Form 20-F
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

¨ Registration statement pursuant to Section 12(b) or (g)

of the Securities Exchange Act of 1934

or

x Annual report pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2013;or

¨ Transition report pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

or

¨ Shell company report pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of event requiring this shell company report:

For the transition period from          to          

Commission file number: 1-35203

 

 

 

THERATECHNOLOGIES INC.

(Exact name of registrant as specified in its charter)

Quebec

(Jurisdiction of incorporation or organization)

2310 Alfred-Nobel Blvd.

Montreal, Quebec, Canada, H4S 2B4

(Address of principal executive offices)

Luc Tanguay

Tel: (514) 336-7800

Fax: (514) 331-9691

2310 Alfred-Nobel Boulevard

Montreal, Quebec, Canada H4S 2B4

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

 

SECURITIES REGISTERED OR TO BE REGISTERED

PURSUANT TO SECTION 12(b) OF THE ACT:

 

Common Shares, no par value

(Title of each class)

  

The Toronto Stock Exchange

(Name of each exchange on which registered)

 

 

SECURITIES REGISTERED OR TO BE REGISTERED

PURSUANT TO SECTION 12(g) OF THE ACT:

N/A

 

 

SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION

PURSUANT TO SECTION 15(d) OF THE ACT:

N/A

 

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

61,010,603 Common Shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

¨Large accelerated filer ¨ Accelerated filer x Non-accelerated filer

Indicate by check mark which basis of accounting the registrant has used to prepare the statements included in this filing:

U.S. GAAP ¨ International Financial Reporting Standards as issued by the International Accounting Standards Board x Other ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ¨ Item 18 ¨ |

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

 


Table of Contents

 

TABLE OF CONTENTS

 

          Page   

INTRODUCTION

     2   

PART I

     4   

Item 1.

    

Identity of Directors, Senior Management and Advisers

     4   

Item 2.

    

Offer Statistics and Expected Timetable

     4   

Item 3.

    

Key Information

     4   

Item 4.

    

Information on the Company

     19   

Item 4A.

    

Unresolved Staff Comments

     40   

Item 5.

    

Operating and Financial Review and Prospects

     40   

Item 6.

    

Directors, Senior Management and Employees

     59   

Item 7.

    

Major Shareholders and Related Party Transactions

     81   

Item 8.

    

Financial Information

     81   

Item 9.

    

The Offer and Listings

     82   

Item 10.

    

Additional Information

     83   

Item 11.

    

Quantitative and Qualitative Disclosures about Market Risks

     92   

Item 12.

    

Description of Securities Other than Equity Securities

     92   

PART II

     92   

Item 13.

    

Defaults, Dividend Arrearages and Delinquencies

     92   

Item 14.

    

Material Modification to the Rights of Security Holders and Use of Proceeds

     92   

Item 15.

    

Controls and Procedures

     92   

Item 16.

    

[Reserved]

     93   

Item 16A.

    

Audit Committee Financial Expert

     93   

Item 16B.

    

Code of Ethics

     93   

Item 16C.

    

Principal Accountant Fees and Services

     94   

Item 16D.

    

Exemptions from the Listing Standards for Audit Committees

     94   

Item 16E.

    

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

     94   

Item 16F.

    

Change in Registrant’s Certifying Accountant

     94   

Item 16G.

    

Corporate Governance

     94   

Item 16H.

    

Mine Safety Disclosure

     94   

PART III

     94   

Item 17.

    

Financial Statements

     94   

Item 18.

    

Financial Statements

     94   

Item 19.

    

Exhibits

     146   

SIGNATURES

     147   

 

 

Form 20-F


Table of Contents

INTRODUCTION

 

 

BASIS OF PRESENTATION

In this Annual Report on Form 20-F, or Annual Report:

 

   

references to “Theratechnologies”, the “Company”, the “Corporation”, “we”, “our” and “us” or similar terms refer to Theratechnologies Inc. and its subsidiaries on a consolidated basis, unless otherwise indicated or unless the context requires otherwise;

 

   

EGRIFTATM refers to tesamorelin for the reduction of excess abdominal fat in HIV-infected patients with lipodystrophy, regardless of the trade name that could be used for such product in any particular territory. EGRIFTA® is our registered trademark in the United States and it is used in that country to commercialize tesamorelin for the reduction of excess abdominal fat in HIV-infected patients with lipodystrophy. Other trademarks and service marks appearing in this Annual Report are the property of their respective holders. Tesamorelin refers to the use of tesamorelin for the potential treatment of other diseases;

 

   

we obtained the industry, market and competitive position data from our own internal estimates and research as well as from general publications of third parties. While we believe our internal company research is reliable and the market definitions, methodology and hypotheses we use are appropriate, such research, analysis, methodology or definitions have not been verified by an independent source. We cannot and do not provide any assurance as to the accuracy or completeness of such information;

 

   

where indicated, we have assumed that we would begin commercializing EGRIFTATM in the United States on May 1, 2014, or Closing Date, as a result of the execution of a termination and transfer agreement dated December 13, 2013, or EMD Serono Termination Agreement, between the Corporation and EMD Serono, Inc., or EMD Serono, terminating the collaboration and licensing agreement dated October 28, 2008, as amended on April 9, 2012, between the Corporation and EMD Serono, or EMD Serono Agreement, allowing the Corporation to regain all rights under the EMD Serono Agreement to commercialize EGRIFTATM in the United States, or EGRIFTA Transaction;

 

   

all monetary amounts set forth are expressed in Canadian dollars, except where otherwise indicated. References to “$” and “C$” are to Canadian dollars and references to “US$” are to U.S. dollars;

 

   

all information is provided as of February 26, 2014, except where otherwise stated.

FORWARD-LOOKING STATEMENTS

This Annual Report contains forward-looking statements and forward-looking information within the meaning of applicable securities laws that are based on our management’s belief and assumptions and on information currently available to our management, collectively, “forward-looking statements”. In some cases, you can identify forward-looking statements by terms such as “may”, “will”, “should”, “could”, “would”, “expect”, “plan”, “anticipate”, “believe”, “estimate”, “project”, “predict”, “intend”, “potential”, “continue” and similar expressions intended to identify forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

 

   

our ability and capacity to resume the manufacture of EGRIFTATM;

 

   

our ability and capacity to improve our manufacturing process for EGRIFTATM;

 

   

our ability and capacity to commercialize EGRIFTATM in the United States on and after the Closing Date;

 

   

our ability and capacity to conduct the post-approval commitments mandated by the United States Food and Drug Administration;

 

   

the ability of our commercial partners to commercialize EGRIFTATM in other territories;

 

   

whether we will be able to find new commercial partners in Europe;

 

   

whether we will receive regulatory approvals for EGRIFTATM from regulatory agencies in territories other than the United States in which we wish to undertake the commercialization of EGRIFTATM, and the timing and costs of obtaining such regulatory approvals;

 

   

our receipt of milestones payments, royalties and other revenues from our commercial partners related to future sales of EGRIFTATM;

 

 

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the continuation of our collaborations and other significant agreements with our existing commercial partners and third-party suppliers and our ability to establish and maintain additional collaboration agreements;

 

   

the rate and degree of market acceptance of EGRIFTATM, tesamorelin and our other product candidates;

 

   

our capacity to mitigate the negative impact of the EGRIFTATM shortage on patients and healthcare professionals;

 

   

our success in obtaining, and the timing and amount of, reimbursement by third-party payors for EGRIFTATM, tesamorelin and our other product candidates in the United States and in other territories;

 

   

the benefits of tesamorelin and our other product candidates as compared to others;

 

   

the success and pricing of other competing drugs or therapies that are or may become available;

 

   

our ability to establish and maintain intellectual property rights in EGRIFTATM, tesamorelin and our other product candidates;

 

   

the manufacturing capacity of third-party manufacturers, including the manufacturer of EGRIFTATM;

 

   

our expectations regarding our financial performance, including revenues, expenses, gross margins, profitability, liquidity, capital expenditures and income taxes; and

 

   

our need for additional financing and our estimates regarding our capital requirements.

Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed in or implied by the forward-looking statements. Certain assumptions made in preparing the forward-looking statements include that:

 

   

the manufacture of EGRIFTATM will resume;

 

   

continuous supply of EGRIFTATM will be available;

 

   

the Closing Date of the EGRIFTA Transaction will be May 1, 2014;

 

   

all of the infrastructure necessary to enable us to commercialize EGRIFTATM in the United States will be in place by the Closing Date;

 

   

the EGRIFTATM shortage will have a limited impact on market acceptance by patients and healthcare professionals;

 

   

we will be able to find new commercial partners in Europe resulting in the refiling of a marketing authorization application for EGRIFTATM in certain European countries or the dispensing of EGRIFTATM through named patient programs;

 

   

EGRIFTATM will receive approval in territories (other than the United States) where marketing authorization applications have been filed, including Brazil, Canada and Mexico;

 

   

no additional clinical studies will be required to obtain regulatory approvals for EGRIFTATM in territories (other than the United States) where marketing authorization applications have been filed;

 

   

no material adverse effects will be experienced by patients from the use of EGRIFTATM;

 

   

sales of EGRIFTATM in the United States will increase over time;

 

   

no recall or market withdrawal of EGRIFTATM will occur;

 

   

no laws, regulation, order, decree or judgment will be passed or issued by a governmental body having the effect of preventing the marketing, promotion or sale of EGRIFTATM in the United States or the consummation of the EGRIFTA Transaction under the EMD Serono Termination Agreement;

 

   

our relations with third-party suppliers of EGRIFTATM will be conflict-free and that such third-party suppliers will have the capacity to manufacture and supply EGRIFTATM to meet market demand and on a timely-basis; and

 

   

our business plan will not be substantially modified.

Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these risks and uncertainties, the forward-looking statements and circumstances discussed in this Annual Report may not occur, and you should not place undue reliance on these forward-looking statements. We discuss many of these risks in greater detail under “Item 3.D—Risk Factors” (below) but additional risks and uncertainties, including those that we do not know about or that we currently believe are immaterial, may also adversely affect the forward-looking statements, our business, financial condition and prospects. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Annual Report. We undertake no obligation and do not intend to update or revise these forward-looking statements, unless required by law. We qualify all of the information presented in this Annual Report, and particularly our forward-looking statements, with these cautionary statements.

 

 

3

Form 20-F


Table of Contents

PART I

Item 1. Identity of Directors, Senior Management and Advisers

A.      Directors and senior management.

Not applicable

B.      Advisers.

Not applicable

C.      Auditors.

Not applicable

Item 2. Offer Statistics and Expected Timetable

Not applicable

Item 3. Key Information

A.     Selected financial data.

The following selected consolidated financial data should be read in conjunction with our Management’s Discussion and Analysis and our audited consolidated financial statements and the accompanying notes included elsewhere in this Annual Report. The Consolidated Statement of Comprehensive Income data for the years ended November 30, 2013, 2012 and 2011 and the Consolidated Statement of Financial Position data as at November 30, 2013, and 2012 have been derived from our audited consolidated financial statements which are included in this Annual Report. The Consolidated Statements of Comprehensive Income data for the years ended November 30, 2010 and 2009, and the Consolidated Statements of Financial Position data as at November 30, 2011, November 30, 2010 and November 30, 2009 have been derived from our audited consolidated financial statements not included herein. Our audited consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standard Board, or IASB. Our historical results from any prior period are not necessarily indicative of results to be expected for any future period.

IFRS differs in some significant respects from U.S. GAAP, and thus may not be comparable to the financial statements of United States companies. These differences between IFRS and U.S. GAAP might be material to the financial information presented in this Annual Report. In addition, differences may arise in subsequent periods related to changes in IFRS or U.S. GAAP or due to new transactions we entered into. We are not required to prepare a reconciliation of our consolidated financial statements between IFRS and U.S. GAAP and have not quantified such differences. We previously reported our financial results in accordance with local GAAP, being Canadian GAAP. The Company’s first financial statements in accordance with IFRS as issued by the IASB were for the year ended November 30, 2010 with a date of transition to IFRS of December 1, 2008.

 

 

4

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Table of Contents

Consolidated Statements of Comprehensive (Loss) Income data:

(in thousands of Canadian dollars, except per share amounts)

    

 

Year Ended November 30,

 
    

 

2013

    2012     2011     2010       2009  

 

Sale of goods

    $2,544          $5,235          $8,351          $-          $-     

 

Milestone payments

    -          -          -          25,000          10,884     

 

Upfront payments and initial technology access fees

    1,710          4,077          5,134          6,846          6,560     

 

Royalties and license fees

    3,299          4,255          1,443          22          24     

 

Total revenue

    7,553          13,567          14,928          31,868          17,468     

 

Research and development expenses, net of tax credits

    7,371          6,341          10,992          14,064          20,810     

 

General and administrative expenses

    3,815          5,462          10,823          8,002          6,543     

 

Restructuring costs

    (3,111)          10,702          716          -          -     

 

Total operating expenses

    12,036          28,413          33,696          25,205          34,215     

 

Total net financial income

    454          911          966          2,381          1,591     

 

(Loss) income before income taxes

    (4,029)          (13,935)          (17,802)          9,044          (15,156)     

 

Income tax (expense recovery)

    (26)          (5)          72          (114)          -     

 

Net (loss) income

    (4,055)          (13,940)          (17,730)          8,930          (15,156)     

 

Total comprehensive (loss) income for the year

    (4,216)          (13,973)          (17,837)          8,214          (14,246)     

 

Basic and diluted (loss) earnings per share

    (0.07)          (0.23)          (0.29)          0.15          (0.25)     

 

Weighted average number of common shares (diluted)

        61,010,603              60,983,651              60,733,780              61,322,991              60,314,309     

Consolidated Statements of Financial Position data:

(in thousands of Canadian dollars)

      As at November 30,          
      2013      2012      2011      2010      2009  

 

Cash and bonds (including non-current)

           $12,353                   $20,503                       $36,787                   $64,550           $63,362   

 

Total assets

     24,844               36,332               52,873           71,651           69,154   

 

Total liabilities

     6,316               13,662               16,530           18,995           26,106   

 

Share Capital

     280,872               280,872               280,488           279,398           279,169   

 

Total equity

     18,528               22,670               36,343           52,656           43,048   

 

Dividends declared per share

     --                   --                   --             --               --         

Exchange rate information

The following table sets forth for each periods indicated, information concerning the high and low closing exchange rates for one Canadian dollar, expressed in U.S. dollar.

 

Month            High                         Low              

 

January 2014

     US$ 0.9399         US$0.8946   

 

December 2013

     US$0.9446         US$0.9342   

 

November 2013

     US$0.9599         US$0.9416   

 

October 2013

     US$0.9719         US$0.9538   

 

September 2013

     US$0.9783         US$0.9497   

 

August 2013

     US$0.9714         US$0.9497   

The average closing exchange rates for one Canadian dollar, expressed in U.S. dollars for the five most recent financial years ended November 30 were US $0.9765 in 2013, US $0.9994 in 2012, US$1.0163 in 2011, US$0.9616 in 2010 and US$0.8730 in 2009. On November 30, 2012 the closing exchange rate for one Canadian dollar, express in U.S. dollar was US$1.0064. On February 24, 2014 the closing exchange rate for one Canadian dollar, expressed in U.S. dollar was US$0.9036.

 

 

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Table of Contents

B.  Capitalization and indebtedness

Not applicable

C.  Reasons for the offer and use of proceeds

Not applicable

D.  Risks factors

RISKS RELATED TO OUR SUPPLY CHAIN

We have temporarily ceased the manufacture of EGRIFTA and there is a stock-out of this product on the market. We have not determined a timeline to resume the manufacture of EGRIFTAand are not in a position to provide any at this time. The failure to resume the manufacture of EGRIFTA will have a material adverse effect on our revenue, business and future business prospects.

In February 2014, we announced that we expected our inventory of EGRIFTA™ to be depleted in a matter of weeks due to a combination of manufacturing delays and issues observed during the production of new batches of EGRIFTA™. We further advised that the ensuing depletion of the inventory would result in a shortage of EGRIFTA™ and an eventual stock-out and that we were temporarily ceasing to manufacture EGRIFTA™. As of the date of this Annual Report, we have not resumed the manufacture of EGRIFTA™ and are unable to determine a timeline to resume its manufacture and delivery.

If we are unable to resume the manufacture of EGRIFTA™ and ensure continuous supply of EGRIFTA™, we will not generate revenues, while continuing to incur expenses for our operations, and our liquidities will be materially adversely affected as well as our operating results. After the Closing Date of the EGRIFTA Transaction, to the extent that we are unable to generate revenue and control our operating expenses, we may be in default of our payment obligations to third parties and unless we can generate revenues or find alternative sources of financings, we could have to reorganize or discontinue our operations or we could resort to insolvency laws.

In order to ensure continuous supply of EGRIFTA™, we may have to develop and implement substantial changes to our manufacturing process. Developing and implementing substantial changes would require time and would also likely require the approval of the United States Food and Drug Administration, or FDA. If we are required to develop and implement substantial changes to our manufacturing process before resuming the manufacture of EGRIFTA™, the combination of time and level of liquidities that may be required will have a material adverse effect on our business and future business prospects. In addition, even if we develop and implement changes to our manufacturing process of EGRIFTA™ and we resume the manufacture and delivery of EGRIFTA™, there can be no assurance that a drug-shortage will not occur in the future based on our revised manufacturing process.

We rely on third parties for the manufacture and supply of EGRIFTA™ and tesamorelin and such reliance may adversely affect us if the third parties are unable or unwilling to fulfill their obligations.

We do not own or operate manufacturing facilities for the production of EGRIFTA™, tesamorelin or any of our other product candidates, nor do we have plans to develop our own manufacturing operations in the foreseeable future. We currently rely on third parties to manufacture and supply all of our required raw materials, drug substance and drug product for our preclinical research, clinical trials and commercial sales. For the manufacture of tesamorelin and EGRIFTA™ for commercial sales, we are currently using, and relying on, single suppliers and single manufacturers for raw materials and the final drug substance, namely Bachem Americas, Inc., or Bachem, and Jubilant HollisterStier General Partnership, or Jubilant. Although potential alternative suppliers and manufacturers have been identified, we have not entered into any agreements with them and qualified these vendors to date and no assurance can be given that such suppliers will be qualified in the future or receive necessary regulatory approvals. The replacement of a third-party manufacturer is time-consuming and costly since we will need to validate its capabilities. The validation process includes an assessment of the capacity of such third-party manufacturer to produce the quantities that we may request from time to time, the manufacturing process and its compliance with current good manufacturing practice, or GMP, regulations. In addition, the third-party manufacturer would have to familiarize itself with our technology. Validation of an additional third-party manufacturer takes at least twenty-four (24) months and could be as long as thirty-six (36) months or more.

Our reliance on third-party manufacturers exposes us to a number of risks. We may be subject to delays in or suspension of the manufacturing of EGRIFTA™ and tesamorelin if a third-party manufacturer:

 

   

becomes unavailable to us for any reason, including as a result of the failure to comply with GMP regulations;

 

   

experiences manufacturing problems or other operational failures, such as labour disputes, equipment failures or unplanned facility shutdowns required to comply with GMP, or damage from any event, including fire, flood, earthquake, business restructuring, labour disputes or insolvency; or

 

 

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fails to perform its contractual obligations under our agreement, such as failing to deliver the quantities requested on a timely basis or not meeting product specifications.

For instance, on February 25, 2013, we were informed by Jubilant that it received a warning letter from the FDA, or Warning Letter, for its failure to comply with GMP regulations. The Warning Letter was issued after an inspection made by the FDA in early 2012 and after review by the FDA of Jubilant’s response letters proposing corrective measures for observations made during FDA’s inspection. Jubilant has addressed all comments contained in the Warning Letter and, on February 25, 2014, we were informed by Jubilant that the FDA had accepted all responses filed by Jubilant with the FDA resulting in the closing of the Warning Letter file. See “Item 4.B – Business Overview – Manufacturing” of this Annual Report. If the FDA had not been satisfied with all of Jubilant’s responses, we could have been unable to resume the manufacture of EGRIFTA™, and to the extent the manufacture of EGRIFTA™ had resumed, there could have been a delay in or suspension of the supply of EGRIFTA™ until Jubilant complied with GMP regulations. There can be no assurance that Bachem, Jubilant or other third-party manufacturers that we contract with will not be subject to Warning Letters and, if they were subject to such letters, that they would be able to respond to all of the FDA’s concerns and continue their manufacturing activities.

Any delays in or suspensions of the supply of EGRIFTA™ would delay or prevent the sale of EGRIFTA™ and, accordingly, materially adversely affect our business, financial condition and operating results. In addition, any manufacturing delay or delay in delivering EGRIFTA™ caused by quality control problems could result in product defects, recall or inventory write-offs.

RISKS RELATED TO THE COMMERCIALIZATION OF EGRIFTA

Our commercial success and revenue growth depend solely on the commercialization of EGRIFTATM in the United States; unsatisfactory future sales levels in the United States will have a material adverse effect on us.

Our ability to generate revenue is currently solely based on the commercialization of EGRIFTATM in the United States. Our revenues are mainly derived from sales of EGRIFTATM to EMD Serono for re-sale, royalties received from EMD Serono on U.S. sales of EGRIFTATM to customers, milestone payments from the EMD Serono Agreement, and the amortization of the initial payment received upon the closing of the EMD Serono Agreement.

On and after the Closing Date of the EGRIFTA Transaction, we will be solely responsible for the commercialization of EGRIFTA™ in the United States. Our success in commercializing EGRIFTA™ will depend on our capacity:

 

   

to recruit, through our U.S. agent, Ventiv Commercial Services, LLC, or inVentiv Health, qualified and talented sales representatives, medical science liaison personnel and other key individuals to help us commercialize EGRIFTA™ in the United States;

 

   

to implement and deploy a marketing campaign that will be accepted by patients, physicians and third-party payors;

 

   

to establish a distribution network for EGRIFTA™ by entering into agreements with wholesalers and/or specialty pharmacies on reasonable commercial terms that builds on the distribution network currently in place;

 

   

to obtain reimbursement coverage for EGRIFTA™ by third-party payors;

 

   

to register the Corporation as a drug supplier to U.S. governmental agencies, including U.S. hospitals;

 

   

to register EGRIFTA™ on U.S. governmental forms as a drug available for purchase in the United States;

 

   

to mitigate the negative impact of the EGRIFTATM shortage on patients and healthcare professionals; and

 

   

to ensure that adequate supplies of EGRIFTA™ are available.

There can be no assurance that sales of EGRIFTA™ to customers in the United States will increase or remain the same in the future. If sales of EGRIFTA™ to customers decrease, our revenue could be materially adversely affected which, in turn, would materially adversely affect our business, financial condition and operating results.

Because we expect to be substantially dependent on revenues from EGRIFTA™ for the foreseeable future, any negative developments relating to this product, such as safety or efficacy issues, our inability to resume the manufacture of EGRIFTA™, the introduction or greater acceptance of competing products or adverse regulatory or legislative developments or our inability to implement any of the abovementioned factors, could have a material adverse effect on our business, financial condition and operating results.

Significant safety or drug interaction problems may arise with respect to EGRIFTA™ which could result in restrictions in EGRIFTA™’s label, product recall or withdrawal of EGRIFTA™ from the market and could materially adversely impact our business and its future business prospects.

 

 

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New safety or drug interaction issues may arise as EGRIFTA™ is used over longer periods of time by a wider group of patients, some of whom may be taking numerous other medicines, or may suffer from additional underlying health problems. Such safety or drug interaction issues could include an increase in the severity or frequency of known problems or the discovery of previously unknown problems, and may result in a variety of adverse regulatory actions. Under U.S. laws, the FDA has broad authority over drug manufacturers to compel any number of actions if safety or drug interaction problems arise, including, but not limited to: (i) requiring manufacturers to conduct post-approval clinical studies to assess known risks or signals of serious risks, or to identify unexpected serious risks; (ii) mandating labeling changes to a product based on new safety information; or (iii) requiring manufacturers to implement a risk evaluation mitigation strategy where necessary to assure safe use of the drug. Similar laws and regulations exist in countries outside of the United States. Previously unknown safety or drug interaction problems could also result in product recalls, restrictions on the product’s permissible uses, or withdrawal of the product from the United States market and/or a rejection of the pending marketing authorization applications in other countries.

In addition, as we may conduct and complete other clinical trials with tesamorelin, new safety issues may be identified which could negatively impact our ability to successfully complete these studies, regardless of the underlying cause. New safety or drug interaction issues may require us to, among other things, provide additional warnings and/or restrictions on EGRIFTA™’s label, including a boxed warning in the United States or similar warnings outside of the United States, directly alert healthcare providers of new safety information, narrow the current approved indication for EGRIFTA™, alter or terminate future planned trials for additional uses of tesamorelin, any of which could have a material adverse effect on potential sales of EGRIFTA™.

We face competition and the development of new products by other companies could materially adversely affect our business and products.

The biopharmaceutical and pharmaceutical industries are highly competitive and we must compete with pharmaceutical companies, biotechnology companies, academic and research institutions as well as governmental agencies for the development and commercialization of products, most of which have substantially greater financial, technical and personnel resources than us. Although we believe that we have currently no direct competitors with an approved product indicated for the reduction of excess abdominal fat in HIV-infected patients with lipodystrophy, new competitive products could come on the market and we could face indirect competition from other companies developing and/or commercializing metabolic products and/or other products that reduce or eliminate the occurrence of excess abdominal fat. See “Item 4. – Competition” of this Annual Report.

We have limited internal sales, marketing or distribution capabilities so we must rely on third parties for the sale and marketing of EGRIFTA™ or any future products.

We have limited internal sales, marketing or distribution capabilities and we currently rely on our commercial partners to market and sell EGRIFTA™ in their respective territories pursuant to the license agreements entered into with such partners. In order to continue the commercialization of EGRIFTA™ in the United States from the Closing Date of the EGRIFTA Transaction, we have entered into a master service agreement with inVentiv Health pursuant to which specific service-related agreements will be entered into. Under such agreements, inVentiv Health will provide the Corporation with various services, including sales representatives, medical science liaison personnel, patient and physician communication advice, regulatory advice and assistance in obtaining coverage for EGRIFTATM under US Medicaid and Medicare programs and under third-party payor programs. There can be no assurance that inVentiv Health will be able to attract qualified and talented personnel in connection with the marketing, promotion and sale of EGRIFTA™ or that we will be able to list EGRIFTA™ as a drug eligible for reimbursement by third-party payors and under U.S. governmental programs. Consequently, revenues derived from the sale of EGRIFTA™ may be materially adversely affected. Furthermore, our agreements with inVentiv Health and our other commercial partners contain termination provisions which, if exercised, could delay or suspend the commercialization of EGRIFTA™ or any future products based on tesamorelin.

Our levels of revenues are highly dependent on obtaining patient reimbursement for EGRIFTA™.

Market acceptance and sales of EGRIFTA™ will substantially depend on the availability of reimbursement from third-party payors such as governmental authorities, including U.S. Medicare and Medicaid, managed care providers, and private insurance plans and may be affected by healthcare reform measures in the United States and elsewhere. Third-party payors decide which medications they will pay for and establish reimbursement levels. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and these third-party payors are attempting to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors have been challenging the prices charged for products. Third-party payors may decrease the level of reimbursement of a product or cease such reimbursement and the occurrence of any of these events could materially adversely affect the sales of EGRIFTA™.

On and after the Closing Date of the EGRIFTA Transaction, we will need to apply to obtain coverage of EGRIFTATM under U.S. Medicare and Medicaid programs, as well as under other U.S. programs. Coverage could be denied or the time period allowed to apply for coverage under any of these programs may be expired. If the deadline by which applications must be filed is not met, we may have to wait up to eighteen (18) months prior to being able to file applications to obtain coverage of EGRIFTATM under

 

 

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certain of these programs. Sales of EGRIFTA™ to patients benefitting from U.S. funded reimbursement programs currently account for approximately 35% to 40% of all sales of EGRIFTA™. Denial of coverage for EGRIFTATM under any of the current programs, or delays in obtaining coverage for EGRIFTA™ under any of these programs, would materially adversely affect our revenues. Moreover, within the first eighteen (18) months after the Closing Date of the EGRIFTA Transaction, we will need to find a partner with an active coverage gap agreement in order for EGRIFTA™ to be covered by Medicare Part D. There can be no assurance that we will be able to find such a partner and this could have a material adverse effect on our revenue and operating results if we are unable to sell EGRIFTA™ to patients who benefit from coverage under Medicare Part D. For a discussion on reimbursements in the United States, see “Item 4 – Pharmaceutical Pricing and Reimbursement” in this Annual Report.

In addition, we cannot be sure that reimbursement by insurers, government or others will be available for EGRIFTA™ in other territories and, if reimbursement is available, the level of reimbursement provided to patients. Under our agreements with our commercial partners, they are responsible for seeking reimbursement of EGRIFTA™ in their respective territories and, as a result, we have no control over whether, or what level of, reimbursement is achieved. If reimbursement is not available or is available only in a limited manner, our commercial partners may not be able to successfully commercialize EGRIFTA™ and this would have a material adverse effect on our revenues and future prospects.

Even though EGRIFTA™ is approved for sale in the United States, revenue that we generate from its sales may be limited.

Sales of EGRIFTA™ or any future products for which we obtain marketing approval from the FDA or other regulatory authorities will depend upon the acceptance of such product by the medical community, including physicians, patients and health care payors. The degree of market acceptance of any of our products will depend on a number of factors, including:

 

   

demonstrated product safety, including the prevalence and severity of side effects, and effectiveness as a treatment that addresses a significant unmet medical need;

 

   

storage requirements, dosing regimen and ease of administration;

 

   

the availability of competitive alternatives;

 

   

our ability to obtain and maintain sufficient third-party coverage for reimbursement from government health care programs, including U.S. Medicare and Medicaid, private health insurers and other third-party payors;

 

   

the willingness and ability of patients to pay out-of-pocket for medications in the absence of third-party coverage;

 

   

the product price; and

 

   

the effectiveness of sales and marketing efforts.

If EGRIFTA™ does not achieve adequate sales, we may not generate sufficient revenue from this product to become profitable. Moreover, if we do not generate sufficient revenue from the sale of EGRIFTA™, we may default on our payment obligations under the EMD Serono Termination Agreement and EMD Serono could exercise its rights under its security interest over all of our tesamorelin-related assets.

Our ability to grow our revenues from sales of EGRIFTA™ in countries outside of the United States will be limited if our commercial partners do not obtain approval, or experience significant delays in their efforts to obtain approval, to market EGRIFTA™.

In order for EGRIFTA™ to be commercialized outside of the United States, it is necessary to obtain regulatory approval from the appropriate regulatory authorities. The regulatory authority of each country has its own rules and regulations and the requirements and timing for regulatory approval vary widely from country to country and may, in some cases, be different than or more rigorous than requirements in the United States. The marketing authorization applications filed by our commercial partners seeking approval of EGRIFTA™ are supported by data from clinical trials we conducted to support our new drug application, or NDA, with the FDA. There is no assurance that these marketing authorization applications supported by the data used to obtain approval of EGRIFTA™ in the United States will meet the requirements of various regulatory agencies outside of the United States to approve EGRIFTA™.

