ProMetic Life Sciences Inc.
Annual Report 2004

Plain-text annual report

WE’RE CREATING A HEALTHIER FUTURE PROMETIC ANNUAL REPORT 2004 A DECADE OF INNOVATION AND IMPACT FOUNDED IN 1994, ProMetic Life Sciences Inc. is at the forefront of the biopharmaceutical industry, bringing new technologies and solutions to the challenge of producing high quality, safer, less expensive therapeutics. THE COMPANY and its subsidiaries form two divisions, Therapeutic and Enabling Technology. The Therapeutic Division, based in Montreal, has already brought promising compounds into clinical trials and has a number of others with promising results in pre-clinical testing. The Enabling Technology Division, located in Cambridge, England, is responsible for the discovery of the groundbreaking Mimetic LigandTM technology that has become the base of so many of ProMetic’s joint ventures and partnerships, such as those with Serono and GlaxoSmithKline. OUR NEW COMPOUNDS are set to have a huge impact on the bio- pharmaceutical industry, offering new treatment solutions in the field of cancer and autoimmune / inflammatory diseases. OUR ENABLING TECHNOLOGY is already providing building blocks for new processes that will revolutionize the production of biopharmaceuti- cals and blood filtration. WITH 120 EMPLOYEES at research and production facilities in Canada and the UK as well as a marketing presence in the U.S., Europe and Asia, ProMetic is single-mindedly focused on building an organization whose impact will be a healthier future for everyone. Revenue (in millions of Canadian dollars) R&D Expenses (in millions of Canadian dollars) Net Loss per Share 2003 2004 ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ 2003 15.0 12.0 9.0 6.0 3.0 0 ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ 2004 ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ 2003 0.25 0.20 0.15 0.10 0.05 0.00 ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ 2004 ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ 006 MESSAGE TO SHAREHOLDERS 011 ENABLING TECHNOLOGY 012 THERAPEUTIC PIPELINE 014 KEY MILESTONES 018 MD&A 025 FINANCIAL STATEMENTS 028 NOTES 048 BOARD OF DIRECTORS 049 EXTERNAL SCIENTIFIC ADVISORS 050 ADDITIONAL INFORMATION ............ ............ ............ ............ 10 8 6 4 2 0 — 1.3 3.8 4.4 • Licensing revenue • Sales and contract revenue 13.5 14.3 $0.23 $0.17 FIGHTING THE SECOND LEADING CAUSE OF DEATH: OUR LONG- STANDING INTEREST HELPING PEOPLE WITH CANCER UNDERGOING CHEMOTHERAPY Chemotherapy causes anemia in many cancer patients, which can lead to severe com- plications. Early results show that PBI-1402 stimulates red blood cell production in human bone marrow, which could help fight anemia resulting from chemotherapy and may be effective against other forms of anemia. 001 CHANGING THE DYNAMICS OF THE PLASMA INDUSTRY A US $5.7 BILLION MARKET BETTER TECHNOLOGY WILL POWER PROFITS Together, the American Red Cross, Hemosol and ProMetic are set to change the landscape in the blood plasma industry. The Cascade process developed by ProMetic and the American Red Cross, and made possible by the Mimetic LigandTM technology, is a significant advance in the plasma products industry, which still relies in large part on a manufacturing backbone process developed 50 years ago. Hemosol is the first licensee of the Cascade technology. 002 CREATING A SAFER BLOOD SUPPLY WHAT COULD BE MORE IMPORTANT? More than 40 million units of blood are collected each year. This year, Pathogen Removal and Diagnostic Technologies (PRDT)(1), and European blood collection systems leader MacoPharma, will roll out the pathogen-removal filter system. This first generation of filters is designed to adsorb abnormal prion proteins in collected blood. The next generation will also target the removal of viruses and other pathogens from blood supply. It adds to the existing measures designed to ensure public safety. (1) ProMetic’s joint venture with the American Red Cross 003 OUR TECHNOLOGY IN A GLOBAL VISION Producing less expensive and high quality drugs means life-saving medicines for everyone, including emerging economies such as the Middle East, Africa, India, South America, and parts of Asia. The creation of BioMena S.A. with partners in Tunisia is a first project designed to transfer our technology and drive down the cost of producing biopharmaceuticals for better accessibility by the population. As much as 94 percent of immunodeficient patients and 80 percent of hemophiliac patients worldwide are not receiving appropriate treatment. (1) MORE AFFORDABLE QUALITY THERAPEUTICS FOR EMERGING ECONOMIES (1) Bioplasma Forum, June 2004 004 ALIVE WITH INNOVATION OUR SCIENCE IS ABOUT CHANGING LIVES PROTEIN MIMETICS DRIVE DISCOVERY ProMetic’s ability to develop synthetic protein mimetics as an alternative to recombinant proteins is based on the Company’s core technology, Mimetic Ligand™, that our Therapeutic Division can use to identify leads for new advances. Already, protein mimetics are under development as treatments for cancer and autoimmune diseases, two important therapeutic areas in which our drug discovery platform is allowing us to make exciting breakthroughs. 005 THE PROMETIC TEAM DEDICATED. DYNAMIC. FOCUSED ON RESULTS. 006 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT The ProMetic team: Pierre Laurin, Chairman, President and CEO Lucie Morin, Vice-President, Human Resources Claude Lambert, Vice-President, Finance and Administration Michelle Laflamme, Vice-President, Business Development and Communications MESSAGE TO SHAREHOLDERS DELIVERING ON PROMISES AND CREATING NEW OPPORTUNITIES 2004 is the year ProMetic went from being a company with great promise to being an organization that delivers on that promise. With teamwork, leadership from our management team and the support of our investors, we have accomplished what we set out to do and much more. We are ready to move into 2005 with a great product pipeline and a solid and growing revenue base. MESSAGE TO SHAREHOLDERS BY PIERRE LAURIN Six promising drug candidates in less than three years Our Therapeutic Division has delivered outstanding performance. Three main factors contribute to this productivity: focus on results; leadership of scientists with extensive industry experience; and our drug discovery platform. Thanks to these factors, we are producing promising drug candidates at just a fraction of the cost of the traditional large pharmaceutical model and with a faster time-to-market than the typical biotechnology company model. To date, out of 2,000 compounds investigated, six were selected to be drug candidates. Other companies investigate between 100,000 and 1,000,000 compounds just to bring one compound through clinical studies and eventually to market. Therapeutics and protein mimetics The development of protein mimetic products is based on our core technology, Mimetic Ligand™, that the Therapeutic Division can use to identify leads for development. Our objective is to replace with synthetic protein mimetics complex and expensive recombinant proteins that are commercially important. market potential Therapeutics Autoimmune disease PBI-0032/PBI-1308 Cancer therapeutics PBI-1402/PBI-1393 Inflammation rAAT Drug discovery platform Enabling Technology Bioseparation Pathogen removal Plasma proteins Technology transfer time/risk ProMetic Business Model 007 MESSAGE TO SHAREHOLDERS PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT The Therapeutic and Enabling Technology team: Boulos Zacharie, Director, Chemistry Lyne Gagnon, Director, Biology Christopher L. Penney, Vice- President and Chief Scientific Officer, Therapeutics Victor Bornsztejn, Global Sales and Marketing Manager Dev Baines, Director, Research and Development Steven J. Burton, Executive Vice-President and Chief Scientific Officer, Enabling Technology Christopher Bryant, Project Director, Plasma Protein Purification System Not appearing: Peter Edwardson, Project Director, PRDT This approach represents a financial opportunity and a significant growth potential, as many such valuable recombinant proteins are already available in the market place. It also provides the advantage of time and increased probability of success for ProMetic. This arises from the fact that the Therapeutic Division is developing protein mimetics of medically proven recombinant proteins. Intellectual property Both our therapeutics and enabling technology are well protected by more than 250 patents and patent applications filed internationally. Positive results for PBI-1402 Therapeutics play an important role in ProMetic’s future development. PBI-1402 is one of our most promising and advanced drug candidates. It is a perfect example of our focus on therapies that not only have a positive impact on human health but can also be developed and manufactured at much lower cost. This means it can be brought to market successfully not just in North America, Europe, and Japan, but also in emerging economies in the Middle East, Africa, India, and South America. Results generated by PBI-1402 (which increases the number of red blood cell precursors [reticulocytes]) in tolerability testing were extremely encouraging. We plan to launch Phase II trials in 2005. PBI-1402 also typifies the approach we have taken to therapeutic development, seeking low molecular weight com- pounds and lower toxicity. 008 008 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT MESSAGE TO SHAREHOLDERS Taking a closer look at recombinant alpha 1-antitrypsin (rAAT) rAAT did very well in tolerability tests and produced promising results in a U.K. study on pediatric patients with severe dermatological disorder. The analysis of results of another study carried out in Canada on patients afflicted with atopic dermatitis point to the need to identify the optimal delivery formulation. This is not uncommon for dermatological therapies. Steady revenue growth Revenues in 2004 grew from $1.3 million to more than $8 million. This growth was achieved based on sales and licensing agreements from our projects. ProMetic generates revenues in three basic ways. The first and most direct is custom ligand development on a contract basis and the sale of gels. The second is enabling technology licensing: these deals take longer to finalize, but they also usually include an upfront payment, ongoing royalties, and, in the case of joint ventures, profit-sharing. Due to the nature of these agreements, most of our revenues are generally recognized over time. Nearly all senior management executives are working on business development at some level, and we are working with independent firms specialized in building promising business relationships in our industry. When our therapeutic compounds make it to market, we will generate the third revenue stream and likely our largest. We will leverage our product value through partnerships for co-development and marketing. ProMetic and the American Red Cross To understand the impact of ProMetic’s Cascade process, you need to know about the dynamics of the plasma market. The first plasma protein extracted for therapeutic purposes was albumin, which was used in the treatment of shock on the battlefield in World War II. Now, there are a number of other important proteins including clotting factors and immunoglobu- lins which have proven therapeutic value as drugs. Traditional plasma fractionation methods were designed for the efficient production of albumin and are far less efficient as a means of producing the other important plasma proteins. You also have to consider that the cost of a litre of blood plasma has soared over the last 20 years, going from US $5 per litre to more than US $120 per litre, making the cost of plasma the largest single expense for the current US $5.7 billion plasma industry. Using filters based on our Mimetic LigandTM technology, we are able to increase the efficiency