ProMetic Life Sciences Inc.
Annual Report 2001

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6100 Royalmount Avenue Montreal, Quebec Canada H4P 2R2 Tel.: (514) 496-2115 Fax: (514) 496-2079 info@prometic.com www.prometic.com annual report 2001 a company with its eye on the present and the future 4 Highlights 24 Financials Message to Shareholders 24. Management’s Report & Auditors' Report to the Shareholders 25. Consolidated Balance Sheets 26. Consolidated Statements of Operations and Deficit 27. Consolidated Statements of Cash Flows Growth Engine = Core Technology + Core Competency 46 Board of Directors 5 7 10 Inflammation 47 Scientific Advisory Committee 14 Cancer 48 Clinical Advisory Committee (Arriva-ProMetic, Inc.) 18 Infectious diseases 49 Additional investor information 21 Management Discussion and Analysis of the Financial Position and Operating Results 50 Contact information ProMetic Business Model The Company fosters growth by offering its enabling technology under license to pharma- ceutical and biotech companies so as to allow them to develop proprietary products that rely on ProMetic's technology. ProMetic expects to generate long-term annuity revenues from its license and long-term supply agreements that enter into effect once its clients' products attain commercial status. ProMetic further leverages its core technologies by developing in-house "high-value therapeutics" and medical applications, and limits its risk exposure through partnerships with multinationals for product development, clinical trials and marketing. Table of contents 8 11 16 Mimetic Ligand™ Inflammation Cancer ProMetic annual report 2001 3 Highlights » Strategic Alliance with Merck KGaA » European Patent Office upholds – Purification of Monoclonal Antibodies Arriva-ProMetic patent rights for its rAAT clinical indications » Execution of a Memorandum of Understanding for the Formation of a Joint Venture Company with the American Red Cross – Detection and Removal of Viruses and Prions » Completion of the Strategic Agreement with PharmAAware Sepsis B.V. for the Diagnosis and Treatment of Sepsis » Expansion of the Therapeutic Research & Development Team in Montreal » Completion of supportive data & International patent filing for PBI-1101 » Completion of supportive data & International patent filing for PBI-1402 » Creation of Clinical Advisory Committee for rAAT » Expansion of the Mimetic Ligand™ Combinatorial chemistry into therapeutics » rAAT successful completion of the preclinical phases » rAAT moves into clinical trials for dermatological applications ProMetic Life Sciences Inc. (PLI) 160% 140% 120% 100% 80% 60% 40% 20% 0% -20% -40% 800 700 600 500 400 300 200 100 0 e g n a h C % ) 0 0 0 ( e m u o V l PLI-T BIO-I NBI-I PLI-T 01 Jan. 2001 01 Mar. 2001 01 May 2001 01 Jul. 2001 01 Sept. 2001 01 Nov. 2001 Share price performance vs. TSE Bio Index and Nasdaq Bio Index 4 ProMetic annual report 2001 Continued Performance of core technology in joint development projects » Genzyme Transgenics for human serum albumin » Delta Biotechnology (subsidiary of Aventis) for recombinant human serum albumin » Publication of results for the purification of IgG from plasma » Publication of results for the purification of monoclonal antibodies » Milestones achieved for the purification of plasmid DNA Financial achievements » Successful financing of $19 million (gross proceeds) out of which $9.9 million was concluded December 31, 2001 » Share price increase of 156% (from December 29, 2000 to December 30, 2001) Message to Shareholders In 2001, ProMetic has maintained an above-average performance compared to other financial references, despite the overall stock market performance and economic uncertainty. ProMetic continues to prove its ability to create value from its core technology through the development of strategic agree- ments and high-value proprietary products. ProMetic is strategically well-positioned to capture market share from multiple growth opportunities within the expanding biotech industry. Mimetic Ligand™ and Continued Shareholders’ Value Proteins are the building blocks of life. Over the past twenty years, the biotechnology industry has utilized recombinant DNA technology to develop and manufacture natural and engineered versions of proteins for therapeutic use. The completion of the human genome map has further enhanced the industry’s understanding of genes and the proteins they encode. Numerous protein and monoclonal antibody therapeutics have already been introduced on the market while hundreds more are in development and poised for market launch in the near future. All of these therapeutic proteins will require large-scale isolation and purification at commercial batch sizes using a cost-efficient approach. ProMetic has created shareholder value by licensing the Mimetic Ligand™ technology to pharmaceutical and biotechnology companies. In 2002, the Company will continue to secure long-term annuity revenues from the commercial applications developed in collaboration with its partners. This will gain more impetus when commercial products are approved for sale on key markets. As the critical mass of such alliances develops further, ProMetic will gradually intensify its independent research and development of high-value therapeutic products. raise awareness of ProMetic has implemented high-profile deals in the past year. The monoclonal antibody sales and marketing collaboration with Merck KGaA will the Company’s proprietary Mimetic Ligand™ technology and will facilitate our continued expansion into the North American and European markets. Although the impact of this alliance on the company’s bottom line is not immediate, it will provide a solid base for growing revenues. Secondly, the Memorandum of Understanding with the American Red Cross validates the Company’s technology for pathogen diagnosis and removal. This was further reinforced by the agreement with PharmAAware Sepsis B.V., whereby ProMetic technology is being used to develop both a diagnostic kit and a therapeutic protein for sepsis and septic shock. These announcements raised awareness in Canada of ProMetic as both a “deal maker” and a company with a viable business strategy. Therapeutic Programs In 2001, ProMetic significantly expanded its Montreal-based research and development division with seasoned industry scientists with medicinal chemistry, biochemistry and biology expertise. The combined efforts of this group and those of our UK-based team have resulted in the rapid development of entirely new therapeutic applications of the Mimetic Ligand™ technology. These new and exciting insights are helping to accelarate our monoclonal antibody and in-licensed therapeutic product initiatives. Two of our own products, recombinant alpha-1- antitrypsin (rAAT) for inflammation and PBI-1402 for cancer, will enter clinical trials in 2002. The Company’s lead compounds are well- characterized molecules with remarkable safety profiles. As we enter Phase I safety trials, the risk and time associated with clinical development will be reduced considerably. Most importantly, these proprietary products provide cost-effective solutions to unmet medical needs. Pierre Laurin, President and CEO “ProMetic is strategically well-positioned to capture market share from multiple growth opportunities within the expanding biotech industry.” ProMetic annual report 2001 5 The Company’s lead compounds are well-characterized molecules with remarkable safety profiles. Clinical trials for the yeast-derived rAAT, developed by the Arriva-ProMetic joint venture, will commence in the first half of 2002. Tests will evaluate the safety and efficacy of rAAT for the treatment of dermatological conditions such as atopic dermatitis and psoriasis. Because AAT is involved in most forms of chronic inflammation, various formulations of rAAT will be developed to target additional inflammatory conditions such as inflammatory bowel diseases (IBD) and cystitis, and wound healing. Clinical studies performed with the natural, serum- derived form of AAT have already demonstrated positive results in the treatment of several the dermatological diseases. Therefore, Company anticipates a similar safety and efficacy profile with its recombinant version. The second leading drug, PBI-1402, is a non-toxic, well-defined low molecular weight synthetic chemoprotective compound, which, in preclinical studies, has demonstrated unequivocal protection and stimulation of neu- trophils and bone marrow cells. Clinical trials will commence in 2002 to evaluate the safety and efficacy of PBI-1402 in accelerating the recovery of neutrophil counts following a variety of chemotherapy regimens. rAAT and PBI-1402 are targeting multi-billion dollar unsatisfied markets, where modest market penetration would result in a significant return to shareholders. ProMetic will continue to leverage its core technology and core competency to provide solutions to unmet medical or industrial needs and will do so in a manner that meets cost-containment pressures. This is true for all commercial applications being pursued by ProMetic and its partners, and range from more cost-efficient protein purification processes to more cost-efficient diagnostics and therapeutics. ProMetic will continue to do this for the benefit of its shareholders, its employees and the patient community at large. Pierre Laurin President and CEO 100% ProMetic BioSciences Ltd. (UK) 26% 4% American Red Cross Forthcoming joint venture PharmAAware Sepsis B.V. 4% Arriva Pharmaceuticals, Inc. 50% Arriva-ProMetic joint venture 100% ProMetic BioSciences Inc. (Therapeutics) Detection & removal systems for viruses and prions Septic Shock Sepsis rAAT respiratory indications (Memorandum of Understanding) Diagnostic kit and therapeutic protein Joint venture partner with Baxter Health Sciences rAAT Dermatology Gastro-enterology Urinary inflammatory indications PBI-1402 PBI-1101 PBI-0032 Mimetics Protein purification MAb (MERCK) Plasma Transgenic Genzyme, IPT Monsanto Recombinant Aventis, Novo Nordisk, Menarini, etc. DNA purification Medical applications Glycosal® (Provalis) Theragyn® (Antisoma) MitraDep® (Mitra) Whenever appropriate, ProMetic’s strategy may include taking an equity position in high reward projects in lieu of a one-time licensing revenue. The value being generated by these activities will gain even more impetus when more commercial products are approved for sale on key markets. 6 ProMetic annual report 2001 Growth Engine = Core Technology + Core Competency Increased investments in our proprietary Mimetic Ligand™ technology have resulted in new molecules that can significantly impact on different aspects of the healthcare business. ProMetic has a remarkable growth engine capable of materializing strategic agreements and developing high-value proprietary products. This stems from its core technology combined with its core competency. Over the years, significant investments have been made to further the scope of the company’s proprietary position on vast libraries of compounds. These libraries form the basis on which ProMetic can develop its own proprietary therapeutics and collaborate with other companies, and expand and validate the use of its technology, thereby supporting an impressive pipeline of products. Commercial Reality: Products with improved technical performance, and which also satisfy pharmaco-economic requirements Increased investments in our proprietary Mimetic Ligand™ technology have resulted in new molecules that can significantly impact on different aspects of the healthcare business. Most importantly, our novel products provide solutions for unmet medical or industrial needs and do so in a cost-efficient manner. The Company seeks to commercialize products that both exceed standard market performance and meet cost-containment pressures. This is true for virtually all commercial applications pursued by ProMetic and/or its partners, and range from being more cost-efficient protein purification processes to more cost-efficient diagnostics and therapeutics. Monoclonal Antibodies and Mimetic Ligand™ ProMetic’s core competency has been stimulated with the new synergy between its Cambridge- based (UK) and Montreal-based R&D groups. All those years of experience and past investments in the UK combined with the seasoned group of scientists in Montreal have led to entirely new concepts in the utilization of the Mimetic Ligand™ technology. This includes new insights into the use of the technology