AEZS 20-F 2014


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________ 
FORM 20-F
¨
Registration Statement Pursuant to Section 12(b) or 12(g) of The Securities Exchange Act of 1934
OR
ý
Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the fiscal year ended December 31, 2014
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
Commission file number 0-30752
AETERNA ZENTARIS INC.
(Exact Name of Registrant as Specified in its Charter)
Not Applicable
(Translation of Registrant's Name into English)
Canada
(Jurisdiction of Incorporation)
1405 du Parc-Technologique Blvd.
Quebec City, Quebec
Canada, G1P 4P5
(Address of Principal Executive Offices)
Dennis Turpin
Telephone: 418-652-8525
E-mail: dturpin@aezsinc.com
1405 du Parc-Technologique Blvd.
Quebec City, Quebec
Canada, G1P 4P5
(Name, Telephone, E-mail and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class                
  
Name of Each Exchange on Which Registered                
Common Shares
  
NASDAQ Capital Market
Toronto Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act: NONE
Securities for which there is a reporting obligation pursuant to Section 15(d) of the ACT: NONE
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as at the close of the period covered by the annual report: 65,509,077 Common Shares as at December 31, 2014.
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ¨      No  ý
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  ý
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  ý     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, or a non-accelerated filer. See definitions of "accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer    ¨    Accelerated filer     ý    Non-accelerated filer     ¨
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
US GAAP    ¨    International Financial Reporting Standards as issued by the     Other    ¨
International Accounting Standards Board    ý
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  ý




Basis of Presentation
General
Except where the context otherwise requires, all references in this Annual Report on Form 20-F to the "Company", "Aeterna Zentaris Inc.", "we", "us", "our" or similar words or phrases are to Aeterna Zentaris Inc. and its subsidiaries, taken together. In this Annual Report on Form 20-F, references to "$" and "US$" are to United States dollars, references to "CAN$" are to Canadian dollars and references to "EUR" are to euros. Unless otherwise indicated, the statistical and financial data contained in this Annual Report on Form 20-F are presented as at December 31, 2014.
This Annual Report on Form 20-F also contains certain information regarding products or product candidates that may potentially compete with our products and product candidates, and such information has been primarily derived from information made publicly available by the companies developing such potentially competing products and product candidates and has not been independently verified by Aeterna Zentaris Inc.
Forward-Looking Statements
This Annual Report on Form 20-F contains forward-looking statements made pursuant to the safe harbor provisions of the U.S. Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as: "intend," "believe," "designed to," "vision," "aimed at," "expect," "may," "should," "would," "will" and similar references. Such statements include, but are not limited to, statements about the progress of our research, development and clinical trials and the timing of, and prospects for, regulatory approval and commercialization of our product candidates, the timing of expected results of our studies and the anticipated results of these studies, statements about the status of our efforts to establish a commercial operation and to obtain the right to promote or sell products that we did not develop, and estimates regarding our capital requirements and our needs for, and our ability to obtain, additional financing. Forward-looking statements involve known and unknown risks and uncertainties, which could cause the Company's actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, among others, the availability of funds and resources to pursue our research and development ("R&D") projects, the successful and timely completion of clinical studies, the degree of market acceptance once our products are approved for commercialization, the ability of the Company to take advantage of business opportunities in the pharmaceutical industry, the ability of the Company to protect its intellectual property, uncertainties related to the regulatory process and general changes in economic conditions. Investors should consult the Company's quarterly and annual filings with the Canadian and United States ("U.S.") securities commissions for additional information on risks and uncertainties relating to the forward-looking statements. Investors are cautioned not to place undue reliance on these forward-looking statements. The Company does not undertake to update these forward-looking statements and disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future results, events or developments, except if required to do so by a governmental authority or applicable law.




TABLE OF CONTENTS
GENERAL INFORMATION
Page
 
 
Item 1.
 
 
 
Item 2.
 
 
Item 3.
 
 
 
 
Item 4.
 
 
 
 
Item 4A.
Item 5.
Item 6.
 
 
 
 
 
Item 7.
 
 
 
Item 8.
 
 
Item 9.
 
 
 
 
 
 
Item 10.
 
 




 
 
 
 
 
 
 
 
 
 
Item 11.
Item 12.
 
 
 
 
 
 
 
 
 
Item 13.
Item 14.
Item 15.
Item 16A.
Item 16B.
Item 16C.
 
 
 
 
 
 
Item 16D.
Item 16E.
Item 16F.
Item 16G.
Item 16H.
 
 
 
 
 
Item 17.
Item 18.
Item 19.




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
A.
Offer statistics
Not applicable.
B.
Method and expected timetable
Not applicable.
Item 3.
Key Information
A.
Selected financial data
The consolidated statement of comprehensive (loss) income data set forth in this Item 3.A with respect to the years ended December 31, 2014, 2013 and 2012 and the consolidated statement of financial position data as at December 31, 2014 and 2013 have been derived from the audited consolidated financial statements set forth in Item 18, which have been prepared in accordance with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board ("IASB"). The consolidated statement of financial position data as at December 31, 2012 set forth in this Item 3.A have been derived from our previous consolidated financial statements not included herein, and have also been prepared in accordance with IFRS, as issued by the IASB. The selected financial data should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 20-F, as well as "Item 5. – Operating and Financial Review and Prospects" of this Annual Report on Form 20-F.

1


Consolidated Statements of Comprehensive (Loss) Income
(in thousands of US dollars, except share and per share data)
Derived from consolidated financial statements prepared in accordance with IFRS, as issued by the IASB
 
 
Years ended December 31,
 
 
2014
 
2013
 
2012
 
 
$
 
$
 
$
Revenues
 
 
 
 
 
 
Sales
 
—

 
96

 
834

License fees
 
11

 
6,079

 
1,219

 
 
11

 
6,175

 
2,053

Operating expenses
 
 
 
 
 
 
Cost of sales
 
—

 
51

 
591

Research and development costs, net of refundable tax credits and grants
 
23,716

 
21,284

 
20,592

Selling, general and administrative expenses
 
13,690

 
12,316

 
10,606

 
 
37,406

 
33,651

 
31,789

Loss from operations
 
(37,395
)
 
(27,476
)
 
(29,736
)
Finance income
 
20,319

 
1,748

 
6,974

Finance costs
 
—

 
(1,512
)
 
(382
)
Net finance income (costs)
 
20,319

 
236

 
6,592

Loss before income taxes
 
(17,076
)
 
(27,240
)
 
(23,144
)
Income tax expense
 
(111
)
 
—

 
—

Net loss from continuing operations
 
(17,187
)
 
(27,240
)
 
(23,144
)
Net income from discontinued operations
 
623

 
34,055

 
2,732

Net (loss) income
 
(16,564
)
 
6,815

 
(20,412
)
Other comprehensive (loss) income:
 
 
 
 
 
 
Items that may be reclassified subsequently to profit or loss:
 
 
 
 
 
 
Foreign currency translation adjustments
 
(1,158
)
 
1,073

 
(504
)
Items that will not be reclassified to profit or loss:
 
 
 
 
 
 
Actuarial (loss) gain on defined benefit plans
 
(1,833
)
 
2,346

 
(3,705
)
Comprehensive (loss) income
 
(19,555
)
 
10,234

 
(24,621
)
Net loss per share (basic and diluted) from continuing operations
 
(0.29
)
 
(0.92
)
 
(1.17
)
Net income (basic and diluted) from discontinued operations
 
0.01

 
1.16

 
0.14

Net (loss) income (basic and diluted) per share
 
(0.28
)
 
0.24

 
(1.03
)
Weighted average number of shares outstanding:
 
 
 
 
 
 
Basic
 
59,024,730

 
29,476,455

 
19,775,073

Diluted
 
59,024,730

 
29,476,455

 
19,806,687



2


Consolidated Statement of Financial Position Information
(in thousands of US dollars)
Derived from consolidated financial statements prepared in accordance with IFRS, as issued by the IASB
 
 
As at December 31,
 
 
2014
 
2013
 
2012
 
 
$
 
$
 
$
Cash and cash equivalents
 
34,931

 
43,202

 
39,521

Restricted cash equivalents
 
760

 
865

 
826

Total assets
 
47,435

 
59,196

 
67,655

Warrant liability
 
8,225

 
18,010

 
6,176

Share capital
 
150,544

 
134,101

 
122,791

Shareholders' equity (deficiency)
 
14,484

 
17,064

 
(6,695
)
B.
Capitalization and indebtedness
Not applicable.
C.
Reasons for the offer and use of proceeds
Not applicable.
D.
Risk factors
Risks Relating to Us and Our Business
Investments in biopharmaceutical companies are generally considered to be speculative.
The prospects for companies operating in the biopharmaceutical industry are uncertain, given the very nature of the industry, and, accordingly, investments in biopharmaceutical companies should be considered to be speculative assets.
We have a history of operating losses and we may never achieve or maintain operating profitability.
Our product candidates remain at the development stage, and we have incurred substantial expenses in our efforts to develop products. Consequently, we have incurred operating losses historically and in each of the last several years. At December 31, 2014, we had an accumulated deficit of $222.3 million. Our operating losses have adversely impacted, and will continue to adversely impact, our working capital, total assets and shareholders' equity (deficiency). We do not expect to reach operating profitability in the immediate future, and our operating expenses are likely to continue to represent a significant component of our overall cost profile as we continue our R&D and clinical study programs and seek regulatory approval for our product candidates and carry out commercial activities. Even if we succeed in developing, acquiring or in-licensing new commercial products, we could incur additional operating losses for at least the next several years. If we do not ultimately generate sufficient revenue to achieve profitability, an investment in our securities could result in a significant or total loss.
Our clinical trials may not yield results which will enable us to obtain regulatory approval for our products, and a setback in any of our clinical trials would likely cause a drop in the price of our Common Shares.
We will only receive regulatory approval for a product candidate if we can demonstrate in carefully designed and conducted clinical trials that the product candidate is both safe and effective. We do not know whether our pending or any future clinical trials, including ZoptEC (Zoptarelin doxorubicin in Endometrial Cancer), which is expected to produce interim results in the first half of 2015, will demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals or will result in marketable products. Unfavorable data from those studies could result in the withdrawal of marketing approval for approved products or an extension of the review period for developmental products. Preclinical testing and clinical development are inherently lengthy, complex, expensive and uncertain processes and have a high risk of failure. It typically takes many years to complete testing, and failure can occur at any stage of testing. Results attained in preclinical testing and early clinical studies, or trials, may not be indicative of results that are obtained in later studies. In addition, we have limited experience in conducting and managing the clinical trials necessary to obtain regulatory approval in the U.S., in Canada and abroad and, accordingly, may encounter unforeseen problems and delays in the approval process. Though we may engage a contract

3


research organization (a "CRO") with experience in conducting regulatory trials, errors in the conduct, monitoring and/or auditing could invalidate the results from a regulatory perspective.
None of our current product candidates have to date received regulatory approval for their intended commercial sale. We cannot market a pharmaceutical product in any jurisdiction until it has completed rigorous preclinical testing and clinical trials and passed such jurisdiction's extensive regulatory approval process. In general, significant R&D and clinical studies are required to demonstrate the safety and efficacy of our product candidates before we can submit regulatory applications. Even if a product candidate is approved by the US Food and Drug Administration (the "FDA"), the Canadian Therapeutic Products Directorate ("CTPD") or any other regulatory authority, we may not obtain approval for an indication whose market is large enough to recover our investment in that product candidate. In addition, there can be no assurance that we will ever obtain all or any required regulatory approvals for any of our product candidates.
We are currently developing our product candidates based on R&D activities, preclinical testing and clinical trials conducted to date, and we may not be successful in developing or introducing to the market these or any other new products or technology. If we fail to develop and deploy new products successfully and on a timely basis, we may become non-competitive and unable to recover the R&D and other expenses we incur to develop and test new products.
Interim results of preclinical or clinical studies do not necessarily predict their final results, and acceptable results in early studies might not be obtained in later studies. Safety signals detected during clinical studies and preclinical animal studies may require us to perform additional studies, which could delay the development of the drug or lead to a decision to discontinue development of the drug. Product candidates in the later stages of clinical development may fail to show the desired safety and efficacy traits despite positive results in initial clinical testing. Results from earlier studies may not be indicative of results from future clinical trials and the risk remains that a pivotal program may generate efficacy data that will be insufficient for the approval of the drug, or may raise safety concerns that may prevent approval of the drug. Interpretation of the prior preclinical and clinical safety and efficacy data of our product candidates may be flawed and there can be no assurance that safety and/or efficacy concerns from the prior data were overlooked or misinterpreted, which in subsequent, larger studies appear and prevent approval of such product candidates.
Furthermore, we may suffer significant setbacks in advanced clinical trials, even after promising results in earlier studies. Based on results at any stage of clinical trials, we may decide to repeat or redesign a trial or discontinue development of one or more of our product candidates. Further, actual results may vary once the final and quality-controlled verification of data and analyses has been completed. If we fail to adequately demonstrate the safety and efficacy of our products under development, we will not be able to obtain the required regulatory approvals to commercialize our product candidates.
A failure in the development of any one of our programs or product candidates could have a negative impact on the development of the others. Setbacks in any phase of the clinical development of our product candidates would have an adverse financial impact (including with respect to any agreements and partnerships that may exist between us and other entities), could jeopardize regulatory approval and would likely cause a drop in the price of our securities.
If we are unable to successfully complete our clinical trial programs, or if such clinical trials take longer to complete than we project, our ability to execute our current business strategy will be adversely affected.
Whether or not and how quickly we complete clinical trials is dependent in part upon the rate at which we are able to engage clinical trial sites and, thereafter, the rate of enrollment of patients, and the rate at which we collect, clean, lock and analyze the clinical trial database. Patient enrollment is a function of many factors, including the design of the protocol, the size of the patient population, the proximity of patients to and availability of clinical sites, the eligibility criteria for the study, the perceived risks and benefits of the drug under study and of the control drug, if any, the efforts to facilitate timely enrollment in clinical trials, the patient referral practices of physicians, the existence of competitive clinical trials, and whether existing or new drugs are approved for the indication we are studying. Certain clinical trials are designed to continue until a pre-determined number of events have occurred to the patients enrolled. Such trials are subject to delays stemming from patient withdrawal and from lower than expected event rates and may also incur increased costs, if enrollment is increased in order to achieve the desired number of events. If we experience delays in identifying and contracting with sites and/or in patient enrollment in our clinical trial programs, we may incur additional costs and delays in our development programs, and we may not be able to complete our clinical trials on a cost-effective or timely basis. In addition, conducting multi-national studies adds another level of complexity and risk as we are subject to events affecting countries other than Canada and the United States. Moreover, negative or inconclusive results from the clinical trials we conduct or adverse medical events could cause us to have to repeat or terminate the clinical trials. Accordingly, we may not be able to complete the clinical trials within an acceptable time frame, if at all. If we or any third party have difficulty enrolling a sufficient number of patients to conduct our clinical trials as planned, we may need to delay or terminate ongoing clinical trials.

4


Clinical trials are subject to continuing oversight by governmental regulatory authorities and institutional review boards and must:
•
meet the requirements of these authorities;
•
meet the requirements for informed consent; and
•
meet the requirements for good clinical practices.
We may not be able to comply with these requirements in respect of one or more of our product candidates.
Additionally, we have limited experience in filing a New Drug Application ("NDA") or similar application for approval in the U.S. or in any other country for our current product candidates, which may result in a delay in, or the rejection of, our filing of an NDA or similar application. During the drug development process, regulatory agencies will typically ask questions of drug sponsors. While we endeavor to answer all such questions in a timely fashion, some questions may not be answered in time to prevent the delay of acceptance of an NDA or the rejection of an NDA.
We have incurred, and expect to continue to incur, substantial expenses, and we have made, and expect to continue to make, substantial financial commitments to establish a commercial operation. There can be no assurance how quickly, if ever, we will realize a profit from our commercial operation.
Our business strategy is to become an integrated specialty biopharmaceutical company with commercial operations to market and sell products that we develop, may acquire or in-license. To that end, during 2014, we established a commercial operation, including hiring a 19-person contract sales force and two regional sales managers and establishing a new office location and infrastructure for our North American business and global operations. We have to date incurred, and expect to continue to incur, substantial expenses, and we have made, and expect to continue to make, substantial financial commitments to build out our commercial operations. Establishing a commercial operation is expensive and time-consuming, and there can be no assurance how quickly, if ever, we will realize a profit from our commercial operation. Factors that may inhibit our efforts to realize a profit from our commercial operations, should we be successful in consummating transactions such as acquisitions, in-licensing, promotional or co-promotional arrangements with third parties, include:
•
our inability to recruit, train and retain adequate numbers of effective sales and marketing personnel and representatives;
•
the inability of our sales personnel to obtain access to or to persuade adequate numbers of physicians to prescribe our products or the products that we in-license or co-promote;
•
the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and
•
unforeseen costs and expenses associated with creating an independent sales and marketing organization.
Our financial viability depends, in part, on our ability to acquire, in-license or otherwise obtain the right to sell other products. If we are unable to do so, we will continue to experience operating losses from our commercial operations.
We must acquire, in-license or otherwise acquire the right to sell or promote other products to achieve profitability of our commercial operations. Our management team is spending a substantial amount of its time on efforts to obtain additional products. These business activities entail numerous operational and financial risks, including:
•
the difficulty or inability to secure financing to acquire or in-license products;
•
the incurrence of substantial debt or dilutive issuances of securities to pay for the acquisition or in-licensing of new products;
•
the disruption of our business and diversion of our management's time and attention;
•
higher than expected development, acquisition or in-license and integration costs;
•
exposure to unknown liabilities; and
•
the difficulty in locating products that are in our targeted therapeutic areas and that are compatible with other products in our portfolio.
We can provide no assurance that we will be able to identify potential product candidates or strategic commercial partners or, if we identify such product candidates or partners, that any related commercial arrangements will be consummated on terms that are favorable to us. To the extent that we are successful in entering into any strategic commercial arrangements, including

5


promotional or co-promotional agreements, or acquisition or in-licensing agreements with third parties, we cannot provide any assurance that any resulting initiatives or activities will be successful. To the extent that any related investments in such arrangements do not yield the expected benefits, our business, financial condition and results of operations may be materially adversely affected.
We have limited resources to identify and execute the procurement of additional products and to integrate them into our current commercial operations. The failure to successfully integrate the personnel and operations of businesses that we may acquire or of products that we may in-license in the future with our existing operations, business and products could have a material adverse effect on our operations and results. We compete with larger pharmaceutical companies and other competitors in our efforts to acquire, in-license and/or obtain the right to market new products. Our competitors likely will have access to greater financial resources than us and may have greater expertise in identifying and evaluating new opportunities. Moreover, we may devote resources to potential acquisition, in-licensing, promotion or co-promotion opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts.
We will require significant additional financing, and we may not have access to sufficient capital.
We will require significant additional capital to fund our commercial operations and to pursue planned clinical trials, regulatory approvals and R&D efforts. We do not anticipate generating significant revenues from operations in the near future, and we currently have no committed sources of capital.
We may attempt to raise additional funds through public or private financings, collaborations with other pharmaceutical companies or from other sources, including, without limitation, through at-the-market offerings and issuances of Common Shares. Additional funding may not be available on terms which are acceptable to us. If adequate funding is not available to us on reasonable terms, we may need to delay, reduce or eliminate one or more of our product development programs or obtain funds on terms less favorable than we would otherwise accept. To the extent that additional capital is raised through the sale of equity securities or securities convertible into or exchangeable or exercisable for equity securities ("Convertible Securities"), the issuance of those securities could result in dilution to our shareholders. Moreover, the incurrence of debt financing or the issuance of dividend-paying preferred shares could result in a substantial portion of our future operating cash flow, if any, being dedicated to the payment of principal and interest on such indebtedness or the payment of dividends on such preferred shares and could impose restrictions on our operations and on our ability to make certain expenditures and/or to incur additional indebtedness. This could render us more vulnerable to competitive pressures and economic downturns.
We anticipate that our cash and equivalents as at December 31, 2014 will be sufficient to fund our commercial operations, development programs, clinical trials and other operating expenses at least through December 31, 2015. However, our future capital requirements are substantial and may increase beyond our current expectations depending on many factors, including:
•
the duration of, changes to and results of our clinical trials for our various product candidates going forward;
•
unexpected delays or developments in seeking regulatory approvals;
•
the time and cost involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;
•
unexpected developments encountered in implementing our business development and commercialization strategies;
•
the potential addition of commercialized products to our pipeline;
•
the outcome of litigation, if any; and
•
further arrangements, if any, with collaborators.
In addition, global economic and market conditions as well as future developments in the credit and capital markets may make it even more difficult for us to raise additional financing in the future.
If we are unsuccessful in increasing our revenues and/or raising additional funding, we may possibly cease to continue operating as we currently do.
We have had sustained operating losses, deficits and negative cash flows from operating activities over the past several years, and we expect that we will continue to do so for an extended period.
Although our audited consolidated financial statements as at December 31, 2014 and December 31, 2013 and for the years ended December 31, 2014, 2013 and 2012 were prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities during the normal course of operations, our ability to continue as a going concern is dependent on the successful execution of our business plan, which will require an increase in revenue and/or additional funding to be

