Nuvo Pharmaceuticals, Inc. Annual Report 2015

FY2015 Annual Report · Nuvo Pharmaceuticals, Inc.

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Nuvo Research Inc. Annual Report 2015

Management’s Discussion and Analysis (MD&A)

February 17, 2016 / The following information should be read in conjunction with the Nuvo Research® Inc.
(Nuvo or the Company) Consolidated Financial Statements for the year ended December 31, 2015 which
were prepared in accordance with International Financial Reporting Standards (IFRS) and filed on
SEDAR on February 17, 2016. Additional information relating to the Company, including its Annual
Information Form (AIF), can be found on SEDAR at www.sedar.com.

All amounts in the MD&A, Consolidated Financial Statements and related Notes are expressed in
Canadian dollars, unless otherwise noted.

On December 14, 2015, Nuvo, 2487002 Ontario Limited and 2487001 Ontario Limited entered into an
arrangement agreement (Arrangement Agreement) in respect of a reorganization of Nuvo into two
separate publicly traded companies (Reorganization), Nuvo Pharmaceuticals Inc. (Nuvo Pharma) and
Crescita Therapeutics Inc. (Crescita) that would each be owned 100% by Nuvo shareholders.
References in this MD&A to Nuvo Pharmaceuticals or Nuvo Pharma are to Nuvo Research Inc.’s
commercial healthcare business that would be operated by Nuvo Pharmaceuticals Inc. if the
Reorganization is completed and references to Crescita Therapeutics or Crescita are to Nuvo Research
Inc.’s drug development business as it is proposed to be transferred to Crescita Therapeutics Inc. if the
Reorganization is completed. However, completion of the Reorganization remains subject to a number of
conditions and Nuvo may decide in its discretion not to proceed with the Reorganization for any
reason. Accordingly, there can be no assurance that the Reorganization will be completed as planned or
at all. For further details, see Corporate Development – Proposed Reorganization of the Company.

Forward-looking Statements

Certain statements in this MD&A constitute forward-looking information and/or forward-looking statements
(collectively, “forward-looking statements”) statements within the meaning of applicable securities laws.
Forward-looking statements include, but are not limited to, statements made under the headings
[“Overview”, “Results of Continuing Operations, “Risk Factors”] and other statements concerning
the Company’s future objectives, strategies to achieve those objectives, as well as statements with
respect to management’s beliefs, plans, estimates, and intentions, and similar statements concerning
anticipated future events, results, circumstances, performance or expectations that are not historical
facts. Forward-looking statements also include statements regarding the proposed Reorganization of
Nuvo into two separate publicly-traded companies. Forward-looking statements generally can be
identified by the use of forward-looking terminology such as “outlook”, “objective”, “may”, “will”, “expect”,
“intend”, “estimate”, “anticipate”, “believe”, “should”, “plans” or “continue”, or similar expressions
suggesting future outcomes or events. Such forward-looking statements reflect management’s current
beliefs and are based on information currently available to management. Forward-looking statements
involve risks and uncertainties that could cause actual results to differ materially from those contemplated
by such statements. Factors that could cause such differences include general business and economic
uncertainties and adverse market conditions as well as other risk factors included in this MD&A under the
heading “Risks Factors”, the Company’s AIF and as described from time to time in the reports and
disclosure documents filed by the Company with Canadian securities regulatory agencies and
commissions. Additional factors that could affect the proposed Reorganization and the operation of Nuvo
Pharma and Crescita as separate publicly-traded companies are described in the Reorganization Circular
(as defined below) under the heading “Risk Factors”. This list is not exhaustive of the factors that may
impact the Company’s forward-looking statements. These and other factors should be considered
carefully and readers should not place undue reliance on the Company’s forward-looking statements. As
a result of the foregoing and other factors, no assurance can be given as to any such future results, levels
of activity or achievements and neither the Company nor any other person assumes responsibility for the
accuracy and completeness of these forward-looking statements. The factors underlying current
expectations are dynamic and subject to change. Although the forward-looking statements contained in
this MD&A are based upon what management believes are reasonable assumptions, there can be no
assurance that actual results will be consistent with these forward-looking statements. All forward-looking
statements in this MD&A are qualified by these cautionary statements. The forward-looking statements

contained herein are made as of the date of this MD&A and except as required by applicable law, the
Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as
a result of new information, future events or otherwise.

Corporate Development
Proposed Reorganization of the Company
On December 14, 2015, Nuvo, 2487002 Ontario Limited and 2487001 Ontario Limited entered into the
Arrangement Agreement in respect of the proposed Reorganization of Nuvo into two separate publicly-
traded companies. Nuvo Pharma would be a revenue and EBITDA generating commercial healthcare
company to be owned 100% by Nuvo’s shareholders. The second company, Crescita, would be a drug
development company also initially owned 100% by Nuvo’s shareholders. Crescita would have a
diversified pipeline of product candidates and sufficient cash resources to execute its current business
plan into 2017. The obligation of Nuvo to complete the Reorganization is subject to receipt of a number
of approvals and fulfillment of a number of conditions, including the approval of the Ontario Superior
Court of Justice, the final approval of the Toronto Stock Exchange and the approval of Nuvo’s
shareholders. If the Reorganization is approved by shareholders and all other conditions are satisfied,
Nuvo expects the Reorganization to be completed in the first quarter of 2016. However, there can be no
assurances regarding the ultimate timing of the Reorganization or that the Reorganization will be
completed at all. Even if the Reorganization is approved by shareholders and all other conditions are
satisfied, Nuvo’s Board of Directors will have the authority to determine when to effect the
Reorganization, as well as the authority to decide not to proceed with the Reorganization at all.

If the proposed Reorganization proceeds, there will be a significant and material effect on the operations
and results of Nuvo. Detailed information regarding the proposed Reorganization and its effects including
a description of certain risks and uncertainties in respect of the Reorganization and the operation of Nuvo
Pharma and Crescita as separate publicly traded companies are included in the Reorganization Circular
dated December 31, 2015 (Reorganization Circular) that is available under Nuvo’s profile at
www.sedar.com.

Overview

Background
Nuvo is a publicly traded, Canadian life sciences company with revenues and a diverse portfolio of topical
products and technologies. The Company operates two distinct business units: Nuvo Pharma and
Crescita. Nuvo Pharma is a commercial healthcare business with three commercial products. Crescita is
a drug development business that operates two sub-groups: the Topical Products and Technology (TPT)
Group and the Immunology Group. The TPT Group has one commercial product, a pipeline of topical
and transdermal products focusing on pain and dermatology and multiple drug delivery platforms that
support the development of patented formulations that can deliver actives into or through the skin. The
Immunology Group has two commercial products.

Subsequent to the year ended December 31, 2015 Nuvo’s Board of Directors unanimously approved a
proposal to initiate a divestiture or orderly wind down of the Company’s Immunology Group. While the
Company continues to explore a possible sale of the Immunology Group, if a divestiture transaction does
not materialize, the wind down of the Immunology operations is expected to be completed by the end of
2016.

As of December 31, 2015, the Company and its subsidiaries employed a total of 74 full-time employees at
its head office in Mississauga, Ontario, its manufacturing and research facility in Varennes, Québec, its
manufacturing facility in Wanzleben, Germany and its research and development (R&D) facility in Leipzig,
Germany.

Nuvo Pharma
Nuvo Pharma is a commercial healthcare business with a portfolio of products and pharmaceutical
manufacturing capabilities. Nuvo Pharma has three commercial products that are available in a number
of countries: Pennsaid 2%, Pennsaid and the HLT Patch.

Pennsaid 2%
Pennsaid 2% is a follow-on product to original Pennsaid. Pennsaid 2% is a non-steroidal anti-
inflammatory drug (NSAID) containing 2% diclofenac sodium compared to 1.5% for original Pennsaid. It
is more viscous than original Pennsaid, is supplied in a metered dose pump bottle and has been
approved in the U.S. for twice daily dosing compared to four times a day for Pennsaid. This provides
Pennsaid 2% with advantages over Pennsaid and other competitor products and with patent protection.

The following table summarizes where the Company’s partners have commercialized Pennsaid 2% or are
working to obtain regulatory approval:

Brand
Pennsaid 2%

Therapeutic
Area
Osteoarthritis
of the knee

Licensee or
Distributor
Horizon Pharma plc

Licensed
Territories
United States

Paladin Labs Inc. 1

Canada1

NovaMedica LLC

Russia1; some
Community of
Independent States1

Intellectual Property
Twelve granted U.S. patents listed in
the FDA’s Orange Book with latest
expiry in 2030.

One patent granted in Canada expiring
in 2027.

One patent granted in Russia expiring
in 2027.

1. Partner is working to obtain regulatory approval in licensed territory.

The following table summarizes additional development the Company is undertaking to expand the
therapeutic area of Pennsaid 2%:

Product
Pennsaid 2%

Therapeutic
Area
Acute strains &
sprains

Stage of
Development
Phase 3 clinical
trials

Intellectual Property 1
Patents granted in AU, CA, CH, DE, DK, FR, GB, GR,
IE, IL, IT, NL, HK, JP, MX, NZ, RU, ZA, expiring in
2027. Applications pending in 5 countries.

Patent applications pending in AU, BR, CA, CL, CN,
EP, IL, JP, MX and RU through 2033.

1 Region and country abbreviations defined as follows: Australia (AU), Canada (CA), Denmark (DK), Europe (EP), France (FR),
Germany (DE), Great Britain (GB), Greece (GR), Ireland (IE), Italy (IT), Netherlands (NL), Hong Kong (HK), Japan (JP), Mexico
(MX), New Zealand (NZ), Russian Federation (RU), South Africa (ZA), Switzerland (CH), United States (U.S.).

Pennsaid 2% was approved on January 16, 2014 in the U.S. for the treatment of the pain of osteoarthritis
(OA) of the knee and is not currently approved for sale or marketing in any other jurisdiction. OA is the
most common joint disease affecting middle-age and older people. It is characterized by progressive
damage to the joint cartilage and causes changes in the structures around the joint. These changes can
include fluid accumulation, bony overgrowth and loosening and weakness of muscles and tendons, all of
which may limit movement and cause pain and swelling. In the U.S. market, Pennsaid 2% was originally
licensed to Mallinckrodt Inc. (Mallinckrodt). In September 2014, the Company reached a settlement
related to its litigation with Mallinckrodt (See Litigation - Mallinckrodt). Under the terms of the settlement
agreement, Mallinckrodt returned the U.S. sales and marketing rights to Pennsaid 2% to Nuvo. In
October 2014, the Company sold the U.S. rights to Pennsaid 2% to Horizon Pharma plc (Horizon) for
US$45.0 million. The Company earns revenue from product sales of Pennsaid 2% to Horizon (See
Significant Transactions – 2014 – Pennsaid 2% U.S. Asset Sale). In January 2015, Horizon launched its
commercial sale and marketing of Pennsaid 2% in the U.S.

Paladin Labs Inc. (Paladin) has the exclusive rights to market and sell Pennsaid 2% in Canada. In
November 2014, the Company reacquired the Pennsaid 2% marketing rights from Paladin for South

America, Central America, South Africa and Israel. As consideration for these rights, the Company
provided its authorization to Paladin to market, sell and distribute an authorized generic version of
Pennsaid in Canada.

Additional clinical and non-clinical trials may be required to support applications for the regulatory
approval of Pennsaid 2% in other countries in which the Company, or other licensees and distributors,
could potentially market the product. The Company was advised by regulatory authorities in Canada and
the United Kingdom that the data from the Phase 2 trial conducted by Mallinckrodt was insufficient to
support approval of Pennsaid 2% in their respective countries and that additional clinical trials would be
required. In July 2015, the Company commenced a Phase 3 clinical trial of Pennsaid 2% for the
treatment of acute pain to support regulatory approval applications for Pennsaid 2% in certain
international jurisdictions. The Company anticipates that results could be available in Q1 2016. In
addition, NovaMedica LLC (NovaMedica) advised the Company that their Pennsaid 2% clinical trial was
successful and that they had submitted their application to obtain regulatory approval in Russia. There
can be no assurance that the current trials will be sufficient for regulatory authorities in any jurisdiction or
that all trials will yield successful results or that the required regulatory approvals will be obtained.

Pennsaid
Pennsaid, the Company’s first commercial topical pain product, is used to treat the signs and symptoms
of OA of the knee. Pennsaid combines the transdermal carrier (containing dimethyl sulfoxide, popularly
known as DMSO), with diclofenac sodium, a leading NSAID and delivers the active drug through the skin
at the site of pain. Pennsaid no longer has patent protection in the territories where it is currently
marketed by our partners.

Pennsaid Commercial Partners:
The following table summarizes where the Company’s partners have commercialized Pennsaid or are
working to obtain regulatory approval:

Brand
Pennsaid

Therapeutic
Area
Osteoarthritis
of the knee

Licensee or
Distributor
Paladin Labs Inc.

Licensed
Territories1
Canada

Vianex S.A.

Greece

Italchimici S.p.A.

Italy

Movianto UK Limited

U.K.

NovaMedica LLC

Russia2; some Community of Independent States2

1 The Company’s patents associated with Pennsaid have expired.
2 Partner is working to obtain regulatory approval in licensed territory.

United States
In September 2014, the Company settled its litigation with Mallinckrodt and under the terms of the
settlement, Mallinckrodt agreed to return the U.S. rights to Pennsaid and Pennsaid 2% to Nuvo (See
Litigation – Mallinckrodt). In October 2014, the Company sold the U.S. rights to Pennsaid 2% to Horizon
(Pennsaid U.S Sale Agreement) (See Significant Transactions – 2014 – Pennsaid 2% U.S. Asset Sale).
Under the terms of the Pennsaid U.S. Sale Agreement, the Company agreed to discontinue the
manufacture, sale and marketing of Pennsaid in the U.S.

In December 2014, a second generic version of Pennsaid launched in the U.S., which entitled the
Company to earn an upfront, non-refundable milestone payment of US$0.5 million. In a patent
infringement complaint against this generic company, the Company, along with Mallinckrodt, entered into
a settlement agreement; whereby, this generic company agreed to pay an upfront, non-refundable
milestone of US$0.5 million upon the launch of its generic version of Pennsaid and agreed to pay
royalties calculated at 50% of gross profits from subsequent product sales until such time as a third
generic version of Pennsaid was launched in the U.S. and the royalty rate would then decrease to 10% of
its gross profits from product sales. This generic agreement was assigned to the Company as part of the
settlement agreement with Mallinckrodt. During the second quarter of 2015, a third generic version of
Pennsaid was launched in the U.S. and the royalty rate decreased to 10% of gross profits from product

sales. The generic version of Pennsaid that the Company earns royalty revenue from is not currently
available in the U.S. market due to a manufacturing issue.

Canada
In February 2014, Taro Pharmaceutical Industries, Ltd. received approval in Canada for a generic version
of Pennsaid which was launched in March 2014. To compete with this generic version of Pennsaid, the
Company’s licensee in Canada launched an authorized generic version of Pennsaid in late 2014. The
Company receives royalty revenue based on net sales and product sales from selling this product.
Despite these efforts, the Company’s royalty revenue from Canadian net sales of Pennsaid and product
sales has been negatively impacted. Other generic versions of Pennsaid have been approved in Canada
and one launched in Canada in late 2015.

Heated Lidocaine/Tetracaine Patch
The HLT Patch is a topical patch that combines lidocaine, tetracaine and heat, using proprietary
Controlled Heat-Assisted Drug Delivery (CHADD™) technology. The CHADD unit generates gentle
heating of the skin and in a well-controlled clinical trial demonstrated that it contributes to the efficacy of
the HLT Patch by improving the flux rate of lidocaine and tetracaine through the skin. The HLT Patch
resembles a small adhesive bandage in appearance and is applied to the skin 20 to 30 minutes prior to
painful medical procedures, such as venous access, blood draws, needle injections and minor
dermatologic surgical procedures.

HLT Patch Commercial Partners:
The following table summarizes where the Company’s partners have commercialized the HLT Patch or
are working to obtain regulatory approval:

Brand
Synera2

Therapeutic
Area
Local Dermal
Analgesia
(Patch)

Licensee or
Distributor
Galen US
Incorporated

Licensed
Territories
United States

Rapydan2

Eurocept B.V.

Europe, Russia1,
Turkey1, Israel1 and
People’s Republic of
China1

Heated Lidocaine/
Tetracaine Patch

Paladin Labs Inc.

Canada1

Intellectual Property
One granted U.S. patent listed in the
FDA’s Orange Book expiring in 2020.
Method of manufacturing patents that
expire 2019 (U.S.).

Two granted European patent
validated in 10 countries with latest
expiry in 2016.
Two patents granted worldwide2 with
latest expiry in 2016

Method of manufacturing patents that
expire 2020 (Europe).

1. Partner is responsible for obtaining regulatory approval in licensed territory.
2. Rapydan is the brand name for the heated lidocaine/tetracaine patch (HLT Patch) in the respective jurisdiction.

The Company holds the sales and marketing rights for the HLT Patch in Mexico, South America,
Australia, Africa and most regions in Asia, although it is not approved in any of these territories.

The Company pays royalties to two companies for 1% and 1.5% of net sales of the HLT Patch.

Crescita
Crescita is a drug development business that operates two sub-groups: the TPT Group and the
Immunology Group.

Topical Products and Technology Group
The TPT Group has one commercial product, Pliaglis and products in development focusing on pain and
dermatology, and multiple drug delivery platforms that support the development of patented formulations
that can deliver actives into or through the skin.

Pliaglis
Pliaglis is a topical local anaesthetic cream that provides safe and effective local dermal analgesia on
intact skin prior to superficial dermatological procedures, such as dermal filler injection, pulsed dye laser

therapy, facial laser resurfacing and laser-assisted tattoo removal. This product consists of a proprietary
formulation of lidocaine and tetracaine that utilizes proprietary phase-changing topical cream Peel
technology. The Peel technology consists of a drug-containing cream which, once applied to a patient’s
skin, dries to form a pliable layer that releases drug into the skin. Pliaglis should be applied to intact skin
for 20 to 30 minutes prior to superficial dermatological procedures and for 60 minutes prior to laser-
assisted tattoo removal. Following the application period, Pliaglis forms a pliable layer that is easily
removed from the skin allowing the dermatological procedure to be performed with minimal to no pain.

Except as described below, Galderma Pharma S.A. (Galderma), a global pharmaceutical company
specialized in dermatology, holds the worldwide sales and marketing rights for Pliaglis. Galderma is
responsible for manufacturing Pliaglis. In December 2015, Nuvo reacquired the development and
marketing rights for Pliaglis for the U.S., Canada and Mexico. Under the terms of the agreement, Nuvo
paid Galderma 125,000 Swiss Francs (approximately $174,000) and will pay an additional 125,000 Swiss
Francs (approximately $174,000) upon transfer of certain rights and documents. Beginning in 2021,
Nuvo has the right to reacquire the Rest of World (ROW) rights on a country-by-country basis without
additional compensation if Galderma does not achieve minimum sales targets. Galderma will continue to
market Pliaglis in the U.S. and Canada and pay a royalty on net sales during a transition period. Nuvo
will receive a fixed single-digit royalty on net sales in the territories outside of North America where
Galderma still owns the development and marketing rights.

Pliaglis was launched in the U.S. market in March 2013 and in the E.U. in April 2013. In the E.U., the
regulatory approval required a post-approval commitment trial, the cost of which will be shared equally by
Galderma and Nuvo. In South America, Pliaglis is approved and marketed in Brazil, Argentina and
Columbia. Pliaglis was launched in Brazil in March 2014. Pliaglis is also approved and marketed in
Canada. Nuvo understands that Galderma is seeking approvals in additional countries. However, there
can be no assurance that any such approvals will be obtained or the timing thereof.

The Company pays royalties to two companies for 1% and 1.5% of net sales of Pliaglis.

Crescita Pipeline
Crescita has a broad portfolio of development stage products and proprietary platform technologies,
which include multiplexed molecular penetration enhancers (MMPE™) and DuraPeel™. Crescita will not
only develop products on its own, but will also actively seek co-development partners to help advance its
pipeline products and fund some or all of their development.

Topical Products and Technology Product Candidate Development Pipeline:
The following table summarizes the Company’s key product candidates:

Product

Flexicaine (lidocaine
7%/ tetracaine 7%
cream)

Ibuprofen Foam (5%
ibuprofen)

Terbinafine 10%
solution

Mical 1 2

Mical 2 2

Therapeutic
Area

Postherpetic
Neuralgia

Stage of
Development

Phase 2 clinical
trial

Acute Pain

Preclinical

Onychomycosis

Preclinical

Intellectual Property1
Patents granted in AU, CN,HK, MX, RU and the U.S.
with latest expiring in 2031. Applications allowed in CA
and pending in 8 countries including EP. Latest
anticipated expiry date is 2031.
Patent granted in the U.S. expiring in 2031.
Applications pending in EP and CA. Anticipated expiry
date is 2031.
Patents granted in AU, JP and the U.S. with latest
expiry date in 2031. Applications pending in 4 countries
including EP. Latest anticipated expiry date is 2030.

Psoriasis

Preclinical

Patent granted in the U.S. expiring in 2027.

Dermatological skin
treatment

Preclinical

Patent granted in the U.S. expiring in 2027.

1. Region and country abbreviations defined as follows: Australia (AU), Brazil (BR), Canada (CA), Chile (CL), China (CN),
Denmark (DK), Europe (EP), France (FR), Germany (DE), Great Britain (GB), Greece (GR), Ireland (IE), Italy (IT), Israel (IL),
Netherlands (NL), Hong Kong (HK), Japan (JP), Mexico (MX), New Zealand (NZ), Russian Federation (RU), South Africa (ZA),
Switzerland (CH), United States (U.S.).

2. Mical is a product being developed under the Ferndale Laboratories, Inc. collaboration (see Significant Transactions – 2014 -

Ferndale Collaboration).

Technology
Crescita has multiple drug delivery platforms that support the development of patented formulations that
can deliver actives into or through the skin. The most significant platforms include:

DuraPeel
The DuraPeel technology is a self-occluding, film-forming cream/gel formulation that provides extended
release delivery to the site of application. The cream/gel contains a drug applied to a patient’s skin
forming a pliable layer that releases drug into the skin for up to 12 hours. The benefits of the DuraPeel
technology include proven compatibility with a variety of active pharmaceutical ingredients (APIs), self-
occluding film reduces product transference risk, fast drying time and easy application and removal and
application to large and irregular skin surfaces. Patents have been issued in Australia, Canada, China,
Japan and the U.S. with the latest expiry in 2027. Patent applications are pending in Australia, Canada,
Brazil, China (allowed), Europe (allowed), India, Japan, Hong Kong and the U.S. through 2031.

MMPE
The MMPE technology uses synergistic combinations of pharmaceutical excipients included on the U.S.
Food and Drug Administration’s (FDA’s) Inactive Ingredient Guide for improved topical delivery of actives
into or through the skin. The benefits of this technology include the potential for increased penetration of
APIs with the possibility of improved efficacy, lower API concentration and/or reduced dosing. Issued
U.S. patents provide intellectual property protection through March 6, 2027.

Immunology Group
The Immunology Group has two commercial products: WF10 and Oxoferin™. WF10 is approved in
Thailand under the brand name Immunokine as an adjunct in the treatment of cancer to relieve post
radiation therapy syndromes and as an adjunct therapy for diabetic foot ulcers, but is not otherwise
approved for sale and marketing in any other jurisdictions. Oxoferin, a topical wound healing agent,
contains the active ingredient in WF10, but at a lower concentration. Oxoferin is marketed by Nuvo and
its partners in parts of the E.U. and Asia as a topical wound healing agent under the trade names
Oxoferin and Oxovasin™.

The Immunology Group, based in Leipzig, Germany, was focused on developing drug products that
modulate chronic inflammation processes resulting in a therapeutic benefit. In December 2015, the
Company announced topline results of a Phase 2 clinical trial to assess WF10™ for the treatment of
allergic rhinitis. The topline results showed that patients dosed with WF10 did not report a reduction in
symptoms that was significantly better than patients dosed with a saline placebo at any of the endpoints
being measured in the trial. There was no significant difference in the performance of WF10 relative to
placebo when patients were exposed to grass and ragweed pollen in the environmental exposure
chamber (EEC) or when they were exposed to naturally occurring allergens during the field portion of the
trial. Nuvo believes that the results are not sufficient to justify the further development of WF10 for the
treatment of allergic rhinitis and has discontinued all WF10 development.

WF10
WF10 is an immune system modulating drug containing chlorite and/or chlorate ions including its
derivative formulations and dosage forms as formulated or developed by the Company. The immune
system provides an essential defense to micro-organisms, cancer and substances it sees as foreign and
potentially harmful.

WF10 Clinical Trials for the Treatment of Allergic Rhinitis

Single-Centre Phase 2a Trial
In 2010, Nuvo conducted a Phase 2 proof-of-concept clinical trial to evaluate WF10 as a treatment for
persistent allergic rhinitis (the 2010 WF10 Trial). The trial was a 60-subject, randomized, double-blind,

placebo-controlled, single-centre trial to assess the efficacy and safety of a regimen of five daily WF10
infusions. The trial met its primary endpoint as measured by the change in Total Nasal Symptom Scores
(TNSS) from baseline to assessment after three weeks comparing the WF10 group with the placebo
group. The trial also met its secondary endpoints as measured by the change in TNSS at six, nine and
twelve weeks and in the Total Ocular Symptom Score (TOSS) from baseline to assessment after three,
six, nine and twelve weeks. The TNSS and TOSS are validated scales to measure nasal and ocular
symptoms associated with allergic rhinitis. The results were statistically significant as the p-value for all
primary and secondary endpoints was less than 0.001 except for the change in TOSS after three weeks
for which the p-value was less than 0.003. WF10 was very well tolerated with a favourable safety profile.

Multi-Centre Phase 2b Trial (the 2014 WF10 Trial)
In December 2014, Nuvo completed another Phase 2 clinical trial. This clinical trial was a 16-week,
double-blind, placebo-controlled, Phase 2 clinical trial conducted in Germany to compare the safety and
efficacy of WF10 and its main constituents (sodium chlorite and sodium chlorate) with saline in patients
with refractory allergic rhinitis and to compare the safety and efficacy of WF10 and its main constituents.
The trial measured TNSS and other secondary endpoints with 179 patients completing the trial at 15 sites
in Germany. The trial included three active arms (the Active Arms): WF10; WF10 with chlorate and
sulphate removed and WF10 with chlorite and sulphate removed.

Each of the Active Arms was compared to a placebo arm in which patients received saline. The primary
endpoint was change in TNSS from baseline to assessment after three weeks comparing the Active Arms
with the placebo arm. The primary endpoint was not achieved as the Active Arms and the placebo arm
all demonstrated a reduction in TNSS and the difference between the Active Arms and the placebo arm
did not achieve statistical significance at measured time points over the course of the observation period.

E.E. Chamber and Field Phase 2a Trial (the 2015 WF10 Trial)
After reviewing the data from both the 2010 WF10 Trial and 2014 WF10 Trial and consulting external
experts, Nuvo believed that the placebo group in the 2014 WF10 Trial may not have recorded as high
TNSS and TOSS scores compared to the 2010 WF10 Trial due to a longer enrollment period that started
later in the allergy season, varying environmental conditions and other factors that resulted in some
patients in the 2014 WF10 Trial not being exposed to a high enough concentration of the allergens that
they were allergic to throughout the trial period. Nuvo therefore made the decision to conduct a new
Phase 2 clinical trial to assess WF10 for the treatment of allergic rhinitis. The 2015 WF10 Trial was a
randomized, double-blind, placebo-controlled, single-centre trial to assess the efficacy, safety and
tolerability of a regimen of five WF10 infusions. The trial enrolled patients who have a moderate to
severe allergy to grass and ragweed pollen. Patients' symptoms were recorded prior to commencement
of the grass allergy season in an ECC, in the field throughout the grass and ragweed allergy seasons and
again in the EEC after completion of the ragweed season. In December 2015, Nuvo announced that the
topline results of the 2015 WF10 Trial showed that patients dosed with WF10 did not report a reduction in
symptoms that was significantly better than patients dosed with a saline placebo at any of the endpoints
being measured in the trial. There was no significant difference in the performance of WF10 relative to
placebo when patients were exposed to grass and ragweed pollen in the EEC or when they were
exposed to naturally occurring allergens during the field portion of the trial. Nuvo believes that the results
are not sufficient to justify the further development of WF10 for the treatment of allergic rhinitis and has
discontinued all WF10 development.

Intellectual Property

WF10
The Company owns the following patents and patent applications covering WF10 and related
formulations for the treatment of asthma, allergic rhinitis and atopic dermatitis.

In August 2012, the United States Patent and Trademark Office (USPTO) granted U.S. Patent No.
8,252,343 for the treatment of allergic asthma, allergic rhinitis and atopic dermatitis using the existing
formulation of WF10. Similar patent applications are pending in Canada and allowed in Europe.

In May 2013, the USPTO granted Patent No. 8,435,568, for the treatment of allergic asthma, allergic
rhinitis and atopic dermatitis using the existing formulation of WF10 and derivative formulations.

In December 2014, the USPTO granted U.S. Patent No. 8,911,797, related to the use of formulations that
include chlorite ions (such as WF10) to treat or inhibit allergy-like symptoms that include conjunctivitis in
patients suffering from or at risk of developing allergic asthma, allergic rhinitis or atopic dermatitis.

The three U.S. patents will expire in 2028.

Manufacturing and Facilities
The Company has a manufacturing facility in Varennes, Québec that produces Pennsaid, Pennsaid 2%
and the bulk drug product for the HLT Patch. The Company manufactures these products for all of its
global partners for all markets where the products are sold. The facility is in compliance with current
Good Manufacturing Practices (GMP). In September 2012 and February 2013, the plant passed two FDA
inspections as part of the U.S. Pennsaid 2% new drug application (NDA) review and U.S. Synera
supplemental new drug application (sNDA) review.

The Company has a small manufacturing facility in Wanzleben, Germany that produces the active
ingredient in WF10 and Oxoferin.

Litigation

From time-to-time, during the ordinary course of business, the Company may be threatened with, or may
be named as, a defendant in various legal proceedings including lawsuits based upon product liability,
personal injury, breach of contract and lost profits or other consequential damage claims.

Mallinckrodt
On August 20, 2013, the Company commenced legal action against Mallinckrodt by filing a Complaint in
the U.S. District Court for the Southern District of New York (the Action).