Our commercial partner in Africa, Latin America and the Middle East, sanofi, has filed marketing authorization applications for EGRIFTATM in Argentina, Brazil, Colombia, Israel, Mexico and Venezuela. In each of Brazil and Mexico, the two most important markets in Latin America, marketing authorization applications have been filed for more than two (2) years. In Colombia, the regulatory authority rejected the application for EGRIFTATM. In Argentina, the filed documents need to be amended and a new marketing authorization application needs be filed. In Israel and Venezuela, additional documents need to be filed in order to pursue the regulatory review of the applications. There is no assurance that EGRIFTATM will be approved in any of these countries, even if we file a new marketing authorization in Argentina or file the missing documents in Israel and Venezuela. If we do not obtain approval of EGRIFTATM in Brazil and Mexico, our potential revenue growth could be adversely affected. Revenue growth may also be affected in the event sanofi decides not to file a marketing authorization application in countries where they believe that it will not be commercially viable to sell EGRIFTATM.

 

 

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In Canada, the non-approval of the new drug submission, or NDS, filed in June 2011 with Health Canada’s Therapeutic Products Directorate, or TPD, for EGRIFTATM would have adverse consequences on the potential approval of EGRIFTATM in certain other countries of the world, including Bahrain, Kuwait, Oman, Qatar, Russia, Moldova, Ukraine, Republic of Belarus, Turkmenistan and Tajikistan. In those countries, regulatory agencies require that a certificate of pharmaceutical product, or CPP, from the country of origin of a product for which authorization is sought be filed with the application. If TPD does not approve our NDS for tesamorelin, no Canadian CPP will be issued and we or a commercial partner will be unable to file a marketing authorization application in countries requiring a Canadian CPP. In such instances, our capacity to grow our revenues could be adversely affected.

In Europe, we have consulted with key physicians, patient groups, and regulatory experts and subsequently met with regulators in certain jurisdictions to evaluate our prospects for acceptance should we decide to re-file for approval. The result of these consultations and meetings led us to believe that we do not have a reasonable likelihood of being approved in Europe without including additional clinical data on EGRIFTA™. Therefore, we have decided to seek commercial partners who can help us to pursue other options in the short term. Alternatives include filing only in certain countries and dispensing EGRIFTA™ by way of named patient programs. There is no assurance that we will be able to successfully pursue these alternatives and if we are unable to do so it could have an adverse effect on our revenue growth, operating results and business prospects.

In addition, even if EGRIFTATM is approved in all or some of the countries where marketing authorization applications are filed, or are intended to be filed, there is no assurance that EGRIFTATM will be successfully commercialized in any of those countries.

The overall commercialization success of EGRIFTATM outside the United States will depend on several factors, including:

 

   

receipt of regulatory approvals for EGRIFTATM from regulatory agencies in the territories in which we wish to expand the commercialization of EGRIFTA™;

 

   

market acceptance of EGRIFTATM by the medical community, patients and third-party payors (such as governmental health administration authorities and private health coverage insurers);

 

   

the amount of resources devoted by our commercial partners, and their local agents in certain countries, to commercialize EGRIFTATM in their respective territories;

 

   

maintaining manufacturing and supply agreements to ensure the availability of commercial quantities of EGRIFTATM through validated processes;

 

   

the number of competitors in these other markets; and

 

   

protecting and enforcing our intellectual property and avoiding patent infringement claims.

The non-approval or lack of commercial success of EGRIFTATM in major markets outside the United States would decrease our capacity to grow revenues and would affect our operating results.

We are dependent on collaboration and licensing agreements for the commercialization of EGRIFTA™ in Latin America, Africa, the Middle East and Canada. These agreements place the commercialization of EGRIFTA™ in these markets outside of our control.

Although our collaboration and licensing agreements with sanofi and Actelion Pharmaceuticals Canada Inc., or Actelion, contain provisions governing their respective responsibilities as partners for the commercialization of EGRIFTA™ in their respective territories, our dependence on these partners to commercialize EGRIFTA™ is subject to a number of risks, including:

 

   

our limited control of the amount and timing of resources that our commercial partners, and their local agents in certain countries, will be devoting to the commercialization, marketing and distribution of EGRIFTA™, including obtaining third-party patient reimbursement coverage, which could adversely affect our ability to obtain or maximize revenues;

 

   

disputes or litigation that may arise between us and our commercial partners, which could adversely affect the commercialization of EGRIFTA™, all of which would divert our management’s attention and our resources;

 

   

our commercial partners not properly defending our intellectual property rights or using them in such a way as to expose us to potential litigation, which could, in both cases, adversely affect the value of our intellectual property rights;

 

   

corporate reorganizations or changes in business strategies of our commercial partners, which could adversely affect a commercial partner’s willingness or ability to fulfill its obligations under its respective agreement; and

 

 

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our commercial partners being found in breach of local laws.

Our collaboration and licensing agreements may be terminated by our partners in the event of a breach by us of our obligations under such agreements, including our obligation to supply EGRIFTA™, for which we rely on third parties. If any one of our commercial partners terminates its agreement with us or fails to effectively commercialize EGRIFTA™, for any of the foregoing or other reasons, we may not be able to replace the commercial partner and the occurrence of any of the abovementioned events would affect our operating results.

RISKS RELATED TO RESEARCH AND DEVELOPMENT ACTIVITIES

In connection with its approval of EGRIFTA™, the FDA has required a long-term observational safety study and a Phase 4 clinical trial.

The long-term observational safety study is to evaluate the safety of long-term administration of EGRIFTA™ and the Phase 4 clinical trial is to assess whether EGRIFTA™ increases the incidence or progression of diabetic retinopathy in diabetic HIV-infected patients with lipodystrophy and excess abdominal fat. Both studies are currently recruiting patients and are being executed by EMD Serono with financial support from us. On and after the Closing Date of the EGRIFTA Transaction, we will assume responsibility for completing these studies. There can be no assurance that the two studies will be successfully completed or that the results of the studies will be positive. In the event that the studies are not completed or that the results are unfavorable, the FDA could prohibit the future sale, or put restrictions on future sale of EGRIFTA™ in the United States, either of which could have a material adverse effect on our business, financial condition and operating results.

We will rely on third-party service providers to conduct the long-term observational safety study and Phase 4 clinical trial for EGRIFTATM as well as our preclinical studies and clinical trials if the research and development activities related to our product candidates are resumed. The failure by any of these third parties to comply with their obligations may delay the studies which could have an adverse effect on our research and development programs.

We have limited human resources to conduct preclinical studies and clinical trials particularly in light of our recent restructurings and will have to rely on third-party service providers to conduct our studies and trials and carry out certain data gathering and analyses in the future. The preclinical, or non-clinical, studies must be conducted in compliance with good laboratory practice, or GLP, regulations. Clinical trials must comply with good clinical practice, or GCP, requirements, which are ethical and scientific quality standards for conducting, recording and reporting clinical trials to assure integrity of study data and that the rights, safety and wellbeing of trial participants are protected. If our third-party service providers become unavailable for any reason, including as a result of the failure to comply with the rules and regulations governing the conduct of preclinical studies and clinical trials, operational failures such as equipment failures or unplanned facility shutdowns, or damage from any event such as fire, flood, earthquake, business restructuring, labour dispute or insolvency or, if they fail to perform their contractual obligations pursuant to the terms of our agreements with them, such as failing to perform the testing, compute the data or complete the reports further to the testing, we may incur delays which may be significant in connection with our post-approval commitments with the FDA for EGRIFTA™ and/or the planned timing of our trials and studies which could adversely affect the timing of the development program of a product candidate or the filing of an application seeking marketing approval in a jurisdiction where we rely on third-party service providers to make such filing. In addition, where we rely on such third-party service provider to help in answering any question raised by a regulatory agency during its review of one of our applications, the unavailability of such third-party service provider may adversely affect the timing of the review of an application and could ultimately delay the approval. If the damages to any of our third-party service providers are material, or, for any reason, such providers do not operate in compliance with GLP regulations or are unable or refuse to perform their contractual obligations, we would need to find alternative third-party service providers.

If we needed to change or select new third-party service providers, the planned working schedule related to preclinical studies and/or clinical trials could be delayed since the number of competent and reliable third-party service providers of preclinical and clinical work in compliance with GLP regulations is limited. In addition, if we needed to change or select new third-party service providers to carry out work in response to a regulatory agency review of one of our applications, there may be delays in responding to such regulatory agency which, in turn, may lead to delays in commercializing a product candidate.

Any selection of new third-party service providers to carry out work related to preclinical studies and clinical trials would be time-consuming and would result in additional delays in receiving data, analysis and reports from such third-party service providers which, in turn, would delay the filing of documents with the FDA in connection with our long-term observational safety study and Phase 4 clinical trial, from and after the Closing Date of the EGRIFTA Transaction. These delays could also postpone the filing of any NDA with regulatory agencies for the purposes of obtaining regulatory approval to commercialize our product candidates. Furthermore, such delays could increase our expenditures to develop a product candidate and materially adversely affect our business, financial condition and operating results.

 

 

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The conduct of clinical trials requires the enrolment of patients and difficulties in enrolling patients could delay the conduct of our clinical trials or result in their non-completion.

The conduct of clinical trials requires the enrolment of patients. We may have difficulties enrolling patients for the conduct of our long-term observational safety study and Phase 4 clinical trial mandated by the FDA, from and after the Closing Date, or our future clinical trials as a result of design protocol, the size of the patient population, the eligibility criteria to participate in the clinical trials, the availability of competing therapies, the patient referral practices of physicians and the availability of clinical trial sites. Difficulty in enrolling patients for our clinical trials could result in the cancellation of clinical trials or delays in completing them. Once patients are enrolled in a clinical trial, the occurrence of any adverse drug effects or side effects observed during the trial could result in the clinical trial being cancelled. Any of these events would have material adverse consequences on the timely development of our product candidates, the filing of an NDA, or its equivalent, with FDA or comparable regulatory agencies and the commercialization of such product candidates. Moreover, if we are unable to complete the long-term observational safety study and the Phase 4 clinical trial within the time mandated by the FDA because we have difficulties enrolling patients for these studies, the FDA could withdraw EGRIFTA™ from the market. Under these circumstances, our revenues and operating results would be materially adversely affected.

We have suspended all significant research and development activities related to our product candidates, including TH1173, and the discovery of new peptides until we have sufficient funds to invest in our research and development programs. We may never resume these activities, which could materially adversely affect our long-term growth and could cause us to rely solely on EGRIFTA™ as a revenue-generating asset indefinitely.

Our portfolio of product candidates is very limited and these product candidates are at early stages of development, except tesamorelin which has been approved for commercialization in the United States. As a result of business plan revisions announced in October 2012, we put on hold the launch of the Phase I clinical program for TH1173 and suspended all significant long-term research and development activities on our product candidates and the discovery of new peptides. There is no assurance that we will resume these activities and our long-term growth could be materially adversely affected.

In addition, even if we resume research and development of our product candidates, there can be no assurance that these product candidates will reach the clinical trial phase, obtain positive results in clinical trials, obtain regulatory approval or, if approved, be successfully commercialized.

RISKS RELATED TO OUR INTELLECTUAL PROPERTY

Our failure to protect our intellectual property may have a material adverse effect on our ability to develop and commercialize our products.

We will be able to protect our intellectual property rights from unauthorized use by third parties only to the extent that our intellectual property rights are covered and protected by valid and enforceable patents, trademarks and copyrights or are effectively maintained as trade secrets. We try to protect our intellectual property position by, among other things, filing patent applications and trademark applications related to our proprietary technologies, inventions, improvements and tradenames that are important to the development of our business.

Because the patent and trademark position of pharmaceutical companies involves complex legal and factual questions, the issuance, scope, validity, and enforceability of patents and trademarks cannot be predicted with certainty. Patents and trademarks, if issued, may be challenged, invalidated or circumvented. For example, if our patents are invalidated or found to be unenforceable, we would lose the ability to exclude others from making, using or selling the inventions claimed. Moreover, an issued patent does not guarantee us the right to use the patented technology or commercialize a product using that technology. Third parties may have blocking patents that could be used to prevent us from developing our product candidates, selling our products or commercializing our patented technology. Thus, patents that we own may not allow us to exploit the rights conferred by our intellectual property protection.

Our pending patent applications may not be issued or granted as patents. Even if issued, they may not be issued with claims of sufficient breadth to protect our product candidates and technologies or may not provide us with a competitive advantage against competitors with similar products or technologies. Furthermore, others may independently develop products or technologies similar to those that we have developed or may reverse engineer or discover our trade secrets through proper means. In addition, the laws of many countries do not protect intellectual property rights to the same extent as the laws of Canada, the United States and the European Patent Convention, and those countries may also lack adequate rules and procedures for defending intellectual property rights effectively. In Brazil, where we were granted a patent covering the composition of matter for tesamorelin that is currently set to expire in 2019, we became aware that the validity of all Brazilian pharmaceutical-related patents having a term in excess of 20 years from the filing date are judicially challenged in the Brazilian courts by the Instituto National da Propriedade Industrial, or INPI, the Brazilian patent office. INPI alleges that all pharmaceutical-related patents granted by INPI that were filed between 1995 and 1997 and that were granted a term in excess of 20 years from the filing date are either invalid or that their terms should be reduced to 20 years from the filing date. If INPI succeeds in its argument, we may lose our patent protection on tesamorelin in Brazil, or we may have a reduction of our patent term from 2019 to 2016.

 

 

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Although we have received patents from the United States Patent and Trademark Office, or USPTO, for the treatment of HIV-related lipodystrophy with tesamorelin, there can be no guarantee that, in the other countries where we filed patent applications for the treatment of HIV-related lipodystrophy, we will receive a patent or obtain granted claims of similar breadth to those granted by the USPTO. In addition, we have applied to the USPTO to obtain 1,827 days of patent term extension for U.S. patent No. 5,861,379. There is no assurance that the USPTO will issue a decision granting us the extension period sought or accept our application.

We also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. We try to protect this information by entering into confidentiality agreements with parties who have access to such confidential information, such as our current and prospective suppliers, distributors, manufacturers, commercial partners, employees and consultants. Any of these parties may breach the agreements and disclose confidential information to our competitors. It is possible that a competitor will make use of such information, and that our competitive position could be disadvantaged.

Enforcing a claim that a third party infringes on, has illegally obtained or is using an intellectual property right, including a trade secret or know-how, is expensive and time-consuming and the outcome is unpredictable. In addition, enforcing such a claim could divert management’s attention from our business. If any intellectual property right were to be infringed, disclosed to or independently developed by a competitor, our competitive position could be harmed. Any adverse outcome of such litigation or settlement of such a dispute could subject us to significant liabilities, could put one or more of our pending patent applications at risk of being invalidated or interpreted narrowly, could put one or more of our patents at risk of not issuing, or could facilitate the entry of generic products.

Our ability to defend ourselves against infringement by third parties of our intellectual property in the United States with respect to EGRIFTA™ currently depends, in part, on our commercial partner’s decision to bring an action against such third party. Under the terms and conditions of the EMD Serono Agreement, EMD Serono has the first right to bring an action against a third party for infringing our patent rights with respect to EGRIFTA™. Any delay in pursuing such action or in advising us that it does not intend to pursue the matter could decrease sales, if any, of tesamorelin for the treatment of reducing excess abdominal fat in HIV-infected patients with lipodystrophy and adversely affect our revenues. From and after the Closing Date of the EGRIFTA Transaction, we will regain all of our rights to decide whether to defend or to bring an action against such third parties.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. For example, confidential information may be disclosed, inadvertently or as ordered by the court, in the form of documents or testimony in connection with discovery requests, depositions or trial testimony. This disclosure would provide our competitors with access to our proprietary information and may harm our competitive position.

Our commercial success depends, in part, on our ability not to infringe on third party patents and other intellectual property rights.

Our capacity to commercialize our product candidates, and more particularly EGRIFTA™, will depend, in part, upon our ability to avoid infringing third party patents and other third-party intellectual property rights. The biopharmaceutical and pharmaceutical industries have produced a multitude of patents and it is not always easy for participants, including us, to determine which patents cover various types of products, processes of manufacture or methods of use. The scope and breadth of patents is subject to interpretation by the courts and such interpretation may vary depending on the jurisdiction where the claim is filed and the court where such claim is litigated. The fact that we own patents for tesamorelin and for the treatment of HIV-related lipodystrophy in certain jurisdictions does not guarantee that we are not infringing one or more third-party patents in such jurisdictions and there can be no guarantee that we will not infringe or violate third-party patents and other third-party intellectual property rights in the United States or other jurisdictions.

For example, EMD Serono has listed a patent held by one of its affiliates in the Orange Book under the Hatch-Waxman Act with respect to EGRIFTA™ in HIV-associated lipodystrophy. With the termination of the EMD Serono Agreement, EMD Serono could assert that such patent would be infringed by our continued sale of EGRIFTA™ in the United States. To counter that risk, we have obtained a non-exclusive license from EMD Serono’s affiliate under the EMD Serono Termination Agreement in order to continue selling EGRIFTA™ in the United States. If we are in default under the EMD Serono Termination Agreement and such default is not cured within the agreed upon time, EMD Serono’s affiliate could terminate our non-exclusive license. The termination of that license could prevent us from selling EGRIFTA™ in the United States if we were found to infringe the patent listed by one of EMD Serono’s affiliates in the Orange Book and this could have a material adverse effect on our business, financial condition and operating results.

Patent analysis for non-infringement is based in part on a review of publicly available databases. Although we review from time to time certain databases to conduct patent searches, we do not have access to all databases. It is also possible that we will not have reviewed some of the information contained in the databases or we found it to be irrelevant at the time we conducted the searches. In addition, because patents take years to issue, there may be currently pending applications that have not yet been published or that we are unaware of, which may issue later as patents. As a result, there can be no guarantee that we will not violate third-party patents.

 

 

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Because of the difficulty in analyzing and interpreting patents, there can be no guarantee that a third party will not assert that we infringe such third-party’s patents or any of its other intellectual property rights. Under such circumstances, there is no guarantee that we would not become involved in litigation. Litigation with any third party, even if the allegations are without merit, is expensive, time-consuming and would divert management’s attention from the daily execution of our business plan. Litigation implies that a portion of our financial assets would be used to sustain the costs of litigation instead of being allocated to further the development of our business.

If we are involved in patent infringement litigation, we would need to prevail in demonstrating that our products do not infringe the asserted patent claims of the relevant patent, that the patent claims are invalid or that the patent is unenforceable. If we are found to infringe a third-party patent or other intellectual property right, we could be required to enter into royalty or licensing agreements on terms and conditions that may not be favorable to us, and/or pay damages, including up to treble damages in the United States (for example, if found liable of wilful infringement) and/or cease the development and commercialization of our product candidates. Even if we were able to obtain a license, the rights may be non-exclusive, which could result in our competitors gaining access to the same intellectual property and to compete with us.

We have not been served with any notice alleging that we infringe a third-party patent, but there may be issued patents that we are unaware of that our products may infringe, or patents that we believe we do not infringe but ultimately could be found to infringe. If we were to challenge the validity of a competitor’s issued United States patent in a United States court, we would need to overcome a statutory presumption of validity that attaches to every United States patent. This means that, in order to prevail, we would have to present clear and convincing evidence as to the invalidity of the patent’s claims. We cannot guarantee that a court would find in our favour on questions of infringement and validity. Any finding that we infringe or violate a third-party patent or other intellectual property right could materially adversely affect our business, financial condition and operating results.

LITIGATION RISKS

An adverse determination, if any, in the securities class action lawsuit currently pending against us, or any other future lawsuits in which we are a defendant, could have a material adverse effect on us.

A motion to authorize the institution of a class action was originally filed in July 2010 in the Superior Court of Québec, District of Montreal, entitled 121851 Canada Inc. v. Theratechnologies Inc. et al., Number 500-06-000-515-102. The complaint alleged that we, a director and a former executive officer violated the secondary market liability provisions of the Securities Act (Québec) by failing to disclose a material change relating to the administration of EGRIFTA™. The plaintiff sought damages on behalf of a class of persons who were shareholders at May 21, 2010 and who sold their common shares on May 25 or 26, 2010. On February 24, 2012, the Superior Court of Québec authorized 121851 Canada Inc. to institute a class action against us, a director and a former executive officer. On March 20, 2012, we filed a motion seeking permission to appeal this judgment with the Court of Appeal of Québec, District of Montreal, Number 500-09-022519-128, and the hearing took place on January 24, 2013. On July 17, 2013, the Court of Appeal of Québec dismissed our motion to dismiss the authorization to institute such class action and confirmed the decision of the Superior Court of Québec. On November 6, 2013, we filed a motion with the Supreme Court of Canada seeking permission to appeal the decision issued by the Court of Appeal of Québec. Such motion was granted by the Supreme Court of Canada on February 20, 2014.

In May 2013, the same plaintiff instituted a second class action based on the same facts and seeking the same conclusion as the first motion except that damages are sought under the Civil Code of Québec instead of the Securities Act (Québec). The differences between the claim made under the Securities Act (Québec) and the Civil Code of Québec rest on the type of evidence the plaintiff will need to show the court to prove its claim and the value of the damages that may be awarded to the plaintiff if it is successful in its allegations against us, a director and a former executive officer. Under the Securities Act (Québec), the plaintiff does not have to demonstrate causation between an alledged breach of the provisions of the Securities Act (Québec) and the damages incurred, if any, but the amount of damages that may be sought is limited. Damages that may be claimed under the Civil Code of Québec are not limited, but the plaintiff has to demonstrate that there is causation between the alledged breach of an obligation and the damages sought. The parties have agreed to stay this motion until a final decision is issued under the first motion.

Whether or not the plaintiff’s claims are successful, this type of litigation is often expensive and diverts management’s attention and resources, which could adversely affect our business financial condition and operating results. We may also be the target of similar litigation in the future. Any future litigation could result in substantial costs and divert our management’s attention and resources, which could cause serious harm to our business, operating results and financial condition. We maintain liability insurance, however, if any costs or expenses associated with this or any other litigation exceed our insurance coverage, we may be forced to bear some or all of these costs and expenses directly, which could be substantial and could have a material adverse effect on our available funds and operating results.

 

 

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If we fail to comply with our contractual obligations, undertakings and covenants under our agreements with our commercial partners and third-party service providers, we may be exposed to claims for damages and/or termination of these agreements, all of which could materially adversely affect the commercialization of EGRIFTA™, our capacity to generate revenues and management’s attention to the development of our business.

We rely on our commercial partners to commercialize and to obtain and maintain regulatory approvals of EGRIFTA™ in their respective territories under our distribution and licensing agreements with each of them. We also rely on third-party service providers for sales, marketing and distribution activities in the United States and to manufacture EGRIFTA™ for commercialization and tesamorelin for our clinical trials. Under those agreements, we have assumed certain obligations, undertakings and covenants which, if breached by us and not remedied within the agreed upon periods, could expose us to claims for damages and/or termination of these agreements. If we are unable to meet our obligations under any of our agreements with our commercial partners and third-party service providers which results in termination of such agreements, this will materially adversely affect our business, financial condition and operating results since we rely on a limited number of commercial partners and third-party service providers to perform key services to our business. In addition, under the terms of the EMD Serono Termination Agreement, we have granted EMD Serono a security interest over all of our tesamorelin-related assets. If we are in breach of the EMD Serono Termination Agreement by failing to meet our payment obligations to EMD Serono, EMD Serono has the right to seize all of those tesamorelin-related assets. Unless we are able to generate sufficient revenues from our products, a breach of the payment provisions under the EMD Serono Termination Agreement by us will have a material adverse effect on our business and could lead to recourses under insolvency laws.

If product liability lawsuits are brought against us, they could result in costly and time-consuming litigation and significant liabilities.

Despite all reasonable efforts to ensure the safety of EGRIFTA™ and our other product candidates, it is possible that we or our commercial partners will sell products which are defective, to which patients react in an unexpected manner, or which are alleged to have side effects. The development, manufacture and sale of such products may expose us to potential liability, and the pharmaceutical industry has been subject to significant product liability litigation. Any claims, with or without merit, could result in costly litigation, reduced sales, significant liabilities and diversion of our management’s time and attention and could have a material adverse effect on our financial condition, business and operating results. A product liability claim could also tarnish our reputation, whether or not such claims are with or without merit.

If a product liability claim is brought against us, we may be required to pay legal and other expenses to defend the claim and, if the claim is successful, damage awards may be substantial and/or may not be covered, in whole or in part, by our insurance. We may not have sufficient capital resources to pay a judgment, in which case our creditors could levy against our assets. We may also be obligated to indemnify our commercial partners and make payments to other parties with respect to product liability damages and claims. Defending any product liability claims, or indemnifying others against those claims, could require us to expend significant financial and managerial resources.

GEO-POLITICAL RISKS

A variety of risks associated with our international business relationships could materially adversely affect our business.

International business relationships in the United States, Europe, Latin America, Africa, the Middle East and elsewhere subject us to additional risks, including:

 

   

differing regulatory requirements for drug approvals in foreign countries;

 

   

potentially reduced protection for intellectual property rights, including unexpected changes in the rules governing patents and their enforcement;

 

   

potential third-party patent rights in foreign countries;

 

   

the potential for so-called parallel importing, which is what happens when a local seller, faced with high or higher local prices, opts to import goods from a foreign market, with low or lower prices, rather than buying them locally;

 

   

unexpected changes in tariffs, trade barriers and regulatory requirements;

 

   

economic weakness, including inflation, or political instability, particularly in foreign economies and markets;

 

   

compliance with tax, employment, immigration and labour laws for employees traveling abroad;

 

   

foreign taxes;

 

   

foreign exchange contracts and foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doing business in another country;

 

 

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workforce uncertainty in countries where labour unrest is more common than in the United States and Canada;

 

   

production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and

 

   

business interruptions resulting from geo-political actions, including war and terrorism, or natural disasters, including earthquakes, volcanoes, typhoons, floods, hurricanes and fires.

These and other risks of international business relationships may materially adversely affect our business, financial condition and operating results.

OTHER RISKS RELATED TO OUR BUSINESS

On the Closing Date, we will contract a debt under the EMD Serono Termination Agreement and will collateralize most of our assets. We may not be able to sell the collateralized assets if we need capital and our breach of the payment obligations under the EMD Serono Termination Agreement could allow EMD Serono to seize those assets, all of which would have a material adverse effect on our business.

Under the terms of the EMD Serono Termination Agreement, we agreed to pay an early termination fee of US $20,000,000, or Early Termination Fee, over a five-year period starting on the first anniversary of the Closing Date. We also agreed to pay EMD Serono an undisclosed increasing royalty, or Royalties, based on annual net sales. The Royalties will be paid until an undisclosed cumulative aggregate amount is reached or until January 1, 2024, the first of these events to occur.

In order to secure the payment of the Early Termination Fee, we granted EMD Serono a security interest on our present and future worldwide corporeal and incorporeal movable property related to tesamorelin until such time as the amount of US $20,000,000 has been reimbursed in full to EMD Serono. Thereafter, the Corporation and EMD Serono agreed to reduce the security interest to all present and future corporeal and incorporeal movable property related to tesamorelin in the United States only to secure the payment of the Royalties.

The granting of a security interest over our present and future worldwide corporeal and incorporeal movable property related to tesamorelin could prevent us from being able to dispose of these assets in the event we need additional capital to meet our obligations or expand our business. In addition, if we fail to meet our payment obligations to EMD Serono, EMD Serono may seize the assets subject to the security interest and, to the extent we have no other revenue-generating products, we could have to discontinue our operations and could resort to insolvency laws.

We have a history of net losses and we may never achieve consistent profitability.

We have been reporting losses since our inception (except for the financial years ended November 30, 2010, 2001 and 2000) and, as at November 30, 2013, we had an accumulated deficit of $271 million.

Our profitability depends on, among other things, our commercial partners’ ability and willingness to successfully commercialize EGRIFTATM and to obtain regulatory approvals of EGRIFTATM in certain countries of Latin America and Canada. From the Closing Date of the EGRIFTA Transaction, our profitability will also depend on our capacity to pursue the commercialization of EGRIFTATM successfully through the implementation of a low-cost and effective distribution network, the recruitment of talented personnel by inVentiv Health, the deployment of an effective marketing campaign and the obtaining of reimbursement coverage for EGRIFTATM under U.S. Medicare and Medicaid programs and under private-health insurers programs. There is no guarantee that our commercial partners will succeed in commercializing EGRIFTATM, that EGRIFTATM and our product candidates will ever receive approval for commercialization in any jurisdictions and that we will be able to implement any of the abovementioned factors when we will be commercializing EGRIFTATM in the United States. In addition, if revenues grow more slowly than we anticipate or if our operating expenses exceed our expectations, our business, financial condition and operating results could be materially adversely affected and we may never sustain profitability.

We may require additional funding and may not be able to raise the capital necessary to fund all or part of our capital requirements, including resuming the research and development programs of our product candidates and their commercialization.

We do not presently generate significant recurrent revenues and may need financing in order to fund all or part of our capital requirements to sustain our growth, to resume research and development of new and current product candidates, to conduct clinical programs, to develop our marketing and commercial capabilities and to meet our compliance obligations with various rules and regulations to which we are subject. In the past, we have been financed through public equity offerings in Canada and private placements of our equity securities, as well as through tax credits. Since the launch of EGRIFTATM, we have also been financing our activities through upfront payments, milestone payments and royalties received from EMD Serono. We may need to undertake additional equity offerings to raise capital, the size of which cannot be predicted. However, the market conditions or our

 

 

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business performance may prevent us from having access to the public market in the future at the times or in the amounts necessary. Therefore, there can be no guarantee that we will be able to continue to raise additional equity capital by way of public or private equity offerings in the future. In such a case, we would have to use other means of financing, such as issuing debt instruments or entering into private financing or credit agreements, the terms and conditions of which may not be favorable to us. In addition, the issuance and sale of substantial amounts of equity, or other securities, or the perception that such issuances and sales may occur could adversely affect the market price of our common shares.

We depend on our current personnel to pursue our business plan and the loss of our key employees and the inability to attract and hire highly qualified individuals to replace the loss of our current key employees could have a material adverse effect on our business and growth potential.

Because of the specialized nature of our business, our success depends to a significant extent on the continued service of our key employees and on our ability to be able to attract, retain and motivate qualified manufacturing, managerial and scientific personnel. We have entered into employment agreements with our executive officers and granted options to all of our executive officers and employees as a retention mechanism, but such agreements and options do not guarantee that our executive officers and employees will remain employed by us for any significant period of time, or at all. In addition, we have a limited workforce to pursue our business plan and the loss of any of our key employees could materially adversely affect our business. From and after the Closing Date of the EGRIFTA Transaction, our third-party service provider, inVentiv Health, will have hired sales representatives, medical science liaison personnel and other individuals to assist us with the commercialization of EGRIFTATM in the United States. Although these individuals are not our employees, the loss of any of those individuals and the inability of inVentiv Health to attract and retain these individuals could have a material adverse effect on the commercialization of EGRIFTA™ and, accordingly, our business, financial condition and operating results.

