ProMetic Life Sciences Inc. Annual Report Signifi cant Events of 2008 Message to Shareholders ProMetic’s Technologies MD&A Consolidated Financial Statements 2 4 9 17 35 Front Cover Illustration These stylized red blood cells in a DNA confi guration signify the focus of the various businesses and research pursuits of ProMetic Life Sciences Inc. This graphic represents a clear evolution of that in last year’s Annual Report, refl ective of the progression of ProMetic over the past 12 months. The Company is involved in diverse activities related to blood. Its technologies are used to extract proteins from plasma and remove pathogens from blood, while its principal therapeutics are aimed at treating blood-related disorders. | ProMetic Life Sciences Inc. • 1 We are Progressive Efficient Innovative Cost Effective • • • • • ProMetic has developed and now manufactures innovative bioseparation products which are used globally by an increasing number of top-tier pharmaceutical companies. ProMetic has become a recognized world leader for introducing a fractionation process, which is being increasingly adopted as a replacement for a decades-old legacy system. revolutionary plasma efficiencies of ProMetic’s biopharmaceutical purification and pathogen removal The technologies are recognized as state-of-the-art contributions to high-value drug manufacturing and the safety of transfused human blood. ProMetic’s protein extraction technology assists the manufacturers of a wide range of blood-derived products to achieve higher yields, with fewer processing steps – and at lower costs. ProMetic has discovered of blood disorders, and applications in hematology, nephrology and oncology. synthetic compounds with unique properties for the treatment • ProMetic Life Sciences Inc. | AR 2008 Signifi cant Events 2008 AND SUBSEQUENT TO YEAR END ProMetic and its partner MacoPharma SA announced successful completion of two human clinical studies using the P-Capt® prion reduction fi lter, which integrates our prion capture resin, while the Irish and UK National Blood Services continued to progress through their own respective clinical trials in patients. MacoPharma SA proceeded to scale-up production of the P-Capt® fi lter in full anticipation of the fi lter’s adoption by these health agencies. Octapharma AG, a world-leading plasma fractionator, incorporated our prion capture technology into the manufacturing process of its Octaplas® product. Sartorius Stedim Biotech entered a strategic alliance with ProMetic, enabling two technology transfer projects in Asia representing potential annual revenue of $60 M for ProMetic once plasma fractionation companies are fully operational. Wuhan Institute of Biological Products in-licenced ProMetic’s yield-improving technology for the initial manufacture of multiple plasma-derived drugs for the Chinese market – work is progressing on schedule. Kedrion S.p.A. in-licenced ProMetic’s technology for use in its manufacturing process for two biopharmaceuticals – technology transfer milestones were achieved in the manufacturing process for a plasma derived therapeutic. Increasing and recurring use of our proprietary bioseparation products by major biopharmaceutical companies. Significant Events | ProMetic Life Sciences Inc. • Abraxis BioScience, Inc. entered into licence agreements which would total $295 M US with ProMetic for up to four biopharmaceuticals – the fi rst product is expected to reach commercial stage by 2011. A strategic $7.4 M equity investment was concluded by Abraxis BioScience, Inc. in ProMetic. A world-leading European biopharmaceutical company signed an estimated $35 M long-term supply agreement for access to ProMetic’s affi nity adsorbents. ProMetic realized the technology transfer milestones on its Blue Blood Biotech Corporation project in Taiwan through collaboration with Sartorius Stedim BioTech. ProMetic reported supplementary clinical data confi rming the performance of PBI-1402 in the chemotherapy-induced anemia trial. ProMetic has extended PBI-1402’s intellectual property portfolio, confi rmed its mechanism of action, and expanded its use in other indications. ProMetic entered a collaborative development agreement with HemCon Medical Technologies Inc. to develop and validate a sterile, single-use antibody capture device for the removal of isoagglutinin antibodies. • ProMetic Life Sciences Inc. | AR 2008 Message to Shareholders Our objective for 2009 is to grow the Company to the point where it is self-suffi cient. Going forward, we aim to continue sustaining our growth while minimizing our reliance on capital markets. With such an objective, we must maintain the fi ne balance between activities that generate profi t, and activities that generate high longer-term value. With this in mind, the strategic decision was made to focus on revenue generating activities driven by our protein technologies and our partnering activities for our therapeutics. How many different ways can it be said that 2008 was a challenging year? We have seen very few market segments escape the global fi nancial storm. Companies in the life sciences sector were particularly affected by the economic meltdown, translating into a signifi cant share price erosion. While we can focus exclusively on these diffi cult economic times, I would be remiss in downplaying the Company’s achievements and would like to take this opportunity to highlight our accomplishments. Our Protein Technologies unit has proved to be a valuable and sustaining asset for the Company. Operating in an extremely adverse economic environment, we continued to make strategic inroads with the products from the Protein Technologies unit. In 2008 ProMetic increased sales to existing clients, and gained important new ones. Market conditions also dictated that ProMetic make strategic business decisions in respect to its Therapeutics Division. Even though we are currently focusing solely on activities that support the partnering of our therapeutics, our research efforts yielded discoveries over the last year that have considerably enhanced their value. Most signifi cantly for our future, we came through the year with these increasingly valuable assets intact and our potential undiminished. Protein Technologies ProMetic has become a key supplier of protein technologies to an increasing number of pharmaceutical and biopharmaceutical (biotherapeutic) companies. Our technologies, products and expertise help them maximize their own resources in terms of raising yields and lowering costs. For these companies, today’s fi nancial realities make such effi ciencies major driving factors. Our products, such as our newly-launched Fabsorbent™ F1P, are now increasingly in demand on a global basis, resulting in a growing and recurring revenue stream. Th e reasons behind our success are straightforward – ProMetic’s technologies are fully validated and have proven track records. Numerous biopharmaceutical products and devices have integrated our products and technologies into their regulatory approved manufacturing processes. Message to Shareholders | ProMetic Life Sciences Inc. • Increasing use of products number of clients revenue growth Furthermore, our prion capture technology has been integrated into the ground-breaking P-Capt® fi lter for donated red blood cells. Perhaps most auspiciously, our protein extraction and our prion reduction technologies for use in plasma-derived therapeutics are progressively being adopted by the world’s leading plasma fractionation companies. The following are a few of the major events of 2008 in reference to the progress of our protein technologies: Proprietary Affi nity Products: In late summer 2008 we concluded an agreement with U.S.-based Abraxis BioScience, Inc. for the development and global commercialization of several biopharmaceutical products employing ProMetic’s affi nity products; the development activities on the fi rst such product are well underway. The agreement included an initial strategic investment in ProMetic of $7.4 million, in addition to licensing, development and milestone fees as well as on-going royalties on sales of products. Including on-going royalties, the total service, manufacturing and milestones fees could total approximately $295 M in revenues to ProMetic over the life of the transaction. Additionally, in December 2008 ProMetic confi rmed a long-term supply agreement with a world-leading European biopharmaceutical company worth up to $35 M. Delivery of ProMetic’s affi nity products commenced immediately. During the year Italian-based Kedrion S.p.A. (“Kedrion”), a leading biopharmaceutical company specialized in plasma-derived products, licenced our yield-improving manufacturing technology. ProMetic has since then successfully executed on the transfer technology milestones for this project, which in itself will yield additional development service revenues for ProMetic in 2009 and 2010. Additionally, ProMetic concluded a strategic alliance and license agreement with the Wuhan Institute for Biological Products (“WIBP”) which obtained exclusive access to ProMetic’s Plasma Protein Purifi cation System (“PPPS™”) for the Chinese market. The advancements continue according to schedule in this project and similarly so for the project involving Blue Blood Biotech Corporation (“Blue Blood”) of Taiwan project. More recently, ProMetic signed a collaborative development agreement with HemCon Medical Technologies Inc. (“HemCon”) to develop a sterile, single-use antibody capture device for the removal of isoagglutinin antibodies, targeting a US $500 M market opportunity. Prion Capture Products: Pathogen Reduction and Diagnostic Technologies Inc. (“PRDT”) has over the course of time developed a group of validated prion capture resins. These resins are seeing increased adoption by companies involved in the blood industry. Such is the case with Octapharma AG (“Octapharma”), one of the world’s leading plasma fractionators. Octapharma produces a solvent / detergent treated plasma called Octaplas® and the manufacturing process for this product incorporates PRDT’s prion capture resin technology, thus improving the prion safety margin. The P-Capt® prion fi lter, marketed by MacoPharma SA (“MacoPharma”) for red blood cell concentrates has also made signifi cant in-roads during the year. • ProMetic Life Sciences Inc. | AR 2008 Ireland has successfully completed its initial evaluation of the P-Capt® fi lter, and is now progressing towards the adoption process while using this state-of-the-art fi lter for a controlled number of patients. The UK National Blood Service that incorporates the Scottish National Blood Transfusion Service has also initiated clinical trials with the P-Capt® fi lter. Further to the confi rmation in February 2009 by the UK Health Protection Agency that vCJD had been discovered in the spleen of a 70+ year old hemophiliac who had died of other causes., Lord Morris of Manchester was quoted as stating during a session of the United Kingdom Parliament: “I was informed more than once on the authority of the Chief Medical Offi cer that the risk for recipients of blood donors who subsequently died of vCJD was purely “hypothetical”; but that demonstrably is not the case now. Is donated blood currently being screened, or fi ltered to remove vCJD infection?” He added: “I understand, and my noble friend will confi rm whether it is so, that technology is now available to remove by fi lter the abnormal prions which are the causative agent of vCJD and that it has passed EU-wide safety testing and clinical trials as required for its use in the UK”. A response from Baroness Thornton was recorded as such: “My noble friend asked about vCJD screening tests. He is quite correct that no screening test was available. Getting a validated screening test is a priority. Prion fi lters are available, which we are testing with all speed. Those tests are still under way. Addressing this situation is a priority. We are taking the matter very seriously indeed”. ProMetic through its prion capture resins has successfully brought forward tangible solutions to address vCJD issues and improve safety of blood and blood-derived products. Our partner, MacoPharma is executing on the adoption at large of the P-Capt® fi lter. Therapeutics In 2008, market conditions dictated that ProMetic make strategic business decisions on the management of our resources, with the aim of ensuring the support of our partnering activities in our Therapeutics unit. An additional factor affecting our activities in our Therapeutics unit and the partnering potential of our lead candidate PBI-1402 came into play in March 2008. That is when the Oncologic Drugs Advisory Committee (“Advisory Committee”) of the Food and Drug Administration (“FDA”) in the U.S. published a briefi ng document about the treatment of anemia in cancer patients. Subsequent to this report, the FDA introduced warnings of increased mortality and/or tumor progression that resulted in new prescribing guidelines for ESAs. Ironically, the new FDA guidelines created a perception that all anemia drugs were equal and that these drugs would be proscribed. PBI-1402’s primary target is, among other highly potential applications, a treatment for anemia in cancer patients. PBI-1402 is a fi rst-in-class chemical entity. Its mechanism of action differs radically from that of EPO, as it does not bind to the same cell surface receptor molecule. PBI-1402 sets into motion a cell differentiation process whereas EPO causes red blood cell proliferation. The focus in 2008 on the generation of data supporting the difference between PBI-1402 and EPO has paid us a signifi cant dividend. Not only is the data supporting the use of PBI-1402 in cancer patients, but it is also further enhancing the potential use of PBI-1402 in patients with chronic kidney disease (“CKD”). The compound has demonstrated nephroprotection properties in pre-clinical studies, a discovery that ProMetic is now more at liberty to discuss since proper patent protection has been secured. In 2008, in addition to our safety and effi cacy data generated from our CIA trial, we have produced compelling evidence that PBI-1402 is uniquely suited to address this unmet medical need. This gives us enhanced clarity in our regulatory pathway and even greater confi dence in our partnering prospects. A Platform Technology: The discoveries we have made with analogues of PBI-1402 in the laboratory can fairly be described as both startling and profound. We are dealing with a mechanism of action that has inspired new chemical entities. ProMetic will further release information regarding these discoveries once we have ensured their appropriate intellectual property protection. We believe that we have developed a family of compounds with hugely signifi cant long-term market potential that should, in conjunction with our lead compound PBI-1402, support ProMetic’s long-term share value. Message to Shareholders | ProMetic Life Sciences Inc. • PBI-1402 fi rst-in-class orally active distinct from EPO The Year Ahead Our objective for 2009 is to grow the Company to the point where it is self-suffi cient. Going forward, we aim to continue sustaining our growth while minimizing our reliance on capital markets. With such an objective, we must maintain the fi ne balance between activities that generate profi t, and activities such as the research projects that generate high longer-term value. With this in mind the strategic decision was made to focus on revenue generating activities driven by our protein technologies and our partnering activities for our therapeutics. Consequently, we have seen ProMetic’s costs decrease due to non-recurring expenditures, effi cient managing of our resources and diminished research expenses given that several products have now reached commercial status. In parallel, our base protein technologies business continues to expand as contracts are executed with established and new clients, thus increasing revenue. Furthermore, in 2009 we will remain focused on ProMetic’s core activities and core competencies at all levels, i.e., revenue generation through sales and initiatives supporting business development, corporate development, and partnering. In coming quarters as the recession eases and credit availability widens, we expect that the market will respond again to the deep value that resides in our protein technologies and therapeutics which address multi-billion dollar markets. I wish to express my thanks to every member of the ProMetic team for their steadfast resolve and dedication during a diffi cult year. And my sincere gratitude goes out to our shareholders, for your support and above all patience. I look forward to reporting on your Company’s activities in the months ahead. Pierre Laurin Chairman of the Board, President and Chief Executive Offi cer • ProMetic Life Sciences Inc. | AR 2008 Management Team 1 Pierre Laurin Chairman of the Board, President and Chief Executive Offi cer ProMetic Life Sciences Inc. 3 Steven J. Burton Chief Executive Offi cer ProMetic BioSciences Ltd 5 Bruce Pritchard Chief Financial Offi cer ProMetic Life Sciences Inc. 2 Christopher Bryant Executive Vice President and Chief Operating Offi cer ProMetic BioTherapeutics, Inc. 4 Christopher L. Penney Chief Scientifi c Offi cer, Therapeutics ProMetic BioSciences Inc. 6 Patrick Sartore Senior Legal Counsel, IP and Corporate Secretary ProMetic Life Sciences Inc. 2. 4. 1. 5. 6. 