6


provided by potential investors as well as non-traditional sources of financing. Although we state in Item 5 of this Annual Report on Form 20-F that management believes that we had, as at December 31, 2014, sufficient liquidity and financial resources to fund planned expenditures and other working capital needs for at least, but not limited to, the 12-month period following such date, there can be no assurance that management will be able to reiterate such belief in the future, particularly in the event that we do not or are unable to raise additional capital, as we do not expect our operations to generate sufficient cash flow to fund our operations.
Additional funding may be in the form of debt or equity or a hybrid instrument depending on our needs, those of investors and market conditions. Depending on the prevailing global economic and credit market conditions, we may not be able to raise additional cash resources through these traditional sources of financing. Although we may also pursue non-traditional sources of financing with third parties, the global equity and credit markets may adversely affect the ability of potential third parties to pursue such transactions with us. Accordingly, as a result of the foregoing, we continue to review traditional sources of financing, such as private and public debt or various equity financing alternatives, as well as other alternatives to enhance shareholder value, including, but not limited to, non-traditional sources of financing, such as strategic alliances with third parties, the sale of assets or licensing of our technology or intellectual property, a combination of operating and related initiatives or a substantial reorganization of our business.
There can be no assurance that we will achieve profitability or positive cash flows or be able to obtain additional funding or that, if obtained, they will be sufficient, or whether any other initiatives will be successful such that we may continue as a going concern. There also could be material uncertainties related to certain adverse conditions and events that could impact our ability to remain a going concern. If the going concern assumptions were deemed no longer appropriate for our consolidated financial statements, adjustments to the carrying value of assets and liabilities, reported expenses and consolidated statement of financial position classifications would be necessary. Such adjustments could be material.
We are and will be subject to stringent ongoing government regulation for our products and our product candidates, even if we obtain regulatory approvals for the latter.
The manufacture, marketing and sale of our products and product candidates are and will be subject to strict and ongoing regulation, even if regulatory authorities approve any of the latter. Compliance with such regulation will be expensive and consume substantial financial and management resources. For example, an approval for a product may be conditioned on our agreement to conduct costly post-marketing follow-up studies to monitor the safety or efficacy of the product. In addition, as a clinical experience with a drug expands after approval because the drug is used by a greater number and more diverse group of patients than during clinical trials, side effects or other problems may be observed after approval that were not observed or anticipated during pre-approval clinical trials. In such a case, a regulatory authority could restrict the indications for which the product may be sold or revoke the product's regulatory approval.
We and our contract manufacturers will be required to comply with applicable current Good Manufacturing Practice ("cGMP") regulations for the manufacture of our products. These regulations include requirements relating to quality assurance, as well as the corresponding maintenance of rigorous records and documentation. Manufacturing facilities must be approved before we can use them in the commercial manufacturing of our products and are subject to subsequent periodic inspection by regulatory authorities. In addition, material changes in the methods of manufacturing or changes in the suppliers of raw materials are subject to further regulatory review and approval.
If we, or if any future marketing collaborators or contract manufacturers, fail to comply with applicable regulatory requirements, we may be subject to sanctions including fines, product recalls or seizures and related publicity requirements, injunctions, total or partial suspension of production, civil penalties, suspension or withdrawals of previously granted regulatory approvals, warning or untitled letters, refusal to approve pending applications for marketing approval of new products or of supplements to approved applications, import or export bans or restrictions, and criminal prosecution and penalties. Any of these penalties could delay or prevent the promotion, marketing or sale of our products and product candidates.
Even if we receive marketing approval for our product candidates, such product approvals could be subject to restrictions or withdrawals. Regulatory requirements are subject to change.
Regulatory authorities generally approve products for particular indications. If an approval is for a limited indication, this limitation reduces the size of the potential market for that product. Product approvals, once granted, are subject to continual review and periodic inspections by regulatory authorities. Our operations and practices are subject to regulation and scrutiny by the United States government, as well as governments of any other countries in which we do business or conduct activities. Later discovery of previously unknown problems or safety issues and/or failure to comply with domestic or foreign laws, knowingly or unknowingly, can result in various adverse consequences, including, among other things, a possible delay in the approval or refusal to approve a product, warning letters, fines, injunctions, civil penalties, recalls or seizures of products, total

7


or partial suspension of production, refusal of the government to renew marketing applications, complete withdrawal of a marketing application, criminal prosecution, withdrawal of an approved product from the market and/or exclusion from government healthcare programs. Such regulatory enforcement could have a direct and negative impact on the product for which approval is granted, but also could have a negative impact on the approval of any pending applications for marketing approval of new drugs or supplements to approved applications.
Because we operate in a highly regulated industry, regulatory authorities could take enforcement action against us in connection with our, or our licensees' or collaborators', business and marketing activities for various reasons.
From time to time, new legislation is passed into law that could significantly change the statutory provisions governing the approval, manufacturing, and marketing of products regulated by the FDA and other health authorities. Additionally, regulations and guidance are often revised or reinterpreted by health agencies in ways that may significantly affect our business and our products. It is impossible to predict whether further legislative changes will be enacted, or whether regulations, guidance, or interpretations will change, and what the impact of such changes, if any, may be. For example, the Patient Protection and Affordable Care Act and the Healthcare and Education Affordability Reconciliation Act of 2010 (collectively, the "ACA"), enacted in the U.S. in March 2010, substantially changed the way healthcare is financed by both governmental and private insurers, and significantly impacted the pharmaceutical industry. With regard to pharmaceutical products, among other things, ACA is expected to expand and increase industry rebates for drugs covered under Medicaid programs and make changes to the coverage requirements under the Medicare D program. We expect both government and private health plans to continue to require healthcare providers, including healthcare providers that may one day purchase our products, to contain costs and demonstrate the value of the therapies they provide.
If we market products in a manner that violates healthcare fraud and abuse laws, we may be subject to civil or criminal penalties, including exclusion from participation in government healthcare programs.
As a pharmaceutical company, even though we do not provide healthcare services or receive payments directly from or bill directly to Medicare, Medicaid or other third-party payers for our products, certain federal and state healthcare laws and regulations pertaining to fraud and abuse are and will be applicable to our business. We are subject to healthcare fraud and abuse regulation by both the federal government and the states in which we conduct our business.
The laws that may affect our ability to operate include the federal healthcare program anti-kickback statute, which prohibits, among other things, knowingly and willfully offering, paying, soliciting, or receiving remuneration to induce, or in return for, the purchase, lease, order, or arrangement for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute applies to arrangements between pharmaceutical manufacturers and prescribers, purchasers and formulary managers. Although there are a number of statutory exceptions and regulatory safe harbors protecting certain common activities, the exceptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor.
Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to get a false claim paid. Pharmaceutical companies have been prosecuted under these laws for a variety of alleged promotional and marketing activities, such as providing free product to customers with the expectation that the customers would bill federal programs for the product; reporting to pricing services inflated average wholesale prices that were then used by federal programs to set reimbursement rates; engaging in off-label promotion that caused claims to be submitted to Medicaid for non-covered off-label uses; and submitting inflated best price information to the Medicaid Drug Rebate Program.
The Health Insurance Portability and Accountability Act of 1996 also created prohibitions against healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payers. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services.
In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians. The ACA imposed new requirements on manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children's Health Insurance Program (with certain exceptions) to report annually to CMS information related to payments or other "transfers of value" made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and applicable manufacturers and group purchasing organizations to report annually to CMS ownership and investment interests held by physicians (as defined above) and their immediate family members and payments or other "transfers of value" to such physician owners and their immediate family members. Manufacturers are required to report such data to the government by the 90th calendar day of each year.

8


The majority of states also have statutes or regulations similar to these federal laws, which apply to items and services reimbursed under Medicaid and other state programs or, in several states, apply regardless of the payer. In addition, some states have laws that require pharmaceutical companies to adopt comprehensive compliance programs. For example, under California law, pharmaceutical companies must comply with both the April 2003 Office of Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers and the PhRMA Code on Interactions with Healthcare Professionals, as amended. Certain states also mandate the tracking and reporting of gifts, compensation, and other remuneration paid by us to physicians and other healthcare providers.
Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management's attention from the operation of our business. Moreover, achieving and sustaining compliance with applicable federal and state laws may prove costly.
Because of the breadth of these laws and the narrowness of the safe harbors, it is possible that some of our business activities could be subject to challenge under one or more of such laws. The ACA also made several important changes to the federal anti-kickback statute, false claims laws, and healthcare fraud statute by weakening the intent requirement under the anti-kickback and healthcare fraud statutes that may make it easier for the government, or whistleblowers to charge such fraud and abuse violations. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the ACA provides that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes. In addition, the ACA increases penalties for fraud and abuse violations. If our past, present or future operations are found to be in violation of any of the laws described above or other similar governmental regulations to which we are subject, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and negatively impact our financial results.
If our products do not gain market acceptance, we may be unable to generate significant revenues.
Even if our products are approved for commercialization, they may not be successful in the marketplace. Market acceptance of any of our products will depend on a number of factors, including, but not limited to:
•
demonstration of clinical efficacy and safety;
•
the prevalence and severity of any adverse side effects;
•
limitations or warnings contained in the product's approved labeling;
•
availability of alternative treatments for the indications we target;
•
the advantages and disadvantages of our products relative to current or alternative treatments;
•
the availability of acceptable pricing and adequate third-party reimbursement; and
•
the effectiveness of marketing and distribution methods for the products.
If our products do not gain market acceptance among physicians, patients, healthcare payers and others in the medical community, who may not accept or utilize our products, our ability to generate significant revenues from our products would be limited and our financial condition could be materially adversely affected. In addition, if we fail to further penetrate our core markets and existing geographic markets or to successfully expand our business into new markets, the growth in sales of our products, along with our operating results, could be negatively impacted.
Our ability to further penetrate our core markets and existing geographic markets in which we compete or to successfully expand our business into additional countries in Europe, Asia or elsewhere is subject to numerous factors, many of which are beyond our control. Our products, if successfully developed, may compete with a number of drugs, therapies, products and tests currently manufactured and marketed by major pharmaceutical and other biotechnology companies. Our products may also compete with new products currently under development by others or with products which may be less expensive than our products. There can be no assurance that our efforts to increase market penetration in our core markets and existing geographic markets will be successful. Our failure to do so could have an adverse effect on our operating results and would likely cause a drop in the price of our securities.


9


We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications for which there may be a greater likelihood of success.
Because we have limited financial and managerial resources, we are currently focusing our efforts on our later-stage clinical research programs, zoptarelin doxorubicin and Macrilen™ (macimorelin acetate), and we are doing so for specific indications. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications for which there may be a greater likelihood of success or may prove to have greater commercial potential. Notwithstanding our investment to date and anticipated future expenditures on zoptarelin doxorubicin, Macrilen™ (macimorelin acetate) and our earlier-stage programs, we have not yet developed, and may never successfully develop, any marketed treatments using these products. Research programs to identify new product candidates or pursue alternative indications for current product candidates require substantial technical, financial and human resources. These activities may initially show promise in identifying potential product candidates or indications, yet fail to yield product candidates or indications for further clinical development.
We may not achieve our projected development goals in the time-frames we announce and expect.
We set goals and make public statements regarding the timing of the accomplishment of objectives material to our success, such as the commencement, enrollment and anticipated completion of clinical trials, anticipated regulatory submission and approval dates and time of product launch. The actual timing of these events can vary dramatically due to factors such as delays or failures in our clinical trials, the uncertainties inherent in the regulatory approval process and delays in achieving manufacturing or marketing arrangements sufficient to commercialize our products. There can be no assurance that our clinical trials will be completed, that we will make regulatory submissions or receive regulatory approvals as planned or that we will be able to adhere to our current schedule for the launch of any of our products. If we fail to achieve one or more of these milestones as planned, the price of our securities would likely decline.
If we fail to obtain acceptable prices or adequate reimbursement for our products, our ability to generate revenues will be diminished.
Our ability to successfully commercialize our products will depend significantly on our ability to obtain acceptable prices and the availability of reimbursement to the patient from third-party payers, such as governmental and private insurance plans. These third-party payers frequently require companies to provide predetermined discounts from list prices, and they are increasingly challenging the prices charged for pharmaceuticals and other medical products. Our products may not be considered cost-effective, and reimbursement to the patient may not be available or sufficient to allow us to sell our products on a competitive basis. It may not be possible to negotiate favorable reimbursement rates for our products. Adverse pricing and reimbursement conditions would also likely diminish our ability to induce third parties to co-promote our products.
In addition, the continuing efforts of third-party payers to contain or reduce the costs of healthcare through various means may limit our commercial opportunity and reduce any associated revenue and profits. We expect proposals to implement similar government controls to continue. In addition, increasing emphasis on managed care will continue to put pressure on the pricing of pharmaceutical and biopharmaceutical products. Cost control initiatives could decrease the price that we or any current or potential collaborators could receive for any of our products and could adversely affect our profitability. In addition, in the U.S., in Canada and in many other countries, pricing and/or profitability of some or all prescription pharmaceuticals and biopharmaceuticals are subject to government control.
If we fail to obtain acceptable prices or an adequate level of reimbursement for our products, the sales of our products would be adversely affected or there may be no commercially viable market for our products.
Competition in our targeted markets is intense, and development by other companies could render our products or technologies non-competitive.
The biopharmaceutical field is highly competitive. New products developed by other companies in the industry could render our products or technologies non-competitive. Competitors are developing and testing products and technologies that would compete with the products that we are developing. Some of these products may be more effective or have an entirely different approach or means of accomplishing the desired effect than our products. We expect competition from pharmaceutical and biopharmaceutical companies and academic research institutions to continue to increase over time. Many of our competitors and potential competitors have substantially greater product development capabilities and financial, scientific, marketing and human resources than we do. Our competitors may succeed in developing products earlier and in obtaining regulatory approvals and patent protection for such products more rapidly than we can or at a lower price.

10


We may not obtain adequate protection for our products through our intellectual property.
We rely heavily on our proprietary information in developing and manufacturing our product candidates. Our success depends, in large part, on our ability to protect our competitive position through patents, trade secrets, trademarks and other intellectual property rights. The patent positions of pharmaceutical and biopharmaceutical firms, including us, are uncertain and involve complex questions of law and fact for which important legal issues remain unresolved. We have filed and are pursuing applications for patents and trademarks in Canada, the U.S. and in other territories. Pending patent applications may not result in the issuance of patents and we may not be able to obtain additional issued patents relating to our technology or products.
The laws of some countries do not protect intellectual property rights to the same extent as the laws of the U.S. and Canada. Many companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of the patent. Compulsory licensing of life-saving drugs is also becoming increasingly popular in developing countries either through direct legislation or international initiatives. Such compulsory licenses could be extended to include some of our product candidates, which could limit our potential revenue opportunities. Moreover, the legal systems of certain countries, particularly certain developing countries, do not favor the aggressive enforcement of patent and other intellectual property protection, which makes it difficult to stop infringement.
Our patents and/or the patents that we license from others may be challenged, narrowed, invalidated, held to be unenforceable or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products. Changes in either patent laws or in interpretations of patent laws in the U.S. and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection. The patents issued or to be issued to us may not provide us with any competitive advantage or protect us against competitors with similar technology. In addition, it is possible that third parties with products that are very similar to ours will circumvent our patents by means of alternate designs or processes. We may have to rely on method-of-use and new-formulation protection for our compounds in development, and any resulting products, which may not confer the same protection as claims to compounds per se.
In addition, our patents may be challenged by third parties in patent litigation, which is becoming widespread in the biopharmaceutical industry. There may be prior art of which we are not aware that may affect the validity or enforceability of a patent claim. There may also be prior art of which we are aware, but which we do not believe affects the validity or enforceability of a claim, which may, nonetheless, ultimately be found to affect the validity or enforceability of a claim. No assurance can be given that our patents would, if challenged, be held by a court to be valid or enforceable or that a competitor's technology or product would be found by a court to infringe our patents. Our granted patents could also be challenged and revoked in U.S. post-grant proceedings as well as in opposition or nullity proceedings in certain countries outside the U.S. In addition, we may be required to disclaim part of the term of certain patents.
Patent applications relating to or affecting our business have been filed by a number of pharmaceutical and biopharmaceutical companies and academic institutions. A number of the technologies in these applications or patents may conflict with our technologies, patents or patent applications, and any such conflict could reduce the scope of patent protection which we could otherwise obtain. Because patent applications in the U.S. and many other jurisdictions are typically not published until eighteen months after their first effective filing date, or in some cases not at all, and because publications of discoveries in the scientific literature often lag behind actual discoveries, we cannot be certain that we were the first to make the inventions claimed in issued patents or pending patent applications, or that we were the first to file for protection of the inventions set forth in the patent applications. If a third party has also filed a patent application in the U.S. covering our product candidates or a similar invention, we may have to participate in adversarial proceedings, such as interferences and deviation proceedings, before the United States Patent and Trademark Office to determine which party is entitled to a U.S. patent claiming the disputed invention. The costs of these proceedings could be substantial and it is possible that our efforts could be unsuccessful, resulting in a loss of our U.S. patent position.
Furthermore, the product development timeline for our products is lengthy and it is possible that our issued patents covering our product candidates in the United States and other jurisdictions may expire prior to commercial launch of the products. The patent that covers the compound zoptarelin doxorubicin and other related targeted cytotoxic anthracycline analogues, pharmaceutical compositions comprising the compounds as well as their medical use for the treatment of cancer will expire in the United States in November 2015 and in the EU, Japan, China and Hong Kong in November 2016. As a result, our ability to protect this compound from competition will be based on the protections provided in the United States for new chemical entities and similar protections, if any, provided in other countries. We cannot assure you that zoptarelin doxorubicin or any of our other drug candidates will obtain new chemical entity exclusivity or any other market exclusivity in the U.S., the EU or any

11


other territory, or that we will be the first to receive the respective regulatory approval for such drugs so as to be eligible for any market exclusivity protection.
We also rely on trade secrets and proprietary know-how to protect our intellectual property. If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected. We seek to protect our unpatented proprietary information in part by requiring our employees, consultants, outside scientific collaborators and sponsored researchers and other advisors to enter into confidentiality agreements. These agreements provide that all confidential information developed or made known to the individual during the course of the individual's relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of our employees, the agreements provide that all of the technology which is conceived by the individual during the course of employment is our exclusive property. These agreements may not provide meaningful protection or adequate remedies in the event of unauthorized use or disclosure of our proprietary information. In addition, it is possible that third parties could independently develop proprietary information and techniques substantially similar to ours or otherwise gain access to our trade secrets. If we are unable to protect the confidentiality of our proprietary information and know-how, competitors may be able to use this information to develop products that compete with our products and technologies, which could adversely impact our business.
We currently have the right to use certain patents and technologies under license agreements with third parties. Our failure to comply with the requirements of one or more of our license agreements could result in the termination of such agreements, which could cause us to terminate the related development program and cause a complete loss of our investment in that program. Inventions claimed in certain in-licensed patents may have been made with funding from the U.S. government and may be subject to the rights of the U.S. government and we may be subject to additional requirements in the event we seek to commercialize or manufacture product candidates incorporating such in-licensed technology.
As a result of the foregoing factors, we may not be able to rely on our intellectual property to protect our products in the marketplace.
We may infringe the intellectual property rights of others.
Our commercial success depends significantly on our ability to operate without infringing the patents and other intellectual property rights of third parties. There could be issued patents of which we are not aware that our products or methods may be found to infringe, or patents of which we are aware and believe we do not infringe but which we may ultimately be found to infringe. Moreover, patent applications and their underlying discoveries are in some cases maintained in secrecy until patents are issued. Because patents can take many years to issue, there may be currently pending applications of which we are unaware that may later result in issued patents that our products or technologies are found to infringe. Moreover, there may be published pending applications that do not currently include a claim covering our products or technologies but which nonetheless provide support for a later drafted claim that, if issued, our products or technologies could be found to infringe.
If we infringe or are alleged to infringe intellectual property rights of third parties, it will adversely affect our business. Our research, development and commercialization activities, as well as any product candidates or products resulting from these activities, may infringe or be accused of infringing one or more claims of an issued patent or may fall within the scope of one or more claims in a published patent application that may subsequently be issued and to which we do not hold a license or other rights. Third parties may own or control these patents or patent applications in the U.S. and abroad. These third parties could bring claims against us or our collaborators that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us or our collaborators, we or they could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit.
The biopharmaceutical industry has produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover various types of products. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. In the event of infringement or violation of another party's patent or other intellectual property rights, we may not be able to enter into licensing arrangements or make other arrangements at a reasonable cost. Any inability to secure licenses or alternative technology could result in delays in the introduction of our products or lead to prohibition of the manufacture or sale of products by us or our partners and collaborators.
Patent litigation is costly and time consuming and may subject us to liabilities.
If we become involved in any patent litigation, interference, opposition or other administrative proceedings we will likely incur substantial expenses in connection therewith, and the efforts of our technical and management personnel will be significantly diverted. In addition, an adverse determination in litigation could subject us to significant liabilities.

12


We may not obtain trademark registrations for our product candidates.
We have filed applications for trademark registrations in connection with our product candidates in various jurisdictions, including the U.S. We intend to file further applications for other possible trademarks for our product candidates. No assurance can be given that any of our trademark applications will be registered in the U.S. or elsewhere, or that the use of any registered or unregistered trademarks will confer a competitive advantage in the marketplace. Furthermore, even if we are successful in our trademark registrations, the FDA and regulatory authorities in other countries have their own process for drug nomenclature and their own views concerning appropriate proprietary names. The FDA and other regulatory authorities also have the power, even after granting market approval, to request a company to reconsider the name for a product because of evidence of confusion in the marketplace. No assurance can be given that the FDA or any other regulatory authority will approve any of our trademarks or will not request reconsideration of one of our trademarks at some time in the future. The loss, abandonment, or cancellation of any of our trademarks or trademark applications could negatively affect the success of the product candidates to which they relate.
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 securities.
We have a history of operating losses. Our revenues and expenses have fluctuated in the past and may continue to do so in the future. These fluctuations could cause our share price to decline. Some of the factors that could cause our revenues and expenses to fluctuate include but are not limited to:
•
the inability to complete product development in a timely manner that results in a failure or delay in receiving the required regulatory approvals to commercialize our 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 revenue available from royalties derived from our licensees;
•
the nature and timing of licensing fee revenues;
•
the nature and timing of tax credits and grants for our research and development activities;
•
the outcome of litigation, including the litigation pending against us that is described elsewhere in this Annual Report on Form 20-F;
•
changes in foreign currency fluctuations;
•
the timing of achievement and the receipt of milestone payments from current or future collaborators;
•
failure to enter into new or the expiration or termination of current agreements with collaborators; and
•
our ability to secure alternative leasing or subleasing arrangements for our underutilized offices in Frankfurt, Germany, and to achieve related cost savings with respect to our current lease obligations.
Due to fluctuations in our revenues and expenses, we believe that period-to-period comparisons of our results of operations are not necessarily indicative of our future performance. It is possible that in some future quarter or quarters, our revenues and expenses will be above or below the expectations of securities analysts or investors. In this case, the price of our securities could fluctuate significantly or decline.
We are currently dependent on certain third parties with which we have significant contractual relationships and we may enter into future collaborations for the R&D of our product candidates.
We are currently dependent on certain third parties with which we have significant contractual relationships and may enter into future collaborations for the R&D of our product candidates. Our arrangements with these third parties may not provide us with the benefits we expect and may expose us to a number of risks.
We are dependent on, and rely upon, third parties to perform various functions related to our business, including, but not limited to, research and development with respect to some of our product candidates. Our reliance on these relationships poses a number of risks.