The Complaint asserted that Mallinckrodt breached its contractual obligations to Nuvo, as set out in the
Pennsaid U.S. Licensing Agreement pursuant to which Nuvo licensed to Mallinckrodt the rights to sell and
market Pennsaid and Pennsaid 2% in the U.S. in return for certain obligations undertaken by
Mallinckrodt.

The Complaint asserted that Mallinckrodt breached the Pennsaid U.S. Licensing Agreement in several
respects, including, among others:

 Mallinckrodt willfully failed to conduct two Phase 3 clinical trials required under the Pennsaid
U.S. Licensing Agreement that are critical to a) securing an indication and product label for
Pennsaid 2% in the U.S. that is equivalent to those for Pennsaid; b) providing evidence of robust
efficacy of Pennsaid 2% for marketing in the U.S. and throughout the world, and c) obtaining
regulatory approval for Pennsaid 2% outside the U.S.;

 Mallinckrodt made significant, negligent errors in certain clinical trials for which it was
responsible, including failure to properly conduct pharmacokinetic studies which led to the delay
of the FDA’s approval of Pennsaid 2% in the U.S.;

 Mallinckrodt willfully failed to apply requisite efforts to commercialize Pennsaid in the U.S.

resulting in significantly lower sales and royalties payable to the Company; and

 Mallinckrodt willfully refused to pay the full milestone payments due to Nuvo under the Pennsaid

U.S. Licensing Agreement.

Nuvo sought damages of not less than US$100 million and a declaration that it was entitled to terminate
the Pennsaid U.S. Licensing Agreement which would result in the rights to sell and market Pennsaid
and/or Pennsaid 2% in the U.S. reverting to Nuvo. While the litigation was ongoing, Mallinckrodt
continued to sell Pennsaid and Pennsaid 2% in the U.S.

On November 1, 2013, Mallinckrodt filed an Answer and Counterclaim in the Action. In its Answer,
Mallinckrodt denied Nuvo’s assertions. Mallinckrodt’s Counterclaim set forth a single cause of action for
breach of contract, and sought unspecified damages, as well as declaratory relief. The Company
believed that it had substantial defenses to the Counterclaim raised in the Action and intended to
vigorously defend against it.

In July 2014, Nuvo amended its Complaint to, among other things, include allegations related to
Mallinckrodt’s failure to use Diligent Efforts to launch and market Pennsaid 2%.

Nuvo and Mallinckrodt agreed to a joint discovery schedule in which document discovery was
substantially completed by June 2014 and all fact discovery was to be completed by December 2014.
The trial would have taken place no sooner than mid-2015.

On September 4, 2014, the Company reached a full settlement with Mallinckrodt of Nuvo’s claims and
Mallinckrodt’s counterclaim relating to Nuvo’s license to Mallinckrodt of the right to sell and market
Pennsaid and Pennsaid 2% in the U.S. Under the terms of the settlement agreement, Mallinckrodt
returned all U.S. rights to Pennsaid and Pennsaid 2% to Nuvo and paid US$10.0 million. Each of
Mallinckrodt and the Company also released claims against the other related to the litigation.

Capability to Deliver Results
The Company will need to spend considerable resources to research, develop and manufacture its
products and technologies. The Company may finance these activities through: existing cash, revenue
generated by product sales to our licensees and partners, royalties and other milestones under existing
agreements, licensing and co-development agreements for other new drug candidates or for its existing
products in territories where they are not currently licensed or by raising funds in the capital markets or by
acquiring debt.

The Company is or will be dependent on its commercial partners for the sale and marketing of its
products and for obtaining regulatory approvals in the following territories, if necessary:

 Pennsaid - Canada, Greece, Italy and Russia and the Community of Independent States

(CIS);

 Pennsaid 2% - U.S., Canada and Russia and the CIS;

 HLT Patch - U.S., Europe, Russia and many of its former republics, Turkey, Israel and the

People’s Republic of China;

 Pliaglis - throughout the world, except for U.S., Canada and Mexico (See Overview –

Crescita – Pliaglis); and

 Oxoferin - several Asian countries.

The Company has broad in-house talent with the capability to develop its pipeline. To execute the current
business plan, the Company may selectively add key personnel and in the future may need to hire more
staff as activities expand. In addition, the Company has access to the commercial, regulatory and
scientific expertise of its advisory boards to assist it through all aspects of the commercialization and drug
development process.

Liquidity

The Company has incurred substantial losses since its inception, as it has invested significantly in drug
development activities. At December 31, 2015, the Company had an accumulated deficit of $200.1
million, including a net loss of approximately $7.1 million for the year ended December 31, 2015. At
December 31, 2015, the Company had cash of $48.7 million.

The Company expects that it will continue to incur losses as its revenue streams are not yet sufficient to
fund: its operations, the infrastructure necessary to support a public company and the costs of selectively
advancing its drug development pipeline. The Company’s ability to continue as a going concern depends
on:



the commercial success of Pennsaid 2% in the U.S., as the Company earns revenue from
product sales of Pennsaid 2% to Horizon;
the commercial success of Pennsaid outside of the U.S., as the Company earns revenue from
sales of Pennsaid to its licensees and distributors in all territories where Pennsaid is sold, as well
as royalties on net sales in Canada;
the success of the Company’s clinical trials for Pennsaid 2% for the treatment of acute sprains
and strains; and
its ability to secure additional licensing fees, secure co-development agreements, obtain
additional capital when required, gain regulatory approval for other drugs and ultimately achieve
profitable operations.

As there can be no certainty as to the outcome of the above matters, there is material uncertainty that
may cast significant doubt about the Company's ability to continue as a going concern.

The Company anticipates that its current cash together with the revenues it expects to generate from
product sales to its licensees and distributors and royalty payments will be sufficient to execute its current
business plan into 2017. Beyond that date, there can be no assurance that the Company will have
sufficient capital to fund its ongoing operations or develop or commercialize any further products without
future financings.

Nonetheless, companies in the pharmaceutical R&D industry typically require periodic funding in order to
develop drug candidates until such time as at least one drug candidate has been successfully
commercialized such that they are receiving sufficient revenue to fund their operations. Nuvo has not yet
reached this stage and; therefore, the Company monitors on a regular basis, its liquidity position, the
status of its partners’ commercialization efforts, the status of its drug development programs, including
cost estimates for completing various stages of development, the scientific progress on each drug
candidate and the potential to license or co-develop each drug candidate.

There can be no assurance that additional financing would be available on acceptable terms, or at all,
when and if required. If adequate funds were not available when required, the Company may have to
substantially reduce or eliminate planned expenditures, terminate or delay clinical trials for its product
candidates, curtail product development programs designed to expand the product pipeline or discontinue
certain operations. If the Company is unable to obtain additional financing when and if required, the
Company may be unable to continue operations.

The Consolidated Financial Statements do not include adjustments to the amounts and classification of
assets and liabilities that would be necessary should the Company be unable to continue as a going
concern.

As part of the Nuvo Strategic Transaction (See Corporate Development – Proposed Reorganization of the
Company), the Company plans to transfer $35.0 million to Crescita as part of the reorganization.
Completion of the reorganization is subject to a number of conditions including shareholder and court
approval. If the proposed transaction is approved by shareholders and all other conditions are satisfied,
Nuvo expects the transaction to be completed in Q1 2016.

Selected Financial Information
in thousands (except per share)

Year ended
December 31, 2015

Year ended
December 31, 2014

Operations
Product sales
Royalties
Research and other contract revenue
Licensing fees
Total Revenue

Total operating expenses
Loss from operations

Other income
Income (loss) before income taxes
Income tax expense
Net income (loss)
Other comprehensive income (loss)
Total comprehensive income (loss)

Share Information

Net income (loss) per share

Basic

Diluted

Average number of common shares outstanding for the year

Basic

Diluted

Financial Position
Cash
Short-term investments
Total assets
Finance lease & other obligations, including current portion
Total liabilities
Total equity

$ 19,208
1,390
754
-
21,352

29,425
(8,073)
(960)
(7,113)
7
(7,120)
(65)
(7,185)

$ (0.65)

10,942

$ 48,680
-
59,132
235
9,413
49,719

$ 6,470
5,458
505
624
13,057

27,080
(14,023)
(52,632)
38,609
19
38,590
38
38,628

$ 3.85

$ 3.71

10,031

10,400

$ 48,275
10,000
65,140
328
9,477
55,663

Non-IFRS Financial Measure
The Company discloses non-IFRS measures that do not have standardized meanings prescribed by
IFRS, but are considered useful by management, investors and other financial stakeholders to assess the
Company’s performance and management from a financial and operational standpoint. Total operating
expenses is defined as the sum of: cost of goods sold (COGS), R&D expenses, general and
administrative (G&A) expenses, interest expense and interest income. Loss from operations is defined as
total revenue, less total operating expenses, and the Company considers it a useful measure, as it
provides investors with an indication of the operating performance by the Company before considering
gains or losses from foreign exchange or items that are non-recurring transactions.

Fluctuations in Operating Results
The Company’s results of operations have fluctuated significantly from period-to-period in the past and
are likely to do so in the future. The Company anticipates that its quarterly and annual results of
operations will be impacted for the foreseeable future by several factors including: the level of Pennsaid
and Pennsaid 2% product sales to the Company’s licensees and distributors, the timing and amount of

royalties and other payments received pursuant to current and future collaborations and licensing
arrangements and the progress and timing of expenditures related to R&D efforts. Due to these
fluctuations, the Company believes that the period-to-period comparisons of its operating results are not
necessarily a good indicator of future performance.

Significant Transactions

2015

Pliaglis North American Rights Reacquisition
In December 2015, the Company reacquired the development and marketing rights for Pliaglis for the
U.S., Canada and Mexico. Under the terms of the agreement, Nuvo paid Galderma approximately
$174,000 (CHF125,000). The Company will pay an additional amount of CHF125,000 (approximately
$174,000) upon the transfer of certain rights and documents. Beginning in 2021, the Company has the
right to reacquire the ROW rights on a country-by-country basis without additional compensation if
Galderma does not achieve minimum sales targets. Galderma will continue to market Pliaglis in the
U.S. and Canada and pay a royalty on net sales during the agreed upon transition period. The
Company will receive a fixed single-digit royalty on net sales in the Galderma territories outside of
North America where Galderma still owns the development and marketing rights.

2014

Pennsaid 2% U.S. Asset Sale
In October 2014, the Company entered into an asset purchase agreement with Horizon pursuant to
which the Company sold the sales and marketing rights, intellectual property and other assets with
respect to Pennsaid 2% in the U.S. (Pennsaid 2% U.S. Sale Agreement) for cash consideration of
US$45.0 million received on the closing date.

Under the terms of the Pennsaid 2% U.S. Sale Agreement, the Company sold the sales and marketing
rights and other assets related to Pennsaid 2% in the U.S. including, among other things: the
investigational new drug application (IND) and the NDA for Pennsaid 2%, the Company’s interests in
patents covering Pennsaid 2% in the U.S. and certain regulatory documentation, promotional
materials and records related to Pennsaid 2%. Horizon launched the sale and marketing of Pennsaid
2% in the U.S. in early January 2015 and is now responsible for all matters related to Pennsaid 2% in
the U.S.

Also pursuant to the Pennsaid 2% U.S. Sale Agreement, Nuvo agreed to discontinue the manufacture,
sale and marketing of Pennsaid in the U.S. and is prohibited, for a period of ten years, from
developing, manufacturing or commercializing any diclofenac sodium product for topical uses in
humans in the U.S.

In connection with the Pennsaid 2% U.S. Sale Agreement, the Company also entered into a long-term
supply agreement with Horizon. Pursuant to the supply agreement, the Company agreed to supply
Pennsaid 2% to Horizon from its Varennes, Québec manufacturing facility for commercialization in the
U.S. The initial term of the supply agreement expires December 31, 2022 and, unless terminated, will
automatically renew for successive two-year terms, thereafter. In February 2016, the supply agreement
was amended (Amended Supply Agreement) to extend the term of the agreement to December 31, 2029
and to introduce volume tiered pricing. The transfer price is subject to semi-annual adjustments based on
Nuvo’s raw material costs and annual adjustments based upon changes in a national manufacturing cost
index for pharmaceutical products. The supply agreement may be terminated earlier by either party for
any uncured material breach or other customary conditions. Under the Amended Supply Agreement,
Nuvo is obligated to supply Pennsaid 2% to Horizon and Horizon is obligated to obtain 90% of its
requirements for Pennsaid 2% from Nuvo. The supply agreement also provides for the selection and
qualification of alternate suppliers of Pennsaid 2% and its active pharmaceutical ingredient (API).
Following the approval by the FDA of a selected alternate supplier, and subject to certain limitations, the
Company is required to enter into a supply agreement with the alternate supplier with respect to Pennsaid
2% or its API. To the extent that maintaining regulatory approvals for an alternative supplier requires the

Company to purchase of minimum quantities of drug product or API from the alternate supplier, the
Company is obligated to purchase such minimum quantities, subject to Horizon’s obligation to reimburse
the Company for any excess cost compared to our cost to otherwise obtain such drug product or API.

Litigation Settlement
On September 4, 2014, the Company reached a full settlement with Mallinckrodt of Nuvo’s claims and
Mallinckrodt’s counterclaim related to Nuvo’s license to Mallinckrodt to sell and market Pennsaid and
Pennsaid 2% in the U.S. Under the terms of the settlement agreement, Mallinckrodt returned all U.S.
rights to Pennsaid and Pennsaid 2% to Nuvo and paid the Company US$10.0 million as settlement for
all claims (See Litigation – Mallinckrodt).

Ferndale Collaboration
In April 2014, the Company entered into a collaboration agreement with Ferndale Laboratories, Inc.
(Ferndale) and a leading Contract Research Organization (CRO) to develop two topical dermatology
products based on Nuvo’s patented MMPE technology. The Company is currently developing both
formulations. Under the terms of the collaboration agreement, Nuvo will utilize its proprietary MMP E
technology to formulate two patented topical dermatology product candidates. Once the formulations
are complete, Ferndale, in collaboration with the CRO, will oversee and fund the formulations’
advancement through Phase 2 clinical trials. It is anticipated that the product candidates will then be
made available for out-licensing. Licensing revenues, including upfront payments, milestone
payments and royalties will be shared by the parties based on a calculation that includes
compensation to Nuvo for contributing the patented formulations.

Private Placement
On March 31, 2014, the Company completed a non-brokered private placement (Private Placement),
pursuant to which an aggregate of 1,390,000 units of the Company were issued at a price of $2.25 per
unit for gross proceeds of $3.1 million ($2.9 million net of issuance costs). Each unit consisted of one
common share of the Company and one-half of one common share purchase warrant of the Company
(Unit). The Company issued 695,000 common share purchase warrants (Private Placement Warrants).

The Private Placement Warrants entitled the holder to purchase one common share of the Company at a
price of $3.00 for a 24-month period. During the year ended December 31, 2015, 239,672 of the Private
Placement Warrants were exercised [December 31, 2014 – 433,149].

In connection with the Private Placement, the Company issued 78,233 broker warrants at a price of $2.54
per Unit (Broker Warrants). Each Broker Warrant unit entitled the holder to purchase one common share
of the Company at a price of $2.54 and included one half of one Private Placement Warrant. During the
year ended December 31, 2015, 42,733 of the Broker Warrants were exercised [December 31, 2014 –
31,300] and 21,367 Private Placement Warrants were issued upon exercise of the Broker Warrants
[December 31, 2014 – 15,650].

The Private Placement Warrants were subject to an acceleration feature where the Company, at its
option, could force the exercise of the Private Placement Warrants if the ten-day volume weighted share
price for the Company’s common shares was equal to or exceeded $3.50 on the Toronto Stock Exchange
(TSX) at any time during the warrant term. If the acceleration feature was used, any Private Placement
Warrants that was not exercised during this period expired. The Company exercised its acceleration
feature on November 30, 2015 and accelerated the expiry date of the outstanding warrants to January 15,
2016. Subsequent to the year ended December 31, 2015, 4,200 Broker Warrants and 49,044 Private
Placement Warrants (inclusive of 2,100 Private Placement warrants that were issued on exercise of the
Broker Warrants) were exercised for proceeds of $0.2 million and 12,252 Private Placement Warrants
expired.

Results of Operations

Product Sales
in thousands

Pennsaid 2%
Pennsaid

Oxoferin and WF10
HLT bulk

Total product sales

Year ended
December 31, 2015

Year ended
December 31, 2014

15,256
3,147

629
176

19,208

2,664
3,091

638
77

6,470

Product sales which represent the Company’s sales to our licensees and distributors increased
significantly to $19.2 million for the year ended December 31, 2015 compared to $6.5 million for the year
ended December 31, 2014.

Pennsaid 2%
Product sales of Pennsaid 2% were $15.3 million for the year ended December 31, 2015 compared to
$2.7 million for the year ended December 31, 2014 and represent the Company’s sales of the Pennsaid
2% commercial format and its physician sample format to its licensee in the U.S. market. The significant
increase in the year ended December 31, 2015 related to Horizon’s efforts to sell Pennsaid 2% in the
U.S. market. Product sales for the year consisted of $10.1 million of the commercial format and $5.2
million of the physician sample format. In the comparative year, product sales consisted of $2.3 million of
the commercial format with the balance of the sales coming from the sample format. Under the terms of
Pennsaid 2% U.S. Sale Agreement, the Company earns revenue from product sales of Pennsaid 2% to
Horizon (See Significant Transactions – 2014 – Pennsaid 2% U.S. Asset Sale). All Pennsaid 2% product
sales relate to the U.S. market as the product has not received regulatory approval in any other territory.

During the current year, the Company benefitted from a weaker Canadian dollar versus the US dollar, the
currency in which it sells Pennsaid 2%. The $12.6 million increase in Pennsaid 2% sales in the current
year included a $2.1 million foreign exchange gain.

According to IMS Health, approximately 320,000 Pennsaid 2% prescriptions were dispensed in the year
ended December 31, 2015 compared to 59,000 prescriptions in the year ended December 31, 2014.

Pennsaid
Product sales of Pennsaid were consistent at $3.1 million for the years ended December 31, 2015 and
December 31, 2014. An increase in product sales to the Company’s partners in Europe was offset by the
termination of sales of Pennsaid in the U.S. market and increased generic competition in Canada that
negatively impacted sales of Pennsaid.

Geographic Pennsaid Product Sales
in thousands

Europe

Canada

United States

Total Pennsaid Product Sales

Year ended
December 31, 2015

Year ended
December 31, 2014

2,699

448

3,147

1,929

793

369

3,091

Geographically for the year ended December 31, 2015, sales in the E.U. were 86% of Pennsaid product
sales [December 31, 2014 - 62%] and sales in Canada were 14% of Pennsaid product sales [December

31, 2014 - 26%] and sales in the U.S. were nil% of total Pennsaid product sales [December 31, 2014 -
12%].

Oxoferin and WF10
Product sales of Oxoferin and WF10 were consistent at $0.6 million for the years ended December 31,
2015 and December 31, 2014. In the current year, an increase in the Company’s sales to partners in
Morocco and Malaysia was offset by a decrease in the Company’s sales to its partner in Pakistan.

HLT Bulk
HLT Bulk sales were $0.2 million for the year ended December 31, 2015 compared to sales of $0.1
million for the year ended December 31, 2014. Sales related to the bulk drug substance that is used in
the manufacturing of the HLT Patch for both the U.S. and E.U. markets. The bulk drug substance is
shipped to a contract manufacturing organization in the U.S. that manufactures the HLT Patch.

Other Revenue
in thousands

Royalties
Research and other contract revenue

Licensing fees

Year ended
December 31, 2015

Year ended
December 31, 2014

1,390
754

2,144

5,458
505

624

6,587

Royalties
The Company receives royalty revenue from: Paladin, its Canadian licensee for Pennsaid and the
authorized generic of Pennsaid, Galderma, its licensee for Pliaglis (See Significant Transactions – 2015 –
Pliaglis North American Rights Reacquisition), Eurocept, its European licensee for Rapydan and Galen
US Incorporated (Galen), its U.S. licensee for Synera. In addition, under the terms of a settlement
agreement related to a patent infringement complaint filed by the Company and Mallinckrodt, its former
U.S. licensee for Pennsaid and Pennsaid 2%, the Company started earning royalties in the fourth quarter
of 2014 from a generic company calculated at 50% of gross profits from their sales of a generic version of
Pennsaid in the U.S. Under the terms of the settlement agreement, the royalty declined to 10% when a
third generic version of Pennsaid was launched in the second quarter of 2015. The settlement agreement
was assigned to the Company under the terms of the litigation settlement with Mallinckrodt. During the
second quarter of 2015, the Company was advised that the generic company had stopped production due
to a manufacturing issue and has yet to restart production. Royalties from each licensee are determined
using agreed upon formulas based on either a definition of the licensee’s net sales or gross profits as
defined in each agreement. The Company recognizes royalty revenue based on either the net sales or
gross profits of each licensee.

In the comparative year, the Company also received royalties from Mallinckrodt, its former U.S. licensee
for Pennsaid and Pennsaid 2%. In September 2014, the Company settled its litigation with Mallinckrodt
and under the terms of the settlement, Mallinckrodt agreed to return the U.S. rights to Pennsaid and
Pennsaid 2% to Nuvo (See Litigation - Mallinckrodt). In October 2014, the Company sold the U.S. rights
to Pennsaid 2% to Horizon (See Significant Transactions – 2014 – Pennsaid 2% U.S. Asset Sale). Under
the terms of the Pennsaid U.S Sale Agreement, the Company no longer receives a royalty on Pennsaid
2% net sales in the U.S. as Horizon assumed sales and marketing responsibility on January 1, 2015.

Royalty revenue decreased to $1.4 million for the year ended December 31, 2015 compared to $5.5
million for the year ended December 31, 2014.

Pennsaid Royalties
Pennsaid royalties were $0.7 million for the year ended December 31, 2015 compared to $2.0 million for
the year ended December 31, 2014. The significant decrease in royalty revenue for the year related to
the termination of Pennsaid sales in the U.S., as well as lower net sales of Pennsaid in Canada due to the
negative impact of generic versions of Pennsaid in the market. Partially offsetting this decrease, the

Company received royalty revenue of $0.3 million from the generic sales of Pennsaid in the U.S. market
for the first half of 2015. In the second half of the year, the Company did not earn royalty revenue as the
company selling the generic version of Pennsaid in the U.S. ceased distribution due to a manufacturing
issue.

Pennsaid 2% Royalties
Royalty revenue related to sales of Pennsaid 2% in the U.S. was $nil for the year ended December 31,
2015 compared to $3.0 million for the year ended December 31, 2014. Under the terms of the Pennsaid
U.S. Sale Agreement, the Company no longer receives a royalty on Pennsaid 2% net sales in the U.S.
as Horizon assumed sales and marketing responsibility on January 1, 2015. In the comparative period,
the Company earned royalties on U.S. sales of Pennsaid 2% from the Company’s former U.S. partner,
Mallinckrodt.

HLT Patch Royalties
Royalties related to the global net sales of the HLT Patch were $0.4 million for the year ended December
31, 2015 compared to $0.2 million year ended December 31, 2014. The Company’s U.S. and European
Partners recognized an increase in net sales.

Pliaglis Royalties
Royalties related to the global net sales of Pliaglis were consistent at $0.2 million for both years ended
December 31, 2015 and December 31, 2014.

Research and Other Contract Revenue
Research and other contract revenue for the year ended December 31, 2015 was $0.8 million compared
to $0.5 million for the year ended December 31, 2014. These revenues were mainly derived from
development services provided by the Company to its partners.

Licensing Fee Revenue
The Company did not earn license fee revenues during the year ended December 31, 2015 compared to
$0.6 million for the year ended December 31, 2014. In 2014, the Company earned an upfront, non-
refundable milestone of US$0.5 million ($0.6 million) related to the launch of the second generic version
of Pennsaid in the U.S. market. In a patent infringement complaint against this generic company, the
Company, along with Mallinckrodt, entered into a settlement agreement; whereby, this generic company
would agree to pay an upfront, non-refundable milestone of US$0.5 million upon the launch of its generic
version of Pennsaid. License fees also included the recognition of a portion of the upfront fees received
from Paladin in 2005 for the Canadian marketing rights for Pennsaid.

Significant Customers
As the Company sells product and receives royalties in a limited number of markets through exclusive
agreements, it receives most of its revenue from a limited number of customers. Revenue, derived from
the Company’s current four largest customers (excluding upfront payments and milestones from licensing
arrangements), is illustrated in the following table:

in thousands, except percentages

Four largest customers
% of total revenue
Largest customer as % of total revenue

Year ended
December 31, 2015

Year ended
December 31, 2014

$18,538
87%
71%

$10,558
81%
51%

Operating Expenses
in thousands

Cost of goods sold

Research and development

General and administrative

Interest expense, net

Total operating expenses

Year ended
December 31, 2015

Year ended
December 31, 2014

10,276

10,329

9,295

(475)

29,425

5,537

8,051

12,978

514

27,080

Total operating expenses for the year ended December 31, 2015 were $29.4 million, an increase from
$27.1 million for the year ended December 31, 2014. The increase for the current year was primarily due
to the increase in COGS due to increased product sales and an increase in R&D expenses related to the
2015 WF10 Trial and the Pennsaid 2% phase 3 clinical trial which were slightly offset by the revaluation
of cash-settled stock-based compensation (SBC) costs which are primarily included in G&A costs for both
years.

Cost of Goods Sold
COGS for the year ended December 31, 2015 was $10.3 million compared to $5.5 million for the year
ended December 31, 2014. The increase in COGS in the current year was associated with increased
Pennsaid 2% product sales. The increase in product sales improved the gross margin on product sales
to $8.9 million or 47% for the year ended December 31, 2015 compared to a gross margin of $0.9 million
or 14% for the year ended December 31, 2014.

For Nuvo Pharma, gross margin on product sales was $8.8 million or 47% for the year ended December
31, 2015 compared to a gross margin of $0.6 million or 10% for the year ended December 31, 2014.
During the current year, the Company benefitted from a weaker Canadian dollar versus the U.S. dollar,
the currency in which it sources certain Pennsaid and Pennsaid 2% raw materials and sells Pennsaid 2%.
In the current year, a 10% appreciation in the Canadian dollar versus the U.S. dollar would have reduced
gross margin by approximately $0.5 million and a 10% depreciation in the Canadian dollar versus the
U.S. dollar would have increased gross margin by approximately $0.5 million.

For Crescita, gross margin on product sales was $0.1 million or 20% for the year ended December 31,
2015 compared to a gross margin of $0.4 million or 56% for the year ended December 31, 2014. The
decrease in gross margin primarily related to a $0.1 million inventory write-down.

Research and Development
R&D expenses were $10.3 million for the year ended December 31, 2015 compared to $8.1 million for the
year ended December 31, 2014.

For Nuvo Pharma, R&D expenses were $1.2 million for the year ended December 31, 2015 compared to
$0.6 million for the year ended December 31, 2014 and related entirely to the Pennsaid franchise. The
increase spending in the current year related to costs associated with the Pennsaid 2% Phase 3 trial for
the treatment of acute pain to support regulatory approval applications for Pennsaid 2% in international
jurisdictions. The trial is being conducted in Germany to assess the efficacy of Pennsaid 2% for the relief
of pain associated with acute, localized muscle or joint injuries such as sprains, strains or sports injuries.
The trial commenced in July 2015 and the Company expects topline results will be available in Q1 2016.

For Crescita, R&D expenses were $9.1 million for the year ended December 31, 2015 compared to $7.5
million for the year ended December 31, 2014.



In the Immunology Group, R&D expenses were $7.6 million for the year ended December 31,
2015 compared to $5.9 million for the year ended December 31, 2014. The costs in the current
year related to the 2015 WF10 Trial to assess the efficacy, safety and tolerability of WF10 for the
treatment of moderate to severe allergies to grass and ragweed pollens. The external costs for

this trial are approximately $4.5 million of which the Company has paid $3.1 million as of
December 31, 2015. In December, the Company announced that the 2015 WF10 Trial was not
successful and has discontinued all WF10 development.



In the TPT Group, R&D expenses were $1.5 million for the year ended December 31, 2015
compared to $1.6 million for the year ended December 31, 2014. In the current and prior year,
the Company incurred costs related to the advancement of the formulations for the Ferndale
collaboration.

R&D expenditures vary depending on the stage of development of drug products and candidates in the
Company’s pipeline and management’s allocation of the Company’s resources to these activities in
general and to each drug specifically.

General and Administrative
G&A expenses were $9.3 million for the year ended December 31, 2015 compared to $13.0 million for the
year ended December 31, 2014. The decrease in the current year related to a $5.2 million decrease in
SBC primarily from the adjustment to market value for the outstanding Share Appreciation Rights (SARs)
and Deferred Share Units (DSUs) at December 31, 2015, partially offset by a $2.1 million increase in
professional fees related to the proposed reorganization of the Company and a decrease in key
management compensation expenses.

A change in the Company’s share price can result in a significant charge or recovery of G&A expenses in
a reporting period due to the revaluation of SARs and DSUs to fair market value at the end of each
reporting period. Assuming all other valuation assumptions remain constant, a $1.00 increase in the
Company’s share price at December 31, 2015 would have resulted in an additional $0.9 million of G&A
expenses in the year ended December 31, 2015. A $1.00 decrease in the Company’s share price at
December 31, 2015 would have resulted in a decrease of $0.9 million of G&A expenses in the year ended
December 31, 2015.

Interest
Interest expense was $40,000 for the year ended December 31, 2015 compared to $0.7 million for the
year ended December 31, 2014. Interest expense for the current and comparative periods included non-
cash accretion charges on the five-year consulting agreement as part of the consideration paid for the
2011 acquisition of the non-controlling interest in Nuvo Research AG. In addition, in the comparative
year, the Company incurred a 15% per annum interest cost related to the outstanding loan with Paladin
which was repaid in full in the fourth quarter of 2014.

Interest income increased to $0.5 million for the year ended December 31, 2015 compared to $0.2 million
for the year ended December 31, 2014. The increase in interest income related to the significantly higher
balances in the interest bearing Canadian bank accounts, as well as the interest income the Company
earned on the $10.0 million invested in short-term investments that matured during the fourth quarter of
2014.

The aggregate result was net interest income of $0.5 million for the year ended December 31, 2015
compared to net interest expense of $0.5 million for the year ended December 31, 2014.