with monoclonal antibodies. Antibodies are proteins, which act like weapons of the body’s own immune system. The immune system produces these proteins to specifically recognize and interact with foreign proteins (pathogens such as viruses) and some proteins produced by cancer cells. Monoclonal antibodies (MAb) are highly specific antibodies derived from only one clone of cells. They recognize a specific target. This illustration represents the structure of an immunoglobulin (IgG) antibody molecule. The IgG molecule is a large protein with a molecular weight of 152,000. By comparison, it is approximately 6 times larger than the average enzyme protein and 8,500 times larger than a water molecule. As shown, the IgG molecule consists of two identical heavy chains and two identical light chains bound together to form a structure, which schematically resembles the letter “Y”. The amino termini (NH2 in the diagram) of the four chains form the top of the “Y” while the carboxyl termini (COOH) of the two heavy chains form the bottom. As indicated, both heavy and light chains have a variable region (VH and VL domains). It is within this variable domain that the antibody binds to a specific portion of a molecule (antigen or epitope). Binding to the antigen is mediated by the contact points or the so-called complementarity determining region (CDR). The tail portion of the heavy chain constitutes the effector domain. Here the antibody is able to interact with other components of the immune system such as the complement cascade. H2N H2N VL domain VH domain CL domain CH1 domain CH2 domain CH3 domain © NH2 NH2 Antigen combining sites Light chain ©=carbohydrate © Heavy chain COOH COOH = – S–S– ProMetic annual report 2001 7 The total market for therapeutic monoclonal antibodies represents a multibillion-dollar opportunity. (MAb) can be Monoclonal antibodies produced with different objectives in mind. Some MAb can be designed to bind to proteins on the surface of a cell and to break down the cell (process referred to as cell lysis via the antibody-dependent cell-mediated cytotoxi- city, ADCC). Other MAb may be designed to act more as a targeting mechanism to help deliver a toxic or radioactive payload specifically to cancerous cells. Some MAb target cytokines (e.g. TNFα) or cell surface markers (e.g. CD4, CD11a) in the treatment of auto-immune diseases. The total market for therapeutic monoclonal antibodies represents a multibillion-dollar opportunity. Currently, the majority of approved MAb targets arthritis and cancer. The total markets for arthritis and cancer drug sales are forecasted to reach 25 and 15 billion dollars respectively by 2010. Over one hundred recombinant antibodies are currently being developed and constitute over 25% of all therapeutics under development. Antibody mimetics are low molecular weight synthetic compounds that can mimic high molecular weight monoclonal antibodies (MAb). mediated cytotoxicity mechanisms (ADCC and complement-mediated) could produce side- effects especially among antibodies targeted for the treatment of auto-immune diseases. A tremendous and lucrative opportunity exists for any technology with the potential to replace a glycoprotein antibody with a synthetic low molecular weight functional equivalent. Therefore, MAb can also be viewed as an opportunity to derive information useful in the design of a mimetic. Although the manufacturing process of MAb has made significant progress, issues exist concerning the difficulties and disadvantages of a biological compared to a synthetic drug. These issues include manufacturing costs and the stability of biologicals. The phenomenal market growth for MAb coupled with relatively limited production capacity (cell culture capacity) for protein biologicals could result in a serious production bottleneck. Issues also exist for the therapeutic use of a protein versus a synthetic drug. These include potential immunological reactions, especially with prolonged use of proteins. In addition to the well-known HAMA (human anti-mouse antibody) response, antibody ProMetic strategy – capitalize on growth opportunities related to the use of monoclonal antibodies Production Downstream processing Alliance Pure MAb Mimetic Ligand™ Foreign Protein Bacteria Virus Cancer Cell 8 ProMetic annual report 2001 Radiotherapy Radio-imaging ProMetic's proprietary and enabling technologies are key to protein isolation and purification, and the development of protein mimetics. Its core technologies and competence are the basis for commercial applications ranging from proteomics research to industrial biopharmaceutical manufacturing, and from diagnostics to therapeutics. In addition to providing its strategic partners with products and technologies, ProMetic is also in the process of developing its own proprietary drug candidates for the treatment of cancer and inflammatory diseases. Purification Diagnosis Therapeutic Infectious diseases Purification of Alkaline Phosphatase (PharmAAware Sepsis B.V.) Removal of Endotoxins Detection and Removal of viruses and pathogens Forthcoming joint venture with the American Red Cross Cartridge Device to remove excess radioactivity (radiotherapy) (Antisoma) Monoclonal Antibodies Strategic Alliance with MERCK KGaA Cancer Purification of DNA vaccines Purification of recombinant albumin Collaboration agreement with Aventis Detection of Alkaline Phosphatase (PharmAAware Sepsis B.V.) PBI-0032 Auto-immune Diseases rAAT PBI-1101 Atopic dermatitis, Psoriasis, Ulcerative Colitis, Cystitis PBI-1402 Chemoprotectant Other mimetics In libraries Cartridge Adapted to dialysis machine to remove excess radioactivity (radiotherapy, radio-imaging) (Mitra) Monoclonal Antibodies Strategic Alliance with MERCK KGaA Inflammation Purification of IgG from plasma ProMetic annual report 2001 9 Inflammation Inflammation is a common condition into which tissues enter as a reaction to injury. In some specific reactions, parts of the body’s system are affected by injuries caused by auto-immune (antibodies produced against the body’s own tissues) or allergic reactions. In this broad therapeutic area, ProMetic focuses on conditions with unsatisfied medical needs and for which it can offer advanced and cost-efficient treatment alternatives. Purification of recombinantAlbumine® from Aventis used as excipient for vaccines Purification of recombinantAlbumine® from Aventis used as excipient for vaccines In addition to its own therapeutics, ProMetic collaborates with various companies for the purification of antibodies to treat Detection of Detection of ne Phosphatase caline Phosphatase inflammatory conditions. PharmAAware BV) (PharmAAware BV) Monoclonal Antibodies Strategic Alliance with MERCK KGaA PBI-0032 Auto-immune Diseases rAAT PBI-1101 Atopic dermatitis, Psoriasis, Ulcerative Colitis, Cystitis Purification of IgG from plasma Diagnosis Purification 02 tant PBI-1393 PBI-1393 IL-2 mimetic adjuvant IL-2 mimetic adjuvant to chemotherapy to chemotherapy Cartridge Cartridge adapted to dyalisis adapted to dyalisis machine to remove machine to remove excess radioactivity excess radioactivity (Mitra) (Mitra) Therapeutic In the U.S.A. alone, approximately 7 million people suffer from a form of psoriasis. 10 ProMetic annual report 2001 ProMetic’s first therapeutic compounds are being formulated to address the following indications: Skin Atopic dermatitis and psoriasis are common forms of inflammation of the skin. Atopic dermatitis (AD) is a disease that causes itchy, inflamed skin. AD is the most severe and chronic type of eczema with flares and sores. It is a very common disease that affects approximately 6% of the general population at least once during their lifetime. Since 1970, the incidence of atopic dermatitis has increased by 30%. Gastro-intestinal tract Inflammatory Bowel Diseases (IBD) refers to a group of disorders that cause the intestines to become inflamed. IBD can involve either the small or large bowels. Crohn’s disease and ulcerative colitis are IBD. The inflammation lasts a long time and usually recurs over time. More than 600,000 Americans suffer from some form of IBD every year. the best-known forms of Crohn’s disease can involve any part of the gastro-intestinal tract, but most frequently involves Genito-urinary tract Interstitial cystitis (IC), a chronic pelvic pain disorder, is a condition resulting in recurring discomfort or pain in the bladder and the surrounding pelvic region. The symptoms of IC vary from case to case. Symptoms may include an urgent need to urinate (urgency), a frequent need to urinate (frequency), or a combination of these symptoms. In IC, the bladder wall is irritated and may become scarred or stiff. IC is far more common in women than in men. Of the more than 700,000 Americans estimated to have IC, 90 percent are women. Psoriasis is a T-cell mediated inflammatory skin disease that generally appears in the form of patches of raised red skin covered by flaky white buildup. 1-3% of the world’s population is affected by psoriasis. In the U.S.A. alone, approximately 7 million people suffer from a form of psoriasis. the distal small bowel and colon. Inflammation is transmural and can produce anything from a small ulcer to a deep fissuring ulcer, to transmural scarring and chronic inflammation. Transmural inflammation leads to the development of fistulas between loops of bowel. Ulcerative colitis involves the colon. It is a diffuse mucosal disease with distal predominance causing ulcers. The rectum is virtually always involved, and additional portions of the colon may also be involved. Of the more than 700,000 Americans estimated to have IC, 90 percent are women. ProMetic annual report 2001 11 Therapeutic Pipeline Product Disease category Targeted indications / use Research Manufacturing Preclinical Toxicology Clinical phase Recombinant alpha-1-antitrypsin (rAAT) Inflammation Atopic dermatitis Psoriasis Inflammatory bowel diseases Interstitial cystitis PBI-1101 PBI-0032 Inflammation Dermatology Inflammation Auto-immune diseases 2002 2002 2003 2003 2002 2004 Products in development Alpha-1-antitrypsin Alpha-1-antitrypsin is a glycoprotein (AAT) primarily synthesized by the liver and released into the blood circulation. Some inflammatory cells such as the macrophages, the monocytes and the neutrophils also secrete AAT. AAT belongs to a family of structurally-related molecules called serine protease inhibitors or SERPINS, which act as inhibitors of specific target proteases. AAT inhibits trypsin, cathepsin G, thrombin, tissue kallikrein, pancreatic and neutrophil elastase by forming a 1-to-1 molar ratio complex at the protease active site. The inhibitory profile of AAT points to the anti-inflammatory action of this inhibitor. The natural form of AAT, derived from pooled plasma, has been on the market since 1989. It is marketed by Bayer as Prolastin®. It is used to treat patients with hereditary emphysema and its availability is not sufficient to satisfy this market: it covers only approximately 5% of the diagnosed cases. The lack of availability of AAT until now has precluded the further development of this steroid-sparing anti-inflammatory agent in various disorders. An open-label pilot study with the approved plasma-derived AAT product has demonstrated positive results in the treatment of several dermatological diseases including atopic dermatitis and psoriasis. In this study, AAT stopped pain and itching and promoted tissue healing without scarring. Arriva-ProMetic is presently developing a yeast-derived product (rAAT). The proprietary production system has been developed to provide an abundant source of rAAT and a finished product free from potential contamination by infectious pathogens (e.g. virus and prions). This production process has been scaled up and produces GMP grade material to enable Arriva- ProMetic to prepare various formulations and commence clinical trials. ProMetic has also invested in proprietary topical formulations of rAAT to treat dermatological conditions. The first indication being pursued is atopic dermatitis with clinical trials starting in the first half of 2002. Other formulations will be developed to address gastroenterology and urology indications. The clinical trials for other indications will commence as soon as the optimal rAAT formulation for the targeted indications has been completed and validated. In March 2001, the use of protease inhibitors for the treatment of skin inflammatory conditions claimed in the European patent (numbered EP 0 512 090) was upheld by the European Patent Office. This ruling followed an opposition filed by Bayer AG, which attempted to restrict the scope of the patent. 