of the process up to 400 percent, depending on the selected proteins. Low profit margins have been a key element holding back growth in the market. The impact of Mimetic LigandTM technology on the cost of goods sold in the plasma industry will be dramatic. Our agreement to out-license the Cascade technology to Hemosol will allow quick turn around to market given the short time it will take to convert their state-of-the-art Meadowpine facility. This agreement means not only payments of $14 million based on the achievements of milestones over the next three to four years, but also on-going royalties on sales. In addition, our partnerships with the American Red Cross and MacoPharma, a European leader in the blood-filtration market, will come into play in the blood pathogen removal market. The first product, designed to filter the prions that cause variant Creutzfeldt-Jakob disease (vCJD), is slated for regulatory approval in 2005. This product and subse- quent filters integrating a leukoreduction filter and, 009 009 MESSAGE TO SHAREHOLDERS PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT eventually, viral filtering should allow us to be a very active player in this market. Technology transfer: putting a global vision into action The production techniques and expertise we have developed over more than a decade will enable the creation of biopharmaceutical production facilities in emerging economies. By transferring our technology to such facilities we can create long-term streams of recurring revenues for ProMetic. The first project pursued resulted in a partnership with health organiza- tions in Tunisia for the creation of BioMena S.A., a private company whose mission is to manufacture drugs at sustainable prices for the treatment of anemia, cancer, hepatitis and multiple sclerosis, for sale in MENA countries. Experience and the right attitude have powered growth We have clearly expanded our capabilities in terms of business development and communications to improve our ability to capitalize on new opportunities. A modest growth in the scientific team has allowed us to strengthen our output through better integration and leveraging of our drug discovery platform. We also acknowledge the support of our shareholders and financial partners who have been able to see the value of ProMetic all along. They are an important part of the solid foundation we have built. The one key thing about the ProMetic team is that each and every one is concerned with doing things right. What is ultimately more important to all of us is doing the right thing. Looking to 2005 Next year will be a year of consolidation, a year in which we build upon the successes and progress of 2004. As a result of products reaching commercial status, milestone payments from partners and clients, as well as custom ligand development projects, 2005 should see increased revenues. We will continue building value for our shareholders by further advancing our therapeutic compounds through our pipeline. This year we delivered on our promises. In 2005, we will capitalize on the opportunities those promises have created. (signed) PIERRE LAURIN Chairman, President and Chief Executive Officer 010 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT ENABLING TECHNOLOGY PIPELINE PROMETIC PIPELINE ENABLING TECHNOLOGY THERAPEUTICS For more information go to next page. Field Bioseparation Pathogen Removal* Plasma Proteins* Technology Transfer Partners/Clients GlaxoSmithKline Serono Octapharma Menarini Aventis Novo Nordisk Strategic alliance between PRDT and MacoPharma First licensee: Hemosol Corp. BioMena S.A.** Projects Custom ligand development and sales of Mimetic LigandsTM Prion removal technology for human blood and development of a first product Extraction of plasma proteins Transfer to manufacturing facility for the production of biopharmaceuticals Status Ongoing First product for regulatory approval in Europe in 2005 Cascade process to be scaled up at Meadowpine in 2005 Signature of technology license and long-term service contract * Project in collaboration with the American Red Cross ** Project in collaboration with the Biotechnology Research Institute – NRC 011 THERAPEUTICS PIPELINE PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT PROMETIC PIPELINE THERAPEUTICS Compound Family PBI-1402 Cancer PBI-1393 Cancer Inflammation PBI-0032 PBI-1308 PBI-1101 rAAT Therapeutic Indication Anemia Adjunct to chemotherapy Adjunct to chemotherapy Antiviral Autoimmune diseases (arthritis, lupus) Status Phase I Advanced pre-clinical Pre-clinical development Inflammation Anti-inflammatory Ready for clinical trials (out-license) Inflammation Severe dermatological disorders Phase II SLE (lupus) Glomerulonephristis (Inflammatory disease of the kidney) Arthritis AUTOIMMUNE DISEASE PROGRAM AUTOIMMUNE DISEASE PROGRAM Scientists at ProMetic have discovered two new classes of compounds which may function as drugs for the treatment of crippling and, in some instances, life-threatening diseases such as lupus and arthritis. Significant activity was demonstrated for both series in animal models of lupus and arthritis. These products represent an alternative to expensive and com- plex therapies without some of the side effects. The autoimmune disease market is estimated at more than US $20 billion. 012 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT THERAPEUTICS PIPELINE Research Manufacturing Pre-clinical Toxicology Clinical Phase I Clinical Phase II Clinical Phase III Market HIV patients on Zidovudine Anti- infection anemia Chemotherapy patients (Cancer) Chronic renal failure Stem cell transplant PBI-1402 Chemotherapy patients (Cancer) neutropenia PBI-1402 PBI-1402 stimulates the proliferation and maturation of hematopoietic progenitor cells. It helps the body produce red blood cells that are depleted in anemia induced by chemother- apy, by renal failure and/or any other forms of anemia. PBI-1402 is the first therapy in its class that is synthetically produced (less expensive to manufacture) and has a lower molecular weight. In Phase I trial, it demonstrated low toxicity profile, good tolerability and it increased both the relative and the absolute number of reticulocytes, the precursors of red blood cells. Considering its low manufacturing costs, PBI-1402 should gain quick penetration in the anemia market (US $6.75 billion). 013 KEY MILESTONES IN 2004 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT MARCH 2004 APRIL 2004 SERONO ASKS PROMETIC TO DESIGN A CUSTOM LIGAND In early March, ProMetic signed a custom ligand development agreement with Serono, the world’s third largest biotechnology company – a contract worth $1.3 million in 2004. In November, ProMetic delivered another important milestone in the project by achieving purity and yield requirements through the scale-up process. Once again, proof positive that the Mimetic LigandTM enabling technology can work on an indus- trial scale, within ambitious timeframes. PRDT’S PROTOTYPE PRION FILTER SIGNIFICANTLY LOWERS RISK OF INFECTION In April, PRDT (ProMetic’s joint venture with the American Red Cross) announced that the in vitro testing of its prion blood filter demonstrated the reduction of abnormal prion proteins to undetectable levels. This equates to 99.99 percent infectivity reduction. By August, MacoPharma (a leader in the industry of blood collection systems and transfusion solutions in Europe) joined the team as a develop- ment and marketing partner. With its expertise in blood collection bag manufacturing and products distributed in 55 countries around the world, MacoPharma will not only help accelerate and con- tribute to the cost of filter development but also give the product a broad sales reach when it launches. Targeted protein Custom ligand 014 Ligands immobilized on support matrix (bead) Support matrix (bead) PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT KEY MILESTONES IN 2004 JUNE 2004 JULY 2004 HEMOSOL FIRST TO IMPLEMENT CASCADE PROCESS June saw ProMetic finalize a major licensing agreement with Hemosol for its Cascade plasma purification process developed through its second alliance with the American Red Cross. The process will significantly reduce the cost of separating valuable blood proteins and will significantly increase the yield of protein recovery. The agreement also means a staged license fee of $15.5 million as well as a total of 3 million shares in Hemosol (of which ProMetic received 2 million in 2003) and ongoing royalties for ProMetic. Production will take place at Hemosol’s state-of-the-art Meadowpine facility near Toronto. GLAXOSMITHKLINE AND PROMETIC SIGN MULTI-LIGAND DEAL In July, ProMetic sealed a landmark agree- ment with global pharmaceutical giant GlaxoSmithKline (GSK) to develop a series of ligands, based on its Mimetic LigandTM technology, for use in the purification of biopharmaceuticals. The ongoing agreement is the first of its kind for ProMetic and represents the type of long-term development and out-licensing relationships that are a key part of ProMetic’s medium-term revenue mix. Hemosol Facility Agarose beads 015 KEY MILESTONES IN 2004 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT NOVEMBER 2004 DECEMBER 2004 PROMETIC RECOGNIZED BY FROST & SULLIVAN When respected international business analysts Frost & Sullivan announced their yearly industry leadership awards in November, ProMetic was named technology leader of the year in the bioseparation industry. According to Frost & Sullivan Industry Analyst Giridhar Rao, “ProMetic’s technology is cost-effective and is not capital-intensive. Over 40 market players, including Aventis, GlaxoSmithKline, and Novo Nordisk, have adopted ProMetic’s revolutionary ligand technology.” POSITIVE PHASE I RESULTS FOR PBI-1402 Test results announced in mid-December showed good tolerability and positive effects confirming the increase of red blood cell precursors. “This new drug could play a major role in the treatment of anemia induced by chemotherapy and renal dialysis,” said Dr. Denis Claude Roy, Hematologist and Director, Cellular Therapy Laboratory at Maisonneuve-Rosemont Hospital in Montreal, and principal investigator of this study. 016 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT KEY MILESTONES IN 2004 DECEMBER 2004 DECEMBER 2004 BIOMENA DEMONSTRATES THE SUCCESSFUL MARRIAGE OF NEW TECHNOLOGY, WORLD VISION AND GOOD BUSINESS SENSE BioMena S.A., the result of an alliance between ProMetic, the Tunisian government and financial partners, is a private company whose mission is to manufacture affordable biopharmaceutical products for diseases such as anemia, cancer, hepatitis and multiple sclerosis and market them to Middle East, North-African countries (MENA) and selected European markets, at competitive prices. The new company will help provide Tunisia with a strategic platform in the biopharmaceutical industry. This state-of-the-art facility will be built at Sidi Thabet, near Tunis. PROMETIC CONCLUDES A $1.4 MILLION AGREEMENT WITH OCTAPHARMA At the end of 2004, ProMetic signed a development agreement with Octapharma, a swiss-based plasma fractionation specialist, providing access to our advanced Mimetic LigandTM affinity technology. This new partner- ship brings added recognition to ProMetic’s expertise and further consolidates our posi- tion as a leading provider of innovative solutions to the biopharmaceutical industry. 