13


We may not realize the contemplated benefits of such agreements nor can we be certain that any of these parties will fulfill their obligations in a manner which maximizes our revenue. These arrangements may also require us to transfer certain material rights or to issue our equity, voting or other securities to third parties. Any license or sublicense of our commercial rights may reduce our product revenue.
These agreements create certain additional risks. The occurrence of any of the following or other events may delay product development or impair commercialization of our products:
•
not all of the third parties are contractually prohibited from developing or commercializing, either alone or with others, products and services that are similar to or competitive with our product candidates and, with respect to our contracts that do contain such contractual prohibitions or restrictions, prohibitions or restrictions do not always apply to the affiliates of the third parties and they may elect to pursue the development of any additional product candidates and pursue technologies or products either on their own or in collaboration with other parties, including our competitors, whose technologies or products may be competitive with ours;
•
the third parties may under-fund or fail to commit sufficient resources to marketing, distribution or other development of our products;
•
the third parties may cease to conduct business for financial or other reasons;
•
we may not be able to renew such agreements;
•
the third parties may not properly maintain or defend certain intellectual property rights that may be important to the commercialization of our products;
•
the third parties may encounter conflicts of interest, changes in business strategy or other issues which could adversely affect their willingness or ability to fulfill their obligations to us (for example, pharmaceutical companies historically have re-evaluated their priorities following mergers and consolidations, which have been common in recent years in this industry);
•
delays in, or failures to achieve, scale-up to commercial quantities, or changes to current raw material suppliers or product manufacturers (whether the change is attributable to us or the supplier or manufacturer) could delay clinical studies, regulatory submissions and commercialization of our product candidates; and
•
disputes may arise between us and the third parties that could result in the delay or termination of the development or commercialization of our product candidates, resulting in litigation or arbitration that could be time-consuming and expensive, or causing the third parties to act in their own self-interest and not in our interest or those of our shareholders or other stakeholders.
In addition, the third parties can terminate our agreements with them for a number of reasons based on the terms of the individual agreements that we have entered into with them. If one or more of these agreements were to be terminated, we would be required to devote additional resources to developing and commercializing our product candidates, seek a new third party with which to contract or abandon the product candidate, which would likely cause a drop in the price of our securities.
We rely on third parties to conduct, supervise and monitor our clinical trials, and those third parties may not perform satisfactorily.
We rely on third parties such as CROs, medical institutions and clinical investigators to enroll qualified patients and conduct, supervise and monitor our clinical trials. Our reliance on these third parties for clinical development activities reduces our control over these activities. Our reliance on these third parties, however, does not relieve us of our regulatory responsibilities, including ensuring that our clinical trials are conducted in accordance with Good Clinical Practice guidelines and the investigational plan and protocols contained in an Investigational New Drug ("IND") application, or a comparable foreign regulatory submission. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. In addition, they may not complete activities on schedule, or may not conduct our preclinical studies or clinical trials in accordance with regulatory requirements or our trial design. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, our efforts to obtain regulatory approvals for, and commercialize, our product candidates may be delayed or prevented.

14


In carrying out our operations, we are dependent on a stable and consistent supply of ingredients and raw materials.
There can be no assurance that we, our contract manufacturers or our licensees will be able, in the future, to continue to purchase products from our current suppliers or any other supplier on terms similar to current terms or at all. An interruption in the availability of certain raw materials or ingredients, or significant increases in the prices we pay for them, could have a material adverse effect on our business, financial condition, liquidity and operating results.
The failure to perform satisfactorily by third parties upon which we rely to manufacture and supply products may lead to supply shortfalls.
We will rely on third parties to manufacture and supply marketed products. To be successful, our products have to be manufactured in commercial quantities in compliance with quality controls and regulatory requirements. Even though it is our objective to minimize such risk by introducing alternative suppliers to ensure a constant supply at all times, there are a limited number of contract manufacturers or suppliers that are capable of manufacturing our product candidates or the materials used in their manufacture. If we are unable to do so ourselves or to arrange for third-party manufacturing or supply of these product candidates or materials, or to do so on commercially reasonable terms, we may not be able to complete development of these product candidates or commercialize them ourselves or through our licensees. Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured products ourselves, including reliance on the third party for regulatory compliance, the possibility of breach of the manufacturing agreement by the third party because of factors beyond our control, and the possibility of termination or non-renewal of the agreement by the third party, based on its own business priorities, at a time that is costly or inconvenient for us.
We are subject to intense competition for our skilled personnel, and the loss of key personnel or the inability to attract additional personnel could impair our ability to conduct our operations.
We are highly dependent on our management and our clinical, regulatory and scientific staff, the loss of whose services might adversely impact our ability to achieve our objectives. Recruiting and retaining qualified management and clinical, scientific and regulatory personnel is critical to our success. Reductions in our staffing levels have eliminated redundancies in key capabilities and skill sets among our full-time staff and required us to rely more heavily on outside consultants and third parties. We have been unable to increase the compensation of our associates to the extent required to remain fully competitive for their services, which increased our employee retention risk. The competition for qualified personnel in the biopharmaceutical field is intense, and if we are not able to continue to attract and retain qualified personnel and/or maintain positive relationships with our outside consultants, we may not be able to achieve our strategic and operational objectives.
We are currently subject to securities class action litigation and we may be subject to similar or other litigation in the future.
We and certain of our current and former officers are defendants in a purported class-action lawsuit pending in the United States District Court for the District of New Jersey, brought on behalf of certain shareholders. The lawsuit alleges violations of the Securities Exchange Act of 1934 in connection with allegedly false and misleading statements made by the defendants between October 18, 2012 and November 6, 2014, or the Class Period, regarding the safety and efficacy of Macrilen™, a product we developed for use in the diagnosis of Adult Growth Hormone Deficiency ("AGHD"), and the prospects for the approval of our new drug application for the product by the FDA. The plaintiffs seek to represent a class comprised of purchasers of our Common Shares during the Class Period and seek damages, costs and expenses and such other relief as determined by the Court.
While we believe we have meritorious defenses and intend to defend this lawsuit vigorously, we cannot predict the outcome. Furthermore, we may, from time to time, be parties to other litigation in the normal course of business. Monitoring and defending against legal actions, whether or not meritorious, is time-consuming for our management and detracts from our ability to fully focus our internal resources on our business activities. In addition, legal fees and costs incurred in connection with such activities may be significant and we could, in the future, be subject to judgments or enter into settlements of claims for significant monetary damages. A decision adverse to our interests could result in the payment of substantial damages and could have a material adverse effect on our cash flow, results of operations and financial position.
With respect to any litigation, our insurance may not reimburse us or may not be sufficient to reimburse us for the expenses or losses we may suffer in contesting and concluding such lawsuit. Substantial litigation costs or an adverse result in any litigation may adversely impact our business, operating results or financial condition. We believe that our directors' and officers' liability insurance will cover our potential liability with respect to the securities class action lawsuit described above; however, the insurer has reserved its rights to contest the applicability of the insurance to such claim, the limits of the insurance may be insufficient to cover our eventual liability, and we will be required to satisfy a substantial self-insured retention before any insurance coverage applies to the claim.

15


We are subject to the risk of product liability claims, for which we may not have or be able to obtain adequate insurance coverage.
The sale and use of our products involve the risk of product liability claims and associated adverse publicity. Our risks relate to human participants in our clinical trials, who may suffer unintended consequences, as well as products on the market whereby claims might be made directly by patients, healthcare providers or pharmaceutical companies or others selling, buying or using our products. We manage our liability risks by means of insurance. We maintain liability insurance covering our liability for our preclinical and clinical studies and for our pharmaceutical products already marketed. However, we may not have or be able to obtain or maintain sufficient and affordable insurance coverage, including coverage for potentially very significant legal expenses, and without sufficient coverage any claim brought against us could have a materially adverse effect on our business, financial condition or results of operations.
Our business involves the use of hazardous materials. We are required to comply with environmental and occupational safety laws regulating the use of such materials. If we violate these laws, we could be subject to significant fines, liabilities or other adverse consequences.
Our discovery and development processes involve the controlled use of hazardous and radioactive materials. We are subject to federal, provincial and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. The risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of an accident or a failure to comply with environmental or occupational safety laws, we could be held liable for any damages that result, and any such liability could exceed our resources. We may not be adequately insured against this type of liability. We may be required to incur significant costs to comply with environmental laws and regulations in the future, and our operations, business or assets may be materially adversely affected by current or future environmental laws or regulations.
We are a holding company, and claims of creditors of our subsidiaries will generally have priority as to the assets of such subsidiaries over our claims and those of our creditors and shareholders.
Aeterna Zentaris Inc. is a holding company and a substantial portion of our non-cash assets is the share capital of our subsidiaries. Aeterna Zentaris GmbH ("AEZS GmbH"), our principal operating subsidiary, based in Frankfurt, Germany, holds most of our intellectual property rights, which represent the principal assets of our business.
Because Aeterna Zentaris Inc. is a holding company, our obligations to our creditors are structurally subordinated to all existing and future liabilities of our subsidiaries. Therefore, our rights and the rights of our creditors to participate in any distribution of the assets of any subsidiary in the event that such subsidiary were to be liquidated or reorganized or in the event of any bankruptcy or insolvency proceeding relating to or involving such subsidiary, and therefore the rights of the holders of our Common Shares to participate in those assets, are subject to the prior claims of such subsidiary's creditors. To the extent that we may be a creditor with recognized claims against any such subsidiary, our claims would still be subject to the prior claims of our subsidiary's creditors to the extent that they are secured or senior to those held by us.
Holders of our Common Shares are not creditors of our subsidiaries. Claims to the assets of our subsidiaries will derive from our own ownership interest in those operating subsidiaries. Claims of our subsidiaries' creditors will generally have priority as to the assets of such subsidiaries over our own ownership interest claims and will therefore have priority over the holders of our Common Shares. Our subsidiaries' creditors may from time to time include general creditors, trade creditors, employees, secured creditors, taxing authorities, and creditors holding guarantees.
Accordingly, in the event of any foreclosure, dissolution, winding-up, liquidation or reorganization, or a bankruptcy or insolvency proceeding relating to us or our property, or any subsidiary, there can be no assurance as to the value, if any, that would be available to holders of our Common Shares.
In addition, any distributions to us by our subsidiaries could be subject to monetary transfer restrictions in the jurisdictions in which our subsidiaries operate.
Our subsidiaries may incur additional indebtedness and other liabilities.
It may be difficult for U.S. investors to obtain and enforce judgments against us because of our Canadian incorporation and German presence.
We are a company existing under the laws of Canada. Many of our directors and officers, and certain of the experts named herein, are residents of Canada or otherwise reside outside the U.S., and all or a substantial portion of their assets, and a substantial portion of our assets, are located outside the U.S. Consequently, although we have appointed an agent for service of process in the U.S., it may be difficult for investors in the U.S. to bring an action against such directors, officers or experts or to

16


enforce against those persons or us a judgment obtained in a U.S. court predicated upon the civil liability provisions of federal securities laws or other laws of the U.S. Investors should not assume that foreign courts (1) would enforce judgments of U.S. courts obtained in actions against us or such directors, officers or experts predicated upon the civil liability provisions of the U.S. federal securities laws or the securities or "blue sky" laws of any state within the U.S. or (2) would enforce, in original actions, liabilities against us or such directors, officers or experts predicated upon the U.S. federal securities laws or any such state securities or "blue sky" laws. In addition, we have been advised by our Canadian counsel that in normal circumstances, only civil judgments and not other rights arising from U.S. securities legislation (for example, penal or similar awards made by a court in a regulatory prosecution or proceeding) are enforceable in Canada and that the protections afforded by Canadian securities laws may not be available to investors in the U.S.
Healthcare reform measures could hinder or prevent the commercial success of our product candidates and adversely affect our business.
The business prospects and financial condition of pharmaceutical and biotechnology companies are affected by the efforts of governmental and third-party payers to contain or reduce the costs of healthcare. In the U.S. and in other jurisdictions there have been, and we expect that there will continue to be, a number of legislative and regulatory proposals aimed at changing the healthcare system, such as proposals relating to the pricing of healthcare products and services in the U.S. or internationally, the reimportation of drugs into the U.S. from other countries (where they are then sold at a lower price), and the amount of reimbursement available from governmental agencies or other third party payers. For example, drug manufacturers are required to have a national rebate agreement with the Department of Health and Human Services in order to obtain state Medicaid coverage, which requires manufacturers to pay a rebate on drugs dispensed to Medicaid patients.
The ACA may have far-reaching consequences for most healthcare companies, including specialty biopharmaceutical companies like us. For example, if reimbursement for our product candidates is substantially less than we expect, our revenue prospects could be materially and adversely impacted.
Regardless of the impact of the ACA on us, the U.S. government and other governments have shown significant interest in pursuing healthcare reform and reducing healthcare costs. Any government-adopted reform measures could cause significant pressure on the pricing of healthcare products and services, including our product candidates, in the United States and internationally, as well as the amount of reimbursement available from governmental agencies and other third-party payors.
In addition, on September 27, 2007, the Food and Drug Administration Amendments Act of 2007 was enacted, giving the FDA enhanced post-market authority, including the authority to require post-marketing studies and clinical trials, labeling changes based on new safety information, and compliance with risk evaluations and mitigation strategies approved by the FDA. The FDA's exercise of this authority may result in delays or increased costs during the period of product development, clinical trials and regulatory review and approval, which may also increase costs related to complying with new post-approval regulatory requirements, and increase potential FDA restrictions on the sale or distribution of approved products.
We are subject to various internal-control reporting requirements under applicable Canadian securities laws and the Sarbanes-Oxley Act in the United States. We can provide no assurance that we will at all times in the future be able to report that our internal controls over financial reporting are effective.
As a public company, we are required to comply with Section 404 of the U.S. Sarbanes-Oxley Act ("Section 404") and National Instrument 52-109 – Certification of Disclosure in Issuers' Annual and Interim Filings, and we are required to obtain an annual attestation from our independent auditors regarding our internal control over financial reporting. In any given year, we cannot be certain as to the time of completion of our internal control evaluation, testing and remediation actions or of their impact on our operations. Upon completion of this process, we may identify control deficiencies of varying degrees of severity under applicable SEC and Public Company Accounting Oversight Board rules and regulations. As a public company, we are required to report, among other things, control deficiencies that constitute material weaknesses or changes in internal controls that, or that are reasonably likely to, materially affect internal controls over financial reporting. 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 the Company's annual consolidated financial statements will not be prevented or detected on a timely basis. If we fail to comply with the requirements of Section 404, similar Canadian requirements or if we report a material weakness, we might be subject to regulatory sanction and investors may lose confidence in our consolidated financial statements, which may be inaccurate if we fail to remedy such material weakness.

17


It is possible that we may be a passive foreign investment company, which could result in adverse tax consequences to U.S. investors.
Adverse U.S. federal income tax rules apply to "U.S. Holders" (as defined in "Item 10.E – Taxation – Certain Material U.S. Federal Income Tax Considerations" in this Annual Report on Form 20-F) that directly or indirectly hold common shares of a passive foreign investment company ("PFIC"). We will be classified as a PFIC for U.S. federal income tax purposes for a taxable year if (i) at least 75% of our gross income is "passive income" or (ii) at least 50% of the average value of our assets, including goodwill (based on annual quarterly average), is attributable to assets which produce passive income or are held for the production of passive income.
We believe that we were not a PFIC for the 2014 taxable year. However, the PFIC determination depends on the application of complex U.S. federal income tax rules concerning the classification of our assets and income for this purpose, and these rules are uncertain in some respects. In addition, the fair market value of our assets may be determined in large part by the market price of our Common Shares, which is likely to fluctuate, and the composition of our income and assets will be affected by how, and how quickly, we spend any cash that is raised in any financing transaction. No assurance can be provided that we will not be classified as a PFIC for the 2015 taxable year and for any future taxable year.
PFIC characterization could result in adverse U.S. federal income tax consequences to U.S. Holders. In particular, absent certain elections, a U.S. Holder would generally be subject to U.S. federal income tax at ordinary income tax rates, plus a possible interest charge, in respect of a gain derived from a disposition of our Common Shares, as well as certain distributions by us. If we are treated as a PFIC for any taxable year, a U.S. Holder may be able to make an election to "mark to market" Common Shares each taxable year and recognize ordinary income pursuant to such election based upon increases in the value of the Common Shares. In addition, U.S. Holders may mitigate the adverse tax consequences of the PFIC rules by making a "qualified electing fund" ("QEF") election; however, we do not expect to provide the information regarding our income that would be necessary for a U.S. Holder to make a QEF election.
If we are a PFIC, U.S. Holders will generally be required to file an annual information return with the Internal Revenue Service (the "IRS") (on IRS Form 8621, which PFIC shareholders will be required to file with their U.S. federal income tax or information returns) relating to their ownership of Common Shares. This filing requirement is in addition to any preexisting reporting requirements that apply to a U.S. Holder's interest in a PFIC (which this requirement does not affect).
For a more detailed discussion of the potential tax impact of us being a PFIC, see "Item 10.E – Taxation – Certain Material U.S. Federal Income Tax Considerations" in this Annual Report on Form 20-F. The PFIC rules are complex. U.S. Holders should consult their tax advisors regarding the potential application of the PFIC regime and any reporting obligations to which they may be subject under that regime.
We may incur losses associated with foreign currency fluctuations.
Our operations are in many instances conducted in currencies other than our functional currency or the functional currencies of our subsidiaries. Fluctuations in the value of currencies could cause us to incur currency exchange losses. We do not currently employ a hedging strategy against exchange rate risk. We cannot assert with any assurance that we will not suffer losses as a result of unfavorable fluctuations in the exchange rates between the US dollar, the Euro, the Canadian dollar and other currencies. For more information, see "Item 11. – Quantitative and Qualitative Disclosures About Market Risk" in this Annual Report on Form 20-F.
Legislative actions, new accounting pronouncements and higher insurance costs may impact our future financial position or results of operations.
Changes in financial accounting standards or implementation of accounting standards may cause adverse, unexpected revenue or expense fluctuations and affect our financial position or results of operations. New pronouncements and varying interpretations of pronouncements have occurred with greater frequency and are expected to occur in the future, and we may make or be required to make changes in our accounting policies in the future. Compliance with changing regulations of corporate governance and public disclosure, notably with respect to internal controls over financial reporting, may result in additional expenses. Changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for companies such as ours, and insurance costs are increasing as a result of this uncertainty.
Security breaches may disrupt our operations and adversely affect our operating results.
Our network security and data recovery measures and those of third parties with which we contract, may not be adequate to protect against computer viruses, cyber-attacks, break-ins, and similar disruptions from unauthorized tampering with our computer systems. The misappropriation, theft, sabotage or any other type of security breach with respect to any of our

18


proprietary and confidential information that is electronically stored, including research or clinical data, could cause interruptions in our operations, and could result in a material disruption of our clinical activities and business operations, in addition to possibly requiring substantial expenditures of resources to remedy. This disruption could have a material adverse impact on our business, operating results and financial condition. Additionally, any break-in or trespass of our facilities that results in the misappropriation, theft, sabotage or any other type of security breach with respect to our proprietary and confidential information, including research or clinical data, or that results in damage to our research and development equipment and assets could have a material adverse impact on our business, operating results, and financial condition.
Risks Relating to our Common Shares
Our Common Shares may be delisted from The Nasdaq Capital Market or the Toronto Stock Exchange, which could affect its market price and liquidity. If our Common Shares were to be delisted, investors may have difficulty in disposing of their shares.
Our Common Shares are currently listed on The Nasdaq Capital Market ("Nasdaq") under the symbol "AEZS" and on the Toronto Stock Exchange ("TSX") under the symbol "AEZ". We must meet continuing listing requirements to maintain the listing of our Common Shares on NASDAQ and TSX. For continued listing, NASDAQ requires, among other things, that listed securities maintain a minimum closing bid price of not less than $1.00 per share. On December 19, 2014, we received a notice from The NASDAQ Listing Qualifications Department indicating that the minimum bid price for our Common Shares had fallen below $1.00 for 30 consecutive business days, and that, therefore, we were no longer in compliance with NASDAQ Marketplace Rule 5550(a)(2) - bid price. We have 180 calendar days, or until June 16, 2015, to regain compliance with the minimum bid price requirement. To regain compliance, the closing bid price of our Common Shares must be at least $1.00 per share for a minimum of 10 consecutive business days. The notice did not impact our listing on The NASDAQ Capital Market when it was issued. If we are not able to regain compliance, NASDAQ would notify us that our securities are subject to delisting. At that time, we could appeal the determination to delist our Common Shares to a Listing Qualifications Panel.
In addition to the minimum bid price requirement, the continued listing rules of NASDAQ require us to meet at least one of the following listing standards: (i) stockholders' equity of at least $2.5 million (the "Equity Standard"); (ii) market value of listed securities (calculated by multiplying the daily closing bid price of our Common Shares by our total outstanding Common Shares) of at least $35 million (the "Market Value Standard"); or (iii) net income from continuing operations (in the latest fiscal year or in two of the last three fiscal years) of at least $500,000 (the "Net Income Standard"). If our total market capitalization decreases to an amount less than $35 million for 30 consecutive trading days, it is possible that we could no longer meet any of these three listing standards. Similar to the process described above in the minimum bid price context, if we fail to meet the Market Value Standard for 30 consecutive trading days and do not otherwise meet the Equity Standard or the Net Income Standard, we expect that we would then receive a notification letter from NASDAQ advising us that we fail to comply with the Market Value Standard and providing us a period of 180 calendar days to regain compliance with the Market Value Standard. In order to regain compliance with the Market Value Standard, the market value of our listed securities would have to be at least $35 million for a period of 10 consecutive business days. Otherwise, our Common Shares may then be subject to delisting.
There can be no assurance that our Common Shares will remain listed on NASDAQ or the TSX. If we fail to meet any of NASDAQ's or TSX's continued listing requirements, our Common Shares may be delisted. Any delisting of our Common Shares may adversely affect a shareholder's ability to dispose, or obtain quotations as to the market value, of such shares.
Our share price is volatile, which may result from factors outside of our control.
Our valuation and share price since the beginning of trading after our initial listings, first in Canada and then in the U.S., 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 shares.
Between January 1, 2014 and December 31, 2014, the closing price of our Common Shares ranged from $0.52 to $1.50 on NASDAQ and from C$0.57 to C$1.66 per share on TSX. Our share price may be affected by developments directly affecting our business and by developments out of our control or unrelated to us. The stock market generally, and the biopharmaceutical sector in particular, are vulnerable to abrupt changes in investor sentiment. Prices of shares and trading volume of companies in the biopharmaceutical industry can swing dramatically in ways unrelated to, or that bear a disproportionate relationship to, operating performance. Our share price and trading volume may fluctuate based on a number of factors including, but not limited to:
•
clinical and regulatory developments regarding our product candidates;
•
delays in our anticipated development or commercialization timelines;