12 ProMetic annual report 2001 PBI-1101 PBI-1101 is a well-known chemical entity for which the Company has discovered anti-inflammatory activities. A method of use and formulation patent was filed in Q4 2001. PBI-1101 can be used as an effective stand-alone anti-inflammatory drug and in combination with other anti-inflammatory drugs. The Company anticipates that the most promising clinical uses for PBI-1101 are for the treatment of dermatological, gastro-intestinal and uro-genital inflammations. One of the mechanisms of action of PBI-1101 was elucidated with experiments, which demonstrated inhibition of T-cell proliferation. This mechanism of action is complementary to those of other anti-inflammatory drugs such as rAAT and corticosteroids. PBI-1101 can be used to produce an improved range of well-characterized therapeu- tics with new patent protection. PBI-1101 can be used to produce an improved range of well-characterized therapeutics with new patent protection. Antibodies, auto-immune diseases and PBI-0032 Several monoclonal antibodies are being developed and others are being commercialized for the treatment of inflammatory conditions such as arthritis. Through its strategic alliance with Merck KGaA, ProMetic markets Mimetic Ligand™ for the purification of antibodies. ProMetic’s technology is also being developed to extract and purify IgG from human plasma. IgG is commonly used for the treatment of various auto-immune diseases. When the immune system mistakes “self tissues” for “non-self tissues” and mounts an inappropriate attack, the result is an auto-immune disease. Auto-immune diseases can affect the body in different ways. For instance, the auto-immune reaction will target brain tissue in multiple sclerosis, the gut in Crohn’s disease, the joints in rheumatoid arthritis and multiple organs in systemic lupus erythematosus. These diseases are chronic conditions affecting millions of people worldwide. They are more prevalent in women than men. From ProMetic’s libraries of proprietary chemicals, a group of compounds has been developed to specifically target immunoglobulins and in particular immunoglobulin G (IgG). The high affinity of PBI-0032 for this family of proteins has yielded a selected candidate for binding to IgG and IgG-immune complexes and thereby acts to remove these complexes from damaged tissue and prevent further tissue damage. ProMetic annual report 2001 13 Cancer The cancer market represents a large, unsatisfied market. In North America, cancer is the second-leading cause of death after heart disease. It is anticipated that with the aging trend in demographics, cancer will become the number one cause of death. It is further estimated that in the U.S. alone, 1.3 million new cases will have been diagnosed in 2001. That’s the equivalent of 2 persons per minute. The main curative therapies for cancer (surgery, radiotherapy and chemotherapy) are generally more successful when the cancer is diagnosed at an early stage. The rationale for the use of chemotherapy is to try to kill the tumor. Chemotherapy relies on toxic compounds that cause damage to the genetic material of fast dividing cells and prevent normal repair mechanisms. However, some normal cells are also fast dividing and so are susceptible to the toxic effects of chemotherapy. This includes bone marrow, which produces immune cells. ProMetic’s technology and competency have allowed it to position itself in the new era of cancer therapy. These new therapies are either meant to: » complement current standard treatments by reducing toxicity and increasing efficacy, which should lead to better response rates, or; » be more specific in targeting cancer cells. represents a large, The cancer market unsatisfied market. It requires smaller R&D and marketing investments; and its regulatory process is usually faster. In addition, there is significant off-label use. ProMetic is developing its own range of therapeutic agents as well as providing its enabling technology under license to its partners for their proprietary therapeutic and diagnostic products. These include the purification of MAb (strategic alliance with MERCK) and the removal of excess radioactivity associated with the use of radioactive MAb for radiotherapy and radio-imaging. (see page 17) In addition to its own therapeutics, ProMetic collaborates with several other companies on various cancer therapies. PBI-0032 Autoimmune Diseases rAAT PBI-1101 Atopic dermatitis, Psoriasis Ulcerative Colitis, Genito-urinary PBI: 2056 Adjurant PBI-1402 Chemoprotectant Other mimetics In libraries Cartridge Adapted to dialysis machine to remove excess radioactivity (radiotherapy, radio-imaging) (Mitra) Detection and Removal of viruses and pathogens that may cause the human form of Mad cow disease (vCJD) (Joint Venture whit the American Red Cross) Therapeutic Diagnosis Cartridge Device to remove excess radioactivity (radiotherapy) (Antisoma) Monoclonal Antibodies Strategic Alliance with MERCK KGaA Purification 14 ProMetic annual report 2001 PBI-1402 protects neutrophils following a variety of chemotherapy regimens. Therapeutic Pipeline Product Disease category Targeted indications / use Research Manufacturing Preclinical Toxicology Clinical phase PBI-1402 Cancer Mimetic Cancer Chemoprotection / neutropenia Adjuvant to chemotherapy / IL-2 Mimetic 2002 PBI-1402 The toxic effects of chemotherapy on the immune system is one of the most important limitations of this therapeutic approach. During chemotherapy, patients are much more susceptible to developing infectious diseases. The therapeutic doses must be spaced to allow for the patient’s immune system to recover. The therapeutic dose is also subject to the relative condition of the patient's immune system. Before and during chemotherapy, blood samples are taken to measure the patient’s neutrophil counts. Neutrophils constitute the body's first line of defense. Their numbers and ability to attack and destroy intruders (phagocytosis) are affected by chemotherapy. Physicians must wait for the neutrophil counts to return to normal before administering follow-up doses of chemotherapy. PBI-1402 Natural killer cell T lymphocytes Bone Lymphoid progenitor cell B lymphocyte Hematopoietic stem cell PBI-1402 Neutrophil Basophil Eosinophil Multipotential stem cell Myeoid progenitor cell Monocyte/macrophage Bone matrix Blood vessel Pericyte Red blood cell Hematopoietic supportive stroma Stromal stem cell Skeletal muscle stem cell Hepatocyte stem cell Platelets Hematopoietic stem cell Marrow adipocyte Osteoclast Adipocyte ProMetic annual report 2001 15 ProMetic's research team demonstrated that PBI-1402, when combined with chemotherapeutic agents, protects human neutrophils. Breast cancer Growth factors such as Neupogen® (rmethuG-CSF), Leukine® (rhuGM-CSF) and Granocyte® (rhuG-CSF) are safe and effective in accelerating the recovery of neutrophil counts following a variety of chemotherapy regimens. However, these growth factors are very expensive and consequently, have not met their full market potential. PBI-1402 is a non-toxic, well-defined low- molecular-weight synthetic chemoprotective drug. In vitro, PBI-1402 enhances human neutrophil survival and phagocytosis with an efficacy comparable to GM-CSF. Based on its pharmacological activity, PBI-1402 may be classified as a chemoprotective drug and hematopoietic growth stimulant. PBI-1402 is targeted as an adjunct to cancer chemotherapy, bone marrow transplantation and diseases involving neutropenia. ProMetic's research team demonstrated that PBI-1402, when combined with chemotherapeutic agents, protects human neutrophils. For instance, PBI-1402 chemoprotection activity has been confirmed in combination with cytotoxic drugs used routinely to treat various cancers such as breast, colon and lung. When combined with cyclophosphamide, 5-fluorouracil, doxoru- bicin and taxol, PBI-1402 significantly increases the survival of neutrophils and the cell counts in hematopoietic tissue such as bone marrow and the spleen. On the basis of these results, patent applications have been filed for PBI-1402 and analogs. Given its remarkable safety profile, PBI-1402 is expected to advance to clinical trial phases in 2002. Effect of PBI-1402 on human neutrophil survival Human neutrophils have a relatively short life cycle. In these experiments, between 40% to 80% of neutrophils died within 24 hours. The % of cell death was significantly reduced in the presence of PBI-1402. t h a e d l l e c % 100 80 60 40 20 0 16 ProMetic annual report 2001 1 2 3 4 5 6 7 8 Subject number Control PBI-1402 Monoclonal antibodies (MAb) are becoming increasingly important in cancer diagnosis and therapy. Cancer MERCK – Strategic Alliance to purify antibodies ProMetic’s enabling technology used for radiotherapy and radio-imaging Monoclonal antibodies (MAb) are becoming increasingly important in cancer diagnosis and therapy. Typically for cancer, MAb are targeted to bind proteins (markers or antigens) present on the surface of a cancer cell, which are not present on the surface of normal cells. There are 5 MAb drugs currently approved for the treatment of a variety of tumors and several are in clinical and preclinical development. joined Merck and ProMetic forces by combining their respective technology to offer a superior purification process to biopharmaceutical companies active in the development of MAb products. One of the major challenges faced by MAb producers is the current lack of manufacturing capacity. As a consequence, methods increasing MAb yields from existing facilities are now being actively sought. The ProMetic-Merck offering provides a robust and integrated system capable of achieving improved yield, purity and process economics. in MAb can be used to destroy cancer cells in different ways. Upon binding to cell surface antigens, MAb can activate the body’s natural immune defense system resulting the destruction of the cancer cell (a process referred to as cell lysis via the antibody-dependent cell-mediated cytotoxicity). Alternatively, MAb can be used to target the delivery of toxic or radioactive substances directly at the surface of cancerous cells whilst leaving normal cells untouched. In addition to is own therapeutic cancer program, ProMetic’s technology is also used to improve cancer therapeutics and diagnostics relying on MAb. Once an antigen expressed by a cancer cell has been identified, a MAb specific to that antigen can be produced. The MAb can then be attached to a radioactive isotope or cytotoxic drug to provide a therapeutic reagent, which delivers a toxic payload directly to tumour cells. However, the process used to attach a radioactive agent to a MAb is not 100% efficient and a small amount of the radioactive agent remains free (not attached to the antibody). Injecting such a mixture would introduce excess and unnecessary radioactivity, which can cause significant adverse side-effects in patients. Consequently, a purification step is necessary to remove excess radioactivity prior to injection into a patient. ProMetic’s technology is used to quickly remove the non-linked or free radioactive agent before the product is injected into the patient. This provides the patient with a high-purity radioactive antibody directed only to cancer cells, thereby minimizing side-effects and unnecessary toxicity. ProMetic’s technology is also used to address another issue relating to radioactive antibodies. When a radioactive MAb targeting a specific cancer site is administered to patients, only a small proportion attaches to tumour cells and more than ninety percent (90%) can remain unbound to the tumor site. The removal of excess circulating radioactive MAb provides significant clinical advantages such as reduced toxicity, the ability to deliver higher concentra- tions of labeled MAb to the tumour site, and the improved imaging resolution for radio- diagnostics. ProMetic’s technology has led to the development of cartridges that can be installed on regular dialysis equipment. ProMetic technology used to purify MAb (alliance with MERCK), and to remove excess radioactivity when MAb are used to deliver radioactive substances on the surface of cancer cells (collaboration with Antisoma PLC and Mitra Ab) Production Downstream processing Pure MAb Alliance Cancer Cell Radiotherapy Radio-imaging