017 MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATING RESULTS AND FINANCIAL POSITION PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT MD&A The management’s discussion and analysis, prepared March 8, 2005, aims at helping the reader to better understand the business and the key elements of the financial results. It explains the trends of the financial situation and the operating results of the Company for the 2004 financial year by comparing to the 2003 operating results and balance sheets as at December 31, 2003. This management's discussion and analysis was prepared in accordance to Regulation 51-102 respecting continuous disclosure obligations and should be read in conjunction with the 2004 consolidated financial statements and the accompanying notes of this annual report. The financial statements were prepared in accordance with Canadian generally accepted accounting principles. Unless otherwise indicated, all figures are expressed in Canadian dollars. OVERVIEW In 2004, ProMetic Life Sciences Inc. and its subsidiaries (“ProMetic” or the “Company”) had a year of solid progress, which means set-out expectations were met. We reached a stage of technical maturity that is reflected both in revenues and in the quality of our products. Even at this early stage, the Company has succeeded in converting value from some of its enabling technology assets into significant non-dilutive cash inflows in 2004 through contract development projects with multinationals such as Serono and GlaxoSmithKline. Encouraging results from PBI-1402 helped generate partnering interest. In addition, the pipeline includes a number of other very interesting compounds. Our joint venture and alliance with the American Red Cross have moved forward and the signing of a license agreement with Hemosol Corp. has generated revenues immediately, bringing our Cascade technology an important step closer to market. We have also signed an agreement with MacoPharma who will share the development costs of Pathogen Removal and Diagnostic Technologies’ (PRDT)(1) prion filter and be the main force behind the launch and distribution of the product. Late in the year, we concluded a technology transfer and professional services agreement in Tunisia. The creation of a for-profit company called BioMena was a key step forward. Partnering with stable organizations in emerging economies to create state-of-the-art facilities for the manufacture of biopharmaceuticals presents an interesting opportunity that is both profitable and fits with our philosophy of helping to create the building blocks of a healthier future. 018 (1) ProMetic’s joint venture with the American Red Cross PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATING RESULTS AND FINANCIAL POSITION SELECTED ANNUAL INFORMATION The following selected annual information is derived from the audited consolidated financial statements for each of the three most recently completed financial years. The financial statements are prepared in accordance with Canadian GAAP. (in thousands of Canadian dollars, except for per share amounts) Revenues Net loss Net loss per share Total assets Long-term debt 2004 $ 8,183 17,152 0.17 29,705 407 2003 $ 1,319 20,298 0.23 42,620 847 2002 $ 2,511 14,111 0.19 39,457 200 OPERATING RESULTS Revenues This year, total revenues were up significantly to $8.2 million from $1.3 million in 2003. Our stream of recurring revenues also increased substantially from $1.3 million in 2003 to $3.8 million this year, in line with the Company’s September 2004 guidance of $3.9 million. Our technology received strong scientific endorsements from our development program partners (Serono, GlaxoSmithKline, Octapharma). Each contract of this type involves payments for milestones in the development of the custom ligand and may eventually lead to increased revenues as partners’ proteins move into further clinical development stages. We also increased our visibility to customers, reflecting investment in commercial resources performed in late 2003. We are at the point now when recurring revenues can absorb an increasing share of operational expenses. This year, the strategic alliance and license agreement with Hemosol contributed $4.4 million to ProMetic’s revenues. The remaining consideration for this agreement consists of future conditional payments totalling $14 million which will be triggered by the achievement of certain predetermined milestones. Hemosol will also pay royalties to ProMetic related to the sale of products produced using the Cascade process. Two of our drug candidates have reached the clinical trial phase (PBI-1402 in Phase I and rAAT in Phase II). A number of other compounds such as ProMetic’s anti-tumor compound PBI-1393 showed positive results and manufacturing is currently being scaled up to allow for clinical trials in 2005. ProMetic’s PRDT venture with the American Red Cross finalized a key strategic alliance with MacoPharma which will share current and future product development expenses for our first-generation human blood prion filter and subsequent generation of products. MacoPharma, one of the largest manufacturers and distributors of blood collection bag sets, will pay an ongoing royalty on sales to PRDT. ProMetic will benefit from sales royalties through its 26-percent stake in PRDT, but also directly through certain management responsibilities for manufacturing. Operating expenses Our research and development expenditures for the year amounted to $14.3 million, up from $13.5 million last year, reflecting increased investments both in the Therapeutic and Enabling Technology Divisions. Tax credits available under provincial tax programs have been recorded in 2004. These two divisions are at the heart of our strategy to focus on medium and long-term value to build solid fundamentals and a strong base of recurring revenues. For example, we funded clinical trial programs for PBI-1402. In addition, through our joint venture with Arriva Pharmaceuticals, Inc., we helped fund two phase II trials for rAAT. 019 MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATING RESULTS AND FINANCIAL POSITION PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT In the Enabling Technology Division, most of the increased spending was related to moving our joint venture and alliance with the American Red Cross nearer to the commercial phase where they would begin creating revenue. In the case of PRDT, the strategic partnership with MacoPharma will assist in containing the cost of bringing the first prion filter to market, with MacoPharma sharing the existing and future development costs. For Plasma Protein Purification Scheme, our collaborative agreement with the American Red Cross, investments related to the scale-up of the Cascade technology and the secondary process development accounted for most of the expenses. Administrative, marketing and other expenses remained stable at $5.3 million, as did depreciation and amortization expenses at $2.7 million, compared to $2.7 million last year. A provision related to a lawsuit of $2.7 million has been recorded in 2004; this non-recurring expense reflects the judgment in favor of Bank of Montreal issued in December 2004. The Company subsequently appealed the judgment in January 2005. Net results ProMetic incurred a net loss of $17.2 million this year or $0.17 per share, as compared to a net loss of $20.3 million, or $0.23 per share in 2003. These results clearly demonstrate that the Company’s strategy is on track for further growth in 2005. Net loss before a provision related to a lawsuit, write-down of short-term investment and net interest income amounts to $0.14 per share for 2004, compared to $0.24 in 2003. LIQUIDITY AND FINANCIAL POSITION Current assets totalled $13.6 million as at December 31, 2004 compared to $28.1 on December 31, 2003. Short-term investments increased to $2.3 million as at December 31, 2004, compared to $1.8 million in the previous year, as one million common shares of Hemosol Corp. were received by the Company following the execution of the strategic alliance and license agreement with Hemosol. The Company holds a total of three million Hemosol common shares with a book value of $2.3 million as at December 31, 2004, while the corresponding market value amounts to $3 million. Accounts receivable reached $2.8 million as at December 31, 2004, compared to $0.7 million in the previous year, mainly due to research and development tax credits receivable for an amount of $1.3 million recorded during the year. Capital assets have increased to $5.2 from $3.5 million in 2003 as capital investments in ProMetic’s Isle of Man facilities to expand manufacturing capacity and adapt to environmental regulations were required. Other asset additions included laboratory equipment and other computer hardware and software needed to accelerate research and development. Deferred development costs decreased in 2004 from $2 million to $1 million, while deferred revenues decreased substantially to $0.2 million as at December 31, 2004 due to the execution of the strategic alliance and license agreement with Hemosol for the Cascade technology. CASH FLOWS Cash flows used in operating activities totaled $16.7 million for the year ended December 31, 2004, compared to $15.8 million for the same period in 2003. This increase is primarily due to the increase in the accounts receivable. Cash flows from financing activities amounted to $3.2 million for the year ended December 31, 2004. In January 2004, the underwriting syndicate exercised, in full, its over-allotment option. As a result, ProMetic issued an additional 1,578,947 Subordinate Voting Shares at a price of $1.90 for gross proceeds of $3 million. Finally, cash flows used in investing activities totaled $3.8 million. The purchase of intellectual property and capital assets constituted the principal elements of asset acquisitions. Our ability to continue as a going concern is dependent upon raising additional financing through borrowing or equity financing, receiving funds through collaborative research contracts or product licensing agreements already in place and achieving future profitable operations. 020 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATING RESULTS AND FINANCIAL POSITION OFF-BALANCE SHEET ARRANGEMENTS In the normal course of business, the Company finances certain of its activities off-balance sheet through leases. On an ongoing basis, we enter into operating leases for buildings and equipment. Minimum future rental payments under these operating leases, determined as at December 31, 2004, are included in the contractual obligations table below. CONTRACTUAL OBLIGATIONS In the normal course of operations, we have entered into several contracts providing for the following payments over the next fiscal years : (in thousands of Canadian dollars) Bank loan Long-term debt Capital lease obligations Operating leases Total contractual obligations Total $ Less than1 year $ Payments due by period 3– 4 years $ 1– 2 years $ After 4 years $ 1,029 802 45 7,811 9,687 1,029 395 45 1,380 2,849 407 2,666 3,073 2,491 2,491 1,274 1,274 CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in accordance with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting periods. We have identified the following accounting policies that we believe require application of management’s most subjective judgments, often requiring the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Our actual results could differ from these estimates and such difference could be material. Impairment of long-lived assets Management reviews the valuation and amortization of licenses and patents on an ongoing basis, taking into consideration any events and circumstances which may impair its value. The Company assesses impairment in a two-step process for first determining when an impairment loss is recognized and then measuring that loss. Research and development and tax credits Research expenditures (net of related tax credits) are expensed as incurred and include reasonable allocation of overhead expenses. Development expenditures (net of related tax credits) are deferred when they meet the criteria for capitalization in accordance with Canadian GAAP, and the future benefits could be regarded as being reasonably certain. Related tax credits are accounted for as a reduction to research