our assets, are located outside the U.S.
Consequently, although we have appointed an agent for service of process in the U.S., it may be difficult for investors in the U.S. to bring an action against
such directors, officers or experts or to enforce against those persons or us a judgment obtained in a U.S. court predicated upon the civil liability provisions of
federal securities laws or other laws of the U.S. Investors should not assume that foreign courts (1) would enforce judgments of U.S. courts obtained in
actions against us or such directors, officers or experts predicated upon the civil liability provisions of the U.S. federal securities laws or the securities or
"blue sky" laws of any state within the U.S. or (2) would enforce, in original actions, liabilities against us or such directors, officers or experts predicated
upon the U.S. federal securities laws or any such state securities or "blue sky" laws. In addition, we have been advised by our Canadian counsel that in normal
circumstances, only civil judgments and not other rights arising from U.S. securities legislation (for example, penal or similar awards made by a court in a
regulatory prosecution or proceeding) are enforceable in Canada and that the protections afforded by Canadian securities laws may not be available to
investors in the U.S.
Health care reform measures could hinder or prevent the commercial success of our product candidates and adversely affect our business.
The business prospects and financial condition of pharmaceutical and biotechnology companies are affected by the efforts of governmental and third-party
payers to contain or reduce the costs of health care. In the U.S. and in foreign jurisdictions there have been, and we expect that there will continue to be, a
number of legislative and regulatory proposals aimed at changing the health care system, such as proposals relating to the pricing of healthcare products and
services in the U.S. or internationally, the reimportation of drugs into the U.S. from other countries (where they are then sold at a lower price), and the amount
of reimbursement available from governmental agencies or other third party payers. For example, drug manufacturers are required to have a national rebate
agreement with the Department of Health and Human Services in order to obtain state Medicaid coverage, which requires manufacturers to pay a rebate on
drugs dispensed to Medicaid patients. On January 27, 2012, the Centers for Medicare and Medicaid Services ("CMS") issued a proposed regulation covering
the calculation of Average Manufacturer Price ("AMP") which is the key variable in the calculation of these rebates.
14
In March 2010, President Obama signed into law a legislative overhaul of the U.S. healthcare system, known as the Patient Protection and Affordable Care
Act of 2010, as amended by the Healthcare and Education Affordability Reconciliation Act of 2010 (collectively, the "PPACA"), which may have far-reaching
consequences for most healthcare companies, including specialty biopharmaceutical companies like us. For example, if reimbursement for our product
candidates is substantially less than we expect, our revenue prospects could be materially and adversely impacted.
Regardless of the impact of the PPACA on us, the U.S. government and other governments have shown significant interest in pursuing healthcare reform and
reducing healthcare costs. Any government-adopted reform measures could cause significant pressure on the pricing of healthcare products and services,
including our product candidates, in the United States and internationally, as well as the amount of reimbursement available from governmental agencies and
other third-party payors.
In addition, on September 27, 2007, the Food and Drug Administration Amendments Act of 2007 was enacted, giving the FDA enhanced post-market
authority, including the authority to require post-marketing studies and clinical trials, labeling changes based on new safety information, and compliance with
risk evaluations and mitigation strategies approved by the FDA. The FDA's exercise of this authority may result in delays or increased costs during the period
of product development, clinical trials and regulatory review and approval, which may also increase costs related to complying with new post-approval
regulatory requirements, and increase potential FDA restrictions on the sale or distribution of approved products.
We are subject to additional reporting requirements under applicable Canadian securities laws and the Sarbanes-Oxley Act in the U.S.. We can provide
no assurance that we will at all times in the future be able to report that our internal controls over financial reporting are effective.
As a public company, we are required to comply with Section 404 of the U.S. Sarbanes-Oxley Act ("Section 404") and National Instrument 52-109 -
Certification of Disclosure in Issuers' Annual and Interim Filings, and we are required to obtain an annual attestation from our independent auditors regarding
our internal control over financial reporting. In any given year, we cannot be certain as to the time of completion of our internal control evaluation, testing and
remediation actions or of their impact on our operations. Upon completion of this process, we may identify control deficiencies of varying degrees of severity
under applicable SEC and Public Company Accounting Oversight Board rules and regulations. As a public company, we are required to report, among other
things, control deficiencies that constitute material weaknesses or changes in internal controls that, or that are reasonably likely to, materially affect internal
controls over financial reporting. A "material weakness" is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of the Company's annual consolidated financial statements will not be prevented or detected on a
timely basis. If we fail to comply with the requirements of Section 404, Canadian requirements or report a material weakness, we might be subject to
regulatory sanction and investors may lose confidence in our consolidated financial statements, which may be inaccurate if we fail to remedy such material
weakness.
It is possible that we may be a passive foreign investment company, which could result in adverse tax consequences to U.S. investors.
Adverse U.S. federal income tax rules apply to "U.S. Holders" (as defined in "Item 10.E – Taxation – Certain Material U.S. Federal Income Tax
Considerations" in this annual report on Form 20-F) that directly or indirectly hold Common Shares of a passive foreign investment company ("PFIC"). We
will be classified as a PFIC for U.S. federal income tax purposes for a taxable year if (i) at least 75% of our gross income is “passive income” or (ii) at least
50% of the average value of our assets, including goodwill (based on annual quarterly average), is attributable to assets which produce passive income or are
held for the production of passive income.
We believe that we were not a PFIC for the 2013 taxable year. However, the PFIC determination depends on the application of complex U.S. federal income
tax rules concerning the classification of our assets and income for this purpose, and these rules are uncertain in some respects. In addition, the fair market
value of our assets may be determined in large part by the market price of our Common Shares, which is likely to fluctuate, and the composition of our
income and assets will be affected by how, and how quickly, we spend any cash that is raised in any financing transaction. No assurance can be provided that
we will not be classified as a PFIC for the 2014 taxable year and for any future taxable year.
PFIC characterization could result in adverse U.S. federal income tax consequences to U.S. Holders. In particular, absent certain elections, a U.S. Holder
would generally be subject to U.S. federal income tax at ordinary income tax rates, plus a possible interest charge, in respect of a gain derived from a
disposition of our Common Shares, as well as certain distributions by us. If we are treated as a PFIC for any taxable year, a U.S. Holder may be able to make
an election to "mark to market" Common Shares each taxable year and recognize ordinary income pursuant to such election based upon increases in the value
of the Common Shares. In addition, U.S. Holders may mitigate the adverse tax consequences of the PFIC rules by making a "qualified electing fund" ("QEF")
election; however, the Company does not expect to provide the information regarding its income that would be necessary for a U.S. Holder to make a QEF
election.
15
If the Company is a PFIC, U.S. Holders will generally be required to file an annual information return with the Internal Revenue Service (the "IRS") (on IRS
Form 8621, which PFIC shareholders will be required to file with their U.S. federal income tax or information returns) relating to their ownership of Common
Shares. This new filing requirement is in addition to any preexisting reporting requirements that apply to a U.S. Holder's interest in a PFIC (which this
requirement does not affect).
For a more detailed discussion of the potential tax impact of us being a PFIC, see "Item 10.E – Taxation – Certain Material U.S. Federal Income Tax
Considerations" in this annual report on Form 20-F. The PFIC rules are complex. U.S. Holders should consult their tax advisors regarding the potential
application of the PFIC regime and any reporting obligations to which they may be subject under that regime.
We may incur losses associated with foreign currency fluctuations.
Our operations are in many instances conducted in currencies other than the euro, our functional currency. Fluctuations in the value of currencies could cause
us to incur currency exchange losses. We do not currently employ a hedging strategy against exchange rate risk. We cannot assert with any assurance that we
will not suffer losses as a result of unfavorable fluctuations in the exchange rates between the US dollar, the euro, the Canadian dollar and other currencies.
For more information, see "Item 11. – Quantitative and Qualitative Disclosures About Market Risk" in this annual report on Form 20-F.
Legislative actions, new accounting pronouncements and higher insurance costs are likely to impact our future financial position or results of operations.
Changes in financial accounting standards or implementation of accounting standards may cause adverse, unexpected revenue or expense fluctuations and
affect our financial position or results of operations. New pronouncements and varying interpretations of pronouncements have occurred with greater
frequency and are expected to occur in the future, and we may make or be required to make changes in our accounting policies in the future. Compliance with
changing regulations of corporate governance and public disclosure, notably with respect to internal controls over financial reporting, may result in additional
expenses. Changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for companies such as
ours, and insurance costs are increasing as a result of this uncertainty.
The outcome of any future claims and litigation could have a material adverse impact on our business, financial condition and results of operations.
The Company and its subsidiaries may, from time to time, be parties to litigation in the normal course of business. Due to the inherent uncertainties of
litigation, it is not possible to predict the final outcome of these lawsuits or determine the amount of any potential losses, if any, and we may, in the future, be
subject litigation proceedings, including class action lawsuits. In the event we are required or determine to pay amounts in connection with any such lawsuits,
such amounts could be significant and could have a material adverse impact on our liquidity, business, financial condition and results of operations.
Risks Relating to our Common Shares
Our share price is volatile, which may result from factors outside of our control. If our Common Shares were to be delisted from NASDAQ Capital
Market ("NASDAQ") or Toronto Stock Exchange (the "TSX"), investors may have difficulty in disposing of our Common Shares held by them.
Our Common Shares are currently listed and traded only on NASDAQ and TSX. Our valuation and share price since the beginning of trading after our initial
listings, first in Canada and then in the U.S., have had no meaningful relationship to current or historical financial results, asset values, book value or many
other criteria based on conventional measures of the value of shares.
Between January 1, 2013 and December 31, 2013, the closing price of our Common Shares ranged from $1.03 to $3.23 on NASDAQ and from C$1.08 to
C$3.27 per share on TSX. Our share price may be affected by developments directly affecting our business and by developments out of our control or
unrelated to us. The stock market generally, and the biopharmaceutical sector in particular, are vulnerable to abrupt changes in investor sentiment. Prices of
shares and trading volume of companies in the biopharmaceutical industry can swing dramatically in ways unrelated to, or that bear a disproportionate
relationship to, operating performance. Our share price and trading volume may fluctuate based on a number of factors including, but not limited to:
•
•
•
•
•
clinical and regulatory developments regarding our product candidates;
delays in our anticipated development or commercialization timelines;
developments regarding current or future third-party collaborators;
other announcements by us regarding technological, product development or other matters;
arrivals or departures of key personnel;
16
•
•
•
•
•
governmental or regulatory action affecting our product candidates and our competitors' products in the U.S., Canada and other countries;
developments or disputes concerning patent or proprietary rights;
actual or anticipated fluctuations in our revenues or expenses;
general market conditions and fluctuations for the emerging growth and biopharmaceutical market sectors; and
economic conditions in the U.S., Canada or abroad.
Our listing on both NASDAQ and TSX may increase price volatility due to various factors, including different ability to buy or sell our Common Shares,
different market conditions in different capital markets and different trading volumes. In addition, low trading volume may increase the price volatility of our
Common Shares. A thin trading market could cause the price of our Common Shares to fluctuate significantly more than the stock market as a whole.
A period of large price decline in our Common Shares could increase the risk that securities class action litigation could be initiated against us. Litigation of
this type and other litigation could result in substantial costs and diversion of management's attention and resources, which would adversely affect our
business. Any adverse determination in litigation could also subject us to significant liabilities.
We must meet continuing listing requirements to maintain the listing of our Common Shares on NASDAQ and TSX. For continued listing, NASDAQ
requires, among other things, that listed securities maintain a minimum closing bid price of not less than $1.00 per share.
If our Common Shares trade for 30 consecutive business days below the required $1.00 minimum closing bid price, we expect that NASDAQ would then
send us a deficiency notice and provide us with a period of 180 calendar days to regain compliance with the minimum bid price requirement. In order to
regain compliance, the closing bid price of our Common Shares would have to be at least US$1.00 for a minimum of 10 consecutive business days. If we
were not able to regain compliance, NASDAQ would notify us that our securities are subject to delisting. At that time, we could appeal the determination to
delist our securities to a Listing Qualifications Panel.
In addition to the minimum bid price requirement, the continued listing rules of NASDAQ require us to meet at least one of the following listing standards:
(i) stockholders' equity of at least $2.5 million (the "Equity Standard"), (ii) market value of listed securities (calculated by multiplying the daily closing bid
price of our Common Shares by our total outstanding Common Shares) of at least $35 million (the "Market Value Standard") or (iii) net income from
continuing operations (in the latest fiscal year or in two of the last three fiscal years) of at least $500,000 (the "Net Income Standard"). If our total market
capitalization decreases to an amount less than $35 million for 30 consecutive trading days, it is possible that we could no longer meet any of these three
listing standards. Similar to the process described above in the minimum bid price context, if we fail to meet the Market Value Standard for 30 consecutive
trading days and do not otherwise meet the Equity Standard or the Net Income Standard, we expect that we would then receive a notification letter from
NASDAQ advising us that we fail to comply with the Market Value Standard and providing us a period of 180 calendar days to regain compliance with the
Market Value Standard. In order to regain compliance with the Market Value Standard, the market value of our listed securities would have to be at least
$35 million for a period of 10 consecutive business days. Otherwise, our securities may then be subject to delisting.
There can be no assurance that our Common Shares will remain listed on NASDAQ. If we fail to meet any of NASDAQ's continued listing requirements, our
Common Shares may be delisted. Any delisting of our Common Shares may adversely affect a shareholder's ability to dispose, or obtain quotations as to the
market value, of such shares.
We do not intend to pay dividends in the near future.
To date, we have not declared or paid any dividends on our Common Shares. We currently intend to retain our future earnings, if any, to finance further
research and the overall commercial expansion of our business. As a result, the return on an investment in our Common Shares will, for the foreseeable
future, depend upon any future appreciation in value. There is no guarantee that our Common Shares will appreciate in value or even maintain the price at
which shareholders have purchased them.
Future issuances of securities and hedging activities may depress the trading price of our Common Shares.
Any additional or future issuance of Convertible Securities, including the issuance of Common Shares upon the exercise of stock options and upon the
exercise of outstanding warrants, could dilute the interests of our existing shareholders, and could substantially decrease the trading price of our Common
Shares. We may issue equity securities in the future for a number of reasons, including to finance our operations and business strategy, to satisfy our
obligations upon the exercise of options or warrants or for other reasons. Our Stock Option Plan generally permits us to have outstanding, at any given time,
stock options that are exercisable for a maximum number of Common Shares equal to 11.4% of all then issued and outstanding Common Shares. As at
December 31, 2013, there were:
17
•
•
•
•
45,312,009 Common Shares issued and outstanding;
no issued and outstanding preferred shares;
20,107,410 Common Shares issuable upon exercise of outstanding warrants; and
2,412,573 stock options outstanding.
In addition, the price of Common Shares could also be affected by possible sales of Common Shares by investors who view other investment vehicles as more
attractive means of equity participation in us and by hedging or arbitrage trading activity that may develop involving our Common Shares. This hedging or
arbitrage could, in turn, affect the trading price of our Common Shares.
Our articles of incorporation contain "blank check" preferred share provisions, which could delay or impede an acquisition of our company.
Our articles of incorporation, as amended, authorize the issuance of an unlimited number of "blank check" preferred shares, which could be issued by our
Board of Directors without shareholder approval and may contain liquidation, dividend and other rights equivalent or superior to our Common Shares. In
addition, we have implemented in our constating documents an advance notice procedure for shareholder approvals to be brought before an annual meeting of
our shareholders, including proposed nominations of persons for election to our Board of Directors. These provisions, among others, whether alone or
together, could delay or impede hostile takeovers and changes in control or changes in our management. Any provision of our constating documents that has
the effect of delaying or deterring a change in control could limit the opportunity for our shareholders to receive a premium for their Common Shares and
could also affect the price that some investors are willing to pay for our Common Shares.
Item 4.
Information on the Company
A.
History and development of the Company
We are a specialty biopharmaceutical Company engaged in developing novel treatments in oncology and endocrinology. Our pipeline encompasses
compounds at various stages of development.
We were incorporated on September 12, 1990 under the Canada Business Corporations Act (the "CBCA") and continue to be governed by the CBCA. Our
registered address and head office is located at 1405 du Parc-Technologique Blvd., Quebec City, Quebec, Canada G1P 4P5, our telephone number is (418)
652-8525 and our website is www.aezsinc.com. None of the documents or information found on our website shall be deemed to be included in or
incorporated by reference into this annual report on Form 20-F, unless such document is specifically incorporated herein by reference.
On December 30, 2002, we acquired Zentaris AG, a biopharmaceutical company based in Frankfurt, Germany. Zentaris was a spin-off of Asta Medica
GmbH, a former pharmaceutical company affiliated with Degussa AG.
In May 2004, we changed our name to Aeterna Zentaris Inc. and on May 11, 2007, Zentaris GmbH was renamed Aeterna Zentaris GmbH ("AEZS GmbH").
AEZS GmbH is our principal operating subsidiary.
On April 6, 2005, our former subsidiary, Atrium Biotechnologies Inc. (now Atrium Innovations Inc.) ("Atrium"), completed its initial public offering in
Canada and began trading on the TSX under the ticker symbol "ATB".
In 2006, we spun off our ownership interest in Atrium in two phases. As of January 2, 2007 we no longer held any ownership interest in Atrium.
In May 2007, we opened an office in the United States, located at 20 Independence Boulevard, Warren, New Jersey 07059-2731. The Company moved this
office to a new location in December 2011 at 25 Mountainview Blvd., Suite 203, Basking Ridge, NJ 07920.
On October 2, 2012, we effected a 6-to-1 Share Consolidation (reverse stock split). Our Common Shares commenced trading on a consolidated and adjusted
basis on both NASDAQ and TSX on October 5, 2012.
On October 1, 2013, we announced the completion of our previously announced agreements with various partners and licensees with respect to the
manufacturing rights and obligations for our Cetrotide® product. The principal outcome of such agreements is the transfer of all manufacturing rights and the
grant of a license to a subsidiary of Merck KGaA of Darmstadt, Germany for the manufacture, testing, assembling, packaging, storage and release of
Cetrotide® in all territories (the "Cetrotide® Business"). Following this transfer, the Cetrotide® Business has been presented in our consolidated financial
statements as a discontinued operation.
18
We currently have three wholly-owned direct and indirect subsidiaries, Aeterna Zentaris GmbH (Germany), based in Frankfurt, Germany, Zentaris IVF
GmbH, a direct wholly-owned subsidiary of AEZS Germany based in Frankfurt, Germany, and Aeterna Zentaris, Inc., an entity incorporated in the State of
Delaware with an office in Basking Ridge, New Jersey in the United States.
Aeterna Zentaris Inc.
(Canada)
100%
Aeterna Zentaris, Inc.
(Delaware)
100%
Aeterna Zentaris GmbH
(Germany)
100%
Zentaris IVF GmbH
(Germany)
In oncology, our current principal focus is on our ongoing Phase 3 "ZoptEC" (Zoptarelin doxorubicin in Endometrial Cancer) trial in endometrial cancer with
zoptarelin doxorubicin. In endocrinology, we are focused on preparing the launch of MACRILEN™ (macimorelin). This product is currently subject to a
standard review by the FDA. If approved, MACRILEN™ will be the first orally administrated drug indicated for the evaluation of Adult Growth Hormone
Deficiency ("AGHD") by evaluating the pituitary gland secretion of growth hormone in response to an oral dose of the product. We are also investigating
various additional compounds as potential treatments for a host of unmet medical needs, as depicted in the chart reproduced under the heading, "Our Product
Pipeline".
Our Common Shares are listed for trading on the TSX under the trading symbol "AEZ" and on NASDAQ under the trading symbol "AEZS".
The Company's agent for service of process and SEC matters in the United States is its wholly-owned subsidiary, Aeterna Zentaris, Inc., located at 25
Mountainview Blvd., Suite 203, Basking Ridge, NJ 07920.
There have been no public takeover offers by third parties with respect to the Company or by the Company in respect of other companies' shares during the
last or current fiscal year.
B.
Business overview
We are a specialty biopharmaceutical Company engaged in developing novel treatments in oncology and endocrinology. Our pipeline encompasses
compounds at various stages of development.
Over the years, the Company has incurred recurring operating losses, having invested significantly in our R&D activities, as well as supporting our general
and administrative expenses. We have financed our operations through different sources including the issuance of Common Shares and warrants, the
conclusion of strategic alliances with licensee partners and R&D grants awarded by governmental agencies. The Company expects to continue to incur
operating losses and may require significant capital to fulfill our future obligations. See the capital disclosures and the liquidity risk sections in "Item 5. –
Operating and Financial Review and Prospects – Liquidity Risk".
In oncology, we have an ongoing Phase 3 ZoptEC trial in endometrial cancer under a Special Protocol Assessment ("SPA") with the FDA with zoptarelin
doxorubicin, a doxorubicin Luteinizing Hormone-Releasing Hormone ("LHRH") targeted conjugate compound for which we have successfully completed a
Phase 2 trial in advanced endometrial and advanced ovarian cancer. We are also advancing a Phase 2 investigator-driven trial with zoptarelin doxorubicin in
castration- and taxane-resistant prostate cancer. Our oncology pipeline also encompasses earlier-stage programs, including our AEZS-120, a targeted, live
recombinant oral tumor vaccine candidate, our Erk/PI3K inhibitors, such as AEZS-129 and AEZS-136 and our disorazol Z
19
product candidates (AEZS-137 and AEZS-138). We are also investigating various additional compounds as potential treatments for a host of unmet medical
needs.
In endocrinology, we have filed an NDA in the U.S. for the registration of MACRILEN™, our orally available peptidomimetic ghrelin receptor agonist with
growth hormone secretagogue activity. On January 6, 2014, we announced that the FDA had accepted for substantive review our NDA for MACRILEN™.
The acceptance for filing of the NDA indicates that the FDA has determined that the application is sufficiently complete to permit a substantive review. The
NDA, submitted on November 5, 2013, seeks approval for the commercialization of MACRILEN™, which, if approved, will be the first orally administered
drug indicated for the evaluation of AGHD by evaluating the pituitary gland secretion of growth hormone in response to an oral dose of the product. The
application is subject to a standard review by the FDA.
Recent Developments
For a complete description of our recent corporate and pipeline developments, refer to "Item 5. – Operating and Financial Review and Prospects – Key
Developments in 2013".
Our Business Strategy
Our primary business strategy is to pursue the successful development and commercialization of our pipeline with a focus on our principal product candidates
zoptarelin doxorubicin and MACRILEN™ in oncology and endocrinology and achieve successful revenue-generating in-/out-licensing opportunities. Our
vision is to become a growth-oriented specialty biopharmaceutical company.
Our product pipeline
_________________________
(1) Investigator-driven and sponsored.
(2) Phase 2 in ovarian cancer completed.
(3) Sponsored entirely by our licensee partners (Spectrum Pharmaceuticals, World (ex-Japan, Korea and other Asian countries) – Handok Pharmaceuticals, Korea and other
Asian countries for benign prostatic hyperplasia ("BPH") indication – Nippon Kayaku, Japan for oncology indications).
(4) Sponsored entirely by our licensee partners (Yakult Honsha, Japan – Handok Pharmaceuticals, Korea – Hikma Pharmaceuticals, Middle East/North Africa).
20
Oncology
In oncology, we are conducting the ZoptEC Phase 3 study under a SPA with the FDA for zoptarelin doxorubicin in endometrial cancer. We are also advancing
an investigator-driven Phase 2 trial with zoptarelin doxorubicin in castration- and taxane-resistant prostate cancer.
Zoptarelin doxorubicin
Zoptarelin doxorubicin represents a new targeting concept in oncology using a hybrid molecule composed of a synthetic peptide carrier and a well-known
chemotherapy agent, doxorubicin. Zoptarelin doxorubicin is the first intravenous drug in advanced clinical development that directs the chemotherapy agent
specifically to LHRH-receptor expressing tumors, resulting in more targeted treatment with less damage to healthy tissue. The product has successfully
completed Phase 2 studies for the treatment of ovarian and endometrial cancer. We hold the worldwide rights to zoptarelin doxorubicin pursuant to an
exclusive license agreement with Tulane University, as licensor, and AEZS GmbH, as licensee.
Endocrinology
In endocrinology, an NDA is under review by the FDA for the registration of MACRILEN™, for use in the evaluation of AGHD, in the U.S. Furthermore,
macimorelin is being investigated in a Phase 2A trial in cancer-induced cachexia currently conducted under a cooperative R&D agreement ("CRADA") with
the Michael E. DeBakey Veterans Affairs Medical Center that is funding the study. We hold the worldwide rights to macimorelin pursuant to an exclusive
license agreement with The French Centre National de la Recherche Scientifique, as licensor, and AEZS GmbH, as licensee.
MACRILEN™
MACRILEN™ is an orally available peptidomimetic ghrelin receptor agonist with growth hormone secretagogue activity. MACRILEN™ has been granted
orphan-drug designation by the FDA. On January 6, 2014, we announced that the FDA had accepted for substantive review our NDA for MACRILEN™ for
the evaluation of AGHD. The application is subject to a standard review by the FDA.
Clinical and Preclinical Programs
Our oncology pipeline also encompasses other earlier-stage programs, including AEZS-120, a targeted, live recombinant oral tumor vaccine candidate, our
Erk/PI3K inhibitors, including AEZS-129 and AEZS-136, as well as our disorazol Z product candidates comprise AEZS-137 and AEZS-138.
We are also investigating various additional compounds as potential treatments for a host of unmet medical need. We also continue to perform targeted drug
discovery activities from which we are able to derive preclinical candidates. This drug discovery includes high throughput screening systems and a library of
more than 120,000 compounds.
We are currently at a stage in which some of our products and product candidates are being further developed jointly with strategic partners or with funding
from governmental organizations.
1.0
1.1
ONCOLOGY
TUMOR TARGETING CYTOTOXIC CONJUGATES AND CYTOTOXICS
Cytotoxic conjugates
In view of the non-specific toxicity of most chemotherapeutic agents against normal cells, targeting such drugs to cancerous tissue offers a potential benefit
for patients with advanced or metastatic tumors. Targeted cytotoxic peptide conjugates are hybrid molecules composed of a cytotoxic moiety linked to a
peptide carrier which binds to receptors on tumors. Cytotoxic conjugates are designed to achieve differential delivery, or targeting, of the cytotoxic agent to
cancer vs. normal cells.
Our cytotoxic conjugates represent a novel oncological strategy to control and reduce toxicity and improve the effectiveness of cytotoxic drugs.
21
In zoptarelin doxorubicin, the most advanced of our cytotoxic conjugates, doxorubicin is chemically linked to an LHRH agonist, a modified natural hormone
with affinity for the LHRH receptor. This design allows for the specific binding and selective uptake of the cytotoxic conjugate by LHRH receptor-positive
tumors. Potential benefits of this targeted approach include a more favorable safety profile with lower incidence and severity of side effects, as normal tissues
would be spared from the toxic effects of doxorubicin. In addition, the targeted approach may enable treatment of LHRH receptor-positive cancers that have
become refractory to doxorubicin which has been administered in its non-targeted form.
1.1.1
Zoptarelin doxorubicin – Ovarian and Endometrial Cancer
In 2007, a Phase 2 open-label, non-comparative, multicenter two indication trial stratified with two stages Simon Design was prepared. The study was
planned to involve up to 82 patients, with up to 41 patients each with a diagnosis of platinum-resistant ovarian cancer (stratum A) or disseminated
endometrial cancer (stratum B). Under coordination by Prof. Günter Emons, M.D., Chairman of the Department of Obstetrics & Gynaecology at the
University of Göttingen, Germany, this open-label, multicenter and multinational Phase 2 study "AGO-GYN 5" was conducted by the German AGO Study
Group (Arbeitsgemeinschaft Gynäkologische Onkologie / Gynaecological Oncology Working Group), in cooperation with clinical sites in Europe. An i.v.
infusion of zoptarelin doxorubicin (267 mg/m2) was administered over a period of two hours, every Day 1 of a 21-day (3-week) cycle. The proposed duration
of the study treatment was six cycles. The study was performed with 14 centers of the German Gynaecological Oncology Working Group, in cooperation with
three clinical sites in Europe. The primary efficacy endpoint was a response rate with a success criterion at the end of Stage II defined as five or more patients
with partial or complete tumor responses according to Response Evaluation Criteria in Solid Tumors ("RECIST") and/or Gynaecologic Cancer Intergroup
("GCIG") guidelines. Secondary endpoints included time to progression ("TTP"), survival, toxicity, as well as adverse effects. In October 2008, we
announced that we had entered the second stage of patient recruitment for the Phase 2 trial in platinum-resistant ovarian cancer indication. This decision was
taken following the report of two partial responses ("PR") among patients with ovarian cancer. The second stage of patient recruitment for the endometrial
cancer indication was reached in November 2008 and was based on the report of one complete response ("CR") and two PR among 14 patients with
endometrial cancer.
On November 2, 2009, we announced positive preliminary efficacy data for the Phase 2 study in patients with LHRH-receptor positive platinum-resistant and
taxane-pretreated ovarian cancer. All 43 patients who had entered the study had completed their treatment, and a preliminary evaluation had shown that the
study had met its predefined primary efficacy endpoint of five or more responders in 41 evaluable patients. Responders, as well as patients with stable disease
after completion of treatment with zoptarelin doxorubicin, were to be followed to assess the duration of response and, ultimately, overall survival ("OS").
On November 24, 2009, we announced positive results for the Phase 2 study in patients with endometrial cancer. Preliminary evaluation showed that the
study met its predefined primary efficacy endpoint of five or more responders in endometrial cancer patients. Responders, as well as patients with stable
disease after completion of treatment with zoptarelin doxorubicin, were to be followed to assess the duration of progression free survival ("PFS") and,
ultimately, OS.
22
On May 6, 2010, we announced that we had received orphan drug designation from the FDA for zoptarelin doxorubicin for the treatment of ovarian cancer.
On May 17, 2010, we announced that we had received a positive opinion for orphan medicinal product designation from the COMP of the EMA for
zoptarelin doxorubicin for the treatment of ovarian cancer.
On June 7, 2010, Prof. Günter Emons, Chairman, Department of Obstetrics & Gynaecology Georg-August University Göttingen, Germany, presented positive
efficacy and safety data for zoptarelin doxorubicin in ovarian cancer at the American Society of Clinical Oncology's ("ASCO") Annual Meeting. The poster
(abstract #5035), was entitled "Phase 2 study of AEZS-108, a targeted cytotoxic LHRH analog, in patients with LHRH receptor-positive platinum resistant
ovarian cancer".
42 patients with platinum-resistant ovarian cancer entered the study. Efficacy included PR in five patients (11.9%) and stable disease for more than twelve
weeks in eleven patients (26.2%). Based on those data, a clinical benefit rate ("CBR") of 38% was estimated. Median TTP and OS were evaluated as 3.5
months (104 days) and 15.6 months (475 days), respectively. OS compared favourably with data from Doxil® and topotecan (8-9 months). In all, tolerability
of zoptarelin doxorubicin was good and commonly allowed retreatment as scheduled. Only one patient (2.4%) had a dose reduction, and overall, 25 of 170
(14.7%) courses were given with a delay, including cases in which delay was not related to toxicity. Severe (Grade 3 or 4) toxicity was mainly restricted to
rapidly reversible hematologic toxicity (leukopenia / neutropenia) associated with fever in three cases. Good tolerability of zoptarelin doxorubicin was also
reflected with only a few patients with non-hematological toxicities of Grade 3 (none with Grade 4), including single cases each of nausea, constipation, poor
general condition, and an enzyme elevation. No cardiac toxicity was reported.
Final evaluation of the ovarian cancer study revealed six patients with PR based on tumor lesions, plus two responders with tumor marker response including
one case with normalization, for an overall response rate of 19% (one unconfirmed CR and seven partial responses). Median TTP and OS were evaluated as
three and twelve months, respectively.
On September 14, 2011, positive final Phase 2 efficacy and safety data for zoptarelin doxorubicin in advanced endometrial cancer were presented at the
European Society of Gynecological Oncology in Milan, Italy. The data showed that zoptarelin doxorubicin, administered as a single agent at a dosage of 267
mg/m2 every three weeks was active, well tolerated and that OS was similar to that reported for modern triple combination chemotherapy, but was achieved
with lower toxicity. The primary endpoint was the response rate as defined by the RECIST. Secondary endpoints included safety, TTP and OS.
In all, of 43 patients treated with zoptarelin doxorubicin, 39 were evaluable for efficacy. Efficacy confirmed by independent response review included two
CR, ten PR, and 17 patients with stable disease ("SD"). Based on those data, the estimated overall response rate ("ORR") (ORR = CR+PR) was 30.8% and
the CBR (CBR = CR+PR+SD) was 74.4%. Responses in patients previously treated with chemotherapy included one CR, one PR and two SDs in eight of the
patients with prior use of platinum/taxane regimens. Median TTP and OS were seven months and 13.7 months, respectively. A final evaluation, not excluding
non-evaluable cases, revealed the following results: two CR, eleven PR (including three patients with PR not confirmed at subsequent time point), and 17
patients with SD, for an ORR of 30.2% and CBR of 70%; median TTP and OS at seven and 15 months, respectively.
Overall, tolerability of zoptarelin doxorubicin was good and commonly allowed retreatment as scheduled. Severe (Grade 3 or 4) toxicity was mainly
restricted to rapidly reversible leukopenia and neutropenia, associated with fever in only one patient who had been treated only three weeks after a surgery.
Good tolerability of zoptarelin doxorubicin was also reflected by a low rate of severe non- hematological and possibly drug-related adverse events which
included single cases each of nausea, diarrhea, fatigue, general health deterioration, creatinine elevation, and blood potassium decrease. No cardiac toxicity
was reported.
On December 28, 2012, we announced that we had reached an agreement with the FDA with respect to a SPA for the ZoptEC Phase 3 registration trial of
zoptarelin doxorubicin in endometrial cancer. The SPA agreement states that the proposed trial protocol design, clinical endpoints and planned analyses are
acceptable to the FDA to support a regulatory submission. Final marketing approval depends on the results of efficacy, the adverse event profile and an
evaluation of the benefit/risk of treatment demonstrated in the ZoptEC Phase 3 trial. This Phase 3 ZoptEC trial in women with locally advanced, recurrent or
metastatic endometrial cancer who have progressed and who have received one chemotherapeutic regimen with platinum and taxane (either as adjuvant first-
line treatment), is an open-label, randomized, multicenter trial conducted in North America, Europe and Israel. The trial compares zoptarelin doxorubicin
with doxorubicin as second line therapy and will involve approximately 500 patients. The primary efficacy endpoint of the ZoptEC trial is improvement in
median Overall Survival.
On April 10, 2013, we announced the signing of a co-development and profit-sharing agreement with Ergomed for zoptarelin doxorubicin in endometrial
cancer. Ergomed was selected as the contract clinical development organization to conduct the ZoptEC Phase 3 trial. Under the terms of the agreement,
Ergomed has agreed to assume 30% (up to $10 million) of the clinical and regulatory costs for the trial which are estimated at approximately $30 million over
the course of the study. Ergomed will
23
receive its return on investment based on an agreed single digit percentage of any net income received by Aeterna Zentaris for zoptarelin doxorubicin in this
indication, up to a specified maximum amount.
On July 31, 2013, we announced that the first patient had been recruited and dosed for the ZoptEC Phase 3 trial in endometrial cancer.
On February 4, 2014, we announced that an article on the Phase 2 results for zoptarelin doxorubicin in endometrial cancer had been published in the February
issue of the International journal of Gynecological Cancer. The results published in this article refer to the final evaluation of the Phase 2 trial in endometrial
cancer described above.
Competitors for zoptarelin doxorubicin in Endometrial Cancer
At present, the Company is not aware of any approved drug product for the treatment of advanced and recurrent metastatic endometrial cancer in either the
United States or Europe. There is also no systemic therapy approved in either the United States or Europe (except Germany) for treating advanced or
recurrent endometrial cancer.
The following products are among some of the many products currently in clinical trial in endometrial cancer:
Product / mode of action*
Company*
Development Status*
Ixabepilone / microtubule inhibitor
Bristol-Myers Squibb
Letrozole / non-steroidal aromatase inhibitor
SAR245408 (XL-147)/PI3K inhibitor
BKM120/PI3K inhibitor
TK1258/FGFR inhibitor
GDC/0980
PI3K/mTOR inhibitor
Lenvatinib (E7080)/
Multi-kinase inhibitor
Novartis
Sanofi
Novartis
Novartis
Genentech
Eisai
Sunitinib malate/Tyrosine kinase inhibitor
_________________________
* Source: Competitor company's website and www.clinicaltrials.gov.
NCI
Phase 3
Phase 2 and Phase 3
Phase 2
Phase 1/2
Phase 1/2
Phase 2
Phase 2
Phase 2
See also the risk factor entitled "Competition in our targeted markets is intense, and development by other companies could render our products or
technologies non-competitive" in Item 3D of this annual report on Form 20-F.
Market Data - Endometrial Cancer
According to the American Cancer Society, endometrial cancer is the most common invasive gynecologic cancer in women in the United States, with an
estimated 52,630 new cases expected to occur in 2014. This disease primarily affects postmenopausal women at an average age of 60 years at diagnosis. In
the United States, it is estimated that approximately 8,590 women will die of endometrial cancer in 2014.
According to Datamonitor Healthcare (March 2010), a research and advisory firm that focuses on therapeutic, strategic and health market analysis and
competitive intelligence, the incidence of endometrial cancer in the seven major pharmaceutical markets was 94,061 patients in 2010 and is forecasted to
reach approximately 98,500 cases by 2019.
1.1.2
Zoptarelin doxorubicin – Triple-Negative Breast Cancer
On October 25, 2011, we announced that the FDA had granted Alberto J. Montero M.D. of the Sylvester Comprehensive Cancer Center, an IND approval for
the initiation of a randomized Phase 2 trial in chemotherapy refractory triple-negative (ER/PR/HER2-negative) LHRH receptor-positive metastatic breast
cancer with zoptarelin doxorubicin. Subsequently, the study was converted into a Company-sponsored study and is now conducted under our IND.
On February 20 2013, we announced that a first patient had been treated for the randomized Phase 2 trial in chemotherapy refractory triple-negative
("ER/PR/HER2-negative") luteinizing hormone-releasing hormone receptor ("LHRH-R")-positive metastatic breast cancer, with zoptarelin doxorubicin.
Alberto J. Montero, MD, Assistant Professor, Department of Medicine, Division of Hematology/Oncology, Sylvester Comprehensive Cancer Center at the
University of Miami Miller School of Medicine, is the lead investigator of this trial which also include sites at the Universities of Regensburg and Goettingen,
in Germany.
24
This is an open-label, randomized, two-arm, multicenter Phase 2 study which will involve up to 74 patients. Patients will be randomized in a 1:1 ratio into one
of the two treatment arms: [Arm A] zoptarelin doxorubicin (267 mg/m2 every 21 days) or [Arm B] SSC standard single agent cytotoxic chemotherapy at the
discretion of the treating oncologist.
The primary study endpoint is median time of progression-free survival. Secondary endpoints include overall response rate, and overall survival. The study
will also evaluate zoptarelin doxorubicin's toxicity profile and patients' quality of life relative to conventional cytotoxic chemotherapy.
On June 3, 2013, Stefan Buchholz, MD. at the Medical Center University of Regensburg, Germany, presented at the ASCO Annual Meeting the study design
of the Phase 2 trial of zoptarelin doxorubicin in chemotherapy refractory triple negative LHRH-R positive metastatic breast cancer. The poster (abstract
#TPS11124) was entitled "A randomized, Phase 2 trial of AEZS-108 in chemotherapy refractory triple negative (ER/PR/HER2-negative) LHRH-R positive
metastatic breast cancer".
As part of our ongoing review to ensure optimization of our resources, we have decided to terminate this Phase 2 trial in triple-negative breast cancer.
1.1.3
Zoptarelin doxorubicin – Bladder Cancer
On May 12, 2010, we announced that the FDA had approved our IND application for zoptarelin doxorubicin in LHRH receptor-positive urothelial (bladder)
cancer. Following this approval from the FDA, this trial will be conducted by Dr. Gustavo Fernandez at the Sylvester Comprehensive Cancer Center at the
University of Miami's Miller School of Medicine, and will include up to 64 patients, male and female, with advanced LHRH receptor-positive urothelial
(bladder) cancer. The study will be conducted in two parts: first, a dose-finding part in up to twelve patients; subsequently, the selected dose will be studied
for its effect on PFS.
On December 14, 2010, we announced the initiation of the Phase 1/2 trial.
On July 26, 2012, we announced that preclinical data on zoptarelin doxorubicin in urinary bladder cancer were published in the online edition of Oncotarget.
The article underlined that zoptarelin doxorubicin powerfully inhibited growth of bladder cancers in nude mice, exerted greater effects and was less toxic than
doxorubicin ("DOX"). In contrast to DOX alone, which activated strong multidrug resistance mechanisms in RT-4 and HT-1197 cancers, zoptarelin
doxorubicin had no or fewer such effects. Polymerase Chain Reaction ("PCR") assays and in vitro studies revealed differences in the action of zoptarelin
doxorubicin and DOX on the expression of genes involved in apoptosis.
As part of our ongoing review to ensure optimization of our resources, we have decided to terminate this Phase 1/2 trial in bladder cancer.
1.1.4
Zoptarelin doxorubicin – Prostate Cancer
On August 5, 2010, we announced that the The National Institutes of Health ("NIH") had awarded Dr. Jacek Pinski, Associate Professor of Medicine at the
Norris Comprehensive Cancer Center of the University of Southern California, a grant of $1.6 million over three years to conduct a Phase 1/2 study in
refractory prostate cancer with zoptarelin doxorubicin. The study, entitled A Phase I/II Trial of AN-152 [AEZS-108] in Castration- and Taxane-Resistant
Prostate Cancer, will enroll up to 55 patients and will be conducted in two portions: an abbreviated dose-escalation followed by a single arm, Simon
Optimum two-stage design Phase 2 study using the dose selected in the Phase 1 portion. The primary objective of the Phase 2 portion is to evaluate the
clinical benefit of zoptarelin doxorubicin in men with castration- and taxane-resistant metastatic prostate cancer, for which the presence of LHRH receptors
has been confirmed.
On December 14, 2010, we announced the initiation of the investigator initiated Phase 1/2 trial.
On September 26, 2011, we announced positive interim data for the Phase 1 portion of the Phase 1/2 trial with zoptarelin doxorubicin in castration-and
taxane-resistant prostate cancer at the European Society for Medical Oncology ("ESMO) meeting, Stockholm, Sweden. This is a single arm study with a
Phase 1 lead-in to a Phase 2 clinical trial. The primary endpoint of the Phase 1 portion is safety. The primary objective of the Phase 2 portion is to evaluate the
clinical benefit of zoptarelin doxorubicin for these patients. Twelve patients entered the study: three patients each received zoptarelin doxorubicin at the lower
dose levels of 160 and 210 mg/m2, and six patients at 267 mg/m2. Data on ten patients were presented as two patients were too early for evaluation.
Zoptarelin doxorubicin was generally well tolerated and there were no dose limiting toxicities so far. The only Grade 3 and 4 toxicities were hematologic in
nature. At the time, there were three Grade 4 toxicities (two at 210 mg/m2 and one at 267 mg/m2), all of which were asymptomatic. There were six Grade 3
toxicities including two cases of Grade 3 anemia after repeated courses (cycles five and six) and one case of febrile neutropenia that occurred during cycle
one. Signs of therapeutic activity included five patients with Prostate Specific Antigen ("PSA") regression. One of these patients treated at the lowest dose
level, received eight treatment cycles because the patient demonstrated continued clinical benefit. Three out of
25
four evaluable patients with radiologic evaluable disease achieved stable disease per RECIST. The Phase 2 extension is planned after completion of the
toxicity assessment in the final dose level of the Phase 1 portion of the study. In correlative studies, drug uptake was demonstrated for the first time in
captured circulating tumor cells of patients, thus validating the principle of targeted tumor therapy with zoptarelin doxorubicin in a clinical setting.
On February 3, 2012, we reported updated results for the Phase 1 portion of the ongoing Phase 1/2 study of zoptarelin doxorubicin in prostate cancer.
The results were based on 13 patients who had been previously treated with androgen-deprivation therapy (LHRH agonist) and at least one taxane-based
chemotheraphy regimen, who were treated on three dose levels of zoptarelin doxorubicin: three at 160 mg/m2, three at 210 mg/m2, and seven at 267 mg/m2.
Overall, zoptarelin doxorubicin was well tolerated among this group of heavily pretreated older patients. There were two dose-limiting toxicities, each of
which having been a case of asymptomatic Grade 4 neutropenia at the 267 mg/m2 dose level and both patients fully recovered. The Grade 3 and 4 toxicities
were primarily hematologic. There was minimal non-hematologic toxicity, most frequently fatigue and alopecia.
Despite the low doses of zoptarelin doxorubicin in the first cohorts, there was some evidence of antitumor activity. One patient received eight cycles (at 210
mg/m2) due to continued benefit. Among the five evaluable patients with measurable disease, four achieved stable disease. At the time of submission of the
abstract, a decrease in PSA was noted in six patients. Six of 13 (46%) treated patients received at least five cycles of therapy with no evidence of disease
progression at twelve weeks. Correlative studies on circulating tumor cells ("CTC") demonstrated the uptake of zoptarelin doxorubicin into the targeted
tumor.
On November 12, 2012, we announced the initiation of the Phase 2 portion of the ongoing Phase 1/2 study of zoptarelin doxorubicin in prostate cancer. The
primary endpoint of the Phase 2 portion is to evaluate the clinical benefit of zoptarelin doxorubicin for these patients. Secondary endpoints include toxicity,
time to RECIST and PSA progression, RECIST response rate for patients with measurable disease, PSA response rate, pain palliation and overall survival.
On June 3, 2013, we announced that final data for the Phase1 portion of the ongoing Phase 1/2 trial with zoptarelin doxorubicin in prostate cancer,
demonstrated the compound's promising anti-tumor activity. Results were presented by lead investigator, Jacek Pinski, MD, PhD, of the USC Norris
Comprehensive Cancer Center, during a poster session at the ASCO Annual Meeting in Chicago.
Eighteen men with a median of two prior chemotherapy regimens (range 1/5) and a median PSA of 106.4 ng/mL (range 8.4-1624.0) were enrolled. The dose
of zoptarelin doxorubicin was escalated from 160 mg/m2 to 210 mg/m2 then to 267 mg/m2. There were two Dose-Limiting Toxicities ("DLT") in the seven
patients receiving zoptarelin doxorubicin at a dose of 267 mg/m2 (grade 4 neutropenia), establishing 210 mg/m2 as the Maximum Tolerated Dose ("MTD").
Significant non-hematologic toxicities included one case of grade 3 nausea. No cardiotoxicity was seen on serial evaluation and six patients completed six
cycles. Internalization of zoptarelin doxorubicin was consistently visualized in CTCs 1 to 3 hours after dosing. Maximal PSA response was stable or
decreased in 8 of 18 men. Among the 15 evaluable patients with measurable disease, ten achieved stable disease and a drop in PSA was noted in three
patients. The MTD of zoptarelin doxorubicin in this indication is 210 mg/m2, which is below the MTD reported in women with refractory endometrial and
ovarian cancer.
The Phase 2 portion of that Phase 1/2 trial is ongoing.
1.1.5
AEZS-137 (Disorazol Z) / AEZS-138 (LHRH-Disorazol Z)
In search of new antitumor agents, we found that disorazol Z (AEZS-137), isolated from the myxobacterium Sorangium cellulosum, possess cytotoxicity in
the picomolar range in a panel of different tumor cell lines. Inhibition of tubulin polymerization, cell cycle arrest and efficient induction of apoptosis, have
been identified as modes of action.
On March 24, 2011, we were awarded a $1.5 million grant from the German Ministry of Education and Research to develop, up to the clinical stage,
cytotoxic conjugates of the proprietary cytotoxic compound AEZS-137 and peptides targeting G-protein coupled receptors, including the LHRH receptors.
The compounds being developed will combine the targeting principle successfully employed in Phase 3 with zoptarelin doxorubicin with the novel cytotoxic
disorazol Z. Furthermore, diagnostic tools systematically assessing the receptor expression in tumor specimens will be developed to allow the future selection
of patients and tumor types with the highest chance of benefiting from this personalized medicine approach. The grant was payable as a partial reimbursement
of qualifying expenditures over a three-year period, until January 31, 2014. The qualified project was performed with Morphisto GmbH and the Helmholtz
Institute in Saarbrücken, Germany, which received additional funding of approximately US$0.7 million. Researchers from the departments of Gynecology
and Obstetrics at both the University of Göttingen and the University of Würzburg, Germany, were also part of the collaboration.
26
On November 16, 2011, we announced the presentation of a poster at the AACR-NCI-EORTC International Conference on Molecular Targets and Cancer
Therapeutics on encouraging preclinical data for AEZS-137. The data showed that AEZS-137 possesses cytotoxicity in a highly diverse panel of 60 different
tumor cell lines, and also underlined the identification of important aspects of this novel natural compound's mechanism of action. AEZS-137 has been
identified as a tubulin binding agent with highly potent antitumor properties. Cell cycle analysis revealed that AEZS-137 arrested cells in the G2/M cell cycle
phase and subsequently induced apoptosis with remarkable potency, as shown by sub-nanomolar EC50 values. Currently, experiments are under way to
determine the tubulin binding site for disorazol Z and to identify further mechanisms of action of this novel highly potent agent. To expand our zoptarelin
doxorubicin technology platform, we aim to evaluate the utility of disorazol Z as a cytotoxic component in a drug-targeting approach utilizing GPCR ligands
as the targeting moieties for the treatment of GPCR over-expressing cancers.
On April 10, 2013, we announced at the American Association for Cancer Research's ("AACR") encouraging updated proof-of-concept results for Disorazol
Z cytotoxic conjugates, such as AEZS-125 and AEZS-138, in human ovarian and endometrial cancer xenograft models. Data demonstrated that conjugates of
D-Lys6-LHRH and Disorazol Z retained strong binding to the LHRH receptor and showed potent inhibition of tubulin polymerization. Cellular cytotoxicity
of the conjugates was in the low nanomolar EC50 range. Increased cytotoxicity in cells over-expressing the LHRH receptor, support receptor targeting as a
mechanism of action. The LHRH receptor-dependent efficacies of Disorazol Z - D-Lys6-LHRH conjugates in vitro and in mouse xenograft models that were
presented, support the principle of tumor targeting by the LHRH receptor as already employed by the drug candidate zoptarelin doxorubicin, which is
currently in a ZoptEC Phase 3 study in endometrial cancer and in a Phase 2 study in prostate cancer.
On February 11, 2014, at the 11th International Symposium on GnRH, in Salzburg, Austria, we presented further data on the mechanism of action and proof of
concept of the disorazol Z cytotoxic conjugate, AEZS-138, which had led to the initiation of its preclinical development during the second quarter of 2013.
As part of our ongoing review to ensure the optimization of our resources, we are currently evaluating our options for this project.
1.2
TUBULIN INHIBITORS / VASCULAR TARGETING AGENTS
1.2.1
AEZS-112
Tubulin is a protein found in all cells that plays an important role during cell division in that, it helps to transmit genetic information to the daughter cells.
Inhibition of this process leads to the death of the affected cell. The antitumor agents taxol and vincristine, which are widely used in cancer therapy, are based
on this principle. Both compounds are expensive natural substances and cause severe side effects when used in humans.
We are currently identifying and developing novel tubulin inhibitors which, compared with currently used products, exhibit improved efficacy in animal
models, have a more acceptable side effect profile, an incomplete or no cross-resistance and are administered orally.
AEZS-112 is a drug development candidate with a favorable safety and tolerability profile showing excellent in vivo activity in various tumor models
including mammary, colon, melanoma and leukemia cancers at acceptable and very well tolerated doses administered orally once weekly. This compound acts
through three mechanisms of action. Strong anticancer activity is combined with proapoptotic and antiangiogenic properties. AEZS‑112 inhibits the
polymerization of tubulin, destroys the mitotic spindle of the cancer cells and inhibits topoisomerase II activity. AEZS-112 arrests the cancer cells in the G2M
cell cycle phase at a nanomolar concentration and induces apoptosis. AEZS-112 is not cross-resistant to cisplatin, vincristine and doxorubicin in cell lines
resistant to these drugs.
On January 8, 2007, we announced the initiation of a Phase 1 trial for AEZS-112 in patients with solid tumors and lymphoma. This open-label, dose-
escalation, multicenter, intermittent treatment Phase 1 trial was conducted in the United States with Daniel D. Von Hoff, M.D., Senior Investigator at the
Translational Genomics Research Institute in Phoenix, AZ, as the lead investigator. The trial included up to 50 patients with advanced solid tumors and
lymphoma who have either failed standard therapy or for whom no standard therapy exists. Patients received a once-a-week oral administration of AEZS-112
for three consecutive weeks, followed by a one-week period without treatment. The cycles were repeated every four weeks based on tolerability and response,
basically planned for up to four cycles, but allowing for continuation in case of potential benefit for the patient. The starting dose of AEZS-112 in this study
was 13 mg/week, with doubling of doses in subsequent cohorts in the absence of significant toxicity. The primary endpoint of the Phase 1 trial focused on
determining the safety and tolerability of AEZS-112 as well as establishing the recommended Phase 2 dose and regimen. Secondary endpoints were aimed at
establishing the pharmacokinetics and determining the efficacy based on standard response criteria.
27
Results of this Phase 1 study were presented in April 2009 at the AACR meeting. In part I, 22 patients (twelve men / ten women) were studied on seven dose
levels ranging from 13 to 800 mg/week. In all, 62 treatment cycles were administered. In part II, the weekly dose was split into three doses taken eight hours
apart. Ultimately, 22 patients (twelve men / ten women) were studied on five dose levels ranging from 120 to 600 (= 200 x 3) mg/week. As at April 1, 2009,
62 treatment cycles had been administered (mean 3.2/patient) and treatment had been ongoing in eight patients. SD for more than twelve weeks was observed
in 16 patients; four more patients were ongoing at less than twelve weeks. Prolonged courses of SD ranging from 20 to 35+ weeks were observed in nine
patients with the following primary cancer types: trachea (39+), tongue (30+), thyroid (29+), prostate and melanoma (28), non-small cell lung cancer (26+),
pancreas and 2x colorectal (20). Except for one patient with a background of gastrointestinal problems ("GI") who had dose-limiting GI reactions and
electrolyte loss at a dose of 200 x 3 mg/week, no clinically relevant drug-related adverse events or changes in laboratory parameters were observed. AEZS-
112 was shown to be metabolically stable in human plasma. As predicted by pharmacokinetic modelling based on data from part I of the study, the split-dose
scheme led to a higher Cmax and trough values after administration of comparable doses. Those preliminary results showed that a maximum tolerated dose
for weekly dosing has not been defined so far. However, prolonged courses of stable disease in both parts of the study were an encouraging observation.
Completion of this Phase 1 trial was announced on September 21, 2009. Stable disease with time to failure ranging from 20 to 60+ weeks was achieved in
twelve patients with various cancer types, including melanoma and cancers of the colon/rectum, lung, pancreas, prostate, tongue, trachea and thyroid. In
several of these patients, the duration of stabilization exceeded the duration of disease control on previous treatment regimens. Except for a dose-limiting
gastrointestinal reaction in a patient with pre-existing GI problems, no clinically relevant drug-related adverse events or changes in laboratory safety
parameters were observed.
In 2011, we developed a higher concentration oral formulation of AEZS-112 in order to improve patient compliance.
As part of our ongoing review to ensure the optimization of our resources and as the compound did not reach the expected outcome in terms of formulation,
we are currently in the process of evaluating our options for this compound.
1.3
IMMUNOTHERAPY / VACCINES
1.3.1
AEZS-120
AEZS-120 is a preclinical tumor vaccine. The general principle of active tumor vaccines is the induction of a cellular and/or humoral immune response which
is capable of attacking the tumor. AEZS-120 is a live recombinant oral tumor vaccine candidate based on Salmonella typhi Ty21a as a carrier strain.
Salmonella typhi Ty21a is an approved oral typhoid vaccine which has been safely applied in more than 250 million doses. The molecular basis of AEZS-120
is the recombinant expression of the fusion protein between cholera toxin B (CtxB) and prostate specific antigen ("PSA"), and the recombinant expression of
two components of the hemolysin secretion system (HlyB and HlyD) as well as the signal component HlyA which allow the secretion of the fusion protein by
the attenuated approved carrier strain S. typhi Ty21a.
The relevant features with respect to activity as a tumor vaccine can be divided into two parts: A) adjuvant elements for optimal induction of innate and
adaptive immunity; and B) the tumor antigen itself.
In the case of AEZS-120, the tumor antigen is PSA which is expressed in the majority of prostate cancer cases and is employed as a tumor antigen in several
prostate cancer vaccines in development. Therefore, PSA can be considered as a valid antigen for prostate cancer vaccines.
The adjuvant activity is provided by two elements: the live bacterial carrier itself and the fusion to CtxB.
28
An important property of AEZS-120 is the oral application mode, which is based on the carrier S. typhi Ty21a. This strain is approved as a vaccine against
typhoid fever and has preserved some features of virulent S. typhi strains which are relevant for the use of S. typhi Ty21a as a vaccine carrier. Virulent S. typhi
is a pathogen which leads to systemic infection after oral uptake. Several virulence factors allow the survival within the gastro-intestinal tract and the crossing
of the intestinal barrier. These features are, at least in part, also intact in the attenuated live vaccine S. typhi Ty21a allowing oral application with retained
immunogenicity.
However, in particular, the cellular immune response against recombinantly expressed antigens, which is important for anti-tumor immunity, has been
described as being suboptimal if the antigen is expressed within the carrier cell.
A substantial enhancement can be achieved via secretion of the recombinant antigen. In gram negative bacteria, like Salmonellae, protein secretion requires
the activity of protein secretion machineries. Several types of secretion systems with different levels of complexity have been described. The principle of
AEZS-120 is based on the recombinant expression of prostate-specific antigen fused to the B subunit of cholera toxin and a secretion signal in the presence of
the Escherichia coli type I hemolysin secretion system. The proprietary system allows the secretion of the antigen together with an immunological adjuvant
which has been demonstrated to be required for optimal induction of CD8 T-cell responses by recombinant Salmonella based bacterial vaccines. The proof-of-
concept was already demonstrated for the mouse homologue of AEZS-120 in a mouse tumor challenge model and is supported by several patent applications
filed in 2007 and 2009.
In 2007, AEZS-120 was selected by the Company as its first preclinical development candidate of an antitumor vaccine.
On July 20, 2011, we reached a key milestone in this non-clinical development program of AEZS-120, which encompassed the full development of a GMP
process, including GMP production and quality testing of a clinical batch, as well as a non-clinical safety and toxicology package. AEZS-120 has been
developed through a research collaboration with the Department of Medical Radiation Biology and Cell Research, and the Department of Microbiology of the
University of Würzburg, Germany. The collaboration was funded with a total of $890,000 for us and $870,000 for the university partner by the German
Ministry of Education and Research (BMBF) for a period of three years. In accordance with this grant, 50% of our preclinical development costs and 100% of
those of our university partner were reimbursed by the German Ministry of Science and Education. In addition, as part of the collaboration, a melanoma
vaccine based on the recombinant expression of a modified B-Raf protein has been generated.
On October 2, 2012, we announced the presentation of a poster on AEZS-120 during the 32nd Congress of the Société Internationale d'Urologie in Fukuoka,
Japan. The poster, entitled "Preclinical Proof of Concept and Characterization of AEZS-120, a Therapeutic Oral Prostate Cancer Vaccine Candidate Based
on Live Recombinant Attenuated Salmonella", underlined the feasibility of an oral therapeutic vaccination approach against prostate cancer. The production,
release, pharmacology, safety and toxicology program was conducted in agreement with the regulatory authorities and successfully finalized. The conclusions
were:
•
•
•
•
The proof-of-concept has been shown in a tumor-challenge mouse model using the anticipated clinical application schedule.
Biosafety and biodistribution studies did not reveal a different safety profile compared to the carrier strain.
Pharmacological and toxicological studies did not reveal differences to the approved carrier strain.
In all, the non-clinical studies suggest that the safety and toxicological profile of AEZS-120 is similar to the approved carrier strain S. typhi Ty21a, which
has already been safely administered in more than 250 million doses.
GMP material for clinical use has been produced and released, and we have approval from the Danish regulatory authorities as well as the ethics committee
for the initiation of a proof-of-concept Phase 1 trial in prostate cancer. However, as part of our ongoing review to ensure the optimization of our resources, we
are currently evaluating our options for this project.
1.4
SIGNAL TRANSDUCTION INHIBITORS
1.4.1
Erk/PI3K inhibitors and dual kinase inhibitors
The Ras/Raf/Mek/Erk and the PI3K/Akt signaling pathways are prime targets for drug discovery in proliferative diseases such as cancer. The results of
research to date indicate that both the MAPK and the PI3K signaling pathways represent therapeutic intervention points for the clinical treatment of
malignant tumors.
Our multi-parameter optimization program for kinase inhibitor selectivity, cellular efficacy, physicochemical and in vitro ADMET properties has led to the
identification of small molecular compounds with a unique kinase selectivity profile. Our kinase research program comprises the investigation of different
compounds for single Erk inhibition, single PI3K inhibition and dual Erk/PI3K kinase inhibition.
29
1.4.1.1
AEZS-129
On November 17, 2010, we presented a poster on encouraging preclinical results for AEZS-129, a novel orally active compound with antitumor effects, at the
22nd EORTC-NCI-AACR Symposium on Molecular Targets and Cancer Therapeutics in Berlin, Germany. AEZS-129 has been identified as a highly potent
and selective pan-PI3K inhibitor. The compound inhibits the PI3K/Akt signaling pathway both in vitro and in vivo and leads to growth inhibition of tumor
cells. The compound was well tolerated during the four-week treatment period and showed substantial tumor growth inhibition in different mouse xenograft
tumor models.
On March 22, 2011, we presented preclinical results for AEZS-129 at the Informa Life Sciences Protein Kinases Congress in Berlin, Germany. AEZS-129
was identified as a potent inhibitor of class I PI3Ks lacking activity against mTOR. Lack of mTOR activity is considered to potentially lead to a better safety
profile. In biochemical and cellular assays, AEZS-129 demonstrated favorable properties in early in vitro ADMET screening, including microsomal stability,
plasma stability and screening against a safety profile composed of receptors, enzymes and cardiac ion-channels. In vitro, the compound was shown to be a
selective ATP-competitive inhibitor of PI3K with a broad antiproliferative activity against a broad panel of tumor cell lines. In vivo, AEZS-129 showed
excellent plasma exposure and significant tumor growth inhibition in several tumor xenografts models, including A-549 (lung), HCT-116 (colon) and Hec1B
(endometrium). These data suggest that AEZS-129 is a promising compound for clinical intervention of the PI3K/Akt pathway in human tumors.
1.4.1.2
AEZS-136
On April 3, 2012, we announced that a poster on AEZS-136 showed the compound's unique inhibition and promising activity against PI3K and Erk signaling
pathways, as well as being well tolerated. The poster, entitled "Dual inhibition of PI3K and Erk1/2 shows synergy and efficacy in human tumor cells, either
by using drug combinations or novel dual PI3K/Erk inhibitors", was presented at the AACR Annual Meeting in Chicago.
The conclusions were as follows:
Effective dual targeting of Raf-Mek-Erk and PI3K-Akt pathway.
•
Unique inhibitor with excellent activity against PI3K and Erk.
•
Induction of cell cycle arrest in G1 phase and apoptosis.
•
Broad anti-proliferative activity in vitro.
•
Favorable in vitro ADMET and in vivo PK profile.
•
• Well tolerated up to daily doses of 90mg/kg for 4 weeks.
In vivo antitumor efficacy after oral administration.
•
On August 13, 2012, we announced the presentation of a poster on AEZS-136 during the 244th National Meeting of the American Chemistry Society in
Philadelphia. The data outlined the compound's unique inhibition and excellent preclinical activity against PI3K and Erk signaling pathways, as well as being
well tolerated. AEZS-136 is an integral part of our kinase research program comprising the investigation of different compounds for single Erk inhibition,
single PI3K inhibition and dual Erk/PI3K kinase inhibition. AEZS-136 selectively inhibits the kinase activity of Erk 1/2 and class 1 PI3Ks, enabling
simultaneous inhibition of the Raf-Mek-Erk and the PI3K-Akt signaling cascades. AEZS-136 was discovered using our proprietary compound library and
high throughput screening technology.
As part of our ongoing review to ensure the optimization of our resources, we are currently evaluating the next steps for our Erk/PI3K inhibitors program.
1.4.2
Perifosine
On March 11, 2013, we announced that the Phase 3 trial in multiple myeloma was discontinued after an interim analysis by an independent Data Safety
Monitoring Board reported that it was highly unlikely the study would achieve a significant difference in its primary endpoint of progression-free survival.
We therefore decided not to make any further investment in the development of perifosine.
Perifosine remains partnered with Yakult in Japan, Handok in Korea and Hikma in the MENA region for various cancer indications.
In addition, perifosine remains the object of certain investigator-initiated studies in different indications such as neuroblastoma, glioma, pediatric solid tumors
and other indications.
30
2.0
2.1
ENDOCRINOLOGY
MACIMORELIN
Macimorelin, a ghrelin agonist, is a novel orally active small molecule that stimulates the secretion of growth hormone by binding to the ghrelin receptor
(GHSR-1a). It has potential uses in both endocrinology and in oncology indications.
In endocrinology, the FDA has accepted for substantive review our NDA for MACRILEN™ for the evaluation of AGHD. MACRILEN™ is a
peptidomimetic ghrelin receptor agonist with growth hormone secretagogue activity. If approved, MACRILEN™ will be the first orally administrated drug
indicated for the evaluation of AHGD by evaluating the pituitary gland secretion of growth hormone in response to an oral dose of the product.
MACRILEN™ has been granted orphan-drug designation by the FDA for use in evaluating growth hormone deficiency ("GHD"). We own the worldwide
rights to MACRILEN™.
In oncology, an IND has been granted for a Phase 2A trial with macimorelin in cancer-induced cachexia, a disease which leads to significant weight loss and
diminished functional performance. Since ghrelin agonists such as macimorelin have been shown to stimulate food intake and increase body weight in rats
and mice, macimorelin could lead to better quality of life for patients with cancer-induced cachexia. Ghrelin agonists have been in clinical trials for over a
decade and have generally demonstrated good safety and efficacy profiles.
2.1.1
MACRILEN™ (macimorelin) – Use for evaluation of AGHD
On October 19, 2009, we announced that we had initiated activities intended to complete the clinical development of MACRILEN™ for use in evaluating
growth hormone deficiency. We had already assumed the sponsorship of the IND and discussed with the FDA the best way to complete the ongoing Phase 3
clinical trial and subsequently file an NDA for approval of MACRILEN™ for use in evaluating AGHD.
The pivotal Phase 3 trial was designed to investigate the safety and efficacy of the oral administration of MACRILEN™ as a growth hormone stimulator for
use in evaluating AGHD. It was accepted by the FDA that for the ongoing part of the study, MACRILEN™ would not be tested against a comparator drug, as
Geref® had been removed from the market.
On June 21, 2010, we presented positive data at the 92nd ENDO Meeting on MACRILEN™ for evaluation and therapeutic use. The preclinical data showed
that MACRILEN™ is a potent and safe oral synthetic GH-releasing compound with potential utility in evaluating growth hormone deficiencies.
On July 14, 2010, we announced the presentation of a poster on MACRILEN™, entitled Use of the Orally Active Ghrelin Mimetic AEZS-130 as a Simple Test
for the Diagnosis of Growth Hormone (GH) Deficiency (GHD) in adults (AGHD). Merriam G.R., Yuen K., Bonert V., Dobs A, Garcia J., Kipnes M., Molitch
M., Swerdloff R., Wang C., Cook D., Altemose I. and Biller B. This poster was presented at the Seventh International Congress of Neuroendocrinology, in
Rouen, France.
On October 5, 2010, at the Fifth International Congress of the Growth Hormone Research Society and the Insulin-like Growth Factors Society, we announced
that, after the interim Phase 3 analysis, MACRILEN™ demonstrated the potential to provide a simple, well tolerated and safe oral product for use in
evaluating AGHD.
On December 20, 2010, we announced we had reached agreement with the FDA on a SPA for MACRILEN™, enabling the Company to complete the
ongoing registration study required to gain approval for use in evaluating AGHD.
The first part of the study, conducted by our former partner, Ardana, was a two-way cross-over study and included 42 patients with confirmed AGHD or
multiple pituitary hormone deficiencies and a low insulin-like growth factor-I. A control group of 10 subjects without AGHD were matched to patients for
age, gender, body mass index and (for females) estrogen status.
On July 26, 2011, we announced the completion of the Phase 3 study of MACRILEN™ as a first oral product for use in evaluating AGHD and the decision to
meet with the FDA for the future filing of an NDA for the registration of MACRILEN™ in the United States.