3. Protein Technologies | ProMetic Life Sciences Inc. • ProMetic’s Protein Technologies • • • Supplying Technologies to Drug Manufacturers – ProMetic licenses and sells its patented bio-separation technologies to many life sciences companies around the world who use the materials to purify their products more effi ciently. Revolutionizing Plasma Fractionation – ProMetic’s protein extraction technology is being adopted increasingly by plasma fractionators worldwide as a replacement for their established but decades old manufacturing technologies. Safeguarding Human Blood – ProMetic’s pathogen removal technology plays an essential role in eliminating the risk of vCJD infection from blood and blood-derived products. • ProMetic Life Sciences Inc. | AR 2008 THE ADVANCES OF PROMETIC’S PROTEIN TECHNOLOGIES IN THE GLOBAL MARKETPLACE IN 2008 AND EARLY 2009 INCLUDED: THE LAUNCH BY PROMETIC OF ITS NEW FABSORBENT™ F1P AND RAPID RECEPTION OF INITIAL ORDERS FOR THIS UNIQUE PRODUCT, WHICH ADDRESSES THE MANUFACTURING NEEDS OF A NEW GENERATION OF MONOCLONAL ANTIBODY FRAGMENTS. THE SIGNING OF LICENCE AGREEMENTS WITH ABRAXIS FOR THE USE OF PROMETIC’S TECHNOLOGY IN THE MANUFACTURE OF UP TO FOUR BIOPHARMACEUTICALS. Assisting the manufacture of protein-based therapeutics: Affi nity adsorbents are essential to the manufacture of therapeutic proteins. Presently 10 biopharmaceutical products or medical devices relying on ProMetic’s technology have received regulatory approval for sale by the FDA or the European Medicines Agency. In addition, there are more than 20 other companies now scaling up products using ProMetic’s bioseparation technologies, proprietary affi nity adsorbents, or Mimetic Ligand™ purifi cation platform. ProMetic’s affi nity technology is used in a variety of different ways including the removal of specifi c contaminants to provide increased yields, higher purities and, as a result, we have helped our clients to very signifi cantly reduce purifi cation costs. The chemical diversity of ProMetic’s ligand libraries allows selection for almost any target protein. ProMetic’s technology allows the capture of multiple targeted proteins directly from the source product to achieve greater yields with high levels of purity. In 2008, ProMetic launched its latest product, Fabsorbent™ F1P, a unique purifi cation adsorbent with broad applicability that addresses the manufacturing needs of a new generation of monoclonal antibody fragments. Fabsorbent™ F1P has been developed in response to demands from companies that have, in the past, relied on Protein L or traditional multi-step methods for the capture and purifi cation of antibody fragments. Fabsorbent™ F1P is marketed directly by ProMetic, thus creating additional revenue prospects. In fall 2008, ProMetic concluded an agreement with Abraxis in the U.S. for the development and commercialization of four biopharmaceutical products. The transaction included an initial strategic investment in ProMetic of $7.4 M at $0.47 per share, and revenues deriving from three further agreements: • • • A Service Agreement through which ProMetic remunerated for various product development activities leading to the fi ling of Investigational New Drug Applications with the FDA; A Licensing Agreement that includes development and sales milestone payments, as well as royalties to ProMetic on nets sales of the four products commercialized by Abraxis; A Manufacturing Agreement whereby ProMetic would manufacture the bulk active ingredients for clinical trial requirements and upon product commercialization. Development activities are underway for two of the four biopharmaceutical products targeting underserved medical conditions. Additionally, in early 2009, ProMetic signed a Collaborative Development Agreement with HemCon in the United States, for the development of a sterile, single-use antibody capture device for the removal of isoagglutinin antibodies. Protein Technologies | ProMetic Life Sciences Inc. • THE SIGNING OF A COLLABORATIVE DEVELOPMENT AGREEMENT WITH HEMCON TO DEVELOP A STERILE, SINGLE-USE ANTIBODY CAPTURE DEVICE FOR THE REMOVAL OF ISOAGGLUTININ ANTIBODIES. THE IN-LICENCING OF PROMETIC’S YIELD-IMPROVING TECHNOLOGY FOR THE MANUFACTURE OF PLASMA- DERIVED DRUGS FOR THE CHINESE MARKET BY THE WIBP. THE IN-LICENCING OF PROMETIC’S TECHNOLOGY BY ITALY-BASED KEDRION, AS WELL AS THE ACHIEVEMENT BY PROMETIC OF TECHNOLOGY TRANSFER MILESTONES. THE LONG-TERM SUPPLY AGREEMENT SIGNED BY A WORLD-LEADING EUROPEAN BIOPHARMACEUTICAL COMPANY FOR ACCESS TO PROMETIC’S AFFINITY ADSORBENTS. State-of-the-art solution for the plasma fractionation industry: As the advantages of its technology are increasingly recognized worldwide, ProMetic is becoming a world leader in regard to helping fractionators extract proteins from plasma. ProMetic’s Plasma Protein Purifi cation System (“PPPS™”) applies ProMetic’s Mimetic Ligand™ technology – powerful affi nity separation materials – in a multi-step process to extract and purify proteins at high yields. The PPPS™ advantageously replaces the legacy Cohn system which has been in use for many decades. Tremendous potential exists for the PPPS™ in that it can serve as a technology platform in countries with emerging markets to establish their own plasma fractionation facility. As well, the PPPS™ technology provides the ability to recover additional new proteins that could become innovative treatments for rare diseases, and thus qualify for orphan drug status. ProMetic is presently working on different stages of development activities for the projects with: • • • Kedrion of Italy which incorporates of ProMetic’s high-yield technology in the manufacturing of a biopharmaceutical; WIBP in China which allows for the access to ProMetic’s yield improving manufacturing technology for the processing of over 1.2 million liters of plasma annually and the commercialization of seven plasma-derived products for the Chinese market; Blue Blood of Taiwan integrates ProMetic’s proprietary manufacturing process for the development of valuable therapeutic products derived from human plasma. • ProMetic Life Sciences Inc. | AR 2008 THE ACHIEVEMENT OF TECHNOLOGY TRANSFER MILESTONES BY BLUE BLOOD FOR A PROJECT IN TAIWAN UTILIZING PROMETIC TECHNOLOGY IN COLLABORATION WITH SARTORIUS. THE INTEGRATION BY OCTAPHARMA, A WORLD-LEADING PLASMA FRACTIONATOR, OF PRDT’S PRION REMOVAL TECHNOLOGY INTO THE MANUFACTURING PROCESS OF ITS OCTAPLAS® PRODUCT. THE SUCCESSFUL COMPLETION OF TWO CLINICAL STUDIES USING THE P-CAPT® PRION REDUCTION FILTER, AND THE SCALE-UP BY MACOPHARMA FOR PRODUCTION OF THE DEVICE IN ANTICIPATION OF ITS ADOPTION BY THE IRISH AND UK HEALTH AGENCIES. Technologies to protect the human blood supply: The Pathogen Removal and Diagnostic Technologies Inc. (“PRDT”) co-development venture between ProMetic and the American Red Cross (“ARC”) has resulted in an assortment of adsorbents for the removal of prions from blood and various blood products, thus increasing their safety. Octapharma, one of the world’s most prominent plasma fractionators has taken a proactive stance against vCJD by incorporating PRDT’s prion capture technology into the manufacturing process of Octaplas®, a solvent / detergent treated plasma. Octapharma’s objective was to further improve the prion safety margin documented for this biopharmaceutical. In 2008 ProMetic concluded the scale-up of PRDT resin manufacture as part of the program of work with Octapharma. Moreover, in late spring 2008 Octapharma published extensive data on the utility of PRDT’s prion capture technology, providing powerful testimony for the effi cacy of this product to the global industry. Octaplas® has been submitted for regulatory approval by Octapharma. Over the last year, the PRDT prion capture resins have been evaluated by an increasing number of biopharmaceutical companies for the manufacture of their blood-derived products. PRDT’s technology also forms the essential component of the revolutionary P-Capt® fi lter, a prion reduction device developed in partnership with MacoPharma. This state-of-the-art fi lter reduces the risk of transmission of vCJD (a fatal brain disease) through donated blood. In 2006, P-Capt® received CE mark approval in Europe, and has since undergone pre-adoption evaluation procedures by the national blood transfusion agencies of the United Kingdom and Ireland. Initial adoption studies have been completed in Ireland, where P-Capt® use is continuing for a controlled number of patients. Adoption studies are also continuing at multiple hospitals in the UK. In February 2009 the fi rst case of a person being infected with the human form of mad cow disease after receiving contaminated plasma derived coagulating factor had been reported by scientists. The man was one of thousands of hemophiliacs who received blood plasma transfusions in the years before strict controls were brought in to eliminate the spread of vCJD. Until now, scientists had maintained that the 4,000 people who may have received plasma from infected donors were at very low risk of developing the fatal brain disease. Although vCJD has been transmitted by blood donations in the past, leading to three deaths, no cases of infection had ever been linked to blood products. Scientists had believed the processing of the product before it is injected into patients signifi cantly reduced the risks. Scientists fear there could be a second wave of the human variant of mad cow disease, which was caused by cattle being fed the remains of other cattle in the 1980s. Following these events, MacoPharma has amplifi ed its lobbying efforts towards the UK government to ensure that the P-Capt® fi lter, a readily available proven technology, is adopted to reduce the risk of vCJD by blood transfusion. Over forty million units of blood are collected every year worldwide, a healthcare necessity that represents a huge market opportunity for ProMetic and its partners. Therapeutics | ProMetic Life Sciences Inc. • ProMetic’s Lead Th erapeutic PBI-1402 PBI-1402 is a • for the treatment of CIA and related conditions in patients with CRA and CKD. fi rst-in-class orally active chemical entity • • • PBI-1402 demonstrated nephroprotection properties in pre-clinical studies, making the compound a potential breakthrough drug for the treatment of CKD. PBI-1402 has shown evidence of numerous pre-clinical models. anti-cancer activity in PBI-1402’s mechanism of action is distinct from EPO – PBI-1402 acts at a diff erent receptor and triggers a cell diff erentiation process at a much earlier bone marrow cell maturation stage. ProMetic’s Pipeline – Hematology, Oncology and Nephrology In Vivo Proof of Concept Pre-clinical Pharm Tox Formulation Phase i Phase ii Phase iii Drug Candidates Targeted Indications PBI-1402 PBI-1402 PBI-1402 PBI-4050 PBI-1308 PBI-1308 PBI-1737 ANEMIA (CIA, CRA) ANEMIA CKD NEPHROPROTECTION ANEMIA PSORIASIS AUTOIMMUNE DISEASE CANCER / AUTOIMMUNE DISEASE • ProMetic Life Sciences Inc. | AR 2008 ADVANTAGES OF PBI1402 ORAL ADMINISTRATION VERSUS MOST DRUGS FOR ANEMIA WHICH ARE INJECTABLES. MECHANISM OF ACTION DISTINCT FROM EPO. AFFORDABLE RELATIVE TO COSTLY RECOMBINANT PROTEINS. PBI1402 targets anemia in cancer patients A Phase Ib/II clinical trial of PBI-1402 revealed a signifi cant increase in red blood cell count and hemoglobin level in patients with chemotherapy-induced anemia (“CIA”). Ongoing results in 2008 continued to demonstrate the safety and effi cacy profi le of the compound. Moreover, results have demonstrated a signifi cant reduction in the need of patients for red blood cell transfusion. More than 93% of CIA patients treated with PBI-1402 did not require a blood transfusion – a signifi cant result given the guidelines published in March of 2008 by the Advisory Committee of the FDA stating that the primary objective of treating CIA patients with erythropoiesis-stimulating agents (“ESAs”) is the ability to reduce the need for red blood cell transfusion. The briefi ng document published by the FDA’s Advisory Committee cited that 20% to 25% of patients treated with traditional ESAs continue to require red blood cell transfusions. Moreover, the same FDA briefi ng document reported that no evidence exists to the effect that EPO improves quality of life or outcomes, and that EPO may actually accelerate morbidity due to tumour growth. The document in effect ruled out EPO as an acceptable treatment for CIA, thus leaving these patients with no option other than red blood cell transfusions. Even though PBI-1402 stimulates erythropoiesis (red blood cell formation), it does not have the same mechanism of action of EPO, the ESA drug of choice for CIA. This intervention by the FDA should have highlighted to the marketplace PBI-1402’s dissimilarity to EPO. However, in the ensuing atmosphere of uncertainty, the general perception created by the FDA’s brief was that all anemia drugs for cancer patients would be proscribed. As a consequence, several multi-national pharma companies had to assess their strategic position with regards to anemia and cancer, and this irrespective of the merit of PBI-1402. However, PBI-1402 is totally different from EPO. PBI-1402 is an orally active small synthetic molecule and its mechanism of action is different from EPO, acting on a totally independent receptor of EPO. PBI-1402 does not produce exaggerated amounts of red blood cells leading to the thrombosis problem associated with EPO. Furthermore, PBI-1402 demonstrated anti-cancer activity – contrary to EPO which some studies indicated increases tumour growth in CIA and cancer- related anemia (“CRA”) patients treated with EPO. Therefore, these data suggest that PBI-1402 is a unique compound which can be used to treat patients with CIA and CRA, and fulfi ll this unmet medical need. A vast market, comprised of the more than two-thirds of cancer patients who develop anemia as a result of chemotherapy treatment, awaits a treatment for CIA such as is promised by PBI-1402. PBI1402 targets anemia associated with CKD More than twenty million patients in North America alone have been diagnosed with chronic kidney disease (“CKD”). Patients at advanced CKD stages (stage 3 and 4) often develop anemia even before they require hemodialysis. Patients still at the pre-dialysis stage would greatly benefi t from a non-invasive oral therapy to treat their anemia. ProMetic’s pre-clinical experiments based on a 5/6 nephrectomized rat model have demonstrated the ability of PBI-1402, when administered as monotherapy, to correct anemia caused by kidney failure. The 5/6 nephrectomized rat model is a gold standard model which simulates chronic renal failure in humans. This latter is a condition whereby the kidneys fail to produce suffi cient EPO which in turn promotes the production of red blood cells. This pre-clinical work not only created additional potential for PBI-1402 in the fi eld of anemia, it revealed immense new potential for PBI-1402 in the fi eld of CKD: a development not reported until very recently, as it awaited the fi ling of patents to protect ProMetic’s discovery. Therapeutics | ProMetic Life Sciences Inc. • IN ANIMAL MODELS, PBI-1402 DRAMATICALLY DELAYED KIDNEY FAILURE AND PROLONGED SURVIVAL. THE INITIAL INDICATION TARGETED BY PBI- 1402, ANEMIA IN CANCER PATIENTS, REMAINS A PRIORITY FOR PROMETIC AND REPRESENTS A HUGELY SIGNIFICANT MARKET OPPORTUNITY. THE DISCOVERY OF NEPHROPROTECTION HOWEVER, TAKES PBI-1402 INTO ANOTHER ARENA OF POTENTIAL WORTH ENTIRELY. THE ABILITY TO TREAT PATIENTS WITH CHRONIC KIDNEY DISEASE WOULD CONSTITUTE A BLOCKBUSTER EVENT IN THE PHARMACEUTICAL INDUSTRY AND A MAJOR CONTRIBUTION TO THE HEALTHCARE SYSTEM. BY DELAYING OR HALTING THE PROGRESS OF KIDNEY FAILURE, COSTLY DIALYSIS TREATMENTS AND TRANSPLANTS WOULD BE AVOIDED. Renal tissue from untreated animal Renal tissue from PBI-1402-treated animal Figure 1: Photomicrographs (100X) of renal tissue from 5/6-Nephrectomized animals untreated (left panel) and treated with PBI-1402 (right panel). Untreated tissue show deposits of collagen at the base of the glomerulus and all the surrounding tissue. Treated tissue show reduction of fi brosis and necrosis. Renal tissue from untreated animal Renal tissue from PBI-1402-treated animal Figure 2: Photomicrographs (100X) of renal tissue from nephrotoxicity induced by Doxorubicin (used in chemotherapy) in untreated mice (left panel) and treated with PBI-1402 (right panel). Untreated tissue show necrosis and fi brosis. PBI-1402-treated tissue show reduction in fl uid accumulation (proteins), of necrosis and fi brosis. • ProMetic Life Sciences Inc. | AR 2008 IN ANIMAL MODELS, PBI-1402 DRAMATICALLY DELAYED KIDNEY FAILURE AND PROLONGED SURVIVAL. FURTHERMORE, WHEN GIVEN AS A PROPHYLACTIC, PBI-1402 IS ABLE TO PROTECT THE KIDNEY AGAINST AGENTS INDUCING NEPHROTOXICITY, SUCH AS AGENTS USED IN CHEMOTHERAPY. PBI1402 demonstrates nephroprotection in CKD models Recent studies in the U.S. show CKD is one of the most expensive diseases to treat, and that costs are increasing rapidly. As indicated above, ProMetic discovered the nephroprotective activity of PBI-1402 while conducting experiments in anemia relief in the 5/6 nephrectomized rat model. Further to treatment of anemia (increase in hemoglobin level and red blood cells), we observed that animals treated with PBI-1402 fi lter blood by the kidney more effi caciously than non-treated animals. Additionally, we observed that kidneys from PBI-1402-treated animals were structurally conserved compared to non-treated animals. The latter demonstrated kidney fi brosis and sclerosis (holes and loss of tissue). Therefore, ProMetic has discovered that PBI-1402 can protect kidney tissue in the 5/6 nephrectomised model and could potentially serve to protect, delay or inhibit the progression of kidney failure in patients with CKD. In today’s medical arsenal there is very little recourse for patients who require nephroprotection. Anti- infl ammatories and treatments to reduce pressure on the kidney exist, and of course transplants are performed. ProMetic’s scientists believe they have discovered a tremendously important new therapeutic for a huge unmet need. Pre-clinical studies have demonstrated that PBI-1402 inhibits fi brosis and has an anti-infl ammatory effect. Additional data have shown, in short, that PBI-1402 shows great promise as an agent to halt the progress of CKD in human patients. With the resumption of discussions with many parties regarding potential fi nancing and partnership for PBI-1402, ProMetic is building further value into this compound by continuing its research and development on PBI-1402 and analogues, and compiling data from all pre-clinical trials to support patent protection. Analogues of PBI1402 Analogues of PBI-1402 represent a family of compounds and promise broad application for additional oncological, hematological and nephrological indications and markets. In addition, ProMetic has discovered a number of promising new chemical entities for the treatment of cancer and autoimmune diseases. Multi-drug candidates PBI-1308 This synthetic compound has been partnered with Laboratorios Dermatologicos Darier S.A. (“Darier”) for development in the fi elds of atopic dermatitis (eczema) and psoriasis. During 2008, Darier’s laboratories developed many PBI-1308 formulations, some of which were tested in pre-clinical models of atopic dermatitis at ProMetic. The results indicate that some formulations have the potential to treat atopic dermatitis. PBI-1393, PBI-1668, PBI-1522, PBI-1737 These fi rst-in-class compounds have demonstrated therapeutic potential in cancer and / or auto-immune disease models. Given their encouraging pre-clinical in vivo results, they could lead to refi nements in standard treatment protocols. Available for out-license and development fi nancing, these compounds represent a varied and abundantly potential pipeline for ProMetic. | ProMetic Life Sciences Inc. • MD&A Th e Management’s Discussion and Analysis of Operating Results and Financial Position, prepared March 25, 2009, aims at helping the reader to better understand the business of the Company and the key elements of its fi nancial results. It explains the trends of the fi nancial situation and the operating results of the Company for the 2008 fi nancial year compared to the 2007 operating results. Th is management’s discussion and analysis was prepared in accordance with Regulation 51-102 Respecting Continuous Disclosure Obligations and should be read in conjunction with the 2008 consolidated fi nancial statements and the accompanying notes included in this annual report. Th ese fi nancial statements were prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”). Unless otherwise indicated, all fi gures are expressed in Canadian dollars. • ProMetic Life Sciences Inc. | AR 2008 Management’s Discussion and Analysis as at March 25, 2009 Operations ProMetic Life Sciences Inc. (“ProMetic”) is a global biopharmaceutical business, comprised of a group of companies focused on developing technologies which bring pharmaceutical products to market that are Safer, Cost-effective and More Convenient than those already available. ProMetic’s business is organised into two distinct operating segments; Protein Technologies and Therapeutics, supported by a Head Offi ce in Montreal, Canada. Protein Technologies The Protein Technologies business unit has research and development operations in Maryland, U.S., and Cambridge, UK, and manufacturing operations on the Isle of Man, UK, and in Joliette, Canada. This business unit focuses on: • • • The development and manufacturing of plasma-derived therapeutics based on ProMetic’s unique, validated, state-of-the-art technology, the Plasma Protein Purifi cation System (“PPPS™”); Pathogen removal