and development expenditures on condition that the Company is reasonably certain that these credits will materialize. During 2004 and 2003, no development costs were deferred. Stock-based compensation When the Company issues stock options to its employees, directors and officers, a fair value is derived for the stock options using the Black-Scholes pricing model. The application of this pricing model requires management to make 021 MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATING RESULTS AND FINANCIAL POSITION PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT assumptions regarding several variables, including the expected life of the options, the price volatility of the Company’s stock over a relevant timeframe, the determination of a relevant risk-free interest rate and an assumption regarding the Company’s dividend policy in the future. CHANGES IN ACCOUNTING POLICIES Stock-based compensation Effective January 1, 2004, Canadian GAAP requires the fair value of options granted to employees be expensed over their vesting period. Prior to January 1, 2004, the Company did not recognize any compensation for stock options granted to employees as the granting and exercizing of options were accounted for as equity transactions. The Company is adopting the new accounting policy on a retroactive basis with no restatement of prior periods. Accordingly, on January 1, 2004, retained earnings was reduced and contributed surplus was increased to account for the stock option expense that would have been charged to loss in 2002 and 2003 with respect to all options granted since January 1, 2002. CAPITAL STOCK INFORMATION As at December 31, 2004, the capital stock issued and outstanding consisted of 86,486,784 participating subordinate voting shares (84,842,937 as at December 31, 2003) and 13,026,375 participating multiple voting shares (same number as at December 31, 2003). As at December 31, 2004, 3,615,702 stock options were issued and outstanding. OUTLOOK In 2005, ProMetic will keep focusing on continued expansion of its recurring revenue base through enabling technology licensing and custom ligand development and also on finding major co-development partners for its most promising therapeutic compounds. It is estimated that revenues from the Enabling Technology Division will expand with the projected confirmation of a $4 million milestone from Hemosol. Higher risk elements are the therapeutic compounds under development. Risk factors include the time necessary to bring a human therapy to market, the costs, and the regulatory environment. To minimize these risks, we are actively looking for major co-developers who have the experience, manpower and funding to make sure promising compounds such as PBI-1402 make it to market as quickly as possible. With strong partnerships, a proven enabling technology, drug candidates that are generating significant attention, and a strong revenue stream already, this will be a year of consolidation and substantial growth. RISKS AND UNCERTAINTIES The information contained in Management’s Discussion and Analysis of Operating Results and Financial Position contains statements regarding future financial and operating results. It also contains forward-looking statements with regards to partnerships, joint ventures and agreements and future opportunities based on these. There are also statements related to the discovery and development of intellectual property as well as other statements about future expectations, goals and plans. These statements should not be construed as guarantees of future performance and are subject to certain risks and uncertainties beyond ProMetic’s control. These risks could cause actual results to differ materially from those expressed or implied in Management’s Discussion and Analysis of Operating Results and Financial Position. Some of the risks include : a change in general economic and/or business conditions; changes in government regulations; adverse results in drug discovery and development and pre-clinical or clinical trials. Other risks include : the ability of our development and marketing partners to deliver on contractual obligations and/or meet milestones; intellectual 022 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATING RESULTS AND FINANCIAL POSITION property issues and the timing and decisions of regulatory bodies such as HPFB(1), FDA(2) and EMEA(3) as well as changes in the competitive landscape and the continued availability of new capital to finance activities. Finally, there are risks involved in the performance of contractual obligations, the failure to meet major milestones or the failure to realize expected synergies in our major partnerships, or our ability to manage them. This statement should not be interpreted as a warning vis-à-vis any individual risk but rather as a general disclaimer about forward-looking statements and an identification of some sources of risk. Forward-looking statements The Management’s Discussion and Analysis of Operating Results and Financial Position contains “forward-looking statements”, in the sense of security and exchange laws, which are based on certain estimates and expectations. The statements, which are not based on historical facts, such as statements related to management’s opinions and expectations, are forward-looking statements. These statements are subject to certain risks and uncertainties, and the actual results could differ sensibly to those presented. Management does not commit to revise these forward-looking statements to take into account new information, events to come or other factors. SUMMARY OF QUARTERLY RESULTS The following unaudited quarterly information is presented in millions of Canadian dollars except for per share amounts: Revenues Net loss Net loss per share Weighted average number of outstanding shares (in millions ) December 31 September 30 2004 $ 2004 $ 0.8 6.1 0.06 1.6 4.6 0.05 June 30 2004 $ 5.2 1.4 0.01 March 31 December 31 September 30 2003 $ 2004 $ 2003 $ June 30 2003 $ March 31 2003 $ 0.5 5.1 0.05 0.4 5.9 0.05 0.3 4.8 0.06 0.3 5.4 0.05 0.3 4.2 0.07 99 99 99 99 88 87 86 86 FOURTH QUARTER Consolidated statements of operations for the three-month periods ended December 31, 2004 and 2003 are as follows: (in thousands of Canadian dollars) Unaudited Revenues Operating expenses Operating loss Provision related to a lawsuit Net interest income Net loss 2004 $ 848 4,216 3,368 (2,715) 9 6,074 2003 $ 445 6,419 5,974 – 27 5,947 Revenue increases during the fourth quarter were caused by higher product sales and developments contracts. The net loss is comparable with last year’s. A decrease in operating expenses was offset by the special charge for a provision related to a lawsuit. (1) HPFB – Health Products and Food Branch, Health Canada (2) FDA – U.S. Food and Drug Association (3) EMEA – European Agency for the Evaluation of Medicinal Products 023 MANAGEMENT’S REPORT/ AUDITORS’ REPORT TO THE SHAREHOLDERS PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT MANAGEMENT’S REPORT The accompanying consolidated financial statements for ProMetic Life Sciences Inc. are management’s responsibility and have been approved by the ProMetic Board of Directors. These financial statements were prepared in accordance with Canadian generally accepted 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 obtained in the financial statements. To ensure the accuracy and the 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 safe-guarded. 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 annual consolidated statements, as well as management’s discussion and analysis of operating results and financial position, and recommend their approval by the Board. Raymond Chabot Grant Thornton, 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. (signed) Pierre Laurin Chairman, President and Chief Executive Officer (signed) Claude Lambert Vice-President, Finance and Administration Montréal, Canada March 8, 2005 AUDITORS’ REPORT TO THE SHAREHOLDERS We have audited the consolidated balance sheet of ProMetic Life Sciences Inc. as at December 31, 2004 and the consolidated statement of operations, deficit and cash flows for the year 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 audit. We conducted our audit 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, 2004 and the results of its operations and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles. The consolidated financial statements as at December 31, 2003 and for the year then ended were audited by other auditors who expressed an opinion without reservation on those statements in their report dated February 25, 2004. (signed) Raymond Chabot Grant Thornton LLP Chartered accountants 024 Montréal, Canada March 8, 2005 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS FINANCIAL YEARS ENDED DECEMBER 31, 2004 AND 2003 CONSOLIDATED BALANCE SHEETS December 31, 2004 and 2003 (in thousands of Canadian dollars) Assets Current assets Cash and cash equivalents Short-term investment (notes 5 and 16) (Market value of $3,030, $3,140 in 2003) Accounts receivable (note 6) Inventories (note 7) Prepaid expenses Investments (notes 8 and 16) Capital assets (note 9) Licenses and patents (note 10) Deferred development costs Liabilities Current liabilities Bank loan (note 11) Accounts payable and accrued liabilities (note 12) Deferred revenue Current portion of long-term debt (note 13) Long-term debt (note 13) Preferred shares, retractable at the holder’s option (note 8 (b)) Shareholders’ Equity Share capital (note 14) Contributed surplus (note 14) Deficit The accompanying notes are an integral part of the consolidated financial statements. On behalf of the Board: (signed) Pierre Laurin Director (signed) Claude Lemire Director 2004 $ 6,770 2,340 2,796 921 789 13,616 4,479 5,190 5,430 990 29,705 1,029 7,714 243 440 9,426 407 1,586 2003 $ 24,052 1,800 684 586 958 28,080 3,371 3,493 5,649 2,027 42,620 – 6,069 1,800 490 8,359 847 914 11,419 10,120 135,682 99 (117,495) 18,286 29,705 132,617 – (100,117) 32,500 42,620 025 CONSOLIDATED FINANCIAL STATEMENTS FINANCIAL YEARS ENDED DECEMBER 31, 2004 AND 2003 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands of Canadian dollars except for per share amounts) Revenues Sales and contract Licensing Expenses Research and development expenses Administration, marketing and other expenses Amortization Loss before the following items Provision related to a lawsuit (note 16) Write-down of short-term investment (note 5) Net interest income Net loss Net loss per share (basic and diluted) Weighted average number of outstanding shares (in thousands) The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED STATEMENTS OF DEFICIT (in thousands of Canadian dollars) Deficit, beginning of year Adjustment for change in stock-based compensation (note 14 (c)) Deficit, beginning of year as restated Net loss Share issue expenses Deficit, end of year The accompanying notes are an integral part of the consolidated financial statements. 026 2004 $ 3,813 4,370 8,183 14,271 5,274 2,740 22,285 14,102 (2,715) (530) 195 17,152 0.17 99,429 2003 $ 1,319 – 1,319 13,501 5,654 2,751 21,906 20,587 – – 289 20,298 0.23 86,707 2004 $ 100,117 44 100,161 17,152 182 117,495 2003 $ 78,395 – 78,395 20,298 1,424 100,117 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS FINANCIAL YEARS ENDED DECEMBER 31, 2004 AND 2003 CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of Canadian dollars) Cash flows from operating activities Net loss Adjustments to reconcile net loss to cash flows used in operating activities Revenues received in shares Stock-based compensation Write-down of short-term investment (note 5) Amortization of capital assets Amortization of deferred development costs Amortization of licenses and patents Change in working capital items (note 20) Cash flows from financing activities Proceeds from share issues Share issue expenses Bank loan Long-term debt Repayment of long-term debt Cash flows from investing activities Disposal of short-term investments Acquisition of a long-term investment Additions to capital assets Additions to licenses and patents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year (For supplemental cash flow information, see note 20) The accompanying notes are an integral part of the consolidated financial statements. 