VANCOUVER, March 30 /PRNewswire-FirstCall/ - Inex Pharmaceuticals Corporation announced today as part of its 2005 audited operating results that it expects the two corporate strategic initiatives it launched in 2005 with the intention of maximizing stakeholder value for all Company assets will be achieved during 2006.
The two initiatives are the spin-off of the Company’s Targeted Immunotherapy platform and product candidates into a new debt-free company and the partnering of its Targeted Chemotherapy drugs to a company with the technical and financial capability to commercialize them.
Targeted Immunotherapy Spin Out
On January 26, 2006, INEX shareholders voted 98.3% in favour of spinning out the Targeted Immunotherapy assets into a new debt-free public company, called Tekmira Pharmaceuticals Corporation. INEX expects to receive the necessary court and regulatory approvals to implement the plan over the next few months.
Before INEX can implement the plan, on May 18, 2006 the British Columbia Court of Appeal will hear appeals from INEX and from Stark Trading and Shepherd Investments Ltd. (collectively “Stark”). INEX is appealing the Supreme Court of British Columbia’s (the “Court”) ruling that provided the holders of INEX’s outstanding convertible promissory notes the right to a separate vote on INEX’s spin-out plan. Stark is appealing the Court’s ruling that the spin-out of Tekmira can take place given the terms of the convertible debt and the Court’s decision to dismiss Stark’s bankruptcy petition.
INEX believes that the decisions of the Court dismissing the bankruptcy petition and ruling that the spin-out can take place given the terms of the convertible debt were correct rulings and INEX will continue to defend its position with respect to these decisions.
Stark is the majority holder of certain promissory notes issued by Inex International Holdings, a subsidiary of INEX. The promissory notes are not due until April 2007 and can be repaid in cash or in shares, at INEX’s option, at maturity.
Targeted Chemotherapy Partnership
On March 17, 2006, INEX announced that it has signed a Letter of Intent to license three products from its Targeted Chemotherapy pipeline to Hana Biosciences, Inc. . Upon closing of the transaction, expected during the Second Quarter of 2006, Hana will pay INEX US$11.5 million in an upfront payment, consisting of cash and Hana shares. INEX will receive an additional US$30.5 million if development and regulatory milestones are achieved and will also receive royalties on product sales.
Hana will be responsible for all future development of the three products including all future expenses. INEX will support Hana in the near term to transfer knowledge and expertise and to ensure the products can be advanced as quickly as possible and will also be reimbursed for this support.
Timothy M. Ruane, President and Chief Executive Officer of INEX, said achievement of the spin-out and the license agreement will set INEX on a new course for the future.
“We are pleased that the two initiatives we began last year to maximize the value of the Company’s assets are both likely to be successfully completed in 2006,” said Ruane.
“As a result, INEX will have financial stability into 2007 and will undertake new corporate objectives, including working with the University of British Columbia to develop a new generation of drug delivery technology.”
Financial results The following is selected financial information for fiscal years 2005, 2004 and 2003: 2005 2004 2003 (in millions of Cdn$ except per share date) restated(1) ------------------------------------------------------------------------- Total revenues $ 15.4 $ 14.6 $ 3.5 Research and development expenses 10.2 26.8 30.7 General and administrative expenses 4.4 9.3 8.8 Restructuring costs 5.7 5.1 - Amortization 2.1 6.6 8.9 Total loss (9.4) (33.7) (39.7) Loss per share(2) (0.24) (0.88) (1.11) Total assets 21.5 49.4 65.8 Total long-term liabilities 40.3 38.7 37.8 Deficit (222.3) (212.9) (179.2) Total shareholders’ equity (deficit) (21.5) (12.6) 19.5 (1) The above selected financial information has been restated for 2003 to reflect the Company’s adoption of the CICA’s approved amendment to Handbook Section 3860, Financial Instruments - Disclosure and Presentation, as discussed in detail in Changes in Accounting Policies in the Company’s “Management’s Discussion and Analysis of Financial Condition and Operations” for the year ended December 31, 2004. (2) Diluted loss per share has not been presented for since INEX’s stock options and exchangeable and development notes are antidilutive.
The factors that have caused period to period variations in revenues, expenses and loss per year between 2005 and 2004 are discussed below. The most significant factor causing the period to period variations between 2004 and 2003 was an increase in revenue related to a Marqibo development strategic partnership agreement signed with Enzon on January 19, 2004. The decrease in research and development expenses in 2004 was primarily due to a reduction in spending on pre-commercial manufacturing, clinical trials and other activities related to the NDA for Marqibo since most of this work was completed in 2003. Restructuring costs in 2004 were the result of scaling back the Company’s activities and reducing its workforce in response to the December 1, 2004 Oncologic Drugs Advisory Committee vote to not support accelerated approval for Marqibo.