and diagnostics using technology which was originally developed in Pathogen Removal and Diagnostic Technologies Inc. (“PRDT”), a joint venture between ProMetic and the American Red Cross (“ARC“); and The manufacture of specialist fi ltration media for use in the manufacture of biopharmaceuticals, based on ProMetic’s patented Mimetic Ligand™ technology. Therapeutics The Therapeutics business unit is based in Laval, Canada. ProMetic’s lead therapeutic, PBI-1402, is an orally active compound being developed to treat different types of anemia. Recently positive data was announced for the Phase Ib/II clinical trial in chemotherapy-induced anemia (“CIA”). • • • • PBI-1402 is a fi rst-in-class orally active chemical entity for the treatment of CIA and conditions related in patients with CRA and CKD. PBI-1402 demonstrated nephroprotection properties in pre-clinical studies, making the compound a potential breakthrough drug for the treatment of CKD. PBI-1402 has shown evidence of anti-cancer activity in numerous pre-clinical models. PBI-1402’s mechanism of action is distinct from EPO – PBI-1402 acts at a different receptor and triggers a cell differentiation process at a much earlier bone marrow cell maturation stage. The Therapeutic unit has developed fi rst-in-class compounds with demonstrated therapeutic potential in cancer and / or proven autoimmune disease models. Management’s Discussion and Analysis | ProMetic Life Sciences Inc. • Long-term Strategy and Business Objectives ProMetic, for many years, has been building its Protein Technologies business strategy around its core Mimetic Ligand™ technology, using this as the key to unlock long-term strategic partnerships which allow ProMetic to progressively be involved in all stages of the drug development and manufacturing process. It is ProMetic’s stated intention to license its core technology then to add further value to our clients’ business by providing development services, regulatory support services, then ultimately becoming involved in manufacturing operations, at each stage establishing a foothold in the chain of value creation of our partner’s drugs. This model of outlicencing and partnering has, and is, serving ProMetic well in its Protein Technologies division. Already, ProMetic has entered into a number of these strategic alliances, for example with MacoPharma for the P-Capt® fi lter, with Kedrion S.p.A. (“Kedrion”), Blue Blood Biotech Corporation (“Blue Blood”) and Wuhan Institute of Biological Products (“WIBP”) for the PPPS™ process and with many major biopharmaceutical and pharmaceutical companies, such as HemCon Medical Technologies Inc. (“HemCon”) for access to the Mimetic Ligand™ technology. Furthermore, this model allows ProMetic to share in Licence Revenues, recovering the cost of earlier investments; Service Revenues, covering the costs of current operations; Manufacturing Revenues allowing further growth and expansion; and ultimately Royalties and Milestone Payments, rewarding our shareholders for supporting the technology. In respect to the Therapeutics unit, the Company has focused on the development of a pipeline of valuable compounds which it will ultimately outlicence or partner at the appropriate stage of development. It is not ProMetic’s intention to become involved in the process of late stage clinical trials (Phase III) or the regulatory approval process, without the support of a partner. Advanced discussions are underway with a number of major pharmaceutical companies with a view to licencing compounds from the Therapeutics unit’s portfolio. Management will be focused on the expansion of all of these relationships in the coming year, as well as seeking out new opportunities. Operating in a Diffi cult Economic Environment As stated previously ProMetic’s Management believes in an open and transparent communication with the shareholders of the Company. In that regard, during 2008, the Company has made a number of public statements commenting on the strength of its upcoming revenue streams and the actions being taken by Management in relation to driving effi ciencies and cost savings in the business, allowing the Company to extend its cash runway, and weather the current economic storm without going to the public market to raise funds for operations. While the Company has been able to achieve this through 2008, the worsening of the global economic situation, coupled with the impact that it has had on general liquidity around the world, has caused ProMetic to consider putting in place non-dilutive funding to extend its cash runway further. The ability to consider debt funding is testament to the strength of the ProMetic Business Model and the quality and reach of its technologies. Without the solid predicted revenues, debt would be diffi cult to obtain. On March 23, 2009, ProMetic entered into a loan agreement with Marigest Inc. which provided for $2.0 million of debt fi nance, bearing interest at a rate ranging from 12% to 15% per annum. In addition, the agreement provides that a further $3.0 million of debt can be called by ProMetic from the lender should certain trigger points related to the stock price of ProMetic be achieved. • ProMetic Life Sciences Inc. | AR 2008 Furthermore, on March 10, 2009, the UK subsidiary, ProMetic Biosciences Ltd, secured a £300,000 repayable working capital grant from the Isle of Man Department of Trade & Industry. This grant is repayable without interest. In the Management’s Discussion and Analysis of the 2008 fi nancial statements, the Company has continued its adoption of the recent guidance provided by the Canadian Institute of Chartered Accountants in its recent CPR alert on MD&A disclosures in volatile and uncertain times. In the following statements, Management intends to explain the impact of the market’s volatility on ProMetic’s performance, fi nancial condition and future prospects, through making reference to: • • Strategy and Risk Management; Analysis of the annual and 4 th Quarter Financial Results, including; − − − Going Concern Assumptions; Liquidity; Critical Accounting Estimates. Strategy and Risk Management ProMetic’s strategy in relation to its Protein Technologies business has always been clear: applying ProMetic’s proprietary technology to new and existing markets for large-scale drug purifi cation, drug development, proteomics (the study of proteins), and the elimination of pathogens. The ultimate benefi t that can be derived from ProMetic’s Protein Technologies unit is the enabling of our partners to manufacture more affordable and safer therapeutics, thus aligning ProMetic’s business perfectly with current market pressures on the healthcare sector. The manufacture of protein-based therapeutics has become a global growth industry, and the number of worldwide licencees of ProMetic’s proprietary enabling technologies is continually growing as well. Accordingly, we have expanded our ability to collectively serve our current and forthcoming licencees. This market, as yet has not been hit by the global economic crisis. The licensees of ProMetic’s core technologies often see its use as adding signifi cant value to their products, differentiating them from other players in the market. This differentiation results in continued growth in demand for ProMetic’s technologies. The bioseparations business continues to have strong and growing revenues, which based on the volume and regular nature of enquiries from blue-chip customers, looks set to continue. ProMetic’s strategy in relation to the Therapeutics unit has been to develop compounds which, ultimately, will lead to more cost-effective treatment regimes in already developed markets. ProMetic’s Management strongly believes that this strategy is highly relevant in the current market economy where cost pressures, above all else, impact the adoption of new drugs. Also, in relation to the Therapeutics unit, the Company is continuing its discussions with several interested parties regarding a licencing transaction for PBI-1402 and its analogues. These discussions continue despite the volatility in the market. However, Management has nevertheless acted to cut the burn-rate of this division, such that only costs associated with a potential partnering will be incurred. These cost-saving measures can clearly be seen in the fi nancial statements accompanying this Discussion and Analysis. Across the business, Management operates, or is putting in place, tools to monitor closely the fi nancial performance, both actual and forecasted, to ensure that appropriate measures are taken to limit cash burn at this time. At the same time, the debt fi nance secured has allowed the runway to be extended further, allowing ProMetic to sustain its position on not requiring additional equity investment at this time. Management’s Discussion and Analysis | ProMetic Life Sciences Inc. • 2008 IN SUMMARY Against a background of a global liquidity crisis, ProMetic’s core business continued to build: the Protein Technologies business gained further traction as a result of increased acceptance and commercialisation of its core products and services. In particular, the delivery of key components under the Kedrion agreement and the execution of the Abraxis BioScience, Inc. (“Abraxis”) transaction resulted in increased cash infl ows. Of course, such agreements have an “in-built” period over which the relationship beds-in and recurring revenues ramp-up to their maximum value. Progress made with these deals in 2008 established solid foundations for growth going forward into 2009 and beyond. Additionally, a strong sales performance from the Company’s core bioseparation resins business added further to the solidity of the top-line. Despite very similar revenues to the previous year, in which a single order made up over 40% of the revenues, 2008 turnover for the bioseparations was made achieved without one single order of the same magnitude. This clearly demonstrates a growing acceptance of the Company’s core technology. Furthermore, the early signs for 2009 are already showing continued strong growth. Sales of resin for prion binding also grew in relation to bulk treatment of blood plasma. The anticipated larger- scale adoption of the P-Capt® fi lter has been further delayed in the decision making process in the UK and Ireland. As announced previously by MacoPharma, they have proceeded to scale-up production of the P-Capt® fi lter in full anticipation of the fi lter’s adoption by these health agencies. Activity also continued in the Therapeutics business, with further progress being made with a number of interested parties toward a licencing transaction for PBI-1402. Again, this activity has taken longer than anticipated, however, with the strong data generated, Management believes that it is in the best interests of the shareholders to seek out a deal which refl ects the true value of the compound. With these growing revenues, and with the equity investment from Abraxis, ProMetic has managed its cash resources to full effect. There is no doubt that cash is tight, and that general illiquidity in the global fi nancial marketplace has placed a huge pressure on the business. However, through careful management of resources, ProMetic has been able to sustain itself. In addition to growing the top-line, Management was focused on reducing costs and repaying existing debt in 2008. As will be discussed later, both of these objectives were achieved, with all of the debt due to the Bank of Montreal (“BMO”) being repaid and the associated hypothec released in the fourth quarter of 2008, and a signifi cant reduction of the other long-term debt made, in accordance with the agreed repayment schedule. Further enhancing the position was a controlled, but systematic reduction of the underlying cost-base of the business. Further emphasis will be placed on cost control during 2009. As the Company moves into a period of growing revenues from the contracts which it has already secured, and continues to control its costs, it progresses towards achieving a position of being EBITDA positive. This relieves Management of the business of raising capital through equity, effectively using operating cash fl ows and debt to fi nance the business. Clearly, there is a transition period in moving to being EBITDA positive, during which access to debt, while not impossible, is diffi cult, especially when coupled with the diffi cult economic climate. However, as disclosed earlier, Management has been successful in raising $2.0 million of debt fi nance and £300,000 of repayable grant fi nance. During this transition period, Management of the business is focused on maximizing the use of other non-dilutive methods of funding to fi nance the business where possible. Overall, 2008 was a positive year for the business, particularly when considered against the tough global economic landscape. Management is confi dent that 2009 will see further expansion built on the solid foundation of 2008. • ProMetic Life Sciences Inc. | AR 2008 2008 Signifi cant Events Corporate • ProMetic raised $19.5 M in share capital; • • • ProMetic appointed Bruce Pritchard as Chief Financial Offi cer of the ProMetic Group; ProMetic approved the nomination of Mr. Bruce Wendel, representative for Abraxis, to its Board of Directors; On October 1, 2008, ProMetic repaid in full the remaining sums due to BMO resulting from a lawsuit, releasing the assets of the business from hypothecs held by BMO. Protein Technology • ProMetic confi rmed the effi cacy of the prion capture resins developed by PRDT at the Recovery of Biological Products Conference in the removal of prions from different solutions; • • • • • ProMetic announced the implementation of PRDT’s prion capture technology into the manufacturing process of Octapharma AG’s Octaplas® to further improve the prion safety margin minimizing the risk of transmission by plasma-derived products of variant Creutzfeldt-Jakob Disease (vCJD), the human form of “mad cow disease”; ProMetic signed a Letter of Intent to acquire ARC’s common stock holding in PRDT; ProMetic signed Strategic Agreements with Abraxis for the development and commercialization of four biopharmaceutical products targeting underserved medical conditions. The transaction included: − − An initial strategic investment in ProMetic of $7.4 M at $0.47 per share; Revenues to be derived from three further Agreements with Abraxis: - - - Service Agreement pursuant to which Abraxis engages ProMetic for various product development activities leading to the fi ling of Investigational New Drug Applications with the FDA; Licensing Agreement that includes development and sales milestone payments, as well as royalties to ProMetic on nets sales of the four products commercialized by Abraxis; Manufacturing Agreement whereby ProMetic would manufacture the bulk active ingredients for clinical trial requirements and upon product commercialization; ProMetic signed a $35 M Long-term Supply Agreement with a European Biopharmaceutical Company for the supply of one of ProMetic’s proprietary affi nity adsorbents for incorporation into this company’s manufacturing process; ProMetic entered into a collaborative development agreement with HemCon to develop and validate a sterile, single-use antibody capture device for the removal of isoagglutinin antibodies. Therapeutics • ProMetic reported additional results from the PBI-1402 CIA trial at the Annual Congress of the European Hematology Association demonstrating that a once daily oral treatment of PBI-1402 induces a signifi cant increase in haemoglobin level, red blood cell count and hematocrit in CIA patients; • Data on PBI-1737 in prostate cancer, PBI-0110 alone and in combination with gemcitabine in pancreatic cancer, and PBI-1308 were presented at the American Association for Cancer Research Annual Meeting. Management’s Discussion and Analysis | ProMetic Life Sciences Inc. • Post Balance Sheet Events On March 23, 2009, ProMetic entered into a loan agreement with Marigest Inc. which provided for $2.0 million of debt fi nance, bearing interest at a rate ranging from 12% to 15% per annum. In addition, the agreement provides that a further $3.0 million of debt can be called by ProMetic from the lender should certain trigger points related to the stock price of ProMetic be achieved. Furthermore, on March 10, 2009, the UK subsidiary, ProMetic Biosciences Ltd, secured a £300,000 repayable working capital grant from the Isle of Man Department of Trade & Industry. This grant is repayable without interest. Selected Annual Information The following selected annual information is derived from the consolidated fi nancial information of the Company for each of the three most recently completed fi nancial years. The fi nancial statements are prepared in accordance with Canadian GAAP. More fi nancial information, including the Company’s Annual Information Form, is available on SEDAR (www.sedar.com). (in thousands of Canadian dollars, except for per share amounts) December 31 Revenues Net loss Net loss per share (basic and diluted) Total assets Long-term debt 2008 10,154 20,178 0.07 19,152 3,949 2007 8,436 22,342 0.09 19,387 6,499 2006 2,647 30,459 0.20 40,727 11,577 The increase in revenues over the 3 year period is attributable to increasing resin sales and service fees in the Protein Technologies unit. This increase in revenues, combined with a systematic reduction in costs has resulted in a reduction in the annual net loss over the same period. This reduction in net loss has been achieved despite the booking of an expense relating to a guarantee of $1,140. The reduction in Total Assets from 2006 to 2007 relates to cash which totalled $20.8 million in 2006 and $2.2 million in 2007. Further discussion and analysis can be found elsewhere in this document. • ProMetic Life Sciences Inc. | AR 2008 Results of Operations Year ended December 31, 2008, compared to year ended December 31, 2007 Revenues Total revenues for 2008, which were mostly derived from the Protein Technology unit, were $10.2 million compared with $8.4 million in 2007. Sales of affi nity resin were comparable with the previous year, in which a single order made up over 40% of the revenues, 2008 turnover for the bioseparations was made achieved without one single order of the same magnitude. This clearly demonstrates a growing acceptance of the Company’s core technology. The growth in revenue came from the service fees associated with the development agreements with Kedrion and Abraxis. These represent the initial revenues which will ramp to a higher level in 2009. As at December 31, 2008, deferred revenues were $1.4 million. The 2008 deferred revenues consisted primarily of advance billing for the biogenerics and development of prion removal resin programs. Costs of Goods Sold The costs of goods sold for the year ended December 31, 2008, totalled $1.9 million compared to $2.2 million in 2007. The related revenues totalled $4.6 million and $6.6 million giving respectively a gross margin of 60% in 2008 compared to 67% for 2007. The difference in the gross margin came from the single order in 2007 which made up over 40% of the revenues. Research and Development expenses rechargeable Research and development expenses rechargeable totalled $1.0 million for the year 2008 compared with $0.6 million in 2007. The increase is mainly attributed to the services agreements signed with Kedrion and Abraxis during the year. Research and Development Expenses Research and development expenses were $15.8 million for the year ended December 31, 2008, compared to $16.3 million for the same period in 