ProMetic annual report 2001 17 Infectious diseases ProMetic’s core technology and core competency are leading to different commercial applications related treatment and prevention of transmissible infectious diseases. the diagnosis, to A Memorandum of Understanding (MOU) was signed with the American Red Cross to form a new joint venture (JV) company... Detection and removal of Pathogens A Memorandum of Understanding (MOU) was signed with the American Red Cross to form a new joint venture (JV) company for the development and commercialization of detection and removal systems for viruses such as hepatitis A and human parvovirus B19, and that may cause Transmissible pathogens Spongiform Encephalopathies (TSEs). At the time of writing, finalization of the corporate entity was still in progress. Under the terms of the MOU, ProMetic and the American Red Cross will each contribute intellectual property and technical expertise to develop diagnostic and removal systems. Specifically, the JV will utilize ProMetic’s proprietary Mimetic Ligand™ technology in combination with American Red Cross expertise in diagnostic and pathogen removal systems in blood and blood components. The JV will also investigate developing other commercial applica- tions for detecting and removing TSEs in industries such as biopharmaceuticals, food, cosmetics and personal care. The Memorandum of Understanding allows for the jointly–owned company to retain all rights to the technology and products developed under the partnership, and to facilitate licensing for all parties wishing to access these proprietary systems upon completion of their validation. Rationale for the JV The American Red Cross will benefit from ProMetic’s platform technology that is able to distinguish between very similar proteins. Additionally, ProMetic’s technology has been validated and manufactured to meet stringent commercial requirements. ProMetic also has a solid and unique knowledge base to deal with both removal and purification systems for the large-scale manufacturing of biopharmaceuticals, as well as diagnostics. The American Red Cross will share its extensive expertise in handling blood products, and in the successfull elimination of blood pathogens. The American Red Cross provides skilled and experienced individuals, fully-equipped facilities, validated models the efficiency of the systems jointly developed, as well as other capabilities. test to Purification Diagnosis Therapeutic Removal of Endotoxins Purification of Alkaline Phosphatase (PharmAAware Sepsis B.V.) Detection and Removal of viruses and pathogens Forthcoming joint venture with the American Red Cross Purification of DNA vaccines Purification of recombinant albumin Collaboration agreement with Aventis Detection of Alkaline Phosphatase (PharmAAware Sepsis B.V.) 18 ProMetic annual report 2001 Cartridge D i t PBI-1402 Chemoprotectant PBI-0032 Autoimmune Diseases rAAT PBI-1101 Atopic dermatitis, Psoriasis Ulcerative Colitis, Genito-urinary The American Red Cross will benefit from ProMetic’s platform technology that is able to distinguish between very similar proteins. About Hepatitis A and Parvovirus B19 Hepatitis A is a type of liver inflammation caused by a virus. Hepatitis A is predominantly transmitted by the fecal-oral route (e.g. inade- quate handwashing practices), but a few cases of transmission by blood transfusion, while rare, are well-documented. Parvovirus B 19 is a virus that can cause asymptomatic infection, as well as acute and chronic infections ranging from joint illness to bone marrow failure. Virus transmission usually occurs via respiratory droplets, but while rare, transmission by blood and blood products obtained from infected donors is well documented. About transmissible spongiform encephalopathies (TSE) Mimetic Ligand™ Bacteria Virus Foreign Protein including the human TSE, form variant Creutzfeldt-Jakob Disease (vCJD), are believed to be prion diseases. Prions are normal protein molecules that exist in many cells of the body but become infectious when folded into abnormal shapes. These prions clump together and form plaques in the brain, leaving sponge-like holes that lead to a fatal degenerative central nervous system disorder. Currently, there is no treatment for these diseases or a sensitive method for their early detection. According to the U.S. Food and transmitted by blood Drug Administration, vCJD is not known to have been transfusion. Furthermore, no cases of BSE or vCJD have been reported in the United States. However, animal models suggest that transmission by blood products may be possible. In addition, cases of vCJD in the United Kingdom continue to increase and BSE has become widespread in Europe and is becoming a significant issue in Japan. Blood Removal Detection Detection Food chain Red Blood Cells Platelets Removal Detection + Removal By products e.g. Gelatine Collagen Cosmetics Pharmaceuticals Removal Removal Plasma Plasma Fractionnation: Albumin Gammaglobulin Coagulation Factors Removal ProMetic annual report 2001 19 Sepsis is a major medical concern, which accounts for $5 billion in healthcare costs in the U.S. alone. The purification of these vaccines (particularly DNA vaccines), as part of their industrial manufacturing process, represents a significant opportunity for ProMetic. Sepsis and Septic shock Through a licensing agreement with PharmAAware Sepsis B.V., ProMetic’s technology will be used to develop both a diagnostic kit and a therapeutic protein for sepsis and septic shock. PharmAAware Sepsis B.V. will utilize ProMetic’s technology to purify alkaline phosphatase (AP), an enzyme known to prevent inflammation and the sepsis cascade, which has shown significant potential as an effective therapy for septic shock. PharmAAware Sepsis B.V. will initially focus on exploiting the endotoxin neutralizing properties of AP to develop a therapeutic for sepsis, and a diagnostic device to improve the monitoring of these patients. Sepsis is a major medical concern, which accounts for $5 billion in healthcare costs in the U.S. alone. ProMetic’s technology will help address this health problem by assisting in the purification of AP, which has shown great promise as a therapeutic, for sepsis, without the complexities and side-effects seen in many existing treatments. This agreement will enable the production of large enough quantities of pure AP to allow for the industrial-scale production of a therapeutic to meet the growing medical need for a more effective treatment. Vaccines and ProMetic technology A review of data from the U.S. Centre for Disease Control and the WHO for the past several years has revealed two trends. First, there seems to be an increase in “emerging infectious diseases”, newly-identified and previously unknown infectious diseases of concern to public health authorities (new variant CJD could fall in this category). Second, “re-emerging infectious diseases”: these are due to the reappearance of, and an increase in, the number of infections from a disease which is known, but which had formerly caused so few infections that it was no longer considered a public health problem. A good example would be tuberculosis with its re-emergence due in part to the AIDS epidemic and treatment resistance. Not mentioned above are diseases such as malaria, which continues to spread in tropical countries, but for which vaccines are under development. Hepatitis B continues to spread in Asia where there is a large pool of carriers. Vaccines do exist but special programmes for their introduction. require The development of new viral vaccines (recombinant and DNA) is at an advanced stage in some cases, while in others, it will be many years before products are marketable. The purification of these vaccines (particularly DNA vaccines), as part of their industrial manufacturing process, represents a significant opportunity for ProMetic. ProMetic has developed a family of patented chromatographic adsorbents designed primarily for plasmid/DNA purification in research laboratories and large scale DNA for purification by pharmaceutical companies. 20 ProMetic annual report 2001 Management Discussion and Analysis of the Financial Position and Operating Results The management discussion and analysis of the financial position and operating results presented below should be read in conjunction with the consolidated financial statements and accompanying notes to be found further on in the annual report. All amounts are in Canadian dollars unless otherwise indicated. Overview ProMetic Life Sciences Inc. (“ProMetic” or “the Company”) is in the process of becoming a major player among international biopharmaceutical companies. Through its subsidiaries in the U.K., the Isle of Man, in Canada and the U.S.A., ProMetic is active in researching, developing, manufacturing and marketing a variety of commercial applications that are based on its patented technology and used large-scale purification of drugs, genomic products and proteomics, and for the discovery and development of drugs. therapeutically the for Financial Analysis Financial Summary – “Shareholder yield and achievement of an important strategic agreement” As predicted in its 2000 annual report, the Company reached its goal of increasing share- holders’ value in 2001. Over the course of the year, the value of ProMetic shares increased by more than 150% ($0.90/share to $2.30/share), despite the collapse of the NASDAQ exchange last spring and the tragic events of September 11. Capitalizing on this excellent performance, the Company improved its liquidity by raising $19.1 million, of which $9.9 million was concluded as at December 31, 2001 and $9.2 million was subscribed as at December 31, 2001. Out of this $9.2 million, an amount of $7.2 million had already been cashed at the date of signature of these financial statements. From the beginning of 2001, the Company took a highly proactive approach to controlling its expenditures and capital asset investments. These measures allowed the Company to ensure the progression of its development projects in spite of a highly difficult economic and financial context. In addition, during the year, the Company signed a Memorandum of Understanding with the American Red Cross to develop systems capable of detecting and eliminating the pathogens that cause mad cow disease and a new variant of Creutzfeldt-Jakob syndrome. Balance Sheet – “A healthy financial condition” The financial reorganization that started at the end of 1999 was completed. It allowed investors to significantly increase their level of confidence in the Company’s day-to-day management of operations and its future development. Current assets reached $13.2 million as at December 31, 2001 compared to $5.3 million as at December 31, 2000. This increase is mainly due to subscriptions receivable of $9.2 million as at December 31, 2001. As of March 15, 2002, received $7.2 million with respect to the subscription. the Company had joint venture increased by $536,000, Capital assets corresponding to acquisitions of $961,000 and an amortization of $425,000. Intellectual property appreciated by approximately $1.1 million; this increase amounts to 50% of company disbursements in Arriva-ProMetic, Inc., a to develop recombinant alpha-1-antitrypsin ($1.3 million), and a $199,000 amortization of all intellectual property. The Company undertook to disburse $4 million U.S. in the joint venture, in which it holds a 50% interest. The Company records 50% of its commitment as “Intellectual Property” in consideration of the exclusive and perpetual license granted to the joint venture. Deferred development costs increased by $566,000 over the year, corresponding to a development cost capitalization of $907,000, an amortization of these costs in the amount of $232,000 and write-offs in the amount of $109,000 during the year ending December 31, 2001. To this effect, the Company applies the same policies as those followed last year. The Company’s total assets increased from $14.2 million as at December 31, 2000 to $24.3 million as at December 31, 2001, representing an increase of $10.1 million. André Bédard Executive Vice-President and Chief Financial Officer As predicted in its 2000 annual report, the Company reached its goal of increasing shareholders’ value in 2001. Cash, Cash Equivalents Short-Term Investments & Subscriptions Receivable 11.8 4.3 0.8 1999 2000 2001 ProMetic annual report 2001 21 Millions of $ 12 10 8 6 4 2 R&D expenditures increased from $3.8 million as at December 31, 2000 to $6.9 million as at December 31, 2001, representing an increase of $3.1 million or 82%. Shareholders’ equity Current liabilities increased from $1.9 million as at December 31, 2000 to $3.3 million as at December 31, 2001, for an increase of $1.4 million that can be attributed to the issuance cost of the subscriptions receivable ($0.9 million) and to accounts payable and expenses of $0.5 million concerning the increase in current R&D expenditures, in corporate business development expenses and capital assets acquisitions. 