19


•
developments regarding current or future third-party collaborators;
•
other announcements by us regarding technological, product development or other matters;
•
arrivals or departures of key personnel;
•
governmental or regulatory action affecting our product candidates and our competitors' products in the U.S., Canada and other countries;
•
developments or disputes concerning patent or proprietary rights;
•
actual or anticipated fluctuations in our revenues or expenses;
•
general market conditions and fluctuations for the emerging growth and biopharmaceutical market sectors; and
•
economic conditions in the U.S., Canada or abroad.
Our listing on both NASDAQ and TSX may increase price volatility due to various factors, including different ability to buy or sell our Common Shares, different market conditions in different capital markets and different trading volumes. In addition, low trading volume may increase the price volatility of our Common Shares. A thin trading market could cause the price of our Common Shares to fluctuate significantly more than the stock market as a whole.
We do not intend to pay dividends in the near future.
To date, we have not declared or paid any dividends on our Common Shares. We currently intend to retain our future earnings, if any, to finance further research and the overall commercial expansion of our business. As a result, the return on an investment in our Common Shares will depend upon any future appreciation in value. There is no guarantee that our Common Shares will appreciate in value or even maintain the price at which shareholders have purchased them.
Future issuances of securities and hedging activities may depress the trading price of our Common Shares.
Any additional or future issuance of Common Shares or Convertible Securities, including the issuance of Common Shares upon the exercise of stock options and upon the exercise of outstanding warrants, could dilute the interests of our existing shareholders, and could substantially decrease the trading price of our Common Shares. We may issue equity securities in the future for a number of reasons, including to finance our operations and business strategy, to satisfy our obligations upon the exercise of options or warrants or for other reasons. Our Stock Option Plan generally permits us to have outstanding, at any given time, stock options that are exercisable for a maximum number of Common Shares equal to 11.4% of all then issued and outstanding Common Shares. As at March 17, 2015, there were:
•
90,557,142 Common Shares issued and outstanding;
•
no issued and outstanding preferred shares;
•
116,887,987 Common Shares issuable upon exercise of outstanding warrants; and
•
3,885,200 stock options outstanding.
In addition, the price of Common Shares could also be affected by possible sales of Common Shares by investors who view other investment vehicles as more attractive means of equity participation in us and by hedging or arbitrage trading activity that may develop involving our Common Shares. This hedging or arbitrage could, in turn, affect the trading price of our Common Shares.
Cashless exercise and adjustment provisions in certain warrants that we issued in March 2015 may make it more difficult and expensive for us to raise additional capital in the future and may result in further dilution to holders of our Common Shares and our other outstanding warrants.
On March 11, 2015, in connection with a public offering in the United States of units comprised of Common Shares and warrants, we issued 44,758,065 Series A common share purchase warrants (the "Series A Warrants") and 29,838,710 Series B common share purchase warrants (the "Series B Warrants"). The Series B Warrants include certain adjustment provisions and may at any time be exercised on a "net" or "cashless" basis. More particularly, a Series B Warrant holder may, in lieu of making a cash payment when exercising a Series B Warrant, elect instead to receive the "net" number of Common Shares determined in accordance with a formula referred to in the Series B Warrant as the "Alternate Cashless Exercise", if, on or after May 26, 2015 (or prior thereto in certain limited circumstances), the volume weighted average price ("VWAP") of the Common Shares, as

20


such term is defined in the Series B Warrants, fails to be greater than $0.74 and pursuant to other terms and conditions. If, on or after May 26, 2015, the VWAP of our Common Shares is below $0.74 at the time of any exercise, these provisions may make it more difficult and more expensive for us to raise capital in the future. In addition, any reduction in the exercise prices of our Series A and Series B Warrants or any increase in the number of Common Shares issuable upon the exercise of the Series A Warrants and Series B Warrants may also result in additional dilution in the per share net tangible book value of our Common Shares.
Our articles of incorporation contain "blank check" preferred share provisions, which could delay or impede an acquisition of our company.
Our articles of incorporation, as amended, authorize the issuance of an unlimited number of "blank check" preferred shares, which could be issued by our Board of Directors without shareholder approval and which may contain liquidation, dividend and other rights equivalent or superior to our Common Shares. In addition, we have implemented in our constating documents an advance notice procedure for shareholder approvals to be brought before an annual meeting of our shareholders, including proposed nominations of persons for election to our Board of Directors. These provisions, among others, whether alone or together, could delay or impede hostile takeovers and changes in control or changes in our management. Any provision of our constating documents that has the effect of delaying or deterring a change in control could limit the opportunity for our shareholders to receive a premium for their Common Shares and could also affect the price that some investors are willing to pay for our Common Shares.
Our business could be negatively affected as a result of the actions of activist shareholders.
Proxy contests have been waged against many companies in the biopharmaceutical industry over the last few years. If faced with a proxy contest, we may not be able to successfully respond to the contest, which would be disruptive to our business. Even if we are successful, our business could be adversely affected by a proxy contest because:
•
responding to proxy contests and other actions by activist shareholders may be costly and time-consuming, and may disrupt our operations and divert the attention of management and our employees;
•
perceived uncertainties as to the potential outcome of any proxy contest may result in our inability to consummate potential acquisitions, collaborations or in-licensing opportunities and may make it more difficult to attract and retain qualified personnel and business partners; and
•
if individuals that have a specific agenda different from that of our management or other members of our board of directors are elected to our board as a result of any proxy contest, such an election may adversely affect our ability to effectively and timely implement our strategic plan and to create value for our shareholders.
Item 4.
Information on the Company
A.
History and development of the Company
We are a specialty biopharmaceutical company engaged in developing and commercializing novel treatments in oncology, endocrinology and women's health.
We were incorporated on September 12, 1990 under the Canada Business Corporations Act (the "CBCA") and continue to be governed by the CBCA. Our registered address and head office is located at 1405 du Parc-Technologique Blvd., Quebec City, Quebec, Canada G1P 4P5; our telephone number is (418) 652-8525 and our website is www.aezsinc.com. None of the documents or information found on our website shall be deemed to be included in or incorporated by reference into this Annual Report on Form 20-F, unless such document is specifically incorporated herein by reference.
On December 30, 2002, we acquired Zentaris AG, a biopharmaceutical company based in Frankfurt, Germany. Zentaris was a spin-off of Asta Medica GmbH, a former pharmaceutical company affiliated with Degussa AG.
In May 2004, we changed our name to Aeterna Zentaris Inc. and on May 11, 2007, Zentaris GmbH was renamed Aeterna Zentaris GmbH. Aeterna Zentaris GmbH conducts our drug development efforts. In September 2007, we incorporated Aeterna Zentaris, Inc. under the laws of Delaware. This wholly owned subsidiary, which is based in the Charleston, South Carolina area, conducts our commercial operations.
On October 2, 2012, we effected a 6-to-1 Share Consolidation (reverse stock split). Our Common Shares commenced trading on a consolidated and adjusted basis on both NASDAQ and TSX on October 5, 2012.

21


On October 1, 2013, we announced the completion of our previously announced agreements with various partners and licensees with respect to the manufacturing rights and obligations for our Cetrotide® product. The principal outcome of such agreements was the transfer of all manufacturing rights and the grant of a license to a subsidiary of Merck KGaA of Darmstadt, Germany for the manufacture, testing, assembling, packaging, storage and release of Cetrotide® in all territories (the "Cetrotide® Business"). Following this transfer, the Cetrotide® Business has been presented in our consolidated financial statements as a discontinued operation.
We currently have three wholly-owned direct and indirect subsidiaries, AEZS GmbH, based in Frankfurt, Germany, Zentaris IVF GmbH, a direct wholly-owned subsidiary of AEZS Germany based in Frankfurt, Germany, and Aeterna Zentaris, Inc., an entity incorporated in the State of Delaware with an office in the Charleston, South Carolina area in the United States.
 
 
 
 
Aeterna Zentaris Inc.
(Canada)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
100%
 
 
100%
 
 
 
 
Aeterna Zentaris GmbH
(Germany)
 
Aeterna Zentaris, Inc.
(Delaware)
 
 
 
 
 
 
 
 
100%
 
 
 
 
 
Zentaris IVF GmbH
(Germany)
 
 
 
 
 
 
 
 
 

Our Common Shares are listed for trading on the TSX under the trading symbol "AEZ" and on NASDAQ under the trading symbol "AEZS".
Our agent for service of process and SEC matters in the United States is our wholly-owned subsidiary, Aeterna Zentaris, Inc., located at 315 Sigma Drive, Suite 302, Summerville, South Carolina 29483.
There have been no public takeover offers by third parties with respect to us or by us in respect of other companies' shares during the last or current fiscal year.
B.
Business overview
We are a specialty biopharmaceutical company engaged in developing and commercializing novel treatments in oncology, endocrinology and women's health. Our drug development efforts are focused currently on two compounds, zoptarelin doxorubicin and Macrilen™, which are in clinical development, and on two oncology compounds (an Erk inhibitor and LHRH-disorazol Z product candidates), which are in pre-clinical development. We also are working concurrently to pursue strategic initiatives in connection with our goal to become a commercially operating specialty biopharmaceutical organization.
We have an ongoing Phase 3 ZoptEC trial in endometrial cancer under a Special Protocol Assessment ("SPA") with the FDA with zoptarelin doxorubicin, a doxorubicin Luteinizing Hormone-Releasing Hormone ("LHRH") targeted conjugate compound for which we have successfully completed a Phase 2 trial in advanced endometrial and advanced ovarian cancer.
We are evaluating whether to conduct a confirmatory Phase 3 trial for the U.S. registration of Macrilen™, our orally available peptidomimetic ghrelin receptor agonist with growth hormone secretagogue activity, following a recent meeting with the FDA regarding the design of the study.
As for our compounds in earlier stages of development, as part of our focused initiative to optimize R&D activities, we have decided to streamline our drug discovery activities and focus on specific projects related to our Erk inhibitors and our LHRH-disorazol Z product candidates. Regarding our Erk inhibitors program, we are looking to select an optimized molecule for development in the first half of 2015. Our investment in the development of Erk inhibitors and our LHRH-disorazol Z product candidate will depend on the level of liquidity available to fund our R&D activities.

22


Recent Developments
For a complete description of our recent corporate and pipeline developments, refer to "Item 5. – Operating and Financial Review and Prospects – Key Developments".
Our Business Strategy
Our primary business strategy is to pursue the development of our pipeline with a focus on our principal product candidates zoptarelin doxorubicin and Macrilen™ in oncology and endocrinology, respectively, and to commercialize oncology, endocrinology and women's health products that we may acquire, in-license or promote. Our vision is to become a growth-oriented specialty biopharmaceutical company.
Overview of our Drug Development Efforts
Our product pipeline
 _________________________
(1) Phase 2 trial in ovarian cancer completed.
(2) Investigator-driven and sponsored.
(3) Currently evaluating options and future plans after issuance of CRL from the FDA.
(4) Potential oral prostate cancer vaccine available for out-licensing.
(5) Sponsored entirely by licensees.
Our drug development efforts are focused currently on two compounds, zoptarelin doxorubicin and Macrilen™, which are in clinical development, and on two oncology compounds, an Erk inhibitor (AEZS-134) and LHRH-disorazol Z (AEZS-138), which are in pre-clinical development. We made the decision to focus our efforts on development of these compounds following a review of our portfolio, during which we concluded that we lack the resources to pursue other earlier-stage opportunities. As a result of this decision, we discontinued drug discovery efforts, including basic research activities in medicinal chemistry and biology and our high-throughput-screening operations, which resulted in a reduction of our research and development staff by approximately 29 personnel. During 2015, we will attempt to out-license or to sell the compounds that we are no longer pursuing for commercial development. We also intend to collaborate with research institutions to pursue, at their own cost, testing on our 100,000-plus library of medicinal compounds.
Zoptarelin Doxorubicin
Zoptarelin doxorubicin represents a new targeting concept in oncology, using a hybrid molecule composed of a synthetic peptide carrier and a well-known chemotherapy agent, doxorubicin. The compound is an intravenous drug in advanced clinical development that directs the chemotherapy agent specifically to LHRH-receptor expressing tumors, resulting in more targeted treatment with potentially less damage to healthy tissue. We are conducting a Phase 3 clinical study ZoptEC of the compound in women with locally advanced, recurrent or metastatic endometrial cancer who have progressed and who have received one chemotherapeutic regimen with platinum and taxane (either as adjuvant or first-line treatment).
Zoptarelin doxorubicin is a type of compound known as a cytotoxic conjugate. Most chemotherapeutic agents, including doxorubicin, are toxic to normal cells as well as to cancerous tumor cells. Therefore, a method for targeting such drugs to cancerous tissue offers a potential benefit for patients with advanced or metastatic tumors. Zoptarelin doxorubicin is a hybrid molecule composed of a doxorubicin chemically linked to an LHRH agonist, a modified natural hormone with affinity for the

23


LHRH receptor. This design allows for the specific binding and selective uptake of the cytotoxic conjugate by LHRH receptor-positive tumors. Potential benefits of this targeted approach include a more favorable safety profile with lower incidence and severity of side effects, as normal tissues would be spared from the toxic effects of doxorubicin. In addition, the targeted approach may enable treatment of LHRH receptor-positive cancers that have become resistant to doxorubicin in its non-targeted form.
ZoptEC is an open-label, randomized, multicenter trial that is being conducted in North America, Europe and Israel. The trial compares zoptarelin doxorubicin with doxorubicin as second line therapy and will involve approximately 500 patients. The primary efficacy endpoint of the ZoptEC trial is improvement in median Overall Survival ("OS"). We are conducting ZoptEC under a SPA agreement with the FDA. The SPA agreement states that the proposed trial protocol design, clinical endpoints and planned analyses are acceptable to the FDA to support a regulatory submission. Final marketing approval depends on the results of efficacy, the adverse event profile and an evaluation of the benefit/risk of treatment demonstrated in ZoptEC. We expect to receive the first interim results of ZoptEC during the first half of 2015.
ZoptEC is being conducted by Ergomed plc, a contract clinical development organization with which we have entered into a co-development and profit-sharing agreement. Under the terms of the agreement, Ergomed has agreed to assume 30% (up to $10 million) of the clinical and regulatory costs for ZoptEC, which are estimated at approximately $32.5 million. Ergomed will receive its return on investment based on an agreed single-digit percentage of any net income or net proceeds from licensing activity we receive for zoptarelin doxorubicin in this indication, up to a specified maximum amount.
We are attempting to commercialize zoptarelin doxorubicin as a treatment for endometrial cancer because, according to the American Cancer Society, endometrial cancer is the most common invasive gynecologic cancer in women in the United States, with approximately 50,000 new cases annually. This disease primarily affects postmenopausal women at an average age of 60 years at diagnosis. In the United States, it is estimated that approximately 8,000 women will die of endometrial cancer annually.
We hold the worldwide rights to zoptarelin doxorubicin pursuant to an exclusive license agreement with the Administrators of the Tulane Educational Fund. On December 1, 2014, we entered into an exclusive license and technology transfer agreement with Sinopharm A-Think Pharmaceuticals Co., Ltd. for the compound, for the initial indication of endometrial cancer, in the territories of Chinese, Hong Kong and Macau. We are currently attempting to sublicense the compound to others for development in additional markets.
The illustration above depicts the mode of action of our hybrid cytotoxic compound zoptarelin doxorubicin. The LHRH targeting agent, when bound to a doxorubicin molecule, causes doxorubicin to bind to the tumor cell.
The following is a summary of the history of our development of zoptarelin doxorubicin in ovarian and endometrial cancer:
•
In 2007, a Phase 2 open-label, non-comparative, multicenter two-indication trial stratified with two stages Simon Design was prepared. The study was planned to involve up to 82 patients, with up to 41 patients each with a diagnosis of platinum-resistant ovarian cancer (stratum A) or disseminated endometrial cancer (stratum B). Under coordination by Prof. Günter Emons, M.D., Chairman of the Department of Obstetrics & Gynaecology at the University of Göttingen, Germany, this open-label, multicenter and multinational Phase 2 study "AGO-GYN 5" was conducted by the German AGO Study Group (Arbeitsgemeinschaft Gynäkologische Onkologie / Gynaecological Oncology Working Group), in cooperation with clinical

24


sites in Europe. An i.v. infusion of zoptarelin doxorubicin (267 mg/m2) was administered over a period of two hours, every Day 1 of a 21-day (3-week) cycle. The proposed duration of the study treatment was six cycles. The study was performed with 14 centers of the German Gynaecological Oncology Working Group, in cooperation with three clinical sites in Europe. The primary efficacy endpoint was a response rate with a success criterion at the end of Stage II defined as five or more patients with partial or complete tumor responses according to Response Evaluation Criteria in Solid Tumors ("RECIST") and/or Gynaecologic Cancer Intergroup ("GCIG") guidelines. Secondary endpoints included time to progression ("TTP"), survival, toxicity, as well as adverse effects. In October 2008, we announced that we had entered the second stage of patient recruitment for the Phase 2 trial in platinum-resistant ovarian cancer indication. This decision was taken following the report of two partial responses ("PR") among patients with ovarian cancer. The second stage of patient recruitment for the endometrial cancer indication was reached in November 2008 and was based on the report of one complete response ("CR") and two PR among 14 patients with endometrial cancer.
•
On November 2, 2009, we announced positive preliminary efficacy data for the Phase 2 study in patients with LHRH-receptor positive platinum-resistant and taxane-pretreated ovarian cancer. All 43 patients who had entered the study had completed their treatment, and a preliminary evaluation had shown that the study had met its predefined primary efficacy endpoint of five or more responders in 41 evaluable patients. Responders, as well as patients with stable disease after completion of treatment with zoptarelin doxorubicin, were to be followed to assess the duration of response and, ultimately, OS.
•
On November 24, 2009, we announced positive results for the Phase 2 study in patients with endometrial cancer. Preliminary evaluation showed that the study met its predefined primary efficacy endpoint of five or more responders in endometrial cancer patients. Responders, as well as patients with stable disease after completion of treatment with zoptarelin doxorubicin, were to be followed to assess the duration of progression free survival ("PFS") and, ultimately, OS.
•
On June 7, 2010, Prof. Günter Emons, Chairman, Department of Obstetrics & Gynaecology Georg-August University Göttingen, Germany, presented positive efficacy and safety data for zoptarelin doxorubicin in ovarian cancer at the American Society of Clinical Oncology's ("ASCO") Annual Meeting. The poster (abstract #5035), was entitled "Phase 2 study of AEZS-108, a targeted cytotoxic LHRH analog, in patients with LHRH receptor-positive platinum resistant ovarian cancer". Two patients with platinum-resistant ovarian cancer entered the study. Efficacy included PR in five patients (11.9%) and stable disease for more than twelve weeks in eleven patients (26.2%). Based on those data, a clinical benefit rate ("CBR") of 38% was estimated. Median TTP and OS were evaluated at 3.5 months (104 days) and 15.6 months (475 days), respectively. OS compared favourably with data from Doxil® and topotecan (8-9 months). In all, tolerability of zoptarelin doxorubicin was good and commonly allowed retreatment as scheduled. Only one patient (2.4%) had a dose reduction, and overall, 25 of 170 (14.7%) courses were given with a delay, including cases in which delay was not related to toxicity. Severe (Grade 3 or 4) toxicity was mainly restricted to rapidly reversible hematologic toxicity (leukopenia / neutropenia) associated with fever in three cases. Good tolerability of zoptarelin doxorubicin was also reflected with only a few patients with non-hematological toxicities of Grade 3 (none with Grade 4), including single cases each of nausea, constipation, poor general condition, and an enzyme elevation. No cardiac toxicity was reported. Final evaluation of the ovarian cancer study revealed six patients with PR based on tumor lesions, plus two responders with tumor marker response including one case with normalization, for an overall response rate of 19% (one unconfirmed CR and seven partial responses). Median TTP and OS were evaluated at three and twelve months, respectively.
•
On September 14, 2011, positive final Phase 2 efficacy and safety data for zoptarelin doxorubicin in advanced endometrial cancer were presented at the European Society of Gynecological Oncology in Milan, Italy. The data showed that zoptarelin doxorubicin, administered as a single agent at a dosage of 267 mg/m2 every three weeks was active, well tolerated and that OS was similar to that reported for modern triple combination chemotherapy, but was achieved with lower toxicity. The primary endpoint was the response rate as defined by the RECIST. Secondary endpoints included safety, TTP and OS. In all, of 43 patients treated with zoptarelin doxorubicin, 39 were evaluable for efficacy. Efficacy confirmed by independent response review included two CR, ten PR, and 17 patients with stable disease ("SD"). Based on those data, the estimated overall response rate ("ORR") (ORR = CR+PR) was 30.8% and the CBR (CBR = CR+PR+SD) was 74.4%. Responses in patients previously treated with chemotherapy included one CR, one PR and two SDs in eight of the patients with prior use of platinum/taxane regimens. Median TTP and OS were seven months and 13.7 months, respectively. A final evaluation, not excluding non-evaluable cases, revealed the following results: two CR, eleven PR (including three patients with PR not confirmed at subsequent time point), and 17 patients with SD, for an ORR of 30.2% and CBR of 70%; median TTP and OS at seven and 15 months, respectively. Overall, tolerability of zoptarelin doxorubicin was good and commonly allowed retreatment as scheduled. Severe (Grade 3 or 4) toxicity was mainly restricted to rapidly reversible leukopenia and neutropenia, associated with fever in only one patient who had been treated only three weeks after a surgery. Good tolerability of zoptarelin doxorubicin was also reflected by a low rate of severe non-hematological and possibly drug-related adverse events which included single cases each of nausea, diarrhea, fatigue, general health deterioration, creatinine elevation, and blood potassium decrease. No cardiac toxicity was reported.

25


At present, we are not aware of any approved drug product for the treatment of advanced and recurrent metastatic endometrial cancer in either the United States or Europe. To the best of our knowledge, there is also no systemic therapy approved in either the United States or Europe (except Germany, where doxorubicin is approved for this therapy) for treating advanced or recurrent endometrial cancer.
The following products are among some of the many products currently in clinical trial in endometrial cancer:
Product / mode of action*
Company*
Development Status*/Sponsor
Carboplatin / DNA replication inhibitor
Teva Pharmaceutical
Phase 3 / GOG
Paclitaxel / Anti microtubule agent
HQ SPCLT Pharma / Abraxis BioScience
Phase 3 / GOG
Bevacizumab / VEGF inhibitor
Genentech
Phase 2 / NCI
Brivanib / VEGFR-2 and FGFR inhibitor
Bristol-Myers Squibb
Phase 2 / GOG
Buparlisib (BKM120)/PI3K inhibitor
Novartis
Phase 2 / Argacy-Gineco group
Cediranib / VEGFR inhibitor
Astra Zeneca
Phase 2 / NCI
Dovitinib (TKI258)/FGFR inhibitor
Novartis
Phase 2 / Novartis
Everolimus / mTOR inhibitor
Novartis
Phase 2 / NCI or MD Anderson
Ixabepilone / microtubule inhibitor
Bristol-Myers Squibb
Phase 2 / NCI
Lenvatinib (E7080)/Multi-kinase inhibitor
Eisai
Phase 2 / Eisai
Letrozole / non-steroidal aromatase inhibitor
Novartis
Phase 2 / MD Anderson
Metformin / anti-hyperglycemic agent
Bristol-Myers Squibb
Phase 2 / GOG
Nintedanib / multiple RTKs inhibitor and non-RTKs
Boehringer Ingelheim
Phase 2 / GOG
Sunitinib malate/Tyrosine kinase inhibitor
Pfizer
Phase 2 / NCI
Temsirolimus / mTOR inhibitor
PF Prism CV
Phase 2 / NCI or MD Anderson
Trastuzumab / HER3/neu receptor antagonist
Genentech
Phase 2 / Yale
_________________________
*
Source: www.clinicaltrials.gov and competitor company's website.
We believe that zoptarelin doxorubicin may be useful in treating other cancers, including breast cancer, bladder cancer and prostate cancer. We terminated early clinical trials of the compound as a treatment for triple-negative breast cancer and bladder cancer as part of our ongoing review of our development activities to ensure the most effective use of our resources. We are currently assisting Dr. Jacek Pinski, Associate Professor of Medicine at the Norris Comprehensive Cancer Center of the University of Southern California, to conduct a Phase 1/2 study in refractory prostate cancer with zoptarelin doxorubicin. Dr. Pinski received a $1.6 million grant from The National Institutes of Health ("NIH") to conduct the study. The study, entitled "A Phase I/II Trial of AN-152 [AEZS-108] in Castration- and Taxane-Resistant Prostate Cancer", will enroll up to 55 patients and will be conducted in two portions: an abbreviated dose-escalation followed by a single arm, Simon Optimum two-stage design Phase 2 study using the dose selected in the Phase 1 portion. The primary objective of the Phase 2 portion is to evaluate the clinical benefit of zoptarelin doxorubicin in men with castration- and taxane-resistant metastatic prostate cancer, for which the presence of LHRH receptors has been confirmed. The following is a summary of Dr. Pinski's study:
•
On December 14, 2010, we announced the initiation of the Phase 1/2 trial.
•
On September 26, 2011, we announced positive interim data for the Phase 1 portion of the Phase 1/2 trial with zoptarelin doxorubicin in castration-and taxane-resistant prostate cancer at the European Society for Medical Oncology ("ESMO") meeting, Stockholm, Sweden. This is a single arm study with a Phase 1 lead-in to a Phase 2 clinical trial. The primary endpoint of the Phase 1 portion is safety. Twelve patients entered the study: three patients each received zoptarelin doxorubicin at the lower dose levels of 160 and 210 mg/m2, and six patients at 267 mg/m2. Data on ten patients were presented as two patients were too early for evaluation. Zoptarelin doxorubicin was generally well tolerated and there were no dose limiting toxicities at such time. The only Grade 3 and 4 toxicities were hematologic in nature. At the time, there were three Grade 4 toxicities (two at 210 mg/m2 and one at 267 mg/m2), all of which were asymptomatic. There were six Grade 3 toxicities including two cases of Grade 3 anemia after repeated courses (cycles five and six) and one case of febrile neutropenia that occurred during cycle one. Signs of therapeutic activity included five patients with Prostate Specific Antigen ("PSA") regression. One of these patients treated at the lowest dose level, received eight treatment cycles because the patient demonstrated continued clinical benefit. Three out of four evaluable patients with radiologic evaluable disease achieved stable disease per RECIST. The Phase 2 extension is planned after completion of the toxicity assessment in the final dose level of the Phase 1 portion of the study. In correlative studies, drug uptake was demonstrated for the first time in captured circulating tumor cells of patients, thus validating the principle of targeted tumor therapy with zoptarelin doxorubicin in a clinical setting.