Overview
For the fiscal year ended December 31, 2005, net loss was $9.4 million ($0.24 per common share) as compared to $33.7 million ($0.88 per common share) for 2004.
The significantly lower net loss in 2005 is partly attributable to the termination of the Enzon Pharmaceuticals Corporation (“Enzon”) development and commercialization partnership for Marqibo which resulted in the recognition of $11.2 million of deferred revenue and $4.0 million of development expense recovery and milestone payments during the first quarter of 2005. In the second quarter of 2006, INEX expects to complete a license agreement for its Targeted Chemotherapy products with Hana which will include an up-front payment of US$11.5 million consisting of cash and Hana shares. However, INEX still expects to continue to incur losses into the future.
INEX’s December 2004 and June 2005 workforce reductions and program cut backs have generated further savings as reflected in reduced research and development and general and administrative expenses in 2005 as compared 2004. Furthermore, amortization expense decreased by $4.5 million in 2005 as compared to 2004 largely due to the Company’s Lynx medical technology being written off to $nil through a $3.4 million impairment loss in the fourth quarter of 2004 and therefore no ongoing amortization expense for this technology in 2005.
Revenue
Revenue from research and development collaborations, licensing fees and milestone payments was $15.4 million for 2005 as compared to $14.6 million for 2004. Revenue in 2005 was primarily a consequence of the recognition of deferred revenue and a one-time payment as a result of the termination of the Enzon partnership. All of INEX’s 2005 revenue was earned or recognized in the first quarter. In the second quarter of 2006, INEX expects to complete a license agreement to its Targeted Chemotherapy products with Hana which will include an up-front payment of US$11.5 million consisting of cash and Hana shares. Also, INEX expects to transfer its product expertise to Hana under a technology transfer agreement under which it will be reimbursed for time spent.
Licensing fees and milestone revenue is shown in the following table: (in millions Cdn$) 2005 2004 ------------------------------------------------------------------------- Licensing fees and milestone payments Enzon revenue Amortization of up-front payment(1) $ 11.2 $ 4.7 Milestones and termination payment(2) 2.7 2.0 Aradigm initial licensing fee(3) 0.2 - GSK Revenue(4) Amortization of initial licensing fee - 0.5 Milestone payments - 1.3 ------------------------------------------------------------------------- Total licensing fees and milestone payments $ 14.1 $ 8.5 Research and development collaborations(2) 1.3 6.1 ------------------------------------------------------------------------- Total Revenue $ 15.4 $ 14.6 (1) Amortization of the up-front US$12.0 million payment received from Enzon at the start of INEX’s strategic partnership in January 2004. As a result of Enzon terminating the strategic partnership on March 16, 2005, the balance of previously deferred revenue was recognized as revenue in the first quarter of 2005. (2) During the period INEX received a product development payment and milestone payment totaling $6.0 million (US$5.0 million) as part of Enzon’s terminating the strategic partnership. Of this $6.0 million, $2.0 million was accrued at December 31, 2004 and $4.0 million was recognized in the first quarter of 2005 including $2.7 million in milestone and termination payments and $1.3 million in research and development collaborations payments. (3) Licensing fee received from Aradigm Corporation (“Aradigm”) according to the agreement dated December 8, 2004 under which Aradigm licensed certain of the Company’s sphingosomal technology. (4) The GSK revenue was earned pursuant to an agreement to develop GSK’s anticancer drug, topotecan hydrochloride, with the Company’s proprietary sphingosomal drug delivery technology. However, GSK experienced a number of technical problems in manufacturing the necessary supply of materials needed for clinical trials, and these problems delayed the program. As a result of the termination by GSK of the agreement on September 1, 2004, INEX will not be receiving any further payments under this agreement and all revenue received and deferred under the agreement has now been amortized into income.
INEX expects that principal sources of revenue for the next several years will be interest income and payments under future licensing and collaborative research and development agreements including the prospective agreement with Hana. However, there can be no assurance that INEX will successfully complete the licensing agreement with Hana or that it can acquire further licensing and collaborative research and development agreements. Such payments may be conditional upon INEX achieving certain milestones under such agreements. See Risks and Uncertainties.