2004 $ 2003 $ (17,152) (20,298) (3,052) 55 530 872 1,037 831 (16,879) 199 (16,680) 3,065 (397) 1,029 – (490) 3,207 – (254) (2,202) (1,353) (3,809) (17,282) 24,052 6,770 – – – 1,007 1,182 562 (17,547) 1,753 (15,794) 20,148 (1,201) – 1,351 (364) 19,934 9,509 (175) (1,639) (1,173) 6,522 10,662 13,390 24,052 027 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004 AND 2003 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT NOTES 028 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004 AND 2003 1 GOVERNING STATUTES AND NATURE OF OPERATIONS ProMetic Life Sciences Inc. (“ProMetic” or the “Company”), incorporated under the Canada Business Corporations Act, is an international biopharmaceutical company engaged in the research, development, manufacturing and marketing of a variety of applications developed from its own exclusive technology platform. The Company owns proprietary technology essential for use in the large-scale purification of drugs, genomics and proteomics products as well as medical and therapeutic applications. These financial statements have been prepared on a going concern basis, which assume that the Company will continue in operation for the foreseeable future and accordingly will be able to realize its assets and discharge its liabilities in the normal course of operations. Since inception, the Company has concentrated on research and development. It has had no net earnings, minimal revenues, negative operating cash flows and has financed its activities through the issuance of shares. The Company’s ability to continue as a going concern is dependent on obtaining additional investment capital and the achievement of profitable operations. There can be no assurance that the Company will be successful in increasing revenue or raising additional investment capital to generate sufficient cash flows to continue as a going concern. These financial statements do not reflect the adjustments that might be necessary to the carrying amount of reported assets, liabilities and revenue and expenses and the balance sheet classification used if the Company were unable to continue operation in accordance with this assumption. 2 CHANGES IN ACCOUNTING POLICIES (a) Standards applicable for the year ended December 31, 2004 Generally accepted accounting principles and financial statement presentation On January 1, 2004, the Company adopted the new recommendations of the Canadian Institute of Chartered Accountants’ (“CICA”) Handbook Section 1100, Generally Accepted Accounting Principles, and Section 1400, General Standards of Financial Statement Presentation. Section 1100 describes what constitutes Canadian generally accepted accounting principles (“GAAP”) and its sources. It also provides guidance on sources to consult when selecting accounting policies and determining appropriate disclosures when a matter is not dealt with explicitly in the primary sources of Canadian GAAP. The new standard eliminates “industry practice” as a possible source of consultation. Section 1400 provides general guidance on financial statement presentation and further clarifies what constitutes fair presentation in accordance with Canadian GAAP. The adoption of these recommendations has had no significant impact on the financial statements for the year ended December 31, 2004. Impairment of long-lived assets The CICA issued Section 3063 of the Handbook, Impairment of Long-lived Assets and revised Section 3475 Disposal of Long-Lived Assets and Discontinued Operations. These two sections provide guidance on how assets are grouped when testing for and measuring impairment and propose a two-step process for first determining when an impairment loss is rec- ognized and then measuring that loss. The Company adopted these recommendations as of January 1, 2004. The adoption of these recommendations had no impact on the financial statements of the Company. Stock-based compensation Effective January 1, 2004, Canadian GAAP requires the fair value of options granted to employees to be expensed over their vesting period. Prior to January 1, 2004, the Company did not recognize any compensation expense for stock options granted to employees as the granting and exercising of options were accounted for as equity transactions (see note 14 (c)). 029 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004 AND 2003 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT 2 CHANGES IN ACCOUNTING POLICIES (CONTINUED) Revenue recognition Effective January 1, 2004, the Company adopted the recommendations of the Emerging Issues Committee ("EIC") of the CICA in abstracts EIC-141, Revenue Recognition and EIC-142, Revenue Arrangements with Multiple Deliverables. EIC-141 provides interpretative guidance on the application of Section 3400 of the CICA Handbook, “Revenue”. More specifically, the abstract presents the criteria to be met so that revenue recognition can be considered as having been achieved. EIC-142 addresses not only when and how an arrangement involving multiple deliverables should be divided into separate elements of accounting, but also how the arrangement’s consideration should be allocated among separate units. Adoption of these recommendations did not affect the financial position or results of operations in the consolidated financial statements. Consolidation of variable interest entities Effective January 1, 2004, the CICA issued AcG-15, Consolidation of Variable Interest Entities. AcG-15 requires certain variable interest entities, or VIEs, to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest defined in the accounting guideline or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Company currently has no contractual relationship or other business relationship with a variable interest entity and therefore the adoption of AcG-15 did not have an effect on the Company’s consolidated financial statements. (b) Standards applicable for the year ended December 31, 2003 Guarantees In February 2003, the CICA issued Accounting Guideline 14 (“AcG-14”), Disclosure of Guarantees, which requires that cer- tain disclosures be made by a guarantor about its obligations under guarantees in its interim and annual consolidated finan- cial statements for periods beginning on or after January 1, 2003. A guarantee is a contract or an indemnification agreement that contingently requires the Company to make payments to the other party of the contract or agreement, based on changes in an underlying that is related to an asset, a liability or an equity security of the other party or based on a third party failure to perform under an obligating agreement. It could also be an indirect guarantee of the indebtedness of another party, even though the payment to the other party may not be based on changes in an underlying that is related to an asset, a liability or an equity security of the other party. The Company did not enter into agreements containing features that meet the AcG-14 criteria for a guarantee. Share purchase financing Effective January 1, 2003, the Company adopted the new CICA EIC abstract No. 132, Share Purchase Financing. This abstract provides interpretive guidance to the accounting requirements for outstanding share purchase loans receivable. The new guidance requires that share purchase loans receivable should be presented as deductions from shareholders’ equity unless there is substantial evidence that the borrower, not the Company, is at risk for any decline in the price of the shares and there is reasonable assurance that the Company will collect the full amount of the loan in cash. 3 SIGNIFICANT ACCOUNTING POLICIES These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”). Significant accounting policies are described below. 030 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004 AND 2003 (a) Use of estimates The preparation of financial statements in accordance with Canadian GAAP 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 year. Significant items for which management must make estimates relate to the valuation and assessment of recoverability of the investments, licenses and patents, 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. (b) Basis of consolidation The consolidated financial statements include the accounts of ProMetic Life Sciences Inc., of its subsidiaries ProMetic BioSciences Inc., ProMetic BioSciences (USA), Inc., and ProMetic BioSciences Ltd as well as those of the two joint ventures Arriva-Prometic Inc. and Pathogen Removal and Diagnostic Technologies Inc. (hereinafter referred to as “A-P” and “PRDT”), which are accounted for on a proportionate consolidation basis whereby the Company’s proportionate share of its joint ventures’ revenues, expenses, assets and liabilities are consolidated. All significant intercompany transactions and balances have been eliminated. (c) Cash and cash equivalents Cash and cash equivalents are bank deposits and highly liquid investments purchased with a maturity of three months or less. (d) Short-term investment The short-term investment is carried at the lower of cost and market value (closing sale price of the Toronto Stock Exchange). (e) Inventories Inventories of work in progress and finished goods are valued at the lower of cost and net realizable value, whereas inven- tories of raw materials are valued at the lower of cost and replacement cost. Cost is determined on a first-in, first-out basis. (f) Investments Investments are recorded at acquisition cost. When, in management’s opinion, there has been a loss in value of an investment that is other than a temporary decline, the investment is written down to recognize the loss. In determining the estimated realizable value of its investment, management relies on its judgment and knowledge of each investment as well as on assumptions about general business and economic conditions that prevail or are expected to prevail. These assumptions are limited due to the uncertainty of projected future events. (g) Capital assets Capital assets are recorded at cost. Amortization is provided over the useful lives of capital assets using the following methods: Asset Leasehold improvements Equipment and tools Office equipment and furniture Computer equipment Method Straight-line Declining balance Declining balance Declining balance Rate/period Lease term 10% to 30% 20% 30% 031 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004 AND 2003 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT 3 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (h) Government grants Government grants on capital expenditures are credited to capital assets and are released to amortization expense over the expected useful life of the relevant assets by equal annual amounts. Grants receivable in connection with operating expenditures are credited to the consolidated statement of operations in the period in which the expenditures take place. (i) Licenses and patents Licenses and patents include vested rights as well as licensing fees for product manufacturing and marketing. Amortization is provided over the useful lives of the licenses and patents acquired using the straight-line method ranging up to 20 years. Management reviews the valuation and amortization of licenses and patents on an ongoing basis, taking into consideration any events and circumstances which may impair its value. The Company assesses impairment in a two-step process for first determining when an impairment loss is recognized and then measuring that