There is intense competition for qualified personnel in the areas of our activities, and we and our third-party service providers may not be able to continue to attract and retain the qualified personnel necessary for the development of our business. Our failure and the failure of our third-party service providers to attract and retain such personnel could impose significant limits on our business operations and hinder our ability to successfully and efficiently realize our business plan.

We may not achieve our publicly announced milestones or our commercial objectives on time.

From time to time, we publicly announce the timing of certain events to occur or the attainment of certain commercial objectives. These statements are forward-looking and are based on the best estimate of management at the time, relating to the occurrence of such events. However, the actual timing of such events or our ability to achieve these objectives may differ from what has been publicly disclosed. Events such as completion of a clinical program, discovery of a new product candidate, filing of an application to obtain regulatory approval, beginning of commercialization of a product, announcement of additional clinical programs for a product candidate or levels of sales of a product may vary from what is publicly disclosed. These variations may occur as a result of a series of events, including the nature of the results obtained during a clinical trial or during a research phase, problems with a supplier or a commercial partner, change in the procurement policy of a commercial partner or any other event having the effect of delaying the publicly announced timeline or reducing the publicly announced commercial objective. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law. Any variation in the timing of certain events having the effect of postponing such events or any variation in the occurrence of certain events having the effect of altering publicly announced commercial objectives could have a material adverse effect on our business, financial condition and operating results.

In connection with the reporting of our financial results, we are required to make estimates and assumptions, which involve uncertainties and any significant differences between our estimates and actual results could have an adverse impact on our reported financial position, operating results and cash flows.

The preparation of our consolidated financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, our management evaluates our critical and other significant estimates and assumptions, including among others, those associated with revenue and deferred revenue, stock option plan, income taxes, onerous lease provision and contingent liabilities such as clinical trial expenses, recoverability of inventories, recoverability of tax credits and grants receivable and capitalization of development expenditures. Any significant differences between our actual results and our estimates and assumptions could negatively impact our reported financial position, operating results and cash flows.

If we identify a material weakness in our internal controls over financial reporting, our ability to meet our reporting obligations and the trading price of our common shares could be negatively affected.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Accordingly, a material weakness increases the risk that the financial information we report contains material errors.

 

 

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We regularly review and update our internal controls, disclosure controls and procedures, and corporate governance policies. In addition, we are required under Canadian and American securities laws to report annually on our internal control over financial reporting. Any system of internal controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Our independent auditors do not certify the effectiveness of our internal controls over financial reporting because we are a non-accelerated filer. If we determine that our internal controls over our financial reporting are not effective, or we discover areas that need improvement in the future, these shortcomings could have an adverse effect on our business and financial results, and the price of our common shares could be negatively affected.

If we cannot conclude that we have effective internal controls over our financial reporting, investors could lose confidence in the reliability of our financial statements, which could lead to a decline in our stock price. Failure to comply with reporting requirements could also subject us to sanctions and/or investigations by the Canadian and American regulatory authorities.

RISKS RELATED TO OUR COMMON SHARES

Our share price has been volatile, and an investment in our common shares could suffer a decline in value.

Since our initial public offering in Canada, our valuation and share price have had no meaningful relationship to current or historical financial results, asset values, book value or many other criteria based on conventional measures of the value of common shares. In the past, the market price of our common shares has fluctuated and will continue to fluctuate due to various factors including the risk factors described herein and other circumstances beyond our control. An investment in our common shares could decline in value or fluctuate significantly.

Our revenues and expenses may fluctuate significantly and any failure to meet financial expectations may disappoint securities analysts or investors and result in a decline in the price of our common shares.

Our revenues and expenses have fluctuated in the past and are likely to do so in the future. These fluctuations could cause our share price to decline. Some of the factors that could cause revenues and expenses to fluctuate include the following:

 

   

the level of sales of EGRIFTATM in the United States;

 

   

the inability to complete product development in a timely manner that results in a failure or delay in receiving the required regulatory approvals or allowances to commercialize product candidates;

 

   

the timing of regulatory submissions and approvals;

 

   

the timing and willingness of any current or future collaborators to invest the resources necessary to commercialize our product candidates;

 

   

the outcome of any litigation;

 

   

payment of fines or penalties for violations of laws;

 

   

changes in foreign currency fluctuations;

 

   

the timing of achievement and the receipt of milestone or royalty payments from current or future third parties;

 

   

failure to enter into new or the expiration or termination of current agreements with third parties; and

 

   

failure to introduce our product candidates to the market in a manner that generates anticipated revenues.

If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common shares could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially.

We do not intend to pay dividends on our common shares and, consequently, the ability of investors to achieve a return on their investment will depend on appreciation in the price of our common shares.

We have never declared or paid any cash dividend on our common shares and we do not currently intend to do so in the foreseeable future. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business. Therefore, the success of an investment in our common shares will depend upon any future appreciation in their value. There is no guarantee that our common shares will appreciate in value or even maintain the price at which our shareholders have purchased their shares.

 

 

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Our shareholder rights plan, the EMD Serono Termination Agreement and certain Canadian laws could delay or deter a change of control.

Our shareholder rights plan entitles a rights holder, other than a person or group holding 20% or more of our common shares, to subscribe for our common shares at a discount of 50% to the market price at that time, subject to certain exceptions.

The EMD Serono Termination Agreement provides also that in the event there occurs a change of control of the Corporation within eighteen (18) months after the Closing Date, EMD Serono has the option to accelerate the full payment of the Early Termination Fee and to seek the payment of an amount intended to equal the net present value of the maximum future undisclosed Royalties. If such change of control occurs after eighteen (18) months after the Closing Date, EMD Serono has the option to accelerate the payment of all of the unpaid Early Termination Fee.

The Investment Canada Act (Canada) subjects an acquisition of control of a company by a non-Canadian to government review if the value of the assets as calculated pursuant to the legislation exceeds a threshold amount. A reviewable acquisition may not proceed unless the relevant minister is satisfied that the investment is likely to be a net benefit to Canada.

Any of the foregoing could prevent or delay a change of control and may deprive or limit strategic opportunities for our shareholders to sell their shares.

We believe that we may have become a “passive foreign investment company”, or PFIC, for U.S. federal income tax purposes and may continue to be, or become, a PFIC in future taxable years.

The determination of whether we are a PFIC is made annually at the end of each taxable year and is dependent upon a number of factors, some of which are uncertain or beyond our control, including the value of our assets and common shares and the amount and type of our income. We may have become a PFIC for the taxable year ended November 30, 2013, and may continue to be, or become, a PFIC in future taxable years. If we are a PFIC, or if we were to become a PFIC in future taxable years, while a U.S. person is the holder of our common shares, such person would generally be subject to adverse U.S. federal income tax consequences, including the treatment of gain realized on the sale of common shares as ordinary (rather than capital gain) income, potential interest charges on those gains and certain other distributions made by us and ineligibility for the preferential tax rates on dividends paid by qualified foreign corporations generally available to certain non-corporate U.S. persons. For a more detailed discussion of the consequences of our company being classified as a PFIC, including discussion of certain elections which, if available, could mitigate some of the adverse consequences described above, see “Item 10.E—Taxation” of this Annual Report.

U.S. persons are urged to consult their tax advisors with respect to the U.S. federal, state, local and non-U.S. tax consequences of the acquisition, ownership, and disposition of our common shares as may be applicable to their particular circumstances.

As a foreign private issuer, we are subject to different U.S. securities laws and rules than a domestic U.S. issuer, which may limit the information publicly available to our shareholders.

As a foreign private issuer we are not required to comply with all the periodic disclosure requirements of the Securities Exchange Act of 1934, as amended, or Exchange Act, and therefore there may be less publicly available information about us than if we were a U.S. domestic issuer. In addition, our officers, directors, and principal shareholders are exempt from the reporting and “short swing” profit recovery provisions of Section 16 of the Exchange Act, as amended, and the rules promulgated thereunder. Therefore, our shareholders may not know on a timely basis when our officers, directors and principal shareholders purchase or sell our common shares.

Item 4.  Information on the Company

A.   History and development of the Company.

Our legal name and commercial name is Theratechnologies Inc. Our head office and principal office and are located at 2310 Alfred-Nobel Boulevard, Montreal, Québec, Canada, H4S 2B4. Our telephone number is (514) 336-7800. Our website is www.theratech.com. Our transfer agent and registrar is Computershare Trust Company of Canada, 1500 University Street, suite 700, Montreal, Québec, Canada H3A 3S8. Our agent for service in the United States is CT Corporation System, 111 8th Avenue, New York, NY 10011 (212) 894-8800.

We were incorporated under Part IA of the Companies Act (Québec), or CAQ, on October 19, 1993 under the name Theratechnologies Inc. We amended our articles on October 20, 1993 by repealing the restrictions applicable to private companies. On December 6, 1993, we again amended our articles to increase the number of directors and to modify our share capital. On March 26, 1997, we further modified our share capital to consist of an unlimited number of common shares and an unlimited number of preferred shares. Finally, on June 21, 2011, we amended our articles to give the power to our directors to appoint a number of additional directors equal to 33.33% of the number of directors elected at the last shareholders meeting preceding any appointment.

 

 

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On February 14, 2011, the CAQ was abrogated and replaced by the Business Corporations Act (Québec), or BCA, and companies governed by Part IA of the CAQ such as us became business corporations governed by the BCA. Accordingly, we did not have to file articles of continuation or amend our existing corporate articles. The BCA was applicable immediately without having to complete any formalities.

On November 11, 2010, our first product, EGRIFTATM (tesamorelin for injection), was approved by the FDA and is, to date, the only approved therapy for the reduction of excess abdominal fat in HIV-infected patients with lipodystrophy. EGRIFTATM is currently marketed in the United States by EMD Serono pursuant to the EMD Serono Agreement. Information relating to the EMD Serono Agreement is detailed in “Item 4.B – Business Overview” of this Annual Report. On May 1, 2014, the EMD Serono Agreement will terminate pursuant to the EMD Serono Termination Agreement and we will be responsible to commercialize EGRIFTATM in the United States. Information relating to the EMD Serono Termination Agreement is detailed in Item 4. B – “Business Overview” of this Annual Report.

On June 6, 2011, our commercial partner in Europe, Ferrer, filed a marketing authorization application, or MAA, with the European Medicines Agency, or EMA, for EGRIFTATM. On June 22, 2012, we announced that Ferrer was withdrawing the MAA for EGRIFTATM following an oral explanation with the EMA’s Committee for Medicinal Products for Human Use, or CHMP which did not allow for the CHMP to conclude on a positive risk/benefit balance. Concerns were raised by the CHMP regarding the increase level of IGF-1 and the related potential safety concerns over the long-term use of EGRIFTATM. The CHMP also raised concerns about the lack of data on the correlation between the effect of reducing VAT and cardiovascular diseases. On April 8, 2013, we announced the termination of our distribution and licensing agreement with Ferrer such that we regained all commercialization rights to territories covered by the Ferrer Agreement. Information relating to the termination of the Ferrer Agreement is detailed in “Item 4. B – Business Overview” of this Annual Report.

Sanofi, our commercial partner in Latin America, Africa and the Middle East, has filed marketing authorization application for EGRIFTATM in Argentina, Brazil, Colombia, Israel, Mexico and Venezuela. On June 22, 2012, we announced that the Brazilian National Health Surveillance Agency, or ANVISA, had audited the Montreal-based third-party manufacturing site for EGRIFTATM and identified technical deficiencies. All of the corrective measures proposed by ANVISA have been agreed to by the manufacturer and, in September 2013, ANVISA conducted a conformational audit of this Montreal-based third-party manufacturing site. The final report regarding this conformational audit has yet to be issued by ANVISA. On June 28, 2013, we announced that sanofi received a letter from the Colombian regulatory agency stating that the agency rejected the approval of EGRIFTATM in this country. In Mexico, sanofi was recently in communication with the regulatory authorities and is currently awaiting their comments on the application filed in this country.

On June 20, 2011, we announced the filing of a NDS with TPD for EGRIFTATM in Canada and, on June 22, 2012, we announced that we had received a Notice of Non-compliance, or NON, from TPD which contained questions regarding the long-term safety of tesamorelin, the appropriate patient population and the proposed indication. We responded to the questions contained in the NON and on March 4, 2013, we announced that we had received a Notice of Non-compliance-Withdrawal, or NON/w, for our NDS. On March 25, 2013, we announced that we had filed a request for reconsideration of the NON/w and, on November 1, 2013, we announced that our request for reconsideration of the NON/w was granted, that the NON/w was rescinded and that TPD agreed to resume the review of our NDS.

On October 30, 2012, we announced revisions to our business plan and a related restructuring. The principal thrust of the revised plan is to become cash neutral as soon as possible by focusing almost all of our efforts and resources on maximizing revenues from EGRIFTATM, while continuing to tightly manage expenses. Completion of the preclinical studies on our second generation growth hormone peptide, or TH1173, by the end of the 2012 calendar year was not affected but the launch of the Phase 1 clinical program with TH1173 was suspended. In addition, all significant long-term research and development activities with respect to our product candidates and the discovery of new peptides were suspended. The restructuring resulted in a workforce reduction of approximately 15 employees. Our business plan has not changed, except that our biggest opportunity for value creation in 2014 will be on the commercialization of EGRIFTATM in the United States further to the EMD Serono Termination Agreement.

On February 5, 2013, our common shares ceased trading on the NASDAQ Global Market following our voluntary decision to delist from this exchange on January 14, 2013. However, our common shares continue to trade on the TSX under the symbol “TH”.

On February 14, 2014, we announced that we expected our inventory of EGRIFTA™ to be depleted in a matter of weeks due to a combination of manufacturing delays and issues observed during the production of new batches of EGRIFTA™. We further advised that the ensuing depletion of the inventory would result in a shortage of EGRIFTA™ and an eventual stock-out and that we were temporarily ceasing to manufacture EGRIFTATM. As of the date of this Annual Report, we have not resumed the manufacture of EGRIFTA™ and are unable to determine a timeline to resume its manufacture and delivery. Resolving the EGRIFTA™ manufacturing problems and ensuring that we have a reliable source of supply are immediate priorities for the Company in 2014.

 

 

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B.   Business Overview.

OVERVIEW

We are a specialty pharmaceutical company addressing unmet medical needs in metabolic disorders to promote healthy ageing and improved quality of life.

Our first product, EGRIFTATM (tesamorelin for injection), was approved by the FDA in November 2010 and was launched in the USA in January 2011. EGRIFTATM is currently the only approved therapy for the reduction of excess abdominal fat in HIV-infected patients with lipodystrophy.

Excess abdominal fat in HIV-infected patients is associated with significant health risks beyond the mortality risk of the HIV infection itself. These health risks include metabolic disturbances such as hyperlipidemia, an increase in the amount of fat in the blood (such as triglycerides and cholesterol), and hyperglycemia, an increase in the amount of sugar in the blood, characterized by insulin resistance, both of which lead to increased risks of cardiovascular diseases and diabetes. Recent data also indicates that abdominal fat accumulation is associated with neurocognitive disorders in HIV-infected patients. While there is evidence that suggests that lipoatrophy may be reduced with certain newer HIV therapies, switching to newer HIV drugs has inconsistent and limited effect on the reversal or the incidence of lipohypertrophy.

EGRIFTATM is currently marketed exclusively in the United States by EMD Serono pursuant to the EMD Serono Agreement. From May 1, 2014 on, we will be responsible for the commercialization of EGRIFTATM in the United States under the EMD Serono Termination Agreement. We have also entered into distribution and licensing agreements for EGRIFTATM with sanofi, granting sanofi the exclusive commercialization rights in Latin America, Africa and the Middle East. We terminated our distribution and licensing agreement with Ferrer in April 2013 and have regained all of our commercialization rights in Europe, Russia, South Korea, Taiwan, Thailand and in certain central Asian countries. We have entered into a supply, distribution and licensing agreement with Actelion granting Actelion the exclusive commercialization rights to EGRIFTATM in Canada. For a description of these agreements, see Item 4.B – “Business Overview – Our Products and Product Candidates” of this Annual Report.

EGRIFTATM is our registered trademark in the United States and it is used in that country for the commercialization of our first product using our most advanced compound, tesamorelin. Tesamorelin is a GRF analogue that stimulates the synthesis and pulsatile release of endogenous growth hormone. Tesamorelin was developed internally using our peptide stabilization method. This method increases a protein’s resistance to enzymatic degradation, which prolongs its duration of action and enhances its effectiveness in clinical use. We believe this peptide and future potential GRF peptides that we may develop can be used in a number of additional indications. Clinical data have shown tesamorelin to have both lipolytic (fat-burning) and anabolic (muscle-building) properties, as well as an effect on cognitive functions. Our initial development of EGRIFTATM focused on the lipolytic properties of the compound.

Our research and development team has worked on the development of new GRF peptides and, in October 2011, we identified TH1173 as our second generation GRF peptide. The preclinical safety program was completed and the results obtained warrant the pursuit of the Phase 1 clinical program. However, as a result of our revised business plan, on October 30, 2012, we announced that our research and development activities were suspended.

Recent Developments

Since the end of our most recently completed fiscal year, we have announced developments in the following activities :

 

  -  

EGRIFTATM Manufacturing. On February 14, 2014, we announced that we expected our inventory of EGRIFTATM to be depleted in a matter of weeks due to a combination of manufacturing delays and issues observed during the production of new batches of EGRIFTATM. We further advised that the ensuing depletion of the inventory would result in a shortage of EGRIFTA™ and an eventual stock-out and that we were temporarily ceasing to manufacture EGRIFTATM. As of the date of this Annual Report, we have not resumed the manufacture of EGRIFTATM and are unable to determine a timeline to resume its manufacture and delivery.

 

  -  

Termination of EMD Serono Agreement. On December 13, 2013, we entered into a termination and transfer agreement with EMD Serono, or EMD Serono Termination Agreement, pursuant to which we will regain all commercialization rights to EGRIFTATM in the United States on the closing Date. The parties have agreed that the closing date would occur on May 1, 2014, or Closing Date. From and after the Closing Date, we will be responsible for all operations in the United States relating to EGRIFTATM, including the conduct of the post-approval commitments mandated by the FDA upon approval of EGRIFTATM.

 

  -  

Shipment of EGRIFTATM to EMD Serono Resumed. On December 3, 2013, we resumed shipment of EGRIFTATM to EMD Serono following the manufacturing difficulties we had encountered and reported by us on April 1, 2013.

 

 

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Three Year History

2013

 

  -  

Labour Disruption at Third-Party Manufacturing Supplier. On November 13, 2013, we announced that we had been informed of a labour disruption by Jubilant HollisterStier, our third-party contract manufacturer of EGRIFTA™. Planned shipments of EGRIFTA™ were not affected by the labour disruption, which has since been resolved.

 

  -  

FDA Notified of EGRIFTA™ Shortage. On September 18, 2013, we announced that EMD Serono had voluntarily notified the FDA about an upcoming shortage of EGRIFTA™ related to the manufacturing difficulties that had been first reported by us on April 11, 2013. EMD Serono implemented a mitigation plan to reduce the duration of the shortage to a minimum.

 

  -  

Class Action Motion Authorized. On July 17, 2013, we announced that the Court of appeal of Québec dismissed our motion to dismiss the previously granted authorization to institute a class action and an action based on the secondary market liability provisions of the Securities Act (Québec) against the Company, a former chair of the Board of Directors and a former executive officer. We filed an application seeking leave to appeal this decision with the Supreme Court of Canada in November 2013. The application was approved by the Supreme Court of Canada on February 20, 2014.

 

  -  

New US Patent Granted for Improving Cognitive Function. On July 11, 2013, we obtained patent number 8,481,489 from the US Patent and Trademark Office, or USPTO, entitled “GH Secretagogues and Uses Therof” covering a method of improving cognitive function in a subject suffering from mild cognitive impairment through the administration of tesamorelin. The patent will expire in 2024.

 

  -  

Colombian Regulatory Authorities Recommend Against Approving Tesamorelin. On June 28, 2013, we announced that our commercial partner, sanofi, had received notification that the Colombian regulatory authorities had recommended against approval of tesamorelin, stating that additional long-term safety and efficacy studies are needed.

 

  -  

Second Motion to Authorize a Class Action Filed. On May 27, 2013, we announced that 121851 Canada Inc. (the same petitioner who filed a motion in July 2010) had filed a second motion of authorization to institute a class action against the Company, a director and a former executive officer. The second motion is based on the same facts and seeks the same conclusion as the first motion, except that damages are sought under the Civil Code of Québec instead of the Securities Act (Québec). The parties have agreed to stay this motion for the time being.

 

  -  

Manufacturing issues with EGRIFTA™. On April 11, 2013, in conjunction with the announcement of our first quarter financial results, we reported that our third-party manufacturing supplier of EGRIFTA™ had experienced difficulties during the conversion of raw materials to finished goods in January 2013. The manufacture of EGRIFTA™ was suspended until corrective measures could be implemented. On September 4, 2013, we announced that we would resume production of EGRIFTA™ using our original manufacturing process after having encountered quality issues with the corrective measures we had developed. We undertook to the FDA to evaluate changes that could increase overall cycle robustness.

 

  -  

New Director Appointed and Named Chair of the Board of Directors. On April 9, 2013, we announced the appointment of Dawn Svoronos (formerly Graham) to our Board of Directors. Ms. Svoronos was previously president of the Europe/Canada region for Merck & Co., a multinational pharmaceutical corporation. Ms. Svoronos was subsequently elected Chair of the Board of Directors at a meeting held on May 24, 2013.

 

  -  

Agreement with Ferrer Terminated. On April 8, 2013, we announced the termination of our distribution and licensing agreement with Ferrer Internacional, S.A. As a result, we regained 100% of the commercialization rights for EGRIFTA™ in Europe, Russia, South Korea, Taiwan, Thailand and in certain central Asian countries.

 

  -  

Amended Lease Agreement. On April 3, 2013, we announced that we entered into an amendment to our lease agreement with our landlord for our corporate headquarters, which resulted in an 85% annual reduction in lease-related cash outlays and shortened the remaining term of the lease from eight (8) years to five (5) years.

 

  -  

Health Canada Decision on Tesamorelin. On March 4, 2013, we announced that Health Canada had issued a Notice of Non-compliance-Withdrawal, or NON/w, for our NDS, for tesamorelin proposed for the treatment of excess abdominal fat in HIV-infected patients with lipodystrophy. After analysis of the NDS, Health Canada concluded that the risks of tesamorelin outweighed its benefits under the proposed conditions of use. On March 25, 2013, we announced that we had filed with Health Canada a request for reconsideration following the issuance of the NON/w and on November 1, 2013, we announced that Health Canada agreed to resume the review of our NDS for EGRIFTA™ after agreeing to rescind the NON/w.

 

 

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  -  

Delisting of Our Common Shares on NASDAQ. On February 5, 2013, our common shares were delisted from the NASDAQ Global Market, or NASDAQ, further to our decision to voluntarily delist such common shares from this market. Our decision was announced on January 14, 2013 after our Board of Directors reviewed the followings: the NASDAQ letter received on August 7, 2012 regarding the closing bid price of our common shares, the applicable NASDAQ rules and regulations, the benefits generated by the maintenance of the listing, our then current share price, the obligation to proceed with a reverse stock-split to maintain the listing, the effect on our share price and shareholdings to proceed with a reverse stock split and the fact that our common shares would continue trading on the Toronto Stock Exchange under the symbol “TH”.

 

  -  

Grant of US Patent for TH1173. On January 29, 2013, we obtained patent number 8,361,964 from the USPTO, for TH1173. We also confirmed that results obtained from our preclinical safety program on TH1173 warranted the pursuit of the Phase 1 clinical development program at the appropriate time.

 

  -  

FDA Approval of Alternative Storage Conditions for EGRIFTA™. On January 21, 2013, we announced that the FDA had granted approval of a supplemental NDS filed by EMD Serono providing for the revision of the EGRIFTA™ prescribing information to include storage conditions for the 2mg vial up to 12 weeks after dispensing to the patients at or below 25° C.

2012

 

  -  

Revised Business Plan. On October 30, 2012, we announced a restructing aimed at becoming cash neutral as soon as possible by maximizing revenues from tesamorelin while tightly managing our expenses. The plan also called for completing the ongoing preclinical studies for TH1173 by the end of the calendar year 2012 and suspending all long-term research and development activities. As a result of the revised business plan, we laid off approximately 15 employees.

 

  -  

Departure of President and Chief Executive Officer. On October 11, 2012, we announced the departure of Mr. John-Michel T. Huss as president and chief executive officer of the Corporation.

 

  -  

Regulatory Update on Filings for EGRIFTATM. On October 10, 2012, we announced that we had responded to questions raised by TPD in its NON and that our NDS was still under review, that the third-party manufacturer of EGRIFTATM had agreed to address all of the issues raised by ANVISA further to its audit, that the filing made by sanofi in Venezuela was deemed incomplete and that we were still assessing various options to resubmit an MAA in Europe.

 

  -  

NASDAQ Deficiency Letter. On August 7, 2012, we announced that we received a letter from NASDAQ notifying us that, for the last 30 consecutive business days, the bid price of our common shares had closed below US$1.00. NASDAQ granted us 180 calendars days, or until February 4, 2013, to comply with its minimum bid price requirement rule.

 

  -  

Results of Independent Study on Reduction of Abdominal VAT on Obese Patients with Reduction of Growth Hormone. On June 27, 2012, we announced the results of an independent study conducted by Dr. Steven K. Grinspoon of the Massachusetts General Hospital evaluating the effect of tesamorelin in obese subjects with relative reductions of growth hormone. The study was conducted on 60 individuals over a 12-month period. The study showed that among obese subjects with relative reductions in growth hormone, tesamorelin selectively reduces VAT in the abdominal area without significant effects on subcutaneous tissue, or SAT. The study also showed that tesamorelin improved triglycerides, C-reactive protein and carotid intima medial thickness, a cardiovascular marker, without aggravating glucose.

 

  -  

Withdrawal of MAA in Europe. On June 22, 2012, we announced that our commercial partner, Ferrer, withdrew the MAA from the EMA following a hearing with the CHMP. We also announced that we had received from TPD a NON regarding our NDS. In addition, we announced that ANVISA had audited our third-party manufacturer of EGRIFTATM in Montreal, Canada, and identified deficiencies.

 

  -  

Application for Registration of EGRIFTATM in Columbia and Venezuela. On June 4, 2012, we announced that our commercial partner, sanofi, filed marketing authorization applications for EGRIFTATM in Columbia and Venezuela.

 

  -  

Initiation of Preclinical Safety Program for TH1173. On May 10, 2012, we announced that we were beginning preclinical safety program for TH1173.

 

  -  

Certification of Class Action. On February 24, 2012, we announced that the Superior Court of Québec, District of Montreal, issued a judgment authorizing the institution of a class action and an action based on the secondary market liability provisions of the Securities Act (Québec) against us, a director and a former executive officer on behalf of persons who were shareholders of the Corporation at May 21, 2010 and who sold their common shares on May 25 or 26, 2010. On March 20, 2012, we filed a motion to the Court of Appeal of Québec, District of Montreal, to appeal this judgment.

 

  -  

Execution of Supply, Distribution and Licensing Agreement for the Canadian Market. On February 21, 2012, we announced the execution, through Theratechnologies Canada Inc., of a supply, distribution and licensing agreement with Actelion, or Actelion Agreement, granting it the exclusive commercialization rights to EGRIFTATM in Canada. For a description of this agreement, see “Item 4.B – Business Overview” of this Annual Report.

 

 

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  -  

Discontinuation of COPD Clinical Program. On December 7, 2011, we announced that we were discontinuing our muscle wasting associated with chronic obstructive pulmonary disease, or COPD, clinical program, that we were focusing our efforts on supporting our commercial partners with pending marketing authorization applications in various countries and accelerating the development of a second generation GRF. This announcement resulted in the lay off of approximately 40 employees.

2011

 

  -  

Applications for Registration of EGRIFTATM in Certain South American and Latin American Countries. On October 19, 2011, September 1, 2011 and August 31, 2011, we announced that our commercial partner, sanofi, filed marketing authorization applications for EGRIFTATM in Mexico, Argentina and Brazil, respectively.

 

  -  

Identification of Second Generation GRF Peptide. On October 6, 2011, we announced our discovery of a new GRF peptide with similar potency and efficacy to tesamorelin.

 

  -  

Results of Independent Study on Cognitive Function. On July 19, 2011, we announced the results of an independent study conducted by Dr. Michael V. Vitiello of the University of Washington in Seattle evaluating the effect of tesamorelin on cognitive function in healthy older adults and older adults with mild cognitive impairment. The study was conducted on 152 older adults, half of whom were cognitively normal and half of whom were diagnosed with amnestic mild cognitive impairment. The study showed that tesamorelin improved executive function in both cognitively normal healthy older adults and in older adults with mild cognitive impairment.

 

  -  

New Drug Submission in Canada. On June 20, 2011, we announced the filing of a NDS in Canada for EGRIFTATM and, on August 16, 2011, we announced that TPD accepted to review the NDS.

 

  -  

Listing of Our Shares on NASDAQ. On June 13, 2011, we announced that our common shares would begin trading on June 15, 2011 on the NASDAQ Global Market under the ticker symbol “THER”.

 

  -  

Application for Registration of EGRIFTATM in Europe. On June 6, 2011, we announced that our commercial partner, Ferrer, filed a MAA with the EMA for EGRIFTATM. On June 27, 2011, we also announced that the MAA had been accepted for review by the EMA. The MAA sought approval of tesamorelin for the reduction of excess abdominal fat in HIV-infected patients with lipodystrophy in the 27 European Union member countries as well as in Iceland, Liechtenstein and Norway.

 

  -  

Evaluation of Research and Development Business Model. On June 2, 2011, we announced that we had revised our research and development business model to further rely on third parties in the public and private arena to help us bring our research and development projects forward. The restructuring of our research and development business model led to a workforce reduction affecting 24 employees.

 

  -  

COPD Indication for Tesamorelin. On February 22, 2011, we announced a new clinical program in muscle wasting in COPD using tesamorelin. The program was to be conducted in stable ambulatory COPD patients with muscle wasting in the Global Initiative for Chronic Obstructive Lung Disease, or GOLD, stage II and III severity experiencing decreased functionality in daily activities. The multi-center Phase 2 study was to evaluate two different doses using a new formulation of tesamorelin in approximately 200 patients.