2007. The variance is mainly attributable to the cost reduction program implemented by Management during the year. Administrative and Marketing Expenses Administrative and marketing expenses decreased signifi cantly to $5.3 million for the year ended December 31, 2008, from $6.6 million for the year ended December 31, 2007. No specifi c reasons other than the cost-cutting measures implemented by Management are responsible for this decrease. Amortization Expenses Amortization expenses for the year ended December 31, 2008, were lower at $1.5 million compared to $3.0 million in December 31, 2007. This decrease is explained by the amortization of a license in 2007, which was then carried forward at a $NIL value, requiring no further amortization in 2008. Net Results The Company incurred a net loss of $20.2 million, or $0.07 per share (basic and diluted), for the year ended December 31, 2008, as compared to a net loss of $22.3 million, or $0.09 per share (basic and diluted) for the year ended December 31, 2007. This signifi cant decrease in net loss is the result of the increase in revenues. In addition, the impact of the cost reduction program contributed greatly to the improvement of the net results. Foreign exchange losses amounted to $1.1 million for 2008, compared to a gain of $0.8 million in 2007. This is mainly caused by the strengthening of the Canadian dollar and US dollar vis-à-vis the British Pound, and the weakening of the Canadian dollar against the US dollar. Since a majority of the expenses are in US dollars, and the majority of revenues are in British Pounds, the Company has suffered as a result of these movements. This reduction in net loss has been achieved despite the booking of an expense relating to a guarantee of $1,140. Management’s Discussion and Analysis | ProMetic Life Sciences Inc. • Capital Resources The Company has no commitments for capital expenditure at the date of the fi nancial statements. Over the coming years, it may be necessary for the Company to invest in further capital expenditure in order to service the requirements of certain of its contracts. As the Company grows and develops a sustainable revenue line and resulting positive cash fl ow, it should be possible for the business to raise cash for expansion through debt facilities. Liquidity and Financial Position Current assets totalled $8.1 million as at December 31, 2008, and $8.3 million as at December 31, 2007. Additional details are provided under the heading Cash Flows. Accounts receivable increased to $4.4 million for the year ended December 31, 2008, compared to $3.3 million in the year ended December 31, 2007. Accounts receivables consist mostly of trade receivables related to the sales of resin, as well as R&D tax credit receivables related to the activities of our Therapeutics unit. The net capital assets decrease to $2.4 million in 2008, from $3.4 million in 2007. This is mainly attributable to the effect of amortization. Cash Flows Cash fl ows used in operating activities amounted to $15.1 million for the year ended December 31, 2008, compared with $22.0 million in 2007. The signifi cant reduction in cash fl ows used for operating activities is mainly attributed to net change in working capital and the improved trading results. Cash fl ows from fi nancing activities amounted to $15.2 million for the year ended December 31, 2008, compared to $5.9 million in 2007. During 2008, the Company issued 53.6 million common shares resulting in an infl ow of $19.5 million. The main issuance of shares for 2008 was composed of private placements qualifi ed by supplements to a base shelf prospectus with existing and new shareholders for 12.6 million shares at $0.40 in April 2008, as well as 14.0 million shares at $0.32 and another 1.3 million shares at $0.38 in June 2008. In addition, the Company closed a private placement qualifi ed by supplement to a base shelf prospectus with Abraxis on September 3, 2008, raising $7.4 million through the issuance of 15.7 million shares at $0.47 per share. The cash fl ows from fi nancing were reduced by the repayment of the long-term. Cash fl ows used in investing activities amounted to $0.3 million compared with $1.3 million for 2007. The addition to capital assets of $0.7 consisted mainly of equipment related to the shipment of signifi cant affi nity ligand adsorbent products. The addition to licences and patents were mainly related to patent expenditures for the PBI- 1402 program. For 2009, the Company intends to generate cash from its commercial activities and the issuance of additional shares or debts. Off -Balance Sheet Arrangements In the normal course of business, the Company fi nances 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, 2008, are included in the contractual obligations table below. • ProMetic Life Sciences Inc. | AR 2008 Contractual Obligations In the normal course of operations, the Company has entered into several contracts resulting in the following payments over the next few years: (in thousands of Canadian dollars) Long-term debt Operating leases and obligations Total contractual obligations Less than Year Payments due by period – Years – Years After Years 3,883 23 3,906 – 39 39 – 4 4 – – – Total 3,883 66 3,949 Besides operating leases, the Company has no signifi cant research and development obligations. Related Party Transactions On December 5, 2008, the Company entered into an agreement to provide a guarantee (the “Guarantee”) in favour of Camofi Master LDC (“Camofi ”), relating to an amended and restated loan agreement (the “Loan”) that Camofi had provided to a company (“the borrower”) wholly owned by a senior offi cer of the Company. The Loan was originally contracted in December 2007 for the purposes of purchasing shares of the Company. The Guarantee provides that the Company must be prepared to fulfi ll the borrower’s obligations with respect to the full payment of capital and interest for the Loan if the borrower is unable to do so. Any such payment shall be made within two days of receipt of notice of default from Camofi . Alternatively, the borrower can force Camofi to liquidate some or all of the shares of the Company that are held as collateral to cover the Loan. If called upon under the Guarantee, the Company may chose either to pay in cash or request that the borrower instruct Camofi to liquidate up to 2,300,000 shares of the Company to repay the Loan. In conjunction with the above, the Company has entered into an agreement with the borrower providing that any payment made by the Company under the Guarantee immediately triggers an equivalent receivable from the borrower. This receivable bears interest at 10% per annum, is evidenced by a demand promissory note and, upon termination of the Loan and the pledge agreement, will be secured by 2,300,000 shares of the Company until all payments of principal and interests owed to the Company are made. This receivable will be recorded at fair value by the Company only when its collectability is reasonably assured. The Company risks losing a maximum amount of $1,873 plus interest and penalties, without taking into consideration the net proceeds arising from the disposal of the 9,500,000 pledged shares of the Company. The Company has not required any consideration in exchange for this Guarantee. As at December 31, 2008, the Loan has an outstanding balance of $US 1,374,593 and is repayable in full by December 11, 2009. As at December 31, 2008, the Company has recognized an amount of $189 as a loss for amounts already disbursed to the borrower and in addition, estimated that there is a likelihood of having to make additional payments under the Guarantee which will amount to $951. As such, an amount of $951 has been accrued as at December 31, 2008, under accounts payable and accrued liabilities, and $1,140 has also been recorded as a loss. Management’s Discussion and Analysis | ProMetic Life Sciences Inc. • Critical Accounting Estimates The preparation of fi nancial 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 fi nancial statements, and the reported amounts of revenues and expenses during the reporting periods. We have identifi ed the following accounting policies that we believe require application of Management’s subjective judgment, often requiring the need to make estimates about the effect of matters that are inherently uncertain, and that may change in subsequent periods. Our actual results could differ from these estimates and such difference could be material. Impairment of Long-Lived Assets Capital assets and licenses and patents subject to amortization are tested for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable when it exceeds the sum of the undiscounted cash fl ows expected from its use and eventual disposal. In such a case, an impairment loss must be recognized and is equivalent to the excess of the carrying amount of a long-lived asset over its fair value. 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 benefi ts could be regarded as being reasonably certain. Related tax credits are accounted for as a reduction to research and development expenditures on the condition that the Company is reasonably certain that these credits will materialize. During 2008 and 2007, no development costs were deferred. Stock-Based Compensation, Warrants, and Rights to Acquire Shares When the Company issues warrants and stock options (to its employees, directors and offi cers), a fair value is derived using the Black-Scholes pricing model. The application of this pricing model requires Management to make assumptions regarding several variables, including the expected life of the options and warrants, 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. For the year ended December 31, 2008, the Company expensed $307,000 for stock-based compensation compared to $367,000 for the same period in 2007. Regarding issuance of warrants and rights to acquire shares, $2.3 million was accounted for in 2008, and nothing was accounted for in 2007. • ProMetic Life Sciences Inc. | AR 2008 Changes in Accounting Policies and Future Accounting Standards Going Concern On January 1, 2008, in accordance with the applicable transitional provisions, the Company applied the new recommendations of Section 1400, General Standards of Financial Statement Presentation of the Canadian Institute of Chartered Accountants’ Handbook, dealing with the going concern assumption. The new recommendations, which are effective for fi scal years beginning on or after January 1, 2008, require Management to make an assessment of the Company’s ability to continue as a going concern over a period which is at least, but is not limited to, twelve months from the balance sheet date. The new requirements only address disclosures and have no impact on the Company’s fi nancial results. Capital Disclosures On January 1, 2008, in accordance with the applicable transitional provisions, the Company applied the recommendations of Section 1535, Capital Disclosures, of the Canadian Institute of Chartered Accountants’ Handbook. This new section, effective for fi scal years beginning on or after October 1, 2007, established standards for disclosing information about the Company’s capital and how it is managed. The new accounting standard only addresses disclosures and has no impact on the Company’s fi nancial results. Inventories On January 1, 2008, in accordance with the applicable transitional provisions, the Company applied the recommendations of new Section 3031, Inventories, of the Canadian Institute of Chartered Accountants’ Handbook. This new section, effective for fi scal years beginning on or after January 1, 2008, replaces Section 3030 of the same title. It provides guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realizable value and deals with the cost formulas that are used to assign costs to inventories. The new standard also requires additional disclosure. This change had no signifi cant impact on the fi nancial statements as at December 31, 2008, except for additional disclosures. Financial Instruments – Disclosures and Presentation On January 1, 2008, in accordance with the applicable transitional provisions, the Company applied the recommendations of Section 3862, Financial Instruments – Disclosures and Section 3863, Financial Instruments – Presentation, of the Canadian Institute of Chartered Accountants’ Handbook. Section 3862, Financial Instruments – Disclosures, describes the required disclosures related to the signifi cance of fi nancial instruments on the entity’s fi nancial position and performance and the nature and extent of risks arising for fi nancial instruments to which the entity is exposed and how the entity manages those risks. Section 3863, Financial Instruments – Presentation, establishes standards for presentation of fi nancial instruments and non- fi nancial derivatives. These Sections complement the principles of recognition, measurement and presentation of fi nancial instruments of Section 3855, Financial Instruments – Recognition and Measurement and Section 3865, Hedges and replace the presentation standards of Section 3861, Financial Instruments – Disclosure and Presentation. Goodwill and Intangible Assets In February 2008, the Canadian Institute of Chartered Accountants (“CICA”) published new Section 3064, Goodwill and Intangible Assets, to replace Section 3062, Goodwill and Other Intangible Assets. Publication of this new section resulted in the withdrawal of Section 3450, Research and Development Costs, and consequential amendments to certain recommendations in the CICA Handbook. Management’s Discussion and Analysis | ProMetic Life Sciences Inc. • The new section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets by profi t-oriented enterprises. This new section is effective for fi scal years beginning on or after October 1, 2008 and the Company will implement it as of January 1, 2009. The Company’s Management is not able to assess the impact that the application of this new section will have on the fi nancial statements. Business Combination, Consolidated Financial Statements and Non-Controlling Interests In January 2009, the ClCA issued Section 1582 Business Combinations, Section 1601 Consolidated Financial Statements and Section 1602 Non-Controlling Interests, which supersede 1581 Business Combinations and Section 1600 Consolidated Financial Statements. The standards apply to annual and interim fi nancial statements relating to fi scal years beginning on or after January 1, 2011. Section 1582 establishes standards for the accounting for a business combination. It provides the Canadian GAAP equivalent to IFRS 3, Business Combinations (January 2008) and applies prospectively to business combinations for which the acquisition date is on or after the beginning of the fi rst annual reporting period beginning on or after January 1, 2011. Section 1601, together with Section 1602, establishes standards for the preparation of consolidated fi nancial statements. Section 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated fi nancial statements subsequent to a business combination. It is equivalent to the corresponding provisions of IFRS IAS 27, Consolidated and Separate Financial Statements (January 2008). Earlier application of the standards is permitted. If an entity applies the Sections before January 1, 2011, it shall disclose that fact and apply Sections 1582, 1601 and 1602 at the same time. The Company is currently evaluating the impact of adopting the standards as part of its IFRS conversion plan. International Financial Reporting Standards In February 2008, the Canadian Accounting Standards Board (“AcSB”) announced that, as of January 1, 2011, publicly-accountable enterprises will have to adopt International Financial Reporting Standards (“IFRS”). Accordingly, the Company will adopt these new standards during its fi scal year beginning on January 1, 2011. The AcSB also stated that, during the transition period, enterprises will be required to provide comparative fi gures in accordance with the IFRS. The IFRS will require additional fi nancial statement disclosure and, while the Company’s conceptual framework is similar to GAAP, enterprises will have to take account of differences in accounting principles. The Company is currently assessing the impact of these new standards on its consolidated fi nancial statements, however, at this time, it is not possible to reasonably determine the impact of this accounting change on the Company’s fi nancial reporting. Other new standards have been published, but they should not have a signifi cant impact on the Company’s fi nancial statements. • ProMetic Life Sciences Inc. | AR 2008 Capital Stock Information Authorized Share Capital The authorized share capital of the Company consists of an unlimited number of common shares, and an unlimited number of preferred shares issuable in series. Issued and Outstanding Share Capital The following details the issued and outstanding equity securities of the Company: Common Shares As at December 31, 2008, the capital stock issued and outstanding consisted of 317,401,768 common shares (263,821,962 as at December 31, 2007). As at March 25, 2009, the capital stock issued and outstanding consisted of 317,401,768 common shares. Share Purchase Warrants and Rights to Acquire Shares The following is a summary of the share purchase warrants and rights to acquire shares outstanding as at December 31, 2008: Issue Date Expiry Date Number Outstanding Exercise Price December 2005 January 2006 December 2006 April 2008 September 2008 Stock Options December 2010 January 2011 December 2009 April 2010 March 2012 19,612,618 2,999,394 1,686,187 757,700 14,495,452 US $0.30 US $0.30 $0.324 $0.44 and $0.48 $0.47 As at December 31, 2008, the Company has 7,956,417 stock options outstanding with exercise prices ranging from $0.31 to $3.00. Risks and Uncertainties Financing Risk Until each of the units is independently fi nanced, the success of the Company is dependent on its ability to support the development of its two operating units and its ability to bring its products to market, obtain the necessary regulatory approvals, and achieve future profi table operations. This is dependent on the Company’s ability to obtain adequate fi nancing through a combination of fi nancing activities and operations. It is not possible to predict either the outcome of future research and development programs nor the Company’s ability, nor its operating units’ ability, to fund these programs going forward. Credit Risk Credit risk is the risk of fi nancial loss to the Company if a customer, partner or counterparty to a fi nancial instrument fails to meet its contractual obligations and arises principally from the Company’s cash and cash equivalents, short-term investments and receivables. The carrying amount of the fi nancial assets represents the maximum credit exposure. The fi nancial instruments that potentially expose the Company to credit risk are primarily cash and trade accounts receivables, and the excess of interest in the joint venture PRDT over proportionate share in consolidated net asset. Management’s Discussion and Analysis | ProMetic Life Sciences Inc. • The Company places its cash in titles of high quality issued by government agencies and fi nancial institutions and diversifi es its investment in order to limit its exposure to credit risk, while applying implemented investment guidelines in place. The Company reviews a new customer’s credit history before extending credit and conducts regular reviews of its existing customers’ credit