loss. (j) Research and development Research expenditures (net of related tax credits) are expensed as incurred and include a reasonable allocation of overhead expenses. Development expenditures (net of related tax credits) are deferred when they meet the criteria for capitalization in accordance with Canadian GAAP, and the future benefits could be regarded as being reasonably certain. Related tax credits are accounted for as a reduction to research and development expenditures on condition that the Company is reasonably certain that these credits will materialize. During 2004 and 2003, no development costs were deferred. (k) Revenue recognition The Company earns revenue from research and development collaboration services, licensing fees and product sales. Payments received under collaborative research and development agreements, which are non-refundable, are recorded as revenue as services are performed and the related expenditures incurred pursuant to the terms of the agreement and provided collectibility is reasonably assured. Non-refundable up-front license fees from collaborative licensing and deve- lopment arrangements are recognized as the Company fulfills its obligations related to the various elements within the agreements, in accordance with the contractual arrangements with third parties and the term over which the underlying benefit has been conferred. Revenues associated with multiple element arrangements are attributed to the various elements based on their relative fair value. Any up-front license payments received under an agreement whereby the Company also provides research and development services are recognized as revenue over the term of the research and development period. Revenue earned under contractual arrangements upon the occurrence of specified milestone isrecognized as the milestones are achieved and collection of payment is reasonably assured. Revenue from product sales is recognized when products are shipped. Cash or other compensation received in advance of meeting the revenue recognition criteria is recorded as deferred revenue on the consolidated balance sheet. (l) Foreign currency translation The Company’s foreign subsidiaries are considered as integrated foreign operations. Foreign denominated monetary assets and liabilities of Canadian and foreign operations 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 rates on the transaction date or at average exchange rates prevailing during the year. Exchange gains or losses are included in the consolidated statement of operations. (m) Income taxes The Company uses the liability method of accounting for income taxes. Future income tax assets and liabilities are recog- nized in the balance sheet for the future tax consequences attributable to differences between the financial statement 032 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004 AND 2003 carrying values of existing assets and liabilities and their respective income tax bases. Future income tax assets and liabilities are measured using income tax rates expected to apply when the assets are realized or the liabilities are settled. The effect of a change in income tax rates is recognized in the year during which these rates change. Future income tax assets are recognized and a valuation allowance is provided if realization is not considered “more likely than not”. (n) Stock-based compensation The Company maintains a stock option plan as described in note 14 (b). The Company uses the fair value method to account for all stock-based payments to non-employees that have been awarded on or after January 1, 2002. Since January 2004, the Company has adopted the new accounting policy for stock-based compensation to employees. Under this method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the related service period. (o) Earnings per share Basic earnings per share are calculated using the weighted average number of common shares outstanding during the year. Diluted earnings per share are calculated using the treasury stock method giving effect to the exercise of options and warrants. The treasury stock method assumes that any proceeds that could be obtained upon the exercise of options and warrants would be used to repurchase common shares at the average market price during the year. (p) Share issue expenses The Company records share issue expenses in the consolidated statement of deficit. 4 INFORMATION INCLUDED IN THE CONSOLIDATED STATEMENT OF OPERATIONS (in thousands of Canadian dollars) Amortization of capital assets Amortization of deferred development costs Amortization of licenses and patents Research and development tax credits Interest on long-term debt 5 SHORT-TERM INVESTMENT (in thousands of Canadian dollars except for number of shares) Number of Hemosol shares, a public company Cost Fair market value 2004 $ 872 1,037 831 1,298 92 2003 $ 1,007 1,182 562 – 95 2004 3,000,000 $2,340 $3,030 2003 2,000,000 $1,800 $3,140 As at September 30, 2004, the value of the investment has been written-down by $530,000 according to a decrease in the Hemosol share price which was below the carrying value. 033 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004 AND 2003 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT 6 ACCOUNTS RECEIVABLE (in thousands of Canadian dollars) Trade* Sales taxes receivable Tax credits receivable (note 11) Advance to an officer, without interest Accrued interest and other * The trade accounts include amounts receivable from two customers, which represent approximately 72% of the Company’s total trade accounts receivable (three customers representing 95% of total trade receivable in 2003). 7 INVENTORIES (in thousands of Canadian dollars) Raw materials Work in progress and finished goods 8 INVESTMENTS (in thousands of Canadian dollars) Convertible preferred shares of Arriva Pharmaceuticals, Inc. Convertible preferred shares of AM-Pharma Holding B.V. Cash subject to certain limitations Excess of the interest in the joint venture Pathogen Removal and Diagnostic Technologies Inc. over proportionate share in consolidated net assets 034 2004 $ 673 277 1,298 360 188 2,796 2004 $ 317 604 921 2004 $ 2,281 358 254 1,586 4,479 2003 $ 245 414 1 – 24 684 2003 $ 273 313 586 2003 $ 2,281 176 – 914 3,371 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004 AND 2003 The consolidated financial statements include the Company’s proportionate share of the revenues, expenses, assets and liabilities of Pathogen Removal and Diagnostic Technologies Inc. (“PRDT”) and of Arriva-Prometic Inc. (“A–P”) as follows: (in thousands of Canadian dollars) Current assets Long-term assets Total liabilities Total expenses being net loss Cash flows from: Operations Investing (a) PRDT $ 33 1,554 1,585(b) 2,664 – – note 10(c) A–P $ 16 2,109 66 526 (138) (266) 2004 Total $ 49 3,663 1,651 3,229 (138) (266) 2003 Total $ 60 3,066 1,071 3,053 (632) (671) (a) On April 8, 2002, ProMetic announced the creation of a new joint venture with the American Red Cross and two other partners under the legal name “Pathogen Removal and Diagnostic Technologies Inc.” in which the Company owns 26% of the voting shares. PRDT is engaged in the research, development and commercialization of pathogen diagnostic and removal systems. Under the terms of the joint-venture agreement, ProMetic and the American Red Cross will each contribute intellectual property and technical expertise to develop pathogen diagnostic and removal systems. They both equally assume the direct costs of the joint venture. Preferred shares including a 14% cumulative dividend will be issued by PRDT to the Company and to the American Red Cross in consideration of their proportionate shares in direct and indirect costs. (b) The PRDT joint venture has issued preferred shares in consideration of the proportionate share of each partner in direct and indirect costs. These preferred shares are retractable at the holder’s option, provided that PRDT has sufficient cash flows, and include a 14% cumulative dividend effective January 1, 2003. Since the shares issued by the joint venture are retractable at the holder’s option, they are considered as debt rather than share capital. Thus, as part of the proportion- ate consolidation, the Company must acknowledge 26% of the shares issued to the American Red Cross as a debt to a third party. 9 CAPITAL ASSETS (in thousands of Canadian dollars) Leasehold improvements Equipment and tools Office equipment and furniture Computer equipment Accumulated amortization Net book value 2004 Accumulated amortization $ 506 3,394 275 440 4,615 Cost $ 2,163 6,185 594 863 9,805 4,615 5,190 2003 Accumulated amortization $ 352 2,906 235 283 3,776 Cost $ 772 5,232 566 699 7,269 3,776 3,493 Deferred capital grants received from the Isle of Man government are credited to the cost of capital assets (see note 22). 035 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004 AND 2003 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT 10 LICENSES AND PATENTS (in thousands of Canadian dollars) Cost Accumulated amortization Net book value 2004 $ 7,642 (2,212) 5,430 2003 $ 7,030 (1,381) 5,649 The Company owns the rights, title and interest in and to the know-how, information, technology and patents (a) relating to its Mimetic Ligand™ technology. A portion of these rights, title and interest were assigned to the Company by Cambridge University’s Institute of Biotechnology in consideration of the payment of continuing royalties; the others having been developed by the Company. Effective November 9, 1995, the Company has the right to a patented technology permitting the link of the (b) Mimetic Ligand™ to a matrix of perfluorocarbon such as Perfluosorb™ beads. This technology is useful in chromato- graphic applications and for medical devices. This license is subject to the payment of a royalty to Arkion Life Sciences, Inc. on net sales with respect to any products covered by the patents. (c) As of April 13, 1999, through its subsidiary, ProMetic Biosciences Inc., the Company entered into a 50-50 joint venture, Arriva-Prometic Inc., with Arriva Pharmaceuticals, Inc. (“Arriva”) for the development of applications relating to serine protease inhibitors as a platform for various pharmaceutical products for dermatological (eczema, psoriasis, genital herpes) and gastrointestinal (Crohn’s disease, irritable bowel syndrome) treatments and urinary tract indications. The first serine protease inhibitor pursued is recombinant alpha 1-antitrypsin (“rAAT”), a compound produced in genetically- engineered yeast cells. Arriva has granted 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$ 398,688 has been contributed in 2004 for a total of US$ 3,839,910 (2003: US$ 3,441,222). The Company will progressively record 50% of its US$ 4 million contribution as intellectual property. In 2004, the Company recorded an amount of $ 266,456 as intellectual property (2003: $ 670,750) for a total of $ 2,880,199 (2003: $ 2,613,743). (d) On June 6, 2002, the Company acquired for $400,000 a worldwide exclusive license to patents, pre-clinical data and know-how pertaining to three therapeutic compounds (immunomodulators and adjuvants) for human applications. The Company will make further improvements to the compounds and milestone payments are to be made if positive results are achieved upon completion of the main development phases. Furthermore, the Company will pay royalties on the sales of compound-based products. 