Loss from Operations
Loss from operations was $8.1 million for the year ended December 31, 2015 compared to $14.0 million
for the year ended December 31, 2014. The decreased loss from operations was attributable to an
increased gross margin from higher Pennsaid 2% product sales, lower SBC costs from the revaluation of
SARs and DSUs to market value and higher net interest income, partially offset by increased R&D
expenditures related to the 2015 WF10 Trial and the Pennsaid 2% Phase 3 trial and lower royalty
revenue.

Other Income
in thousands

Foreign currency gain

Litigation settlement

Impairment of intangible assets

Gain on disposal of property , plant and equipment

Total other income

Year ended
December 31, 2015

Year ended
December 31, 2014

(960)

(1,657)

(52,343)

1,664

(296)

(52,632)

Foreign Currency Gain
The Company experienced a net foreign currency gain of $1.0 million for the year ended December 31,
2015 compared to $1.7 million for the year ended December 31, 2014. In the current year, the impact of
the weaker Canadian dollar versus the U.S. dollar and euro increased the value of U.S. and euro
denominated cash and receivables. In the comparative year, the foreign currency gain related to a
foreign currency gain of $1.1 million on the litigation settlement.

Litigation Settlement
In September 2014, the Company reached a full settlement with Mallinckrodt of Nuvo's claims and
Mallinckrodt's counterclaim relating to Nuvo's license to Mallinckrodt of the right to sell and market
Pennsaid and Pennsaid 2% in the U.S. Under the terms of the settlement agreement, Mallinckrodt
returned all U.S. rights to Pennsaid and Pennsaid 2% (Pennsaid Rights) to Nuvo and paid US$10.0
million.

The Pennsaid Rights were valued at US$45.0 million, as this represented the fair market value as
evidenced by the sale to Horizon in October 2014 (See Significant Transactions – 2014 – Pennsaid 2%
U.S. Asset Sale). The total gain on litigation settlement for the year ended December 31, 2014 was
$52.3 million which included the net cash settlement payment of $8.8 million and the non-cash portion of
$43.5 million, net of direct costs to sell.

Impairment of Intangible Assets
The Company reviewed the carrying values of the intangible assets for potential impairment at December
31, 2014 as sales for the HLT Patch and Pliaglis were not meeting expectations. Commercial strategies
for both products have produced revenues that were lower than expected. Indications for impairment did
exist, and management determined that each asset was impaired, such that recoverable amounts were
lower than the carrying amounts. The recoverable amount and value in use (being the present value of
expected future cash flows) was calculated using historical results and management’s estimate of
potential cash flows over the remaining patent life, net of direct costs forecasted by management,
discounted at an after-tax rate of 19% which approximated the Company’s current weighted average cost
of capital. At December 31, 2014, the Company recorded an impairment charge for the HLT Patch of
$0.5 million and an impairment charge for Pliaglis of $1.2 million

Gain on disposal of property, plant and equipment
The Company recognized a gain of $0.3 million for the year ended December 31, 2014 related to the sale
of a portion of unused land at its manufacturing site in Varennes, Québec.

Net Income (Loss) and Total Comprehensive Income (Loss)
in thousands

Net income (loss) before income taxes

Income tax

Net income (loss)

Unrealized gains (losses) on translation of foreign operations
Total comprehensive income (loss)

Year ended
December 31, 2015

Year ended
December 31, 2014

(7,113)

(7,120)

(65)

(7,185)

38,609

38,590

38,628

Net Income (Loss)
Net loss was $7.1 million for the year ended December 31, 2015 compared to net income of $38.6 million
for the year ended December 31, 2014. The net income in the comparative year ended December 31,
2014 included a significant gain of $52.3 million from the Company’s litigation settlement.

Total Comprehensive Income (Loss)
Total comprehensive loss was $7.2 million for the year ended December 31, 2015 compared to a total
comprehensive income of $38.6 million for the year ended December 31, 2014. The current year
included an unrealized loss of $65,000 on the translation of foreign operations compared to an unrealized
gain of $38,000 in the comparative year.

Net Income (Loss) Per Common Share
Net loss per common share was $0.65 for the year ended December 31, 2015 versus net income per
common share of $3.85 for the year ended December 31, 2014. On a diluted basis, net loss per common
share was $0.65 for the year ended December 31, 2015 versus net income per common share of $3.71
for the year ended December 31, 2014.

The weighted average number of common shares outstanding on a basic and diluted basis was 10.9
million for the year ended December 31, 2015. For the year ended December 31, 2014, the weighted
average number of common shares outstanding on a basic and diluted basis was 10.0 million and 10.4
million.

Segments
IFRS 8 - Operating Segments, requires operating segments to be determined based on internal reports
that are regularly reviewed by the chief operating decision maker for the purpose of allocating resources
to the segment and to assessing its performance. Prior to September 30, 2015, the Company managed
the business in the following operating segments: i) Topical Products and Technology Group and ii)
Immunology Group. As discussed in Note 3(i) of the Consolidated Financial Statements for the year
ended December 31, 2015, the Company realigned its operating segments as a result of proposed
strategic changes to the organizational structure. Accordingly, the Company has presented the following
operating segments that are independently and regularly reviewed and managed: i) Nuvo Pharma and ii)
Crescita.

On a segmented basis, Nuvo Pharma incurred net income before income taxes of $8.3 million for the
year ended December 31, 2015 compared to $53.3 million for the year ended December 31, 2014. In the
current year, Nuvo Pharma experienced an increased gross margin due to increased Pennsaid 2%
product sales and lower SBC costs from the revaluation of SARs and DSUs to market value, slightly
offset by decreased royalty revenue. The comparative year included a net gain of $52.3 million related to
the litigation settlement with Mallinckrodt.

Crescita incurred net loss before income taxes of $15.4 million for the year ended December 31, 2015
compared to $14.7 million for the year ended December 31, 2014. In the current year, Crescita had an
increase in costs related to the clinical trials for WF10 and Pennsaid 2%, as well as increased
professional fees related to the Reorganization of the Company.

Liquidity and Capital Resources
in thousands

Net income (loss)

Items not involving current cash flows

Cash used in operations

Net change in non-cash working capital

Cash provided by (used in) operating activities

Cash provided by investing activities

Cash provided by (used in) financing activities

Effect of exchange rates on cash

Net change in cash during the year

Cash, beginning of year

Cash, end of year

Year ended
December 31, 2015

Year ended
December 31, 2014

(7,120)

(171)

(7,291)

(3,341)

(10,632)

9,668

827

(137)

542

405

48,275

48,680

38,590

(41,463)

(2,873)

5,513

2,640

33,708

(815)

35,533

121

35,654

12,621

48,275

Cash
Cash was $48.7 million at December 31, 2015, an increase of $0.4 million compared to $48.3 million at
December 31, 2014. The $0.4 million increase in cash was primarily attributable to increased margins
from higher product sales offset by costs associated with the clinical trials for WF10 and Pennsaid 2%
and the costs related to the proposed Reorganization of the Company (See Corporate Development –
Proposed Reorganization of the Company).

Operating Activities
Cash used in operations was $7.3 million for the year ended December 31, 2015 compared to $2.9
million for the year ended December 31, 2014. The increase in cash used in operations related to the
decrease in net income that was mostly offset by the change in non-cash items. In the comparative year,
net income included a $52.3 million gain on the litigation settlement, of which $43.5 million was a non-
cash item.

Overall cash used in operating activities was $10.6 million for the year ended December 31, 2015
compared to cash provided by operating activities of $2.6 million for the year ended December 31, 2014.
The increase in cash used in operating activities related to an increase in cash used in operations and a
$3.3 million investment in non-cash working capital compared to a $5.5 million recovery of non-cash
working capital in the prior year. The $3.3 million investment in non-cash working capital in the current
year was attributable to an increase in accounts receivable as a result of increased Pennsaid 2% product
sales and the payment of a $0.6 million deposit to the Canadian Revenue Agency related to fiscal 2014
that was refunded in full subsequent to the year ended December 31, 2015. The $5.5 million recovery in
working capital in the comparative period was primarily attributable to the collection of the milestone
payment of US$2.0 million ($2.1 million) from Galderma related to the launch of Pliaglis in Brazil and an
increase in accounts payable and accrued liabilities related to the cash-settled SBC liability, partially
offset by the increase in inventory to support Horizon’s launch of Pennsaid 2% in the U.S. market.

Investing Activities
Net cash provided by investing activities totalled $9.7 million for the year ended December 31, 2015
compared to net cash provided by investing activities of $33.7 million for the year ended December 31,
2014. In the current period, the Company’s $10.0 million investment in short-term investments matured.

In the prior year, net cash provided by investing activities related primarily to net proceeds of $43.6 million
received from the Pennsaid 2% U.S. Asset Sale (See Significant Transactions – 2014 – Pennsaid 2%
U.S. Asset Sale), partially offset by an investment of $10.0 million in short-term investments. In both the
current and comparative years, cash used in investing activities included the acquisition of property, plant
and equipment for production and laboratory equipment acquired by the Company’s manufacturing facility
in Varennes, Québec.

Financing Activities
Net cash provided by financing activities totalled $0.8 million for the year ended December 31, 2015
compared to net cash used in financing activities of $0.8 million for the year ended December 31, 2014.
In the current year, the Company received $0.9 million in cash from the exercise of warrants and $0.1
million from the issuance of common stock that was slightly offset by payments towards the five-year
consulting agreement recognized as part of the non-controlling interest in 2011. In the comparative year,
the Company raised $2.9 million net of financing fees through the Private Placement (See – Significant
Transactions – 2014 – Private Placement) and received $1.4 million from the exercise of warrants. This
increase in cash was partially offset by payments towards the Company’s loan and payments towards the
five-year consulting agreement recognized as part of the non-controlling interest in 2011.

Selected Quarterly Information
The following is selected quarterly financial information for the last eight quarterly reporting periods.

in thousands, except per share data

March 31,
2015

June 30,
2015

September 30,
2015

December 31,
2015

Revenue
Net income (loss) before income taxes
Net income (loss) per common share

Basic
Diluted

$
4,547
(263)

(0.03)
(0.03)

$
3,246
(5,952)

(0.55)
(0.55)

$
5,716
(1,194)

(0.11)
(0.11)

$
7,843
296

0.03
0.03

March 31,
2014

June 30,
2014

September 30,
2014

December 31,
2014

Revenue
Net income (loss) before income taxes
Net income (loss) per common share

Basic
Diluted

$
2,757
(2,722)

(0.31)
(0.31)

$
3,863
(2,279)

(0.23)
(0.23)

$
3,010
49,722 (2)

4.84 (2)
4.71 (2)

$
3,427
(6,112) (1)

(0.58) (1)
(0.56) (1)

(1) The quarter ended December 31, 2014 included a $1.7 million impairment charge on intangible assets related to Pliaglis

and the HLT Patch.

(2) The quarter ended September 30, 2014 included a net gain of $52.3 million related to the litigation settlement with

Mallinckrodt (See Significant Transactions – 2014 – Mallinckrodt Litigation).

Fourth Quarter Results
in thousands

Product sales

Royalties

License fees

Research and other contract revenue

Total Revenue

Cost of goods sold

Research and development

General and administrative expenses

Interest expense, net

Operating expenses

Other (income) expenses

Net income (loss) before income taxes

Income taxes

Net income (loss)

Other comprehensive income (loss)

Total comprehensive income (loss)

Key Developments

Three months ended
December 31, 2015

Three months ended
December 31, 2014

7,166

345

332

7,843

3,235

2,214

2,513

(102)

7,860

(313)

296

(18)

278

1,586

1,226

567

3,427

1,601

2,785

4,255

8,697

842

(6,112)

(6,143)

(6,104)

During the quarter and prior to the release of the fourth quarter results:

Proposed Reorganization of the Company

 On December 14, 2015, Nuvo, 2487002 Ontario Limited and 2487001 Ontario Limited entered
into the Arrangement Agreement in respect of the proposed Reorganization of Nuvo into two
separate publicly-traded companies. Nuvo Pharma would be a revenue and EBITDA generating
commercial healthcare company to be owned 100% by Nuvo’s shareholders. The second
company, Crescita, would be a drug development company also initially owned 100% by Nuvo’s
shareholders. See Corporate Development – Proposed Reorganization of the Company for more
detail on this proposed transaction.

WF10


In December, the Company announced topline results of the 2015 WF10 Trial. Patients dosed
with WF10 did not report a reduction in symptoms that was significantly better than patients
dosed with a saline placebo at any of the endpoints being measured in the trial. Management
believes that the results do not justify the further development of WF10 for the treatment of
allergic rhinitis and has discontinued all WF10 development.

Pennsaid 2%

 NovaMedica advised the Company that their Pennsaid 2% clinical trial was successful and that

they have submitted their application to obtain regulatory approval in their territory.

Pliaglis


In December, the Company reacquired Pliaglis development and marketing rights for the U.S.,
Canada and Mexico (See Significant Transactions – 2015 – Pliaglis North American Rights
Reacquisition).

Operating Results
Total revenue for the three months ended December 31, 2015 was $7.8 million compared to $3.4 million
for the three months ended December 31, 2014. The increase in revenue primarily related to an increase
in Pennsaid 2% product sales in the U.S., slightly offset by a decrease in royalty revenue from Pennsaid
and Pennsaid 2% in the U.S. as the Company no longer earns a royalty on net sales in the U.S market.

Total operating expenses for the three months ended December 31, 2015 decreased to $7.9 million
compared to $8.7 million for the three months ended December 31, 2014. The decrease in operating
expenses was primarily due to a decrease in SBC expenses of $3.9 million, partially offset by an increase
in COGS and the costs related to the proposed Reorganization of the Company.

COGS for the three months ended December 31, 2015 was $3.2 million compared to $1.6 million for the
three months ended December 31, 2014. The increase in COGS was primarily related to an increase in
Pennsaid 2% product sales to Horizon. The increase in product sales improved the gross margin on
product sales to $3.9 million or 55% for the three months ended December 31, 2015 compared to a
negative margin of $15,000 for the three months ended December 31, 2014.

R&D expenses decreased to $2.2 million for the three months ended December 31, 2015 compared to
$2.8 million for the three months ended December 31, 2014. The decrease in the quarter was primarily
attributable to a $0.3 million reduction in SBC expenses.

G&A expenses decreased to $2.5 million for the three months ended December 31, 2015 compared to
$4.3 million for the three months ended December 31, 2014. The decrease in the quarter was primarily
related to a $3.6 million decrease in SBC expenses, slightly offset by $1.7 million in professional fees
associated with the proposed Reorganization of the Company.

Other income was $0.3 million for the three months ended December 31, 2015 which was related to
foreign exchange gain. In the comparative period, the Company recognized other expenses of $0.8
million primarily related an impairment charge of $1.7 million on intangible assets that was partially offset
by a $0.5 million foreign exchange gain and a gain related to the sale of unused land at the Company’s
manufacturing site in Varennes, Quebec.

Net income for the three months ended December 31, 2015 was $0.3 million compared to a net loss of
$6.1 million for the three months ended December 31, 2014. The improvement in the quarter related to
an increased gross margin on product sales and decreased SBC expense that was only slightly offset by
costs associated with the proposed Reorganization of the Company.

Total comprehensive income was $0.3 million for the three months ended December 31, 2015 compared
to a total comprehensive loss of $6.1 million for the three months ended December 31, 2014. Included in
the comprehensive loss was an $18,000 unrealized loss on the translation of foreign operations for the
three months ended December 31, 2015 compared to a $39,000 unrealized gain for the three months
ended December 31, 2014.

Liquidity
in thousands

Net income (loss)

Items not involving current cash flows

Cash provided by (used in) operations

Net change in non-cash working capital

Cash provided by (used in) operating activities

Cash provided by investing activities

Cash provided by (used in) financing activities

Effect of exchange rates on cash

Net change in cash

Cash, beginning of period

Cash, end of year

Three months ended
December 31, 2015

Three months ended
December 31, 2014

296

(88)

208

(2,993)

(2,785)

9,979

419

7,613

218

7,831

40,849

48,680

(6,143)

2,564

(3,579)

10,864

7,285

33,876

(2,592)

38,569

38,593

9,682

48,275

Cash was $48.7 million at December 31, 2015, an increase of $7.9 million compared to $40.8 million at
September 30, 2015. The increase in cash primarily related to the $10.0 million invested in short-term
investments that matured in the quarter.

Cash used in operating activities was $2.8 million for the three months ended December 31, 2015
compared to cash provided by operating activities of $7.3 million for the three months ended December
31, 2014. An increase in cash provided by operations was offset by a significant investment in non-cash
working capital in the quarter primarily related to increased accounts receivable resulting from increased
product sales and a decrease in accounts payable and accrued liabilities due to the revaluation of cash-
settled share-based compensation. In the comparative period, the increase in cash used in operations
was offset by a significant recovery of non-cash working capital due to the receipt of the US$10 million
litigation settlement proceeds.

Net cash provided by investing activities totalled $10.0 million for the three months ended December 31,
2015 compared to net cash provided by investing activities of $33.9 million for the three months ended
December 31, 2014. In the current period, the Company’s $10.0 million short-term investments matured.
In the comparative period, net cash provided by investing activities related primarily to net proceeds of
$43.6 million received from the Pennsaid 2% U.S. Asset Sale (See Significant Transactions – 2014 –
Pennsaid 2% U.S. Asset Sale), slightly offset by the purchase of a $10.0 million short-term investment.

Net cash provided by financing activities totalled $0.4 million for the three months ended December 31,
2015 compared to net cash used of $2.6 million for the three months ended December 31, 2014. In the
fourth quarter of 2015, the Company received $0.4 million in proceeds from the exercise of warrants. In
the comparative period, the Company paid $3.7 million to settle the Paladin loan which was slightly offset
by $0.9 million in proceeds from the exercise of warrants.

Financial Instruments

IFRS 7 - Financial Instruments: Disclosures requires disclosure of a three-level hierarchy that reflects the
significance of the inputs used in making fair value measurements. Fair values of assets and liabilities
included in Level 1 are determined by reference to quoted prices in active markets for identical assets
and liabilities. Assets and liabilities in Level 2 include those where valuations are determined using inputs
other than quoted prices for which all significant outputs are observable, either directly or indirectly. Level
3 valuations are those based on inputs that are unobservable and significant to the overall fair value
measurement.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value
measurements. The Company reviews the fair value hierarchy classification on a quarterly basis.
Changes to the ability to observe valuation inputs may result in a reclassification of levels for certain
securities within the fair value hierarchy. The Company did not have any transfer of assets and liabilities
between Level 1, Level 2 and Level 3 of the fair value hierarchy during the years ended December 31,
2015 and 2014.

The Company has determined the estimated fair values of its financial instruments based on appropriate
valuation methodologies. However, considerable judgment is required to develop these estimates.
Accordingly, these estimated values are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The estimated fair value amounts can be materially affected by the
use of different assumptions or methodologies.

The following table presents the Company’s assets and liabilities that are measured at fair value on a
recurring basis as at December 31, 2015:

Using Quoted
Prices in Active
Markets for
Identical Assets
(Level 1)
$
-
-

Using Significant
Other
Unobservable
Inputs
(Level 2)
$
-
-

Using Significant
Unobservable
Inputs
(Level 3)
$
-
-

2,231
-
2,231

-
1,328
1,328

-
-
-

Total
$
-
-

2,231
1,328
3,559

Assets:
Total Assets
Liabilities:
Deferred Share Units
Stock Appreciation Rights
Total Liabilities

The following table presents the Company’s assets and liabilities that are measured at fair value on a
recurring basis as at December 31, 2014:

Using Quoted Prices
in Active Markets for
Identical Assets
(Level 1)
$

Using Significant
Other Unobservable
Inputs
(Level 2)
$

Using Significant
Unobservable
Inputs
(Level 3)
$

10,000
10,000

2,770
-
2,770

-
-

-
2,876
2,876

-
-

-
-
-

Total
$

10,000
10,000

2,770
2,876
5,646

Assets:
Short-term Investments
Total Assets
Liabilities:
Deferred Share Units
Stock Appreciation Rights
Total Liabilities

Level 1 assets include guaranteed investment certificates or other securities held by the Company that
are valued at quoted market prices. The Company accounted for its investment at fair value on a
recurring basis at December 31, 2014. The Company has no level 1 assets at December 31, 2015.

Level 1 liabilities include obligations of the Company for the DSUs. One DSU has a cash value equal to
the market price of one of the Company’s common shares. The Company revalues the DSU liability each
reporting period using the market value of the underlying shares.

Level 2 liabilities include obligations of the Company for the SARs Plan. The fair values of each tranche
of SARs issued and outstanding are revalued at each reporting period using the Black-Scholes option
pricing model.

The fair values of all other short-term financial assets and liabilities, presented in the Consolidated
Statements of Financial Position approximate their carrying amounts due to the short period to maturity of
these financial instruments.

Rates currently available to the Company for long-term obligations, with similar terms and remaining
maturities, have been used to estimate the fair value of the finance lease and other obligations. These
fair values approximate the carrying values for all instruments.

FINANCIAL RISK MANAGEMENT

Risk Factors
The following is a discussion of liquidity, credit and market risks and related mitigation strategies that
have been identified. This is not an exhaustive list of all risks nor will the mitigation strategies eliminate
all risks listed.

Liquidity Risk
While the Company had $48.7 million in cash as at December 31, 2015, it continues to have an ongoing
need for substantial capital resources to research, develop, commercialize and manufacture its products
and technologies as the Company is not generating enough cash to fund its operations. The Company
has limited participation in Pennsaid and Pennsaid 2% revenues in countries where it is currently
marketed. In Canada, the Company receives royalties based on Canadian net sales of Pennsaid. In the
first quarter of 2014, a generic version of Pennsaid was launched that has negatively impacted the
Company’s royalty revenue in Canada. In the U.S., the Company receives product revenues from the
sale of Pennsaid 2% to Horizon pursuant to a long-term exclusive supply agreement.

The Company has contractual obligations related to accounts payable and accrued liabilities, purchase
commitments and other obligations of $10.8 million that are due in less than a year and $0.1 million of
contractual obligations that are payable from 2017 to 2020.

Credit Risk
The Company’s cash balances subject the Company to a significant concentration of credit risk. As at
December 31, 2015, the Company had $48.2 million invested with two financial institutions, in various
bank accounts as per its practice of protecting its capital rather than maximizing investment yield through
additional risk. These financial institutions are major Canadian banks which the Company believes
lessens the degree of credit risk. The remaining $0.5 million of cash balances are held in bank accounts
in various geographic regions outside of Canada.

The Company, in the normal course of business, is exposed to credit risk from its global customers, most
of whom are in the pharmaceutical industry. The accounts receivable are subject to normal industry risks
in each geographic region in which the Company operates. In addition, the Company is exposed to
credit-related losses on sales to its customers outside North America and the E.U. due to potentially
higher risks of enforceability and collectability. The Company attempts to manage these risks prior to the
signing of distribution or licensing agreements by dealing with creditworthy customers; however, due to
the limited number of potential customers in each market, this is not always possible. In addition, a
customer’s creditworthiness may change subsequent to becoming a licensee or distributor, and the terms
and conditions in the agreement may prevent the Company from seeking new licensees or distributors in
these territories during the term of the agreement. As at December 31, 2015, the Company’s four largest
customers located in North America and the E.U. represented 89% [December 31, 2014 - 60%] of total
accounts receivable and accounts receivable from customers located outside of North America and the
E.U. represented 2% [December 31, 2014 - 8%] of total accounts receivable.

Pursuant to their collective terms, accounts receivable were aged as follows:

Current
0-30 days past due
31-60 days past due
Over 90 days past due

December 31, 2015

December 31, 2014

5,497
36
-
-
5,533

2,940
43
20
2
3,005

Interest Rate Risk
All finance lease obligations are at fixed interest rates.

Currency Risk
The Company operates globally, which gives rise to a risk that earnings and cash flows may be adversely
affected by fluctuations in foreign currency exchange rates. The Company is primarily exposed to the
U.S. dollar and euro, but also transacts in other foreign currencies. The Company currently does not use
financial instruments to hedge these risks. The significant balances in foreign currencies were as follows:

Cash
Accounts receivable
Other current assets
Accounts payable and accrued liabilities
Finance lease and other long-term

obligations

Euros

December 31,
2015
€
885
782
2
(959)

December 31,
2014
€
1,266
242
159
(943)

U.S. Dollars

December 31,
2015
$
4,783
3,010
-
(520)

December 31,
2014
$
665
2,205
-
(601)

-
710

-
724

(162)
7,111

(281)
1,988

Based on the aforementioned net exposure as at December 31, 2015, and assuming that all other
variables remain constant, a 10% appreciation or depreciation of the Canadian dollar against the U.S.
dollar would have an effect of $984 on total comprehensive income (loss) and a 10% appreciation or
depreciation of the Canadian dollar against the euro would have an effect of $107 on total comprehensive
income (loss).

In terms of the euro, the Company has three significant exposures: its net investment and net cash flows
in its European operations, its euro denominated cash held in its Canadian operations and sales of
Pennsaid by the Canadian operations to European distributors. In terms of the U.S. dollar, the Company
has four significant exposures: its net investment and net cash flows in its U.S. operations, its U.S. dollar
denominated cash held in its Canadian operations, the cost of purchasing raw materials either priced in
U.S. dollars or sourced from U.S. suppliers that are needed to produce Pennsaid, Pennsaid 2% or other
products at the Canadian manufacturing facility and revenue generated in U.S. dollars from agreements
with Horizon, Galderma, Galen and Eurocept.

The Company does not actively hedge any of its foreign currency exposures given the relative risk of
currency versus other risks the Company faces and the cost of establishing the necessary credit facilities
and purchasing financial instruments to mitigate or hedge these exposures. As a result, the Company
does not attempt to hedge its net investments in foreign subsidiaries.

The Company does not currently hedge its euro cash flows. Sales to European distributors for Pennsaid
are primarily contracted in euros. The Company receives payments from the distributors in its euro bank
accounts and uses these funds to pay euro denominated expenditures and to fund the net outflows of the
European operations as required. Periodically, the Company reviews the amount of euros held, and if
they are excessive compared to the Company’s projected future euro cash flows, they may be converted
into U.S. or Canadian dollars. If the amount of euros held is insufficient, the Company may convert a
portion of other currencies into euros.

The Company does not currently hedge its U.S. dollar cash flows. The Company’s U.S. operations have
net cash outflows, and currently these are funded using the Company’s U.S. dollar denominated cash
and payments received under the terms of the agreements with Horizon, Galderma and Galen.
Periodically, the Company reviews its projected future U.S. dollar cash flows and if the U.S. dollars held
are insufficient, the Company may convert a portion of its other currencies into U.S. dollars. If the amount
of U.S. dollars held is excessive, they may be converted into Canadian dollars or other currencies, as
needed for the Company’s other operations.

Contractual Obligations

The following table lists the Company’s contractual obligations for the twelve-month periods ending
December 31 as follows:

in thousands

Finance lease obligations
Operating leases
Purchase obligations
Other obligations(1)

Total

$
15
287
1,124
9,420
10,846

2016

$
3
239
1,124
9,385
10,751

2017

2018 and
thereafter

$
3
47
-
35
85

$
9
1
-
-
10

(1) Other obligations include accounts payable, accrued liabilities and the long-term consulting contract with the former minority

shareholder of Nuvo Research AG.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements.

Related Party Transactions

For the year ended December 31, 2015, certain officers of the Company exercised 33,884 Private
Placement Warrants (See – Significant Transactions – 2014 – Private Placement). Proceeds raised from
the Company’s officers totalled $0.1 million.

For the year ended December 31, 2014, certain officers of the Company participated in the Private
Placement (See – Significant Transactions – 2014 – Private Placement) and acquired 67,768 Private
Placement Warrants on the same terms as the other purchasers. Proceeds raised from the Company’s
officers totalled $0.2 million.

Outstanding Share Data

The number of common shares outstanding as at December 31, 2015 was 11.1 million compared to 10.8
million at December 31, 2014. The increase was due to the issuance of approximately 0.3 million shares
from the exercise of Private Placement Warrants and Broker Warrants issued with the Company’s Private
Placement (See – Significant Transactions – 2014 – Private Placement).

As at December 31, 2015, there were 750,021 options outstanding of which 560,847 have vested.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of Consolidated Financial Statements in conformity with IFRS requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure
of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported
amounts of revenue and expenses during the reporting periods. Management has identified the following

accounting estimates that it believes are most critical to understanding the Consolidated Financial
Statements and those that require the application of management’s most subjective judgments, often
requiring the need to make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods. The Company’s actual results could differ from these estimates and such
differences could be material. All significant accounting policies are disclosed in Note 3, “Summary of
Significant Accounting Policies” of the Company’s Consolidated Financial Statements for the year ended
December 31, 2015.

Critical Accounting Estimates
Key areas of estimation or use of managerial assumptions are as follows:

(i) Change in Operating Segments
During 2015, the Board of Directors of Nuvo unanimously approved a proposed reorganization of Nuvo
into two separate publicly traded companies. This organizational realignment gave rise to changes in
how the Company presents information for financial reporting and management decision-making
purposes and resulted in a change in the Company’s reporting segments. The realignment resulted in
two operating segments: i) Nuvo Pharma and ii) Crescita. Historically, the Company operated under two
distinct business units: i) the TPT Group and ii) the Immunology Group. These business units will remain
operating segments of Crescita. The Nuvo Pharma segment comprises the Company’s manufacturing
facility in Varennes, Quebec and includes the Company’s Pennsaid, Pennsaid 2% and HLT Patch
franchises. Corporate overhead costs are allocated to Nuvo Pharma and Crescita’s TPT Group. All prior
period segment disclosures have been restated to reflect the changes in the Company’s operating
segments. The change did not impact the results reported in the Consolidated Financial Statement.

(ii) Share-based Payments:
The Company measures the cost of share-based payments, either equity or cash-settled, with employees
by reference to the fair value of the equity instrument or underlying equity instrument at the date on which
they are granted. In addition, cash-settled share-based payments are revalued to fair value at every
reporting date.

Estimating fair value for share-based payments requires management to determine the most appropriate
valuation model for a grant, which is dependent on the terms and conditions of each grant. In valuing
certain types of stock-based payments, such as incentive stock options and stock appreciation rights, the
Company uses the Black-Scholes option pricing model.

Several assumptions are used in the underlying calculation of fair values of the Company's stock options
and stock appreciation rights using the Black-Scholes option pricing model, including the expected life of
the option, stock price volatility and forfeiture rates.