performance. Liquidity Risk Liquidity risk is the risk that the Company will not be able to meet its fi nancial obligations as they come due. To the extent that the Company does not believe it has suffi cient liquidity to meet its current obligations, the Management considers securing additional funds through equity, debt or partnering transactions. The Company manages its liquidity risk by continuously monitoring forecasts and actual cash fl ows. Accounts payable and accrued liabilities are due within the current operating period. Market Risk Market risk is the risk that changes in market prices, such as interest rates and foreign exchange rates will affect the Company’s income or the value of its fi nancial instruments. Interest Risk The majority of the Company’s debt is at fi xed rate, there is limited exposure to interest rate risk. Foreign Exchange Risk The Company is exposed to the fi nancial risk related to the fl uctuation of foreign exchange rates. The Company operates in the United Kingdom and in the U.S. and portion of its expenses incurred and revenues generated are in US dollar and in Sterling Pound. Financial instruments potentially exposing the Company to foreign exchange risk consist principally of cash, receivables, accounts payable and accrued liabilities and long-term debt. The Company manages the foreign exchange risk by holding foreign currencies on hand to support foreign currencies forecasted cash outfl ows, and the majority of the Company’s revenues are in US dollar and in Sterling Pound which mitigates the foreign exchange risk. Equity Risk The changes in the Company’s equity price could impact its ability to raise additional capital. Forward-Looking Statements The information contained in Management’s Discussion and Analysis of Operating Results and Financial Position contains statements regarding future fi nancial 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. We have attempted to identify these statements by use of words such as “expect”, “believe”, “anticipate”, “intend”, and other words that denote future events. These forward- looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. These risks and uncertainties include but are not limited to the Company’s ability to develop, and successfully manufacture pharmaceutical products, and to obtain contracts for its products and services and commercial acceptance of advanced affi nity separation technology. Additional information on risk factors can be found in the Company’s Annual Information Form for the year ended December 31, 2008. Shareholders are cautioned that these statements are predictions and these actual events or results may differ materially from those anticipated in these forward-looking statements. Any forward-looking statements we may make as of the date hereof are based on assumptions that we believe to be reasonable as of this date and we undertake no obligation to update these statements as a result of future events or for any other reason, unless required by applicable securities laws and regulations. • ProMetic Life Sciences Inc. | AR 2008 Disclosure Controls and Procedures Based on an evaluation of the effectiveness of ProMetic’s disclosure controls and procedures, the President and Chief Executive Offi cer (“CEO”) and the Chief Financial Offi cer (“CFO”) have concluded that disclosure controls and procedures were effective as of December 31, 2008, and that their design provides reasonable assurance that material information relating to ProMetic, including its consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which the annual fi lings are being prepared. Further discussion is provided here as to how this conclusion was arrived at. Controls Environment Management believes that the controls environment in which ProMetic operates can be summarised diagrammatically as follows, demonstrating the various layers of control that surround the fi nancial ledgers: Corporate Table of Authorities as Adopted by the Board of Directors Disclosure Controls and Procedures Statutory D is ent m n o ir v n E l a r u t l u C r e s t e n e Q u a rterly Reportin r n a l Controls F t s r a g m e w o r k General Ledger u s c l o I n tate m S l a i c n a n i F Information Technology / Confi dentiality and Disclosure Agreement / Intellectual Property / Contract of Employment / Insider Policy Within each of these layers, policies exist to provide: • Reasonable assurance that: − − Material information relating to ProMetic is made known to the CEO and CFO by others, particularly during the period in which the annual fi lings are being prepared; Information required to be disclosed by ProMetic in its annual fi lings, interim fi lings or other reports fi led or issued by ProMetic under securities legislation is recorded, processed, summarised and reported within the time periods specifi ed in securities legislation; • Reasonable assurance regarding the reliability of fi nancial reporting and the preparation of fi nancial statements for external purposes in accordance with Canadian GAAP. Management’s Discussion and Analysis | ProMetic Life Sciences Inc. • Approach Used to Assess the Effectiveness of Internal Controls at ProMetic In order to assess the effectiveness of internal controls at ProMetic, Management has taken a top-down, risk- based approach as recommended by the Canadian Securities Administrators. This involves three main stages: 1) 2) 3) Identifying and prioritising the key risk areas; Identifying and evaluating the associated internal controls; Classifying any defi ciencies that may exist and putting procedures in place to remedy these weaknesses. 1) Identifying and prioritising the key risk areas Based on an assessment of the business, Management considers the following to be the key risk areas for ProMetic: • • • • • Revenue recognition; Cash and cash management; Intellectual Property; The current effectiveness of the Disclosure Committee; Payroll (based on relative size of the sums involved). 2) Identifying and evaluating the associated internal controls For revenue recognition, the issue lies not with accounting for product sales, which is straight forward, but in ensuring revenues from complex contracts with multiple deliverables are accounted for in accordance with EIC-142. Comprehensive policy notes are prepared by the CFO with input from the legal and business development representatives responsible for the deal negotiations. These are then circulated to the Audit Committee and the auditors. Collective agreement is sought before applying the policy. Cash and cash management is controlled tightly by the CFO in conjunction with the Finance Director in Canada and the Financial Controller in the UK. Daily cash fl ow forecast covering a three month cash horizon are updated three times each week and circulated to the CFO and once a week to the CEO. This level of visibility together with regular reconciliation of bank accounts provides tight control over cash. The Intellectual Property Portfolio (“IP”) is managed by the legal department at PLI. All expenditure on IP is made in compliance with the corporate authorisation policies. The Legal team, Group CEO and CEO of PBL carry out regular reviews of the IP portfolio. The Disclosure Committee composition and remit complies with current best practice and has recently been updated by the Board of Directors. The Charter of the Disclosure Committee lays out its role and responsibilities. Payroll operations are linked closely to the function of the Human Resources departments in Canada and the UK as well as the Compensation Committee where the payroll cost relates to senior management. These functions feed exceptions into the regular payroll process which, when combined by review and authorisation procedures implemented by fi nance personnel provides for a high level of control. 3) Classifying any defi ciencies that may exist and putting procedures in place to remedy these weaknesses Having reviewed and tested the controls framework around each of the key areas of risk identifi ed and described above, management has concluded that no material weaknesses exist. There are certain areas that have been identifi ed where controls and operation of controls could be strengthened. Management will address these early in 2009. • ProMetic Life Sciences Inc. | AR 2008 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 (basic and diluted) Weighted average number of outstanding shares DECEMBER 31 4.0 5.2 SEPTEMBER 30 3.3 3.6 JUNE 30 1.1 5.6 2008 MARCH 31 1.8 5.8 DECEMBER 31 1.7 5.8 SEPTEMBER 30 0.7 7.0 0.02 0.01 0.02 0.02 0.02 0.03 JUNE 30 3.0 4.8 0.02 2007 MARCH 31 3.0 4.7 0.02 294 286 286 266 260 239 235 235 Fourth Quarter The following information is a summary of selected unaudited consolidated fi nancial information of the Company for the three-month periods ended December 31, 2008, and 2007. (in thousands of Canadian dollars) Revenues Operating expenses Operating loss Payable related to a lawsuit (Gain) loss on asset disposal Charges related to a guarantee Net interest expenses Net loss 2008 3,981 7,508 3,527 – (1) 1,140 506 5,172 2007 1,722 6,909 5,187 196 85 – 413 5,881 Revenues for the fourth quarter of 2008 are $2.3 million higher than the same quarter in 2007. This increase in due to the new services agreement signed in 2008 with Kedrion and Abraxis and the selling of a signifi cant quantity of affi nity resins from the subsidiary in the UK. Operating expenses are higher by $0.6 million in 2008. This combines increased cost of goods, consistent with the increased revenues. However, netted against this is an overall reduction in other expenses. The research and development expenses and administrative expenses decreased following the cost reduction plan followed thoroughly by Management during the current year. The loss on exchange rate increased due to the strengthening of the American dollar during the fourth quarter 2008. Finally, the amortization expenses decreased compared to last year because of a fully amortized license in 2007. The net loss decreased signifi cantly during the fourth quarter of 2008 mainly due to the increased gross profi t resulting from increased sales. This reduction in net loss has been achieved despite the booking of an expense relating to a guarantee of $1,140. Cash outfl ows from operating activities were $1.1 million compared to $5.6 million for the same period in 2007. This decrease is mainly attributed to the fourth quarter 2008 revenues and reduction costs measures. Cash outfl ows from fi nancing activities of $1.8 million were higher in the fourth quarter of 2008 compared to an infl ow of $1.2 million in 2007. This decrease is mainly attributed to proceeds from shares issues in the fourth quarter of 2007 of $2.4 million. | ProMetic Life Sciences Inc. • Consolidated Financial Statements of Prometic Life Sciences Inc. Years ended December 31, 2008 and 2007 • ProMetic Life Sciences Inc. | AR 2008 Management Report The accompanying consolidated fi nancial statements for ProMetic Life Sciences Inc. are Management’s responsibility and have been approved by the ProMetic Life Sciences Inc. Board of Directors. These fi nancial statements were prepared in accordance with Canadian generally accepted accounting principles. They include some amounts that are based on estimates and judgments. The fi nancial information contained elsewhere in the annual report is consistent with those obtained in the fi nancial statements. To ensure the accuracy and the objectivity of the information contained in the fi nancial 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 fi nancial documents are reliable and provide an adequate basis for the fi nancial statements, and that the Company’s assets are properly accounted for and safe-guarded. The Board of Directors upholds its responsibility for the fi nancial statements in this annual report primarily through its Audit Committee. The Audit Committee is made up of independent directors who review the Company’s annual consolidated fi nancial statements, as well as Management’s Discussion and Analysis of operating results and fi nancial position, and recommend their approval by the Board of Directors. 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 fi nancial information and other related subjects. i L Pierre Laurin Pi Chairman of the Board, President and Chief Executive Offi cer Bruce Pritchard Chief Financial Offi cer Montreal, Canada March 25, 2009 Auditor’s Report To the shareholders of ProMetic Life Sciences Inc. We have audited the consolidated balance sheets of ProMetic Life Sciences Inc. as at December 31, 2008 and 2007 and the consolidated statements of operations and comprehensive loss, defi cit, contributed surplus and cash fl ows for the years then ended. These fi nancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these fi nancial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the fi nancial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the fi nancial statements. An audit also includes assessing the accounting principles used and signifi cant estimates made by management, as well as evaluating the overall fi nancial statement presentation. In our opinion, these consolidated fi nancial statements present fairly, in all material respects, the fi nancial position of the Company as at December 31, 2008 and 2007, and the results of its operations and its cash fl ows for the years then ended in accordance with Canadian generally accepted accounting principles. 1 Montreal, March 25, 2009 1 Chartered accountant auditor permit no. 22865 Consolidated Financial Statements | ProMetic Life Sciences Inc. • Consolidated Balance Sheets (In thousands of Canadian dollars) December 31, Assets Current assets Cash Accounts receivable (note 4) Inventories (note 5) Prepaid expenses Investments (note 6) Capital assets (note 7) Licenses and patents (note 8) Liabilities Current liabilities Bank loan (note 9) Accounts payable and accrued liabilities (note 10) Payable related to a lawsuit Deferred revenues Current portion of long-term debt Long-term debt (note 11) Preferred shares, retractable at the holder's option (note 6 b)) Shareholders' equity Share capital (note 12) Contributed surplus Defi cit The accompanying notes are an integral part of the consolidated fi nancial statements. 2008 2007 $ 917 4,414 2,567 239 8,137 3,585 2,403 5,027 $ 19,152 $ 911 7,112 - 1,419 3,906 13,348 43 4,348 17,739 210,972 9,338 (218,897) 1,413 $ 19,152 $ 2,163 3,349 2,233 578 8,323 2,682 3,425 4,957 $ 19,387 $ 205 4,657 1,910 1,560 3,358 11,690 3,141 3,053 17,884 192,225 6,753 (197,475) 1,503 $ 19,387 • ProMetic Life Sciences Inc. | AR 2008 Consolidated Statements of Operations and Comprehensive Loss (In thousands of Canadian dollars except for per share amounts) Years ended December 31, Revenues Charges Costs of goods sold Research and development expenses rechargeable Research and development expenses Administration and marketing expenses Loss (Gain) on exchange rate Amortization of capital assets Amortization of license and patents Loss before the following items Gain (loss) on disposal of capital asset Charge related to a guarantee (note 13) Interests and penalties related to a lawsuit Net interest expenses Net loss and comprehensive loss Net loss per share (basic and diluted) Weighted average number of outstanding shares (in thousands) For supplemental operations information, see note 15 The accompanying notes are an integral part of the consolidated fi nancial statements. Consolidated Statements of Defi cit (In thousands of Canadian dollars) Years ended December 31, Defi cit, beginning of the year Net Loss Share issue expenses Defi cit, end of year The accompanying notes are an integral part of the consolidated fi nancial statements. 2008 2007 $ 10,154 $ 8,436 1,856 1,001 15,812 5,326 1,146 1,058 425 26,624 $ (16,470) 355 (1,140) (581) (2,342) $ (20,178) (0.07) 293,715 2,201 610 16,280 6,606 (798) 1,607 1,385 27,892 $ (19,456) (85) – (326) (2,475) $ (22,342) (0.09) 242,321 2008 2007 $ 197,475 20,178 1,243 $ 218,897 $ 174,179 22,342 954 $ 197,475 Consolidated Financial Statements | ProMetic Life Sciences Inc. • Consolidated Statement of Contributed Surplus (In thousands of Canadian dollars) Years ended December 31, 2008 and 2007 Stock-based compensation Warrants and rights to acquire shares Total contributed surplus Other Contributed surplus, as at December 31, 2006 $ 400 $ 5,486 $ 2,136 $ 8,022 Stock-based compensation Exercise of options Exercise of warrants Contributed surplus, as at December 31, 2007 Stock-based compensation Issuance of rights and warrants Contributed surplus, as at December 31, 2008 367 (10) – 757 $ 307 – $ 1,064 – – (1,626) 3,860 – 2,278 6,138 $ $ – – – 2,136 – – 2,136 $ $ 367 (10) (1,626) 6,753 307 2,278 9,338 $ $ The accompanying notes are an integral part of the consolidated fi nancial statements. • ProMetic Life Sciences Inc. | AR 2008 Consolidated Statements of Cash Flows (In thousands of Canadian dollars) Years ended December 31, Cash fl ows used in operating activities Net loss and comprehensive loss Adjustments to reconcile net loss to cash fl ows used in operating activities Interests on long-term debt Charges paid with shares Stock-based compensation Unrealized loss (gain) on exchange rate (Gain) Loss on disposal of capital assets Amortization of capital assets Amortization of licenses and patents Change in working capital items (note 20) Cash fl ows from fi nancing activities Proceeds from share issues and rights to acquire shares Share issue expenses Bank loan Repayment of bank loan Long-term debt Repayment of long-term debt Cash fl ows used in investing activities Acquisition of an investment Disposal of capital assets Additions to capital assets Additions to licenses and patents Net decrease in cash Net effect of currency exchange rate on cash Cash, beginning of year Cash, end of year For supplemental cash fl ow information, see note 20 The accompanying notes are an integral part of the consolidated fi nancial statements. 