On August 30, 2011, we announced favorable top-line results of our completed Phase 3 study with MACRILEN™ as a first oral product for use in evaluating
AGHD. The results showed that MACRILEN™ had reached its primary endpoint demonstrating >90% area-under-the-curve ("AUC") of the Receiver
Operating Characteristic ("ROC") curve, which determines the level of specificity and sensitivity of the product. Importantly, the primary efficacy parameters
show that the study achieved both specificity and sensitivity at a level of 90% or greater. In addition, eight of the ten newly enrolled AGHD patients were
correctly classified by a pre-specified peak GH threshold level. The use of MACRILEN™ was shown to be safe and well tolerated overall throughout the
completion of this trial.
31
On June 26, 2012, we announced that the final results from a Phase 3 trial for MACRILEN™ showed that the drug is safe and effective in evaluating AGHD.
Jose M. Garcia, MD, PhD, of the Baylor College of Medicine and the Michael E. DeBakey VA Medical Center, disclosed these data during an oral
presentation at the 94th ENDO Annual Meeting and Expo in Houston. The study had originally been designed as a cross-over trial of MACRILEN™ vs.
growth hormone-releasing hormone (GHRH) + L-Arginine (ARG) in AGHD patients and in controls matched for body mass index ("BMI"), estrogen status,
gender and age. After 43 AGHD patients and ten controls had been tested, GHRH became unavailable. The study was completed by testing ten more AGHD
patients and 38 controls with MACRILEN™ alone. Of the 53 AGHD subjects enrolled, 52 received MACRILEN™, and 50 who had confirmed AGHD prior
to study entry were included in this analysis, along with 48 controls. Two AGHD subjects could not be matched due to the combination of young age, high
BMI and estrogen use. The objective of this clinical trial was to determine the efficacy and safety of MACRILEN™ in the evaluating of AGHD. Mean peak
growth hormone ("GH") levels in AGHD patients and controls following MACRILEN™ administration were 2.36ng/mL (range 0.03-33) and 17.71ng/mL
(range 10.5-94), respectively. The ROC plot analysis yielded an optimal GH cut-point of 2.7ng/mL, with 82% sensitivity, 92% specificity and a 13%
misclassification rate. Obesity (BMI>30) was present in 58% of cases and controls, and peak GH levels were inversely associated with BMI in controls.
Adverse events ("AE") were seen in 37% of AGHD patients and in 21% of controls following MACRILEN™. In contrast, 61% of AGHD subjects and 30%
of controls experienced AEs with L ARG+GHRH. The most common AEs after MACRILEN™ were unpleasant taste (19.2%) and diarrhea (3.8%) for the
AGHD patients and unpleasant taste (4.2%) and diarrhea (4.2%) for the matched controls. No clinically meaningful changes from baseline in ECG results
during the study for AGHD patients; however, one control subject had an ECG change (T wave abnormality and QTc interval prolongation) one hour after
treatment with MACRILEN™ that was considered a serious treatment-related adverse event and resolved spontaneously within 24 hours. The subject had
been pre-treated with citalopram, a drug that was later reported by the FDA to be associated with QT prolongation, although the patient had stopped this
medication seven days prior to dosing. Overall, this study demonstrated that MACRILEN™ is safe and effective for use in evaluating AGHD.
On August 7, 2012, the United States Patent and Trademark Office granted us a patent for the use of MACRILEN™ as a product to be used in evaluating
AGHD. Filed on February 19, 2007, the patent (US 8,192,719 B2), entitled "Methods and Kits to Diagnose Growth Hormone Deficiency by Oral
Administration of EP1572 or EP1573 Compounds", became effective as of June 5, 2012 and will expire on October 12, 2027. The corresponding composition
of matter patent (US 6,861,409 B2), filed on June 13, 2001 and granted on March 1, 2005, will expire on August 1, 2022, with the possibility of a patent term
extension of up to five years.
On September 25, 2012, the European Patent Office granted us a patent for the use of MACRILEN™ related to methods and kits for use in relation to the
evaluation of GHD in a human or animal subject. Filed on February 19, 2007, the patent, (EP #1 984 744 B1) entitled "Methods and Kits to Diagnose Growth
Hormone Deficiency", was effective as of September 19, 2012 following its publication in the European Patent Bulletin, and it will expire on February 19,
2027.
On September 26, 2012, we received notification from the FDA that Fast Track designation previously applied for had not been granted for MACRILEN™ as
a product for use in evaluating AGHD.
On October 18, 2012, we announced that results from a multicenter open-label Phase 3 trial for MACRILEN™ demonstrated that the drug is safe and
effective in evaluating AGHD. George R. Merriam, MD, Director of the Clinical Study Unit at the Veterans Affairs Puget Sound Health Care System, and
Professor of Medicine at the University of Washington, Seattle and Tacoma, WA, disclosed these data at the 6th International Congress of the GRS and IGF
Society in Munich, Germany. His presentation confirmed data previously presented by Jose M. Garcia, MD, Ph.D., of the Baylor College of Medicine and the
Michael E. DeBakey Veterans Affairs Medical Center, at the 94th ENDO Meeting in Houston, Texas in June 2012. Dr. Merriam's presentation drew attention
to the effect of BMI on optimizing the cut-off values to improve the sensitivity and specificity of the test. Responses in normal subjects classified as obese,
with BMI's above 30, were significantly lower than in leaner subjects. Since GH deficiency can lead to increased body fat, many of the patients also met
criteria for obesity, and therefore, a lower peak GH cut-off is more accurate in separating obese normals from obese patients. Based upon these study results,
a cut-off of 2.7 µg/L was optimal for subjects with a BMI≥30 and a cut-off of 6.8 µg/L for subjects with a BMI<30. Age had a weaker effect on test
performance and gender made no difference. Thus GH stimulation with oral MACRILEN™ may provide a simple, rapid, safe, and well-tolerated product
used in evaluating AGHD, with accuracy comparable to that of the GHRH-ARG test.
On January 6, 2014, we announced that the FDA had accepted for substantive review our NDA for our orally available peptidomimetic ghrelin receptor
agonist with growth hormone secretagogue activity, MACRILEN™, for the evaluation of AGHD. The acceptance for filing of the NDA indicates that the
FDA has determined that the application is sufficiently complete to permit a substantive review. The NDA, submitted on November 5, 2013, seeks approval
for the commercialization of MACRILEN™, which, if approved, will be the first orally administered drug indicated for the evaluation of AGHD by
evaluating the pituitary gland secretion of growth hormone in response to an oral dose of the product. The application is subject
32
to a standard review by the FDA. MACRILEN™ benefits from patent protection covering major markets; in particular, the product is protected in the U.S. at
least until October 2027. Phase 3 data have demonstrated the compound to be well tolerated, with accuracy comparable to available intravenous and
intramuscular testing procedures.
Throughout the remainder of 2014, we expect to advance the pre-launch activities related to the initial commercialization of MACRILEN™ in AGHD in the
U.S. market. As noted above, our NDA is currently under substantive review by the FDA. Subject to the successful review and acceptance of our NDA, we
expect to make MACRILEN™ available by prescription in the U.S. as soon as commercially practicable following final regulatory approval.
We intend to build a commercial infrastructure necessary to access the physicians who perform the majority of AGHD tests (endocrinologists) along with the
major centers of AGHD influence. Commercial initiatives are likely to include the targeted selection, hiring and deployment of a contracted sales force by the
end of 2014. The targeted marketing efforts of our sales force will reach endocrinology specialists of AGHD. We believe these efforts will enable the
realization of a substantial portion of the potential commercial opportunity for MACRILEN™.
Competitors for MACRILEN™ in the evaluation of AGHD
Competitors for MACRILEN™ as a product for the evaluation of AGHD are principally the diagnostic tests currently performed by endocrinologists,
although none of these tests are approved by the FDA for this purpose.
The most commonly used diagnostics tests for GHD are:
• Measurement of blood levels of Insulin Growth Factor ("IGF")-1, which is typically used as the first test when GHD is suspected. However, this test is
not used to definitively rule out GHD as many growth hormone deficient patients show normal IGF-1 levels;
•
•
•
Insulin Tolerance Test ("ITT"), which is considered to be the "gold standard" for GH secretion provocative tests but requires constant patient monitoring
while the test is administered and is contra-indicated in patients with seizure disorders, with cardiovascular disease and in brain injured patients and
elderly patients. ITT is administered i.v.;
GHRH + Arginine test, which is an easier test to perform in an office setting and has a good safety profile but is considered to be costly to administer
compared to ITT and Glucagon. This test is contra-indicated in patients with renal failure. GHRH + Arginine is approved in the EU and has been
proposed to be the best alternative to ITT, but it is no longer available in the United States. This test is administered i.v.; and
Glucagon test, which is simple to perform and is considered relatively safe by endocrinologists but is contraindicated in malnourished patients and
patients who have not eaten for more than 48 hours. Since there is a suspicion that this test may cause hypoglycemia, it may not be appropriate in diabetic
populations. This test is administered i.m.
Oral administration of MACRILEN™ offers more convenience and simplicity over the current GHD tests used, requiring either i.v. or i.m. administration.
Additionally, MACRILEN™ may demonstrate a more favorable safety profile than existing diagnostic tests, some of which may be inappropriate for certain
patient populations e.g. diabetes mellitus or renal failure, and have demonstrated a variety of side effects which MACRILEN™ has not thus far. These factors
may be limiting the use of GHD testing and may enable MACRILEN™ to become the product of choice in evaluating AGHD.
Market Data - AGHD
There are approximately 36,000 AGHD tests performed annually in the U.S. Based on published information from the U.S. Centers for Disease Control and
Prevention, different scientific publications and by Navigant Research, we estimate that the total potential U.S. market for AGHD evaluation is approximately
158,000 tests per year, including the evaluation of patients who have suffered traumatic brain injury ("TBI"). In patients with TBI, a GHD is frequent and may
contribute to cognitive sequel and reduction in quality of life. GHD develops in approximately 19% of both severe and moderate hospitalized TBI victims
(scientific publications: Agha et al., British Journal of Neurosurgery, 2007, Fernandez-Rodrigues et al., Frontiers in Endocrinology, 2011 and Popovic et al.,
Frontiers of Hormone Research, Basel, Karger, 2005).
2.1.2
Macimorelin – Cancer Cachexia
On November 28, 2011, we announced that the FDA had granted Jose M. Garcia, M.D., Ph.D., Assistant Professor, Division of Diabetes Endocrinology and
Metabolism, Departments of Medicine and Molecular and Cell Biology, Baylor College of Medicine and Michael E. DeBakey Veterans Affairs Medical
Center, in Houston Texas, an IND approval for the initiation of a Phase 2A trial to assess the safety and efficacy of repeated doses of macimorelin in patients
with cancer cachexia. Cachexia,
33
which is characterized by diminished appetite and food intake in cancer patients, is defined as an involuntary weight loss of at least 5% of the pre-illness body
weight over the previous 6 months.
On March 8, 2012, we announced that the Michael E. DeBakey Veterans Affairs Medical Center, in Houston, Texas, had initiated the Phase 2A trial assessing
the safety and efficacy of repeated doses of macimorelin in patients with cancer cachexia. The study is conducted under a CRADA with the Michael E.
DeBakey Veterans Affairs Medical Center, which is funding the study. This is a double-blind, randomized, placebo-controlled Phase 2A trial to test the
effects of different doses of macimorelin in 18 to 26 patients with cancer cachexia. The study will involve three sequential groups receiving differing doses of
macimorelin. Each dose group will have six patients who will receive macimorelin and two to four patients who will receive a placebo. The primary objective
of the study is to evaluate the safety and efficacy of repeated oral administration of macimorelin at different doses daily for one week in view of developing a
treatment for cachexia.
The study is ongoing with patient enrollment not yet completed.
2.2
LHRH ANTAGONISTS
2.2.1
Cetrotide®
On October 1, 2013, we announced that we had completed the transactions contemplated by the transfer and service agreement and concurrent agreements
with various partners and licensees with respect to the manufacturing rights for Cetrotide®, currently marketed by a subsidiary of Merck KGaA of Darmstadt,
Germany ("Merck Serono") for therapeutic use as part of in vitro fertilization programs. The principal outcome of these agreements is the transfer of
manufacturing rights and the grant of a license to Merck Serono for the manufacture, testing, assembling, packaging, storage and release of Cetrotide® in all
territories in exchange for a non-refundable one-time payment of €2.5 million (approximately $3.3 million). In addition, we also entered into a transitional
services agreement with Merck KGaA under which the Company will, during a 36-month period, provide various transition services to assist Merck KGaA in
assuming responsibility for the manufacturing of Cetrotide® in consideration for the payment of a monthly fee to the Company throughout such period.
2.2.2
Ozarelix
Ozarelix is a modified LHRH antagonist which is a linear decapeptide sequence. Ozarelix is a fourth-generation LHRH antagonist designed to extend the
suppression of testosterone levels, which does not require a sophisticated depot formulation for long-lasting activity.
On August 12, 2004, we entered into a licensing and collaboration agreement with Spectrum for ozarelix and its potential to treat hormone-dependent cancers
as well as benign proliferative disorders, such as BPH and endometriosis for all potential indications in North America (including Canada and Mexico) and
India while keeping the rights for the rest of the world. In addition, Spectrum is entitled to receive 50% of upfront and milestone payments and royalties
received from our Japanese partner, Nippon Kayaku, that are generated in the Japanese market for oncological indications. In November 2010, this agreement
with Spectrum was amended. Under the terms of the amended agreement, Spectrum is entitled to use our patent rights and know-how to develop, use, make,
have made, sell, offer for sale, have sold, import, export and commercialize ozarelix in all worldwide territories except Japan, Korea, Indonesia, Malaysia, the
Philippines and Singapore. Under the terms of the amended agreement, Spectrum granted, as further consideration, 326,956 shares of its common stock, with
an equivalent fair value at the time of approximately $1,263,000, as an upfront nonrefundable license fee payment to us. Also per the amended agreement, we
will be entitled to receive a total of approximately $22,765,000 in cash payments, as well as approximately $670,000 in Spectrum common stock, upon
achieving certain regulatory milestones in various markets. Furthermore, we will be entitled to receive royalties (scale-up royalties from high single to low
double-digit) on future net sales of ozarelix products in the named territories.
On August 3, 2006, we announced a licensing and collaboration agreement with Nippon Kayaku for ozarelix. Under the terms of the agreement, we granted
Nippon Kayaku an exclusive license to develop and market ozarelix for all potential oncological indications in Japan. In return, we received an upfront
payment upon signature and are eligible to receive payments upon achievement of certain development and regulatory milestones, in addition to low double-
digit royalties on potential net sales. Spectrum is entitled to receive 50% of the upfront, milestone payments and royalties received from Nippon Kayaku.
During the third quarter of 2008, we entered into a commercialization agreement with Handok for ozarelix (BPH indication) for the Korean market.
34
2.2.2.1
Prostate Cancer Clinical Trials
In August 2006, we announced positive Phase 2 results for ozarelix in hormone-dependent inoperable prostate cancer. This open-label, randomized-controlled
dose-finding trial enrolled 64 patients receiving different IM dosage regimens of ozarelix to assess its safety and efficacy. The study achieved its primary
endpoint of defining a tolerable dosage regimen of ozarelix that would ensure continuous suppression of testosterone at castration level for a three-month test
period. A secondary efficacy endpoint aimed at assessing tumor response as determined by a 50% or greater reduction of serum PSA level, compared to
baseline, was also achieved. The best results regarding the primary endpoint of continuous suppression were obtained with a dose of 130 mg per cycle where
all patients remained suppressed to castration until at least day 85. In patients with continuous testosterone suppression below castration level, tumor response
as measured by PSA levels was 97%.
A Phase 2 trial for the treatment of prostate cancer is currently ongoing with our partner, Spectrum. This is an international, multicenter, open-label,
randomized study assessing the safety and efficacy of a monthly dosing regimen of ozarelix versus goserelin depot in men with prostate cancer (source:
www.clinicaltrials.gov).
RAW MATERIALS
Raw materials and supplies are generally available in quantities adequate to meet the needs of our business. We will be dependent on third-party
manufacturers for the pharmaceutical products that we will market. An interruption in the availability of certain raw materials or ingredients, or significant
increases in the prices paid by us for them, could have a material adverse effect on our business, financial condition, liquidity and operating results.
DISTRIBUTION
Regarding MACRILEN™, throughout the remainder of 2014, we expect to advance the pre-launch activities related to the initial commercialization of this
product for the evaluation of AGHD in the U.S. market. As noted above, our NDA is currently under substantive review by the FDA. Subject to the
successful review and acceptance of our NDA, we expect to make MACRILEN™ available by prescription in the U.S. as soon as commercially practicable
following final regulatory approval.
We intend to build a commercial infrastructure necessary to access the physicians who perform the majority of AGHD tests (endocrinologists) along with the
major centers of AGHD influence. Commercial initiatives are likely to include the targeted selection, hiring and deployment of a contracted sales force by the
end of 2014. The marketing efforts of our sales force will target endocrinology specialists of AGHD. We believe these efforts should enable the realization of
a substantial portion of the potential commercial opportunity for MACRILEN™.
We are evaluating the possible final distribution channels for MACRILEN™, however, we expect that MACRILEN™ will be accessed through a mixture of
specialty pharmacies, hospital pharmacies, wholesalers and other secondary channels.
To date, we have established an agreement with a contract manufacturer for the commercial supply of the product and expect to use a third-party logistics
provider for key services related to logistics, warehousing and inventory management.
We continue to evaluate the potential to commercialize MACRILEN™ in other geographic territories, including Canada and Europe.
REGULATORY COMPLIANCE
Governmental authorities in Canada, the United States, Europe and other countries extensively regulate the preclinical and clinical testing, manufacturing,
labeling, storage, record keeping, advertising, promotion, export, marketing and distribution, among other things, of our product candidates. Under the laws of
the United States, the countries of the EU, and other countries, we and the institutions at which we sponsor research are subject to obligations to ensure that
our clinical trials are conducted in accordance with Good Clinical Practices ("GCP") guidelines and the investigational plan and protocols contained in an
IND application, or comparable foreign regulatory submission. The Japanese regulatory process for approval of new drugs is similar to the FDA approval
process described below except that Japanese regulatory authorities request bridging studies to verify that foreign clinical data are applicable to Japanese
patients and also require the tests to determine appropriate dosages for Japanese patients to be conducted on Japanese patient volunteers. Due to these
requirements, delays of two to three years in introducing a drug developed outside of Japan to the Japanese market are possible. Set forth below is a brief
summary of the material governmental regulations affecting the Company in the major markets in which we intend to market our products.
35
Canada
In Canada, the Canadian Therapeutic Products Directorate is the Canadian federal authority that regulates pharmaceutical drugs and medical devices for
human use. Prior to being given market authorization, a manufacturer must present substantive scientific evidence of a product's safety, efficacy and quality as
required by the Food and Drugs Act and other legislation and regulations. The requirements for the development and sale of pharmaceutical drugs in Canada
are substantially similar to those in the United States, which are described below.
United States
In the United States, the FDA under the Federal Food, Drug, and Cosmetic Act, the Public Health Service Act and other federal statutes and regulations,
subject pharmaceutical products to rigorous review.
In order to obtain approval of a new product from the FDA, we must, among other requirements, submit proof of safety and efficacy as well as detailed
information on the manufacture and composition of the product. In most cases, this proof entails extensive preclinical, clinical, and laboratory tests. Before
approving a new drug or marketing application, the FDA also typically conducts pre-approval inspections of the company, its CROs and/or its clinical trial
sites to ensure that clinical, safety, quality control, and other regulated activities are compliant with GCP, or Good Laboratory Practices ("GLP"), for specific
non-clinical toxicology studies. Manufacturing facilities used to produce a product are also subject to ongoing inspection by the FDA. The FDA may also
require confirmatory trials, post-marketing testing, and extra surveillance to monitor the effects of approved products, or place conditions on any approvals
that could restrict the commercial applications of these products. Once approved, the labeling, advertising, promotion, marketing, and distribution of a drug or
biologic product must be in compliance with FDA regulatory requirements.
The first stage required for ultimate FDA approval of a new biologic or drug involves completion of preclinical studies and the submission of the results of
these studies to the FDA. This, together with proposed clinical protocols, manufacturing information, analytical data, and other information in an IND, must
become effective before human clinical trials may commence. Preclinical studies involve laboratory evaluation of product characteristics and animal studies
to assess the efficacy and safety of the product. The FDA regulates preclinical studies under a series of regulations called the current GLP regulations. If the
sponsor violates these regulations, the FDA may require that the sponsor replicate those studies.
After the IND becomes effective, a sponsor may commence human clinical trials. The sponsor typically conducts human clinical trials in three sequential
phases, but the phases may overlap. In Phase 1 trials, the sponsor tests the product in a small number of patients or healthy volunteers, primarily for safety at
one or more doses. Phase 1 trials in cancer are often conducted with patients who have end-stage or metastatic cancer. In Phase 2, in addition to safety, the
sponsor evaluates the efficacy of the product in a patient population somewhat larger than Phase 1 trials. Phase 3 trials typically involve additional testing for
safety and clinical efficacy in an expanded population at geographically dispersed test sites. The sponsor must submit to the FDA a clinical plan, or
"protocol", accompanied by the approval of the institutions participating in the trials, prior to commencement of each clinical trial. The FDA may order the
temporary or permanent discontinuation of a clinical trial at any time. In the case of product candidates for cancer, the initial human testing may be done in
patients with the disease rather than in healthy volunteers. Because these patients are already afflicted with the target disease, such studies may provide results
traditionally obtained in Phase 2 studies. Accordingly, these studies are often referred to as "Phase 1/2" studies. Even if patients participate in initial human
testing and a Phase 1/2 study is carried out, the sponsor is still responsible for obtaining all the data usually obtained in both Phase 1 and Phase 2 studies.
The sponsor must submit to the FDA the results of the preclinical and clinical testing, together with, among other things, detailed information on the
manufacture and composition of the product, in the form of an NDA or, in the case of a biologic, a Biologics License Applications ("BLA"). In a process that
can take a year or more, the FDA reviews this application and, when and if it decides that adequate data are available to show that the new compound is both
safe and effective for a particular indication and that other applicable requirements have been met, approves the drug or biologic for marketing. The amount
of time taken for this approval process is a function of a number of variables, including the quality of the submission and studies presented and the potential
contribution that the compound will make in improving the treatment of the disease in question.
Orphan-drug designation is granted by the FDA Office of Orphan Drug Products to novel drugs or biologics that treat a rare disease or condition affecting
fewer than 200,000 patients in the U.S. The designation provides the drug developer with a seven-year period of U.S. marketing exclusivity if the drug is the
first of its type approved for the specified indication or if it demonstrates superior safety, efficacy or a major contribution to patient care versus another drug
of its type previously granted the designation for the same indication. We have been granted orphan drug designations for zoptarelin doxorubicin for the
treatment of advanced ovarian cancer and for MACRILEN™ for the evaluation of growth hormone deficiency.
36
Under the Hatch-Waxman Act, newly-approved drugs and indications may benefit from a statutory period of non-patent data exclusivity. The Hatch-Waxman
Act provides five-year data exclusivity to the first applicant to gain approval of an NDA for a new chemical entity, or NCE, meaning that the FDA has not
previously approved any other drug containing the same active pharmaceutical ingredient, or active moiety. Although protection under the Hatch-Waxman
Act will not prevent the submission or approval of another full NDA, such an NDA applicant would be required to conduct its own preclinical and adequate,
well controlled clinical trials to demonstrate safety and effectiveness.
The Hatch-Waxman Act also provides three years of data exclusivity for the approval of new and supplemental NDAs, including Section 505(b)(2)
applications, for, among other things, new indications, dosage forms, routes of administration, or strengths of an existing drug, or for a new use, if new
clinical investigations that were conducted or sponsored by the applicant are determined by the FDA to be essential to the approval of the application. This
exclusivity, which is sometimes referred to as clinical investigation exclusivity, would not prevent the approval of another application if the applicant has
conducted its own adequate, well-controlled clinical trials demonstrating safety and efficacy, nor would it prevent approval of a generic product that did not
incorporate the exclusivity-protected changes of the approved drug product.
The labeling, advertising, promotion, marketing, and distribution of a drug or biologic product must be in compliance with FDA regulatory requirements.
Failure to comply with applicable requirements can lead to the FDA demanding that production and shipment cease and, in some cases, that the manufacturer
recall products, or to enforcement actions that can include seizures, injunctions, and criminal prosecution. These failures can also lead to FDA withdrawal of
approval to market a product.
European Union
Medicines can be authorized in the EU by using either the centralized authorization procedure or national authorization procedures.
Centralized procedure
The EU has implemented a centralized procedure coordinated by the EMA for the approval of human medicines, which results in a single marketing
authorization issued by the European Commission that is valid across the EU, as well as Iceland, Liechtenstein and Norway. The centralized procedure is
compulsory for human medicines that are derived from biotechnology processes, such as genetic engineering, that contain a new active substance indicated
for the treatment of certain diseases, such as HIV/AIDS, cancer, diabetes, neurodegenerative disorders or autoimmune diseases and other immune
dysfunctions, and designated orphan medicines. For medicines that do not fall within these categories, an applicant has the option of submitting an application
for a centralized marketing authorization to the EMA, as long as the medicine concerned is a significant therapeutic, scientific or technical innovation, or if its
authorization would be in the interest of public health.
National authorization procedures
There are also two other possible routes to authorize medicinal products in several EU countries, which are available for investigational drug products that fall
outside the scope of the centralized procedure:
Decentralized procedure. Using the decentralized procedure, an applicant may apply for simultaneous authorization in more than one EU country of
medicinal products that have not yet been authorized in any EU country and that do not fall within the mandatory scope of the centralized procedure.
The application will be reviewed by a selected Reference Member State ("RMS"). The Marketing Authorization granted by the RMS will then be recognized
by the other Member States involved in this procedure.
Mutual recognition procedure. In the mutual recognition procedure, a medicine is first authorized in one EU Member State, in accordance with the national
procedures of that country. Following this, further marketing authorizations can be sought from other EU countries in a procedure whereby the countries
concerned agree to recognize the validity of the original, national marketing authorization.
For more information about the regulatory risks associated with the Company's business operations, see "Item 3. – Key Information – Risk Factors".
DRUG DISCOVERY
There is an increasing demand on the world market for active substances. Our internal drug discovery unit provides an important prerequisite for the
provision of new patented active substances, which can then be developed further or licensed to third parties.
37
Our drug discovery unit concentrates on the search for active substances for innovative targets, which open the door to the introduction of new therapeutic
approaches. Further, this unit searches for new active substances having improved properties for clinically validated targets for which drugs are already being
used in humans and which produce inadequate effects, cause severe side effects, are not economical or are not available in a patient-friendly form.
To this end, we possess an original substance library for the discovery of active compounds with a comprehensive range of promising natural substances
which can serve as models for the construction of synthetic molecules. The initial tests involve 120,000 samples from our internal substance library in the
form of high-throughput screening. The "hits", which are the first active compounds found in the library, are tested further and built up specifically into
potential lead structures. Based on two to three lead structures, they are then optimized in a further step to potential development candidates.
INTELLECTUAL PROPERTY – PATENTS
We believe that we have a solid intellectual property portfolio that covers compounds, manufacturing processes, compositions and methods of medical use for
our lead drugs and drug candidates. Our patent portfolio consists of approximately 50 owned and in-licensed patent families (issued, granted or pending in the
United States, Europe and other jurisdictions). Independent of the original patent expiry date, additional exclusivity is possible in the United States, Europe
and several other countries by data protection for new chemical entities or by orphan drug designation. In addition, in the United States, Europe and certain
other jurisdictions the terms of a patent covering an approved drug can be extended by patent term extension or supplementary protection certificate.
In the United States, the patent term of a patent that covers an FDA-approved drug may also be eligible for patent term extension, which permits patent term
restoration as compensation for the patent term lost during the FDA regulatory review process. The Drug Price Competition and Patent Term Restoration Act
of 1984, or the Hatch-Waxman Act, permits a patent term extension of up to five years beyond the expiration of the patent, in which the patentee may file an
application for yearly interim extensions within five years if the patent will expire and the FDA has not yet approved the NDA. The length of the patent term
extension is related to the length of time the drug is under regulatory review. Patent extension cannot extend the remaining term of a patent beyond a total of
14 years from the date of product approval and only one patent applicable to an approved drug may be extended.
Similar provisions are available in Europe and other foreign jurisdictions to extend the term of a patent that covers an approved drug. In these jurisdictions,
however, no interim extensions exist and the marketing approval must be granted before the patent expires. In the future, if and when our pharmaceutical
products receive FDA approval, we expect to apply for patent term extensions on patents covering those products. While we anticipate that any such
applications for patent term extensions will likely be granted, we cannot predict the precise length of the time for which such patent terms would be extended
in the United States, Europe or other jurisdictions. If we are not able to secure patent term extensions on patents covering our products for meaningful periods
of additional time, we may not achieve or sustain profitability, which would adversely affect our business.
Of the issued or granted patents, the protective rights described below form the core of our patent portfolio with regard to our lead drugs and drug candidates.
Zoptarelin doxorubicin:
•
•
•
U.S. patent 5,843,903 provides protection in the United States for the compound zoptarelin doxorubicin and other related targeted cytotoxic anthracycline
analogs, pharmaceutical compositions comprising the compounds as well as their medical use for the treatment of cancer. This U.S. patent expires in
November 2015. A patent term extension of up to five years may be possible.
European patent 0 863 917 B1 provides protection in Europe for the compound zoptarelin doxorubicin and other related targeted cytotoxic anthracycline
analogs, pharmaceutical compositions comprising the compounds as well as their medical use for the treatment of tumors. This European patent expires
in November 2016. A patent term extension of up to five years may be possible in case approval has been achieved prior to patent expiration.
Japanese patent 3 987 575 provides protection in Japan for the compound zoptarelin doxorubicin and other related targeted cytotoxic anthracycline
analogs, pharmaceutical compositions comprising the compounds as well as their medical use for the treatment of tumors. This Japanese patent expires in
November 2016. A patent term extension of up to five years may be possible in case approval has been achieved prior to patent expiration.
Macimorelin:
•
U.S. patent 6,861,409 protects the compound macimorelin and U.S. patent 7,297,681 protects other related growth hormone
38
secretagogue compounds, each also protecting pharmaceutical compositions comprising the compounds as well as their medical use for elevating the
plasma level of growth hormone. U.S. patent 6,861,409 and U.S. patent 7,297,681 both expire in August 2022. A patent term extension of up to five
years may be possible.
•
•
•
•
•
•
European patent 1 289 951 protects the compound macimorelin and European patent 1 344 773 protects other related growth hormone secretagogue
compounds, pharmaceutical compositions comprising the compounds as well as their medical use for elevating the plasma level of growth hormone. EP
patent 1 289 951 and EP patent 1 344 773 both expire in June 2021. A patent term extension of up to five years by SPC may be possible in case approval
has been achieved prior to patent expiration.
Japanese patent 3 522 265 protects the compound macimorelin and pharmaceutical compositions comprising the compounds as well as their medical use
for elevating the plasma level of growth hormone. This Japanese patent expires in June 2021. A patent term extension of up to five years may be possible
in case approval has been achieved prior to patent expiration.
Canadian patent 2,407,659 protects the compound macimorelin and pharmaceutical compositions comprising the compounds as well as their medical use
for elevating the plasma level of growth hormone. This Canadian patent expires in June 2021.
U.S. patent 8,192,719 protects a method of assessing pituitary-related growth hormone deficiency in a human or animal subject comprising an oral
administration of the compound macimorelin and determination of the level of growth hormone in the sample and assessing whether the level of growth
hormone in the sample is indicative of growth hormone deficiency. This U.S. patent 8,192,719 expires in October 2027.
European patent 1 984 744 protects a method of assessing pituitary-related growth hormone deficiency by oral administration of macimorelin. The
European patent 1 984 744 expires in February 2027.
Japanese patent 4 852 728 protects a method of assessing pituitary-related growth hormone deficiency by oral administration of macimorelin. The
Japanese patent 4 852 728 expires in February 2027.
AEZS-120:
•
•
European patent 2 092 067 B1 provides protection in Europe for microorganisms as carriers of heterogeneous nucleotide sequences coding for antigens
and protein toxins, a process of manufacturing thereof as well as corresponding plasmids or expression vectors, useful as medicaments, in particular as
tumor vaccines for the treatment of various tumors. This European patent expires in November 2027. A patent term extension of up to five years may be
possible in case approval has been achieved prior to patent expiration.
U.S. and Japanese patent applications (both filed in November 2007) recently received a Notice of Allowance. Granted patents will expire in November
2027.
Ozarelix:
•
•
•
U.S. patent 6,627,609 provides protection in the United States for the compound ozarelix and related third-generation LHRH antagonists and
pharmaceutical compositions comprising them. This U.S. patent will expire in March 2020. A patent term extension of up to five years may be possible.
European patent 1 163 264 provides protection in Europe for the compound ozarelix and related third-generation LHRH antagonists and pharmaceutical
compositions comprising them. This European patent will expire in March 2020. A SPC of up to five years may be possible in case approval has been
achieved prior to patent expiration.
Japanese patent 3 801 867 provides protection in Japan for the compound ozarelix and related third-generation LHRH antagonists and pharmaceutical
compositions comprising them. This Japanese patent will expire in March 2020. A patent term extension of up to five years may be possible in case
approval has been achieved prior to patent expiration.
Erk/PI3K:
•
•
•
U.S. patent 8,202,883 protects compound AEZS-129. This U.S. patent will expire in May 2029 (including patent term adjustment ("PTA"). A patent term
extension of up to five years may be possible.
U.S. patent 8,507,486 protects compound AEZS-136. This U.S. patent will expire in May 2028. A patent term extension of up to five years may
be possible.
U.S. patent 8,536,332 protects methods of treatment for compound AEZS-129. This U.S. patent will expire in May 2028. A patent term extension of up
to five years may be possible.
39
•
•
•
•
•
•
•
U.S. patent 8,604,196 protects methods of treatment for compound AEZS-136. This U.S. patent will expire in May 2028 and is subject to a terminal
disclaimer based on US 8,507,486 (07/04Z/2). A patent term extension of up to five years may be possible.
U.S. patent application US-2012-0258080 seeks protection for compound AEZS-134 as well as methods of treatment for this compound. When granted,
the U.S. patent would expire in April 2032. A patent term extension of up to five years may be possible.
European Patent Application EP2,164,849 seeks protection for compounds AEZS-129 and -136 as well as methods of treatment for these compounds.
When granted, the EP patent would expire in May 2028. A SPC of up to five years may be possible in case approval has been achieved prior to patent
expiration.
European Patent Application No. EP2,694,067 seeks protection for compound AEZS-134 as well as methods of treatment for this compound. When
granted, the EP patent would expire in April 2032. A SPC of up to five years may be possible in case approval has been achieved prior to patent
expiration.
Japanese Patent Application No. 2010-506945 seeks protection for compound AEZS-129 as well as methods of treatment for this compound. When
granted, the JP patent would expire in May 2028. A SPC of up to five years may be possible in case approval has been achieved prior to patent
expiration.
Japanese Patent Application No. 2014-6832 seeks protection for compounds AEZS-136 as well as methods of treatment for this compound. When
granted, the JP patent would expire in May 2028. A SPC of up to five years may be possible in case approval has been achieved prior to patent
expiration.
Japanese patent application based on PCT/EP2012/056138 seeks protection for compound AEZS-134 as well as methods of treatment for this compound.
When granted, the JP patent would expire in April 2032. A SPC of up to five years may be possible in case approval has been achieved prior to patent
expiration.
Disorazol Z - LHRH conjugates (AEZS-138):
•
•
•
•
U.S. patent 7,741,277 protects compound AEZS-138 (disorazole Z - LHRH conjugate). This U.S. patent will expire in January 2028 (including PTA). A
patent term extension of up to five years may be possible.
U.S. patent 8,470,776 protects methods of treatment for compound AEZS-138 (disorazole Z - LHRH conjugate). This U.S. patent will expire in February
2029 (including PTA). A patent term extension of up to five years may be possible.
European patent application 2,066,679 protects compound AEZS-138 (disorazole Z - LHRH conjugate) as well as methods of treatment for this
compound. When granted, this EP patent will expire in September 2027. A SPC of up to five years may be possible in case approval has been achieved
prior to patent expiration.
Japanese patent 5,340,155 protects compound AEZS-138 (disorazole Z - LHRH conjugate) as well as methods of treatment for this compound. This
JP patent will expire in September 2027. A SPC of up to five years may be possible in case approval has been achieved prior to patent expiration.
Overview of important granted patents in the United States, Europe and Japan:
Patent No.
Title
Zoptarelin doxorubicin
Country
Expiry Date
U.S. 5,843,903
EP 0 863 917
JP 3 987 575
Macimorelin
U.S. 6,861,409
EP 1 289 951
JP 3 522 265
CA 2,407,659
U.S. 8,192,719
Targeted cytotoxic anthracycline analogs
United States
Targeted cytotoxic anthracycline analogs
Targeted cytotoxic anthracycline analogs
Europe
Japan
Growth hormone secretagogues
Growth hormone secretagogues
Growth hormone secretagogues
Growth hormone secretagogues
United States
Germany, United Kingdom, France,
Switzerland and others
Japan
Canada
Method and kit to diagnose growth hormone deficiency
United States
40
2015-11-27
2016-11-14
2016-11-14
2022-08-01
2021-06-13
2021-06-13
2021-06-13
2027-10-12
Patent No.
EP 1 984 744
JP 4 852 728
AEZS-120
EP 2 092 067
AEZS-112
U.S. 7,365,081
EP 1 309 585
Ozarelix
U.S. 6,627,609
EP 1 163 264
JP 3 801 867
AEZS-129
U.S. 8,202,883
U.S. 8,536,332
EP Patent Appl. EP 2,164,849
JP Patent Appl. JP 2010-506945
AEZS-136
U.S. 8,507,486
U.S. 8,604,196
EP Patent Appl. EP 2,164,849
JP Patent Appl. JP 2014-6832
AEZS-134
U.S. Patent Appl. US 2012-
0258080
EP Patent Appl.
EP 2,694,067
JP pat. appl. based on
PCT/EP2012/056138
AEZS-138
U.S.7,741,277
U.S. 8,470,776
EP Patent Appl. EP 2,066,679
JP 5,340,155
______________________
* Includes Patent Term Extension.
Title
Country
Method and kit to diagnose growth hormone deficiency
Europe
Method and kit to diagnose growth hormone deficiency
Japan
Expiry Date
2027-02-19
2027-02-19
Microorganisms as carriers of nucleotide sequences
Europe
2027-11-13
Indole derivatives and their use as medicaments
United States
Indole derivatives and their use as medicaments
Germany, United Kingdom, France,
Switzerland and others
LHRH antagonists having improved solubility properties United States
LHRH antagonists having improved solubility properties
Germany, United Kingdom, France,
Switzerland and others
LHRH antagonists having improved solubility properties Japan
Novel Pyridopyrazine Derivatives, Process of
Manufacturing and Uses thereof
Novel Pyridopyrazine Derivatives, Process of
Manufacturing and Uses thereof
Novel Pyridopyrazine Derivatives, Process of
Manufacturing and Uses thereof
Novel Pyridopyrazine Derivatives, Process of
Manufacturing and Uses thereof
Novel Pyridopyrazine Derivatives, Process of
Manufacturing and Uses thereof
Novel Pyridopyrazine Derivatives, Process of
Manufacturing and Uses thereof
Novel Pyridopyrazine Derivatives, Process of
Manufacturing and Uses thereof
Novel Pyridopyrazine Derivatives, Process of
Manufacturing and Uses thereof
United States
United States
Europe
Japan
United States
United States
Europe
Japan
Pyridopyrazine Derivatives and their Use
United States
Pyridopyrazine Derivatives and their Use
Pyridopyrazine Derivatives and their Use
Europe
Japan
Conjugates of Disorazoles and Derivatives, Process of
Manufacturing and Uses thereof
Conjugates of Disorazoles and Derivatives, Process of
Manufacturing and Uses thereof
Conjugates of Disorazoles and Derivatives, Process of
Manufacturing and Uses thereof
Conjugates of Disorazoles and Derivatives, Process of
Manufacturing and Uses thereof
United States
United States
Europe
Japan
41
2017-09-08
2021-07-26
2020-03-14
2020-03-11
2020-03-11
2029-05-29*
2028-05-09
2028-05-09
2028-05-09
2028-05-09
2028-05-09
(term. disclaimer)
2028-05-09
2028-05-09
2032-04-04
2032-04-04
2032-04-04
2028-01-19*
2029-02-02*
2027-09-06
2027-09-06
C.
Organizational structure
The following chart presents our corporate structure, the jurisdiction of incorporation of our direct and indirect subsidiaries and the percentage of shares that
we held in those subsidiaries as at December 31, 2013.
Aeterna Zentaris Inc.
(Canada)
100%
Aeterna Zentaris, Inc.
(Delaware)
100%
Aeterna Zentaris GmbH
(Germany)
100%
Zentaris IVF GmbH
(Germany)
D.
Property, plants and equipment
Our corporate head office is located in Quebec City, Province of Quebec, Canada. The following table sets forth information with respect to our main
facilities as at December 31, 2013.
Location
Use of space
1405 du Parc Technologique Blvd., Quebec City (Quebec),
Canada
Fully occupied for management, R&D and administration
25 Mountainview Blvd., Suite 203, Basking Ridge, NJ 07920
Fully occupied for management, R&D and administration
Square
Footage
Type of
interest
3,561
3,188
Leased
Leased
Weismüllerstr. 50
D-60314
Frankfurt-am-Main, Germany
Item 4A Unresolved Staff Comments
None.
Fully occupied for management, R&D, business
development and administration
46,465
Leased
42
Item 5.
Operating and Financial Review and Prospects
Key Developments
MACRILEN™
▪
On January 6, 2014, we announced that the FDA had accepted for substantive review our New Drug Application ("NDA") for our orally available
peptidomimetic ghrelin receptor agonist with growth hormone secretagogue activity, MACRILEN™, for the evaluation of adult growth hormone
deficiency ("AGHD"). The acceptance for filing of the NDA indicates that the FDA has determined that the application is sufficiently complete to permit
a substantive review. The NDA, submitted on November 5, 2013, seeks approval for the commercialization of MACRILEN™, which, if approved, will
be the first orally administered drug indicated for the evaluation of AGHD by evaluating the pituitary gland secretion of growth hormone in response to
an oral dose of the product. The application is subject to a standard review and will have a Prescription Drug User Fee Act ("PDUFA") date of November
5, 2014. The PDUFA date is the goal date for the FDA to complete its review of the NDA. MACRILEN™ benefits from patent protection covering major
markets; in particular, the product is protected in the U.S. at least until October 2027. Phase 3 data have demonstrated the compound to be well tolerated,
with accuracy comparable to available intravenous and intramuscular testing procedures.
Zoptarelin Doxorubicin
▪
▪
On April 10, 2013 we announced the signing of a co-development and profit sharing agreement with Ergomed Clinical Research Ltd. ("Ergomed") as the
contract clinical development organization for the Phase 3 ZoptEC (Zoptarelin doxorubicin in Endometrial Cancer) trial in women with locally
advanced, recurrent or metastatic endometrial cancer who have progressed and who have received one chemotherapeutic regimen with platinum and
taxane (either as adjuvant or first-line treatment). The ZoptEC trial is an open-label, randomized, multicenter trial conducted in North America, Europe
and Israel under a Special Protocol Assessment with the FDA. The trial compares zoptarelin doxorubicin with doxorubicin as second line therapy and
will involve approximately 500 patients. Patient dosing was initiated in July 2013, and the primary efficacy endpoint of the ZoptEC trial is improvement
in median Overall Survival.
Under the terms of the agreement, Ergomed has agreed to assume 30% (up to $10 million) of the clinical and regulatory costs for this trial, which are
estimated at approximately $30 million over the course of the study. Ergomed will be entitled to receive an agreed upon single-digit percentage of any net
income received by us for zoptarelin doxorubicin in this indication, up to a specified maximum amount.
On June 3, 2013, we announced encouraging final data for the Phase 1 portion of the ongoing Phase 1/2 trial in men with castration- and taxane-resistant
prostate cancer with zoptarelin doxorubicin. Data were presented at the American Society of Clinical Oncology Annual Meeting in Chicago by the
principal investigator, Jacek Pinski, MD, PhD, of the University of Southern California's Norris Comprehensive Cancer Center. In general, zoptarelin
doxorubicin was well tolerated and demonstrated promising evidence of its anti-tumor activity in this heavily pretreated population. Among the 15
evaluable patients with measurable disease, ten achieved stable disease, and a drop in Prostatic Specific Antigen was noted in three patients. The
maximum tolerated dose ("MTD") of zoptarelin doxorubicin in this indication was established at 210 mg/m2, which is below the MTD reported in
women with refractory endometrial and ovarian cancer. The Phase 2 portion of this trial in prostate cancer is ongoing.
Cetrotide® Manufacturing Rights and Discontinued Operations
▪
▪
On October 1, 2013, we announced that we had successfully completed the transactions contemplated by the transfer and service agreement and
concurrent agreements with various partners and licensees with respect to the manufacturing rights for Cetrotide®, currently marketed by a subsidiary of
Merck KGaA of Darmstadt, Germany ("Merck Serono") for therapeutic use as part of in vitro fertilization programs. The principal outcome of these
agreements is the transfer of manufacturing rights and the grant of a license to Merck Serono for the manufacture, testing, assembling, packaging, storage
and release of Cetrotide® in all territories (the "Cetrotide® Business") in exchange for a non-refundable, one-time payment of €2.5 million (approximately
$3.3 million).
The Cetrotide® Business has been presented in our consolidated financial statements as a discontinued operation. As such, relevant amounts impacting
elements of our comprehensive income (loss) and cash flows have been retroactively reclassified to reflect the Cetrotide® Business as a discontinued
operation and are discussed separately from continuing operations in this MD&A.
43
Perifosine
▪
On March 11, 2013, we announced that the Phase 3 trial in multiple myeloma was discontinued after an interim analysis by an independent Data Safety
Monitoring Board reported that it was highly unlikely the study would achieve a significant difference in its primary endpoint of progression-free
survival. We therefore decided not to make any further investment in the development of perifosine.
Appointments to Executive Management Team
▪
▪
▪
On April 15, 2013, we announced the appointment of David Dodd as our President, Chief Executive Officer ("CEO") and director of the Company. Mr.
Dodd's executive management experience in the pharmaceutical and biotechnology industries spans more than 35 years. Prior to joining our Company,
Mr. Dodd was President, CEO and Chairman of BioReliance Corporation, a leading provider of biological safety and related testing services, and
President, CEO and director of Serologicals Corporation. Mr. Dodd also held the roles of President and CEO of Solvay Pharmaceuticals, Inc. and of
Chairman of its subsidiary, Unimed Pharmaceuticals, Inc., and held various senior management positions at Wyeth-Ayerst Laboratories, the Mead
Johnson Laboratories Division at Bristol-Myers Squibb and at Abbott Laboratories. Mr. Dodd holds a Master's degree from Georgia State University and
completed the Harvard Business School Advanced Management Program.
On November 1, 2013, we announced the appointment of Jude Dinges as our Senior Vice President and Chief Commercial Officer. Mr. Dinges is
responsible for all activities regarding the potential commercial launch of MACRILEN™ in AGHD, as well as for identifying future commercial
opportunities. Mr. Dinges began his career nearly 30 years ago at Bristol Laboratories and later at Merck & Co. in training, sales, management, marketing
and market development and was a key contributor to the successful launch of brands such as Cozaar®, Fosamax®, Singulair®, Maxalt®, Vioxx®, and
Vytorin®. Mr. Dinges joined Novartis Pharmaceuticals in 2006, overseeing the launch of Tekturna®, and in 2008 became the Respiratory & Infectious
Disease Specialty Medicines Director. In 2009, he joined Amgen Inc. as Executive Director of Region Sales, Bone Health Business Unit.
On January 3, 2014, we announced the appointment of Richard Sachse, MD, PhD, as our Senior Vice President, Chief Scientific Officer and Managing
Director. Dr. Sachse, who is based in Frankfurt, holds a degree in medicine from the Friedrich-Alexander-University Erlangen and a board certification in
Clinical Pharmacology and has over 20 years' experience as a physician and scientist. He has extensive expertise in a variety of different therapeutic
areas, including endocrinology and oncology. In addition to registration studies, Dr. Sachse is especially experienced in the design and implementation of
translational programs to bridge research programs to the clinic, as well as in the design and implementation of clinical pharmacology programs,
including all required profiling studies and activities, enabling successful registration of products at the international level. Before joining Aeterna
Zentaris, Dr. Sachse was Vice President and Head of Global Translational Medicine at Boehringer Ingelheim. From 1996 to 2000, he was International
Project Leader at the Bayer AG Institute for Clinical Pharmacology and Principal Investigator at the Bayer Clinical Pharmacology Unit. From 2001 to
2006, Dr. Sachse held a variety of management positions within early and late phase clinical development programs, including responsibilities for
completed Phase 3 programs leading to successful New Drug Application / Marketing Authorization Application submissions. In 2007, he became Senior
Director, Head of Experimental Medicine, at UCB in Belgium, before being appointed Vice President, Head of Global Translational Medicine, at
Boehringer Ingelheim in 2010.
Corporate Developments
"At-the-Market" Issuance Program
▪
Between May 22, 2013 and December 31, 2013, we sold a total of approximately 1.7 million common shares under our At‑The-Market ("ATM") sales
program at an average price of $1.76 per share, resulting in aggregate gross proceeds of approximately $3.0 million. This ATM sales program allows the
Company to sell, at market prices prevailing at the time of sale, up to a maximum of 2.5 million of our common shares through ATM issuances on the
NASDAQ for aggregate gross proceeds not to exceed $4.6 million. Between January 1, 2014 and March 20, 2014, we issued a total of 0.2 million
common shares under this ATM sales program for aggregate gross proceeds of $0.3 million.
Registered Direct Offering
▪
On July 30, 2013, we completed a registered direct offering of 5.2 million units at a purchase price of $1.50 per unit, generating net proceeds of
approximately $7.0 million. Each unit consisted of one common share and 0.5 of a warrant to purchase one common share. Each warrant is exercisable at
any time after January 30, 2014 for a period of five years from the date of issuance at an exercise price of $1.85 per share.
44
Public Offerings
▪
▪
On November 25, 2013 we completed a public offering of 13.1 million units, generating net proceeds of approximately $13.7 million. Each unit
consisted of one common share and one whole warrant to purchase one common share, at a purchase price of $1.15 per unit. Each warrant is exercisable
for a period of five years at an original exercise price of $1.60 per share, subject to certain anti-dilution provisions.
Subsequent to year-end, on January 14, 2014, we completed a public offering of 11.0 million units, generating net proceeds of approximately $12.2
million, with each unit consisting of one common share and 0.8 of a warrant to purchase one common share, at a purchase price of $1.20 per unit. Each
warrant is exercisable for a period of five years at an original exercise price of $1.25 per share, which is subject to certain anti-dilution provisions.
Listing Transfer to the NASDAQ Capital Market
▪
On August 28, 2013, we announced that our request to transfer our listing to the NASDAQ Capital Market from the NASDAQ Global Market had been
approved by the NASDAQ Listing Qualifications Staff. Our common shares continue to trade on the NASDAQ Capital Market, effective August 29,
2013.
Status of Our Drug Pipeline
_________________________
(1) Investigator-driven and sponsored.
(2) Phase 2 in ovarian cancer completed.
(3) Sponsored entirely by license partners.
We are focused on preparing for the launch of MACRILEN™ for the evaluation of AGHD in the U.S. and on advancing our ZoptEC Phase 3 program with
zoptarelin doxorubicin in endometrial cancer, as discussed further below.
Regarding AEZS-120, which is a targeted, live recombinant oral tumor vaccine candidate, we are reviewing the development program and our available
resources related to this compound.
Ozarelix, a modified luteinizing hormone-releasing hormone ("LHRH") receptor antagonist, with the potential to treat hormone-dependent cancers as well as
benign proliferative endocrinological disorders, and perifosine, an oral AKT inhibitor which is being investigated as a potential treatment option for various
cancer indications, no longer require significant investment from our Company, being licensed out to Spectrum Pharmaceuticals, Inc. and to Yakult Honsha
Co., Ltd. ("Yakult"), respectively. Both partners are responsible for conducting and sponsoring all ongoing development.
45
As for our compounds in earlier stages of development, our Erk/PI3K inhibitors and our disorazol Z product candidates, as well as our discovery activities,
are both under review as part of our focused initiative to optimize research and development ("R&D") activities. Our Erk/PI3K inhibitors are part of our
kinase research program, comprising the investigation of different compounds for single Erk inhibition, single PI3K inhibition and dual Erk/PI3K kinase
inhibition. Disorazol Z product candidates comprise AEZS-138, a novel cytotoxic hybrid based on the natural compound disorazol Z (AEZS-137), and the
LHRH receptor agonist D-Lys6-LHRH. We currently do not expect to invest significantly in these projects, unless partnered and/or sponsored through
strategic alliances.
Consolidated Statements of Comprehensive Income (Loss) Information
(in thousands, except share and per share data)
Revenues
Sales
License fees and other
Operating expenses
Cost of sales
Research and development costs, net of refundable tax
credits and grants
Selling, general and administrative expenses
Loss from operations
Finance income
Finance costs
Net finance (costs) income
Loss before income taxes
Income tax expense
Net loss from continuing operations
Net income (loss) from discontinued operations
Net (loss) income
Other comprehensive (loss) income:
Items that may be reclassified subsequently to profit or loss:
Three-month periods ended
December 31,
2013
$
2012
$
Years ended December 31,
2013
$
2012
$
2011
$
—
—
—
—
5,345
2,627
7,972
(7,972)
65
(2,689)
(2,624)
(10,596)
—
(10,596)
2,353
(8,243)
—
281
281
—
5,523
2,877
8,400
(8,119)
689
(700)
(11)
(8,130)
—
(8,130)
1,183
(6,947)
96
6,079
6,175
834
1,219
2,053
250
4,455
4,705
51
591
212
21,284
12,316
33,651
20,592
10,606
31,789
24,245
11,955
36,412
(27,476)
(29,736)
(31,707)
1,748
(1,512)
236
6,974
(382)
6,592
(27,240)
(23,144)
—
(27,240)
34,055
6,815
—
(23,144)
2,732
(20,412)
6,239
(8)
6,231
(25,476)
(1,104)
(26,580)
(487)
(27,067)
Foreign currency translation adjustments
424
(204)
1,073
(504)
(789)
Items that will not be reclassified to profit or loss:
Actuarial gain (loss) on defined benefit plans
Comprehensive (loss) income
Net loss per share (basic and diluted) from continuing
operations
Net income (loss) (basic and diluted) from discontinuing
operations
Net (loss) income (basic and diluted) per share
Weighted average number of shares outstanding:
2,346
(5,473)
(3,705)
(10,856)
2,346
10,234
(3,705)
(24,621)
(1,335)
(29,191)
(0.28)
(0.34)
(0.92)
(1.17)
0.06
(0.22)
0.05
(0.29)
1.16
0.24
0.14
(1.03)
(1.69)
(0.03)
(1.72)
Basic
Diluted
37,274,129
24,181,462
29,476,455
19,775,073
15,751,331
37,274,129
24,181,462
29,476,455
19,806,687
15,751,331
46
2013 compared to 2012
Revenues from Continuing Operations
Revenues are derived predominantly from license fees, which include periodic milestone payments, R&D contract fees and the amortization of upfront
payments received from our licensing partners.
Sales revenues are derived from the sale of active pharmaceutical ingredients, or raw materials, to license partners. Periodic variations of sales, and,
consequently, of cost of sales, are attributable to the R&D needs of the requesting license partner.
License fees and other revenues were nil and $6.1 million for the three-month period and the year ended December 31, 2013, respectively, as compared to
$0.3 million and $1.2 million for the same periods in 2012.
In March 2011, we entered into an agreement with Yakult for the development, manufacture and commercialization of perifosine in all human uses, excluding
leishmaniasis, in Japan. Under the terms of this agreement, Yakult had made an initial, non-refundable gross upfront payment to the Company of
approximately $8.4 million. We recorded this upfront payment as deferred revenues and commenced amortizing the underlying proceeds on a straight-line
basis over the estimated life cycle of perifosine in colorectal cancer ("CRC") and multiple myeloma ("MM").
On April 1, 2012, following negative results of a Phase 3 study of perifosine in CRC, we discontinued the perifosine program in that indication. Furthermore,
in March 2013, following an analysis of interim results of the Phase 3 study of perifosine in MM, we also discontinued the development of perifosine in the
MM indication. Given these results and the termination of these studies, we determined that we no longer had significant obligations under the agreement
with Yakult to continue with the development of perifosine, and we recognized, in March 2013, the remaining unamortized amount of deferred revenue of
$5.9 million related to the above licensing agreement.
On a year-over-year basis, the increase in license fees and other revenues is therefore attributable to the earlier-than-expected recognition of the previously
deferred upfront license payment received from Yakult, following the discontinuance of our development of perifosine and given that the earnings process
associated with this compound as pertaining to the upfront proceeds received was deemed to be complete.
License fees and other revenues are expected to decrease significantly in 2014 as compared to the year ended December 31, 2013, given the absence of any
remaining unamortized license fee payments as at December 31, 2013.
Operating Expenses from Continuing Operations
R&D costs, net of refundable tax credits and grants, were $5.3 million and $21.3 million for the three-month period and the year ended December 31,
2013, respectively, compared to $5.5 million and $20.6 million for the same periods in 2012.
The following table summarizes our net R&D costs by nature of expense:
(in thousands)
Third-party costs
Employee compensation and benefits
Facilities rent and maintenance
Other costs*
R&D tax credits and grants
_________________________
* Includes depreciation, amortization and impairment charges.
Three-month periods ended
December 31,
Years ended December 31,
2013
$
2012
$
2013
$
2012
$
2011
$
2,345
2,145
401
744
(112)
5,523
10,049
7,864
1,758
2,130
(517)
21,284
8,679
8,590
1,661
2,530
(868)
20,592
10,077
10,028
1,835
2,688
(383)
24,245
2,828
1,629
466
540
(118)
5,345
47
The following table summarizes primary third-party R&D costs, by product candidate, incurred by the Company during the three-month periods ended
December 31, 2013 and 2012.
(in thousands, except percentages)
Product Candidate
Zoptarelin doxorubicin
MACRILEN™, macimorelin
Erk/PI3K inhibitors
Perifosine
Disorazol Z
Other
Three-month periods ended December 31,
2013
$
1,667
284
312
—
139
426
2,828
%
$
%
2012
58.9
10.0
11.0
—
4.9
15.2
100.0
282
30
199
1,434
55
345
2,345
12.0
1.3
8.5
61.2
2.3
14.7
100.0
The following table summarizes primary third-party R&D costs, by product candidate, incurred by the Company during the years ended December 31, 2013,
2012 and 2011.
(in thousands, except percentages)
Product Candidate
Zoptarelin doxorubicin
MACRILEN™, macimorelin
Erk/PI3K inhibitors
Perifosine
Disorazol Z
Other
Years ended December 31,
2013
2012
2011
$
%
$
%
$
%
4,934
1,238
1,128
1,134
659
956
49.1
12.3
11.2
11.3
6.6
9.5
10,049
100.0
2,133
112
1,727
3,801
331
575
8,679
24.6
1.3
19.9
43.8
3.8
6.6
1,652
1,156
1,860
3,726
256
1,427
16.4
11.5
18.5
37.0
2.5
14.1
100.0
10,077
100.0
Third-party R&D costs were $10.0 million for the year ended December 31, 2013, as compared to $8.7 million for the same period in 2012. This increase
mainly results from the higher development costs associated with zoptarelin doxorubicin, and in particular with our Phase 3 ZoptEC trial initiated in 2013
with Ergomed, as discussed above. Additionally, we incurred higher development costs in 2013 related to MACRILEN™ and macimorelin, primarily
consisting of the purchase of active pharmaceutical ingredients. These increases were partly offset by the lower comparative development costs associated
with perifosine, given that we have decided not to make any further investment in this product candidate, as discussed above, and by the lower preclinical
study-related costs associated with our Erk/PI3K inhibitors.
Third-party R&D costs also increased during the year ended December 31, 2013 due to higher expenditures associated with our disorazol Z product
candidates, pursuant to a variety of collaboration agreements with various universities and institutes, and to the purchase of active pharmaceutical ingredients.
Excluding the impact of foreign exchange rate fluctuations, we expect net R&D costs for 2014 to increase, as compared to 2013, mainly due to the
advancement of our lead ZoptEC Phase 3 trial with zoptarelin doxorubicin and related sub-studies. Based on currently available information and forecasts, we
expect that we will incur net R&D costs of between $24 million and $26 million for the year ended December 31, 2014. As discussed below, however, we
currently are in the process of performing a strategic review of all of our preclinical activities. This review may result in changes to our future overall R&D
activities that may have a significant impact on our results of operations versus the currently available guidance. As such, our net R&D cost estimates may be
revised in future periods as we continue to review our R&D activities, advance R&D development and as new information becomes available.
48
Selling, general and administrative ("SG&A") expenses were $2.6 million and $12.3 million for the three-month period and the year ended December 31,
2013, respectively, compared to $2.9 million and $10.6 million for the same periods in 2012.
For the year ended December 31, 2013, the increase in SG&A expenses, as compared to 2012, is mainly related to the recognition in the second quarter of
2013 of non-recurring termination benefits (approximately $1.4 million) paid to our former CEO and to the recording of related non-cash share-based
compensation costs, amounting to approximately $0.7 million.
We expect SG&A expenses to decrease in 2014 as compared to the year ended December 31, 2013, despite the progressive ramping up of pre-
commercialization activities associated with MACRILEN™, which, as discussed below and conditional upon the successful regulatory approval of our NDA,
we expect to launch in the evaluation of AGHD indication in the U.S. market in 2015.
Net finance income (costs) is comprised predominantly of the change in fair value of warrant liability, gains and losses due to changes in foreign currency
exchange rates and, as pertaining to 2011 only, to gains on a short-term investment. For the three-month period and the year ended December 31, 2013, net
finance (costs) income totalled $(2.6) million and $0.2 million, respectively, as compared to nil and $6.6 million for the same periods in 2012, as presented
below.
(in thousands)
Finance income
Gains due to changes in foreign currency exchange rates
Change in fair value of warrant liability
Interest income
Gain on held-for-trading financial instrument
Finance costs
Losses due to changes in foreign currency exchange rates
Change in fair value of warrant liability
Three-month periods ended
December 31,
2013
$
2012
$
Years ended December 31,
2013
$
2012
$
2011
$
—
—
65
—
65
(805)
(1,884)
(2,689)
(2,624)
—
634
55
—
689
(700)
—
(700)
(11)
—
1,563
185
—
1,748
(1,512)
—
(1,512)
236
—
6,746
228
—
6,974
(382)
—
(382)
6,592
2,197
2,533
223
1,278
6,231
—
—
—
6,231
The change in fair value of our warrant liability results from the "mark-to-market" revaluation, via the application of the Black-Scholes option pricing model,
of currently outstanding share purchase warrants. The Black-Scholes "mark-to-market" warrant valuation most notably has been impacted by the closing price
of our common shares, which, on the NASDAQ, has fluctuated from between $1.03 and $3.23 during the year ended December 31, 2013.
Gains or losses due to changes in foreign currency exchange rates are mainly related to the US dollar vis-à-vis the euro, which weakened from 2011 to 2012
and strengthened from 2012 to 2013, as presented below.
Three-month periods ended
December 31,
Years ended December 31,
2013
2012
2013
2012
2011
Euro to US$ average conversion rate
1.3617
1.2975
1.3288
1.2858
1.3919
Net loss from continuing operations for the three-month period and the year ended December 31, 2013 was $10.6 million and $27.2 million, or $0.28 and
$0.92 per basic and diluted share, respectively, compared to $8.1 million and $23.1 million, or $0.34 and $1.17 per basic and diluted share for the same
periods in 2012.
The increase in net loss from continuing operations for the three-month period ended December 31, 2013, as compared to the same period in 2012, is largely
due to higher net finance costs, as presented above.
49
The increase in net loss from continuing operations for the year ended December 31, 2013, as compared to 2012, is due largely to the recording of non-
recurring termination benefits and related non-cash share-based compensation costs, lower comparative net finance income and higher comparative net R&D
costs, partially offset by higher comparative license fee revenues, largely associated with the accelerated recognition of remaining net unamortized amount of
deferred revenues related to the licensing agreement entered into with Yakult, as discussed above.
2012 compared to 2011
Revenues from Continuing Operations
License fees and other revenues were $1.2 million for the year ended December 31, 2012, as compared to $4.5 million for the year ended December 31, 2011.
This decrease is mainly due to the recording of a $2.6 million milestone payment from Yakult with respect to the initiation of a Phase 1 trial with perifosine in
CRC in Japan during the last quarter of 2011.
Operating Expenses from Continuing Operations
R&D costs, net of refundable tax credits and grants, were $20.6 million for the year ended December 31, 2012, as compared to $24.2 million for the year
ended December 31, 2011. This decrease is attributable to lower R&D employee compensation and benefit costs, as well as to continued cost-rationalization
initiatives, resulting in a lower number of employees. The decrease is also related to comparative lower third-party costs associated with the development of
MACRILEN™ in AGHD and to the weakening of the euro against the US dollar.
SG&A expenses were $10.6 million for the year ended December 31, 2012, as compared to $12.0 million for the year ended December 31, 2011. The
decrease in SG&A expenses is mainly related to non-recurring 2011 events. During the year ended December 31, 2011, we recognized an impairment loss on
property, plant and equipment, an increase in onerous lease provision and we incurred marketing expenses related to the potential marketing by the Company
of perifosine in Europe. In addition, the decrease in SG&A expenses is attributable to the decrease in employee benefit expenses as well as to the weakening
of the euro against the US dollar, partly offset by higher transaction costs related to share purchase warrants, higher share-based compensation costs related to
collaborators and higher professional fees.
Income tax expense was nil for the year ended December 31, 2012, as compared to $1.1 million for the year ended December 31, 2011, which consists of
foreign withholding taxes related to an upfront payment received from a partner and to milestone license fee revenues recorded in 2011.
Net loss from continuing operations for the year ended December 31, 2012 was $23.1 million, or $1.17 per basic and diluted share, as compared to $26.6
million, or $1.69 per basic and diluted share, for the year ended December 31, 2011. This decrease is largely due to lower net R&D costs, SG&A expenses
and income tax expense, as well as to higher net finance income, partly offset by the significant decrease in license fee revenues.
Discontinued Operations
Following a strategic review of our risk and prospects with respect to the Cetrotide® Business and, in particular, having taken into account, as discussed
below, the previous monetization of the corresponding royalty stream, we decided to transfer all manufacturing rights of Cetrotide® and to discontinue our
involvement with the Cetrotide® Business. On April 3, 2013 (the "Effective Date"), we entered into a transfer and service agreement ("TSA") and concurrent
agreements with various partners and licensees with respect to our manufacturing rights for Cetrotide®, currently marketed for therapeutic use as part of in
vitro fertilization programs. The principal effect of these agreements was to transfer, effective October 1, 2013 (the "Closing Date"), our manufacturing rights
for Cetrotide® to Merck Serono in all territories. Also per the TSA, we agreed to provide certain transition services to Merck Serono over a period of 36
months from the Effective Date in order to assist Merck Serono in managing overall responsibility for the Cetrotide® Business.
Under the TSA, during the period commencing on the Effective Date and ending on the Closing Date (the "Interim Period"), we were obligated to continue to
conduct the Cetrotide® Business in the ordinary course in a manner consistent with past practices, subject to certain conditions. Per the TSA, we received a
non-refundable, one-time payment of €2.5 million (approximately $3.3 million) in consideration for the transfer of our manufacturing rights referred to above,
as well as other payments in exchange for the transfer, also on the Closing Date, of certain assets, such as inventory and equipment used solely for the
manufacture of Cetrotide®. We recognized the non-refundable, one-time payment on the Closing Date, as we no longer had managerial involvement or
effective control over the manufacturing of goods sold through the Cetrotide® Business. We provide the aforementioned transition services to Merck Serono
in exchange for a monthly service fee.
50
As a result of the transfer of substantially all of the risks and rewards associated with the Cetrotide® Business on the Closing Date, the Cetrotide® Business
has been classified as a discontinued operation in the consolidated financial statements. As such, relevant amounts in our consolidated statements of
comprehensive income (loss) have been retroactively reclassified to reflect the Cetrotide® Business as a discontinued operation, as presented below.
(in thousands)
Revenues
Sales and royalties
License fees and other*
Operating expenses
Cost of sales
Research and development costs, net of tax credits and
grants
Selling, general and administrative expenses
Net income (loss) from discontinued operations
Three-month periods ended
December 31,
2013
$
2012
$
Years ended December 31,
2013
$
2012
$
2011
$
3,057
3,717
6,774
9,165
99
9,264
63,755
4,589
68,344
30,704
908
31,612
31,056
292
31,348
3,071
7,489
30,002
26,229
27,348
—
1,350
4,421
2,353
—
592
8,081
1,183
8
4,279
34,289
34,055
12
2,639
28,880
2,732
272
4,215
31,835
(487)
_________________________
* Includes the non-refundable, one-time payment made by Merck Serono in exchange for the manufacturing rights for Cetrotide®.
