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BELLUS Health reports results for first quarter of fiscal 2009
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LAVAL, QC, May 6 /CNW Telbec/ - BELLUS Health Inc. ("BELLUS Health" or the "Company") (TSX: BLU) reported results for the first quarter ended March 31, 2009. The Company reported a net loss of $9,907,000 ($0.20 per share) for the quarter, compared to $13,042,000 ($0.27 per share) for the same period the previous year. The decrease in the net loss is mainly due to a reduction in research and development (R&D) expenses, before research tax credits and grants, which amounted to $3,610,000 for the current quarter, compared to $8,780,000 for the same period the previous year. The decrease is mainly attributable to a reduction in the research and development of tramiprosate (ALZHEMED(TM); homotaurine) for the treatment of Alzheimer's disease following the Company's decision in November 2007 to terminate the tramiprosate (ALZHEMED(TM)) pharmaceutical drug development program. The Company is also developing NC-503 (eprodisate) for the treatment of Type II diabetes and certain features of metabolic syndrome.
As at March 31, 2009, the Company had available cash, cash equivalents and marketable securities of $3,187,000, compared to $10,595,000 at December 31, 2008. The decrease is primarily due to funds used in operating activities.
On April 16, after the end of the first quarter of 2009, the Company announced the completion of the first tranche of its previously announced $20.5 million CAD convertible notes (see Liquidity and capital resources section for further details). BELLUS Health received gross proceeds of $10 million CAD for the issuance of new convertible notes. A second tranche of $10.5 million CAD is expected to be funded by June 2009. In March 2009, the Company announced a reduction in the workforce and other related measures which are expected to result in annual savings of approximately $3.5 million CAD, and the restructuring of the lease of the Company's main premises and the 2006 and 2007 convertible notes, which are expected to result in annual cash savings of approximately an additional US$4.1 million on an annual basis.
BELLUS Health also announced today that, in a cost-saving measure, it is taking steps to remove its common shares from registration under the U.S. Securities Exchange Act of 1934, as amended, by filing a Form 15 with U.S. Securities and Exchange Commission (the "SEC"). Consequently, BELLUS Health will no longer be required to file reports with the SEC. BELLUS Health will continue to be subject to public company reporting obligations in Canada, and investors will continue to be able to access its reports on the sedar.com and bellushealth.com websites. The Company expects the steps to be completed in the coming days.
The Company also announced that on May 5, 2009, Mr. Calin Rovinescu tendered his resignation from the Board of Directors of BELLUS Health and all of its committees, effective immediately.
"I recognize the significant challenges that Calin has assumed as President and Chief Executive Officer of Air Canada. We wish him every success and thank him for his valuable contribution to our Board of Directors and its committees," said Dr. Bellini, Chairman, President and Chief Executive Officer.
Highlights of the Consolidated Financial Results for the First Quarter of
2009
BELLUS Health Inc. (BELLUS Health or the Company) is a global health company focused on the development and commercialization of products to provide innovative health solutions to address critical unmet needs.
This Management's Discussion and Analysis (MD&A) provides a review of the Company's operations and financial performance for the three-month period ended March 31, 2009, compared to the three-month period ended March 31, 2008. It should be read in conjunction with the Company's unaudited consolidated financial statements for the period ended March 31, 2009, as well as the Company's audited consolidated financial statements for the year ended December 31, 2008, which have been prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP). For discussion regarding related-party transactions, contractual obligations, disclosure controls and procedures, internal control over financial reporting, critical accounting policies and estimates, recent accounting pronouncements, and risks and uncertainties, refer to the Annual Report and the Annual Information Form for the year ended December 31, 2008, as well as registration statements and other public filings, which are available on SEDAR at www.sedar.com or on EDGAR at www.sec.gov. This document contains forward-looking statements, which are qualified by reference to, and should be read together with the "Forward-Looking Statements" cautionary notice, which can be found at the end of this MD&A. All currency figures reported in this document, including comparative figures, are reported in US dollars, unless otherwise specified. This MD&A was prepared by Management with information available as at May 5, 2009.
Results of Operations
For the three-month period ended March 31, 2009, the net loss amounted to $9,907,000 ($0.20 per share), compared to $13,042,000 ($0.27 per share) for the corresponding period the previous year.