21.0 Shareholders’ equity reached $21 million as at December 31, 2001. 12.3 Revenues Millions of $ 25 20 15 10 5 3.9 1999 2000 2001 Research & Development Expenditures Millions of $ 7 6 5 4 3 2 1 6.9 3.8 3.2 1999 2000 2001 22 ProMetic annual report 2001 slight is due increase Revenues for the year ended December 31, 2001 totalled $2.5 million compared to $2.1 million for the period ended December 31, 2000. This to product development contracts. The signing of cooperation agreements in 2001 and of new agreements in 2002 should result in an increase in R&D revenues next year. Most from revenues correspond cooperation, development agreements. Revenues from sales of products that had the marketing stage represented less than 10% of the total. to payments and reached R&D Whenever appropriate, the Company’s strategy may include taking an equity position in high- reward projects (in lieu of a one-time licensing revenue for signing an agreement). This allows ProMetic to further maximize the potential value arising from such high-profile projects. The average period between a customer’s adoption of ProMetic technology and the first commercial sale is approximately three to four years. Generally speaking, a customer must pass a series of development, scaling and preclinical validation stages before being in a position to submit documents to the appropriate this period, regulatory agencies. During ProMetic’s revenues will increase gradually, thereby achieving stronger growth once regulatory approvals are adopted. The revenues for each product that reaches the marketing stage to that product’s market will be proportional penetration and should sustain throughout the product’s life cycle. The fact that ProMetic has chosen widespread partners will allow it to better distribute its technology-based products. The resulting rapid market penetration will accelerate the generation of future revenues. Expenditures – “Acceleration of R&D programmes and expansion of its therapeutic sector” Total expenditures before R&D expenses, amortization of capital assets and intellectuel property and financial costs were $3.5 million in 2001 compared to $2.8 million in 2000. This increase can be attributed to investments in corporate and business development and the expansion of commercial activities in Asia. The investment has proved to be a sound strategy, as the Company’s shares increased from $0.90 as at December 31, 2000 to $2.30 as at December 31, 2001. R&D expenditures increased from $3.8 million as at December 31, 2000 to $6.9 million as at December 31, 2001, representing an increase of $3.1 million that can basically be attributed to: 1) the development of the therapeutic sector and the hiring of a therapeutic team in Montreal in anticipation of upcoming clinical trials and the increasing importance of the new drug discovery programme. The team expects to announce clinical studies of certain main components, such as PBI-1402 in chemotherapy and the anti-inflammatory rAAT, over the next few quarters; 2) the acceleration of the main development projects in drug purification. Amortization of capital assets and intellectual property stood at $624,000 for the year ended December 31, 2001, for an increase of $63,000 over 2000. This increase is due to additional investments over the year. Financial revenues as at December 31, 2001 were $63,000 compared to financial costs of $101,000 for the year ended December 31, 2000. This decrease can be attributed to the Company’s having paid interest in 2000 on its long-term debt repaid that year, and to its having maintained a higher average cash balance in 2001 than in 2000, thereby generating greater interest revenues. “ProMetic: well-positioned in niche and high-growth markets” Results Net losses for the fiscal year ended December 31, 2001 stood at $8.4 million ($0.14 per share) compared to $5.2 million ($0.10 per share) for the twelve-month period ended December 31, 2000. The reasons for this difference are fully explained in the “Revenues” and “Expenditures” sections above. Cash Flows During financial year 2001, cash flows used for operating activities reached $7.6 million compared to $5.2 million for the financial year ended December 31, 2000. This increase is mainly due to an increase in operating losses of $3.2 million, which was itself due to an increase in R&D expenses (see additional comments in the Expenditures section). For the twelve-month period ended December 31, 2001, cash flows from financing activities were mainly attributable to the issue of subordinate voting shares worth $9.9 million, net of share issue expenses of $955,000. During financial year 2001, cash flows from investing activities amounted to $893,000 compared to $5.7 million for the financial year ended December 31, 2000, an improvement of $4.8 million constituted as follows: receipt of a short-term investment in financial year 2001, thereby creating a positive difference of $4 million; reduction of investment needs (acquisition of an investment) by $1.5 million in 2001 following the finalization of the Quarterly information Company’s participation in Arriva Pharmaceu- ticals, Inc. in 2000; reduction by $90,000 of additional capital assets during the financial year ended December 31, 2001; investments of $1.2 million in intellectual property attributable to our participation in the Arriva-ProMetic, Inc. joint venture (see balance sheet section), and a $467,000 reduction in the level of deferred development costs (see Balance Sheet section). During financial year 2001, Company activities generated $0.3 million in cash and cash equivalents, compared to $1.5 million during financial year 2000. Outlook “A strategic position in niche and high-growth markets” The Company should announce important stages in the realization of its R&D programmes over the next few quarters. This will help to increase investor and analyst interest. Management will continue to maintain rigorous control of all Company operations. Since 1999, the Company has repositioned itself to maximize its value and minimize risks inherent to its development. Its approach is to sign development agreements with customer-partners who agree to defray development costs. In the majority of cases, the Company also signs production agreements that will allow it to obtain a profit margin on product manufacturing and a royalty on the sale of finished products using ProMetic’s technology. In certain targeted markets with strong growth potential, the the future Company has secured other source of revenue through equity participation in companies that will market these potentially highly profitable products. This is the case with recombinant alpha-1-antitrypsin, for which ProMetic will obtain 50% of revenues of Arriva-ProMetic, Inc., in addition to an equity participation in Arriva Pharmaceuticals, Inc. This is also the case for the development of systems capable of detecting and eliminating the pathogens that cause mad cow disease and Creutzfeldt-Jakob syndrome, with a participation in the joint venture resulting from the future association with the American Red Cross. Through its recent signing of a Memorandum of Understanding with the American Red Cross, the Company has confirmed the value and potential of its technology. Many now consider ProMetic to be indispensable. The Company must commit significant financial resources before products can be developed successfully and revenues are high enough to generate profit. The Company believes that its current liquid assets, combined with those to be obtained during 2002, will be sufficient to meet its needs for liquid assets associated with operations and capital asset expenditures over the next twenty-four months. The issues dealt with in this annual report, more specifically in the management discussion and analysis of the financial condition and operating results, are of a somewhat forward-looking nature. Consequently, for various reasons, the actual results obtained may be substantially different. Fourth Quarter 2001 Third Quarter 2001 Second Quarter 2001 First Quarter 2001 Fourth Quarter 2000 Third Quarter 2000 Second Quarter 2000 First Quarter 2000 Revenues $565,454 $1,111,096 $446,752 $377,493 $464,792 $397,127 $346,134 $871,286 Net loss Net loss per share $2,728,203 $0.04 $1,856,903 $0.03 $2,158,067 $0.04 $1,671,912 $0.03 $1,245,536 $0.02 $1,553,489 $0.03 $1,337,089 $0.03 $1,031,526 $0.02 ProMetic annual report 2001 23 ProMetic Life Sciences Inc. Management’s Report The accompanying consolidated financial statements for ProMetic Life Sciences Inc. are management’s responsibility and have been approved by the ProMetic Life Sciences Inc. Board of Directors. These financial statements were prepared by management in accordance with generally accepted Canadian accounting principles. They include some amounts that are based on estimates and judgments. The financial information contained elsewhere in the Annual Report is consistent with that contained in the financial statements. To ensure the accuracy and objectivity of the information contained in the financial statements, the management of ProMetic Life Sciences Inc. maintains a system of internal accounting controls. Management believes that this system gives a reasonable degree of assurance that the financial documents are reliable and provide an adequate basis for the financial statements, and that the Company’s assets are properly accounted for and safeguarded. The Board of Directors upholds its responsibility for the financial statements in this Annual Report primarily through its audit committee. The audit committee is made up of outside directors who review the Company’s consolidated annual financial statements as well as management’s analysis and the operating results, and recommend their approval by the Board. KPMG LLP, Chartered Accountants, the external auditors designated by the shareholders, periodically meet with the audit committee to discuss auditing, the reporting of financial information and other related subjects. Pierre Laurin Chairman, President and Chief Executive Officer André Bédard Executive Vice-President and Chief Financial Officer Montreal, Canada, March 15, 2002 Auditors' Report to the Shareholders We have audited the consolidated balance sheets of ProMetic Life Sciences Inc. as at December 31, 2001 and 2000 and the consolidated statements of operations and deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally-accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2001 and 2000 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. KPMG LLP Chartered Accountants Montreal, Canada, March 15, 2002 24 ProMetic annual report 2001 Consolidated Balance Sheets December 31, 2001 and 2000 Assets Current assets: Cash and cash equivalents Short-term investments Accounts and other receivables (note 3) Subscriptions receivable (note 10 (d)) Inventories (note 4) Prepaid expenses Investment (note 5) Capital assets (note 6) Intellectual property (note 7) Deferred development costs (note 9) Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued liabilities Current portion of long-term debt Shareholders' equity: Share capital (note 10) Deficit Commitments (notes 7 and 11) Subsequent events (note 10 (d)) Contingencies (note 12) ProMetic Life Sciences Inc. 2001 $ 2,606,798 – 924,159 9,150,000 292,333 228,093 13,201,383 2,281,245 1,973,001 3,272,535 3,583,831 2000 $ 2,270,316 2,000,000 524,133 – 300,594 172,659 5,267,702 2,281,245 1,436,717 2,183,669 3,018,104 24,311,995 14,187,437 3,271,521 – 3,271,521 83,500,266 (62,459,792) 21,040,474 1,741,756 110,758 1,852,514 64,432,379 (52,097,456) 12,334,923 24,311,995 14,187,437 See accompanying notes to consolidated financial statements. On behalf of the Board: Pierre Laurin, Director Claude Lemire, Director ProMetic annual report 2001 25 ProMetic Life Sciences Inc. Consolidated Statements of Operations and Deficit Years ended December 31, 2001 and 2000 Revenues Cost of sales and expenses other than the undernoted items Research and development expenses (note 9) Depreciation of capital assets Amortization of intellectual property Financial (revenues) expenses, net Net loss Deficit, beginning of year Share issue expenses Deficit, end of year Net loss per share Weighted average number of outstanding shares (in thousands) See accompanying notes to consolidated financial statements. 