2013 compared to 2012
Revenues from discontinued operations
Sales and royalties related to discontinued operations were comprised both of net sales of Cetrotide® and of royalties, which represented the amortization,
under the units-of-revenue method, of the proceeds received pursuant to a transaction with Healthcare Royalty Partners L.P. (formerly Cowen Healthcare
Royalty Partners L.P.) ("HRP"), in which we monetized our royalty stream related to Cetrotide®. In this transaction, we had received a payment of $52.5
million, less certain transaction costs, from HRP in exchange for our rights to royalties on future net sales of Cetrotide® generated by Merck Serono.
We had initially recorded the proceeds received from HRP as deferred revenue due to our then significant continuing involvement with the Cetrotide®
Business. However, as of the Closing Date, there was no basis to continue amortizing the deferred revenue associated with HRP, primarily due to the fact that
we no longer had significant continuing involvement in the Cetrotide® Business. As such, commencing on the Effective Date, we accelerated the amortization
of the remaining deferred revenues of approximately $31.9 million over the Interim Period, by continuing to apply the units-of-revenue method, which is
consistent with past practice. The remaining deferred revenues were fully amortized through the end of September 2013.
Sales and royalties from discontinued operations were $3.1 million and $63.8 million for the three-month period and year ended December 31, 2013,
respectively, as compared to $9.2 million and $30.7 million for the same periods in 2012.
The decrease in sales and royalties from discontinued operations during the quarter ended December 31, 2013, as compared to the quarter ended December
31, 2012, relates to the lower comparative volume of recurring Cetrotide® sales. Specifically, we recorded no sales of Cetrotide® during the three months
ended December 31, 2013, as compared to the corresponding quarter of 2012, given that the transfer of the Cetrotide® Business was effective on October 1,
2013. However, in connection with the transfer of the Cetrotide® Business, we sold Cetrotide®-related inventory (amounting to approximately $3.0 million) to
Merck Serono on October 1, 2013. The sale of inventory assets, therefore, partially offset the significant comparative reduction in recurring Cetrotide®
product sales.
License fees and other revenues from discontinued operations increased significantly from each of the quarters and years ended December 31, 2012 to the
same periods in 2013 primarily due to the recording, on the Closing Date, of the non-refundable, one-time payment made by Merck Serono, as discussed
above.
51
Cost of sales from discontinued operations were $3.1 million and $30.0 million for the three-month period and year ended December 31, 2013,
respectively, as compared to $7.5 million and $26.2 million for the same periods in 2012. The decrease in comparative quarterly cost of sales from
discontinued operations results from the absence of recurring Cetrotide® product sales in the fourth quarter of 2013 as compared to the same quarter in 2012.
On a comparative annual basis, however, total cost of sales from discontinued operations increased in 2013, as compared to 2012, as a result of the higher
comparative volume of Cetrotide® product sales, including the sale of inventory assets to Merck Serono, as discussed above.
Additionally, cost of sales as a percentage of sales and royalties increased to approximately 100.5% for the three-month period ended December 31, 2013, as
compared to 81.7% for the same period in 2012, mainly due to the absence of royalties recognized after the Cetrotide® Business was transferred.
For the year ended December 31, 2013, cost of sales as a percentage of sales and royalties decreased to approximately 47.1%, as compared to 85.4% for the
same period in 2012, predominantly due to the accelerated recognition of royalties as mentioned above.
SG&A expenses from discontinued operations amounted to $1.4 million and $4.3 million for the three-month period and year ended December 31, 2013,
respectively, as compared to $0.6 million and $2.6 million for the same periods in 2012. The year-over-year increase is largely attributable to the recording of
a provision for certain non-cancellable contracts related to the Cetrotide® Business that were deemed onerous due to the fact that management expects no
economic benefits to flow to the Company following the transfer of the Cetrotide® Business on the Closing Date. The provisions for onerous contracts total
$1.3 million and represent the present value of estimated unavoidable future royalty and patent costs associated with the intellectual property underlying
Cetrotide®.
Net income from discontinued operations was $2.4 million and $34.1 million for the three-month period and year ended December 31, 2013, respectively,
as compared to $1.2 million and $2.7 million for the same periods in 2012. The comparative increases reflect the net impact of items discussed above, and in
particular, for comparative annual purposes, are influenced in large part by the inclusion of the accelerated recognition of previously deferred remaining HRP-
related revenues as discontinued operations.
2012 compared to 2011
Revenues from discontinued operations, which included recurring sales of Cetrotide® and the ongoing amortization of the proceeds received in 2008 from
HRP, were $31.6 million for the year ended December 31, 2012 as compared to $31.3 million for the year ended December 31, 2011.
Cost of sales from discontinued operations were $26.2 million for the year ended December 31, 2012 as compared to $27.3 million for the year ended
December 31, 2011.
SG&A expenses from discontinued operations were $2.6 million for the year ended December 31, 2012 as compared to $4.2 million for the year ended
December 31, 2011. The comparative decrease is attributable in large part to the absence of an impairment loss in 2012 on our Cetrotide® intangible asset, as
compared to 2011.
Net income (loss) from discontinued operations was $2.7 million for the year ended December 31, 2012 as compared to $(0.5) million for the same periods
in 2011. The comparative increase reflects the net impact of items discussed above.
Net (loss) income
2013 compared to 2012
Net (loss) income for the three-month period and the year ended December 31, 2013 was $(8.2) million and $6.8 million, or $(0.22) and $0.24 per basic and
diluted share, respectively, compared to $(6.9) million and $(20.4) million, or $(0.29) and $(1.03) per basic and diluted share for the same periods in 2012.
The comparative quarter-to-quarter increase in net loss is mainly due to increased finance costs, partially offset by higher net income from discontinued
operations and lower operating expenses. The comparative year-over-year decrease in net loss is mainly due to higher net income from discontinued
operations and higher revenues, partially compensated by higher operating costs and lower finance income.
52
2012 compared to 2011
Net loss for the year ended December 31, 2012 was $20.4 million, or $1.03 per basic and diluted share, compared to $27.1 million, or $1.72 per basic and
diluted share for the same period in 2011. The decrease in net loss for the year ended December 31, 2012 is explained above.
Quarterly Consolidated Results of Operations Information
(in thousands, except for per share data)
Quarters ended
December 31, 2013
September 30,
2013
$
$
June 30,
2013
$
March 31, 2013
$
Revenues
Loss from operations
Net (loss) income from continuing operations
Net (loss) income
Net (loss) income per share from continuing operations (basic
and diluted)*
Net (loss) income per share (basic and diluted)*
—
(7,972)
(10,596)
(8,243)
(0.28)
(0.22)
17
(8,648)
(7,799)
3,842
(0.26)
0.13
96
(9,693)
(9,848)
9,330
(0.39)
0.37
6,062
(1,163)
1,003
1,886
0.04
0.07
(in thousands, except for per share data)
Quarters ended
December 31, 2012 September 30, 2012
$
$
June 30,
2012
$
281
(8,119)
(8,130)
(6,947)
265
(6,447)
(7,321)
(6,554)
402
(7,672)
4,468
4,540
March 31, 2012
$
1,105
(7,498)
(12,161)
(11,451)
Revenues
Loss from operations
Net (loss) income from continuing operations
Net (loss) income
Net (loss) income per share from continuing operations (basic
and diluted)*
(0.34)
(0.39)
0.24
(0.69)
Net (loss) income per share (basic and diluted)*
_________________________
* Net (loss) income per share is based on the weighted average number of shares outstanding during each reporting period, which may differ on a quarter-to-quarter basis. As
(0.35)
(0.29)
0.25
(0.65)
such, the sum of the quarterly net (loss) income per share amounts may not equal year-to-date net (loss) income per share.
Historical quarterly results of operations and net (loss) income cannot be taken as reflective of recurring expenditure patterns or predictable trends.
In the last eight quarters, net (loss) income has been impacted by revenues from continuing operations, which have been non-recurring and have been derived
predominantly from licensing initiatives, by the comparative level of net R&D costs in connection with the development and termination of our previous
perifosine Phase 3 programs, by the increased development of zoptarelin doxorubicin, including the initiation in 2013 of a Phase 3 ZoptEC trial and by the
development of MACRILEN™ and of certain earlier stage compounds, as well as by the net income (loss) from discontinued operations, related to the
transfer of the Cetrotide® Business mentioned above.
Quarterly net (loss) income was also impacted by the recognition of termination benefits granted to our former CEO and to the related non-cash share-based
compensation costs in the second quarter of 2013, as well as by foreign exchange gains or losses and changes in fair value of our warrant liability.
53
Consolidated Statement of Financial Position Information
(in thousands)
Cash and cash equivalents
Trade and other receivables and other current assets
Restricted cash
Property, plant and equipment
Other non-current assets
Total assets
Payables and other current liabilities
Current portion of deferred revenues
Warrant liability (current and non-current portions)
Non-financial non-current liabilities*
Total liabilities
Shareholders' equity (deficiency)
Total liabilities and shareholders' equity (deficiency)
_________________________
* Comprised mainly of non-current portion of deferred revenues, employee future benefits and provisions.
As at December 31,
2013
$
2012
$
43,202
2,453
865
1,351
11,325
59,196
7,242
—
18,010
16,880
42,132
17,064
59,196
39,521
13,780
826
2,147
11,391
67,665
10,470
5,235
6,176
52,479
74,360
(6,695)
67,665
The increase in cash and cash equivalents as at December 31, 2013, as compared to December 31, 2012, is due to the receipt of net proceeds of $20.8 million
pursuant to registered direct and public offerings and $2.9 million in drawdowns made under our May 2013 ATM Program, the receipt of the non-refundable,
one-time payment after the Closing Date of the transactions involving the discontinuation of the Cetrotide® Business, variations in components of our
working capital and the relative strengthening, as at December 31, 2013, of the euro against the US dollar, as compared to December 31, 2012, partially offset
by recurring disbursements.
The decrease in trade and other receivables and other current assets as at December 31, 2013, as compared to December 31, 2012, is mainly due to lower
trade accounts receivable, inventory and prepaid expenses as a result of the transfer of the Cetrotide® Business, partly offset by the relative strengthening, as
at December 31, 2013, of the euro against the US dollar, as compared to December 31, 2012.
The decrease in payables and other current liabilities as at December 31, 2013, as compared to December 31, 2012, is mainly due to lower trade accounts
payable, lower accrued Cetrotide® services and deliveries and lower accrued R&D costs, partly offset by the relative strengthening, as at December 31, 2013,
of the euro against the US dollar, as compared to December 31, 2012.
The decrease in current portion of deferred revenues as at December 31, 2013, as compared to December 31, 2012, is predominantly due to the change in the
timing in the amortization of deferred revenues, as mentioned above.
Our warrant liability increased from December 31, 2012 to December 31, 2013 predominantly due to the issuance of 15.7 million additional share purchase
warrants in connection with the registered direct and public offerings mentioned above. The increase was partly offset by net fair value gains, recorded
pursuant to the periodic "mark-to-market" revaluation of the underlying outstanding share purchase warrants.
The decrease in non-financial non-current liabilities as at December 31, 2013, as compared to December 31, 2012, is mainly due to a decrease in deferred
revenues, resulting predominantly from the amortization of upfront payments received from our partners in connection with Cetrotide® and perifosine, as
mentioned above, and to the decrease of $1.8 million in our pension-related employee benefit obligation (due predominantly to the recording of an actuarial
gain). These decreases were partly offset by the recognition of a provision for onerous contracts of $1.3 million, as mentioned above, and by the relative
strengthening, as at December 31, 2013, of the euro against the US dollar, as compared to December 31, 2012.
54
The significant increase in shareholders' equity from December 31, 2012 to December 31, 2013 is mainly attributable to the decrease in our deficit due to the
recording of net income, to the increase in share capital following the issuance of common shares pursuant to the aforementioned registered direct and public
offerings and May 2013 ATM Program drawdowns, to the decrease in accumulated other comprehensive loss due to foreign currency translation gains and to
the increase in other capital due to the recording of share-based compensation costs.
Financial Liabilities, Obligations and Commitments
We have certain contractual lease obligation commitments as well as other long-term obligations related to unfunded benefit pension plans and unfunded
post-employment benefit plans. The following tables summarize future cash requirements with respect to these obligations.
Future minimum lease payments and future minimum sublease payments expected to be received under non-cancellable operating leases (subleases), as well
as future payments in connection with utility service agreements are as follows:
(in thousands)
Less than 1 year
1 – 3 years
4 – 5 years
More than 5 years
Total
Minimum lease payments
As at December 31, 2013
Minimum sublease
payments
$
$
Utilities
$
1,795
2,562
515
—
4,872
(226)
(451)
(244)
—
(921)
640
559
—
—
1,199
In accordance with the assumptions used in our employee future benefits obligation calculation as at December 31, 2013, undiscounted benefits expected to
be paid are as follows:
(in thousands)
Less than 1 year
1 – 3 years
4 – 5 years
More than 5 years
Total
Outstanding Share Data
As at December 31,
2013
$
531
1,177
1,259
26,654
29,621
As at March 20, 2014, we had 56,513,969 common shares issued and outstanding, as well as 2,546,740 stock options outstanding. Warrants outstanding as at
March 20, 2014 represented a total of 28,907,410 equivalent common shares.
Capital Disclosures
Our objective in managing capital, consisting of shareholders' equity (deficiency), with cash and cash equivalents and restricted cash equivalents being its
primary components, is to ensure sufficient liquidity to fund R&D activities, selling, general and administrative expenses, working capital and capital
expenditures.
In the past, we have had access to liquidity through non-dilutive sources, including investment tax credits and grants, interest income, licensing and related
services and royalties. More recently, we have increasingly raised capital via public equity offerings and drawdowns under various ATM sales programs.
55
Our capital management objective remains the same as that in previous periods. The policy on dividends is to retain cash to keep funds available to finance
the activities required to advance our product development portfolio.
We are not subject to any capital requirements imposed by any regulators or by any other external source.
Liquidity, Cash Flows and Capital Resources
Our operations and capital expenditures have been financed through certain transactions impacting our cash flows from operating activities, public equity
offerings, as well as from the drawdowns under various ATM programs, as discussed above.
Our cash and cash equivalents amounted to $43.2 million as at December 31, 2013, as compared to $39.5 million as at December 31, 2012. As at
December 31, 2013, we had cash and cash equivalents amounting to $9.3 million that were denominated in euros.
Based on our assessment, which took into account current cash levels, as well as our strategic plan and corresponding budgets and forecasts, we believe that
we have sufficient liquidity and financial resources to fund planned expenditures and other working capital needs for at least, but not limited to, the 12-month
period following the statement of financial position date of December 31, 2013.
We may endeavour to secure additional financing, as required, through strategic alliance arrangements or through other activities, as well as via the issuance
of new share capital.
The variations in our liquidity by activity are explained below.
(in thousands)
Three-month periods ended
December 31,
2013
$
2012
$
Years ended December 31,
2013
$
2012
$
2011
$
Cash and cash equivalents - Beginning of period
24,829
33,202
39,521
46,881
31,998
Cash flows from operating activities:
Cash used in operating activities from continuing
operations
Cash provided by (used in) operating activities from
discontinued operations
Cash flows from financing activities:
Net proceeds from issuance of common shares and
warrants
Net proceeds from the exercise of share purchase warrants
and other
Cash flows from investing activities:
Net cash (used in) provided by investing activities from
continuing operations
Net cash provided by investing activities from
discontinued operations
(6,184)
(6,481)
(30,131)
(25,681)
(22,454)
9,622
3,438
(2,282)
(8,763)
10,147
(19,984)
(5,134)
(30,815)
(3,789)
(26,243)
14,795
15,097
23,708
23,619
36,250
—
—
14,795
15,097
—
23,708
589
24,208
2,306
38,556
(21)
113
92
(113)
—
(113)
(85)
113
28
(272)
—
(272)
2,463
—
2,463
Effect of exchange rate changes on cash and cash
equivalents
Cash and cash equivalents - End of period
48
43,202
98
39,521
(71)
43,202
(481)
39,521
107
46,881
56
Operating Activities
2013 compared to 2012
Cash flows provided by (used in) operating activities were $3.4 million and $(20.0) million for the three-month period and the year ended December 31,
2013, respectively, compared to $(8.8) million and $(30.8) million for the same periods in 2012. The significant decreases in cash flows used in operating
activities are mainly due to the cash provided by operating activities from discontinued operations as a result of the changes in operating assets and liabilities
and to the receipt, during the fourth quarter of 2013, of the non-refundable, one-time payment received from Merck Serono pursuant to the transfer of the
Cetrotide® Business, as discussed above.
The year-over-year decrease in cash flows used in operating activities is partly offset by the increase in cash used in operating activities from continuing
operations, which is explained by the comparable increase in R&D and SG&A expenditures, mainly related to the zoptarelin doxorubicin and MACRILEN™
projects, as well as by lower cash flows provided by license fee revenues.
We expect net cash used in operating activities to range from $33 million to $35 million for the year ended December 31, 2014, as we continue to invest in
zoptarelin doxorubicin, our ZoptEC Phase 3 program and related sub-studies, as well as the pre-launch activities related to MACRILEN™ in AGHD in the
U.S. market. This estimate may vary significantly in future periods, most notably as a result of the strategic review of our R&D activities, as discussed further
below.
2012 compared to 2011
Cash flows used in operating activities totalled $30.8 million for the year ended December 31, 2012, as compared to $26.2 million for the year ended
December 31, 2011. Operating cash flows for the year ended December 31, 2011 included the receipt of a non-recurring $8.4 million upfront payment made
by Yakult in connection with our development, commercialization and licensing agreement for the rights related to perifosine in Japan. The increase in cash
used in operating activities during 2012 was partially offset by a lower loss from operations for the year ended December 31, 2012.
Financing Activities
2012 compared to 2011
Cash flows provided by financing activities were $24.2 million for the year ended December 31, 2012, as compared to $38.6 million for the year ended
December 31, 2011. The year-over-year decrease is primarily due to lower proceeds from the issuance of common shares and warrants, which resulted in the
receipt of net cash proceeds of $23.6 million in 2012, as compared to $36.3 million for the same period in 2011, and to lower proceeds received on the
exercise of share purchase warrants.
Investing Activities
2012 compared to 2011
Cash flows (used in) provided by investing activities totalled $(0.3) million for the year ended December 31, 2012, as compared to $2.5 million for the year
ended December 31, 2011. This decrease is due to the absence, in 2012, of cash proceeds received on the sale of short-term investments, partly offset by
lower cash disbursements made in connection with the purchases of laboratory and other equipment used in ongoing R&D activities.
Critical Accounting Policies, Estimates and Judgments
Our consolidated financial statements as at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011 have
been prepared in accordance with IFRS as issued by the IASB.
The preparation of consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect
the reported amounts of our assets, liabilities, revenues, expenses and related disclosures. Judgments, estimates and assumptions are based on historical
experience, expectations, current trends and other factors that management believes to be relevant at the time at which our consolidated financial statements
are prepared.
Management reviews, on a regular basis, the Company's accounting policies, assumptions, estimates and judgments in order to ensure that the consolidated
financial statements are presented fairly and in accordance with IFRS. Revisions to accounting estimates are recognized in the period in which the estimates
are revised and in any future periods affected.
57
A summary of those critical accounting estimates and assumptions, as well as critical judgments used in applying accounting policies in the preparation of our
consolidated financial statements, can be found in note 3 to our consolidated financial statements as at December 31, 2013 and December 31, 2012 and for the
years ended December 31, 2013, 2012 and 2011.
Recent Accounting Pronouncements
Adopted in 2013
The following new standards and amendments to standards are effective for the first time for interim periods beginning on or after January 1, 2013 and have
been applied in preparing these consolidated financial statements. The accounting policies have been applied consistently by all subsidiaries of the Company.
IFRS 10, Consolidated Financial Statements ("IFRS 10"), which builds on existing principles by identifying the concept of control as the determining factor
in whether an entity should be included within the consolidated financial statements of a parent company. IFRS 10 also provides additional guidance to assist
in the determination of control where this is difficult to assess.
IFRS 11, Joint Arrangements ("IFRS 11"), which enhances accounting for joint arrangements, particularly by focusing on the rights and obligations of the
arrangement, rather than the arrangement's legal form. IFRS 11 also addresses inconsistencies in the reporting of joint arrangements by requiring a single
method to account for interests in jointly controlled entities and prohibits proportionate consolidation.
IFRS 12, Disclosure of Interests in Other Entities, which is a comprehensive standard on disclosure requirements for all forms of interests in other entities,
including joint arrangements, associates, special purpose vehicles and other off-balance sheet vehicles.
IFRS 13, Fair Value Measurement ("IFRS 13"), which defines fair value, sets out in a single IFRS a framework for measuring fair value and requires
disclosures about fair value measurements. IFRS 13 does not determine when an asset, a liability or an entity's own equity instrument is measured at fair
value. Rather, the measurement and disclosure requirements of IFRS 13 apply when another IFRS requires or permits the item to be measured at fair value
(with limited exceptions).
In June 2011, the IASB issued an amended version of IAS 19, Employee Benefits, including the elimination of the option to defer the recognition of actuarial
gains and losses (known as the "corridor method"), the streamlining of the presentation of changes in assets and liabilities arising from defined benefit plans
and the enhancement of the disclosure requirements for defined benefit plans, including additional information about the characteristics of defined benefit
plans and the risks to which entities are exposed through participation in those plans.
In December 2011, the IASB issued an amended version of IFRS 7, Financial Instruments: Disclosure ("IFRS 7"), including the requirement to disclose
information that enables users of an entity's financial statements to evaluate the effect, or potential effect, of offsetting financial assets and financial liabilities,
to the entity's financial position.
The impact of the adoption of these standards and amendments did not have a significant impact on the Company's consolidated financial statements.
Not yet adopted
On May 29, 2013, the IASB made amendments to the disclosure requirements of IAS 36, Impairment of Assets ("IAS 36"), requiring disclosure, in certain
instances, of the recoverable amount of an asset or cash generating unit, and the basis for the determination of fair value less costs of disposal, when an
impairment loss is recognized or when an impairment loss is subsequently reversed. The amendments to IAS 36 are effective for annual periods beginning on
or after January 1, 2014 and will be applied prospectively. The Company does not expect that these amendments will have a significant impact on the
Company's consolidated financial statements.
In May 2013, the IFRS Interpretations Committee ("IFRIC") issued International Financial Reporting Standard Interpretation 21, Levies ("IFRIC 21"), an
interpretation on the accounting for levies imposed by governments. IFRIC 21 is an interpretation of IAS 37, Provisions, Contingent Liabilities and
Contingent Assets ("IAS 37"). IAS 37 sets out criteria for the recognition of a liability, one of which is the requirement for the entity to have a present
obligation as a result of a past event (known as an obligating event). IFRIC 21 clarifies that the obligating event that gives rise to a liability to pay a levy is the
activity described in the relevant legislation that triggers the payment of the levy. IFRIC 21 is effective for annual periods beginning on or after January 1,
2014 and is to be applied on a retrospective basis. The Company does not expect that IFRIC 21 will have a significant impact on the Company's consolidated
financial statements.
58
In November 2009 and October 2010, the IASB issued IFRS 9, Financial Instruments ("IFRS 9"), which represents the completion of the first part of a three-
part project to replace IAS 39, Financial Instruments: Recognition and Measurement. Under the new standard, an entity choosing to measure a liability at fair
value will present the portion of the change in its fair value due to changes in the entity's own credit risk in the other comprehensive income or loss section of
the entity's statement of comprehensive income (loss), rather than within profit or loss in the case where the fair value option is taken for financial liabilities.
Additionally, IFRS 7, which is effective on adoption of IFRS 9, was amended to include revised guidance related to the derecognition of financial
instruments. The Company is currently assessing the impact, if any, that IFRS 9 will have on the Company's consolidated financial statements.
Outlook for 2014
MACRILEN™
Throughout the remainder of 2014, we expect to advance the pre-launch activities related to the initial commercialization of MACRILEN™ for the evaluation
of AGHD in the U.S. market. As noted above, our NDA is currently under substantive review by the FDA. Subject to the successful review and acceptance of
our NDA, we expect to make MACRILEN™ available by prescription in the U.S. as soon as commercially practicable following final regulatory approval.
There are approximately 36,000 AGHD tests performed annually in the U.S. Based on published information from the U.S. Centers for Disease Control and
Prevention and by Navigant Research, we estimate that the total potential U.S. market for AGHD evaluation is approximately 158,000 tests per year,
including the evaluation of patients who have suffered traumatic brain injury ("TBI"). Research published in the British Journal of Neurosurgery (2007) and
in the Frontiers in Endocrinology (2011) estimates that approximately 19% of hospitalized patients suffering from severe and moderate cases of TBI will
develop growth hormone deficiency.
We intend to build a commercial infrastructure necessary to access the physicians who perform the majority of AGHD tests (endocrinologists) along with the
major centers of AGHD influence. Commercial initiatives are likely to include the targeted selection, hiring and deployment of a contracted sales force by the
end of 2014. The targeted marketing efforts of our sales force will reach endocrinology specialists of AGHD. We believe these efforts will enable the
realization of a substantial portion of the potential commercial opportunity for MACRILEN™.
We are evaluating the possible final distribution channels for MACRILEN™, however, we expect that MACRILEN™ will be accessed through a mixture of
specialty pharmacies, hospital pharmacies, wholesalers and other secondary channels.
To date, we have established an agreement with a contract manufacturer for the commercial supply of the product and expect to use a third-party logistics
provider for key services related to logistics, warehousing and inventory management.
We will continue to evaluate the potential to commercialize MACRILEN™ in other geographic territories, including Canada and Europe.
Zoptarelin doxorubicin
We expect to complete initiation of clinical sites (over 100) for our Phase 3 ZoptEC study with Ergomed. Our goal is to secure a first interim (futility) analysis
for the Phase 3 ZoptEC study during the first half of 2015 by reaching anticipated patient enrollment.
We also expect to disclose results of the Phase 2 investigator-driven study in castration- and taxane-resistant prostate cancer, for which the investigator of this
study was awarded a grant from the National Institutes of Health.
Business development
With our focus to become a growth-oriented, specialty biopharmaceutical company, and in addition to our commitment to developing key product candidates
in our existing pipeline, we expect to continue to evaluate potential in-licensing and/or acquisition opportunities, as well as co-promotional arrangements
related to targeted commercial products.
Expectations for revenues, operating expenditures and cash flows
Revenues from continuing operations are expected to significantly decrease in 2014, as compared to 2013, mainly as a result of the transfer of the Cetrotide®
Business and as all deferred revenues have been recognized in 2013.
Our main focus for R&D efforts will be on our later-stage compound, zoptarelin doxorubicin and its Phase 3 ZoptEC study, as discussed above, where we
anticipate substantial investment to fund ongoing development initiatives. For earlier-stage initiatives and product candidates, we expect to recover certain
R&D costs through grants, R&D credits or other collaboration
59
agreements. As noted above, however, we currently are in the process of performing a review of all of our preclinical activities in order to streamline our
operations, reduce our operating cash burn and more appropriately align our financial resources with our longer-term strategic goals. This review may result
in changes to our future overall R&D activities and cost profile that may have a significant impact on our results of operations versus currently available
information and forecasts, which estimates net R&D costs at between $24 million and $26 million for the year ended December 31, 2014. As such, our net
R&D cost estimates may be revised in future periods as we continue to review our R&D activities, advance R&D development and as new information
becomes available.
Our SG&A expenses are expected to decrease in 2014, as compared to 2013, despite the ramping up of pre-commercialization efforts related to the expected
launch of MACRILEN™ in the U.S. The overall decrease largely reflects the decrease in termination benefits, which in 2013 were paid to our former CEO,
as discussed above.
We expect that our overall operating burn in 2014 will range from $33 million to $35 million as we continue to fund operating activities and working capital
requirements, and excluding the impact of any decisions associated with the overall review of our R&D activities and of any foreign exchange impacts. Our
Board of Directors and management team are committed to optimizing our use of operating cash flows, and while we cannot provide any definitive
conclusions or address the timeline and potential results of the aforementioned strategic review, we continue to work diligently in order to reach a successful
outcome.
Financial Risk Factors and Other Instruments
Fair value risk
The change in our warrant liability, which is measured at fair value through profit or loss, results from the periodic "mark-to-market" revaluation, via the
application of the Black-Scholes option pricing model, of currently outstanding share purchase warrants. The Black-Scholes valuation is impacted, among
other inputs, by the market price of our common shares. As a result, the change in fair value of the warrant liability, which is reported as finance income
(costs) in our consolidated statements of comprehensive income (loss), has been and may continue in future periods to be materially affected by changes in
our common share closing price, which has ranged from $1.03 to $3.23 on the NASDAQ during the year ended December 31, 2013.
If variations in the market price of our common shares of -10% and +10% were to occur, the impact on our net income (loss) for the warrant liability held at
December 31, 2013 would be as follows:
(in thousands)
Warrant liability
Total impact on net income – increase / (decrease)
Foreign currency risk
Carrying
amount
$
18,010
-10%
$
+10%
$
2,205
2,205
(2,172)
(2,172)
Since we operate internationally, we are exposed to currency risks as a result of potential exchange rate fluctuations related to non-intragroup transactions. In
particular, fluctuations in the U.S. dollar exchange rates against the euro could have a significant impact on our results of operations.
If foreign exchange rate variations of -5% (depreciation of the EUR) and +5% (appreciation of the EUR) against the US$, from period-end rates of EUR1 =
US$1.3779 were to occur, the impact on our net (loss) income for each category of financial instruments held at December 31, 2013 would be as follows:
(in thousands)
Cash and cash equivalents
Warrant liability
Total impact on net income – increase / (decrease)
Carrying
amount
$
27,452
18,010
Balances denominated in US$
-5%
$
+5%
$
1,373
(901)
472
(1,373)
900
(473)
60
Liquidity risk
Liquidity risk is the risk that we will not be able to meet our financial obligations as they become due. We manage this risk through the management of our
capital structure and by continuously monitoring actual and projected cash flows. The Board of Directors reviews and approves our operating and capital
budgets, as well as any material transactions out of the ordinary course of business. We have adopted an investment policy in respect of the safety and
preservation of our capital to ensure our liquidity needs are met. The instruments are selected with regard to the expected timing of expenditures and
prevailing interest rates.
We believe that we have sufficient funds to pay our ongoing general and administrative expenses, to pursue our R&D activities and to meet our liabilities,
obligations and existing commitments as they fall due for the ensuing twelve months. In assessing whether the going concern assumption is appropriate, we
take into account all available information about the future, which is at least, but not limited to, twelve months from the end of the reporting period. We
expect to continue to incur operating losses and may require significant capital to fulfill our future obligations. Our ability to continue future operations
beyond December 31, 2014 and to fund our activities is dependent on our ability to secure additional financings which may be completed in a number of ways
including but not limited to licensing arrangements, partnerships, share and other equity issuances and other financing activities. We will pursue such
additional sources of financing when required, and while we have been successful in securing financing in the past, there can be no assurance we will be able
to do so in the future or that these sources of funding or initiatives will be available for the Company or that they will be available on terms which are
acceptable to us.
Credit risk
Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. We regularly
monitor credit risk exposure and take steps to mitigate the likelihood of this exposure resulting in losses. Our exposure to credit risk currently relates to cash
and cash equivalents, to trade and other receivables and to restricted cash. We invest our available cash in amounts that are readily convertible to known
amounts of cash and deposit our cash balances with financial institutions that are rated the equivalent of "Baa1" and above. This information is supplied by
independent rating agencies where available and, if not available, we use publicly available financial information to ensure that we invest our cash in
creditworthy and reputable financial institutions.
As at December 31, 2013, trade accounts receivable for an amount of approximately $1.7 million were with one customer.
As at December 31, 2013, no trade accounts receivable were past due or impaired.
Generally, we do not require collateral or other security from customers for trade accounts receivable; however, credit is extended following an evaluation of
creditworthiness. In addition, we perform ongoing credit reviews of all our customers and establish an allowance for doubtful accounts when accounts are
determined to be uncollectible.
The maximum exposure to credit risk approximates the amount recognized on the statement of financial position.
Related Party Transactions and Off-Balance Sheet Arrangements
In addition to payments made to members of our key management team, during the year ended December 31, 2013, we paid $76,800 in professional fees to
one of the members of the Company's Board of Directors for special tasks mandated by our Nominating, Corporate Governance and Compensation
Committee.
As at December 31, 2013, we did not have any interests in special purpose entities or any other off-balance sheet arrangements.
61
Item 6.
Directors, Senior Management and Employees
A.
Directors and senior management
The following table sets forth information about our directors and corporate officers as at March 20, 2014.
Name and Place of Residence
Position with Aeterna Zentaris
Aubut, Marcel
Quebec, Canada
Dodd, David A.
South Carolina, United States
Dinges, Jude
Georgia, United States
Dorais, José P.
Quebec, Canada
Egbert, Carolyn
Texas, United States
Ernst, Juergen
Brussels, Belgium
Lapalme, Pierre
Quebec, Canada
Limoges, Gérard
Quebec, Canada
Métivier, Amélie
Quebec, Canada
Sachse, Richard
Mittelbiberach, Germany
Shapiro, Elliot
Quebec, Canada
Turpin, Dennis
Quebec, Canada
Director
President and Chief Executive Officer
Senior Vice President and Chief Commercial Officer
Director
Director
Chairman of the Board and Director
Director
Director
Assistant Secretary
Senior Vice President, Chief Scientific Officer/Chief Medical Officer
Corporate Secretary
Senior Vice President and Chief Financial Officer
There are no family relationships among any of the directors or executive officers of the Company and its subsidiaries. The following is a brief biography of
each of our directors and senior officers.
62
Marcel Aubut has served as a director on our Board since 1996. Mr. Aubut is a partner and Vice-Chairmain of the Board of BCF LLP, a law firm. The
countless companies and boards with which Marcel Aubut has been involved over the years demonstrate his versatility and, above all, his vast experience in
the world of business. These include, among others, Atomic Energy of Canada, Olymel L.P. (Olybro), Boralex Power Income Fund, Triton Electronik, Whole
Foods Market Canada, Hydro-Québec (Executive Committee), Purolator Courier Ltd., Tremblant Resort, Cinar Inc., La Laurentienne générale, La
Laurentienne vie, Investors Group Inc., Transforce Inc., Intra Continental Insurers Ltd., the National Hockey League Pension Society, Boréal Entreprises
Premier CDN Ltée, Les Industries Amisco Ltée, Donohue Matane Inc., La Société de développement du Loisir et du Sport du Québec, the Canadian Olympic
Committee, the Canadian Olympic Foundation, member of VANOC's Audit Committee, Governance and Ethics Committee and Observer Team, Sodic
Québec Inc., Innovatech Québec, Textile Dionne, Canada's Sports Hall of Fame, the Committee for the 2002 Quebec City Olympic Games Bid, the
Committee for the 2015 Toronto Pan American Games Bid, la Fondation Nordiques, etc. He has also presided over the establishment of numerous industrial
projects in the greater region of Quebec City.
Jude Dinges was appointed our Senior Vice President and Chief Commercial Officer in November 2013. He began his career nearly 30 years ago as a
professional sales representative at Bristol Laboratories and later at Merck & Co., where he was promoted to positions with increased responsibilities in
training, sales, management, marketing, and market development. While at Merck, Mr. Dinges won multiple awards, including the President's Achievement
Award in 2001, awarded to one of 32 Business Directors each year. He received the Change Agent Award for his market development prelaunch business
planning and contributions to sales force execution, while launching the blockbuster brands Cozaar®, Fosamax®, Singulair®, Maxalt®, Vioxx®, and Vytorin®.
He was recognized with a Career Achievement Award for his consistent top performance as a Senior/Executive Business Director. Mr. Dinges joined Novartis
Pharmaceuticals in 2006 and led his region to top performance in the launch of Tekturna® while balancing a broad antihypertensive portfolio across several
Novartis divisions. His region also led the nation in market share for Exelon® and Exelon Patch®. In 2008, Mr. Dinges became the Respiratory & Infectious
Disease Specialty Medicines Director. In 2009, Mr. Dinges joined Amgen Inc. as Executive Director of Region Sales, Bone Health Business Unit. Mr. Dinges
led his region team to a highly successful launch of monoclonal antibody, Prolia®, across southeastern United States and Puerto Rico.
David A. Dodd was appointed our President and CEO in April 2013. Mr. Dodd's executive management experience in the pharmaceutical and biotechnology
industries spans more than 35 years. Prior to joining Aeterna Zentaris, Mr. Dodd was President and CEO of Solvay Pharmaceuticals, Inc. During his six-year
tenure as President, CEO and Director of Serologicals Corporation, the market value of the company increased from $85 million in June 2000 to an all-cash
sale to Millipore Corporation in July 2006 for $1.5 billion. He also was President, CEO and Chairman of BioReliance Corporation, a leading provider of
biological safety and related testing services. Prior to that, Mr. Dodd held various senior management positions at Wyeth-Ayerst Laboratories, the Mead
Johnson Laboratories Division at Bristol-Myers Squibb, and Abbott Laboratories. Mr. Dodd holds a Master degree from Georgia State University, and
completed the Harvard Business School Advanced Management Program.
José P. Dorais has served as a director on our Board since 2006. Mr. Dorais is a partner of Miller Thomson LLP, a law firm, where he mainly practices
administrative, corporate, business and international trade law. Over his 35-year career, he has worked in both the private and public sectors; in the latter he
acted as Secretary to the Minister of Justice and as Secretary of the consulting committee on the Free Trade Agreement for the Quebec Provincial
Government. Mr. Dorais has been a member of numerous boards of directors, including the Société des Alcools du Québec, Armand-Frappier Institute,
Biochem Pharma and St-Luc Hospital in Montreal. He was, until recently, a member of the Board of Directors of Alliance Films Inc. and Investissement
Québec and Chairman of the Board of Foster Wheeler Énergie Inc. He holds a law degree from the University of Ottawa and is a member of the Barreau du
Québec.
Carolyn Egbert has served as a director on our Board since August 2012. After enjoying the private practice of law as a defense litigator in Michigan and
Washington, D.C., she joined Solvay America, Inc. ("Solvay") (a chemical and pharmaceutical company) in Houston, Texas. Over the course of a twenty-year
career with Solvay, she held the positions of Vice President, Human Resources, President of Solvay Management Services, Global Head of Human Resources
and Senior Executive Vice President of Global Ethics and Compliance. During her tenure with Solvay, she served as a director on the Board of Directors of
seven subsidiary companies. After retiring in 2010, she established a consulting business providing expertise in corporate governance, ethics and compliance,
organizational development and strategic human resources. She holds a Bachelor of Sciences degree in Biological Sciences from George Washington
University, Washington D.C. and a Juris Doctor degree from Seattle University, Seattle, Washington. She also was a Ph.D. candidate in Pharmacology at both
Georgetown University Medical School at Washington, D.C. and Northwestern University Medical School at Chicago, Illinois. She remains an active
member of both the Michigan State Bar and the District of Columbia Bar, Washington, D.C.
63
Juergen Ernst has served as a director on our Board since 2005. As the former General Manager of the Pharmaceutical Sector of Solvay S.A. (international
chemical and pharmaceutical group), Mr. Ernst has had extensive senior management experience, where, among other functions, he oversaw the human
resources department. Mr. Ernst is also a member of the Board of Directors of Pharming Group N.V., a biotechnology company based in the Netherlands.
Pierre Lapalme has served as a director on our Board since December 2009. Mr. Lapalme has, over the course of his career, held numerous senior
management positions in various global life sciences companies. He is former Senior Vice President, Sales and Marketing for Ciba-Geigy (which
subsequently became Novartis) and former Chief Executive Officer and Chairman of the Board of Rhone-Poulenc Pharmaceuticals Inc. in Canada and in
North America, as well as Executive Vice President and Chief Executive Officer of Rhone-Poulenc-Rorer Inc. North America (now sanofi-aventis), where he
supervised the development, manufacturing and sales of prescription products in North and Central America. Mr. Lapalme served on the Board of Directors
of the National Pharmaceutical Council USA and was a member of the Board of Directors of the Pharmaceutical Manufacturers Association of Canada, where
he played a leading role in reinstituting patent protection for pharmaceuticals. Until recently, he was a member of the Board and Chairman of the Board of
Sciele Pharma Inc., which was acquired by Shionogi and Co. Ltd. Mr. Lapalme is currently Chairman of the Board of Biomarin Inc., Chairman of the Board
of Pediapharm Inc., Chairman of the Board of GlyPharma Therapeutics and a member of the Board of Directors of Algorithme Pharma Inc. and of Insy's
Therapeutics Inc., a Phoenix-Arizona based specialty pharma company. He studied at the University of Western Ontario and at INSEAD, France.
Gérard Limoges, has served as a director on our Board since 2004. Mr. Limoges served as the Deputy Chairman of Ernst & Young LLP Canada until his
retirement in September 1999. After a career of 37 years with Ernst & Young, Mr. Limoges has been devoting his time as a director of a number of
companies. Mr. Limoges began his career with Ernst & Young in Montreal in 1962. After graduating from the Management Faculty of the Université de
Montréal (HEC Montréal) in 1966, he wrote the CICA exams the same year (Honors: Governor General's Gold Medal for the highest marks in Canada and
Gold Medal of the Ordre des Comptables Agréés du Québec). He became a chartered accountant in 1967 and partner of Ernst & Young in 1971. After
practicing as auditor since 1962 and partner since 1971, he was appointed Managing Partner of the Montreal Office in 1979 and Chairman for Quebec in
1984 when he also joined the National Executive Committee. In 1992, he was appointed Vice Chairman of Ernst & Young Canada and the following year,
Deputy Chairman of the Canadian firm. After retirement from practice at the end of September 1999, he was appointed Trustee of the School board of
Greater Montreal (1999), member of the Quebec Commission on Health Care and Social Services (2000-2001) and special advisor to the Rector of the
Université de Montréal and affiliate schools (2000-2003). Mr. Limoges, at the request of the Board of Directors of the Université de Montréal, participated in
the selection of the Dean of the Faculty of Medicine in 2011. Mr. Limoges is a board member or trustee and chairman of the Audit Committees of the
following public companies: Aeterna Zentaris Inc. (TSX and the NASDAQ), Hartco Inc. (TSX), PROREIT (TSX) and Hart Stores Inc. (TSXV). He is also a
board member of various private companies and charities. Mr. Limoges became an FCPA, FCA (Fellow) in 1984 and received the Order of Canada in 2002.
Amélie Métivier, Assistant Secretary. Ms. Métivier has served as our Assistant Secretary since April 2009. In addition, Ms. Métivier is currently a lawyer at
the law firm of Norton Rose Fulbright Canada LLP with a business law and transaction-oriented practice, where she has worked since 2003. She is a member
of the Barreau du Québec and holds an LL.B. (2004) degree from the Université de Montréal.
Richard Sachse was appointed our Senior Vice President and Chief Scientific Officer in January 2014. In March 2014, he was also appointed Chief Medical
Officer. Dr. Sachse holds a degree in medicine from the Friedrich-Alexander-University Erlangen, in Germany, and a board certification in Clinical
Pharmacology. With more than 20 years experience as a physician and scientist, he has extensive expertise in a variety of different therapeutic areas,
including endocrinology and oncology. In addition to registration studies, he is especially experienced in the design and implementation of translational
programs to bridge research programs to the clinic, as well as in the design and implementation of clinical pharmacology programs, including all required
profiling studies and activities, enabling successful registration of products at the international level. From 1996 to 2000, he was International Project Leader
at the Bayer AG Institute for Clinical Pharmacology, and Principal Investigator at the Bayer Clinical Pharmacology Unit, implementing innovative
exploratory development tools, including biomarkers to demonstrate early Proof of Concept. From 2001 to 2006, Dr. Sachse held a variety of different
management positions within early and late phase clinical development programs, including responsibilities for completed Phase 3 programs leading to
successful NDA/MAA submissions. In 2007, after a merger, he became Senior Director, Head of Experimental Medicine, at UCB in Belgium, where he
managed the implementation of novel biomarkers in clinical development to provide data supporting identification of appropriate target indication and target
population. In 2010, Dr. Sachse became Vice President, Head of Global Translational Medicine at Boehringer Ingelheim.
64
Elliot Shapiro was appointed our Corporate Secretary in April 2009. In addition, Mr. Shapiro is currently a partner and a lawyer at the law firm of Norton
Rose Fulbright Canada LLP with a business law and transaction-oriented practice, where he has worked since 1999. He is a member of the Barreau du
Québec. Mr. Shapiro holds B.C.L. (1999), LL.B. (1999) and B.A. (1993) degrees from McGill University.
Dennis Turpin was appointed our Senior Vice President and Chief Financial Officer in August 2007. Prior to that, he served as our Vice President and Chief
Financial Officer since June 1999. Mr. Turpin joined Aeterna Zentaris in August 1996 as Director of Finance. Prior to that, he was Director in the tax
department at Coopers Lybrand, now PricewaterhouseCoopers, from 1988 to 1996 and worked as an auditor from 1985 to 1988. Mr. Turpin earned his
Bachelor's degree in Accounting from Laval University in Québec. He obtained his license in accounting in 1985 and became a chartered accountant in 1987.
B.
Compensation
Our executive officers are generally paid in their home country's currency. Unless otherwise indicated, all directors' and executive compensation information
included in this document is presented in US dollars and, to the extent a director or officer has been paid in a currency other than US dollars (i.e. Canadian
dollars or euros), the amounts have been converted from such person's home country currency to US dollars based on the following average exchange rates:
for the financial year ended December 31, 2013: €1.000 = US$1.329 and CAN$1.000 = US$0.971; for the financial year ended December 31, 2012: €1.000 =
US$1.286 and CAN$1.000 = US$1.001; and for the financial year ended December 31, 2011: €1.000 = US$1.392 and CAN$1.000 = US$1.011.
1. Compensation of Outside Directors
The compensation paid to the Company's directors is designed to (i) attract and retain the most qualified people to serve on the Board and its committees, (ii)
align the interests of the Company's directors with those of its shareholders, and (iii) provide appropriate compensation for the risks and responsibilities
related to being an effective director. This compensation is recommended to the Board by the Nominating, Governance and Compensation (NGC) Committee
("Governance Committee"). The Governance Committee is composed of three (3) directors, each of whom is independent, namely Messrs. José P. Dorais
(Chair), Juergen Ernst and Ms. Carolyn Egbert. One of the members of the Governance Committee, Juergen Ernst, is the Chairman of the Board.
The Board has adopted a formal mandate for the Governance Committee, which is available on our website at www.aezsinc.com. The mandate of the
Governance Committee provides that it is responsible for (i) assisting the Board in developing our approach to corporate governance issues, (ii) proposing
new Board nominees, (iii) assessing the effectiveness of the Board and its committees, their respective chairs and individual directors and (iv) making
recommendations to the Board with respect to directors' compensation.
In 2013, the Governance Committee retained James F. Reda and Associates ("Reda"), a division of Gallagher Benefit Services, Inc., as a compensation
consultant. Reda was retained to assist the Governance Committee with (i) a review of the Company's compensation programs, particularly its executive
short-term and long-term incentive programs, and (ii) a review and benchmarking of the remuneration of members of the Board. Reda analyzed the
Company's past practices and defined a peer group of companies in order to understand the competitive compensation practices and to propose a program
designed to deliver both cash and equity compensation components to the Company's directors and executive officers. The Company's existing director
compensation structure was benchmarked against market compensation data gathered from North American biopharmaceutical companies of comparable
size. See the section below titled "Compensation Consultant" and "Benchmarking" for more information.
Based on the results of the benchmarking study and in light of the substantial responsibilities inherent to the position of director, the payment of an increased
target envelope of director compensation, including both cash and equity components was proposed by Reda. Upon recommendation of the Governance
Committee, the Board determined not to immediately effect or implement any increase to the remuneration payable to directors and deferred further
consideration of various elements of directors' compensation to a later point in time in 2014.
65
Annual Retainers and Attendance Fees
Annual retainers and attendance fees are paid on a quarterly basis to the members of the Board who are not employees of the Company or its subsidiaries
("Outside Directors") on the following basis:
Type of Compensation
Annual Compensation for the year
2013
(in units of home country currency)
Chairman's Retainer
Board Member Retainer
Board Meeting Attendance Fees
Audit Committee Chair Retainer
Audit Committee Member Retainer
Audit Committee Meeting Attendance Fees
Governance Committee Chair Retainer
Governance Committee Member Retainer
Governance Committee Meeting Attendance Fees
45,000
15,000
1,000 per meeting
15,000
4,000
1,000 per meeting
12,000
2,000
1,000 per meeting
All amounts in the above table are paid to Board and committee members in their home country currency.
The President and Chief Executive Officer is the only member of the Board who is not an Outside Director and as such is not compensated in his capacity as a
director. The Chairman is an Outside Director and is compensated as such. Outside Directors are reimbursed for travel and other out-of-pocket expenses
incurred in attending Board or committee meetings.
66
Outstanding Option-Based Awards and Share-Based Awards
The following table shows all awards outstanding to each Outside Director up to the end of the financial year ending and as at December 31, 2013:
Name
Issuance Date
Number of
Securities
Underlying
Unexercised
Options(1)
Option-based Awards
Option
Exercise Price
Option
Expiration Date
Value of
Unexercised In-the-
money
Options(2)
Issuance Date
Share-based Awards
Number of
Shares or
Units of Shares
that have Not
Vested
Market or Payout
Value of Share-based
Awards that have Not
Vested
(mm-dd-yyyy)
(#)
(CAN$ or US$)
(mm-dd-yyyy)
(CAN$ or US$)
(mm-dd-yyyy)
(#)
($)
Aubut, Marcel
Dorais, José P.
Egbert, Carolyn
Ernst, Juergen
Lapalme, Pierre
Limoges, Gérard
12/14/2004
12/13/2005
01/04/2007
12/11/2007
12/08/2008
12/09/2009
12/08/2010
12/07/2011
05/09/2012
05/08/2013
11/27/2013
12/08/2010
12/07/2011
05/09/2012
05/08/2013
11/27/2013
12/06/2012
05/08/2013
11/27/2013
02/25/2005
12/13/2005
01/04/2007
12/11/2007
11/14/2008
12/08/2008
12/09/2009
12/08/2010
12/07/2011
05/09/2012
05/08/2013
11/27/2013
12/09/2009
12/08/2010
12/07/2011
05/09/2012
05/08/2013
11/27/2013
12/14/2004
12/13/2005
01/04/2007
12/11/2007
12/08/2008
12/09/2009
12/08/2010
12/07/2011
05/09/2012
05/08/2013
11/27/2013
2,500
2,500
833
4,166
2,500
3,333
5,000
8,333
10,000
5,000
25,000
5,000
8,333
10,000
5,000
25,000
7,500
5,000
25,000
2,500
2,500
833
4,166
16,666
2,500
3,333
5,000
8,333
10,000
5,000
25,000
3,333
5,000
8,333
10,000
5,000
25,000
2,500
2,500
833
4,166
2,500
3,333
5,000
8,333
10,000
5,000
25,000
CAN$34.98
CAN$21.18
CAN$27.90
CAN$10.92
CAN$3.30
CAN$5.70
CAN$9.12
US$10.44
US$3.54
US$1.86
US$1.12
CAN$9.12
US$10.44
US$3.54
US$1.86
US$1.12
US$2.17
US$1.86
US$1.12
CAN$30.54
CAN$21.18
CAN$27.90
CAN$10.92
CAN$3.90
CAN$3.30
CAN$5.70
CAN$9.12
US$10.44
US$3.54
US$1.86
US$1.12
CAN$5.70
CAN$9.12
US$10.44
US$3.54
US$1.86
US$1.12
CAN$34.98
CAN$21.18
CAN$27.90
CAN$10.92
CAN$3.30
CAN$5.70
CAN$9.12
US$10.44
US$3.54
US$1.86
US$1.12
12/13/2014
12/12/2015
01/03/2017
12/10/2017
12/08/2018
12/08/2019
12/07/2020
12/06/2021
05/08/2022
05/07/2023
11/26/2023
12/07/2020
12/06/2021
05/08/2022
05/07/2023
11/26/2023
12/05/2022
05/07/2023
11/26/2023
02/24/2015
12/12/2015
01/03/2017
12/10/2017
11/13/2018
12/08/2018
12/08/2019
12/07/2020
12/06/2021
05/08/2022
05/07/2023
11/26/2023
12/08/2019
12/07/2020
12/06/2021
05/08/2022
05/07/2023
11/26/2023
12/13/2014
12/12/2015
01/03/2017
12/10/2017
12/08/2018
12/08/2019
12/07/2020
12/06/2021
05/08/2022
05/07/2023
11/26/2023
—
—
—
—
—
—
—
—
—
—
US$6,500
—
—
—
—
US$6,500
—
—
US$6,500
—
—
—
—
—
—
—
—
—
—
—
US$6,500
—
—
—
—
—
US$6,500
—
—
—
—
—
—
—
—
—
—
US$6,500
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
_________________________
(1) The number of securities underlying unexercised options represents all awards outstanding as at December 31, 2013.
(2)
"Value of unexercised in-the-money options" at financial year-end is calculated based on the difference between the closing prices of the Common Shares on the TSX or
the NASDAQ, as applicable, on the last trading day of the fiscal year (December 31, 2013) of CAN$1.47 and US$1.38, respectively, and the exercise price of the options,
multiplied by the number of unexercised options.
67
See "Summary of the Stock Option Plan" below for more details on the Stock Option Plan (as defined below).
Total Compensation of Outside Directors
The table below summarizes the total compensation earned by the Outside Directors during the financial year ended December 31, 2013 (all amounts are in
US dollars):
Name
Fees earned
($)
Share-based
Awards
Option-based
Awards(2)
Non-Equity
Incentive Plan
Compensation
Pension
Value
All Other
Compensation(3)
Total
Retainer(1)
Attendance(1)
($)
($)
($)
($)
($)
($)
51,361
74,222
139,351
137,964
58,168
—
496
79,320 (4)
7,928
—
496
Aubut, Marcel
Dorais, José P.
Egbert, Carolyn
Ernst, Juergen
Lapalme, Pierre
14,564
28,711
17,000
82,054
18,449
6,766
14,984
13,000
17,950
9,688
—
—
—
—
—
—
30,031
30,031
30,031
30,031
30,031
—
—
—
—
—
—
—
—
—
—
—
—
Limoges, Gérard
_________________________
(1) These amounts represent the portion paid in cash to the Outside Directors and are paid in each director's home country currency.
(2) The value of option-based awards represents the closing price of the Common Shares on the NASDAQ on the last trading day preceding the date of grant (US$1.86 for
30,031
29,822
14,567
74,915
options granted on May 8, 2013 and US$1.12 for options granted on November 27, 2013) multiplied by the Black-Scholes factor as at such date (80.01% for options
granted on May 8, 2013 and 80.68% for options granted on November 27, 2013) and the number of stock options granted on such date.
(3) These amounts represent fees paid in cash for special tasks or overseas travelling and are also paid in each director's home country currency.
(4) Represents fees paid for special tasks delegated to Ms. Egbert and approved by the Governance Committee in connection with the search for, and the appointment of, a
new President and Chief Executive Officer and various transition and integration work related thereto.
During the financial year ended December 31, 2013, the Company paid an aggregate amount of $355,795 to all of its Outside Directors for services rendered
in their capacity as directors, excluding reimbursement of out-of-pocket expenses and the value of option-based awards granted in 2013.
2. Compensation of Executive Officers
The mandate of the Governance Committee provides that it is responsible for taking all reasonable measures to ensure that appropriate human resources
systems and procedures, such as hiring policies, competency profiles, training policies and compensation structures, are in place so that we can attract,
motivate and retain the quality of senior management required to meet our business objectives.
The Governance Committee also assists the Board in discharging its responsibilities relating to executive and other human resources hiring, assessment,
compensation and succession planning matters.
Thus, the Governance Committee recommends the appointment of senior officers, including the terms and conditions of their appointment and termination,
and reviews the evaluation of the performance of such senior officers, including recommending their compensation and overseeing risk identification and
management in relation to executive compensation policies and practices. The Board, which includes the members of the Governance Committee, reviews the
corporate goals and objectives that are set annually and evaluates the Chief Executive Officer's performance and compensation in light of such goals and
objectives.
The Governance Committee recognizes that the industry, regulatory and competitive environment in which the Company operates requires a balanced level of
risk-taking to promote and achieve the performance expectations of executives of a specialty biopharmaceutical company that is also seeking to acquire or in-
license new commercial products. The Governance Committee is of the view that the Company's executive compensation program should not encourage
senior executives to take excessive risk. In this regard, the Governance Committee recommends the implementation of compensation methods that tie a
portion of senior executive compensation to each of the short-term and longer-term performance of both the Company as well as that of each individual
executive officer and that take into account the advantages and risks associated with such compensation methods. The Governance Committee is also
responsible for creating compensation policies that are intended to reward the creation of shareholder value while reflecting a balance between the short-term
and longer-term performance of the Company and of each executive officer.
68
Compensation Consultant
The Governance Committee may, from time to time, engage its own independent consultant to advise it with respect to executive compensation matters.
During the financial year ended December 31, 2013, the Governance Committee retained the services of Reda to provide advice on the competitiveness and
appropriateness of compensation programs for the Chief Executive Officer and the Company's other senior executive officers, as well as with respect to the
level and form of compensation payable to Outside Directors.
The fees paid to Reda for compensation consulting services provided to the Governance Committee and the Company during the financial year ended
December 31, 2013 were $54,134.
While the Governance Committee may rely on external information and advice, all of the decisions with respect to executive compensation are made by the
Board upon the recommendation of the Governance Committee and may reflect factors and considerations other than, or that may differ from, the information
and recommendations provided by any external compensation consultants that may be retained from time to time.
Compensation Discussion & Analysis
Compensation Philosophy and Objectives
The Company's executive compensation program is designed to attract, motivate and retain high-performing senior executives, encourage and reward superior
performance and align the executives' interests with those of our shareholders by:
•
•
•
•
providing the opportunity for an executive to earn compensation that is competitive with the compensation received by executives employed by a group
of comparable North American companies;
providing the opportunity for executives to participate in an equity-based incentive plan, namely a stock option plan;
aligning employee compensation with company corporate objectives; and
attracting and retaining highly qualified individuals in key positions.
Risk Assessment of Executive Compensation Program
The Board, through the Governance Committee, oversees the implementation of compensation methods that tie a portion of executive compensation to each
of the short-term and longer-term performance of the Company and of each executive officer and that take into account the advantages and risks associated
with such compensation methods. In addition, the Board oversees the creation of compensation policies that are intended to reward the creation of shareholder
value while reflecting a balance between the short-term and longer-term performance of the Company and of each executive officer.
The Governance Committee has considered in general terms the concept of risk as it relates to the Company's executive compensation program.
Base salaries are fixed in amount to provide a steady income to the executive officers regardless of share price and thus do not encourage or reward risk-
taking to the detriment of other important business, operational, commercial or clinical metrics or milestones. The variable compensation elements (annual
bonuses and stock options) are designed to reward each of short-term, mid-term and long-term performance. For short-term performance, a discretionary
annual bonus may be awarded based on the timing and level of attainment of specific operational and corporate goals that the Governance Committee
believes to be challenging, yet does not encourage unnecessary or excessive risk-taking. While the Company's bonus payments are generally based on annual
performance, a maximum bonus payment is pre-fixed for each senior executive officer and represents only a portion of each individual's overall total
compensation opportunities. In exceptional circumstances, a particular executive officer may be awarded a bonus that exceeds his or her maximum pre-fixed
or target bonus amount. Finally, a significant portion of executive compensation is provided in the form of stock options, which is intended to further align the
interests of executives with those of shareholders. The Governance Committee believes that these awards do not encourage unnecessary or excessive risk-
taking since the ultimate value of the awards is tied to the Company's share price, and in the case of grants under the long-term incentive compensation plan,
are generally subject to mid-term and long-term vesting schedules to help ensure that executives generally have significant value tied to long-term share price
performance.
The Governance Committee believes that the variable compensation elements (annual bonuses and stock options) represent a percentage of overall
compensation that is sufficient to motivate the Company's executive officers to produce superior short-term, mid-term and long-term corporate results, while
the fixed compensation element (base salary) is also sufficient to discourage executive officers from taking unnecessary or excessive risks. The Governance
Committee and the Board also generally have the discretion to adjust annual bonuses and stock option grants based on individual performance and any other
factors they may determine to be appropriate in the circumstances. Such factors may include, where necessary or appropriate, the level of risk-taking a
particular executive officer may have engaged in during the preceding year.
69
Based on the foregoing, the Governance Committee has not identified any specific risks associated with the Company's executive compensation program that
are reasonably likely to have a material adverse effect on the Company. The Governance Committee believes that the Company's executive compensation
program does not encourage or reward any unnecessary or excessive risk-taking behaviour.
The Board of Directors, based on the Governance Committee's recommendation, set goals for the Company at the end of 2012, which constituted the 2013
performance objectives for the position of Chief Executive Officer and the Company's other executive officers. The performance objectives are not
established for individual executive officers but rather by function(s) exercised within the Company, many of which are carried out by or fall within the
responsibility of the Company's President and Chief Executive Officer, Chief Financial Officer and the Company's other executive officers.
In December 2013, the Governance Committee determined that although a number of the objectives set forth in the table below were met, some delays were
experienced in the attainment of certain objectives as described below. The Governance Committee also took into consideration the significant changes in
management that occurred in 2013, including the appointment of a new President and Chief Executive Officer, as well as the hiring of a Senior Vice President
and Chief Commercial Officer.
70
Objectives for 2013
Perifosine
l Ensure interim analysis in multiple myeloma by Data Safety
Monitoring Board ("DSMB") to permit futility analysis and
go-no-go decision to complete the Phase 3 program in a
timely manner
Results for 2013
l Discontinuation of the Phase 3 trial in multiple myeloma
following an interim analysis by an independent DSMB
l Closing of all sites involved in the trial and review of Yakult
Honsha Co., Ltd. strategic alliance
Cetrotide®
l Conclude the licensing out of all global manufacturing rights
l Successfully completed the transfer of the manufacturing
of Cetrotide®
l Ensure transition of the manufacturing activities with the
different partners
MACRILEN™ (macimorelin)
l Submit a New Drug Application ("NDA") in the United
States in the evaluation of adult growth hormone deficiency
("AGHD")
rights to Merck Serono a subsidiary of Merck KGaA ("Merck
Serono")
l Non-refundable one-time payment received of approximately
$3.3 million plus other payments related to the transfer of
certain assets
l Transition Service Agreement in place with Merck Serono to
facilitate the completion/integration of the manufacturing of
Cetrotide®
l NDA submitted to evaluate AGHD in November 2013, post
year-end, the FDA confirmed acceptance for filing and that
the NDA review is ongoing with a Prescription Drug User Fee
Act ("PDUFA") date November 5, 2014
l The NDA was submitted at a later date than originally
expected
l Prepare a commercial plan for the future launch of
l Completed after hiring of our Senior Vice President and Chief
MACRILEN™ (macimorelin)
Commercial Officer, Jude Dinges
Zoptarelin doxorubicin
ZoptEC
(Zoptarelin doxorubicin
Endometrial Cancer) Phase 3 program
l Complete Phase 3 trial design and submit to FDA a Special
in
Protocol Assessment ("SPA") and the equivalent in Europe in
endometrial cancer
l SPA agreement obtained from FDA, the Phase 3 ZoptEC trial
was also discussed and a scientific advice was also agreed
with the European Medicines Agency ("EMA")
l Ensure CRO partnership with performance objectives and
l Co-development and profit-sharing agreement signed with
control of corresponding costs
Ergomed as a CRO for the execution of the Phase 3 ZoptEC
trial in endometrial cancer. Ergomed has agreed to assume
30% of the clinical and regulatory costs up to $10 million and
will receive pre-established single digit percentage on net
income and up to specified maximum amount
l Start recruitment in the different countries (sites and patients)
l
and achieve pre-established recruitment rate
Initiated > 50% of clinical sites for the ZoptEC trial before
year-end 2013
AEZS-120
l Initiate a Phase 1 trial
Finance and budget
l Budget management
l Ensure the continued funding of ongoing drug development
programs for a minimum period of time while maintaining
flexibility to execute different forms of financing
Organization structure
l Review and reorganize senior management and key
employees by function (as opposed to by site), realign
reporting lines and empower senior management and key
employees to take ownership of, and responsibility over, their
respective functions and tasks
71
l Approval of Danish regulatory authorities received for the
initiation of a proof-of-concept Phase 1 trial in prostate
cancer, however, the trial has not yet started pending the result
of additional scientific evaluation being performed
l With the different strategic partnerships, including Ergomed
and the transfer of Cetrotide® manufacturing rights, as well as
the tight control of the operations, the burn rate was reduced
to $1.7 million per month on average which was lower than
the pre-established operating budget
l Cash flow from financing activities net of transaction costs
was $23.7 million in 2013. Cash and cash equivalents balance
was $43.2 million at year-end, which is significantly higher
than what was initially budgeted
l Successful organization review was done within the first six
months of the arrival of our Chief Executive Officer and
implementation of the new structure is ongoing
The determination of individual performance does not involve quantitative measures using a mathematical calculation in which each individual performance
objective is given a numerical weight. Instead, the Governance Committee's determination of individual performance is a subjective determination as to
whether a particular executive officer substantially achieved the stated objectives or over-performed or under-performed with respect to corporate objectives
that were deemed to be important to the Company's success.
While the Company has not formally adopted a policy prohibiting or restricting its executive officers and directors from purchasing financial instruments,
including, for greater certainty, pre-paid variable forward contracts, equity swaps, collars, or units of exchange funds, which are designed to hedge or offset a
decrease in market value of equity securities granted as executive compensation or directors' remuneration, the Company's executive officers and directors
have not historically engaged in such financial instruments or transactions. In addition, the Company's disclosure and trading policy requires that all
"reporting insiders", including executive officers and directors, pre-clear with the Company's Corporate Secretary each trade relating to the Company's
securities, which would include the entering into of any such financial instrument or transaction, hedge, swap or forward contract.
Benchmarking
In order to attain the Company's objectives of providing market competitive compensation opportunities, the Company's executive compensation plan, based
on a study provided by Reda, is benchmarked against market compensation data gathered from organizations of comparable size and/or stage of development
or other companies that the Company competes with for executive talent (the "Reference Group"). An overview of the characteristics of the Reference Group
is provided in the following table:
(In millions of US$)
Location
Industries
Revenues
Last fiscal year
Market Capitalization
As at April 30, 2013
Aeterna Zentaris
North America and Europe
Biopharmaceutical
33.7(1)
46.1
Reference Group
North America
Biopharmaceutical
17.5(2)
155.0
Net Loss
Last fiscal year
_________________________
(1) For the year ended December 31, 2012, as presented in the Company's 2012 audited consolidated financial statements, which were presented in conformity with IFRS as
17.4(2)
20.4(1)
issued by the IASB.
(2) The Reference Group for the financial year ended December 31, 2013 was selected in June 2013, and these data are based on their most recently completed fiscal year at
such time.
The Reference Group used in respect of the financial year ended December 31, 2013 was composed of the following companies within the biopharmaceutical
sector: Affymax Inc., Agenus Inc., Arqule Inc., Astex Pharmaceuticals Inc., Aveo Pharmaceuticals Inc., Cancer Genetics Inc., Cell Therapeutics Inc.,
Cleveland Biolabs Inc., Curis Inc., Galena Biopharma Inc., Helix Biopharma Corp., Immunomedics Inc., Insys Therapeutics Inc., Isoray Inc., Maxigen Inc.,
Merrimack Pharmaceuticals Inc., Oncogenex Pharmaceuticals Inc., Peregrine Pharmaceuticals Inc., Pharmathene Inc., Progenics Pharmaceutical Inc.,
Repligen Corp., Savient Pharmaceuticals Inc., Targacept Inc., Verastem Inc. and Vical Inc.
Positioning
The Company's compensation policy is for executive compensation to be generally aligned with the 50th percentile, or the mid-point, of the Reference Group.
The Governance Committee uses discretion and judgment when determining compensation levels as they apply to a specific executive officer. Individual
compensation may be positioned above or below median, based on individual experience and performance or other criteria deemed important by the
Governance Committee. For 2013, the total cash target payment (base salary and, if applicable or awarded in cash, annual bonus) for the Company's executive
officers is approximately at the 50th percentile competitive range of the Reference Group, however, in light of the fact that a cash bonus was paid to only two
of the "Named Executive Officers" (defined as the Chief Executive Officer, the Chief Financial Officer and the three other most highly compensated
executive officers of the Company), namely Messrs. Dodd and Turpin, the total cash compensation (base salary and annual cash bonus) actually paid to the
Company's executive officers with respect to the 2013 year fell below the 50th percentile competitive range of the Reference Group and, more specifically,
falls at approximately the 34th percentile range of the Reference Group.
72
Compensation Elements
An executive compensation policy has been established to acknowledge and reward the contributions of the executive officers to the Company's success and
to ensure competitive compensation, so that the Company may benefit from the expertise required to pursue its objectives.
The Company's executive compensation policy is comprised of both fixed and variable components. The variable components include equity and non-equity
incentive plans. Each compensation component is intended to serve a different function, but all elements are intended to work in concert to maximize both
corporate and individual performance by establishing specific, competitive operational and corporate goals and by providing financial incentives to
employees based on their level of attainment of these goals.