(iii) Revenue Recognition:
As is typical in the pharmaceutical industry, the Company’s royalty streams are subject to a variety of
deductions that generally are estimated and recorded in the same period that the revenues are
recognized and primarily represent rebates, discounts and incentives and product returns. These
deductions represent estimates of the related obligations. Amounts recorded for sales deductions can
result from a complex series of judgments about future events and uncertainties and can rely on
estimates and assumptions.

(iv) Intangible Assets:
The Company determines fair values based on discounted cash flows, market information, independent
valuations and management’s estimates. The values calculated for intangible assets involve significant
estimates and assumptions, including those with respect to future cash flows, discount rates and asset
lives. These significant estimates and judgments could impact the Company’s future results if the current
estimates of future performance and fair values change and could affect the amount of amortization
expense on intangible assets in future periods.

inflows. Management first considers the Company’s commercialized products and then determines the
operations that contribute to each product’s revenue base and net cash inflows. Management has
identified three CGUs: the U.S. operations dedicated to generating cash inflows for Synera and Pliaglis,
the manufacturing facility in Québec that generates cash inflows for Pennsaid and Pennsaid 2% and the
Immunology Group that generates cash inflows for WF10.

(vi) Impairment of Non-financial Assets:
The Company reviews the carrying value of non-financial assets for potential impairment when events or
changes in circumstances indicate that the carrying amount may not be recoverable. The impairment test
on CGUs is carried out by comparing the carrying amount of the CGU and its recoverable amount. The
recoverable amount of a CGU is the higher of fair value, less costs to sell, and its value in use. This
complex valuation process entails the use of methods, such as the discounted cash flow method, which
requires numerous assumptions to estimate future cash flows. The recoverable amount is impacted
significantly by the discount rate selected to be used in the discounted cash flow model, as well as the
quantum and timing of expected future cash flows and the growth rate used for the extrapolation.

Recent Accounting Pronouncements

Certain new standards, interpretations, amendments and improvements to existing standards were
issued by the IASB or IFRS Interpretations Committee (IFRIC) that are not yet effective and have not yet
been early adopted by the Company. The standards impacted that may be applicable to the Company
are as follows:

IFRS 9 – Financial Instruments
In October 2010, the IASB issued IFRS 9, which replaces IAS - 39 Financial Instruments: Recognition
and Measurement. IFRS 9 establishes principles for the financial reporting of financial assets and
financial liabilities that will present relevant and useful information to users of financial statements for their
assessment of the amounts, timing and uncertainty of an entity's future cash flows. This new standard is
effective for the Company’s interim and annual financial statements commencing January 1, 2018. The
Company is in the process of reviewing the standard to determine the impact on the Consolidated
Financial Statements.

IFRS 15 – Revenue from Contracts with Customers
In May 2014, the IASB issued IFRS 15 - Revenue from Contracts with Customers, which covers
principles for reporting about the nature, amount, timing and uncertainty of revenue and cash flows
arising from contracts with customers. IFRS 15 is effective for annual periods beginning on or after
January 1, 2018, with earlier adoption permitted. Entities will transition following either a full or modified
retrospective approach. The Company is in the process of reviewing the standard to determine the
impact on the Consolidated Financial Statements.

IFRS 16 – Leases
In January 2016, the IASB has issued IFRS 16 - Leases, its new leases standard that requires lessees to
recognize assets and liabilities for most leases on their balance sheets. Lessees applying IFRS 16 will
have a single accounting model for all leases, with certain exemptions. Lessor accounting is substantially
unchanged. The new standard will be effective from January 1, 2019 with limited early application
permitted. The Company is in the process of reviewing the standard to determine the impact on the
Consolidated Financial Statements.

Other accounting standards or amendments to existing accounting standards that have been issued, but
have future effective dates, are either not applicable or are not expected to have a significant impact on
the Company’s Consolidated Financial Statements.

The Company assesses the impact of adoption of future standards on its Consolidated Financial
Statements, but does not anticipate significant changes in 2016.

Management’s Responsibility for Financial Reporting

Disclosure Controls
Disclosure controls and procedures (DCP) are designed to provide reasonable assurance that information
required to be disclosed by the Company in its filings under Canadian securities legislation is recorded,
processed, summarized and reported in a timely manner. The system of DCP includes, among other
things, the Company’s Corporate Disclosure and Code of Conduct and Business Ethics policies, the
review and approval procedures of the Corporate Disclosure Committee and continuous review and
monitoring procedures by senior management.

At December 31, 2015, the system of DCP was evaluated, under the supervision of the Company’s
Chairman and Co-Chief Executive Officer, President and Co-Chief Executive Officer and Vice President
and Chief Financial Officer. Based on this evaluation, the Company’s management has concluded that
the DCP are effective and provide reasonable assurance that all material information relating to the
Company would be made known to them. While the Co-Chief Executive Officers and the Chief Financial
Officer believe that the Company’s DCP provide reasonable assurance, they are also aware that any
control system can only provide reasonable, not absolute, assurance of achieving its control objectives.

Internal Controls Over Financial Reporting
Management is also responsible for the design of internal controls over financial reporting (ICFR) within
the Company, in order to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with IFRS. Due to its inherent
limitations, ICFR may not prevent or detect misstatements. In addition, the design of any system of
control is based upon certain assumptions about the likelihood of future events and there can be no
assurance that any design will succeed in achieving its stated goals under all future events, no matter
how remote or that the degree of compliance with the policies or procedures may not deteriorate.
Accordingly, even effective ICFR can only provide reasonable, not absolute, assurance of achieving the
control objectives for financial reporting.

The design and operating effectiveness of the Company’s ICFR were evaluated, under the supervision of
the Company’s Chairman and Co-Chief Executive Officer, President and Co-Chief Executive Officer and
Vice President and Chief Financial Officer, in accordance with criteria established in the 2013 Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and Multilateral Instrument 52-109 as at December 31, 2015. Based on this
evaluation, the Company’s management has concluded that ICFR are effective and provided reasonable
assurance that its financial reporting is reliable.

Changes to Internal Controls Over Financial Reporting
There were no changes to ICFR that occurred during the year ended December 31, 2015 that has
materially affected the Company’s ICFR.

Risk Factors

Prospects for companies in the biotechnology and pharmaceutical industry generally may be regarded as
uncertain given the nature of the industry and, accordingly, investments in biotechnology and
pharmaceutical companies should be regarded as speculative. R&D involves a high and significant
degree of risk. An investor should carefully consider the risks and uncertainties described below, as well
as other information contained in this MD&A, as well as broader risk factors discussed in the Company’s
AIF. The risks and uncertainties described below are not an exhaustive list. Additional risks and
uncertainties not presently known to the Company or that the Company believes to be immaterial may
also adversely affect the Company’s business. If any one or more of the following risks occur, the
Company’s business, financial condition and results of operations could be seriously harmed. Further, if
the Company fails to meet the expectations of the public market in any given period, the market price of
the Company’s common shares could decline. Before making an investment decision, each prospective
investor should carefully consider the risk factors set out below and those included in the AIF and other
public documents.

There are also certain risks relating to the Reorganization and if the Reorganization is completed, the
business of Nuvo Pharma and Crescita following the completion of the Reorganization. For a complete
discussion of these risks factors, please refer to the Reorganization Circular that was filed on SEDAR on
January 22, 2016.

Need for Additional Financing
The Company has an ongoing need for substantial capital resources to research, develop, commercialize
and manufacture its products and technologies as the Company is not generating enough cash to fund its
operations. The Company has limited participation in revenues from the commercial products that the
Company has out-licensed and these revenues are not sufficient to cover the costs of operating the
business. The Company earns revenue from product sales of Pennsaid 2%, Pennsaid, WF10 and
Oxoferin, but is dependent on its partners to sell these products in their respective licensed territories.
The Company also earns revenue from royalties on the net sales of Pennsaid in Canada, on the net sales
of Pliaglis in the Galderma territory and net sales of the HLT Patch - branded as Synera in the U.S. and
Rapydan in Europe.

Companies in the pharmaceutical R&D industry typically require periodic funding in order to develop drug
candidates until such time as at least one drug candidate has been successfully commercialized or until
the companies are receiving sufficient revenue to fund their operations. The Company has not yet
reached this stage, and; therefore, the Company monitors on a regular basis, its liquidity position, the
status of its partners’ commercialization efforts, the status of its drug development programs, including
cost estimates for completing various stages of development, the scientific progress on each drug
candidate and the potential to license or co-develop each drug candidate and it continues to actively
pursue fundraising possibilities through various means.

There can be no assurance that the Company will have sufficient capital to fund its ongoing operations or
develop or commercialize any further products without future financings. There can be no assurance that
additional financing will be available on acceptable terms or at all. If adequate funds are not available,
the Company may have to substantially reduce or eliminate planned expenditures, terminate or delay
clinical trials for its product candidates, curtail product development programs designed to expand the
product pipeline or discontinue certain operations.

Economic Environment
Economic conditions may limit the Company’s ability to access capital or may cause the Company’s
suppliers to increase their prices, reduce their output or change their terms of sale. If the Company’s
customers’ or suppliers’ operating and financial performance deteriorates or if they are unable to make
scheduled payments or obtain credit, its customers may not be able to pay or may delay payment of
accounts receivable owed and its suppliers may restrict credit or impose different payment terms. Any
inability of customers to pay the Company for its products or any demands by suppliers for different
payment terms, may adversely affect its earnings and cash flow.

The Company has no control over changes in inflation and interest rates, foreign currency exchange rates
and controls or other economic factors affecting its businesses or the possibility of political unrest, legal
and regulatory changes in jurisdictions in which the Company operates. These factors could negatively
affect the Company’s future results of operations in those markets.

Dependence on Sales and Marketing Partnerships
The Company has limited sales and marketing experience and lacks financial and other resources
necessary to undertake marketing and advertising activities worldwide. Accordingly, the Company relies
on marketing arrangements, including joint ventures, licensing or other third-party arrangements, to
distribute its products in jurisdictions where it lacks the resources or expertise. The Company faces, and
will continue to face, significant competition in seeking appropriate partners and distributors. Moreover,
collaboration and distribution arrangements are complex and time consuming to negotiate, document and
implement. Therefore, there can be no assurance that the Company will be able to find additional
marketing and distribution partners in any jurisdiction or be able to enter into any marketing and
distribution arrangements on any terms, acceptable or not. Moreover, there can be no assurance that its
partners will dedicate the resources needed to successfully market and distribute the Company’s
products and maximize sales. In addition, under these arrangements, disputes may arise with respect to

payments that the Company or its partners believe are due under such distribution or marketing
arrangements, a partner or distributor may develop or distribute products that compete with the
Company’s products or they may terminate the relationship.

The Company has no influence in sales and marketing activities for Pennsaid and Pennsaid 2% in the
markets it is currently available in. Decisions impacting sales and marketing efforts are made by the
Company’s partners for their respective territories. If one of the Company’s partners (especially Paladin
in Canada for Pennsaid and Horizon in the U.S. for Pennsaid 2%) was unable to successfully sell or stops
selling its respective product, for any reason, it could have an adverse effect on the Company’s product
sales and cash resources, as well as royalties earned in Canada.

The Company has licensed the rights for the HLT Patch to Galen for the U.S. and Eurocept for the E.U.
and certain other territories and has no influence on sales and marketing activities for this product in the
licensed territories.

The Company has minimal influence in the worldwide sales and marketing activities for Pliaglis, as these
decisions are made by Galderma, except for North America. In December 2015, the Company
reacquired the North American rights to Pliaglis. (See Significant Transactions – 2015 – Pliaglis North
American Rights Reacquisition). Although the Company has three seats on the Joint Steering Committee
that was established to monitor the development and commercial activities related to Pliaglis in the
Galderma territory, the Company has no direct control over the technical, regulatory and commercial
activities for the product. In addition, Galderma is responsible for the commercialization of Pliaglis
outside of North America and, as such, the Company will rely on Galderma to successfully execute a
worldwide commercialization program. Delays in obtaining the appropriate regulatory approvals for
Pliaglis in territories or an unsuccessful launch in any major territory may have an adverse effect on the
Company’s royalty income and cash flows.

The Company depends on all of its partners and licensees to comply with all government legislation and
regulations relating to selling the Company’s products in their respective territories. If any of the
Company’s partners do not comply, this could have a material impact on the cash flows of the Company.

Generic Drug Manufacturers
Regulatory approval for competing generic drugs can be obtained without investing in the same level of
costly and time-consuming clinical trials that the Company has conducted or might conduct in the future.
Due to the substantially reduced development costs, generic drug manufacturers are often able to charge
much lower prices for their products than the original developer. The Company faces competition from
manufacturers of generic drugs on some of its products that are commercial, since a number of the
Company’s patents have expired, or if not yet expired, may be ignored by generic drug manufacturers
who choose to launch their products “at risk” of a possible patent infringement lawsuit brought by the
Company or its licensing partners. Generic competition may impact the prices at which the Company’s
products are sold, the royalty rates the Company receives and the volume of product sold which may
substantially reduce the Company’s overall revenues.

In 2014, a generic version of Pennsaid was launched in Canada. The Company’s partner in Canada has
launched an authorized generic to compete with the generic version of Pennsaid and protect market
share. The Company’s revenues from royalties and product sales in Canada were negatively impacted
as a result of the launch of these generic versions. In addition, another generic version of Pennsaid was
launched in late 2015.

In the U.S., under the “Hatch-Waxman Act”, the FDA can approve an ANDA for a generic version of a
branded drug or a variation of an existing branded drug, without undertaking the clinical testing necessary
to obtain approval to market a new drug. This is referred to as the "ANDA process". In place of such
clinical studies, an ANDA applicant usually needs to submit data and information demonstrating that its
product has the same active ingredient(s) and is bioequivalent to the branded product, in addition to, for
example, any data necessary to establish that any difference in inactive ingredients does not result in
different safety or efficacy profiles, as compared to the reference drug. The “Hatch-Waxman Act”, in
addition to providing brand-name drug manufacturers with periods of marketing exclusivity, such as 3-
year “new clinical investigation” exclusivity, requires an applicant for a drug that relies, at least in part, on

the FDA’s findings of safety or effectiveness for a branded drug, to notify the sponsor of the branded drug
of their application and potential infringement of any patents timely listed in the FDA Orange Book. Upon
receipt of this notice, the sponsor of the branded drug has 45 days to bring a patent infringement suit in
federal district court against the applicant seeking approval of a product covered by the patent. If such a
suit is commenced and the ANDA was filed after the patent had been listed in the FDA Orange Book,
then the FDA is generally prohibited from granting approval of the ANDA or Section 505(b)(2) NDA, a
type of NDA that relies on information for which the applicant does not have a right of reference, until the
earliest of 30 months from the date the FDA accepted the application for filing (the 30-Month Stay), or the
conclusion of patent infringement litigation in the generic's favour or expiration of the patent. If an ANDA
was filed before the patent had been listed in the FDA Orange Book, the 30-Month Stay does not apply
and it is possible that the ANDA holder may launch its generic product “at risk” of patent infringement
proceedings initiated by the innovator drug company. If the litigation is resolved in favour of the applicant
or the challenged patent expires during the 30-month stay period, the stay is terminated and the FDA may
thereafter approve the application based on the standards for approval of ANDAs and Section 505(b)(2)
NDAs. Frequently, the unpredictable nature and significant costs of patent litigation leads the parties to
settle out of court. Settlement agreements between branded companies and generic applicants may
allow, among other things, a generic product to enter the market prior to the expiration of any or all of the
applicable patents covering the branded product, either through the introduction of an authorized generic
or by providing a license to the patents in suit.

In the U.S., Pennsaid 2% is protected by multiple patents listed in the FDA Orange Book and has
received 3-year exclusivity under the “Hatch-Waxman Act”. All of the intellectual property for Pennsaid
2% for the U.S. is owned by Horizon and it is their responsibility to litigate any claims against these
patents from generic companies. The approval or launch of generic versions of Pennsaid 2% in the U.S.
market could have an adverse effect on the Company’s future revenue from product sales.

Obtaining Government and Regulatory Approvals
The research, testing, manufacturing, packaging, labeling, approval, storage, selling, marketing and
distribution of drug products are subject to extensive regulation in the U.S. by the FDA, in Canada by the
TPD and by similar regulatory authorities in the E.U., Japan and elsewhere, and regulations and
requirements differ from country-to-country. Despite the time and expense exerted by the Company,
failure can occur at any stage.

The process of completing a drug development program and obtaining regulatory approval for a drug can
be long and may involve significant delays despite the Company’s best efforts and can require substantial
cash resources. Even after initial approval has been obtained, further research, including post-marketing
studies, may be required to expand indications covered under the product approvals and labelling. Also,
regulatory agencies require post-marketing surveillance programs to monitor side effects. Results of
post-marketing programs may limit or expand additional marketing of the drug. Moreover, regulations are
rigorous, time consuming and costly and the Company cannot predict the extent to which it may be
affected by changes in regulatory developments and its ability to meet such regulations. There is also a
risk that the Company’s products may be withdrawn from the market and the required approvals
suspended as a result of non-compliance with regulatory requirements.

Furthermore, there can be no assurance that the regulators will not require modification to any
submissions, which may result in delays or failure to obtain regulatory approvals. Any delay or failure to
obtain regulatory approvals could adversely affect the Company’s business, financial condition and
operational results. Further, there can be no assurance that the Company’s products will prove to be safe
and effective in clinical trials or receive the requisite regulatory approval in any market.

In addition to the regulatory product approval framework, pharmaceutical companies are subject to a
number of other regulations covering occupational safety, laboratory practices, environmental protection
and hazardous substance control. They may also be subject to existing and future local, provincial, state,
federal and foreign regulation, including possible future regulation of the overall industry.

Failure to obtain necessary regulatory approvals, the restriction, suspension or revocation of existing
approvals or any other failure to comply with regulatory requirements, could have a material adverse
effect on the Company’s business, financial condition and operational results.

United States Regulation
The FDA has substantial discretion in the drug approval process. The FDA may delay, limit or deny
approval of a drug candidate for many reasons including:

•

a drug candidate may not be deemed safe or effective;

the FDA may
insufficient;

find

the data

from preclinical studies, CMC and clinical

trials

the FDA may change its approval policies or adopt new regulations; or

third-party products may enter the market and change approval requirements.

Even once drug candidates are approved, these approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur after the product reaches the market. The
FDA may require further testing and surveillance programs to monitor the pharmaceutical product that
has been commercialized. Non-compliance with applicable requirements can result in fines and other
judicially imposed sanctions, including product seizures, injunction actions and criminal prosecutions.

The process of receiving FDA approval has become more difficult with the requirement to submit a Risk
Evaluation and Mitigation Strategy (REMS) as part of the drug application for certain classes of drugs and
some individual drug products. In addition, the FDA may require REMS after approving a covered
application, including applications approved before the REMS program was initiated.

In addition, the FDA has the authority to regulate the claims the Company’s partners make in marketing
its prescription drug products to ensure that such claims are true, not misleading, supported by scientific
evidence and consistent with the product’s approved labelling. Failure to comply with FDA requirements
in this regard could result in, among other things, suspensions or withdrawal of approvals, product
seizures and injunctions against the manufacture, holding, distribution, marketing and sale of a product,
civil and criminal sanctions.

Canada Regulation
The TPD may deny issuance of a NOC for an NDS if applicable regulatory criteria are not satisfied or may
require additional testing. Product approvals may be withdrawn if compliance with regulatory standards is
not maintained or if problems occur after the product reaches the market. The TPD may require further
testing and surveillance programs to monitor a pharmaceutical product which has been commercialized.
Non-compliance with applicable requirements can result in fines and other judicially imposed sanctions,
including product seizures, injunction actions and criminal prosecutions.

Additional Regulatory Considerations
There is no assurance that problems will not arise that could delay or prevent the commercialization of
the Company’s products currently under development or that the TPD, FDA or other foreign regulatory
agencies will be satisfied with the information submitted by the Company, including results of clinical
trials, to approve the marketing of such products. In addition to the regulatory approval process,
pharmaceutical companies are subject to regulations under local, provincial, state and federal law,
including requirements regarding occupational safety, laboratory practices, environmental protection and
hazardous substance control and may be subject to other present and future local, provincial, state,
federal and foreign regulations, including possible future regulations of the pharmaceutical industry. The
Company cannot predict the time required for regulatory approval or the extent of clinical testing and
documentation that is required by regulatory authorities. Any delays in obtaining, or failure to obtain
regulatory approvals in Canada, the U.S., the E.U. or other foreign countries, would significantly delay the
development of the Company’s markets and the receipt of revenues from the sale of its products.

Manufacturing and Supply Risks
The Company purchases key raw materials necessary for the manufacture of its products and finished
products from a limited number of suppliers around the world and in some cases relies on its licensing
partners to manufacture its products.

In the case of Pennsaid and Pennsaid 2%, the Company has a supply agreement with a single supplier
based in the U.S. to purchase all of the Company’s requirements for pharmaceutical grade DMSO (one of
the key ingredients in Pennsaid and Pennsaid 2%) until December 31, 2022 using the supplier’s patented
process. It may be difficult to find another manufacturer if the supplier is unable to supply the Company
with a sufficient amount of DMSO or if the Company is forced for any other reason to find another
supplier. It could take another supplier a significant period of time to develop and certify the necessary
processes to manufacture the product on terms acceptable to the Company or the related regulatory
authority. There may not be suppliers who are able to meet the Company’s volume or quality
requirements at a price that is as favourable as the current supplier. Any operating, production or quality
problems experienced by these suppliers that result in a reduction or interruption in supply could
significantly delay the manufacture and sale of the Company’s products.

In addition, since WF10 and Oxoferin are manufactured by CMOs, the Company has limited ability to
control the manufacturing process or costs related to this process. Increases in the prices paid to the
CMO, price increases from suppliers of any component of the product, interruptions in supply of product
or lapses in quality could adversely impact the Company’s margins, profitability and cash flows. The
Company is reliant on its third-party CMOs to maintain the facilities at which it manufactures the
Company’s products in compliance with FDA, EMA, state and local regulations or other countries’
regulatory authorities. If the CMO fails to maintain compliance with regulatory authorities, they could be
ordered to cease manufacturing, which would have a material adverse impact on the Company’s
business, results of operations, financial condition and cash flows. In addition to FDA regulations,
violation of standards enforced by the Environmental Protection Agency (EPA) and the Occupational
Safety and Health Administration (OSHA), and their counterpart agencies at the state level, could slow
down or curtail operations of the CMO or any of its suppliers.

If the relationships with the CMO or any of the single-sourced suppliers is discontinued or, if any
manufacturer is unable to supply or produce required quantities of product on a timely basis or at all, or if
a supplier ceases production of an ingredient or component, the operations would be negatively impacted
and the business would be harmed.

Under the terms of the Pliaglis license agreements, Galderma has the sole right to manufacture Pliaglis
and; therefore, the Company does and will depend on Galderma as the only qualified supplier of the
product for all global markets. Pliaglis also contains the active drugs lidocaine and tetracaine and in the
past the form of tetracaine used in the product has, at times, been difficult to procure. The Company is
reliant on Galderma to maintain the facilities at which it manufactures Pliaglis in compliance with FDA,
EMA, state and local regulations and other regulatory agencies. If Galderma fails to maintain compliance
with FDA, EMA or other critical regulations, they could be ordered to cease manufacturing, which would
have a material adverse impact on the Company’s business, results of operations, financial condition and
cash flows. In addition to FDA regulations, violation of standards enforced by the EPA, the OSHA and
their counterpart agencies at the state level, could slow down or curtail operations of Galderma.

For the HLT Patch, Galen and Eurocept are responsible for manufacturing the patch and both rely on the
same CMO in the U.S. The Company does and will depend on Galen and Eurocept to ensure the CMO
remains a qualified supplier of the product for all global markets and will have limited ability, if any, to
control the manufacturing process. The HLT Patch also contains the active drugs lidocaine and
tetracaine and in the past, the form of tetracaine used in the product has, at times, been difficult to
procure. The Company is reliant on Galen and Eurocept to ensure that the CMO maintains the facility at
which it manufactures the HLT Patch in compliance with FDA, EMA, state and local regulations and other
regulatory agencies. If the CMO fails to maintain compliance with FDA, EMA or other critical regulations,
they could be ordered to cease manufacturing which would have a material adverse impact on the
Company’s business, results of operations, financial condition and cash flows. In addition to FDA
regulations, violation of standards enforced by the EPA, the OSHA, and their counterpart agencies at the
state level, could slow down or curtail operations of the CMO.

In addition, the FDA and other regulatory agencies require that raw material manufacturers comply with
all applicable regulations and standards pertaining to the manufacture, control, testing and use of the raw
materials as appropriate. For the Active API or critical raw materials depending on the drug product, this
means compliance to current GMPs for APIs and submission of all data related to the manufacture,

control and testing of the API for quality, purity, identity and stability, as well as a complete description of
the process, equipment, controls and standards used for the production of the API. This is usually
submitted to the FDA in the form of a Drug Master File (DMF) by the manufacturer and referenced by the
sponsor of the NDA. The DMF information and data is reviewed by the FDA as a critical component of
the approvability of the NDA.

As a result, in the case where only one supplier of a particular API or critical raw material meets all of the
FDA’s (or other regulatory agencies) requirements and has a DMF (or similar filing) on file with the FDA,
the Company is at risk should a supplier violate GMP, fail an FDA inspection, terminate access to its
DMF, be unable to manufacture product, choose not to supply the Company or decide to increase prices.
For DMSO and tetracaine, the Company has only one approved supplier for all jurisdictions in which
Pennsaid and the HLT Patch has been approved. For Pennsaid and Pennsaid 2%’s API, diclofenac
sodium, the Company has two approved suppliers for Canada and the E.U., but only one approved
supplier for the U.S. For some of the Company’s other raw materials required to manufacture Pennsaid,
the bulk substance for the HLT Patch, Oxoferin and WF10, the Company currently has only one approved
supplier.

In addition, the Company could be subject to various import duties applicable to both finished products
and raw materials and it may be affected by other import and export restrictions, as well as developments
with an impact on international trade. Under certain circumstances, these international trade factors
could affect manufacturing costs, which will in turn affect the Company’s margins, as well as the
wholesale and retail prices of manufactured products.

The Company’s current internal manufacturing capabilities are limited to its site in Varennes, Québec,
which is the sole manufacturer of Pennsaid, Pennsaid 2% and the bulk drug product for the HLT Patch for
all markets and its site in Wanzleben, Germany that produces the active ingredient in WF10 and Oxoferin.
The Company has never achieved capacity in these facilities. This exposes the Company to the following
risks, any of which could delay or prevent the commercialization of its products, result in higher costs or
deprive it of potential product revenues:

 The Company may encounter difficulties in achieving volume production, quality control
and quality assurance, as well as relating to shortages of qualified personnel.
Accordingly, the Company might not be able to manufacture sufficient quantities to meet
its clinical trial needs or to commercialize its products;

 The Company’s manufacturing facilities are required to undergo satisfactory current GMP
inspections prior to regulatory approval and are obliged to operate in accordance with
FDA, E.U. and other nationally mandated GMP, which govern manufacturing processes,
stability testing, record keeping and quality standards. Failure to establish and follow
GMPs and to document adherence to such practices, may lead to significant delays in
the availability of material for clinical studies and may delay or prevent filing or approval
of marketing applications for the Company’s products; and

 Changing manufacturing locations would be difficult and the number of potential
manufacturers is limited. Changing manufacturers generally requires re-validation of the
manufacturing processes and procedures in accordance with FDA, E.U. and other
nationally mandated GMPs. Such re-validation may be costly and would be time
consuming. It would be difficult or impossible to quickly find replacement manufacturers
on acceptable terms, if at all.

The Company’s manufacturing facilities are subject to ongoing periodic unannounced inspection by the
FDA and corresponding agencies, including E.U. and Canadian agencies, and may be subject to
inspection by local, state, provincial and federal authorities from various jurisdictions to ensure strict
compliance with GMPs and other government regulations. Failure by the Company to comply with
applicable regulations could result in sanctions being imposed on it, including fines, injunctions, civil
penalties, failure of the government to grant review of submissions or market approval of drugs, delays,
suspension or withdrawal of approvals, seizures or recalls of product, operating restrictions, facility
closures and criminal prosecutions, any of which could materially adversely affect the Company’s
business.

The Company may encounter manufacturing failures that could impede or delay commercial production of
its products. Any failure in the Company’s manufacturing operations could cause the Company to be
unable to meet the demand for its products and lose potential revenue and harm its reputation. The
Company’s manufacturing operations may encounter difficulties involving, among other things, production
yields, regulatory compliance, quality control and quality assurance and shortages of qualified personnel.

Impact of demand fluctuations outside our ability to control or influence
In general, our marketing partners are required to provide the Company with 12 to 24-month rolling
forecasts of their demand on a quarterly basis, and are also required to place firm purchase orders with
us based on the near-term portion of those forecasts. If wholesaler or market demand for these products
is lower than forecasted, our marketing partners or their wholesaler customers may accumulate excess
inventory. If such conditions persist, our marketing partners may sharply reduce subsequent purchase
orders for a sustained period of time until such excess inventory is consumed, if ever. Significant and
unplanned reductions in our manufacturing orders have occurred in the past and our results of operations
were adversely affected. If such reductions occur again in the future, our revenues will be negatively
impacted, we will lose our economies of scale, and our revenues may be insufficient to fully absorb our
overhead costs, which could result in net losses. Conversely, if our marketing partners promote
significantly increased demand, we may not be able to manufacture such unplanned increases in a timely
manner, especially following prolonged periods of reduced demand. As we have no control over these
factors, our purchase orders could fluctuate significantly from quarter-to-quarter, and the results of our
operations could fluctuate accordingly.

Impact of natural disasters or other events that disrupt our business operations
Nuvo’s manufacturing facilities are located in Varennes, Québec and Wanzleben, Germany, where
natural disasters or similar events, like blizzards, fires or explosions or large-scale accidents or power
outages, could severely disrupt our operations, and have a material adverse effect on our business,
results of operations, financial condition and prospects. If a disaster, power outage or other event
occurred that prevented us from using all or a significant portion this facility, that damaged critical
infrastructure or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for
us to continue our business for a substantial period of time.

