VANCOUVER, Aug. 3 /PRNewswire-FirstCall/ - Inex Pharmaceuticals Corporation reported today in its second quarter 2006 operating results that the successful negotiation of two partnerships and the settlement of its convertible debt have placed the Company on track to complete its transformation into Tekmira Pharmaceuticals Corporation by the end of September 2006.
Timothy M. Ruane, President and Chief Executive Officer of INEX, said, “Tekmira will be a dynamic new debt-free company, with two significant partnerships and a technology platform focused on developing oligonucleotide drugs to treat cancer.”
INEX announced May 8, 2006 that it had licensed three products from its Targeted Chemotherapy technology platform to Hana Biosciences, Inc. in return for an up-front payment of US$11.5 million in cash and Hana shares, an additional US$30.5 million as development and regulatory milestones are achieved, plus royalties on product sales. Hana will be responsible for all future development of the three products, including all future expenses. Hana anticipates initiating pivotal phase 3 trials for Marqibo in 2006 and initiating phase 1 clinical trials for INX-0125 (sphingosomal vinorelbine) in 2006 and for INX-0076 (sphingosomal topotecan) in 2007.
INEX announced June 20, 2006 it had signed a definitive note purchase and settlement agreement with all of the holders of the exchangeable and development notes (the “Former Noteholders”) issued by a wholly-owned subsidiary of INEX and guaranteed by INEX. Under the agreement with the Former Noteholders the up-front Hana shares were transferred to the Former Noteholders on June 20, 2006 and INEX has agreed to pay some of the future contingent Hana milestones and royalties to the Former Noteholders.
On July 17, 2006, INEX announced the acceleration of a collaboration signed March 27, 2006 with Alnylam Pharmaceuticals, Inc. . The companies are exploring the use of INEX’s liposomal delivery technology for the systemic delivery of Alnylam’s RNAi therapeutic products. Due to the rapid progress made so far, INEX and Alnylam have decided to move into the next phase of the collaboration, which includes investigating additional gene targets. In conjunction with this progress, Alnylam will make certain payments to INEX totalling approximately US$1.9 million, US$1.0 million of which relates to an option to license INEX’s technology.
The Company announced July 18, 2006 that a shareholder meeting will occur September 20, 2006 to approve the revised Plan of Arrangement to spin out INEX’s pharmaceutical assets into Tekmira. Shareholders of record on August 11, 2006 will be eligible to vote. Meeting materials will be mailed to shareholders in August 2006.
Highlights of the spin-out include transferring to Tekmira: - All of the pharmaceutical assets from INEX’s two technology platforms, Targeted Chemotherapy and Targeted Immunotherapy; - All of INEX’s cash; - INEX’s pharmaceutical partnerships with Hana and Alnylam.
All of the Tekmira shares will be distributed to INEX common shareholders. INEX’s current management team and employees will join Tekmira in the same positions they occupy at INEX. The Tekmira spin-out is subject to shareholder, regulatory and court approval.
Protiva dispute
Also during the second quarter, INEX announced April 28, 2006 that certain of its directors and officers filed statements of defence in response to a claim filed by Protiva Biotherapeutics Inc. in the Supreme Court of British Columbia. INEX also filed a counterclaim against Protiva.
INEX believes its legal position will prevail and that the litigation will have a negligible impact on the execution of its business plan.
The dispute with Protiva is over the rights to certain drug delivery technology for the delivery of a class of drugs called oligonucleotides, including small interfering RNA (siRNA). Protiva, a private biotechnology company, was spun out from INEX in 2001 along with certain intellectual property rights to use INEX’s drug delivery technology only for the delivery of gene plasmids in the pursuit of developing gene therapy products. As part of these 2001 agreements that formed Protiva, INEX retained all rights to the delivery of olignucleotides, including siRNA. INEX holds a minority interest in Protiva.
Pursuant to rights INEX has under agreements with Protiva, INEX believes that any technology advancements made by Protiva and its collaborators or by INEX for the delivery of oligonucleotides, including siRNA, are either owned by INEX or should be licensed to INEX on an exclusive, worldwide, paid-up and royalty-free basis.