Net sales amounted to $84,000 for the current quarter and represent the sales of VIVIMIND(TM) (also known as tramiprosate and homotaurine), the Company's first natural health brand launched on September 2, 2008 in Canada and also globally on the Internet. VIVIMIND(TM), to protect memory function, is based on homotaurine, a naturally occurring ingredient found in certain seaweed. Targeted at healthy baby boomers, this patented natural health brand is expected to address a largely underserved self-care market by providing a scientific, evidence-based health solution. VIVIMIND(TM) is the direct result of over 15 years of significant scientific research, including clinical testing in over 2,000 individuals. Post-hoc analysis of the North American Phase III clinical trial of tramiprosate (homotaurine) involving 1,052 Alzheimer's disease (AD) patients showed a positive impact on cognitive function and that, anatomically, it helped to reduce the volume loss of the hippocampus, an important area of the brain responsible for memory. VIVIMIND(TM) is commercialized by OVOS Natural Health Inc., a wholly owned subsidiary of BELLUS Health. The Company's strategy includes revenue generation in the short- to medium-term through the sale of natural health products and in the medium- to long-term through development of a pipeline of pharmaceutical products.
Research and development expenses, before research tax credits and grants, amounted to $3,610,000 for the current quarter, compared to $8,780,000 for the same period the previous year. The decrease is mainly attributable to a reduction in the research and development of tramiprosate (ALZHEMED(TM); homotaurine) for the treatment of AD, following the Company's decision in November 2007 to terminate the tramiprosate (ALZHEMED(TM)) pharmaceutical drug development program. The Company is also developing NC-503 (eprodisate) for the treatment of Type II diabetes and certain features of metabolic syndrome. During the second quarter of 2008, a Phase II clinical trial in diabetic patients was initiated in Canada and patient recruitment and randomization commenced. The study is a randomized 26-week, double-blind, placebo-controlled study. Interim results are anticipated late in the second quarter or early in the third quarter of 2009, at which time a decision may be made as to the future of this program. Results from a validated rat model of diabetes and metabolic syndrome have demonstrated that NC-503 decreases glycemic levels in obese diabetic Zucker rats, when compared to the control group, while preserving 40% more pancreatic islet cells (insulin secreting cells) as compared to the control group, and have shown some protective effect on renal function.
Research tax credits and grants amounted to $303,000 for the current quarter, compared to $397,000 for the corresponding period the previous year. Research tax credits represent refundable tax credits earned under the Quebec Scientific Research and Experimental Development Program for expenditures incurred in Quebec. The decrease is attributable to lower research and development expenses incurred in Quebec during the current period that are eligible for refundable tax credits.
General and administrative expenses totaled $3,148,000 for the current quarter, compared to $3,576,000 for the same quarter the previous year. The decrease is mainly due to the reduction in the workforce and additional measures implemented by the Company to reduce its burn rate.
Marketing and selling expenses amounted to $1,878,000 for the current quarter compared to nil for the same quarter the previous year and represent expenses incurred in relation to the commercialization of the Company's natural health brand, VIVIMIND(TM).
Stock-based compensation amounted to $452,000 for the current quarter, compared to $1,035,000 for the corresponding quarter the previous year. This expense relates to stock options and stock-based incentives, whereby compensation cost in relation to stock options is measured at fair value at the date of grant and is expensed over the award's vesting period. The decrease is mainly due to adjustments in relation to forfeitures of stock options, which occurred as a result of reductions in the workforce.
Interest income amounted to $13,000 for the current quarter compared to $498,000 for the same quarter the previous year. The decrease is mainly attributable to lower average cash balances and lower interest rates during the current period, compared to the same period the previous year.
Accretion expense amounted to $1,282,000 for the current quarter, compared to $1,207,000 for the same quarter the previous year. Accretion expense represents the imputed interest under GAAP on the $42,085,000 aggregate principal amount of 6% convertible senior notes issued in November 2006 (2006 Notes), as well as on the remaining $4,500,000 principal amount of 6% senior convertible notes (2007 Senior Notes) issued in May 2007. The Company accretes the carrying values of the 2006 Notes and the 2007 Senior Notes to their face value through a charge to earnings over their expected life of 60 months and 54 months, respectively. As of March 31, 2009, $42,085,000 of the 2006 Notes and $4,500,000 of the 2007 Senior Notes remained outstanding.