 

  -  

Execution of Distribution and Licensing Agreement for EGRIFTATM for Europe. On February 3, 2012, we announced the execution, through Theratechnologies Europe Inc., of a distribution and licensing agreement with Ferrer, or Ferrer Agreement, granting it the exclusive distribution rights to EGRIFTATM in Europe, Russia, South Korea, Taiwan and certain Asian countries for the reduction of excess abdominal fact in HIV-infected patients with lipodystrophy. For a description of this agreement, see “Item 4.B – Business Overview” of this Annual Report.

 

  -  

Execution of Distribution and Licensing Agreement for EGRIFTATM for the Latin American, African and Middle Eastern Markets. On December 6, 2010, we announced the execution, through Theratechnologies Intercontinental Inc., of a distribution and licensing agreement with sanofi, or Sanofi Agreement, granting it the exclusive distribution rights to EGRIFTA™ in Latin America, Africa and the Middle East for the reduction of excess abdominal fact in HIV-infected patients with lipodystrophy. For a description of this agreement, see “Item 4.B – Business Overview” of this Annual Report.

 

  -  

Discontinuation of AKI Program. In the course of the year, we have decided to discontinue our pre-clinical development of our TH0673 peptide in the field of acute kidney injury. This decision was made after further analysis of the development program for such peptide.

 

 

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Table of Contents

OUR STRATEGY

Our strategy for value creation in 2014 lies in the U.S. market. After regaining the U.S. commercialization rights for EGRIFTATM on the Closing Date, we will move forward with a specialty pharmaceutical business model that is solely focused on our own product. All U.S. activities will be aimed directly at elevating the importance of treating excess abdominal fat in HIV-infected patients with lipodystrophy, an indication unique to EGRIFTATM, for patients, health care providers and third-party payors. Our goal is to increase the patient base, which will ultimately lead to higher revenues and cash flow. We also plan to leverage our U.S. commercial experience to enhance our worldwide partnership initiatives, helping us to drive performance and become more proactive and responsive to our partners’ needs.

Our research and development programs on our product candidates as well as the discovery of new peptides have been suspended and the subsequent development of TH1173 has been put on hold.

OUR PRODUCTS AND PRODUCT CANDIDATES

EGRIFTATM - Our Lead Product

EGRIFTATM induces the release of growth hormone which causes a reduction in excess abdominal fat (lipohypertrophy) in HIV-infected patients without reducing or interfering with subcutaneous fat, and, as such, has no clinically significant effect on undesired loss of subcutaneous fat (lipoatrophy).

EGRIFTATM is currently available in the United States as a once-daily one unit dose (one vial containing 2 mg of tesamorelin) of sterilized lyophilized powder to be reconstituted with sterile water for injection. To administer EGRIFTATM, a unit dose is retrieved from the vial into a syringe providing a 2 ml patient-administered subcutaneous injection. EGRIFTATM is injected under the skin into the abdomen once a day. At the time of its launch, EGRIFTATM was available as a once-daily two unit dose (two vials, each containing 1 mg of tesamorelin) of sterilized lyophilized powder to be reconstituted with sterile water for injection. To administer EGRIFTATM, 1 ml was retrieved from each vial into one syringe to prepare a single 2 ml patient self-administered subcutaneous injection.

For the purposes of FDA approval, EGRIFTATM was evaluated in two clinical trials involving 816 HIV-infected adult men and women with lipodystrophy and excess abdominal fat. In both studies, patients treated daily with EGRIFTATM experienced greater reductions in abdominal fat as measured by CT scan and greater improvements in belly appearance distress, compared with patients receiving another injectable solution (placebo). Once the treatment was terminated, the patients’ condition reversed to its status prior to the beginning of the treatment. The most commonly reported adverse effects in the studies included reactions due to the release of endogenous hormone, such as joint pain (arthralgia), pain in the extremities, swelling in the lower limbs and muscle pain (myalgia), injection site reactions such as skin redness (erythema), itching (pruritis) and pain and clinically manageable changes in blood sugar control. Our clinical trials did not seek to measure any potential cardiovascular benefits of EGRIFTATM on cardiovascular events. Since the launch of EGRIFTATM in the United States, our review of the pharmacovigilance data did not reveal any new safety concerns. These data are consistent with the known safety profile of EGRIFTATM.

In connection with its approval, the FDA required the following three post-approval commitments:

 

  -  

to develop a single vial presentation of the existing formulation of EGRIFTATM. The FDA required that this new presentation be available by November 2013 and EMD Serono launched it in October 2012.

 

  -  

to conduct a long-term observational safety study using EGRIFTATM. The purpose of the long-term observational study, or Observational Study, required by the FDA is to evaluate the safety of long-term administration of EGRIFTATM. The FDA required that the proposed protocol for the Observational Study be filed by the second quarter of 2011 and the FDA subsequently approved the protocol for the Observational Study. Under the terms of the EMD Serono Agreement, EMD Serono is responsible for the conduct of the Observational Study and we are responsible for the payment of 50% of the direct costs related to such study. EMD Serono is currently recruiting patients for the Observational Study. From the Closing Date, under the EMD Serono Termination Agreement, we will be responsible for the conduct of the Observational Study and all of the associated costs.

 

  -  

to conduct a Phase 4 clinical trial using EGRIFTATM. The primary purpose of the Phase 4 clinical trial, or Retinopathy Trial, is to assess whether EGRIFTATM increases the incidence or progression of diabetic retinopathy in diabetic HIV-infected patients with lipodystrophy and excess abdominal fat. The FDA required that the proposed protocols for the Retinopathy Trial be submitted by the second quarter of 2011 and the FDA has now approved the protocol for the Retinopathy Trial. Under the terms of the EMD Serono Agreement, EMD Serono is responsible for the conduct of the Retinopathy Trial and we are responsible for the payment of all the direct costs related to this trial. EMD Serono is currently recruiting patients for the Retinopathy Trial. From the Closing Date, under the EMD Serono Termination Agreement, we will be responsible for the conduct of the Retinopathy Trial.

Lipodystrophy

Lipodystrophy is characterized by abnormalities in the production and storage of fat. It has two components: lipohypertrophy, abnormal and excessive fat accumulation, and lipoatrophy, the noticeable, localized loss of fat tissue under the skin. In patients with lipohypertrophy, fat accumulation occurs mostly around the waist and may also occur in other regions, including breast tissue and in dorsocervical tissues in the neck, resulting in a “buffalo hump”. Excess fat also appears as lipomas, or benign tumors composed of fat cells. In patients with lipoatrophy, the loss of fat tissue generally occurs in the limbs and facial area.

 

 

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Excess abdominal fat in HIV-infected patients is associated with significant health risks beyond the mortality risk of the HIV infection itself. These health risks include metabolic disturbances such as hyperlipidemia, an increase in the amount of fat in the blood (such as triglycerides and cholesterol), and hyperglycemia, an increase in the amount of sugar in the blood, characterized by insulin resistance, both of which lead to increased risks for cardiovascular disease and diabetes.

In HIV-infected patients, lipodystrophy may be caused by the viral infection itself, the use of antiretroviral therapy, or both. Recent data suggest that different pathophysiological mechanisms are involved in the development of lipohypertrophy and lipoatrophy. The most common statistically significant independent risk factors identified for lipohypertrophy are duration of antiretroviral therapy, markers of disease severity and protease inhibitor use. Other factors include age, genetics, and gender.

EGRIFTATM Commercialization Activities

EGRIFTATM is currently commercialized in the United States only and EMD Serono launched EGRIFTATM in that country in January 2011.

We are working closely with sanofi and Actelion to obtain regulatory approval for and the subsequent commercialization of EGRIFTATM in certain Latin American countries and in Canada.

In Europe, since the withdrawal of our authorization application in June 2012 and the termination of the Ferrer Agreement in April 2013, we consulted with key physicians, patient groups and regulatory experts and subsequently met with regulatory agencies in certain jurisdictions to evaluate our prospects for acceptance should we decide to refile a marketing authorization application for EGRIFTATM. The result of these consultations and meetings led us to believe that we do not have a reasonable likelihood of being approved in Europe without obtaining additional clinical data on EGRIFTATM. Therefore, we have decided to seek commercial partners who can help us to pursue other options in the short term. Alternatives include filing in certain European countries and dispensing EGRIFTA™ by way of named patient programs.

United States

On October 28, 2008, we entered into a collaboration and licensing agreement with EMD Serono, or EMD Serono Agreement, granting EMD Serono the exclusive commercialization rights to EGRIFTATM for the reduction of excess abdominal fat in HIV-infected patients with lipodystrophy in the United States and, on April 9, 2012, we amended certain provisions of the EMD Serono Agreement to further detail certain provisions of this agreement.

Under the terms of the EMD Serono Agreement, we are entitled to receive royalties at an increasing rate based on achieving specified levels of annual net sales of EGRIFTATM in the United States. Under the EMD Serono Agreement, royalties on sales are paid quarterly in arrears based on a calendar year. Since the execution of the EMD Serono Agreement up until November 30, 2013, we earned $9,853,000 in royalties and $15,131,000 in revenues from sales of EGRIFTATM to EMD Serono. In addition, we may also receive up to US$215 million in upfront and milestone payments in addition to royalties and revenues from the sale of EGRIFTATM to EMD Serono. To date, we have received US$65 million which includes an upfront payment and regulatory milestone payments of US$57 million and an equity investment of US$8 million.

Under the terms of the EMD Serono Agreement, we are responsible for the manufacturing and supply of EGRIFTATM, for the development of a new formulation and for the payment of 100% of the direct costs of the Retinopathy Trial and 50% of the direct costs of the Observational Study. The amendment to the original agreement includes a provision providing EMD Serono with a right of set-off covering the payment of future royalties against any amount due and unpaid within the agreed upon period to EMD Serono as reimbursement of our share of the actual direct costs for the Retinopathy Trial and the Observational Study.

The EMD Serono Agreement also entitles us to conduct additional clinical programs to develop tesamorelin for potential additional indications. EMD Serono has the option to commercialize products resulting from such additional clinical programs in the United States. If EMD Serono exercises this option, it will pay half of the development and regulatory costs incurred and to be incurred by us in connection with such additional clinical programs. If EMD Serono decides not to exercise its option, we have the right to commercialize tesamorelin for such indications on our own or with third parties. We also have the option to co-promote any product resulting from such clinical programs under terms and conditions to be agreed with EMD Serono. This agreement extends until the expiration of the last valid claim based on a patent right (including patent applications) controlled by us in the United States covering EGRIFTATM or any other product based on an additional indication for tesamorelin that EMD Serono has elected to commercialize under the agreement.

Since the launch of EGRIFTATM in January 2011, we have supported EMD Serono through the development of a new presentation for EGRIFTATM (the one vial presentation), the improvement of its storage conditions and the by providing our share of the financing of the Observational Study and Retinopathy Trial.

 

 

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On December 13, 2013, we entered into a termination and transfer agreement with EMD Serono, or EMD Serono Termination Agreement, providing for the termination of the EMD Serono Agreement. Under the EMD Serono Termination Agreement, we will regain all rights under the EMD Serono Agreement on the Closing Date, including commercialization rights for EGRIFTA® (tesamorelin for injection) in the United States.

Under the terms of the EMD Serono Termination Agreement, we agreed to pay an early termination fee of US $20,000,000, or Early Termination Fee, over a five-year period starting on the first anniversary of the Closing Date (May 1, 2014). We also agreed to pay EMD Serono an increasing royalty, or Royalties, based on annual net sales. The Royalties will be paid until an undisclosed cumulative aggregate amount is reached or until January 1, 2024, the first of these events to occur.

In order to secure the payment of the Early Termination Fee, the Corporation agreed to grant EMD Serono a security interest on its present and future worldwide corporeal and incorporeal movable property related to tesamorelin until such time as the amount of US $20,000,000 has been reimbursed in full to EMD Serono. Thereafter, the Corporation and EMD Serono agreed to reduce the security interest to all present and future corporeal and incorporeal movable property related to tesamorelin in the United States only to secure the payment of the Royalties.

The EMD Serono Termination Agreement provides that from and after the Closing Date, we will be responsible for the conduct of all regulatory and commercialization activities in the United States, including the conduct of the Retinopathy Trial and the Observational Study.

The EMD Serono Termination Agreement contains provisions regarding the transfer of the regulatory files between the parties, a five (5) year non-compete undertaking by EMD Serono in favor of the Corporation, customary representations and warranties and indemnity provisions. In addition, the EMD Serono Termination Agreement provides that in the event there occurs a change of control of the Corporation within eighteen (18) months after the Closing Date, EMD Serono has the option to accelerate the full payment of the Early Termination Fee and to seek the payment of an amount intended to equal the net present value of the maximum future Royalties. If such change of control occurs after eighteen (18) months after the Closing Date, EMD Serono has the option to receive the payment of all of the unpaid Early Termination Fee.

Until the Closing Date, EMD Serono will continue the commercialization of EGRIFTATM in the United States pursuant to the terms and conditions of the EMD Serono Agreement.

We are currently establishing the organizational requirements necessary to commercialize EGRIFTATM in preparation for the Closing Date. In that respect, we entered into a master service agreement with Ventiv Commercial Services, LLC, or inVentiv Health, as of December 10, 2013, or inVentiv Agreement, pursuant to which we agreed to retain the services of inVentiv Health to provide us with various services in connection with the commercialization of EGRIFTATM in the United States.

The specific services to be provided to the Corporation and the terms related thereto will be detailed in various project agreements. inVentiv Health will provide us with services related to a sales force, medical science liaison personnel, negotiation support with wholesalers, specialty pharmacies and other entities involved in the commercialization and distribution of EGRIFTATM, assistance with regulatory, compliance and reimbursement matters and patients and health care professionals communication services.

The inVentiv Agreement contains customary representations and warranties, indemnification, confidentiality and intellectual property provisions and has a three (3) year term, unless earlier terminated pursuant to the termination provisions contained therein.

Latin America, Africa and the Middle East

On December 6, 2010, we entered into a distribution and licensing agreement with sanofi, or Sanofi Agreement, granting sanofi the exclusive commercialization rights to EGRIFTATM in Latin America, Africa and the Middle East.

Under the terms of the Sanofi Agreement, we will sell EGRIFTATM to sanofi at a transfer price equal to the higher of a percentage of sanofi’s net selling price and a predetermined floor price. sanofi will be responsible for conducting all regulatory and commercialization activities for EGRIFTATM in the territories subject to the Sanofi Agreement. We will be responsible for the manufacture and supply of EGRIFTATM to sanofi. We have retained all development rights to tesamorelin for other indications and will be responsible for conducting development activities for any additional potential indications. We also granted sanofi an option to commercialize tesamorelin for other indications in the territories mentioned above. If such option is not exercised, or is declined, by sanofi, we may commercialize tesamorelin for such indications on our own or with a third party. The initial term of the Sanofi Agreement extends until December 2020.

To date, sanofi has filed marketing authorization applications in Argentina, Brazil, Colombia, Israel, Mexico and Venezuela.

In Mexico, although we were expecting a decision in the fourth quarter of 2013, sanofi was recently in communication with the Mexican regulatory authorities and is currently awaiting comments on the filed marketing authorization application. As such and based on the information presently available, we are not able to predict timelines for a decision by the Mexican regulatory authorites on the marketing authorization application.

 

 

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The regulatory review process in Brazil slowed after ANVISA audited our Montreal-based third-party manufacturer, Jubilant, and identified technical deficiencies. All of the corrective measures designed to address ANVISA’s deficiencies were implemented. ANVISA performed a conformational audit in September 2013 of the corrective measures that were implemented and sanofi is currently waiting for ANVISA’s final report. If all of the measures were implemented to the satisfaction of ANVISA, we expect ANVISA to issue a certificate of compliance with Brazil’s good manufacturing practices to Jubilant. It is only after Jubilant is issued this certificate of compliance that the review of the clinical part of the marketing authorization application will resume. Based on the information presently available, we are not able to predict timelines for the final review by ANVISA of our marketing authorization application.

In Argentina, the marketing authorization application filed in September 2011 needs to be amended as a result of missing documents and, accordingly, the file must be resubmitted. Although we were expecting sanofi to resubmit the file in the third quarter of 2013, no such submission was filed because of documents that are still missing. Given the relatively commercial importance of this market, sanofi focused its efforts in the past year on Brazil and Mexico.

In Israel, we were informed by sanofi during the last fiscal year that the regulatory agency requires a certificate of pharmaceutical product from the FDA before the end of March 2014 in order to continue the review of the marketing authorization application. An application seeking such certificate of pharmaceutical product has been filed with the FDA.

In Venezuela, the marketing authorization application filed in June 2012 was deemed to be incomplete by the regulatory agency for technical reasons. We have since supported sanofi with corrective measures and we expected sanofi to resubmit the file in the first half of 2013. However, no such resubmission was made. Given the relatively commercial importance of this market, sanofi focused its efforts in the past year on Brazil and Mexico. There are no known timelines on the resubmission of a marketing authorization application in Venezuela.

The application filed in Colombia by sanofi was rejected by the Colombian regulatory authorities on the basis that additional long-term safety and efficacy studies were deemed to be needed. sanofi does not intend to appeal this decision.

Europe, Russia, South Korea, Taiwan, Thailand and certain central Asian countries

On February 3, 2011, we entered into a distribution and licensing agreement with Ferrer, or Ferrer Agreement, granting Ferrer the exclusive commercialization rights to EGRIFTATM in Europe, Russia, South Korea, Taiwan, Thailand and certain central Asian countries.

In June 2011, Ferrer filed a marketing authorization application with the EMA for EGRIFTATM. In June 2012, Ferrer, withdrew the MAA from the EMA following a hearing with the CHMP and, in April 2013, we entered into an agreement to terminate the Ferrer Agreement. As a result, we regained 100% of the commercialization rights for EGRIFTA™ in Europe, Russia, South Korea, Taiwan, Thailand and in certain central Asian countries.

To date, no other marketing authorization applications have been filed in Europe. Since the termination of the Ferrer Agreement, we consulted with key physicians, patient groups and regulatory experts and subsequently met with regulatory agencies in certain jurisdictions to evaluate our prospects for acceptance should we decide to refile a marketing authorization application for EGRIFTATM. The result of these consultations and meetings led us to believe that we do not have a reasonable likelihood of being approved in Europe without obtaining additional clinical data on EGRIFTATM. Therefore, we have decided to seek commercial partners who can help us to pursue other options in the short term. Alternatives include filing in certain European countries and dispensing EGRIFTA™ by way of named patient programs.

Canada

In February 2012, we entered into a supply, distribution and licensing agreement with Actelion, or Actelion Agreement, granting Actelion the exclusive commercialization rights to EGRIFTATM in Canada.

Under the terms of the Actelion Agreement, we will sell EGRIFTATM to Actelion at a transfer price equal to the higher of a percentage of Actelion’s net selling price and a predetermined floor price. Actelion will be responsible for conducting all regulatory and commercialization activities for EGRIFTATM in Canada subject to the Actelion Agreement. We will be responsible for the manufacture and supply of EGRIFTATM to Actelion. We have retained all development rights to tesamorelin for other indications and will be responsible for conducting development activities for any additional potential indications. We also granted Actelion an option to commercialize tesamorelin for other indications in Canada. If such option is not exercised, or is declined, by Actelion, we may commercialize tesamorelin for such indications on our own or with a third party. The initial term of the Actelion Agreement extends until the later of (i) the expiration of the last valid claim based on a patent right (including patent applications) controlled by us in Canada covering EGRIFTATM or any other product based on an additional indication for tesamorelin that Actelion has elected to commercialize under the Actelion Agreement and (ii) 10 years from the date of the first commercial sale of EGRIFTATM.

In June 2011, we filed a NDS with TPD. However, in June 2012, we received a NON from TPD in relation to our NDS. The NON contained questions regarding long-term safety, the appropriate patient population and the proposed indication for EGRIFTATM. After having responded to the questions asked by TPD in the NON, TPD issued a NON/w in March 2013 and, subsequently, we filed a request for reconsideration. On November 1, 2013, we announced that TPD agreed to resume the review of our NDS after agreeing to rescind the NON/w. We are currently pursuing our discussions with TPD, but we are not able to predict timelines for a decision on our NDS.

 

 

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Unpartnered Territories

We have retained full commercial rights for EGRIFTATM in unpartnered territories and we may seek partners for the commercialization of EGRIFTATM in those territories.

Tesamorelin - Our Lead Compound

Tesamorelin is a stabilized 44 amino acid human GRF analogue, which was synthesized in our laboratories in 1995 using our long-acting peptide method. Although natural peptides have significant therapeutic potential, they are subject to enzymatic degradation which severely limits their effectiveness in clinical use. Our long-acting peptide method is a peptide stabilization process which increases the target protein’s resistance to enzymatic degradation, while maintaining its natural specificity. This usually results in a more stable and efficient compound, which can thus prolong its duration of action. Tesamorelin induces growth hormone secretion in a natural and pulsatile way. The clinical results obtained to date using tesamorelin suggest a therapeutic potential in both anabolic and lipolytic indications. Tesamorelin has demonstrated the ability to significantly reduce VAT, increase muscle mass and reduce waist circumference.

Mechanism of action

In vitro, tesamorelin binds and stimulates human GRF receptors with similar potency as the endogenous GRF. GRF is a hypothalamic peptide that acts on the pituitary somatotroph cells to stimulate the synthesis and pulsatile release of endogenous growth hormone, which is both anabolic and lipolytic. Growth hormone exerts its effects by interacting with specific receptors on a variety of target cells, including chondrocytes, osteoblasts, myocytes, hepatocytes, and adipocytes, resulting in a host of pharmacodynamic effects. Some, but not all these effects, are primarily mediated by insulin-like growth factor one, IGF-1, produced in the liver and in peripheral tissues.

The effects of recombinant human growth hormone, or rhGH, and tesamorelin have been the subject of several clinical trials in the area of HIV-associated lipodystrophy. Based on these clinical trials, the safety profiles of rhGH and tesamorelin appear to be very different. The natural synthesis of growth hormone is regulated by a feedback mechanism preventing its overproduction. Tesamorelin induces optimal activity of the somatotrope function and retains the natural rhythm (pulsatility) of the physiological secretion of growth hormone without interfering with the feedback mechanism mentioned above. With the exogenous administration of rhGH, the feedback mechanisms are short-circuited, which gives rise to higher levels of growth hormone. The side effects associated with rhGH include nerve, muscle or joint pain, swelling due to fluid retention (edema), carpal tunnel syndrome, numbness and tingling of skin and increased risk of diabetes. These side effects are particularly frequent among older people. In addition, rhGH can cause hyperglycemia which makes it contraindicated for patients with diabetes or pre-diabetic conditions.

Third-Party Studies Evaluating Tesamorelin

On June 27, 2012 we announced the results of a study led by Dr. Steven K. Grinspoon of the Massachusetts General Hospital and entitled “Physiologic Effects of Long-Term GHRH 1-44 in Abdominal Obesity”. The purpose of this study was to evaluate the effectiveness of synthetic growth-hormone releasing hormone in decreasing the amount of abdominal fat and improving cardiovascular function in obese subjects with relative reductions in growth hormone. This placebo-controlled study demonstrated that, among obese subjects with relative reductions in growth hormone, tesamorelin selectively reduces VAT in the abdominal area, without significant effects on SAT. Tesamorelin was also shown to improve triglycerides, C-reactive protein and carotid intima medial thickness, without aggravating glucose. These data suggest a functional consequence of reduced GH secretion in obesity and demonstrate an improved cardiovascular disease, or CVD, risk profile. In addition, this study suggests, more broadly, that strategies to selectively reduce VAT and spare SAT may improve CVD risk in obesity. The results occurred in the context of a dosing algorithm designed to keep insulin-like growth factor-1 within the normal physiological range. The study was published in the “Journal of Clinical Endocrinology & Metabolism” (Makimura H et al. J Clin Endocrinol Metab 2012 Dec; 97(12):4769-4779).

On July 19, 2011, we announced the results of the independent Somatotrophics, Memory, and Aging Research Trial led by Dr. Michael V. Vitiello of the University of Washington in Seattle. The purpose of this single-center, randomized, double-blind, placebo-controlled Phase 2 clinical trial was to evaluate the effect of tesamorelin on cognitive function in healthy older adults and older adults with mild cognitive impairment, or MCI, also known as pre-Alzheimer’s syndrome. A total of 152 older adults, half of whom were cognitively normal and half of whom were diagnosed with MCI, received either tesamorelin or a placebo. Tesamorelin improved executive function (response inhibition, set-shifting, and working memory) in both cognitively normal healthy older adults and in adults with MCI. Tesamorelin also improved delayed verbal recall in adults with MCI. This study is the first to demonstrate that short-term administration of a human growth releasing factor analogue improves executive function (the control or management of cognitive functions and processes) for both cognitively normal and memory-impaired older adults, and has an additional effect on verbal memory for MCI adults, who are at high risk for progression to Alzheimer’s dementia. The study was published in the journal “Archives of Neurology” (Baker L et al. Arch Neurol 2012;69(11):1420-1429).

Currently, we are not developing tesamorelin in patients suffering from obesity or MCI.

 

 

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Other Product Candidates

TH1173 – Our Second Generation GRF

In 2012, we pursued and completed preclinical work on TH1173, our second generation GRF and the results obtained warrant the pursuit of the Phase 1 clinical program for TH1173. However, all of our research and development activities, including TH1173, have since been suspended. On January 29, 2013, the USPTO issued a composition of matter patent for TH1173, scheduled to expire in 2032. As a result of the issuance of this patent, we expect to be in a position to explore partnerships and licensing opportunities in certain territories for TH1173.

New GRF Peptides

In addition to TH1173, our discovery team has identified a number of new GRF peptides. These peptides are at the discovery stage and, consistent with our revised business plan, all research and development activities have been suspended, including for these GRF peptides.

Melanotransferrin

In November 2010, we entered into a discovery and collaboration agreement with Université du Québec à Montréal, Gestion Valeo and Transfert Plus L.P. in connection with research led by Dr. Richard Béliveau seeking to discover short peptide mimics of melanotransferrin for the development of a new cancer treatment. Melanotransferrin is related to the transferrin family of proteins and is expressed normally in melanocytes, but also in several cancer cells. Dr. Béliveau’s research has demonstrated that soluble melanotransferrin reduces cell migration, invasion and angiogenesis, which are hallmarks of tumorigenesis and metastasis.

Our research identified several small peptides from the melanotransferrin protein which could replicate the functions of the full length protein. To date, we have assessed the in vivo biologic efficacy of these peptides, and the results obtained lead us to believe that these peptides have certain anti-tumoral characteristics. We need to conduct further research and development on these peptides, including toxicology and pharmacology studies. This work will only be done when we resume research and development activities.

Under the terms of this agreement, as consideration for our research, we were granted an undivided 50% interest in the short peptide mimics that we discovered and an option to acquire the remaining 50% undivided interest from Transfert Plus L.P. and a 100% interest in the melanotransferrin technology. We exercised the option on July 10, 2013. We now have 15 months from that date to pursue the research and development of the small peptides, or an additional 12-month period to license our research and development rights for such peptides to a third party, failing which we will have to retrocede to Transfert Plus L.P. a 50% undivided interest in the small peptides we discovered and the 100% interest in the melanotransferrin technology.

Capital Expenditures and Divestitures

We had no capital expenditures for our fiscal year 2013, $69,000 for our fiscal year 2012 and $234,000 for our fiscal year 2011. All of these capital expenditures were made in Canada and were financed internally. We divested laboratory equipment to arm’s length third parties for proceeds of $60,000 during our fiscal year 2013. There were no material divestitures for our fiscal years 2012 and 2011. There are currently no capital expenditures and divestitures in progress.

INTELLECTUAL PROPERTY

Our Current Patent Portfolio

Our current patent portfolio is comprised of patents and patent applications for the following compounds:

Tesamorelin

 

  -  

In the United States, we own a patent covering the composition of matter of tesamorelin, which is scheduled to expire in 2015. We have applied for a patent term extension requesting an extension of 1,827 days to this patent term. If our request for patent term extension for the entire 1,827 days is granted, the patent protection for tesamorelin in the United States would be extended until 2020. In addition, we own three issued United States patents relating to the use of tesamorelin in the treatment of HIV-associated lipodystrophy, which are scheduled to expire in 2023, as well as a patent relating to the use of tesamorelin in the treatment of mild cognitive impairment that is scheduled to expire in 2025. Furthermore, we have a patent set to expire in 2027 that relates to the use of tesamorelin in the improvement of muscle function in subjects suffering from severe wasting. We have also applied for a patent on a new formulation of tesamorelin. If such patent is granted, it would be scheduled to expire in 2028. Because tesamorelin qualifies as a new chemical entity, we also benefit from data protection for a five-year period for EGRIFTATM ending November 2015.

 

 

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  -  

In Europe, tesamorelin is covered by a granted patent validated in various European countries, which is scheduled to expire in 2016. Furthermore, a patent application relating to the use of tesamorelin in the treatment of mild cognitive impairment is currently pending before the European Patent Office, and a patent stemming from this application, if granted, would expire in 2023.

 

  -  

In Canada, we own a patent covering the composition of matter of tesamorelin, which is scheduled to expire in 2016, a patent relating to the use of tesamorelin in the treatment of metabolic conditions associated with fat accumulation and/or hypercholesterolemia, including HIV-associated lipodystrophy, which is scheduled to expire in 2024, as well as a patent relating to the use of tesamorelin in the treatment of mild cognitive impairment that is set to expire in 2023.

 

  -  

We have obtained a patent covering the composition of matter of tesamorelin in Brazil that is currently set to expire in 2019. However, in Brazil, INPI alleges that all pharmaceutical-related patents that stem from application filed between 1995 and 1997 and that were granted a term in excess of 20 years from the filing date are either invalid or that their terms should be reduced to 20 years from the filing date, and INPI has initiated court proceedings in that regard. If INPI succeeds in its argument, we may lose our patent protection on tesamorelin in Brazil, or we may have a reduction of our patent term from 2019 to 2016.

TH1173

 

  -  

We have obtained from the USPTO a patent covering the composition of matter of TH1173, which is scheduled to expire in 2032. Corresponding patent applications are currently pending in Canada, Europe, Japan, China, South Korea, Brazil, Argentina and Venezuela, and patents stemming from these applications, if granted, would also expire in 2032.

Melanotransferrin

 

  -  

We have filed an International Patent Cooperation Treaty application relating to melanotransferrin-related peptides from which national patent applications may be pursued in countries of interest. If such patents were granted, they would be scheduled to expire in 2032.

Our Trademarks & Other Intellectual Property

EGRIFTA® is our registered trademark in the United States and it is used in that country to commercialize tesamorelin for the reduction of excess abdominal fat in HIV-infected patients with lipodystrophy.