Product development milestones The goals for INEX and Tekmira for the second half of 2006 include: - Supporting Hana to advance Marqibo into phase 3 clinical trials and advance INX-0125 into a phase 1 clinical trial; - Supporting Alnylam’s evaluation of INEX’s liposomal drug delivery technology for the systemic delivery of Alnylam’s RNAi therapeutic products directed towards multiple gene targets; - Presenting additional preclinical data for INX-0167 in non-human primate studies demonstrating its potential as a potent immune stimulant; and - Initiating formal toxicology studies for INX-0167 in order to file an Investigational New Drug Application in 2007 to begin clinical trials. Financial Results
For the six months ended June 30, 2006, net income was $17.3 million ($0.45 per common share, basic and fully diluted) as compared to a net loss of $3.2 million ($0.08 per common share, basic and fully diluted) for comparable period in 2005. For the three months ended June 30, 2006, net income was $21.2 million ($0.55 per common share, basic and fully diluted) as compared to a net loss of $11.3 million ($0.29 per common share, basic and fully diluted) for comparable period in 2005.
There are a number of factors contributing to changes in the results the largest of which is the gain on purchase and settlement of the exchangeable and development notes of $26.8 million.
Revenue / Revenue from research and development collaborations, licensing fees and milestone payments was $6.1 million for the second quarter and the first six months of 2006 as compared to nil for the second quarter of 2005 and $15.4 million for the first six months of 2005. Revenue in the first six months of 2005 was primarily a consequence of the recognition of deferred revenue and a one-time payment as a result of the termination of INEX’s partnership with Enzon Pharmaceuticals. Revenue in the second quarter of 2006 arose from licensing and collaboration payments from partnerships with Hana and Alnylam.
On March 25, 2006, INEX signed an exclusive research collaboration agreement with Alnylam to evaluate systemic delivery of their RNAi therapeutics using the Company’s liposomal technology. Under the collaboration agreement, Alnylam will pay a total of $0.64 million (US$0.55 million) in three equal payments as certain milestones are achieved. As at June 30, 2006, work under the collaboration agreement was two-thirds complete and two of the three collaboration payments or $0.42 million (US$0.37 million) had been paid to INEX and have been recognized as revenue in the quarter. Under the terms of the agreement, Alnylam also paid $0.15 million (US$0.13 million) for an option to execute a global license for specific RNAi therapeutic targets. This 90 day option expired on June 24, 2006 but was renewed for a further 90 days by a second payment of $0.14 million (US$0.13 million). Income for this option and its extension is being recognized on a straight-line basis therefore $0.2 million has been recorded as licensing fees and milestone payments in the second quarter of 2006. The license agreement would include upfront license fees, future milestone payments and royalties as the products are commercialized. Alnylam also has the right to expand the option to negotiate license terms for additional targets. On July 14, 2006, the Company signed an amendment to the research agreement with Alnylam. Under the amendment INEX received US$1.25 million by way of option payments including an option to take a broad exclusive license to INEX’s technology and may receive up to an additional US$0.65 million to support certain expanded research programs.
On May 6, 2006, the Company signed a number of agreements with Hana including an agreement to issue worldwide licenses (the “License Agreement”) for three of the Company’s Targeted Chemotherapy products, Marqibo, INX-0125 and INX-0076. Under the License Agreement, Hana paid a non-refundable up-front cash payment of $1.7 million (US$1.5 million) and issued 1,118,568 Hana shares to INEX (together the “Up-front Payments”). The aggregate value of the Hana shares on May 6, 2006, based on a share price of $12.34 (US$11.15) was $13.8 million (US$12.5 million). Also on May 6, 2006, INEX signed an asset transfer agreement with Hana to transfer certain surplus laboratory equipment as part consideration for the Up-front Payments from Hana. The net book value of the assets transferred under this agreement was $0.2 million. Effective April 3, 2006, INEX also signed a Service Agreement under which Hana will reimburse INEX for future expenses and time spent in maintaining and transferring the technology and product expertise related to the three products.
In accordance with the Company’s revenue recognition policy, $15.3 million of the Up-front Payments was deferred and is being amortized on a straight line basis from April 3, 2006 to December 31, 2006 when the Company expects to deliver substantially all of the services under the Service Agreement with Hana and $0.2 million has been allocated to the surplus laboratory equipment transferred to Hana giving a gain on disposal of nil. Therefore, of the $15.3 million portion of the Up-front Payments, $5.0 million has been recognized in the second quarter as licensing fees and milestone payments and the balance of $10.3 million has been deferred and will be recognized by December 31, 2006.