Expenses
Research and development
Research and development expenses decreased to $10.2 million for the year ended December 31, 2005 from $26.8 million in the same period in 2004. This decrease relates primarily to reduced research and development personnel and reduced external costs for products in INEX’s pipeline. Preclinical study, clinical trial and drug manufacture costs have been significantly reduced with many of the Company’s phase 2 clinical trials for Marqibo and preclinical studies for INX-0125 (sphingosomal vinorelbine), which were ongoing during 2004, are now completed. Research and development salary expenses declined $7.4 million as compared with 2004 due to workforce reductions in December 2004 and June 2005. The Company’s internal research and development staff was 17 at December 31, 2005 (total staff 26) as compared to 120 (total staff 165) just prior to the December 2004 restructuring and 37 (total staff 57) just prior to the June 2005 restructuring.
INEX expects to further reduce its research and development expenditures from 2005 levels until it has completed the partnering of its Targeted Chemotherapy products at which time INEX will continue development of a second generation liposomal delivery platform and consider acquisition of new technologies. After the anticipated spin-out of INEX’s Targeted Immunotherapy assets into Tekmira, for the near-term INEX will no longer have any non-executive employees and will access the majority of its personnel requirements through a service agreement with Tekmira.
Assuming completion of a licensing agreement with Hana and Tekmira’s assumption of the majority of employee and infrastructure costs, INEX currently estimates that research and development expenses in 2006 will be $5.0 million excluding any reimbursement of time spent on technology transfer to Hana. This estimate will be affected by a number of factors including the timing of the anticipated licensing agreement with Hana and the spin-out of Tekmira.
General and administrative
General and administrative expenses fell to $4.4 million for the year ended December 31, 2005 as compared to $9.3 million in the same period in 2004. The decline is largely attributable to reduced salaries and related costs resulting from the December 2004 and June 2005 workforce reductions. INEX has also reduced lease and operating expenses through a sub-lease agreement for its excess lab and office space effective October 1, 2005.
As discussed in “Research and development”, subsequent to the spin-out, INEX will no longer have any non-executive employees and will access the majority of its personnel requirements through a service agreement with Tekmira. INEX currently estimates that general and administrative expenses in 2006 will be $1.5 million. This estimate will be affected by a number of factors including the timing of the anticipated licensing agreement with Hana and the spin-out of Tekmira.
Restructuring costs
Net restructuring costs for the year ended December 31, 2005 were $5.7 million and were $5.1 million for the year ended December 31, 2004. In December 2004, following the December 1, 2004 Oncologic Drugs Advisory Committee vote to not support accelerated approval for Marqibo INEX scaled back certain activities and implemented a workforce reduction of approximately 62% or 103 employees. INEX further reduced its workforce on June 21, 2005 from 57 to 30 employees (8 of which were interim employees resulting in a total of 22 full time employees). This restructuring was necessary to conserve cash and to facilitate a new strategic path for INEX’s lead anticancer drug Marqibo, the other Targeted Chemotherapy products and the early stage Targeted Immunotherapy pipeline.
The following table summarizes restructuring costs recorded in the consolidated statement of operations: (in millions Cdn$) 2005 2004 ------------------------------------------------------------------------- Employee severance compensation $ 4.5 $ 5.6 Cancellation of unvested stock options for severed employees(1) (0.2) (1.2) Laboratory equipment impairment loss(2) - 0.7 Gain on sale of property and equipment(2) (0.2) - Leasehold improvement impairment loss(3) 1.5 - ------------------------------------------------------------------------- Total $ 5.7 $ 5.1 (1) The cancellation of unvested stock options for severed employees resulted in the reversal of the stock-based compensation expense previously recorded on those options. (2) The December 2004 scaling back of activities rendered a portion of INEX’s laboratory equipment surplus to requirements. The impairment loss is based on the Company’s estimate of the fair value of this surplus laboratory equipment as compared to its net book value. This equipment was sold at a gain in 2005. (3) The June 2005 reduction of INEX’s workforce rendered a portion of its premises surplus to requirements, resulting in an impairment loss on the leasehold improvements. The loss is based on the net book value of the leasehold improvements as INEX will no longer realize a benefit from these assets, nor will it have a use for them in the future. Amortization
Amortization expense was $2.1 million for the year ended December 31, 2005. This compares with $6.6 million for the comparable period in 2004. The decrease is largely due to INEX’s Lynx medical technology being written off to $nil through a $3.4 million impairment loss in the fourth quarter of 2004 and therefore no ongoing amortization expense for this technology in the current fiscal period. Also, there was minimal amortization expense on leasehold improvements in the second half of 2005 due to the $1.5 million impairment loss recorded in the second quarter of 2005 and reduced amortization expense on laboratory equipment due to the $0.7 million impairment loss recorded in 2004 (see Restructuring Costs) and sales of laboratory equipment in 2005 (see Other Income/Losses).