The Company's current executive compensation program is comprised of the following four basic components:
(i) base salary;
(ii) non-equity incentives - consisting of an annual bonus linked to both individual and corporate performance;
(iii) long-term equity incentives - consisting solely of stock options granted under the Company's stock option plan established for the benefit of its directors,
certain executive officers and other participants as may be designated from time to time by either the Board or the Governance Committee (the "Stock
Option Plan"); and
(iv) other elements of compensation - consisting of benefits, perquisites and retirement benefits.
Base Salary
Salaries of the Company's executive officers are based on a comparison with competitive benchmark positions. The starting point to determine executive base
salaries is the median of executive salaries in the Reference Group. In determining individual base salaries, the Governance Committee takes into
consideration individual circumstances that may include the scope of an executive's position, the executive's relevant competencies or experience and
retention risk. The Governance Committee also takes into consideration the fulfillment of the corporate objectives of the Company as well as the individual
performance of the executive.
Short-Term Incentive Compensation
The short-term incentive compensation plan sets out the allocation of incentive awards based on the advancement of the Company's product pipeline, its
financial position as well as strategic objectives.
In the case of executive officers, a program is designed to maximize both corporate and individual performance by establishing specific operational, clinical,
regulatory, financial, commercial and corporate goals and to provide financial incentives to executive officers based on their level of attainment of these
goals. The granting of incentives requires the approval of both the Governance Committee and the Board and is based upon an assessment of each individual's
performance, as well as the performance of the Company. The underlying objectives are set at the end of each financial year as part of the annual review of
corporate strategies.
For the financial year ended December 31, 2013, the Governance Committee recommended, and the Board approved, in the best interests of the Company,
that no bonuses be awarded to the Company's executive officers in respect of the 2013 year, except as otherwise indicated below, and that no long-term
incentive stock options be granted to the Company's executive officers in respect of the 2013 year.
In making decisions related to the short-term incentive compensation for the Named Executive Officers during the most recently completed financial year, the
conclusions of the Governance Committee were based, in part, on the goals and results for 2013, as described in Section "Risk Assessment of Executive
Compensation Program". These conclusions, other than for the President and Chief Executive Officer, for which a description is provided in Section
"Compensation of the Chief Executive Officer", are as follows.
Mr. Turpin's 2013 goals were aligned with the Company's overall objectives, with an emphasis on financial and budgetary objectives. In respect of the 2013
year, the Governance Committee determined that Mr. Turpin's individual performance surpassed his pre-fixed objectives. Under Mr. Turpin's financial
direction, the Company implemented and carried out a successful ATM financing program generating net proceeds of approximately $3.0 million, a registered
direct offering generating net proceeds of approximately $7.0 million and an underwritten public offering generating net proceeds of approximately $13.7
million, which, in addition to Mr. Turpin's disciplined management and control of the Company's budget
73
and expenses, enabled the Company to end the year with cash and cash equivalents that significantly exceeded the budgeted amount. In light of the foregoing,
the Governance Committee determined that Mr. Turpin's contributions to the achievement of the Company's goals merited a cash bonus in an amount of
$66,677, representing 58% of his maximum target bonus amount.
Dr. Blake's and Mr. Pelliccione's 2013 respective goals were aligned with the Company's overall objectives, with an emphasis on overseeing and supporting
the attainment of the Company's clinical and regulatory objectives. In respect of the 2013 year, the Governance Committee determined that each of Dr.
Blake's and Mr. Pelliccione's respective individual performance did not meet their objectives in a timely manner. The Governance Committee determined that
no cash bonus should be awarded to Dr. Blake or Mr. Pelliccione in respect of the 2013 year. Messrs. Blake and Pelliccione ceased to be employed by Aeterna
Zentaris as of March 13, 2014.
As Mr. Dinges was formally appointed Senior Vice President and Chief Commercial Officer of the Company on November 1, 2013, no cash bonus was
awarded to Mr. Dinges in respect of the 2013 year.
See the section below titled "Compensation of the Chief Executive Officer" for a description of the short-term incentive compensation of the President and
Chief Executive Officer.
Long-Term Equity Compensation Plan of Executive Officers
The long-term component of the compensation of the Company's executive officers is based exclusively on the Stock Option Plan, which permits the award
of a number of options based on the contribution of the officers and their responsibilities. To encourage retention and focus management on developing and
successfully implementing the continuing growth strategy of the Company, stock options have historically vested over a period of three years, with the first
third vesting on the first anniversary of the date of grant. However, the vesting schedule for certain stock options granted to senior executives in the financial
years ended December 2012, 2011, 2010 and 2009 was accelerated from three years to eighteen months since a portion of these grants were intended to serve
as a partial or total replacement for cash bonuses. In December 2013, the Governance Committee and the Board determined that going forward, all stock
options would vest over a period of three years with the first third vesting on the first anniversary of the date of grant, as reflected in the Amendments (as
defined below) to the Stock Option Plan described below. Stock options are usually granted to executive officers in December of each year.
For the financial year ended December 31, 2013, the Governance Committee recommended that no stock options be granted to executive officers under the
long-term equity compensation plan, although certain stock options were granted to Messrs. Dodd and Dinges upon their respective appointments as President
and Chief Executive Officer and Senior Vice President and Chief Commercial Officer.
Summary of the Stock Option Plan
We initially established the Stock Option Plan in order to attract and retain directors, officers, employees of the Company or any of its subsidiaries, as the case
may be, and suppliers of ongoing services, who will be motivated to work towards ensuring the success of the Company. The Board has full and complete
authority to interpret the Stock Option Plan, to establish applicable rules and regulations and to make all other determinations it deems necessary or useful for
the administration of the Stock Option Plan, provided that such interpretations, rules, regulations and determinations are consistent with the rules of all stock
exchanges and quotation systems on which the Company's securities are then traded and with all relevant securities legislation.
On March 20, 2014, the Board approved certain amendments to the Stock Option Plan (the "Amendments"), which Amendments are not subject to
shareholder approval, and which were approved by the TSX. The Amendments are described further below.
Under the previous stock option plan, individuals eligible to participate under the plan were determined from time to time by either the Board or the
Governance Committee. The Amendments provide a more limited list of those persons eligible to receive grants under the Stock Option Plan as it is the
Company's intention to grant options primarily to independent directors and the most senior executive officers of the Company and to generally limit the
number of options granted to other officers or employees of the Company or to suppliers of ongoing services. The Stock Option Plan now specifically
provides that the sole persons eligible to receive grants under the Stock Option Plan (each, a "Participant") shall be: (i) the most senior executive officers of
the Company, including the persons occupying the positions of Chief Executive Officer, Chief Financial Officer, Chief Scientific Officer, Chief Commercial
Officer, Chief Administrative Officer and Chief Compliance Officer; (ii) such other executive officers of the Company or of its subsidiaries that may, from
time to time, report directly to the Chief Executive Officer; (iii) the non-employee, independent members of the Board; and (iv) such other officers or
employees of the Company or of any of its subsidiaries, as the case may be, or suppliers of ongoing services, as may be expressly designated by resolution of
the Board or the Governance Committee.
74
The maximum number of Common Shares issuable under the Stock Option Plan remains fixed at 11.4% of the issued and outstanding Common Shares at any
given time, which, as of March 20, 2014, represented 6,442,592 Common Shares. There were 2,546,740 options outstanding under the Stock Option Plan
representing approximately 4.5% of all issued and outstanding Common Shares on March 20, 2014.
Under the Stock Option Plan, (i) the number of securities issuable to insiders, at any time, or issued within any one-year period, under all of the Company's
security-based compensation arrangements, cannot exceed 10% of the Company's issued and outstanding securities and (ii) no single Participant may hold
options to purchase, from time to time, more than 5% of the Company's issued and outstanding Common Shares. In addition: (i) the aggregate fair value of
options granted under all security-based compensation arrangements of the Company to any one non-employee, independent director of the Company entitled
to receive a benefit under the Stock Option Plan, within any one-year period, cannot exceed US$100,000 valued on a Black-Scholes basis and as determined
by the Governance Committee; and (ii) the aggregate number of securities issuable to all non-employee, independent directors of the Company entitled to
receive a benefit under the Stock Option Plan, within any one-year period, under all security-based compensation arrangements of the Company, cannot
exceed 1% of its issued and outstanding securities.
Options granted under the Stock Option Plan may be exercised at any time within a maximum period of seven years following the date of their grant (the
"Outside Expiry Date"), which was reduced by the Amendments from a previous maximum term of ten years. The Board or the Governance Committee, as
the case may be, designates, at its discretion, the specific Participants to whom stock options are granted under the Stock Option Plan and determines the
number of Common Shares covered by each of such option grants, the grant date, the exercise price of each option, the expiry date and any other matter
relating thereto, in each case in accordance with the applicable rules and regulations of the regulatory authorities. The price at which the Common Shares may
be purchased may not be lower than the greater of the closing prices of the Common Shares on the TSX or the NASDAQ, as applicable, on the last trading
day preceding the date of grant of the option. Options granted under the Stock Option Plan shall vest in equal tranches over a three-year period (one-third
each year, starting on the first anniversary of the grant date) or as otherwise determined by the Board or the Governance Committee, as the case may be.
Unless the Board or the Governance Committee decides otherwise, Participants cease to be entitled to exercise their options under the Stock Option Plan: (i)
immediately, in the event a Participant who is an officer or employee resigns or voluntarily leaves his or her employment with the Company or one of its
subsidiaries or the employment with the Company or one of its subsidiaries is terminated with cause and, in the case of a Participant who is a non-employee
director of the Company or one of its subsidiaries, the date on which such Participant ceases to be a member of the relevant Board of Directors; (ii) six
months following the date on which employment is terminated as a result of the death of a Participant who is an officer or employee and, in the case of a
Participant who is a non-employee director of the Company or one of its subsidiaries, six months following the date on which such Participant ceases to be a
member of the relevant Board of Directors by reason of death; (iii) 90 days following the date on which a Participant's employment with the Company or any
of its subsidiaries is terminated for a reason other than those mentioned in (i) or (ii) above including, without limitation, upon the disability, long-term illness,
retirement or early retirement of the Participant (the Amendments increased this from the previous period of 30 days); and (iv) where the Participant is a
service supplier, 30 days following the date on which such Participant ceases to act as such, for any cause or reason (each, an "Early Expiry Date").
The Stock Option Plan also provides that, if the expiry date of one or more options (whether an Early Expiry Date or an Outside Expiry Date) occurs during a
"blackout period" or within the seven business days immediately after a blackout period imposed by the Company, the expiry date will be automatically
extended to the date that is seven business days after the last day of the blackout period. For the purposes of the foregoing, "blackout period" means the period
during which trading in the Company's securities is restricted in accordance with its corporate policies.
Participants may not assign their options (nor any interest therein) other than by will or in accordance with the applicable laws of estates and succession.
The Amendments also provide for a more detailed change in control provision. Under the current Stock Option Plan, as amended by the Amendments, in the
event: (i) the Company accepts an offer to amalgamate, merge or consolidate with any other entity (other than a wholly-owned subsidiary of the Company) or
to sell or license all or substantially all of its assets to any other entity (other than a wholly-owned subsidiary of the Company); (ii) the Company signs a
support agreement in customary form pursuant to which the Board agrees to support a takeover bid and recommends that shareholders of the Company tender
their Common Shares to such takeover bid; or (iii) holders of greater than 50% of the Company's then outstanding Common Shares tender all of their
Common Shares to a takeover bid made to all of the holders of the Common Shares to purchase all of the then issued and outstanding Common Shares, then,
in each case, all of the outstanding options shall, without any further action required to be taken by the Company, immediately vest. Each Participant shall
thereafter be entitled to exercise all of such options at any time up to and including, but not after the close of business on that date which is
75
ten (10) days following the Closing Date (as defined below). Upon the expiration of such ten (10)-day period, all rights of the Participant to such options or to
the exercise of same (to the extent not already exercised) shall automatically terminate and have no further force or effect whatsoever. "Closing Date" is
defined to mean (x) the closing date of the amalgamation, merger, consolidation, sale or license transaction in the case of clause (i) above; (y) the first expiry
date of the takeover bid on which each of the offeror's conditions are either satisfied or waived in the case of clause (ii) above; or (z) the date on which it is
publicly announced that holders of greater than 50% of the Company's then outstanding Common Shares have tendered their Common Shares to a takeover
bid in the case of clause (iii) above.
The Stock Option Plan provides that the following amendments may be made to the plan upon approval of each of the Board and the Company's shareholders
as well as receipt of all required regulatory approvals:
•
•
•
•
•
•
•
•
•
any amendment to Section 3.2 of the Stock Option Plan (which sets forth the limit on the number of options that may be granted to insiders) that would
have the effect of permitting, without having to obtain shareholder approval on a "disinterested vote" at a duly convened shareholders' meeting, the grant
of any option(s) under the Stock Option Plan otherwise prohibited by Section 3.2;
any amendment to the number of securities issuable under the Stock Option Plan (except for certain permitted adjustments, such as in the case of stock
splits, consolidations or reclassifications);
any amendment which would permit any option granted under the Stock Option Plan to be transferable or assignable other than by will or in accordance
with the applicable laws of estates and succession;
the addition of a cashless exercise feature, payable in cash or securities, which does not provide for a full deduction of the number of underlying
securities from the Stock Option Plan reserve;
the addition of a deferred or restricted share unit component or any other provision which results in employees receiving securities while no cash
consideration is received by the Company;
with respect to any Participant whether or not such Participant is an "insider" and except in respect of certain permitted adjustments, such as in the case
of stock splits, consolidations or reclassifications:
◦
◦
◦
any reduction in the exercise price of any option after the option has been granted, or
any cancellation of an option and the re-grant of that option under different terms, or
any extension to the term of an option beyond its Outside Expiry Date to a Participant who is an "insider" (except for extensions made in the context
of a "blackout period");
any amendment to the method of determining the exercise price of an option granted pursuant to the Stock Option Plan;
the addition of any form of financial assistance or any amendment to a financial assistance provision which is more favourable to employees; and
any amendment to the foregoing amending provisions requiring Board, shareholder and regulatory approvals.
The Stock Option Plan further provides that the following amendments may be made to the Stock Option Plan upon approval of the Board and upon receipt of
all required regulatory approvals, but without shareholder approval:
•
•
•
•
•
•
amendments of a "housekeeping" or clerical nature or to clarify the provisions of the Stock Option Plan;
amendments regarding any vesting period of an option;
amendments regarding the extension of an option beyond an Early Expiry Date in respect of any Participant, or the extension of an option beyond the
Outside Expiry Date in respect of any Participant who is a "non-insider" of the Company;
adjustments to the number of issuable Common Shares underlying, or the exercise price of, outstanding options resulting from a split or a consolidation
of the Common Shares, a reclassification, the payment of a stock dividend, the payment of a special cash or non-cash distribution to the Company's
shareholders on a pro rata basis provided such distribution is approved by the Company's shareholders in accordance with applicable law, a
recapitalization, a reorganization or any other event which necessitates an equitable adjustment to the outstanding options in proportion with
corresponding adjustments made to all outstanding Common Shares;
discontinuing or terminating the Stock Option Plan; and
any other amendment which does not require shareholder approval under the terms of the Stock Option Plan.
76
Outstanding Option-Based Awards and Share-Based Awards
The following table shows all awards outstanding to the Named Executive Officers as well as the former President and Chief Executive Officer as of
December 31, 2013:
Name
Issuance Date
Option-based Awards
Option
Exercise Price
Option
Expiration Date
Value of
Unexercised In-the-
money
Options(2)
Issuance
Date
Number of
Securities
Underlying
Unexercised
Options(1)
(mm-dd-yyyy)
(#)
(CAN$ or US$)
(mm-dd-yyyy)
(CAN$ or US$)
Dodd, David A.(4)
Engel, Juergen(6)
Turpin, Dennis
Blake, Paul(7)
Pelliccione, Nicholas J.(7)
04/15/2013
04/15/2013
12/14/2004
12/13/2005
01/04/2007
12/11/2007
11/14/2008
12/08/2008
12/09/2009
12/08/2010
12/07/2011
12/06/2012
12/14/2004
12/13/2005
01/04/2007
12/11/2007
12/09/2009
12/08/2010
12/07/2011
12/06/2012
07/27/2007
12/11/2007
12/08/2008
12/09/2009
12/08/2010
12/07/2011
12/06/2012
05/07/2007
12/11/2007
12/08/2008
12/09/2009
12/08/2010
12/07/2011
12/06/2012
11/27/2013
300,000
US$1.98
04/14/2023
—
—
—
16,666
CAN$34.98
12/13/2014
8,333
8,333
8,333
33,333
12,500
27,500
37,125
44,499
133,400
15,000
8,333
8,333
8,333
19,166
9,475
17,353
84,000
7,500
8,333
8,333
18,333
10,675
18,071
80,700
4,166
8,333
3,333
10,000
8,333
17,218
70,100
CAN$21.18
12/12/2015
CAN$27.90
01/03/2017
CAN$10.92
12/10/2017
CAN$3.90
11/13/2018
CAN$3.30
12/08/2018
CAN$5.70
12/08/2019
CAN$9.12
12/07/2020
US$10.44
12/06/2021
US$2.17
12/05/2022
CAN$34.98
12/13/2014
CAN$21.18
12/12/2015
CAN$27.90
01/03/2017
CAN$10.92
12/10/2017
CAN$5.70
12/08/2019
CAN$9.12
12/07/2020
US$10.44
12/06/2021
US$2.17
12/05/2022
US$18.30
US$10.92
07/26/2017
12/10/2017
CAN$3.30
12/08/2018
CAN$5.70
12/08/2019
CAN$9.12
12/07/2020
US$10.44
12/06/2021
US$2.17
12/05/2022
US$23.76
US$10.92
05/06/2017
12/10/2017
CAN$3.30
12/08/2018
CAN$5.70
12/08/2019
CAN$9.12
12/07/2020
US$10.44
12/06/2021
US$2.17
12/05/2022
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Share-based Awards
Number of
Shares or
Units of shares
that have Not
Vested
(#)
175,000(5)
200,000(5)
Market or Payout
Value of Share-based
Awards that have Not
Vested(3)
($)
— (5)
— (5)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Dinges, Jude(8)
_________________________
(1) The number of securities underlying unexercised options represents all awards outstanding at December 31, 2013.
(2)
11/26/2023
US$1.12
150,000
US$39,000
"Value of unexercised in-the-money options" at financial year-end is calculated based on the difference between the closing prices of the Common Shares on the TSX or
the NASDAQ, as applicable, on the last trading day of the year (December 31, 2013) of CAN$1.47 and US$1.38, respectively, and the exercise price of the options,
multiplied by the number of unexercised options.
"Market or Payout Value of Share-based Awards that have Not Vested" at financial year-end is calculated based on the excess, if any, of the closing price of a Common
Share on the last trading day of the year (December 31, 2013) over $1.98, being the closing price of a Common Share on the NASDAQ on the last trading day preceding
the effective date of Mr. Dodd's appointment multiplied by 175,000 or 200,000, as applicable. See also note (5) below.
(3)
(4) David A. Dodd was appointed President and Chief Executive Officer effective April 15, 2013 and was granted 300,000 stock options in connection with such
appointment.
(5) Pursuant to Mr. Dodd's Employment Agreement, the Company agreed to pay Mr. Dodd two separate share-based retention bonuses as follows: (1) the Company shall pay
Mr. Dodd a retention bonus if he remains employed through December 31, 2014 equal to (a) the excess, if any, of the closing price of a Common Share on the last regular
trading day in 2014 over $1.98, being the closing price of a
77
Common Share on the NASDAQ on the last trading day preceding the effective date of Mr. Dodd's appointment multiplied by (b) 175,000; and, (2) the Company shall
pay Mr. Dodd a retention bonus if he remains employed through December 31, 2015 equal to (a) the excess, if any, of the closing price of a Common Share on the last
regular trading day in 2015 over $1.98, being the closing price of a Common Share on the NASDAQ on the last trading day preceding the effective date of Mr. Dodd's
appointment multiplied by (b) 200,000. These share-based retention bonuses will be paid in US dollars no later than March 15 of the year following the end of 2014 and
2015, respectively.
Juergen Engel served as President and Chief Executive Officer up until April 15, 2013.
(6)
(7) Messrs. Blake and Pelliccione ceased to be employed by Aeterna Zentaris as of March 13, 2014.
(8)
Jude Dinges was appointed Senior Vice President and Chief Commercial Officer effective November 1, 2013 and was granted 150,000 stock options in connection with
such appointment.
There are no vested share-based awards that have not yet been paid out or distributed.
Incentive Plan Awards — Value Vested or Earned During the Year
The following table shows the incentive plan awards value vested or earned for each Named Executive Officer and former President and Chief Executive
Officer for the financial year ended December 31, 2013.
Name
Option-based awards — Value
vested during the year(1)
Share-based awards —
Value
vested during the year
Dodd, David A.
Engel, Juergen
Turpin, Dennis
Blake, Paul(2)
Pelliccione, Nicholas J.(2)
($)
—
—
—
—
—
($)
—
—
—
—
—
Non-equity incentive
plan
compensation — Value
earned
during the year
($)
50,000
—
66,677
—
—
Dinges, Jude
_________________________
(1) Represents the aggregate dollar value that would have been realized if the options had been exercised on the vesting date, based on the difference between the closing
—
—
—
price of the Common Shares on the NASDAQ and the exercise price on such vesting date.
(2) Messrs. Blake and Pelliccione ceased to be employed by Aeterna Zentaris as of March 13, 2014.
Other Forms of Compensation
Benefits and Perquisites
The Company's executive employee benefits program also includes life, medical, dental and disability insurance. Perquisites consist of a car allowance and
human resources counselling. These benefits and perquisites are designed to be competitive overall with equivalent positions in comparable North American
organizations in the life sciences industry.
Pension Plan
Juergen Engel, the former President and Chief Executive Officer, participated in a non-contributory defined benefit pension plan, and amounts thereunder
remain payable to Mr. Engel following his departure from the Company. Benefits payable under this plan correspond to 40% of the executive officer's average
salary of the last twelve months before leaving the company or reaching retirement age. This amount is unchanged during the first five working years of the
executive officer and increases by 0.4% for each additional year of employment before the executive officer reaches the age of 65.
As the normal retirement age is 65 years, first payments under the pension plan were made to Mr. Engel as of September 1, 2010. The following table shows
total annual pension benefits payable to Mr. Engel pursuant to this plan. Upon the death of a participant, the surviving spouse of the participant will be
entitled to a benefit equal to 60% of the benefits to which such participant was entitled. All benefits payable under this plan are in addition to German
governmental social security benefits.
78
Defined Benefit Plans Table as at December 31, 2013
Name
Number
of years
of
credited
service
(#)
Engel, Juergen
34
_________________________
(1)
At year
end
($)
207,696
Annual benefits payable
At age 65(1)
Accrued
obligation at
start of year(2)
Compensatory
change
Non-
compensatory
change
Accrued
obligation at
year end(3)(4)
($)
193,142
($)
($)
4,240,141
(318,754)
($)
171,400
($)
3,885,090
In light of the fact that Mr. Engel attained the age of 65 during the 2010 year, by way of exception to other currency conversions in this Circular, the amount in this
column has been converted from euros to US$ based on the annual average exchange rate for the financial year ended December 31, 2010, which was €1.000 = US$1.326.
(2) By way of exception to other currency conversions in this Circular, the amount in this column has been converted from euros to US$ based on the exchange rate on
December 31, 2012, which was €1.000 = US$1.319.
(3) The figure in the column "Accrued obligation at year end" was further reduced by an amount of $207,696 representing the amount of mandatory pension payments made
to Mr. Engel during 2013.
(4) By way of exception to other currency conversions in this Circular, the amount in this column has been converted from euros to US$ based on the exchange rate on
December 31, 2013, which was €1.000 = US$1.378.
All figures in the above table were calculated using the assumptions and methods used for financial statement reporting purposes under the accounting
principles used to prepare the Company's financial statements filed with the Canadian securities regulatory authorities and available at www.sedar.com and
furnished to the United States Securities and Exchange Commission and available at www.sec.gov.
Employer Contribution to Employees' Retirement Plan
In 2008, the Board approved a plan whereby the Company would contribute to its employees' retirement plans both in Canada (RRSP) and the United States
(401(k)) to the extent of 50% of the employee's contribution up to a maximum of $7,750 annually for Canadian employees under 50 years old and $8,750 for
those in the United States. The plan also includes a contribution for employees over 50 years old up to a maximum of $10,250 for Canadian employees and
$11,500 for those in the United States. Employees based in Frankfurt, Germany also benefit from certain employer contributions into the employees' pension
funds (DUPK/RUK). The Company's executive officers, including the Named Executive Officers, are eligible to participate in such employer-contribution
plans to the same extent and in the same manner as all other employees of the Company.
79
Summary Compensation Table
The Summary Compensation Table set forth below shows compensation information for each of the Named Executive Officers as well as for the former
President and Chief Executive Officer for services rendered in all capacities during each of the financial years ended December 31, 2013, 2012 and 2011.
SUMMARY COMPENSATION TABLE
Name and principal position
Years
Salary
Share
based
awards
($)
($)
Option
based
awards(1)
($)
328,846
(3)
414,048
(4)
474,606
Dodd, David A.
President and Chief Executive Officer
Engel, Juergen
Former President and Chief Executive
Officer
Turpin, Dennis
Senior Vice President and Chief
Financial Officer
Blake, Paul(10)
Former Senior Vice President and
Chief Medical Officer
Pelliccione, Nicholas J.(10)
Former Senior Vice President,
Regulatory Affairs and Quality
Assurance
Dinges, Jude
Senior Vice President and Chief
Commercial Officer
2013
2012
2011
2013
2012
2011
2013
2012
2011
2013
2012
2011
2013
2012
2011
2013
2012
2011
—
—
148,825
(6)
443,601
505,260
331,652
341,605
332,434
384,300
384,300
370,223
333,600
333,600
321,062
121,988
(11)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Non-equity incentive plan
compensation
Annual
incentive
plan
Long-term
incentive
plans
Pension
Value
All other
compensation(2)
Total
compensation
($)
50,000
—
—
—
—
160,764
—
—
—
237,876
336,420
—
66,677
149,787
131,198
—
143,902
136,622
—
125,000
130,178
135,542
—
—
—
80,509
—
—
89,670
—
—
77,739
—
—
—
($)
($)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
797,849
590,136
—
—
—
—
—
—
—
—
—
—
—
—
($)
11,500 (5)
—
—
1,679,920 (7)(8)
200,974 (8)
214,212 (8)
4,763 (9)
—
5,056 (9)
11,500 (5)
11,000 (5)
11,000 (5)
11,500 (5)
11,000 (5)
11,000 (5)
2,354 (5)
—
—
($)
1,279,000
—
—
1,828,745
1,680,300
1,806,792
403,092
491,392
549,197
395,800
539,202
607,515
345,100
469,600
539,979
259,884
—
—
_________________________
(1) The value of option-based awards represents the closing price of the Common Shares on the NASDAQ on the last trading day preceding the date of grant (US$1.98 for
options granted on April 15, 2013 and US$1.12 for options granted on November 27, 2013) multiplied by the Black-Scholes factor as at such date (79.90% for options
granted on April 15, 2013 and 80.68% for options granted on November 27, 2013) and the number of stock options granted on such date.
"All Other Compensation" represents perquisites and other personal benefits which, in the aggregate, amount to $50,000 or more, or are equivalent to 10% or more of a
Named Executive Officer's total salary for the financial year ended December 31, 2013. The type and amount of each perquisite, the value of which exceeds 25% of the
total value of perquisites, is separately disclosed for each Named Executive Officer, if applicable. In the case of the former President and Chief Executive Officer, Juergen
Engel, "All Other Compensation" includes a termination or severance payment, as well as mandatory pension payments paid to him after he attained age 65. See also note
(7) below.
(2)
(3) Represents the salary actually earned by and paid to Mr. Dodd following his appointment as President and Chief Executive Officer on April 15, 2013.
(4) The value of Mr. Dodd's share-based awards represents the closing price of the Common Shares on the NASDAQ on the last trading day preceding the date of grant
(US$1.98 for share appreciation rights ("SARS") granted on April 15, 2013) multiplied by the Black-Scholes factor as at such date (175,000 SARS at a factor of 54% and
200,000 SARS at a factor of 58%) and the number of SARS granted on such date.
(5) Represents 401(k) employer contributions to Messrs. Dodd's, Blake's, Pelliccione's and Dinges's retirement savings plans.
(6) Represents the salary actually earned by and paid to Mr. Engel in his capacity as President and Chief Executive Officer until his departure from the Corporation effective
April 15, 2013.
(7) Under the terms of a release agreement, Mr. Engel received a termination or severance payment of approximately US$1.4 million.
(8) Represents mandatory pension payments made to the former President and Chief Executive Officer in 2011, 2012 and 2013 after he attained age 65.
(9) Represents RRSP employer contribution to Mr. Turpin's retirement savings plan.
(10) Messrs. Blake and Pelliccione ceased to be employed by Aeterna Zentaris as of March 13, 2014.
(11) Represents consultant fees paid to Mr. Dinges between May 12, 2013 and October 31, 2013 combined with the salary actually paid to him following his appointment as
Senior Vice President and Chief Commercial Officer on November 1, 2013.
80
Compensation of the Chief Executive Officer
The compensation of the President and Chief Executive Officer is governed by the Company's executive compensation policy described in the section titled
"Compensation of Executive Officers", and the President and Chief Executive Officer participates, together with the other Named Executive Officers, in all of
the Company's incentive plans.
Mr. Dodd's total earned salary from April 15 to December 31, 2013 was $328,846 (based on an annual base salary of $475,000), which places him at
approximately 6% below the 50th percentile in the Reference Group.
Having considered Mr. Dodd's performance during the 2013 year, his significant operational and commercial experience and the fact that he is key to the
continued operation and transformation of the Company, the Governance Committee recommended, and the Board approved that a cash bonus in the amount
of US$50,000 be awarded to Mr. Dodd in respect of the 2013 year.
For the financial year ended December 31, 2013, the Governance Committee recommended that no stock options be granted to the President and Chief
Executive Officer under the long-term equity compensation plan, although Mr. Dodd did receive a grant of 300,000 stock options in connection with his
appointment in April 2013. See the section titled "Long-Term Equity Compensation Plan of Executive Officers – Summary of the Stock Option Plan", for a
complete description of the Stock Option Plan.
C.
Board Practices
Our Articles provide that our Board shall be composed of a minimum of five and a maximum of 15 directors. Directors are elected annually by our
shareholders, but the directors may from time to time appoint one or more directors, provided that the total number of directors so appointed does not exceed
one-third of the number of directors elected at the last annual meeting of shareholders. Each elected director will remain in office until termination of the next
annual meeting of the shareholders or until his or her successor is duly elected or appointed, unless his or her post is vacated earlier. For information
regarding Mr. Dodd's employment agreement with the Company, which provides for benefits on termination of his employment, see "Item 10.C – Material
Contracts". None of the other directors are party to any directors' service contracts with the Company providing for benefits on termination of employment.
Committees of the Board of Directors
Audit Committee
Our Board has established an Audit Committee and a Governance Committee.
The Audit Committee assists the Board in fulfilling its oversight responsibilities. The Audit Committee reviews the financial reporting process, the system of
internal control, the audit process, and the Company's process for monitoring compliance with laws and regulations and with our Code of Ethical Conduct. In
performing its duties, the Audit Committee will maintain effective working relationships with the Board, management, and the external auditors. To
effectively perform his or her role, each committee member will obtain an understanding of the detailed responsibilities of committee membership as well as
the Company's business, operations and risks.
The function of the Audit Committee is oversight and while it has the responsibilities and powers set forth in its charter (incorporated by reference to Exhibit
11.2), it is neither the duty of the committee to plan or to conduct audits or to determine that the Company's financial statements are complete, accurate and in
accordance with generally accepted accounting principles, nor to maintain internal controls and procedures.
The current members of the Audit Committee are José P. Dorais, Pierre Lapalme and Gérard Limoges.
Governance Committee
The mandate of the Governance Committee provides that it is responsible for taking all reasonable measures to ensure that appropriate human resources
systems and procedures, such as hiring policies, competency profiles, training policies and compensation structures are in place so that the Company can
attract, motivate and retain the quality of personnel required to meet its business objectives.
The Governance Committee also assists the Board in discharging its responsibilities relating to executive and other human resources hiring, assessment,
compensation and succession planning matters.
81
Thus, the Governance Committee recommends the appointment of senior officers, including the terms and conditions of their appointment and termination,
and reviews the evaluation of the performance of our senior officers, including recommending their compensation and overseeing risk identification and
management in relation to executive compensation policies and practices. The Board, which includes the members of the Governance Committee, reviews the
Chief Executive Officer's corporate goals and objectives and evaluates his or her performance and compensation in light of such goals and objectives.
The current members of the Governance Committee are Juergen Ernst, José P. Dorais and Carolyn Egbert.
D.
Employees
As at March 14, 2014, we had a total of 76.26 full time equivalents ("FTE") (as compared to 81 as at March 1, 2013 and 89 as at March 1, 2012), of which
61.56 are based in Frankfurt, Germany, 6 in New Jersey, United States, and 8.7 in Quebec City, Canada. Of these, 44.82 are involved in discovery, preclinical,
clinical and pharmaceutical development, 7.9 are involved in regulatory affairs, quality assurance and intellectual property, and 23.54 are involved in business
operations, communications, finance, information technology, human resources, project management and legal affairs. We have agreements with our
employees covering confidentiality, loyalty, non-competition, and assignment to the Company of all intellectual property rights developed during the
employment period.
E.
Share ownership
The information in the table below is provided as at December 31, 2013:
Name
No. of Common Shares owned
or held
Percent(1)
No. of stock options held(2)
No. of currently
exercisable options
Aubut, Marcel
Blake, Paul
Dinges, Jude
Dodd, David A.
Dorais, José P.
Egbert, Carolyn
Ernst, Juergen
Lapalme, Pierre
Limoges, Gérard
Pelliccione, Nicholas J.
Turpin, Dennis
Total
_________________________
* Less than 1%
18,750
11,725
3,391
8,333
—
—
9,808
—
1,499
4,625
3,541
61,672
*
*
*
*
*
*
*
*
*
*
*
0.14
69,165
151,945
150,000
300,000
53,333
37,500
85,831
56,666
69,165
121,483
169,994
1,265,082
29,722
121,157
—
—
13,890
5,000
46,388
17,223
29,722
94,229
138,105
495,436
(1) Based on 45,312,009 Common Shares outstanding as at December 31, 2013.
(2) For information regarding option expiration dates and exercise price refer to the tables included under Item 6.B.
Item 7.
Major Shareholders and Related Party Transactions
A.
Major shareholders
We are not directly or indirectly owned or controlled by another corporation or by any foreign government. Based on filings with the SEC and the Canadian
securities regulatory authorities, as at March 20, 2014, there are no persons/entities who beneficially owned, directly or indirectly, or exercised control or
direction over our Common Shares carrying more than 5% of the voting rights attached to all our Common Shares.
United States Shareholders
As at December 31, 2013, there were a total of 54 holders of record of our Common Shares, of which three were registered with addresses in the United
States holding in the aggregate approximately 93% of our outstanding Common Shares. We believe that the number of beneficial owners of our Common
Shares is substantially greater than the number of record holders, because the overwhelming majority of our Common Shares are held in broker "street
names".
82
B.
Related party transactions
None.
C.
Interests of experts and counsel
Not applicable.
Item 8.
Financial Information
A.
Consolidated statements and other financial information
The consolidated financial statements filed as part of this annual report on Form 20-F are presented under "Item 18. – Financial Statements".
B.
Significant changes
No significant changes occurred since the date of our annual consolidated financial statements included elsewhere in this annual report on Form 20-F.
Item 9.
The Offering and Listing
A.
Offer and listing details
Not Applicable, except for Item 9A(4).
83
Our Common Shares are listed and posted for trading on NASDAQ under the symbol "AEZS" and on the TSX under the symbol "AEZ". The following table
indicates, for the relevant periods, the high and low closing prices of our Common Shares on NASDAQ and on the TSX:
NASDAQ (US$)
TSX (CAN$)
High
Low
High
Low
3.23
12.90
15.48
12.54
16.98
4.12
5.06
4.80
12.90
1.65
1.98
2.10
3.23
1.49
1.32
1.49
1.44
1.65
1.51
1.70
1.03
1.87
8.58
4.74
2.76
1.87
2.35
2.29
9.36
1.03
1.37
1.73
1.88
1.23
1.23
1.19
1.08
1.03
1.35
1.48
3.27
12.84
15.06
12.84
18.66
4.08
5.04
4.80
12.84
1.71
2.09
2.18
3.27
1.66
1.46
1.58
1.52
1.71
1.56
1.79
1.08
1.87
8.46
4.80
3.42
1.87
2.34
2.40
9.42
1.08
1.41
1.74
1.90
1.37
1.37
1.29
1.13
1.08
1.41
1.55
2013
2012
2011
2010
2009
2012
Fourth quarter
Third quarter
Second quarter
First quarter
2013
Fourth quarter
Third quarter
Second quarter
First quarter
Most recent 6 months
March 2014(1)
February 2014
January 2014
December 2013
November 2013
October 2013
September 2013
_________________________
(1) Up to and including March 18, 2014
B.
Plan of distribution
Not applicable.
C.
Markets
Our Common Shares are listed and posted for trading on NASDAQ under the symbol "AEZS" and on the TSX under the symbol "AEZ".
D.
Selling shareholders
Not applicable.
E.
Dilution
Not applicable.
F.
Expenses of the issuer
Not applicable.
84
Item 10. Additional Information
A.
Share capital
Not applicable.
B.
Memorandum and articles of association
The Company is governed by its restated articles of incorporation (the "Restated Articles of Incorporation") under the CBCA and by articles of amendment
dated October 2, 2012 (together with the Restated Articles of Incorporation, the "Articles") and by its bylaws (the "bylaws"). The Company's Articles are on
file with the Corporations Directorate of Industry Canada under Corporation Number 264271-9. The Articles do not include a stated purpose and do not place
any restrictions on the business that the Company may carry on.
Inspection Rights of Shareholders
Under the CBCA, shareholders are entitled to be provided with a copy of the list of registered shareholders of the Company. In order to obtain the shareholder
list, the Company must be provided with an affidavit including, among other things, a statement that the list will only be used for the purposes permitted by
the CBCA. These permitted purposes include an effort to influence the voting of shareholders of the Company, an offer to acquire securities of the Company
and any other matter relating to the affairs of the Company. The Company is entitled to charge a reasonable fee for the provision of the shareholder list and
must deliver that list no more than ten days after receipt of the affidavit described above.
Under the CBCA, shareholders have the right to inspect certain corporate records, including its Articles and bylaws and minutes of meetings and resolutions
of the shareholders. Shareholders have no statutory right to inspect minutes of meetings and resolutions of directors of the Company. Shareholders of the
Company have the right to certain financial information respecting the Company. In addition to the annual and quarterly financial statements required to be
filed under applicable securities laws, under the CBCA, the Company is required to place before every annual meeting of shareholders its audited
comparative annual financial statements. In addition, shareholders have the right to examine the financial statements of each of our subsidiaries and any other
corporate entity whose accounts are consolidated in the financial statements of the Company.
Directors
The minimum number of directors of the Company is five and the maximum number is 15. In accordance with the CBCA, at least 25% of its directors must
be residents of Canada. In order to serve as a director, a person must be a natural person at least 18 years of age, of sound mind, not bankrupt, and must not be
prohibited by any court from holding the office of director. None of the Articles, the bylaws and the CBCA imposes any mandatory retirement requirements
for directors.
The directors are elected by a majority of the votes cast at the annual meeting at which an election of directors is required, to hold office until the election of
their successors except in the case of resignations or if their offices become vacant by death or otherwise. Subject to the provisions of the Company's bylaws,
all directors may, if still qualified to serve as directors, stand for re-election. The Board is not replaced at staggered intervals but is elected annually.
There is no provision in the Company's bylaws or its Articles that requires that a director of the Company must be a shareholder.
The directors are entitled to remuneration as shall from time to time be determined by the Board or by a committee to which the Board may delegate the
power to do so. Under the mandate of the Company's Governance Committee, such committee, comprised of a majority of independent directors, is tasked
with making recommendations to the Board concerning director remuneration.
The CBCA provides that a director who is a party to, or who is a director or officer of, or has a material interest in, any person who is a party to a material
contract or transaction or proposed material contract or transaction with the Company must disclose to the Company the nature and extent of his or her
interest at the time and in the manner provided by the CBCA, or request that same be entered in the minutes of the meetings of the Board, even if such
contract, in connection with the normal business activity of the Company, does not require the approval of either the directors or the shareholders. At the
request of the president or any director, the director placed in a situation of conflict of interest must leave the meeting while the Board discusses the matter.
The CBCA prohibits such a director from voting on any resolution to approve the contract or transaction unless the contract or transaction:
85
•
•
•
relates primarily to his or her remuneration as a director, officer, employee or agent of the Company or an affiliate;
is for indemnity or insurance for director's liability as permitted by the CBCA; or
is with an affiliate of the Company.
The CBCA provides that the Board may, on behalf of the Company and without authorization of its shareholders:
borrow money upon the credit of the Company;
issue, reissue, sell or pledge debt obligations of the Company;
give a guarantee on behalf of the Company to secure performance of an obligation of any person; and
•
•
•
• mortgage, hypothecate, pledge or otherwise create a security interest in all or any property of the Company, owned or subsequently acquired, to secure
any obligation of the Company.
The shareholders have the ability to restrict such powers through the Company's Articles or bylaws (or through a unanimous shareholder agreement), but no
such restrictions are in place.
The CBCA prohibits the giving of a guarantee to any shareholder, director, officer or employee of the Company or of an affiliated corporation or to an
associate of any such person for any purpose or to any person for the purpose of or in connection with a purchase of a share issued or to be issued by the
Company or its affiliates, where there are reasonable grounds for believing that the Company is or, after giving the guarantee, would be unable to pay its
liabilities as they become due, or the realizable value of the Company's assets in the form of assets pledged or encumbered to secure a guarantee, after giving
the guarantee, would be less than the aggregate of the Company's liabilities and stated capital of all classes. These borrowing powers may be varied by the
Company's bylaws or its Articles. However, the Company's bylaws and Articles do not contain any restrictions on or variations of these borrowing powers.
Pursuant to the CBCA, the directors of the Company manage and administer the business and affairs of the Company and exercise all such powers and
authority as the Company is authorized to exercise pursuant to the CBCA, the Articles and the bylaws. The general duties of a director or officer of the
Company under the CBCA are to act honestly and in good faith with a view to the best interests of the Company and to exercise the care, diligence and skill
that a reasonably prudent person would exercise in comparable circumstances. Any breach of these duties may lead to liability to the Company and its
shareholders for breach of fiduciary duty. In addition, a breach of certain provisions of the CBCA, including the improper payment of dividends or the
improper purchase or redemption of shares, will render the directors who authorized such action liable to account to the Company for any amounts
improperly paid or distributed.
The Company's bylaws provide that the Board may, from time to time, appoint from amongst their number committees of the Board, and delegate to any such
committee any of the powers of the Board except those which pursuant to the CBCA a committee of the Board has no authority to exercise. As such, the
Board has two standing committees: the Audit Committee and the Governance Committee.
Subject to the limitations provided by the CBCA, the Company's bylaws provide that the Company shall, to the full extent provided by law, indemnify a
director or an officer of the Company, a former director or officer of the Company or a person who acts or acted at the Company's request as a director or
officer of a body corporate of which the Company is or was a shareholder or creditor, and his or her heirs and legal representatives, against all costs, losses,
charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him or her in respect of any civil, criminal or
administrative action or proceeding to which he or she is made a party by reason of having been a director or officer of the Company or such body corporate,
provided:
(a) he or she acted in good faith in the best interests of the Company; and
(b) in the case of a criminal or an administrative action or proceeding that is enforced by a monetary penalty, he or she had reasonable grounds to believe that
his or her conduct was lawful.
The directors of the Company are authorized to indemnify from time to time any director or other person who has assumed or is about to assume in the
normal course of business any liability for the Company or for any corporation controlled by the Company, and to secure such director or other person against
any loss by the pledge of all or part of the movable or immovable property of the Company through the creation of a hypothec or any other real right in all or
part of such property or in any other manner.
86
Share Capitalization
Our authorized share capital structure consists of an unlimited number of shares of the following classes (all classes are without nominal or par value):
Common Shares; and first preferred shares (the "First Preferred Shares") and second preferred shares (the "Second Preferred Shares" and, together with the
First Preferred Shares, the "Preferred Shares"), both issuable in series. As at March 20, 2014, there were 56,513,969 Common Shares outstanding. No
Preferred Shares of the Company have been issued to date. The Company has also issued warrants to acquire Common Shares in connection with certain
equity financings.
Common Shares
The holders of the Common Shares are entitled to one vote for each common share held by them at all meetings of shareholders, except meetings at which
only shareholders of a specified class of shares are entitled to vote. In addition, the holders are entitled to receive dividends if, as and when declared by the
Company's Board of Directors on the Common Shares. Finally, the holders of the Common Shares are entitled to receive the remaining property of the
Company upon any liquidation, dissolution or winding-up of the affairs of the Company, whether voluntary or involuntary. Shareholders have no liability to
further capital calls as all shares issued and outstanding are fully paid and non-assessable.
Preferred Shares
The First and Second Preferred Shares are issuable in series with rights and privileges specific to each class. The holders of Preferred Shares are generally not
entitled to receive notice of or to attend or vote at meetings of shareholders. The holders of First Preferred Shares are entitled to preference and priority to any
participation of holders of Second Preferred Shares, Common Shares or shares of any other class of shares of the share capital of the Company ranking junior
to the First Preferred Shares with respect to dividends and, in the event of the liquidation of the Company, the distribution of its property upon its dissolution
or winding-up, or the distribution of all or part of its assets among the shareholders, to an amount equal to the value of the consideration paid in respect of
such shares outstanding, as credited to the issued and paid-up share capital of the Company, on an equal basis, in proportion to the amount of their respective
claims in regard to such shares held by them. The holders of Second Preferred Shares are entitled to preference and priority to any participation of holders of
Common Shares or shares of any other class of shares of the share capital of the Company ranking junior to the Second Preferred Shares with respect to
dividends and, in the event of the liquidation of the Company, the distribution of its property upon its dissolution or winding-up, or the distribution of all or
part of its assets among the shareholders, to an amount equal to the value of the consideration paid in respect of such shares outstanding, as credited to the
issued and paid-up share capital of the Company, on an equal basis, in proportion to the amount of their respective claims in regard to such shares held by
them.
Our Board of Directors may, from time to time, provide for additional series of Preferred Shares to be created and issued, but the issuance of any Preferred
Shares is subject to the general duties of the directors under the CBCA to act honestly and in good faith with a view to the best interests of the Company and
to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
Shareholder Actions
The CBCA provides that shareholders of the Company may, with leave of a court, bring an action in the name of and on behalf of the Company for the
purpose of prosecuting, defending or discontinuing an action on behalf of the Company. In order to grant leave to permit such an action, the CBCA provides
that the court must be satisfied that the directors of the Company were given adequate notice of the application, the shareholder is acting in good faith and that
it appears to be in the Company's best interests that the action be brought.
Shareholder Rights Plan
The Company's Board of Directors adopted a shareholder rights plan on March 23, 2010, which was initially confirmed and ratified by the Company's
shareholders on May 13, 2010 (the "Rights Plan").
Under the terms of the Rights Plan, its continued existence was reconfirmed by the Company's shareholders at the Company's annual meeting of shareholders
held on May 8, 2013.
Objectives and Background of the Shareholder Rights Plan
The fundamental objectives of the Rights Plan are to provide adequate time for our Board and shareholders to assess an unsolicited take-over bid for the
Company, to provide the Board with sufficient time to explore and develop alternatives for maximizing shareholder value if a take-over bid is made, and to
provide shareholders with an equal opportunity to participate in a take-over bid.
87
The Rights Plan encourages a potential acquiror who makes a take-over bid to proceed either by way of a "Permitted Bid", as described below, which requires
a take-over bid to satisfy certain minimum standards designed to promote fairness, or with the concurrence of our Board. If a take-over bid fails to meet these
minimum standards and the Rights Plan is not waived by the Board, the Rights Plan provides that holders of Common Shares, other than the acquiror, will be
able to purchase additional Common Shares at a significant discount to market, thus exposing the person acquiring Common Shares to substantial dilution of
its holdings.
Summary of the Rights Plan
The following is a summary of the principal terms of the Rights Plan, which summary is qualified in its entirety by reference to the terms thereof. Capitalized
terms not otherwise defined in this summary shall have the meaning ascribed to such terms in the Shareholder Rights Plan Agreement which sets forth the
Rights Plan. The Rights Plan is filed as an exhibit to this annual report on Form 20-F.
Operation of the Rights Plan
Pursuant to the terms of the Rights Plan, one right was issued in respect of each common share outstanding at 5:01 p.m. on March 29, 2010 (the "Effective
Date"). In addition, one right will be issued for each additional common share issued after the Record Time and prior to the earlier of the Separation Time (as
defined below) and the Expiration Time (as defined below). The rights have an initial exercise price equal to the Market Price (as defined below) of the
Common Shares as determined at the Separation Time, multiplied by five, subject to certain anti-dilution adjustments (the "Exercise Price"), and they are not
exercisable until the Separation Time. Upon the occurrence of a Flip-in Event, each right will entitle the holder thereof, other than an Acquiring Person or any
other person whose rights are or become void pursuant to the provisions of the Rights Plan, to purchase from the Company, effective at the close of business
on the eighth trading day after the Stock Acquisition Date, upon payment to the Company of the Exercise Price, Common Shares having an aggregate Market
Price equal to twice the Exercise Price on the date of consummation or occurrence of such Flip-in Event, subject to certain anti-dilution adjustments.
Definition of Market Price
Market Price is generally defined in the Rights Plan, on any given day on which a determination must be made, as the volume weighted average trading price
of the Common Shares for the five consecutive trading days (i.e. days on which the TSX is open for the transaction of business, subject to certain exceptions),
through and including the trading day immediately preceding such date of determination, subject to certain exceptions.
Trading of Rights
Until the Separation Time (or the earlier termination or expiration of the rights), the rights trade together with the Common Shares and are represented by the
same share certificates as the Common Shares or an entry in the Company's securities register in respect of any outstanding Common Shares. From and after
the Separation Time and prior to the Expiration Time, the rights are evidenced by rights certificates and trade separately from the Common Shares. The rights
do not carry any of the rights attaching to the Common Shares such as voting or dividend rights.
Separation Time
The rights will separate from the Common Shares to which they are attached and become exercisable at the time (the "Separation Time") of the close of
business on the eighth business day after the earliest to occur of:
1.
the first date (the "Stock Acquisition Date") of a public announcement of facts indicating that a person has become an Acquiring Person; and
2.
the date of the commencement of, or first public announcement of the intention of any person (other than the Company or any of its subsidiaries) to
commence a take-over bid or a share exchange bid for more than 20% of the outstanding Common Shares of the Company other than a Permitted Bid or
a Competing Permitted Bid (as defined below), so long as such take-over bid continues to satisfy the requirements of a Permitted Bid or a Competing
Permitted Bid), as the case may be.
The Separation Time can also be such later time as may from time to time be determined by the Board, provided that if any such take- over bid expires, or is
cancelled, terminated or otherwise withdrawn prior to the Separation Time, without securities deposited thereunder being taken up and paid for, it shall be
deemed never to have been made and if the Board determines to waive the application of the Rights Plan to a Flip-in Event, the Separation Time in respect of
such Flip-in Event shall be deemed never to have occurred.
88
From and after the Separation Time and prior to the Expiration Time, each right entitles the holder thereof to purchase one common share upon payment to
the Company of the Exercise Price.
Flip-in Event
The acquisition by a person (an "Acquiring Person"), including others acting jointly or in concert with such person, of more than 20% of the outstanding
Common Shares, other than by way of a Permitted Bid, a Competing Permitted Bid or in certain other limited circumstances described in the Rights Plan, is
referred to as a "Flip-in Event".
In the event that, prior to the Expiration Time, a Flip-in Event which has not been waived occurs (see "Waiver and Redemption" below), each right (other than
those held by or deemed to be held by the Acquiring Person) will thereafter entitle the holder thereof, effective as at the close of business on the eighth trading
day after the Stock Acquisition Date, to purchase from the Company, upon payment of the Exercise Price and otherwise exercising such right in accordance
with the terms of the Rights Plan, that number of Common Shares having an aggregate Market Price on the date of consummation or occurrence of the Flip-in
Event equal to twice the Exercise Price, for an amount in cash equal to the Exercise Price (subject to certain anti-dilution adjustments described in the Rights
Plan).
A bidder may enter into Lock-up Agreements with the Company's shareholders ("Locked-up Persons") who are not affiliates or associates of the bidder and
who are not, other than by virtue of entering into such agreement, acting jointly or in concert with the bidder, whereby such shareholders agree to tender their
Common Shares to the take-over bid (the "Lock-up Bid") without the bidder being deemed to beneficially own the Common Shares deposited pursuant to the
Lock-up Bid. Any such agreement must include a provision that permits the Locked-up Person to withdraw the Common Shares to tender to another take-
over bid or to support another transaction that will either provide greater consideration to the shareholder than the Lock-up Bid or provide for a right to sell a
greater number of shares than the Lock-up Bid contemplates (provided that the Lock-up Agreement may require that such greater number exceed the number
of shares under the Locked-up Bid by a specified percentage not to exceed 7%).
The Lock-up Agreement may require that the consideration under the other transaction exceed the consideration under the Lock-up Bid by a specified
amount. The specified amount may not be greater than 7%. For greater certainty, a Lock-up Agreement may contain a right of first refusal or require a period
of delay (or other similar limitation) to give a bidder an opportunity to match a higher price in another transaction as long as the limitation does not preclude
the exercise by the Locked-up Person of the right to withdraw the Common Shares during the period of the other take-over bid or transaction.
The Rights Plan requires that any Lock-up Agreement be made available to the Company and the public. The definition of Lock-up Agreement also provides
that under a Lock-up Agreement, no "break up" fees, "topping" fees, penalties, expenses or other amounts that exceed in aggregate the greater of (i) 2.5% of
the price or value of the aggregate consideration payable under the Lock-up Bid, and (ii) 50% of the amount by which the price or value of the consideration
received by a Locked-up Person under another take-over bid or transaction exceeds what such Locked-up Person would have received under the Lock-up Bid,
can be payable by such Locked- up Person if the Locked-up Person fails to deposit or tender Common Shares to the Lock-up Bid or withdraws Common
Shares previously tendered thereto in order to deposit such Common Shares to another take-over bid or support another transaction.
Permitted Bid Requirements
The requirements of a Permitted Bid include the following:
1.
the take-over bid must be made by means of a take-over bid circular;
2.
the take-over bid must be made to all holders of Common Shares wherever resident, on identical terms and conditions, other than the bidder;
3.
the take-over bid must not permit Common Shares tendered pursuant to the bid to be taken up or paid for:
a)
prior to the close of business on a date which is not less than 60 days following the date of the bid, and
b)
then only if at such date more than 50% of the then outstanding Common Shares held by shareholders other than any other Acquiring Person, the
bidder, the bidder's affiliates or associates, persons acting jointly or in concert with the bidder and any employee benefit plan, deferred profit-sharing
plan, stock participation plan or trust for the benefit of employees of the Company or any of its subsidiaries, unless the beneficiaries of such plan or
trust direct the manner in which the Common Shares are to be voted or direct whether the Common Shares are to be tendered to a take-over bid (the
"Independent Shareholders"), have been deposited or tendered to the take-over bid and not withdrawn;
89
4.
the take-over bid must allow Common Shares to be deposited, unless the take-over bid is withdrawn, at any time up to the close of business on the date
that the Common Shares are to be first taken up and paid for;
5.
the take-over bid must allow Common Shares to be withdrawn until taken up and paid for; and
6.
if more than 50% of the then outstanding Common Shares held by Independent Shareholders are deposited or tendered to the take-over bid within the 60-
day period and not withdrawn, the bidder must make a public announcement of that fact and the take-over bid must remain open for deposits and tenders
of Common Shares for not less than ten days from the date of such public announcement.
A Permitted Bid need not be a bid for all outstanding Common Shares not held by the bidder, i.e., a Permitted Bid may be a partial bid. The Rights Plan also
allows a competing Permitted Bid (a "Competing Permitted Bid") to be made while a Permitted Bid is in existence. A Competing Permitted Bid must satisfy
all the requirements of a Permitted Bid other than the requirement set out in clause 3(a) above and must not permit Common Shares tendered or deposited
pursuant to the bid to be taken up or paid for prior to the close of business on a date which is earlier than 35 days (or such longer minimum period of days that
the bid must be open for acceptance after the date of the bid under applicable Canadian provincial securities legislation) and the 60th day after the earliest
date on which any other Permitted Bid or Competing Permitted Bid that is then in existence was made.
Waiver and Redemption
The Board may, prior to the occurrence of a Flip-in Event, waive the dilutive effects of the Rights Plan in respect of, among other things, a particular Flip-in
Event resulting from a take-over bid made by way of a take-over bid circular to all holders of Common Shares of the Company. In such an event, such waiver
shall also be deemed to be a waiver in respect of any other Flip-in Event occurring under a take-over bid made by way of a take-over bid circular to all
holders of Common Shares prior to the expiry of the first mentioned take-over bid.
The Board may, with the approval of a majority of Independent Shareholders (or, after the Separation Time has occurred, holders of rights, other than rights
which are void pursuant to the provisions of the Rights Plan or which, prior to the Separation Time, are held otherwise than by Independent Shareholders), at
any time prior to the occurrence of a Flip-in Event which has not been waived, elect to redeem all, but not less than all, of the then outstanding rights at a
price of $0.00001 each, appropriately adjusted as provided in the Rights Plan (the "Redemption Price").
Where a take-over bid that is not a Permitted Bid or Competing Permitted Bid is withdrawn or otherwise terminated after the Separation Time has occurred
and prior to the occurrence of a Flip-in Event, the Board may elect to redeem all the outstanding rights at the Redemption Price without the consent of the
holders of the Common Shares or the rights and reissue rights under the Rights Plan to holders of record of Common Shares immediately following such
redemption. Upon the rights being so redeemed and reissued, all the provisions of the Rights Plan will continue to apply as if the Separation Time had not
occurred, and the Separation Time will be deemed not to have occurred and the Company shall be deemed to have issued replacement rights to the holders of
its then outstanding Common Shares.
Amendment to the Rights Plan
The Rights Plan may be amended to correct any clerical or typographical error or to make such changes as are required to maintain the validity of the Rights
Plan as a result of any change in any applicable legislation, regulations or rules thereunder, without the approval of the holders of the Common Shares or
rights. Prior to the Separation Time, the Company may, with the prior consent of the holders of Common Shares, amend, vary or delete any of the provisions
of the Rights Plan in order to effect any changes which the Board, acting in good faith, considers necessary or desirable. The Company may, with the prior
consent of the holders of rights, at any time after the Separation Time and before the Expiration Time, amend, vary or delete any of the provisions of the
Rights Plan.
Protection Against Dilution
The Exercise Price, the number and nature of securities which may be purchased upon the exercise of rights and the number of rights outstanding are subject
to adjustment from time to time to prevent dilution in the event of stock dividends, subdivisions, consolidations, reclassifications or other changes in the
outstanding Common Shares, pro rata distributions to holders of Common Shares and other circumstances where adjustments are required to appropriately
protect the interests of the holders of rights.
90
Fiduciary Duty of Board
The Rights Plan will not detract from or lessen the duty of the Board to act honestly and in good faith with a view to the best interests of the Company and its
shareholders. The Board will continue to have the duty and power to take such actions and make such recommendations to the Company's shareholders as are
considered appropriate.
Exemptions for Investment Advisors
Fund managers, investment advisors (for fully-managed accounts), trust companies (acting in their capacities as trustees and administrators), statutory bodies
whose business includes the management of funds, and administrators of registered pension plans are exempt from triggering a Flip-in Event, provided that
they are not making, or are not part of a group making, a take-over bid.
Term
The Rights Plan will expire (the "Expiration Time") on the earlier of the first annual meeting of shareholders of the Company following March 29, 2016,
being the sixth anniversary of the Effective Date and the time at which the right to exercise rights shall terminate pursuant to the provisions of the Rights Plan
pertaining to the redemption of rights and the waiver of the application of the Rights Plan, after which time it will automatically terminate.
Action Necessary to Change Rights of Shareholders
In order to change the rights of its shareholders, the Company would need to amend its Articles to effect the change. Such an amendment would require the
approval of holders of two-thirds of the issued and outstanding shares cast at a duly called special meeting. For certain amendments, a shareholder is entitled
under the CBCA to dissent in respect of such a resolution amending the Articles and, if the resolution is adopted and the Company implements such changes,
demand payment of the fair value of its shares.
Disclosure of Share Ownership
In general, under applicable securities regulation in Canada, a person or company who beneficially owns, or who directly or indirectly exercises control or
direction over voting securities of a reporting issuer, voting securities of an issuer or a combination of both, carrying more than ten percent of the voting rights
attached to all the issuer's outstanding voting securities is an insider and must, within ten days of becoming an insider, file a report in the required form
effective the date on which the person became an insider, disclosing any direct or indirect beneficial ownership of, or control or direction over, securities of
the reporting issuer.
Additionally, securities regulation in Canada provides for the filing of a report by an insider of a reporting issuer whose holdings change, which report must
be filed within five days from the day on which the change takes place.
Section 13 of the United States Securities Exchange Act of 1934 (the "Exchange Act") imposes reporting requirements on persons who acquire beneficial
ownership (as such term is defined in the Rule 13d-3 under the Exchange Act) of more than five percent of a class of an equity security registered under
Section 12 of the Exchange Act. The Company's Common Shares are so registered. In general, such persons must file, within ten days after such acquisition,
a report of beneficial ownership with the SEC containing the information prescribed by the regulations under Section 13 of the Exchange Act. This
information is also required to be sent to the issuer of the securities and to each exchange where the securities are traded.
Meeting of Shareholders
An annual meeting of shareholders is held each year for the purpose of considering the financial statements and reports, electing directors, appointing auditors
and fixing or authorizing the Board to fix their remuneration and for the transaction of other business as may properly come before a meeting of shareholders.
Any annual meeting may also constitute a special meeting to take cognizance and dispose of any matter of which a special meeting may take cognizance and
dispose. Under the bylaws, the Chief Executive Officer or the President of the Company has the power to call a meeting of shareholders.
The CBCA provides that the holders of not less than 5% of the outstanding voting shares of the Company may requisition the directors of the Company to
call a meeting of shareholders for the purpose stated in the requisition. Except in limited circumstances, including where a meeting of shareholders has
already been called and a notice of meeting already given or where it is clear that the primary purpose of the requisition is to redress a personal grievance
against the Company or its directors, officers or shareholders, the directors of the Company, on receipt of such requisition, must call a meeting of
shareholders. If the directors fail to call a meeting of shareholders within twenty-one days after receiving the requisition, any shareholder who signed the
requisition may call the meeting of shareholders and, unless the shareholders resolve otherwise at
91
the meeting, the Company shall reimburse the shareholders for the expenses reasonably incurred by them in requisitioning, calling and holding the meeting of
shareholders.
The CBCA also provides that, except in limited circumstances, a resolution in writing signed by all of the shareholders entitled to vote on that resolution at a
meeting of shareholders is as valid as if it had been passed at a meeting of shareholders.
A quorum of shareholders is present at an annual or special meeting of shareholders, regardless of the number of persons present in person at the meeting, if
the holder(s) of shares representing at least 10% of the outstanding voting shares at such meeting are present in person or represented in accordance with the
Company's bylaws. In the case where the CBCA, the Articles or the bylaws of the Company require or permit the vote by class of holders of a given class of
shares of the share capital of the Company, the quorum at any meeting will be one or more persons representing 10% of the outstanding shares of such class.
Notice of the time and place of each annual or special meeting of shareholders must be given not less than 21 days, nor more than 50 days, before the date of
each meeting to each director, to the auditor and to each shareholder entitled to vote thereat. If the address of any shareholder, director or auditor does not
appear in the books of the Company, the notice may be sent to such address as the person sending the notice may consider to be most likely to reach such
shareholder, director or auditor promptly. Every person who, by operation of the CBCA, transfers or by any other means whatsoever, becomes entitled to any
share, shall be bound by every notice given in respect of such share which, prior to the entry of his or her name and address on the register of the Company, is
given to the person whose name appears on the register at the time such notice is sent. Notice of meeting of shareholders called for any other purpose other
than consideration of the financial statements and auditor's report, election of directors and reappointment of the incumbent auditor, must state the nature of
the business in sufficient detail to permit the shareholder to form a reasoned judgment on and must state the text of any special resolution or bylaw to be
submitted to the meeting.
On March 21, 2013, the Board of Directors approved an amendment to the Company's bylaws in order to include an advance notice provision (the "Advance
Notice Requirement") and concurrently approved an amendment to and restatement of the Company's bylaws giving effect to the Advance Notice
Requirement (the "Amended and Restated Bylaws"). The Amended and Restated Bylaws giving effect to the Advance Notice Requirement were subsequently
ratified and approved by the Company's shareholders on May 8, 2013. The Advance Notice Requirement applies in certain circumstances where nominations
of persons for election to the Board of Directors are made by shareholders of the Company other than pursuant to: (a) a requisition of a meeting made
pursuant to the provisions of the CBCA; or (b) a shareholder proposal made pursuant to the provisions of the CBCA.
Among other things, the Advance Notice Requirement fixes a deadline by which shareholders must submit a notice of director nominations to the Company
prior to any annual or special meeting of shareholders where directors are to be elected and sets forth the information that a shareholder must include in the
notice for it to be valid. In the case of an annual meeting of shareholders, notice to the Company must be given not less than 30 nor more than 65 days prior to
the date of the annual meeting; provided, however, that in the event that the annual meeting is to be held on a date that is less than 50 days after the date on
which the first public announcement of the date of the annual meeting was made, notice may be made not later than the close of business on the 10th day
following such public announcement. In the case of a special meeting of shareholders (which is not also an annual meeting), notice to the Company must be
given not later than the close of business on the 15th day following the day on which the first public announcement of the date of the special meeting was
made.
The Board of Directors may, in its sole discretion, waive any requirement of the Advance Notice Requirement.
Limitations on Right to Own Securities
Neither Canadian law nor the Company's Restated Articles of Incorporation or bylaws limit the right of a non-resident to hold or vote Common Shares, other
than as provided in the Investment Canada Act (the "Investment Act"). The Investment Act prohibits implementation of certain direct reviewable investments
by an individual, government or agency thereof, corporation, partnership, trust or joint venture that is not a "Canadian", as defined in the Investment Act (a
"non-Canadian"), unless, after review, the minister responsible for the Investment Act is satisfied or is deemed to be satisfied that the investment is likely to
be of net benefit to Canada. An investment in the Common Shares of the Company by a non-Canadian (other than a "WTO Investor", as defined below)
would be reviewable under the Investment Act if it were an investment to acquire direct control of the Company, and the book value of the assets of the
Company were CAN$5 million or more (provided that immediately prior to the implementation of the investment the Company was not controlled by WTO
Investors). Subject to the Amendments (as defined below), an investment in Common Shares of the Company by a WTO Investor would be reviewable under
the Investment Act if it were an investment to acquire direct control of the Company and the value of the assets of the Company equalled or exceeded
CAN$354 million (for 2014). A non-Canadian, whether a WTO Investor or otherwise, would be deemed to acquire control of the Company for purposes of
the Investment Act if he or she acquired a majority of the Common Shares of
92
the Company. The acquisition of less than a majority, but at least one-third of the shares, would be presumed to be an acquisition of control of the Company,
unless it could be established that the Company was not controlled in fact by the acquirer through the ownership of the shares. In general, an individual is a
WTO Investor if he or she is a "national" of a country (other than Canada) that is a member of the World Trade Organization ("WTO Member") or has a right
of permanent residence in a WTO Member. A corporation or other entity will be a "WTO Investor" if it is a "WTO Investor-controlled entity", pursuant to
detailed rules set out in the Investment Act. The United States is a WTO Member. Certain transactions involving the Common Shares would be exempt from
the Investment Act, including: (a) an acquisition of the shares if the acquisition were made in the ordinary course of that person's business as a trader or dealer
in securities; (b) an acquisition of control of the Company in connection with the realization of a security interest granted for a loan or other financial
assistance and not for any purpose related to the provisions of the Investment Act; and (c) an acquisition of control of the Company by reason of an
amalgamation, merger, consolidation or corporate reorganization, following which the ultimate direct or indirect control in fact of the Company, through the
ownership of voting interests, remains unchanged.
The Canadian Federal Government adopted certain amendments (the "Amendments") to the Investment Act in 2009. Some of the Amendments, which came
into force on February 6, 2009, introduce a national security test and review process, authorizing the Canadian Minister of Industry to review investments that
"could be injurious to national security", regardless of the size of the transaction. Some of the other Amendments will come into force on a day to be fixed by
order of the Canadian Governor in Council, including the increase to the thresholds that trigger governmental review for WTO Investors. Therefore, the
thresholds for the review of direct acquisitions of control by WTO Investors would increase from the current CAN$354 million (based on book value) to
CAN$600 million (to be based on the "enterprise value" of the Canadian business) for the two years after such Amendments come into force, to CAN$800
million in the following two years and then to CAN$1 billion for the next two years. Thereafter, the thresholds are to be adjusted to account for inflation. A
number of the Amendments still require additional definition and details, which will be set forth in regulations promulgated under the Investment Act.