The fair value of third party Asset-Backed Commercial Paper (ABCP) decreased by $341,000 for the current quarter compared to a decrease of $375,000 for the same quarter the previous year. This represents adjustments recorded on the valuation of ABCP held by the Company. See Liquidity and Capital Resources section for more details.
Foreign exchange gain amounted to $123,000 for the current quarter, compared to a gain of $754,000 for the same quarter the previous year. Foreign exchange gains or losses arise on the movement in foreign exchange rates in relation to the Company's net monetary assets denominated in currencies other than US dollars, which is its functional and reporting currency, and consists primarily of monetary assets and liabilities denominated in Canadian dollars. Foreign exchange gains for the comparative quarter include $924,000 of gain recognized on the reclassification of the refundable amount ($6,000,000) due to Centocor, Inc., from deferred revenue (non-monetary liability) to accrued liability (monetary liability) following the recovery by the Company of ownership rights in and control of eprodisate (KIACTA(TM)).
Other income amounted to $529,000 for the current quarter, compared to $278,000 for the same quarter the previous year. Other income consists of non-operating revenue, primarily sub-lease revenue. The increase is attributable to a gain recognized and realized during the current quarter on the settlement of a dispute.
Liquidity and capital resources
As at March 31, 2009, the Company had available cash, cash equivalents and marketable securities of $3,187,000, compared to $10,595,000 at December 31, 2008. The decrease is primarily due to funds used in operating activities.
On April 16, 2009, the Company announced the completion of the first tranche of a CDN$20.5 million convertible notes (2009 Notes) financing with Vitus Investments III Private Limited (Vitus), a corporation whose shares are beneficially owned by Mr. Carlo Bellini, and Victoria Square Ventures Inc. (VSVI), a subsidiary of Power Corporation of Canada (the Investors). On that date, BELLUS Health received gross proceeds of CDN$10 million for the issuance of 2009 Notes (CDN$5 million from each Vitus and VSVI) and a second tranche of CDN$10.5 million (CDN$5 million from Vitus and CDN$5.5 million from VSVI) is expected to be funded in June 2009. Prior to this financing and as a condition thereof, BELLUS Health and all of the existing noteholders had agreed to amend the terms of the outstanding 2006 Notes and 2007 Senior Notes to either make them convertible into a new series of preferred shares of BELLUS Health and to have these notes converted into such preferred shares immediately, or to otherwise amend the existing notes which shall remain outstanding. In addition, the landlord of the premises of BELLUS Health, in Laval, Quebec, has agreed, as a condition precedent to the financing, to defer certain rental payments and to accept payment of the deferred rent in cash or common shares of BELLUS Health (at the then applicable market price) at the option of BELLUS Health at a later date. The features of the 2009 Notes issued to the Investors, the terms of the preferred shares, the amended terms of the 2006 Notes and 2007 Senior Notes, as well as the amended terms of the lease for the Laval premises are set forth below.
The 2009 Notes are secured, subject to certain permitted encumbrances, by a first charge on all of the assets of BELLUS Health and certain of its subsidiaries and are convertible into common shares of BELLUS Health at CDN$0.20 per share (the Financing Conversion Price). Interest will be capitalized on the 2009 Notes at the rate of 15% per year and the notes will mature 5 years and one day from the date of issuance. The 2009 Notes include customary anti-dilution provisions in respect of issuances of securities or distributions to shareholders and, in the event BELLUS Health issues additional equity or equity-linked securities at a price per common share that is less than the Financing Conversion Price then in effect, "full ratchet" anti-dilution protection (which will have the effect of lowering the Financing Conversion Price to the new issue price of equity or equity-linked securities) will apply, subject to certain exceptions. In addition, the 2009 Notes contain adjustment provisions in the event of a change of control, and negative covenants, as well as a pre-emptive right in respect of future financings of BELLUS Health. The 2009 Notes issued to VSVI contains certain piggyback rights in favor of VSVI. The exercise of pre-emptive and piggyback rights will be subject to regulatory approval. The aggregate amount of the 2009 Notes issued to the Investors was increased by CDN$615,000 to cover a set up fee in connection with the financing. Assuming that each of the 2009 Notes remain outstanding until maturity, are converted in full at the Financing Conversion Price and that all interest thereon is paid by the issuance of common shares of BELLUS Health at the Financing Conversion Price, the maximum number of common shares issuable under the 2009 Notes is 212,349,035, representing a potential dilution factor of 424%, based on the number of common shares issued and outstanding as at March 31, 2009.