Revenue is detailed in the following table: Three months ended Six months ended June 30, June 30, June 30, June 30, (in millions Cdn$) 2006 2005 2006 2005 ------------------------------------------------------------------------- Research and development collaborations Enzon(1) $ - $ - $ - $ 1.3 Alnylam 0.4 - 0.4 - Hana 0.5 - 0.5 - ------------------------------------------------------------------------- Total research and development collaborations $ 0.9 $ - $ 0.9 $ 1.3 Licensing fees and milestone payments Enzon revenue Amortization of up-front payment(2) $ - $ - $ - $ 11.2 Milestones and termination payment(1) - - - 2.7 Aradigm initial licensing fee(3) - - - 0.2 Alnylam initial licensing fee 0.2 - 0.2 - Hana up-front payments 5.0 - 5.0 - ------------------------------------------------------------------------- Total licensing fees and milestone payments $ 5.2 $ - $ 5.2 $ 14.1 (1) In the first quarter of 2005 INEX received a product development payment and milestone payment totalling $6.0 million (US$5.0 million) as part of Enzon’s termination of 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. (2) Amortization of the up-front US$12.0 million payment received from Enzon at the start of the 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. (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.
Revenue from the Hana and Alnylam partnerships in the second half of 2006 is expected to be approximately $12.0 million giving a total projected revenue for 2006 of approximately $18.1 million.
Expenses / Research and development / Research and development expenses decreased to $1.2 million for the second quarter of 2006 from $2.5 million in the same period in 2005 and to $2.5 million for the first half of 2006 from $6.4 million in the same period in 2006. This decrease relates primarily to reduced research and development personnel and reduced external costs for products in INEX’s pipeline. Research and development salary expenses declined in the three months and six month period ending June 30, 2006 as compared to the same periods in 2005 as a result of a workforce reduction in June 2005. INEX’s internal research and development staff was 18 at June 30, 2006 (total staff 28) as compared to 36 just prior to the June 2005 restructuring (total staff 57) and 18 at June 30, 2005 (total staff 30). Also contributing to the decrease in research and development costs is decreased external costs related to the Company’s Targeted Chemotherapy platform for which spending was reduced after Enzon terminated the strategic partnership in the first quarter of 2005 and for which spending is now passed through to the Company’s new Target Chemotherapy partner, Hana.
INX-0167 costs are expected to increase total research and development costs in the second half of the year and expected total research and development costs for 2006 are approximately $6.0 million.
General and administrative / General and administrative expenses fell to $1.0 million for the three months ended June 30, 2006 as compared to $1.3 million in the same period in 2005 and $2.2 million for the six months ended June 30, 2006 as compared to $2.7 million in the same period in 2005. The decline is largely attributable to reduced salaries and related costs resulting from the June 2005 workforce reductions. INEX also reduced lease and operating expenses through a sub-lease agreement for excess lab and office space effective October 1, 2005. Legal and consulting fees were, however, substantially higher in the three and six months ended June 30, 2006 as compared to the same periods in 2005 associated with the Hana and Alnylam partnerships and litigation with the former majority debt holder.
INEX expects to incur substantial professional fees as it looks to complete its corporate reorganization in the third quarter of 2006 and expects general and administrative costs for the year to approach $5.0 million.
Restructuring costs / Net restructuring costs in the three and six months period ended June 30, 2006 were nil as contrasted to $5.8 million in both the three and six month comparable periods. In June 2005 INEX completed a corporate restructuring reducing its workforce to a total of 30 employees (8 of which were interim employees).
Impairment of medical technology / The licensing of Targeted Chemotherapy technology to Hana and the purchase and settlement of the exchangeable and development notes which includes the assignment of a portion of at least some of the Hana milestones to the Former Noteholders, prompted management to review the fair value of INEX’s medical technology. Potential net cash in-flows generated by the medical technology are several years away and are contingent upon the success of Hana’s development of Marqibo. Management therefore decided to take a full impairment loss on medical technology and INEX recorded impairment of medical technology of $7.2 million in the quarter ended June 30, 2006. There is no comparative figure for this expense item.
Amortization / Amortization expense was $0.2 million for the second quarter of 2006 and $0.6 million for the comparable period in 2005. Current year to date amortization expense is $0.6 million as compared to $1.2 million for the six months ended June 30, 2005. The decrease is largely due to minimal amortization expense on leasehold improvements in 2006 due to the $1.5 million impairment loss recorded in the second quarter of 2005, the sale of laboratory equipment in the fourth quarter of 2005 and a provincial sales tax refund of $0.2 million that was confirmed in the second quarter of 2006 and is related to property and equipment that had already been fully amortized.
Total amortization for 2006 is expected to be approximately $1.0 million.