Patents, Trademarks and Proprietary Technology
There can be no assurance as to the breadth or degree of protection that existing or future patents or
patent applications may afford the Company or that any patent applications will result in issued patents or
that the Company’s patents or trademarks will be upheld if challenged. It is possible that the Company’s
existing patent or trademark rights may be deemed invalid. Although the Company believes that its
products do not, and will not, infringe valid patents or trademarks or violate the proprietary rights of
others, it is possible that use, sale or manufacture of its products may infringe on existing or future
patents, trademarks or proprietary rights of others. If the Company’s products infringe the patents or
proprietary rights of others, the Company may be required to stop selling or making its products, may be
required to modify or rename its products or may have to obtain licenses to continue using, making or
selling them. There can be no assurance that the Company will be able to do so in a timely manner,
upon acceptable terms and conditions, or at all. The failure to do any of the foregoing could have a
material adverse effect upon the Company. In addition, there can be no assurance that the Company will
have sufficient financial or other resources to enforce or defend a patent infringement or proprietary rights
violation action. Moreover, if the Company’s products infringe patents, trademarks or proprietary rights of
others, the Company could, under certain circumstances, become liable for substantial damages which
could also have a material adverse effect.

Regardless of the validity of the Company’s patents, there can be no assurance that others will be unable
to obtain patents or develop competitive non-infringing products or processes that permit such parties to
compete with the Company. The Company may not be able to protect its intellectual property rights
throughout the world as filing, prosecuting and defending patents and trademarks on all of the Company’s
product candidates, products and product names, when and if they exist, in every jurisdiction would be
prohibitively expensive and can take several years. Competitors may manufacture, sell or use the
Company’s technologies and use its trademarks in jurisdictions where the Company or its partners have
not obtained patent and trademark protection. These products may compete with the Company’s

products, when and if it has any, and may not be covered by any of its or its partners’ patent claims or
other intellectual property rights.

The laws of some countries do not protect intellectual property rights to the same extent as the laws of
Canada and the U.S. and many companies have encountered significant problems in protecting and
defending such rights in foreign jurisdictions. The legal systems of certain countries, particularly certain
developing countries, do not favour the enforcement of patents, trademarks and other intellectual property
protection, particularly those protections relating to biotechnology and pharmaceuticals, which could
make it difficult for the Company to stop the infringement of its patents. Proceedings to enforce patent
rights in foreign jurisdictions could result in substantial cost and divert efforts and attention from other
aspects of the business.

The discovery, trial and appeals process in patent litigation can take several years. Should the Company
commence a lawsuit against a third party for patent infringement or should there be a lawsuit commenced
against the Company with respect to the validity of its patents or any alleged patent infringement by the
Company, the cost of such litigation, as well as the ultimate outcome of such litigation, if commenced,
whether or not the Company is successful, could have a material adverse effect on its business, results of
operations, financial condition and cash flows

Inability to Achieve Drug Development Goals within Expected Time Frames
From time-to-time, the Company sets targets and makes public statements regarding its expected timing
for achieving drug development goals. These include targets for the commencement and completion of
preclinical and clinical trials, studies and tests and anticipated regulatory filing and approval dates. These
targets are set based on a number of assumptions that may not prove to be accurate. The actual timing
of these forward-looking events can vary dramatically from the Company’s estimates or they might not be
achieved at all, due to factors such as delays or failures in clinical trials or preclinical work, scheduling
changes at CROs, the need to develop additional data required by regulators as a condition of approval,
the uncertainties inherent in the regulatory approval process, delays in achieving manufacturing or
marketing arrangements necessary to commercialize product candidates and limitations on the funds
available to the Company. If the Company does not meet these targets, including those which are
publicly announced, the ultimate commercialization of its products may be delayed and, as a result, its
business could be harmed.

Also, there can be no assurance that such trials and studies will be sufficient for regulatory authorities or
that the required regulatory approvals will be obtained.

Uncertainty of Drug Research and Development
There can be no assurance that any of the Company’s product candidates will be successfully developed
in a timely manner or that they will prove to be more effective than products based on existing or new
technologies or that a sufficient number of medical professionals will recommend their use. The risk that
a product candidate may fail clinical trials, the Company may be unable to successfully complete
development or a decision for financial or other reasons to halt development of any product candidate,
particularly in instances where significant capital expenditures have already been made, could have a
material adverse effect on the Company.

In December 2015, Nuvo announced that it failed to meet the primary endpoint in the 2015 WF10 Study.
(See Overview – Crescita – Immunology Group). The Company will have product candidates that are at
an early stage in the drug development process and have not progressed to the clinical trial phase of
development. There can be no assurance that preclinical or clinical testing of the Company’s product
candidates will yield sufficiently positive results to enable progress toward commercialization and any
such trials will take significant time to complete. Unsatisfactory results may prompt the Company to
reduce or abandon future testing or commercialization of particular product candidates and this may have
a material adverse effect on the Company.

Due to the inherent risk associated with R&D efforts in the pharmaceutical industry, particularly with
respect to new drugs, the Company’s R&D expenditures may not result in the successful introduction of
government approved new pharmaceutical products. Also, after submitting a drug candidate for
regulatory approval, the regulatory authority may require additional studies, and as a result, the Company

may be unable to reasonably predict the total R&D costs to develop a particular product.

Risk Related to Clinical Trials
The Company and its drug development partners must demonstrate, through preclinical studies and
clinical trials, that the product being developed is safe and efficacious before obtaining regulatory
approval for the commercial sale of such product. The results of preclinical studies and previous clinical
trials are not necessarily predictive of future results and the Company’s current product candidates may
not have favourable results in later testing or trials. Preclinical tests and Phase 1 and Phase 2 clinical
trials are primarily designed to test safety, to study PK and pharmacodynamics and to understand the
side effects of products at various doses and schedules. Success in preclinical or animal studies and
early clinical trials does not ensure that later large-scale efficacy trials will be successful and such
success is not necessarily predictive of final results. Favourable results in early trials may not be
repeated in later trials and positive interim results do not ensure success in final results. Even after the
completion of Phase 3 clinical trials, the FDA, TPD, EMA or other regulatory authorities may disagree with
the clinical trial design and interpretation of data and may require additional clinical trials to demonstrate
the efficacy of product candidates.

A number of companies in the biotechnology and pharmaceutical industry have suffered significant
setbacks in advanced clinical trials, even after achieving promising results in earlier trials and preclinical
studies. The Company suffered a similar setback with the recent results of its 2015 WF10 Study and the
2014 WF10 Study. (See Overview – Crescita – Immunology Group). In many cases where clinical results
were not favourable, were perceived negatively or otherwise did not meet expectations, the share prices
of these companies declined significantly. Failure to complete clinical trials successfully and to obtain
successful results on a timely basis could have an adverse effect on the Company’s future business and
its common share price.

Patient Enrolment May Not be Adequate for Current Trials or Future Clinical Trials
The Company’s future prospects could suffer if it, or any of its drug development partners, fails to develop
and maintain sufficient levels of patient enrolment in its current or future clinical trials. Delays in planned
patient enrolment may result in increased costs, delays or termination of clinical trials, which could
materially harm the Company’s future prospects.

Reliance on Third Parties to Conduct Clinical and Preclinical Studies
The Company and its drug development partners rely on third parties such as CROs, medical institutions
and clinical investigators to enroll qualified patients, conduct, supervise and monitor its clinical trials,
conduct preclinical studies and complete CMC work. The reliance on these third parties for clinical
development activities reduces its control over these activities. The reliance on these third parties;
however, does not relieve the Company or its drug development partners of their regulatory
responsibilities, including ensuring that its clinical trials are conducted in accordance with GCPs and that
its preclinical studies are conducted in accordance with GLPs. Furthermore, these third parties may have
relationships with other entities, some of which may be competitors. In addition, they may not complete
activities on schedule or may not conduct preclinical studies or clinical trials in accordance with regulatory
requirements or the Company’s trial design. If these third parties do not successfully carry out their
contractual duties or meet expected deadlines, the Company’s ability to obtain regulatory approvals for
product candidates may be delayed or prevented.

Competition
The pharmaceutical industry is characterized by evolving technology and intense competition. The
Company is engaged in areas of research where developments are expected to continue at a rapid pace.
Many companies, including major pharmaceutical and specialized biotechnology companies, are
engaged in activities focused on medical conditions that are the same as or similar to those targeted by
the Company. The Company’s success depends upon maintaining its competitive position in the R&D
and commercialization of its products. Competition from pharmaceutical, chemical and biotechnology
companies, as well as universities and research institutes, is intense and is expected to increase. Many
of these organizations have substantially greater R&D, experience in manufacturing, marketing, financial
and managerial resources and they represent significant competition. If the Company fails to compete
successfully in any of these areas, its business, results of operations, financial condition and cash flows
could be adversely affected.

The intensely competitive environment of the branded products business requires an ongoing, extensive
search for medical and technological innovations and the ability to market products effectively, including
the ability to communicate the effectiveness, safety and value of branded products for their intended uses
to healthcare professionals in private practice, group practices and managed care organizations. There
can be no assurance that the Company and its drug development partners will be able to successfully
develop medical or technological innovations or that the Company and its licensing partners will be able
to effectively market the Company’s existing products or any future products.

The Company’s branded products may face competition from generic versions. Generic versions are
generally significantly cheaper than the branded version, and, where available, may be required or
encouraged in preference to the branded version under third-party reimbursement programs or
substituted by pharmacies for branded versions by law. The entrance of generic competition to the
Company’s branded products generally reduces the market share and adversely affects the Company’s
profitability and cash flows. Generic competition with the Company’s branded products would be
expected to have a material adverse effect on net sales and profitability of the branded product and of the
Company.

Additionally, the Company competes to acquire the intellectual property assets that are required to
continue to develop and broaden its product portfolio. In addition to in-house R&D efforts, the Company
seeks to acquire rights to new intellectual property through corporate acquisitions, asset acquisitions,
licensing and joint venture arrangements. Competitors with greater resources may acquire assets that
the Company seeks, and even if the Company is successful, competition may increase the acquisition
price of such assets. If the Company fails to compete successfully, its growth may be limited.

Competition for Pennsaid and Pennsaid 2%
Several major pharmaceutical companies have developed oral COX-2 selective NSAIDs designed to
reduce gastrointestinal side effects associated with other types of NSAIDs. Many of these products have
been taken off the market or drug development has stopped in response to safety concerns. Those that
remain represent competition for market share. While the Company believes that topical administration
gives Pennsaid and Pennsaid 2% a better safety profile than all oral NSAIDs, including those with PPIs
and COX-2 selective medications, it may be subject to regulations and regulatory decisions of governing
bodies, such as the FDA in the U.S., including label warnings that apply to NSAIDs generally.

Pennsaid 2% faces competition in the U.S. from at least two other topically applied diclofenac drug
products available by prescription that were approved for marketing by the FDA, as well as numerous
OTC products. The FLECTOR Patch, which contains the NSAID diclofenac epolamine was approved by
the FDA for the topical treatment of acute pain due to minor strains, sprains and contusions and is
marketed by one of the largest healthcare companies in the world. The second drug product, Novartis’
Voltaren Gel which contains the NSAID diclofenac sodium was approved by the FDA for the relief of the
pain of OA of joints amenable to topical treatment, such as the knees and those of the hand and is
marketed by Endo Pharmaceuticals Inc. Both of these topical products have achieved respectable sales
levels and they provide significant competition for market share. If patients and practitioners believe
these competing products provide pain relief, it may be difficult for our partner to convince them to use
Pennsaid 2% or conversely, if they do not believe that they provide pain relief this may create a
perception that all topically applied products have similar efficacy, making it more difficult to convince
physicians and their patients of the value of Pennsaid 2%.

In Canada, there are two generic versions of Pennsaid selling in the market. The first generic was
launched in 2014. In addition, our partner launched an authorized generic to protect market share. The
launch of these generic versions of Pennsaid had an adverse impact on the Company’s revenue from
Canada. A topical diclofenac product, Novartis’ Voltaren Emulgel (1.16% w/w diclofenac diethylamine)
has been available in Canada as an OTC since October 2008. In August 2014, Voltaren Emulgel Extra
Strength (2.32% w/w diclofenac diethylamine) was approved in Canada as an OTC product and was
launched by Novartis in October 2014. In the E.U., several major pharmaceutical companies market oral
and topical NSAIDs that compete against Pennsaid in countries where it is marketed.

In addition to recently approved products, there may be other companies that are developing topical
NSAID products for the U.S. and other markets that may present additional competition in the future.

Like Pennsaid and Pennsaid 2%, these drugs may be efficacious yet reduce the incidence of some of the
side effects associated with oral NSAIDs.

The impact of competitive branded products and generic products could have a significant adverse effect
on Pennsaid 2% product sales in the U.S. market, as well as the resulting level of royalties earned and
product sales in Canada from Pennsaid sales.

Products May Fail to Achieve Market Acceptance
Any products successfully developed by the Company may not achieve market acceptance and, as a
result, may not generate significant revenues. Market acceptance of the Company’s products by
physicians or patients will depend on a number of factors, including:

•

availability, cost and effectiveness of products when compared
products and alternative treatments;

to competing

relative convenience and ease of administration;

the prevalence and severity of any adverse side effects;

the acceptance of competing products;

pricing, which may be subject to regulatory control;

effectiveness of marketing and distribution partners’ sales and marketing strategies; and

the ability to obtain sufficient third-party insurance coverage or reimbursement.

If any product commercialized by the Company does not provide a treatment regimen that is as beneficial
as the current standard of care or otherwise does not provide patient benefit, there is the potential that it
will not achieve market acceptance. This may result in a shortfall in revenues and an inability to achieve
or maintain profitability.

Reimbursement and Product Pricing
There can be no assurance that Pennsaid, Pennsaid 2%, Pliaglis or the HLT Patch will be successfully
commercialized in current markets or that the additional regulatory approvals necessary to commercialize
Pennsaid, Pennsaid 2%, Pliaglis and the HLT Patch in markets where they are not currently approved will
be obtained.

In Canada, private health coverage insurers have generally approved reimbursement of Pennsaid costs,
but government health authorities have not approved such reimbursement. Obtaining reimbursement
approval for a product from each government or other third-party payer is a time consuming and costly
process that could require the Company to provide supporting scientific, clinical and cost effectiveness
data for the use of its products to each payer. In certain territories, this process is the responsibility of the
licensee and the Company will have little financial impact from this process except to the extent the
licensees are forced to provide significant discounts or rebates which would affect the level of net sales of
the product and reduce the amount of royalties the Company earns. The Company may not have or be
able to provide data sufficient to gain acceptance with respect to reimbursement. Even when a payer
determines that a product is eligible for reimbursement, they may impose coverage limitations that
preclude payment for some approved uses or that full reimbursement may not be available for the
Company’s products.

Furthermore, even after approval for reimbursement for the Company’s products is obtained from private
health coverage insurers or government health authorities, it may be removed at any time. Significant
uncertainty exists as to the reimbursement status of newly approved healthcare products and there can
be no assurance that third-party coverage will be sufficient to give the Company an appropriate return on
its investment in developing existing or new products. Increasingly, government and other third-party
payers are attempting to contain expenditures for new therapeutic products by limiting or refusing
coverage, limiting reimbursement levels, imposing high co-pays, requiring prior authorizations and

implementing other measures. Inadequate coverage or reimbursement could adversely affect market
acceptance of the Company’s products. Third-party payers increasingly challenge the pricing of
pharmaceutical products. Moreover, the trend toward managed healthcare in the U.S., the growth of
organizations such as health maintenance organizations and reforms to healthcare and government
insurance programs, could significantly influence the purchase of healthcare services and products,
resulting in lower prices and reduced demand for the Company’s products.

In the U.S., each third-party payer plan is organized into tiers and the number of tiers will vary. Each tier
represents a different reimbursement level. There is no guarantee that the Company’s products will be
reimbursed even at tiers where the reimbursement amounts are minimal.

In some countries, particularly the countries of the E.U., the pricing of prescription pharmaceuticals is
subject to government control. In these countries, pricing negotiations with governmental authorities can
take considerable time and delay the introduction of a product to the market. To obtain reimbursement or
pricing approval in some countries, the Company may be required to conduct a clinical trial that compares
the cost effectiveness of its product candidate to other available therapies. If reimbursement of the
Company’s product is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory
levels, its business could be adversely affected. In addition, any country could pass legislation or change
regulations affecting the pricing of pharmaceuticals before or after a regulatory agency approves any of
its product candidates for marketing in ways that could adversely affect the Company. While the
Company cannot predict the likelihood of any legislative or regulatory changes, if any government or
regulatory agency adopts new legislation or new regulations, the Company’s business could be harmed.

Potential Product Liability
The Company may be subject to product liability claims associated with the use of its products either after
their approval or during clinical trials and there can be no assurance that liability insurance will continue to
be available on commercially reasonable terms or at all. Product liability claims might also exceed the
amounts or fall outside of such coverage. Product liability claims against the Company, regardless of
their merit or potential outcome, could be costly and divert management’s attention from other business
matters or adversely affect its reputation and the demand for its products.

In addition, certain drug retailers and distributors require minimum liability insurance as a condition of
purchasing or accepting products for retail or wholesale distribution. Failure to satisfy such insurance
requirements could impede the ability of the Company or its potential partners in achieving broad retail
distribution of its products, resulting in a material adverse effect on the Company.

There can be no assurance that a product liability claim or series of claims brought against the Company
would not have a material adverse effect on its business, financial condition, results of operations and
cash flows. If any claim is brought against the Company, regardless of the success or failure of the claim,
there can be no assurance that the Company will be able to obtain or maintain product liability insurance
in the future on acceptable terms or with adequate coverage against potential liabilities or the cost of a
recall.

Litigation and Regulation
From time-to-time, during the ordinary course of business, the Company is threatened with, or is named
as a defendant in various legal proceedings, including lawsuits based upon product liability, patent
infringement, personal injury, breach of contract and lost profits or other consequential damage claims.

A significant judgment against the Company or the imposition of a significant fine or penalty or a finding
that the Company has failed to comply with laws or regulations or a failure to settle any dispute on
satisfactory terms, could have a significant adverse impact on the Company’s ability to continue
operations. Additionally, lawsuits and investigations can be expensive to defend, whether or not the
lawsuit or investigation has merit, and the defense of these actions may divert the attention of the
Company’s management and other resources that would otherwise be engaged in running the
Company’s business.

Acquisition and Integration of Complementary Technologies or Businesses
The Company may pursue product or business acquisitions that could complement or expand its
business. However, it may not be able to identify appropriate acquisition candidates in the future. If an
acquisition candidate is identified, the Company may not be able to successfully negotiate the terms of
any such acquisition or finance such acquisition. Any such acquisition could result in unanticipated costs
or liabilities, diversion of management’s attention from the core business, the expenditure of resources
and the potential loss of key employees, particularly those of the acquired organizations. In addition, the
Company may not be able to successfully integrate any businesses, products, technologies or personnel
that it might acquire in the future, which may harm its business.

To the extent the Company issues common shares or other rights to finance any acquisition, existing
shareholders may be diluted. In connection with an acquisition, the Company may acquire goodwill and
other long-lived assets that are subject to impairment tests, which could result in future impairment
charges.

Inability to Achieve Expected Savings from Restructurings
The Company may, from time-to-time, seek to restructure its operations, which may require it to incur
restructuring charges and it may not be able to achieve the level of benefits that it expects to realize from
any restructuring activities or it may not be able to realize these benefits within the expected time frames.
Furthermore, upon the closure of any facilities in connection with restructuring efforts, the Company may
not be able to divest such facilities at a fair price or in a timely manner. Changes in the amount, timing
and nature of charges related to restructurings and the failure to complete or a substantial delay in
completing any restructuring plan could have a material adverse effect on the Company’s business.

Losses Due to Foreign Currency Fluctuations
The Company anticipates that the majority of the revenue from commercialization of its product
candidates may be in currencies other than Canadian dollars. Fluctuation in the exchange rate of the
Canadian dollar relative to these other currencies could result in the Company realizing a lower profit
margin on sales of its product candidates than anticipated at the time of entering into such commercial
agreements. Adverse movements in exchange rates could have a material adverse effect on the
Company’s financial condition and results of operations.

International Operations
The Company has operations outside of Canada, primarily in the E.U. and the U.S., in order to research,
develop, market, distribute and manufacture certain of its products and potential products. The Company
may expand such operations further in the future. Participation in international markets requires
resources and management’s attention and subjects the Company to business risks, including the
following:



different regulatory requirements for approval of its product candidates;

dependence on local distributors;

longer payment cycles and problems in collecting accounts receivable;

adverse changes in trade and tax regulations;

absence or substantial lack of legal protection for intellectual property rights;

difficulty in managing widespread operations;

political and economic instability;

increased costs and complexities associated with financial reporting; and

currency risks.

The occurrence of any of these or other factors may cause the Company’s international operations to be
unsuccessful, could lower the prices at which it can sell its products or otherwise have an adverse effect
on its operating results.

Taxes
The Company is a multinational corporation with global operations. As such, it is subject to the tax laws
and regulations of Canadian federal, provincial and local governments, the U.S. and many international
jurisdictions, including transfer pricing laws and regulations between many of these jurisdictions.

Significant judgment is required in determining the Company’s provision for income taxes and claims for
investment tax credits (ITCs) related to qualifying Scientific Research and Experimental Development
(SR&ED) expenditures in Canada. Various internal and external factors may have favourable or
unfavourable effects on future provisions for income taxes and the Company’s effective income tax rate.
These factors include, but are not limited to, changes in tax laws, regulations and/or rates, results of
audits by tax authorities, changing interpretations of existing tax laws or regulations, changes in estimates
of prior years’ items, future levels of R&D spending and changes in overall levels of income before taxes.
Furthermore, new accounting pronouncements or new
interpretation of existing accounting
pronouncements can have a material impact on the Company’s effective income tax rate.

The Company could be impacted by certain tax treatments for various revenue streams in different tax
jurisdictions. The Company was subject to withholding taxes on certain of its revenue streams. The
withholding tax rates that were used were based on the interpretation of specific tax acts and related
treaties. If a tax authority has a different interpretation from the Company’s, it could potentially impose
additional taxes, penalties or fines. This would potentially reduce the amounts of revenue ultimately
received by the Company.

The Company, from time-to-time, has executed multiple reorganization transactions impacting its tax
structure. If a tax authority has a different interpretation from the Company’s, it could potentially impose
additional taxes, penalties or fines.

Volatility of Share Price
Market prices for pharmaceutical related securities, including those of the Company, have been
historically volatile and subject to substantial fluctuations. The stock market, from time-to-time,
experiences significant price and volume fluctuations unrelated to the operating performance of particular
companies. Future announcements concerning the Company or its competitors, including the results of
testing, technological innovations, new commercial products, marketing arrangements, government
regulations, developments concerning regulatory actions affecting the Company’s products and its
competitors’ products in any jurisdiction, developments concerning proprietary rights, litigation, additions
or departures of key personnel, cash flow, public concerns about the safety of the Company’s products
and economic conditions and political factors in the U.S., the E.U., Canada or other regions may have a
significant impact on the market price of the common shares. In addition, there can be no assurance that
the common shares will continue to be listed on the TSX.

The market price of the Company’s common shares could fluctuate significantly for many other reasons,
including for reasons unrelated to our specific performance, such as reports by industry analysts, investor
perceptions, or negative announcements by our customers, competitors or suppliers regarding their own
performance, as well as general economic and industry conditions. For example, to the extent that other
companies within our industry experience declines in their stock price, the share price of the Company’s
common shares may decline as well. In addition, when the market price of a company’s shares drops
significantly, shareholders often institute securities class action lawsuits against the company. A lawsuit
against the Company could result in substantial costs and could divert the time and attention of the
Company’s management and other resources.

Dilution from Further Equity Financing and Declining Share Price
If the Company raises additional funding or completes an acquisition or merger by issuing additional
equity securities, such issuance may substantially dilute the interests of shareholders of the Company
and reduce the value of their investment. The market price of the Company’s common shares could
decline as a result of issuances of new shares or sales by existing shareholders of common shares in the

market or the perception that such sales could occur. Sales by shareholders might also make it more
difficult for the Company itself to sell equity securities at a time and price that it deems appropriate.

Active Trading Market for Common Shares
The Company’s common shares are listed for trading on the TSX. There can be no assurance that an
active trading market in the Company’s common shares on the TSX will be sustained.

Compliance with Laws and Regulations Affecting Public Companies
Any future changes to the laws and regulations affecting public companies, compliance with existing
provisions of Multilateral Instrument 52-109 – Certification of Disclosure in Issuer’s Annual and Interim
Filings of the Canadian Securities Administrators and the other applicable Canadian securities laws and
regulation and related rules and policies, may cause the Company to incur increased costs as it evaluates
the implications of new rules and implements any new requirements. Delays or a failure to comply with
the new laws, rules and regulations could result in enforcement actions, the assessment of other
penalties and civil suits.

Any new laws and regulations may make it more expensive for the Company to provide indemnities to the
Company’s officers and directors and may make it more difficult to obtain certain types of insurance,
including liability insurance for directors and officers. Accordingly, the Company may be forced to accept
reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar
coverage. The impact of these events could also make it more difficult for the Company to attract and
retain qualified persons to serve on its Board of Directors or as executive officers. The Company may be
required to hire additional personnel and utilize additional outside legal, accounting and advisory services,
all of which could cause general and administrative costs to increase beyond what the Company currently
has planned. The Company is continuously evaluating and monitoring developments with respect to
these laws, rules and regulations and it cannot predict or estimate the amount of the additional costs it
may incur or the timing of such costs.

The Company is required annually to review and report on the effectiveness of its internal control over
financial reporting in accordance with Multilateral Instrument 52-109 – Certification of Disclosure in
Issuer’s Annual and Interim Filings of the Canadian Securities Administrators. The results of this review
are reported in the Company’s Annual Report and in its Management's Discussion and Analysis of
Results of Operations and Financial Condition. The Company’s Co-Chief Executive Officers and Chief
Financial Officer are required to report on the effectiveness of the Company's internal control over
financial reporting.

Management's review is designed to provide reasonable assurance, not absolute assurance, that all
material weaknesses existing within the Company's internal controls are identified. Material weaknesses
represent deficiencies existing in the Company's internal controls that may not prevent or detect a
misstatement occurring which could have a material adverse effect on the quarterly or annual financial
statements of the Company. In addition, management cannot provide assurance that the remedial
actions being taken by the Company to address any material weaknesses identified will be successful,
nor can management provide assurance that no further material weaknesses will be identified within its
internal controls over financial reporting in future years.

If the Company fails to maintain effective internal controls over its financial reporting, there is the
possibility of errors or omissions occurring or misrepresentations in the Company's disclosures which
could have a material adverse effect on the Company's business, its financial statements and the value of
the Company's common shares.

Additional Risks
Additional risks that could materially adversely affect the Company’s business or an investment in its
common shares include, but are not limited to:



Changes in government regulation

Ability to protect know how and trade secrets



Rapid technological change could make products or drug delivery technology obsolete

Prolonged development time

Competition for the HLT Patch and Pliaglis

Publications of negative study or clinical trial results

Hazardous materials and environmental

Operating losses

Quarterly fluctuations

Personnel

Information technology infrastructure

Issuance of preferred shares

Absence of dividends

Shareholders’ rights plan

Securities industry analyst research reports

Public company requirements may strain resources

Management of growth

Additional Information

Additional information relating to the Company, including the Company’s most recently filed AIF and
Management Information Circular, can be found on SEDAR at www.sedar.com.

Management’s Report

The accompanying Consolidated Financial Statements have been prepared by management and approved by the
Board of Directors of the Company. Management is responsible for the information and representations
contained in these financial statements and the accompanying Management’s Discussion and Analysis. The
financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS).
The significant accounting policies followed by the Company are set out in Note 3 to the Consolidated Financial
Statements.

To assist management in discharging these responsibilities, the Company maintains a system of procedures and
internal controls which are designed to provide reasonable assurance that its assets are safeguarded, that
transactions are executed in accordance with management’s authorization, and that the financial records form a
reliable base for the preparation of accurate and timely financial information.

The Company’s external auditors are appointed by the shareholders. They independently perform the necessary
tests of accounting records and procedures to enable them to report their opinion as to the fairness of the
consolidated financial statements and their conformity with IFRS.

The Board of Directors ensures that management fulfills its responsibilities for financial reporting and internal
control. The Board of Directors exercises this responsibility through an Audit Committee composed of three
Directors, all of whom are not involved in the day-to-day operations of the Company. The Audit Committee meets
quarterly with management, and with external auditors to review audit recommendations and any matters that the
auditors believe should be brought to the attention of the Board of Directors. The Audit Committee reviews the
Consolidated Financial Statements and Management’s Discussion and Analysis and recommends their approval
to the Board of Directors.

Chairman and
Co-Chief Executive Officer
February 17, 2016

President and
Co-Chief Executive Officer
February 17, 2016

Vice President
and Chief Financial Officer
February 17, 2016

Nuvo Research Inc. • Consolidated Financial Statements

INDEPENDENT AUDITORS’ REPORT

To the Shareholders of Nuvo Research Inc.

We have audited the accompanying consolidated financial statements of Nuvo Research Inc. (the “Company”), which comprise the consolidated statements of financial position as at December 31,
2015 and 2014 and the consolidated statements of income (loss) and comprehensive income (loss), changes in equity and cash flows for the years ended December 31, 2015 and 2014, and 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, 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.

Auditors’ 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. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are
free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’
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 auditors
considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used
and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Nuvo Research Inc. as at December 31, 2015 and 2014, and their financial
performance and cash flows for the years ended December 31, 2015 and 2014 in accordance with International Financial Reporting Standards.

Emphasis of Matter
Without qualifying our opinion, we draw attention to Note 1 in the consolidated financial statements which indicates that the Company incurred a net loss of $7,120,000 during the year ended
December 31, 2015 and, as of that date the Company had an accumulated deficit of $200,059,000. These conditions, along with other matters as set forth in Note 1, indicate the existence of a
material uncertainty that may cast significant doubt about the Company’s ability to continue as a going concern.

February 17, 2016
Toronto, Canada

Chartered Professional Accountants
Licensed Public Accountants

Nuvo Research Inc. • Consolidated Financial Statements

NUVO RESEARCH INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Canadian dollars in thousands)

Notes

As at December 31,
2015

As at December 31,
2014

ASSETS

CURRENT

Cash

Short-term investments

Accounts receivable

Inventories

Other current assets

TOTAL CURRENT ASSETS

NON-CURRENT

Property, plant and equipment

TOTAL ASSETS

LIABILITIES AND EQUITY

CURRENT

Accounts payable and accrued liabilities

Current portion of other obligations

TOTAL CURRENT LIABILITIES

Other obligations

TOTAL LIABILITIES

EQUITY

Common shares

Contributed surplus

Accumulated other comprehensive income (AOCI)

Deficit

TOTAL EQUITY

TOTAL LIABILITIES AND EQUITY

Commitments (Note 16)
See accompanying Notes.