2001 $ $2,500,795 3,456,849 6,897,467 425,188 199,009 (62,633) 10,915,880 8,415,085 52,097,456 1,947,251 62,459,792 0.14 62,487 2000 $ 2,079,339 2,815,166 3,769,555 409,246 151,926 101,086 7,246,979 5,167,640 45,785,821 1,143,995 $52,097,456 0.10 53,068 26 ProMetic annual report 2001 ProMetic Life Sciences Inc. Consolidated Statements of Cash Flows Years ended December 31, 2001 and 2000 Cash flows from operating activities: Net loss Adjustments to reconcile net loss to cash flows used in operating activities: Depreciation of capital assets Amortization and write-off of deferred development costs (note 9) Amortization of intellectual property Loss on disposal of capital assets Net change in non-cash operating working capital items (note 16) Cash flows from financing activities: Proceeds from share issues Share issue expenses Repayment of long-term debt Cash flows from investing activities: Disposal (acquisition) of short-term investments Acquisition of an investment (note 5) Additions to intellectual property Deferred development costs (note 9) Additions to capital assets Proceeds from disposal of capital assets Net increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Other information related to cash flows: Interest paid during the year Interest received during the year Non-cash transactions: Unpaid capital asset purchases Unpaid share issue expenses Conversion of long-term debt into shares See accompanying notes to consolidated financial statements. 2001 $ (8,415,085) 425,188 341,330 199,009 – (7,449,558) (172,423) (7,621,981) 9,917,887 (955,171) (110,758) 8,851,958 2,000,000 – (1,287,875) (907,057) (698,563) – (893,495) 336,482 2,270,316 2,606,798 6,863 144,895 262,909 992,080 – 2000 $ (5,167,640) 409,246 21,613 151,926 3,739 (4,581,116) (592,039) (5,173,155) 14,272,400 (1,143,995) (735,664) 12,392,741 (2,000,000) (1,539,345) (56,031) (1,374,284) (788,878) 27,606 (5,730,932) 1,488,654 781,662 2,270,316 229,612 74,947 – – 500,000 ProMetic annual report 2001 27 ProMetic Life Sciences Inc. Notes to Consolidated Financial Statements Years ended December 31, 2001 and 2000 The Company is a biopharmaceutical company which operates in the fields of bioseparation, medical devices, drug delivery and the development of biopharmaceutical products. 1. Significant accounting policies: (a) Basis of presentation: These consolidated financial statements have been prepared on the going concern basis which assumes the realization of assets and the settlement of liabilities in the normal course of operations. The ability of the Company to continue as a going concern is dependent upon the continued financial support of its shareholders and other external funding sources, if applicable, and on the ability of the Company to generate cash flow from operations and other measures to eliminate the deficit. These financial statements do not reflect adjustments that would be necessary if the going concern assumption were not appropriate. If the going concern basis was not appropriate for these financial statements, then adjustments would be necessary in the carrying value of assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used. Management is of the opinion that adequate resources will be available to complete the projects under development as at December 31, 2001. (b) Consolidation basis: The consolidated financial statements include the accounts of ProMetic Life Sciences Inc. and its subsidiaries as well as those of the joint venture which are accounted for using the proportionate consolidation method whereby the Company’s proportionate share of the revenues, expenses, assets and liabilities are consolidated. All significant intercompany transactions and balances have been eliminated. (c) Cash and cash equivalents and short-term investments: Cash equivalents are highly liquid investments purchased with an original maturity of three months or less. Short-term investments are investment grade short-term debt instruments with original maturities greater than three months. Short-term investments are valued at the lower of cost and market value. The carrying value of these investments approximates their fair value due to their short maturity. (d) Inventories: Work in progress and finished goods are valued at the lower of cost and net realizable value and raw materials are valued at the lower of cost and replacement cost. Cost is established using the first in, first out method. 28 ProMetic annual report 2001 ProMetic Life Sciences Inc. Notes to Consolidated Financial Statements, page 2 Years ended December 31, 2001 and 2000 1. Significant accounting policies (continued): (e) Investment: The investment is recorded at cost. When, in the opinion of management, a permanent decline in value has occurred, the investment is written down to its estimated realizable value. In determining the estimated realizable value of its investments, management relies on its judgment and knowledge of each investment as well as assumptions of general business and economic conditions that prevail and are expected to prevail. These assumptions are limited due to the uncertainty of predictions concerning future events. (f) Capital assets: Capital assets are recorded at cost. Depreciation is provided over the estimated useful lives of capital assets using the following methods and rates: Asset Leasehold improvements Equipment and tools Office equipment and furniture Computer equipment (g) Intellectual property: Method Straight-line Declining balance Declining balance Declining balance Rate/period Lease period 10% to 30% 20% 30% Intellectual property includes patent fees and vested rights as well as license fees to obtain rights for product manufacturing and marketing. Amortization is provided over the estimated useful lives of the intellectual property assets acquired using the straight-line method ranging from 5 to 15 years. On an ongoing basis, management reviews the valuation and amortization of intellectual property, taking into consideration any events and circumstances which might have impaired its value. The Company assesses impairment by determining whether the unamortized balance can be recovered through undiscounted future cash flows to be derived from the intellectual property over its remaining life. Any permanent impairment is written off against earnings. (h) Deferred development costs: Development costs of new products and processes, which are considered technically and financially feasible, are stated at cost less related research and development tax credits and grants. These costs are amortized from the date of commercialization or use of the product or process, based on sales or the internal use of the product or process. Should the Company determine that the unamortized balance is in excess of recoverable amounts, the excess will be charged to operations for the year. ProMetic annual report 2001 29 ProMetic Life Sciences Inc. Notes to Consolidated Financial Statements, page 3 Years ended December 31, 2001 and 2000 1. Significant accounting policies (continued): (i) Revenue recognition: The Company recognizes revenues from various research and technology agreements when the contracted services are provided and the various conditions, if any are met, and recognizes revenues from sale of products at the time of product shipment. (j) Scientific research and experimental development expenses: Research and development expenditures are charged to operations in the year in which they are incurred, net of related tax credits. (k) Foreign currency translation: The Company's foreign subsidiaries are considered to be integrated foreign operations. Foreign denominated monetary assets and liabilities of Canadian and foreign transactions are translated into Canadian dollars using the temporal method. Under this method, monetary assets and liabilities are translated at year-end exchange rates while non-monetary items are translated at historical exchange rates. Expense items are translated at the exchange rate on the transaction date or at average exchange rates prevailing during the period. Exchange gains or losses are included in the statement of operations. (l) Income taxes: The Company uses the asset and liability method of accounting for income taxes. Future income tax assets and income tax liabilities are recognized in the balance sheet to account for the future tax consequences of timing differences between the respective accounting and taxable value of balance sheet assets and liabilities. As appropriate, a valuation allowance is recognized to decrease the value of tax assets to an amount that is more likely than not to be realized. Future income tax assets and income tax liabilities are measured using the income tax rates that are expected to apply when the asset is realized or the liability is settled. The effect of changes in income tax rates is recognized in the year during which these rates change. (m) Stock option plan: The Company has established a stock option plan, as described in note 10 (b). No charge is recognized for this plan when stock options are granted. Any consideration paid on the exercise of stock options is credited to share capital. 30 ProMetic annual report 2001 ProMetic Life Sciences Inc. Notes to Consolidated Financial Statements, page 4 Years ended December 31, 2001 and 2000 1. Significant accounting policies (continued): (n) Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items for which management must make estimates relate to the valuation and assessment of recoverability of the investment, intellectual property, research tax credits and deferred development costs. Reported amounts and note disclosure reflect the overall economic conditions that are most likely to occur and anticipated measures to be taken by management. Actual results could differ from those estimates. 2. Changes in accounting policies: The Company has made certain changes in accounting policies to conform to new accounting standards. (a) Earnings per share: In January 2001, the Company adopted retroactively the new recommendations of the Canadian Institute of Chartered Accountants (“CICA”) with respect to the calculation of earnings per share. These new recommendations of CICA Handbook Section 3500 harmonize the Canadian standards with the United States standards. The standard requires the disclosure of the calculation of basic and diluted amounts per share and the use of the treasury stock method for calculating the dilutive impact of stock options and warrants. This restatement did not have an impact on the diluted amounts per share for the year ended December 31, 2000. (b) Business combinations, goodwill and other intangible assets: In August 2001, the CICA issued Section 1581, Business Combinations, and Section 3062, Goodwill and other Intangible Assets, of the CICA Handbook. Under Section 1581 of the CICA Handbook, business combinations initiated or completed after June 30, 2001 are accounted for under the purchase method. Also, the section specifies criteria that intangible assets acquired in a business combination method must meet in order to be recognized and reported apart from goodwill. For purchase combinations that were initiated or completed after June 30, 2001, goodwill and intangibles are recorded and amortized in accordance with Section 1581 and Section 3062 of the Handbook. In accordance with Section 3062, goodwill and intangible assets with indefinite lives are not amortized and other identified intangibles are amortized. ProMetic annual report 2001 31 ProMetic Life Sciences Inc. Notes to Consolidated Financial Statements, page 5 Years ended December 31, 2001 and 2000 2. Changes in accounting policies (continued): (b) Business combinations, goodwill and other intangible assets (continued): For purchase business combinations initiated or completed on or before June 30, 2001, the accounting under Section 1580, Business Combinations and under Section 3060, Capital assets, have been applied. Under these sections, goodwill and separately identifiable intangibles are recorded and amortized until the Company adopts Section 3062 of the Handbook, which must be applied by the Company for fiscal year beginning on January 1, 2002. 