26


•
On February 3, 2012, we reported updated results for the Phase 1 portion of the study. The results were based on 13 patients who had been previously treated with androgen-deprivation therapy (LHRH agonist) and at least one taxane-based chemotheraphy regimen, who were treated on three dose levels of zoptarelin doxorubicin: three at 160 mg/m2, three at 210 mg/m2, and seven at 267 mg/m2. Overall, zoptarelin doxorubicin was well tolerated among this group of heavily pretreated older patients. There were two dose-limiting toxicities, each of which having been a case of asymptomatic Grade 4 neutropenia at the 267 mg/m2 dose level and both patients fully recovered. The Grade 3 and 4 toxicities were primarily hematologic. There was minimal non-hematologic toxicity, most frequently fatigue and alopecia. Despite the low doses of zoptarelin doxorubicin in the first cohorts, there was some evidence of antitumor activity. One patient received eight cycles (at 210 mg/m2) due to continued benefit. Among the five evaluable patients with measurable disease, four achieved stable disease. At the time of submission of the abstract, a decrease in PSA was noted in six patients. Six of 13 (46%) treated patients received at least five cycles of therapy with no evidence of disease progression at twelve weeks. Correlative studies on circulating tumor cells ("CTC") demonstrated the uptake of zoptarelin doxorubicin into the targeted tumor.
•
On November 12, 2012, we announced the initiation of the Phase 2 portion of the ongoing Phase 1/2 study of zoptarelin doxorubicin in prostate cancer. The primary endpoint of the Phase 2 portion is to evaluate the clinical benefit of zoptarelin doxorubicin for these patients. Secondary endpoints include toxicity, time to RECIST and PSA progression, RECIST response rate for patients with measurable disease, PSA response rate, pain palliation and overall survival.
•
On June 3, 2013, we announced that final data for the Phase 1 portion of the ongoing Phase 1/2 trial with zoptarelin doxorubicin in prostate cancer demonstrated the compound's promising anti-tumor activity. Results were presented by Dr. Pinski during a poster session at the ASCO Annual Meeting in Chicago. Eighteen men with a median of two prior chemotherapy regimens (range 1/5) and a median PSA of 106.4 ng/mL (range 8.4-1624.0) were enrolled. The dose of zoptarelin doxorubicin was escalated from 160 mg/m2 to 210 mg/m2 then to 267 mg/m2. There were two Dose-Limiting Toxicities ("DLT") in the seven patients receiving zoptarelin doxorubicin at a dose of 267 mg/m2 (grade 4 neutropenia), establishing 210 mg/m2 as the Maximum Tolerated Dose ("MTD"). Significant non-hematologic toxicities included one case of grade 3 nausea. No cardiotoxicity was seen on serial evaluation and six patients completed six cycles. Internalization of zoptarelin doxorubicin was consistently visualized in CTCs 1 to 3 hours after dosing. Maximal PSA response was stable or decreased in 8 of 18 men. Among the 15 evaluable patients with measurable disease, ten achieved stable disease and a drop in PSA was noted in three patients. The MTD of zoptarelin doxorubicin in this indication is 210 mg/m2, which is below the MTD reported in women with refractory endometrial and ovarian cancer.
•
On December 29, 2014 we announced that an article on final data for the Phase 1 portion of the ongoing Phase 1/2 trial in prostate cancer with zoptarelin doxorubicin was published in the December issue of Clinical Cancer Research. The article outlines data previously disclosed in June 2013 at the American Society of Clinical Oncology's ("ASCO") Annual Meeting. The article is entitled "Phase I, Dose-Escalation Study of the Targeted Cytotoxic LHRH Analog AEZS-108 in Patients with Castration- and Taxane-Resistant Prostate Cancer", Liu SV, Tsao-Wei DD, Xiong S, Groshen S, Dorff TB, Quinn DI, Tai YC, Engel J, Hawes D, Schally AV, Pinski J.
Macrilen™ (Macimorelin Acetate)
Macrilen™ (macimorelin acetate) is a novel orally available peptidomimetic ghrelin receptor agonist that stimulates the secretion of growth hormone by binding to the ghrelin receptor (GHSR-1a) and that has potential uses in both endocrinology and oncology indications. Macrilen™ has been granted orphan-drug designation by the FDA for use in evaluating growth hormone deficiency ("GHD").
In November 2013, we filed an NDA for Macrilen™ for the evaluation of adult GHD ("AGHD") by evaluating the pituitary gland secretion of growth hormone in response to an oral dose of the product. The FDA accepted the NDA for substantive review in January 2014. On November 6, 2014, the FDA informed us, by issuing a Complete Response Letter ("CRL"), that it had determined that our NDA could not be approved in its present form. The CRL stated that the planned analysis of our pivotal trial did not meet its stated primary efficacy objective as agreed to in the SPA agreement between us and the FDA. The CRL further mentioned issues related to the lack of complete and verifiable source data for determining whether patients were accurately diagnosed with AGHD. The FDA concluded that, "in light of the failed primary analysis and data deficiencies noted, the clinical trial does not by itself support the indication." To address the deficiencies identified above, the CRL stated that we will need to demonstrate the efficacy of macimorelin as a diagnostic test for GHD in a new, confirmatory clinical study. The CRL also stated that a serious event of electrocardiogram QT interval prolongation occurred for which attribution to drug could not be excluded. Therefore a dedicated thorough QT study to evaluate the effect of macimorelin on the QT interval would be necessary.

27


Following receipt of the CRL, we assembled a panel of experts in the field of growth-hormone deficiency, including distinguished experts in the field from both the United States of America and the EU. The panel met On January 8, 2015, during which we discussed our conclusions from the CRL, as well as the potential design of a new pivotal study. In parallel, we are collecting information on timelines and costs for such a study. We are evaluating whether to conduct a confirmatory Phase 3 trial for the U.S. registration of Macrilen™, our orally available peptidomimetic ghrelin receptor agonist with growth hormone secretagogue activity, following a recent meeting with the FDA regarding the design of the study.
The following is a summary of the history of our development of Macrilen™:
•
We out-licensed the development compound macimorelin acetate to Ardana Bioscience in 2004. Ardana Bioscience subsequently initiated the clinical development program of macimorelin acetate as an orally active compound intended to be used in the diagnosis of adult growth hormone deficiency. Following agreement with the FDA on the study design, Ardana Bioscience initiated a pivotal Phase 3 study in 2007, which tested the compound compared to a test of growth hormone-releasing hormone ("GHRH") + L-Arginine ("ARG") , using a competitor's compound. The study was discontinued in 2008 due to Ardana Bioscience's bankruptcy. We terminated Ardana Bioscience's license to the compound due to its bankruptcy.
•
On October 19, 2009, we announced that we had initiated activities intended to complete the clinical development of Macrilen™ for use in evaluating AGHD. We had already assumed the sponsorship of the IND from Ardana Bioscience and discussed with the FDA the best way to complete the ongoing Phase 3 clinical trial and subsequently to file an NDA for approval of Macrilen™ for use in evaluating AGHD. The pivotal Phase 3 trial was designed to investigate the safety and efficacy of the oral administration of Macrilen™ as a growth hormone stimulator for use in evaluating AGHD. It was accepted by the FDA that for the ongoing part of the study, Macrilen™ would not be compared to the GHRH + ARG test because the competitor's compound had been removed from the market.
•
On June 21, 2010, we presented positive data at the 92nd ENDO Meeting on Macrilen™ for evaluation and therapeutic use. The preclinical data showed that Macrilen™ is a potent and safe oral synthetic GH-releasing compound with potential utility in evaluating GHD.
•
On July 14, 2010, we announced the presentation of a poster on Macrilen™, entitled "Use of the Orally Active Ghrelin Mimetic AEZS-130 as a Simple Test for the Diagnosis of Growth Hormone (GH) Deficiency (GHD) in adults (AGHD)". Merriam G.R., Yuen K., Bonert V., Dobs A, Garcia J., Kipnes M., Molitch M., Swerdloff R., Wang C., Cook D., Altemose I. and Biller B. This poster was presented at the Seventh International Congress of Neuroendocrinology, in Rouen, France.
•
On October 5, 2010, at the Fifth International Congress of the Growth Hormone Research Society and the Insulin-like Growth Factors Society, we announced that, after the interim Phase 3 analysis, Macrilen™ demonstrated the potential to provide a simple, well tolerated and safe oral product for use in evaluating AGHD.
•
On December 20, 2010, we announced we had reached agreement with the FDA on a SPA for Macrilen™, enabling us to complete the ongoing registration study required to gain approval for use in evaluating AGHD. The first part of the study, conducted by our former licensee, Ardana, was a two-way cross-over study and included 42 patients with confirmed AGHD or multiple pituitary hormone deficiencies and a low insulin-like growth factor-I. A control group of 10 subjects without AGHD was matched to patients for age, gender, body mass index and (for females) estrogen status.
•
On July 26, 2011, we announced the completion of the Phase 3 study of Macrilen™ as a first oral product for use in evaluating AGHD and the decision to meet with the FDA for the future filing of an NDA for the registration of Macrilen™ in the United States.
•
On August 30, 2011, we announced favorable top-line results of our completed Phase 3 study with Macrilen™ as a first oral product for use in evaluating AGHD. The results showed that Macrilen™ had reached its primary endpoint demonstrating >90% area-under-the-curve ("AUC") of the Receiver Operating Characteristic ("ROC") curve, which determines the level of specificity and sensitivity of the product. Importantly, the primary efficacy parameters showed that the study achieved both specificity and sensitivity at a level of 90% or greater. In addition, eight of the ten newly enrolled AGHD patients were correctly classified by a pre-specified peak GH threshold level. The use of Macrilen™ was shown to be safe and well tolerated overall throughout the completion of this trial.
•
On June 26, 2012, we announced that the final results from a Phase 3 trial for Macrilen™ showed that the drug is safe and effective in evaluating AGHD. Jose M. Garcia, MD, PhD, of the Baylor College of Medicine and the Michael E. DeBakey VA Medical Center (the "DeBakey Center"), disclosed these data during an oral presentation at the 94th ENDO Annual Meeting and Expo in Houston, Texas. The study had originally been designed as a cross-over trial of Macrilen™ compared to the GHRH + ARG test in AGHD patients and in controls matched for body mass index ("BMI"), estrogen status, gender

28


and age. After 43 AGHD patients and ten controls had been tested, the GHRH + ARG test became unavailable because the competitor's compound was withdrawn from the market. The study was completed by testing ten more AGHD patients and 38 controls with Macrilen™ alone. Of the 53 AGHD subjects enrolled, 52 received Macrilen™, and 50 who had confirmed AGHD prior to study entry were included in this analysis, along with 48 controls. Two AGHD subjects could not be matched due to the combination of young age, high BMI and estrogen use. The objective of this clinical trial was to determine the efficacy and safety of Macrilen™ in the evaluation of AGHD. Mean peak growth hormone ("GH") levels in AGHD patients and controls following Macrilen™ administration were 2.36ng/mL (range 0.03-33) and 17.71ng/mL (range 10.5-94), respectively. The ROC plot analysis yielded an optimal GH cut-point of 2.7ng/mL, with 82% sensitivity, 92% specificity and a 13% misclassification rate. Obesity (BMI>30) was present in 58% of cases and controls, and peak GH levels were inversely associated with BMI in controls. Adverse events ("AE") were seen in 37% of AGHD patients and in 21% of controls following Macrilen™. In contrast, 61% of AGHD subjects and 30% of controls experienced AEs with L ARG+GHRH. The most common AEs after Macrilen™ were unpleasant taste (19.2%) and diarrhea (3.8%) for the AGHD patients and unpleasant taste (4.2%) and diarrhea (4.2%) for the matched controls. No clinically meaningful changes from baseline in ECG results during the study for AGHD patients were observed; however, one control subject had an ECG change (T wave abnormality and QTc interval prolongation) one hour after treatment with Macrilen™ that was considered a serious treatment-related adverse event and resolved spontaneously within 24 hours. The subject had been pre-treated with citalopram, a drug that was later reported by the FDA to be associated with QT prolongation, although the patient had stopped this medication seven days prior to dosing. Overall, this study demonstrated that Macrilen™ is safe and effective for use in evaluating AGHD.
•
On August 7, 2012, the United States Patent and Trademark Office granted us a patent for the use of Macrilen™ as a product to be used in evaluating AGHD. Filed on February 19, 2007, the patent (US 8,192,719 B2), entitled "Methods and Kits to Diagnose Growth Hormone Deficiency by Oral Administration of EP1572 or EP1573 Compounds", became effective as of June 5, 2012 and will expire on October 12, 2027. The corresponding composition of matter patent (US 6,861,409 B2), filed on June 13, 2001 and granted on March 1, 2005, will expire on August 1, 2022, with the possibility of a patent term extension of up to five years.
•
On September 25, 2012, the European Patent Office granted us a patent for the use of Macrilen™ related to methods and kits for use in relation to the evaluation of GHD in a human or animal subject. Filed on February 19, 2007, the patent, (EP #1 984 744 B1) entitled "Methods and Kits to Diagnose Growth Hormone Deficiency", was effective as of September 19, 2012 following its publication in the European Patent Bulletin, and it will expire on February 19, 2027.
•
On September 26, 2012, we received notification from the FDA that Fast Track designation previously applied for had not been granted for Macrilen™ as a product for use in evaluating AGHD.
•
On October 18, 2012, we announced that results from a multicenter open-label Phase 3 trial for Macrilen™ demonstrated that the drug is safe and effective in evaluating AGHD. George R. Merriam, MD, Director of the Clinical Study Unit at the Veterans Affairs Puget Sound Health Care System, and Professor of Medicine at the University of Washington, Seattle and Tacoma, WA, disclosed these data at the 6th International Congress of the GRS and IGF Society in Munich, Germany. His presentation confirmed data previously presented by Dr. Garcia at the 94th ENDO Meeting in Houston, Texas in June 2012. Dr. Merriam's presentation drew attention to the effect of BMI on optimizing the cut-off values to improve the sensitivity and specificity of the test. Responses in normal subjects classified as obese, with BMIs above 30, were significantly lower than in leaner subjects. Since GH deficiency can lead to increased body fat, many of the patients also met criteria for obesity, and therefore, a lower peak GH cut-off is more accurate in separating obese normals from obese patients. Based upon these study results, a cut-off of 2.7 µg/L was optimal for subjects with a BMI≥30 and a cut-off of 6.8 µg/L for subjects with a BMI<30. Age had a weaker effect on test performance and gender made no difference. Dr. Merriam's study concluded that GH stimulation with oral Macrilen™ may provide a simple, rapid, safe, and well-tolerated product used in evaluating AGHD, with accuracy comparable to that of the GHRH-ARG test.
We hold the worldwide rights to macimorelin pursuant to an exclusive license agreement with The French Centre National de la Recherche Scientifique, as licensor, and AEZS GmbH, as licensee.
If approved by the FDA, Macrilen™ would be the first orally administered drug indicated for the evaluation of AGHD. Competitors for Macrilen™ as a product for the evaluation of AGHD are principally the diagnostic tests currently performed by endocrinologists, although none of these tests are approved by the FDA for this purpose. The most commonly used diagnostic tests for GHD are:
•
Measurement of blood levels of Insulin Growth Factor ("IGF")-1, which is typically used as the first test when GHD is suspected. However, this test is not used to definitively diagnose GHD because many growth hormone deficient patients show normal IGF-1 levels.

29


•
Insulin Tolerance Test ("ITT"), which is considered to be the "gold standard" for GH secretion provocative tests but which requires constant patient monitoring while the test is administered and is contra-indicated in patients with seizure disorders, with cardiovascular disease and in brain injured patients and elderly patients. The ITT is administered i.v.
•
GHRH + ARG test, which is an easier test to perform in an office setting and has a good safety profile but is considered to be costly to administer compared to ITT and Glucagon. This test is contra-indicated in patients with renal failure. GHRH + ARG is approved in the EU and has been proposed to be the best alternative to ITT, but it is no longer available in the United States. This test is administered i.v.
•
Glucagon test, which is simple to perform and is considered relatively safe by endocrinologists. The mechanism of action for this test is unclear. Also, this test takes up to three to four hours. It produces side effects in up to one-third of the patients. Since there is a suspicion that this test may cause hypoglycemia, it may not be appropriate in diabetic populations. This test is administered i.m.
Oral administration of Macrilen™ offers more convenience and simplicity over the current GHD tests used, requiring either i.v. or i.m. administration. Additionally, Macrilen™ may demonstrate a more favorable safety profile than existing diagnostic tests, some of which may be inappropriate for certain patient populations, e.g. diabetes mellitus or renal failure, and have demonstrated a variety of side effects, which Macrilen™ has not thus far. These factors may be limiting the use of GHD testing and may potentially enable Macrilen™ to become the product of choice in evaluating AGHD.
There are approximately 36,000 AGHD tests performed annually in the U.S. Based on published information from the U.S. Centers for Disease Control and Prevention, different scientific publications and by Navigant Research, we estimate that the total potential U.S. market for AGHD evaluation is approximately 158,000 tests per year, including the evaluation of patients who have suffered traumatic brain injury ("TBI"). In patients with TBI, GHD is frequent and may contribute to cognitive sequel and reduction in quality of life. GHD develops in approximately 19% of both severe and moderate hospitalized TBI victims.
Erk Inhibitors (AEZS-134)
We believe that the results of research to date indicate that the MAPK signaling pathway represents a therapeutic intervention point for the clinical treatment of malignant tumors. In this pathway, we have focussed on Erk inhibitors. As a result of our multi-parameter optimization program for kinase inhibitor selectivity, cellular efficacy, physicochemical and in vitro ADMET properties, we developed compounds that we believe might have therapeutic potential. We concluded that, among these compounds, AEZS-134, a highly potent and selective ATP competitive Erk inhibitor, has the most potential. Therefore, we are continuing with the optimization and pre-clinical development of AEZS-134. On April 9, 2014, we announced the presentation of a poster on AEZS-134 during the American Association for Cancer Research Annual Meeting. The data presented provide a rationale for new therapeutic opportunities in oncology, suggesting that Erk inhibitors such as AEZS-134 may provide a treatment option for patients suffering from tumors that are resistant to currently established therapies such as B-Raf and Mek inhibitors. AEZS-134 demonstrated potent anti-proliferative activity in B-Raf wildtype, B-RafV600E mutant, Ras wildtype and K-Ras mutant tumor cell lines in comparison to common Raf inhibitors. Furthermore, we could show that AEZS-134 is efficacious in Mek inhibitor resistant Hct116 and MDA MB231 cells that have been well characterized in terms of Mek F129L allosteric binding pocket mutation, varying degrees of K-Ras amplification, cellular proliferation assays and MAPK pathway phosphorylation studies. Our data indicate a broader targeting potency for Erk rather than Mek and/or Raf.
LHRH-Disorazol Z (AEZS-138)
In search of new antitumor agents, we found that disorazol Z, a compound that was isolated from the myxobacterium Sorangium cellulosum, possesses cytotoxicity in the picomolar range in a panel of different tumor cell lines. Inhibition of tubulin polymerization, cell cycle arrest and efficient induction of apoptosis, have been identified as modes of action. AEZS-138 is a cytotoxic conjugate of disorazol Z and a synthetic peptide carrier that targets the LHRH receptor. It is, therefore, an outgrowth of our research that lead to our formulation of zoptarelin doxorubicin. The following is a summary of our development efforts with respect to AEZS-138:
•
On March 24, 2011, we were awarded a $1.5 million grant from the German Ministry of Education and Research to develop, up to the clinical stage, cytotoxic conjugates of the proprietary cytotoxic compound disorazol Z and peptides targeting G-protein coupled receptors, including the LHRH receptors. The compounds combine the targeting principle being studied in Phase 3 with zoptarelin doxorubicin with the novel cytotoxic disorazol Z. The grant was payable as a partial reimbursement of qualifying expenditures over a three-year period, until January 31, 2014. The qualified project was performed with Morphisto GmbH and the Helmholtz Institute in Saarbrücken, Germany, which received additional funding of approximately US$0.7 million. Researchers from the departments of Gynecology and Obstetrics at both the University of Göttingen and the University of Würzburg, Germany, were also part of the collaboration.