There are no limits on the rights of non-Canadians to exercise voting rights on their Common Shares of the Company.
C.
Material contracts
Other than as disclosed herein under "Shareholder Rights Plan" and below, and except for contracts entered into in the ordinary course of business, there are
no material contracts to which the Company or any of its subsidiaries is a party.
Employment Agreements
The Company and/or its subsidiaries have entered into employment agreements (the "Employment Agreements") with each of the Named Executive Officers
who remain in the employment of the Company. The Employment Agreements provide that the Company will pay the Named Executive Officers a base
salary and an annual bonus and that such executives will be eligible to receive long-term incentive grants in the form of stock options which will be reviewed
annually in accordance with the Company's policies. The Employment Agreements have an indefinite term. Each of the Employment Agreements provides
that if the Company terminates the employment of a Named Executive Officer without "Cause" (or, in the case of Messrs. Dodd and Dinges, there is a
"separation from service" within the meaning of §409A of the U.S. Internal Revenue Code of 1986, as amended (a "Separation from Service") or a
resignation for "Good Reason"), then the executive will be entitled to receive, in the case of Mr. Dodd, a lump-sum payment (less applicable tax
withholdings) in an amount equal to twice the sum of his then base salary, his then annual bonus, the amount of his then car allowance, plus any earned
retention bonus and eighteen months of the value of the other benefits to which he is entitled (through the purchase by the Company of eighteen months of the
coverage required under the Consolidated Omnibus Budget Reconciliation Act of 1986 ("COBRA")). In the case of Mr. Turpin, the lump-sum payment will
be equivalent to eighteen months of his then applicable base salary, 1.5 times the annual bonus of the preceding year and eighteen months of the value of the
other benefits to which he is entitled. In the case of Mr. Dinges, he is entitled to receive a lump-sum payment (less applicable tax withholdings) in an amount
equal to one times the sum of his then base salary, his then annual bonus, pro-rated as applicable, any earned retention bonus, the amount of his then car
allowance and eighteen months of the value of the other benefits to which he is entitled (through the purchase by the Company of eighteen months of the
coverage required under COBRA). In addition, in the case of Messrs. Dodd and Dinges, if the executive has a Separation of Service, then the executive's right
to exercise all then outstanding stock options granted to him shall fully and immediately vest on the effective date of the Separation from Service. Messrs.
Blake and Pelliccione ceased to be employed by Aeterna Zentaris as of March 13, 2014.
Furthermore, each of Messrs. Dodd, Turpin and Dinges shall not, for a period equal to one year following such executive's termination of employment with
the Company, directly or indirectly, compete with the Company; solicit any clients of the Company or do anything whatsoever to induce or to lead any person
to end, in whole or in part, its business relations with the Company; induce, attempt to induce or otherwise interfere in the relations which the Company has
with its distributors, suppliers, representatives, agents and other parties with whom the Company deals; or induce, attempt to induce or otherwise solicit the
93
personnel of the Company to leave their employment with the Company or hire the personnel of the Company for any enterprise in which the executive has
an interest.
Pursuant to the Employment Agreements, each of Messrs. Dodd and Turpin are also entitled to receive, as of the date of this annual report on Form 20-F,
certain payments (the "Change of Control Payments") in the event (i) a "Change of Control" occurs, and (ii) during the twelve-month period following the
Change of Control, either the Company terminates the employment of the executive without "Cause" (or, in the case of Mr. Dodd, there is a Separation from
Service), or if the executive terminates his or her employment for "Good Reason" during such period. However, in accordance with the provisions of Mr.
Turpin's Employment Agreement, the Company was entitled to unilaterally terminate his right to receive the Change of Control Payment at a specified period
of time. In 2013, the Company thus provided notice to Mr. Turpin of the termination of his right to receive Change of Control Payments in accordance with
the terms of his Employment Agreement. Consequently, effective June 29, 2014, Mr. Turpin will no longer be entitled to receive the Change of Control
Payment detailed below.
The Change of Control Payments are as follows:
•
•
for Mr. Dodd, (i) the equivalent of thirty-six months of his then annual base salary, (ii) an amount equivalent to twice the annual bonus, if any, which he
would have been entitled to receive in the year during which the Change of Control occurred, (iii) any earned retention bonus, and (iv) an amount
equivalent to 12 months of the then annual cost to provide the other benefits to which he is entitled, or the cost to purchase coverage by the Company
under COBRA for such benefits, whichever is applicable; and
for Mr. Turpin, the Change of Control Payment (which will terminate on June 29, 2014 as described above) would be the same as in the context of a
termination of employment described above, except that the 1.5 multiple of his bonus payment would be based on his potential bonus for the year in
which the Change of Control occurs as opposed to his actual bonus received for the preceding financial year.
All Change of Control Payments described above are subject to applicable statutory withholdings. In addition, in the event of a Change of Control followed
by termination of employment within twelve months, any outstanding stock options held by Mr. Turpin are unaffected by the change of control provisions
included in his Employment Agreement and such stock options will be treated in accordance with the applicable provisions of the Stock Option Plan
described elsewhere in this annual report on Form 20-F, while any outstanding stock options held by Mr. Dodd shall, in such circumstances, fully and
immediately vest on the date of his Separation from Service.
For the purposes of the applicable Employment Agreements (including the annexes and schedules thereto):
•
•
•
a "Change of Control" shall be deemed to have occurred in any of the following circumstances: (i) subject to certain exceptions, upon the acquisition by a
person (or one or more persons who are affiliates of one another or who are acting jointly or in concert) of a beneficial interest in securities of the
Company representing in any circumstance 50% or more of the voting rights attaching to the then outstanding securities of the Company; (ii) upon a sale
or other disposition of all or substantially all of the Company's assets; (iii) upon a plan of liquidation or dissolution of the Company; or (iv) if, for any
reason, including an amalgamation, merger or consolidation of the Company with or into another company, the individuals who, as at the date of the
relevant Employment Agreement, constituted the Board (and any new directors whose appointment by the Board or whose nomination for election by the
Company's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors as at the date of the
relevant Employment Agreement or whose appointment or nomination for election was previously so approved) cease to constitute a majority of the
members of the Board;
termination of employment by the Company for "Cause" includes (but is not limited to) (i) if the executive commits any fraud, theft, embezzlement or
other criminal act of a similar nature, and (ii) if the executive is guilty of serious misconduct or willful negligence in the performance of his duties; and
termination of employment by the executive officer for "Good Reason" means,
◦
◦
in the case of Mr. Dodd, the occurrence, without his express written consent, of any of the following acts: (i) a material reduction of his total
compensation (including annual base salary plus annual bonus, benefits and number of stock options) as in effect on the date of his Employment
Agreement or as same may be increased from time to time, provided such reduction is not warranted and due to company performance; (ii) any
change in his direct reporting relationship to the Board; (iii) any reduction in his duties and responsibilities as President and Chief Executive Officer
of the Company; or (iv) a physical change of one hundred miles of more in his principal place of business;
in the case of Mr. Turpin, the occurrence, without the executive's express written consent, of any of the following acts: (i) a material reduction of the
executive's total compensation (including annual base salary plus annual bonus, benefits
94
and number of stock options) as in effect on the date of his Employment Agreement or as same may be increased from time to time; (ii) a material
reduction or change in the executive's duties, authority, responsibilities, accountability or a change in the business or corporate structure of the
Company which materially affects his or her authority, compensation or ability to perform duties or responsibilities (such as shifting from a policy-
making to a policy-implementation position); (iii) a forced relocation; or (iv) a material change in the terms and conditions of the change of control
provisions included in his Employment Agreement that are not otherwise contemplated by his Employment Agreement; and
◦
in the case of Mr. Dinges, the occurrence, without his express written consent, of any of the following acts: (i) a more than 25% reduction of his base
annual salary as in effect on the date of his Employment Agreement or as the same may be increased from time to time, provided such reduction is
not warranted and due to either company performance or failure of Mr. Dinges to achieve performance standards or objectives as determined by the
President of the Company in his/her sole and absolute discretion and judgment; or (ii) a material reduction in his duties and responsibilities as the
Company's Chief Commercial Officer.
D.
Exchange controls
Canada has no system of exchange controls. There are no exchange restrictions on borrowing from foreign countries or on the remittance of dividends,
interest, royalties and similar payments, management fees, loan repayments, settlement of trade debts or the repatriation of capital.
E.
Taxation
THE FOLLOWING SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED TO BE,
LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER. CONSEQUENTLY, HOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS FOR ADVICE AS TO THE TAX CONSEQUENCES OF AN INVESTMENT IN THE COMMON SHARES HAVING REGARD TO THEIR
PARTICULAR CIRCUMSTANCES.
Material Canadian Income Tax Considerations
The following summary describes the principal Canadian federal income tax considerations to a holder who acquires Common Shares (a "holder") and who,
for the purposes of the Canadian federal Income Tax Act, R.S.C. 1985, as amended (the "Tax Act"), and at all relevant times, deals at arm's length with, and is
not affiliated with, the Company and holds their Common Shares as capital property. Common Shares will generally be considered to be capital property to a
holder for purposes of the Tax Act unless either the holder holds such Common Shares in the course of carrying on a business of trading or dealing in
securities, or the holder has held or acquired such Common Shares in a transaction or transactions considered to be an adventure in the nature of trade.
This summary is not applicable to a holder (i) that is a "financial institution", as defined in the Tax Act for purposes of the mark-to- market rules, (ii) that is a
"specified financial institution", as defined in the Tax Act, (iii) an interest in which would be a "tax shelter investment" as defined in the Tax Act, (iv) that has
made a functional currency reporting election for purposes of the Tax Act or (v) that has entered into a "derivative forward agreement", as defined in the Tax
Act, in respect of Common Shares. Such holders should consult their own tax advisors.
Additional considerations, not discussed herein, may be applicable to a holder that is a corporation resident in Canada, and is, or becomes, controlled by a
non-resident corporation for the purposes of the "foreign affiliate dumping" rules in section 212.3 of the Tax Act. Such holders should consult their tax
advisors with respect to the consequences of acquiring Common Shares.
This summary is based upon the current provisions of the Tax Act and the regulations promulgated thereunder (the "Regulations") and the Company's
understanding of the current published administrative policies and assessing practices of the Canada Revenue Agency ("CRA"). It also takes into account all
proposed amendments to the Tax Act and the Regulations publicly released by the Minister of Finance (Canada) prior to the date hereof ("Tax Proposals"),
and assumes that all such Tax Proposals will be enacted as currently proposed. No assurance can be given that the Tax Proposals will be enacted in the form
proposed or at all. This summary does not otherwise take into account or anticipate any changes in law or administrative or assessing practice or policy of the
CRA, whether by legislative, regulatory, judicial or administrative action or interpretation, nor does it address any provincial, local, territorial or foreign tax
considerations.
95
Holders Not Resident in Canada
The following discussion applies to a holder of Common Shares who, at all relevant times, for purposes of the Tax Act, is neither resident nor deemed to be
resident in Canada and does not, and is not deemed to, use or hold Common Shares in carrying on a business or part of a business in Canada (a "Non-Resident
holder"). In addition, this discussion does not apply to an insurer who carries on an insurance business in Canada and elsewhere or to an "authorized foreign
bank" (as defined in the Tax Act).
Disposition of Common Shares
A Non-Resident holder generally will not be subject to tax under the Tax Act in respect of any capital gain realized by such Non- Resident holder on a
disposition or deemed disposition of Common Shares unless such shares constitute "taxable Canadian property" (as defined in the Tax Act) of the Non-
Resident holder at the time of disposition and the gain is not exempt from tax pursuant to the terms of an applicable income tax treaty or convention.
As long as the Common Shares are listed on a designated stock exchange (which currently includes NASDAQ and the TSX) at the time of their disposition,
the Common Shares generally will not constitute taxable Canadian property of a Non-Resident holder, unless (a) at any time during the 60-month period
immediately preceding the disposition: (i) the Non-Resident holder, persons with whom the Non-Resident holder did not deal at arm's length, or the Non-
Resident holder together with all such persons, owned 25% or more of the issued shares of any class or series of shares of the corporation; and (ii) more than
50% of the fair market value of the shares of the corporation was derived directly or indirectly from one or any combination of real or immovable property
situated in Canada, "Canadian resource properties" ( as defined in the Tax Act), "timber resource properties" (as defined in the Tax Act) or options in respect
of, or interests in, or for civil law rights in, any such property whether or not such property exists or (b) our Common Shares are otherwise deemed to be
taxable Canadian property to the Non-Resident holder. Under the Tax Proposals, the 25% ownership test will apply to Common Shares owned by one or any
combination of the Non-Resident holder, persons with whom the Non-Resident holder does not deal at arm's length, and partnerships whose members
include, either directly or indirectly through one or more partnerships, the Non-Resident holder or persons that do not deal at arm's length with the Non-
Resident holder.
A Non-Resident holder's capital gain (or capital loss) in respect of Common Shares that constitute or are deemed to constitute taxable Canadian property (and
are not "treaty-protected property" as defined in the Tax Act) will generally be computed in the manner described below under the heading "Holders Resident
in Canada - Disposition of Common Shares".
If the Common Shares were to cease being listed on NASDAQ, the TSX or another "recognized stock exchange" (as defined in the Tax Act), a Non-Resident
holder who disposes of Common Shares that are taxable Canadian property may be required to fulfill the requirements of section 116 of the Tax Act, unless
the Common Shares are "treaty-protected property" (as defined in the Tax Act) of the disposing Non-Resident holder.
Non-Resident holders whose Common Shares are taxable Canadian property should consult their own tax advisors.
Taxation of Dividends on Common Shares
Dividends paid or credited or deemed to be paid or credited to a Non-Resident holder by the corporation are subject to Canadian withholding tax at the rate of
25% unless reduced by the terms of an applicable tax treaty or convention.
Under the Canada - United States Tax Convention (1980) (the "Convention") as amended, the rate of withholding tax on dividends paid or credited to a Non-
Resident holder who is the beneficial owner of the dividends, is resident in the U.S. for purposes of the Convention and entitled to the benefits of the
Convention (a "U.S. holder") is generally limited to 15% of the gross amount of the dividend (or 5% in the case of a U.S. holder that is a company
beneficially owning at least 10% of the corporation's voting shares). Non-Resident holders should consult their own tax advisors.
Holders Resident in Canada
The following discussion applies to a holder of Common Shares who, at all relevant times, for purposes of the Tax Act, is or is deemed to be resident in
Canada (a "Canadian holder"). Certain Canadian holders whose Common Shares might not otherwise qualify as capital property may, in certain
circumstances, treat the Common Shares and every other "Canadian security" (as defined in the Tax Act) owned by the Canadian holder as capital property by
making an irrevocable election provided by subsection 39(4) of the Tax Act.
96
Taxation of Dividends on Common Shares
Dividends received or deemed to have been received on the Common Shares will be included in a Canadian holder's income for purposes of the Tax Act.
Such dividends received or deemed to have been received by a Canadian holder that is an individual (other than certain trusts) will be subject to the gross-up
and dividend tax credit rules generally applicable under the Tax Act in respect of dividends received on shares of taxable Canadian corporations. Generally, a
dividend will be eligible for the enhanced gross-up and dividend tax credit if the corporation designates the dividend as an "eligible dividend" (within the
meaning of the Tax Act) in accordance with the provisions of the Tax Act. There may be limitations on the ability of the Company to designate dividends as
eligible dividends. A Canadian holder that is a corporation will be required to include such dividends in computing its income and will generally be entitled to
deduct the amount of such dividends in computing its taxable income. A Canadian holder that is a "private corporation" or a "subject corporation" (as such
terms are defined in the Tax Act), may be liable under Part IV of the Tax Act to pay a refundable tax of 33 1/3% on dividends received or deemed to have
been received on the Common Shares to the extent such dividends are deductible in computing the holder's taxable income.
Disposition of Common Shares
A disposition, or a deemed disposition, of a common share by a Canadian holder will generally give rise to a capital gain (or a capital loss) equal to the
amount by which the proceeds of disposition of the share, net of any reasonable costs of disposition, exceed (or are less than) the adjusted cost base of the
share to the holder. Such capital gain (or capital loss) will be subject to the treatment described below under "Taxation of Capital Gains and Capital Losses".
Additional Refundable Tax
A Canadian holder that is a "Canadian-controlled private corporation" (as such term is defined in the Tax Act) may be liable to pay an additional refundable
tax of 6 2/3% on certain investment income including amounts in respect of "Taxable Capital Gains", as defined below.
Taxation of Capital Gains and Capital Losses
In general, one half of any capital gain (a "Taxable Capital Gain") realized by a Canadian holder in a taxation year will be included in the holder's income in
the year. Subject to and in accordance with the provisions of the Tax Act, one half of any capital loss (an "Allowable Capital Loss") realized by a Canadian
holder in a taxation year must be deducted from Taxable Capital Gains realized by the holder in the year and Allowable Capital Losses in excess of Taxable
Capital Gains may be carried back and deducted in any of the three preceding taxation years or carried forward and deducted in any subsequent taxation year
against net Taxable Capital Gains realized in such years. The amount of any capital loss realized by a Canadian holder that is a corporation on the disposition
or deemed disposition of a common share may be reduced by the amount of dividends received or deemed to have been received by it on such common share
(or on a share for which the common share has been substituted) to the extent and under the circumstances prescribed by the Tax Act. Similar rules may apply
where a corporation is a member of a partnership or a beneficiary of a trust that owns Common Shares, directly or indirectly, through a partnership or a trust.
Alternative Minimum Tax
A Taxable Capital Gain realized and taxable dividends received or deemed to have been received by a Canadian holder who is an individual (including a trust,
other than certain specified trusts) may give rise to liability for alternative minimum tax.
Certain Material U.S. Federal Income Tax Considerations
The following discussion is a summary of certain material U.S. federal income tax consequences applicable to the ownership and disposition of Common
Shares by a U.S. Holder (as defined below), but does not purport to be a complete analysis of all potential U.S. federal income tax effects. This summary is
based on the Internal Revenue Code of 1986, as amended (the "Code"), U.S. Treasury regulations promulgated thereunder, IRS rulings and judicial decisions
in effect on the date hereof. All of these are subject to change, possibly with retroactive effect, or different interpretations. This summary does not discuss the
potential effects, whether adverse or beneficial, of any proposed legislation that, if enacted, could be applied on a retroactive basis. This summary is not
binding on the IRS, and the IRS is not precluded from taking a position that is different from, and contrary to, the positions taken in this summary.
This summary does not address all aspects of U.S. federal income taxation that may be relevant to particular U.S. Holders in light of their specific
circumstances (for example, U.S. Holders subject to the alternative minimum tax or the Medicare contribution tax on net investment income under the Code)
or to holders that may be subject to special rules under U.S. federal income tax law, including:
97
•
•
•
•
•
•
•
•
•
•
•
•
•
dealers in stocks, securities or currencies;
securities traders that use a mark-to-market accounting method;
banks and financial institutions;
insurance companies;
regulated investment companies;
real estate investment trusts;
tax-exempt organizations;
retirement plans, individual plans, individual retirement accounts and tax-deferred accounts;
partnerships or other pass-through entities for U.S. federal income tax purposes and their partners or members;
persons holding Common Shares as part of a hedging or conversion transaction straddle or other integrated or risk reduction transaction;
persons who or that are, or may become, subject to the expatriation provisions of the Code;
persons whose functional currency is not the U.S. dollar; and
direct, indirect or constructive owners of 10% or more of the total combined voting power of all classes of our voting stock.
This summary also does not address the tax consequences of holding, exercising or disposing of warrants in the Company. If the Company is a PFIC, as
described below, U.S. Holders of its warrants will be subject to adverse tax rules and will not be able to make the mark-to-market or the QEF election
described below with respect to such warrants. U.S. Holders of warrants should consult their tax advisors with regard to the U.S. federal income tax
consequences of holding, exercising or disposing of warrants in the Company, including in the situation in which the Company is classified as a PFIC.
This summary also does not discuss any aspect of state, local or foreign law, or estate or gift tax law as applicable to U.S. Holders. In addition, this discussion
is limited to U.S. Holders holding Common Shares as capital assets. For purposes of this summary, "U.S. Holder" means a beneficial holder of Common
Shares who or that for U.S. federal income tax purposes is:
•
•
•
•
an individual citizen or resident of the United States;
a corporation or other entity classified as a corporation for U.S. federal income tax purposes created or organized in or under the laws of the United
States, any state thereof or the District of Columbia;
an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
a trust, if (a) a court within the United States is able to exercise primary supervision over the administration of such trust and one or more "U.S. persons"
(within the meaning of the Code) have the authority to control all substantial decisions of the trust, or (b) a valid election is in effect to be treated as a
U.S. person for U.S. federal income tax purposes.
If a partnership or other entity or arrangement classified as a partnership for U.S. federal income tax purposes holds Common Shares, the U.S. federal income
tax treatment of a partner generally will depend on the status of the partner and the activities of the partnership. This summary does not address the tax
consequences to any such partner. Such a partner should consult its own tax advisor as to the tax consequences of the partnership owning and disposing of
Common Shares.
U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO THE APPLICATION OF THE TAX CONSEQUENCES
DESCRIBED BELOW TO THEIR PARTICULAR SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER
TAX LAWS, INCLUDING GIFT AND ESTATE TAX LAWS.
98
Dividends
Subject to the PFIC rules discussed below, any distributions paid by the Company out of current or accumulated earnings and profits (as determined for U.S.
federal income tax purposes), before reduction for any Canadian withholding tax paid with respect thereto, will generally be taxable to a U.S. Holder as
foreign source dividend income, and will not be eligible for the dividends received deduction generally allowed to corporations. Distributions in excess of
current and accumulated earnings and profits will be treated as a non-taxable return of capital to the extent of the U.S. Holder's adjusted tax basis in the
Common Shares and thereafter as capital gain. U.S. Holders should consult their own tax advisors with respect to the appropriate U.S. federal income tax
treatment of any distribution received from the Company.
Dividends paid by the Company should be taxable to a non-corporate U.S. Holder at the special reduced rates normally applicable to long-term capital gains,
provided that certain conditions are satisfied. A U.S. Holder will not be able to claim a reduced rate if the Company is treated as a PFIC for the taxable year in
which the dividend is paid or the preceding year. See "Passive Foreign Investment Company Considerations" below.
Under current law, payments of dividends by the Company to non-Canadian investors are generally subject to a 25% Canadian withholding tax. The rate of
withholding tax applicable to U.S. Holders that are eligible for benefits under the Canada-United States Tax Convention (the "Convention") is reduced to a
maximum of 15%. This reduced rate of withholding will not apply if the dividends received by a U.S. Holder are effectively connected with a permanent
establishment of the U.S. Holder in Canada. For U.S. federal income tax purposes, U.S. Holders will be treated as having received the amount of Canadian
taxes withheld by the Company, and as then having paid over the withheld taxes to the Canadian taxing authorities. As a result of this rule, the amount of
dividend income included in gross income for U.S. federal income tax purposes by a U.S. Holder with respect to a payment of dividends may be greater than
the amount of cash actually received (or receivable) by the U.S. Holder from the Company with respect to the payment.
Subject to certain limitations, a U.S. Holder will generally be entitled, at the election of the U.S. Holder, to a credit against its U.S. federal income tax
liability, or a deduction in computing its U.S. federal taxable income, for Canadian income taxes withheld by the Company. This election is made on a year-
by-year basis and applies to all foreign taxes paid (whether directly or through withholding) by a U.S. Holder during a year. For purposes of the foreign tax
credit limitation, dividends paid by the Company generally will constitute foreign source income in the "passive category income" basket. The foreign tax
credit rules are complex and U.S. Holders should consult their tax advisors concerning the availability of the foreign tax credit in their particular
circumstances.
Dividends paid in Canadian dollars will be included in the gross income of a U.S. Holder in a U.S. dollar amount calculated by reference to the exchange rate
in effect on the date the U.S. Holder (actually or constructively) receives the dividend, regardless of whether such Canadian dollars are actually converted into
U.S. dollars at that time. If the Canadian dollars received are not converted into U.S. dollars on the date of receipt, a U.S. Holder will have a tax basis in the
Canadian dollars equal to their U.S. dollar value on the date of receipt. Gain or loss, if any, realized on a sale or other disposition of the Canadian dollars will
generally be U.S. source ordinary income or loss to a U.S. Holder.
The Company generally does not pay any dividends and does not anticipate paying any dividends in the foreseeable future.
Sale, Exchange or Other Taxable Disposition of Common Shares
Subject to the PFIC rules discussed below, upon a sale, exchange or other taxable disposition of Common Shares, a U.S. Holder generally will recognize
capital gain or loss for U.S. federal income tax purposes equal to the difference, if any, between the amount realized on the sale, exchange or other taxable
disposition and the U.S. Holder's adjusted tax basis in the Common Shares.
This capital gain or loss will be long-term capital gain or loss if the U.S. Holder's holding period in the Common Shares exceeds one year. The deductibility
of capital losses is subject to limitations. Any gain or loss will generally be U.S. source for U.S. foreign tax credit purposes.
Passive Foreign Investment Company Considerations
A foreign corporation will be classified as a PFIC for any taxable year in which, after taking into account the income and assets of the corporation and certain
subsidiaries pursuant to applicable "look-through rules", either (i) at least 75% of its gross income is "passive income" or (ii) at least 50% of the average value
of its assets is attributable to assets which produce passive income or are held for the production of passive income. Passive income generally includes
dividends, interest, rents and royalties (other than certain rents and royalties derived in the active conduct of a trade or business), annuities and gains from
assets that produce passive income. If a non-U.S. corporation owns at least 25% by value of the stock of another corporation,
99
the non-U.S. corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation and as receiving
directly its proportionate share of the other corporation's income.
The Company believes it was not a PFIC for the 2013 taxable year. However, the fair market value of the Company's assets may be determined in large part
by the market price of the Common Shares, which is likely to fluctuate, and the composition of the Company's income and assets will be affected by how, and
how quickly, the Company spends any cash that is raised in any financing transaction. Thus, no assurance can be provided that the Company will not be
classified as a PFIC for the 2014 taxable year and for any future taxable year. U.S. Holders should consult their tax advisors regarding the Company's PFIC
status.
If the Company is classified as a PFIC for any taxable year during which a U.S. Holder owns Common Shares, the U.S. Holder, absent certain elections
(including the mark-to-market and QEF elections described below), will generally be subject to adverse rules (regardless of whether the Company continues
to be classified as a PFIC) with respect to (i) any "excess distributions" (generally, any distributions received by the U.S. Holder on the Common Shares in a
taxable year that are greater than 125% of the average annual distributions received by the U.S. Holder in the three preceding taxable years or, if shorter, the
U.S. Holder's holding period for the Common Shares) and (ii) any gain realized on the sale or other disposition of the Common Shares.
Under these adverse rules (a) the excess distribution or gain will be allocated ratably over the U.S. Holder's holding period, (b) the amount allocated to the
current taxable year and any taxable year prior to the first taxable year in which the Company is classified as a PFIC will be taxed as ordinary income, and (c)
the amount allocated to each of the other taxable years during which the Company was classified as a PFIC will be subject to tax at the highest rate of tax in
effect for the applicable category of taxpayer for that year and an interest charge will be imposed with respect to the resulting tax attributable to each such
other taxable year. A U.S. Holder that is not a corporation will be required to treat any such interest paid as "personal interest", which is not deductible.
U.S. Holders can avoid the adverse rules described above in part by making a mark-to-market election with respect to the Common Shares, provided that the
Common Shares are "marketable". The Common Shares will be marketable if they are "regularly traded" on a "qualified exchange" or other market within the
meaning of applicable U.S. Treasury regulations. For this purpose, the Common Shares generally will be considered to be regularly traded during any
calendar year during which they are traded, other than in de minimis quantities, on at least 15 days during each calendar quarter. The Common Shares are
currently listed on NASDAQ, which constitutes a qualified exchange; however, there can be no assurance that the Common Shares will be treated as regularly
traded for purposes of the mark-to-market election on a qualified exchange. If the Common Shares were not regularly traded on NASDAQ or were delisted
from NASDAQ and were not traded on another qualified exchange for the requisite time period described above, the mark-to-market election would not be
available.
A U.S. Holder that makes a mark-to-market election must include in gross income, as ordinary income, for each taxable year an amount equal to the excess, if
any, of the fair market value of the U.S. Holder's Common Shares at the close of the taxable year over the U.S. Holder's adjusted tax basis in the Common
Shares. An electing U.S. Holder may also claim an ordinary loss deduction for the excess, if any, of the U.S. Holder's adjusted tax basis in the Common
Shares over the fair market value of the Common Shares at the close of the taxable year, but this deduction is allowable only to the extent of any net mark-to-
market gains previously included in income. A U.S. Holder that makes a mark-to-market election generally will adjust such U.S. Holder's tax basis in the
Common Shares to reflect the amount included in gross income or allowed as a deduction because of such mark-to-market election. Gains from an actual sale
or other disposition of the Common Shares will be treated as ordinary income, and any losses incurred on a sale or other disposition of the Common Shares
will be treated as ordinary losses to the extent of any net mark-to-market gains previously included in income.
If the Company is classified as a PFIC for any taxable year in which a U.S. Holder owns Common Shares but before a mark-to-market election is made, the
adverse PFIC rules described above will apply to any mark-to-market gain recognized in the year the election is made. Otherwise, a mark-to-market election
will be effective for the taxable year for which the election is made and all subsequent taxable years. The election cannot be revoked without the consent of
the IRS unless the Common Shares cease to be marketable, in which case the election is automatically terminated.
If the Company is classified as a PFIC, a U.S. Holder of Common Shares will generally be treated as owning stock owned by the Company in any direct or
indirect subsidiaries that are also PFICs and will be subject to similar adverse rules with respect to distributions to the Company by, and dispositions by the
Company of, the stock of such subsidiaries. A mark-to-market election is not permitted for the shares of any subsidiary of the Company that is also classified
as a PFIC. U.S. Holders should consult their tax advisors regarding the availability of, and procedure for making, a mark-to-market election.
100
In some cases, a shareholder of a PFIC can avoid the interest charge and the other adverse PFIC consequences described above by making a QEF election to
be taxed currently on its share of the PFIC's undistributed income. The Company does not, however, expect to provide the information regarding its income
that would be necessary in order for a U.S. Holder to make a QEF election with respect to Common Shares if the Company is classified as a PFIC.
A U.S. Holder that makes a timely and effective QEF election for the first tax year in which its holding period of its Common Shares begins generally will not
be subject to the adverse PFIC consequences described above with respect to its Common Shares. Rather, a U.S. Holder that makes a timely and effective
QEF election will be subject to U.S. federal income tax on such U.S. Holder's pro rata share of (a) the Company's net capital gain, which will be taxed as
long-term capital gain to such U.S. Holder, and (b) the Company's ordinary earnings, which will be taxed as ordinary income to such U.S. Holder, in each
case regardless of which such amounts are actually distributed to the U.S. Holder by the Company. Generally, "net capital gain" is the excess of (a) net long-
term capital gain over (b) net short-term capital loss, and "ordinary earnings" are the excess of (a) "earnings and profits" over (b) net capital gain.
A U.S. Holder that makes a timely and effective QEF election with respect to the Company generally (a) may receive a tax-free distribution from us to the
extent that such distribution represents "earnings and profits" that were previously included in income by the U.S. Holder because of such QEF election and
(b) will adjust such U.S. Holder's tax basis in the Common Shares to reflect the amount included in income or allowed as a tax-free distribution because of
such QEF election. In addition, a U.S. Holder that makes a QEF election generally will recognize capital gain or loss on the sale or other taxable disposition
of Common Shares.
The QEF election is made on a shareholder-by-shareholder basis. Once made, a QEF election will apply to the tax year for which the QEF election is made
and to all subsequent tax years, unless the QEF election is invalidated or terminated or the IRS consents to revocation of the QEF election. In addition, if a
U.S. Holder makes a QEF election, the QEF election will remain in effect (although it will not be applicable) during those tax years in which the Company is
not a PFIC.
If the Company is classified as a PFIC and then ceases to be so classified, a U.S. Holder may make an election (a "deemed sale election") to be treated for
U.S. federal income tax purposes as having sold such U.S. Holder's Common Shares on the last day of the taxable year of the Company during which it was a
PFIC. A U.S. Holder that made a deemed sale election would then cease to be treated as owning stock in a PFIC by reason of ownership of Common Shares
in the Company. However, gain recognized as a result of making the deemed sale election would be subject to the adverse rules described above and loss
would not be recognized.
If the Company is a PFIC in any year with respect to a U.S. Holder, the U.S. Holder will be required to file an annual information return on IRS Form 8621
regarding distributions received on Common Shares and any gain realized on the disposition of Common Shares.
In addition, if the Company is a PFIC, U.S. Holders will generally be required to file an annual information return with the IRS (also on IRS Form 8621,
which PFIC shareholders are required to file with their U.S. federal income tax or information returns) relating to their ownership of Common Shares. This
new filing requirement is in addition to the preexisting reporting requirements described above that apply to a U.S. Holder's interest in a PFIC (which this
requirement does not affect).
U.S. Holders should consult their tax advisors regarding the potential application of the PFIC regime and any reporting obligations to which they may be
subject under that regime.
Information Reporting and Backup Withholding
Payments made within the United States, or by a U.S. payor or U.S. middleman, of dividends on, and proceeds arising from sales or other dispositions of
Common Shares, generally will be reported to the IRS and to the U.S. Holder as required under applicable regulations. Backup withholding tax may apply to
these payments if the U.S. Holder fails to timely provide in the appropriate manner an accurate taxpayer identification number or otherwise fails to comply
with, or establish an exemption from, such backup withholding tax requirements. Certain U.S. Holders are not subject to the information reporting or backup
withholding tax requirements described herein. U.S. Holders should consult their tax advisors as to their qualification for exemption from backup withholding
tax and the procedure for establishing an exemption.
Backup withholding tax is not an additional tax. U.S. Holders generally will be allowed a refund or credit against their U.S. federal income tax liability for
amounts withheld, provided the required information is timely furnished to the IRS.
Subject to certain exceptions and future guidance, U.S. tax legislation generally requires a U.S. Holder that is a specified individual or, to the extent provided
in recently proposed and temporary U.S. Treasury regulations, a domestic entity, to report annually to the IRS on IRS Form 8938 such U.S. Holder's interests
in stock or securities issued by a non-U.S. person (such as the Company). Pursuant to IRS Notice 2013-10, reporting under this legislation will not be
required by domestic entities any
101
earlier than taxable years beginning after December 31, 2012. U.S. Holders should consult their tax advisors regarding the information reporting obligations
that may arise from their acquisition, ownership or disposition of Common Shares.
F.
Dividends and paying agents
Not applicable.
G.
Statement by experts
Not applicable.
H.
Documents on display
In addition to placing our audited comparative annual financial statements before every annual meeting of shareholders as described above, we are subject to
the information requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements, we file and furnish reports and
other information with the SEC. These materials, including this annual report on Form 20-F and the exhibits thereto, may be inspected and copied at the
SEC's Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information on the operation of the SEC's
Public Reference Room by calling the SEC in the United States at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports,
proxy statements and other information regarding registrants that file electronically with the SEC. The Company's annual reports and some of the other
information submitted by the Company to the SEC may be accessed through this website. In addition, material filed by the Company can be inspected on the
Canadian Securities Administrators' electronic filing system, SEDAR, accessible at the website www.sedar.com. This material includes the Company's
Management Information Circular for its annual meeting of shareholders to be held on May 9, 2014 furnished to the SEC on Form 6-K, which provides
information including directors' and officers' remuneration and indebtedness and principal holders of securities. Additional financial information is provided
in our audited annual financial statements for the year ended December 31, 2013 and our MD&A relating to these statements included elsewhere in this
annual report on Form 20-F. These documents are also accessible on SEDAR (www.sedar.com) and on EDGAR (www.sec.gov).
I.
Subsidiary information
The subsidiaries of the Company are set forth under "Item 4C. – Organizational Structure".
Item 11.
Quantitative and Qualitative Disclosures About Market Risk
We have not entered into any forward currency contracts or other financial derivatives to hedge foreign exchange risk. We are therefore subject to foreign
currency transaction and translation gains and losses.
Fair value
The Company classifies its financial instruments in the following categories: "Financial assets at fair value through profit or loss ("FVTPL")"; "Loans and
receivables"; "Financial liabilities at FVTPL"; and "Other financial liabilities".
•
•
•
The Company's loans and receivables are comprised of cash and cash equivalents, trade and other receivables and restricted cash equivalents.
Financial liabilities at FVTPL are currently comprised of the Company's warrant liability.
Other financial liabilities include trade accounts payable and accrued liabilities and other long-term liabilities.
The carrying values of all of the aforementioned financial instruments, excluding cash and cash equivalents, restricted cash equivalents and warrant liability
which are stated at fair value, approximate their fair values due to their short-term maturity or to the prevailing interest rates of these instruments, which are
comparable to those of the market.
Financial risk factors
The following provides disclosures relating to the nature and extent of the Company's exposure to risks arising from financial instruments, including credit
risk, liquidity risk and market risk (share price risk and currency risk), and how the Company manages those risks.
102
(a) Credit risk
Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company
regularly monitors credit risk exposure and takes steps to mitigate the likelihood of this exposure resulting in losses. The Company's exposure to credit risk
currently relates to cash and cash equivalents, to trade and other receivables and to restricted cash equivalents. The Company holds its available cash in
amounts that are readily convertible to known amounts of cash and deposits its cash balances with financial institutions that are rated the equivalent of "Baa1"
and above. This information is supplied by independent rating agencies where available and, if not available, the Company uses publicly available financial
information to ensure it invests its cash in creditworthy and reputable financial institutions.
As at December 31, 2013, trade accounts receivable for an amount of approximately $1.7 million were with two external customers or partners.
As at December 31, 2013, no trade accounts receivable were past due or impaired.
Generally, the Company does not require collateral or other security from customers for trade accounts receivable; however, credit is extended following an
evaluation of creditworthiness. In addition, the Company performs ongoing credit reviews of all its customers and establishes an allowance for doubtful
accounts when accounts are determined to be uncollectible.
The maximum exposure to credit risk approximates the amount recognized on the statement of financial position.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. As indicated in the capital disclosures section
(see "Item 5 – Operating and Financial Review and Prospects") the Company manages this risk through the management of its capital structure. It also
manages liquidity risk by continuously monitoring actual and projected cash flows. The Board of Directors reviews and approves the Company's operating
and capital budgets, as well as any material transactions out of the ordinary course of business. The Company has adopted an investment policy in respect of
the safety and preservation of its capital to ensure the Company's liquidity needs are met. The instruments are selected with regard to the expected timing of
expenditures and prevailing interest rates.
(b) Market risk
Share price risk
The change in fair value of the Company's warrant liability, which is measured at FVTPL, results from the periodic "mark-to-market" revaluation, via the
application of the Black-Scholes option pricing model, of currently outstanding share purchase warrants. The Black-Scholes valuation is impacted, among
other inputs, by the market price of the Company's Common Shares. As a result, the change in fair value of the warrant liability, which is reported as finance
income (costs) in the accompanying consolidated statements of comprehensive income (loss), has been and may continue in future periods to be materially
affected most notably by changes in the Company's common share closing price, which on the NASDAQ, has ranged from $1.03 to $3.23 during the year
ended December 31, 2013.
If variations in the market price of our Common Shares of -10% and +10% were to occur, the impact on the Company's net (loss) income for warrant liability
held at December 31, 2013 would be as follows:
(in thousands)
Warrant liability
Total impact on net income – increase / (decrease)
Foreign currency risk
Carrying
amount
$
18,010
-10%
$
+10%
$
2,205
2,205
(2,172)
(2,172)
Since the Company operates internationally, it is exposed to currency risks as a result of potential exchange rate fluctuations related to non-intragroup
transactions. In particular, fluctuations in the US dollar exchange rates against the EUR could have a potentially significant impact on the Company's results
of operations.
103
If foreign exchange rate variations of -5% (depreciation of the EUR) and +5% (appreciation of the EUR) against the US$, from period-end rates of EUR1 =
US$1.3779 were to occur, the impact on the Company's net (loss) income for each category of financial instruments held at December 31, 2013 would be as
follows:
(in thousands)
Cash and cash equivalents
Warrant liability
Total impact on net income – increase / (decrease)
Item 12.
Description of Securities Other than Equity Securities
Carrying
amount
$
27,452
18,010
Balances denominated in US$
-5%
$
+5%
$
1,373
(901)
472
(1,373)
900
(473)
A.
Debt securities
Not applicable.
B.
Warrants and rights
Not applicable.
C.
Other securities
Not applicable.
D.
American depositary shares
Not applicable.
104
PART II
Item 13.
Defaults, Dividend Arrearages and Delinquencies
None.
Item 14.
Material Modification to the Rights of Security Holders and Use of Proceeds
None.
Item 15.
Controls and Procedures
Under the supervision of and with the participation of the Registrant's management, including the Chief Executive Officer and Chief Financial Officer, we
have conducted an evaluation pursuant to Rule 13a-15, promulgated under the Securities Exchange Act of 1934, as amended, of the effectiveness of our
disclosure controls and procedures as at December 31, 2013. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures were effective as at December 31, 2013.
Management's Annual Report on Internal Control over Financial Reporting
The Registrant's management is responsible for establishing and maintaining adequate internal control over financial reporting. The Registrant's internal
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with IFRS as issued by IASB.
The Registrant's internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the Registrant's assets; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with IFRS, and that receipts and expenditures of the Registrant are being
made only in accordance with authorizations of the Registrant's management; and (iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Registrant's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of the Registrant's internal control over financial reporting based on the criteria established in
Internal Control - Integrated Framework: 1992 issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this
evaluation, management concluded that the Registrant's internal control over financial reporting was effective as at December 31, 2013.
Attestation Report of the Independent Auditors
The effectiveness of the Registrant's internal control over financial reporting as of December 31, 2013, has been audited by PricewaterhouseCoopers LLP,
independent auditors, as stated in their report which is included under "Item 18. – Financial Statements".
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the year ended December 31, 2013 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting. However, in May 2013, the COSO released an updated Internal Control -
Integrated Framework: 2013. The Company currently uses the COSO 1992 original framework and will transition to the updated framework during the
transition period which extends to December 15, 2014, after which the 1992 framework will be superseded. Management is currently assessing the impact of
this transition and will report any significant changes to the Company's internal controls over financial reporting that may result therefrom.
105
Item 16A. Audit Committee Financial Expert
The Board of the Registrant has determined that the Registrant has at least one audit committee financial expert (as defined in paragraph (b) of Item 16A to
Form 20-F). The name of the audit committee financial expert of the Registrant is Mr. Gérard Limoges, FCPA, FCA, the Audit Committee's Chairman. The
Commission has indicated that the designation of Mr. Limoges as the audit committee financial expert of the Registrant does not: (i) make Mr. Limoges an
"expert" for any purpose, including without limitation for purposes of Section 11 of the Securities Act of 1933, as amended, as a result of this designation; (ii)
impose any duties, obligations or liability on Mr. Limoges that are greater than those imposed on him as a member of the Audit Committee and the Board in
the absence of such designation; or (iii) affect the duties, obligations or liability of any other member of the Audit Committee or the Board. The other
members of the Audit committee are Mr. Pierre Lapalme and Mr. José P. Dorais, each of whom, along with Mr. Limoges, is independent, as that term is
defined in the NASDAQ listing standards. For a description of their respective education and experience, please refer to "Item 6. – Directors, Senior
Management and Employees".
Item 16B. Code of Ethics
On March 29, 2004, the Board adopted a "Code of Ethical Conduct", which has been amended by the Board on November 3, 2004, December 13, 2005,
March 2, 2007 and March 10, 2009. The December 13, 2005 amendment incorporates changes to the duty to report violations consistent with applicable laws.
The Registrant has selected an independent third party supplier to provide a confidential and anonymous communication channel for reporting concerns about
possible violations to the Registrant's Code of Ethical Conduct as well as financial and/or accounting irregularities or fraud. A copy of the Code of Ethical
Conduct, as amended, is included as Exhibit 11.1 to this annual report on Form 20-F and is also available on the Registrant's Web site at www.aezsinc.com
under the Investors - Governance tab. The Code of Ethical Conduct is a "code of ethics" as defined in paragraph (b) of Item 16B to Form 20- F. The Code of
Ethical Conduct applies to all of the Registrant's employees, directors and officers, including the Registrant's principal executive officer, principal financial
officer, and principal accounting officer or controller, or persons performing similar functions, and includes specific provisions dealing with integrity in
accounting matters, conflicts of interest and compliance with applicable laws and regulations. The Registrant will provide this document without charge to
any person or company upon request to the Chief Financial Officer of the Registrant, at its head office at 1405 du Parc-Technologique Boulevard, Quebec
City, Quebec, G1P 4P5, Canada.
Item 16C. Principal Accountant Fees and Services
(All amounts are in US dollars)
A. Audit Fees
During the financial years ended December 31, 2013 and 2012, the Registrant's principal accountant, PricewaterhouseCoopers LLP, billed $422,613 and
$364,442, respectively, for the audit of the Registrant's annual consolidated financial statements and for services rendered in connection with the Registrant's
statutory and regulatory filings.
B. Audit-related Fees
During the financial years ended December 31, 2013 and 2012, the Registrant's principal accountant, PricewaterhouseCoopers LLP, billed $218,857 and
$79,652, respectively, for audit or attest services not required by statute or regulation, for accounting consultations on proposed transactions, for the review of
prospectuses and prospectus supplements, including the delivery of customary consent and comfort letters in connection therewith, as well as evaluations of
accounting policy decisions.
C. Tax Fees
During the financial years ended December 31, 2013 and 2012, the Registrant's principal accountant, PricewaterhouseCoopers LLP, billed $36,332 and
$52,726, respectively, for services related to tax compliance, tax planning and tax advice.
D. All Other Fees
During the financial years ended December 31, 2013 and 2012, the Registrant's principal accountant, PricewaterhouseCoopers LLP, billed $8,928 and $Nil,
respectively, for services not included in audit fees, audit-related fees and tax fees.
106
E. Audit Committee Pre-Approval Policies and Procedures
Under applicable Canadian securities regulations, the Registrant is required to disclose whether its Audit Committee has adopted specific policies and
procedures for the engagement of non-audit services and to prepare a summary of these policies and procedures. The Audit Committee Charter (included as
Exhibit 11.2 to this annual report on Form 20-F) provides that it is such committee's responsibility to approve all audit engagement fees and terms as well as
reviewing policies for the provision of non-audit services by the external auditors and, when required, the framework for pre-approval of such services. The
Audit Committee delegates to its Chairman the pre-approval of such non-audit fees. The pre-approval by the Chairman is then presented to the Audit
Committee at its first scheduled meeting following such pre-approval.
For each of the years ended December 31, 2013 and 2012, none of the non-audit services provided by the Registrant's external auditor were approved by the
Audit Committee pursuant to the "de minimis exception" to the pre-approval requirement for non-audit services.
F. Work performed by Full-time, Permanent Employees of Principal Accountant
During the financial year ended on December 31, 2013, only full-time, permanent employees of the Registrant's principal accountant,
PricewaterhouseCoopers LLP, performed audit work on the Registrant's financial statements.
Item 16D. Exemptions from the Listing Standards for Audit Committees
None.
Item 16E.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 16F. Changes in Registrant's Certifying Accountant
None.
Item 16G. Corporate Governance
The Registrant is generally in compliance with the corporate governance requirements of NASDAQ except as described below. The Registrant is not in
compliance with the NASDAQ requirement that a quorum for a meeting of the holders of the common stock of the Registrant be no less than 33 1/3% of such
outstanding shares. The by-laws of the Registrant provide that a quorum for purposes of any meeting of shareholders of the Registrant consists of at least 10%
of the outstanding voting shares. The Registrant benefits from an exemption from NASDAQ from this quorum requirement because the quorum provided for
in the by-laws of the Registrant complies with the requirements of the CBCA, the Registrant's governing corporate statute, and with the rules of TSX, the
home country exchange on which the Registrant's voting shares are traded. In accordance with applicable current NASDAQ requirements, the Registrant has
in the past provided to NASDAQ letters from outside counsel certifying that these practices are not prohibited by the Registrant's home country law.
Item 16H. Mine Safety Disclosure
None.
107
Item 17
Financial Statements
We have elected to provide financial statements pursuant to Item 18.
Item 18. Financial Statements
The financial statements appear on pages 109 through 158.
PART III
108
Aeterna Zentaris Inc.
Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended
December 31, 2013, 2012 and 2011
(presented in thousands of US dollars)
109
Independent Auditor's Report
To the Shareholders of
Aeterna Zentaris Inc.
We have completed integrated audits of Aeterna Zentaris Inc. and its subsidiaries' 2013 and 2012 consolidated financial statements and their internal
control over financial reporting as at December 31,
2013. Our opinions, based on our audits, are presented below.
Report on the consolidated financial statements
We have audited the accompanying consolidated financial statements of Aeterna Zentaris Inc. and its subsidiaries, which comprise the consolidated
statements of financial position as at December 31, 2013 and December 31, 2012 and the consolidated statements of changes in shareholders' equity
(deficiency), comprehensive income (loss) and cash flows for each of the three years in the period ended December 31, 2013, and the related notes,
which comprise a summary of significant accounting policies and other explanatory information.
Management's responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial
Reporting Standards as issued by the International Accounting Standards Board and for such internal control as management determines is necessary to
enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with
Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material
misstatement. Canadian generally accepted auditing standards also require that we comply with ethical requirements.
An audit involves performing procedures to obtain audit evidence, on a test basis, about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the company's
preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An
audit also includes evaluating the appropriateness of accounting principles and policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
............................................................................................................................................................................................................
PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l.
1250 René-Lévesque Boulevard West, Suite 2800, Montréal, Quebec, Canada H3B 2G4
T: +1 514 205 5000, F: +1 514 876 1502, www.pwc.com/ca
“PwC” refers to PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l., an Ontario limited liability partnership.
110
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion on the consolidated
financial statements.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Aeterna Zentaris Inc. and its
subsidiaries as at December 31, 2013 and December 31, 2012 and their financial performance and their cash flows for each of the three years in the
period ended December 31, 2013 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards
Board.
Report on internal control over financial reporting
We have also audited Aeterna Zentaris Inc.'s and its subsidiaries' internal control over financial reporting as at December 31, 2013, based on criteria
established in Internal Control - Integrated Framework (1992), issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
Management's responsibility for internal control over financial reporting
Management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the section entitled "Management's Annual Report on Internal Control over Financial Reporting" appearing
on page 105 of the Annual Report on Form 20-F.
Auditor's responsibility
Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit. We conducted our audit of
internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects.
An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control, based on the assessed risk, and
performing such other procedures as we consider necessary in the circumstances.
We believe that our audit provides a reasonable basis for our audit opinion on the company's internal control over financial reporting.
Definition of internal control over financial reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the
financial statements.
Inherent limitations
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.
111
Opinion
In our opinion, Aeterna Zentaris Inc. and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as at
December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by COSO.
March 20, 2014
Montréal, Québec, Canada
1 CPA auditor, CA, public accountancy permit No. A123498
112
December 31, 2013
December 31, 2012
$
$
43,202
1,953
—
500
45,655
865
1,351
725
708
9,892
59,196
7,242
—
7,242
—
18,010
15,407
1,473
42,132
134,101
86,107
(203,925)
781
17,064
59,196
39,521
7,993
4,084
1,703
53,301
826
2,147
797
1,128
9,466
67,665
10,470
5,235
15,705
34,663
6,176
17,231
585
74,360
122,791
83,892
(213,086)
(292)
(6,695)
67,665
Aeterna Zentaris Inc.
Consolidated Statements of Financial Position
(in thousands of US dollars)
ASSETS
Current assets
Cash and cash equivalents (note 7)
Trade and other receivables (note 8)
Inventory (note 9)
Prepaid expenses and other current assets
Restricted cash equivalents (note 10)
Property, plant and equipment (note 11)
Other non-current assets
Identifiable intangible assets (note 12)
Goodwill (note 13)
LIABILITIES
Current liabilities
Payables and accrued liabilities (note 14)
Current portion of deferred revenues (notes 5 and 6)
Deferred revenues (notes 5 and 6)
Warrant liability (note 15)
Employee future benefits (note 19)
Provisions and other non-current liabilities (note 16)
SHAREHOLDERS' EQUITY (DEFICIENCY)
Share capital (note 17)
Other capital
Deficit
Accumulated other comprehensive income (loss)
Commitments and contingencies (note 25)
Subsequent events (note 29)
The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Board of Directors
Juergen Ernst
Director
Gérard Limoges
Director
113
Common shares
(number of)1, 2
Share capital
Other capital
$
$
Deficit
$
Accumulated other
comprehensive
income (loss)
$
Total
$
25,329,288
122,791
83,892
(213,086)
(292)
(6,695)
Aeterna Zentaris Inc.
Consolidated Statements of Changes in Shareholders' Equity (Deficiency)
For the years ended December 31, 2013, 2012 and 2011
(in thousands of US dollars, except share data)
Balance - January 1, 2013
Net income
Other comprehensive income:
Foreign currency translation adjustments
Actuarial gain on defined benefit plans
(note 19)
Comprehensive income
Share issuance in connection with registered
direct and public offerings (note 17)
Share issuances in connection with "At-the-
Market" drawdowns (note 17)
Share-based compensation costs
—
—
—
—
18,300,000
8,573
1,682,721
2,737
—
Balance - December 31, 2013
45,312,009
134,101
Balance - January 1, 2012
Net loss
Other comprehensive loss:
Foreign currency translation adjustments
Actuarial loss on defined benefit plans
(note 19)
Comprehensive loss
Share issuance in connection with a public
offering
Share issuances in connection with "At-the-
Market" drawdowns, net of transaction
costs
Share issuances pursuant to the exercise of
warrants (note 15)
Share issuances pursuant to the exercise of
stock options (note 17)
Share-based compensation costs
—
—
—
—
6,600,000
11,265
1,190,973
8,382
52,383
25,583
819
441
—
Common shares
(number of)1, 2
Share capital
Other capital
$
$
Deficit
$
Accumulated other
comprehensive
income (loss)
$
Total
$
17,460,349
101,884
82,327
(188,969)
212
(4,546)
—
(20,412)
—
(20,412)
—
—
—
—
—
—
2,215
86,107
—
—
—
—
—
—
(232)
1,797
83,892
6,815
—
6,815
—
1,073
2,346
9,161
—
—
—
(203,925)
1,073
2,346
—
1,073
10,234
—
8,573
—
—
781
2,737
2,215
17,064
—
(504)
(504)
(3,705)
(24,117)
—
(504)
(3,705)
(24,621)
—
—
—
—
—
—
11,265
—
—
—
—
8,382
819
209
1,797
(6,695)
Balance - December 31, 2012
25,329,288
122,791
(213,086)
(292)
_________________________
1
Issued and paid in full.
2 Adjusted to reflect the October 2, 2012 six-to-one share consolidation (see note 1 – Summary of business, liquidity risk, reporting entity, share consolidation and basis of
preparation and note 17 – Share capital).
The accompanying notes are an integral part of these consolidated financial statements.
114
Aeterna Zentaris Inc.
Consolidated Statements of Changes in Shareholders' Equity (Deficiency)
For the years ended December 31, 2013, 2012 and 2011
(in thousands of US dollars, except share data)
Common shares
(number of)1, 2
Share capital
Other capital
Deficit
Accumulated other
comprehensive
income (loss)
Balance - January 1, 2011
Net loss
Other comprehensive loss:
Foreign currency translation adjustments
Actuarial loss on defined benefit plans (note 19)
Comprehensive loss
Issuances pursuant to registered direct offerings,
net of transaction costs
Issuance pursuant to the exercise of warrants (note
15)
Issuance pursuant to the exercise of stock options
(note 17)
26,724
Share-based compensation costs
Balance - December 31, 2011
13,904,986
$
60,900
$
81,091
$
(160,567)
$
1,001
(17,575)
Total
$
—
—
—
—
3,244,094
35,881
284,545
4,861
242
—
17,460,349
101,884
—
(27,067)
—
(27,067)
—
—
—
—
—
(97)
1,333
82,327
—
(1,335)
(28,402)
—
—
—
—
(188,969)
(789)
—
(789)
—
—
—
—
212
(789)
(1,335)
(29,191)
35,881
4,861
145
1,333
(4,546)
_________________________
1 Issued and paid in full.
2 Adjusted to reflect the October 2, 2012 six-to-one share consolidation (see note 1 – Summary of business, liquidity risk, reporting entity, share consolidation and basis of
preparation and note 17 – Share capital).
The accompanying notes are an integral part of these consolidated financial statements.
115
Aeterna Zentaris Inc.
Consolidated Statements of Comprehensive Income (Loss)
For the years ended December 31, 2013, 2012 and 2011
(in thousands of US dollars, except share and per share data)
Revenues
Sales
License fees and other (note 5)
Operating expenses (note 18)
Cost of sales
Research and development costs, net of refundable tax credits and
grants
Selling, general and administrative expenses
(notes 11 and 12)
Loss from operations
Finance income (note 20)
Finance costs (note 20)
Net finance income
Loss before income taxes
Income tax expense (note 22)
Net loss from continuing operations
Net income (loss) from discontinued operations (note 6)
Net income (loss)
Other comprehensive income (loss):
Items that may be reclassified subsequently to profit or loss:
Foreign currency translation adjustments
Items that will not be reclassified to profit or loss:
Actuarial gain (loss) on defined benefit plans
Comprehensive income (loss)
Net loss per share (basic and diluted) from continuing operations
(note 26)
Net income (loss) (basic and diluted) from discontinued operations
(notes 6 and 26)
Net income (loss) (basic and diluted) per share
Weighted average number of shares outstanding
(notes 17 and 26):
Basic
Diluted
Years ended December 31,
2013
$
2012
$
2011
$
96
6,079
6,175
51
21,284
12,316
33,651
(27,476)
1,748
(1,512)
236
(27,240)
—
(27,240)
34,055
6,815
1,073
2,346
10,234
(0.92)
1.16
0.24
834
1,219
2,053
591
20,592
10,606
31,789
(29,736)
6,974
(382)
6,592
(23,144)
—
(23,144)
2,732
(20,412)
(504)
(3,705)
(24,621)
(1.17)
0.14
(1.03)
250
4,455
4,705
212
24,245
11,955
36,412
(31,707)
6,239
(8)
6,231
(25,476)
(1,104)
(26,580)
(487)
(27,067)
(789)
(1,335)
(29,191)
(1.69)
(0.03)
(1.72)
29,476,455
29,476,455
19,775,073
19,806,687
15,751,331
15,751,331
The accompanying notes are an integral part of these consolidated financial statements.
116
Aeterna Zentaris Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 2013, 2012 and 2011
(in thousands of US dollars)
Cash flows from operating activities
Net loss from continuing operations
Items not affecting cash and cash equivalents:
Change in fair value of warrant liability (note 15)
Depreciation, amortization and impairment (notes 11 and 12)
Share-based compensation costs (note 15)
Gain on held-for-trading financial instrument
Employee future benefits (note 19)
Amortization of deferred revenues (note 5)
Foreign exchange loss (gain) on items denominated in foreign currencies
Gain on disposal of property, plant and equipment
Amortization of prepaid expenses and other non-cash items
Changes in operating assets and liabilities (note 21)
Net cash provided by (used in) operating activities of discontinued operations
(note 6)
Net cash used in operating activities
Cash flows from financing activities
Years ended December 31,
2013
$
2012
$
2011
$
(27,240)
(23,144)
(26,580)
(1,563)
949
2,215
—
(172)
(6,046)
1,078
—
8,007
(7,359)
10,147
(19,984)
(6,746)
1,234
1,797
—
335
(1,077)
614
—
5,124
(3,818)
(5,134)
(30,815)
Proceeds from issuances of common shares and warrants, net of cash transaction
costs of $2,119 in 2013, $1,665 in 2012 and $1,204 in 2011 (note 17)
23,708
23,619
Proceeds from the exercise of share purchase warrants (note 15)
Proceeds from the exercise of stock options (note 17)
Repayment of long-term payable
Net cash provided by financing activities
Cash flows from investing activities
Proceeds from the sale of short-term investment
Purchase of identifiable intangible assets (note 12 )
Purchase of property, plant and equipment (note 11)
Disposals of property, plant and equipment (note 11)
Net cash provided by investing activities of discontinued operations (note 6)
Net cash provided by (used in) investing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents – Beginning of the year
Cash and cash equivalents – End of the year
Cash and cash equivalents components (note 7):
Cash
Cash equivalents
—
—
—
437
209
(57)
23,708
24,208
—
—
(85)
—
113
28
(71)
3,681
39,521
43,202
27,877
15,325
43,202
—
—
(272)
—
—
(272)
(481)
(7,360)
46,881
39,521
15,441
24,080
39,521
The accompanying notes are an integral part of these consolidated financial statements.
117
(2,533)
1,690
1,333
(1,278)
492
(1,284)
(1,955)
(26)
4,207
3,480
(3,789)
(26,243)
36,250
2,222
145
(61)
38,556
3,242
(69)
(736)
26
—
2,463
107
14,883
31,998
46,881
15,112
31,769
46,881
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
1
Summary of business, liquidity risk, reporting entity, share consolidation and basis of preparation
Summary of business
Aeterna Zentaris Inc. (the "Company") is a specialty biopharmaceutical company engaged in developing novel treatments in oncology and
endocrinology. The Company's pipeline encompasses compounds at various stages of development.
Liquidity risk
The Company has a history of operating losses, due largely to significant research and development ("R&D") investment, as well as to the incurrence
of substantial selling, general and administrative expenses. The Company has financed its operations through different sources, including the issuance
of common shares and the conclusion of strategic alliances with licensee partners and other collaborators. The Company expects to continue to incur
operating expenses and may require significant capital to fulfill its future obligations in absence of sufficient corresponding revenues. See note 23 –
Capital disclosures and note 24(b) – Financial instruments and financial risk management – Liquidity risk.
Reporting entity
The accompanying consolidated financial statements include the accounts of Aeterna Zentaris Inc., an entity incorporated under the Canada Business
Corporations Act, and its wholly owned subsidiaries (collectively referred to as the "Group"). Aeterna Zentaris Inc. is the ultimate parent company of
the Group.
The Company currently has three wholly owned direct and indirect subsidiaries, Aeterna Zentaris GmbH ("AEZS Germany"), based in Frankfurt,
Germany, Zentaris IVF GmbH, a wholly owned subsidiary of AEZS Germany, based in Frankfurt, Germany, and Aeterna Zentaris, Inc., an entity
incorporated in the state of Delaware and with offices in Basking Ridge, New Jersey, in the United States.
The address of the Company is 1405 du Parc-Technologique Blvd., Quebec City, Canada, G1P 4P5.
The Company's common shares are listed both on the Toronto Stock Exchange and on the NASDAQ Capital Market (the "NASDAQ").
Share consolidation (reverse stock split)
On October 2, 2012, the Company effected a consolidation of its issued and outstanding common shares on a six-to-one basis (the "Share
Consolidation"). The Share Consolidation affected all shareholders, optionholders and warrantholders uniformly and thus did not materially affect any
securityholder's percentage of ownership interest. All references in these consolidated financial statements to common shares, options and share
purchase warrants have been retroactively adjusted to reflect the Share Consolidation.
Basis of preparation
(a) Statement of compliance
The consolidated financial statements as at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and
2011 have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting
Standards Board ("IASB").
These consolidated financial statements were approved by the Company's Board of Directors on March 20, 2014.
The accompanying consolidated financial statements were prepared on a going concern basis, under the historical cost convention, except for the
warrant liability, which is measured at fair value through profit or loss ("FVTPL").
The preparation of financial statements in accordance with IFRS requires the use of certain critical accounting estimates and the exercise of
management's judgment in applying the Company's accounting policies. Areas
118
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
involving a high degree of judgment or complexity and areas where assumptions and estimates are significant to the Company's consolidated
financial statements are discussed in note 3 – Critical accounting estimates and judgments.
(b) Principles of consolidation
These consolidated financial statements include any entity in which the Company directly or indirectly holds more than 50% of the voting rights or
over which the Company exercises control. The Company controls an entity when the Company is exposed to, or has rights to, variable returns
from its involvement with the entity and has the ability to affect those returns through its power over the entity. An entity is included in the
consolidation from the date that control is transferred to the Company, while any entities that are sold are excluded from the consolidation from the
date that control ceases. All intercompany balances and transactions are eliminated on consolidation.
(c) Foreign currency
The accompanying consolidated financial statements are presented in thousands of US dollars, which is the Company's presentation currency.
Assets and liabilities of Group entities are translated from euro ("EUR") balances at the period-end exchange rates, and the results of operations
are translated from EUR amounts at average rates of exchange for the period. The resulting translation adjustments are included in accumulated
other comprehensive income (loss) within shareholders' equity (deficiency).
Items included in the financial statements of the Group's entities are measured using the currency of the primary economic environment in which
the entities operate (the "functional currency"), which is the EUR. Foreign currency transactions are translated into the functional currency using
the exchange rates prevailing at the dates of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions
and from the translation of monetary assets and liabilities not denominated in euro are recognized in the consolidated statement of comprehensive
income (loss).
Foreign exchange gains and losses that relate to cash and cash equivalents and the warrant liability are presented within finance income or finance
costs in the consolidated statement of comprehensive income (loss). All other foreign exchange gains and losses are presented in the consolidated
statement of comprehensive income (loss) within operating expenses.
2
Summary of significant accounting policies
The accounting policies set out below have been applied consistently to all years presented in these consolidated financial statements, and have been
applied consistently by all Group entities.
Cash and cash equivalents
Cash and cash equivalents consist of unrestricted cash on hand and balances with banks, as well as short-term interest-bearing deposits, such as money
market accounts, that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value, with a maturity of
three months or less from the date of acquisition.
Inventory
Inventory is valued at the lower of cost and net realizable value, which is defined as the estimated selling price in the ordinary course of business less
the estimated costs of completion and the estimated selling costs. Cost is determined on a first-in, first-out basis. The cost of finished goods and work
in progress includes raw materials, labour and manufacturing overhead under the absorption costing method.
Restricted cash equivalents
Restricted cash equivalents are comprised of a bank deposit, related to a long-term operating lease obligation, that cannot be used for current purposes.
119
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
Property, plant and equipment and depreciation
Items of property, plant and equipment are recorded at cost, net of related government grants and accumulated depreciation and impairment charges.
Depreciation is calculated using the following methods, annual rates and period:
Equipment
Furniture and fixtures
Computer equipment
Leasehold improvements
Methods
Annual rates and period
Declining balance and straight-line
Declining balance and straight-line
Straight-line
Straight-line
20%
10% and 20%
25% and 331/3%
Remaining lease term
Depreciation expense, which is recorded in the consolidated statement of comprehensive income (loss), is allocated to the appropriate functional
expense categories to which the underlying items of property, plant and equipment relate.
Identifiable intangible assets
Identifiable intangible assets with finite useful lives consist of in-process R&D acquired in business combinations, patents and trademarks, technology
and other assets. In-process R&D acquired in business combinations are recognized at fair value at the acquisition date. Patents and trademarks are
comprised of costs, including professional fees incurred in connection with the filing of patents and the registration of trademarks for product
marketing and manufacturing purposes, net of related government grants, impairment losses, where applicable, and accumulated amortization.
Identifiable intangible assets with finite useful lives are amortized, from the time at which the assets are available for use, on a straight-line basis over
their estimated useful lives of eight to fifteen years for in-process R&D and patents and ten years for trademarks. Amortization expense, which is
recorded in the consolidated statement of comprehensive income (loss), is allocated to the appropriate functional expense categories to which the
underlying identifiable intangible assets relate.
Goodwill
Goodwill represents the excess of the purchase price over the fair values of the net assets of entities acquired at their respective dates of acquisition.
Goodwill is carried at cost less accumulated impairment losses. Goodwill is allocated to each cash-generating unit ("CGU") or group of CGUs that are
expected to benefit from the related business combination.
Impairment of assets
Items of property, plant and equipment and identifiable intangible assets with finite lives subject to depreciation or amortization, respectively, are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable.
Management is required to assess at each reporting date whether there is any indication that an asset may be impaired. Where such an indication exists,
the asset's recoverable amount is compared to its carrying value, and an impairment loss is recognized for the amount by which the asset's carrying
amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purpose
of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows, or CGU. In determining value in
use of a given asset or CGU, estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset. Impairment losses are allocated to the appropriate functional expense
categories to which the underlying identifiable intangible assets relate, and are recorded in the consolidated statement of comprehensive income (loss).
Items of property, plant and equipment and amortizable identifiable intangible assets with finite lives that suffered impairment are reviewed for
possible reversal of the impairment if there has been a change, since the date of the most recent impairment test, in the estimates used to determine the
impaired asset's recoverable amount. However, an asset's carrying amount, increased due to the reversal of a prior impairment loss, must not exceed the
carrying amount that would have been determined, net of depreciation or amortization, had the original impairment not occurred.
