ProMetic Life Sciences Inc. Annual Report 2004

FY2004 Annual Report · ProMetic Life Sciences Inc.

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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
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2003

15.0

12.0

9.0

6.0

3.0

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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

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—
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

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

7,811

9,687

1,029

395

1,380

2,849

407

2,666

3,073

2,491

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

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

847
440

407

Bank
loan
$

395
364
43

802

2003
$

1,156

181

1,337
490

847

Capital lease
obligation
$

46
–
–

–

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

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

–

182

–

2004
$

127
316

2003
$

607
(58)
(272)
1,476
–

1,753

2003
$

1,211

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

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