30


•
On November 16, 2011, we announced the presentation of a poster at the AACR-NCI-EORTC International Conference on Molecular Targets and Cancer Therapeutics on encouraging preclinical data for disorazol Z. The data showed that disorazol Z possesses cytotoxicity in a highly diverse panel of 60 different tumor cell lines, and also underlined the identification of important aspects of this novel natural compound's mechanism of action. Disorazol Z has been identified as a tubulin binding agent with highly potent antitumor properties. Cell cycle analysis revealed that disorazol Z arrested cells in the G2/M cell cycle phase and subsequently induced apoptosis with remarkable potency, as shown by sub-nanomolar EC50 values. Currently, experiments are under way to determine the tubulin binding site for disorazol Z and to identify further mechanisms of action of this novel highly potent agent. To expand our zoptarelin doxorubicin technology platform, we aim to evaluate the utility of disorazol Z as a cytotoxic component in a drug-targeting approach utilizing GPCR ligands as the targeting moieties for the treatment of GPCR over-expressing cancers.
•
On April 10, 2013, we announced at the American Association for Cancer Research's ("AACR") encouraging updated proof-of-concept results for disorazol Z cytotoxic conjugates, such as AEZS-138, in human ovarian and endometrial cancer xenograft models. Data demonstrated that conjugates of D-Lys6-LHRH and disorazol Z retained strong binding to the LHRH receptor and showed potent inhibition of tubulin polymerization. Cellular cytotoxicity of the conjugates was in the low nanomolar EC50 range. Increased cytotoxicity in cells over-expressing the LHRH receptor, support receptor targeting as a mechanism of action. The LHRH receptor-dependent efficacies of disorazol Z - D-Lys6-LHRH conjugates in vitro and in mouse xenograft models that were presented support the principle of tumor targeting by the LHRH receptor as already employed by zoptarelin doxorubicin.
•
On February 11, 2014, at the 11th International Symposium on GnRH, in Salzburg, Austria, we presented further data on the mechanism of action and proof of concept of the disorazol Z cytotoxic conjugate, AEZS-138, which had led to the initiation of its preclinical development during the second quarter of 2013.
Overview of our Commercial Operations
Our commercial operations consist of full-time sales force and a sales-management staff. We currently have 19 sales representatives in the United States who provide services for us pursuant to our agreement with Ventiv Commercial Services, LLC, an affiliate of inVentiv Health, Inc. ("inVentiv"), a contract-sales organization. Our sales force is managed by our Senior Vice President, Commercial, a national sales director and two regional sales directors.
We promote EstroGel®, a leading non-patch transdermal hormone replacement therapy product, pursuant to a co-promotion agreement (the "Ascend Agreement") with ASCEND Therapeutics US LLC ("ASCEND"), which we entered into in August 2014. The Ascend Agreement provides that we will detail EstroGel® in specific agreed-upon U.S. territories in exchange for a sales commission that is based upon incremental sales volumes of the product that are generated over pre-established baselines.
The Ascend Agreement has a two-year term that commenced in November 2014. It is subject to extension for successive periods of two years each upon our agreement with ASCEND. The Ascend Agreement has customary termination provisions and, in addition, is subject to termination for convenience by either party upon the provision of not less than six months' written notice to the other party. During the term of the Ascend Agreement, either party may offer other products that it acquires to the other party for inclusion in the co-promotion arrangement established by the Ascend Agreement.
Our agreement with inVentiv provides that the inVentiv personnel who provide services to us are independent contractors and not our employees. InVentiv is solely responsible for the human resource and performance-management functions of all such personnel. It is also responsible for paying the compensation, benefits, payroll-related or withholding taxes and any governmental charges or benefits, including unemployment and disability insurance contributions or benefits and workers compensation contributions with respect to such personnel and for reimbursing them for their expenses.
We paid inVentiv an implementation fee to compensate it for services provided to us up to the date of the hire of the first sales representative it employed to provide services to us. We pay a fixed monthly fee to inVentiv for the services of the sales representatives it provides for us, which is subject to adjustment if the assumptions regarding the annual salary paid to the sales representative prove to be too high or too low, and we also reimburse inVentiv for certain expenses that it incurs as a result of providing sales representatives to us.
Our agreement with inVentiv has a two-year term that started in November 2014. The term may be extended for additional periods of one year upon our reaching a written agreement with inVentiv regarding the terms of the extension not less than 60 days before the end of the expiring term. The agreement is subject to customary termination provisions for non-payment of amounts due, material breach and bankruptcy or insolvency. In addition, we may terminate the agreement without cause by giving inVentiv at least 90 days' prior written notice. If we terminate the agreement prior to the first anniversary of the commencement of the term, we will owe inVentiv an early-termination fee, the amount of which is determined by reference to the termination date.

31


RAW MATERIALS
Raw materials and supplies are generally available in quantities adequate to meet the needs of our business. We will be dependent on third-party manufacturers for the pharmaceutical products that we will market. An interruption in the availability of certain raw materials or ingredients, or significant increases in the prices paid by us for them, could have a material adverse effect on our business, financial condition, liquidity and operating results.
REGULATORY COMPLIANCE
Governmental authorities in Canada, the United States, Europe and other countries extensively regulate the preclinical and clinical testing, manufacturing, labeling, storage, record keeping, advertising, promotion, export, marketing and distribution, among other things, of pharmaceuticals. Under the laws of the United States, the countries of the EU, and other countries, we and the institutions at which we sponsor research are subject to obligations to ensure that our clinical trials are conducted in accordance with Good Clinical Practices ("GCP") guidelines and the investigational plan and protocols contained in an IND application, or comparable foreign regulatory submission. The Japanese regulatory process for approval of new drugs is similar to the FDA approval process described below except that Japanese regulatory authorities request bridging studies to verify that foreign clinical data are applicable to Japanese patients and also require the tests to determine appropriate dosages for Japanese patients to be conducted on Japanese patient volunteers. Due to these requirements, delays of two to three years in introducing a drug developed outside of Japan to the Japanese market are likely. Set forth below is a brief summary of the material governmental regulations affecting us in the major markets in which we intend to market our products and/or promote products that we acquire or in-license or to which we obtain promotional rights.
Canada
In Canada, the CTPD is the Canadian federal authority that regulates pharmaceutical drugs and medical devices for human use. Prior to being given market authorization, a manufacturer must present substantive scientific evidence of a product's safety, efficacy and quality as required by the Food and Drugs Act and other legislation and regulations. The requirements for the development and sale of pharmaceutical drugs in Canada are substantially similar to those in the United States, which are described below.
United States
In the United States, the FDA under the Federal Food, Drug, and Cosmetic Act, the Public Health Service Act and other federal statutes and regulations, subjects pharmaceutical products to rigorous review.
In order to obtain approval of a new product from the FDA, we must, among other requirements, submit proof of safety and efficacy as well as detailed information on the manufacture and composition of the product. In most cases, this proof entails extensive preclinical, clinical, and laboratory tests. Before approving a new drug or marketing application, the FDA also typically conducts pre-approval inspections of the company, its CROs and/or its clinical trial sites to ensure that clinical, safety, quality control, and other regulated activities are compliant with GCP, or Good Laboratory Practices ("GLP"), for specific non-clinical toxicology studies. Manufacturing facilities used to produce a product are also subject to ongoing inspection by the FDA. The FDA may also require confirmatory trials, post-marketing testing, and extra surveillance to monitor the effects of approved products, or place conditions on any approvals that could restrict the commercial applications of these products. Once approved, the labeling, advertising, promotion, marketing, and distribution of a drug or biologic product must be in compliance with FDA regulatory requirements.
The first stage required for ultimate FDA approval of a new biologic or drug involves completion of preclinical studies and the submission of the results of these studies to the FDA. This, together with proposed clinical protocols, manufacturing information, analytical data, and other information in an IND, must become effective before human clinical trials may commence. Preclinical studies involve laboratory evaluation of product characteristics and animal studies to assess the efficacy and safety of the product. The FDA regulates preclinical studies under a series of regulations called the current GLP regulations. If the sponsor violates these regulations, the FDA may require that the sponsor replicate those studies.
After the IND becomes effective, a sponsor may commence human clinical trials. The sponsor typically conducts human clinical trials in three sequential phases, but the phases may overlap. In Phase 1 trials, the sponsor tests the product in a small number of patients or healthy volunteers, primarily for safety at one or more doses. Phase 1 trials in cancer are often conducted with patients who have end-stage or metastatic cancer. In Phase 2, in addition to safety, the sponsor evaluates the efficacy of the product in a patient population somewhat larger than Phase 1 trials. Phase 3 trials typically involve additional testing for safety and clinical efficacy in an expanded population at geographically dispersed test sites. The sponsor must submit to the FDA a clinical plan, or "protocol", accompanied by the approval of the institutions participating in the trials, prior to commencement of each clinical trial. The FDA may order the temporary or permanent discontinuation of a clinical trial at any time. In the case

32


of product candidates for cancer, the initial human testing may be done in patients with the disease rather than in healthy volunteers. Because these patients are already afflicted with the target disease, such studies may provide results traditionally obtained in Phase 2 studies. Accordingly, these studies are often referred to as "Phase 1/2" studies. Even if patients participate in initial human testing and a Phase 1/2 study is carried out, the sponsor is still responsible for obtaining all the data usually obtained in both Phase 1 and Phase 2 studies.
The sponsor must submit to the FDA the results of the preclinical and clinical testing, together with, among other things, detailed information on the manufacture and composition of the product, in the form of an NDA or, in the case of a biologic, a Biologics License Applications ("BLA"). In a process that can take a year or more, the FDA reviews this application and, when and if it decides that adequate data are available to show that the new compound is both safe and effective for a particular indication and that other applicable requirements have been met, approves the drug or biologic for marketing. The amount of time taken for this approval process is a function of a number of variables, including the quality of the submission and studies presented and the potential contribution that the compound will make in improving the treatment of the disease in question.
Orphan-drug designation is granted by the FDA Office of Orphan Drug Products to novel drugs or biologics that treat a rare disease or condition affecting fewer than 200,000 patients in the U.S. The designation provides the drug developer with a seven-year period of U.S. marketing exclusivity if the drug is the first of its type approved for the specified indication or if it demonstrates superior safety, efficacy or a major contribution to patient care versus another drug of its type previously granted the designation for the same indication. We have been granted orphan drug designations for zoptarelin doxorubicin for the treatment of advanced ovarian cancer and for Macrilen™ for the evaluation of growth hormone deficiency.
Under the Drug Price Competition and Patent Term Restoration Act of 1984 (the "Hatch-Waxman Act"), newly-approved drugs and indications may benefit from a statutory period of non-patent data exclusivity. The Hatch-Waxman Act provides five-year data exclusivity to the first applicant to gain approval of an NDA for a new chemical entity, or NCE, meaning that the FDA has not previously approved any other drug containing the same active pharmaceutical ingredient, or active moiety. Although protection under the Hatch-Waxman Act will not prevent the submission or approval of another full NDA, such an NDA applicant would be required to conduct its own preclinical and adequate, well controlled clinical trials to demonstrate safety and effectiveness.
The Hatch-Waxman Act also provides three years of data exclusivity for the approval of new and supplemental NDAs, including Section 505(b)(2) applications, for, among other things, new indications, dosage forms, routes of administration, or strengths of an existing drug, or for a new use, if new clinical investigations that were conducted or sponsored by the applicant are determined by the FDA to be essential to the approval of the application. This exclusivity, which is sometimes referred to as clinical investigation exclusivity, would not prevent the approval of another application if the applicant has conducted its own adequate, well-controlled clinical trials demonstrating safety and efficacy, nor would it prevent approval of a generic product that did not incorporate the exclusivity-protected changes of the approved drug product.
The labeling, advertising, promotion, marketing, and distribution of a drug or biologic product must be in compliance with FDA regulatory requirements. Failure to comply with applicable requirements can lead to the FDA demanding that production and shipment cease and, in some cases, that the manufacturer recall products, or to enforcement actions that can include seizures, injunctions, and criminal prosecution. These failures can also lead to FDA withdrawal of approval to market a product.
European Union
Medicines can be authorized in the EU by using either the centralized authorization procedure or national authorization procedures.
Centralized procedure
The EU has implemented a centralized procedure coordinated by the EMA for the approval of human medicines, which results in a single marketing authorization issued by the European Commission that is valid across the EU, as well as Iceland, Liechtenstein and Norway. The centralized procedure is compulsory for human medicines that are derived from biotechnology processes, such as genetic engineering, that contain a new active substance indicated for the treatment of certain diseases, such as HIV/AIDS, cancer, diabetes, neurodegenerative disorders or autoimmune diseases and other immune dysfunctions, and designated orphan medicines. For medicines that do not fall within these categories, an applicant has the option of submitting an application for a centralized marketing authorization to the EMA, as long as the medicine concerned is a significant therapeutic, scientific or technical innovation, or if its authorization would be in the interest of public health.

33


National authorization procedures
There are also two other possible routes to authorize medicinal products in several EU countries, which are available for investigational drug products that fall outside the scope of the centralized procedure:
Decentralized procedure. Using the decentralized procedure, an applicant may apply for simultaneous authorization in more than one EU country of medicinal products that have not yet been authorized in any EU country and that do not fall within the mandatory scope of the centralized procedure.
The application will be reviewed by a selected Reference Member State ("RMS"). The Marketing Authorization granted by the RMS will then be recognized by the other Member States involved in this procedure.
Mutual recognition procedure. In the mutual recognition procedure, a medicine is first authorized in one EU Member State, in accordance with the national procedures of that country. Following this, further marketing authorizations can be sought from other EU countries in a procedure whereby the countries concerned agree to recognize the validity of the original, national marketing authorization.
Regulation of Commercial Operations
The marketing, promotional, and pricing practices of human pharmaceutical manufacturers, as well as the manner in which manufacturers interact with purchasers and prescribers, are subject to various U.S. federal and state laws, including the federal anti-kickback statute and the False Claims Act and state laws governing kickbacks, false claims, unfair trade practices, and consumer protection, and to similar laws in other countries. In the United States, these laws are administered by, among others, the Department of Justice (DOJ), the Office of Inspector General of the Department of Health and Human Services, the Federal Trade Commission, the Office of Personnel Management, and state attorneys general. Over the past several years, the FDA, the DOJ, and many other agencies have increased their enforcement activities with respect to pharmaceutical companies and increased the inter-agency coordination of enforcement activities.
In the United States, biopharmaceutical and medical device manufacturers are required to record any transfers of value made to licensed physicians and teaching hospitals and to disclose such data to the Department of Health and Human Services ("HHS"). In addition to civil penalties for failure to report transfers of value to physicians or teaching hospitals, there will be criminal penalties, if a manufacturer intentionally makes false statements or excludes information in such reports. The payment data across biopharmaceutical and medical device companies is posted by HHS on a publicly available website. Increased access to such data by fraud and abuse investigators, industry critics and media will draw attention to our collaborations with reported entities and will importantly provide opportunities to underscore the critical nature of our collaborations for developing new medicines and exchanging scientific information. This national payment transparency effort coupled with industry commitment to uphold voluntary codes of conduct (such as the PhRMA Code on Interactions with Healthcare Professionals and PhRMA Guiding Principles Direct to Consumer Advertisements About Prescription Medicines) and rigorous internal training and compliance efforts will complement existing laws and regulations to help ensure ethical collaboration and truthful product communications.
The Canadian association of Research-Based Pharmaceutical Companies ("Rx & D") adopted "Guidelines for Transparency in Stakeholder Funding" that require member companies to regularly disclose, by means of the web sites and annual reports, a list of all stakeholders to which they provide direct funding. The term "stakeholder" is defined in Rx & D’s Code of Ethical Practices to include "Health Care Professionals". In the EU, the disclosure code of transfers of value to healthcare professionals and organizations adopted by the European Federation of Pharmaceutical Industries and Associations ("EFPIA") requires all members of EFPIA to disclose transfers of value to healthcare professionals and healthcare organizations beginning in 2016, covering the relevant transfers in 2015. Each member company will be required to document and disclose: (i) the names of healthcare professionals and associations that have received payments or other transfers of value and (ii) the amounts or value transferred, and the type of relationship.
For more information about the regulatory risks associated with our business operations, see "Item 3. – Key Information – Risk Factors".
Intellectual Property - Patents
We seek to protect our compounds, manufacturing processes, compositions and methods of medical use for our lead drugs and drug candidates through a combination of patents, trade secrets and know-how. Our patent portfolio consists of approximately 28 owned and in-licensed patent families (issued, granted or pending in the United States, Europe and other jurisdictions). The patent positions of companies in the biotechnology and pharmaceutical industries are highly uncertain and involve complex legal and factual questions. Therefore, we cannot predict the breath of claims, if any, that may be allowed under any of our

34


patent applications, or the enforceability of any of our allowed patents. See "Item 3D. Risk Factors – We may not obtain adequate protection for our products through our intellectual property."
Patents extend for varying periods according to the date of patent filing or grant and the legal term of patents in the various countries where patent protection is obtained. The actual protection afforded by a patent, which can vary from country to country, depends on the type of patent, the scope of its coverage and the availability of legal remedies in the country. In the United States, the patent term of a patent that covers an FDA-approved drug may also be eligible for patent term extension, which permits patent term restoration as compensation for the patent term lost during the FDA regulatory review process. The Hatch-Waxman Act permits a patent term extension of up to five years beyond the expiration of the patent, in which the patentee may file an application for yearly interim extensions within five years if the patent will expire and the FDA has not yet approved the NDA. The length of the patent term extension is related to the length of time the drug is under regulatory review. Patent extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval and only one patent applicable to an approved drug may be extended.
Similar provisions are available in Europe and other foreign jurisdictions to extend the term of a patent that covers an approved drug. In these jurisdictions, however, no interim extensions exist and the marketing approval must be granted before the patent expires. In the future, if and when our pharmaceutical products receive FDA approval, we expect to apply for patent term extensions on patents covering those products. While we anticipate that any such applications for patent term extensions will likely be granted, we cannot predict the precise length of time for which such patent terms would be extended in the United States, Europe or other jurisdictions. If we are not able to secure patent term extensions on patents covering our products for meaningful periods of additional time, we may not achieve or sustain profitability, which would adversely affect our business.
In addition to patent protection, our products may benefit from the market-exclusivity provisions contained in the orphan-drug regulations or the pediatric-exclusivity provisions or other provisions of the United States Food, Drug and Cosmetic Act of 1938, as amended, such as new chemical entity exclusivity or new formulation exclusivity. Orphan drug regulations provide incentives to pharmaceutical and biotechnology companies to develop and manufacture drugs for the treatment of rare diseases, currently defined as diseases that exist in fewer than 200,000 individuals in the U.S., or diseases that affect more than 200,000 individuals in the U.S. but that the sponsor does not realistically anticipate will generate a net profit. Under these provisions, a manufacturer of a designated orphan drug can seek tax benefits, and the holder of the first FDA approval of a designated orphan product will be granted a seven-year period of marketing exclusivity for such FDA-approved orphan product. In the U.S., the FDA has the authority to grant additional data protection for approved drugs where the sponsor conducts specified testing in pediatric or adolescent populations. If granted, this pediatric exclusivity provides an additional six months which are added to the term of data protection as well as to the term of any relevant patents, to the extent these protections have not already expired. We may also seek to utilize market exclusivities in other territories, such as in the EU. We cannot assure you that any of our drug candidates will obtain such orphan drug designation, pediatric exclusivity, new chemical entity exclusivity or any other market exclusivity in the U.S., the EU or any other territory, or that we will be the first to receive the respective regulatory approval for such drugs so as to be eligible for any market exclusivity protection.
Our drug development efforts are focused currently on two compounds, zoptarelin doxorubicin and Macrilen™ (macimorelin), which are in clinical development, and on two oncology compounds, an Erk inhibitor (AEZS-134) and LHRH-disorazol Z (AEZS-138), which are in pre-clinical development. The following is a description of our intellectual property rights with respect to these compounds.
Zoptarelin doxorubicin:
We license intellectual property relating to LH-RH agonists and LH-RH antagonists carrying various cytotoxic radicals (including zoptarelin doxorubicin) from the Administrators of the Tulane Educational Fund ("Tulane") pursuant to a License Agreement dated September 17, 2002 (the "Tulane Agreement"). The Tulane Agreement grants to us an exclusive worldwide license for all therapeutic uses of LH-RH agonists and LH-RH antagonists carrying various cytotoxic radicals, to the extent covered by one of the patents listed below. The term of the Tulane Agreement continues for ten years after the first commercial sale of a product based on the licensed intellectual property (a "Licensed Product") or until the expiration of the last to expire of the patents listed below, whichever is longer, on a country-by-country basis.
Pursuant to the Tulane Agreement, we are required to pay Tulane the following amounts: (i) US$400,000 upon the first grant of regulatory approval for a Licensed Product in the United States, Canada, the European Union or Japan; (ii) 10% of all consideration received by us from a sublicensee for authorization to use the licensed intellectual property to develop, manufacture, market, distribute and sell a Licensed Product; (iii) 5% of our net sales of Licensed Products; and (iv) 50% of any royalties that we receive from a sublicensee with respect to its net sales of Licensed Products; provided, however, that the payment with respect to royalties received from a sublicensee shall not be less than 3.5% nor more than 5% of the sublicensee's net sales of the Licensed Product.

35


The following patents are covered by the Tulane Agreement:
•
U.S. patent 5,843,903 covers zoptarelin doxorubicin and other related targeted cytotoxic anthracycline analogs, pharmaceutical compositions comprising the compounds as well as their medical use for the treatment of cancer. This patent expires in November 2015.
•
European patent 0 863 917 B1 covers zoptarelin doxorubicin and other related targeted cytotoxic anthracycline analogs, pharmaceutical compositions comprising the compounds as well as their medical use for the treatment of tumors. This patent expires in November 2016.
•
Japanese patent 3 987 575 covers zoptarelin doxorubicin and other related targeted cytotoxic anthracycline analogs, pharmaceutical compositions comprising the compounds as well as their medical use for the treatment of tumors. This patent expires in November 2016.
•
Chinese patent ZL96198605.0 covers zoptarelin doxorubicin and other related targeted cytotoxic anthracycline analogs, pharmaceutical compositions comprising the compounds as well as their medical use for the treatment of tumors. This patent expires in November 2016.
•
Hong Kong patent 1017363 covers zoptarelin doxorubicin and other related targeted cytotoxic anthracycline analogs, pharmaceutical compositions comprising the compounds as well as their medical use for the treatment of tumors. This patent expires in November 2016.
Macimorelin:
•
U.S. patent 6,861,409 covers macimorelin and U.S. patent 7,297,68 covers other related growth hormone secretagogue compounds, each also covering pharmaceutical compositions comprising the compounds as well as their medical use for elevating the plasma level of growth hormone. U.S. patent 6,861,409 and U.S. patent 7,297,681 both expire in August 2022.
•
European patent 1 289 951 covers macimorelin and European patent 1 344 773 covers other related growth hormone secretagogue compounds, pharmaceutical compositions comprising the compounds as well as their medical use for elevating the plasma level of growth hormone. EP patent 1 289 951 and EP patent 1 344 773 both expire in June 2021.
•
Japanese patent 3 522 265 covers macimorelin and pharmaceutical compositions comprising the compounds as well as their medical use for elevating the plasma level of growth hormone. This patent expires in June 2021.
•
Canadian patent 2,407,659 covers macimorelin and pharmaceutical compositions comprising the compounds as well as their medical use for elevating the plasma level of growth hormone. This patent expires in June 2021.
•
U.S. patent 8,192,719 covers a method of assessing pituitary-related growth hormone deficiency in a human or animal subject comprising an oral administration of the compound macimorelin and determination of the level of growth hormone in the sample and assessing whether the level of growth hormone in the sample is indicative of growth hormone deficiency. This patent 8,192,719 expires in October 2027.
•
European patent 1 984 744 covers a method of assessing pituitary-related growth hormone deficiency by oral administration of macimorelin. This expires in February 2027.
•
Japanese patent 4 852 728 covers a method of assessing pituitary-related growth hormone deficiency by oral administration of macimorelin. This expires in February 2027.
Erk inhibitors (AEZS-134):
We own a number of patents that relate to our Erk inhibitors, of which AEZS-134 is our lead candidate.
•
U.S. patent 8,791,118 covers AEZS-134 as well as methods of treatment for this compound. This patent expires in May 2032 (including PTA).
•
European Patent Application No. EP2,694,067 covers AEZS-134 as well as methods of treatment for this compound. If granted, the EP patent would expire in April 2032.
•
Japanese patent application based on PCT/EP2012/056138 covers AEZS-134 as well as methods of treatment for this compound. If granted, the patent would expire in April 2032.