3. Accounts and other receivables: Trade Sales taxes receivable Research tax credits receivable Advance to an executive Other 4. Inventories: Raw materials Work in progress and finished goods 5. Investment: 2001 $ 414,965 150,060 177,510 70,000 111,624 924,159 2001 $ 156,734 135,599 292,333 2000 $ 344,496 60,244 – – 119,393 524,133 2000 $ 148,552 152,042 300,594 Investment in preferred voting shares in the share capital of Arriva Pharmaceuticals, Inc. (see note 7(c)). 32 ProMetic annual report 2001 ProMetic Life Sciences Inc. Notes to Consolidated Financial Statements, page 6 Years ended December 31, 2001 and 2000 6. Capital assets: Leasehold improvements Equipment and tools Office equipment and furniture Computer equipment Leasehold improvements Equipment and tools Office equipment and furniture Computer equipment 7. Intellectual property: Intellectual property ((a),(b) and (c)) Intellectual property ((a) and (b)) Cost $ 462,625 3,087,319 282,505 266,688 4,099,137 Cost $ 390,856 2,412,439 157,716 176,654 3,137,665 Cost $ 3,758,878 Cost $ 2,471,003 Accumulated depreciation $ 188,942 1,758,749 61,325 117,120 2,126,136 Accumulated depreciation $ 136,824 1,472,353 34,540 57,231 1,700,948 Accumulated amortization $ 486,343 Accumulated amortization $ 287,334 2001 Net book value $ 273,683 1,328,570 221,180 149,568 1,973,001 2000 Net book value $ 254,032 940,086 123,176 119,423 1,436,717 2001 Net book value $ 3,272,535 2000 Net book value $ 2,183,669 ProMetic annual report 2001 33 ProMetic Life Sciences Inc. Notes to Consolidated Financial Statements, page 7 Years ended December 31, 2001 and 2000 7. Intellectual property (continued): (a) The Company owns the rights, title and interest in and to the know-how, the information, the technology and the patents relating to its Mimetic Ligand Technology. Part of these rights, title and interest were assigned to the Company by the Cambridge University’s Institute of Biotechnology in consideration of the payment of continuing royalties; the others were developed by the Company. (b) The Company owns the exclusive right to a patented technology permitting the link of its Mimetic Ligand™ to a matrix with a Teflon-like surface such as the Teflon® beads (Teflon® is a registered mark of Dupont Chemical & Energy Operations, Inc.) and the Company’s perfluorocarbon beads. This technology is useful in chromatographic applications and for medical devices. This license is subject to the payment of a royalty to Arkion Life Sciences, Inc. ("Arkion", which purchased in July 2000, all of the assets of DCV Inc., the company with which ProMetic had entered into a license agreement per the patented technology) on net sales with respect to any products covered by the patent rights. (c) As of April 13, 1999, through Arriva-ProMetic Inc. ("Arriva-ProMetic", formerly known as AlphaOne-ProMetic, Inc.), the Company entered into a 50-50 joint venture with Arriva Pharmaceuticals, Inc. ("Arriva") of Alameda, California for the development of applications relating to commercializing serine protease inhibitors as a platform for various pharmaceutical products for dermatological (ex.: eczema, psoriasis, genital herpes), gastrointestinal (ex.: Crohn’s disease, irritable bowel syndrome) and urinary tract indications. The first serine protease pursued is rAAT, a lead compound produced in genetically-engineered yeast cells. Arriva has granted to Arriva-ProMetic an exclusive, perpetual license to develop, manufacture and commercialize these serine protease inhibitors and the Company has granted Arriva-ProMetic an exclusive, perpetual license for the use of its Mimetic Ligand™ purification technology for the indications within the scope of the joint venture. The Company has also undertaken to fund the joint venture to a maximum of US$4 million of which US$1,543,651 was contributed in 2001. The Company will progressively record 50% of its US$4 million contribution as "Intellectual property" in consideration for Arriva’s exclusive and perpetual license granted to the joint venture. In 2001, the Company recorded an amount of $1,209,672 as intellectual property. The Company had also undertaken to purchase preferred voting shares in Arriva for a total amount of US$1.5 million. This transaction was completed in November 2000 (see note 5). 34 ProMetic annual report 2001 ProMetic Life Sciences Inc. Notes to Consolidated Financial Statements, page 8 Years ended December 31, 2001 and 2000 8. Investment in a joint venture: The consolidated financial statements include the Company's proportionate share of the revenues, expenses, assets and liabilities of Arriva-ProMetic, Inc. as follows: Current assets Long-term assets Total liabilities Total expenses being net loss Cash flow from: Operations Financing Investing 9. Deferred development costs: Research and development: Incurred during the year Amount deferred Research tax credits Amortization of deferred development costs Write-off of deferred development costs Expense for the year 2001 $ 3,357 1,162,590 68,289 (1,321,686) (1,206,315) – (1,209,672) 2000 $ 5,122,226 (1,374,284) – 3,747,942 6,000 15,613 3,769,555 2001 $ 7,640,704 (907,057) (177,510) 6,556,137 232,331 108,999 6,897,467 ProMetic annual report 2001 35 ProMetic Life Sciences Inc. Notes to Consolidated Financial Statements, page 9 Years ended December 31, 2001 and 2000 9. Deferred development costs (continued): Deferred development costs: Deferred development costs, beginning of year Deferred development costs for the year Amortization of deferred development costs Write-off for the year Deferred development costs, end of year 10. Share capital: Authorized and without par value: 2001 $ 3,018,104 907,057 (232,331) (108,999) 3,583,831 2000 $ 1,665,433 1,374,284 (6,000) (15,613) 3,018,104 Unlimited number of Subordinate voting shares, participating, carrying one vote per share 20,000,000 Multiple voting shares, participating, carrying ten votes per share, convertible at the option of the holder or automatically converted upon their sale to a third party by the holder into an equal number of Subordinate voting shares An unlimited number of Preferred shares, no par value, issuable in one or several series: 1,050,000 Preferred shares, series A, non-participating, non-voting, convertible at the option of the holder into Subordinate voting shares at $0.50 per share except for unpaid dividends, convertible at a rate equal to the trading average of the Subordinate voting shares during the 20 days preceding the conversion, preferential cumulative dividend of 12% per year, payable quarterly 950,000 Preferred shares, series B, non-participating, non-voting, convertible at the option of the holder into Subordinate voting shares at $0.60 per share except for unpaid dividends, convertible at a rate equal to the trading average of the Subordinate voting shares during the 20 days preceding the conversion, preferential cumulative dividend of 12% per year, payable quarterly 36 ProMetic annual report 2001 ProMetic Life Sciences Inc. Notes to Consolidated Financial Statements, page 10 Years ended December 31, 2001 and 2000 10. Share capital (continued): Issued and fully paid: 54,056,402 Subordinate voting shares (2000 - 46,254,045) 13,261,586 Multiple voting shares (2000 - 13,703,197) 900,000 Preferred shares, series A (2000 - 1,050,000) 950,000 Preferred shares, series B Subscriptions (d) 2001 $ 70,908,876 1,591,390 900,000 950,000 9,150,000 83,500,266 2000 $ 60,787,994 1,644,385 1,050,000 950,000 – 64,432,379 Cumulative dividends on Preferred shares amount to $414,885 as at December 31, 2001 (2000 - $208,525). (a) Share issuance: Changes in the issued and outstanding subordinate voting shares were as follows: Number Amount $ Balance as at December 31, 1999 32,777,747 46,395,130 Shares issued pursuant to: Private placements Public offerings Conversion of loans Conversion of multiple voting shares 3,986,438 7,590,000 1,300,000 599,860 3,584,900 9,487,500 1,250,000 70,464 Balance as at December 31, 2000 46,254,045 60,787,994 Shares issued pursuant to: Private placements Public offering Exercise of warrants and options Conversion of shares 2,094,433 3,300,500 1,650,700 756,724 3,141,650 4,950,750 1,825,487 202,995 Balance as at December 31, 2001 54,056,402 70,908,876 Except for shares issued pursuant to the conversions of loans and shares, all subordinate voting shares were issued for a cash consideration. ProMetic annual report 2001 37 ProMetic Life Sciences Inc. Notes to Consolidated Financial Statements, page 11 Years ended December 31, 2001 and 2000 10. Share capital (continued): (a) Share issuance (continued): During 2001, 441,611 Multiple voting shares and 150,000 Preferred shares series A were converted into 441,611 and 315,113 Subordinate voting shares, respectively. In 2000, the Company issued 2,000,000 Preferred shares (1,050,000 series A and 950,000 series B) for gross proceeds of $2,000,000. (b) Stock options: The Company established a stock option plan for its directors, officers and employees or consultants. The plan provides that the aggregate number of shares reserved for issuance at any time under the plan and any other employee incentive plans may not exceed 6,000,000 (3,500,000 in 2000) Subordinate voting shares. The 2001 increase in the maximum number of shares reserved under the plan is subject to the approval of the shareholders. The options could be exercised in a period not exceeding 10 years from the date they were granted. Year of grant 1997 1998 1999 2000 2001 Exercise price (in Dollars) 1.49 to 1.75 2.00 to 3.00 1.00 to 2.00 1.35 1.00 to 2.00 Number of options outstanding 2000 2001 165,502 65,500 2,195,000 300,000 2,196,833 165,502 65,500 2,265,000 300,000 – 4,922,835 2,796,002 38 ProMetic annual report 2001 ProMetic Life Sciences Inc. Notes to Consolidated Financial Statements, page 12 Years ended December 31, 2001 and 2000 10. Share capital (continued): (b) Stock options (continued): Changes in the number of options outstanding during the past two fiscal years were as follows: Number of options as at December 31, 1999 Granted Cancelled Number of options as at December 31, 2000 Granted Exercised Cancelled Number of options as at December 31, 2001 Options 3,055,318 300,000 (559,316) 2,796,002 2,206,833 (3,000) (77,000) 4,922,835 The following table summarizes information about stock options outstanding at December 31, 2001: Range of exercise prices $ 1.00 to 1.49 1.50 to 1.75 2.00 to 3.00 Number outstanding 2,532,002 1,869,833 521,000 4,922,835 (c) Warrants and other options: Weighted average remaining contractual life (in years) 7.58 3.96 6.24 Weighted average exercise price $ 1.08 1.63 2.10 Number exercisable 1,435,802 118,400 191,500 1,745,702 Weighted average exercise price per share $ 1.16 1.35 1.01 1.21 1.62 1.00 1.08 1.40 Weighted average exercise price $ 1.03 1.70 2.16 In connection with shares issued pursuant to offerings and private placements, the Company also granted warrants and options for the purchase of shares. ProMetic annual report 2001 39 ProMetic Life Sciences Inc. Notes to Consolidated Financial Statements, page 13 Years ended December 31, 2001 and 2000 10. Share capital (continued): (c) Warrants and other options (continued): As at December 31, 2001, the following warrants and other options were outstanding: Warrants/options 100,000(1) 180,000 531,300 330,050(1) Expiry date September 2003 September 2002 September 2002 September 2003 Price per share $ 1.64 1.44 1.44 1.64 (1) The exercise price will increase to $1.80 after September 2002. During 2001 and pursuant to the exercise of warrants, the Company issued 1,600,000 and 47,700 Subordinate voting shares at a price of $1.10 and $1.31 per share respectively, for total gross proceeds of $1,822,487. (d) Subscriptions: As at December 31, 2001, the Company accepted subscriptions for an amount of $9,150,000 (4,575,000 Subordinate voting shares at $2 per share). As at March 15, 2002, the Company had received $7,150,000 with respect to the subscriptions. 