2008 2007 $ (20,178) $ (22,342) 1,200 1,492 307 1,388 (355) 1,058 425 (14,663) (443) (15,106) 19,451 (1,150) 706 – – (3,794) 15,213 (3) 405 (64) (701) (363) (256) (990) 2,163 917 $ 1,215 139 367 (313) 85 1,607 1,385 (17,857) (4,160) (22,017) 9,037 (1,043) 650 (445) 22 (2,354) 5,867 (147) – (622) (518) (1,287) (17,436) (1,226) 20,825 2,163 $ Notes to Consolidated Financial Statements | ProMetic Life Sciences Inc. • (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Years ended December 31, 2008 and 2007 Note 1. GOVERNING STATUTES, NATURE OF OPERATIONS AND GOING CONCERN 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 purifi cation of drugs, genomics and proteomics products as well as medical and therapeutic applications. These fi nancial statements have been prepared in accordance with Canadian generally accepted accounting principles and on the basis of the going concern assumption which assumes 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 its resources on research and development. It has had no net earnings, minimal revenues, negative operating cash fl ows, working capital defi ciencies and has fi nanced its activities through the issuance of shares, bank loans and long-term debt. The Company’s ability to continue as a going concern is dependent on raising additional funds either from the issuance of shares or long-term debt and achieving profi table operations. Raising funds in the current economic environment is proving diffi cult and the cost of accessing capital has increased. The Company’s Management has already negotiated a new $2.0 million loan and a repayable working capital grant of £300,000 (Note 24) and is currently in discussion with certain shareholders, fi nancial institutions and other debt providers to obtain additional funds. The Company’s ability to increase revenue or raise additional capital to generate suffi cient cash fl ows to continue as a going concern is subject to signifi cant risks, including those described above. These fi nancial statements do not refl ect the adjustments that might be necessary to the carrying amount of reported assets, liabilities and revenues and expenses and the balance sheet classifi cation used if the Company were unable to continue operations in accordance with this assumption. Note 2. CHANGES IN ACCOUNTING POLICIES a) New accounting standards Going Concern On January 1, 2008, in accordance with the applicable transitional provisions, the Company applied the new recommendations of Section 1400, General Standards of Financial Statement Presentation of the Canadian Institute of Chartered Accountants’ Handbook, dealing with the going concern assumption. The new recommendations, which are effective for fi scal years beginning on or after January 1, 2008, require management to make an assessment of the Company’s ability to continue as a going concern over a period which is at least, but is not limited to, twelve months from the balance sheet date. The new requirements only address disclosures and have no impact on the Company’s fi nancial results. Capital disclosures On January 1, 2008, in accordance with the applicable transitional provisions, the Company applied the recommendations of Section 1535, Capital Disclosures, of the Canadian Institute of Chartered Accountants’ Handbook. This new section, effective for fi scal years beginning on or after October 1, 2007, established standards for disclosing information about the Company’s capital and how it is managed. The new accounting standard only addresses disclosures and has no impact on the Company’s fi nancial results. The additional disclosures required as a result of adopting this new section are presented in Note 14. • ProMetic Life Sciences Inc. | AR 2008 Years ended December 31, 2008 and 2007 (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Note 2. Changes in accounting policies (cont.) Inventories On January 1st, 2008, in accordance with the applicable transitional provisions, the Company applied the recommendations of new Section 3031, Inventories, of the Canadian Institute of Chartered Accountants’ Handbook. This new section, effective for fi scal years beginning on or after January 1, 2008, replaces Section 3030 of the same title. It provides guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realizable value and deals with the cost formulas that are used to assign costs to inventories. The new standard also requires additional disclosure. This change had no signifi cant impact on the fi nancial statements as at December 31, 2008, except for additional disclosures. Financial Instruments – Disclosures and presentation On January 1, 2008, in accordance with the applicable transitional provisions, the Company applied the recommendations of Section 3862, Financial Instruments – Disclosures and Section 3863, Financial Instruments – Presentation, of the Canadian Institute of Chartered Accountants’ Handbook. Section 3862, Financial instruments – Disclosures, describes the required disclosures related to the signifi cance of fi nancial instruments on the entity’s fi nancial position and performance and the nature and extent of risks arising for fi nancial instruments to which the entity is exposed and how the entity manages those risks. Section 3863, Financial instruments – Presentation, establishes standards for presentation of fi nancial instruments and non-fi nancial derivatives. These Sections complement the principles of recognition, measurement and presentation of fi nancial instruments of Section 3855, Financial Instruments – Recognition and Measurement and Section 3865, Hedges and replace the presentation standards of Section 3861, Financial Instruments – Disclosure and Presentation. The additional disclosures required as a result of adopting these new sections are presented in Note 18. b) Future accounting standards As at March 25, 2009, certain new primary sources of GAAP (standards) have been published but are not yet in effect. The Company has not early adopted any of these standards. The new standards, which could potentially impact the Company’s fi nancial statements, are detailed as follows: Goodwill and intangible assets In February 2008, the Canadian Institute of Chartered Accountants (CICA) published new Section 3064, Goodwill and Intangible Assets, to replace Section 3062, Goodwill and Other Intangible Assets. Publication of this new section resulted in the withdrawal of Section 3450, Research and Development Costs, and consequential amendments to certain recommendations in the CICA Handbook. The new section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets by profi t-oriented enterprises. This new section is effective for fi scal years beginning on or after October 1, 2008 and the Company will implement it as of January 1, 2009. The Company’s management is not able to assess the impact that the application of this new section will have on the fi nancial statements. Business Combinations, Consolidated Financial Statements and Non-Controlling Interests In January 2009, the ClCA issued Section 1582 Business Combinations, Section 1601 Consolidated Financial Statements and Section 1602 Non-Controlling Interests, which supersede 1581 Business Combinations and Section 1600 Consolidated Financial Statements. The standards apply to annual and interim fi nancial statements relating to fi scal years beginning on or after January 1, 2011. Section 1582 establishes standards for the accounting for a business combination. It provides the Canadian GAAP equivalent to IFRS 3, Business Notes to Consolidated Financial Statements | ProMetic Life Sciences Inc. • (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Years ended December 31, 2008 and 2007 Note 2. Changes in accounting policies (cont.) Combinations (January 2008) and applies prospectively to business combinations for which the acquisition date is on or after the beginning of the fi rst annual reporting period beginning on or after January 1, 2011. Section 1601, together with Section 1602, establishes standards for the preparation of consolidated fi nancial statements. Section 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated fi nancial statements subsequent to a business combination. It is equivalent to the corresponding provisions of IFRS IAS 27, Consolidated and Separate Financial Statements (January 2008). Earlier application of the standards is permitted. If an entity applies the Sections before January 1, 2011, it shall disclose that fact and apply Sections 1582, 1601 and 1602 at the same time. The Company is currently evaluating the impact of adopting the standards as part of its IFRS conversion plan. International Financial Reporting Standards (IFRS) In February 2008, the Canadian Accounting Standards Board (AcSB) announced that, as of January 1, 2011, publicly-accountable enterprises will have to adopt IFRS. Accordingly, the Company will adopt these new standards during its fi scal year beginning on January 1, 2011. The AcSB also stated that, during the transition period, enterprises will be required to provide comparative fi gures in accordance with the IFRS. The IFRS will require additional fi nancial statement disclosure and, while the Company’s conceptual framework is similar to Canadian generally accepted accounting principal, enterprises will have to take account of differences in accounting principles. The Company is currently assessing the impact of these new standards on its consolidated fi nancial statements, however, at this time, it is not possible to reasonably determine the impact of this accounting change on the Company’s fi nancial reporting. Other new standards have been published, but they should not have a signifi cant impact on the Company’s fi nancial statements. Note 3. SIGNIFICANT ACCOUNTING POLICIES These consolidated fi nancial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”). Signifi cant accounting polices are described below. a) Use of estimates The preparation of fi nancial 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 fi nancial statements and the reported amounts of revenues and expenses during the year. Signifi cant items for which management must make estimates relate to revenue recognition, the valuation and assessment of recoverability of the investments, licenses and patents, impairment of long-lived assets and tax credits and calculation of stock-based compensation. Reported amounts and note disclosure refl ect 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 fi nancial statements include the accounts of ProMetic Life Sciences Inc., of its subsidiaries ProMetic BioSciences Inc., ProMetic BioSciences (USA), Inc., ProMetic BioSciences Ltd., ProMetic BioTherapeutics Inc., ProMetic Manufacturing Inc. as well as those of 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 signifi cant intercompany transactions and balances have been eliminated. • ProMetic Life Sciences Inc. | AR 2008 Years ended December 31, 2008 and 2007 (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Note 3. Signifi cant accounting policies (cont.) c) Financial instruments The classifi cation and measurement of the Company’s fi nancial instruments is as follows: • • • • • • • • Cash and cash subject to certain limitations are respectively classifi ed and designated as held-for-trading fi nancial assets. They are measured at fair value and changes in fair value are recognized in consolidated net earnings. Accounts receivable are classifi ed as loans and receivables. They are measured at amortized cost, which is generally the amount on initial recognition less an allowance for doubtful accounts. The guaranteed investment certifi cates are classifi ed as held-to-maturity since the Company has the intention and the capacity to keep these assets until their expiration. These investments are measured at amortized cost using the effective interest method. The convertible preferred shares of AM-Pharma Holding B.V., a private company, are classifi ed as available-for-sale and they are measured at cost. The excess of interest in the joint venture Pathogen Removal and Diagnostic Technologies Inc. is classifi ed as loans and receivables and is measured at amortized cost using the effective interest method. Bank loan, accounts payable and accrued liabilities are classifi ed as other fi nancial liabilities. They are measured at amortized cost using the effective interest method. Long-term debt is classifi ed as other fi nancial liabilities. It is measured at amortized cost, using the effective interest method. Financing costs are applied against long-term debt. The preferred shares retractable at the holder’s option are classifi ed as other fi nancial liabilities and are measured at amortized cost using the effective interest method. d) Inventories Inventories of raw materials, work in progress and fi nished goods are valued at the lower of cost and net realizable value. Cost is determined on a fi rst in, fi rst out basis. The amount of inventories recognized as an expense is presented under costs of goods sold in the consolidated statement of operations and comprehensive loss. e) Investments 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. f) Capital assets Capital assets are recorded at cost. Amortization is provided over the useful lives of capital assets using the following method, annual rates and period: Asset Method Rate/period Leasehold improvements Equipment tools Offi ce equipment and furniture Computer equipment Straight-line Declining balance Declining balance Declining balance Lease term of 5 and 12.5 years 20% 20% 30% Notes to Consolidated Financial Statements | ProMetic Life Sciences Inc. • (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Years ended December 31, 2008 and 2007 Note 3. Signifi cant accounting policies (cont.) g) Government grants Government grants on capital expenditures are credited to capital assets and are amortized over the expected life of the relevant assets. Grants receivable in connection with operating expenditures are credited to the consolidated statement of operations in the period in which the expenditures take place. h) Licenses and patents Licenses and patents include acquired 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. i) Impairment of long-lived assets Capital assets and licenses and patents subject to amortization are tested for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable when it exceeds the sum of the undiscounted cash fl ows expected from its use and eventual disposal. In such a case, an impairment loss must be recognized and is equivalent to the excess of the carrying amount of a long-lived asset over its fair value. 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 benefi ts 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 fi scal years ended December 31, 2008 and 2007, no development costs were deferred. k) Revenue recognition The Company earns revenues from research and development services, license fees and products sales, which may include multiple elements. The individual elements of each agreement are divided into separate units of accounting, if certain criteria are met. The applicable revenue recognition method is then applied to each unit. Otherwise, the applicable revenue recognition criteria are applied to combined elements as a single unit of accounting. Revenues from combined elements as a single unit of accounting are recognized using the percentage of completion method. Under this method, revenues and profi ts are recognized proportionally with the degree of completion of the services under the contract when collection is reasonably assured. Revenues from research and development services are recognized as the contracted services are performed and reasonable assurance of collection exists. Certain license fees are comprised of up-front fees and milestone payments. Up-front fees are recognized over the estimated term of the involvement of the Company. Milestone payments are recognized as revenue when milestone is achieved, customer acceptance is obtained and customer is obligated to make performance payment. Certain license arrangements require no continuing involvement by the Company. Non-refundable license fees are recognized as revenue when the Company has no further involvement or obligation to perform under the arrangement, the fee is fi xed or determinable and collection of the amount is reasonably assured. Revenue from product sales is recognized when there is persuasive evidence that an arrangement exists; products are shipped; the selling price is fi xed or determinable and collection is reasonably assured. Amounts received in advance of meeting the revenue recognition criteria is recorded as deferred revenue on the consolidated balance sheet. • ProMetic Life Sciences Inc. | AR 2008 Years ended December 31, 2008 and 2007 (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Note 3. Signifi cant accounting policies (cont.) 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 recognized in the balance sheet for the future tax consequences attributable to differences between the fi nancial statement 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 12 b). The Company uses the fair value method to account for all stock-based payments to employees and non-employees. The stock-based compensation is measured at the grant date based on the fair value of the award and is recognized over the related vesting period. o) Earnings per share Basic net loss per share is calculated using the weighted average number of common shares outstanding during the year. Diluted net loss per share is calculated using the treasury stock method giving effect to the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted to such shares at the later of the beginning of the year or the issuance date. The treasury stock method assumes that any proceeds that could be obtained upon the exercise of options, warrants and rights to acquire shares would be used to repurchase common shares at the average market price during the year. The diluted net loss per share is equal to the basic loss per share due to the anti-dilution effect of stock options, warrants and rights to acquire shares described in Note 12. p) Share issue expenses The company records share issue expenses in the consolidated statement of defi cit. Notes to Consolidated Financial Statements | ProMetic Life Sciences Inc. • (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Years ended December 31, 2008 and 2007 Note 4. ACCOUNTS RECEIVABLE Trade Sales taxes receivable Tax credits receivable Advance to an offi cer, without interest Other Note 5. INVENTORIES Raw materials Work in progress and fi nished goods 2008 2,759 80 1,415 12 148 4,414 $ $ 2007 1,715 162 1,056 36 380 3,349 $ $ 2008 $ $ 165 2,402 2,567 2007 349 1,884 2,233 $ $ During the year, there was no write-down of inventories or reversal of provision previously recognized (nil in 2007). • ProMetic Life Sciences Inc. | AR 2008 Years ended December 31, 2008 and 2007 (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Note 6. INVESTMENTS Cash subject to certain limitations Guaranteed investment certifi cates, 1.85% and 2.25%, expiring in June 2009, pledged as security of letters of credit to suppliers expiring in September 2009 and October 2012 Convertible preferred shares of AM-Pharma Holding B.V. Excess of interest in the joint venture Pathogen Removal and Diagnostic Technologies (PRDT) over proportionate share in consolidated net assets (a) and b)) 2008 2007 $ 72 $ 76 360 268 329 358 2,885 1,920 $ 3,585 $ 2,682 a) The Company has a joint venture with the American Red Cross and two other partners under the legal name Pathogen Removal and Diagnostic Technologies Inc. (“PRDT”) in which the Company owns 26% of the voting shares. PRDT is engaged in the research, development and commercialization of pathogen removal and diagnostic systems. Under the terms of the joint venture agreement, ProMetic and the American Red Cross have contributed intellectual property and technology to develop Pathogen Removal and Diagnostics Systems. Up to April 30, 2008, both parties equally assumed the direct costs to the joint venture. Effective May 1, 2008, ProMetic assumed most of the expenses. b) The PRDT joint venture has issued preferred shares in consideration of the proportionate share of each partner in direct and indirect costs. The shares received by the Company are presented as excess of the interest in the joint venture PRDT over proportionate share in consolidated net assets. These preferred shares are retractable at the holder’s option, provided that PRDT has suffi cient cash fl ows, 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 proportionate consolidation, the Company must recognize 26% of the shares issued to the American Red Cross as a debt to a third party. The consolidated fi nancial statements include the Company’s proportionate share of the revenues, expenses, assets and liabilities of PRDT and of A-P (Note 8b) as follows: Current assets Long-term assets Long-term liabilities Total revenues Total expenses Net loss Cash fl ows from: Operations Investing $ 2008 – 2,885 4,348 (b) 7 2,284 2,277 $ 2007 1 1,920 3,057 24 4,618 4,594 – – $ (73) 9 Notes to Consolidated Financial Statements | ProMetic Life Sciences Inc. • (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Years ended December 31, 2008 and 2007 Note 7. CAPITAL ASSETS Leasehold improvements Equipment and tools Offi ce equipment and furniture Computer equipment Accumulated amortization Net book value 2008 Accumulated amortization $ 2,730 4,556 514 925 8,725 $ Cost 3,338 5,888 688 1,214 11,128 8,725 $ 2,403 2007 Accumulated amortization $ 2,157 4,348 470 806 7,781 $ Cost 3,346 6,016 688 1,156 11,206 7,781 3,425 $ Deferred capital grants for a total of $ 26 in 2008 and of $191 in 2007 received from the Isle of Man government are credited to the cost of capital assets (see note 22). Note 8. LICENSES AND PATENTS Licenses Patents Accumulated amortization Net book value 2008 Accumulated amortization $ 2,075 584 2,659 Cost $ 4,456 3,230 7,686 2,659 $ 5,027 2007 Accumulated amortization $ 4,627 420 5,047 Cost $ $ 7,268 2,736 10,004 5,047 4,957 a) b) The Company owns the rights, title and interest in and to the know-how, information, technology and patents relating to its Mimetic Ligands™ 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. 