Other Income/Losses / Interest income / Interest income was $0.11 million for the second quarter and $0.21 million for the first six months of 2006 as compared to $0.12 million for the second quarter and $0.26 for the first six months of 2005. The decrease is a result of a decrease in the average cash and cash equivalents held during the 2006 periods as compared to the 2005 periods, somewhat offset by higher average interest rates in 2006. The Company anticipates that in future periods 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 $0.9 million for the three months and $1.9 million for the six months ended June 30, 2006 as compared to $1.0 million and $2.0 million for the comparable periods in 2005. On June 20, 2006, INEX signed a purchase and settlement agreement with the holders of the Notes (the “Purchase and Settlement”). There will be no interest charged or recorded for accounting purposes on the Notes after their purchase and settlement on June 20, 2006.
Gain on purchase and settlement of exchangeable and development notes / On June 20, 2006 INEX signed a purchase and settlement agreement with the Former Noteholders and recorded a gain on settlement of $26.8 million. There is no comparative amount for this item.
Going forward, any milestone payments received from Hana, will be recorded in INEX’s Statement of Operations as licensing fees and milestone payment revenue with an equal and opposite adjustment to gain on purchase and settlement of exchangeable and development notes. The net effect of these adjustments on net income or loss will be nil.
Foreign exchange and other gains (losses) / Foreign exchange and other gains (losses) showed gains of $1.7 million for the second quarter and gains of $1.6 million for the first six months of 2006 as compared to losses of $0.3 million for the second quarter and losses of $0.4 for the first six months of 2005. Foreign exchange and other gains (losses) are largely the result of foreign exchange gains and losses on the US dollar denominated exchangeable and development notes. The Canada/US dollar exchange rate is expected to continue to fluctuate in future periods (see Risks and uncertainties).
Investment in Protiva Biotherapeutics Inc. (“Protiva”) / In the third quarter of 2005, Protiva issued new share capital thereby reducing INEX’s ownership percentage from 34% to 7% such that INEX no longer has significant influence over Protiva, and now applies the cost method of accounting to this investment.
Loss on disposal of Hana Biosciences, Inc. shares / On June 20, 2006, as a part of the consideration for the purchase of the Notes, INEX transferred 1,118,568 Hana shares with a value at that time of $10.7 million (US$9.6 million) to the Former Noteholders. The 1,118,568 Hana shares were first recorded on May 6, 2006, the date they were issued, at their then trading price of $12.38 (US$11.15) giving an aggregate value of $13.8 million (US$12.5 million). The loss in value of the Hana shares of $3.1 million has been recorded in the second quarter of 2006 as Loss in value of Hana shares.
Income taxes / In the first quarter of 2005 the Company 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. The $0.001 million income tax expense in second quarter of 2006 represents an adjustment to the US income tax provision now that the Company has finalized and filed its 2004 and 2005 US income tax returns.
Capital Expenditures / Capital expenditures were $0.06 million in the second quarter and $0.08 million in the first half of 2006 and $0.009 million and $0.05 million for the comparable periods in 2005. Of the capital additions in the first half of 2006, $0.11 million were funded by capital leases.
RISKS AND UNCERTAINTIES
INEX’s funding needs and those of Tekmira if the spin-out is completed may vary depending on a number of factors including:
- revenues earned from the Service Agreement with Hana - the cost of the corporate reorganization that will see all transferable assets and liabilities spun out into Tekmira - the extent to which the Company 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 its product candidates - the decisions, and the timing of decisions, made by health regulatory agencies regarding INEX’s technology and products - the Company’s decisions to in-license or acquire additional products for development - competing technological and market developments - prosecuting and enforcing patent claims and other intellectual property rights
INEX’s risks and uncertainties are discussed in detail in the “Management’s Discussion and Analysis of Financial Operations” portion of the Company’s 2005 Annual Report and in its Annual Information Form dated March 29, 2006. INEX’s 2005 Annual Report and Annual Information Form is available at www.sedar.com.