36


Disorazol Z - LHRH conjugates (AEZS-138):
•
U.S. patent 7,741,277 covers AEZS-138 (disorazole Z - LHRH conjugate). This patent will expire in January 2028 (including PTA).
•
U.S. patent 8,470,776 covers methods of treatment for compound AEZS-138 (disorazole Z - LHRH conjugate). This patent will expire in February 2029 (including PTA).
•
European patent application 2,066,679 covers AEZS-138 (disorazole Z - LHRH conjugate) as well as methods of treatment for this compound. If granted, this patent will expire in September 2027.
•
Japanese patent 5,340,155 covers AEZS-138 (disorazole Z - LHRH conjugate) as well as methods of treatment for this compound. This patent will expire in September 2027.
C.
Organizational structure
Our corporate structure, the jurisdiction of incorporation of our direct and indirect subsidiaries and the percentage of shares that we held in those subsidiaries as at December 31, 2014 is depicted in the chart set forth under the caption "Item 4A. History and development of the Company".
D.
Property, plants and equipment
Our corporate head office is located in Quebec City, Province of Quebec, Canada. The following table sets forth information with respect to our main facilities as at December 31, 2014.
Location
 
Use of space
 
Square Footage
 
Type of interest
1405 du Parc Technologique Blvd., Quebec City (Quebec), Canada
 
Fully occupied for management, R&D, administration, commercial operations and business development
 
3,561

 
Leasehold
315 Sigma Drive, Suite 302D, Summerville SC 29483
 
Partially occupied for management, administration, commercial operations and business development
 
4,623

 
Leasehold
Weismüllerstr. 50
D-60314
Frankfurt-am-Main, Germany
 
Partially occupied for management, R&D, business development and administration
 
46,465

 
Leasehold
Item 4A    Unresolved Staff Comments
None.

37


Item 5.
Operating and Financial Review and Prospects
Key Developments
Commercial Developments
•
During the fourth quarter, our full-time contract sales force of 19 sales representatives started the field selling in the US of EstroGel®, pursuant to the co-promotion services agreement (the "Co-promotion Agreement") entered into with ASCEND Therapeutics US LLC ("ASCEND") in August 2014. The Co-promotion Agreement provides that we or one of our subsidiaries detail and market ASCEND's leading non-patch transdermal hormone replacement therapy product, available under the name EstroGel®, in specific agreed-upon US territories, in exchange for a sales commission, which will be payable to us based upon incremental EstroGel® sales volumes that are generated over certain pre-established thresholds.
Product Candidate Developments
Zoptarelin Doxorubicin
•
During the year, we completed site initiation, with over 120 sites currently in operation, for our ZoptEC (Zoptarelin doxorubicin in Endometrial Cancer) Phase 3 trial in women with locally advanced, recurrent or metastatic endometrial cancer. To date, over 400 of the expected 500 patients have been entered into the trial. The ZoptEC Phase 3 trial is an open-label, randomized, multicenter trial conducted in North America, Europe and Israel under a Special Protocol Assessment ("SPA") with the FDA; it compares zoptarelin doxorubicin with doxorubicin as second line therapy. The primary efficacy endpoint is improvement in median Overall Survival.
•
On December 1, 2014, we entered into a master collaboration agreement, a Technology Transfer and Technical Assistance Agreement ("TTA") and a License Agreement ("LA") with Sinopharm A-Think Pharmaceuticals Co., Ltd. ("Sinopharm") for the development, manufacture and commercialization of zoptarelin doxorubicin ("the Product") in all human uses, in the People's Republic of China, including Hong Kong and Macau (collectively, "the Territory"). Under the terms of the TTA, Sinopharm made a one-time, non-refundable payment of $1.1 million ("Transfer Fee") to us for the transfer of technical documentation and materials, know-how and technical assistance services. Additionally, per the LA, we will be entitled to receive additional consideration upon achieving certain pre-established milestones, including the occurrence of certain regulatory and commercial events in the Territory. Furthermore, we will be entitled to receive royalties on future net sales of the Product in the Territory.
Macrilen™
•
On November 6, 2014, the FDA issued a Complete Response Letter ("CRL") for our New Drug Application ("NDA") for Macrilen™ in the evaluation of adult growth hormone deficiency ("AGHD"). Based on its review, the FDA determined that our NDA could not be approved in its form as submitted. The CRL stated that the planned analysis of our pivotal trial did not meet its stated primary efficacy objective as agreed to in the SPA agreement between the Company and the FDA, and that we will need to demonstrate the efficacy of macimorelin as a diagnostic test for growth hormone deficiency in a new, confirmatory clinical study. The CRL also stated that a serious event of electrocardiogram QT interval prolongation occurred for which attribution to drug could not be excluded. Therefore, a dedicated thorough QT study to evaluate the effect of macimorelin on the QT interval would be necessary. We intend to make a decision regarding the future development of Macrilen™ in the near term, taking into account various considerations, including our prior and upcoming discussions with the FDA.
Erk Inhibitors
•
On April 9, 2014, we announced that we had presented, at the American Association for Cancer Research Annual Meeting in San Diego, a poster, entitled Erk Inhibition as a Therapeutic Option for the Treatment of Raf- and Mek- Inhibitor Resistant Tumors, on AEZS-134, a highly potent and selective adenosine triphosphate competitive Erk inhibitor. The poster provided a rationale for new therapeutic opportunities in oncology with this compound, given that preclinical data suggest that Erk inhibitors such as AEZS-134 may provide a treatment option for patients suffering from tumors that are resistant to currently established therapies such as B-Raf and Mek inhibitors.

38


Corporate Developments
Establishment of Global Commercial Operations and Resource Optimization
•
On May 5, 2014, we announced that we had selected Charleston, South Carolina, as the new location for our North American business and global commercial operations. In conjunction with our plans and commitment to our Charleston office, we expect to be eligible to receive job development investment tax credits pursuant to approval received from the Coordinating Council for Economic Development of South Carolina.
•
On August 7, 2014, our Nominating, Governance and Compensation Committee approved our global resources optimization program (the "Resource Optimization Program"), which has been rolled out as part of our strategy to transition into a commercially operating specialty biopharmaceutical organization. The Resource Optimization Program, the goal of which is to streamline R&D activities and to increase commercial operations and flexibility, is expected to result in the termination of 30 employees. Employee departures under this program, which commenced during the first quarter of 2015, will continue through August 31, 2015. We expect that overall annualized savings upon completion of the Resource Optimization Program will amount to approximately $2.3 million. Total restructuring costs associated with the Resource Optimization Program recorded during 2014 were approximately $2.5 million, representing our estimated severance payments, onerous lease provision and other directly related costs. Our estimates of restructuring costs and annualized savings may be revised in future periods as new information becomes available.
Public Offerings
•
On January 14, 2014, we completed a public offering of 11.0 million units, generating net proceeds of approximately $12.2 million, with each unit consisting of one common share and 0.80 of a warrant to purchase one common share, at a purchase price of $1.20 per unit (the "January 2014 Offering").
•
On March 11, 2015, we completed a public offering of 59,677,420 units (the "Units"), generating net proceeds of approximately $34.5 million, with each Unit consisting of either one common share or one warrant to purchase one common share ("Series C Warrant"), 0.75 of a warrant to purchase one common share ("Series A Warrant") and 0.50 of a warrant to purchase one common share ("Series B Warrant"), at a purchase price of $0.62 per Unit (the "March 2015 Offering"). The Series A Warrants are exercisable for a period of five years at an exercise price of $0.81 per share, and the Series B Warrants are exercisable for a period of 18 months at an exercise price of $0.81 per share. Both the Series A and Series B warrants are subject to certain anti-dilution provisions. The Series C Warrants are exercisable for a period of five years at an exercise price of $0.62 per share. Total gross proceeds payable to us in connection with the exercise of the Series C Warrants have been pre-paid by investors and therefore are included in the aforementioned proceeds.
•
In connection with the March 2015 Offering, the holders of 21,123,332 of the 21,900,000 outstanding warrants issued by us in connection with a previous public offering of units in November 2013 and with the January 2014 Offering, as defined above, entered into an amendment agreement that caused such previously issued warrants to expire and terminate in exchange of a cash payment made by us in the aggregate amount of approximately $5.7 million.
"At-the-Market" Issuance Program
•
Between July 1, 2014 and December 31, 2014, we issued a total of approximately nine million common shares under our At-the-Market ("ATM") sales agreement entered into May 2014 with MLV & Co. LLC (the "May 2014 ATM Program"), at an average price of $1.36 for aggregate gross proceeds of approximately $12.2 million, less cash and non-cash transaction costs of approximately $0.4 million. The May 2014 ATM Program provides that we may, at our discretion, from time to time during the term of the sales agreement, sell up to a maximum of 14.0 million of our common shares through ATM issuances on the NASDAQ, up to an aggregate amount of $15 million.
NASDAQ Minimum Bid Price Compliance
•
On December 18, 2014, we received a notice from the NASDAQ regarding our failure to comply with the NASDAQ's $1.00 minimum bid price requirement. The Company has 180 calendar days, or until June 16, 2015, to regain compliance with the minimum bid price requirement.

39


Status of Our Drug Pipeline
_________________________
(1) Phase 2 trial in ovarian cancer completed.
(2) Investigator-driven and sponsored.
(3) Currently evaluating options and future plans after issuance of CRL from the FDA.
(4) Potential oral prostate cancer vaccine available for out-licensing.
(5) Sponsored entirely by licensees.

We are focused on advancing our ZoptEC Phase 3 program with zoptarelin doxorubicin in endometrial cancer, as discussed further below, and on evaluating our options for Macrilen™ for the evaluation of AGHD.

40


As for our compounds in earlier stages of development, as part of the Resource Optimization Program, we have decided to streamline our drug discovery activities and focus on specific projects related to our Erk inhibitors and our LHRH-disorazol Z product candidates. Regarding our Erk inhibitors program, we are looking to select an optimized molecule for development in the first half of 2015.
Our investment in the development of Erk inhibitors and our LHRH-disorazol Z product candidate will depend on the level of liquidity available to fund our R&D activities.
Consolidated Statements of Comprehensive Income (Loss) Information
 
 
Three-month periods ended December 31,
 
Years ended December 31,
(in thousands, except share and per share data)
 
2014
 
2013
 
2014
 
2013
 
2012
 
 
$
 
$
 
$
 
$
 
$
Revenues
 
 
 
 
 
 
 
 
 
 
Sales
 
—

 
—

 
—

 
96

 
834

License fees
 
11

 
—

 
11

 
6,079

 
1,219

 
 
11

 
—

 
11

 
6,175

 
2,053

Operating expenses
 
 
 
 
 
 
 
 
 
 
Cost of sales
 
—

 
—

 
—

 
51

 
591

Research and development costs, net of refundable tax credits and grants
 
6,282

 
5,345

 
23,716

 
21,284

 
20,592

Selling, general and administrative expenses
 
4,676

 
2,627

 
13,690

 
12,316

 
10,606

 
 
10,958

 
7,972

 
37,406

 
33,651

 
31,789

Loss from operations
 
(10,947
)
 
(7,972
)
 
(37,395
)
 
(27,476
)
 
(29,736
)
Finance income
 
15,053

 
65

 
20,319

 
1,748

 
6,974

Finance costs
 
—

 
(2,689
)
 
—

 
(1,512
)
 
(382
)
Net finance income (costs)
 
15,053

 
(2,624
)
 
20,319

 
236

 
6,592

Income (loss) before income taxes
 
4,106

 
(10,596
)
 
(17,076
)
 
(27,240
)
 
(23,144
)
Income tax expense
 
(111
)
 
—

 
(111
)
 
—

 
—

Net income (loss) from continuing operations
 
3,995

 
(10,596
)
 
(17,187
)
 
(27,240
)
 
(23,144
)
Net income from discontinued operations
 
158

 
2,353

 
623

 
34,055

 
2,732

Net income (loss)
 
4,153

 
(8,243
)
 
(16,564
)
 
6,815

 
(20,412
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
Items that may be reclassified subsequently to profit or loss:
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(677
)
 
424

 
(1,158
)
 
1,073

 
(504
)
Items that will not be reclassified to profit or loss:
 
 
 
 
 
 
 
 
 
 
Actuarial gain (loss) on defined benefit plans
 
1,336

 
2,346

 
(1,833
)
 
2,346

 
(3,705
)
Comprehensive income (loss)
 
4,812

 
(5,473
)
 
(19,555
)
 
10,234

 
(24,621
)
Net income (loss) per share (basic and diluted) from continuing operations
 
0.06

 
(0.28
)
 
(0.29
)
 
(0.92
)
 
(1.17
)
Net income (basic and diluted) from discontinued operations
 
—

 
0.06

 
0.01

 
1.16

 
0.14

Net income (loss) (basic and diluted) per share
 
0.06

 
(0.22
)
 
(0.28
)
 
0.24

 
(1.03
)
Weighted average number of shares outstanding:
 
 
 
 
 
 
 
 
 
 
Basic
 
65,383,290

 
37,274,129

 
59,024,730

 
29,476,455

 
19,775,073

Diluted
 
65,383,290

 
37,274,129

 
59,024,730

 
29,476,455

 
19,806,687


41


2014 compared to 2013
Revenues
Revenues are derived predominantly from license fees, which include the amortization of upfront payments received from our licensees and R&D contract service fees.
Sales revenues are derived from the sale of active pharmaceutical ingredients, or raw materials, to licensees. Periodic variations of sales, and, consequently, of cost of sales, are attributable to the R&D needs of the requesting licensee.
Revenues recorded during the year ended December 31, 2013 resulted predominantly from the non-recurring, accelerated recognition of remaining unamortized deferred revenue associated with an upfront payment received from a licensee following the termination of related R&D activities.
We expect revenues during the year ended December 31, 2015 to be higher than those recorded during the year ended December 31, 2014 due to the initial recognition of the Transfer Fee and due to sales commission revenue that we expect to begin generating in connection with our sales efforts related to EstroGel®, provided that we are able to begin to exceed the pre-established baselines outlined in the Co-promotion Agreement.
Operating Expenses
R&D costs, net of refundable tax credits and grants, were $6.3 million and $23.7 million for the three-month period and the year ended December 31, 2014, respectively, compared to $5.3 million and $21.3 million for the same periods in 2013.
The increase for the year ended December 31, 2014, as compared to the same period in 2013, is attributable to higher comparative employee compensation and benefits costs, which in turn are mainly due to the recording of R&D restructuring costs. Following the approval of the Resource Optimization Program, discussed above, we recorded a provision for restructuring costs, amounting to approximately $2.5 million, for severance payments, onerous lease provision and other directly related costs associated with the Resource Optimization Program. This increase is partly offset by lower comparative salaries and short-term employee benefits and share-based compensation costs.
The following table summarizes our net R&D costs by nature of expense:
 
 
Three-month periods ended December 31,
 
Years ended December 31,
(in thousands)
 
2014
 
2013
 
2014
 
2013
 
2012
 
 
$
 
$
 
$
 
$
 
$
Third-party costs
 
3,967

 
2,828

 
11,356

 
10,049

 
8,679

Employee compensation and benefits
 
1,231

 
1,629

 
8,430

 
7,864

 
8,590

Facilities rent and maintenance
 
887

 
466

 
2,160

 
1,758

 
1,661

Other costs*
 
197

 
540

 
1,901

 
2,130

 
2,530

R&D tax credits and grants
 
—

 
(118
)
 
(131
)
 
(517
)
 
(868
)
 
 
6,282

 
5,345

 
23,716

 
21,284

 
20,592

 _________________________
*    Includes depreciation, amortization, impairment charges and onerous lease provision recognized.
The following table summarizes primary third-party R&D costs, by product candidate, incurred by the Company during the three-month periods ended December 31, 2014 and 2013.
(in thousands, except percentages)
 
Three-month periods ended December 31,
Product Candidate
 
2014
 
2013
 
 
$
 
%
 
$
 
%
Zoptarelin doxorubicin
 
3,609

 
91.0

 
1,667

 
58.9

Macrilen™, macimorelin
 
192

 
4.8

 
284

 
10.0

Erk inhibitors
 
112

 
2.8

 
312

 
11.0

LHRH - Disorazol Z
 
54

 
1.4

 
139

 
4.9

Other
 
—

 
—

 
426

 
15.2

 
 
3,967

 
100.0

 
2,828

 
100.0


42


The following table summarizes primary third-party R&D costs, by product candidate, incurred by the Company during the years ended December 31, 2014, 2013 and 2012.
(in thousands, except percentages)
 
Years ended December 31,
Product Candidate
 
2014
 
2013
 
2012
 
 
$
 
%
 
$
 
%
 
$
 
%
Zoptarelin doxorubicin
 
9,668

 
85.1

 
4,934

 
49.1

 
2,133

 
24.6

Erk inhibitors
 
488

 
4.3

 
1,128

 
11.2

 
1,727

 
19.9

Macrilen™, macimorelin
 
404

 
3.6

 
1,238

 
12.3

 
112

 
1.3

LHRH - Disorazol Z
 
257

 
2.3

 
659

 
6.6

 
331

 
3.8

Perifosine
 
196

 
1.7

 
1,134

 
11.3

 
3,801

 
43.8

Other
 
343

 
3.0

 
956

 
9.5

 
575

 
6.6

 
 
11,356

 
100.0

 
10,049

 
100.0

 
8,679

 
100.0


As shown above, a substantial portion of the increase in 2013-to-2014 quarter-to-date and year-to-date third-party R&D costs relates to development initiatives associated with zoptarelin doxorubicin, and in particular with our Phase 3 ZoptEC trial initiated in 2013 with Ergomed Clinical Research Ltd. ("Ergomed"), the contract clinical development organization with which, in April 2013, we entered into a co-development and profit sharing agreement. This increase is partially offset by the lower comparative development costs associated with most of our other product candidates.
During the year ended December 31, 2014, ongoing services provided by Ergomed included the conducting of initiation and monitoring visits at various clinical sites, screening and enrolment initiatives, investigation-related management and analysis and regulatory support. ZoptEC-related efforts are progressing in accordance with pre-established timelines. As we continue to closely monitor all initiatives supported by Ergomed, we may decide to revise some of the trial's parameters or expand the scope of work performed by Ergomed, and consequently, total estimated costs in connection with the co-development and revenue sharing agreement may be adjusted. To date, our arrangement with Ergomed has been revised following our decision to open additional clinical sites and to perform additional sub-studies, resulting in estimated cost increases of approximately $1.8 million, as compared to our original estimate.
Excluding the impact of foreign exchange rate fluctuations, we expect net R&D costs for 2015 to slightly decrease, as compared to 2014, due to the realization of cost savings in connection with the Resource Optimization Program, offset partially by slightly higher third-party R&D costs in connection with our Phase 3 ZoptEC trial. Based on currently available information and forecasts, we expect that we will incur net R&D costs of between $21 million and $23 million for the year ended December 31, 2015.
Selling, general and administrative ("SG&A") expenses were $4.7 million and $13.7 million for the three-month period and the year ended December 31, 2014, respectively, compared to $2.6 million and $12.3 million for the same periods in 2013.
For the three-month period ended December 31, 2014, the increase in SG&A expenses, as compared to the same period in 2013, is mainly related to the deployment of our contracted sales force, which is currently detailing EstroGel®, and higher comparative operating foreign exchange losses.
For the year ended December 31, 2014, the increase in SG&A expenses, as compared to the same period in 2013, is mainly related to higher comparative operating foreign exchange losses, the ramping up of our pre-commercialization activities, the deployment of our contracted sales force related to our co-promotion activities and the recording of restructuring costs related to administrative staff redundancies resulting from the Resource Optimization Program.
During 2015, excluding the impact of foreign exchange rate fluctuations and the recording of transaction costs related to potential financing activities (not currently known or estimable), we expect SG&A expenses to remain broadly in line with expenditures incurred during the year ended December 31, 2014, despite the fact that our contracted sales force is expected to detail EstroGel® during the full year 2015, as compared to less than two months in 2014. This year-over-year increase, associated with our co-promotion activities, is expected to be offset by lower marketing and other pre-commercialization expenses related to Macrilen™ and by lower termination benefit expenses.

43


Net finance income (costs) are comprised predominantly of the change in fair value of warrant liability and of gains and losses recorded due to changes in foreign currency exchange rates, as presented below.
 