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 fi rst serine protease inhibitor pursued is recombinant alpha 1-antitrypsin (“rAAT”), a compound produced in genetically-engineered yeast cells. In December 2008, a termination agreement of the joint venture was signed between ProMetic BioSciences Inc. and Arriva Pharmaceuticals, Inc. As a result of the agreement, the license was written-off. This write-off had no impact on the fi nancial statement since the net value of the license was nil as at December 31, 2007. • ProMetic Life Sciences Inc. | AR 2008 Years ended December 31, 2008 and 2007 (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Note 8. Licenses and patents (cont.) c) d) e) f) On June 6, 2002, the Company acquired for $400 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. The purpose of the strategic alliance between the Company and the American Red Cross signed in January 2003 is to co-develop the Plasma Protein Purifi cation Scheme (“PPPS”) process and license to third parties proprietary technology for the recovery and purifi cation of valuable therapeutic proteins from human blood plasma. The PPPS process integrates novel technologies in a sequence that is expected to signifi cantly improve both the yield and range of valuable proteins capable of being isolated from human plasma. In April 2006, the Company paid the American Red Cross US $1,000,000 for an exclusive license for access to and use of intellectual property rights for 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 royalty to the American Red Cross of 12% of all sales products to third parties. Also, every year, an annual minimum royalty of US $30,000 is payable. An offi cer is entitled to receive royalties based on the sales of certain products submitted to ProMetic before joining the Company. These royalties are 0.5% of net sales or 3% of revenues received by the Company. This employee also has the exclusive right to commercialize these products should ProMetic decide to stop developing and (or) commercializing them, subject to mutually acceptable terms and conditions. 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. Note 9. BANK LOAN Bank loan for an authorized amount of $915 related to research and development tax credits, secured by a hypothec for that amount on all present and future research and development tax credits bearing interest at prime plus 2% (5.5% as at December 31, 2008; 8% as at December 31, 2007) and repayable upon receipt of tax credits. $ 911 $ 205 2008 2007 Notes to Consolidated Financial Statements | ProMetic Life Sciences Inc. • (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Years ended December 31, 2008 and 2007 Note 10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payables Accruals related to a guarantee (note 13) Other accruals Note 11. LONG-TERM DEBT Loans with a nominal value of US$10,000,000, and US$600,000 guaranteed by all assets of the Company, bearing interest at 15.034 % and 15% respectively (effective rate of 42.45% as at December 31, 2008 and 2007), payable with monthly instalments of US$433,250 and US$28,730, maturing in August 2009. (a) Obligations under capital leases, 11.54% to 13.94% payable in monthly instalments of $0.3 to $0.5, maturing from June 2010 to August 2012. Current portion of long term debt The instalments on the long-term debt for the next years are as follows: Year ending December : 2009 2010 2011 2012 2008 3,160 951 3,001 7,112 $ $ 2007 2,823 – 1,834 4,657 $ $ Current portion 2008 2007 $ 3,883 $ 3,883 $ 6,462 23 3,906 66 3,949 3,906 43 $ 37 6,499 3,358 3,141 Total 4,304 24 15 5 $ $ (a) The fair value of long-term debt, including the current portion thereof, is between US$3,293,000 and US$3,331,000. To determine the range of amounts for fair value, the Company discounted expected future cash fl ows in accordance with the loan contracts in effect using rates which the Company could use at the balance sheet date for loans with similar terms and conditions and maturity dates. • ProMetic Life Sciences Inc. | AR 2008 Years ended December 31, 2008 and 2007 (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Note 12. SHARE CAPITAL During the year, the Company modifi ed its authorized share capital in changing the designation of the subordinate voting share into common shares. The multiple voting shares were also eliminated from the authorized share capital. Authorized and without par value: Unlimited number of common shares, participating, carrying one vote per share, entitled to dividends. Unlimited number of preferred shares, no par value, issuable in one or more series. 1,050,000 preferred shares, series A, non-participating, non-voting, redeemable for cash or convertible into common shares, convertible at the option of the holder into common shares at $0.50 per share except for unpaid dividends, convertible at a rate equal to the trading average of the common shares on the Toronto Stock Exchange during the 20 business days prior to the conversion, cumulative preferential cash dividend of 12% per year, calculated monthly and payable quarterly. 950,000 preferred shares, series B, non-participating, non-voting, redeemable for cash or convertible into common shares, convertible at the option of the holder into common shares at $0.60 per share except for unpaid dividends, convertible at a rate equal to the trading average of the common shares on the Toronto Stock Exchange during the 20 business days prior to the conversion, cumulative preferential cash dividend of 12% per year, calculated monthly and payable quarterly. Issued and fully paid Common shares Share purchase loan to an offi cer, without interest and due no later than 2009 Balance at end of year Number 2008 Amount Number 2007 Amount 317,401,768 $ 211,422 263,821,962 $ 192,675 (450) $ 210,972 (450) $ 192,225 Notes to Consolidated Financial Statements | ProMetic Life Sciences Inc. • (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Years ended December 31, 2008 and 2007 Note 12. Share capital (cont.) a) Share issue Changes in the issued and outstanding common shares were as follows: Balance at beginning of year Shares issued pursuant to: Issuance Equity draw down facility Exercise of warrants Exercise of options Balance at end of year Number 2008 Amount Number 2007 Amount 263,821,962 $ 192,675 234,670,814 $ 181,862 53,579,806 – – – 317,401,768 18,747 – – – $ 211,422 22,427,852 610,968 6,072,328 40,000 263,821,962 8,550 350 1,887 26 $ 192,675 In 2008, the issuance of shares resulted in a cash infl ow of $17,255 and payments of $1,492 in professional services. During the year, the Company issued 15,677,021 common shares and 14,495,452 rights to acquire shares under a strategic investment agreement for a consideration of $7,368. An amount of $5,173 was recorded in the share capital based on the common shares quote on the issuance date. The residual amount of $2,195 was recorded in contributed surplus for rights to acquire shares issued. In 2007, the issuance of shares resulted in a cash infl ow of $8,409 (including $1,000 from a company owned by a director) and payments of $141 in professional services. The total of the equity draw down facility provided a cash infl ow of $350 while the exercise of warrants contributed to $262 in cash while $1,625 came from the contributed surplus. The exercise of options had a cash infl ow of $16 and the balance of $10 was removed from the contributed surplus. Related party transactions were measured at the exchange amount. As at December 31, 2008, the following warrants and rights to acquire shares were outstanding: Warrants and rights to acquire shares 1,686,187 757,500 19,612,618 2,999,394 14,495,452 Expiry date December 2009 April 2010 December 2010 January 2011 March 2012 Exercise price $0.324 $0,44 and $0.48 US $0.30 US $0.30 $0.47 The Company uses the Black-Scholes option valuation model to calculate the fair value of warrants. During the year, 757,500 warrants were issued having a fair value of $0.11 and expiring in April 2010. The warrants can be exercised at $0.44 per share for the period beginning Sept. 15, 2008 to April 8, 2009 and at $0.48 per share for the period beginning April 9, 2009 to April 8, 2010. • ProMetic Life Sciences Inc. | AR 2008 Years ended December 31, 2008 and 2007 (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Note 12. Share capital (cont.) b) Stock options The Company has established a stock option plan for its directors, offi cers and employees or service providers. 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 15,913,317 (6,000,000 in 2007) common 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, after one year following the date they were granted or immediately as they are granted). The exercise price is based on the average strike price of the fi ve business days prior to the grant. 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, 2006 2007 Granted Exercised Forfeited Expired Number of options as at December 31, 2007 2008 Granted Exercised Forfeited Expired Number of options as at December 31, 2008 Weighted average exercise price per share $ $ 0.91 0.61 0.41 0.88 – 0.80 0.39 – 0.66 1.56 0.64 Options 3,931,500 2,181,250 (40,000) (171,550) – 5,901,200 2,802,917 – (484,700) (263,000) 7,956,417 A compensation expense of $307 in 2008 and $367 in 2007 was recorded as a result of stock options granted to directors, offi cers, employees and consultants. The following tables summarize information about stock options outstanding as at December 31, 2008: Range of exercise price Number outstanding 0.31 - 0.46 0.50 - 0.64 1.00 - 1.50 1.60 - 2.00 2.70 - 3.00 4,750,467 1,113,750 1,712,500 255,500 124,200 7,956,417 Weighted average remaining contractual life (in years) Weighted average exercise price Number exercisable Weighted average exercise price 3.82 3.63 1.39 0.24 0.49 0.38 0.58 1.07 1.99 2.70 1,574,920 467,250 1,712,500 247,000 99,360 4,101,030 0.38 0.54 1.07 2.00 2.70 As at December 31, 2007, 3,046,270 stock options were exercisable. Notes to Consolidated Financial Statements | ProMetic Life Sciences Inc. • (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Years ended December 31, 2008 and 2007 Note 12. Share capital (cont.) Weighted average exercise price of the options having an exercise price: Lower than the market price Equal to the market price Higher than the market price Weighted average fair value of the options having an exercise price: Lower than the market price Equal to the market price Higher than the market price Grant date Grant date 2008 – – 0.39 2008 – – 0.21 2007 0.46 – 0.68 2007 0.28 – 0.29 c) Stock-based compensation and other stock-based payments 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 2008 2007 3.44% 0% 78.22% 5 years 4.02% 0% 76.00% 5 years The estimated fair value of options granted during the year ended December 31, 2008 is $0.21. In 2007, it was $0.29. d) Equity draw down facility On December 7, 2007, the Company entered into a securities purchase agreement in respect of an equity draw down facility. The facility will terminate in December 2009, and it provides the Company with access to fi nancing of up to $15,000 in return for the issuance of common shares at a discount of 4 to 7 percent to market price based upon the weighted average price of the common shares. Under the commitment, these resources may be drawn at Company’s sole discretion, with Company determining the timing, minimum dollar amount and price per share of each draw under this facility, subject to certain conditions including a market price greater than $0.45. ProMetic is under no obligation to draw from this Facility and will remain at all times free to enter into other fi nancing transactions. The Company has drawn $350 in cash in 2007 under the equity draw down facility. There has been no draw down in 2008 under the equity draw down facility. • ProMetic Life Sciences Inc. | AR 2008 Years ended December 31, 2008 and 2007 (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Note 13. RELATED PARTY TRANSACTION On December 5, 2008, the Company entered into an agreement to provide a guarantee (the “Guarantee”) in favour of Camofi Master LDC (“Camofi ”), relating to an amended and restated loan agreement (the “Loan”) that Camofi had provided to a company (“the borrower”) wholly owned by a senior offi cer of the Company. The Loan was originally contracted in December 2007 for the purposes of purchasing shares of the Company. The Guarantee provides that the Company must be prepared to fulfi ll the borrower’s obligations with respect to the full payment of capital and interest for the Loan if the borrower is unable to do so. Any such payment shall be made within two days of receipt of notice of default from Camofi . Alternatively, the borrower can force Camofi to liquidate some or all of the shares of the Company that are held as collateral to cover the Loan. If called upon under the Guarantee, the Company may chose either to pay in cash or request that the borrower instruct Camofi to liquidate up to 2,300,000 shares of the Company to repay the Loan. In conjunction with the above, the Company has entered into an agreement with the borrower providing that any payment made by the Company under the Guarantee immediately triggers an equivalent receivable from the borrower. This receivable bears interest at 10% per annum, is evidenced by a demand promissory note and, upon termination of the Loan and the pledge agreement, will be secured by 2,300,000 shares of the Company until all payments of principal and interests owed to the Company are made. This receivable will be recorded at fair value by the Company only when its collectability is reasonably assured. The Company risks losing a maximum amount of $1,873 plus interest and penalties, without taking into consideration the net proceeds arising from the disposal of the 9,500,000 pledged shares of the Company. The Company has not required any consideration in exchange for this Guarantee. As at December 31, 2008, the Loan has an outstanding balance of $US 1,374,593 and is repayable in full by December 11, 2009. As at December 31, 2008, the Company has recognized an amount of $189 as a loss for amounts already disbursed to the borrower and in addition, estimated that there is a likelihood of having to make additional payments under the Guarantee which will amount to $951. As such, an amount of $951 has been accrued as at December 31, 2008, under accounts payable and accrued liabilities, and $1,140 has also been recorded as a loss. Notes to Consolidated Financial Statements | ProMetic Life Sciences Inc. • (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Years ended December 31, 2008 and 2007 Note 14. CAPITAL DISCLOSURES The Company’s capital consists of cash, bank loan, long-term debt and shareholders’ equity. Bank loan Long-term debt Equity Cash 2008 911 3,949 1,413 (917) 5,356 $ $ 2007 205 6,499 1,503 (2,163) 6,044 $ $ The Company’s objectives in managing capital is to ensure a suffi cient liquidity position to fi nance its research and development activities, administration and marketing expenses, working capital and overall capital expenditures, including those associated with patents and trademarks. The Company makes every effort to manage its liquidity to minimize dilution to its shareholders, whenever possible. To meet the objectives in managing capital, the Company may attempt to issue new shares, to draw cash under the equity draw down facility or to seek additional debt fi nancing. The Company is not subject to externally imposed capital requirements and the Company’s overall strategy with respect to capital risk management remains unchanged from the year ended December 2007. Note 15. INFORMATION INCLUDED IN THE CONSOLIDATED STATEMENTS OF OPERATIONS Gross research and development expenses $ 17,891 $ 17,836 2008 2007 Research and development tax credits Interest on long term debt Interest on bank loan and other interest expenses Interest on other fi nancial liabilities Interest income on fi nancial assets held for trading (1,078) (945) 2,204 160 2,364 2,631 148 2,779 (22) (304) • ProMetic Life Sciences Inc. | AR 2008 Years ended December 31, 2008 and 2007 (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Note 16. COMMITMENTS The Company has total commitments of $7,867 under various operating leases for the rental of offi ces and laboratory space and offi ce equipment. The minimum annual payments for the coming years are as follows: 2009 2010 2011 2012 2013 Note 17. PENSION PLAN $ $ 2,970 2,387 1,540 970 – 7,867 The Company contributes to a defi ned contribution pension plan for all of its permanent employees. The Company matches employee contributions representing up to 3% of their annual salary. The Company’s contributions for the year are $ 281 ($ 290 in 2007). Notes to Consolidated Financial Statements | ProMetic Life Sciences Inc. • (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Years ended December 31, 2008 and 2007 Note 18. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT a) Financial instruments The Company has classifi ed its fi nancial instruments as follows: Financial assets Held for trading Cash, measured at fair value Cash subject to certain limitations, measured at fair value Loans and receivables Accounts receivable, recorded at amortized cost Excess of the interest in the joint venture of Pathogen Removal and Diagnostic Technologies, measured at amortized cost Held to maturity Guaranteed investment certifi cates, recorded at amortized cost Available-for-sale Convertible preferred shares of AM-Pharma, recorded at cost Financial liabilities Other fi nancial liabilities Bank loan, accounts payable and accrued liabilities, measured at amortized cost Long-term debt, measured at amortized cost Preferred shares retractable at the holder's option, measured at amortized cost 2008 2007 $ 917 72 989 2,919 2,885 5,804 360 268 8,023 3,949 4,348 16,320 $ 2,163 76 2,239 2,131 1,920 4,051 329 358 4,862 6,499 3,053 14,414 • ProMetic Life Sciences Inc. | AR 2008 Years ended December 31, 2008 and 2007 (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Note 18. Financial instruments and fi nancial risk management (cont.) b) Fair value The carrying value of cash, accounts receivable, guaranteed investment certifi cate, cash subject to certain limitations, bank loan, accounts payable and accrued liabilities equals their fair value because of the near- term maturity of these instruments. The fair value of the investment AM-Pharma Holding B.V. was not readily determinable because it is a private company. 