11. Commitments: The Company has commitments under various operating leases for office space and laboratories. The minimum annual payments are as follows: 2002 2003 2004 2005 2006 2007 and thereafter 40 ProMetic annual report 2001 $ 847,111 711,352 564,464 487,648 480,665 2,054,765 ProMetic Life Sciences Inc. Notes to Consolidated Financial Statements, page 14 Years ended December 31, 2001 and 2000 12. Contengencies: Following the discontinuation of the generic pharmaceutical business by ProMetic Pharma Inc. ("Pharma") a former subsidiary of the Company, in 1999, the Company received the two following outstanding claims: – A guaranteed creditor of Pharma is claiming $2,021,619 from the Company pursuant to guarantees and agreements related to certain credit contracts concluded between this creditor and Pharma. The action commenced on June 29, 2000. – Another Pharma creditor instituted an action on account for the recovery of certain amounts totaling $305,104. The Company and a subsidiary have an outstanding claim from a former employee for an amount of approximately $320,000. This claim was rejected by the Superior Court (Quebec, Canada) on August 8, 2000 and the former employee appealed this judgment. After obtaining representation from their legal counselors, management is of the opinion that these claims are without substantial merit and no provision related to these matters has been recorded in these consolidated financial statements in that respect. Settlements, if any, will be charged to operations in the period in which the settlement occurs. 13. Financial instruments: (a) Fair value: The carrying amount of cash and cash equivalents, short-term investments, accounts and other receivable, accounts payable and accrued liabilities approximates their fair value because of the near-term maturity of these instruments. The carrying amount of the Company’s floating rate long-term debt approximates its fair value because it bears interest at current market floating rates. (b) Credit risk: The Company reviews a new customer’s credit history before extending credit and conducts regular reviews of its existing customers’ credit performance. (c) Foreign currency rate risk: The Company receives a substantial part of its revenues in US dollars and the majority of its expenses are incurred in pounds sterling. The Company does not possess nor issue financial instruments for hedging or trading purposes. ProMetic annual report 2001 41 ProMetic Life Sciences Inc. Notes to Consolidated Financial Statements, page 15 Years ended December 31, 2001 and 2000 14. Related party transactions: The Company entered into the following transaction with related parties: Consulting fees paid to directors 15. Income taxes: Items relating to income taxes are as follows: Net loss Basic income tax rate Computed income tax provision Decrease in income taxes resulting from: Unrecorded potential tax benefit of current period losses Effect of tax rate differences in foreign subsidiaries Non-taxable items Significant components of the Company’s net future income tax balances are as follows: Future income tax assets: Operating losses carried forward Share issue expenses Unused research and development expenses Unused tax credits, net of related taxes Capital assets Less: valuation allowance Net future income tax assets Future income tax liabilities: Capital assets Intellectual property Deferred development costs Net future income tax assets 42 ProMetic annual report 2001 2001 $ 248,540 2000 $ 194,175 2001 $ (8,415,085) 37% (3,113,581) 1,895,779 1,182,151 35,651 2000 $ (5,167,640) 38% (1,963,703) 1,245,628 661,862 56,213 – – 2001 $ 6,782,922 1,032,465 154,342 92,761 76,562 8,139,052 (6,954,309) 1,184,743 (89,701) (595,997) (499,045) – 2000 $ 4,516,570 1,143,648 59,132 33,329 11,125 5,763,804 (4,958,599) 805,205 (244,914) (238,988) (321,303) – ProMetic Life Sciences Inc. Notes to Consolidated Financial Statements, page 16 Years ended December 31, 2001 and 2000 15. Income taxes (continued): In assessing the realizability of future tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and tax planning strategies in making this assessment. At December 31, 2001, the Company had the following operating loss carry forwards and unclaimed deductions and credits available for carry forward: Research and development expenditures, without time limitation Losses carried forward: Expiring: 2002 2003 2004 2005 2006 2007 2008 2012 2018 2019 2021 without expiration date Canada Federal $ Provincial $ 618,568 896,870 42,580 525,630 764,964 1,100,268 2,465,153 2,692,151 5,403,352 – – – – – 42,580 364,589 – 1,149,113 2,047,933 2,692,189 5,403,352 – – – – – Other countries $ – – – – – – – – 674,089 1,589,707 593,270 520,084 12,355,964 Share issue expenses 3,328,386 3,328,386 – 16,322,484 15,028,142 15,733,114 Unused tax credits: Expiring: 2009 2011 53,757 80,718 134,475 – – – – – – ProMetic annual report 2001 43 ProMetic Life Sciences Inc. Notes to Consolidated Financial Statements, page 17 Years ended December 31, 2001 and 2000 16. Net change in non-cash operating working capital items: Increase in accounts receivable Decrease in inventories Increase in prepaid expenses Increase (decrease) in accounts payable and accrued liabilities 2001 $ (400,026) 8,261 (55,434) 274,776 (172,423) 2000 $ (288,245) 219,003 (17,324) (505,473) (592,039) 17. Segmented information: The Company operates in one reporting segment consisting in research, development, manufacturing and commercialization of a variety of commercial applications from its platform technology. Revenues(1) by geographic segment are as follows: United States United Kingdom Europe (excluding United Kingdom) Other Canada Intersegment sales (1) Revenues are attributed to countries based on location of customer. Net losses from the continuing operations by geographic segment are as follows: Canada United States United Kingdom 44 ProMetic annual report 2001 2001 $ 1,425,130 633,902 296,922 114,144 30,697 – 2,500,795 2001 $ 3,357,232 393,763 4,664,090 8,415,085 2000 $ 1,256,989 797,025 139,652 37,598 160,672 (172,907) 2,219,029 2000 $ 1,590,788 299,817 3,277,035 5,167,640 ProMetic Life Sciences Inc. Notes to Consolidated Financial Statements, page 18 Years ended December 31, 2001 and 2000 17. Segmented information (continued): Assets by geographic segment are as follows: Canada United Kingdom United States Capital assets and intellectual property by geographic segment are as follows: United Kingdom Canada United States Capital and intellectual property expenditures by geographic segment are as follows: United Kingdom Canada United States 18. Comparative figures: 2001 $ 17,695,636 5,951,487 664,872 24,311,995 2001 $ 2,422,118 2,800,958 22,460 5,245,536 2001 $ 191,023 2,051,334 6,990 2,249,347 2000 $ 8,010,094 5,543,422 633,921 14,187,437 2000 $ 2,599,566 973,143 47,677 3,620,386 2000 $ 660,163 181,059 3,687 844,909 Comparative figures have been reclassified in order to conform with the current year’s presentation. ProMetic annual report 2001 45 Board of Directors Sadok Besrour (1) President, Placements Sadobex Inc. John Bienenstock Professor of Medicine and Pathology, Health Sciences Faculty. Physician, Scientist and Consultant. McMaster University, Hamilton, Ontario. Roger Garon (2) Chairman of the Board, Multivet Ltd Pierre Laurin Chairman of the Board, President and Chief Executive Officer, ProMetic Claude Lemire (1) Claude Lemire Consultant Roger A. Perrault (2) President, R.A. Perrault Consultants Inc. Barry Gibson Consultant Hans W. Schmid (2) Chairman of the Board, HPC Healthcare & Pharma Consulting AG Robert Lacroix (1) Executive Vice-President, CTI Capital Inc. 46 ProMetic annual report 2001 (1) Member of the Audit Committee (2) Compensation Committee Scientific Advisory Committee The Company has an Advisory Committee comprised of scientists with expertise in the areas of biotechnology, bioprocessing and biopharmaceuticals. The members of the Advisory Committee are as follows: Christopher Lowe, Ph.D. Director, Institute of Biotechnology, University of Cambridge (UK). A world authority on molecular modeling for affinity purification of therapeutic proteins. Barry L. Haymore, MD., Ph.D. Consultant, Microbe Inotech Laboratories Inc., St. Louis, MO, U.S.A. A Consultant, who is known internationally for his work in separation science and metal affinity chromatography. John C. Curling, Ph.D. Independent Consultant. A recognized expert in plasma protein purification and known for his work in biotechnology process development. John Bienenstock, MB., MD., FRCPC Professor of Medicine and Pathology, Health Sciences Faculty. Physician, Scientist and Consultant. McMaster University, Hamilton, Ontario. Pete Gagnon, Ph.D. President, Validated Biosystems Inc. A world expert on downstream process development, with particular emphasis on monoclonal antibodies and managing upstream contaminants. Max Arella, Ph.D. President, Sannica Biotech/Pharma, Professor INRS-Institute Armand-Frappier (leave of absence) and adjunct Professor University of Montreal and P.E.I. University. A Virologist member of various national and international committees on infectious diseases and expression of recombinant proteins. David J. Stewart, Ph.D. Director of Meetings, Cold Spring Harbor Laboratory NY, U.S.A. An affinity chromatography expert who was directly involved in the development of synthetic alternatives to Protein A and Perfluorocarbon matrices. David J. Hammond, Ph.D. Director, Plasma Derivatives, American Red Cross, Holland Laboratory. Expert in ligand design technologies, viral binding/removal and protein purification. Steve J. Burton, Ph.D. Research Director, ProMetic BioSciences Ltd., (UK). An acknowledged expert on downstream processing purification procedures for thera- peutic proteins. Robert H. Painter, Ph.D. Professor, University of Toronto, Department of Biochemistry. Professor of biochemistry and a recognized expert on blood plasma fractionation and protein chemistry. Roger A. Perrault, MD., Ph.D., FRCPC President of R.A. Perrault Consultants Inc. A world authority on blood plasma fractionation and applications of plasma derivatives. ProMetic annual report 2001 47 Clinical Advisory Committee (Arriva-ProMetic, Inc.) The members of the Clinical Advisory Committee are as follows: Roger A. Perrault, MD., Ph.D, FRCPC Montreal, Quebec President of R.A. Perrault Consultants Inc. A world authority on blood plasma fractionation and applications of plasma derivatives. David Gratton, MD., FRCPC Montreal, Quebec Professor, McGill University, Health Science Centre Past President Canadian Dermatology Association. Authority in the field of dermatology. Dan Chalker, MD. Clinical Professor, Medical College, Georgia. Diplomat, American Board of Dermatology. Fellow of American Academy of Dermatology. Conducted pioneering clinical research on alpha-1-antitrypsin use in the field of dermatology. Ernest Charlesworth, MD., FRCPC Dermatologist, allergist and immunologist, San Angelo, Texas. Known authority in Dermatology. Working Group Member on Atopic Dermatitis Practice Parameters. Sheldon Spector, MD. Clinical Professor of Medicine, UCLA Medical Center. President, California Society of Allergy, Asthma and Immunology. Internationally known authority in the field of allergy and immunology. . 48 ProMetic annual report 2001 Additional investor information Auditors KPMG LLP Chartered Accountants 2000 McGill College Avenue Suite 1900 Montreal, Quebec Canada H3A 3H8 Tel.: (514) 840-2100 www.kpmg.ca Listings Toronto Stock Exchange (PLI) Tradable shares outstanding as at December 31, 2001: 54,056,402 Transfer Agent and Registrar National Bank Trust 1100 University Street Suite 900 Montreal, Quebec Canada H3B 2G7 Tel.: (514) 871-7200 Investor Relations ProMetic Life Sciences Inc. Pierre Laurin Patrick C. Hofman Montreal, Quebec Tel.: (514) 673-1116 E-mail: p.hofman@qc.aira.com Annual Meeting of Shareholders Wednesday, May 15, 2002 (11:00 A.M.) The Montreal Museum of Fine Arts Auditorium Maxwell-Cummings 1380 Sherbrooke West Montreal, Quebec Canada H3G 1J5 Tel.: (514) 285-1600 ProMetic annual report 2001 49 Contact information Noonan/Russo Communications, Inc. New York, U.S.A. New York, NY 10001 Tel.: (212) 696-4455 London, UK London, UK EC2V 5BR Tel.: 011-44-20-7726-4452 ProMetic Life Sciences Inc. Montreal, Quebec Tel.: (514) 496-2115 E-mail: info@prometic.com ProMetic BioSciences Ltd. Cambridge, UK Tel.: 011-44-1223-420-300 ProMetic BioSciences (U.S.A.), Inc. Burtonsville, MD Tel.: (301) 421-0030 E-mail: prometic-usa@mindspring.com 50 ProMetic annual report 2001 Printed in Canada Ce rapport annuel est également disponible en français 6100 Royalmount Avenue Montreal, Quebec Canada H4P 2R2 Tel.: (514) 496-2115 Fax: (514) 496-2079 info@prometic.com www.prometic.com annual report 2001 a company with its eye on the present and the future

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