FINANCIALS Consolidated Balance Sheets (Expressed in Canadian Dollars) June 30 December 31 2006 2005 ------------------------------------------------------------------------- unaudited ASSETS Current assets Cash and cash equivalents $ 6,379,408 $ 12,173,022 Accounts receivable 1,424,850 301,922 Prepaid expenses and other assets 179,576 209,160 ------------------------------------------------------------------------- Total current assets 7,983,834 12,684,104 Property and equipment 768,274 1,107,170 Medical technology - 7,688,820 ------------------------------------------------------------------------- $ 8,752,108 $ 21,480,094 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS’ DEFICIENCY Current liabilities Accounts payable and accrued liabilities $ 1,339,282 $ 1,933,402 Income tax payable 432,025 433,799 Current portion of obligations under capital leases 93,186 57,594 Current portion of deferred lease inducements 140,735 140,735 Deferred revenue 10,435,831 - ------------------------------------------------------------------------- Total current liabilities 12,441,059 2,565,530 Obligations under capital leases 125,108 99,302 Exchangeable and Development Notes - 40,158,926 Deferred lease inducements 64,409 134,777 ------------------------------------------------------------------------- Total liabilities 12,630,576 42,958,535 Shareholders’ deficiency: Common share capital: June 30, 2006 - 38,566,788 180,237,917 180,237,917 December 31, 2005 - 38,566,788 Additional paid-in capital 14,938,244 20,569,880 Deficit (199,054,629) (222,286,238) ------------------------------------------------------------------------- Total shareholders’ deficiency (3,878,468) (21,478,441) ------------------------------------------------------------------------- $ 8,752,108 $ 21,480,094 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Statements of Operations and Deficit (Expressed in Canadian Dollars) Three months ended Six months ended June 30 June 30 June 30 June 30 2006 2005 2006 2005 ------------------------------------------------------------------------- unaudited unaudited unaudited unaudited Revenue Research and development collabora- tions $ 940,033 $ - $ 940,033 $ 1,299,398 Licensing fees and milestone payments 5,129,431 - 5,140,787 14,136,818 ------------------------------------------------------------------------- 6,069,464 - 6,080,820 15,436,216 ------------------------------------------------------------------------- Expenses Research and development 1,179,617 2,516,861 2,451,526 6,428,865 General and administrative 1,026,369 1,290,695 2,171,319 2,720,967 Restructuring costs - 5,823,634 - 5,823,634 Impairment of medical technology 7,210,515 - 7,210,515 - Amortization 187,089 598,523 620,472 1,195,595 ------------------------------------------------------------------------- 9,603,590 10,229,713 12,453,832 16,169,061 ------------------------------------------------------------------------- Income (Loss) from operations (3,534,126) (10,229,713) (6,373,012) (732,845) Interest income 108,777 121,153 205,137 260,458 Interest on exchangeable and development notes (881,194) (999,916) (1,872,729) (2,022,411) Gain on purchase and settlement of exchangeable and development notes 26,844,179 - 26,844,179 - Foreign exchange and other gains (losses) 1,725,414 (320,431) 1,554,515 (411,434) Dilution gain from Protiva Biotherapeutics Inc. - 192,176 - 852,672 Equity in loss of Protiva Biotherapeutics Inc. - (30,914) - (691,410) Loss on disposal of Hana Biosciences, Inc. shares (3,069,049) - (3,069,049) - ------------------------------------------------------------------------- Income (Loss) before income taxes 21,194,001 (11,267,645) 17,289,041 (2,744,970) Income taxes 806 - 806 451,000 ------------------------------------------------------------------------- Net income (loss) $ 21,193,195 $ (11,267,645) $ 17,288,235 $ (3,195,970) Deficit, Beginning of period (226,191,198) (204,854,424) (222,286,238) (212,926,099) Discount on exchangeable and development notes 5,943,374 - 5,943,374 - ------------------------------------------------------------------------- Deficit, End of period $(199,054,629) $(216,122,069) $(199,054,629) $(216,122,069) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average number of common shares Basic 38,566,788 38,566,788 38,566,788 38,566,788 Diluted 38,771,614 38,566,788 38,580,453 38,566,788 Income (Loss) per common share Basic $ 0.55 $ (0.29) $ 0.45 $ (0.08) Diluted $ 0.55 $ (0.29) $ 0.45 $ (0.08) Consolidated Statements of Cash Flow (Expressed in Canadian Dollars) Three months ended Six months ended June 30 June 30 June 30 June 30 2006 2005 2006 2005 ------------------------------------------------------------------------- unaudited unaudited unaudited unaudited OPERATIONS Income (Loss) for the period $ 21,193,195 $ (11,267,645) $ 17,288,235 $ (3,195,970) Items not involving cash: Amortization of property and equipment (51,376) 353,038 142,176 710,279 Impairment loss on property and equipment - 1,528,064 - 1,528,064 Amortization of medical technology 238,465 242,565 478,305 482,396 Impairment loss on medical technology 7,210,515 7,210,515 Amortization of deferred lease inducements (35,184) (34,797) (70,368) (69,594) Amortization of other long-term assets - 1,458 - 800,492 In kind contribution of capital assets - 61,043 - 61,043 Interest on exchangeable and develop- ment notes 881,194 999,916 1,872,729 2,022,411 Unrealized foreign exchange gain (loss) on exchangeable and develop- ment notes (1,838,930) 538,775 (1,659,484) 793,688 Gain on purchase and settlement of exchangeable and develop- ment notes (26,844,179) (26,844,179)