We have obtained registration for EGRIFTATM in many of the countries covered by the Sanofi Agreement and those that were covered under the Ferrer Agreement. The use of the EGRIFTA trademark for tesamorelin intended for the treatment of excess abdominal fat in HIV-infected patients with lipodystrophy in the jurisdictions where our commercial partners intend to commercialize EGRIFTATM generally requires the approval of the regulatory authorities reviewing the marketing authorization application in such jurisdictions and the approval of the local intellectual property agency. In certain countries, such as in Canada, registration of a trademark may not occur until a declaration of use of the product for which a trademark is sought is filed with the appropriate intellectual property agency of such countries. A declaration of use can be filed once a product is approved for commercialization.

Other trademarks related to tesamorelin have been filed as part of our business strategy. We have also reserved certain domain names in order to support future activities.

Our Policy on Intellectual Property

Our intellectual property practice is to keep all information relating to proprietary compounds, inventions, improvements, trade secrets, know-how and continuing technological innovation confidential and, where practicable, file patent and trademark applications. In particular, as part of our intellectual property protection practice, we:

 

   

perform surveillance of third party patents and patent applications in order to identify any third party patent or third party patent application which, if granted, could be infringed by our activities;

 

   

where practicable, file patent applications for any new and patentable invention, development or improvement in the United States and in other countries;

 

   

prosecute all pending patent applications in conformity with applicable patent laws and in a manner that efficiently covers our activities;

 

   

file trademark applications in countries of interest for our trademarks;

 

   

register domain names in countries of interest; and

 

   

maintain our intellectual property rights by paying government fees as may be necessary to ensure such rights remain in force.

 

 

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Regulatory Exclusivity

The regulatory regimes of certain countries may provide market exclusivity for a pharmaceutical product. For instance, in the United States, patent term extension laws provide a patent holder with additional protection against third parties who may wish to commercialize a product similar to an approved product.

Data Protection

In the United States, the Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act, awards, in certain circumstances, non-patent marketing exclusivities to pioneer drug manufacturers. The Hatch-Waxman Act provides five years of non-patent marketing exclusivity within the United States to an applicant who gains approval of a NDA for a “new chemical entity,” a drug for which the FDA has not previously approved any other new drug with the same active moiety, which is the molecule or ion responsible for the action of the drug. This marketing exclusivity prevents the FDA from approving, in certain circumstances, any abbreviated new drug application for a generic drug or any 505(b)(2) NDA. See “Government Regulation – United States – FDA Process” below.

Patent Term Extension

In the United States, the Hatch-Waxman Act permits, under certain circumstances, patent term extension for one patent per approved drug of up to five years for patent term lost during product development and the FDA regulatory review process. However, patent term extension cannot extend the remaining patent term beyond a total of 14 years from the product’s approval date. The patent term extension period is generally one-half the time between the effective date of an Investigational New Drug Application, or IND, and the submission date of an NDA plus the time between the submission date of an NDA and the NDA. We have applied for a patent term extension with respect to tesamorelin and are seeking an additional term of 1,827 days.

MANUFACTURING

We do not own or operate commercial scale manufacturing facilities for the production of our product or any of our product candidates, nor do we have plans to develop our own manufacturing operations in the foreseeable future. We currently depend on third-party contract manufacturers for all of our required raw materials, drug substance and finished product for commercial sale and clinical trials.

We are responsible for the manufacture and supply of tesamorelin to ensure the commercialization of EGRIFTATM under the EMD Serono Agreement, the Sanofi Agreement and the Actelion Agreement. As part of the EMD Serono Agreement, we are required to maintain certain levels of inventory. In order to fulfill these contractual obligations, we have negotiated and entered into various third-party supply agreements.

On February 14, 2014, we announced that we expected our inventory of EGRIFTA™ to be depleted in a matter of weeks due to a combination of manufacturing delays and issues observed during the production of new batches of EGRIFTA™. We further advised that the ensuing depletion of the inventory would result in a shortage of EGRIFTA™ and an eventual stock-out and that we were temporarily ceasing to manufacture EGRIFTATM. As of the date of this Annual Report, we have not resumed the manufacture of EGRIFTA™ and are unable to determine a timeline to resume its manufacture and delivery. Resolving the EGRIFTA™ manufacturing problems and ensuring that we have a reliable source of supply are immediate priorities for the Company in 2014.

Bachem

We have an agreement with Bachem Americas, Inc., an American subsidiary of Swiss-based Bachem AG, providing for the manufacturing and supply of the active pharmaceutical ingredient of tesamorelin for EGRIFTATM for commercial sale in the United States and for clinical programs. Bachem is our only validated supplier of raw materials. The price of tesamorelin manufactured by Bachem has been set under our agreement and is not subject to volatility.

Jubilant HollisterStier

We have an agreement with Jubilant HollisterStier General Partnership (formerly Draxis Pharma General Partnership), or Jubilant, providing for the manufacture and supply of the finished form of EGRIFTATM for commercial sale in the United States and for tesamorelin for clinical programs. Under our agreement, Jubilant must fill vials with tesamorelin, lyophilize it, label and package those vials and deliver them to locations in accordance with our instructions.

On February 25, 2013, we were informed by Jubilant that it received a Warning Letter from the FDA for its failure to comply with GMP regulations.

 

 

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Jubilant addressed all comments contained in the Warning Letter and, on February 25, 2014, we were informed by Jubilant that the FDA accepted all responses filed by Jubilant to address the comments made by the FDA resulting in the closing of the Warning Letter file and classifying Jubilant’s Kirkland manufacturing site as acceptable.

In January 2013, we have experienced manufacturing difficulties during the conversion of raw materials to finished goods. The manufacture of EGRIFTA™ was suspended until corrective measures could be implemented. Corrective measures were developed and the manufacture of EGRIFTATM resumed in May. However, the analysis of the lots manufactured using the corrective measures had quality issues and, in September 2013, we reverted to the original approved manufacturing process. As a result of the suspension of the manufacture of EGRIFTATM, EMD Serono filed a notice of drug-shortage with the FDA and, subsequently, as part of the documents filed with the FDA, we undertook to carry out work to evaluate our current manufacturing process. We have begun carrying out such work and this will be our immediate priority during the present financial year.

We have identified possible secondary suppliers of these products. We believe that there are alternate sources of supply for these products that will be able to satisfy our needs and will be able to receive FDA qualification. The qualification of suppliers such as Jubilant usually takes at least twenty-four (24) months.

Becton Dickinson

On November 6, 2009, we entered into a supply agreement with Becton Dickinson Canada Inc., or Becton Dickinson. Under this agreement, Becton Dickinson is responsible for supplying us with syringes and hypodermic needles which are provided with EGRIFTATM in the United States.

Hospira

On March 26, 2009, we entered into development and supply agreements with Hospira Worldwide, Inc., or Hospira. Under these agreements, Hospira is responsible for manufacturing and supplying us with sterile water for injection, filled and finished in plastic vials, in connection with the sale of EGRIFTATM in the United States. Hospira is also responsible for packaging syringes, needles, sterile water for injection and patient inserts in connection with the sale of EGRIFTATM in the United States. On October 17, 2013, we and Hospira amended these development and supply agreements to extend their term until March 25, 2015.

ABAR

On January 5, 2010, we entered into a supply agreement with Gruppo Cartotecnico ABAR Litofarma S.R.L., or ABAR, an Italian company, in order to ensure the commercial supply of pharmaceutical mass market folding boxes for the sale of EGRIFTATM in the United States.

COMPETITION

The pharmaceutical industry is characterized by intense competition and rapid innovation. Our potential competitors include large pharmaceutical and biotechnology companies, specialty pharmaceutical and generic drug companies, academic institutions, government agencies and research institutions, many of whom have greater financial, technical and human resources than us. We believe the key competitive factors that will affect the development and commercial success of EGRIFTATM and our product candidates are efficacy, safety and tolerability profile, reliability, product acceptance by physicians and other healthcare providers, convenience of dosing, price and reimbursement.

We are not aware of other GRF products being commercialized indicated for the reduction of excess abdominal fat in HIV-infected patients with lipodystrophy. However, we may face indirect competition for EGRIFTATM from other drugs, such as human growth-hormone and testosterone that may be prescribed by physicians. To our knowledge, the use of these other drugs for the reduction of excess abdominal fat in HIV-infected patients with lipodystrophy has not been approved by the FDA nor any other regulatory authority.

We are aware that the FDA has granted priority review to Bristol-Myers Squibb Company and AstraZeneca’s Metreleptin, an investigational recombinant analog of the human hormone leptin evaluated for the treatment of metabolic disorders associated with inherited or acquired lipodystrophy. We are also aware that Aileron Therapeutics, Inc. may seek to develop its GRF peptide, ALRN-5281, for the treatment of HIV-associated lipodystrophy. Based on publicly available information, Aileron has initiated Phase 1 development for this peptide.

 

 

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GOVERNMENT REGULATION

Overview

The research, development, manufacture and marketing of pharmaceutical products are governed by various governmental authorities throughout the world to ensure efficacy and safety.

Governmental authorities in the United States at the federal, state and local level, and other countries, extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, marketing, export and import of products, such as EGRIFTATM and any other product candidate that we may develop. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources. Failure to comply with the applicable requirements at any time during the product development process, approval process or after approval, may subject an applicant to administrative or judicial sanctions. Sanctions could include refusal to approve pending applications, withdrawal of an approval, a clinical hold, warning letters, product recalls, product seizures, total or partial suspension of production or distribution injunctions, fines, refusals of government contracts, restitution, disgorgement or civil or criminal penalties.

On November 10, 2010, the FDA approved EGRIFTATM as the first approved treatment for excess abdominal fat in HIV-infected patients with lipodystrophy. Our other product candidates must receive regulatory approval from the FDA or other relevant foreign regulatory authorities before they may legally be marketed in the United States or other countries.

In Canada, these activities are governed by the provisions of the Food and Drugs Act and its regulations, which are enforced by TPD and the Food Branch of Health Canada.

United States - FDA Process

Before new pharmaceutical products may be sold in the United States, clinical trials of the product candidates must be conducted and the results submitted to the FDA for approval. The drug approval process requires, among other things, a demonstration of product safety and efficacy. Generally, a demonstration of safety and efficacy includes preclinical testing and clinical trials of product candidates. The testing, manufacture and marketing of pharmaceutical products in the United States requires the approval of the FDA. The FDA enforces laws and regulations which apply to preclinical testing, clinical trials, and manufacture of these products. The drug approval process in the United States is described in brief below.

Pre-Clinical Testing: Before testing of any compounds with potential therapeutic value in human subjects may begin in the United States, stringent government requirements for pre-clinical data must be satisfied. Pre-clinical testing includes laboratory evaluations of product pharmacology and toxicity in animal studies of the drug candidates. In parallel, the chemistry of the drug candidates must be elucidated and their manufacturing, including formulation and stability, clearly defined and controlled.

Investigational New Drug Application: Among other things, pre-clinical testing results obtained from animal studies and in vitro studies, are submitted to the FDA as part of an IND application and are reviewed by the FDA prior to the commencement of human clinical trials. An IND sponsor must also include a protocol detailing, among other things, the objectives of the initial clinical trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated if the initial clinical trial lends itself to an efficacy evaluation. Some preclinical testing may continue even after the IND is submitted. Unless the FDA objects to an IND (referred to as a clinical hold), the IND becomes effective 30 days following its receipt by the FDA. Once trials have commenced, the FDA may stop the trials at any time by placing them on “clinical hold” because of safety concerns or noncompliance. If the FDA issues a clinical hold, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical study can begin. Accordingly, we cannot be sure that submission of a IND will result in the FDA allowing clinical trials to begin or that, once began, issues will not arise that suspend or terminate such trials.

Clinical Trials: Clinical trials involve the administration of the drug to healthy human volunteers or to patients under the supervision of a qualified investigator pursuant to an FDA-approved protocol. Each clinical trial must be conducted under the auspices of an Institutional Review Board, or IRB, that considers, among other things, ethical factors, the safety of human subjects and approves the patient informed consent, which must be agreed to, with signatures obtained, by all participants prior to participation in the clinical trial. Once an IND is in effect, each new clinical protocol and any amendments to the protocol must be submitted to the FDA for review, and to the IRB for approval. Protocols detail, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria, and the parameters to be used to monitor subject safety. Human clinical trials are typically conducted in three sequential phases, although the phases may overlap with one another.

All phases of clinical trials must be conducted in conformance with GCP requirements, which are ethical, and scientific quality standards for conducting, recording, and reporting clinical trials to assure that the rights, safety, and well-being of trial participants are protected, and the FDA’s regulations for the protection of human subjects.

Phase 1 Clinical Trials: Phase 1 clinical trials represent the initial administration of the investigational drug to a small group of healthy human subjects or, more rarely, to a group of select patients with the targeted disease or disorder. The goal of Phase 1 clinical trials is typically to test for safety, dose tolerance, absorption, bio-distribution, metabolism, excretion and clinical pharmacology and, if possible, to gain early evidence regarding efficacy.

Phase 2 Clinical Trials: Phase 2 clinical trials involve a small sample of the actual intended patient population and seek to assess the efficacy of the drug for specific targeted indications, to determine dose response and the optimal dose range and to gather additional information relating to safety and potential adverse effects.

 

 

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Phase 3 Clinical Trials: Once an investigational drug is found to have some efficacy and an acceptable safety profile in the targeted patient population, Phase 3 clinical trials are initiated to establish further clinical safety and efficacy of the investigational drug in a broader sample of the patient population with the target disease or disorder at geographically dispersed study sites in order to determine the overall risk-benefit ratio of the drug and to provide an adequate basis for regulatory approval and product labeling.

New Drug Application: All data obtained from a comprehensive development program including research and product development, manufacturing, pre-clinical and clinical trials and related information are submitted in an NDA to the FDA. In addition to reports of the trials conducted under the IND, the NDA includes information pertaining to the preparation of the new drug, chemistry, manufacturing and controls, or CMC, analytical methods, details of the manufacture of finished products and proposed product packaging and labeling. The submission of an application is no guarantee that the FDA will find the application complete and accept it for filing. The FDA may refuse to file the application and request additional information rather than accept the application for filing, in which case, the application must be resubmitted with the supplemental information. The re-submitted application is also subject to review before the FDA accepts it for filing. Once an application is accepted for filing, an FDA review team—medical doctors, chemists, statisticians, microbiologists, pharmacologists, and other experts—evaluates whether the studies the sponsor submitted show that the drug is safe and effective for its proposed use and whether the applicant’s manufacturing complies with GMP requirements to assure and preserve the product’s identity, strength, quality and purity. As part of the approval process, the FDA will inspect the facility or facilities where the product is manufactured. The FDA review process may be extended by FDA requests for additional information or clarification. In some cases, the FDA may decide to expedite the review of new drugs that are intended to treat serious or life threatening conditions and demonstrate the potential to address unmet medical needs.

As part of its review, the FDA may refer the application to an advisory committee for evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations.

The FDA may also determine that a risk evaluation and mitigation strategy, or REMS, is necessary to ensure that the benefits of a new product outweigh its risks. If required, a REMS may include various elements, such as publication of a medication guide, patient package insert, a communication plan to educate healthcare providers of the drug’s risks, limitations on who may prescribe or dispense the drug, or other measures that the FDA deems necessary to assure the safe use of the drug.

In reviewing an NDA, the FDA may grant marketing approval, request additional information or deny the application if it determines the application does not provide an adequate basis for approval. The FDA may require larger or additional clinical trials, leading to unanticipated delay or expense. Even if such additional information and data are submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Data from clinical trials may be subject to different interpretation, and the FDA may interpret data differently than the applicant. The receipt of regulatory approval often takes a number of years, involving the expenditure of substantial resources and depends on a number of factors, including the severity of the disease in question, the availability of alternative treatments and the risks and benefits demonstrated in clinical trials. The FDA may require, as a condition of approval, restricted distribution and use, enhanced labeling, special packaging or labeling, expedited reporting of certain adverse events, pre-approval of promotional materials, or restrictions on direct-to-consumer advertising or commitments to conduct additional research post-approval. The FDA will issue a complete response letter if the agency decides not to approve the NDA in its present form. The complete response letter usually describes all of the specific deficiencies in the NDA identified by the FDA. The deficiencies may be minor, for example, requiring labeling changes, or major, for example, requiring additional clinical studies. If a complete response letter is issued, the applicant may either resubmit the NDA, addressing all of the deficiencies identified in the letter, or withdraw the application. In addition, changes in FDA approval policies or requirements may occur, or new regulations may be promulgated, which may result in delay or failure to receive FDA approval.

Changes to an approved product, such as adding a new indication, making certain manufacturing changes, or changing manufacturers or suppliers of certain ingredients or components requires review and approval of the FDA.

Under the Hatch-Waxman Act, the U.S. Congress created an abbreviated FDA review process for generic versions of pioneer (brand name) drug products. The Hatch-Waxman Act requires NDA applicants and NDA holders to provide certain information about patents related to the drug for listing in the FDA’s publication, “Approved Drug Products with Therapeutic Equivalence Evaluations”, commonly known as the Orange Book. The Hatch-Waxman Act allows for, under certain circumstances, an abbreviated NDA, or ANDA, where an applicant seeks to determine that its proposed product is biologically equivalent to the reference drug. ANDA applicants do not have to conduct extensive clinical trials to prove the safety or efficacy of the drug product; rather, they are required to conduct less rigorous bioequivalence testing. Drugs approved in this way are commonly referred to as “generic equivalents” to the listed drug, are listed as such by the FDA, and can often be substituted by pharmacists under prescriptions written for the original listed drug. In addition, in certain cases, an application for marketing approval may include information regarding safety and efficacy of a proposed drug that comes from studies not conducted by or for the applicant and for which the applicant has not obtained a specific right to reference those studies. Such applications, known as a 505(b)(2) NDA, are permitted for new drug products that incorporate previously approved active ingredients, even if the proposed new drug incorporates an approved active ingredient in a novel formulation or for a new indication. Section 505(b)(2) also permits the FDA to rely for such approvals on literature or on a finding by the FDA of safety and/or efficacy for a previously

 

 

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approved drug product. In addition, a 505(b)(2) NDA for changes to a previously approved drug product may rely on the FDA’s finding of safety and efficacy of the previously approved product coupled with new clinical information needed by FDA to support the change. FDA approval of the NDA or ANDA is required before marketing of the product may begin in the United States.

The Pediatric Research Equity Act, or PREA, requires NDAs (or NDA supplements) for a new active ingredient, new indication, new dosage form, new dosing regimen, or new route of administration to contain data assessing the safety and efficacy for the claimed indication in all relevant pediatric subpopulations. Data to support dosing and administration also must be provided for each pediatric subpopulation for which the drug is safe and effective. FDA may grant deferrals for the submission of data, or full or partial waivers from the PREA requirements. Unless otherwise required by regulation, PREA does not apply to any drug for an indication for which orphan designation, as described below, has been granted.

If a product receives regulatory approval, the approval may be significantly limited to specific diseases and dosages or the indications for use may otherwise be limited, which could restrict the commercial value of the product. Further, the FDA may require that certain contraindications, warnings or precautions be included in the product labeling. In addition, the FDA may require post-approval studies, sometimes referred to as Phase 4 testing which involves clinical trials designed to further assess a drug safety and effectiveness and may require testing and surveillance programs to monitor the safety of approved products that have been commercialized.

Post-Approval Studies and Registries: Post-approval studies, also referred to as Phase 4 clinical trials, are studies that are conducted after a product has been approved. These trials can be conducted for a number of purposes, including to collect long-term safety information or to collect additional data about a specific population. As part of a product approval, the FDA may require that certain Phase 4 studies be conducted post-approval, and in these cases these Phase 4 studies are called post-marketing commitments.

Adverse Event Reporting: Regulatory authorities track information on side effects and adverse events reported during clinical studies and after marketing approval. Non-compliance with FDA safety reporting requirements may result in FDA regulatory action that may include civil action or criminal penalties. Side effects or adverse events that are reported during clinical trials can delay, impede or prevent marketing approval. Similarly, adverse events that are reported after marketing approval can result in additional limitations being placed on the product’s use and, potentially, withdrawal or suspension of the product from the market. Furthermore, in September 2007 the Food and Drug Administration Amendments Act of 2007 was enacted, which provides the FDA with expanded authority over drug products after approval. This legislation enhances the FDA’s authority with respect to post-marketing safety surveillance including, among other things, the authority to require additional post-approval studies or clinical trials and mandate label changes as a result of safety findings, including the development and implementation of a REMS.

Orphan Drug Designation

Under the Orphan Drug Act, the FDA may grant orphan designation to a drug intended to treat a “rare disease or condition,” which is a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making a drug available in the United States for this type of disease or condition will be recovered from sales in the United States of the drug. Orphan product designation must be requested before submitting an NDA. After the FDA grants orphan drug designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan product designation does not convey any advantage in, or shorten the duration of the regulatory review and approval process.

If a drug that has orphan designation subsequently receives the first FDA approval for the disease or condition for which it has such designation, the product is entitled to orphan drug exclusivity, which means that the FDA may not approve any other applications to market the same drug for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan exclusivity. Competitors, however, may receive approval of different drugs for the indication for which the orphan product has exclusivity or may obtain approval for the same drug but for a different indication for which the orphan product has exclusivity. Orphan product exclusivity also could block the approval of one of our product candidates for seven years if a competitor obtains approval of the same drug or if our product candidate is determined to be contained within the competitor’s product for the same indication or disease. If a drug designated as an orphan drug receives marketing approval for an indication broader than what is designated, it may not be entitled to orphan product exclusivity.

Expedited Development and Review Programs

The FDA has a fast track program that is intended to expedite or facilitate the process for reviewing new drugs that meet certain criteria. Specifically, new drugs are eligible for fast track designation if they are intended to treat a serious or life-threatening condition and demonstrate the potential to address unmet medical needs for the condition. Fast track designation applies to the combination of the product and the specific indication for which it is being studied. Unique to a fast track product, the FDA may consider for review sections of the NDA on a rolling basis before the complete application is submitted, if the sponsor provides a schedule for the submission of the sections of the NDA, the FDA agrees to accept sections of the NDA and determines that the schedule is acceptable, and the sponsor pays any required user fees upon submission of the first section of the NDA.

 

 

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Any product submitted to the FDA for market, including a fast track program, may also be eligible for other types of FDA programs intended to expedite development and review, such as priority review and accelerated approval. Any product is eligible for priority review if it has the potential to provide safe and effective therapy where no satisfactory alternative therapy exists or a significant improvement in the treatment, diagnosis or prevention of a disease compared to marketed products. The FDA will attempt to direct additional resources to the evaluation of an application for a new drug designated for priority review in an effort to facilitate the review. Additionally, a product may be eligible for accelerated approval. Drug products studied for their safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over existing treatments may receive accelerated approval, which means that they may be approved on the basis of adequate and well-controlled clinical studies establishing that the product has an effect on a surrogate endpoint that is reasonably likely to predict a clinical benefit, or on the basis of an effect on a clinical endpoint other than survival or irreversible morbidity. As a condition of approval, the FDA may require that a sponsor of a drug receiving accelerated approval perform adequate and well-controlled post-marketing clinical studies. In addition, the FDA currently requires as a condition for accelerated approval pre-approval of promotional materials, which could adversely impact the timing of the commercial launch of the product. Fast track designation, priority review and accelerated approval do not change the standards for approval but may expedite the development or approval process.

The Food and Drug Administration Safety and Innovation Act of 2012 amended the Federal Food, Drug, and Cosmetic Act to require FDA to expedite the development and review of a Breakthrough Therapy. A sponsor may request that a drug or biological product be designated as a breakthrough therapy if it is intended to treat a serious or life-threatening condition or disease and preliminary clinical evidence indicates that it may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. If so designated, FDA shall act to expedite the development and review of the product’s marketing application, including by meeting with the sponsor throughout the product’s development, providing timely advice to the sponsor to ensure that the development program to gather nonclinical and clinical data is as efficient as practicable, and taking steps to ensure that the design of the clinical trials is as efficient as practicable.

Non-U.S. Regulation

In addition to regulations in the United States, we will be subject to a variety of regulations governing clinical studies and commercial sales and distribution of our products in other jurisdictions around the world. Whether or not we obtain FDA approval for a product, we must obtain approvals from the comparable regulatory authorities of foreign countries before we can commence clinical studies or marketing of the product in those countries. The approval process varies from country to country and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical studies, product licensing, pricing and reimbursement vary greatly from country to country. In some international markets, additional clinical trials may be required prior to the filing or approval of marketing applications within the country.

In order to obtain approval for commercializing new drugs in Canada, we must satisfy many regulatory conditions. We must complete preclinical studies in order to file a Clinical Trial Application, or CTA, in Canada. We then receive different clearance authorizations to proceed with Phase 1 clinical trials, which can then lead to Phase 2 and Phase 3 clinical trials. Once all three phases of trials are completed, we file a registration file named a New Drug Submission, or NDS, in Canada. If the NDS demonstrates that the product was developed in accordance with the regulatory authorities’ rules, regulations and guidelines and demonstrates favourable safety, efficacy and receives a risk/benefit analysis, then the regulatory authorities issue a notice of compliance, which allows us to market the product.

Good Manufacturing Practices

The FDA, the EMA, the competent authorities of the European Union Member States and other foreign regulatory agencies regulate and inspect equipment, facilities, and processes used in the manufacturing of pharmaceutical and biologic products prior to approving a product. Among the conditions for NDA or equivalent foreign approval is the requirement that the prospective manufacturer’s quality control and manufacturing procedures adhere to the FDA’s or other competent authorities’ current GMP. Before approval of an NDA or equivalent foreign approval, the FDA or other competent authority may perform a pre-approval inspection of a manufacturing facility to determine its compliance with GMP and other rules and regulations. In complying with GMP, manufacturers must continue to expend time, money and effort in the area of production and quality control to ensure full technical compliance. Similarly, NDA or equivalent foreign approval may be delayed or denied due to GMP non-compliance or other issues at contract sites or suppliers included in the NDA or equivalent foreign approval, and the correction of these shortcomings may be beyond our control. Facilities are also subjected to the requirements of other government bodies, such as the U.S. Occupational Safety & Health Administration and the U.S. Environmental Protection Agency.

If, after receiving clearance from regulatory agencies or competent authorities, a company makes certain changes in manufacturing equipment, location, or process, additional regulatory review and approval may be required. Our third-party suppliers must adhere to GMP and product-specific regulations enforced by the FDA and other competent authorities following product approval. The FDA, the European Union and other national competent authorities and regulatory agencies also conduct regular, periodic visits to re-inspect equipment, facilities and processes following the initial approval of a product. If, as a result of these inspections, it is determined that our suppliers’ equipment, facilities or processes do not comply with applicable regulations and conditions of product approval, regulatory agencies may seek civil, criminal or administrative sanctions and/or remedies against them, including the suspension of manufacturing operations.

 

 

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Good Clinical Practices

The FDA, the EMA and other competent authorities promulgate regulations and standards, commonly referred to as Good Clinical Practices, or GCP, for designing, conducting, monitoring, auditing and reporting the results of clinical trials to ensure that the data and results are accurate and that the trial participants are adequately protected. The FDA, the European Union and other foreign national competent authorities and regulatory agencies enforce GCP through periodic inspections of trial sponsors, principal investigators and trial sites. We rely on third-party service providers to conduct our clinical trials. If our study sites fail to comply with applicable GCP, the clinical data generated in our clinical trials may be deemed unreliable and relevant regulatory agencies may require us to perform additional clinical trials before approving our marketing applications.

Good Laboratory Practices

The FDA and other regulatory authorities promulgate regulations and standards, commonly referred to as Good Laboratory Practices, or GLP, for the conduct of non-clinical, commonly referred to as “preclinical,” non-human studies to provide a framework within which laboratory studies are planned, performed, monitored, recorded, reported and archived. Compliance with GLP is intended to assure regulatory authorities of the quality and integrity of the results obtained during the preclinical studies. Before we may test our product candidates on humans in clinical trials, we must first conduct preclinical testing, including animal studies, in accordance with GLP. The FDA or other regulatory authorities may inspect the testing facilities where our pre-clinical studies are conducted. The results of preclinical studies in the United States, Europe or other countries, not conducted in accordance with GLP, might be inadmissible in support of an NDA in the United States, or comparable applications in other countries.

United States Sales and Marketing

Our commercial partner, EMD Serono, is subject to various United States regulations relating to the sales and marketing of EGRIFTATM in the United States. From and after the Closing Date of the EGRIFTA Transaction, we will be subject to such United States regulations. The FDA regulates all advertising and promotion activities for products under its jurisdiction both prior to and after approval. A company can make only those claims relating to safety and efficacy that are approved by the FDA. Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved label. The FDA actively enforces the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant sanctions. The FDA does not regulate the practice of medicine by physicians in their choice of treatment, but FDA regulations do impose stringent restrictions on manufacturers’ communications regarding off-label uses. Failure to comply with applicable FDA requirements may subject a company to adverse publicity, enforcement action by the FDA, corrective advertising, and the full range of civil and criminal penalties available to the FDA.

Marketing of EGRIFTATM within the United States is also subject to various federal and state laws pertaining to health care “fraud and abuse,” including anti-kickback laws and false claims laws. Anti-kickback laws make it illegal for a prescription drug manufacturer to solicit, offer, receive, or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase or prescription of a particular drug. Due to the breadth of the statutory provisions and the absence of guidance in the form of regulations and very few court decisions addressing industry practices, it is possible that our commercial partners’ practices might be challenged under anti-kickback or similar laws. False claims laws prohibit anyone from knowingly and willingly presenting, or causing to be presented for payment to third-party payors (including Medicare and Medicaid) claims for reimbursed drugs or services that are false or fraudulent.

In addition, several states require that companies implement compliance programs or comply with industry ethics codes, adopt spending limits, and report to state governments any gifts, compensation, and other remuneration provided to physicians. Regulations implementing certain provisions of the recently enacted health care reform legislation will require record-keeping and disclosure to the federal government of payments to physicians commencing in 2013 and 2014. Any activities relating to the sale and marketing of our products may be subject to scrutiny under these laws. Violations of fraud and abuse laws may be punishable by criminal and/or civil sanctions, including fines and civil monetary penalties, as well as the possibility of exclusion from federal health care programs (including Medicare and Medicaid). If the government were to allege or convict our commercial partner of violating these laws, our business could be harmed. In addition, there is ability for private individuals to bring similar actions.

Further, there are an increasing number of state laws that require manufacturers to make reports to states on pricing and marketing information. Our activities could be subject to challenge for the reasons discussed above and due to the broad scope of these laws and the increasing attention being given to them by law enforcement authorities.

PHARMACEUTICAL PRICING AND REIMBURSEMENT

In the United States and in other countries, sales of EGRIFTATM and our other product candidates will depend in part on the availability of reimbursement from third-party payors. Third-party payors include government health administrative authorities (such as the Centers for Medicare & Medicaid Services in the United States), managed care providers, private health insurers and other organizations.