120
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
Goodwill is not subject to amortization and instead is tested for impairment annually or more often if there is an indication that the CGU to which the
goodwill has been allocated may be impaired. Impairment is determined for goodwill by assessing whether the carrying value of a CGU, including the
allocated goodwill, exceeds its recoverable amount, which is the higher of fair value less costs to sell and value in use. In the event that the carrying
amount of goodwill exceeds its recoverable amount, an impairment loss is recognized in an amount equal to the excess. Impairment losses related to
goodwill are not subsequently reversed.
Share purchase warrants
Share purchase warrants are classified as liabilities, since the Company does not have the unconditional right to avoid delivering cash to the holders in
the future. Each of the Company's share purchase warrants contains a written put option, arising upon the occurrence of a Fundamental Transaction, as
that term is defined in the share purchase warrant agreement, and also upon a change of control. As a result of the existence of these put options, and
despite the fact that the repurchase feature is conditional on a defined contingency, the share purchase warrants are required to be classified as a
financial liability, since such contingency could ultimately result in the transfer of assets by the Company.
The warrant liability is initially measured at fair value, and any subsequent changes in fair value are recognized as gains or losses through profit or
loss. Any transaction costs related to the share purchase warrants are expensed as incurred.
The warrant liability is classified as non-current, unless the underlying share purchase warrants are expected to expire or be settled within 12 months
from the end of a given reporting period.
Employee benefits
Salaries and other short-term benefits
Salaries and other short-term benefit obligations are measured on an undiscounted basis and are recognized in the consolidated statement of
comprehensive income (loss) over the related service period or when the Company has a present legal or constructive obligation to make payments as a
result of past events and when the amount payable can be estimated reliably.
Post-employment benefits
The Company's subsidiary in Germany maintains defined contribution and unfunded defined benefit plans, as well as other benefit plans for its
employees. For defined benefit pension plans and other post-employment benefits, net periodic pension expense is actuarially determined on an annual
basis using the projected unit credit method. The cost of pension and other benefits earned by employees is determined by applying certain
assumptions, including discount rates, the projected age of employees upon retirement, the expected rate of future compensation and employee
turnover.
The employee future benefits liability is recognized at its present value, which is determined by discounting the estimated future cash outflows using
interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity
approximating the terms of the related future benefit liability. Actuarial gains and losses that arise in calculating the present value of the defined benefit
obligation are recognized in other comprehensive income (loss), net of tax, in the deficit in the consolidated statement of financial position in the year
in which the actuarial gains and losses arise and without recycling to the consolidated statement of comprehensive income (loss) in subsequent periods.
For defined contribution plans, expenses are recorded in the consolidated statement of comprehensive income (loss) as incurred–namely, over the
period that the related employee service is rendered.
Termination benefits
Termination benefits are recognized in the consolidated statement of comprehensive income (loss) when the Company is demonstrably committed,
without the realistic possibility of withdrawal, to a formal detailed plan to terminate employment earlier than originally expected. Termination benefit
liabilities expected to be settled after 12 months from the end of a given reporting period are discounted to their present value, where material.
121
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
Financial instruments
The Company classifies its financial instruments in the following categories: "Financial assets at FVTPL"; "Loans and receivables"; "Financial
liabilities at FVTPL"; and "Other financial liabilities".
Financial assets and liabilities are offset, and the net amount is reported in the consolidated statement of financial position, when there is a legally
enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the asset and settle the liability
simultaneously.
(a) Classification
Financial assets at fair value through profit or loss
Financial assets at FVTPL are financial assets held for trading. Fair value is defined as the amount at which the financial assets could be
exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. A financial asset is classified as at FVTPL if
the instrument is acquired or received as consideration principally for the purpose of selling in the short-term. Financial assets at FVTPL are
classified as current assets if expected to be settled within 12 months from the end of a given reporting period; otherwise, the assets are classified
as non-current.
As at December 31, 2013 and 2012, the Company held no assets classified as financial assets at FVTPL.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and
receivables are included in current assets, except for instruments with maturities greater than 12 months after the end of a given reporting period or
where restrictions apply that limit the Company from using the instrument for current purposes, which are classified as non-current assets.
The Company's loans and receivables are comprised of cash and cash equivalents, trade and other receivables and restricted cash equivalents.
Financial liabilities at fair value through profit or loss
Financial liabilities at FVTPL are financial liabilities held for trading. A financial liability is classified as at FVTPL if the instrument is acquired or
incurred principally for the purpose of selling or repurchasing in the short-term or where the Company does not have the unconditional right to
avoid delivering cash or another financial asset to the holders in certain circumstances. Financial liabilities at FVTPL are classified as current
liabilities if expected or potentially required to be settled within 12 months from the end of a given reporting period; otherwise, the liabilities are
classified as non-current.
Financial liabilities at FVTPL are currently comprised of the Company's warrant liability.
Other financial liabilities
Other financial liabilities include trade accounts payable and accrued liabilities and other non-current liabilities.
(b) Recognition and measurement
Financial assets at fair value through profit or loss
Financial assets at FVTPL are recognized on the settlement date, which is the date on which the asset is delivered to the Company. Financial assets
at FVTPL are initially recognized at fair value, and transaction costs are expensed immediately in the consolidated statement of comprehensive
income (loss). Financial assets at FVTPL are derecognized when the right to receive cash flows from the underlying investment have expired or
have been transferred and when the Group has transferred substantially all risks and rewards of ownership. Gains and losses
122
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
arising from changes in the fair value of financial assets at FVTPL are presented in the consolidated statement of comprehensive income (loss)
within finance income or finance costs in the period in which they arise.
Loans and receivables
Loans and receivables are recognized on the settlement date and are measured initially at fair value and subsequently at amortized cost using the
effective interest rate method.
Financial liabilities at fair value through profit or loss
Financial liabilities at FVTPL are recognized on the settlement date. Financial liabilities at FVTPL are initially recognized at fair value, and
transaction costs are expensed immediately in the consolidated statement of comprehensive income (loss). Gains and losses arising from changes
in the fair value of financial liabilities at FVTPL are presented in the consolidated statement of comprehensive income (loss) within finance
income or finance costs in the period in which they arise.
Other financial liabilities
Financial instruments classified as "Other financial liabilities" are measured initially at fair value and subsequently at amortized cost using the
effective interest rate method.
(c)
Impairment
Financial assets measured at amortized cost are reviewed for impairment at each reporting date. Where there is objective evidence that impairment
exists for a financial asset measured at amortized cost, an impairment charge equivalent to the difference between the asset's carrying amount and
the present value of estimated future cash flows is recorded in the consolidated statement of comprehensive income (loss). The expected cash
flows exclude future credit losses that have not been incurred and are discounted at the financial asset's original effective interest rate.
Impairment charges related to financial assets carried at amortized cost are reversed if, in a subsequent period, the amount of the impairment loss
decreases and the decrease can be related objectively to an event occurring after the impairment was recognized. However, the reversal cannot
result in a carrying amount of the financial asset that exceeds what the amortized cost would have been had the impairment not been recognized at
the date the impairment is reversed.
Share capital
Common shares are classified as equity. Incremental costs that are directly attributable to the issue of common shares and stock options are recognized
as a deduction from equity, net of any tax effects.
Where offerings result in the issuance of units (where each unit is comprised of a common share of the Company and a share purchase warrant,
exercisable in order to purchase a common share or fraction thereof), proceeds received in connection with those offerings are allocated between Share
capital and Share purchase warrants based on the residual method. Proceeds are allocated to warrant liability based on the share purchase warrants fair
value, and the residual amount of proceeds is allocated to Share capital. Transaction costs in connection with such offerings are allocated to the liability
and equity units components in proportion to the allocation of proceeds.
Provisions
Provisions represent liabilities to the Company for which the amount or timing is uncertain. Provisions are recognized when the Company has a present
legal or constructive obligation as a result of past events, when it is probable that an outflow of resources will be required to settle the obligation and
where the amount can be reliably estimated. Provisions are not recognized for future operating losses.
Provisions are made for any contracts which are deemed onerous. A contract is onerous if the unavoidable costs of meeting the obligations under the
contract exceed the economic benefits expected to be received under it. Provisions for onerous contracts are measured at the present value of the lower
of the expected cost of terminating the contract and the
123
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
expected net cost of continuing with the contract. Present value is determined based on expected future cash flows that are discounted at a pre-tax rate
that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized
in finance costs.
Revenue recognition
Sales of products
Revenues from the sale of goods are recognized when the Company has transferred to the buyer the significant risks and rewards of ownership of the
goods (which is at the time the goods are shipped), when the Company retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold, when the amount of revenues can be measured reliably, when it is probable that
the economic benefits associated with the transaction will flow to the Company and when the costs incurred or to be incurred in respect of the
transaction can be measured reliably.
Royalty revenues
The Company had deferred recognition of proceeds received in December 2008 from Healthcare Royalty Partners L.P. (formerly Cowen Healthcare
Royalty Partners L.P. ) ("HRP") relating to the Company's rights to royalties on future sales of Cetrotide® covered by a license agreement with ARES
Trading S.A. ("Merck Serono") in which the latter had been granted worldwide marketing, distribution and selling rights, except in Japan, for
Cetrotide®, a compound used for in vitro fertilization.
The Company recognized the proceeds received from HRP as royalty revenues over the life of the underlying royalty sale arrangement, pursuant to the
"units-of-revenue" method. Under that method, periodic royalty revenues are calculated as the ratio of the remaining deferred revenue amount to the
total estimated remaining royalties that Merck Serono expected to pay to HRP over the term of the underlying arrangement multiplied by the royalty
payments due to HRP for the period.
As mentioned in note 6 – Discontinued operations, from April 3, 2013 to October 1, 2013, the Company accelerated the amortization of the remaining
deferred revenues, given management's determination that, as of October 1, 2013, there is no basis to continue amortizing the deferred revenue
associated with HRP, primarily due to the fact that the Company no longer has significant continuing involvement in the Cetrotide® Business.
Licensing revenues and multiple element arrangements
The Company is currently in a phase in which certain potential products are being further developed or marketed jointly with strategic partners.
Existing licensing agreements usually foresee one-time payments (upfront payments), payments for R&D services in the form of cost reimbursements,
milestone payments and royalty receipts for licensing and marketing product candidates. Revenues associated with those multiple-element
arrangements are allocated to the various elements based on their relative fair value.
Agreements containing multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered
element has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered obligation(s).
The consideration received is allocated among the separate units based on each unit's fair value, and the applicable revenue recognition criteria are
applied to each of the separate units.
License fees representing non-refundable payments received at the time of signature of license agreements are recognized as revenue upon signature of
the license agreements when the Company has no significant future performance obligations and collectibility of the fees is probable. Upfront
payments received at the beginning of licensing agreements are deferred and recognized as revenue on a systematic basis over the period during which
the related services are rendered and all obligations are performed.
124
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
Milestone payments
Milestone payments, which are generally based on developmental or regulatory events, are recognized as revenue when the milestones are achieved,
collectibility is assured, and when the Company has no significant future performance obligations in connection with the milestones.
Share-based compensation costs
The Company operates an equity-settled share-based compensation plan under which the Company receives services from directors, senior executives,
employees and other collaborators as consideration for equity instruments of the Company.
The Company accounts for all forms of share-based compensation using the fair value-based method. Fair value of stock options is determined at the
date of grant using the Black-Scholes option pricing model, which includes estimates of the number of awards that are expected to vest over the vesting
period. Where granted share options vest in installments over the vesting period (defined as graded vesting), the Company treats each installment as a
separate share option grant. Share-based compensation expense is recognized over the vesting period, or as specified vesting conditions are satisfied,
and credited to Other Capital.
Any consideration received by the Company in connection with the exercise of stock options is credited to Share Capital. Any Other Capital
component of the share-based compensation is transferred to Share Capital upon the issuance of shares.
Current and deferred income tax
Income tax on profit or loss comprises current and deferred tax. Tax is recognized in profit or loss, except that a change attributable to an item of
income or expense recognized as other comprehensive income (loss) or directly in equity (deficit) is also recognized directly in other comprehensive
income (loss) or directly in equity (deficit). Management periodically evaluates positions taken in tax returns with respect to situations in which
applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax
authorities.
The current income tax charge is calculated in accordance with tax rates and laws that have been enacted or substantively enacted by the reporting date
in the countries where the Company's subsidiaries operate and generate taxable income.
Deferred income tax is recognized on temporary differences (other than, where applicable, temporary differences associated with unremitted earnings
from foreign subsidiaries and associates to the extent that the investment is essentially permanent in duration, and temporary differences associated
with the initial recognition of goodwill) arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial
statements and on unused tax losses or R&D non-refundable tax credits in the Group. Deferred income tax is determined using tax rates and laws that
have been enacted or substantively enacted by the reporting date.
Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary
differences can be utilized.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities
and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity
or different taxable entities where there is an intention to settle the balances on a net basis.
Research and development costs
Research costs are expensed as incurred. Development costs are expensed as incurred, except for those that meet generally accepted criteria for
deferral, in which case, the costs are capitalized and amortized to operations over the estimated period of benefit. No development costs have been
deferred during any of the periods presented.
125
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
Research and development refundable tax credits and grants
The Company's German subsidiary is entitled to receive research grants from the German Federal Ministry of Education and Research. Funding is
earned on qualified projects, and corresponding expenses are reimbursed at a certain rate of eligible base amounts.
Refundable R&D tax credits and grants are accounted for using the cost reduction method. Accordingly, refundable R&D tax credits and grants are
recorded as a reduction of the related expenses or capital expenditures in the period the expenses are incurred, provided that the Company has
reasonable assurance the refundable R&D tax credits or grants will be realized.
Discontinued operations
A discontinued operation is a component of the Company that has been disposed of, or is classified as held for sale, and represents a separate major
line of business or geographical area of operations and/or is part of a single co-ordinated plan to dispose of a separate major line of business or
geographical area of operations. Classification as a discontinued operation occurs upon the earlier of the disposal of the operation (or disposal group)
or the date at which the operation meets the criteria for classification as held for sale. When an operation is classified as discontinued, comparative
statements of comprehensive income (loss) and cash flows are presented as if the operations had been discontinued at the beginning of the earliest
comparative period presented.
Net income (loss) per share
Basic net income (loss) per share is calculated using the weighted average number of common shares outstanding during the year.
Diluted net income (loss) per share is calculated based on the weighted average number of common shares outstanding during the year, plus the effects
of dilutive common share equivalents, such as stock options and share purchase warrants. This method requires that diluted net income (loss) per share
be calculated using the treasury stock method, as if all common share equivalents had been exercised at the beginning of the reporting period, or period
of issuance, as the case may be, and that the funds obtained thereby were used to purchase common shares of the Company at the average trading price
of the common shares during the period.
3
Critical accounting estimates and judgments
The preparation of consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that
affect the reported amounts of the Company's assets, liabilities, revenues, expenses and related disclosures. Judgments, estimates and assumptions are
based on historical experience, expectations, current trends and other factors that management believes to be relevant at the time at which the
Company's consolidated financial statements are prepared.
Management reviews, on a regular basis, the Company's accounting policies, assumptions, estimates and judgments in order to ensure that the
consolidated financial statements are presented fairly and in accordance with IFRS. Revisions to accounting estimates are recognized in the period in
which the estimates are revised and in any future periods affected.
(a) Critical accounting estimates and assumptions
Critical accounting estimates and assumptions are those that have a significant risk of causing material adjustment and are often applied to matters
or outcomes that are inherently uncertain and subject to change. As such, management cautions that future events often vary from forecasts and
expectations and that estimates routinely require adjustment.
The following discusses the most significant accounting estimates and assumptions that the Company has made in the preparation of the
consolidated financial statements.
126
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
Fair value of the warrant liability and stock options
Determining the fair value of the warrant liability and stock options requires judgment related to the choice of a pricing model, the estimation of
stock price volatility and the expected term of the underlying instruments. Any changes in the estimates or inputs utilized to determine fair value
could result in a significant impact on the Company's future operating results, liabilities or other components of shareholders' equity (deficiency).
Fair value assumptions used are described in notes 15 – Warrant liability and 17 – Share capital.
Identifiable intangible assets and goodwill impairment
The values associated with identifiable intangible assets with finite lives and goodwill are determined by applying significant estimates and
assumptions, including those related to cash flow projections, economic risk, discount rates and asset useful lives.
Valuations performed in connection with post-acquisition assessments of impairment of identifiable intangible assets are based on estimates that
include risk-adjusted future cash flows, which are discounted using appropriate interest rates. Projected cash flows are based on business forecasts,
trends and expectations and are therefore inherently judgmental. Future events could cause the assumptions utilized in impairment assessments to
change, resulting in a potentially significant effect on the Company's future operating results due to increased impairment charges, or reversals
thereof, or adjustments to amortization charges. Additional information is included in note 12 – Identifiable intangible assets.
The annual impairment assessment related to goodwill is based on estimates that are derived from current market capitalization and on other
factors, including assumptions related to relevant industry-specific market analyses. Future events, including a significant reduction in the
Company's share price, could cause the assumptions utilized in the impairment tests to change, resulting in a potentially adverse effect on the
Company's future results due to increased impairment charges.
Employee future benefits
The determination of expenses and obligations associated with employee future benefits requires the use of assumptions, such as the discount rate
to measure obligations, the projected age of employees upon retirement, the expected rate of future compensation and estimated employee
turnover. Because the determination of the cost and obligations associated with employee future benefits requires the use of various assumptions,
there is measurement uncertainty inherent in the actuarial valuation process. Actual results will differ from results that are estimated based on the
aforementioned assumptions. Additional information is included in note 19 – Employee future benefits.
Income taxes
The estimation of income taxes includes evaluating the recoverability of deferred tax assets based on an assessment of Group entities' ability to
utilize the underlying future tax deductions against future taxable income prior to expiry of those deductions. Management assesses whether it is
probable that some or all of the deferred income tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income, which in turn is dependent upon the successful commercialization of the Company's products. To the
extent that management's assessment of any Group entity's ability to utilize future tax deductions changes, the Company would be required to
recognize more or fewer deferred tax assets, and future income tax provisions or recoveries could be affected. Additional information is included
in note 22 – Income taxes.
(b) Critical judgments in applying the Company's accounting policies
Revenue recognition
Management's assessments related to the recognition of revenues related to arrangements containing multiple elements are based on judgment.
Judgment is necessary to identify separate units of accounting and to allocate related consideration to each separate unit of accounting. Where
deferral of upfront payments or license fees is deemed appropriate, subsequent revenue recognition is often determined based upon the assessment
of the
127
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
Company's continuing involvement in the arrangement, the benefits expected to be derived by the customer and expected patent lives. Additional
information is included in note 5 – Development, commercialization and licensing initiatives.
4
Recent accounting pronouncements
Adopted in 2013
The following new standards and amendments to standards are effective for the first time for interim periods beginning on or after January 1, 2013 and
have been applied in preparing these consolidated financial statements. The accounting policies have been applied consistently by all subsidiaries of
the Company.
IFRS 10, Consolidated Financial Statements ("IFRS 10"), which builds on existing principles by identifying the concept of control as the determining
factor in whether an entity should be included within the consolidated financial statements of a parent company. IFRS 10 also provides additional
guidance to assist in the determination of control where this is difficult to assess.
IFRS 11, Joint Arrangements ("IFRS 11"), which enhances accounting for joint arrangements, particularly by focusing on the rights and obligations of
the arrangement, rather than the arrangement's legal form. IFRS 11 also addresses inconsistencies in the reporting of joint arrangements by requiring a
single method to account for interests in jointly controlled entities and prohibits proportionate consolidation.
IFRS 12, Disclosure of Interests in Other Entities, which is a comprehensive standard on disclosure requirements for all forms of interests in other
entities, including joint arrangements, associates, special purpose vehicles and other off-balance sheet vehicles.
IFRS 13, Fair Value Measurement ("IFRS 13"), which defines fair value, sets out in a single IFRS a framework for measuring fair value and requires
disclosures about fair value measurements. IFRS 13 does not determine when an asset, a liability or an entity's own equity instrument is measured at
fair value. Rather, the measurement and disclosure requirements of IFRS 13 apply when another IFRS requires or permits the item to be measured at
fair value (with limited exceptions).
In June 2011, the IASB issued an amended version of IAS 19, Employee Benefits, including the elimination of the option to defer the recognition of
actuarial gains and losses (known as the "corridor method"), the streamlining of the presentation of changes in assets and liabilities arising from
defined benefit plans and the enhancement of the disclosure requirements for defined benefit plans, including additional information about the
characteristics of defined benefit plans and the risks to which entities are exposed through participation in those plans.
In December 2011, the IASB issued an amended version of IFRS 7, Financial Instruments: Disclosure ("IFRS 7"), including the requirement to
disclose information that enables users of an entity's financial statements to evaluate the effect, or potential effect, of offsetting financial assets and
financial liabilities, to the entity's financial position.
The impact of the adoption of these standards and amendments did not have a significant impact on the Company's consolidated financial statements.
Not yet adopted
On May 29, 2013, the IASB made amendments to the disclosure requirements of IAS 36, Impairment of Assets ("IAS 36"), requiring disclosure, in
certain instances, of the recoverable amount of an asset or CGU, and the basis for the determination of fair value less costs of disposal, when an
impairment loss is recognized or when an impairment loss is subsequently reversed. The amendments to IAS 36 are effective for annual periods
beginning on or after January 1, 2014 and will be applied prospectively. The Company does not expect that these amendments will have a significant
impact on the Company's consolidated financial statements.
128
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
In May 2013, the IFRS Interpretations Committee ("IFRIC") issued International Financial Reporting Standard Interpretation 21, Levies ("IFRIC 21"),
an interpretation on the accounting for levies imposed by governments. IFRIC 21 is an interpretation of IAS 37, Provisions, Contingent Liabilities and
Contingent Assets ("IAS 37"). IAS 37 sets out criteria for the recognition of a liability, one of which is the requirement for the entity to have a present
obligation as a result of a past event (known as an obligating event). IFRIC 21 clarifies that the obligating event that gives rise to a liability to pay a
levy is the activity described in the relevant legislation that triggers the payment of the levy. IFRIC 21 is effective for annual periods beginning on or
after January 1, 2014 and is to be applied on a retrospective basis. The Company does not expect that IFRIC 21 will have a significant impact on the
Company's consolidated financial statements.
In November 2009 and October 2010, the IASB issued IFRS 9, Financial Instruments ("IFRS 9"), which represents the completion of the first part of a
three-part project to replace IAS 39, Financial Instruments: Recognition and Measurement. Under the new standard, an entity choosing to measure a
liability at fair value will present the portion of the change in its fair value due to changes in the entity's own credit risk in the other comprehensive
income or loss section of the entity's statement of comprehensive income (loss), rather than within profit or loss in the case where the fair value option
is taken for financial liabilities. Additionally, IFRS 7, which is effective on adoption of IFRS 9, was amended to include revised guidance related to the
derecognition of financial instruments. The Company is currently assessing the impact, if any, that IFRS 9 will have on the Company's consolidated
financial statements.
5
Development, commercialization and licensing initiatives
Licensing revenues
On March 8, 2011, the Company had entered into an agreement with Yakult Honsha Co., Ltd. ("Yakult") for the development, manufacture and
commercialization of perifosine in all human uses, excluding leishmaniasis, in Japan. Under the terms of this agreement, Yakult had made an initial,
non-refundable gross upfront payment to the Company of €6,000,000 (approximately $8,412,000). The Company applied the provisions of IAS 18,
Revenue ("IAS 18"), and recognized deferred revenue, which was being amortized on a straight-line basis through the estimated end of the estimated
life cycle of perifosine in colorectal cancer ("CRC") and multiple myeloma ("MM"), which was assumed to be the estimated expiry date of the
applicable valid patent considering a five-year extension, or until July 2018.
On April 1, 2012, following disclosure of the results of the Phase 3 study of perifosine in CRC, the Company discontinued the perifosine program in
that indication. Furthermore, in March 2013, following an analysis of interim results of the Phase 3 study of perifosine in MM, the Company also
discontinued the development of perifosine in the MM indication.
Based on these events, the Company determined that it no longer had significant obligations under the agreement with Yakult to continue with the
development of perifosine. Accordingly, the Company recognized, in March 2013, the remaining amount of deferred revenue of $5,860,000 related to
the above licensing agreement within License fees and other in the consolidated statement of comprehensive income (loss).
Co-development and revenue sharing agreement
On April 10, 2013, the Company entered into a co-development and revenue-sharing agreement ("CDRSA") with Ergomed Clinical Research Limited
("Ergomed"), pursuant to which Ergomed has agreed to assist the Company in the clinical development program for zoptarelin doxorubicin (the
"Product") for the purpose of maximizing the commercialization potential of the Product with the ultimate aim of selling or licensing the
Product. Concurrently with the execution of the CDRSA, the Company entered into a master services agreement ("MSA") with Ergomed for a clinical
Phase 3 trial of the Product in endometrial cancer, pursuant to which Ergomed will provide clinical development services with respect to the co-
development initiative referred to above.
Under the CDRSA, Ergomed will not charge the Company for 30% of the total costs up to a maximum of $10,000,000. While Ergomed will not
directly contribute any cash proceeds towards the completion of the activities contemplated by the CDRSA, Ergomed, as primary supplier of a
substantial portion of the Product-related clinical and regulatory activities, will contribute to the overall funding of the initiative via the application of a
30% discount from the costs set
129
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
forth in the MSA until the cumulative total of such reductions reaches a maximum of $10,000,000. Ergomed will be entitled to receive an agreed upon
single-digit percentage of any net income received by us for zoptarelin doxorubicin in endometrial cancer indication, up to a specified maximum
amount.
The Company recognizes the costs associated with the CDRSA and MSA on a discounted basis and as services are rendered by Ergomed, as R&D
costs in the consolidated statement of comprehensive income (loss). During the year ended December 31, 2013, the Company expensed a total of
$3,560,000 pursuant to the CDRSA and MSA.
6
Discontinued operations
On April 3, 2013 (the "Effective Date"), the Company entered into a transfer and service agreement ("TSA") and concurrent agreements with various
partners and licensees with respect to the manufacturing rights for Cetrotide®, currently marketed for therapeutic use as part of in vitro fertilization
programs. The principal effect of these agreements was to transfer, effective October 1, 2013 (the "Closing Date"), the manufacturing rights for
Cetrotide® and to grant a license to Merck Serono for the manufacture, testing, assembling, packaging, storage and release of Cetrotide® in all
territories. Also per the TSA, the Company has agreed to provide certain transition services to Merck Serono over a period of 36 months from the
Effective Date in order to assist Merck Serono in managing overall responsibility for the manufacturing of Cetrotide® and related activities
(collectively, the "Cetrotide® Business").
Under the TSA, during the period commencing on the Effective Date and ending on the Closing Date (the "Interim Period"), the Company was
obligated to continue to conduct the Cetrotide® Business in the ordinary course in a manner consistent with past practices, subject to certain conditions.
Per the TSA, the Company received a non-refundable, one-time payment of €2,500,000 (approximately $3,300,000) in consideration for the transfer of
the manufacturing rights referred to above, as well as other payments in exchange for the transfer, also on the Closing Date, of certain assets and
equipment (see note 9 – Inventory and note 11 – Property, plant and equipment) used solely for the manufacture of Cetrotide®.
The Company has agreed to provide the aforementioned transition services in exchange for a monthly service fee, which is payable by Merck Serono.
The related transition services revenues are recognized as License fees and other within net income (loss) from discontinued operations in the
Company's consolidated statement of comprehensive income (loss) as the transition services are provided over the corresponding term of the transition
services contract.
Impact of the TSA on previously deferred revenues
In 2008, the Company had monetized its royalty stream related to Cetrotide® via a transaction with HRP, which resulted, among other elements, in the
payment by HRP to the Company of $52,500,000, less certain transaction costs, in exchange for the Company's rights to royalties on future net sales of
Cetrotide® generated by Merck Serono. The Company had initially recorded the proceeds received from HRP as deferred revenue due to the
Company's significant continuing involvement with the Cetrotide® Business. Since then, the Company has amortized the deferred revenue into income
(as Sales and royalties within net income (loss) from discontinued operations in the Company's consolidated statement of comprehensive income
(loss)) over the life of the underlying license agreement, based on the "units-of-revenue" method. Under that method, periodic royalty revenues were
calculated by multiplying the ratio of the unamortized deferred revenue amount to the total estimated remaining royalties that Merck Serono expected
to pay to HRP over the term of the underlying arrangement by the royalty payments due to HRP for the period.
Management has determined that, as of the Closing Date, there is no basis to continue amortizing the deferred revenue associated with HRP, primarily
due to the fact that the Company no longer has significant continuing involvement in the Cetrotide® Business, as discussed above. As such,
commencing on the Effective Date, the Company accelerated the amortization of the remaining deferred revenues of approximately $31,875,000 over
the Interim Period, by continuing to apply the units-of-revenue method, which is consistent with past practice. The remaining deferred revenues were
fully amortized through the end of the Interim Period and were recorded as Sales and royalties within net income (loss) from discontinued operations in
the Company's consolidated statement of comprehensive income (loss).
130
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
Presentation of Cetrotide® Business subsequent to the Closing Date
In accordance with the provisions of IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, upon the transfer of substantially all of
the risks and rewards associated with the Cetrotide® Business on the Closing Date, the Cetrotide® Business was classified as a discontinued operation.
As such, relevant amounts in the consolidated statements of comprehensive income (loss) and cash flows have been retroactively reclassified to reflect
the Cetrotide® Business as a discontinued operation.
Components of the Company's net income (loss) from discontinued operations are summarized below.
Revenues*
Sales and royalties
License fees and other
Operating expenses
Cost of sales
Research and development costs, net of tax credits and grants
Selling, general and administrative expenses
Net income (loss) from discontinued operations
Components of operating expenses presented as discontinued include
the following:
Subcontractor fees
Raw material purchases
Change in inventory
Impairment of equipment
Depreciation of equipment
Cost of sales
Goods and services**
Royalty and patent expenses related to onerous contracts
Impairment of intangible asset
Years ended December 31,
2013
$
2012
$
2011
$
63,755
4,589
68,344
30,002
8
4,279
34,289
34,055
24,930
579
4,173
268
52
30,002
2,987
1,300
—
34,289
30,704
908
31,612
26,229
12
2,639
28,880
2,732
25,515
1,189
(560)
—
85
26,229
2,651
—
—
28,880
31,056
292
31,348
27,348
272
4,215
31,835
(487)
25,667
1,849
(261)
—
93
27,348
3,394
—
1,093
31,835
_________________________
*
In addition to recurring sales of Cetrotide®, the revenues presented above include the aforementioned non-refundable, one-time payment of €2,500,000
(approximately $3,300,000), as well as royalty revenues of $33,631,000 in 2013 ($4,175,000 in 2012 and $4,556,000 in 2011), which represent the amortization of
proceeds received in connection with the Company's transaction with HRP.
** Goods and services include royalty expenses, professional fees, marketing services, insurance, travel and representation costs.
131
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
The selling, general and administrative expenses presented above for the year ended December 31, 2013 also include the initial recognition of a
provision for certain non-cancellable contracts related to the Cetrotide® Business that were deemed onerous due to the fact that management expects no
economic benefits to flow to the Company following the transfer of the Cetrotide® Business on the Closing Date. The provisions for onerous contracts
total $1,300,000 and represent the present value of estimated unavoidable future royalty and patent costs associated with the intellectual property
underlying Cetrotide®. The estimate may vary as a result of changes in estimated future royalty and patent costs. The unexpired term of these contracts
is nine years as at December 31, 2013. See also note 16 – Provisions and other non-current liabilities.
Components of the Company's net cash provided by (used in) operating activities of discontinued operations are summarized below.
Cash flows from operating activities
Net income (loss) from discontinued operations
34,055
2,732
(487)
Years ended December 31,
2013
$
2012
$
2011
$
Items not affecting cash and cash equivalents:
Provision for onerous contracts
Depreciation, amortization and impairment
Amortization of deferred revenues
Changes in operating assets and liabilities:
Trade and other receivables
Inventory
Prepaid expenses and other current assets
Payables and accrued liabilities
Provisions and other non-current liabilities
1,300
320
(33,631)
6,212
4,061
882
(2,996)
(56)
—
85
(4,175)
(2,397)
(1,230)
(760)
611
—
—
1,186
(4,556)
(646)
518
28
168
—
Net cash provided by (used in) operating activities of
discontinued operations
10,147
(5,134)
(3,789)
7
Cash and cash equivalents
Cash on hand and balances with banks
Interest-bearing deposits with maturities of three months or less
8
Trade and other receivables
Trade accounts receivable
Value added tax
Other
132
As at December 31,
27,877
15,325
43,202
As at December 31,
2013
$
2013
$
1,709
2
242
1,953
2012
$
2012
$
15,441
24,080
39,521
7,323
428
242
7,993
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
9
Inventory
Raw materials
Work in progress
Finished goods
As at December 31,
2013
$
2012
$
—
—
—
—
1,691
1,931
462
4,084
In connection with the transfer of the Cetrotide® Business (see note 6 – Discontinued operations) on October 1, 2013, the Company sold €2,189,800
(approximately $2,959,000) of raw materials, half-finished and finished goods to Merck Serono.
10
Restricted cash equivalents
In support of the Company's long-term operating lease obligation in Germany and in replacement of a related bank guarantee, the Company transferred
approximately $865,000 ($826,000 in 2012) to a restricted cash account. The fixed amount, including any interest earned thereon, is restricted for as
long as the underlying lease arrangement (note 25 – Commitments and contingencies) has not expired and therefore cannot be utilized for current
purposes as at December 31, 2013.
11
Property, plant and equipment
Components of the Company's property, plant and equipment are summarized below.
At January 1, 2012
Additions
Disposals / Retirements
Impact of foreign exchange rate changes
At December 31, 2012
Additions
Disposals / Retirements
Impact of foreign exchange rate changes
At December 31, 2013
Equipment
$
Furniture and
fixtures
$
Cost
Computer
equipment
$
Leasehold
improvements
$
Total
$
9,197
180
(79)
146
9,444
44
(853)
419
9,054
1,502
1,724
1,125
13,548
87
—
26
1,615
15
(452)
59
1,237
5
(3)
28
—
—
19
1,754
1,144
26
(8)
80
—
—
52
1,852
1,196
272
(82)
219
13,957
85
(1,313)
610
13,339
133
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
At January 1, 2012
Disposals / Retirements
Recurring depreciation expense
Impact of foreign exchange rate changes
At December 31, 2012
Disposals / Retirements
Impairment loss*
Recurring depreciation expense
Impact of foreign exchange rate changes
At December 31, 2013
Accumulated depreciation
Equipment
$
Furniture and
fixtures
$
Computer
equipment
$
Leasehold
improvements
$
Total
$
7,126
(79)
564
128
7,739
(822)
268
461
370
8,016
1,478
1,664
—
8
25
1,511
(352)
—
6
57
(3)
34
26
1,721
(8)
—
30
78
1,222
1,821
768
—
57
14
839
—
—
50
40
929
11,036
(82)
663
193
11,810
(1,182)
268
547
545
11,988
_________________________
* Related to equipment transferred to Merck Serono pursuant to the TSA (see note 6 – Discontinued operations).
At December 31, 2012
At December 31, 2013
Carrying amount
Equipment
$
Furniture and
fixtures
$
Computer
equipment
$
Leasehold
improvements
$
1,705
1,038
104
15
33
31
305
267
Total
$
2,147
1,351
Depreciation of $495,000 ($578,000 in 2012) is presented in the consolidated statement of comprehensive income (loss) as follows: $480,000
($555,000 in 2012) in net R&D costs and $15,000 ($23,000 in 2012) in selling, general and administrative expenses. See also note 6 – Discontinued
operations for depreciation expense related to discontinued operations.
12
Identifiable intangible assets
Identifiable intangible assets with finite useful lives consist entirely of in-process R&D costs, patents and trademarks. Changes in the carrying value of
the Company's identifiable intangible assets with finite useful lives are summarized below.
134
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
Year ended December 31, 2013
Year ended December 31, 2012
Cost
$
Accumulated
amortization
Carrying value
$
$
Cost
$
Balances – Beginning of the year
38,172
(37,044)
Retirement
Impairment loss*
Recurring amortization expense*
Impact of foreign exchange rate
changes
Balances – End of the year
—
—
—
—
—
(454)
1,718
39,890
(1,684)
(39,182)
1,128
—
—
(454)
34
708
37,982
(431)
—
—
621
38,172
_________________________
* Recorded as R&D costs in the consolidated statements of comprehensive income (loss).
Accumulated
amortization
Carrying value
$
(36,213)
431
(184)
(472)
(606)
(37,044)
$
1,769
—
(184)
(472)
15
1,128
During the year ended December 31, 2011, an impairment loss was recognized based on the results of impairment testing of the Company's Cetrotide®
asset. The impairment loss was recognized predominantly to take into account management's lower trend estimates related to the commercialization of
Cetrotide®, due to changes in the competitive environment in the Japanese market. Management determined that the recoverable amount of Cetrotide®,
was equivalent to the asset's value in use, as defined by IAS 36. Value in use was determined by applying a discount rate of 20% (a pre-tax rate that
reflected both current market assessments of the time value of money and the risks specific to the asset for which the future cash flow estimates had not
been adjusted) to the estimated future cash flows deemed to be attributable to the use of Cetrotide®. Management had projected cash flows over a
period of 11 years, through the end of the expected life of Cetrotide® and used an average growth rate of 1.7 % for the first six years and an average
growth rate of -9.7% for years seven through 11 to extrapolate cash flow projections. More specifically, the discount rate represented an estimate of a
reasonable return that would be expected by an investor in an arm's length monetization transaction in respect of future Cetrotide®-derived cash flows.
Following management's analyses, which demonstrated that the remaining carrying value of Cetrotide® was no longer recoverable, an impairment
charge of approximately $1,093,000, was recorded as additional amortization expense, which in turn was included within selling expenses in the
consolidated statement of comprehensive income (loss). See also note 6 – Discontinued operations.
13
Goodwill
Goodwill has not been allocated to any specific CGU of the Group.
The change in carrying value is as follows:
Balance as at January 1, 2012
Impact of foreign exchange rate changes
Balance as at December 31, 2012
Impact of foreign exchange rate changes
Balance as at December 31, 2013
Accumulated
impairment loss
$
Carrying amount
$
—
—
—
—
—
9,313
153
9,466
426
9,892
9,313
153
9,466
426
9,892
Cost
$
135
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
14 Payables and accrued liabilities
Trade accounts payable
Salaries, employment taxes and benefits
Accrued R&D costs
Accrued Cetrotide® services and deliveries
Current portion of provisions (note 16)
Other accrued liabilities
15 Warrant liability
The change in the Company's warrant liability can be summarized as follows:
Balance – Beginning of the year
Share purchase warrants issued during the year (note 17)
Share purchase warrants exercised during the year
Change in fair value of share purchase warrants
Impact of foreign exchange rate changes
Less: current portion
Balance – End of the year
As at December 31,
2013
$
2012
$
4,802
402
666
—
441
931
7,242
Years ended December 31,
2013
$
2012
$
2011
$
6,176
13,397
—
(1,563)
—
18,010
—
18,010
9,204
4,100
(382)
(6,746)
—
6,176
—
6,176
6,671
707
1,530
434
94
1,034
10,470
14,367
—
(2,638)
(2,533)
8
9,204
(42)
9,162
A summary of the activity related to the Company's share purchase warrants is provided below.
2013
2012
2011
Years ended December 31,
Weighted
average
exercise price
(US$)
Number
Balance – Beginning of the year
4,407,410
Issued
Exercised
Expired
15,700,000
—
—
5.14
1.55 *
—
—
Number
1,511,179
2,970,000
(52,383)
(21,386)
Balance – End of the year
20,107,410
2.34
4,407,410
Weighted
average
exercise price
(US$)
8.62
3.45
8.24
9.00
5.14
Weighted
average
exercise price
(US$)
9.17
—
7.81
12.59
8.62
Number
2,153,872
—
(284,545)
(358,148)
1,511,179
_________________________
* As discussed in note 17 – Share capital, in connection with the public offering closed on November 25, 2013, 13,100,000 share purchase warrants were issued with
an original exercise price of $1.60 per share, subject to adjustment. The above weighted average exercise price reflects an adjusted exercise price of $1.49 per share
following a dilutive issuance of shares on December 31, 2013. See also note 29 – Subsequent events.
136
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
The following table summarizes the share purchase warrants outstanding and exercisable as at December 31, 2013:
Exercise price
1.49
1.85
3.45
7.50
8.24
9.00
10.29
Exercise price
1.49
3.45
7.50
8.24
9.00
10.29
Warrants outstanding
Number
Weighted average
remaining contractual
life (years)
13,100,000
2,600,000
2,970,000
122,221
530,424
740,737
44,028
20,107,410
4.90
4.58
3.80
0.81
1.47
1.80
1.46
4.45
Warrants currently exercisable
Number
Weighted average
remaining contractual
life (years)
13,100,000
2,970,000
122,221
530,424
740,737
44,028
17,507,410
4.90
3.80
0.81
1.47
1.80
1.46
4.43
The table presented below shows the inputs and assumptions applied to the Black-Scholes option pricing model in order to determine the fair value of
warrants outstanding as at December 31, 2013.
October 2009
Investor
Warrants
April 2010
Investor
Warrants
June 2010
Investor
Warrants
June 2010
Compensation
Warrants
October 2012
Investor
Warrants
Number of equivalent shares
Market-value per share price
Exercise price
Risk-free annual interest rate
Expected volatility
Expected life (years)
122,221
1.38
7.50
0.13%
68.03%
0.81
0.00%
740,737
1.38
9.00
0.33%
112.70%
1.80
0.00%
530,424
1.38
8.24
0.25%
80.81%
1.47
0.00%
(a)
(b)
(c)
(d)
July 2013
Warrants
2,600,000
1.38
1.85
1.54%
100.97%
4.58
0.00%
2,970,000
1.38
3.45
1.16%
94.05%
3.80
0.00%
November 2013
Warrants
13,100,000
1.38
1.49 *
1.69%
101.93%
4.90
0.00%
44,028
1.38
10.29
0.24%
81.05%
1.46
0.00%
Expected dividend yield
_________________________
(a) Based on United States Treasury Government Bond interest rates with a term that is consistent with the expected life of the warrants.
(b) Based on the historical volatility of the Company's stock price over the most recent period consistent with the expected life of the warrants, as well as on future
expectations.
(c) Based upon time to expiry from the reporting period date.
(d) The Company has not paid dividends nor intends to pay dividends in the foreseeable future.
* Subject to adjustment (see note 17 – Share capital and note 29 – Subsequent events).
137
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
The Black-Scholes valuation methodology uses "Level 2" inputs in calculating fair value, as defined in IFRS 7 and as discussed in note 24 – Financial
instruments and financial risk management.
16
Provisions and other non-current liabilities
Onerous contract provisions (see below)
Other
Onerous contract provisions
Balance at January 1, 2013
Additional provision recognized
Utilization of provision
Unwinding of discount and effect of change in the
discount rate
Balance at December 31, 2013
Less: current portion
As at December 31,
2013
$
2012
$
1,291
182
1,473
Cetrotide® onerous
contracts*
$
Onerous lease**
$
Total
$
—
1,300
(56)
52
1,296
(342)
954
530
—
(97)
3
436
(99)
337
436
149
585
530
1,300
(153)
55
1,732
(441)
1,291
Recorded following the transfer of the Cetrotide® Business, as discussed in note 6 – Discontinued operations.
_________________________
*
** Represents the present value of the future lease payments that the Company is obligated to make pursuant to a non-cancellable operating lease, net of estimated
future sub-lease income. The estimate may vary as a result of changes in the utilization of the leased premises and of the sub-lease arrangement. The remaining
term of the lease is four years as at December 31, 2013.
17
Share capital
The Company has an unlimited number of authorized common shares (being voting and participating shares) with no par value, as well as an unlimited
number of preferred, first and second ranking shares, issuable in series, with rights and privileges specific to each class, with no par value.
Share consolidation
The 112,375,726 common shares issued and outstanding immediately prior to the Share Consolidation were consolidated into 18,729,288 common
shares. The Company's outstanding stock options and share purchase warrants were adjusted on the same basis with proportionate adjustments being
made to each stock option and share purchase warrant exercise price.
All share, option and share purchase warrant and per share, option and share purchase warrant data have been retroactively adjusted to reflect and give
effect to the Share Consolidation as if it occurred at the beginning of the earliest period presented.
138
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
Common shares issued in connection with "At-the-Market" ("ATM") drawdowns - May 2013 ATM Program
On May 22, 2013, the Company entered into an ATM sales agreement (the "May 2013 ATM Program"), under which the Company is able, at its
discretion and from time to time, to sell up to 2,500,000 of its common shares through ATM issuances on the NASDAQ for aggregate gross proceeds
not to exceed $4,600,000. The May 2013 ATM Program provides that common shares are to be sold at market prices prevailing at the time of sale and,
as a result, prices may vary.
Between May 22, 2013 and December 31, 2013, the Company issued a total of 1,682,721 common shares under the May 2013 ATM Program at an
average price of $1.76 per share, resulting in aggregate gross proceeds of $2,961,532, less cash transaction costs of $88,849 and previously deferred
transaction costs of $136,000. See also note 29 – Subsequent events.
Registered direct offering
On July 30, 2013, the Company completed a registered direct offering (the "July 2013 Offering") of 5,200,000 units, at a purchase price of $1.50 per
unit, with each unit consisting of one common share and 0.5 of a warrant to purchase a common share. The related warrants (the "July 2013 Warrants")
represent the right to acquire an aggregate of 2,600,000 common shares, as discussed below.
Total cash proceeds raised through the July 2013 Offering amounted to $7,800,000, less cash transaction costs of approximately $747,000 and
previously deferred transaction costs of $21,000. The securities were offered by the Company pursuant to a shelf prospectus dated June 8, 2012 and a
prospectus supplement dated July 25, 2013.
The Company issued the July 2013 Warrants to the investors who participated in the July 2013 Offering at an exercise price of $1.85 per share. These
warrants are exercisable at any time after January 30, 2014, will expire five years from their date of issuance and, upon complete exercise, would result
in the issuance of an aggregate of 2,600,000 common shares that would generate additional proceeds to the Company of $4,810,000.
The Company estimated the fair value attributable to the 2,600,000 July 2013 Warrants as of the date of grant by applying the Black-Scholes pricing
model, to which the following additional assumptions were applied: a risk-free annual interest rate of 1.37%, an expected volatility of 105.03%, an
expected life of five years and a dividend yield of 0.0%. As a result, the fair value of the share purchase warrants was estimated at $2,670,000.
The total gross proceeds of the July 2013 Offering were allocated as follows: $2,670,000 was allocated to the Warrant liability, and the balance of
$5,130,000, representing $0.99 per common share, was allocated to Share capital. Transaction costs were allocated to the liability and equity
components in proportion to the allocation of proceeds. As such, an amount of $253,000 was allocated to the share purchase warrants and immediately
recognized in general and administrative expenses in the consolidated statement of comprehensive income (loss), and $515,000 was allocated to Share
capital.
Public offering
On November 25, 2013, the Company completed a public offering (the "November 2013 Offering") of 13,100,000 units, at a purchase price of $1.15
per unit, with each unit consisting of one common share and one warrant to purchase a common share. The related warrants (the "November 2013
Warrants") represent the right to acquire an aggregate of 13,100,000 common shares, as discussed below.
Total cash proceeds raised through the November 2013 Offering amounted to $15,065,000, less cash transaction costs of approximately $1,283,000 and
previously deferred transaction costs of $9,000. The securities were offered by the Company pursuant to a shelf prospectus dated June 8, 2012 and a
prospectus supplement dated November 20, 2013.
The Company issued the November 2013 Warrants to the investors who participated in the November 2013 Offering at an exercise price of $1.60 per
share, which is subject to certain anti-dilution provisions (see also note 29 – Subsequent events). These warrants are exercisable at any time during
their five-year term and, upon complete exercise, would result
139
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
in the issuance of an aggregate of 13,100,000 common shares that would generate additional proceeds for an amount that would be determined based
on the then adjusted exercise price.
The Company estimated the fair value attributable to the 13,100,000 November 2013 Warrants as of the date of grant by applying the Black-Scholes
pricing model, to which the following additional assumptions were applied: a risk-free annual interest rate of 1.36%, an expected volatility of 103.57%,
an expected life of 5 years and a dividend yield of 0.0%. As a result, the fair value of the share purchase warrants was estimated at $10,727,000.
Total gross proceeds of the November 2013 Offering were allocated as follows: $10,727,000 was allocated to the Warrant liability, and the balance of
$4,338,000 representing $0.33 per common share, was allocated to Share capital. Transaction costs were allocated to the liability and equity
components in proportion to the allocation of proceeds. As such, an amount of $912,000 was allocated to the share purchase warrants and immediately
recognized in general and administrative expenses in the consolidated statement of comprehensive income (loss), and an amount of $380,000 was
allocated to Share capital.
Shareholder rights plan
The Company has a shareholder rights plan (the "Rights Plan") that provides the Board of Directors and the Company's shareholders with additional
time to assess any unsolicited take-over bid for the Company and, where appropriate, to pursue other alternatives for maximizing shareholder value.
Under the Rights Plan, one right has been issued for each currently issued common share, and one right will be issued with each additional common
share to be issued. The Rights Plan was most recently re-confirmed and approved by the Company's shareholders at its annual meeting of shareholders
held on May 8, 2013.
Stock options
In December 1995, the Company's Board of Directors adopted a stock option plan (the "Stock Option Plan") for its directors, senior executives,
employees and other collaborators who provide services to the Company. The total number of common shares that may be issued under the Stock
Option Plan cannot exceed 11.4% of the total number of issued and outstanding common shares at any given time.
Options granted under the Stock Option Plan expire after a maximum period of ten years following the date of grant. Options granted under the Stock
Option Plan generally vest over a three-year period. However, 778,780 of the options granted in 2012 vest over a period of 18 months.
The following tables summarize the activity under the Stock Option Plan.
2013
2012
2011
Years ended December 31,
Canadian dollar-denominated options
Number
Weighted
average
exercise
price
(CAN$)
Balance – Beginning of the year
727,875
12.71
Granted
Exercised*
Forfeited
Expired
Balance – End of the year
—
—
(9,932)
(65,164)
652,779
—
—
12.61
10.77
12.91
Weighted
average
exercise
price
(CAN$)
14.99
—
8.51
15.07
23.22
12.71
Number
1,031,328
—
(25,582)
(57,437)
(220,434)
727,875
Weighted
average
exercise
price
(CAN$)
15.32
11.58
5.33
9.24
37.08
14.99
Number
1,093,047
2,500
(26,724)
(7,777)
(29,718)
1,031,328
_________________________
* The weighted average share price at time of exercise was CAN$11.25 for the year ended December 31, 2012 (CAN$11.68 for the year ended December 31, 2011).
140
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
US dollar-denominated options
Balance – Beginning of the year
Granted*
Forfeited
Balance – End of the year
Years ended December 31,
2013
2012
2011
Weighted
average
exercise
price
(US$)
4.27
1.56
3.37
3.40
Weighted
average
exercise
price
(US$)
11.59
2.40
10.44
4.27
Number
287,950
1,060,445
(19,903)
1,328,492
Weighted
average
exercise
price
(US$)
16.98
10.49
—
11.59
Number
48,886
239,064
—
287,950
Number
1,328,492
630,000
(198,698)
1,759,794
_________________________
* In addition to the stock options granted to employees, the Company granted during the year 2012, 125,000 stock options to a financial advisor and 66,666 stock
options to an investor relations advisor. The 125,000 stock options were to vest upon the achievement of a certain strategic alliance transaction, which did not occur.
Of the 66,666 stock options, 33,333 vested upon signature of the service agreement, and the remainder vested 90 days later. Both grants described herein were
forfeited during the year 2013 upon termination of the service agreements.
Exercise price
(CAN$)
3.30 to 4.80
4.81 to 7.02
7.03 to 9.78
9.79 to 21.21
21.22 to 53.28
Exercise price
(CAN$)
3.30 to 4.80
4.81 to 7.02
7.03 to 9.78
9.79 to 21.21
21.22 to 53.28
CAN$ options outstanding as at December 31, 2013
Number
Weighted average
remaining
contractual life (years)
Weighted average
exercise price
(CAN$)
101,722
167,295
160,588
99,992
123,182
652,779
4.90
5.94
6.07
3.11
1.52
4.54
3.59
5.70
8.99
15.72
33.22
12.91
CAN$ options exercisable as at December 31, 2013
Number
Weighted average
remaining
contractual life (years)
Weighted average
exercise price
(CAN$)
4.90
5.94
6.07
3.07
1.52
4.54
3.59
5.70
8.99
15.76
33.22
12.91
101,722
167,295
160,588
99,159
123,182
651,946
141
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
Exercise price
(US$)
1.12 to 2.15
2.16 to 2.92
2.93 to 10.17
10.18 to 10.68
10.69 to 23.76
Exercise price
(US$)
2.40 to 2.92
2.93 to 10.17
10.18 to 10.68
10.69 to 23.76
US$ options outstanding as at December 31, 2013
Weighted average
remaining
contractual life
(years)
Weighted average
exercise price
(US$)
9.58
8.93
5.82
7.93
3.57
8.68
1.56
2.17
3.48
10.44
16.98
3.40
Number
630,000
756,580
122,499
201,829
48,886
1,759,794
US$ options exercisable as at December 31, 2013
Weighted average
remaining
contractual life
(years)
Weighted average
exercise price
(US$)
8.93
4.83
7.93
3.57
7.95
2.17
3.46
10.44
16.98
4.86
Number
504,390
88,058
159,614
48,886
800,948
As at December 31, 2013, the total compensation cost related to unvested Canadian Dollar stock options not yet recognized amounted to nil ($22,766
in 2012).
As at December 31, 2013, the total compensation cost related to unvested US Dollar stock options not yet recognized amounted to $533,206
($1,660,787 in 2012). This amount is expected to be recognized over a weighted average period of 1.15 years (1.00 year in 2012).
The Company settles stock options exercised through the issuance of common shares from treasury.
142
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
Fair value input assumptions for Canadian dollar-denominated options granted
The table below shows the assumptions, or weighted average parameters, applied to the Black-Scholes option pricing model in order to determine
share-based compensation costs over the life of the awards.
Expected dividend yield
Expected volatility
Risk-free annual interest rate
Expected life (years)
Weighted average share price
Weighted average exercise price
Year ended December
31,
2011
0.0%
81.0%
1.8%
6.82
CAN$11.58
CAN$11.58
(a)
(b)
(c)
(d)
Weighted average grant date fair value
_________________________
(a) The Company has not paid dividends nor intends to pay dividends in the foreseeable future.
(b) Based on the historical volatility of the Company's stock price over the most recent period consistent with the expected life of the stock options, as well as on
CAN$8.43
future expectations.
(c) Based on Canadian Government Bond interest rates with a term that is consistent with the expected life of the stock options.
(d) Based upon historical data related to the exercise of stock options, on post-vesting employment terminations and on future expectations related to exercise
behaviour.
Fair value input assumptions for US dollar-denominated options granted
The table below shows the assumptions, or weighted average parameters, applied to the Black-Scholes option pricing model in order to determine
share-based compensation costs over the life of the awards.
Expected dividend yield
Expected volatility
Risk-free annual interest rate
Expected life (years)
Weighted average share price
Weighted average exercise price
(a)
(b)
(c)
(d)
Years ended December 31,
2013
2012
0.0%
98.1%
1.46%
6.63
US$1.56
US$1.56
0.0%
95.4%
0.98%
6.77
US$2.40
US$2.40
Weighted average grant date fair value
_________________________
(a) The Company has not paid dividends nor intends to pay dividends in the foreseeable future.
(b) Based on the historical volatility of the Company's stock price over the most recent period consistent with the expected life of the stock options, as well as on
US$1.26
US$1.93
future expectations.
(c) Based on United States Treasury Government Bond interest rates with a term that is consistent with the expected life of the stock options.
(d) Based upon historical data related to the exercise of stock options, on post-vesting employment terminations and on future expectations related to exercise
behaviour.
The Black-Scholes pricing models referred above use "Level 2" inputs in calculating fair value, as defined by IFRS 7, and as discussed in note 24 –
Financial instruments and financial risk management.
143
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
18
Operating expenses
Components of the Company's operating expenses from continuing operations include the following:
Subcontractor fees
Raw material purchases
Cost of sales
Salaries, employment taxes and short-term benefits
Post-employment benefits
Termination benefits
Share-based compensation costs
Total employee benefits expenses
Goods and services(1)
Leasing costs, net of sublease payments of $226,000 in 2013,
$226,000 in 2012 and $179,000 in 2011(2)
Refundable tax credits and grants
Share-based compensation costs related to collaborators
Transaction costs related to share purchase warrants
Depreciation and amortization
Impairment losses
Operating foreign exchange (gains) losses
Years ended December 31,
2013
$
2012
$
2011
$
51
—
51
10,235
684
1,445
2,367
14,731
15,954
1,879
(517)
(148)
1,165
949
—
(413)
18,869
33,651
—
591
591
10,827
1,032
189
1,455
13,503
14,663
1,751
(868)
342
370
1,050
184
203
17,695
31,789
—
212
212
12,716
1,177
182
1,333
15,408
17,033
2,153
(383)
—
—
1,378
312
299
20,792
36,412
_________________________
(1) Goods and services include third-party R&D costs, laboratory supplies, professional fees, marketing services, insurance and travel expenses.
(2) Leasing costs also include changes in the onerous lease provision (note 16 – Provisions and other non-current liabilities), other than attributable to the unwinding of
the discount.
19
Employee future benefits
The Company's subsidiary in Germany provides unfunded defined benefit pension plans and unfunded post-employment benefit plans for certain
groups of employees. Provisions for pension obligations are established for benefits payable in the form of retirement, disability and surviving
dependent pensions.
The unfunded defined benefit pension plans are final salary pension plans, which provide benefits to members (or to their surviving dependents) in the
form of a guaranteed level of pension payable for life. The level of benefits provided depends on the members' length of service and on their base
salary in the final years leading up to retirement. Current pensions vary in accordance to applicable statutory requirements, which foresee an
adjustment, every three years on an individual basis, that is based on inflationary increases or in relation to salaries of comparable groups of active
employees in the Company. An adjustment may be denied by the Company if the Company's financial situation does not allow for an increase in
pensions. These plans are unfunded, and the Company meets benefit payment obligations as they fall due.
144
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
The following table presents the changes in the aforementioned plans' accrued benefit obligations:
Pension benefit plans
Years ended December 31,
Other benefit plans
Years ended December 31,
2013
$
2012
$
2011
$
2013
$
2012
$
2011
$
Balance – Beginning of year
16,062
11,769
10,492
1,169
Current service cost
Interest cost
Actuarial (gain) loss arising from
changes in financial assumptions
Benefits paid
Impact of foreign exchange rate
changes
Balance – End of year
Amounts recognized:
In comprehensive income (loss)
In other comprehensive income(loss)
219
421
(2,346)
(357)
647
14,646
(640)
1,699
139
491
3,705
(337)
295
16,062
(630)
(4,000)
185
555
1,335
(354)
(444)
11,769
(740)
(891)
57
31
(258)
(274)
37
762
170
(37)
1,111
134
46
79
(219)
18
1,169
(259)
(18)
1,041
206
54
46
(196)
(40)
1,111
(306)
40
The cumulative amount of actuarial losses recognized in other comprehensive income (loss) as at December 31, 2013 is approximately $2,503,000
(cumulative actuarial losses of approximately $4,849,000 as at December 31, 2012 and approximately $1,144,000 as at December 31, 2011).
The significant actuarial assumptions applied to determine the Company's accrued benefit obligations are as follows:
Pension benefit plans
Years ended December 31,
Other benefit plans
Years ended December 31,
Actuarial assumptions
Discount rate
Pension benefits increase
2013
%
3.37
2.00
2012
%
2.60
2.00
2011
%
4.20
2.00
Rate of compensation increase
2.75 to 3.75
2.75 to 3.75
2.75 to 3.75
2013
%
3.37
2.00
2.75
2012
%
2.60
2.00
2.75
2011
%
4.20
2.00
2.75
Assumptions regarding future mortality are set based on actuarial advice in accordance with published statistics and experience in Germany. These
assumptions translate into an average life expectancy in years for a pensioner retiring at age 65:
Retiring at the end of the reporting period:
Male
Female
Retiring 20 years after the end of the reporting period:
Male
Female
145
2013
2012
19
23
22
26
19
23
22
26
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
The most recent actuarial reports give effect to the pension and post-employment benefit obligations as at December 31, 2013. The next actuarial
reports are planned for December 31, 2014.
The calculation of the pension benefit obligation is sensitive to the discount rate assumption set out above. From December 31, 2011 to December 31,
2013, management determined that the discount rate assumption should be adjusted as a result of relevant changes in the European economic
environment.
Given recent developments in the European economic environment, an increase of 0.25% in the discount rate shown above is considered reasonably
possible over the next financial year. Were such a fluctuation to occur, the effect of this change on the pension benefit obligation presented as at
December 31, 2013 would be a decrease of approximately $550,000.
In accordance with the assumptions used as at December 31, 2013, undiscounted defined pension benefits expected to be paid are as follows:
2014
2015
2016
2017
2018
Over five years
$
531
574
603
618
641
26,654
29,621
The weighted average duration of the defined benefit obligation is 16.4 years.
Total expenses for the Company's defined contribution plan in its German subsidiary amounted to approximately $228,771 for the year ended
December 31, 2013 ($331,287 for 2012 and $312,984 for 2011).
20
Finance income and finance costs
Components of the Company's finance income and finance costs can be summarized as follows:
Finance income
Gains due to changes in foreign currency exchange
rates
Change in fair value of warrant liability
Interest income
Gain on held-for-trading financial instrument
Finance costs
Losses due to changes in foreign currency exchange
rates
Years ended December 31,
2013
$
2012
$
2011
$
—
1,563
185
—
1,748
(1,512)
(1,512)
236
146
—
6,746
228
—
6,974
(382)
(382)
6,592
2,197
2,533
223
1,278
6,231
—
—
6,231
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
21
Supplemental disclosure of cash flow information
Changes in operating assets and liabilities:
Trade and other receivables
Inventory
Prepaid expenses and other current assets
Other non-current assets
Payables and accrued liabilities
Provisions and other non-current liabilities
Deferred revenues
Income taxes
Years ended December 31,
2013
$
2012
$
2011
$
(3)
112
(6,454)
(124)
(900)
10
—
—
(7,359)
2,780
670
(4,154)
(364)
(2,447)
(49)
—
(254)
(3,818)
(2,686)
(779)
(4,096)
(456)
2,802
(24)
8,614
105
3,480
During the year ended December 31, 2012, the Company paid approximately $259,000 in income taxes ($841,000 in 2011) in the form of foreign
jurisdiction withholding tax on payments received pursuant to the licensing agreement entered into with Yakult, as discussed in note 5 – Development,
commercialization and license initiatives.
22
Income taxes
Significant components of current and deferred income tax expense:
Current tax expense
Deferred tax:
Origination and reversal of temporary differences
Change in enacted tax rates
Adjustments in respect of prior years
Change in unrecognized tax assets
Income tax expense
Years ended December 31,
2013
$
2012
$
2011
$
—
(4,253)
—
418
3,835
—
—
(1,104)
7,282
—
44
(7,326)
—
9,017
(104)
3,428
(12,341)
(1,104)
The reconciliation of the combined Canadian federal and provincial income tax rate to the income tax expense is provided below:
Combined Canadian federal and provincial statutory
income tax rate
26.9%
26.9%
28.4%
Years ended December 31,
2013
2012
2011
147
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
Income tax (expense) recovery based on combined statutory
income tax rate
Change in unrecognized tax assets
Permanent difference attributable to the use of local
currency for tax reporting
Permanent difference attributable to net change in fair value
of warrant liability
Share-based compensation costs
Difference in statutory income tax rate of foreign
subsidiaries
Permanent difference attributable to unrealized foreign
exchange gain/loss
Change in enacted rates used
Foreign witholding tax
Adjustments in respect of prior years
Other
Years ended December 31,
2013
$
2012
$
2011
$
(1,833)
3,835
(892)
(217)
(596)
(809)
131
—
—
418
(37)
—
5,494
(7,326)
14
1,182
(421)
997
(22)
—
—
44
38
—
7,290
(12,341)
378
661
(441)
893
(32)
(104)
(1,104)
3,428
268
(1,104)
The decrease in the applicable tax rates presented above results from the reduction of the Canadian federal income tax rate from 16.5% in 2011 to
15.0% in 2012.
Income tax expense of $1,104,000 for the year ended December 31, 2011 represents current taxation in the form of foreign jurisdiction tax
withholdings on payments pursuant to the licensing agreement entered into with Yakult (note 5 – Development, commercialization and licensing
initiatives).
Deferred income tax assets are recognized to the extent that the realization of the related tax benefit through reversal of temporary differences and
future taxable profits is probable.
Loss before income taxes
Loss before income taxes is attributable to the Company's tax jurisdictions as follows:
Germany
Canada
United States
Years ended December 31,
2013
$
2012
$
2011
$
(19,784)
(7,639)
183
(27,240)
(23,690)
322
224
(23,144)
(24,759)
(290)
(427)
(25,476)
148
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
Significant components of deferred tax assets and liabilities:
Deferred tax assets
Non-current:
Operating losses carried forward
Intangible assets
Deferred tax liabilities
Current:
Deferred revenues
Non-current:
Property, plant and equipment
Deferred revenues
Warrant liability
Other
Deferred tax assets (liabilities), net
As at December 31,
2013
$
2012
$
2,465
10,080
12,545
1,262
1,262
50
10,157
1,076
—
11,283
12,545
—
840
—
840
—
—
160
—
626
54
840
840
—
149
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
Significant components of unrecognized deferred tax assets are as follows:
Deferred tax assets
Current:
Onerous contract provisions
Inventory
Deferred revenues
Non-current:
Operating losses carried forward
Research and development costs
Unused tax credits
Employee future benefits
Property, plant and equipment
Share issue expenses
Onerous contract provisions
Intangible assets
Deferred revenues
Other
Unrecognized deferred tax assets
As at December 31,
2013
$
2012
$
87
—
—
87
59,813
11,988
10,386
2,135
1,260
712
435
248
—
—
86,977
87,064
—
9
464
473
49,453
12,642
10,904
2,772
1,376
867
159
12,271
182
145
90,771
91,244
As at December 31, 2013, amounts and expiry dates of tax attributes to be deferred for which no deferred tax asset was recognized were as follows:
2015
2028
2029
2030
2031
2032
2033
Canada
Federal
$
Provincial
$
512
10,481
6,234
5,341
2,281
5,531
5,297
35,677
—
4,677
6,211
5,322
2,261
5,531
5,297
29,299
The Company has estimated non-refundable research and development tax credits of approximately $10,386,000 which can be carried forward to
reduce Canadian federal income taxes payable and which expire at dates ranging from 2018 to 2033. Furthermore, the Company has unrecognized tax
assets in respect of operating losses to be carried forward in Germany and in the United States. The losses amount to approximately $161,839,000 in
Germany, for which there is no expiry date and to $550,186 in the United States, which expire as follows:
150
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
2028
2029
United States
$
372
178
550
The operating loss carryforwards and the tax credits claimed are subject to review, and potential adjustment, by tax authorities.
Other deductible temporary differences for which tax assets have not been booked are not subject to a time limit, except for share issue expenses which
are amortizable over five years.
23
Capital disclosures
The Company's objective in managing capital, consisting of shareholders' equity (deficiency), with cash and cash equivalents and restricted cash
equivalents being its primary components, is to ensure sufficient liquidity to fund R&D activities, selling, general and administrative expenses,
working capital and capital expenditures.
In the past, the Company has had access to liquidity by non-dilutive sources, including investment tax credits and grants, interest income, licensing and
related services and royalties. More recently, the Company has increasingly raised capital via public equity offerings and drawdowns under various
ATM sales programs, as discussed in note 17 – Share capital.
The capital management objective of the Company remains the same as that in previous periods. The policy on dividends is to retain cash to keep
funds available to finance the activities required to advance the Company's product development portfolio.
The Company is not subject to any capital requirements imposed by any regulators or by any other external source.
151
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
24
Financial instruments and financial risk management
Financial assets (liabilities) as at December 31, 2013 and December 31, 2012 are presented below.
December 31, 2013
Cash and cash equivalents (note 7)
Trade and other receivables (note 8)
Restricted cash equivalents (note 10)
Payables and accrued liabilities (note 14)
Warrant liability (note 15)
Other non-current liabilities (note 16)
December 31, 2012
Cash and cash equivalents (note 7)
Trade and other receivables (note 8)
Restricted cash equivalents (note 10)
Payables and accrued liabilities (note 14)
Warrant liability (note 15)
Other non-current liabilities (note 16)
Fair value
Loans and
receivables
$
Financial
liabilities at
FVTPL
$
Other
financial
liabilities
$
43,202
1,899
865
—
—
—
45,966
—
—
—
—
(18,010)
—
(18,010)
—
—
—
(6,687)
—
(140)
(6,827)
Loans and
receivables
$
Financial
liabilities at
FVTPL
$
Other
financial
liabilities
$
39,521
7,565
826
—
—
—
47,912
—
—
—
—
(6,176)
—
(6,176)
—
—
—
(10,282)
—
(149)
(10,431)
Total
$
43,202
1,899
865
(6,687)
(18,010)
(140)
21,129
Total
$
39,521
7,565
826
(10,282)
(6,176)
(149)
31,305
The Black-Scholes valuation methodology uses "Level 2" inputs in calculating fair value, as defined in IFRS 13, which establishes a hierarchy that
prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The input levels discussed in IFRS 13
are:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for an asset or liability, either directly (i.e. prices) or indirectly
(i.e. derived from prices).