036 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004 AND 2003 The purpose of the strategic alliance between the Company and the American Red Cross signed in January (e) 2003 is to co-develop the Cascade process and license to third parties proprietary technology for the recovery and purification of valuable therapeutic proteins from human blood plasma. The Cascade process integrates novel technologies in a sequence that is expected to significantly improve both the yield and range of valuable proteins capable of being isolated from human plasma. On October 1, 2003, the Company acquired for $642,077, from the American Red Cross, an exclusive license for access to and use of intellectual property rights for the Plasma Protein Purification Scheme (“PPPS”) project. ProMetic will be collecting revenues deriving from any licensing activities, such as royalties on net sales, lump sum amounts and/or milestone payments. ProMetic will pay a 25% after having recouped its stage 1 devel- opment costs that the Company is committed to support. The American Red Cross will pay ProMetic 2% on any net sales of licensed products. (f) An officer and some directors are entitled to receive royalties based on the sales of certain products submitted to ProMetic before joining the Company. These royalties vary between 0.1% and 0.3% of net sales or between 1% and 3% of revenues received by the Company. These employees also have the exclusive right to commercialize these products should ProMetic decide to stop developing and (or) commercializing them, subject to mutually acceptable terms and conditions. (g) In the normal course of business, the Company enters into license agreements for the market launching or commercialization of intellectual property. Under these licenses, including those mentioned above, the Company has committed to pay royalties ranging generally between 0.5% and 10% of net sales from products it commercializes. 11 BANK LOAN (in thousands of Canadian dollars) Bank loan of ProMetic BioSciences Inc., a wholly-owned subsidiary of the Company, related to research and development tax credits and secured by a hypothec in the amount of $1.3 million on all present and future assets of the subsidiary (other than intellectual property and certain investments) guaranteed by the Company, bearing interest at prime plus 1.75% (6% as at December 31, 2004) payable upon receipt of the corresponding tax credits. 12 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (in thousands of Canadian dollars) Provision related to a lawsuit (note 16) Accounts payable to an officer Other 2004 $ 2003 $ 1,029 – 2004 $ 2,715 236 4,763 7,714 2003 $ – 102 5,967 6,069 037 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004 AND 2003 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT 13 LONG-TERM DEBT (in thousands of Canadian dollars) Loan of ProMetic BioSciences Inc., a wholly-owned subsidiary, secured by the Company and a first mortgage on the subsidiary’s capital assets financed by such loan, bearing interest at 9.5%, payable with monthly instalments of $37,845, due June 2007 Capital lease obligation payable in monthly instalments of $11,340 expiring in 2005 Current portion of long-term debt The payments on the long-term debt for each of the next three years are as follows: (in thousands of Canadian dollars) Year ending December 31: 2005 2006 2007 Total payments Less amount representing interest (at a rate of 9.42%) Present value of net minimum capital lease payments Current portion of obligations under capital leases 2004 $ 802 45 847 440 407 Bank loan $ 395 364 43 802 2003 $ 1,156 181 1,337 490 847 Capital lease obligation $ 46 – – 46 1 45 45 – 14 SHARE CAPITAL Authorized and without par value 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. 038 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004 AND 2003 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 on the Toronto Stock Exchange during the 20 business days prior to 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 on the Toronto Stock Exchange during the 20 business days prior to the conversion, preferential cumulative dividend of 12% per year, payable quarterly. (in thousands of Canadian dollars except for number of shares) Issued and fully paid: Subordinate voting shares Multiple voting shares Share purchase loan to an officer, without interest and due no later than 2009 Balance, at end of year Number 86,486,784 13,026,375 2004 $ 134,569 1,563 (450) 135,682 Number 84,842,937 13,026,375 2003 $ 131,504 1,563 (450) 132,617 (a) Share issue Changes in the issued and outstanding subordinate voting shares were as follows: 2004 $ (in thousands of Canadian dollars except for number of shares) Number Number 2003 $ Balance, at beginning of year 84,842,937 131,504 72,743,722 110,656 Shares issued pursuant to: Public offerings Exercise of warrants and options Conversion of preferred shares 1,578,947 64,900 – 3,000 65 – 10,526,316 93,250 1,479,649 20,000 148 700 Balance, end of year 86,486,784 134,569 84,842,937 131,504 During financial year 2003, except for shares issued pursuant to the conversion of preferred shares, all subordinate voting shares were issued for a cash consideration. During financial year 2004, no Class A and Class B preferred shares were converted. In 2003, 550,000 Class A and 150,000 Class B preferred shares were converted into 1,201,988 and 277,661 subordinate voting shares, respectively There were 631,578 warrants as at December 31, 2003 which expired in December 2004. 039 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004 AND 2003 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT 14 SHARE CAPITAL (CONTINUED) (b) Stock options The Company has 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 subordinate voting shares. Some options may be exercised in a period not exceeding 10 years from the date they were granted. Since September 10, 2001, the new options issued may be exercised over a period not exceeding 5 years and 1 month from the date they were granted (options vest 20% per annum). Year of grant Exercise price Number of options outstanding 2004 2003 1997 1998 1999 2000 2001 2002 2003 2004 $1.49 to $1.75 $2.00 to $3.00 $1.00 to $2.00 $1.35 $1.00 to $2.00 $2.50 to $2.70 $2.70 $2.70 165,502 64,000 1,537,500 300,000 815,000 223,000 95,000 415,700 3,615,702 165,502 64,000 1,603,000 300,000 1,823,000 224,000 113,500 – 4,293,002 The following table summarizes the changes in the number of stock options outstanding over the last two years: Number of options as at December 31, 2002 2003 Granted Exercised Cancelled Number of options as at December 31, 2003 2004 Granted Exercised Cancelled Number of options as at December 31, 2004 Options 4,257,402 285,000 (25,800) (223,600) 4,293,002 567,450 (64,900) (1,179,850) 3,615,702 Weighted average exercise price per share 1.49 2.70 1.00 2.61 1.51 2.70 1.00 1.76 1.62 040 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004 AND 2003 The following table summarizes information about stock options outstanding as at December 31, 2004: Range of exercise prices $1.00 to $1.49 $1.50 to $1.75 $2.00 to $3.00 Number outstanding 1,868,002 498,000 1,249,700 3,615,702 Weighted average remaining contractual life (in years) 4.58 2.08 3.65 Weighted average exercise price $1.11 $1.58 $2.42 Weighted average exercise price $1.03 $1.58 $2.20 Number exercisable 1,744,002 358,000 544,200 2,646,202 (c) Stock-based compensation and other stock-based payments Effective January 1, 2004, Canadian GAAP requires the fair value of options granted to employees to be expensed over their vesting period. Prior to January 1, 2004, the Company did not recognize any compensation for stock options granted to employees as the granting and exercising of options were accounted for as equity transactions. The Company adopted the new accounting policy on a retroactive basis with no restatement of prior periods. Accordingly, on January 1, 2004, retained earnings was reduced and contributed surplus was increased by $43,822 to account for the stock option expense that would have been charged to loss in 2002 and 2003 with respect to all options granted since January 1, 2002. The Company uses the Black-Scholes option valuation model to calculate the fair value of options at the date of grant, using the following assumptions: Risk-free interest rate Dividend yield Expected volatility of share price Expected life 2004 4.61% 0% 58.7% 5 years 2003 4.47% 0% 99.7% 5 years The estimated fair value of options granted during the year ended December 31, 2004 is $0.67 ($1.49 in 2003) Had the company expensed the fair value of the stock options in prior periods, the following pro forma amounts would have resulted: (in thousands of Canadian dollars except for per share amounts) Net loss Plus: Compensation expense recognized in the statement of earnings Less: Total compensation expenses Pro forma net loss Pro forma net loss per share (basic and diluted) 2004 $ 17,152 55 (55) 17,152 0.17 2003 $ 20,298 – (29) 20,327 0.23 041 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004 AND 2003 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT 15 COMMITMENTS The Company has commitments under various operating leases for the rental of office and laboratory space and office equipment. The minimum annual payments for the coming years are as follows: (in thousands of Canadian dollars) 2005 2006 2007 2008 2009 2010 and thereafter $ 1,380 1,348 1,318 1,285 1,206 1,274 7,811 16 PROVISION RELATED TO A LAWSUIT Following the judgment in favor of Bank of Montreal issued in December 2004, a non-recurring expense of $2.7 million has been recorded in the consolidated statement of operations and in the accrued liabilities. Subsequent to this event, the Company appealed the judgment in January 2005. Furthermore, a legal hypothec in the amount of $2,762,458 (with interests and additional indemnity as provided by law) resulting from a judgment, was registered on December 23, 2004 in favour of Bank of Montreal and charging certain movable assets of ProMetic Life Sciences Inc. (“PLI”), including shares held by it in the capital of its subsidiaries and Hemosol Corp., Arriva Pharmaceuticals Inc., Arriva-ProMetic Inc., AM-Pharma Holding B.V., Pathogen Removal and Diagnostic Technologies Inc., any sums lent to them by PLI and sums held by PLI with National Bank Trust Inc. 17 FINANCIAL INSTRUMENTS (a) Fair value The carrying value of cash and cash equivalents, accounts receivable, bank loan, cash subject to certain limitations, accounts payable and accrued liabilities approximates their fair value because of the near-term maturity of these instruments. The carrying value of the long-term debt approximates its fair value because the implicit interest rate approximates market rates available for similar instruments. The fair value of the investments in Arriva-Pharmaceuticals Inc. and in AM-Pharma Holding B.V. was not readily determinable because they are private companies. The fair value of the excess of the interest in the joint venture PRDT over proportionate share in consolidated net asset and preferred shares retractable at the holder’s option cannot be determined because these are shares of a private joint venture company at the pre-commercial stage and because it is not possible to determine in which period these shares may be redeemed. 042 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT (b) Credit risk NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004 AND 2003 The Company reviews a new customer’s credit history before extending credit and conducts regular reviews of its existing customers’ credit performance. (c) Foreign exchange risk The Company derives a substantial part of its revenues in pounds sterling and the majority of its expenses that are not denominated in Canadian dollars are incurred in pounds sterling. Financial assets, consisting principally of cash and cash equivalents, and short-term investment and accounts receivable, denominated in pounds sterling totaled £1,337,121 in 2004 and £1,009,375 in 2003 and financial liabilities denominated in pounds sterling totaled £1,022,066 in 2004 and £911,879 in 2003. The Company does not possess nor issue financial derivative instruments. 