On behalf of the Board of Directors

9, 10

48,680

5,533

2,402

1,337

57,952

1,180

59,132

9,178

192

9,370

9,413

234,763

13,956

1,059

48,275

10,000

3,005

1,929

770

63,979

1,161

65,140

9,149

140

9,289

188

9,477

233,568

13,910

1,124

(200,059)

(192,939)

49,719

59,132

55,663

65,140

Anthony E. Dobranowski, Director

Dr. Klaus von Lindeiner, Director

Nuvo Research Inc. • Consolidated Financial Statements

NUVO RESEARCH INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND
COMPREHENSIVE INCOME (LOSS)

Year ended
December 31, 2015

Year ended
December 31, 2014

(Canadian dollars in thousands, except per share and share figures)

Notes

4, 10, 13

10, 13

REVENUE

Product sales

Royalties

Research and other contract revenue

Licensing fees

Total revenue

OPERATING EXPENSES

Cost of goods sold

Research and development expenses

General and administrative expenses

Interest expense

Interest income

Total operating expenses

OTHER EXPENSES (INCOME)

Litigation settlement, net

Impairment of intangible assets

Gain on disposal of property, plant and equipment

Foreign currency gain

Other income

Net income (loss) before income taxes

Income tax expense

NET INCOME (LOSS)
Other comprehensive income (loss) to be reclassified to
net income (loss) in subsequent periods

Unrealized gains (losses) on translation of foreign operations

TOTAL COMPREHENSIVE INCOME (LOSS)

Net income (loss) per common share –

- basic

- diluted
Average number of common shares outstanding

(in thousands)

- basic

- diluted

See accompanying Notes.

19,208

1,390

754

21,352

10,276

10,329

9,295

(515)

29,425

(960)

(7,113)

(7,120)

(65)

(7,185)

$(0.65)

10,942

6,470

5,458

505

624

13,057

5,537

8,051

12,978

713

(199)

27,080

(52,343)

1,664

(296)

(1,657)

(52,632)

38,609

38,590

38,628

$3.85

$3.71

10,031

10,400

Nuvo Research Inc. • Consolidated Financial Statements

NUVO RESEARCH INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Canadian dollars in thousands, except for
number of shares)

Common Shares

Contributed
Surplus

AOCI

Deficit

Total

Notes

(000s)
9, 10

$
9, 10

8,850

229,068

13,573

1,086

(231,529)

12,198

Balance, December 31, 2013

Shares issued, net of issue costs

Warrants issued, net of issuance costs

Warrants exercised
Unrealized gains on translation of foreign

operations

Stock option compensation expense
Performance stock unit compensation

expense

Shares issued under Share Bonus Plan
Employee contributions to Share

Purchase Plan

Employer’s portion of Share Purchase

Plan

Stock options exercised

Net income

1,390

2,582

464

1,553

135

281

(174)

274

(57)

(10)

38,590

Balance, December 31, 2014

10,775

233,568

13,910

1,124

(192,939)

Warrants exercised
Unrealized losses on translation of foreign

operations

Stock option compensation expense

Stock options exercised
Employee contributions to Share

Purchase Plan

Employer’s portion of Share Purchase

Plan

Net loss

332

1,035

(116)

(65)

177

(15)

(7,120)

Balance, December 31, 2015

11,145

234,763

13,956

1,059

(200,059)

See accompanying Notes.

2,582

281

1,379

274

135

38,590

55,663

919

(65)

177

(7,120)

49,719

Nuvo Research Inc. • Consolidated Financial Statements

NUVO RESEARCH INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Canadian dollars in thousands)

OPERATING ACTIVITIES
Net income (loss)

Items not involving current cash flows:

Non-cash portion of litigation settlement

Impairment of intangible assets

Depreciation and amortization

Deferred license revenue recognized

Equity-settled stock-based compensation

Unrealized foreign exchange gain

Gain on disposal of property, plant and equipment

Inventory write-down

Interest and accretion of long-term other obligations

Other

Net change in non-cash working capital

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

INVESTING ACTIVITIES

Disposal (acquisition) of short-term investments
Acquisition of property, plant and equipment

Proceeds from sale of property, plant and equipment
Proceeds from disposal of asset held for sale, net

CASH PROVIDED BY INVESTING ACTIVITIES

FINANCING ACTIVITIES

Issuance of common shares

Exercise of warrants

Repayment of other obligations

CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

Effect of exchange rate changes on cash

Net change in cash during the year

Cash, beginning of year

CASH, END OF YEAR

Interest paid1
Interest received1
Income taxes paid1

Year ended
December 31, 2015

Year ended
December 31, 2014

Notes

(7,120)

38,590

6,13

313

226

(919)

138

(7,291)

(3,341)

(10,632)

10,000
(332)

-
-

9,668

919

(188)

827

542

405

48,275

48,680

-
542
7

(43,554)

1,664

715

(57)

432

(652)

(296)

192

(2,873)

5,513

2,640

(10,000)
(224)

378
43,554

33,708

3,026

1,379

(5,220)

(815)

121

35,654

12,621

48,275

700
149
55

1. Amounts paid and received for interest and paid for income taxes were reflected as operating cash flows in the

Consolidated Statements of Cash Flows.

See accompanying Notes.

Nuvo Research Inc. • Consolidated Financial Statements

NUVO RESEARCH® INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Unless noted otherwise, all amounts shown are in thousands of Canadian dollars

1. NATURE OF BUSINESS AND GOING CONCERN ASSUMPTION

Nuvo Research Inc. (Nuvo or the Company) is a publicly traded, Canadian life sciences company with revenues
and a diverse portfolio of topical products and technologies. The Company operates two distinct business units:
Nuvo Pharmaceuticals (Nuvo Pharma) and Crescita Therapeutics (Crescita). Nuvo Pharma is a commercial
healthcare business with three commercial products. Crescita is a drug development business that operates two
sub-groups: the Topical Products and Technology (TPT) Group and the Immunology Group. The TPT Group has
one commercial product, a pipeline of topical and transdermal products focusing on pain and dermatology and
multiple drug delivery platforms that support the development of patented formulations that can deliver actives
into or through the skin. The Immunology Group has two commercial products. The Company’s registered office
and principal place of business is located at 7560 Airport Road, Unit 10, Mississauga, Ontario, L4T 4H4.

Proposed Reorganization
On December 14, 2015, Nuvo, 2487002 Ontario Limited and 2487001 Ontario Limited entered into the
Arrangement Agreement in respect of the proposed reorganization of Nuvo into two separate publicly-traded
companies, Nuvo Pharma and Crescita. The obligation of Nuvo to complete this reorganization is subject to
receipt of a number of approvals and fulfillment of a number of conditions, including the approval of the Ontario
Superior Court of Justice, the final approval of the Toronto Stock Exchange and the approval of Nuvo’s
shareholders. If the reorganization is approved by shareholders and all other conditions are satisfied, Nuvo
expects the reorganization to be completed in the first quarter of 2016. However, there can be no assurances
regarding the ultimate timing of the reorganization or that the reorganization will be completed at all. Even if the
reorganization is approved by shareholders and all other conditions are satisfied, Nuvo’s Board of Directors will
have the authority to determine when to effect the reorganization, as well as the authority to decide not to proceed
with the reorganization at all.

If the proposed reorganization proceeds, there will be a significant and material effect on the operations and
results of Nuvo. Detailed information regarding the proposed reorganization and its effects including a description
of certain risks and uncertainties in respect of the reorganization and the operation of Nuvo Pharma and Crescita
as separate publicly traded companies are included in the information circular dated December 31, 2015 that is
available under Nuvo’s profile at www.sedar.com.

Nuvo Pharma
Nuvo Pharma is a commercial healthcare business with a portfolio of products and pharmaceutical manufacturing
capabilities. Nuvo Pharma has three commercial products that are available in a number of countries: Pennsaid®
2%, Pennsaid and the heated lidocaine/tetracaine patch (HLT Patch).

Pennsaid 2%
Pennsaid 2% is the follow-on product to original Pennsaid (described below). Pennsaid 2% is a topical non-
steroidal anti-inflammatory drug (NSAID) containing 2% diclofenac sodium compared to 1.5% for original
Pennsaid. Pennsaid 2% is more viscous than original Pennsaid, is supplied in a metered dose pump bottle and
has been approved in the U.S. for twice-daily dosing compared to four times a day for Pennsaid. On January 16,
2014, Pennsaid 2% was approved in the U.S. for the treatment of the pain of osteoarthritis (OA) of the knee. The
sales and marketing rights in the U.S. were originally licensed to Mallinckrodt Inc. (Mallinckrodt). In September
2014, the Company reached a settlement related to its litigation with Mallinckrodt. Under the terms of the
settlement agreement, Mallinckrodt paid US$10.0 million to settle the claims and returned the sales and
marketing rights for Pennsaid 2% to Nuvo (see Note 21, Litigation Settlement). In October 2014, the Company
sold the U.S. rights to Pennsaid 2% to Horizon Pharma plc (Horizon) for US$45.0 million (see Note 22, Pennsaid
2% U.S. Asset Sale). In January 2015, Horizon launched its commercial sale and marketing of Pennsaid 2% in
the U.S. Pennsaid 2% is currently manufactured by the Company for sale to Horizon. Pennsaid 2% is not
approved in any country outside of the U.S.

Nuvo Research Inc. • Consolidated Financial Statements

Pennsaid
Pennsaid is a topical NSAID containing 1.5% diclofenac sodium and is used to treat the signs and symptoms of
OA of the knee. It is approved for sale and marketing in several countries including Canada, where it is licensed
to Paladin Labs Inc. (Paladin). As a result of the litigation settlement with Mallinckrodt, the U.S. sales and
marketing rights to Pennsaid were returned to the Company. Under the terms of the agreement with Horizon for
the sale of the Pennsaid 2% rights, the Company agreed to discontinue the manufacture, sale and marketing of
Pennsaid in the U.S.

HLT Patch
The HLT Patch is a topical patch that combines lidocaine, tetracaine and heat, using Nuvo’s proprietary
Controlled Heat-Assisted Drug Delivery (CHADD™) technology. The HLT Patch is approved in the U.S. to
provide local dermal analgesia for superficial venous access and superficial dermatological procedures and is
marketed by Galen US Incorporated (Galen) under the brand name Synera. In Europe, the HLT Patch is
approved for surface anaesthesia of normal intact skin and is marketed by the Company’s European-based
licensee, Eurocept International B.V. (Eurocept), under the brand name Rapydan.

Crescita
Crescita is a drug development business that operates two sub-groups: the TPT Group and the Immunology
Group.

Topical Products and Technology Group
The TPT Group has one commercial product: Pliaglis. Pliaglis is a topical local anaesthetic cream that provides
safe and effective local dermal anaesthesia on intact skin prior to superficial dermatological procedures, such as
dermal filler injections, pulsed-dye laser therapy, facial laser resurfacing and laser-assisted tattoo removal.
Except as described below, Galderma S.A. (Galderma) holds the worldwide marketing rights to Pliaglis. Pliaglis is
approved for sale and marketing in the U.S., several Western European countries, Argentina, Brazil and Canada.
Galderma launched the commercial sale and marketing of Pliaglis in the U.S., Canada and multiple countries in
the European Union and South America. In December, the Company reacquired the Pliaglis development and
marketing rights from Galderma for the U.S., Canada and Mexico (see Note 11, License Fees). The TPT Group
is developing drugs for a variety of therapeutic areas with a focus on dermatology and pain.

Immunology Group
The Immunology Group has two commercial products: WF10™ and Oxoferin™. WF10 is approved in Thailand
under the brand name Immunokine as an adjunct in the treatment of cancer to relieve post radiation therapy
syndromes and as an adjunct therapy for diabetic foot ulcers, but is not otherwise approved for sale and
marketing in any other jurisdictions. Oxoferin, a topical wound healing agent, contains the active ingredient in
WF10, but at a lower concentration. Oxoferin is marketed by Nuvo and its partners in parts of the E.U. and Asia
as a topical wound healing agent under the trade names Oxoferin and Oxovasin™.

The Immunology Group was focused on developing drug products that modulate chronic inflammation processes
resulting in a therapeutic benefit including the development of WF10 for the treatment of allergic rhinitis. In
December 2015, the Company announced topline results of a Phase 2 clinical trial to assess WF10 for the
treatment of allergic rhinitis. The topline results showed that patients dosed with WF10 did not report a reduction
in symptoms that was significantly better than patients dosed with a saline placebo at any of the endpoints being
measured in the study. There was no significant difference in the performance of WF10 relative to placebo when
patients were exposed to grass and ragweed pollen in the environmental exposure chamber (EEC) or when they
were exposed to naturally occurring allergens during the field portion of the study. Nuvo believes that the results
do not justify the further development of WF10 for the treatment of allergic rhinitis and has discontinued all WF10
development.

Subsequent to the year ended December 31, 2015 Nuvo’s Board of Directors unanimously approved a proposal
to initiate a divestiture or orderly wind down of the Company’s Immunology Group. While the Company continues
to explore a possible sale of the Immunology Group, if a divestiture transaction does not materialize, the wind
down of the Immunology operations is expected to be completed by the end of 2016 (see Note 24, Subsequent
Event – Disposal of Immunology Group).

Going Concern
These Consolidated Financial Statements have been prepared on a going-concern basis, which presumes that
the Company will be able to realize its assets and discharge its liabilities in the normal course of operations for the

Nuvo Research Inc. • Consolidated Financial Statements

foreseeable future. As at December 31, 2015, the Company had an accumulated deficit of $200,059 including a
net loss of $7,120 in 2015. The Company’s ability to continue as a going concern depends on:



the commercial success of Pennsaid 2% in the U.S., as the Company earns revenue from product sales
of Pennsaid 2% to Horizon;
the commercial success of Pennsaid outside of the U.S., as the Company earns revenue from sales of
Pennsaid to its licensees and distributors in all territories where Pennsaid is sold, as well as royalties on
net sales in Canada;
the success of the Company’s clinical trial for Pennsaid 2% for the treatment of acute sprains and strains;
and
its ability to secure additional licensing fees, secure co-development agreements, obtain additional capital
when required, gain regulatory approval for other drugs and ultimately achieve profitable operations.

As there can be no certainty as to the outcome of the above matters, there is material uncertainty that may cast
significant doubt about the Company's ability to continue as a going concern.

The Company anticipates that its current cash, together with the revenues it expects to generate from product
sales and royalties, will be sufficient to execute its current business plan into 2017. Beyond that date, there can
be no assurance that the Company will have sufficient capital to fund its ongoing operations or develop or
commercialize any further products without future financings.

There can be no assurance that additional financing would be available on acceptable terms or at all, when and if
required. If adequate funds are not available when required, the Company may have to substantially reduce or
eliminate planned expenditures, terminate or delay clinical trials for its product candidates, curtail product
development programs designed to expand the product pipeline or discontinue certain operations. If the
Company is unable to obtain additional financing when and if required, the Company may be unable to continue
operations.

These Consolidated Financial Statements do not include any adjustments to the amounts and classification of
assets and liabilities that would be necessary should the Company be unable to continue as a going concern.

2. BASIS OF PREPARATION

Statement of Compliance
These Consolidated Financial Statements have been prepared by management in accordance with International
Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB).

The policies applied to these Consolidated Financial Statements are based on IFRS, which have been applied
consistently to all periods presented. These Consolidated Financial Statements were issued and effective as at
February 17, 2016, the date the Board of Directors approved the Consolidated Financial Statements.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Measurement
These Consolidated Financial Statements have been prepared under the historical cost convention, except for the
revaluation of certain financial assets and financial liabilities to fair value. Items included in the financial
statements of each consolidated entity in the Company are measured using the currency of the primary economic
environment in which the entity operates (the functional currency). These Consolidated Financial Statements are
presented in Canadian dollars, which is the Company’s functional currency.

Use of Estimates and Judgments
The preparation of financial statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the
Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from estimates, and such differences could be material.

Nuvo Research Inc. • Consolidated Financial Statements

Key areas of estimation or use of managerial assumptions are as follows:

(i) Change in Operating Segments
During 2015, the Board of Directors of Nuvo unanimously approved a proposed reorganization of Nuvo into two
separate publicly traded companies. This organizational realignment gave rise to changes in how the Company
presents information for financial reporting and management decision-making purposes and resulted in a change
in the Company’s reporting segments. The realignment resulted in two operating segments: i) Nuvo Pharma and
ii) Crescita. Historically, the Company operated under two distinct business units: i) the TPT Group and ii) the
Immunology Group. These business units will remain operating segments of Crescita. The Nuvo Pharma
segment comprises the Company’s manufacturing facility in Varennes, Quebec and includes the Company’s
Pennsaid , Pennsaid 2% and HLT Patch franchises. Corporate overhead costs are allocated to Nuvo Pharma
and Crescita’s TPT Group. All prior period segment disclosures have been restated to reflect the changes in the
Company’s operating segments. The change did not impact the Consolidated Financial Statement results. See
Note 19, Segmented Information, for further discussion.

(ii) Share-based Payments:
The Company measures the cost of share-based payments, either equity or cash-settled, with employees by
reference to the fair value of the equity instrument or underlying equity instrument at the date on which they are
granted. In addition, cash-settled share-based payments are revalued to fair value at every reporting date.

Estimating fair value for share-based payments requires management to determine the most appropriate
valuation model for a grant, which is dependent on the terms and conditions of each grant. In valuing certain
types of stock-based payments, such as incentive stock options and stock appreciation rights, the Company uses
the Black-Scholes option pricing model.

Several assumptions are used in the underlying calculation of fair values of the Company's stock options and
stock appreciation rights using the Black-Scholes option pricing model, including the expected life of the option,
stock price volatility and forfeiture rates.

(iii) Revenue Recognition:
As is typical in the pharmaceutical industry, the Company’s royalty streams are subject to a variety of deductions
that are generally estimates and recorded in the same period that the revenues are recognized and primarily
represent rebates, discounts and incentives and product returns. These deductions represent estimates of the
related obligations. Amounts recorded for sales deductions can result from a complex series of judgments about
future events and uncertainties and can rely on estimates and assumptions.

(iv) Intangible Assets:
The Company determines fair values based on discounted cash flows, market information, independent
valuations and management’s estimates. The values calculated for intangible assets involve significant estimates
and assumptions, including those with respect to future cash flows, discount rates and asset lives. These
significant estimates and judgments could impact the Company’s future results if the current estimates of future
performance and fair values change and could affect the amount of amortization expense on intangible assets in
future periods.

(v) Cash-generating Units:
The identification of cash-generating units (CGUs) within the Company requires considerable judgment. Under
IFRS, management must determine the smallest group of assets that generate independent cash inflows.
Management first considers the Company’s commercialized products, and then determines the operations that
contribute to each product’s revenue base and net cash inflows. Management has identified three CGUs: the
U.S. operations dedicated to generating cash inflows for Synera and Pliaglis, the manufacturing facility in Québec
that generates cash inflows for Pennsaid and Pennsaid 2% and the Immunology Group that generates cash
inflows for WF10.

Nuvo Research Inc. • Consolidated Financial Statements

future cash flows. The recoverable amount is impacted significantly by the discount rate selected to be used in
the discounted cash flow model, as well as the quantum and timing of expected future cash flows and the growth
rate used for the extrapolation.

Basis of Consolidation
These Consolidated Financial Statements include the accounts of the Company and all of its subsidiaries as
follows:

Nuvo Research America, Inc. and its subsidiaries:
Nuvo Research US, Inc., ZARS Pharma, Inc., and ZARS (UK) Limited

Dimethaid (UK) Ltd.

Dimethaid Immunology Inc.

Nuvo Research AG and its subsidiaries:

Nuvo Manufacturing GmbH and Nuvo Research GmbH

% Ownership

December 31, 2015

December 31, 2014

100%

The Company controls the subsidiaries above with the power to govern their financial and operating policies. All
significant inter-company balances and transactions have been eliminated upon consolidation.

Foreign Currency Translation
The Company and its subsidiary companies each determine their functional currency based on the currency of
the primary economic environment in which they operate. The Company’s functional currency is the Canadian
dollar, while subsidiary companies’ functional currencies are either the Canadian dollar, U.S. dollar or the euro.

(i) Transactions

Transactions denominated in a currency other than the functional currency of an entity are translated at
exchange rates prevailing at the time the transaction occurred. The resulting exchange gains and losses
are included in each entity’s net income (loss) in the period in which they arise.

(ii) Translation into Presentation Currency

The Company's foreign operations are translated to the Company’s presentation currency, which is the
Canadian dollar, for inclusion in the Consolidated Financial Statements. Foreign denominated monetary
and non-monetary assets and liabilities of foreign operations are translated at exchange rates in effect at
the end of the reporting period, and revenue and expenses are translated at the average exchange rate for
the period (as this is considered a reasonable approximation to actual rates). The resulting translation
gains and losses are included in other comprehensive income (OCI) with the cumulative gain or loss
reported in accumulated other comprehensive income (AOCI).

When the Company disposes of its entire interest in a foreign operation or loses control or influence over a foreign
operation, the foreign currency gains or losses in AOCI related to the foreign operation are recognized in profit or
loss. If the Company disposes of part of an interest in a foreign operation that remains a subsidiary, the
proportionate amount of foreign currency gains or losses in AOCI related to the subsidiary are reallocated
between controlling and non-controlling interests.

Cash
Cash includes cash on hand and current balances with banks and similar institutions. They are readily
convertible into known amounts of cash and have an insignificant risk of changes in value. Cost approximates fair
value.

Short-term Investments
Short-term investments are held in highly liquid instruments such as guaranteed investment certificates or other
securities, held primarily with Schedule 1 Canadian banks, with an original term to maturity of more than three
months and remaining term to maturity of less than one year.

Nuvo Research Inc. • Consolidated Financial Statements

Inventories
Inventories include raw materials, work-in-process and finished goods. Raw materials are stated at the lower of
cost and replacement cost with cost determined on a first-in, first-out basis. Manufactured inventory (finished
goods and work-in-process) is valued at the lower of cost and net realizable value determined on a first-in, first-
out basis. Manufactured inventory cost includes the cost of raw materials, direct labour, an allocation of overhead
and the cost to acquire finished goods. The Company monitors the shelf life and expiry of finished goods to
determine when inventory values are not recoverable and a write-down is necessary.

Property, Plant and Equipment
Property, plant and equipment (PP&E) is recorded at cost. Assets acquired under finance leases are carried at
cost, which is the present value of minimum lease payments after deduction of any executory costs.

The Company allocates the amount initially recognized in respect of an item of PP&E to its significant parts and
amortizes separately each such part. Depreciation of PP&E is provided for over the estimated useful lives from
the date the assets becomes available for use as follows:

Buildings
Leasehold improvements
Furniture and fixtures
Computer equipment and software
Production, laboratory and other equipment

10 to 25 years
Term of lease
5 years
1 to 3 years
3 to 5 years

Straight line
Straight line
Straight line
Straight line
Straight line

Residual values, method of depreciation and useful lives of the assets are reviewed annually and adjusted if
appropriate.

Intangible Assets
Intangible assets acquired in a business combination are recognized separately from goodwill at their fair value at
the date of acquisition, which is considered to be cost. Intangible assets consist of the costs to acquire
intellectual property under a business acquisition. Amortization commences when the intangible asset is
available for use and for patented assets is computed on a straight-line basis over the intangible asset’s
estimated useful life, which cannot exceed the lesser of the remaining patent life and 20 years.

Impairment of Non-financial Assets
The Company reviews the carrying value of non-financial assets for potential impairment when events or changes
in circumstances indicate that the carrying amount may not be recoverable. For the purpose of measuring
recoverable amounts, assets are grouped at the lowest levels for which there are separately identifiable cash
flows (or CGUs). The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use
(being the present value of the expected future cash flows of the relevant asset or CGU). An impairment loss is
recognized for the amount by which the asset’s carrying value exceeds its recoverable amount.

A previously recognized impairment loss is reversed only if there has been a change in the estimates used to
determine the asset’s recoverable amount since the last impairment loss was recognized. If this is the case, the
carrying amount of the asset is increased to its recoverable amount but cannot exceed the carrying amount that
would have been determined had no impairment loss been recognized for the asset in prior years. An impairment
reversal is recognized as other income.

Leases
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and
rewards of ownership to the Company. All other leases are classified as operating leases. The capitalized
finance lease obligation reflects the present value of future lease payments, discounted at the appropriate interest
rate. Assets under finance leases are amortized over the term of the lease. All other leases are accounted for as
operating leases with rental payments being expensed on a straight-line basis.

Financial Instruments
All financial instruments are classified into one of the following five categories: fair value through profit or loss
(FVTPL), held-to-maturity investments, loans and receivables, available-for-sale assets or other financial
liabilities. All financial instruments, including derivatives, are included on the Consolidated Statements of
Financial Position and are measured at fair market value upon inception. Subsequent measurement and

Nuvo Research Inc. • Consolidated Financial Statements

recognition of changes in the fair value of financial instruments depends on their initial classification. FVTPL
financial investments are measured at fair value, and all gains and losses are included in operations in the period
in which they arise. Available-for-sale financial instruments are measured at fair value with revaluation gains and
losses included in OCI until the asset is removed from the Consolidated Statements of Financial Position. Loans
and receivables, instruments held to maturity and other financial liabilities are measured at amortized cost using
the effective interest method. Gains and losses upon inception, impairment write-downs and foreign exchange
translation adjustments are recognized immediately.

The Company classifies its financial instruments as follows:

 Cash and accounts receivable are classified as loans and receivables and are measured at amortized

cost. Interest income is recorded in net income (loss), as applicable.

 Short-term investments are classified as held to maturity and are measured at amortized cost. Interest

income is recorded in net income (loss), as applicable.

 Accounts payable, accruals, long-term obligations and finance lease obligations are classified as other
financial liabilities and are measured at amortized cost using the effective interest method. Interest
expense is recorded in net income (loss), as applicable.

Financing costs associated with the issuance of debt are netted against the related debt and are deferred and
amortized over the term of the related debt using the effective interest method.

Impairment of Financial Assets
At each reporting date, the Company assesses whether there is objective evidence that a financial asset is
impaired. If such evidence exists, the Company recognizes an impairment loss. For financial assets carried at
amortized cost, the loss is the difference between the amortized cost of the loan or receivable and the present
value of the estimated future cash flows, discounted using the instrument’s original effective interest rate. The
carrying value of the asset is reduced by this amount either directly or indirectly through the use of an allowance
account.

Comprehensive Income (Loss)
Comprehensive income (loss) is the change in equity from transactions and other events and circumstances from
non-shareholder sources. Other comprehensive income (loss) refers to items recognized in comprehensive
income (loss), but that are excluded from net income (loss) calculated in accordance with IFRS. The resulting
changes from translating the financial statements of foreign operations to the Company’s presentation currency of
Canadian dollars are recognized in comprehensive income (loss) for the year.

Revenue Recognition
The Company recognizes revenue from product sales, royalties, research and development (R&D) collaborations
and licensing arrangements, which may include multiple elements. Revenue arrangements with multiple
elements are reviewed in order to determine whether the multiple elements can be divided into separate units of
accounting, if certain criteria are met. If separable, the consideration received is allocated amongst the separate
units of accounting based on their respective fair values, and the applicable revenue recognition criteria is applied
to each of the separate units. If not separable, the applicable revenue recognition criteria are applied to
combined elements as a single unit of accounting.

Product Sales
Revenue from product sales is recognized upon shipment of the product to the customer, provided transfer of title
to the customer occurs upon shipment and provided the Company has not retained any significant risks of
ownership or future obligations with respect to the product shipped, the price is fixed and determinable and
collection is reasonably assured. Where applicable, revenue from product sales is recognized net of reserves for
estimated sales discounts and allowances, returns, rebates and chargebacks.

Royalties
Revenue arising from royalties is recognized when reasonable assurance exists regarding measurement and
collectability. Royalties are typically calculated as a percentage of net sales realized by the Company’s licensees
of its products (including their sublicensees), as specifically defined in each agreement. The licensees’ sales
generally consist of revenues from product sales of the Company’s pharmaceutical products, and net sales are
determined by deducting the following: estimates for chargebacks, rebates, sales incentives and allowances,
returns and losses and other customary deductions in each region where the Company has licensees. While the
Company receives royalty payments quarterly, it can only recognize the amounts as revenue when reasonable

Nuvo Research Inc. • Consolidated Financial Statements

assurance exists regarding measurement and collectability. Royalty revenue from the launch of a product in a
new territory, for which the Company or its licensee are unable to develop the requisite historical data on which to
base estimates of returns, may be deferred until such time that a reasonable estimate can be made and once the
product has achieved market acceptance. Any royalty payments received or receivable in advance of when they
would be recognized as revenue are recorded in deferred revenue.

Licensing and Collaboration Arrangements
The Company may enter into licensing and collaboration agreements for product development, licensing, supply
and distribution for its commercial products and product pipeline. The terms of the agreements may include non-
refundable signing and licensing fees, milestone payments and royalties on any product sales derived from
collaborations. These multiple-element arrangements are analyzed to determine whether the deliverables can be
separated or whether they must be accounted for as a single unit of accounting. License fees are recognized as
revenue when persuasive evidence of an arrangement exists, the fee is fixed or determinable, delivery or
performance has substantially completed and collection is reasonably assured. If there are no substantive
performance obligations over the life of the contract, the up-front non-refundable payment is recognized when the
underlying performance obligation is satisfied. If substantive contractual obligations are satisfied over time or
over the life of the contract, revenue may be deferred and recognized over the performance. The term over which
upfront fees are recognized is revised if the period over which the Company maintains substantive contractual
obligations changes.

Milestone payments are immediately recognized as licensing revenue when the condition is met, if the milestone
is not a condition to future deliverables and collectability is reasonably assured. Otherwise, they are recognized
over the remaining term of the agreement or the performance period.

Research and Other Contract Revenue
Revenues from R&D collaborations are generally recognized as the contracted services are performed, and the
related expenditures are incurred pursuant to the terms of the agreement and provided collectability is reasonably
assured.

Research and Development
Research costs, other than capital expenditures, are charged to operations as incurred. Expenditures on
internally developed products are capitalized if it can be demonstrated that:

it is technically feasible to develop the product for it to be sold;


 adequate resources are available to complete the development;



 expenditure on the project can be measured reliably.

there is an intention to complete and sell the product;
the Company is able to sell the product;
sale of the product will generate future economic benefits; and

Development expenses are charged to operations as incurred unless such costs meet the criteria for deferral and
amortization. No development costs have been deferred to-date.