 

 

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These third-party payors are increasingly challenging the price and examining the cost-effectiveness of medical products and services. In addition, significant uncertainty exists as to the reimbursement status of newly approved healthcare product candidates. We, or our commercial partners, may need to conduct expensive pharmacoeconomic studies in order to demonstrate the cost-effectiveness of EGRIFTATM or our other product candidates. EGRIFTATM or our other product candidates may not be considered cost-effective. It is time consuming and expensive for us, and our commercial partners, to seek reimbursement from third-party payors. Reimbursement may not be available or sufficient to allow us to sell EGRIFTATM or our other product candidates on a competitive and profitable basis.

United States

Pursuant to the EMD Serono Agreement, EMD Serono is responsible for identifying and obtaining possible reimbursements under such government programs in the United States. From and after the Closing Date of the EGRIFTA Transaction, we will be responsible for identifying and obtaining possible reimbursements under such programs. The U.S. Congress and state legislatures from time to time propose and adopt initiatives aimed at cost containment, which could impact our ability to sell our products profitably. For example, in March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, and the associated reconciliation bill, which we refer to collectively as the Health Care Reform Law, a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Effective October 1, 2010, the Health Care Reform Law revises the definition of “average manufacturer price” for reporting purposes, which could increase the amount of Medicaid drug rebates to states once the provision is effective. Further, the new law imposes a significant annual fee on companies that manufacture or import certain branded prescription drug products and biologic agents. Substantial new provisions affecting compliance also have been enacted, which may require us, or EMD Serono, to modify our business practices with healthcare practitioners. We will not know the full effects of the Health Care Reform Law until applicable federal and state agencies issue regulations or guidance under the new law. Although it is too early to determine the effect of the Health Care Reform Law, the new law appears likely to continue the pressure on pharmaceutical pricing, especially under the Medicare program, and also may increase our regulatory burdens and operating costs.

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or MMA, imposed new requirements for the distribution and pricing of prescription drugs for Medicare beneficiaries, and included a major expansion of the prescription drug benefit under a new Medicare Part D. Medicare Part D went into effect on January 1, 2006. Under Part D, Medicare beneficiaries may enroll in prescription drug plans offered by private entities which will provide coverage of outpatient prescription drugs. Part D plans include both stand-alone prescription drug benefit plans and prescription drug coverage as a supplement to Medicare Advantage plans. Unlike Medicare Part A and B, Part D coverage is not standardized. Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D prescription drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, though not necessarily all the drugs in each category or class. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy and therapeutic committee.

It is not clear what effect the MMA will have on the prices paid for EGRIFTATM and our other product candidates. Some studies indicate that Part D lowered the average price and increased the utilization of prescription drugs by Medicare beneficiaries. Government payment for some of the costs of prescription drugs may increase demand for products for which we receive marketing approval. However, any negotiated prices for our products covered by a Part D prescription drug plan will likely be lower than the prices we might otherwise obtain. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that results from the MMA may result in a similar reduction in payments from non-governmental payors.

There are also laws that govern a company’s eligibility to participate in Medicare and Medicaid reimbursements. For example, a company may be debarred from participation if it is found to have violated federal anti-kickback laws, which could have a significant effect on a company’s ability to operate its business.

The cost of pharmaceuticals continues to generate substantial governmental and third-party payor interest. We expect that the pharmaceutical industry will experience pricing pressures due to the trend toward managed healthcare, the increasing influence of managed care organizations, and additional legislative proposals. Indeed, we expect that there will continue to be a number of U.S. federal and state proposals to implement governmental pricing controls and limit the growth of healthcare costs, including the cost of prescription drugs.

Countries other than the United States

Outside of the United States, sales of EGRIFTATM and our other product candidates will depend in part on the availability and level of reimbursement from third-party payors. Third-party payors can be public or private or a combination of both. In order to obtain public reimbursement, prescription drugs are often evaluated by specialized bodies in a country. This process is in many cases independent of marketing approval and the time to carry out the evaluation differs in each country, often extending beyond the initial regulatory approval date of the drug.

 

 

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The requirements and aspects considered during the assessment of a new prescription drug are not necessarily the same in each country and are given different weight depending on the countries’ attitudes towards providing public healthcare and the government’s willingness to pay for these new drugs. We or our commercial partners could be required to conduct specific health economic and other studies or analyses in order to satisfy such requirements. The decision to comply with such requirements will depend on the prospects of obtaining a positive opinion and the costs involved in the process and the profitability of the market.

In many jurisdictions, pricing plays an important role in the evaluation of prescription drugs for reimbursement and in most cases, there are price controls that can include, but are not limited to, reference pricing to drugs sold within the country and in other countries, the evaluation of what a fair price would be based on the condition that is being treated and innovative quality of the new drug.

Many countries have initiated cost-cutting measures which have been reflected in reduced budgets for drugs, higher discounts imposed on manufacturers and price negotiations between authorities and manufacturers among other actions. We expect the current reimbursement evaluation process and pricing policies to keep evolving in ways that we may not foresee.

Pursuant to the Sanofi Agreement and the Actelion Agreement, each of sanofi and Actelion is responsible for identifying and obtaining possible reimbursements under government programs in their respective territories.

C.   Organizational Structure

As at November 30, 2013, Theratechnologies had the following subsidiaries:

 

Subsidiary

Wholly-owned

   Jurisdiction of    
incorporation
   Address

 

Theratechnologies Intercontinental Inc.

   Québec         2310, Alfred-Nobel Blvd., Montréal, Québec, H4S 2B4

 

Theratechnologies Europe Inc.

   Québec         2310, Alfred-Nobel Blvd., Montréal, Québec, H4S 2B4

 

Theratechnologies Canada Inc.

   Québec         2310, Alfred-Nobel Blvd., Montréal, Québec, H4S 2B4

 

Pharma-G. Inc.

   Québec         2310, Alfred-Nobel Blvd., Montréal, Québec, H4S 2B4

D.    Property, plants and equipment

Our head office and principal place of business is located at 2310 Alfred-Nobel Boulevard, Montréal, Québec, Canada, H4S 2B4. We lease 5,000 square-foot of office space in a 36,400 square-foot building. We are currently the only tenant in this building.

Item 4A.     Unresolved Staff Comments

None

Item 5. Operating and Financial Review and Prospects

Information relating to operating and financial review and prospects are detailed in the Management’s Discussion and Analysis, or MD&A, for the years ended November 30, 2013 and 2012 included therein and in conjunction with the Audited Consolidated Financial Statements of the Corporation and related notes included at “Item 18 – Financial Statements” of this Annual Report.

A.   Operating results.

Refer to our MD&A included hereinafter in this Annual Report.

B.   Liquidity and capital resources.

Refer to the MD&A included hereinafter in this Annual Report.

C.   Research and development, patents and licenses.

The Company incurred research and development costs net of tax credits amounting to $7,371,000, $6,341,000 and $10,992,000 in the years ended November 30, 2013, 2012 and 2011, respectively. Refer to the MD&A included hereinafter and to “Item 4.B – Business Overview” of this Annual Report.

D.   Trend information.

Other than those discussed under “Item 4.B – Business Overview” and under the MD&A included hereinafter, the Company does not know of any significant trends that would be material to its operations since the last financial year.

 

 

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E.   Off-balance sheet arrangements.

Refer to the MD&A included hereinafter in this Annual Report.

F.   Tabular disclosure of contractual obligations.

Refer to the MD&A included hereinafter in this Annual Report.

G.   Safe harbor.

This Annual Report contains forward-looking statements, principally in “Item 4 - Information on the Company” and “Item 5 - Operating and Financial Review and Prospects”. These statements may be identified by the use of words like “plan”, “expect”, “aim”, believe”, “project”, “anticipate”, “intend”, “estimate”, “will”, “should”, “could” and similar expressions in connection with any discussion, expectation, or projection of future operating or financial performance, events or trends. In particular, these include statements about the Corporation’s strategy for growth, future performance or results of current sales and production, interest rates, foreign exchange rates, and the outcome of contingencies, such as acquisitions and/or legal proceedings and intellectual property issues.

Forward-looking statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Actual future results and trends may differ materially from historical results or those projected in any such forward-looking statements depending on a variety of factors, including, among other things, the factors discussed in this Annual Report under “Item 3.D - Risk Factors” and factors described in documents that the Corporation may furnish from time to time to the SEC. Except as required by law, the Corporation undertakes no obligation to update publicly or revise any forward-looking statements because of new information. Please refer to the forward-looking statements section at the beginning of this Annual Report.

MANAGEMENTS DISCUSSION AND ANALYSIS FOR THE FINANCIAL YEARS ENDED

NOVEMBER 30, 2013 AND 2012

The following Management’s Discussion and Analysis, or MD&A, provides Management’s point of view on the financial position of Theratechnologies Inc., on a consolidated basis, as at November 30, 2013 and November 30, 2012. It also provides a review of our performance by comparing the Company’s results of operations, on a consolidated basis, for the twelve-month period ended November 30, 2013, or Fiscal 2013, with the twelve-month period ended November 30 2012, or Fiscal 2012, and for Fiscal 2012 with the twelve-month period ended November 30, 2011, or Fiscal 2011. Unless otherwise indicated or unless the context requires otherwise, all references in this MD&A to “Theratechnologies”, the “Company”, the “Corporation”, “we”, “our”, “us” or similar terms refer to Theratechnologies Inc. and its subsidiaries on a consolidated basis. This MD&A is dated February 26, 2014 and should be read in conjunction with the audited consolidated financial statements and the notes thereto. All monetary amounts set forth in this MD&A are expressed in Canadian dollars, except where otherwise indicated. References to $ and C$ are to Canadian dollars and references to US$ are to U.S. dollars.

Except as otherwise indicated, the financial information contained in this MD&A and in our audited consolidated financial statements has been prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB. IFRIC refers to International Financial Reporting Interpretation Committee. The audited consolidated financial statements and MD&A have been reviewed by our Audit Committee and approved by our Board of Directors.

In this MD&A, the use of EGRIFTA™ refers to tesamorelin for the reduction of excess abdominal fat in HIV-infected patients with lipodystrophy regardless of the trade name used for such product in any particular territory. Tesamorelin refers to the use of tesamorelin for the potential treatment of other diseases. EGRIFTA® is our registered trademark in the United States and it is used in that country to commercialize tesamorelin for the reduction of excess abdominal fat in HIV-infected patients with lipodystrophy.

BUSINESS OVERVIEW

We are a specialty pharmaceutical company addressing unmet medical needs in metabolic disorders to promote healthy ageing and improved quality of life.

Our first product, EGRIFTA™ (tesamorelin for injection), was approved by the United States Food and Drug Administration, or FDA, in November 2010 and is, to date, the only approved therapy for the reduction of excess abdominal fat in HIV-infected patients with lipodystrophy. EGRIFTATM is currently marketed in the United States by EMD Serono, Inc., or EMD Serono, pursuant to a collaboration and licensing agreement executed in October 2008, as amended in April 2012, or the EMD Serono Agreement. EMD Serono launched EGRIFTA™ on January 10, 2011.

In order to expand the commercial distribution of EGRIFTA™, we have granted exclusive commercialization rights for it in other territories as follows: in December 2010 to an affiliate of sanofi, or sanofi, for Latin America, Africa and the Middle East; and in February 2012 to Actelion Pharmaceuticals Canada Inc., or Actelion, for Canada. We are responsible for the manufacture of EGRIFTA™ and its supply to EMD Serono, sanofi, and Actelion.

 

 

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We had also previously granted exclusive commercialization rights to Ferrer Internacional S.A., or Ferrer, for Europe, Russia, South Korea, Taiwan, Thailand and certain central Asian countries. However, following an unsuccessful application for the approval of EGRIFTATM in Europe, this agreement was terminated by mutual consent in April, 2013. In so doing, we re-acquired 100% of the commercialization rights of EGRIFTA™ in these markets where there are currently no approved treatments for lipodystrophy in HIV-infected patients available.

Our overriding business strategy in 2013 was to focus on EGRIFTA™ in order to become cash-flow neutral as soon as possible and we made solid progress. Our use of cash in operating activities was $7,744,000 in 2013 down significantly from $15,634,000 in the prior year. A restructuring of the business in late 2012 and the renegotiation of our lease in April 2013 were important positive factors. Despite the improvement, not everything went as planned. Manufacturing problems surfaced in the first quarter of 2013 that led to in inventory write-downs and other unplanned expenses as well as lower fourth-quarter sales to EMD Serono. A further disappointment was slower than hoped for progress on regulatory approvals in Brazil, Mexico and Canada.

On December 13, 2013, we entered into a termination and transfer agreement with EMD Serono, or EMD Serono Termination Agreement, to regain all rights under the EMD Serono Agreement. The closing of this transaction is expected to occur on May 1, 2014, or Closing Date. We also retained the services of inVentiv Health to establish and manage our operations in the United States. The services provided by inVentiv Health will include sales force, marketing support, patient communications, regulatory compliance, reimbursement and market access.

Regaining the US commercialization rights to EGRIFTA™ will have a significant impact on the nature of our business and, as a consequence, on our financial reporting after the Closing Date. Our revenues will be higher as they will represent the full proceeds of sales of EGRIFTA™ to wholesalers. Our expense will likewise expand to encompass all of the marketing and distribution expenses previously incurred by EMD Serono. We will have new financial obligations in the form of debt and royalties payable to EMD Serono, which we expect to pay from operating cash flows. Further information on the EMD Serono Termination Agreement can be found below under “Subsequent Events”.

Looking ahead, our biggest opportunity for value creation in 2014 lies in the US market. After regaining the US commercialization rights for EGRIFTA™ in May, we will move forward with a specialty pharmaceutical business model that is solely focused on our own product. All US activities will be aimed directly at elevating the importance of treating excess abdominal fat in HIV-infected patients with lipodystrophy, an indication unique to EGRIFTA™, for patients, health care providers and third-party payors. Our goal is to increase the patient base, which will ultimately lead to higher revenues and cash flow. We also plan to leverage our US commercial experience to enhance our worldwide partnership initiatives, helping us to drive performance and become more proactive and responsive to partners’ needs.

On February 14, 2014, we announced that we expected our inventory of EGRIFTA™ to be depleted in a matter of weeks due to a combination of manufacturing delays and issues observed during the production of new batches of EGRIFTA™. We further advised that the ensuing depletion of the inventory would result in a shortage of EGRIFTA™ and an eventual stock-out and that we were temporarily ceasing to manufacture EGRIFTA™. As of the date of this MD&A, we have not resumed the manufacture of EGRIFTA™ and are unable to determine a timeline to resume its manufacture and delivery. Resolving the EGRIFTA™ manufacturing problems and ensuring that we have a reliable source of supply are immediate priorities for the Company in 2014.

The paragraphs that follow provide more background information and details on the various aspects of our business in Fiscal 2013.

Commercial, Research and Development and Regulatory Activities

United States

EMD Serono began selling EGRIFTA™ in the United States in January 2011. We generate revenue from the supply of EGRIFTA™ to EMD Serono for re-sale and we receive royalties on their ultimate sales to pharmaceutical distributors. Details of our EGRIFTA™ revenue in 2013 can be found in the revenue discussion below.

EMD Serono is currently conducting two Phase 4 clinical trials with EGRIFTA™ in the United States in order to fulfil post approval commitments made to the FDA. The first trial is a long-term observational safety study for which we are responsible for 50% of the cost. The second study is to assess whether EGRIFTA™ increases the incidence or progression of diabetic retinopathy in diabetic HIV-infected patients with lipodystrophy and excess abdominal fat. For this trial, we are obligated to reimburse EMD Serono for the direct costs involved. Both of the Phase 4 clinical trials are under way and recruiting patients.

Our internal research and development activities in Fiscal 2013 were focused on the EGRIFTA™ manufacturing process. In January 2013, we encountered manufacturing problems and suspended production. A revised manufacturing process introduced in May gave rise to quality issues and we announced in September 2013 that we were reverting to the original FDA-approved manufacturing process and undertaking to evaluate changes that could increase overall cycle robustness. The manufacturing problems had a negative impact on revenues, most notably on sale of goods in the fourth quarter. New supplies of EGRIFTA™ became available in December 2013.

 

 

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Other R&D projects involving EGRIFTA™ were aimed at product improvements such as the preparation of a supplemental new drug application, or sNDA, providing for room-temperature storage of EGRIFTA™, which was filed by EMD Serono and approved by the FDA in January 2013.

Latin America, Africa and the Middle East

Pursuant to our distribution and licensing agreement with sanofi, or Sanofi Agreement, marketing authorization applications are currently in process in Brazil, Mexico, Argentina, Venezuela and Israel. The largest potential markets for EGRIFTA™ in Latin America are Brazil and Mexico; and sanofi is focusing its efforts on these two countries.

The regulatory review process in Brazil slowed in 2013 due to technical deficiencies identified by the Brazilian National Health Surveillance Agency, or ANVISA, at our third-party manufacturer in 2012. ANVISA performed a conformational audit in September 2013 in order to evaluate a series of corrective measures that were implemented to address the technical deficiencies and sanofi is currently waiting for ANVISA’s final report. If ANVISA’s concerns are satisfied, it is expected to issue a certificate of compliance with Brazil’s good manufacturing practices and the review of the clinical part of our marketing authorization application can resume. Based on the information presently available, we are not able to predict timelines for the final review by ANVISA of our marketing authorization application.

In Mexico, although we were expecting a decision in the fourth quarter of 2013, sanofi was recently in communication with the Mexican regulatory authority and is currently awaiting their comments on the EGRIFTA™ file. As such, and based on the information presently available, we are not able to predict timelines for the Mexican application.

In Israel and Venezuela the marketing authorization applications have all been delayed because of missing documents and, in Argentina, the authorities have asked that our application be amended and resubmitted. Given the relatively modest commercial importance of these markets, sanofi focused its efforts on Brazil and Mexico in 2013.

An application had also been filed by sanofi in Colombia which was rejected by the authorities in June of 2013 on the basis that additional long-term safety and efficacy studies were deemed to be needed. No decision has been made by sanofi on whether or not to appeal the Colombian decision.

Europe

Throughout 2013 we consulted with key physicians, patient groups, and regulatory experts in Europe and subsequently met with regulators in certain jurisdictions to evaluate our prospects for acceptance should we decide to re-file for approval. The result of these consultations and meetings led us to believe that we do not have a reasonable likelihood of being approved in Europe without obtaining additional clinical data on EGRIFTA™. Therefore, we have decided to seek commercial partners who can help us to pursue other options in the short term. Alternatives include filing only in certain countries and dispensing EGRIFTA™ by way of named patient programs.

Canada

On March 4, 2013, Health Canada’s Therapeutic Products Directorate, or TPD, issued a Notice of Non-compliance-withdrawal for our New Drug submission, or NDS, seeking approval for EGRIFTA™ in Canada. On March 25, 2013, we announced the filing of a request for reconsideration of the decision made by TPD and on August 23, 2013 we presented our arguments before a scientific advisory committee established for that purpose by Health Canada. On November 1, 2013, we announced that Health Canada agreed to resume review of our NDS and rescind the previously issued notice of Non-compliance-withdrawal. We are currently pursuing our discussions with TPD but we are not able to predict timelines for a decision on our NDS.

Renegotiation of Corporate Lease

On April 2, 2013, we entered into an amended lease agreement for our corporate headquarters, which resulted in an 85% annual reduction in lease-related cash outlays and shortened the remaining term of the lease from eight years to five years. Further information on the amended lease agreement, can be found below under “Contractual Obligations”.

Other Developments

On January 14, 2013, we announced our intention to voluntarily delist our common shares from the NASDAQ Global Market and the delisting took effect on February 5, 2013. Our common shares continue to trade on the Toronto Stock Exchange under the symbol “TH”.

On January 29 2013, we announced that the United States Patent and Trademark Office, or USPTO, issued a composition of matter patent for TH1173, our second-generation GRF peptide, providing scheduled protection until 2032.

 

 

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On February 24, 2012, the Superior Court of Québec authorized 121851 Canada Inc. to institute a class action against the Company, a director and a former executive officer and on March 20, 2012, we filed a motion seeking permission to appeal this judgement with the Court of Appeal of Québec. The hearing took place on January 24, 2013 and our motion was dismissed by the Court on July 17, 2013. An application for leave to appeal the decision issued by the Court of Appeal was filed in November 2013 with the Supreme Court of Canada. Such application was approved by the Supreme Court of Canada on February 20, 2014.

In May 2013, the same plaintiff instituted a second class action based on the same facts and seeking the same conclusion as the first motion except that damages are sought under the Civil Code of Québec instead of the Securities Act (Québec). The parties have agreed to stay this motion until a final decision is issued under the first motion. We intend to contest any class action that the shareholders’ representative could institute since we consider that it would be without merit. Further information on the class action can be found below under “Contingent Liability”.

On July 10, 2013, we exercised our option to acquire 100% of certain melanotransferrin technology and the 50% interest that we did not already own in the short-peptide mimics of melanotransferrin that we discovered as a participant in a discovery and collaboration agreement entered into in November 2010 with Université du Québec à Montréal, Gestion Valeo and Transfert Plus L.P. To date we have assessed the in vivo biologic efficacy of these peptides and the results obtained lead us to believe that they have certain anti-tumoral characteristics. We need to conduct further research and development on these peptides, including toxicology and pharmacology studies. This work will only be done when we resume research and development activities.

We were recently informed that our patent for tesamorelin in Brazil, which was to be in effect until 2019, is being judicially challenged by the Brazilian patent office. If the challenge is successful we could lose our patent protection or see the end-date of the patent protection reduced from 2019 to 2016.

Selected Annual Information

Years ended November 30

(in thousands of Canadian dollars, except per share amounts)

     2013        2012        2011  

Revenue

       $7,553           $13,567           $14,928   

Research and development expenses, net of tax credits

       $7,371           $6,341           $10,992   

General and Administrative expenses

       $3,815           $5,462           $10,823   

Restructuring costs

       $(3,111)           $10,702           $716   

Loss from operating activities

       $(4,483)           $(14,846)           $(18,768)   

Net finance income

       $454           $911           $966   

Net loss

       $(4,055)           $(13,940)           $(17,730)   

Basic and diluted loss per share

       $(0.07)           $(0.23)           $(0.29)   
              

At November 30

(in thousands of Canadian dollars)

     2013        2012        2011  

Cash and current and non-current bonds

       $12,353           $20,503           $36,787   

Total assets

       $24,844           $36,332           $52,873   

Total share capital

       $280,872           $280,872           $280,488   

Total equity

       $18,528           $22,670           $36,343   

Operating Results - twelve months ended November 30, 2013 compared to twelve months ended November 30, 2012

 

 

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Revenue

Our revenues in both years were mainly sales of EGRIFTA™ to EMD Serono for re-sale, royalties received from EMD Serono on U.S. sales to customers, and research services, which include milestone payments and the amortization of the initial payment received upon the closing of the agreement with EMD Serono. Consolidated revenue for the twelve months ended November 30, 2013 amounted to $7,553,000 compared to $13,567,000 in Fiscal 2012.

 

(in thousands of Canadian dollars)    2013      2012  

Sale of goods

     $2,544         $5,235   

Upfront and milestone payments

     $1,710         $4,077   

Royalties and license fees

     $3,299         $4,255   

Revenue

                     $7,553                         $13,567   

Revenue generated from sale of goods amounted to $2,544,000 in the twelve-month period ended November 30, 2013 compared to $5,235,000 in Fiscal 2012, reflecting lower shipments to EMD Serono and a lower selling price in Fiscal 2013.

The lower level of shipments was largely due to reductions in EMD Serono’s inventory as well as to the manufacturing problems encountered during the year. Having resumed shipments to EMD Serono early in the first quarter of fiscal 2014, future shipments are expected to track patient sales over the long term but they can vary significantly in the short term as a function of EMD Serono’s procurement policies.

The lower selling price in 2013 was the result of the introduction of the new single-vial presentation of EGRIFTA™ in October 2012. While the EGRIFTA™ selling price is now lower than in previous years, our markup in percentage terms remains unchanged.

Royalties, which are almost entirely derived from the sales of EGRIFTA™, were $3,299,000 in Fiscal 2013 compared to $4,255,000 in Fiscal 2012. The royalties reported in Fiscal 2012 are for the 14-month period from October 1, 2011 to November 30, 2012 as they include royalties actually received in the 12 months ended September 30, 2012 as well as an amount of $699,000 based on management’s estimate of the royalties earned on EGRIFTA™ sales in October and November 2012. The supply shortages in the fourth quarter of Fiscal 2013 also had a negative impact on royalties.

Revenue also includes the amortization of the initial payment of $27,097,000 received upon the closing of the EMD Serono Agreement. For the twelve-month period ended November 30, 2013, $1,710,000 was recognized as revenue related to the initial payment, compared to $4,077,000 in Fiscal 2012. The amortization amounts are adjusted periodically to allow sufficient time for the development work required under the EMD Serono Agreement that has yet to be completed. At November 30, 2013, the remaining deferred revenue related to this transaction recorded on the consolidated statement of financial position amounted to $2,771,000.

Cost of Sales

For the twelve months ended November 30, 2013, the cost of sales was $3,711,000 compared to $5,056,000 in Fiscal 2012. The cost of sales is made up of cost of goods sold and unallocated production costs. The cost of goods sold component in 2013 amounted to $2,262,000 compared to $4,711,000 in the prior year, reflecting lower sale of goods in Fiscal 2013 as described above. Unallocated production costs were $1,449,000 in Fiscal 2013 compared to $345,000 in the prior year due largely to inventory write downs and other costs associated with the manufacturing problems experienced in 2013.

R&D Expenses

R&D expenses, net of tax credits, amounted to $7,371,000 in the twelve months ended November 30, 2013 compared to $6,341,000 in Fiscal 2012. R&D expenses include our share of expenses for the two Phase 4 clinical trials currently being conducted by EMD Serono. We are responsible for all of the costs associated with the diabetic retinopathy study, which amounted to $3,005,000 in Fiscal 2013 compared to $1,502,000 in the prior year. Our fifty percent share of the long-term safety study was $654,000 in Fiscal 2013 compared to $117,000 in the prior year. R&D expenses in 2013 also included costs associated with our project aimed at improving the manufacturing process for EGRIFTA™, while those of 2012 included the development costs of TH1173 and a new formulation of EGRIFTA™. The remaining R&D expenses in both years are mainly costs associated with helping our commercial partners to pursue regulatory approvals in their respective jurisdictions.

Selling and Market Development Expenses

Selling and market development expenses amounted to $250,000 for the twelve months ended November 30, 2013, compared to $852,000 in Fiscal 2012, reflecting cost savings from restructuring initiatives in Fiscal 2012.

 

 

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General and Administrative Expenses

General and administrative expenses amounted to $3,815,000 in the twelve months ended November 30, 2013 compared to $5,462,000 in Fiscal 2012. The expenses in 2013 were lower largely as a result of the restructuring initiatives in 2012.

Restructuring Costs

In Fiscal 2013, we recovered previously expensed restructuring costs in the amount of $3,111,000. This was largely as a result of the lease amendment agreement entered into in April 2013, which eliminated the remaining $3,133,000 of an onerous lease provision. The onerous lease provision was originally established in the amount of $4,055,000 as part of the 2012 restructuring initiatives and was the principal element of the $6,176,000 in restructuring costs incurred in the first nine months of that year.

Restructuring costs, which include provisions and write-downs, are described in more detail in note 20 (b) “Other information — Restructuring costs” of our audited consolidated financial statements for the years ended November 30, 2013, 2012 and 2011.

Net Financial Income

Finance income for the twelve months ended November 30, 2013 was $541,000 compared to $890,000 in Fiscal 2012. Interest revenue has trended lower due to a gradual decline in the portfolio size as investments were liquidated to fund operations.

Finance costs for the twelve months ended November 30, 2013 were $87,000 compared to a gain of $21,000 in Fiscal 2012, which resulted from favorable foreign exchange fluctuations.

Net Loss

Taking into account the revenue and expense variations described above, we recorded a net loss of $4,055,000 or $0.07 per share in the twelve months ended November 30, 2013 compared to a net loss of $13,940,000 or $0.23 per share in Fiscal 2012.

Fourth Quarter Comparison

Consolidated revenue for the three months ended November 30, 2013 amounted to $1,246,000 compared to $3,899,000 for the comparable period of 2012.

 

(in thousands of Canadian dollars)                 2013                   2012  

 

Sale of goods

     $311         $1,375   

 

Upfront and milestone payments

     $320         $868   

 

Royalties and license fees

     $615         $1,656   

 

Revenue

     $1,246         $3,899   

Revenue generated from the sale of goods for the three months ended November 30, 2013 was $311,000 compared to $1,375,000 in the comparable period in Fiscal 2012. The decline reflects lower shipments to EMD Serono linked to the manufacturing problems encountered in Fiscal 2013.

Revenue related to the amortization of the initial payment received upon the closing of the EMD Serono Agreement was $320,000 for the three-month period ended November 30, 2013, compared to $868,000 in the comparable period of Fiscal 2012. The amortization amounts are adjusted periodically to allow sufficient time for the development work required under the EMD Serono Agreement that has yet to be completed.

Royalties were $615,000 in the three months ended November 30, 2013, compared to $1,656,000 in the comparable period of Fiscal 2012. The royalties reported for the fourth quarter of Fiscal 2012 included royalties received in the three months ended September 30, 2012 as well as an amount of $699,000 based on management’s estimate of the royalties earned on EGRIFTA™ sales in October and November 2012. The supply shortage in the fourth quarter of Fiscal 2013 had a negative impact on royalties in that year.

The cost of sales for the three months ended November 30, 2013 was $1,155,000 compared to $1,323,000 in the comparable period of Fiscal 2012. The cost of sales is made up of cost of goods sold and unallocated production costs. The cost of goods sold component for the three months ended November 30, 2013 was $322,000 compared to $1,288,000 in the comparable period of Fiscal 2012, reflecting lower sale of goods in 2013 as described above. Unallocated production costs were $833,000 in the three months ended November 30, 2013 compared to $35,000 in the prior year period, mainly due to inventory write downs and other costs associated with the manufacturing problems experienced during the period.

 

 

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R&D expenses, net of tax credits, amounted to $1,547,000 in the three months ended November 30, 2013 compared to $1,894,000 in the comparable period of Fiscal 2012. R&D expenses include our share of expenses for the two Phase 4 clinical trials currently being conducted by EMD Serono. We are responsible for all of the costs associated with the diabetic retinopathy study, which amounted to $893,000 in the three months ended November 30, 2013 compared to $404,000 in the comparable period of 2012. Our fifty percent share of the long-term safety study was $133,000 in the fourth quarter of Fiscal 2013 compared to $82,000 in the prior-year period.

Selling and market development expenses amounted to $60,000 for the three months ended November 30, 2013, compared to $116,000 for the comparable period of Fiscal 2012, reflecting cost savings from restructuring initiatives in Fiscal 2012.

General and administrative expenses amounted to $1,201,000 in the three months ended November 30, 2013 compared to $556,000 in the comparable period of Fiscal 2012. The 2013 expenses include costs associated with the EMD Serono Termination Agreement. The expenses in 2012 were lower as a result of the suspension of executive bonuses in that year.