In 2006 INEX expects amortization expense to be approximately $1.2 million.
Other Income/Losses
Interest income
Interest income was $0.5 million for the year ended December 31, 2005 as compared to $0.9 million for the year ended December 31, 2004. The decrease is a result of a decrease in the average cash and cash equivalents held throughout 2005 as compared to the prior year, somewhat offset by higher average interest rates during 2005. INEX anticipates that in future years interest income will continue to fluctuate in relation to cash balances and interest yields. See Risks and Uncertainties.
Interest on exchangeable and development notes
Interest expense on the US dollar denominated exchangeable and development notes (the “Notes”) was $4.0 million for the year ended December 31, 2005 as compared to $3.9 million for the prior year. The increase in interest expense due to compounding was partially offset by a decrease in the US to Canadian dollar foreign exchange rate. The interest expense accrued on the Notes is not payable until the Notes mature in April 2007.
Foreign exchange and other income
Foreign exchange and other income for the year ended December 31, 2005 was $1.3 million as compared to $2.5 million in the comparable period in 2004. Other income is largely the result of unrealised foreign exchange gains on the Company’s US dollar denominated exchangeable and development notes. This income is partially offset by exchange losses on holdings of foreign cash. INEX expects continued fluctuation in Canada/US dollar exchange rates in future years. See Risks and Uncertainties.
Investment in Protiva Biotherapeutics Inc.
During the second quarter of 2005, INEX’s Long-term Investment balance was reduced to $nil as a result of the continued losses incurred by Protiva Biotherapeutics Inc. (“Protiva”), a company INEX spun out in 2001, as INEX’s percentage of losses, based on ownership percentage, exceeded its initial investment. Consequently, and according to the Company’s existing investment policy, the remaining deferred dilution gain was recognized.
In the third quarter of 2005, Protiva issued new share capital thereby reducing INEX’s ownership percentage from 34% to 7% that in turn gave rise to a dilution gain of $1.2 million. INEX also recorded $0.9 million as amortization of earlier dilution gains giving a total 2005 dilution gain from its Protiva investment of $2.1 million. INEX’s equity in Protiva’s loss for 2005 was $1.7 million and an impairment loss of $0.2 million on the balance of the investment in Protiva was recorded. As a result of INEX’s dilution in this investment, it no longer has significant influence over Protiva so now applies the cost method of accounting to this investment.
On March 28, 2006 INEX announced receipt of a statement of claim filed by Protiva in the Supreme Court of British Columbia. Under INEX’s agreements with Protiva, INEX believes it has certain rights to obtain a fully paid-up, exclusive license from Protiva for certain oligonucleotide technology. In its statement of claim, Protiva is asking for a declaration that INEX has no claim over the disputed technology. Protiva has also asked for relief against certain of INEX’s directors and officers in connection with this dispute. INEX disputes all claims made by Protiva and intends to vigorously enforce its rights.
Income taxes
In 2005 INEX accrued $0.5 million (US$0.4 million) of income taxes payable relating to a portion of the termination payment received from Enzon, which may give rise to a tax liability. There is no comparative item for 2004.
Capital Expenditures
Capital expenditures were $0.1 million, during the year ended December 31, 2005, as compared to $1.2 million for 2004. In the last two years, none of INEX’s capital additions were funded by capital leases. During the year ended December 31, 2004, INEX used certain of its capital assets to raise long-term debt financing, net of security deposit, of $1.1 million. The early repayment of this long-term debt in 2005 is further discussed in “Liquidity and capital resources”. INEX anticipates minimal capital expenditures in 2006.
RISKS AND UNCERTAINTIES
INEX’s risks and uncertainties are discussed in further detail in the Company’s Annual Information Form which can be found at www.sedar.com.
INEX’s funding needs may vary depending on a number of factors including: - completion and the timing of completion of a licensing agreement with Hana - the cost, completion and the timing of the expected spin-out of the Company’s Targeted Immunotherapy assets into Tekmira and Tekmira’s assumption of the majority of the Company’s operating expenditures - the extent to which INEX continues development or can extract significant value from its technologies - INEX’s ability to attract corporate partners, and their effectiveness in carrying out the development and ultimate commercialization of the Company’s product candidates - the decisions, and the timing of decisions, made by health regulatory agencies regarding the Company’s technology and products - the Company’s decision to in-license or acquire additional products for development - competing technological and market developments - prosecuting and enforcing the Company’s patent claims and other intellectual property rights
INEX’s risks and uncertainties are discussed in further detail in the “Management’s Discussion and Analysis of Financial Condition and Operations” portion of its 2005 Annual Report and in its Annual Information Form. Both the 2005 Annual Report and Annual Information Form will be available on www.sedar.com.