Government Assistance
Government assistance received under incentive programs, including investment tax credits for qualifying R&D
activities, is accounted for using the cost reduction method; whereby, the assistance is netted against the related
expense or capital expenditure to which it relates when there is reasonable assurance that the credits will be
realized.

Government assistance received under reimbursement or funding programs are accounted for using the cost
reduction method; whereby, a receivable is set up as the costs are incurred based on the terms of reimbursement
or funding program and the expected recoveries are netted against the related expense.

Net Income or Loss Per Common Share
Basic net income or loss per common share is calculated using the weighted average number of common shares
outstanding during the year.

Diluted net income or loss per common share is calculated assuming the weighted average number of common
shares outstanding during the year is increased to include the number of additional common shares that would have

Nuvo Research Inc. • Consolidated Financial Statements

been outstanding if the dilutive potential shares had been issued. The dilutive effect of warrants, stock options and
performance share units is determined using the treasury-stock method. The treasury-stock method assumes that
the proceeds from the exercise of warrants and options are used to purchase common shares at the volume
weighted average market price during the year. The dilutive effect of convertible securities is determined using the
“if-converted” method. The “if-converted” method assumes that the convertible securities are converted into
common shares at the beginning of the period and all income charges related to the convertible securities are added
back to income.

Income Taxes
Income taxes on profit or loss include current and deferred taxes. Income taxes are recognized in profit or loss
except to the extent that they relate to business combinations or items recognized directly in equity or in OCI.
Current tax is the expected tax payable or receivable on the taxable income or loss for the period, using tax rates
enacted or substantively enacted at the reporting date and any adjustment to tax payable in respect of previous
years. The Company is subject to withholding taxes on certain forms of income earned under its in-licensing
agreements from foreign jurisdictions.

Deferred tax is generally recognized in respect of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is
measured at the tax rates that are expected to be applied to temporary differences when they reversed, based on
the laws that have been enacted or substantively enacted in the relevant jurisdiction by the reporting date.

Deferred tax assets and liabilities are recognized where the carrying amount of an asset or liability in the
Consolidated Statements of Financial Position differs from its tax base, except for differences arising on:






the initial recognition of goodwill;
the initial recognition of an asset or liability in a transaction that is not a business combination and at the
time of the transaction affects neither accounting or taxable profit; and
investments in subsidiaries, branches and associates, and interests in joint ventures where the Company is
able to control the timing of the reversal of the difference and it is probable that the difference will not
reverse in the foreseeable future.

A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the
extent probable that future taxable income will be available against which they can be utilized. Deferred tax assets
are reviewed at each reporting date and are reduced to the extent it is no longer probable the related tax benefit will
be realized.

Stock-based Compensation and Other Stock-based Payments
The Company has six stock-based compensation plans: the Share Option Plan, the Share Purchase Plan and the
Share Bonus Plan, each a component of the Company’s Amended and Restated Share Incentive Plan, the
Deferred Share Unit (DSU) Plan for non-employee directors, the Deferred Share Unit Plan for employees and the
Stock Appreciation Rights (SARs) Plan. All are described in Note 10.

Share Incentive Plan
The Company measures and recognizes compensation expense for the Share Incentive Plan based on the fair
value of the common shares or options issued.

Under the Share Option Plan, the Company issues either fixed awards or performance-based options. Options
vest either immediately upon grant or over a period of one to four years or upon the achievement of certain
performance related measures or milestones. Each tranche in an award is considered a separate award with its
own vesting period and grant date fair value. Fair value of each tranche is measured at the date of grant using
the Black-Scholes option pricing model. Compensation expense is recognized over the tranche’s vesting period
based on the number of awards expected to vest, by increasing contributed surplus. When options are exercised,
the proceeds received by the Company, together with the fair value amount in contributed surplus, are credited to
common shares.

Under the Share Purchase Plan, consideration paid by employees on the purchase of common shares is credited
to common shares when the shares are issued. The fair value of the Company’s matching contribution,
determined based upon the trading price of the common shares, is recorded as compensation expense. These
expenses are included in stock-based compensation expense and credited to common shares.

Nuvo Research Inc. • Consolidated Financial Statements

Under the Share Bonus Plan, the fair value of the direct award of common shares, determined based upon the
trading price of the common shares, is recorded as compensation expense. These expenses are included in
stock-based compensation expense and credited to contributed surplus over the vesting period, until the common
shares are issued and the value is transferred from contributed surplus to common shares.

Deferred Share Unit Plan
The DSU Plan consists of two plans: one for non-employee directors and one for employees. Under the DSU
Plan, the Company issues DSUs to non-employee directors based on value of services provided and to
employees based on their elected portion of quarterly earnings they wish to receive in units of the DSU plan.
DSUs are intended to be settled in cash and recorded as liabilities and included in accounts payable and accrued
liabilities. Upon issuance, the fair value of the DSUs is recorded as compensation expense and a corresponding
liability (the DSU Accrual) is established. At all subsequent reporting dates, the DSU Accrual is adjusted for
movements in fair value, with the amount of the adjustment charged to compensation expense.

Stock Appreciation Rights Plan
SARs are issued to directors, officers, employees or designated affiliates to provide incentive compensation
based on the appreciation in value of the Company’s common shares. Under the SARs Plan, participants
receive, upon vesting, a cash amount equal to the difference between the SARs' fair market value and the grant
price value, also known as the intrinsic value. Fair market value is determined by the closing price of the
Company’s common share on the Toronto Stock Exchange (TSX) on the day preceding the exercise date. SARs
vest in tranches prescribed at grant date, and each tranche is considered a separate award with its own vesting
period and fair value. Until SARs vest, compensation expense is measured based on the fair value of the SARs
at the end of each reporting period, using a Black-Scholes option pricing model. The fair value of the liability is
remeasured at the end of each reporting date and adjusted at the settlement date, when the intrinsic value is
realized. The SARs accrual is included in accounts payable and accrued liabilities.

Issuance Costs of Equity Instruments
The Company records issuance costs of equity instruments against the equity instrument that was issued.

Accounting Standards Adopted
There were no new accounting standards adopted by the Company during 2015.

Significant Accounting Policies
All significant accounting policies have been applied on a basis consistent with those followed in the most recent
annual Consolidated Financial Statements. The policies applied in these Consolidated Financial Statements are
based on IFRS issued and outstanding as at February 18, 2016, the date the Board of Directors approved these
Consolidated Financial Statements.

Accounting Standards Issued But Not Yet Applied
Certain new standards, interpretations, amendments and improvements to existing standards were issued by the
IASB or IFRS Interpretations Committee (IFRIC) that are not yet effective and have not yet been early adopted by
the Company. The standards impacted that may be applicable to the Company are as follows:

IFRS 9 – Financial Instruments
In October 2010, the IASB issued IFRS 9, which replaces IAS - 39 Financial Instruments: Recognition and
Measurement. IFRS 9 establishes principles for the financial reporting of financial assets and financial liabilities
that will present relevant and useful information to users of financial statements for their assessment of the
amounts, timing and uncertainty of an entity's future cash flows. This new standard is effective for the Company’s
interim and annual financial statements commencing January 1, 2018. The Company is in the process of
reviewing the standard to determine the impact on the Consolidated Financial Statements.

IFRS 15 – Revenue from Contracts with Customers
In May 2014, the IASB issued IFRS 15 - Revenue from Contracts with Customers, which covers principles for
reporting about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with
customers. IFRS 15 is effective for annual periods beginning on or after January 1, 2018, with earlier adoption
permitted. Entities will transition following either a full or modified retrospective approach. The Company is in the
process of reviewing the standard to determine the impact on the Consolidated Financial Statements.

Nuvo Research Inc. • Consolidated Financial Statements

IFRS 16 – Leases
In January 2016, the IASB has issued IFRS 16 - Leases, its new leases standard that requires lessees to
recognize assets and liabilities for most leases on their balance sheets. Lessees applying IFRS 16 will have a
single accounting model for all leases, with certain exemptions. Lessor accounting is substantially unchanged.
The new standard will be effective from January 1, 2019 with limited early application permitted. The Company is
in the process of reviewing the standard to determine the impact on the Consolidated Financial Statements.

Other accounting standards or amendments to existing accounting standards that have been issued, but have
future effective dates, are either not applicable or are not expected to have a significant impact on the Company’s
Consolidated Financial Statements.

4. INVENTORIES

Inventories consist of the following as at:

Raw materials
Work-in-process
Finished goods

December 31, 2015
$
1,205
349
848
2,402

December 31, 2014
$
515
146
1,268
1,929

During the year ended December 31, 2015, inventories in the amount of $9.3 million were recognized as cost of
goods sold [December 31, 2014 - $4.5 million]. For the Nuvo Pharma Group, $3 of raw materials were written
down during the year ended December 31, 2015 [December 31, 2014 - $138] and there were no reversals of prior
write-downs during the years ended December 31, 2015 and 2014. In Crescita, during the year ended December
31, 2015, $7 (€5) of raw materials and $128 (€89) of finished goods were written down [December 31, 2014 - $54
(€38) of finished goods] and no reversals of prior write-downs occurred during the years ended December 31,
2015 and 2014. All Crescita inventories relate to the Immunology Group.

5. OTHER CURRENT ASSETS

Other current assets consist of the following as at:

Deposits(i)
Other receivables(ii)
Prepaid expenses

December 31, 2015
$
728
468
141
1,337

December 31, 2014
$
45
543
182
770

(i)

(ii)

Included $588 [December 31, 2014 - $nil] related to taxes owed to the Canada Revenue Agency (CRA) for fiscal 2014. As part of the
Company’s tax filings for the 2014 fiscal year, the Company amended its tax filings from fiscal 2009 to 2013 (Amended Returns) that
resulted in additional non-capital losses. Subsequent to the year end, the Company received a full refund of this deposit from the CRA.
Included $nil [December 31, 2014 - $223] related to R&D expenditures for which the Company was eligible for reimbursement under
funding agreements with the Development Bank of Saxony (SAB) that expired in October 2014 for the development of WF10 related
projects.

Nuvo Research Inc. • Consolidated Financial Statements

6. PROPERTY, PLANT AND EQUIPMENT

PP&E consists of the following:

Cost
Balance, December 31, 2013
Foreign exchange movements
Additions
Disposals
Balance, December 31, 2014
Foreign exchange
Additions
Disposals
Balance, December 31, 2015

Accumulated depreciation
Balance, December 31, 2013
Foreign exchange movements
Depreciation expense
Balance, December 31, 2014
Foreign exchange
Depreciation expense
Disposals
Balance, December 31, 2015

Land(ii)
$
124
-
-
(82)
42
-
-
-
42

Buildings
$
2,082
(38)
15
-
2,059
61
242
(28)
2,334

Leasehold
Improvements
$
114
-
-
-
114
-
-
-
114

Furniture
& Fixtures
$
271
(1)
-
-
270
4
-
-
274

Computer
Equipment
$
1,004
(2)
37
-
1,039
4
22
-
1,065

Production
Laboratory &
Other
Equipment(i)
$
3,522
(9)
172
-
3,685
23
68
(4)
3,772

-
-
-
-
-
-
-
-

1,570
(37)
58
1,591
59
62
(27)
1,685

468
649

114
-
-
114
-
-
-
114

-
-

268
(3)
2
267
4
1
-
272

958
(1)
30
987
3
25
-
1,015

2,796
(7)
300
3,089
21
225
-
3,335

Total
$
7,117
(50)
224
(82)
7,209
92
332
(32)
7,601

5,706
(48)
390
6,048
87
313
(27)
6,421

NBV as at December 31, 2014
NBV as at December 31, 2015

42
42

3
2

52
50

596
437

1,161
1,180

(i) Production, laboratory and other equipment as at December 31, 2015 included a cost of $35 [December 31, 2014 - $56] and
accumulated depreciation of $25 [December 31, 2014 - $55] for assets under finance leases. Depreciation of PP&E was $1 for the
year ended December 31, 2015 [December 31, 2014 - $2] related to assets under finance leases.
In the year ended December 31, 2014, the Company sold a portion of unused land at its manufacturing site in Varennes, Québec for
proceeds of $0.4 million and recognized a gain on the sale of the land of $0.3 million.

(ii)

7. IMPAIRMENT OF INTANGIBLE ASSETS

The Company reviewed the carrying values of the intangible assets for potential impairment at December 31,
2014 as sales for the HLT Patch and Pliaglis were not meeting expectations. Commercial strategies for both
products produced revenues that were lower than expected, and the costs to maintain the intellectual property
and regulatory commitments exceeded royalties earned. Indications for impairment did exist, and management
determined that each asset was impaired, such that recoverable amounts were lower than the carrying amounts.
The recoverable amount and value in use (being the present value of expected future cash flows) was calculated
using best estimates for future periods based on discussions with licensing partners, knowledge of historical
results and expectations for the future, net of direct costs forecasted by management, assuming declining
revenues, discounted at an after-tax rate of 19% which approximated the Company’s current weighted average
cost of capital. As at December 31, 2014, the Company recorded an impairment charge for the HLT Patch of
$462 and an impairment charge for Pliaglis of $1,202 in impairment of intangible assets in the Consolidated
Statements of Income (Loss) and Comprehensive Income (Loss). The remaining net carrying amount was $nil for
both the HLT Patch and Pliaglis. Amortization of intangible assets is included in general and administrative (G&A)
expenses in the Consolidated Statements of Income (Loss) and Comprehensive Income (Loss).

Nuvo Research Inc. • Consolidated Financial Statements

8. OTHER OBLIGATIONS

Other obligations consist of the following as at:

Long-term consulting agreement from acquisition of non-controlling

interest (i)

Finance lease obligations (ii)

Less amounts due within one year
Long-term balance

December 31, 2015
$

December 31, 2014
$

225
10
235
192
43

326
2
328
140
188

(i) Long-term Consulting Agreement from Acquisition of Non-controlling Interest
In December 2011, the Company increased its ownership in Nuvo Research AG to 100% by acquiring the 40%
interest held by the minority owner. The consideration transferred to the non-controlling interest included a five-
year, US$150 per annum consulting agreement with the former minority shareholder, discounted at 15.5% and
fair valued at US$519 ($528).

The future payments on the consulting obligation are as follows for the years ending December 31:

2016
2017
Total payments
Less amount representing interest (approximately 15.5%)
Present value of obligation, including accretion
Less current portion
Long-term balance

$
207
35
242
17
225
190
35

(ii) Finance Lease Obligations
The Company leases office equipment under a finance lease expiring in 2020. The minimum future lease
payments are as follows for the years ending December 31:

2016
2017
2018 and thereafter

Total minimum lease payments
Less: amount representing interest (approximately 15%)
Present value of minimum lease payments
Less: current portion
Long-term balance

3
3
9

15
5
10
2
8

For the year ended December 31, 2015, interest paid on finance lease obligations was under $1 [2014 – under
$1].

9. CAPITAL STOCK

Authorized

 Unlimited first and second preferred shares, non-voting, non-participating, issuable in series, number,
designation, rights, privileges, restrictions and conditions are determinable by the Company’s Board of
Directors.

 Unlimited common shares, voting, without par value.

Nuvo Research Inc. • Consolidated Financial Statements

Shareholders’ Rights Plan
The Company initially instituted a shareholders’ rights plan (the Rights Plan) in 1992. Since that time, the Rights
Plan has been amended, restated and continued from time-to-time. Most recently, in June 2013, the
shareholders approved certain amendments to the Rights Plan, including the continuation of the Rights Plan until
the annual meeting of shareholders in 2018. The Rights Plan is intended to provide some protection to
shareholders of the Company from unfair take-over strategies, including the acquisition of control of the Company
by a bidder in a transaction or series of transactions that does not treat all shareholders equally or fairly or afford
all shareholders an equal opportunity to share in the premium paid upon an acquisition of control. One right is, or
will be, issued in respect of each outstanding common share. The rights become exercisable only when an
acquiring person acquires or announces its intention to acquire 20% or more of the Company’s outstanding
common shares without complying with the “permitted bid” provisions of the Rights Plan. Subject to the terms of
the Rights Plan, each right will entitle the holder thereof, to purchase a common share of the Company at a 50%
discount to the market price.

Private Placement
On March 31, 2014, the Company completed a non-brokered private placement (Private Placement), pursuant to
which an aggregate of 1,390,000 units of the Company were issued at a price of $2.25 per unit for gross proceeds
of $3.1 million ($2.9 million net of issuance costs). Each unit consisted of one common share of the Company
and one-half of one common share purchase warrant of the Company (Unit). The Company issued 695,000
common share purchase warrants (Private Placement Warrants).

A Private Placement Warrant entitled the holder to purchase one common share of the Company at a price of
$3.00 for a 24-month period. During the year ended December 31, 2015, 239,672 of the Private Placement
Warrants were exercised [December 31, 2014 - 433,149].

In connection with the Private Placement, the Company issued 78,233 broker warrants at a price of $2.54 per Unit
(Broker Warrants). Each Broker Warrant unit entitled the holder to purchase one common share of the Company
at a price of $2.54 and included one half of one Private Placement Warrant. During the year ended December 31,
2015, 42,733 of the Broker Warrants were exercised [December 31, 2014 - 31,300] and 21,367 Private
Placement Warrants were issued upon exercise of the Broker Warrants [December 31, 2014 - 15,650].

The Private Placement Warrants were subject to an acceleration feature where the Company, at its option, could
force the exercise of the Private Placement Warrants if the ten-day volume weighted share price for the
Company’s common shares was equal to or exceeded $3.50 on the TSX at any time during the warrant term. If
the acceleration feature was used, any Private Placement Warrants that were not exercised during this period
expired. The Company exercised its acceleration feature on November 30, 2015 and accelerated the expiry date
of the outstanding warrants to January 15, 2016. Subsequent to the year-end, 4,200 Broker Warrants and 49,044
Private Placement Warrants (inclusive of 2,100 Private Placement Warrants that were issued on exercise of the
Broker Warrants) were exercised for proceeds of $0.2 million and 12,252 Private Placement Warrants expired.

Paladin Warrants
In May 2012, the Company signed a loan agreement with Paladin, its Canadian licensing partner for Pennsaid.
Under this loan facility, the Company could borrow up to $12.0 million from Paladin in three equal tranches of $4.0
million each. The first tranche was advanced on closing of the May 2012 agreement, the second tranche was
advanced on closing of the July 2013 amendment. Under the terms of the Loan Agreements, when the second
tranche was drawn by Nuvo, Paladin was issued warrants to acquire 50,000 Nuvo common shares at $1.82 per
share which represented a 130% premium to the 5-day trailing value weighted average trading price (VWAP) of
Nuvo common shares on the TSX. The Company settled the entire Paladin loan in October 2014.

During the year ended December 31, 2015, Paladin exercised all of its 50,000 warrants.

Nuvo Research Inc. • Consolidated Financial Statements

Warrants

The warrants outstanding by tranche are as follows:

Private Placement Warrants
Broker Warrants(i)
Paladin Warrants(ii)

Expiry Date
March 31, 2016
March 31, 2016
July 10, 2016

Exercise Price
$3.00
$2.54
$1.82

Number of Warrants

December 31,
2015
59,196
4,200
-
63,396

December 31,
2014
277,501
46,933
50,000
374,434

(i) Entitles the holder to purchase a Unit consisting of one common share of the Company for $2.54 and one-half of one common share

purchase warrant of the Company.

(ii) Warrants previously issued to Paladin under a loan facility. All warrants were exercised by Paladin during the year.

All warrants are exercisable on issuance. Changes in the number of warrants outstanding were as follows:

Balance, December 31, 2013
Issued
Exercised
Balance, December 31, 2014
Issued
Exercised
Balance, December 31, 2015

Number of
Warrants
$

50,000
788,883
(464,449)
374,434
21,367
(332,405)
63,396

Weighted Average
Exercise Price
$

1.82
2.95
2.97
2.78
3.00
2.95
2.97

10. STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS

The Company has six stock-based compensation plans: the Share Option Plan, the Share Purchase Plan and
the Share Bonus Plan, each a component of the Company’s Share Incentive Plan, the DSU Plan for non-
employee directors, the DSU Plan for employees and the SARs Plan.

Share Incentive Plan
Under the Company’s Share Incentive Plan, there are three sub plans: (i) the Share Option Plan, (ii) the Share
Purchase Plan and (iii) the Share Bonus Plan. The original plan was amended and restated effective September
21, 2005, when shareholders of the Company approved an amendment changing the maximum number of
common shares that may be issued under the plan from a fixed maximum number to a fixed maximum
percentage. The amendment changed the maximum number of common shares that may be issued under the
Share Incentive Plan to a fixed maximum percentage of 15% of the Company’s outstanding common shares from
time-to-time. The common shares that may be issued under the plan are allocated to the three sub-plans as
follows: Share Option Plan 10%, Share Purchase Plan 3% and Share Bonus Plan 2%. As the Share Incentive
Plan is a “rolling plan”, the TSX requires that it, along with any unallocated options, rights or other entitlements
receive shareholder approval at the Company's annual meeting every three years. At the Annual and Special
Meeting of Shareholders of the Company held on June 11, 2014, the common shareholders approved an ordinary
resolution affirming, ratifying and approving the Share Incentive Plan and approving all of the unallocated
common shares issuable pursuant to the Share Incentive Plan.

(i) Share Option Plan
Under the Share Option Plan, the Company may grant options to purchase common shares to officers, directors,
employees or consultants of the Company or its affiliates. Options issued under the Share Option Plan are
granted for a term not exceeding ten years from the date of grant. All options issued to-date have a life of ten
years. In general, options have vested either immediately upon grant or over a period of one to four years or
upon the achievement of certain performance related measures or milestones. Under the provisions of the Share
Option Plan, the exercise price of all stock options shall not be less than the closing price of the common shares

Nuvo Research Inc. • Consolidated Financial Statements

on the last trading date immediately preceding the grant date of the option.

As at December 31, 2015, the number of options available and reserved for issue was 289,206.

The following is a schedule of the options outstanding as at:

Balance, December 31, 2013

Granted
Exercised
Forfeiture
Expired

Balance, December 31, 2014

Exercised(i)
Expired

Balance, December 31, 2015

Number
of Options
000s

Range of
Exercise Price
$

Weighted Average
Exercise Price
$

785
212
(15)
(32)
(63)
887
(24)
(112)
751

1.96 – 37.05
3.39
1.96
5.53 – 13.00
19.50 – 37.05
1.96 – 24.05
1.96
11.70 – 13.00
1.96 – 24.05

8.91
3.39
1.96
7.09
20.61
6.93
1.96
12.95
6.18

(i) The weighted average share price for the options exercised in 2015 was $5.79.

The following table summarizes the outstanding and exercisable options held by directors, officers, employees
and consultants as at December 31, 2015:

Exercise Price
Range
$

1.96 - 5.53
6.50 - 8.78
11.70 - 24.05

Outstanding

Exercisable

Number of
Options
000s

Remaining
Contractual Life
years

360
334
57
751

7.8
3.7
4.0
5.7

Weighted
Average
Exercise Price
$

3.40
7.72
14.73
6.18

Vested
Options
000s

205
299
57
561

Weighted
Average
Exercise Price
$

3.37
7.87
14.73
6.92

The fair value of each tranche is measured at the date of grant using the Black-Scholes option pricing model.
There were no options granted during the year ended December 31, 2015.

(ii) Share Purchase Plan
Under the Share Purchase Plan, eligible officers, employees or consultants of the Company or its affiliates may
contribute up to 10% of their annual base salary to the plan to purchase Nuvo common shares. The Company
matches each participant’s contribution by issuing Nuvo common shares having a value equal to the aggregate
amount contributed by each participating employee.

During 2015, employees contributed $49 [December 31, 2014 - $135] to the plan and the Company matched
these contributions by issuing 7,450 common shares [December 31, 2014 - 23,305] with a fair value of $49
[December 31, 2014 - $135] that was recorded as compensation expense. The total number of shares issued
under this plan during the year ended December 31, 2015 was 14,900 [December 31, 2014 - 46,610].

Deferred Share Unit Plan

Directors
Under the DSU Plan, non-employee directors can be allotted and elect to receive a portion of their annual
retainers and other Board-related compensation in the form of DSUs. One DSU has a cash value equal to the
market price of one of the Company’s common shares and the number of DSUs issued to a director’s DSU
account for any payment is determined using the five-day VWAP of the Company’s common shares immediately
preceding the payment date.

Nuvo Research Inc. • Consolidated Financial Statements

Employees
Under the employee DSU Plan, employees can elect to have a portion of their quarterly earnings issued in units
of the DSU Plan. Consistent with non-employee directors, one DSU has a cash value equal to the market price of
one of the Company’s common shares. The number of units to be credited to an employee will be calculated by
dividing the elected portion of the compensation payable to the employee by the five-day VWAP of the
Company’s common shares immediately preceding the close of each quarter.

Upon issuance, the fair value of the DSUs is recorded as compensation expense and the DSU accrual is
established. At all subsequent reporting dates, the DSU accrual is adjusted to the market value of the underlying
shares and the adjustment is recorded as compensation expense. Within a specified time after retirement or
termination, non-employee directors and employees receive a cash payment equal to the market value of their
DSUs. For the year ended December 31, 2015, a $539 expense reversal was recorded in G&A expenses which
consisted of a charge of $196 for the fair value of the DSUs issued for director fees, combined with a $735
decrease in the aggregate DSU accrual to the market value of the underlying shares. The DSU accrual was
included in accounts payable and accrued liabilities.

The following table summarizes the outstanding DSUs and related accrual as at December 31, 2015:

Balance, December 31, 2013
Issued for employee compensation
Issued for directors’ fees
Adjustment to market value
Balance, December 31, 2014
Issued for directors’ fees
Adjustment to market value
Balance, December 31, 2015

Stock Appreciation Rights Plan

Number of
DSUs
000s

208
104
83
-
395
33
-
428

Market
Values
$

2.15
2.59 – 6.93
2.03 – 6.93
-
7.00
4.29 – 7.04
-
5.21

Accrual
$

449
391
223
1,707
2,770
196
(735)
2,231

The Company established the SARs Plan for directors, officers, employees or designated affiliates to provide
incentive compensation based on the appreciation in value of the Company’s common shares. Under the SARs
Plan, participants receive, upon vesting, a cash amount equal to the difference between the SARs fair market
value and the grant price value, also known as the intrinsic value. Fair market value is determined by the closing
price of the Company’s common share on the TSX on the day preceding the exercise date. SARs vest in
tranches prescribed at the grant date and each tranche is considered a separate award with its own vesting
period and grant date fair value. Until SARs vest, compensation expense is measured based on the fair value of
the SARs at the end of each reporting period, using a Black-Scholes option pricing model. The fair value of the
liability is remeasured at the end of each reporting date and adjusted at the settlement date, when the intrinsic
value is realized. The SARs accrual is included in accounts payable and accrued liabilities.

Fair values of each tranche issued and outstanding in the year were measured as at December 31, 2015 using
the Black-Scholes option pricing model with the following inputs:

SARs
Outstanding
000s

Grant Date

Exercise
Price

Risk-free Interest
Rate

304
238
246

October 30, 2013
April 4, 2014
January 7, 2015

1.85
3.39
7.20

0.62%
0.62%
0.62% - 0.80%

Expected
Life
(years)

1
1 - 2
1 - 3

Volatility
Factor

Fair Values

73
73 - 77
73 - 77

3.36 – 3.45
1.82 – 2.82
0.00 – 2.17

Nuvo Research Inc. • Consolidated Financial Statements

The SARs accrual is included in accounts payable and accrued liabilities. The following table summarizes the
outstanding SARs and related accrual as at December 31, 2015:

Balance, December 31, 2013
Granted
Adjustment to market value

Balance, December 31, 2014
Granted
Vested
Adjustment to market value
Balance, December 31, 2015

Summary of Stock-based Compensation

Stock option compensation expense under the Share Option Plan
Shares issued to employees under Share Purchase Plan
DSUs – issued for settlement of directors’ fees
DSUs – issued for employee compensation
DSUs – adjustment to market value
Preferred Stock Unit compensation expense under the Share Bonus
Plan
SARs compensation expense
Stock-based compensation expense

Recorded in the Consolidated Statements of Income (Loss) and
Comprehensive Income (Loss) as follows:

Cost of goods sold
Research and development expenses
General and administrative expenses

Number of
SARs
000s

606
318
-

924
246
(382)
-
788

Fair
Values
$

0.76 – 1.11
0.40 – 1.42
-

3.61 – 5.38
0.59 – 1.92
3.61 – 5.15
-
0.00 – 3.45

Accrual
$

50
36
2,790

2,876
30
(1,848)
270
1,328

Year ended
December 31, 2015
$
177
49
196
-
(735)

Year ended
December 31, 2014
$
274
135
223
391
1,707

-
300
(13)

29
79
(121)
(13)

23
2,826
5,579

38
494
5,047
5,579

11. LICENSE FEES

In December 2015, the Company reacquired the development and marketing rights for Pliaglis for the U.S.,
Canada and Mexico. Under the terms of the agreement, Nuvo paid Galderma approximately $174 (CHF125) that
has been included in G&A expenses for the year ended December 31, 2015. The Company will pay an additional
$174 (CHF125) upon transfer of certain rights and documents. Galderma will continue to market Pliaglis in the
U.S. and Canada and pay a royalty on net sales during the agreed upon transition period. The Company will
receive a fixed single-digit royalty on net sales in the Galderma territories outside of North America.

In December 2014, a second generic version of Pennsaid launched in the U.S., which entitled the Company to
earn an upfront, non-refundable milestone of US$0.5 million ($0.6 million). In a patent infringement complaint
against this generic company, the Company, along with Mallinckrodt, entered into a settlement agreement;
whereby, this generic company would agree to pay an upfront, non-refundable milestone of US$0.5 million upon
the launch of its generic version of Pennsaid and agree to pay royalties calculated at 50% of gross profits from
subsequent product sales until which time a third generic version of Pennsaid was launched and then the royalty
rate would decrease to 10% of its gross profits from product sales. The US$0.5 million milestone payment was
recorded in license revenue for the year ended December 31, 2014. During the second quarter of 2015, a third
generic version of Pennsaid was launched in the U.S. and the royalty rate decreased to 10% of gross profits from

Nuvo Research Inc. • Consolidated Financial Statements

product sales. The generic version of Pennsaid that the Company earns royalty revenue from is not currently
available in the U.S. market due to a manufacturing issue.