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. The fair value of long-term debt is disclosed in Note 11. c) Financial risk management The Company has exposure to credit risk, liquidity risk and market risk. The Company’s Board of Directors has the overall responsibility for the oversight of these risks and reviews the Company’s policies on an ongoing basis to ensure that these risks are appropriately managed. i) Credit risk Credit risk is the risk of fi nancial loss to the Company if a customer, partner or counterparty to a fi nancial instrument fails to meet its contractual obligations and arises principally from the Company’s cash, investments and receivables. The carrying amount of the fi nancial assets represents the maximum credit exposure. The fi nancial instruments that potentially expose the Company to credit risk are primarily cash, trade accounts receivable and the excess of interest in the joint venture PRDT over proportionate share in consolidated net asset. The Company reviews a new customer’s credit history before extending credit and conducts regular reviews of its existing customers’ credit performance. The Company places its cash in titles of high quality issued by government agencies and fi nancial institutions and diversifi es its investment in order to limit its exposure to credit risk while applying implemented investment guidelines in place. The reserve for doubtful accounts as at December 31, 2008 totals $620. As at December 31, 2007, it amounted to $294. The increase of the reserve for doubtful accounts of $326 is due to the allowance in 2008 for accounts receivable that are deemed to be uncollectible. The Trade accounts receivable include amounts from four customers which represents approximately 78% (31%, 18%, 15% and 14% respectively) of the Company’s total trade accounts receivable as at December 31, 2008 and three customers representing 65% (34% 14% and 17% respectively) of total trade receivable as at December 31, 2007. The Company derives signifi cant revenue from certain customers. In 2008, there were three customers who individually accounted for 16%, 15% and 11% of revenues respectively. In 2007, two customers represented 44% and 9% respectively. Notes to Consolidated Financial Statements | ProMetic Life Sciences Inc. • (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Years ended December 31, 2008 and 2007 Note 18. Financial instruments and fi nancial risk management (cont.) ii) Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its fi nancial obligations as they come due. To the extent that the Company does not believe it has suffi cient liquidity to meet its current obligations, the management considers securing additional funds through equity, debt or partnering transactions. The Company manages its liquidity risk by continuously monitoring forecasts and actual cash fl ows. The cash fl ows payable in respect to the contractual terms of the fi nancial liabilities at the balance sheet date are as follows: As at December , 2008 Bank loan Accounts payable and accrued liabilities Long-term debt Preferred shares, retractable at the holder’s option Less than months - months months to year More than year 911 – – 6,568 1,702 4,348 13,529 408 1,702 – 2,110 136 1,144 – 1,280 – – 43 – 43 Total 911 7,112 4,591 4,348 16,962 This table only covers liabilities and obligations, and does not anticipate any of the income associated with assets or rights. iii) Market risk Market risk is the risk that changes in market prices, such as interest rates, and foreign exchange rates will affect the Company’s income or the value of its fi nancial instruments. a) Interest risk The majority of the Company’s debt is at fi xed rate, there is limited exposure to interest rate risk. b) Foreign exchange risk The Company is exposed to the fi nancial risk related to the fl uctuation of foreign exchange rates. The Company operates in the United Kingdom and in the United States and portion of expenses incurred and revenues generated are in US dollar and in sterling pound. Financial instruments potentially exposing the Company to foreign exchange risk consist principally of cash, receivables, accounts payable and accrued liabilities and long-term debt. The Company manages the foreign exchange risk by holding foreign currencies on hand to support foreign currencies forecasted cash outfl ows and the majority of the Company’s revenues are in US dollar and in sterling pound which mitigates the foreign exchange risk. As at December 31, 2008, the Company is exposed to currency risk through the following assets and liabilities denominated respectively In US dollar and sterling pound. • ProMetic Life Sciences Inc. | AR 2008 Years ended December 31, 2008 and 2007 (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Note 18. Financial instruments and fi nancial risk management (cont.) In US dollar Cash Accounts receivable Accounts payable and accrued liabilities Long term debt Net exposure In sterling pound Cash Accounts receivable Accounts payable and accrued liabilities Net exposure 2008 2007 418,952 2,083,503 (2,785,866) (3,199,789) 798,255 – (1,655,318) (6,561,003) (3,483,200) (7,418,066) 2008 2007 199,661 68,142 (636,156) 202,178 203,098 (597,953) (368,353) (192,677) Based on the above net exposures as at December 31, 2008, and assuming that all other variables remain constant, a 10% depreciation or appreciation of the Canadian dollar against the US dollar would result in a decrease or an increase of the net loss of $348,320. A 10% depreciation or appreciation of the sterling pound would not result in a material change to the Company’s loss. The Company has not hedged its exposure to currency fl uctuations. Note 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: Net loss Basic income tax rate Computed income tax provision Decrease (increase) in income taxes resulting from: Unrecorded potential tax benefi t arising from current period losses Effect of tax rate differences in foreign subsidiaries Non-taxable items Change in tax rate 2008 2007 $ (20,178) 31% (6,255) $ (22,342) 32% (7,149) 5,218 (2,360) 3,397 – – $ 6,057 1,118 (26) – – $ Notes to Consolidated Financial Statements | ProMetic Life Sciences Inc. • (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Years ended December 31, 2008 and 2007 Note 19. Income taxes (cont.) Signifi cant components of the Company’s net future income tax balances are as follows: Future income tax assets: Losses carried forward Share issue expenses Unused research and development expenses Accounts payable and accrued liabilities Licenses and patents Deferred revenues Interest expenses carry forward Capital assets Less: valuation allowance Net future income tax assets Future income tax liabilities: Capital assets Net future income tax assets 2008 2007 $ 19,496 719 6,362 51 194 227 2,277 127 29,453 (29,442) 11 $ 15,293 731 6,133 355 160 273 594 161 23,700 (23,644) 56 (11) – $ (56) – $ As at December 31, 2008, the Company had available the following deductions, losses and credits: Research and development expenses, without time limit $ 18,123 $ 30,616 $ – Losses carried forward expiring in: Canada Federal Provincial Foreign Countries 2009 2010 2011 2014 2015 2017 2018 2020 2021 2023 2024 2025 2026 2027 2028 Share issue expenses Interest deduction carryover 4,809 5,170 – 2,363 1,128 – – – – – – – 6,455 7,256 9,373 2,672 – 39,226 4,630 4,577 – 1,969 607 – – – – – – – 5,035 6,476 8,326 2,672 – 34,292 – – 282 – – 1,222 456 14 624 986 1,451 982 7,124 6,832 6,898 – 5,896 32,767 As at December 31, 2008, the Company also had unused federal tax credit available to reduce future Canadian taxable income in the amount of $4,987 and expiring between 2010 and 2028. Those tax credits have not been recorded and no future income tax liability has been recorded with respect to those tax credits. • ProMetic Life Sciences Inc. | AR 2008 Years ended December 31, 2008 and 2007 (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Note 20. ADDITIONAL INFORMATION ON THE CONSOLIDATED STATEMENT OF CASH FLOWS a) Change in working capital items Accounts receivable Inventories Prepaid expenses Accounts payable and accrued liabilities Payable related to a lawsuit Deferred revenue Non-cash transactions b) Unpaid additions to capital assets and licenses and patents Excess of the interest in the joint venture PRDT over the proportionate share in the consolidated net assets Preferred shares retractable at the holder’s option Unpaid share issue expenses Unpaid interest related to the long-term debt c) Other cash fl ow information Interest paid Interest earned 2008 2007 $ (1,065) (334) 339 2,668 (1,910) (141) (443) $ $ $ (1,137) (205) 13 (1,209) (1,174) (448) (4,160) 210 965 1,295 126 1,200 2,785 32 429 337 137 116 1,215 3,638 313 Notes to Consolidated Financial Statements | ProMetic Life Sciences Inc. • (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Years ended December 31, 2008 and 2007 Note 21. SEGMENTED INFORMATION The fi nancial information is presented in two different operating segments. The two operating segments are: Therapeutics and Protein Technology Therapeutics: This operating segment has two lead compounds, PBI-1402 and PBI-1393, in progressing clinical trials, both of which address unmet needs of cancer patients undergoing chemotherapy. Protein Technology: This operating segment contains the fi nancial information of these activities: BioTherapeutics: It is the developer of a unique, validated, state-of-the-art solution for plasma fractionation, the Plasma Protein Purifi cation System (PPPS). Bioseparation : It develops and markets bioseparation products based on applications of its patented Mimetic LigandTM technology. Animal Care : The long term goal is to use the validated PRDT technology for prion reduction in the search for a diagnostic that would certify live cattle as BSE-tested. The accounting policies for the operating segments are the same as those outlined in the accounting policies note. a) Revenues and expenses by operating segments For the year ended December 31, 2008 Therapeutics Protein Technology Corporate Revenues Costs of good sold Research and development expenses rechargeable 38 – – Research and development expenses 4,096 Administration and marketing expenses Amortization of capital assets Amortization of licenses and patents Interest expenses including penalties related to lawsuit Loss related to a guarantee Interest revenues Loss on exchange rate Gain on disposal of capital assets Net loss – 173 126 85 – (11) – (355) 4,076 10,116 1,856 1,001 11,716 507 828 299 17 – (13) – – – – – – 4,819 57 – 2,845 1,140 – 1,146 – Total 10,154 1,856 1,001 15,812 5,326 1,058 425 2,947 1,140 (24) 1,146 (355) 6,095 10,007 20,178 • ProMetic Life Sciences Inc. | AR 2008 Years ended December 31, 2008 and 2007 (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Note 21. Segmented information (cont.) For the year ended December 31, 2007 Therapeutics Protein Technology Corporate Revenues Costs of good sold Research and development expenses rechargeable 5 – – 8,431 2,201 610 Research and development expenses 4,857 11,424 Administration and marketing expenses Amortization of capital assets Amortization of licenses and patents Interest expenses including penalties related to lawsuit Interest revenues Gain on exchange rate Loss on disposal of capital assets – 231 1,000 27 (16) – 85 737 1,312 385 25 (31) – – – – – – 5,869 64 – Total 8,436 2,201 610 16,280 6,606 1,607 1,385 3,051 3,103 (255) (798) – (302) (798) 85 Net loss 6,179 8,232 7,931 22,342 b) Revenues by geographic segment (1) United States Italy Austria Brazil France Canada Denmark Switzerland United Kingdom Germany South Korea India Taiwan Sweden Netherlands Other countries 2008 2007 6,407 1,047 1,034 556 338 160 138 129 121 73 59 48 36 – – 8 $ 10,154 1,239 269 4,492 465 92 100 128 – 752 477 – 26 – 275 113 8 $ 8,436 (1) Revenues are attributed to countries based on location of customer and not on location of subsidiaries. Notes to Consolidated Financial Statements | ProMetic Life Sciences Inc. • (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Years ended December 31, 2008 and 2007 Note 21. Segmented information (cont.) c) Assets by operating segments Therapeutics Protein Technology Corporate d) Assets by geographic segment Canada United States United Kingdom e) Capital assets and licenses and patents by operating segments Therapeutics Protein Technology Corporate f) Capital assets and licenses and patents by geographic segment Canada United States United Kingdom g) Acquisition of capital assets and licenses and patents by operating segments Therapeutics Protein Technology Corporate h) Acquisition of capital assets and licenses and patents by geographic segment Canada United States United Kingdom 2008 2007 $ 4,268 11,043 3,841 $ 19,152 $ 4,077 10,902 4,408 $ 19,387 2008 2007 $ 9,453 1,567 8,132 $ 19,152 $ 9,673 2,577 7,137 $ 19,387 2008 2,469 4,814 147 7,430 2008 2,806 1,140 3,483 7,430 2008 347 266 22 635 2008 369 20 246 635 $ $ $ $ $ $ $ $ 2007 2,475 5,724 183 8,382 2007 2,894 1,229 4,259 8,382 2007 865 699 49 1,613 2007 918 169 526 1,613 $ $ $ $ $ $ $ $ • ProMetic Life Sciences Inc. | AR 2008 Years ended December 31, 2008 and 2007 (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Note 22. GOVERNMENT GRANTS The Company has received government grants from Isle of Man Government for operating and capital expenditures. For grants received in 2005 and 2006, $1,073 and $80 respectively, the Isle of Man government reserves the right to reclaim in part or all of the grants should the Company leave the Isle of Man according to the following schedule – 100% repayment within 5 years of receipt, then a sliding scale after that for the next 5 years – 6 years 80%, 7 years 60%, 8 years 40%, 9 years 20%, 10 years 0%. The terms for the grants received amounted to $26 in 2008 and $191 in 2007. They are fully repayable if ProMetic BioSciences Ltd leaves the Isle of Man within fi ve 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 fi nancial statements for any future repayment to the Isle of Man government relating to the above agreement. Note 23. CONTINGENCIES 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 the supplier has introduced in April 2004 a cross demand against PLI and PBI claiming for payment as damages of all profi ts 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 and no provision related to this matter has been recorded in these consolidated fi nancial statements in that respect. Settlements, if any, will be charged to the statement of operations in the period in which the settlements occur. Also, during the year, a claim in the amount of $223 has been fi led against PLI as a result of unpaid services. After obtaining representation from their legal advisers, management is not in a position to estimate either the gain or the loss resulting from this action. Therefore, no provision has been recorded in these consolidated fi nancial statements in that respect. Settlements, if any, will be charged to the statement of operations in the period in which the settlements occur. Notes to Consolidated Financial Statements | ProMetic Life Sciences Inc. • (In thousands of Canadian dollars except for number of shares or as otherwise specifi ed) Years ended December 31, 2008 and 2007 Note 24. POST BALANCE SHEET EVENTS On March 23, 2009, ProMetic entered into a loan agreement with Marigest Inc which provided for $2.0 million of debt fi nance, bearing interest at a rate ranging from 12% to 15% per annum. The debt shall be secured by a movable hypothec on the universality of ProMetic’s tangible and intangible assets.The loan is repayable on March 23, 2010 or on such other date, as may be mutually agreed upon by the parties. In addition, the agreement provides that a further $3.0 million of debt can be called by ProMetic from the lender should certain trigger points, related to the stock price of ProMetic, be achieved. Furthermore, on March 10, 2009, the UK subsidiary, ProMetic Biosciences Limited, secured a £300,000 repayable working capital grant from the Isle of Man Department of Trade & industry. This grant is repayable without interest. Note 25. COMPARATIVE FIGURES Certain 2007 comparative fi gures have been reclassifi ed to conform to the fi nancial statement presentation adopted for 2008. • ProMetic Life Sciences Inc. | AR 2008 Board of Directors G.F. Kym Anthony Deputy Chairman Research Capital Corporation Chair DFG Investment Advisers John Bienenstock(3) Distinguished University Professor McMaster University and Director, Brain-Body Institute St. Joseph’s Healthcare Hamilton Roger Garon(1) (2) Chairman of the Board Multivet International Inc. Barry H. Gibson Owner Aroma-Tec Industries Inc. Positions – Committees: (1) Audit Committee: Robert Lacroix (Chairman) Roger Garon Benjamin Wygodny (2) Compensation Committee: Benjamin Wygodny (Chairman) Roger Garon (3) Corporate Governance Committee: Robert Lacroix (Chairman) John Bienenstock Benjamin Wygodny Robert Lacroix(1) (3) Senior Vice-President CTI Capital Securities Inc. Pierre Laurin Chairman of the Board, President and Chief Executive Offi cer ProMetic Life Sciences Inc. Bruce Wendel Executive Vice-President, Corporate Operations and Development Abraxis BioScience, LLC Benjamin Wygodny(1) (2) (3) President Angus Partnership Inc. Corporate Information | ProMetic Life Sciences Inc. • Corporate Information Headquarters ProMetic Life Sciences Inc. (Canada) 8168 Montview Road Mount-Royal, Quebec H4P 2L7 Canada Tel: Fax: Email: Web: +514.341.2115 +514.341.6227 info@prometic.com www.prometic.com Investor Relations Tel: Email: +514.341.2115 investor@prometic.com On peut se procurer la version française du présent rapport annuel en s’adressant au service des relations avec les investisseurs de ProMetic Sciences de la Vie inc. (coordonnés ci-dessus) ou sur notre site internet à l’adresse www.prometic.com. Therapeutics ProMetic BioSciences Inc. (Canada) 500 Cartier Blvd. West, Suite 150 Laval, Quebec H7V 5B7 Canada Tel: Fax: Email: +450.781.1394 +450.781.1403 info@prometic.com Protein Technologies ProMetic BioSciences Ltd (United Kingdom) R&D 211 Cambridge Science Park Milton Road Cambridge CB4 0WA United Kingdom Tel: Fax: Email: On-line Shop: www.prometicbiosciences.com +44.1223.420.300 +44.1223.420.270 sales@prometicbiosciences.com North American Sales Offi ce Tel: Fax: Email: +301.917.6320 +301.838.9022 sales@prometicbiosciences.com Manufacturing Freeport Ballasalla, Isle of Man IM9 2AP United Kingdom Tel: Fax: Email: +44.1624.821.450 +44.1624.821.451 sales@prometicbiosciences.com ProMetic BioTherapeutics, Inc. (United States) 9800 Medical Center Drive Suite C-110 Rockville, Maryland 20850 USA Tel: Fax: Email: +301.917.6320 +301.838.9023 info@prometic.us • ProMetic Life Sciences Inc. | AR 2008 Auditors Raymond Chabot Grant Thornton, LLP 600 De La Gauchetière Street West, Suite 2000 Montreal, Quebec H3B 4L8 Canada Transfer Agent and Registrar Computershare Trust Company of Canada 1500 University Street, Suite 700 Montreal, Quebec H3A 3S8 Canada Listing: Toronto Stock Exchange Symbol: PLI Outstanding shares as of December 31, 2008: 317,401,768 Annual Information Form The 2008 Annual Information Form of ProMetic Life Sciences Inc. is available upon request from the Company’s Head Offi ce or by accessing the SEDAR (System for Electronic Document Analysis and Retrieval) site, www.sedar.com. e m s i h p a r G | s n o i t a c i n u m m o C | . c n i 3 G C www.ProMetic.com