There was a recovery of previously expensed restructuring costs amounting to $18,000 in the three months ended November 30, 2013. The restructuring costs in the comparable period of Fiscal 2012 were $4,526,000, which resulted from restructuring activities at that time.

Net financial income for the three months ended November 30, 2013 was $100,000 compared to $166,000 in the comparable period of Fiscal 2012. The decline was principally due to lower interest revenues related to a gradual decline in the portfolio size as investments were liquidated to fund operations.

Taking into account the revenue and expense variations described above, we recorded a net loss of $2,598,000 or $0.04 per share in the three months ended November 30, 2013 compared to a net loss of $4,341,000 or $0.07 per share in the comparable period of Fiscal 2012.

In the three months ended November 30, 2013, the use of cash in operating activities amounted to $1,404,000 compared to $3,756,000 in the comparable period of Fiscal 2012.

Operating Results - twelve months ended November 30, 2012 compared to twelve months ended November 30, 2011

Revenue

Our revenues are mainly sales of EGRIFTA™ to EMD Serono for re-sale, royalties received from EMD Serono on U.S. sales to customers, and research services, which include milestone payments and the amortization of the initial payment received upon the closing of the agreement with EMD Serono. Consolidated revenue for the twelve months ended November 30, 2012 amounted to $13,567,000 compared to $14,928,000 in Fiscal 2011.

 

(in thousands of Canadian dollars)    2012      2011  

 

Sale of goods

     $5,235         $8,351   

 

Upfront and milestone payments

     $4,077         $5,134   

 

Royalties and license fees

     $4,255         $1,443   

 

Revenue

                        $13,567                         $14,928   

Revenue generated from sale of goods amounted to $5,235,000 in the twelve-month period ended November 30, 2012 compared to $8,351,000 in Fiscal 2011. EGRIFTA™ was first offered for sale to the public in January 2011 and our sales in Fiscal 2011 reflect the buildup of stocks needed by EMD Serono for the product launch in the U.S. market. Revenues from sale of goods in Fiscal 2012 were more closely tied to actual sales to patients.

Revenue also includes the amortization of the initial payment of $27,097,000 received upon the closing of the EMD Serono Agreement. For the twelve-month period ended November 30, 2012, $4,077,000 was recognized as revenue related to the initial payment, compared to $5,134,000 in Fiscal 2011. The amortization amount in Fiscal 2012 reflects an extension made to the service period attributed to the initial payment in order to allow sufficient time for work that has yet to be completed. At November 30, 2012, the remaining deferred revenue related to this transaction recorded on the consolidated statement of financial position amounted to $4,481,000.

 

 

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Royalties, which are almost entirely derived from the sales of EGRIFTA™, were $4,255,000 in Fiscal 2012 compared to $1,443,000 in Fiscal 2011. Most of the increase is due to growth in EGRIFTA™ sales, which were up significantly in Fiscal 2012 compared to Fiscal 2011. In addition, the royalties reported in Fiscal 2012 include an amount of $699,000 based on management’s estimate of the royalties earned on EGRIFTA™ sales in October 2012 and November 2012, for which the comparable amounts from last year were only recorded in the first quarter of Fiscal 2012.

Cost of Sales

For the twelve months ended November 30, 2012, the cost of sales of EGRIFTA™ amounted to $5,056,000 compared to $9,146,000 in Fiscal 2011. The cost of sales is made up of cost of goods sold and unallocated production costs. The cost of goods sold component in 2012 amounted to $4,711,000 compared to $8,040,000 in the prior year, reflecting lower sale of goods in Fiscal 2013 as described above. Unallocated production costs were $345,000 in Fiscal 2013 compared to $1,106,000 in the prior year.

R&D Expenses

R&D expenses, net of tax credits, amounted to $6,341,000 in the twelve months ended November 30, 2012 compared to $10,992,000 in Fiscal 2011. The significant reduction in R&D expenses is largely due to the adoption of a more focused business plan and the related restructuring initiatives. R&D expenses in 2012 include our share of expenses for the two Phase 4 clinical trials currently being conducted by EMD Serono. We are responsible for all of the costs associated with the diabetic retinopathy study, which amounted to $1,502,000 in Fiscal 2012. Our fifty percent share of the long-term safety study was $117,000 in the Fiscal 2012. There were no expenses related to the two Phase 4 trials in Fiscal 2011. Other R&D expenses in 2012 were associated with pursuing the development of TH1173 and a new formulation of EGRIFTA™, and helping our commercial partners to pursue regulatory approvals in their respective jurisdictions.

R&D expenses in Fiscal 2011 were related to the Phase 2 clinical trial evaluating tesamorelin in muscle wasting associated with COPD, to the work on a new formulation and a new presentation of EGRIFTA™ and to the discovery and development of novel GRF peptides, including TH1173. R&D expenses in Fiscal 2011 also included the cost of filing the NDS in Canada, all regulatory and clinical activities to support our three commercial partners, and follow-up on post-approval commitments made to the FDA.

Selling and Market Development Expenses

Selling and market development expenses amounted to $852,000 for the twelve months ended November 30, 2012, compared to $2,019,000 in Fiscal 2011, reflecting cost savings from restructuring initiatives in Fiscal 2012. With EGRIFTA™ licensing agreements now in place in major markets, the ongoing selling and market development expenses are reduced to the costs of managing relationships with our commercial partners and certain selling expenses such as insurance coverage for inventories.

General and Administrative Expenses

General and administrative expenses amounted to $5,462,000 in the twelve months ended November 30, 2012 compared to $10,823,000 in Fiscal 2011. The expenses in 2012 were considerably lower as a result of restructurings, the departure of the former President and Chief Executive Officer and the suspension of executive bonuses. In addition, the relatively high expenses in 2011 included the costs associated with the planned public offering of our common shares, the cost of listing our common shares on NASDAQ, as well as costs related to the change in leadership of the Company in that year.

Restructuring Costs

Restructuring costs amounted to $10,702,000 in the twelve months ended November 30, 2012 compared to $716,000 in Fiscal 2011. Early in Fiscal 2012, we took steps to narrow the focus of our business by concentrating our efforts on EGRIFTA™ and on developing TH1173. The related restructuring costs were $6,176,000, which were mainly incurred in the first quarter. We announced further revisions to our business plan and related restructuring activities aimed at accelerating the process of becoming cash neutral in October 2012. The second restructuring resulted in fourth-quarter costs of $4,526,000.

In Fiscal 2011, a restructuring was undertaken in June, following a re-evaluation of our R&D business model. The objective was to rely more on external partners in both the private and public sectors in order to bring our R&D projects forward. As a result, we incurred restructuring costs of $716,000 in the third quarter.

Restructuring costs, which include provisions and write-downs, are described in more detail in note 20 (b) “Other Information — Restructuring costs” of our audited consolidated financial statements for the years ended November 30, 2012, 2011 and 2010.

Net Financial Income

Finance income for the twelve months ended November 30, 2012 was $890,000 compared to $1,602,000 in Fiscal 2011. Interest revenue has trended lower due to a gradual decline in the portfolio size as investments were liquidated to fund operations.

 

 

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Finance costs for the twelve months ended November 30, 2012 were actually a gain of $21,000 as a result of favorable foreign exchange fluctuations. The finance costs of $636,000 in Fiscal 2011 included a foreign exchange loss incurred in the first quarter, upon receipt and translation to Canadian dollars of a US$25,000,000 milestone payment from EMD Serono. The milestone payment had originally been recognized as revenue and translated into Canadian dollars at the more favorable exchange rate in effect at the end of Fiscal 2010, resulting in an exchange gain of $511,000 in that period.

Net Loss

Taking into account the revenue and expense variations described above, we recorded a net loss of $13,940,000 or $0.23 per share in the twelve months ended November 30, 2012 compared to a net loss of $17,730,000 or $0.29 per share in Fiscal 2011.

Quarterly Financial Information

The following table is a summary of our unaudited consolidated operating results presented in accordance with IFRS for the last eight quarters.

(In thousands of dollars, except per share amounts)

      2013      2012  
         Q4               Q3              Q2              Q1              Q4              Q3             Q2              Q1  

 

Sale of goods

     $311        $786         $996         $451         $1,375         $1,725        $856         $1,279   

 

Upfront and milestone payments

     $320        $463         $463         $464         $868         $1,070        $1,069         $1,070   

 

Royalties and license fees

     $615        $928         $872         $884         $1,656         $1,027        $731         $841   

Revenue

  

 

 

 

$1,246

 

  

    $2,177         $2,331         $1,799         $3,899         $3,822        $2,656         $3,190   

Net (loss) profit

  

 

 

 

$(2,598)

 

  

    $(1,935)         $(1,382)         $1,860         $(4,341)         $(698)        $(1,417)         $(7,484)   

Basic and diluted (loss) profit per share

  

 

 

 

$(0.04)

 

  

    $(0.03)         $(0.02)         $0.03         $(0.07)         $(0.01)        $(0.02)         $(0.12)   

Revenue generated from sale of goods declined in Fiscal 2013, reflecting lower shipments to EMD Serono and a lower selling price. The lower level of shipments was largely due to reductions in EMD Serono’s inventory as well as to the supply shortage, which occurred in the fourth quarter as a result of the manufacturing problems encountered earlier in the year. The lower selling price in 2013 was the result of the introduction of the new single-vial presentation of EGRIFTA™ in October 2012. While the EGRIFTA™ selling price is now lower than in previous years, our markup in percentage terms remains unchanged.

The royalties and license fees reported for the fourth quarter of Fiscal 2012 are for the 5-month period from July 1, 2012 to November 30, 2012 as they include royalties actually received in the three months ended September 30, 2012 as well as an amount of $699,000 based on management’s estimate of the royalties earned on EGRIFTA™ sales in October and November 2012.

The net losses reported in the first and fourth quarters of Fiscal 2012 include restructuring costs of $6,176,000 and $4,526,000 respectively.

The net profit in the first quarter of 2013 resulted from the elimination of an onerous lease provision in the amount of $3,093,000, which was no longer required following the signing of an amended lease agreement with our landlord.

Liquidity and Capital Resources

Our objective in managing capital is to ensure a sufficient liquidity position to finance our business activities. Prior to Fiscal 2011, we funded our activities by relying primarily on public offerings of common shares in Canada and private placements of our common shares as well as on up-front payments and milestone payments primarily associated with the EMD Serono Agreement. When possible, we optimize our liquidity position using non-dilutive sources, including investment tax credits, grants and interest income. With the market launch of EGRIFTA™ in Fiscal 2011, we began to receive additional revenues in the form of product sales and royalties. We believe the Company has sufficient cash and bonds on hand at November 30, 2013 to carry out our planned activities and meet our liabilities as they come due for the next 12 months.

 

 

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For the twelve months ended November 30, 2013, the use of cash in operating activities was $7,744,000 compared to $15,634,000 in Fiscal 2012.

The large decrease in the use of cash in Fiscal 2013 reflects the reduction in the net loss from $13,940,000 in Fiscal 2012 to $4,055,000 in Fiscal 2013. Inventory decreased by $676,000 in Fiscal 2013 compared to an increase of $2,864,000 in Fiscal 2012. Following a buildup of inventory in Fiscal 2011 and the first six months of Fiscal 2012 related to the market launch of EGRIFTA™, inventory levels stabilized and started to decrease. Accounts payable and accrued liabilities have also stabilized. The cash flows in both 2013 and 2012 were significantly impacted by provisions, which decreased by $5,626,000 in Fiscal 2013 of which $2,498,000 was disbursed in cash. This compares to an increase in the provision of $5,574,000 in Fiscal 2012, which included substantial restructuring provisions for which cash was not disbursed in the period. Largely as a result of the effect of restructuring provisions and the stabilization of inventory levels, changes in operating assets and liabilities used $3,458,000 of cash in Fiscal 2013, compared to $1,427,000 of cash generated in Fiscal 2012.

The Company’s share purchase plan, or Plan, was discontinued in March 2012 and consequently no common share subscriptions were received in connection with the Plan in Fiscal 2013 and Fiscal 2012 (7,837 common shares for $34,000 in Fiscal 2011).

No stock options were exercised in Fiscal 2013. In Fiscal 2012, 145,337 stock options were exercised for cash consideration of $243,000 and 344,665 stock options were exercised for cash consideration of $668,000 in Fiscal 2011).

As at November 30, 2013, cash and bonds, and tax credits and grants receivable amounted to $12,353,000 compared to a liquidity position of $20,924,000 ($20,503,000 in cash and bonds, and tax credits and grants receivable of $421,000) at the end of Fiscal 2012. We invest our available cash in highly liquid fixed income instruments from governmental, municipal and paragovernmental bodies ($11,386,000 November 30, 2013).

Apart from our $3,800,000 of unused credit facilities, we do not have any additional arrangements for external debt financings. We may seek additional capital through the incurrence of debt, the issuance of equity or other financing alternatives.

Contractual Obligations

Commitments

The following table lists as at November 30, 2013 information with respect to the Company’s known contractual obligations.

  (In thousands of Canadian dollars)

Contractual Obligations            Total                 Less than 1  
Year
         1 to 3 Years              4 to 5 Years              More than    
5 Years
 

Long Term Debt Obligations

     --                   --                   --                   --                   --             

Capital Lease Obligations

     --                   --                   --                   --                   --             

Operating Lease Obligations

     $414               $90               $191               $133               --             

Purchase Obligations

     --                   --                   --                   --                   --             

Other Long-Term Liabilities

     --                   --                   --                   --                   --             

Total

     $414               $90               $191               $133               --             

Lease Amendment Agreement

Effective April 2, 2013, the Company amended its lease agreement with its landlord, which resulted in an 85% reduction in annual cash outlays for rent and shortens the remaining term of the lease from eight years to five years. The floor space occupied by the Company is reduced from 36,400 sq. ft. to 5,000 sq. ft. Consequently, management reviewed its estimates of the onerous lease provision and a reversal in the amount of $3,133,000 has been recorded in 2013.

Long-Term Procurement Agreements

We have long-term procurement agreements with third-party suppliers in connection with the commercialization of EGRIFTA™. As at November 30, 2013, we had outstanding purchase orders and minimum payments required under these agreements amounting to $3,128,000 ($2,724,000 in 2012) for the manufacture of EGRIFTA™.

 

 

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Credit Facilities

We have a $1,800,000 revolving credit facility, bearing interest at prime plus 0.5%. Under the terms of the revolving credit facility, the market value of investments held must always be equivalent to 150% of amounts drawn under the facility. If the market value falls below $7,000,000, we will provide the bank with a first ranking movable hypothec (security interest) of $1,850,000 on securities judged satisfactory by the bank.

We also have a line of net risk for derivative instruments up to a maximum of $2,000,000.

As at November 30, 2013 and 2012, we did not have any borrowings outstanding under these credit facilities.

Post-Approval Commitments

In connection with its approval of EGRIFTA™, the FDA has required the following three post-approval commitments:

 

   

to develop a single vial formulation of EGRIFTA™ (the development of a new presentation of the same formulation);

 

   

to conduct a long-term observational safety study using EGRIFTA™; and

 

   

to conduct a Phase 4 clinical trial using EGRIFTA™.

We have developed a new presentation of EGRIFTA™ which complies with the first of the FDA’s post-approval requirements and it was launched by EMD Serono in October 2012.

The long-term observational safety study is to evaluate the safety of long-term administration of EGRIFTA™ and is in the recruitment phase. We have agreed to share the cost of this study equally with EMD Serono and estimate that our share of the cost could amount to an average of $1,300,000 per year, over a fifteen-year period. Expenditures to date amount to $771,000.

The Phase 4 clinical trial is to assess whether EGRIFTA™ increases the incidence or progression of diabetic retinopathy in diabetic HIV-infected patients with lipodystrophy and excess abdominal fat. EMD Serono is responsible for executing the trial and is to be reimbursed by us for the direct costs involved. The trial is in the recruitment phase. The FDA-approved protocol for the trial calls for patients to inject themselves daily with either EGRIFTA™ or placebo over a three-year treatment period. We estimate that the trial could cost approximately $20,000,000. Expenditures to date amount to $4,507,000.

Contingent Liability

A motion to authorize the institution of a class action was originally filed in July 2010 in the Superior Court of Québec, District of Montreal, entitled 121851 Canada Inc. v. Theratechnologies Inc. et al., Number 500-06-000515-102. The complaint alleged that we, a director and a former executive officer violated the secondary market liability provisions of the Securities Act (Québec) by failing to disclose a material change relating to the administration of EGRIFTATM. The plaintiff sought damages on behalf of a class of persons who were shareholders at May 21, 2010 and who sold their common shares on May 25 or 26, 2010. On February 24, 2012, the Superior Court of Québec authorized 121851 Canada Inc. to institute a class action against us, a director and a former executive officer. On March 20, 2012, we filed a motion seeking permission to appeal this judgement with the Court of Appeal of Québec, District of Montreal, Number 500-09-022519-128, and the hearing took place on January 24, 2013. Our motion was dismissed by the Court on July 17, 2013. An application for leave to appeal the decision issued by the Court of Appeal was filed in November 2013 with the Supreme Court of Canada. Such application was approved by the Supreme Court of Canada on February 20, 2014.

In addition, 121851 Canada Inc. filed a new motion in the Superior Court of Québec, district of Montréal, in May 2013, to institute a class action against the Company, a director and a former executive officer. The second motion is based on the same facts and seeks the same conclusion as the first motion except that damages are sought under the Civil Code of Québec instead of the Securities Act (Québec). The parties have agreed to stay this motion until a final decision is issued under the first motion.

We intend to contest these class actions and consider them to be without merit. The Company has subscribed to insurance covering its potential liability and the potential liability of its directors and officers in the performance of all their duties for the Company.

Off-Balance Sheet Arrangements

We were not involved in any off-balance sheet arrangements for the year ended November 30, 2013, with the exception of the lease of our headquarters as described above.

 

 

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Subsequent Events

EGRIFTA™ Manufacturing

On February 14, 2014, we announced that we expected our inventory of EGRIFTA™ to be depleted in a matter of weeks due to a combination of manufacturing delays and issues observed during the production of new batches of EGRIFTA™. We further advised that the ensuing depletion of the inventory would result in a shortage of EGRIFTA™ and an eventual stock-out and that we were temporarily ceasing to manufacture EGRIFTA™. As of the date of this MD&A, we have not resumed the manufacture of EGRIFTA™ and are unable to determine a timeline to resume its manufacture and delivery. Resolving the EGRIFTA™ manufacturing problems and ensuring that we have a reliable source of supply are immediate priorities for the Company in 2014.

Commercialization Rights for EGRIFTA™ in the United States

On December 13, 2013, we announced that we had reached an agreement with EMD Serono to regain all rights under the collaboration and licensing agreement with EMD Serono, or EMD Serono Agreement, including the commercialization rights for EGRIFTA™ in the United States.

Under the terms of the termination and transfer agreement entered into with EMD Serono, or EMD Serono Termination Agreement, we agreed to pay an early termination fee of USD $20,000,000, or Early Termination Fee, evenly over a five-year period starting on the first anniversary of the closing date. We also agreed to pay EMD Serono an increasing royalty, or Royalties, based on annual net sales. The Royalties will be paid until a cumulative aggregate amount is reached or until January 1, 2024, the first of these events to occur.

In order to secure the payment of the Early Termination Fee, we agreed to grant EMD Serono a security interest on its present and future corporeal and incorporeal movable property related to EGRIFTA™ until such time as the amount of USD $20,000,000 has been reimbursed in full to EMD Serono. Thereafter, we and EMD Serono agreed to reduce the security interest to all present and future corporeal and incorporeal movable property related to EGRIFTA™ in the United States only to secure the payment of the Royalties.

The EMD Serono Termination Agreement provides that from and after the closing date, we will be responsible for the conduct of all regulatory and commercialization activities in the United States, including the conduct, and all of the costs, of the long-term observational safety study and the Phase 4 clinical trial mandated by the FDA. Also, as a consequence of the EMD Serono Termination Agreement, we will no longer be obligated to develop a new formulation of EGRIFTA™ and the related, remaining balance in our deferred revenue account will be included in revenue on the closing date.

In addition, the EMD Serono Termination Agreement provides that in the event there occurs a change of control of the Company within eighteen (18) months after the closing date, EMD Serono has the option to accelerate the full payment of the Early Termination Fee and to seek the payment of an amount intended to equal the net present value of the maximum future Royalties. If such change of control occurs after eighteen (18) months after the closing date, EMD Serono has the option to accelerate the payment of all unpaid Early Termination Fee.

We also retained the services of inVentiv Health to establish and manage our operations in the United States. The services provided by inVentiv Health will include sales force, marketing support, patient communications, regulatory compliance, reimbursement and market access. All decisions regarding the commercialization of EGRIFTA™ will be made from our head office.

The closing of the transaction is expected to occur on May 1, 2014. Until the closing date, the EMD Serono Agreement will continue to apply.

Stock Option Plan

Between December 1, 2013 and February 24, 2014, 122,668 options were forfeited and expired at a weighted exercise average price of $3.12 per share. On December 13, 2013, the Company granted 125,000 options at an exercise price of $0.50 per share.

Deferred Stock Unit Plan

In December 2013, the two cash settled forward stock contracts (note 16 (ii) of the consolidated financial statements) were amended to expire in December 2014.

Financial Risk Management

This section provides disclosure relating to the nature and extent of our exposure to risks arising from financial instruments, including credit risk, liquidity risk, currency risk and interest rate risk, and how we manage those risks.

 

 

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Credit Risk

Credit risk is the risk of a loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. We regularly monitor credit risk exposure and take steps to mitigate the likelihood of this exposure resulting in losses. Our exposure to credit risk currently relates to accounts receivable from only one customer (see note 5 of the audited consolidated financial statements) and derivative financial assets which it manages by dealing with highly-rated Canadian financial institutions.

Included in the consolidated statement of financial position are trade receivables of $445,000 (2012 - $1,045,000), all of which were aged under 60 days. There was no bad debt expense for the year ended November 30, 2013 (November 30, 2012 - nil, November 30, 2011 — nil). Financial instruments other than cash and trade and other receivables that potentially subject the Company to significant credit risk consist principally of bonds. We invest our available cash in highly liquid fixed income instruments from governmental, paragovernmental and municipal bodies ($11,386,000 as at November 30, 2013; $18,991,000 as at November 30, 2012). As at November 30, 2013, we believe we were not exposed to any significant credit risk for the carrying amount of the bonds.

Liquidity Risk

Liquidity risk is the risk that we will not be able to meet our financial obligations as they become due. We manage liquidity risk through the management of our capital structure, as outlined under “Liquidity and Capital Resources”. We also manage liquidity risk by continuously monitoring actual and projected cash flows. The Board of Directors and/or the Audit Committee reviews and approves our operating and capital budgets, as well as any material transactions out of the ordinary course of business.

We have adopted an investment policy in respect of the safety and preservation of capital designed to ensure that our liquidity needs are met. The instruments are selected with regard to the expected timing of expenditures and prevailing interest rates.

The required payments on the contractual maturities of financial liabilities, as well as the payments required under the terms of the operating lease, as at November 30, 2013, are presented in notes 18, 21 and 24 of the audited consolidated financial statements.

Currency Risk

We are exposed to financial risk related to the fluctuation of foreign exchange rates and the degree of volatility of those rates. Currency risk is limited to the portion of our business transactions denominated in currencies other than the Canadian dollar, primarily revenues from milestone payments, sale of goods, royalties and expenses incurred in U.S. dollars, euros and pounds sterling, or GBP.

We manage currency risk by maintaining cash in U.S. dollars on hand to support forecasted U.S. dollar outflows over a 12-month horizon and from time to time by entering into forward foreign exchange contracts. We do not currently view our exposure to the euro and GBP as a significant foreign exchange risk due to the limited volume of transactions conducted by the Company in these currencies.

No foreign exchange contracts were outstanding on November 30, 2013. In November 2012, we entered into two forward foreign exchange contracts to sell, in aggregate, US$390,000 for C$387,000 in December 2012 and January 2013. The fair value of these instruments at November 30, 2012 was nil.

Exchange rate fluctuations for foreign currency transactions can cause cash flows as well as amounts recorded in consolidated statement of comprehensive income to vary from period to period and not necessarily correspond to those forecasted in operating budgets and projections. Additional earnings variability arises from the translation of monetary assets and liabilities denominated in currencies other than the Canadian dollar at the rates of exchange at each consolidated statement of financial position date, the impact of which is reported as foreign exchange gain or loss in the consolidated statement of comprehensive (loss) income. Given our policy on the management of our U.S. foreign currency risk, we do not believe a sudden change in foreign exchange rates would impair or enhance our ability to pay our U.S. dollar denominated obligations.

The following table presents the significant items in the original currencies exposed to currency risk at the following dates:

  (In thousands)

                   $US              EURO    

November 30,
2013

GBP

 

Cash

     858         -        -   

Trade and other receivables

     408         -        -   

Accounts payable and accrued liabilities

     (1,356)         (14)        (2)   

Total exposure

     (90)         (14)        (2)   

 

 

 

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The following exchange rates applied during the year ended November 30, 2013:

 

            

November 30,

2013

 
     

Average

rate

   

Reporting

date rate

 

$ US - C$

             1.0239        1.0620   

EURO - C$

     1.3557        1.4427   

GBP - C$

     1.6000        1.7383   

Based on the Company’s foreign currency exposures noted above, varying the above foreign exchange rates to reflect a 5% strengthening of the Canadian dollar would have a positive or (negative) impact on the net profit or (loss) as follows, assuming that all other variables remained constant:

  (In thousands)

                    

November 30,

2013

 
                  $US              EURO    

 

GBP

 

 

Positive or (negative) impact

     5         1        -   

An assumed 5% weakening of the Canadian dollar would have had an equal but opposite effect on the above currencies to the amounts shown above, assuming that all other variables remain constant.

Interest Rate Risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

Our short-term bonds are invested at fixed interest rates and/or mature in the short-term. Long-term bonds are also instruments that bear interest at fixed rates. The risk that we will realize a loss as a result of a decline in the fair value of our bonds is limited because these investments, although they are classified as available for sale, are generally held until close to maturity. The unrealized gains or losses on bonds are recorded in accumulated other comprehensive income.

Based on the value of our short and long-term bonds at November 30, 2013, an assumed 0.5% decrease in market interest rates would have increased the fair value of these bonds and the accumulated other comprehensive income by approximately $125,000 ($258,000 in 2012); an assumed increase in interest rate of 0.5% would have an equal but opposite effect, assuming that all other variables remained constant.

Cash bears interest at a variable rate. Trade and other receivables, accounts payable and accrued liabilities and provisions bear no interest.

Based on the average value of variable interest-bearing cash during the year ended November 30, 2013 which was $540,000 ($1,043,000 in 2012), an assumed 0.5% increase in interest rates during such period would have increased the future cash flows and decreased the net loss by approximately $3,000 ($5,000 in 2012); an assumed decrease of 0.5% would have had an equal but opposite effect.

Fair Values of Financial Instruments

We have determined that the carrying values of our short-term financial assets and liabilities, including cash, trade and other receivables as well as accounts payable and accrued liabilities, approximate their fair value because of the relatively short period to maturity of the instruments.

Bonds, derivative financial assets and liabilities, and liability related to the DSU Plan are stated at estimated fair value, determined by inputs that are primarily based on broker quotes at the reporting date and the quoted market value of the shares of the Company for the liability related to the DSU (see note 23 of the audited consolidated financial statements – Determination of fair values).

 

 

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Critical Accounting Estimates

Use of Estimates and Judgment

The preparation of our audited consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Information about critical judgments in applying accounting policies and assumption and estimation uncertainties that have the most significant effect on the amounts recognized in the consolidated financial statements is as follows:

 

   

Revenue and deferred revenue:

Revenue recognition is subject to critical judgements, particularly in collaboration agreements that include multiple deliverables, as judgment is required in allocating revenue to each component, including upfront payments, milestone payments, research services, royalties and license fees and sale of goods.

Management uses judgment in estimating the amount of royalties earned. The amount earned is calculated as a percentage of net sales of its products realized by the Company’s licensees. Net sales are provided by licensees or estimated by management using estimates of revenues from product sales of the licensees less estimates for discounts, rebates, chargebacks and allowances.

 

   

Contingent liability:

Management uses judgment in assessing the possibility of any outflow in settlement of contingent liabilities.

 

   

Onerous contracts:

There is estimation uncertainty with respect to selecting inputs to the discounted cash flows used to determine the amount of the onerous contracts.

Other areas of judgment and uncertainty relate to the estimation of accruals for clinical trial expenses, the recoverability of inventories, the measurement of the amount and assessment of the recoverability of tax credits and grants receivable and capitalization of development expenditures.

Reported amounts and note disclosure reflect the overall economic conditions that are most likely to occur and the anticipated measures management intends to take. Actual results could differ from those estimates.

The above estimates and assumptions are reviewed regularly. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

Recent changes in accounting standards

New or revised standards and interpretations issued but not yet adopted

The following new or revised standards and interpretations have been issued but are not yet effective for the Company:

 

  a)

IFRS 9, Financial Instruments

In November 2009, the IASB issued IFRS 9, Financial Instruments (IFRS 9 (2009)), and in October 2010, the IASB published amendments to IFRS 9 (IFRS 9 (2010)).

In November 2013, the IASB issued a new general hedge accounting standard, which forms part of IFRS 9 Financial Instruments (2013). The new standard removes the January 1, 2015 effective date of IFRS 9. The new mandatory effective date will be determined once the classification and measurement and impairment phases of IFRS 9 are finalized.

IFRS 9 (2009) introduces new requirements for the classification and measurement of financial assets. Under IFRS 9 (2009), financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows.

IFRS 9 (2010) introduces additional changes relating to financial liabilities.

 

 

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IFRS 9 (2013) includes a new general hedge accounting standard which will align hedge accounting more closely with risk management. This new standard does not fundamentally change the types of hedging relationships or the requirement to measure and recognize ineffectiveness, however it will provide more hedging strategies that are used for risk management to qualify for hedge accounting and introduce more judgment to assess the effectiveness of a hedging relationship.

Special transitional requirements have been set for the application of the new general hedging model.

The mandatory effective date is not yet determined, however, early adoption of the new standard is still permitted. Canadian reporting entities cannot early adopt IFRS 9 (2013) until it has been approved by the Canadian Accounting Standards Board. The extent of the impact of IFRS 9 has not yet been determined.

 

  b)

IFRS 10, Consolidated Financial Statements

In May 2011, the IASB issued IFRS 10, which is effective for annual periods beginning on or after January 1, 2013, with early adoption permitted.

IFRS 10 replaces the guidance in IAS 27, Consolidated and Separate Financial Statements, and SIC 12, Consolidation – Special Purpose Entities (SPE). IAS 27 (2008) survives as IAS 27 (2011), Separate Financial Statements, only to carry forward the existing accounting requirements for separate financial statements.