12. NET INCOME (LOSS) PER COMMON SHARE

Income (loss) per share is computed as follows:

(in thousands, except per share and share figures)
Basic income (loss) per share:
Net income (loss)
Average number of shares outstanding during the year
Basic income (loss) per share

Diluted income (loss) per share:
Net income (loss), assuming dilution
Average number of shares outstanding during the year
Dilutive effect of:
Stock options
Warrants
Weighted average common shares outstanding, assuming dilution

Diluted income (loss) per share

Year ended
December 31, 2015
$

Year ended
December 31, 2014
$

(7,120)
10,942
$(0.65)

(7,120)
10,942

-
-
10,942

$(0.65)

38,590
10,031
$3.85

38,590
10,031

119
250
10,400

$3.71

The following table presents the maximum number of shares that would be outstanding if all dilutive and
potentially dilutive instruments were exercised or converted as at:

Common shares issued and outstanding
Stock options outstanding (Note 10)
Warrants (Note 9)(i)

December 31, 2015
000s

December 31, 2014
000s

11,145
751
65

11,961

10,775
887
397

12,059

(i)

Includes 2,100 Private Placement Warrants that will be issued on the exercise of Broker Warrants [2014 – 23,466 Private Placement
Warrants].

Nuvo Research Inc. • Consolidated Financial Statements

13. EXPENSES BY NATURE

The Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) include the following
expenses by nature:

(a) Employee costs:

Short-term employee wages, bonuses and benefits
Share-based payments
Post-employment benefits
Termination benefits
Total employee costs
Included in:
Cost of goods sold
Research and development expenses
General and administrative expenses
Total employee costs

(b) Depreciation and amortization:

Cost of goods sold
Research and development expenses
General and administrative expenses (i)
Total depreciation and amortization

Year ended
December 31, 2015
$
9,150
164
26
101
9,441

Year ended
December 31, 2014
$
8,109
4,457
14
36
12,616

3,508
2,777
3,156
9,441

2,377
3,163
7,076
12,616

Year ended
December 31, 2015
$
213
87
13
313

Year ended
December 31, 2014
$
252
87
376
715

(i) G&A expenses include $nil of amortization of intangible assets for the year ended December 31, 2015 [December 31, 2014 - $348].

14. NET CHANGE IN NON-CASH WORKING CAPITAL

The net change in non-cash working capital consists of the following:

Accounts receivable
Inventories
Other current assets
Accounts payable and accrued liabilities
Net change in non-cash working capital

Year ended
December 31, 2015
$
(2,065)
(588)
(557)
(131)
(3,341)

Year ended
December 31, 2014
$
1,696
(1,129)
(252)
5,198
5,513

Nuvo Research Inc. • Consolidated Financial Statements

15. INCOME TAXES

Deferred Tax Assets and Liabilities
Deferred income taxes represent the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The
following represents deferred tax assets which have not been recognized in these Consolidated Financial
Statements:

Non-capital loss carryforwards
U.S. Federal and State research and development credits
Canadian Scientific Research and Experimental Development (SR&ED)

expenditure pool carryforward

Investment tax credits
Tax basis of property, plant and equipment and intangibles in excess of

accounting value

Financing costs, deferred revenue and other

Deferred tax assets not recognized

Year Ended
December 31, 2015
$

Year Ended
December 31, 2014
$

20,830
1,612

455
1,809

2,649
38

27,393

15,829
1,352

-
1,340

3,190
19

21,730

A reconciliation between the Company’s statutory and effective tax rates is presented below:

Statutory rate
Items not deducted for tax
Impact of foreign income tax rate differential
Utilization of previously unused losses
Revaluation of deferred taxes as a result of enacted tax rate
changes and other
Losses not benefitted
Other

Year Ended
December 31, 2015
%

Year Ended
December 31, 2014
%

26.8
9.6
29.1
-

(0.6)
(64.8)

26.7
(1.4)
(2.9)
(25.0)

-
(4.3)
6.9

Loss Carryforwards and Canadian SR&EDs
The Company and its subsidiaries have non-capital losses available for carryforward to reduce future years'
taxable income, the benefit of which has not been recorded. These losses and the related future tax assets by
jurisdiction are as follows:

Canada
United States
United States (i)
United States
Switzerland
Germany

Expiry Period

2030 to 2031
2025
2023 to 2029
2026 to 2035
2016 to 2022
Indefinite

Non-capital
losses
$

Future tax
asset
$

3,423
24
9,110
30,591
21,429
10,404

74,981

917
9
2,848
11,959
2,080
3,017

20,830

(i)

These U.S. losses carried forward relate to losses acquired upon the purchase of ZARS in 2011. The Company has $32.1 million of U.S.
losses carried forward relating to the portion of the acquired losses that are restricted due to the change in control, and therefore are not
included in the table.

Nuvo Research Inc. • Consolidated Financial Statements

The Company has approximately $1.7 million [December 31, 2014 - $nil] of Canadian SR&ED expenditures for
federal tax purposes that are available to reduce taxable income in future years and have an unlimited
carryforward period, the benefit of which has not been reflected in these financial statements. SR&ED
expenditures are subject to audit by the tax authorities and accordingly, these amounts may vary.

The Company has net capital losses of $7.8 million [December 31, 2014 - $6.1 million] in Canada available to
offset net taxable capital gains in future years which have not been recognized.

Government Assistance
A portion of the Company’s R&D expenditures are eligible for Canadian federal investment tax credits that it may
carry forward to offset any future Canadian federal income tax payable as follows:

Year of credit

December 31, 2005
December 31, 2006

December 31, 2007
December 31, 2008

December 31, 2009
December 31, 2010

December 31, 2011
December 31, 2012

Amount
$

435
688

335
225

142
395

208
43

2,471

Year of Expiry

2015
2026

2027
2028

2029
2030

2031
2032

The benefits of these non-refundable Canadian federal investment tax credits have not been recognized in the
financial statements.

16. COMMITMENTS

The Company has commitments under research contracts and minimum future rental payments under operating
leases for the years ending December 31 as follows:

2016
2017
2018 and thereafter

Research and Other
Service Contracts
$
1,124
-
-
1,124

Operating
Leases
$
239
47
1
287

Total
$
1,363
47
1
1,411

For the year ended December 31, 2015, payments under operating leases totalled $273 [December 31, 2014 -
$211].

Under the terms of the Pennsaid 2% U.S. Asset Sale with Horizon, Nuvo is contractually obligated to manufacture
Pennsaid 2% for the U.S. market to December 2029. The agreement provides for tiered pricing based on
volumes of product shipped. The Company is also required to maintain certain inventory levels of raw materials.

The Company has additional long-term supply contracts where the Company is contractually obligated to
manufacture Pennsaid and Pennsaid 2% for its customers.

The Company has a long-term supply agreement with a third-party manufacturer for the supply of dimethyl
sulfoxide, one of its key raw materials, which expires in December 2022. The agreement automatically renews for
successive three-year terms, unless terminated in writing by either party at least 12 months prior to the expiration
of the current term. The agreement obligates the Company to purchase 100% of its dimethyl sulfoxide
requirements from the third party at specified pricing, but does not contain any minimum purchase commitments.

Nuvo Research Inc. • Consolidated Financial Statements

Under certain licensing agreements, the Company may be required to make payments upon the achievement of
specific developmental, regulatory or commercial milestones. As it is uncertain if, and when, these milestones will
be achieved, the Company did not accrue for any of these payments at December 31, 2015 or 2014.

Under certain licensing agreements, the Company is required to make royalty payments to two companies for a
combined 2.5% of annual net sales of the HLT Patch and Pliaglis.

In December 2015, the Company reacquired the development and marketing rights for Pliaglis for the U.S.,
Canada and Mexico. Under the terms of the agreement, Nuvo will pay a second payment of $174 (CHF125)
upon transfer of certain rights and documents.

Under the terms of the 2004 agreement and as reiterated in the 2011 agreement to purchase the non-controlling
interest in Nuvo Research AG, the Company is obligated to pay 6% of future WF10 licensing and royalty revenue
and 6% of proceeds received from the sale of any portion of Nuvo Research AG to the former minority
shareholder. No amounts have been paid or are payable.

Guarantees
The Company periodically enters into research, licensing, distribution or supply agreements with third parties that
include indemnification provisions that are customary in the industry. These guarantees generally require the
Company to compensate the other party for certain damages and costs incurred as a result of third-party
intellectual property claims or damages arising from these transactions. In some cases, the maximum potential
amount of future payments that could be required under these indemnification provisions is unlimited. These
indemnification provisions generally survive termination of the underlying agreements. The nature of the
intellectual property indemnification obligations prevents the Company from making a reasonable estimate of the
maximum potential amount it could be required to pay. Historically, the Company has not made any
indemnification payments under such agreements and no amount has been accrued in the accompanying
Consolidated Financial Statements with respect to these indemnification obligations.

17. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

IFRS 7 - Financial Instruments: Disclosures requires disclosure of a three-level hierarchy that reflects the
significance of the inputs used in making fair value measurements. Fair values of assets and liabilities included in
Level 1 are determined by reference to quoted prices in active markets for identical assets and liabilities. Assets
and liabilities in Level 2 include those where valuations are determined using inputs other than quoted prices for
which all significant outputs are observable, either directly or indirectly. Level 3 valuations are those based on
inputs that are unobservable and significant to the overall fair value measurement.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value
measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes to the
ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value
hierarchy. The Company did not have any transfer of assets and liabilities between Level 1, Level 2 and Level 3
of the fair value hierarchy during the years ended December 31, 2015 and 2014.

The Company has determined the estimated fair values of its financial instruments based on appropriate valuation
methodologies. However, considerable judgment is required to develop these estimates. Accordingly, these
estimated values are not necessarily indicative of the amounts the Company could realize in a current market
exchange. The estimated fair value amounts can be materially affected by the use of different assumptions or
methodologies.

Nuvo Research Inc. • Consolidated Financial Statements

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring
basis as at December 31, 2015:

Assets:
Total Assets
Liabilities:
Deferred Share Units
Stock Appreciation Rights
Total Liabilities

Using Quoted Prices
in Active Markets for
Identical Assets
(Level 1)
$
-
-

Using Significant
Other Unobservable
Inputs
(Level 2)
$
-
-

Using Significant
Unobservable
Inputs
(Level 3)
$
-
-

2,231
-
2,231

-
1,328
1,328

-
-
-

Total
$
-
-

2,231
1,328
3,559

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring
basis as at December 31, 2014:

Assets:
Short-term Investments
Total Assets
Liabilities:
Deferred Share Units
Stock Appreciation Rights
Total Liabilities

Using Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
$

Using Significant
Other Unobservable
Inputs
(Level 2)
$

Using Significant
Unobservable
Inputs
(Level 3)
$

10,000
10,000

2,770
-
2,770

-
-

-
2,876
2,876

-
-

-
-
-

Total
$

10,000
10,000

2,770
2,876
5,646

Level 1 assets include guaranteed investment certificates or other securities held by the Company that are valued
at quoted market prices. The Company accounted for its investment at fair value on a recurring basis at
December 31, 2014. The Company has no level 1 assets at December 31, 2015.

Level 1 liabilities include obligations of the Company for the DSU described in Note 10. One DSU has a cash
value equal to the market price of one of the Company’s common shares. The Company revalues the DSU
liability each reporting period using the market value of the underlying shares.

Level 2 liabilities include obligations of the Company for the SARS Plan described in Note 10. The fair values of
each tranche of SARs issued and outstanding are revalued at each reporting period using the Black-Scholes
option pricing model.

The fair values of all other short-term financial assets and liabilities, presented in the Consolidated Statements of
Financial Position approximate their carrying amounts due to the short period to maturity of these financial
instruments.

Rates currently available to the Company for long-term obligations, with similar terms and remaining maturities,
have been used to estimate the fair value of the finance lease and other obligations. These fair values
approximate the carrying values for all instruments.

Risk Factors
The following is a discussion of liquidity, credit and market risks and related mitigation strategies that have been
identified. This is not an exhaustive list of all risks nor will the mitigation strategies eliminate all risks listed.

Nuvo Research Inc. • Consolidated Financial Statements

Pennsaid and Pennsaid 2% revenues in countries where it is currently marketed. In Canada, the Company
receives royalties based on Canadian net sales of Pennsaid. In the first quarter of 2014, a generic version of
Pennsaid was launched that has negatively impacted the Company’s royalty revenue in Canada. In the U.S., the
Company receives product revenues from the sale of Pennsaid 2% to Horizon pursuant to a long-term exclusive
supply agreement.

The Company has contractual obligations related to accounts payable and accrued liabilities, purchase
commitments and other obligations of $10.8 million that are due in less than a year and $0.1 million of contractual
obligations that are payable from 2017 to 2020.

Credit Risk
The Company’s cash balances subject the Company to a significant concentration of credit risk. As at December
31, 2015, the Company had $48.2 million invested with two financial institutions, in various bank accounts as per
its practice of protecting its capital rather than maximizing investment yield through additional risk. These
financial institutions are major Canadian banks which the Company believes lessens the degree of credit risk.
The remaining $0.5 million of cash balances are held in bank accounts in various geographic regions outside of
Canada.

The Company, in the normal course of business, is exposed to credit risk from its global customers, most of
whom are in the pharmaceutical industry. The accounts receivable are subject to normal industry risks in each
geographic region in which the Company operates. In addition, the Company is exposed to credit-related losses
on sales to its customers outside North America and the E.U. due to potentially higher risks of enforceability and
collectability. The Company attempts to manage these risks prior to the signing of distribution or licensing
agreements by dealing with creditworthy customers; however, due to the limited number of potential customers in
each market, this is not always possible. In addition, a customer’s creditworthiness may change subsequent to
becoming a licensee or distributor, and the terms and conditions in the agreement may prevent the Company
from seeking new licensees or distributors in these territories during the term of the agreement. As at December
31, 2015, the Company’s four largest customers located in North America and the E.U. represented 89%
[December 31, 2014 - 60%] of total accounts receivable and accounts receivable from customers located outside
of North America and the E.U. represented 2% [December 31, 2014 - 8%] of total accounts receivable.

Pursuant to their collective terms, accounts receivable were aged as follows:

Current
0-30 days past due
31-60 days past due
Over 90 days past due

Interest Rate Risk
All finance lease obligations are at fixed interest rates.

December 31, 2015

December 31, 2014

5,497
36
-
-
5,533

2,940
43
20
2
3,005

Nuvo Research Inc. • Consolidated Financial Statements

Currency Risk
The Company operates globally, which gives rise to a risk that earnings and cash flows may be adversely
affected by fluctuations in foreign currency exchange rates. The Company is primarily exposed to the U.S. dollar
and euro, but also transacts in other foreign currencies. The Company currently does not use financial
instruments to hedge these risks. The significant balances in foreign currencies were as follows:

Cash
Accounts receivable
Other current assets
Accounts payable and accrued liabilities
Finance lease and other long-term obligations

Euros

U.S. Dollars

December 31,
2015
€
885
782
2
(959)
-
710

December 31,
2014
€
1,266
242
159
(943)
-
724

December 31,
2015
$
4,783
3,010
-
(520)
(162)
7,111

December 31,
2014
$
665
2,205
-
(601)
(281)
1,988

Based on the aforementioned net exposure as at December 31, 2015, and assuming that all other variables
remain constant, a 10% appreciation or depreciation of the Canadian dollar against the U.S. dollar would have an
effect of $984 on total comprehensive income (loss) and a 10% appreciation or depreciation of the Canadian
dollar against the euro would have an effect of $107 on total comprehensive income (loss).

In terms of the euro, the Company has three significant exposures: its net investment and net cash flows in its
European operations, its euro denominated cash held in its Canadian operations and sales of Pennsaid by the
Canadian operations to European distributors. In terms of the U.S. dollar, the Company has four significant
exposures: its net investment and net cash flows in its U.S. operations, its U.S. dollar denominated cash held in
its Canadian operations, the cost of purchasing raw materials either priced in U.S. dollars or sourced from U.S.
suppliers that are needed to produce Pennsaid, Pennsaid 2% or other products at the Canadian manufacturing
facility and revenue generated in U.S. dollars from agreements with Horizon, Galderma, Galen and Eurocept.

The Company does not actively hedge any of its foreign currency exposures given the relative risk of currency
versus other risks the Company faces and the cost of establishing the necessary credit facilities and purchasing
financial instruments to mitigate or hedge these exposures. As a result, the Company does not attempt to hedge
its net investments in foreign subsidiaries.

The Company does not currently hedge its euro cash flows. Sales to European distributors for Pennsaid are
primarily contracted in euros. The Company receives payments from the distributors in its euro bank accounts
and uses these funds to pay euro denominated expenditures and to fund the net outflows of the European
operations as required. Periodically, the Company reviews the amount of euros held, and if they are excessive
compared to the Company’s projected future euro cash flows, they may be converted into U.S. or Canadian
dollars. If the amount of euros held is insufficient, the Company may convert a portion of other currencies into
euros.

The Company does not currently hedge its U.S. dollar cash flows. The Company’s U.S. operations have net cash
outflows, and currently these are funded using the Company’s U.S. dollar denominated cash and payments
received under the terms of the agreements with Horizon, Galderma and Galen. Periodically, the Company
reviews its projected future U.S. dollar cash flows and if the U.S. dollars held are insufficient, the Company may
convert a portion of its other currencies into U.S. dollars. If the amount of U.S. dollars held is excessive, they may
be converted into Canadian dollars or other currencies, as needed for the Company’s other operations.

18. CAPITAL MANAGEMENT

The Company’s objectives in managing capital are to ensure sufficient liquidity to pursue the Company’s
development plans for each of its drug candidates and to maintain its ongoing operations. Product revenues from
the Company’s approved drug products are not yet significant enough to fund ongoing operations. As a result, to
secure the capital necessary to pursue its development plans and fund ongoing operations, the Company will
need to raise additional funds through the issuance of debt or equity, by entering into distribution and license
agreements or by entering into co-development agreements.

Nuvo Research Inc. • Consolidated Financial Statements

The Company currently defines its capital to include its cash and shareholders’ equity excluding AOCI. In the
past, the Company has financed its operations primarily through the net proceeds received from the sale of
common shares and warrants, issuance of secured debt and convertible debentures, finance lease obligations,
proceeds from collaborative relationships and investment income earned on cash balances and short-term
investments.

The Company expects to utilize its cash, which was $48.7 million at December 31, 2015, revenue from product
sales and royalty payments to fund its operations. As part of the Nuvo Strategic Transaction (see Note 1, Nature
of Business and Going Concern Assumption), the Company plans to transfer $35.0 million to Crescita as part of
the reorganization. Completion of the reorganization is subject to a number of conditions including shareholder
and court approval. If the proposed transaction is approved by shareholders and all other conditions are satisfied,
Nuvo expects the transaction to be completed in Q1 2016.

The Company currently anticipates that its cash and the revenues it expects to generate from product sales and
royalty payments will be sufficient to fund operations into 2017. Nonetheless, companies in the pharmaceutical
industry typically require periodic funding in order to continue developing their drug candidate pipelines until they
have successfully commercialized at least one of their drug candidates and receives sufficient ongoing revenue to
fund their operations. Nuvo has not yet reached this stage and; therefore, the Company monitors, on a regular
basis, its liquidity position, the status of its partners’ commercialization efforts, the status of its drug development
programs, including cost estimates for completing various stages of development, the scientific progress on each
drug candidate, the potential to license or co-develop each drug candidate and continues to actively pursue fund-
raising possibilities through various means, including the sale of its equity securities. There can be no assurance,
especially considering the economic environment, that additional financing would be available on acceptable
terms, or at all, when and if required. If adequate funds are not available when required, the Company may have
to substantially reduce or eliminate planned expenditures, terminate or delay clinical trials for its product
candidates, curtail product development programs designed to expand the product pipeline or discontinue certain
operations. If the Company is unable to obtain additional financing when and if required, the Company may be
unable to continue operations.

19. SEGMENTED INFORMATION

Segments
IFRS 8 - Operating Segments, requires operating segments to be determined based on internal reports that are
regularly reviewed by the chief operating decision maker for the purpose of allocating resources to the segment
and to assessing its performance. Prior to September 30, 2015, the Company managed the business in the
following operating segments: i) TPT Group and ii) Immunology Group. As discussed in Note 3(i), the Company
realigned its operating segments as a result of strategic changes to the organizational structure. Accordingly, the
Company has presented the following operating segments that are independently and regularly reviewed and
managed: i) Nuvo Pharma and ii) Crescita. Crescita has two distinct business units: i) the TPT Group and ii) the
Immunology Group.

From a financial perspective, executive management uses the net income (loss) before income taxes to assess
the performance of each segment.

The following tables show certain information with respect to operating segments:

Year ended December 31, 2015
Total revenue
Gross margin on product sales
Depreciation of property, plant and equipment
Interest income
Interest expense
Net income (loss) before income taxes(ii)
Assets (i)
Property, plant and equipment
Additions to property, plant and equipment

Nuvo
Pharma(ii)

$
20,495
8,804
276
515
-
8,335
57,944
1,100
309

Crescita

TPT
Group(ii)
$
228
-
13
-
40
(7,230)
316
31
19

Immunology
Group
$
629
128
24
-
-
(8,218)
872
49
4

Total

$
21,352
8,932
313
515
40
(7,113)
59,132
1,180
332

Nuvo Research Inc. • Consolidated Financial Statements

Year ended December 31, 2014
Total revenue
Gross margin on product sales
Depreciation of property, plant and equipment and

intangible assets (iii)

Interest income
Interest expense
Net income (loss) before income taxes(ii), (iii), (iv), (v)
Assets
Property, plant and equipment
Additions to property, plant and equipment

Nuvo
Pharma(ii)

$
12,227
574

415
199
661
53,299
63,504
1,071
181

Crescita
TPT
Group(ii)
$
192
-

Immunology
Group
$
638
359

277
-
52
(8,241)
216
25
10

23
-
-
(6,449)
1,420
65
33

Total

$
13,057
933

715
199
713
38,609
65,140
1,161
224

(i) As part of the Nuvo Strategic Transaction (see Note 1, Nature of Business and Going Concern Assumption), the Company plans to

transfer $35.0 million to Crescita as part of the reorganization.

(ii) Corporate overhead costs are allocated to the Nuvo Pharma and TPT Group segments.
(iii) During 2014, amortization of intangible assets of $0.1 million and $0.3 million was included in the results of the Nuvo Pharma and TPT

Group segments.

(iv) During 2014, impairment of intangible assets of $0.5 million and $1.2 million was included in the results of the Nuvo Pharma and TPT

Group segments.

(v) The total gain on the litigation settlement of $52.3 million for the year ended December 31, 2014 was included in the results of Nuvo

Pharma.

Geographic Information
The Company’s revenue is derived from sales to and licensing revenue derived from external customers located
in the following geographic areas:

United States
Europe
Canada
Other foreign countries

Year ended
December 31, 2015
$
16,698
3,245
737
672

Year ended
December 31, 2014
$
7,809
2,193
1,797
1,258

21,352

13,057

The geographic location of the Company’s PP&E was as follows as at:

Canada
Europe and other

December 31, 2015
$
1,131
49
1,180

December 31, 2014
$
1,095
66
1,161

Significant Customers
For the year ended December 31, 2015, the Company’s four largest customers (excluding upfront payments and
milestones from licensing arrangements) represented 87% [December 31, 2014 - 81%] of total revenue and the
Company’s largest customer represented 71% [December 31, 2014 - 51%] of total revenue. The Company’s
largest customers are in the Nuvo Pharma segment.

Nuvo Research Inc. • Consolidated Financial Statements

20. RELATED PARTY TRANSACTIONS

Key Management Compensation
Key management personnel are those persons having authority and responsibility for planning, directing and
controlling the activities of the Company, including directors. Key management includes five executive officers
and five non-employee directors. Compensation for the Company’s key management personnel was as follows:

Short-term wages, bonuses and benefits (i)
Share-based payments
Total key management compensation

Included in:
Research and development expenses
General and administrative expenses
Total key management compensation

Year Ended
December 31, 2015
$

Year Ended
December 31, 2014
$

1,863
94

1,957

470
1,487

1,957

3,325
4,338

7,663

935
6,728

7,663

(i) For the year ended December 31, 2015, certain officers of the Company were assessed on the achievement of corporate
objectives including: the success of the 2015 Pennsaid 2% phase 3 trial and the completion of a strategic restructuring
transaction. The Company expects the achievement of these targets to be determined during the first quarter of 2016.

For the year ended December 31, 2015, certain officers of the Company exercised 33,884 Private Placement
Warrants. Proceeds raised from the Company’s officers totalled $0.1 million.

For the year ended December 31, 2014, certain officers of the Company participated in the Private Placement
described in Note 9, Capital Stock and acquired 67,768 on the same terms as the other purchasers. Proceeds
raised from the Company’s officers totalled $0.2 million.

21. LITIGATION SETTLEMENT

In September 2014, the Company reached a full settlement with Mallinckrodt of Nuvo's claims and Mallinckrodt's
counterclaim relating to Nuvo's license to Mallinckrodt of the right to market and sell Pennsaid and Pennsaid 2%
in the U.S. Under the terms of the settlement agreement, Mallinckrodt returned all U.S. rights to Pennsaid and
Pennsaid 2% (Pennsaid Rights) to Nuvo valued at US$45.0 million ($50.4 million) and paid US$10.0 million
($11.2 million). During the year ended December 31, 2014, the Company recorded an $8.8 million net gain
[$10.9 million of translated proceeds, net of $2.1 million direct costs associated with the proceeds] and a foreign
exchange gain of $0.3 million in the Consolidated Statements of Income (Loss) and Comprehensive Income
(Loss).

The Pennsaid Rights were valued at US$45.0 million, as this represented the fair market value as evidenced
by its sale in October 2014 (see Note 22, Pennsaid 2% U.S. Asset Sale). The total gain on the litigation
settlement for the year ended December 31, 2014 was $52.3 million, which included the net cash settlement
payment of $8.8 million and the non-cash portion of $43.5 million, net of direct costs to sell.

22. PENNSAID 2% U.S. ASSET SALE

On October 17, 2014, the Company entered into an asset purchase agreement with Horizon pursuant to which
the Company sold the sales and marketing rights, intellectual property and other assets with respect to
Pennsaid 2% in the U.S. (Pennsaid 2% U.S. Sale Agreement), including, among other things: the
investigational new drug application (IND) and the NDA for Pennsaid 2%, the Company’s interests in patents
covering Pennsaid 2% in the U.S. and certain regulatory documentation, promotional materials and recor ds
related to Pennsaid 2% for cash consideration of US$45.0 million ($50.4 million) received on the closing date.
Proceeds of $43.5 million, net of direct costs, were received in the fourth quarter of 2014 , and these proceeds
are presented in the Consolidated Statements of Cash Flows in investing activities.

Nuvo Research Inc. • Consolidated Financial Statements

23. SUBSEQUENT EVENT – PRIVATE PLACEMENT AND BROKER WARRANTS EXPIRY

On November 30, 2015, the Company exercised its acceleration feature for the Private Placement Warrants
and the Broker Warrants. The Company accelerated the expiry date to January 15, 2016 (Acceleration Expiry
Date). In accordance with the terms of the Private Placement Warrants and the Broker Warrants, any Private
Placement Warrants or Broker W arrants that were not validly exercised in accordance with their terms prior to
the Accelerated Expiry Date would immediately expire and all rights of the holders of the Private Placement
Warrants and the Broker Warrants would be terminated without any compensation to the holder thereof.

Subsequent to the year ended December 31, 2015, 49,044 Private Placement Warrants and 4,200 Broker
Warrants were exercised for proceeds of $0.2 million and 12,252 Private Placement Warrants expired.

24. SUBSEQUENT EVENT – DISPOSAL OF IMMUNOLOGY GROUP

On February 16, 2016, the Board of Directors of Nuvo unanimously approved a proposal to initiate a divestiture or
orderly wind down of the Company’s Immunology Group segment (see Note 19, Segmented Information). The
Immunology Group includes the Company’s wholly owned subsidiary Nuvo Research AG and its subsidiaries
Nuvo Manufacturing GmbH and Nuvo Research GmbH.

While the Company continues to explore a possible sale of the Immunology Group, if a divestiture transaction
does not materialize, the wind down of the Immunology operations is expected to be completed by the end of
2016. The Company has accrued $0.3 million for onerous WF10 contracts for the year ended December 31,
2015.

Nuvo Research Inc. • Consolidated Financial Statements

Corporate Information

HEAD OFFICE
7560 Airport Road, Unit 10
Mississauga, Ontario, Canada L4T 4H4
Tel. (905) 673-6980
Fax. (905) 673-1842
Email: info@nuvoresearch.com
Website: www.nuvoresearch.com

AUDITORS
Ernst & Young LLP
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada

LEGAL COUNSEL
Goodmans LLP
Toronto, Canada

STOCK EXCHANGE LISTING
The Toronto Stock Exchange
Symbol: NRI

INVESTOR RELATIONS
Email: ir@nuvoresearch.com

TRANSFER AGENT/REGISTRAR
Common Shares
CST Trust Company
P.O. Box 700, Station B
Montreal, QC
H3B 3K3
Canada
Telephone: 1-800-387-0825
or outside Canada and U.S. 416-682-3860
Fax: 1-888-249-6189
or outside Canada and U.S. 514-985-8843
Email: inquiries@canstockta.com
Website: www.canstockta.com

CORPORATE GOVERNANCE
A statement of the Company’s current corporate governance practices is contained in the management
information circular and proxy statement for the May 13, 2015 Annual and Special Meeting of
Shareholders. The Company’s website www.nuvoresearch.com contains the Company’s corporate
governance documents including Code of Conduct and Business Ethics, Corporate Disclosure Policy,
Insider Trading Policy and Audit Committee Charter.

Board of Directors and Executive Officers

Daniel N. Chicoine, BComm, CPA
Chairman & Co-Chief Executive Officer

Anthony E. Dobranowski, BSc, MBA, CPA
Director

John C. London, LLB, LLM
Director - President & Co-Chief Executive Officer

Jacques Messier, DVM, MBA
Director - Chair of the Compensation & Corporate
Governance Committee

Henrich R.K. Guntermann, MD, MSc
Director - President, Europe & Immunology Group

Samira Sakhia, MBA, CPA
Director

Stephen L. Lemieux, BA, MMPA, CPA
Vice President & Chief Financial Officer

Theodore H. Stanley, MD
Director

Tina K. Loucaides, MSc, LLB
Vice President, Secretary & General Counsel

David A. Copeland, BMath, CPA
Director - Chair of the Audit Committee

Klaus von Lindeiner, Dr en droit
(University of Geneva)
Director