Financials Consolidated Balance Sheets (Expressed in Canadian Dollars) December 31 December 31 2005 2004 ------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents $ 12,173,022 $ 30,045,776 Accounts receivable 301,922 2,163,629 Accrued revenue - 1,999,766 Prepaid expenses and other assets 209,160 333,363 ------------------------------------------------------------------------- Total current assets 12,684,104 34,542,534 Long-term investment - 691,410 Property and equipment 1,107,170 4,125,111 Medical technology 7,688,820 8,648,146 Other long-term assets - 1,398,367 ------------------------------------------------------------------------- $ 21,480,094 $ 49,405,568 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS’ DEFICIENCY Current liabilities Accounts payable and accrued liabilities $ 1,933,402 $ 9,944,457 Income tax payable 433,799 - Current portion of obligations under capital leases 57,594 107,282 Current portion of long-term debt - 825,428 Current deferred lease inducements 140,735 139,187 Current portion of deferred revenue - 2,208,000 ------------------------------------------------------------------------- Total current liabilities 2,565,530 13,224,354 Obligations under capital leases 99,302 156,380 Long-term debt - 1,045,202 Exchangeable and Development Notes 40,158,926 37,522,788 Deferred lease inducements 134,777 275,512 Deferred revenue - 8,947,715 Deferred dilution gain - 852,672 ------------------------------------------------------------------------- Total liabilities 42,958,535 62,024,623 Shareholders’ deficiency: Common share capital: December 31, 2005 - 38,566,788 180,237,917 180,237,917 December 31, 2004 - 38,566,788 Additional paid-in capital 20,569,880 20,069,127 Deficit (222,286,238) (212,926,099) ------------------------------------------------------------------------- Total shareholders’ deficiency (21,478,441) (12,619,055) ------------------------------------------------------------------------- $ 21,480,094 $ 49,405,568 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Statements of Operations and Deficit Years Ended (Expressed in Canadian Dollars) December 31 December 31 2005 2004 ------------------------------------------------------------------------- Revenue Research and development collaborations $ 1,299,398 $ 6,091,405 Licensing fees and milestone payments 14,136,818 8,538,181 ------------------------------------------------------------------------- 15,436,216 14,629,586 ------------------------------------------------------------------------- Expenses Research and development 10,177,612 26,827,547 General and administrative 4,395,812 9,324,798 Restructuring costs 5,656,242 5,113,153 Amortization 2,126,052 6,585,041 ------------------------------------------------------------------------- 22,355,718 47,850,539 ------------------------------------------------------------------------- Income (loss) from operations (6,919,502) (33,220,953) Interest income 510,310 902,629 Interest on exchangeable and development notes (4,006,408) (3,909,007) Foreign exchange and other income 1,345,199 2,507,449 Dilution gain from Protiva Biotherapeutics Inc. 2,067,220 1,309,756 Equity in loss of Protiva Biotherapeutics Inc. (1,670,214) (1,309,756) Impairment in investment in Protiva Biotherapeutics Inc. (235,744) - ------------------------------------------------------------------------- Loss before income taxes (8,909,139) (33,719,882) Income taxes 451,000 - ------------------------------------------------------------------------- Net loss $ (9,360,139) $ (33,719,882) Deficit, Beginning of period (212,926,099) (179,206,217) ------------------------------------------------------------------------- Deficit, End of period $ (222,286,238) $ (212,926,099) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Loss per common share $ (0.24) $ (0.88) Weighted average number of common shares 38,566,788 38,522,011 Consolidated Statements of Cash Flow Years Ended (Expressed in Canadian Dollars) December 31 December 31 2005 2004 ------------------------------------------------------------------------- OPERATIONS Loss for the period $ (9,360,139) $ (33,719,882) Items not involving cash: Amortization of property and equipment 1,155,059 1,680,414 Impairment loss on property and equipment 1,528,064 727,157 Amortization of medical technology 959,326 4,904,627 Amortization of deferred revenue - (5,222,460) Amortization of deferred lease inducements (139,187) (125,039) Amortization of other long-term assets 809,242 205,227 In kind contribution of capital assets 61,043 - Increase in deferred lease inducements - 99,039 Interest on exchangeable and development notes 4,006,408 3,909,007 Unrealized foreign exchange gain (loss) on exchangeable and development notes (1,370,270) (3,124,152) Dilution gain from Protiva Biotherapeutics Inc. (2,067,220) (1,309,756) Eq