IFRS 10 provides a single model to be applied in the control analysis for all investees, including entities that currently are SPEs in the scope of SIC 12. In addition, the consolidation procedures are carried forward substantially unmodified from IAS 27 (2008).

The amendments issued in June 2012 simplify the process of adopting IFRS 10 and provide additional relief from certain disclosures.

The Company intends to adopt IFRS 10, including the amendments issued in June 2012, in its consolidated financial statements for the annual period beginning on December 1, 2013. The Company does not expect the amendment to have a material impact on the consolidated financial statements.

 

  c)

IFRS 13, Fair Value Measurement

In May 2011, the IASB published IFRS 13, which is effective prospectively for annual periods beginning on or after January 1, 2013. The disclosure requirements of IFRS 13 need not be applied in comparative information for periods before initial application.

IFRS 13 replaces the fair value measurement guidance contained in individual IFRS with a single source of fair value measurement guidance. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, i.e. an exit price. The standard also establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements to provide information that enables financial statement users to assess the methods and inputs used to develop fair value measurements and, for recurring fair value measurements that use significant unobservable inputs (Level 3), the effect of the measurements on profit or loss or other comprehensive income (OCI).

IFRS 13 explains how to measure fair value when it is required or permitted by other IFRSs. The standard does not introduce new requirements to measure assets or liabilities at fair value, nor does it eliminate the practicability exceptions to fair value measurements that currently exist in certain standards.

The Company intends to adopt IFRS 13 prospectively in its consolidated financial statements for the annual period beginning on December 1, 2013. The Company does not expect the amendment to have a material impact on the consolidated financial statements.

 

  d)

Amendments to IAS 19, Employee Benefits

In June 2011, the IASB published an amended version of IAS 19. Adoption of the amendment is required for annual periods beginning on or after January 1, 2013, with early adoption permitted.

 

 

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The amendments impact termination benefits, which would now be recognized at the earlier of when the entity recognizes costs for a restructuring within the scope of IAS 37, Provisions, Contingent Liabilities and Contingent Assets, and when the entity can no longer withdraw the offer of the termination benefits.

The Company intends to adopt the amendments in its consolidated financial statements for the annual period beginning on December 1, 2013. The Company does not expect the amendment to have a material impact on the consolidated financial statements. IFRIC 21, Levies

In May 2013, the IASB issued IFRIC 21, Levies.

This IFRIC is effective for annual periods commencing on or after January 1, 2014 and is to be applied retrospectively.

The IFRIC 21 provides guidance on accounting for levies in accordance with the requirements of IAS 37, Provisions, Contingent Liabilities and Contingent Assets.

The interpretation defines a levy as an outflow from an entity imposed by a government in accordance with legislation. It also notes that levies do not arise from executory contracts or other contractual arrangements.

The interpretation also confirms that an entity recognizes a liability for a levy only when the triggering event specified in the legislation occurs.

The Company intends to adopt IFRIC 21 in its consolidated financial statements for the annual period beginning December 1, 2014. The extent of the impact of adoption of the amendments has not yet been determined.

 

  e)

Annual Improvements to IFRS (2010-2012) and (2011-2013) cycles

In December 2013, the IASB issued narrow-scope amendments to a total of nine standards as part of its annual improvements process. The IASB uses the annual improvements process to make non-urgent but necessary amendments to IFRS.

Most amendments will apply prospectively for annual periods beginning on or after July 1, 2014; earlier application is permitted, in which case, the related consequential amendments to other IFRS would also apply.

Amendments were made to clarify the following in their respective standards:

 

   

Definition of “vesting condition” in IFRS 2, Share-based payment;

 

   

Measurement of short-term receivables and payables, and scope of portfolio exception in IFRS 13, Fair Value Measurement;

 

   

Definition of “related party” in IAS 24, Related Party Disclosures.

Special transitional requirements have been set for amendments to IFRS 2.

The Company intends to adopt these amendments in its consolidated financial statements for the annual period beginning on December 1, 2014. The extent of the impact of adoption of the amendments has not yet been determined.

Standard adopted

Amendments to IAS 1, Presentation of Financial Statements

In June 2011, the IASB published amendments to IAS 1, Presentation of Financial Statements: Presentation of Items of Other Comprehensive Income, which are effective for annual periods beginning on or after July 1, 2012 and are to be applied retrospectively.

 

 

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The amendments require that an entity presents separately the items of OCI that may be reclassified to profit or loss in the future from those that would never be reclassified to profit or loss. Consequently an entity that presents items of OCI before related tax effects will also have to allocate the aggregated tax amount between these categories.

The existing option to present the profit or loss and OCI in two statements has remained unchanged.

The Company adopted IAS 1 on December 1, 2012, which had no impact on the consolidated financial statements.

Outstanding Share Data

On February 24, 2014, the number of common shares issued and outstanding was 61,010,603 while outstanding options granted under our stock option plan were 1,878,169.

Disclosure Controls and Procedures and Internal Control Over Financial Reporting

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under Canadian and American laws is recorded, processed, summarized and reported within the time periods specified under Canadian and SEC’s rules and forms, and that such information is accumulated and communicated to our President and Chief Executive Officer and Vice President, Finance, to allow timely decisions regarding required disclosure. Our management, including our President and Chief Executive Officer and Vice President, Finance, conducted an evaluation of our disclosure controls and procedures, as defined under National Instrument 52-109 – Certification of Disclosure in Issuer’s Annual and Interim Filings and under Exchange Act Rule 13a-15(e), as of the end of the period covered by this MD&A. Based upon that evaluation, our President and Chief Executive Officer and Vice President, Finance, have concluded that, as of November 30, 2013, our disclosure controls and procedures, as defined under National Instrument 52-109 – Certification of Disclosure in Issuer’s Annual and Interim Filings and under Exchange Act Rule 13a-15(e), were effective to ensure that information we are required to disclose in reports that we file or submit under Canadian and American laws is communicated to management, including our President and Chief Executive Officer and Vice President, Finance, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported within the time periods specified under Canadian and SEC’s rules and forms.

Management’s Annual Report on Internal Control over Financial Reporting

Our management, including our President and Chief Executive Officer and Vice President, Finance, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined under National Instrument 52-109 – Certification of Disclosure in Issuer’s Annual and Interim Filings and under Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS, as issued by the IASB. Internal controls over financial reporting include those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS, as issued by the IASB, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements on a timely basis. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to consolidated financial statements preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal controls over financial reporting as of the end of the period covered by this Annual Report based on the criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of our internal controls over financial reporting and testing of the operational effectiveness of our internal control over financial reporting. Based on that assessment, our management concluded that as of November 30, 2013, our internal controls over financial reporting were effective.

Changes in Internal Control over Financial Reporting

There was no change in our internal controls over financial reporting that occurred during the period covered by this MD&A that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

 

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Item 6.    Directors, Senior Management and Employees

A.   Directors and senior management.

Our Directors

The table below sets forth the following information about our directors as of February 24, 2014: his/her name, age, province/state of residence, principal occupation, the year each director first became a director of the Corporation, his/her status as an independent director, his/her biography, his/her areas of expertise, his/her memberships on the committees of the Board of Directors, whether he/she acts as director for other public companies, and the number of common shares, DSUs and options beneficially held or controlled.

 

LOGO

Gilles Cloutier

Age: 69

Chapel Hill,

North Carolina,

United States

 

Independent

 

Director since:

March 28, 2003

 

Areas of Expertise:

- Pharmaceutical

  Industry

- Regulatory

- Research &

  Development

 

Other Directorship:

None

  

 

Principal Occupation

   Corporate Director
  

 

Dr. Gilles Cloutier has over 30 years of experience in the pharmaceutical industry including five years with contract research organizations, providing strategic support to biotechnology and pharmaceutical companies. Dr. Cloutier has also held key positions with large North-American pharmaceutical companies, where he developed expertise in the field of clinical research. His experience includes the development and approval of several drugs in Canada, the United States and Europe. Dr. Cloutier sits on the board of the Corporation and is also a director on the board of the Fondation Innovation Vie.

  

 

Securities Held or Controlled

  

 

Common Shares

(#)

  

 

DSU

(#)

  

 

Options

(#)

  

 

71,000

  

 

3,000

  

 

45,000

  

 

Committees of the Board of Directors

  

 

Member of Nominating and Corporate Governance Committee

Member of Compensation Committee

 

 

59

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LOGO

Gérald A. Lacoste

Age: 70

Rivière Rouge,

Québec, Canada

 

Independent

Director since:

February 8, 2006

 

Areas of Expertise:

- Securities and

  Market Regulations

- Corporate

  Governance

- Mergers &

  Acquisitions

 

Other Directorship:

None

  

 

Principal Occupation

  

Corporate Director

  

 

Gérald A. Lacoste is a retired lawyer with extensive experience in the fields of securities regulation, financing and corporate governance. He was previously Chairman of the Québec Securities Commission (now known as the Autorité des marchés financiers) and was also President and Chief Executive Officer of the Montreal Exchange. During his career, Mr. Lacoste acted as legal counsel to the Canadian Standing Senate Committee on Banking, Trade and Commerce, he chaired the Québec Advisory Committee on Financial Institutions, and was a member of the task force on the capitalization of life insurance companies in Québec. Mr. Lacoste is currently a corporate director and is a member of the North American Free Trade Agreement (NAFTA) arbitration panel.

  

 

Securities Held or Controlled

  

 

Common Shares

(#)

  

 

DSU

(#)

  

 

Options

(#)

  

 

71,000

  

 

20,042

  

 

35,000

  

 

Committees of the Board of Directors

  

 

President of Nominating and Corporate Governance Committee

Member of Audit Committee

             
             
             
                   

 

LOGO

Paul Pommier

Age: 71

Laval, Québec,

Canada

 

Independent

Director since:

January 6, 1997

 

Areas of Expertise:

- Corporate

  Finance

- Securities

- Mergers &

  Acquisitions

Other Directorship:

None

  

 

Principal Occupation    

  

Corporate Director

  

 

Mr. Paul Pommier worked for more than 25 years at National Bank Financial Inc., his last position being Senior Executive Vice President, Corporate and Government Finance. Throughout his career, he oversaw public and private financings, mergers and acquisitions, as well as the marketing of investment offerings. Under his leadership, National Bank Financial Inc. developed notable expertise in tax-shelter financings.

  

 

Securities Held or Controlled

  

 

Common Shares

(#)

  

 

DSU

(#)

  

 

Options

(#)

  

 

220,100

  

 

120,314

  

 

45,000

  

 

Committees of the Board of Directors

  

 

President of Audit Committee

Member of Compensation Committee

 

 

60

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Table of Contents

LOGO

Dawn Svoronos (previously known as Dawn Graham)

Age: 60

Elizabethtown, Ontario, Canada

 

Independent

Director since:

April 8, 2013

 

Areas of Expertise:

- Pharmaceutical

  Industry

- Commercialization    of Drug Products

 

Other Directorship:

Medivation, Inc.

  

 

Principal Occupation    

  

 

Corporate Director - Chair of the Board of the Corporation

  

 

Ms. Dawn Svoronos (formerly Graham) worked in the commercial side of the business for the multinational pharmaceutical company Merck & Co. Inc., for 23 years, retiring in 2011. From 2009 to 2011, Ms. Svoronos was President of the Europe/Canada region for Merck and from 2006 to 2009 was President of Merck in Canada. Previously held positions with Merck include Vice-President of Asia Pacific and Vice-President of Global Marketing for the Arthritis, Analgesics and Osteoporosis franchise. Ms. Svoronos sits on the Board of Directors of Medivation Inc. in San Francisco and is Chair of the Board of Directors for the Center for Drug Research & Development in Vancouver.

  

 

Securities Held or Controlled

  

 

Common Shares

(#)

  

 

DSU

(#)

  

 

Options

(#)

  

 

85,000

  

 

N.A.

  

 

50,000

  

 

Committee of the Board of Directors

  

 

Member of Nominating and Corporate Governance Committee

Member of Compensation Committee

 

LOGO

Jean-Denis Talon (1)

Age: 72

Montreal,

Québec, Canada

 

Independent

Director since:

May 10, 2001

 

Areas of Expertise:

- Human Resources

- Governmental Relations

- Mergers &

  Acquisitions

 

Other Directorship:

None

  

 

Principal Occupation    

  

 

Corporate Director

  

 

Mr. Jean-Denis Talon had a successful career with AXA Insurance over a period of more than 20 years, ultimately becoming President and Chief Executive Officer. He was Chairman of the Board of AXA Canada until September 2011. Mr. Talon is also a former President of the Financial Affairs Committee at the Insurance Bureau of Canada.

  

 

Securities Held or Controlled

  

 

Common Shares

(#)

  

 

DSU

(#)

  

 

Options

(#)

   80,000    3,000    45,000
  

 

Committees of the Board of Directors

  

 

President of Compensation Committee

Member of Audit Committee

 

 

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LOGO

Luc Tanguay (2)

Age: 55

Town of Mount Royal,

Québec, Canada

 

Non-independent

Director since:

December 6, 1993

 

Areas of Expertise:

- Corporate Finance

- Securities

- Mergers &

  Acquisitions

 

Other Directorship:

None

  

 

Principal Occupation

 

  

 

President and Chief Executive Officer of the Corporation

 

  

 

Mr. Luc Tanguay has been active in the biotechnology industry for over 20 years. As a member of our senior management since 1996, he has contributed to our growth by facilitating access to public and private capital funding. A member of the board of directors since 1993, he has held various management positions since joining the Company. Prior to joining us, Mr. Tanguay had a career in investment banking at National Bank Financial Inc. Mr. Tanguay obtained his M. Sc. Finance from the University of Sherbrooke.

  

 

Securities Held or Controlled

  

 

Common Shares

(#)

  

 

DSU

(#)

  

 

Options

(#)

  

 

175,000

  

 

27,572

  

 

395,000

             
             
             
                   
(1)

Mr. Talon was a member of the board of directors of Toptent Inc., or Toptent, from August 1, 2007 to November 26, 2009. On December 3, 2009, Toptent filed a notice of intention to make a proposal under the Bankruptcy and Insolvency Act (Canada), or Bankruptcy Act. Subsequently, on May 7, 2010, Toptent filed a proposal under the Bankruptcy Act. The proposal was accepted by Toptent’s creditors on May 20, 2010.

(2)

Mr. Tanguay was a member of the board of directors of Ambrilia Biopharma Inc., or Ambrilia, from August 22, 2006 to March 30, 2010. On July 31, 2009, Ambrilia obtained court protection from its creditors under the Companies’ Creditors Arrangement Act (Canada), or CCAA. The purpose of the order issued by the court granting Ambrilia protection from its creditors was to provide Ambrilia and its subsidiaries the opportunity to restructure its affairs. On July 31, 2009, the TSX halted the trading of Ambrilia’s shares pending its review of Ambrilia’s meeting the requirements for continuous listing. On January 31, 2011, the TSX decided to delist the common shares of Ambrilia at the close of market on March 4, 2011 for failure to meet the continued listing requirements of the TSX. The common shares remain suspended from trading. On April 8, 2011, Ambrilia announced that it would seek permission to terminate the protection granted by the Superior Court pursuant to the CCAA and, upon permission of the Court, it would file for bankruptcy pursuant to the Bankruptcy Act. On April 12, 2011, Ambrilia went bankrupt.

None of our directors have a family relationship with each other and with each of our executive officers. To our knowledge, none of our directors have arrangements with our major shareholders, customers and suppliers.

Terms of Office

Each of our directors is elected annually at our shareholders meeting and remains in office until the next annual meeting of shareholders or until he/she resigns or his/her position becomes vacant following his/her death, destitution or for any other reason before the next annual meeting of shareholders.

Cease Trade Orders, Bankruptcies, Penalties or Sanctions

Except as described above in notes 1 and 2 to the table providing information on our directors, to our knowledge, no director (a) is, as at February 24, 2014, or has been within the ten (10) years before February 24, 2014, a director or executive officer of any company (including the Corporation) that, while that person was acting in that capacity, (i) was the subject of a cease trade or similar order or an order that denied the relevant company access to any exemption under securities legislation, for a period of more than thirty (30) consecutive days; (ii) was subject to an event that resulted, after the director or executive officer ceased to be a director or executive officer, in the company being the subject of a cease trade or similar order or an order that denied the relevant company access to any exemption under securities legislation, for a period of more than thirty (30) consecutive days; or (iii) within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets; or (b) has, within the ten (10) years before February 24, 2014, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold his assets.

 

 

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Directors’ Mandatory Retirement Policy

Our Board of Directors has adopted a formal retirement policy in the context of its succession planning process. Under this policy, directors who are not employees of the Corporation who reach the age of 75 or who have been acting as directors for 15 consecutive years may not be nominees for re-election at the subsequent annual meeting of shareholders. Our current directors (other than Mrs. Svoronos) who are not employees of the Corporation are grandfathered from this policy.

Directors and Executive Officers Shareholding Policy

In April 2013, the Board decided to suspend the Corporation’s directors and executive officers shareholding policy, or Shareholding Policy, adopted in December 2010 and the grant of DSUs. The Board made that decision after considering, among other things, the corporate restructuring that occurred in the fiscal year 2012 and its consequences on the management team as well as the changes that have taken place at the Board level. Pursuant to the policy, each director was required to hold common shares, DSUs, or a combination thereof, representing at least 400% of the value of its annual retainer to act as a Board member of the Corporation. The shareholding value for the President and Chief Executive Officer was set at 300% of his annual base salary and he was given a three (3) to five (5) year period to hold such value. The shareholding value for the other executive officers was intended to be 150% of their annual base salary. The value of an individual’s shareholding was based on the higher of the acquisition cost of a common share and/or a DSU and its (their) fair market value. Any fluctuations in the fair market value of the common shares and DSUs had no effect on the compliance by an individual with the Shareholding Policy once such individual had reached the targeted value.

Our Senior Management

The table below sets forth the following information about our senior management, or Executive Officers, as of February 24, 2014: his/her name, age, province/state of residence, his/her principal occupation, the year each Executive Officer joined the Corporation, his/her biography and the number of common shares, DSUs and options beneficially held or controlled. The information about Mr. Luc Tanguay, the President and Chief Executive Officer of the Corporation, is found in the table above regarding information about our directors.

 

LOGO

Marie-Noël Colussi

Age: 45

Laval, Québec,

Canada

  

 

Principal Occupation

  

 

Vice President, Finance

  

 

Ms. Marie-Noël Colussi is a graduate of the Université du Québec à Montréal in business administration. Prior to joining us, Ms. Colussi worked for eight years with KPMG, a major accounting firm. Ms. Colussi has experience in accounting, auditing, control and taxation, particularly in research and development. She joined us in 1997, and prior to her appointment as Vice President, Finance, in February 2002, she held the positions of Director, Accounting and Internal Control and Controller.

  

 

Securities Held or Controlled

 

  

 

Common Shares

(#)

  

 

DSU

(#)

  

 

Options

(#)

  

 

10,075

  

 

3,182

  

 

208,500

 

LOGO

Lyne Fortin

Age: 54

Laval, Québec,

Canada

  

 

Principal Occupation

  

 

Chief Commercial Officer

  

 

Ms. Fortin has over 27 years of experience in the commercialization of pharmaceutical products for human health. She has been in executive level positions at Merck Canada for 13 years until 2011. In these roles she was responsible for Marketing and Sales of product portfolios in diverse therapeutic areas. She also managed all the commercial support functions which included marketing and sales research, sales training, sales operations, manufacturing planning, Office of Compliance, Sigma and change management. From 2005 to 2009, she was appointed to the Merck Marketing Committee for Europe, Middle-East, Africa and Canada to advance commercial practices and became a member of the Board of Directors of Merck Canada in 2007 until 2011. From 2011 to 2013, she acted as consultant to the biopharmaceutical industry advising clients on commercial matters. She was appointed Chief Commercial Officer of our Corporation in December 2013.

Ms. Fortin graduated from the Université de Montréal with a Certificate in Chemistry in 1978 and a Bachelor degree in Pharmacy in 1982 (Member of the Order of Pharmacists of Québec from 1983-2012). She obtained a MBA from Concordia University in 1984.

  

 

Securities Held or Controlled

  

 

Common Shares

(#)

  

 

DSU

(#)

  

 

Options

(#)

  

 

Nil

  

 

N.A

  

 

125,000

 

 

63

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LOGO

Jocelyn Lafond

Age: 46

Verdun, Québec,

Canada

  

 

Principal Occupation

  

 

Vice President, Legal Affairs, and Corporate Secretary

  

 

Mr. Lafond has over 20 years of experience in the fields of corporate and securities law. Mr. Lafond holds a law degree from the Université Laval and a Masters Degree in Law from the University of Toronto. He has been a member of the Barreau du Québec since 1992. Prior to joining us in 2007, Mr. Lafond was a partner with the international law firm of Fasken Martineau DuMoulin LLP.

  

 

Securities Held or Controlled

  

 

Common Shares

(#)

  

 

DSU

(#)

  

 

Options

(#)

  

 

Nil

  

 

5,000

  

 

270,000

 

LOGO

Christian

Marsolais

Age: 51

Town of Mount

Royal, Québec,

Canada

  

 

Principal Occupation

  

 

Senior Vice President, Scientific Affairs and Alliances

  

Dr. Christian Marsolais has over 15 years of experience in clinical research for large pharmaceutical companies, such as Sandoz Canada Inc. and BioChem Therapeutics Inc. Before joining us in 2007, Dr. Marsolais held various positions at Pfizer Global Pharmaceuticals, where he was appointed Director of Medical Affairs, Therapeutic Areas, in 2004. In this position, Dr. Marsolais was responsible for the clinical program and scientific initiatives development, as well as the integration of the Scientific Affairs and Clinical Research for the oncology and HIV Franchise. Dr. Marsolais holds a Ph.D. in Biochemistry from the Université de Montréal.

   Securities Held or Controlled
  

 

Common Shares

(#)

  

 

DSU

(#)

  

 

Options

(#)

  

 

8,597

  

 

6,312

  

 

276,000

 

LOGO

Pierre Perazzelli

Age: 62

Brossard, Québec,

Canada

  

 

Principal Occupation

 

  

 

Vice President, Pharmaceutical Development

 

  

 

A graduate of Université Laval, Mr. Perazzelli has been working in the pharmaceutical manufacturing industry for over 20 years. Throughout his career, he has held various positions in large pharmaceutical companies, including Bristol Myers Squibb and Abbott Laboratories, Ltd. He was Director of the LAB Laboratory, a research centre specializing in pharmaceutical formulation. He is also experienced in the production of generic drugs. Mr. Perazzelli joined us in 2000.

  

 

Securities Held or Controlled

  

 

Common Shares

(#)

  

 

DSU

(#)

  

 

Options

(#)

  

 

Nil

  

 

4,061

  

 

217,666

None of our Executive Officers have a family relationship with each other and with our directors and, to our knowledge, none of our Executive Officers have arrangements with our major shareholders, customers and suppliers.

Term of Office

Each of our Executive Officers is employed for an indefinite term.

B. Compensation

Compensation of our Directors

The Corporation has adopted a compensation policy for its directors who are not employed on a full-time basis by the Corporation under which they are paid an annual retainer fee as well as attendance fees. For the fiscal year ended November 30, 2013, annual retainer fees were paid on the first day of each calendar quarter whereas attendance fees were paid on the last day of each calendar quarter for meetings held during such quarter. In addition, the Corporation reimburses the reasonable expenses incurred by each director who are not employed on a full-time basis by the Corporation to attend meetings of the Board of Directors and meetings of the committees of the Board of Directors.

 

 

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The table below details the annual retainer and attendance fees paid in the last fiscal year to our directors who were not employed on a full-time basis by the Corporation as board members and as committee members.

 

Position at Board Level or Committee Level    Compensation for Fiscal Year 2013  

Annual Retainer to Chair of the Board

     $100,000(1)                       

Annual Retainer to Board Members

     $17,500                       

Attendance Fees Paid for Each Meeting of the Board of Directors

    

- in person

     $1,500                       

- by conference call

     $800                       

Annual Retainer to Chair of the Audit Committee

     $8,000                        

Annual Retainer to Chair of each Committee (other than the Audit Committee and Finance Committee)

     $6,000                        

Annual Retainer to Committee Members

     $3,000                        

Attendance Fees Paid for Each Meeting of a Committee

    

- in person

     $1,000                        

- by conference call

     $800                         
  (1)

Beginning on May 2013, the only fees paid to the Chair were based on the Annual Retainer to the Chair, or up to $100,000. None of the other fees described in the table were paid to the Chair.

The table below details all components of the compensation provided to the directors of the Corporation for the fiscal year ended November 30, 2013 and the value thereof.

 

Name    Fees
earned
    

Share-based

awards(1)

     Option-based
awards
    Non-equity
incentive plan
compensation
   Pension
value
   All other
compensation
   Total  
   ($)      (#)      ($)      ($)     ($)    ($)    ($)    ($)  

 

Gilles Cloutier

 

     43,650         --         --         --      --    --    --      43,650   

 

Gérald A. Lacoste(2)

 

     45,775         13,060         4,375         --      --    --    --      50,150   

 

Paul Pommier(3)

 

     76,825         87,687         29,375         --      --    --    --      106,200   

 

Dawn Svoronos(4)

 

     45,383         --         --         11,000 (5)    --    --    --      56,383   

 

Jean-Denis Talon

 

     50,950         --         --         --      --    --    --      50,950   
  (1)

Share-based awards are comprised of deferred share units, or DSUs, issued under the deferred share unit plan, or DSU Plan. For a description of the DSU Plan, see “Item 6.E – Share Ownership” of this Annual Report. The value of a DSU is equal to the average closing price of our common shares on the TSX on the date it is granted and during the four (4) previous trading days. DSUs may only be redeemed when a director ceases to act as such.

 

  (2)

In the first quarter of the last fiscal year, Mr. Lacoste was granted 25% of his annual retainer as Board member in DSUs given that he was not meeting the Shareholding Policy. After the April decision to suspend the Shareholding Policy, no additional DSUs were granted during the remainder of the last fiscal year. The balance of Mr. Lacoste’s annual retainer was paid in cash. The DSUs were granted on January 2, 2013 and the value of a DSU was equal to $0.335.

 

  (3)

In the first quarter of last fiscal year, Mr. Pommier elected to purchase DSUs through the conversion of 25% of his annual retainer as chair of the Board and through the conversion of 25% of his annual retainer as Board member. After the April decision to suspend the Shareholding Policy, no additional DSUs were granted during the remainder of the last fiscal year. The balance of Mr. Pommier’s annual retainer as Board member was paid in cash. The DSUs were granted on January 2, 2013 and the value of a DSU was equal to $0.335.

 

  (4)

Mrs. Dawn Svoronos was appointed Chair of the Board on May 24, 2013.

 

  (5)

Represents 50,000 options. These options were granted on May 29, 2013, are fully vested and will expire on May 28, 2023. Each option has an exercise price of $0.26. The value of the option-based awards for the fiscal year ended November 30, 2013 was determined using the Black-Scholes-Merton model on the date of grant with the following assumptions:

 

   

(i)

  

Risk-free interest rate:

   2.03%  
 

(ii)

  

Expected volatility:

     97.32%   
 

(iii)

  

Average option life in years:

     8      
 

(iv)

  

Expected dividends:

     --      
 

(v)

  

Grant date share price:

     $0.265   
 

(vi)

  

Option exercise price:

     $0.26   
 

(vii)

  

Grant date fair value:

     $0.22   

Outstanding Option-Based Awards and Share-Based Awards

During the fiscal year ended November 30, 2013, no options were granted to our directors, except to Dawn Svoronos who was granted 50,000 options to purchase common shares on May 29, 2013. For a description of our share option plan, or Option Plan, see “Item 6.E – Share Ownership” of this Annual Report.

 

 

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The table below details all outstanding option-based awards and outstanding share-based awards as at November 30, 2013 for each of the directors who is not an employee of the Corporation.

 

     Option-Based Awards     Share-Based Awards  
Name  

Number of
securities
underlying
unexercised
options

(#)

   

Option
exercice
price

($)

   

Option
expiration

date

   

Value of
unexercised 

in-the- 

money
options (1) 

($) 

    Number of shares
or units of shares
that have not
vested
(#) 
 

Market or
payout value of

share-based
awards that have 
not vested

($)

 

Market or payout
value of vested
share-based
awards not paid
out or
distributed(2)

($)

 

 

Gilles Cloutier

    5,000        3.68        2014.05.03        Nil      --   --     780   
      5,000        1.75        2015.05.06        Nil             
      5,000        1.86        2016.03.30        Nil             
      5,000        8.29        2017.03.29        Nil             
      5,000        1.80        2018.12.18        Nil             
      10,000        1.84        2019.03.28        Nil             
      10,000        4.75        2020.06.08        Nil                   

Gérald A. Lacoste

    5,000        1.86        2016.03.30        Nil      --   --     5,211   
      5,000        8.29        2017.03.29        Nil             
      5,000        1.80        2018.12.18        Nil             
      10,000        1.84        2019.03.28        Nil             
      10,000        4.75        2020.06.08        Nil                   

Paul Pommier

    5,000        3.68        2014.05.03        Nil      --   --     31,282   
      5,000        1.75        2015.05.06        Nil             
      5,000        1.86        2016.03.30        Nil             
      5,000        8.29        2017.03.29        Nil             
      5,000        1.80        2018.12.18        Nil             
      10,000        1.84        2019.03.28        Nil             
      10,000        4.75        2020.06.08        Nil                   

Dawn Svoronos

    50,000        0.26        2023.05.29        Nil      --   --        

Jean-Denis Talon

    5,000        3.68        2014.05.03        Nil      --   --     780   
      5,000        1.75        2015.05.06        Nil             
      5,000        1.86        2016.03.30        Nil             
      5,000        8.29        2017.03.29        Nil             
      5,000        1.80        2018.12.18        Nil             
      10,000        1.84        2019.03.28        Nil             
      10,000        4.75        2020.06.08        Nil                   

 

    (1)

The value of unexercised in-the-money options at fiscal year-end is the difference between the closing price of our common shares on November 29, 2013 ($0.26) on the TSX and the respective exercise price of the options. The TSX was closed for business on November 30, 2013.

 

    (2)

Share-based awards are comprised of DSUs issued under the DSU Plan. The market or payout value of share-based awards that have vested as at November 30, 2013 is determined by multiplying the closing price of our common shares as at November 29, 2013 ($0.26) on the TSX by the number of share-based awards held as at November 30, 2013. The TSX was closed for business on November 30, 2013. The actual payout value will vary based on the date on which the DSUs will be redeemed.

Incentive Plan Awards – Value vested or earned during the year

The table below details the value vested or earned during the fiscal year ended November 30, 2013 under each incentive plan for each of the directors who is not an employee of the Corporation.

 

Name  

Option-based awards -

Value vested during