Level 3 – Inputs for an asset or liability that are not based on observable market data (unobservable inputs).
The carrying values of the Company's cash and cash equivalents, trade and other receivables, restricted cash equivalents, payables and accrued
liabilities and other non-current liabilities approximate their fair values due to their short-term maturities or to the prevailing interest rates of the related
instruments, which are comparable to those of the market.
152
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
Financial risk factors
The following provides disclosures relating to the nature and extent of the Company's exposure to risks arising from financial instruments, including
credit risk, liquidity risk and market risk (share price risk and currency risk), and how the Company manages those risks.
(a)
Credit risk
Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The
Company regularly monitors credit risk exposure and takes steps to mitigate the likelihood of this exposure resulting in losses. The Company's
exposure to credit risk currently relates to cash and cash equivalents, trade and other receivables and restricted cash equivalents. The Company
holds its available cash in amounts that are readily convertible to known amounts of cash and deposits its cash balances with financial
institutions that are rated the equivalent of "Baa1" and above. This information is supplied by independent rating agencies where available and,
if not available, the Company uses publicly available financial information to ensure that it invests its cash in creditworthy and reputable
financial institutions.
As at December 31, 2013, trade accounts receivable for an amount of approximately $1,675,000 were with one customer.
As at December 31, 2013, no trade accounts receivable were past due or impaired.
Generally, the Company does not require collateral or other security from customers for trade accounts receivable; however, credit is extended
following an evaluation of creditworthiness. In addition, the Company performs ongoing credit reviews of all of its customers and establishes an
allowance for doubtful accounts when accounts are determined to be uncollectible.
The maximum exposure to credit risk approximates the amount recognized in the Company's consolidated statement of financial position.
(b)
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. As indicated in note 23 –
Capital disclosures, the Company manages this risk through the management of its capital structure. It also manages liquidity risk by
continuously monitoring actual and projected cash flows. The Board of Directors reviews and approves the Company's operating and capital
budgets, as well as any material transactions occurring outside of the ordinary course of business. The Company has adopted an investment
policy in respect of the safety and preservation of its capital to ensure the Company's liquidity needs are met. The instruments are selected with
regard to the expected timing of expenditures and prevailing interest rates.
The Company expects to continue to incur operating expenses and may require significant capital to fulfill its future obligations in absence of
sufficient corresponding revenues. The Company's ability to continue future operations beyond December 31, 2014 and to fund its activities is
dependent on its ability to secure additional financings, which may be completed in a number of ways, including but not limited to licensing
arrangements, partnerships, the issuance of securities and other financing activities. Management will pursue such additional sources of
financing when required, and while the Company has been successful in securing financing in the past, there can be no assurance it will be able
to do so in the future or that these sources of funding or initiatives will be available or on terms which are acceptable to the Company.
(c) Market risk
Share price risk
The change in fair value of the Company's warrant liability, which is measured at FVTPL, results from the periodic "mark-to-market"
revaluation, via the application of the Black-Scholes option pricing model, of currently outstanding share purchase warrants. The Black-Scholes
valuation is impacted, among other inputs, by the market
153
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
price of the Company's common shares. As a result, the change in fair value of the warrant liability, which is reported as finance income (costs)
in the accompanying consolidated statements of comprehensive income (loss), has been and may continue in future periods to be materially
affected most notably by changes in the Company's common share closing price, which on the NASDAQ, has ranged from $1.03 to $3.23
during the year ended December 31, 2013.
If variations in the market price of our common shares of -10% and +10% were to occur, the impact on the Company's net (loss) income for
warrant liability held at December 31, 2013 would be as follows:
Warrant liability
Total impact on net income – increase / (decrease)
Foreign currency risk
Carrying
amount
$
18,010
-10%
$
+10%
$
2,205
2,205
(2,172)
(2,172)
Since the Company operates internationally, it is exposed to currency risks as a result of potential exchange rate fluctuations related to non-
intragroup transactions. In particular, fluctuations in the US dollar exchange rates against the EUR could have a potentially significant impact on
the Company's results of operations.
If foreign exchange rate variations of -5% (depreciation of the EUR) and +5% (appreciation of the EUR) against the US$, from period-end rates
of EUR1 = US$1.3779 were to occur, the impact on the Company's net (loss) income for each category of financial instruments held at
December 31, 2013 would be as follows:
Carrying
amount
$
27,452
18,010
Balances denominated in US$
-5%
$
1,373
(901)
472
+5%
$
(1,373)
900
(473)
Cash and cash equivalents
Warrant liability
Total impact on net income – increase / (decrease)
154
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
25
Commitments and contingencies
The Company is committed to various operating leases for its premises. Future minimum lease payments and future minimum sublease payments
expected to be received under non-cancellable operating leases (subleases), as well as future payments in connection with utility service agreements, as
at December 31, 2013 are as follows:
Less than 1 year
1 - 3 years
4 - 5 years
More than 5 years
Total
Minimum lease payments
Minimum sub-lease
payments
$
$
Utilities
$
1,795
2,562
515
—
4,872
(226)
(451)
(244)
—
(921)
640
559
—
—
1,199
The Company has a leasing arrangement in Germany under which it rents laboratory, storage and office space. The original term of the lease covers a
period of ten years (and expires in March 2016), and the lease is automatically renewable for two further five-year periods if not terminated otherwise
by the Company within 12 months prior to original expiry. Under the terms of the arrangement, the minimum lease payment may be increased or
decreased in accordance with the fluctuations in the consumer price index for Germany if that change is more than 5% on an cumulative basis. The
terms of the lease arrangement for the ten year-period following automatic renewal would be the same as per the original agreement.
As discussed in note 10 – Restricted cash equivalents, the Company transferred approximately $865,000 to a restricted cash account in support of the
aforementioned lease arrangement.
In October 2007, the Company entered into a $100,000 letter of credit agreement in favour of its landlord in the United States with respect to the
Company's long-term lease obligation. In August 2009 and November 2011, the amount of the letter of credit was reduced to $75,000 and $50,000,
respectively, as per the original landlord-tenant agreement, and is payable to the landlord in the event that the Company fails to perform any of its
obligations under the related lease agreement.
Contingencies
In the normal course of operations, the Company may become involved in various claims and legal proceedings related to, for example, contract
terminations and employee-related and other matters. No contingent liabilities have been accrued as at December 31, 2013 or 2012.
Class Action Lawsuit
On May 29, 2013, the previously disclosed purported class action lawsuit filed against the Company and certain of its officers (the "Defendants") in the
United States District Court for the Southern District of New York was entirely dismissed with prejudice and without leave to amend. No payment was
made by any of the Defendants to the plaintiff or his counsel in connection with the lawsuit. The plaintiff had 30 days from the docketing of the final
judgment to file a notice of appeal, which was not done.
155
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
26
Net income (loss) per share
The following table sets forth pertinent data relating to the computation of basic and diluted net income (loss) per share attributable to common
shareholders.
Net loss from continuing operations
Net income (loss) from discontinued operations
Net income (loss)
Basic weighted average number of shares
outstanding
Dilutive effect of stock options
Dilutive effect of share purchase warrants
Diluted weighted average number of shares
outstanding
Items excluded from the calculation of diluted net
income (loss) per share because the exercise price
was greater than the average market price of the
common shares or due to their anti-dilutive effect
Stock options
Warrants (number of equivalent shares)
Years ended December 31,
2013
$
2012
$
2011
$
(27,240)
34,055
6,815
(23,144)
2,732
(20,412)
29,476,455
19,775,073
—
—
31,614
—
(25,476)
(487)
(25,963)
15,751,331
190,625
282,903
29,476,455
19,806,687
16,224,859
2,115,453
7,141,879
1,183,388
1,803,730
613,644
—
For the years ended December 31, 2012 and 2011, the diluted net income (loss) per share was the same as the basic net (loss) income per share, since
the effect of the assumed exercise of stock options and warrants to purchase common shares is anti-dilutive. Accordingly, the diluted net income (loss)
per share for these periods was calculated using the basic weighted average number of shares outstanding.
The weighted average number of shares is influenced most notably by share issuances made in connection with financing activities, such as registered
direct and public offerings and ATM drawdowns, which resulted in the issuance of a total of 19,982,721 (see note 17 – Share capital), 7,790,973 and
3,244,094 common shares during the years ended December 31, 2013, 2012 and 2011, respectively. See also note 29 – Subsequent events.
27
Compensation of key management
Compensation awarded to key management* included:
Salaries and short-term employee benefits
Post-employment benefits
Termination benefits
Share-based compensation costs
Years ended December 31,
2013
$
2012
$
2011
$
2,280
58
1,438
1,795
5,571
2,354
957
—
941
4,252
2,886
684
—
936
4,506
_________________________
* Key management includes the Company's directors and members of the executive management team.
156
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
On April 15, 2013, the Company appointed a new President and Chief Executive Officer ("CEO"), who also was appointed to the Company's Board of
Directors. In accordance with his employment agreement, the Company's new President and CEO was granted, as a retention bonus, 375,000 share
appreciation rights ("SARs"), pursuant to which he will be entitled to receive a future cash payment if he remains employed through a certain date. The
retention bonus will be based on the increase in the Company's share price from $1.98 over a specified period of time. 175,000 SARs will vest on
December 31, 2014, and the remaining 200,000 SARs will vest on December 31, 2015.
The Company's former President and CEO received, upon termination of his employment, benefits of approximately $1,438,000. Additionally, the
Company's former President and CEO was permitted to retain all of his stock options, which, pursuant to IFRS 2, Share-based Payment, constitutes a
modification to the terms of the existing stock options granted in a share-based payment transaction, by allowing such stock options to expire at the
original expiry date, based on the original date of grant, despite the termination of employment. As a result of this modification, an amount of
$682,000, which corresponds to the compensation cost related to unvested stock options not yet recognized immediately before the modification and to
the incremental fair value of the stock options, measured by comparing the stock options immediately before and immediately after the modification
date, was recognized within selling, general and administrative expenses in the consolidated statement of comprehensive income (loss).
Most of the employment agreements entered into between the Company and its executive officers include termination provisions, whereby the
executive officers would be entitled to receive benefits that would be payable if the Company were to terminate the executive officers' employment
without cause or if their employment is terminated following a change of control. Separation benefits generally are calculated based on an agreed-
upon multiple of applicable base salary and incentive compensation and, in certain cases, other benefit amounts.
In addition to payments made to members of our key management team, during the year ended December 31, 2013, the Company paid $76,800 in
professional fees to one of the members of the Company's Board of Directors for special tasks mandated by the Company's Nominating, Corporate
Governance and Compensation Committee.
28
Segment information
The Company operates in a single operating segment, being the biopharmaceutical segment.
Geographical information
The Company is domiciled in Canada and derives all of its revenues from its operating subsidiaries domiciled in Germany.
157
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
Revenues by geographical area are detailed as follows:
United States
Switzerland
Japan
Other
Amounts presented:
Within discontinued operations
Within continuing operations
Years ended December 31,
2013
$
2012
$
2011
$
33,640
34,081
6,586
212
74,519
68,344
6,175
74,519
5,158
24,406
4,062
39
33,665
31,612
2,053
33,665
5,492
24,977
5,472
112
36,053
31,348
4,705
36,053
Revenues have been allocated to geographic regions based on the country of residence of the Company's external customers or partners.
Non-current assets* by geographical area are detailed as follows:
Germany
United States
Canada
As at December 31,
2013
$
2012
$
11,928
16
7
11,951
12,713
2
26
12,741
_________________________
* Non-current assets include property, plant and equipment, identifiable intangible assets and goodwill.
Major customers representing 10% or more of the Company's revenues in each of the last three years are as follows:
Company 1*
Company 2*
Company 3
_________________________
* Related to the Cetrotide® Business (see note 6 – Discontinued operations).
29
Subsequent events
Years ended December 31,
2013
$
2012
$
2011
$
34,081
33,640
5,952
24,406
4,175
1,040
24,977
4,556
3,657
On January 14, 2014, the Company completed a public offering of 11,000,000 units, generating net proceeds of approximately $12,200,000, with each
unit consisting of one common share and 0.8 of a warrant to purchase one common share, at a purchase price of $1.20 per unit (the "January 2014
Offering"). Each warrant is exercisable for a period of five years at an exercise price of US$1.25 per share, subject to certain anti-dilution provisions.
In connection with the January 2014 Offering, the holders of warrants issued in the November 2013 Offering have agreed to waive certain anti-dilution
provisions of such warrants solely in connection with the January 2014 Offering, and have agreed
158
Aeterna Zentaris Inc.
Notes to Consolidated Financial Statements
As at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013, 2012 and 2011
(tabular amounts in thousands of US dollars, except share/option/warrant and per share/option/warrant data and as otherwise noted)
that the exercise price of such warrants following the closing of the January 2014 Offering will be adjusted from their original exercise price of $1.60
per share to an exercise price equal to $1.25 per share. For holders of the warrants issued in the November 2013 Offering who did not participate in the
January 2014 Offering, the exercise price of the corresponding November 2013 Warrants held by the sole non-participating holder was further reduced
by $0.05 per share.
Between January 1, 2014 and March 20, 2014, the Company issued a total of 201,960 common shares under the May 2013 ATM Program for
aggregate gross proceeds of $288,114.
See also note 17 – Share capital.
159
Item 19.
Exhibits
Exhibit Index
1.1
1.2
1.3
2.1
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
8.1
11.1
11.2
12.1
12.2
13.1
13.2
15.1
Restated Certificate of Incorporation and Restated Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 99.2 to the Registrant's report
on Form 6-K furnished to the Commission on May 25, 2011)
Certificate of Amendment and Articles of Amendment of the Registrant (incorporated by reference to Exhibit 99.2 to the Registrant's report on Form 6-K
furnished to the Commission on October 3, 2012)
Amended and Restated By-Law One of the Registrant (incorporated by reference to Exhibit 1.3 of the Registrant's annual report on Form 20-F for the financial
year ended December 31, 2012 filed with the Commission on March 21, 2013)
Amended and Restated Shareholder Rights Plan Agreement between the Registrant and Computershare Trust Company of Canada dated as at March 29, 2010
(incorporated by reference to Exhibit 99.1 to the Registrant's report on Form 6-K furnished to the Commission on March 29, 2010)
Second Amended and Restated Stock Option Plan of the Registrant
Employment Agreement dated July 18, 2007 between Paul Blake, M.D. and the Registrant (incorporated by reference to Exhibit 4.2 of the Registrant's annual
report on Form 20-F for the financial year ended December 31, 2007 filed with the Commission on March 28, 2008)
Termination of the Change of Control Program letter dated June 14, 2013 from the Registrant to Paul Blake
Employment Agreement dated November 1, 2013 between Jude Dinges and a subsidiary of the Registrant
Employment Agreement dated April 15, 2013 between David A. Dodd and a subsidiary of the Registrant
Employment Agreement dated May 7, 2007 between the Registrant and Nicholas J. Pelliccione (incorporated by reference to Exhibit 4.7 of the Registrant's annual
report on Form 20-F for the financial year ended December 31, 2007 filed with the Commission on March 28, 2008)
Termination of the Change of Control Program letter dated June 14, 2013 from the Registrant to Nicholas J. Pelliccione
Service contract dated January 1, 2014 between Richard Sachse, MD and Aeterna Zentaris GmbH, a subsidiary of the Registrant
Amendment to Amended Employment Agreement dated as at June 20, 2007 among the Registrant, Aeterna Zentaris, Inc. and Dennis Turpin (incorporated by
reference to Exhibit 4.8 of the Registrant's annual report on Form 20-F for the financial year ended December 31, 2007 filed with the Commission on March 28,
2008)
Termination of the Change of Control Program letter dated June 14, 2013 from the Registrant to Dennis Turpin
Subsidiaries of the Registrant
Code of Ethical Conduct of the Registrant (incorporated by reference to Exhibit 11.1 of the Registrant's annual report on Form 20-F for the financial year ended
December 31, 2008 filed with the Commission on March 30, 2009)
Audit Committee Charter of the Registrant (incorporated by reference to Exhibit 11.2 of the Registrant's annual report on Form 20-F for the financial year ended
December 31, 2010 filed with the Commission on March 31, 2011)
Certification of the Principal Executive Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002
Certification of the Principal Financial Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002
Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Consent of the Independent Auditors
160
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
AETERNA ZENTARIS INC.
/s/ Dennis Turpin
Dennis Turpin, CPA, CA
Senior Vice President and Chief Financial
Officer
Date: March 20, 2014
161
Exhibit 4.1
SECOND AMENDED AND RESTATED STOCK OPTION PLAN OF
AETERNA ZENTARIS INC.
1.
Purpose of the Plan
1.1
1.2
The purpose of the stock option plan for directors and certain designated officers, employees and suppliers of ongoing services (the "Plan") of
Aeterna Zentaris Inc. (the "Corporation") is to secure for the Corporation and its shareholders the benefit of an incentive interest in share ownership
by directors and certain designated officers and employees of the Corporation and its Subsidiaries (as defined below), as the case may be, and by
certain designated suppliers of ongoing services.
The sole persons eligible to receive grants under this Plan (each, a "Participant") shall be as follows: (i) the most senior executive officers of the
Corporation, including the persons occupying the positions of Chief Executive Officer, Chief Financial Officer, Chief Scientific Officer, Chief
Commercial Officer, Chief Administrative Officer and Chief Compliance Officer; (ii) such other executive officers of the Corporation or of its
Subsidiaries that may, from time to time, report directly to the Chief Executive Officer; (iii) the non-employee, independent members of the Board of
Directors of the Corporation (the "Board"); and (iv) such other officers or employees of the Corporation or of any of its Subsidiaries, as the case
may be, or suppliers of ongoing services, as may be expressly designated by resolution of the Board or its Nominating, Governance and
Compensation Committee (the "Committee"). For the purposes of this Plan, "Subsidiaries" shall mean any legal entity of which the Corporation
holds or is the beneficiary, at any time, directly or indirectly, otherwise than as security only, of securities conferring over fifty percent (50%) of the
votes enabling it to elect the majority of the directors of such entity as well as any current or future Subsidiary of such legal entity.
2.
Administration
2.1
This Plan shall be administered by the Board or the Committee. The Board or the Committee shall have full and complete latitude to interpret this
Plan and to establish the rules and regulations applying to it and to make all other determinations it deems necessary or useful for the administration
of the Plan, provided that such interpretations, rules, regulations and determinations shall be consistent with the relevant policy statements of the
competent securities authorities and the rules of the stock exchanges on which the securities of the Corporation are listed.
3.
Shares Subject to the Plan
3.1
3.2
3.3
The shares issuable further to the exercise of options granted under the Plan are the Common Shares of the Corporation (the "Shares"). The total
number of Shares that may be issued under the Plan shall not exceed eleven point four percent (11.4%) of the total number of issued and outstanding
Shares at any given time. No Participant shall hold options to purchase more than five percent (5%) of the number of Shares issued and outstanding
from time to time.
In addition: (i) the number of securities issuable to "insiders" (as such term is defined in the TSX Company Manual) of the Corporation, at any time,
under all security-based compensation arrangements of the Corporation, cannot exceed ten percent (10%) of its issued and outstanding securities;
and (ii) the number of securities issued to insiders of the Corporation, within any one-year period, under all security-based compensation
arrangements of the Corporation, cannot exceed ten percent (10%) of its issued and outstanding securities.
In addition: (i) the aggregate fair value of options granted under all security-based compensation arrangements of the Corporation to any one non-
employee, independent director of the Corporation entitled to receive a benefit under this Plan, within any one-year period, cannot exceed
US$100,000 valued on a Black-Scholes basis and as determined by the Committee; and (ii) the aggregate number of securities issuable to all non-
employee, independent directors of the Corporation entitled to receive a benefit under this Plan, within any one-year period, under all security-based
compensation arrangements of the Corporation, cannot exceed one percent (1%) of its issued and outstanding securities.
3.4
All options that are exercised, or that expire or are cancelled without being exercised, shall become available to be granted (or "reloaded") under the
terms of this Plan upon such exercise, cancellation or expiration, as the case may be.
1
4.
Grant of Options
4.1
4.2
The Board or the Committee shall from time to time designate the Participants in this Plan as contemplated by Section 1.2 hereof, as well as the
number of options, if any, that shall or may be granted to such Participants hereunder. Any Participant may hold more than one option. The granting
of each option shall be evidenced by a letter from the Corporation addressed to the Participant setting forth the number of Shares covered by such
option, the subscription price, the terms and conditions of exercise of the option and the option period.
Subject to the provisions of Section 3, the non-employee, independent directors of the Corporation are eligible to receive grants of up to
60,000 options per year. These options shall be vested over a period of three (3) years in equal thirds with the first third becoming vested on the first
anniversary of the Grant Date (as defined below), the second third becoming vested on the second anniversary of the Grant Date and the final third
becoming vested on the third anniversary of the Grant Date. The specific number of options to be granted to non-employee, independent directors in
accordance with the foregoing shall be determined by the Board upon recommendation of the Committee.
5.
Exercise Price
5.1
The exercise price of an option shall be established by the Board or the Committee at the time of the grant and such price shall not be less than the
greater of the closing prices of the Shares on the Nasdaq Stock Market and the Toronto Stock Exchange on the last trading day preceding the date of
grant of the option (the "Grant Date"). If either of these exchanges is closed or if the Shares did not trade on one of the two exchanges on the last
trading day preceding the Grant Date, the exercise price shall be the closing price of the Shares at the open exchange ("Exercise Price").
The closing price of the Shares shall be converted into Canadian dollars, when this conversion is required, at the noon buying rate of the Bank of
Canada on the last trading day preceding the Grant Date established in the previous paragraph.
6.
Option Period
6.1
Subject to the provisions of Section 6.2, each option granted under this Plan shall be exercisable during a period established by the Board or the
Committee (the "Option Period"). The Option Period shall commence no earlier than the Grant Date and shall terminate no later than seven years
after such date (the "Outside Expiry Date"). Subject to the provisions of Section 6.2 and unless otherwise expressly determined by resolution of the
Board or the Committee, options granted under this Plan to Participants (other than non-employee, independent directors, in respect of which Section
4.2 shall prevail) shall be vested over a period of three (3) years in equal thirds with the first third becoming vested on the first anniversary of the
Grant Date, the second third becoming vested on the second anniversary of the Grant Date and the final third becoming vested on the
third anniversary of the Grant Date.
6.2
Notwithstanding the provisions of Section 6.1, an option shall not be exercisable by a Participant from and after each and every one of the following
dates (each, an "Early Expiry Date"), unless the Board or the Committee decides otherwise:
6.2.1
6.2.2
6.2.3
(i) in the case where the Participant is an officer or an employee, the date on which the Participant resigns or voluntarily leaves his
employment with the Corporation or one of its Subsidiaries, as the case may be, or the date on which the employment of the Participant
with the Corporation or one of its Subsidiaries is terminated for just cause, as the case may be, including, without limiting the scope of the
foregoing, in the event of a breach of his obligations to the Corporation, or (ii) in the case where the Participant is a director of the
Corporation or one of its Subsidiaries, as the case may be, but is not employed by either the Corporation or one of its Subsidiaries, the date
on which such Participant ceases to be a member of the relevant Board of Directors for any reason other than death;
(i) in the case where the Participant is an officer or employee, six (6) months following the date on which the Participant's employment with
the Corporation or any of its Subsidiaries, as the case may be, is terminated by reason of death or (ii) in the case where the Participant is a
director of the Corporation or any of its Subsidiaries, as the case may be, but is not employed by either the Corporation or any of its
Subsidiaries, six (6) months following the date on which such Participant ceases to be a member of the relevant Board of Directors by
reason of death;
in the case where the Participant is an officer or employee, ninety (90) days following the date on which the Participant's employment with
the Corporation or any of its Subsidiaries, as the case may be, is terminated for any cause or reason other than those mentioned in
paragraphs 6.2.1 and 6.2.2 including, without limiting the scope of the foregoing, disability, long-term illness, retirement or early
retirement; or
2
6.3
6.4
6.2.4
in the case where the Participant is a supplier of ongoing services, thirty (30) days following the date on which the Participant ceases to act
as a supplier of ongoing services to the Corporation or any of its Subsidiaries, as the case may be, for any cause or reason.
Subject to Section 6.4 hereof, all rights conferred by an option under this Plan that shall not have been exercised by either an Early Expiry Date or
the Outside Expiry Date shall be forfeited and cancelled.
If an Early Expiry Date or the Outside Expiry Date applicable to any option granted under this Plan falls within a blackout period imposed by the
Corporation under the Corporation's trading restrictions and blackout periods policy (as such policy may be amended from time to time by the
Corporation), or within seven (7) business days immediately following such a blackout period, then the applicable Early Expiry Date or the Outside
Expiry Date, as the case may be, will be automatically extended to the date which is seven (7) business days after the last day of the blackout period.
The seven (7) business day extension period established in this paragraph is a fixed period which is not subject to Board discretion.
7.
Exercise of Options
7.1
7.2
Subject to the provisions of Section 6, an option may be exercised in whole, at any time, or in part, from time to time, during the Option Period, but
in all cases in accordance with the exercise schedule established by the Board or the Committee and applicable at the time of the grant.
An option may be exercised by written notice to the Secretary of the Corporation. Such notice shall set forth the number of options exercised and the
number of underlying Shares subscribed for pursuant to such exercise and the address to which the certificate evidencing such Shares is to be
delivered. Such notice shall also be accompanied by a certified cheque made payable to the Corporation in the amount of the Exercise Price.
The Corporation shall cause a certificate for the number of Shares specified in the notice to be issued in the name of the Participant and delivered to
the address specified in the notice no later than ten (10) business days following the receipt of such notice and cheque.
8.
No Assignment
8.1
No option or interest therein shall be assignable by the Participant other than by will or in accordance with the applicable laws of estates
and succession.
9.
Not a Shareholder
9.1
A Participant shall have no rights as a shareholder of the Corporation with respect to any Shares covered by his/her option until he/she shall have
become the holder of record of such Shares.
10.
Change in Control or Other Fundamental Transaction
10.1
Notwithstanding anything contained to the contrary in this Plan or in any resolution of the Board in implementation thereof:
10.1.1
in the event: (i) the Corporation accepts an offer to amalgamate, merge or consolidate with any other entity (other than a wholly-owned
Subsidiary) or to sell or license all or substantially all of its assets to any other entity (other than a wholly-owned Subsidiary); (ii) the
Corporation signs a support agreement in customary form pursuant to which the Board agrees to support a takeover bid and recommends
that shareholders of the Corporation tender their Shares to such takeover bid; or (iii) holders of greater than 50% of the Corporation's then
outstanding Shares tender all of their Shares to a takeover bid made to all of the holders of the Shares to purchase all of the then issued and
outstanding Shares, then, in each case, all of the outstanding Options shall, without any further action required to be taken by the
Corporation, immediately vest. Each Participant shall thereafter be entitled to exercise all of such Options at any time up to and including,
but not after the close of business on that date which is ten (10) days following the Closing Date. Upon the expiration of such ten (10)-day
period, all rights of the Participant to such Options or to the exercise of same (to the extent not theretofore exercised) shall automatically
thereupon terminate and have no further force or effect whatsoever. For the purposes of paragraph 10.1.1, "Closing Date" shall mean (x) the
closing date of the amalgamation, merger, consolidation, sale or license transaction in the case of clause (i) above; (y) the first expiry date of
the takeover bid on which each of the offeror's conditions are either satisfied or waived in the case of clause (ii) above; or (z) the date on
which it is publicly announced that holders of greater than 50% of the Corporation's then outstanding Shares have tendered their Shares to a
takeover bid in the case of clause (iii) above.
3
11.
Modification of the Plan
Board, shareholder and requisite regulatory approvals shall be required for any of the following amendments to be made to this Plan:
11.1
any amendment to Section 3.2 that would have the effect of permitting, without having to obtain shareholder approval on a "disinterested vote" at a
duly convened shareholders' meeting, the grant of any option(s) under this Plan otherwise prohibited by Section 3.2;
11.2
any amendment to the number of securities issuable under this Plan (except for any adjustment described in paragraph 12.1.4 hereof);
11.3
11.4
11.5
any amendment which would permit any option granted under this Plan to be transferable or assignable other than by will or in accordance with the
applicable laws of estates and succession;
the addition of a cashless exercise feature, payable in cash or securities, which does not provide for a full deduction of the number of underlying
securities from this Plan reserve;
the addition of a deferred or restricted share unit or any other provision which results in employees receiving securities while no cash consideration
is received by the Corporation;
11.6
with respect to any Participant (whether or not such Participant is an "insider" of the Corporation),
(i) any reduction in the exercise price of any option after the option has been granted, or
(ii) any cancellation of an option and the re-grant of that option under different terms, or
(iii) any extension to the term of an option beyond the Outside Expiry Date (except for extensions made pursuant to Section 6.4),
except in respect of any adjustment described in paragraph 12.1.4 hereof;
11.7
any amendment to the method of determining the exercise price of an option granted pursuant to this Plan;
11.8
the addition of any form of financial assistance or any amendment to a financial assistance provision which is more favorable to employees;
11.9
any amendment to Section 3.3 that would have the effect of removing or increasing the limitations on the aggregate number of securities issuable to,
and/or the aggregate fair value of options granted or that may be granted to, non-employee directors within any one-year period (except for any
adjustment described in paragraph 12.1.4 hereof); and
11.10
any amendment to this Section 11.
12.
Amendments and Termination
12.1
The Board may, subject to receipt of requisite regulatory approval, where required, in its sole discretion, make all other amendments to this plan that
are not contemplated in Section 11 above including, without limitation, the following:
12.1.1
amendments of a "housekeeping" or clerical nature or to clarify this Plan's provisions;
12.1.2
amendments regarding any vesting period of an option;
12.1.3
amendments regarding the extension of an option beyond an Early Expiry Date in respect of any Participant;
12.1.4
adjustments to the number of issuable Shares underlying, or the exercise price of, outstanding options resulting from a split or a
consolidation of the Shares, a reclassification, the payment of a stock dividend, the payment of a special cash or non-cash distribution to the
Corporation's shareholders on a pro rata basis provided such distribution is approved by the Corporation's shareholders in accordance with
applicable law, a recapitalization, a reorganization or any other event which necessitates an equitable adjustment to the outstanding options
in proportion with corresponding adjustments made to all outstanding Shares;
12.1.5
discontinuing or terminating this Plan; and
12.1.6
any other amendment which does not require shareholder approval under Section 11 hereof.
4
12.2
12.3
Notwithstanding Section 12.1 above, the Corporation shall not contravene any requirements, rules, laws and regulations of the TSX or of any
regulatory authorities.
Notwithstanding any provisions to the contrary, any amendment to or termination of this Plan shall in no way amend or otherwise affect the
conditions of the options already granted under this Plan to the extent that such options have not then been exercised, unless the rights of the
Participant have already expired or have already been fully exercised or unless the Participant affected by such change has already agreed to it.
13.
Miscellaneous Provisions
13.1
13.2
The Corporation's obligations under the terms of this Plan are subject to all applicable laws, regulations or rules of any governmental agency or other
competent authority in respect of the issuance or distribution of securities and to the rules of any stock exchange on which the Shares are listed. Each
Participant shall agree to comply with such laws, regulations and rules and to provide to the Corporation any information or undertaking required to
comply with such laws, regulations and rules.
The participation in this Plan of a director, an officer or an employee of the Corporation or any of its Subsidiaries shall be entirely optional and shall
not be interpreted as conferring upon a director, an officer or an employee of the Corporation or any of its Subsidiaries any right or privilege
whatsoever, except for the rights and privileges set out expressly in this Plan. Neither this Plan nor any act that is done under the terms of this Plan
shall be interpreted as restricting the right of the Corporation or any of its Subsidiaries to terminate the employment of an officer or employee at any
time. Any notice of dismissal given to an officer or employee at the time his/her employment is terminated, or any payment in the place and stead of
such notice, or any combination of the two, shall not have the effect of extending the duration of the employment for purposes of this Plan.
13.3
No director, officer or employee of the Corporation or any of its Subsidiaries shall acquire the automatic right to be granted one or more options
under the terms of this Plan by reason of any previous grant of options under the terms of this Plan.
13.4
This Plan does not provide for any guarantee in respect of any loss or profit which may result from fluctuations in the price of the Shares.
13.5
13.6
13.7
The Corporation and its Subsidiaries shall assume no responsibility as regards the tax consequences that participation in this Plan will have for a
director, an officer or an employee of, or supplier of ongoing services to, the Corporation or any of its Subsidiaries, and such persons are urged to
consult their own tax advisors in such regard.
This Plan and any option granted under the terms of this Plan shall be governed and interpreted according to the laws of the Province of Quebec and
the laws of Canada applicable thereto.
This Plan modifies and restates the amended and restated stock option plan adopted by the Corporation on March 21, 2013. This Plan confers no
other advantage upon the beneficiaries of the stock option plan.
5
STOCK OPTION PLAN
OF AETERNA ZENTARIS INC.
SUBSCRIPTION FORM
(Date)
Aeterna Zentaris Inc.
1405 du Parc-Technologique Blvd.
Québec, Québec
G1P 4P5
Attention of the Secretary
I, the undersigned, , hereby exercise options and subscribe for Common Shares of Aeterna Zentaris Inc.
(the "Corporation") pursuant to the exercise of such options under the terms of the Stock Option Plan of the Corporation, out of the Common
Shares available for purchase by the undersigned, and I enclose herewith my certified cheque (or money order) made payable to the order of Aeterna Zentaris
Inc., in the amount of
dollars in payment of the said subscription.
___________________________________________
(Signature)
___________________________________________
(Full Address)
___________________________________________
___________________________________________
(Telephone)
6
Exhibit 4.3
100 Marketplace, Suite 203
25 Mountainview Blvd.
Basking Ridge, NJ 07920-3452
USA
1405 boul du Parc Technologique
Quebec (Quebec) G1P 4P5
Canada
June 14, 2013
DELIVERED BY HAND
Paul Blake, M.D.
Senior Vice President and Chief Medical Officer
[civic address redacted for privacy reasons]
Re: Termination of the Change of Control Program
Dear Paul:
As provided in your employment agreement, Aeterna Zentaris Inc. (hereinafter the "Corporation") hereby formally informs you that the
Change of Control Program (hereinafter the "Program") that is currently detailed in Appendix 1 of your employment agreement is
terminated.
Section 5 of Appendix 1 of your employment agreement dated July 18, 2007 provides that the Corporation may terminate the Program at
any time and for any reason by providing you with a written notice of at least 30 days prior to each anniversary date of the signature of the
agreement, namely July 18.
The Corporation has decided to exercise its right to terminate the Program.
As a consequence of the termination of the Program, section 7.1 and Appendix 1 of your employment agreement shall be deemed void and
inapplicable as of July 18, 2013, although the termination of the Program does not affect the remaining provisions of your employment
agreement.
Please let me know if you have any questions related to the above.
Sincerely,
David A. Dodd
President and CEO
EMPLOYMENT AGREEMENT
Exhibit 4.4
This employment agreement (the Agreement) is made by and between AETERNA ZENTARIS, INC. (the Corporation), a corporation duly
incorporated under the laws of Delaware, and JUDE DINGES (the Executive), domiciled at [civic address redacted for privacy reasons],
Georgia, USA, and shall be effective as of November 1, 2013 (the Effective Date):
DEFINITIONS: As used throughout this Agreement:
The term "President," shall mean the President of the Corporation.
The term "Parent" shall mean the Corporation's parent, Aeterna Zentaris Inc.
The term "the Group" shall mean the Parent, subsidiaries and affiliates of the Corporation.
The term "the Governance Committee" shall mean the Corporate Governance, Nominating and Human Resources Committee of the
Parent.
1.
2.
3.
4.
5.
The term "the Board" shall mean the Parent's Board of Directors.
SECTION 1 – PURPOSE:
Section 1 – 1 The Corporation wishes to employ, as of the Effective Date, the Executive as its Senior Vice President and Chief Commercial
Officer (the CCO), and the Executive wishes to be employed as of the Effective Date by the Corporation on the terms and conditions set
forth herein.
Section 1 – 2 The Executive shall report to the President or such other person as designated by the President or the Board.
SECTION 2 – DUTIES:
Section 2 – 1 Executive agrees to devote his business time, attention, skill and efforts to the faithful performance and discharge of his duties
and responsibilities as the CCO of the Corporation in conformity with professional standards, in a prudent and workmanlike manner and
in a manner consistent with the obligations imposed under applicable law. Executive shall promote the interests of the Corporation and
its parent, subsidiaries and affiliates (hereinafter referred to as "the Group") in carrying out Executive's duties and responsibilities and
shall not deliberately and knowingly take any action, or fail to take any action which failure could, or reasonably be expected to, have a
material and adverse effect on the Corporation or the Group. Subject to the overriding right of the Corporation, as exercised through and
by the President, to unilaterally effect any and all changes to the composition thereof, it is intended that Executive would also initially
serve as a member of the Group's Operating Committee.
Section 2 – 2 Executive and the Corporation agree that Executive's principal place of business initially will be at the Corporation's office in New
Jersey. The Corporation shall have the right to relocate Executive's principal place of business upon reasonable notice. In the event of
such relocation of Executive's principal place of business, Executive agrees that such relocation will not serve as, or constitute,
termination of employment, constructive or otherwise, or fall within the definition of Termination Without Cause, Resignation for Good
Reason or Separation from Service as are defined and set forth in Section 6 below, and specifically within Sections 6.3, 6.5 or 6.6.
Executive understands and agrees that his duties and responsibilities will require him to travel on
a regular basis to Canada and Europe, as well as to other locations in the world to further the business and interests of the Corporation
and the Group.
Section 2 – 3 Executive discloses, represents and affirms that he has no obligation toward any person or entity, including former employers,
that would be incompatible with this Agreement or that could create an impediment to or conflict of interest with the performance of his
duties with the Corporation and/or the Group.
Section 2 – 4 Executive's duties include the responsibility to ensure a comprehensive and successful ongoing program in support of the
Corporation's present, future and anticipated commercial activities, including with respect to:
(a)
approved products;
(b)
post-clinical/pre-market status products;
(c)
in-licensing/co-promotion/collaborative activities;
(d)
out-licensing/alliance activities of the Corporation's and the Group's products/portfolio; and
(e)
any other activities related to the existing or potential portfolio of revenue-generating assets.
In addition, Executive will perform business development, commercial and other related services, including:
(f)
identifying business development opportunities consistent with stated commercial goals of the Corporation and the Group;
(g)
providing critical analysis and decision support;
(h)
developing commercial launch plans for any potential drug or product candidates of the Corporation and the Group;
(i)
(j)
identifying potential product candidates for acquisition or in-licensing; and
recruiting potential candidates for employment with the Corporation and/or the Group.
Furthermore, subject to his direct reporting to the President, Executive shall: (i) directly supervise the following functions and positions within
the Corporation's organization, including that of the Group: sales and marketing; supply chain management; business development;
and alliance management, and (ii) indirectly supervise or oversee external vendors and third-parties who perform market research and
business development activities in support of the commercial activities of the Corporation and the Group. Executive shall be
responsible for such other duties and activities as may be assigned to him from time to time by the President.
SECTION 3 – COMPENSATION:
Section 3 – 1 Annual Base Salary. The Corporation shall pay Executive a base annual salary (the Base Salary) in the amount of THREE
HUNDRED AND TWENTY THOUSAND DOLLARS US (US$320,000), subject to applicable taxable withholding and deductions and
payable in accordance with the Corporation's standard payroll practice for executive officers and employees. The Base Salary shall be
reviewed annually by the President and may be changed in accordance with the Corporation's compensation policies.
2
Section 3 – 2 Annual Cash Bonus. Executive shall be eligible to earn an annual cash bonus (the Annual Bonus), which shall be computed in
the target range of 30% of the Executive's Base Salary. Such Annual Bonus will be calculated upon the achievement of performance
objectives pre-established by the President. The granting of an Annual Bonus is also based on the business performance of the
Corporation and the Group and shall be subject to the full discretion and approval of the Parent's Board of Directors and/or its
Governance Committee. The Annual Bonus, if any, payable for any calendar year shall be paid no later than March 15 of the following
calendar year.
Section 3 – 3 Stock Options. Subject to any required approval of the Board and/or its Governance Committee, Executive shall be eligible to
receive in 2013 150,000 stock options to purchase common shares of the capital of the Parent, subject to vesting, exercise, pricing and
all other applicable terms of the Parent's Stock Option Plan.
Section 3 – 4 Car Allowance. The Corporation shall pay Executive an annual, taxable car allowance payable in accordance with the
Corporation's policy as it applies to executives. The Corporation shall assume and pay all related operating costs of the vehicle,
including insurance, registration, maintenance, repairs and fuel expenses for business use.
Section 3 – 5 Business Expenses. The Corporation shall reimburse Executive, upon presentation of valid receipts or vouchers, for reasonable
entertainment, travel and other business expenses, incurred on behalf of or at the request of the Corporation or the Group and which
are in accordance with the Corporation's policies and rules; provided, however, (a) the amount of such expenses eligible for
reimbursement in any calendar year shall not affect the expenses eligible for reimbursement in another calendar year; (b) no right to
such reimbursement may be exchanged or liquidated for another benefit or payment; and, (c) any reimbursements of such expenses
shall be made as soon as practicable under the circumstances, but in any event no later than the end of the calendar year following the
calendar year in which the related expenses are incurred by Executive.
SECTION 4 – VACATION:
Section 4 – 1 Executive shall be entitled to four (4) weeks of paid vacation leave in accordance with the Corporation's vacation policy for
executives. Executive agrees that exercise of the vacation benefit shall be pre-arranged and co-ordinated with the President. All of the
vacation benefit shall be taken during each calendar year and shall not be carried over in any amount into succeeding years. Unused
vacation leave shall not be payable in cash to the Executive.
SECTION 5 – OTHER BENEFITS:
Section 5 – 1 Subject to eligibility requirements and participation rules, Executive may participate in all of the employee benefit plans
maintained by the Corporation and the Group, which are available to employees whose principal place of business is the same as
Executive's principal place of business.
SECTION 6 – TERMINATION:
Section 6 – 1 At-Will Employment. Nothing in this Agreement shall be construed to alter the at-will employment relationship between the
Corporation and Executive. Subject to the terms set forth in this Agreement, either the Corporation or Executive may terminate
Executive's employment at any time for any reason, with or without Cause, as defined in Section 6.2 below.
Section 6 – 2 Termination for Cause. Executive's employment may be terminated by the Corporation upon simple notice in writing transmitted
to the Executive, without the Corporation (or any of its
3
Subsidiaries) being bound to pay any compensation whatsoever if termination is for any of the following reasons, each of which
constitutes Cause:
(a)
(b)
Executive is declared bankrupt or insolvent or makes an assignment of his property or is placed under protective supervision,
which situations Executive acknowledges to be incompatible with the continuation of his employment.
Executive becomes physically or mentally disabled to such an extent as to make him unable to perform the essential functions
of his duties normally and adequately for an aggregate of three (3) months during a period of twelve (12) consecutive months. In
such a case, Executive may continue to benefit under short-term and long-term disability insurance plans, subject to the terms
of such plans, if any. The Corporation's ability to terminate Executive as a result of any disability shall be to the extent permitted
by applicable state or federal law.
(c)
Executive breaches the terms of this Agreement.
(d)
(e)
(f)
Executive fundamentally or materially fails to perform his duties as an employee and/or as an officer of the Corporation and/or of
the Group, or fails or refuses to follow the directives of the President or the Board.
Executive commits fraud, theft, embezzlement or other felony criminal act. Executive agrees that it shall constitute fraud if
Executive provides, or causes to be provided, or misrepresents, either verbally or in writing, to the Corporation or any member
of the Group, any information with respect to Executive's background, experience, knowledge, skills or abilities.
Executive engages in material misconduct or willful or gross negligence in the performance of his duties, causing material
damage to the Corporation and/or the Group or to the business of the Corporation and/or the Group.
(g)
Executive misuses or abuses alcohol, drugs or controlled substances.
(h)
(i)
Executive uses or discloses in an unauthorized way the proprietary, confidential or trade secret information of the Corporation or
of the Group.
Executive conducts himself publicly, by speech or by behavior, in such a manner as to cause public embarrassment, scandal or
ridicule to the Corporation or to the Group, or to any of their respective employees.
Provided, however, excluding Section 6.2(e), no other reason set forth in this Section 6.2 shall constitute Cause unless Executive, upon notice,
is given 20 days to effect a cure or a correction and he fails to do so to the reasonable satisfaction of the President and/or the Board;
provided, however, that this right to cure only applies if the reason for termination is curable or correctible as determined in the sole and
absolute discretion of the President and/or the Board. Executive agrees that any reason for termination that relates to a lack of ethics,
honesty or integrity on the part of Executive is not curable.
Section 6 – 3 Good Reason. Executive shall have the right to resign at any time for any of the following reasons, each of which shall constitute
Good Reason:
(a)
A more than 25% reduction of Executive's Base Salary as of the Effective Date or as thereafter increased from time to time,
provided such reduction is not warranted and due to either company performance or Executive's failure to achieve performance
standards
4
or objectives as determined by the President in his/her sole and absolute discretion and judgment.
(b)
A material reduction (absent Executive's consent) in Executive's duties and responsibilities as the Corporation's CCO.
Provided, however, no reason set forth in this Section 6.3 shall constitute Good Reason unless the Corporation upon express, written notice is
given a reasonable period to effect a cure or a correction.
Section 6 – 4 Termination by Death. In the event of Executive's death during his period of employment, the Corporation's obligation to make
payments under this Agreement shall terminate on the date of death, except the Corporation shall pay Executive's estate or surviving
designated beneficiary or beneficiaries, as appropriate, any earned but unpaid salary and bonus and reimburse business expenses
incurred but not reimbursed as of his date of death. Vesting of any stock options outstanding on the date of death shall be exercisable
only to the extent the Executive's right to exercise was vested on his date of death.
Section 6 – 5 Voluntary Termination. In the event Executive wishes to resign for any reason other than for Good Reason, Executive shall give
the Corporation at least thirty (30) days' prior written notice of such resignation. Any such notice properly given shall not relieve either
the Executive or the Corporation of their mutual obligations to perform under this Agreement or to relieve the Corporation to compensate
the Executive during such notice period for any earned but unpaid salary and bonus and reimburse business expenses incurred but not
reimbursed as of his date of termination.
Section 6 – 6 Termination By Separation of Service or Resignation for Good Reason. In the event that Executive has a "separation from
service" within the meaning of a §409A of the US Internal Revenue Code of 1986, as amended (a Separation from Service) or
Executive resigns for Good Reason: (1) Executive's right to exercise all then outstanding stock options granted to him shall fully and
immediately vest on the effective date of his Separation from Service; (2) the Corporation shall pay to Executive in a lump sum (less
applicable tax withholdings) an amount equal to (1) one times (1X) the sum of his then Base Salary, his then Annual Bonus, pro-rated as
applicable, any earned retention bonus, the amount of his then car allowance (as described in Section 3.4 above)]; and (3) the
Corporation shall provide the benefits then provided to Executive under Section 5.1 above by purchasing up to eighteen (18) months of
the coverage required under the Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA). All payments due under this
Section shall be paid in US dollars by the Corporation no later than twenty (20) business days after the date of Executive's Separation
from Service unless there is a requirement to delay the payments under this Section 6.6 for six (6) months to avoid a tax on Executive
under §409A of the US Internal Revenue Code of 1986 (the Code), in which event, the payment shall be so delayed by six (6) months
and one day.
SECTION 7 – NON-COMPETITION, NON-SOLICITATION AND LOYALTY:
Section 7 – 1 Executive shall not compete with the Corporation or the Group, directly or indirectly. He shall not participate in any capacity
whatsoever in a business that would directly or indirectly compete with the Corporation or with any member of the Group, including one
involved in the development and commercialization of the specific endocrine therapies and oncology treatments, which the Corporation
or any member of the Group is actively developing, including, without limitation, as an executive, director, officer, employer, principal,
agent, fiduciary, administrator of another's property, associate, independent contractor, franchisor, franchisee, distributor or consultant
unless such participation is fully disclosed to and approved in writing in advance by the Corporation or the Group. In addition, Executive
shall not have any interest whatsoever in such an enterprise, including, without limitation, as owner, shareholder, partner, limited partner,
lender or silent partner. This non-competition covenant is limited as follows:
5
(a)
(b)
As to the time period, to the duration of Executive's employment and for a period of one (1) year following the date of
termination of his employment;
As to the geographical area, the territory in which a specific product had been actively exploited by the Corporation or any
member of the Group during the two (2) years preceding the employment termination date. For purposes of this clause, the
Corporation and the Group are deemed to have actively exploited such territory for such product if, during the two (2) years
immediately preceding the employment termination date:
(i)
(ii)
Distribution rights for this product were granted to a distributor of the Corporation or any member of the Group pursuant
to a distribution agreement (exclusive or non-exclusive); or if
The Corporation or any member of the Group has completed Phase II clinical development work for this product in this
territory, or searched for commercial partners or applied to protect its intellectual property rights in relation to the product
and its use, including patent applications in relation to the product or its use, which applications referred to these
territories.
(c)
As to the nature of the activities, to duties or activities which are identical or substantially similar to those performed or carried
on by Executive during the twenty-four (24) months preceding the termination of his employment.
Section 7 – 2 The foregoing stipulation shall nevertheless not prevent Executive from buying or holding shares or other securities of a
corporation or entity, other than the Parent, whose securities are publicly traded on a recognized stock exchange where the securities so
held by the Executive do not represent more than five percent (5%) of the voting shares of such other corporation or entity and do not
allow for its control.
Section 7 – 3 Executive also undertakes, for the same period and in respect of the same territory referred to above in sub-sections 7.1(a) and
7.1(b) not to solicit clients or do anything whatsoever to induce or to lead any person to end, in whole or in part, business relations with
the Corporation or any member of the Group.
Section 7 – 4 Executive also undertakes, for the same period and in respect of the same territory referred to above in sub-sections 7.1(a) and
7.1(b) not to induce, attempt to induce or otherwise interfere in the relations which the Corporation or any member of the Group has with
its distributors, suppliers, representatives, agents and other parties with whom the Corporation or any member of the Group deals.
Section 7 – 5 Executive also undertakes, for the same period and in respect of the same territory referred to in sub-sections 7.1(a) and 7.1(b)
not to induce, attempt to induce or otherwise solicit the personnel of the Corporation to leave their employment with the Corporation or
the Group nor to hire the personnel of the Corporation or the Group for any enterprise in which Executive has an interest.
Section 7 – 6 Executive acknowledges that the provisions of this Section 7 - are limited as to the time period, the geographic area and the
nature of the activities to what the parties deem necessary to protect the legitimate interests of the Corporation and the Group, while
allowing the Executive to earn his living.
Section 7 – 7 Nothing in this Section 7 - shall operate to reduce or extinguish the obligations of Executive arising at law or under this contract
which survive at the termination of this Agreement in reason of their nature and, in particular, without limiting the foregoing, Executive's
duty of loyalty and obligation to act faithfully, honestly and ethically.
6
SECTION 8 – CONFIDENTIALITY:
Section 8 – 1 Executive acknowledges that he has received and will receive or conceive, in carrying on or in the course of his work during his
employment with the Corporation, confidential information pertaining to the activities, the technologies, the operations and the business,
past, present and future, of the Corporation and/or the Group or related or associated companies, which information is not in the public
domain. Executive acknowledges that such confidential information belongs to the Corporation and/or the Group and that its disclosure
or unauthorized use could be damaging or prejudicial to the Corporation and/or the Group and contrary to their best interests.
Accordingly, Executive agrees to respect the confidentiality of such information and not to make use of or disclose it to, or to discuss it
with, any person, other than in the ordinary course of his duties with the Corporation and the Group, or as required under applicable law,
without the explicit prior written authorization of the Corporation.
This undertaking to respect the confidentiality of such information and not to make use of or disclose or discuss it to or with any person
shall survive and continue to have full effect notwithstanding the termination of Executive's employment with the Corporation, so long as
such confidential information does not become public as a result of an act by the Corporation or a third party, which act does not involve
the fault of one of its Executives.
Section 8 – 2 The term confidential information includes, among other things:
(a)
(b)
products, formulae, processes and composition of products, as well as raw materials and ingredients, of whatever kind, that are
used in their manufacture;
technical knowledge and methods, quality control processes, inspection methods, laboratory and testing methods, information
processing programs and systems, manufacturing processes, plans, drawings, tests, test reports and software;
(c)
equipment, machinery, devices, tools, instruments and accessories;
(d)
information with respect to the compensation and performance of employees of the Corporation and the Group;
(e)
financial information, production cost data, marketing strategies, raw materials supplies, suppliers, staff and client lists and
related information, marketing plans, sales techniques and policies, including pricing policies, sales and distribution data and
present and future expansion plans; and,
(f)
research, experiments, inventions, discoveries, developments, improvements, ideas, industrial secrets and know-how.
Section 8 – 3 Executive agrees to keep confidential and not to disclose to any third party both the existence and the terms of this Agreement,
except (i) to disclose the restrictions stated in Section 7 of this Agreement and (ii) if disclosure is required by regulation or law In the
event Executive is required to disclose the existence or terms of this Agreement pursuant to subpoena or other duly issued court order,
Executive shall give prompt notice to the Corporation of such subpoena or court order to allow the Corporation sufficient opportunity to
contest such subpoena or court order.
SECTION 9 – OWNERSHIP OF INTELLECTUAL PROPERTY:
Section 9 – 1 Executive hereby assigns and agrees to assign to the Corporation (or to the relevant member of the Group for whom the specific
work is being performed) all of his intellectual
7
property rights as of their creation and to make full and prompt disclosure to the Corporation of all information relating to anything made
or designed by him or that may be made or designed by him during the period of his employment, whether alone or jointly with other
persons, or within a period of two (2) years following the termination of his employment and resulting from or arising out of any work
performed by Executive on behalf of the Corporation (or the Group) or connected with any matter relating or possibly relating to any
business in which the Corporation or any member of the Group or related or associated companies is involved unless specifically
released from such obligation in writing by the Board.
Section 9 – 2 In addition, Executive renounces all rights in any document or work realized or created during the period of his employment
related to his employment by the Corporation. Executive acknowledges that the Corporation has the right to use, modify or reproduce
any such document or work realized or created by Executive, at its sole discretion, without Executive's authorization and without his
name being mentioned.
Section 9 – 3 At any time during the period of his employment or after the termination of his employment, Executive shall sign, acknowledge
and deliver, at the Corporation's expense, but without compensation other than a reasonable sum for his time devoted thereto if his
employment has then terminated, any document required by the Corporation to give effect to Section 9.1, including patent applications
and documents evidencing the assignment of ownership. Executive shall also provide such other assistance as the Corporation or any
member of the Group may require with respect to any proceeding or litigation relating to the protection or defense of intellectual property
rights belonging to the Corporation or to any member of the Group.
Section 9 – 4 The entirety of this Section 9 shall be binding on Executive's heirs, assignees and legal representatives.
SECTION 10 – OWNERSHIP OF FILES AND OTHER PROPERTY:
Section 10 – 1 Any property of the Corporation or of any member of the Group, including any file, sketch, drawing, letter, report, memorandum
or other document, any equipment, machinery, tool, instrument or other device, any diskette, recording tape, compact disc, software,
electronic communication device or any other property, which comes into Executive's control or possession during his employment with
the Corporation in the performance or in the course of his duties, regardless of whether he has participated in its preparation or design,
how it may have come under his control or into his possession and whether it is an original or a copy, shall at all times remain the
property of the Corporation (or of the relevant member of the Group) and, upon the termination of Executive's employment, shall
promptly be returned to the Corporation or its designated representative. Executive may not keep a copy or give one to a third party
without the prior expressly written permission of the Corporation.
SECTION 11 – TERMINATION OF PRIOR CONTRACTS:
Section 11 – 1 As of the effective date hereof, this Agreement supersedes and cancels any prior agreement, offer or understanding, verbal or
written, with respect to Executive's employment with the Corporation.
SECTION 12 – AMENDMENT OF THE AGREEMENT:
Section 12 – 1 To be valid and enforceable, any amendment to this Agreement must be confirmed in writing by each of the Corporation and
Executive.
8
SECTION 13 – NOTICES:
Section 13 – 1 Any notice given hereunder shall be given in writing and sent by registered or certified mail or hand-delivered. If such notice is
sent by registered or certified mail, it shall be deemed to have been received five (5) business days following the date of its mailing if the
postal services are working normally. If such is not the case, the notice must be hand-delivered or served by bailiff, at the discretion of
the sender. In the case of hand-delivery or service, the notice shall be deemed to have been received the same day. It is agreed that if
the delivery date is a non- business day, the notice shall be deemed to have been received on the following business day.
For purposes of mailed or hand-delivered notices to be effectively delivered under this provision, the notices must be addressed as
follows:
For the Corporation, the address is: 100 Market Place, Suite 203, 25 Mountainview Boulevard, Basking Ridge, New Jersey, 07920.
For Executive, the address is: Mr. Jude Dinges, [civic address redacted for privacy reasons], Georgia, USA.
SECTION 14 – NON-ASSIGNABILITY:
Section 14 – 1 The obligations and rights under this Agreement may not be assigned or transferred by Executive without the prior written
consent of the Corporation, which consent may be denied in the Corporation's sole and absolute discretion.
SECTION 15 – GOVERNING LAW:
Section 15 – 1 This Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware, notwithstanding any
choice of law provisions otherwise requiring application of other laws. It shall be interpreted according to the fair meaning of its terms
and not strictly in favor of, or against, either party.
SECTION 16 – SEVERABILITY:
Section 16 – 1 If any provision of this Agreement or the application thereof is held invalid, the invalidity shall not affect other provisions or
applications of this Agreement, which can be given effect without the invalid provisions or applications and, to this end, the provisions of
this Agreement are declared to be severable.
SECTION 17 – MEDIATION:
Section 17 – 1 The Corporation and Executive hereby expressly agree that with respect to any dispute arising under this Agreement, such
dispute shall be resolved solely and exclusively through binding mediation. Any such mediation shall: (1) take place at a location
mutually agreed upon by the Corporation and Executive; and (2) be conducted by a recognized panel of three mediators or which can
be comprised of three experienced business experts from the pharmaceutical or biotechnical industry mutually agreed upon by the
Corporation and Executive. With respect to any such mediation panel, one mediator shall be selected by the Corporation, one mediator
shall be selected by Executive, and one mediator shall be selected by mutual agreement between the Corporation and Executive. Each
of the parties hereto shall bear its own, respective costs of such mediation.
9
SECTION 18 – COUNTERPARTS:
Section 18 – 1 This Agreement may be executed in counterparts, each of which shall be deemed one and the same Agreement.
(Remainder of page intentionally left blank.)
10
NOW, THEREFORE, the Corporation and Executive have duly signed this Agreement on the dates shown by their names below:
AETERNA ZENTARIS, INC. (CORPORATION)
By: DAVID A. DODD
President
11
EMPLOYMENT AGREEMENT
Exhibit 4.5
This Agreement is made by and between AETERNA ZENTARIS INC., a corporation duly incorporated under the laws of Canada, having its
head office at 1405 Parc-Technologique Blvd., Quebec, QC G1P 4P5 (the Corporation) and DAVID DODD, domiciled at [civic address
redacted for privacy reasons], South Carolina, USA (the Executive) and shall be effective as of April 15, 2013 (the "Effective Date").:
SECTION 1 – PURPOSE:
1.1
1.2
The Corporation wishes to employ at the Effective Date the Executive as its President and Chief Executive Officer and the Executive
wishes to be employed at the Effective Date by the Corporation on the terms and conditions set forth herein.
The Executive shall report directly to the Corporation's Board of Directors (the "Board") and all other employees of the Corporation and
each other corporation or other organization which is controlled directly or indirectly by the Corporation (each an "Affiliate" and
collectively the "Affiliates") shall report directly or indirectly to the Executive..
SECTION 2 – DUTIES:
2.1
2.2
2.3
2.4
2.5
The Executive agrees to devote his business time, attention, skill and efforts to the faithful performance and discharge of his duties and
responsibilities as the President and Chief Executive Officer of the Corporation in conformity with professional standards, in a prudent
and workmanlike manner and in a manner consistent with the obligations imposed under applicable law. The Executive shall promote
the interests of the Corporation and its Affiliates in carrying out the Executive's duties and responsibilities and shall not deliberately and
knowingly take any action, or fail to take any action which failure could, or reasonably be expected to, have a material and adverse
effect on the business of the Corporation or any of its Affiliates.
The Executive and the Corporation agree that the Executive's principal place of business initially will be at the Corporation's office in
New Jersey and, further, that any reassignment of his principal place of business will be to a place in the United States mutually agreed
upon by the Executive and the Chairman of the Board. The Executive understands that his duties and responsibilities will require him to
travel on a regular basis to Canada and Europe as well as to other locations in the world from time to time to further the business and
interests of the Corporation.
The Executive discloses, represents and affirms that he has no obligation toward any person or entity, including former employers, that
would be incompatible with this Agreement or that could create an impediment to or conflict of interest with the performance of his duties
with the Corporation and its affiliates.
The Executive shall be appointed as, or nominated for election as, and recommended for election as, a member of the Board at the first
opportunity to effect such appointment or nomination. The Executive also shall be appointed as the Managing Director of the
Corporation's Affiliate, Aeterna Zentaris GmbH either on or as soon as practical after the Effective Date. The Executive shall receive no
compensation for his services under this Section 2.4 in addition to his compensation otherwise payable under this Agreement.
The Corporation and the Executive agree that the Executive may continue to sit upon the board of directors of any corporations or
organizations on which he serves on the Effective Date as long as the Chairman of the Board and the Executive mutually agree that his
membership on any such board of directors does not unreasonably interfere with the performance of Executive's duties and
responsibilities under this Agreement and, solely with the prior written authorization of the Chairman of the Board, the Executive may
serve on any other board of directors
SECTION 3 – COMPENSATION:
3.1
3.2
3.3
3.4
Annual Base Salary. The Corporation shall pay the Executive a base annual salary (the Base Salary) which initially shall be FOUR
HUNDRED AND SEVENTY FIVE THOUSAND DOLLARS US (US$475,000), subject to applicable taxable withholding and deductions
and payable in accordance with the Corporation's standard payroll practice for executive officers. The Base Salary shall be reviewed
annually by the Board or a committee of the Board and may be increased in accordance with the Corporation's compensation policy.
Finally, all or part of the Executive's Base Salary may be paid through the Affiliate doing business at his principal place of business to
facilitate proper tax withholding for the Executive and his participation in the employee benefit plans described in Section 5.1.
Annual Cash Bonus. The Executive shall be eligible to earn an annual cash bonus (the Annual Bonus), which shall be computed in
the target range of 65% to 75% of the Executive's Base Salary. Such Annual Bonus will be calculated upon the achievement of
performance objectives that will be established by the Board in consultation with the Executive within thirty (30) days prior to the
beginning of a fiscal year. For 2013, any Annual Bonus awarded will be based upon performance objectives established by the Board in
consultation with the Executive and subject to pro-ration for the period of service from the Effective Date through the end of 2013. The
granting of an Annual Bonus is also based on the business performance of the Corporation and subject to approval by the Board. The
Annual Bonus, if any, payable for any calendar year shall be paid no later than March 15 of the following calendar year. Finally, if the
Executive's employment terminates (other than for Cause) on or after July 1 of a calendar year, he shall be entitled to the payment of a
pro-rata part of any Annual Bonus, which would have been payable if he had continued to be employed by the Corporation through the
end of such calendar year.
Stock Options. Subject to any required shareholder or regulatory approval, the Executive shall be eligible to receive an annual grant of
stock options to purchase shares of the Corporation's publicly traded common stock (the "Common Stock"), targeted to, but not limited
to, the range of 200,000 to 250,000, subject to vesting, exercise, pricing and all other applicable terms of the Corporation's Stock Option
Plan. Granting of such annual stock options shall also be subject to the prior approval of the Board, which may adjust upwards or
downwards the number of options granted, depending on the number of options available annually. If any shareholder or regulatory
approval is required, the Corporation shall promptly undertake all reasonable efforts to secure such approval. For the calendar year
2013 and subject to the approvals described in this paragraph 3.3, the Corporation shall grant 300,000 stock options to the Executive as
of the Effective Date and at a strike price equivalent to the share price at the close of the preceding business day, which is anticipated to
be April 12, 2013.
Retention Bonus. The Corporation shall pay the Executive a two-part retention bonus as follows: (1) the Corporation shall pay the
Executive a retention bonus if he remains employed through Decemer 31, 2014 equal to (a) the excess, if any, of the closing price of a
share of Common Stock on the last regular trading day in 2014 over the share price at the close of the business day immediately before
the Effective Date times (b) 175,000; and, (2) the Corporation shall pay the Executive a retention bonus if he remains employed through
December 31, 2015 equal to (a) the excess, if any, of the closing price of a share of Common Stock on the last regular trading day in
2015 over the share price at the close of the business day immediately before the Effective Date times (b) 200,000. The bonuses
payable in (1) and (2) herein shall be paid in US dollars no later than March 15 of the year following the end of 2014 and 2015,
respectively..
3.5
Living Assistance. The Corporation and the Executive agree that it may become necessary for the Executive to live in temporary
housing or quarters at his principal place of business.. To this end, the Corporation agrees that it will pay the reasonable and necessary
costs to lease
2
temporary furnished housing or quarters for the Executive, which shall be subject to the mutual agreement of the Executive and the
Chairman of the Board.
3.6
3.7
Car Allowance. The Corporation shall pay the Executive an annual, taxable car allowance of TWENTY THOUSAND US DOLLARS
(US$20,000.00), payble in accordance with the Corporation's policy as it applies to executives. The Corporation shall assume and pay
all related operating costs of the vehicle, including insurance, registration, maintenance, repairs and fuel expenses.
Business Expenses. The Corporation shall reimburse the Executive, upon presentation of valid receipts or vouchers, for reasonable
entertainment, travel and other business expenses, incurred on behalf of or at the request of the Corporation or an Affiliate and which
are in accordance with the Corporation's policies and rules; provided, however, (a) the amount of such expenses eligible for
reimbursement in any calendar year shall not affect the expenses eligible for reimbursement in another calendar year; (b) no right to
such reimbursement may be exchanged or liquidated for another benefit or payment; and, (c) any reimbursements of such expenses
shall be made as soon as practicable under the circumstances, but in any event no later than the end of the calendar year following the
calendar year in which the related expenses are incurred by the Executive.
SECTION 4 – VACATION:
4.1
The Executive shall be entitled to a paid annual vacation of four (4) weeks in accordance with the Corporation's vacation policy for
executives. The Executive agrees that exercise of the vacation benefit shall be pre-arranged with the Chairman of the Board. All of the
vacation benefit shall be taken during each calendar year and shall not be carried over in any amount into succeeding years. Unused
vacation shall not be payable in cash to the Executive. The full annual vacation benefit shall be extended to the Executive for 2013.
SECTION 5 – OTHER BENEFITS:
5.1
Subject to eligibility requirements and participation rules, the Executive may participate in all of the employee benefit plans maintained
by the Corporation and its Affiliates which are available to employees whose principal place of business is the same as the Executive's
principal place of business.
SECTION 6 – TERMINATION:
6.1
6.2
At-Will Employment. Nothing in this Agreement shall be construed to alter the at-will employment relationship between the Corporation
and the Executive. Subject to the terms set forth in this Agreement, either the Corporation or the Executive may terminate the
Executive's employment at any time for any reason, with or without Cause, as defined in Section 6.2 below.
Termination for Cause. The Executive's employment may be terminated by the Corporation upon simple notice in writing transmitted to
the Executive, without the Corporation (or any of its Affiliates) being bound to pay any compensation whatsoever if termination is for any
of the following reasons, each of which constitutes Cause:
(a)
(b)
The Executive is declared bankrupt or insolvent or makes an assignment of his property or is placed under protective
supervision, which situations the Executive acknowledges to be incompatible with the continuation of his employment.
The Executive becomes physically or mentally disabled to such an extent as to make him unable to perform the essential
functions of his duties normally and adequately for an aggregate of six (6) months during a period of twelve (12) consecutive
months. In such a
3
case, the Executive may continue to benefit under short-term and long-term disability insurance plans, subject to the terms of
such plans, if any. The Corporation's ability to terminate the Executive as a result of any disability shall be to the extent
permitted by applicable state or federal law.
(c)
The Executive breaches the terms of this Agreement.
(d)
(e)
The Executive fundamentally or materially fails to perform his duties as President and Chief Executive Officer of the Corporation
and/or as Managing Director of Aeterna Zentaris GmbH.
There is a conclusive determination that the Executive has committed any fraud, theft, embezzlement or other criminal act of a
similar nature.
(f)
The Executive has committed serious misconduct or willful or gross negligence in the performance of his duties.