 
Three-month periods ended December 31,
 
Years ended December 31,
 
 
2014
 
2013
 
2014
 
2013
 
2012
 
 
$
 
$
 
$
 
$
 
$
Finance income
 
 
 
 
 
 
 
 
 
 
Change in fair value of warrant liability
 
14,079

 
—

 
18,272

 
1,563

 
6,746

Gains due to changes in foreign currency exchange rates
 
924

 
—

 
1,879

 
—

 
—

Interest income
 
50

 
65

 
168

 
185

 
228

 
 
15,053

 
65

 
20,319

 
1,748

 
6,974

Finance costs
 
 
 
 
 
 
 
 
 
 
Change in fair value of warrant liability
 
—

 
(1,884
)
 
—

 
—

 
—

Losses due to changes in foreign currency exchange rates
 
—

 
(805
)
 
—

 
(1,512
)
 
(382
)
 
 
—

 
(2,689
)
 
—

 
(1,512
)
 
(382
)
 
 
15,053

 
(2,624
)
 
20,319

 
236

 
6,592


The change in fair value of our warrant liability results from the periodic "mark-to-market" revaluation, via the application of the Black-Scholes option pricing model, of currently outstanding share purchase warrants. The Black-Scholes "mark-to-market" warrant valuation most notably has been impacted by the issuance of 8.8 million additional share purchase warrants and by the closing price of our common shares, which, on the NASDAQ, has fluctuated from $0.52 to $1.50 during the year ended December 31, 2014 and from $1.03 to $3.23 for the same period in 2013.
With specific reference to 2014, we recorded substantial fair value gains on our warrant liability, resulting from the significant reduction in our share price following our announcement, in November, that the FDA had issued a CRL in connection with our NDA for Macrilen™. The lower closing price of our shares following our announcement of the CRL has resulted in a lower Black-Scholes valuation of our outstanding share purchase warrants during the fourth quarter of 2014.
Gains or losses due to changes in foreign currency exchange rates are mainly related to the US dollar, which strengthened against the euro ("EUR") by approximately 4.2% and 12.2%, during the three-month and twelve-month periods ended December 31, 2014, respectively. During the three-month and twelve-month periods ended December 31, 2013, however, the US dollar weakened against the EUR by approximately 2.0% and 4.5%, respectively.
Net income (loss) from continuing operations for the three-month period and the year ended December 31, 2014 was $4.0 million and $(17.2) million, or $0.06 and $(0.29) per basic and diluted share, respectively, compared to $(10.6) million and $(27.2) million, or $(0.28) and $(0.92) per basic and diluted share for the same periods in 2013.
The increase in net income from continuing operations for the three-month period ended December 31, 2014, as compared to the same period in 2013, is due to the higher comparative net finance income, partly offset by higher comparative R&D and SG&A expenses, as presented above.
The decrease in net loss from continuing operations for the year ended December 31, 2014, as compared to the same period in 2013, is due largely to higher comparative net finance income, partly offset by lower comparative license fee revenues and by higher comparative net R&D costs and SG&A expenses, as presented above.
Discontinued Operations
Following a strategic review of our risk and prospects with respect to the manufacturing of Cetrotide® and related activities (collectively, the "Cetrotide® Business"), and, in particular, having taken into account, as discussed below, the previous monetization of the corresponding royalty stream, we decided to transfer all manufacturing rights of Cetrotide® and to discontinue our involvement with the Cetrotide® Business. On April 3, 2013 (the "Effective Date"), we entered into a transfer and service agreement ("TSA") and concurrent agreements with various partners and licensees with respect to our manufacturing rights for Cetrotide®, marketed for therapeutic use as part of in vitro fertilization programs. The principal effect of these agreements was to transfer, effective October 1, 2013 (the "Closing Date"), our manufacturing rights for Cetrotide® to Merck Serono in all territories. Also per the TSA, we agreed to provide certain transition services to Merck Serono over a

44


period of 36 months from the Effective Date in order to assist Merck Serono in managing overall responsibility for the Cetrotide® Business.
Under the TSA, during the period commencing on the Effective Date and ending on the Closing Date (the "Interim Period"), we were obligated to continue to conduct the Cetrotide® Business in the ordinary course in a manner consistent with past practices, subject to certain conditions. Per the TSA, we received a non-refundable, one-time payment of €2.5 million (approximately $3.3 million) in consideration for the transfer of our manufacturing rights referred to above, as well as other payments in exchange for the transfer, also on the Closing Date, of certain assets, such as inventory and equipment used solely for the manufacture of Cetrotide®. We recognized the non-refundable, one-time payment on the Closing Date, as we no longer had managerial involvement or effective control over the manufacturing of goods sold through the Cetrotide® Business. We provide the aforementioned transition services to Merck Serono in exchange for a monthly service fee.
As a result of the transfer of substantially all of the risks and rewards associated with the Cetrotide® Business on the Closing Date, the Cetrotide® Business has been classified as a discontinued operation in the consolidated financial statements. As such, relevant amounts in our consolidated statements of comprehensive (loss) income have been retroactively reclassified to reflect the Cetrotide® Business as a discontinued operation.
 
 
Three-month periods ended December 31,
 
Years ended December 31,
(in thousands)
 
2014
 
2013
 
2014
 
2013
 
2012
 
 
$
 
$
 
$
 
$
 
$
Revenues
 
 
 
 
 
 
 
 
 
 
Sales and royalties
 
—

 
3,057

 
—

 
63,755

 
30,704

License fees and other*
 
118

 
3,717

 
1,037

 
4,589

 
908

 
 
118

 
6,774

 
1,037

 
68,344

 
31,612

Operating expenses
 
 
 
 
 
 
 
 
 
 
Cost of sales
 
—

 
3,071

 
—

 
30,002

 
26,229

Research and development costs, net of tax credits and grants
 
8

 
—

 
25

 
8

 
12

Selling, general and administrative expenses
 
(48
)
 
1,350

 
389

 
4,279

 
2,639

 
 
(40
)
 
4,421

 
414

 
34,289

 
28,880

Net income from discontinued operations
 
158

 
2,353

 
623

 
34,055

 
2,732

 _________________________
*
Includes the non-refundable, one-time payment made by Merck Serono in exchange for the manufacturing rights for Cetrotide®and revenues from certain transition services provided pursuant to the aforementioned agreement.
The decrease in sales and royalties from discontinued operations, in cost of sales from discontinued operations and in SG&A expenses from discontinued operations during the three-month period and the year ended December 31, 2014, as compared to the same periods in 2013, reflects the fact that we recorded no sales of Cetrotide® and royalties during the three-month period and the year ended December 31, 2014, as compared to the corresponding period of 2013, given that the transfer of the Cetrotide® Business was effective on October 1, 2013.
Net income (loss)
Net income (loss) for the three-month period and the year ended December 31, 2014 was $4.2 million and $(16.6) million, or $0.06 and $(0.28) per basic and diluted share, respectively, compared to $(8.2) million and $6.8 million, or $(0.22) and $0.24 per basic and diluted share, for the same periods in 2013.
The increase in net income for the three-month period ended December 31, 2014, as compared to the same period in 2013, is due largely to higher comparative net finance income, offset partially by higher comparative operating expenses and by lower net income from discontinued operations.
The decrease in net income for the year ended December 31, 2014, as compared to the same period in 2013, is due largely to higher loss from operations and to lower net income from discontinued operations, partially offset by higher comparative net finance income.

45


2013 compared to 2012
Revenues
License fees and other revenues were $6.1 million for the year ended December 31, 2013, as compared to $1.2 million for the same period in 2012.
In March 2011, we entered into an agreement with Yakult for the development, manufacture and commercialization of perifosine in all human uses, excluding leishmaniasis, in Japan. Under the terms of this agreement, Yakult had made an initial, non-refundable gross upfront payment to the Company of approximately $8.4 million. We recorded this upfront payment as deferred revenues and commenced amortizing the underlying proceeds on a straight-line basis over the estimated life cycle of perifosine in colorectal cancer ("CRC") and multiple myeloma ("MM").
On April 1, 2012, following negative results of a Phase 3 study of perifosine in CRC, we discontinued the perifosine program in that indication. Furthermore, in March 2013, following an analysis of interim results of the Phase 3 study of perifosine in MM, we also discontinued the development of perifosine in the MM indication. Given these results and the termination of these studies, we determined that we no longer had significant obligations under the agreement with Yakult to continue with the development of perifosine, and we recognized, in March 2013, the remaining unamortized amount of deferred revenue of $5.9 million related to the above licensing agreement.
On a year-over-year basis, the increase in license fees and other revenues is therefore attributable to the earlier-than-expected recognition of the previously deferred upfront license payment received from Yakult, following the discontinuance of our development of perifosine and given that the earnings process associated with this compound as pertaining to the upfront proceeds received was deemed to be complete.
Operating Expenses
R&D costs, net of refundable tax credits and grants, were $21.3 million for the year ended December 31, 2013, compared to $20.6 million for the same period in 2012.
Third-party R&D costs were $10.0 million for the year ended December 31, 2013, as compared to $8.7 million for the same period in 2012. This increase mainly results from the higher development costs associated with zoptarelin doxorubicin, and in particular with our Phase 3 ZoptEC trial initiated in 2013 with Ergomed, as discussed above. Additionally, we incurred higher development costs in 2013 related to Macrilen™ and macimorelin, primarily consisting of the purchase of active pharmaceutical ingredients. These increases were partly offset by the lower comparative development costs associated with perifosine, given that we have decided not to make any further investment in this product candidate, as discussed above, and by the lower preclinical study-related costs associated with our Erk/PI3K inhibitors program.
Third-party R&D costs also increased during the year ended December 31, 2013 due to higher expenditures associated with our disorazol Z product candidates, pursuant to a variety of collaboration agreements with various universities and institutes, and to the purchase of active pharmaceutical ingredients.
Selling, general and administrative ("SG&A") expenses were $12.3 million for the year ended December 31, 2013, compared to $10.6 million for the same period in 2012. This increase is mainly related to the recognition in the second quarter of 2013 of non-recurring termination benefits (approximately $1.4 million) paid to our former Chief Executive Officer and to the recording of related non-cash share-based compensation costs, amounting to approximately $0.7 million.
Net finance income totaled $0.2 million for the year ended December 31, 2013, as compared to $6.6 million for the same period in 2012. This decrease is mainly due to the decrease in net gain related to the change in fair value of our warrant liability and the increase in losses due to changes in foreign currency exchange rates.
The change in fair value of our warrant liability results from the "mark-to-market" revaluation, via the application of the Black-Scholes option pricing model, of currently outstanding share purchase warrants. The Black-Scholes "mark-to-market" warrant valuation most notably has been impacted by the closing price of our common shares, which, on the NASDAQ, fluctuated between $1.03 and $3.23 during the year ended December 31, 2013.
Gains or losses due to changes in foreign currency exchange rates are mainly related to the US dollar, which weakened against the EUR by approximately 3.3% from 2012 to 2013.

46


Net loss from continuing operations for the year ended December 31, 2013 was $27.2 million, or $0.92 per basic and diluted share, compared to $23.1 million or $1.17 per basic and diluted share for the same period in 2012.
The increase in net loss from continuing operations for the year ended December 31, 2013, as compared to 2012, is due largely to the recording of non-recurring termination benefits and related non-cash share-based compensation costs, lower comparative net finance income and higher comparative net R&D costs, partially offset by higher comparative license fee revenues, largely associated with the accelerated recognition of remaining net unamortized amount of deferred revenues related to the licensing agreement entered into with Yakult, as discussed above.
Discontinued Operations
Sales and royalties related to discontinued operations were comprised of both net sales of Cetrotide® and royalties, which represented the amortization, under the units-of-revenue method, of the proceeds received pursuant to a transaction with Healthcare Royalty Partners L.P. (formerly Cowen Healthcare Royalty Partners L.P.) ("HRP"), in which we monetized our royalty stream related to Cetrotide®. In this transaction, we had received a payment of $52.5 million, less certain transaction costs, from HRP in exchange for our rights to royalties on future net sales of Cetrotide® generated by Merck Serono.
We had initially recorded the proceeds received from HRP as deferred revenue due to our then significant continuing involvement with the Cetrotide® Business. However, as of the Closing Date, there was no basis to continue amortizing the deferred revenue associated with HRP, primarily due to the fact that we no longer had significant continuing involvement in the Cetrotide® Business. As such, commencing on the Effective Date, we accelerated the amortization of the remaining deferred revenues of approximately $31.9 million over the Interim Period, by continuing to apply the units-of-revenue method, which is consistent with past practice. The remaining deferred revenues were fully amortized through the end of September 2013.
Sales and royalties from discontinued operations were $63.8 million for the year ended December 31, 2013, as compared to $30.7 million for the same period in 2012. This increase is primarily due to the accelerated amortization of deferred revenues mentioned above.
The substantial license fees and other revenues from discontinued operations recorded during the year ended December 31, 2013, and as compared to the years ended December 31, 2012 and 2014, are primarily attributable to the recognition, on the Closing Date, of the non-refundable, one-time payment made by Merck Serono, as discussed above.
Cost of sales from discontinued operations were $30.0 million for the year ended December 31, 2013, as compared to $26.2 million for the same period in 2012. Cost of sales from discontinued operations increased in 2013, as compared to 2012, as a result of the higher comparative volume of Cetrotide® product sales, including the sale of inventory assets to Merck Serono, as mentioned above.
For the year ended December 31, 2013, cost of sales as a percentage of sales and royalties decreased to approximately 47.1%, as compared to 85.4% for the same period in 2012, predominantly due to the accelerated recognition of royalties as mentioned above.
SG&A expenses from discontinued operations amounted to $4.3 million for the year ended December 31, 2013, as compared to $2.6 million for the same period in 2012. The year-over-year increase is largely attributable to the recording of a provision for certain non-cancellable contracts related to the Cetrotide® Business that were deemed onerous due to the fact that management expected no economic benefits to flow to the Company following the transfer of the Cetrotide® Business on the Closing Date. The provisions for onerous contracts recognized total $1.3 million and represent the present value of estimated unavoidable future royalty and patent costs associated with the intellectual property underlying Cetrotide®.
Net income from discontinued operations was $34.1 million for the year ended December 31, 2013, as compared to $2.7 million for the same period in 2012. The comparative increase reflects the net impact of items discussed above, and in particular, are influenced in large part by the inclusion of the accelerated recognition of previously deferred remaining HRP-related revenues as discontinued operations.
Net income (loss) for the year ended December 31, 2013 was $6.8 million, or $0.24 per basic and diluted share, compared to $(20.4) million, or $(1.03) per basic and diluted share for the same period in 2012.
The comparative year-over-year decrease in net loss is mainly due to higher net income from discontinued operations and higher revenues, partially compensated by higher operating costs and lower finance income.

47


Quarterly Consolidated Results of Operations Information
(in thousands, except for per share data)
 
Three-month periods ended
 
 
December 31, 2014
 
September 30,
2014
 
June 30,
2014
 
March 31, 2014
 
 
$
 
$
 
$
 
$
Revenues
 
11

 
—

 
—

 
—

Loss from operations
 
(10,947
)
 
(9,843
)
 
(8,410
)
 
(8,195
)
Net income (loss) from continuing operations
 
3,995

 
(11,629
)
 
(5,249
)
 
(4,304
)
Net income (loss)
 
4,153

 
(11,337
)
 
(5,024
)
 
(4,356
)
Net income (loss) per share from continuing operations (basic and diluted)*
 
0.06

 
(0.20
)
 
(0.09
)
 
(0.08
)
Net income (loss) per share (basic and diluted)*
 
0.06

 
(0.20
)
 
(0.09
)
 
(0.08
)

(in thousands, except for per share data)
 
Three-month periods ended
 
 
December 31, 2013
 
September 30, 2013
 
June 30,
2013
 
March 31, 2013
 
 
$
 
$
 
$
 
$
Revenues
 
—

 
17

 
96

 
6,062

Loss from operations
 
(7,972
)
 
(8,648
)
 
(9,693
)
 
(1,163
)
Net (loss) income from continuing operations
 
(10,596
)
 
(7,799
)
 
(9,848
)
 
1,003

Net (loss) income
 
(8,243
)
 
3,842

 
9,330

 
1,886

Net (loss) income per share from continuing operations (basic and diluted)*
 
(0.28
)
 
(0.26
)
 
(0.39
)
 
0.04

Net (loss) income per share (basic and diluted)*
 
(0.22
)
 
0.13

 
0.37

 
0.07

_________________________
*
Net income (loss) per share is based on the weighted average number of shares outstanding during each reporting period, which may differ on a quarter-to-quarter basis. As such, the sum of the quarterly net income (loss) per share amounts may not equal year-to-date net (loss) income per share.

Historical quarterly results of operations and net income (loss) from continuing operations cannot be taken as reflective of recurring revenue or expenditure patterns or of predictable trends, largely given the non-recurring nature of certain components of our historical revenues due most notably to the accelerated recognition of upfront payments and to unpredictable quarterly variations attributable to our net finance income (costs), which in turn are comprised of the impact of the periodic "mark-to-market" revaluation of our warrant liability and of foreign exchange gains and losses. Additionally, our net R&D costs historically have varied on a quarter-over-quarter basis due to the ramping up or winding down of potential product candidate activities, which in turn are dependent upon a number of factors that often do not occur on a linear or predictable basis.
More recently, our SG&A expenses have increased on a quarter-over-quarter basis due to the ramping up of pre-commercialization activities associated with Macrilen™ (prior to the receipt of the CRL from the FDA) and to the deployment of our contracted sales force related to our co-promotion activities associated with EstroGel®.
In addition to the items referred to above, our net income (loss) also has been impacted by net variations attributable to the Cetrotide® Business, which, as discussed above, has been presented on a retrospective basis within discontinued operations.

48


Consolidated Statement of Financial Position Information
 
 
As at December 31,
(in thousands)
 
2014
 
2013
 
 
$
 
$
Cash and cash equivalents1
 
34,931

 
43,202

Trade and other receivables and other current assets
 
1,286

 
2,453

Restricted cash equivalents
 
760

 
865

Property, plant and equipment
 
797

 
1,351

Other non-current assets
 
9,661

 
11,325

Total assets
 
47,435

 
59,196

Payables and other current liabilities2
 
7,304

 
7,242

Current portion of deferred revenues
 
270

 
—

Warrant liability
 
8,225

 
18,010

Non-financial non-current liabilities3
 
17,152

 
16,880

Total liabilities
 
32,951

 
42,132

Shareholders' equity
 
14,484

 
17,064

Total liabilities and shareholders' equity
 
47,435

 
59,196

_________________________
1    Of which approximately $3.6 million was denominated in EUR as at December 31, 2014.
2    Of which approximately $1.5 million is related to a provision for restructuring costs.
3    Comprised mainly of employee future benefits, provisions for onerous contracts and non-current portion of deferred revenues.

The decrease in cash and cash equivalents as at December 31, 2014, as compared to December 31, 2013, is due to variations in components of our working capital and to recurring disbursements, as well as to the effect of exchange rate fluctuations, partially offset by the receipt of net proceeds of $12.2 million in connection with the January 2014 Offering, of $11.9 million pursuant to drawdowns made under the May 2014 ATM Program and of $0.3 million pursuant to drawdowns made under a previous ATM sales agreement program, entered into in May 2013 and discontinued in connection with the implementation of the May 2014 ATM Program.
The decrease in trade and other receivables and other current assets as at December 31, 2014, as compared to December 31, 2013, is mainly due to lower trade accounts receivable related to discontinued operations.
The decrease in other non-current assets as at December 31, 2014, as compared to December 31, 2013, is primarily due to the lower comparative exchange rate of the EUR against the US dollar, which weakened from December 31, 2013 to December 31, 2014. The decrease is also due to the net reduction in the carrying value of our identifiable intangible assets, for which we recognized an impairment loss of approximately $0.2 million, pursuant to the implementation of the Resource Optimization Program, discussed above.
The increase in payables and other current liabilities as at December 31, 2014, as compared to December 31, 2013, is due to the recording of a provision for restructuring costs related to the Resource Optimization Program, discussed above, to the higher comparative trade accounts payable balances due to the increased number of patients that have been entered into our ZoptEC Phase 3 program and to costs incurred in connection with the deployment of our contracted sales force, partially offset by lower comparative trade accounts payable balances related to the Cetrotide® Business as well as by the lower comparative exchange rate of the EUR against the US dollar.
Our warrant liability decreased from December 31, 2013 to December 31, 2014. The decrease is due to net fair value revaluation gains of $18.3 million, which were recorded pursuant to our periodic "mark-to-market" revaluation of the underlying outstanding share purchase warrants, as discussed above and was partly offset by the issuance of 8.8 million additional share purchase warrants in connection with the January 2014 Offering, which initially had increased our warrant liability by $8.5 million.
The decrease in shareholders' equity as at December 31, 2014, as compared to December 31, 2013, is mainly attributable to the increase in our deficit due to the recording of net loss and actuarial loss on pension-related employee benefit obligation and to the increase in our accumulated other comprehensive loss due to foreign currency translation adjustments, partly offset by the increase in our share capital following the issuance of common shares discussed above.

49


Financial Liabilities, Obligations and Commitments
We have certain contractual lease obligation commitments as well as other long-term obligations related to unfunded benefit pension plans and unfunded post-employment benefit plans. The following tables summarize future cash requirements with respect to these obligations.
Expected future minimum lease payments and future minimum sublease receipts under non-cancellable operating leases (subleases) as well as future payments in connection with utility service agreements are as follows:
 
 
As at December 31, 2014
(in thousands)
 
Minimum lease payments
 
Sublease income
 
 
$
 
$
Less than 1 year
 
1,678

 
(392
)
1 – 3 years
 
1,352

 
(493
)
4 – 5 years
 
325

 
(19
)
Total
 
3,355

 
(904
)

With regard to our lease arrangement in Germany for laboratory, office and storage space, we do not expect to renew the agreement beyond the end of its original term (expiry of March 2016), and we are examining options for alternative space to accommodate remaining German-based staff. As such, the minimum lease payments presented above exclude any lease payments for our German subsidiary beyond March 2016.
In accordance with the assumptions used in our employee future benefits obligation calculation as at December 31, 2014, undiscounted benefits expected to be paid are as follows:
(in thousands)
 
$
Less than 1 year
 
495

1 – 3 years
 
1,014

4 – 5 years
 
1,084

More than 5 years
 
19,867

Total
 
22,460


Outstanding Share Data
As at March 16, 2015, we had 90,557,142 common shares issued and outstanding, as well as 3,885,200 stock options outstanding. Warrants outstanding as at March 16, 2015 represented a total of 116,887,987 equivalent common shares.
Capital Disclosures
Our objective in managing capital, consisting of shareholders' equity, with cash and cash equivalents and restricted cash equivalents being its primary components, is to ensure sufficient liquidity to fund R&D activities, selling, general and administrative expenses, working capital and capital expenditures.
Over the past several years, we have increasingly raised capital via public equity offerings and drawdowns under various ATM sales programs as our primary source of liquidity.
Our capital management objective remains the same as that in previous periods. The policy on dividends is to retain cash to keep funds available to finance the activities required to advance our product development portfolio and to pursue appropriate commercial opportunities as they may arise.
We are not subject to any capital requirements imposed by any regulators or by any other external source.
Liquidity, Cash Flows and Capital Resources
Our operations and capital expenditures have been financed through certain transactions impacting our cash flows from operating activities, public equity offerings, as well as from the drawdowns under various ATM programs.

50


Based on our assessment, which took into account current cash levels, as well as our strategic plan and corresponding budgets and forecasts, we believe that we have sufficient liquidity and financial resources to fund planned expenditures and other working capital needs for at least, but not limited to, the 12-month period following the statement of financial position date of December 31, 2014.
We may endeavour to secure additional financing, as required, through strategic alliance arrangements or through other activities, as well as via the issuance of new share capital or other securities.
The variations in our cash and cash equivalents by activity are explained below.
(in thousands)
 
Three-month periods ended December 31,
 
Years ended December 31,
 
 
2014
 
2013
 
2014
 
2013
 
2012
 
 
$
 
$
 
$
 
$
 
$
Cash and cash equivalents - Beginning of period
 
41,952

 
24,829

 
43,202

 
39,521

 
46,881

Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
Cash used in operating activities from continuing operations
 
(8,676
)
 
(6,184
)
 
(30,787
)
 
(30,131
)
 
(25,681
)
Cash provided by (used in) operating activities from discontinued operations
 
93

 
9,622

 
(295
)
 
10,147

 
(5,134
)
 
 
(8,583
)
 
3,438

 
(31,082
)
 
(19,984
)
 
(30,815
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
Net proceeds from issuance of common shares and warrants
 
2,075