Each of Vitus and VSVI have the right to nominate two (2) members to the Board of Directors of BELLUS Health and BELLUS Health has agreed to seek the reduction of the size of its Board of Directors from twelve (12) to seven (7) directors at its next annual general meeting.
Prior to the 2009 Notes financing, BELLUS Health and all of the existing noteholders had agreed to amend the terms of the outstanding 2006 Notes and 2007 Senior Notes. Holders of $33,085,000 principal amount of existing 2006 Notes and 2007 Senior Notes have agreed to amend the terms of their notes to make them convertible into the preferred shares in the authorized capital of BELLUS Health and received 3,096 preferred shares per $1,000 aggregate principal amount of existing convertible notes, representing a conversion price equal to 200% of the Financing Conversion Price (resulting in a conversion price of CDN$0.40 per share) (the Preferred Share Conversion Price). A total of 102,431,160 preferred shares were issued to note holders who elected to receive preferred shares. Such preferred shares are convertible into common shares of BELLUS Health on a one-to-one basis, subject to adjustment, entitle the holder to 6% cumulative dividends payable in cash or common shares of the Company at the option of the Company and shall be automatically converted into common shares of the Company five years from the date of issuance. The conversion of the 2006 Notes and 2007 Senior Notes to preferred shares is expected to trigger a gain or loss on conversion during the second quarter of fiscal 2009. The remaining note holders have agreed to amend their existing convertible notes as set out below. Assuming that each of the preferred shares remain outstanding until maturity, is converted in full at the Preferred Share Conversion Price and that all dividends payable in respect of the preferred shares are paid by the issuance of common shares of BELLUS Health at an assumed market price of CDN$0.35, the maximum number of common shares issuable on conversion of the preferred shares would be 137,595,789, representing a potential dilution factor of 275%, based on the number of common shares issued and outstanding as at March 31, 2009.
Holders of $13,000,000 principal amount of the 2006 Notes and one holder of $500,000 principal amount of 2007 Senior Notes have also agreed to amend the terms of their notes, without immediate conversion into preferred shares. The amendments include providing for a 6% annual interest rate payable in cash or common shares of BELLUS Health at the option of BELLUS Health at the then market price of the common shares, replacing the existing conversion rate adjustment period of October 2009 - November 2009 with a period from October 2012 - November 2012 for conversion of the notes at the then applicable market price of the common shares of BELLUS Health based on a twenty (20) day volume weighted average price at that time and replacing the right to have BELLUS Health redeem the notes in November 2011 with a right to redeem the notes in November 2014 at the then face value of the notes. Amendments to the notes also include the removal of certain negative covenants. Assuming that the remaining 2006 Notes and 2007 Senior Notes are converted in full at an assumed market price of CDN$0.35 in 2012, when the price of such instruments gets adjusted based on the then market price of the common shares of BELLUS Health, and that all interest thereon is paid by way of issuance of common shares of BELLUS Health at an assumed market price of CDN$0.35, the maximum number of common shares issuable under the remaining 2006 Notes and the 2007 Senior Notes, as amended, would be 56,437,714, representing a potential dilution factor of 113%, based on the number of common shares issued and outstanding as at March 31, 2009.
BELLUS Health has agreed that the right to redeem the remaining 2006 Notes and 2007 Senior Notes, as amended, shall be exercisable 90 days prior to the maturity date of the 2009 Notes to be issued to the Investors. Any additional unsecured debt, other than operating facilities or debt that is pari passu or junior in ranking to the existing convertible notes, as amended, shall not mature or be redeemable for cash prior to the date on which the redemption right of the remaining 2006 Notes and 2007 Senior Notes comes into effect. In addition, BELLUS Health has agreed to certain restrictions on its ability to declare or pay dividends in cash while the 2009 Notes are outstanding.