(g)
The Executive fails or refuses to follow reasonable directives of the Board.
(h)
(i)
(j)
(k)
(l)
The Executive engages in willful or reckless conduct, causing material damage to the Corporation (or its Affiliates) or the
Corporation's (or its Affiliates') business.
The Executive misuses or abuses alcohol, drugs or controlled substances.
The Executive uses or discloses in an unauthorized way the Corporation's (or any of its Affiliates') confidential or trade secret
information.
The Executive conducts himself publicly, by speech or behavior, in such a manner as to cause public embarrassment, scandal
or ridicule to the Corporation, any of its affiliates or any of their employees.
Provided, however, no reason set forth in this Section 6.2 shall constitute Cause unless (1) the Executive upon notice is given a
reasonable period to effect a cure or a correction; (2) the reason is curable or correctible as determined by the Board; and, (3)
the reason clearly and adversely affects the Executive's ability to continue to perform his duties and responsibilities under this
Agreement.
6.3. Good Reason. The Executive shall have the right to resign at any time for any of the following reasons, each of which shall constitute
Good Reason:
(a)
A material reduction of the Executive's total compensation (including his Base Salary, Annual Bonus opportunities, benefits and
stock option grant opportunities) as in effect on the Effective Date or as thereafter increased from time to time, provided such
reduction is not warranted and due to company performance.
(b)
Any change in the Executive's direct reporting relationship to the Board.
(c)
(d)
Any reduction (absent the Executive's express, written consent) in the Executive's duties and responsibilities as the
Corporation's President and Chief Executive Officer.
A physical change of one hundred miles or more in the Executive's principal place of business absent his express, written
consent.
4
(e)
Provided, however, no reason set forth in this Section 6.3 shall constitute Good Reason unless the Corporation upon express,
written notice is given a reasonable period to effect a cure or a correction.
6.4.
6.5.
6.6.
Termination by Death. In the event of the Executive's death during his period of employment, the Corporation's obligation to make
payments under this Agreement shall terminate on the date of death, except the Corporation shall pay the Executive's estate or
surviving designated beneficiary or beneficiaries, as appropriate, any earned but unpaid salary and bonus and reimburse business
expenses incurred but not reimbursed as of his date of death. Vesting of any stock options outstanding on the date of death shall be
exercisable only to the extent the Executive's right to exercise was vested on his date of death.
Voluntary Termination. If the event Executive wishes to resign for any reason other than Good Reason or the Corporation wishes to
terminate his employment without Cause, the Executive shall give, or receive, as applicable at least thirty (30) days prior written notice
of such resignation or termination, whichever is applicable. Any such notice shall not relieve either the Executive or the Corporation of
their mutual obligations to perform under this Agreement or to relieve the Corporation to compensate the Executive during such notice
period for any earned but unpaid salary and bonus and reimburse business expenses incurred but not reimbursed as of his date of
termination.
Termination Without Cause Or Resignation For Good Reason. In the event that the Executive has a "separation from service" within
the meaning of a §409A of the US Internal Revenue Code of 1986, as amended (a "Separation from Service") as a result of the
Corporation terminating the Executive's employment without Cause or the Executive resigning for Good Reason, (1) Executive's right to
exercise all then outstanding stock options granted to him shall fully and immediately vest on the effective date of his Separation from
Service and any outstanding and unpaid retention bonus under Section 3.4 of this Agreement shall be calculated as if the date of his
Separation from Service was, as applicable, the end of 2014 and 2015 and paid to the Executive; (2) the Corporation shall pay to
Executive in a lump sum (less applicable tax withholdings) an amount equal to two times the sum of his then Base Salary, his then
Annual Bonus, the amount of his then car allowance (as described in Section 3.6 above); and, (3) the Corporation shall provide the
benefits then provided to the Executive under Section 5 above by purchasing up to eighteen (18) months of the coverage required under
the Consolidated Omnibus Budget Reconciliation Act of 1986 ("COBRA"). All payments due under this Section 6.6 shall be paid in US
dollars by the Corporation no later than ten (10) business days after the date of the Executive's Separation from Service unless there is
a requirement to delay the payments under this Section 6.6 for six (6) months to avoid a tax on the Executive under §409A of the US
Internal Revenue Code of 1986 (the "Code"), the payment shall be so delayed by six (6) months and one day.
SECTION 7 – CHANGE OF CONTROL:
7.1
For purposes of this Section 7, a Change of Control shall be deemed to have occurred in any of the following circumstances:
(a)
Subject to the exceptions set forth in Schedule A attached hereto and incorporated within, upon the purchase or acquisition, in
one or more transactions, by a Person or one or more Persons who are affiliates of one another or who are acting jointly or in
concert (as such expressions are defined in the Securities Act (Ontario) (the Acquiring Person) of a beneficial interest in
securities of the Corporation representing in any circumstance fifty percent (50%) or more of the voting rights attaching to the
then outstanding securities of the Corporation; or
(b)
upon a sale or other disposition of all or substantially all of the Corporation's assets; or
5
(c)
upon a plan of liquidation or dissolution of the Corporation; or
(d)
if, for any reason, including an amalgamation, merger or consolidation of the Corporation with or into another company, the
individuals who at the date hereof constitute the Board (and any new directors whose appointments by the Board or whose
nomination for election by the Corporation's shareholders was approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the date hereof or whose appointment or nomination for election was previously
so approved cease to constitute a majority of members of the Board; or,
(e)
upon termination of Executive either without Cause or by resignation for Good Reason.
7.2
If the Executive has a Separation from Service within twelve (12) months following a Change of Control as a result of a termination of
his employment by the Corporation without Cause or his resignation for Good Reason, the Executive shall receive the following:
(a)
An amount equivalent to thirty-six (36) months of his then annual base salary;
(b)
(c)
(d)
An amount equivalent to two (2) times (2x) the Annual Bonus, if any, to which the Executive would have been entitled to receive
in the year during which the Change of Control occurred;
The Executive's right to exercise all then outstanding stock options granted to him shall fully and immediately vest on the date of
his Separation from Service and any outstanding and unpaid retention bonus under Section 3.4 shall be calculated as if the date
of his Separation from Service was, as applicable, the end of 2014 and 2015 and paid to the Executive; and,
The then annual cost to provide, or the cost to purchase by the Corporation coverage under COBRA, whichever is applicable, to
provide the benefits then provided to Executive under Section 5.
7.3
The Corporation shall pay to the Executive in a lump sum in US dollars within ten (10) business days after the effective date of his
Separation from Service following a Change of Control, the amounts described in 7.2 of this Section 7. In the event the Executive dies
before he has received payment of these amounts, the Corporation will pay these amounts to his estate or surviving designated
beneficiary or beneficiaries, as appropriate. Finally, if there is a requirement to delay the payments called for in this Section 7.3 for six
(6) months to avoid a tax on the Executive under §409A of the Code, the payment shall be so delayed by six (6) months and one (1) day
7.4 If the Change of Control described in Section 7.1 constitutes a "change of control" (within the meaning of §280G of the Code) and it shall
be determined at the Corporation's by a nationally recognized US certified public accounting firm selected by the Executive and reasonably
acceptable to the Corporation that any vesting of any option exercise rights or payment called as a result of such Change in Control for under
Section 7.2 or under any other plan or arrangement of the Corporation (whether vested or paid or payable or distributed or distributable
pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section
7.4) (collectively the "Payments") would be subject to the excise tax imposed by §4999 of the Code or any interest or penalties are incurred by
the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties are hereinafter collectively referred
to as the "Excise Tax"), then the Corporation shall make a timely payment on the Executive's behalf to the US Internal Revenue Service or
other applicable taxing authority (a "Gross-Up Payment") in an amount such that, if such payment had been made directly to the Executive and
the Executive had paid all Excise Taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation,
any income taxes (and any
6
interest and penalties imposed with respect thereto) and the Excise Tax imposed upon the Gross-Up Payment, the Executive would have
retained an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments plus any additional Excise Tax imposed on
the Gross-Up Payment. The Corporation's obligation to make the Gross-Up Payment under this Section 7.4 shall survive the Executive's
Separation from Service with the Corporation.
SECTION 8 – NO-COMPETITION, NO SOLICITATION AND LOYALTY:
8.1
The Executive shall not compete with the Corporation nor with any of its affiliates, directly or indirectly. He shall not participate in any
capacity whatsoever in a business that would directly or indirectly compete with the Corporation or with any of its affiliates, specifically
one involved in the development and commercialization of the specific endocrine therapies and oncology treatments, which the
Corporation and its affiliates are actively developing, including, without limitation, as an executive, director, officer, employer, principal,
agent, fiduciary, administrator of another's property, associate, independent contractor, franchisor, franchisee, distributor or consultant
unless such participation is fully disclosed to the Board and approved in writing in advance by the Chairman of the Board. In addition,
the Executive shall not have any interest whatsoever in such an enterprise, including, without limitation, as owner, shareholder, partner,
limited partner, lender or silent partner. This non-competition covenant is limited as follows:
8.1.1 As to the time period, to the duration of the Executive's employment and for a period of one (1) year following the date of
termination of his employment;
8.1.2 As to the geographical area, the territory in which a specific product had been actively exploited by the Corporation and/or its
affiliates during the two years preceding the employment termination date. For purposes of this clause, the Corporation and its
affiliates are deemed to have actively exploited such territory for such product if, during the two (2) years immediately preceding
the termination date:
(i)
(ii)
Distribution rights for this product were granted to a distributor of the Corporation and/or its affiliates, pursuant to a
distribution agreement (exclusive or non-exclusive) except if such distribution agreement ceased to have effect, prior to
the termination date, pursuant to the terms of such distribution agreement and provided that neither the Corporation nor
any of its affiliates actively searched for other distributors for the territory covered by this Agreement; or if
The Corporation and/or its affiliates have completed Phase II clinical development work for this product in this territory,
or searched for commercial partners or applied to protect its intellectual property rights in relation to the product and its
use, including patent applications in relation to the product or its use, which applications referred to these territories.
8.1.3 As to the nature of the activities, to duties or activities which are identical or substantially similar to those performed or carried
on by the Executive during the twenty-four (24) months preceding the termination of his employment.
8.2
The foregoing stipulation shall nevertheless not prevent the Executive from buying or holding shares or other securities of a corporation
or entity other than the Corporation whose securities are publicly traded on a recognized stock exchange where the securities so held
by the Executive do not represent more than five percent (5%) of the voting shares of such other corporation or entity and do not allow
for its control.
8.3
The Executive also undertakes, for the same period and in respect of the same territory referred to hereinabove in sub-sections 8.1.1.
and 8.1.2. not to solicit clients or do anything whatsoever to
7
induce or to lead any person to end, in whole or in part, business relations with the Corporation or any of its affiliates.
8.4
8.5
8.6
8.7
The Executive also undertakes, for the same period and in respect of the same territory referred to hereinabove in sub-sections 8.1.1.
and 8.1.2. not to induce, attempt to induce or otherwise interfere in the relations which the Corporation or which any of its affiliates has
with their distributors, suppliers, representatives, agents and other parties with whom the Corporation or any of its affiliates deals.
The Executive also undertakes, for the same period and in respect of the same territory referred to in sub-sections 8.1.1. and 8.1.2. not
to induce, attempt to induce or otherwise solicit the personnel of the Corporation to leave their employment with the Corporation or any
of its affiliates nor to hire the personnel of the Corporation or any of its affiliates for any enterprise in which the Executive has an interest.
The Executive acknowledges that the provisions of this Section 8 are limited as to the time period, the geographic area and the nature
of the activities to what the parties deem necessary to protect the legitimate interests of the Corporation and its affiliates, while allowing
the Executive to earn his living.
Nothing in this Section 8 shall operate to reduce or extinguish the obligations of the Executive arising at law or under this contract which
survive at the termination of this Agreement in reason of their nature and, in particular, without limiting the foregoing, the Executive's
duty of loyalty and obligation to act faithfully, honestly and ethically.
SECTION 9 – CONFIDENTIALITY:
9.1
The Executive acknowledges that he has received and will receive or conceive, in carrying on or in the course of his work during his
employment with the Corporation, confidential information pertaining to the activities, the technologies, the operations and the business,
past, present and future, of the Corporation or its affiliates or related or associated companies, which information is not in the public
domain. The Executive acknowledges that such confidential information belongs to the Corporation and/or its affiliates and that its
disclosure or unauthorized use could be damaging or prejudicial to the Corporation and/or its affiliates and contrary to their best
interests.
Accordingly, the Executive agrees to respect the confidentiality of such information and not to make use of or disclose it to, or to
discuss it with, any person, other than in the ordinary course of his duties with the Corporation and its Affiliates, or as required under
applicable law, without the explicit prior written authorization of the Corporation.
This undertaking to respect the confidentiality of such information and not to make use of or disclose or discuss it to or with any
person shall survive and continue to have full effect notwithstanding the termination of the Executive's employment with the Corporation,
so long as such confidential information does not become public as a result of an act by the Corporation or a third party, which act does
not involve the fault of one of its Executives.
9.2
The term confidential information includes, among other things:
9.2.1
products, formulae, processes and composition of products, as well as raw materials and ingredients, of whatever kind, that are
used in their manufacture;
9.2.2
technical knowledge and methods, quality control processes, inspection methods, laboratory and testing methods, information
processing programs and systems, manufacturing processes, plans, drawings, tests, test reports and software;
8
9.2.3
equipment, machinery, devices, tools, instruments and accessories;
9.2.4
financial information, production cost data, marketing strategies, raw materials supplies, suppliers, staff and client lists and
related information, marketing plans, sales techniques and policies, including pricing policies, sales and distribution data and
present and future expansion plans; and,
9.2.5
research, experiments, inventions, discoveries, developments, improvements, ideas, industrial secrets and know-how.
9.3
The Executive agrees to keep confidential and not disclose to any third party both the existence and the terms of this Agreement, except
if disclosure is required by regulation or law In the event Executive is required to disclose the existence or terms of this Agreement
pursuant to subpoena or other duly issued court order, Executive shall give prompt notice to the Corporation of such subpoena or court
order to allow the Corporation sufficient opportunity to contest such subpoena or court order.
SECTION 10 – OWNERSHIP OF INTELLECTUAL PROPERTY:
10.1 The Executive hereby assigns and agrees to assign to the Corporation all of his intellectual property rights as of their creation and to
make full and prompt disclosure to the Corporation of all information relating to anything made or designed by him or that may be made
or designed by him during the period of his employment, whether alone or jointly with other persons, or within a period of two (2) years
following the termination of his employment and resulting from or arising out of any work performed by the Executive on behalf of the
Corporation (or its affiliates) or connected with any matter relating or possibly relating to any business in which the Corporation or any of
its affiliates or related or associated companies is involved unless specifically released from such obligation in writing by the
Corporation's Board of Directors.
10.2
In addition, the Executive renounces all moral rights in any document or work realized during the period of his employment related to his
employment by the Corporation. The Executive acknowledges that the Corporation has the right to use, modify or reproduce any such
document or work realized by the Executive, at its entire discretion, without the Executive's authorization and without his name being
mentioned.
10.3 At any time during the period of his employment or after the termination of his employment, the Executive shall sign, acknowledge and
deliver, at the Corporation's expense, but without compensation other than a reasonable sum for his time devoted thereto if his
employment has then terminated, any document required by the Corporation to give effect to Section 10.1, including patent applications
and documents evidencing the assignment of ownership. The Executive shall also provide such other assistance as the Corporation or
one of its affiliates may require with respect to any proceeding or litigation relating to the protection or defense of intellectual property
rights belonging to the Corporation or any of its affiliates.
10.4 The entirety of this Section 10 shall be binding on the Executive's heirs, assignees and legal representatives.
SECTION 11 – OWNERSHIP OF FILES AND OTHER PROPERTY:
11.1 Any property of the Corporation, including any file, sketch, drawing, letter, report, memorandum or other document, any equipment,
machinery, tool, instrument or other device, any diskette, recording tape, compact disc, software, electronic communication device or
any other property, which comes into the Executive's control or possession during his employment with the Corporation in the
performance or in the course of his duties, regardless of whether he has participated in its preparation or design, how it may have come
under his control or into his
9
possession and whether it is an original or a copy, shall at all times remain the property of the Corporation and, upon the termination of
the Executive's employment, shall promptly be returned to the Corporation or its designated representative.. The Executive may not
keep a copy or give one to a third party without the prior expressly written permission of the Chairman of the Board.
SECTION 12 – TERMINATION OF PRIOR CONTRACTS:
12.1 As of the effective date hereof, this Agreement supersedes and cancels any prior agreement, verbal or written, with respect to the
Executive's employment with the Corporation.
SECTION 13 – AMENDMENT OF THE AGREEMENT:
13.1 To be valid and enforceable, any amendment to this Agreement must be confirmed in writing by each of the Corporation and the
Executive.
SECTION 14 – NOTICES:
14.1 Any notice given hereunder shall be given in writing and sent by registered or certified mail or hand-delivered. If such notice is sent by
registered or certified mail, it shall be deemed to have been received five (5) business days following the date of its mailing if the postal
services are working normally. If such is not the case, the notice must be hand-delivered or served by bailiff, at the discretion of the
sender. In the case of hand-delivery or service, the notice shall be deemed to have been received the same day. It is agreed that if the
delivery date is a non- business day, the notice shall be deemed to have been received on the following business day.
For purposes of mailed or hand-delivered notices to be effectively delivered under this provision, the notices must be addressed as
follows:
For the Corporation, the address is: 1405 Parc-Technologique Blvd., Quebec City, Quebec, Canada G1P 4P5.
For the Executive, the address is: Mr. David Dodd, [civic address redacted for privacy reasons], South Carolina, USA
SECTION 15 – SUCCESSORS:
15.1 This Agreement shall be binding on the successors, heirs, assignees and legal representatives of all of the parties hereto.
SECTION 16 – JURISDICTION:
16.1 This Agreement shall be governed by and interpreted in accordance with the laws, including conflicts of laws, by the State of Delaware
in the United States of America.
SECTION 17 – SEVERABILITY:
17.1
If any provision of this Agreement or the application thereof is held invalid, the invalidity shall not affect other provisions or applications
of this Agreement, which can be given effect without the invalid provisions or applications and, to this end, the provisions of this
Agreement are declared to be severable.
SECTION 18 – MEDIATION:
18.1 The Corporation and the Executive hereby expressly agree that with respect to any dispute arising under this Agreement, such dispute
shall be resolved through binding mediation. Any
10
such mediation shall: (1) take place at a location mutually agreed upon by the Corporation and the Executive; and (2) be conducted by a
recognized panel of three professional mediators or which can be comprised of three experienced business experts from the
pharmaceutical or biotechnical industry mutually agreed upon by the Corporation and the Executive. With respect to any such mediation
panel, one mediator shall be selected by the Corporation, one mediator shall be selected by the Executive, and one mediator shall be
selected by mutual agreement between the Corporation and the Executive. Each of the parties hereto shall bear their own, respective
costs of such mediation.
SECTION 19 – LANGUAGE:
19.1 All of the parties hereto expressly agree that this Agreement be drafted, read and interpreted in the English language.
SECTION 20 – COUNTERPARTS:
20.1. This Agreement may be executed in counterparts, each of which shall be deemed one and the same Agreement.
SECTION 21 – REIMBURSEMENT OF LEGAL AND OTHER EXPENSES:
21.1. The Corporation shall reimburse the Executive in a total amount not to exceed Five Thousand Dollars US (US$5,000.00) for his
reasonable legal fees and expenses incurred in connection with the negotiation of this Agreement.
(Reminder of page intentionally left blank.)
11
NOW, THEREFORE, the Corporation and the Executive have duly signed this Agreement on the dates shown by their names below:.
AETERNA ZENTARIS INC.
(Remainder of page intentionally left blank.)
12
SCHEDULE A
Exceptions to the definition of Acquiring Person as used in Section 7 - Change of Control:
ACQUIRING PERSON SHALL MEAN ANY PERSON WHO IS AT ANY TIME AFTER THE DATE HEREOF THE BENEFICIAL OWNER OF
FIFTY PERCENT (50%) OR MORE OF THE OUTSTANDING VOTING SHARES, PROVIDED, HOWEVER, THAT THE TERM ‘ACQUIRING
PERSON' SHALL NOT INCLUDE:
(i)
(ii)
the Corporation or any corporation controlled by the Corporation;
any Person who becomes the beneficial owner of fifty percent (50%) or more of the outstanding Voting Shares as a result of one or
any combination of: (a) a Voting Share Reduction: (b) an Exempt Acquisition; or (c) a Pro Rata Acquisition; provided, however, that if a
Person shall become the Beneficial Owner of fifty percent (50%) or more of the outstanding Voting Shares by reason of one or any
combination of a Voting Share Reduction, an Exempt Acquisition or a Pro Rata Acquisition, and thereafter becomes the Beneficial
Owner of an additional one percent (1%) of any Voting Share then outstanding (otherwise than pursuant to an additional Voting Share
Reduction, Exempt Acquisition or Pro Rata Acquisition), then, as of the date that such Persona becomes a Beneficial Owner of such
additional Voting Shares, such Person shall become an Acquiring Person; or
(iii)
an underwriter or member of a banking or selling group acting in such capacity that becomes the Beneficial Owner of fifty percent
(50%) or more of the Voting Shares in connection with a distribution of securities pursuant to an underwriting agreement with the
Corporation.
The capitalized terms used herein shall have the following definitions:
(a)
(b)
(c)
(d)
Beneficial Owner or Beneficially Own means a Person or any of such Person's affiliates or associates, as such terms are defined in
Canada's National Instrument 45-106 - Prospectus and Registration Exemptions, who, by law or in equity, is deemed to own or to be
the owner of any securities.
Exempt Acquisition means an acquisition whereby a Person became an Acquiring Person by inadvertence and without any intention
to become, or knowledge that it would become, an Acquiring Person and, in the event that a waiver is granted by the Corporation's
Board of Directors, such acquisition shall be deemed not to have occurred for the purposes hereof. Any such waiver may only be
given on the condition that such Person, within ten (10) days after the foregoing determination by the Corporation's Board of Directors
or such later date as the Corporation's Board of Directors may determine (the Disposition Date), has reduced its Beneficial
Ownership of Voting Shares such that the Person is no longer an Acquiring Person and such waiver shall only be effective if the
reduction has occurred within such ten (10) day or longer period.
Person means any individual, firm, partnership, association, trust, trustee, executor, administrator, legal personal representative,
government, governmental body or authority, corporation, or other incorporated or unincorporated organization, syndicate or other
entity.
Pro Rata Acquisition means an acquisition by a Person of Voting Shares pursuant to (i) any dividend reinvestment plan, stock
purchase plan or other plan of the Corporation made available to all holders of Voting Shares (other than holders resident in any
jurisdiction where participation in such plan is restricted or impractical as a result of applicable law); (ii) a stock dividend, a stock split
or other event pursuant to which such Person becomes the Beneficial Owner of Voting
13
Shares on the same pro rata basis as all other holders of Voting Shares of the same class or series; (iii) the acquisition or exercise of
rights to purchase Voting Shares distributed to all holders of Voting Shares (other than holders resident in any jurisdiction where such
distribution or exercise is restricted or impractical as a result of applicable law) by the Corporation pursuant to a rights offering (but
only if such rights are acquired directly from the Corporation); or (iv) a distribution of Voting Shares or convertible securities in respect
thereof offered pursuant to a prospectus or by way of a private placement by the Corporation or a conversion or exchange of any such
convertible security, provided that such Person does not thereby acquire a greater percentage of Voting Shares or convertible
securities so offered than the Person's percentage of Voting Shares Beneficially Owned immediately prior to such acquisition.
(e)
(f)
Voting Shares means the shares of the capital of the Corporation to which generally attach voting rights which, as of the date hereof,
are the common shares of the capital of the Corporation.
Voting Share Reduction means an acquisition or redemption by the Corporation or any corporation controlled by the Corporation of
Voting Shares which, by reducing the number of Voting Shares of the Corporation outstanding, increases the percentage of Voting
Shares of the Corporation Beneficially Owned by any Person to fifty percent (50%) or more of the Voting Shares then outstanding.
14
Exhibit 4.7
100 Marketplace, Suite 203
25 Mountainview Blvd.
Basking Ridge, NJ 07920-3452
USA
1405 boul du Parc Technologique
Quebec (Quebec) G1P 4P5
Canada
June 14, 2013
BY REGISTERED MAIL OR HAND DELIVERED
Nicholas J. Pelliccione, Ph.D.
Senior Vice President, Regulatory Affairs and Quality Assurance
[civic address redacted for privacy reasons]
Re: Termination of the Change of Control Program
Dear Nick:
As provided in your employment agreement, Aeterna Zentaris Inc. (hereinafter the "Corporation") hereby formally informs you that the
Change of Control Program (hereinafter the "Program") that is currently detailed in Appendix 1 of your employment agreement is
terminated.
Section 5 of Appendix 1 of your employment agreement dated May 7th, 2007 provides that the Corporation may terminate the Program at
any time and for any reason by providing you with a written notice of at least 30 days prior to each anniversary date of the signature of the
agreement, namely May 7.
The Corporation has decided to exercise its right to terminate the Program.
As a consequence of the termination of the Program, section 7.1 and Appendix 1 of your employment agreement shall be deemed void and
inapplicable as of May 7th, 2014, although the termination of the Program does not affect the remaining provisions of your employment
agreement.
Please let me know if you have any questions related to the above.
Sincerely,
David A. Dodd
President and CEO
DIENSTVERTRAG
SERVICE CONTRACT
Exhibit 4.8
zwischen
between
Aeterna Zentaris GmbH, vertreten durch
die
Ge-sellschafterversammlung,
Weismüllerstraße 45, 60314 Frankfurt am
Main
Aeterna Zentaris GmbH, represented by
its
meeting,
Weismüllerstraße 45, 60314 Frankfurt
am Main
share-holders’
- nachstehend "Gesellschaft" genannt -
- hereinafter referred to as the “Com-pany”-
vertreten durch die Gesellschafterver-sammlung
represented by the shareholders’
meeting
Und
and
Herrn Dr. Richard Sach-se,[Adresse]
Dr. Richard Sachse, [Ad-dress]
- nachstehend "Dr. Sachse" -
DOCSMTL: 5406141/2
- hereinafter "Dr. Sachse" -
2
Artikel 1 - Aufgabenbereich und
Pflichten
1.1 Herr Dr. Sachse mit beidseitiger
Unterschrift unter diesen Vertrag
mit Wirkung zum 1. Januar 2014
zum Senior Vice President und
Chief Scientific Officer („CSO“)
der Muttergesellschaft der Gesell-
Inc,
schaft, Aeterna Zentaris
(„AEZS Inc.“) sowie als Ge-
schäftsführer der Gesellschaft be-
stellt worden. Der Begriff „Grup-
pe“ bedeutet im Rahmen dieses
Dienstvertrages AEZS Inc. ge-
meinsam mit sämtlichen Beteili-
gungsgesellschaften, unter ande-
rem auch der Gesellschaft. Mit
die-sem Dienstvertrag wird ein
Dienst-verhältnis zwischen den
Parteien geschlossen. In seiner
Funktion ist Dr. Sachse neben
der
Vorsitzen-den
dem
Geschäftsführung für die Leitung
der Gesellschaft sowie
- auf
Verlangen der Gesellschafter - der
und Beteiligungsge-
Tochter-
sellschaften verantwortlich. Er
ver-tritt
Gesellschaft
gemeinsam
die
Article 1 - Position and Scope of
Duties
1.1
Upon execution of this Service
Contract and effective January
01, 2014 (the “Effective Date”),
Dr. Sachse shall be appointed
Senior Vice President and Chief
Scientific Officer (“CSO”) of the
company,
Company´s parent
Aeterna Zentaris Inc (“AEZS
Inc.), as well as Managing Direc-
tor of the Company. For the pur-
poses of this Service Contract,
the term “Group” refers to AEZS
Inc. together with all of its sub-
sidiaries, including, for greater
certainty, the Company. By way
of this contract, the parties enter
into a service relationship. In his
capacity as Managing Director,
Dr. Sachse is, in addition to be-
ing the chairman of the manag-
ing board responsible for the
management of the Company
and - upon request of the share-
holders - of certain other mem-
bers of the Group. He represents
oder
einem
anderen
mit
Geschäftsführer
einem
Prokuristen. In seiner Funktion als
CSO berichtet Dr. Sachse an den
Präsident und Chief Executive
Officer der AEZS Inc oder eine
andere Person, wie durch die
Gesellschaft festgelegt.
.
1.2
Die Gesellschafter behalten sich
das Recht vor, jederzeit weitere
Geschäftsführer
bestellen
und/oder Dr. Sachse andere und/-
oder weitere Tätigkeiten zuzuwei-
sen oder Zuweisungen aufzuhe-
ben.
zu
der
Sorgfalt
1.3 Dr. Sachse wird seine Pflichten
mit
eines
ordentlichen Kaufmanns nach
Maßgabe der Be-stimmungen
dieses
des
Gesellschaftsvertrages, der Ge-
schäftsordnung , der allgemeinen
Richtlinien und besonderen An-
weisungen der Gesellschafter und
der Gesetze erfüllen und dabei
den Belangen der Gruppe in wirt-
Vertrages,
3
1.2
1.3
the company together with a fur-
ther Managing Director or the
“Prokurist” (authorized signato-
ry). In his CSO function, Dr.
Sachse shall report directly to the
President and Chief Executive
Officer of AEZS Inc or to such
other person or officer as may be
designated from time to time by
the Company.
The shareholders may, at any
time, appoint additional mana-
gers ("Geschäftsführer") and/or
assign different and/or additional
responsibilities to Dr. Sachse or
cancel responsibilities.
Dr. Sachse shall perform his du-
ties as Managing Director by ob-
serving the diligence of a prudent
businessman in accordance with
the provisions of this Service
Contract, the Company's Articles
of Association, the Standing Or-
ders for the Management Board,
the general and specific directi-
ves or instructions given by the
4
1.4
1.5
1.6
schaftlicher,
orga-nisatorischer
Sorge tra-gen.
finanzieller und
Hinsicht
Dr. Sachse nimmt die Rechte
und Pflichten des Arbeitgebers
im Sin-ne der arbeits- und
sozialrechtli-chen Vorschriften
wahr.
Der Dienstsitz ist Frankfurt am
Main Die Gesellschaft behält
sich vor, Dr. Sachse auch andere
seinen Kenntnissen und Fähig-
keiten sowie seiner Vorbildung
entsprechende und zumutbare
Verantwortungen und Aufgaben
zu übertragen und/oder ihn an
einen anderen Arbeitsplatz oder
Tätigkeitsort innerhalb der Ge-
sellschaft oder der Gruppe zu
versetzen. Dr. Sachse ist zu
Dienstreisen und längerfristiger
Tätigkeit bei Beteiligungsgesell-
schaften in In- und Ausland be-
reit.
Dr. Sachse versichert, dass er
weder einen Interessenkonflikt
noch-
1.4
1.5
1.6
shareholders, and in accordance
with the law. He will act in keep-
ing with the economic, financial
and organizational concerns of the
Group.
Dr. Sachse shall fulfil at all times
the rights and obligations of an
employer according to the appli-
cable labour and social law.
to
responsibilities
The principal place of business
shall be Frankfurt. The Company
shall have the right to delegate
and
additional
duties to Dr. Sachse which corre-
spond to his experience, skills and
knowledge and
transfer his
principle place of business within
the Company or to other members
the Group. Dr. Sach-se
of
understands
that
and
carrying out his duties and re-
sponsibilities requires him to travel
for business reasons and to work
for a longer period of time at one
of the Group´s locations abroad.
Dr. Sachse hereby attests and
confirms that he has no conflicts
agrees
Verpflichtungen irgendwelcher Art
gegenüber dritten Personen oder
Gesellschaften hat, ein-schließlich
früheren Arbeitgebern, welche nicht
im
die-sem
Dienstvertrag und der Durch-
führung
seiner Pflichten unter
diesem Dienstvertrag stehen.
Einklang
mit
Artikel 2 Aufgaben
Die Pflichten von Herrn Dr. Sachse
gegenüber der Gesellschaft sowie
der AEZS Inc. und anderen Mit-
gliedern der Gruppe beinhalten die
folgenden:
Durchführung sämtlicher Pflichten, die mit
der Funktion als Chief Scienti-fic
Officer einhergehen und solche
Aufgaben, wie sie von Zeit zu Zeit
vom Chief Scientific Officer der
Gruppe beschrieben werden kön-
nen.
Artikel 3 - Nebentätigkeiten
Dr. Sachse verpflichtet sich, seine gan-
5
interests with or any
of
obligation toward any person
including
or entity,
former
employers,
that would be
incompatible with this Service
Contract and the perfor-mance
of his duties as described in
this Service Contract .
Article 2 Duties
Dr. Sachse´s duties vis-a-vis the Com-
pany, AEZS Inc. as well as all other
members of the Group shall include
the following:
Performing all duties incident to the
office of Chief Scientific Officer of the
Group and such other duties as may be
prescribed from time to time by the
Chief Executive Officer of the Group.
Article 3 - Other Activities
Dr. Sachse shall devote his full work-
6
ze Arbeitszeit und Arbeitskraft der Ge-
sellschaft zu widmen. Es ist ihm wäh-
rend der Dauer dieses Vertrages nicht
gestattet, eine bezahlte oder unbezahlte
Tätigkeit auszuüben einschließlich ei- ner
Teilzeitbeschäftigung, es sei denn, es
liegt
vorherige
schriftliche Zustimmung der Gesell-
schafter vor. Die Erteilung oder Nich-
terteilung einer solchen Zustimmung
steht in dem freien Ermessen der Ge-
sellschafter.
ausdrückliche
eine
ing time and ability to the Company's
business. Any other activity for or
without remuneration including any part
time work, is subject to the ex- plicit
prior written
the
shareholders. The shareholder(s) may
refuse to grant such consent without
giving reasons therefor.
consent
of
Artikel 4 - Genehmigungsbedürftige
Geschäfte
Article 4 - Transactions Subject to
Consent
Für alle Geschäfte, die über die regulä- re
Tätigkeit der Gesellschaft hinausge-hen,
bedarf Dr. Sachse der vorherigen
schriftlichen Zustimmung der Gesell-
insbesondere der
schafter. Näheres,
Umfang der
zustimmungspflichtigen
Geschäfte, ergibt sich aus der Ge-
schäftsordnung der Geschäftsführung.
Dr. Sachse shall obtain the prior writ-
ten approval of the shareholder(s) to
effect any transactions outside the
usual scope of business. Details, par-
ticularly with respect to such transac-
tions
the
that require consent of
Quotaholders´ meeting, are evident
from the management guidelines.
Artikel 5 - Erfindungen
Article 5 - Inventions
5.1
Alle Rechte an Erfindungen, un-
5.1
All rights pertaining to inven-
ausschließ-lich
ihrer Patent- oder
abhängig von
Gebrauchsmusterschutzfähigkeit, an
technischen
Verbesserungsvor-
schlägen und an Computersoft-ware,
die von Dr. Sachse während der
Dauer dieses Vertrages ge-macht und
entwickelt werden (ins-gesamt im
Folgenden "Erfindun-gen" genannt)
stehen
der
Gesellschaft zu, ohne dass eine
zusätzliche Vergütung gezahlt wird.
Dr. Sachse hat die Gesell-schaft oder
eine von
ihr benannte Person
unverzüglich über Erfin-dungen in
Kenntnis
die
Gesellschaft bei der Erlangung von
sonstigen
Patentschutz
gewerblichen Schutzrechten
auf
Wunsch zu unterstützen.
Der vorstehende Absatz 5.1 gilt für
alle Erfindungen, gleichgültig
setzen
oder
und
zu
(a) ob sie im Zusammenhang mit
der
einem Geschäftszweig
Gruppe stehen oder nicht,
(b) ob sie auf Erfahrungen der
Gruppe beruhen oder nicht,
7
5.2
called
tions, whether patentable or not,
and to proposals for technical
improvements made and
to
com-puter software developed
by Dr. Sachse
(hereinafter
"Inventions")
jointly
during the term of this Service
shall be deemed
Contract
acquired by
the Compa-ny
without paying extra compen-
sation therefor. Dr. Sachse shall
the Company or a
inform
person designated by
the
Company of any Inventions
immediately
in writing and
shall assist the Com-pany in
acquiring
other
patent
industrial property rights, if the
Company so desires.
Subsection 5.1 above shall
apply to any Inventions no
matter whether
(a) they are related to the busi-
ness of the Group or not,
or
(b) they are based on experi-
ence and Know-how of any
5.2
8
(c) ob sie aus der Dr. Sachse
Gruppe
bei
der
obliegenden
Tä-tigkeit
entstanden sind oder nicht,
oder
5.3
(d) ob sie während der betriebs-
üblichen Arbeitszeit oder
au-ßerhalb der Arbeitszeit
ge-macht worden sind.
Die Rechte der Gesellschaft an
diesem
den
Dienstvertrag
zustehenden
Erfindungen werden durch
Änderungen dieses Dienst-
vertrages
seiner
Beendigung nicht berührt.
gemäß
und
ihr
Artikel 6 - Vergütung
6.1
200.000,
Grundgehalt: Dr. Sachse erhält
von
ein Bruttojahresgehalt
EUR
00
(zweihundert-tausend Euros)
zahlbar
in zwölf gleichen
monatlichen Beträgen am Ende
eines Monats. Das Bruttojah-
resgehalt wird jährlich mit Wir-
kung
eines
zum Beginn
Kalender-jahres überprüft.
member of the Group or not, or
(c) they are emanated from such
duties of activities as are to be
performed by Dr. Sachse within
the Group, or
(d) they are materialized during or
outside normal business hours of
the Group.
5.3
The Company's right to Inven-tions
acquired hereunder shall in no way
be affected by any amendments to or
the termina- tion of this Service
Contract.
Article 6 - Remuneration
6.1
Base Salary: Dr. Sachse shall be paid
a gross annual base salary in the
amount of EUR 200,000.00 (two
hundred thousand Euros) payable at
the end of each month in 12 equal
monthly instalments. The annual base
salary is eligible for revision annually
and any such revision shall be
effective at the beginning of each
calendar
9
6.2
6.2
Bonuszahlung: Dr. Sachse hat zu-
sätzlich Anspruch auf einen
jährli-chen Bonus, sofern die
betriebs-wirtschaftlichen
Ergebnisse der Gesellschaft einen
solchen recht-fertigen und das
Nominating, Governance
and
Compensation
Committee
Com-mittee”)
(“Governance
und/oder der Aufsichts- rat der
AEZS Inc. diesen geneh-migt hat.
Bei der Bemessung des Bonus
wird neben dem wirtschaft-lichen
Erfolg der Gesellschaft auch das
Erreichen individueller Ziele, die
jährlich durch das Governance
/ oder den
Committee und
Inc.
Aufsichtsrat der AEZS
gemeinsam mit
dem Chief
Execut-ive Officer der Gruppe
festzulegen sind, berücksichtigt.
Der Zielbonus berechnet sich in
der Größenord-nung von 50 %
des Grundgehalts
ist
vollständig
im Ermessen des
Governance Committees und des
Aufsichtsrats der AEZS Inc.
und
and
the company
year.
Cash Bonus: Dr. Sachse shall
additionally be entitled to earn an
annual bonus, if the economic re-
sults of
justify
payment of such bonus and sub-
ject to the determination and ap-
proval of the Nominating, Gov-
ernance
Compensation
“Governance
(the
Committee
Committee”) and/or the Board of
Directors of AEZS Inc. The tar-
get amount for any such bonus
shall be 50% of the base salary.
Bonus attainment will be as-sessed
according
overall
operational and corporate per-
formance of the Group as well as
individual
the achievement of
objectives as set by the Govern-
ance Committee and/or the Board
of Directors of AEZS Inc. in
conjunction with the Group’s Chief
Executive Officer on an annual
basis. The cash bonus is subject to
the
the
discretion
Governance Committee and the
Board of Directors of AEZS
full
the
of
to
10
6.3
und
welche
Aktienoptionen: Abhängig von der
Genehmigung durch den Auf-sichtsrat
der AEZS Inc. und
/ oder des
Governance Committees, er-hält Dr.
Sachse für das Jahr 2014 150,000
Aktienoptionen,
ihn
berechtigen, Stammaktien der AEZS
Inc. zu kaufen. Diese Akti-enoptionen
unterliegen was ihre Verfallbarkeit,
Ausübung, Preis
sämtliche
sonstige anwendba-ren Regelungen
angeht, dem Stock Option Plan der
AEZS Inc. Ab-hängig von einer
„blackout peri-od“, welche durch
AEZS Inc. auf-erlegt wird und durch
welche Insi-dern verboten würde, mit
Wertpa-pieren der AEZS Inc. zu
handeln, ist vorgesehen, dass diese
150,000 Aktienoptionen Herrn Dr.
Sachse so bald wie möglich nach Ab-
schluss dieses Dienstvertrages er-teilt
jedoch
werden,
innerhalb der ersten Quartals 2014.
Nachfolgend
erstmaligen
dieser
Gewährung von Aktienoptionen, ist
Herr Dr. Sachse zukünftig be-
jedem Fall
in
6.3
to
subject
Inc.
Stock Options: Subject to the
approval of AEZS
Inc.’s
Board of Directors and/or its
Govern-ance Committee, Dr.
Sachse shall be eligible to
receive in 2014 150,000 stock
options to purchase common
shares of the capital of AEZS
vesting,
Inc.,
exercise, pricing and all other
applicable terms of the Stock
Option Plan of AEZS Inc.
Subject to the foregoing and to
the existence of any blackout
pe-riod imposed by AEZS Inc.
that would prevent the trading
by in-siders in securities of
AEZS Inc., it is intended that
such 150,000 stock options
would be granted
to Dr.
Sachse as soon as practi-cable
following the execution of this
Service Contract and, in any
event, no later than the end of
the first fiscal quarter of 2014.
Following
initial stock
the
option grant as set forth in the
preceding
paragraph, Dr.
Sachse shall be
11
rechtigt, zusätzliche Aktienoptio-
nen unter dem Stock Option Plan
zu erhalten, jeweils im Ermessen
des Aufsichtsrats der AEZS Inc.
und / oder seiner Governance
Committees, nachfolgend der
Empfehlung des Chief Executive
Officers der Gruppe.
Durch Zahlung der oben genann-
ten Vergütung sind alle Tätigkei-
ten von Dr. Sachse nach diesem
Dienstvertrag abgegolten. Insbe-
sondere hat Dr. Sachse keinen
An-spruch auf Bezahlung von
Über-stunden
oder
Wochenendarbeit.
6.4
Artikel 7 - Nebenleistungen
Reisekosten
sonstige
und
7.1
notwen-digen Auslagen, die von
Dr. Sach-se im Interesse der
aufgewendet
Gesellschaft
werden, werden Dr. Sachse im
in Deutschland
Rahmen des
steuerrechtlich
Zuläs-sigen
erstattet.
to
6.4
receive additional
eligible
stock option grants in the future
under the Stock Option Plan at
the discretion of AEZS Inc.’s
Board of Directors and/or its
Governance Committee acting
upon the recommendation of the
Group’s Chief Executive Officer.
By payment of the above men-
tioned remuneration, all activities
which Dr. Sachse has to perform
under this Service Contract shall
be compensated. In particular, Dr.
Sachse shall not be entitled to any
additional
of
overtime work or work during
weekends.
Article 7 - Other Benefits
7.1 Travel expenses and other neces-
sary expenses incurred by Dr. Sach-
se in the furtherance of the Compa-
ny's business shall be reimbursed
according to the guidelines of the
Company and within the framework
of the principles applicable in Ger-
many for tax purposes.
compensation
12
7.2
7.2
Die Gesellschaft wird Dr. Sachse
einen Dienstwagen entsprechend
der Gesellschaft
der
bei
Richtlinie
geltenden
für
geschäftliche
private
und
Zwecke zur Verfügung stellen.
Alle Steuern, die durch das
Recht von Dr. Sachse zur Privat-
nutzung des Dienstwagens ent-
stehen, werden von Dr. Sachse
ge-tragen. Alle sonstigen Kosten
des Dienstwagens (Betriebs- und
Un-terhaltungskosten) trägt die
Im Fall einer
Ge-sellschaft.
Freistel-lung
ist der Wagen
zurückzuge-ben, ohne dass Dr.
Sachse
Zu-
rückbehaltungsrecht oder Nut-
zungsausfallansprüche hätte.
ein
shall
The Company shall provide Dr.
Sachse with a company car ac-
cording to the Company’s guide-
line for business and private use.
The value of the private use per
month as determined by the German
tax regulations for the particular
con-stitute
type of
car
additional compensation
to Dr.
Sachse which will be sub-ject to
wage withholding tax. The costs of
maintenance
the
company car shall be borne by the
Company. In case of a re-lease from
work the Company may take back
the car at any time. In this case, Dr.
Sachse shall have no right of
retention
damage
compensation claim.
and use of
and
no
7.3
Die Gesellschaft erstattet Dr.
Sachse
für die Dauer vom
01.01.2014 bis 30.06.2014 die
Kosten seiner Unterkunft
in
Frank-furt.
7.3
For the period from January 01,
2014 to June 30, 2014, the Com-
pany shall assume and directly pay
for the cost of an apartment for Dr.
Sachse in Frankfurt.
7.4
die
entsprechend.
Für die betriebliche Altersversor-
gung gilt die Betriebsvereinba-rung
über
rückgedeckte Ver-
sicherungskasse in ihrer jeweili-gen
Fassung
Ab
01.07.2014 erhält Dr. Sachse durch
die Gesellschaft eine frei-willige
arbeitgeberfinanzierte
Al-
tersversorgung nach Maßgabe der
dazu bestehenden Vereinbarun-gen.
Mit der Unterzeichnung die-ses
Dienstvertrages wandelt er ab dem
Juli 2014 einen Betrag in Höhe von
2 % seines versor-gungsfähigen
zur
Bruttoentgelts
Beitragsbemessungsgrenze
in der
gesetzlichen Rentenversiche-rung für
den
Versor-
gungsanwartschaften um. Durch
seine freiwillige Entscheidung kann
der Betrag von 2 % auf 3 % erhöht
werden. Die Gesellschaft wendet den
der
umgewandelten
Unterstützungskasse zu, welche die
arbeitgeberfinanzierte
Altersversorgung durchführt.
Be-trag
Erwerb
von
bis
13
7.4
the Company’s pension
For
scheme, the employer works
council agreement regarding the
pension fund in its respective
version is applicable for Dr.
Sachse. Starting July 01, 2014,
Dr. Sachse will receive a volun-
tary employer-financed retire-
ment provision as stated in this
agreement. Upon execution of
this Service Agreement and
start-ing
in July 2014, Dr.
Sachse shall convert 2% of his
gross salary up to the maximum
of the respective threshold in
the annuity assur-ance in order
to receive a right to future
pension benefits. By way of
voluntary decision this sum can
be increased from 2% to 3%.
The Company allocates
this
con-verted salary to the pension
the
fund, which
employer-financed
retirement
provision.
conducts
14
Artikel 8 - Arbeitsverhinderung
Article 8 - Inability to Perform Du-
8.1
8.2
Dr. Sachse ist verpflichtet, der
jede
Ge-sellschaft
ihre
Arbeitsverhinde-rung und
voraussichtliche
Dauer
unverzüglich anzuzeigen. Auf
Verlangen sind die Gründe der
Arbeitsverhinderung mitzutei-
len.
unverschuldeter
Im
Falle
Arbeits-unfähigkeit
durch
Krankheit oder Unfall erhält Dr.
Vor-lage
bei
Sachse
entsprechender ärztlicher Be-
scheinigungen für die Dauer von
bis zu sechs (6) Wochen sein mo-
natliches Brutto-Grundgehalt ge-
mäß Artikel 6.1 dieses Vertrages
weiter. Stirbt Dr. Sachse während
der Dauer dieses Dienstvertrages,
seine
erhalten
so
unterhaltsberech-tigten
Hinterbliebenen
einen
für
Zeitraum von drei Monaten sein
monatliches Brutto-Grundgehalt
gemäß Artikel 6.1 dieses Vertra-
ges.
8.1
8.2
ties
In case Dr. Sachse shall be unable
to perform his duties under this
Service Contract, he shall inform
the Company of such absence and
its prospective duration without
delay. Upon
request, he shall
inform the Company of the specific
reasons of such absence.
In the event of incapacity to per-
form the duties under this Ser- vice
Contract due to illness or accident
and without Dr. Sach- se´s fault, he
shall be entitled to a continuation of
his monthly gross base salary
according to Article 6.1 of this
Service Contract for a duration of
up to six (6) weeks, provided the
relevant doctor’s certificates are
furnished. If Dr. Sachse dies during
the term of this Service Contract,
his de-pendents can claim to be
paid his monthly gross base salary
ac-cording to Article 6.1 of this
Service Contract for a duration
Artikel 9 - Urlaub
9.1
9.2
von
Dr. Sachse hat Anspruch auf einen
Urlaub
30 Arbeitstagen;
Samstage werden dabei nicht mit-
gerechnet.
Der Zeitpunkt seines Urlaubes ist
unter Berücksichtigung der be-
trieblichen Notwendigkeiten und den
persönlichen Wünschen von Dr.
Sachse
in Abstimmung mit den
Gesellschaftern festzulegen, wobei
die persönlichen Wünsche von Dr.
Sachse sowie die Interes-sen der
Gruppe zu berücksichtigen sind.
Artikel 10 - Verschwiegenheitspflicht
10.1 Dr. Sachse verpflichtet sich, alle ihm
be-
sonst
anvertrauten
kanntgewordenen
geschäftliche,
betrieblichen oder technischen In-
formationen, die sich auf die Ge-
sellschaft oder andere Mitglieder der
Gruppe beziehen und vertrau-lichen
Charakter haben, Dritten
oder
15
of three months.
Article 9 - Vacation
9.2
9.1 Dr. Sachse shall be entitled
to an annual vacation of 30
working days excluding Satur-
days.
The time of vacation shall be
determined in agreement with
thereby
the
taking in-to consideration the
personal wishes of Dr. Sachse
and the in-terests of the Group.
shareholder(s),
Article 10 - Confidentiality
10.1 Dr. Sachse shall not disclose to
any third party or use for
person-al gain, any confidential
tech- nical or other business
infor-mation which has been
entrusted to him, or which has
otherwise become known to Dr.
Sachse and which relates to the
Company or
16
der
nicht zu offenbaren und nicht für seine
eigenen Zwecke zu verwen-den. Dies
insbesondere hin-sichtlich der
gilt
Einzelheiten
Be-
triebsorganisation, hinsichtlich der
Beziehungen zu Kunden und Auf-
technischen
traggebern und des
Know-How
der Gruppe. Diese
Verpflichtung gilt sowohl während der
Anstel-
dieses
Dauer
lungsverhältnisses als auch nach
seiner Beendigung.
to any other members of the
Group. In particular, no infor-
mation may be disclosed con-
cerning the organization of the
business, the relation with cus-
tomers and suppliers and the
Group’s
This
obliga-tion shall not expire
upon
the
Service Contract but shall
continue to remain in force
thereafter.
termi-nation of
know-how.
sind
10.2 Geschäftliche Unterlagen aller Art,
einschließlich der auf dienstliche
Angelegenheiten und Tätigkeiten sich
persönlichen
beziehenden
Aufzeichnungen,
sorgfältig
aufzubewahren und dürfen nur zu
geschäftlichen Zwecken verwen-det
werden. Das Anfertigen
von
Abschriften oder Auszügen sowie das
Kopieren
Zeichnungen,
Kostenberechnungen, Statistiken und
Ge-
ähnlichem
schäftsunterlagen
für
dienstliche Zwecke zulässig.
10.3 Bei Beendigung des Anstellungs-
verhältnisses hat Dr. Sachse von
andere
von
und
nur
ist
the
only
affairs
10.2 Business records of any kind,
including private notes con-
cerning
and
activities of the Group, shall
be carefully kept and shall be
used
business
purposes. No copies or extract
or duplicates of drawings,
calculations, statistics and the
like nor of any other business
records may be copied or ex-
tracted for purposes other than
for the Group’s business.
for
10.3 Upon
termination of
this
Service Contract, Dr. Sachse
shall return
17
sämtli-
und Kopien
sich aus alle in seinem Besitz be-
findlichen
Geschäftsunterlagen,
Mitteilungen oder Akten in schrift-
licher oder elektronischer Form, sowie
Abschriften
da-von
herauszugeben. Darüber hin-aus wird
Herr Dr.
che
Sachse
Arbeitsgeräte, welche ihm von der
Gesellschaft zur Verfügung gestellt
in deren Ei-gentum
wurden, und
stehen zurückgeben. Dies beinhaltet
Computer-zubehör,
Computer,
ähnli-ches Dr.
Mobiltelefon und
Zu-
Sachse
rückbehaltungsrecht
Firmenei-
gentum zu.
kein
an
steht
Artikel 11 Wettbewerbsverbot
11.1 Dr. Sachse soll in keiner Weise in
Wettbewerb mit der Gesellschaft oder
der Gruppe treten. Er soll in keiner
Funktion
einer Gesell-schaft
teilhaben, welche direkt o-der indirekt
im Wettbewerb zur Gesellschaft oder
der Gruppe steht. Dies beinhaltet
Gesellschaf-
an
business
documents,
all
commu-nications or records
in written or electronic form
as well as all copies thereof.
In addition, Dr. Sachse shall
return all business equipment
provided to him and owned
by the Company, includ-ing
but not limited to his com-
adjunct
computer
puter,
equip-ment,
cellular
telephone and the like. Dr.
Sachse shall have no right of
retention of any Compa-ny
property.
Article 11 Non-compete
11.1 Dr. Sachse shall not compete
with the Company or the
Group, di-rectly or indirectly.
He shall not participate in any
capacity what-soever
in a
business that would directly
or indirectly compete with the
Company
any
member
the Group,
including
or with
of
18
ten, die mit der Entwicklung und
Vermarktung von speziellen The-
rapien in der Endokrinologie und
Onkologie befasst sind, welche
auch die Gesellschaft oder die
Gruppe aktive entwickeln. Dies
beinhaltet eine potentielle Tätig-
keit als
leitender Angestellter,
Aufsichtsrat, Makler, Treuhänder,
Vermögensverwalter, Gesellschaf-
ter, Unternehmer, Franchisegeber,
Franchisenehmer, Händler oder
Berater, insofern eine solche Teil-
habe nicht vollständig offengelegt
und von der Gesellschaft und der
Gruppe im Vorhinein schriftlich
genehmigt wurde. Dr. Sachse wird
darüber hinaus keine Anteile jed-
weder Art an einer solchen Gesell-
schaft haben, weder als Eigentü-
mer, Aktionär, Partner, Partner mit
beschränkter Haftung, Darlehens-
geber oder stiller Teilhaber. Diese
Wettbewerbsklausel ist wie folgt
beschränkt:
(a) Zeitlich auf die Dauer dieses
Dienstvertrages sowie ein Jahr
one involved in the development
and commercialization of
the
specific endocrine therapies and
oncology treatments, which the
Company or any member of the
Group is actively developing, in-
cluding, without limitation, as an
executive, director, officer, em-
ployer, principal, agent, fiduci-
ary, administrator of another’s
property, associate, independent
contractor, franchisor, franchi-
see, distributor or consultant un-
less such participation is fully
disclosed to and approved in
writing in advance by the Com-
pany or the Group. In addition,
Dr. Sachse shall not have any in-
terest whatsoever in such an en-
terprise, including, without limi-
tation, as owner, shareholder,
partner, limited partner, lender or
non-
silent
competition covenant is limited
as follows:
(a) As to the time period, to the
duration of this Agreement
and for a pe-
partner.
This
19
(b)
riod of one (1) year fol-lowing
the date of termi-nation of this
Agreement:
the
As to the geographical area, the
territory in which a specific
product had been actively ex-
ploited by the Corpora-tion or
the Group
any member of
(2) years
during
two
preceding
employment
the
termination date. For purposes
of this clause, the Corpora-tion
and the Group are deemed to
have actively exploited such
territory for such product if,
dur-ing the two (2) years im-
the
mediately
employment termination date:
(i) Distribution rights for
this product were granted
to a distributor of the
Corporation or
preceding
(b)
das
auf
nach Beendigung dieses
Dienst-vertrages.
Geographisch
Gebiet, in
welchem
spezielles
ein
Produkt während der letzten
zwei Jahre vor Beendigung
dieses Dienstver-trages aktiv
durch die Gesell- schaft oder
vertrieben
die Gruppe
wurde. Die Gesellschaft und
die Gruppe haben dann im
Rahmen dieses Absatzes ein
Produkt aktiv während der
Jahre vor
letzten
Beendigung
dieses
Dienstver-tages vertrieben,
wenn:
zwei
(i) Vertriebsrechte
für
die-ses Produkt an
einen
Vertragshändler
der Gesellschaft
oder der Gruppe
aufgrund
eines
(exklusiven oder
nicht-exklusiven)
Vertriebs-
vertrages vergeben
wurden
Die
Gesellschaft oder
die Gruppe eine
Phase II Studie für
dieses Produkt im
jeweiligen Gebiet
beendet hat o-
(ii)
der sich nach
kommer-ziellen
Partnern
umge-
sehen hat oder
Patente für dieses
und
Produkt
seinen Gebrauch
an-gemeldet oder
gesi- chert hat
(c)
(a)Inhaltlich
auf
die
Tätigkeiten und Pflichten,
welche identisch oder im
wesentlichen gleich
sind
wie jene, die von Dr. Sachse
während der 24 Monate vor
Beendigung
dieses
Dienstvertrages ausgeführt
wurden.
20
(c)
any member of the Group
pursuant to a distribution
agreement (exclu-sive or
non-exclusive); or if
Phase
(ii) The Corporation or any
member of the Group has
completed
II
clinical
deve-lopment
work for this product in
this territory, or searched
for commercial part-ners
or applied to protect its
intellec-tual
property
rights in relation to the
product and its use.
to
the nature of
As
the
activities, to duties or ac-tivities
which
or
substantially simi-lar to those
performed or
identi-cal
are
21
11.2 Der vorstehenden Bedingungen
sollen jedoch Dr. Sachse nicht da-
ran hindern, Aktien oder andere
Wertpapiere einer Gesellschaft zu
kaufen oder zu besitzen, mit Aus-
nahme der AEZS Inc., deren
Wertpapiere öffentlich an einer
anerkannten Börse gehandelt wer-
den, insofern diese Wertpapiere,
welche im Besitz von Dr. Sachse
sind, nicht mehr als fünf Prozent
(5%) der Stammaktien dieser Ge-
sellschaft ausmachen und sie ihn
nicht dazu ermächtigen, darüber
Kontrolle auszuüben.
Sollte Dr. Sachse nach Beendigung
dieses Dienstvertrages aufgrund
des nachvertraglichen Wettbe-
werbsverbots keine Neubeschäfti-
11.3
11.2 The
carried on by Dr. Sachse
during the twenty-four
(24) months preceding
the termination of this
Agreement.
foregoing
stipulation
shall nevertheless not prevent
Dr. Sachse from buying or
holding
shares or other
securities of a corporation or
entity, other than AEZS Inc.,
whose securities are publicly
traded on a recognized stock
exchange where the securi-
ties so held by Dr. Sachse do
not represent more than five
percent (5%) of the voting
shares
other
corporation or entity and do
not allow for its control.
Should Dr. Sachse, due to the
post-termination
non-
compete clause not find a
new
the
employ-ment,
Company will continue
such
of
11.3
22
gung finden, erhält er sein Grund-
gehalt nach Artikel 6.1 weiter ge-
zahlt. Mit Aufnahme einer neuen
Beschäftigung,
spätestens nach
Ablauf der Wettbewerbsverbots-
dauer von einem Jahr nach Been-
digung dieses Dienstvertrages, ent-
fällt diese Zahlung.
Artikel 12 - Vertragsdauer und Kün-
digung
12.1 Dieser Dienstvertrag ist auf unbe-
stimmte Dauer geschlossen. Das
Anstellungsverhältnis endet jedoch
spätestens mit Ablauf des Monats,
in dem Dr. Sachse das gesetzliche
Rentenalter
in Deutschland er-
reicht, ohne dass es einer Kündi-
gung bedarf.
Die Gesellschaft ist berechtigt,
den
12.2
Dienstvertrag mit einer Frist von 6 Mo-
naten zum Monatsende grundlos zu kün-
digen. Im Falle einer Kündigung unter
diesem Absatz 12.2 hat Dr. Sachse ledig-
lich Anspruch auf die Grundvergütung für
die Zeit der Kündigungsfrist.Darüber
hinausgehende Ansprüche auf eine Bo-
to pay him his base salary in ac-
cordance with Article 6.1 above.
Once he starts a new employ-
ment, in any case once the non-
compete period ends one year af-
ter termination of this service
agreement, these payments will
cease.
Article 12 - Term of Employment
and Notice
12.1 This Service Contract shall not
have any fixed or minimum term.
It shall, however, end without the
need to give notice not later than
the expiry of the month during
which Dr. Sachse attains
the
minimum age of legal retirement
in Germany.
12.2 The Company shall be entitled to
terminate this Service Contract
without cause by giving Dr. Sach-
se 6 months’ prior notice effective
to the end of any calendar month.
In case of termination without
cause under this Section 12.2, Dr.
Sachse is only eligible to his base
nuszahlung
Zahlungen bestehen nicht.
oder
sonstige
12.3
12.4
Im Falle der Kündigung des
Dienstverhältnisses nach Art. 12.2
ist die Gesellschaft berechtigt, Dr.
Sachse für die Restlaufzeit des
Vertrages von seinen Dienstpflich-
ten unter Fortzahlung seines Geh-
altes zu entbinden. In diesem Falle
kann die Gesellschaft Dr. Sachse
das Recht einräumen, sich auch
bereits während der Kündigungs-
frist eine neue Beschäftigung zu
suchen. Sollte er eine neue Be-
schäftigung aufnehmen, entfällt ab
diesem Zeitpunkt die Pflicht der
Gesellschaft zur Zahlung des Ge-
halts.
Im Falle einer fristlosen Kündigung
aus besonderem Grund durch die
Gesellschaft erhält Dr. Sachse
keine
den
über
Zahlungen
Kündigungs-zeitpunkt hinaus.
23
12.3
terminated according
salary for the duration of the ter-
mination period. No exceeding
claims to a cash bonus or others
exist.
In case this Service Contract has
to
been
Section 12.2, the Company is en-
titled to relieve Dr. Sachse from
work at any time. In this case, the
Company shall continue to pay the
salary to Dr. Sachse for a period of
6 months after the no-tice has
become effective. In case
the
Company admits Dr. Sachse to
start a new employment within the
cancellation period the Com-pany
shall
its
relieved
obligation to pay said salary from
the date of the new em-ployment.
from
be
12.4
In case of termination of this
Service Contract by the Compa-ny
with cause, Dr. Sachse will not
receive any payments after the
date on which Dr. Sachse is first
advised by the Company of such
termination with cause.
24
12.5 Die Kündigung bedarf der Schrift-
form, wobei Telefax und sonstige
telekommunikative
Übermitt-
lungswege i.S. von § 127 Abs.2
BGB ausreichen.
Artikel 13- Weitere Bestimmungen
13.1 Änderungen oder Ergänzungen,
dieses Vertrages bedürfen der
Schriftform und müssen sowohl
von der Gesellschaft als auch von
Dr. Sachse unterzeichnet sein..
13.2 Dieser Dienstvertrag und seine
Auslegung unterliegen deutschem
Recht und deutschem Gerichts-
stand am Sitz der Gesellschaft. Bei
Auslegungszweifeln entscheidet die
deutsche Fassung dieses zwei-
sprachigen Vertragstextes.
13.3 Dieser Dienstvertrag enthält die
gesamte Vereinbarung zwischen
den Parteien. Bereits getroffene
Vereinbarungen zwischen den Par-
teien über ein Arbeits- oder
Dienstverhältnis werden hiermit
12.5 Notice of termination must be
given in writing; fax or any other
telecommunication device within
the meaning of Sec. 127 para. 2
German Civil Code will suffice.
Article 13- Final Provisions
13.1 Any amendments of or additions
to this Service Contract shall be
made in writing signed by each of
the Company and Dr. Sachse in
order to be effective.
13.2 This Service Contract and
its
interpretation are governed by
German law. The place of juris-
diction shall be the corporate seat
of the Company. In cases of doubt,
the German version of
this
bilingual Contract shall prevail.
13.3 This Service Contract represents
the entire agreement and under-
standing of the parties. This Ser-
vice Contract supersedes and re-
places all other previously issued
contracts regarding the employ-
25
aufgehoben. Über diesen Dienst-
vertrag hinausgehende schriftliche
oder mündliche Absprachen sind
nicht getroffen worden.
13.4 Dieser Dienstvertrag ist seitens Dr
Sachse nur mit vorheriger schrift-
licher Zustimmung der Gesell-
schaft teilweise oder vollständig
übertragbar.
13.5 Dr. Sachse erkennt hiermit an, dass
die AEZS Inc. sowie jedes andere
Mitglied der Gruppe durch diesen
Dienstvertrag begünstigt sein sol-
len und Ansprüche aus diesem
Dienstvertrag direkt gegen Dr.
Sachse durchsetzen können.
the parties. No
ment between
written or verbal agreements out-
side this Service Contract have
been made.
13.4 Dr. Sachse may only assign this
Service Contract in whole or in part
with the Company´s prior written
consent.
13.5 Dr. Sachse hereby agrees and
acknowledges that AEZS Inc. and
each other member of the Group
shall be beneficiaries of this Ser-
vice Contract and that they shall be
entitled to enforce claims here-
under directly against Dr. Sachse.
Exhibit 4.10
100 Marketplace, Suite 203
25 Mountainview Blvd.
Basking Ridge, NJ 07920-3452
USA
1405 boul du Parc Technologique
Quebec (Quebec) G1P 4P5
Canada
June 14, 2013
BY REGISTERED MAIL
Mr. Dennis Turpin, CPA, CA
Senior Vice President and Chief Financial Officer
1405 boul du Parc Technologique
Quebec (Quebec) G1P 4P5
Canada
Re: Termination of the Change of Control Program
Dear Dennis:
As provided in your employment agreement, Aeterna Zentaris Inc. (hereinafter the "Corporation") hereby formally informs you that the
Change of Control Program (hereinafter the "Program") that is currently detailed in Appendix 1 of your employment agreement is
terminated.
Section 5 of Appendix 1 of your employment agreement dated June 29, 2007 provides that the Corporation may terminate the Program at
any time and for any reason by providing you with a written notice of at least 30 days prior to each anniversary date of the signature of the
agreement, namely June 29.
The Corporation has decided to exercise its right to terminate the Program.
As a consequence of the termination of the Program, section 7.1 and Appendix 1 of your employment agreement shall be deemed void and
inapplicable as of June 29, 2014, although the termination of the Program does not affect the remaining provisions of your employment
agreement.
Please let me know if you have any questions related to the above.
Sincerely,
David A. Dodd
President and CEO
Exhibit 8.1
SUBSIDIARIES OF THE REGISTRANT
AETERNA ZENTARIS INC.
Aeterna Zentaris Inc.
(Canada)
100%
Aeterna Zentaris GmbH
(Germany)
100%
Zentaris IVF GmbH
(Germany)
100%
Aeterna Zentaris, Inc.
(Delaware)
Certification of the Principal Executive Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002
Certification
Exhibit 12.1
I, David A. Dodd, certify that:
1.
I have reviewed this annual report on Form 20-F of Aeterna Zentaris Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the company as at, and for, the periods presented in this report;
4. The company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as at the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the
annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and
5. The company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the company's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control
over financial reporting.
Date: March 20, 2014
/s/ David A. Dodd
David A. Dodd
President and Chief Executive Officer
(principal executive officer)
Certification of the Principal Financial Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002
Certification
Exhibit 12.2
I, Dennis Turpin, certify that:
1.
I have reviewed this annual report on Form 20-F of Aeterna Zentaris Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the company as at, and for, the periods presented in this report;
4. The company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as at the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the
annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and
5. The company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the company's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control
over financial reporting.
Date: March 20, 2014
/s/ Dennis Turpin
Dennis Turpin
Senior Vice President and Chief Financial Officer
(principal financial officer)
Exhibit 13.1
Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Aeterna Zentaris Inc. (the “Company”) on Form 20-F for the year ended December 31, 2013 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, David A. Dodd, President and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Dated: March 20, 2014
/s/ David A. Dodd
David A. Dodd
President and Chief Executive Officer
Exhibit 13.2
Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Aeterna Zentaris Inc. (the “Company”) on Form 20-F for the year ended December 31, 2013 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Dennis Turpin, Senior Vice President and Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Dated: March 20, 2014
/s/ Dennis Turpin
Dennis Turpin
Senior Vice President and Chief Financial Officer
Exhibit 15.1
We hereby consent to the incorporation by reference in the registration statement on Form F-3 (No. 333-194547) and F-10/A (No. 333-194080) of Aeterna
Zentaris Inc. of our report dated March 20, 2014 relating to the consolidated financial statements and the effectiveness of internal control over financial
reporting, which appears in this Form 20-F.
CONSENT OF INDEPENDENT AUDITOR
Québec, Quebec
March 20, 2014
1
CPA auditor, CA, public accountancy permit No. A123498