18 RELATED-PARTY TRANSACTIONS During the year, the Company entered into the following transactions with some of its directors or companies which it controls: (in thousands of Canadian dollars) Fees to directors 2004 $ 367 2003 $ 247 These transactions were measured at the exchange amount. 19 INCOME TAXES The following table reconciles the differences between the domestic statutory tax rate and the effective tax rate used by the Company in the determination of the income tax expenses: (in thousands of Canadian dollars) Net loss Basic income tax rate Computed income tax provision Decrease in income taxes resulting from: Unrecorded potential tax benefit arising from current period losses Effect of tax rate differences in foreign subsidiaries Non-taxable items 2004 $ (17,152) 31% (5,317) 2,544 1,285 1,488 – 2003 $ (20,298) 33% (6,698) 3,386 2,044 1,268 – 043 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004 AND 2003 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT 19 INCOME TAXES (CONTINUED) Significant components of the Company’s net future income tax balances are as follows: (in thousands of Canadian dollars) Future income tax assets Losses carried forward Share issue expenses Unused research and development expenses Accounts payable and accrued liabilities Deferred revenue Capital assets Less: valuation allowance Net future income tax assets Future income tax liabilities Accounts receivable Capital assets Licenses and patents Deferred development costs Net future income tax assets 2004 $ 12,920 712 3,106 18 24 40 16,820 (15,537) 1,283 – (406) (784) (93) – As at December 31, 2004, the Company had available the following deductions, losses and credits: (in thousands of Canadian dollars) Canada Research and development expenses, without time limit Losses carried forward expiring in: 2005 2006 2007 2008 2009 2010 2011 2012 2014 2018 2020 2021 2023 2024 Without expiry date Share issue expenses 044 Federal $ 10,418 550 2,416 2,092 5,303 5,492 5,810 – – 4,039 – – – – – – 2,296 27,998 Provincial $ 13,214 446 2,473 2,332 5,303 5,311 5,525 – – 4,039 – – – – – – 2,296 27,725 2003 $ 11,831 1,124 1,377 200 178 6 14,716 (12,993) 1,723 (226) (471) (815) (211) – Foreign countries $ – – – – – – – 471 1,201 448 14 613 969 1,451 36,362 – 41,529 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004 AND 2003 As at December 31, 2004, the Company also had unused federal tax credit available to reduce future Canadian taxable income in the amount of $2,855,600 and expiring between 2009 and 2014. Those tax credits have not been recorded and no future income tax liability has been recorded with respect to those tax credits. 20 ADDITIONAL INFORMATION ON THE CONSOLIDATED STATEMENT OF CASH FLOWS (a) Change in working capital items (in thousands of Canadian dollars) Accounts receivable Inventories Prepaid expenses Accounts payable and accrued liabilities Deferred revenue (b) Non-cash transactions (in thousands of Canadian dollars) Unpaid additions to capital assets and licenses and patents Excess of the interest in the joint venture Pathogen Removal and Diagnostic Technologies Inc. over the proportionate share in the consolidated net assets Preferred shares retractable at the holder’s option Unpaid share issue expenses Advance to officers presented as a deduction of share capital Shares of AM Pharma received as consideration of research and development service rendered Shares of Hemosol Corp. received as consideration of entering into a binding memorandum of understanding (c) Other cash flow information (in thousands of Canadian dollars) Interest paid Interest earned 2004 $ (2,112) (335) 169 2,234 243 199 2004 $ 837 672 672 8 – 182 – 2004 $ 127 316 2003 $ 607 (58) (272) 1,476 – 1,753 2003 $ 1,211 532 532 223 450 – 1,800 2003 $ 76 467 045 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004 AND 2003 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT 21 SEGMENTED INFORMATION The Company operates in one reporting segment consisting in research, development, manufacturing and commercialization of a variety of commercial applications from its technology platform. (a) Revenues by geographic segment (1) (in thousands of Canadian dollars) Canada United States United Kingdom Europe (excluding United Kingdom) Other countries 2004 $ 4,380 836 1,065 1,850 52 8,183 2003 $ 12 203 811 263 30 1,319 (1) Revenues are attributed to countries based on location of customer and not on location of subsidiaries. The Company derives significant revenue from certain customers. In 2004 there were two customers which individually accounted for 53% and 16% of revenues respectively (in 2003 three represented 23%, 16% and 16% respectively). (b) Assets by geographic segment (in thousands of Canadian dollars) Canada United States United Kingdom (c) Capital assets and licenses and patents by geographic segment (in thousands of Canadian dollars) Canada United States United Kingdom 2004 $ 18,928 288 10,489 29,705 2004 $ 5,076 87 5,457 10,620 2003 $ 33,616 456 8,548 42,620 2003 $ 5,303 97 3,742 9,142 046 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004 AND 2003 22 GOVERNMENT GRANTS The Company has received government grants from Isle of Man government for operating and capital expenditures. For grants received prior to 2004, the Isle of Man government reserves the right to reclaim $1,003,314 ($887,450 in 2003) in part or all of the grants should the Company leave the Isle of Man within five years of receipt or should certain events occur within five years of receipt. The terms for the grants received in 2004 ($202,720) are fully repayable if the Company leaves the Isle of Man within five years of receipt of the grant and thereafter repayable on a sliding scale for up to a period of ten years. No provision has been made in these financial statements for any future repayment to the Isle of Man government relating to the above agreement 23 CONTINGENCIES Following the discontinuation of the generic pharmaceutical business by ProMetic Pharma Inc. ("Pharma"), a former subsidiary of the Company, in 1999, the Company received by another Pharma creditor a claim against the Company for the recovery of certain amounts due totaling $305,104. Following the introduction in September 2000 of a claim for damages at the Superior Court by ProMetic Life Sciences Inc. (“PLI”) and ProMetic BioSciences Inc. (“PBI”), a subsidiary of PLI, against a supplier for an amount of $7,726,243, the supplier has introduced in April 2004 a cross demand against PLI and PBI claiming for payment as damages all profits realized from the sale of Agarose beads between October 18, 1999 and October 18, 2004. After obtaining representation from their legal advisers, management is of the opinion that it has valid grounds for defense in respect of each claim 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 the statement of operations in the period in which the settlements occurs. 047 BOARD OF DIRECTORS PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT BOARD OF DIRECTORS Sadok Besrour (1) (3) President, Placements Sadobex Inc. Roger Garon (2) Chairman of the Board, Multivet Ltd Barry Gibson Consultant John Bienenstock University Professor, McMaster University Director, Brain-Body Institute, St. Joseph’s Healthcare Hamilton Andrew Gertler (3) Chairman and Chief Executive Officer, Neutron Enterprises, Inc. Robert Lacroix (1) (3) Senior Vice-President, CTI Capital Inc. Pierre Laurin Chairman of the Board President and Chief Executive Officer, ProMetic Life Sciences Inc. Claude Lemire (1) Consultant John J. R. Noble (2) Radiologist Hans W. Schmid (2) Chairman of the Board, ASAT AG Applied Science & Technology (1) Audit Committee (2) Compensation Committee (3) Corporate Governance Committee 048 PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT EXTERNAL SCIENTIFIC ADVISORS EXTERNAL SCIENTIFIC ADVISORS In 2004, the Company relied on a network of well-recognized scientists with expertise in different areas such as biotechnology, bioprocessing and biopharmaceuticals: ENABLING TECHNOLOGY Max Arella, PhD Professor, INRS-Institute Armand-Frappier Adjunct Professor, University of Montréal and P.E.I. University Ruben G. Carbonnell Director of the William R. Kenan Junior Institute for Engineering Technology and Science, North Carolina University John C. Curling, PhD Consultant David J. Hammond, PhD Executive Director, R&D, Plasma Derivatives, American Red Cross Barry L. Haymore, MD, PhD Consultant, Microbe Inotech Laboratories Inc. THERAPEUTICS Robert G. Rohwer, PhD Director, Molecular Neurovirology Laboratory, VA Maryland Health Care System International authority in the field of the TSE John Bienenstock, CM, MD (Hon), FRCP, FRPC, FRSC University Professor, McMaster University Director, Brain-Body Institute, St. Joseph’s Healthcare Hamilton David Gratton, MD, FRCPC Associate Professor of Dermatology, McGill University Jean Marsac, MD, PhD Consultant Hans W. Schmid, PhD Chairman of the Board, ASAT AG Applied Science & Technology David J. Stewart, PhD Director of Meetings and Courses, Cold Spring Harbor Laboratory Peter Tijssen, PhD Professor of virology, INRS-Institute Armand-Frappier Dan Chalker, MD Clinical Professor, Medical College, Georgia Diplomat, American Board of Dermatology Fellow, American Academy of Dermatology Ernest Charlesworth, MD, FRCPC Associate Professor, University of Texas Medical School at Houston Dermatologist, allergist and immunologist Jean-Marie Dupuy, MD, PhD Consultant Martine Garneau, MD Consultant Roger A. Perrault, MD, PhD, FRCPC President, R.A. Perrault Consultants Inc. Denis Claude Roy, MD Hematologist, Associate Professor of Medicine at the University of Montréal Director, Cellular Therapy Laboratory at Maisonneuve- Rosemont Hospital Hans W. Schmid, PhD Chairman of the Board, ASAT AG Applied Science & Technology Sheldon Spector, MD Clinical Professor, Department of Medicine, UCLA School of Medicine 049 ADDITIONAL INFORMATION PROMETIC LIFE SCIENCES INC. 2004 ANNUAL REPORT ADDITIONAL INFORMATION PROMETIC LIFE SCIENCES INC. Head Office 6100 Royalmount Avenue, Montréal, Quebec Canada H4P 2R2 Tel. : (514) 341-2115 Fax : (514) 341-6227 info@prometic.com www.prometic.com On peut se procurer la version française du présent rapport annuel en s’adressant au Service des communications de ProMetic Sciences de la Vie inc. : 8168, chemin Montview Montréal, Québec Canada H4P 2L7 Vous le trouverez aussi sur notre site Internet à l’adresse : www.prometic.com AUDITORS Raymond Chabot Grant Thornton 600 de La Gauchetière Street West, Suite 1900 Montréal, Quebec Canada H3B 4L8 TRANSFER AGENT AND REGISTRAR National Bank Trust 1100 University Street, Suite 900 Montréal, Quebec Canada H3B 2G7 LISTINGS Toronto Stock Exchange (PLI.SV) Outstanding shares as at December 31, 2004: 99,513,159 INVESTOR RELATIONS For more information, please contact : Nicole Blanchard Tel.: (514) 341-2115 Fax: (514) 341-6227 investor@prometic.com ANNUAL MEETING OF SHAREHOLDERS The Annual Meeting of Shareholders will be held on Wednesday, May 4, 2005 at 11:00 a.m. (EDT) at Le Windsor, 1170 Peel Street, Montréal, Quebec ANNUAL INFORMATION FORM The 2004 Annual Information Form of ProMetic Life Sciences Inc. is available upon request from the Company’s head office. ProMetic Lifes Sciences Inc. ProMetic BioSciences Inc. Montréal, Quebec R&D Group – Therapeutic Tel.: (514) 341-2115 info@prometic.com ProMetic BioSciences Ltd Isle of Man, British Isles Scale-up and manufacturing Tel.: 44.1624.823.519 Cambridge, UK R&D Group – Enabling technology Tel.: 44.1223.420.300 ProMetic BioSciences (USA), Inc. Wayne, New Jersey Sales and marketing Tel.: (973) 812-9880 sales@prometic.com We would like to thank all the ProMetic employees who contributed to this annual report. 050 a d a n a C n i d e t n i r P i o d u t S t o o h S i , n o t t a r G s o ç n a r F - n a e J : r e h p a r g o t o h P i n g s e D é r c a S u e F www.prometic.com 

Continue reading text version or see original annual report in PDF format above